Stress Testing the Stress Test Scenarios: Actual Macro Data Are Already Worse than the More Adverse Scenario for 2009 in the Stress Tests. So the Stress Tests Fail the Basic Criterion of Reality Check Even Before They Are Concluded

Author: Nouriel Roubini · April 13th, 2009 · 2563822009-04-13+02%3A02%3A19Nouriel+Roubini › Share This Print

The spin machine about the banks’ stress test is already in full motion; some banking regulators or other US government officials have already leaked to the New York Times the spin that all 19 banks who are subject to the stress test will pass it, i.e. none of them will fail it. But if you look at the actual data today macro data for Q1 on the three variables used in the stress tests – growth rate, unemployment rate, and home price depreciation – are already worse than those in U.S. government baseline scenario for 2009 AND already very close to or worse than those for the more adverse stressed scenario for 2009. Thus, the stress test results are meaningless as actual data are already running worse than the worst case scenario.

The FDIC, the Fed and the OCC (this was an inter-agency process) used assumptions for the macro variables in 2009 and 2010 both the baseline and more adverse scenarios that are so optimistic that actual data for 2009 are already worse than the adverse scenario. And for some crucial variables such as the unemployment rate – that is key to proper estimates of default rates and recovery rates (given default) for residential mortgages, commercial mortgages, credit cards, auto loans, student loans and other banks loans – current trends show that by the end of 2009 the unemployment rate will be higher than the average unemployment rate assumed in the more adverse scenario for 2010, not for 2009! In other terms, the results of the stress test – even before they are published – are not worth the paper they are written on as they make assumptions on the economy that are much more optimistic –even in the worst scenarios that the government has designed - than the actual figures for Q1 of 2009.

Description of the stress tests baseline and more adverse scenarios

To see why actual 2009 are already even worse than the more adverse scenario in the stress tests let us first look at how the stress tests are done:

According to the US government regulators there are two scenarios, one a more optimistic “baseline scenario” for 2009 and 2010 for the three macro variables (GDP, unemployment, and home prices) and one more pessimistic one – the “alternative more adverse scenario”. The baseline scenario assumes – based on the average of the forecasts by the consensus of macro forecasters at the time when the stress tests were announced – that GDP growth (percentage change in annual average) will be -2.1% in 2009 and +2.0% in 2010, that the unemployment rate will average 8.4% in 2009 and 8.8% in 2010, and that home prices will fall 14% in 2009 and 4% in 2010 (percentage change fourth quarter of the previous year to fourth quarter of the indicated year based on the Case-Shiller, 10-City Composite index). In the alternative adverse scenarios GDP growth is assumed to be -3.3% in 2009 and 0.5% in 2010, the unemployment rate is assumed to average 8.9% in 2009 and 10.3% in 2010 while home prices are assumed to fall 20% in 2009 and 7% in 2010.

The description provided by the government of the stress tests also shows graphs – but not actual figures – for the quarterly behavior of the three macro variables in 2009 and 2010 for both scenarios. Based on these quarterly graphs in Q1 of 2009 the unemployment rate would approximately average for the quarter 7.7% in the baseline scenario and 7.8% in the adverse scenario; the GDP growth rate (4-quarter % change) would be -1.9% in the baseline scenario and -2.1 in the adverse scenario; while home prices would fall in Q1 relative to Q4 of 2008 by 4% in the baseline scenario and by 7% in the adverse scenario.

How do these scenarios actually stack with actual figures for Q1 2009, with current consensus forecasts and with current likely paths for these macro variables?

Unemployment rate

Take the unemployment rate: in March of this year the actual unemployment rate was already – at 8.5% much higher than the baseline scenario for Q1 (7.7%) and even higher than the adverse scenario 7.8%. Even if you were to take the average unemployment rate in Q1 that was 8.1% this figure is already well above both the baseline and adverse scenario.

If one has to look ahead the likely evolution of the unemployment rate in 2009 and 2010 will lead to actual data that are much worse than the baseline and more adverse scenarios. For example, based on current trends in employment and initial claims Ted Wieseman, US fixed income economist for Morgan Stanley and a very mainstream analyst, has recently argued that the unemployment rate could reach 10% by June of 2009; as he put it:

The key round of early March economic news was weak, with another disastrous employment report again standing out. Non-farm payrolls plunged 663,000 in March, bringing the average drop over the past five months to 667,000, an unprecedented run of job losses in absolute terms and the worst in percentage terms over such a period since the 1973-75 recession… The past week’s jobless claims report showed substantial deterioration as we move towards the survey period for the April employment report, so at this point there is no reason to expect the extremely weak recent trend in the jobs report to show any improvement next month. Indeed, at the rate jobs are disappearing, the unemployment rate could be into double-digits as early as June (bold added).

Indeed with per month job losses well above 600K for several months in a row and with initial claims still averaging 650k per week for the last few weeks there is no chance that job losses will be any less than 600K for the next two months.

Even if the economy were to turn to positive growth by Q3 – as the consensus forecasts expects – the unemployment rate would rise for at least another 12 months as job market data are lagging indicators of economic activity. For example, in 2001 the recession was short and shallow – only 8 months – and over by November but job losses continued for another 19 months until August of 2003. So based on current trends – and even generously assuming that the economy recovers positive growth by Q3 of 2009 (quite an heroic assumption) it is almost certain that the unemployment rate will be 10.5% by December of this year (and would thus average about 9.5% for the year); in a more adverse – but more realistic scenario – the unemployment rate would reach 11% by December of 2009 and average 9.8% for the year.

So in summary, based on current actual data the unemployment rate is already well above the values that the government had for them in Q1 of 2009 in both the baseline and stress scenarios. And given current trends in the unemployment rate and initial claims for unemployment benefits – even assuming that the economy behaves like the consensus forecasts and recovers positive growth in H2 of 2009 – the average unemployment rate in 2009 would be 9.5% that is not only well above the baseline scenario of 8.4% for 2009 but also well above the average unemployment rate for 2010 in that baseline scenario. Worse, 9.5% would be even worse than the average unemployment rate that is assumed by the government for 2009 in the adverse scenario, i.e. 8.9%. Actually based on current data for initial claims it is highly likely that by April 2009 (this month) the unemployment rate will reach 9.0% and thus be higher already at this early part of 2009 than the average of 8.9% that the government assumes it will be for the average of 2009.

Since based on current and likely trends the unemployment rate will be – at best over 10% by year end – and more likely closer to 11% by year end (and average 9.8% for the year) 2009 data are already worse than the adverse scenario and will for sure be worse than the adverse scenario. But more importantly by year end 2009 the actual unemployment rate – even with a growth recovery in H2 – will be higher at 10.5% – than the average unemployment rate assumed by the government in the adverse scenario for 2010, not 2009!

GDP growth

A similar analysis suggests that the US government assumptions for GDP growth and home prices are already worse than the adverse scenario – let alone the baseline scenario – for Q1 of 2009. A first estimate of Q1 2009 GDP growth will be out only at the end of April 2009 but the current consensus is that the figure will be around -5% for the SAAR figure in Q1 (i.e. the growth rate of the economy in Q1 2009 relative to Q4 of 2008 seasonally adjusted at annual rate) with a number of respected and reputable forecasters putting that figure at -6% or even worse. Now, based on the graphs the GDP growth rate (4-quarter % change in Q1 2009 relative to Q1 2008) would be -1.9% in the baseline scenario and -2.1 in the adverse scenario. If we plug the current consensus estimate of Q1 GDP growth and then compute the y-o-y 4-quarter % change we get a figure of -2.3%. Thus, based on consensus estimates of GDP for Q1 2009 the 4-quarter contraction of GDP will be – in Q1 of this year – already worse than both the baseline scenario figure (-1.9%) and the more adverse scenario figure (-2.1%). If, as possible, the GDP contraction in Q1 is -6% (SAAR) the Q1 2009 vs Q1 2008 percentage change in GDP will be -2.5%, a figure even worse than the previous one compared to the baseline and more adverse scenarios for Q1 of this year. So by Q1 of this year both the unemployment rate and the GDP growth rate are (or will likely be once the Q1 GDP first estimates are out) worse than the government figures for both the baseline and more adverse scenarios.

Moreover, relative to the time in December when the consensus forecasts for 2009 were used by the government to derive its baseline scenario for 2009 such consensus forecasts have significantly worsened. Based on the latest March figures the consensus is now projecting that 2009 GDP growth will be -3.2 rather than the -2.0% in the original government baseline. And a number of high profile mainstream sell-side research such as Goldman Sachs, Merrill Lynch, Morgan Stanley – houses – that have had a better than average track record in forecasting the current downturn – are now forecasting a 2009 GDP contraction of about 3.5% on average (the current RGE Monitor forecast is even worse at 3.7%). Thus, the current consensus forecast for 2009 GDP growth is – at 3.2% – practically identical to the adverse scenario GDP growth for 2009; and most reputable research institutions are forecasting for 2009 a figure that is actually worse than the consensus scenario. Also, while the current consensus forecast for 2010 growth (2.0%) is practically identical to the baseline scenario for 20010 GDP growth (2.1%) a number of more accurate than consensus source are predicting a much weaker scenario for 2010: for example Goldman Sachs has a current forecast of 1.2% for 2010 GDP growth as opposed to the baseline scenario figure of 2.0%. So, in all likelihood even the current consensus forecasts is close – or worse – than the more adverse scenario while the baseline scenario is already out of the window both for Q1 and the year overall.

Home prices

Let us now consider the outlook for home prices. Unfortunately the Case-Shiller 10-City Composite figures are available – for now – up to January 2009 with the February figures due to be published at the end of April. The government baseline assumes that home prices will fall – December 2009 vs December 2008 – by 14% while its more adverse scenario sees home prices falling by 22% during 2009. The fall in home prices in January 2009 relative to December 2008 was 1.9% that – if continuing at this rate for all of 2009 – it compounds to an annual rate of 20.6% that is well above the 14% of the baseline scenario and also very close to the adverse scenario of 22%. One month does not make a trend and the 12-month % change in home prices was a negative 19% in January 2009, December and November 2008, up from the 18% drop in August-September-October 2008 and the 17% drop in the May-June-July 2008 period. So, in the last year the rate of home price depreciation has accelerated from 17% to 18% to 19% and most recently to 25%. It is possible that the rate at which home prices will fall for the rest of 2009 will be around the 22% rate envisioned by the adverse scenario. But even the more recent optimistic data for the housing sector – a possible stabilization of housing starts, building permits, new home sales and existing home sales – do not imply that the rate of fall of home prices will be significantly lower in the months to come. The reason is that, while home sales and housing starts/completion are now showing signs of stabilization – after falling from their peak by more than 70% – the excess supply of new and existing homes is still huge – both in absolute terms and as a ratio of sales – and thus a significant downward pressure on prices. Even if housing starts/completions were to go to zero – from their current 500K level – it would take about 11 months until the current supply of new homes is depleted by the current demands. And since a recovery of both supply and demand from current depressed levels would reduce the excess inventory only if new home sales are well above new completions, there is no reason to believe that home prices will fall at a much slower rate for the rest of 2009. In other terms, even if quantities in housing were to stabilize and then recover in the next few months prices will keep on falling for all of 2009 and for all of 20010 at a very rapid rate.

Also, research done by RGE suggests that – based on a variety of criteria such as real home prices, home price to rental ratios, home price to income ratios, price affordability measures of homes in 2009 and 2010 home prices will fall much more than the baseline scenarios of the government – that sees a cumulative fall in home prices in 2009-2010 of 18.5%. These criteria suggest that home prices will cumulatively fall by a figure very close – if not higher – than the one assumed in the more adverse scenario, i.e. 30.5%.

In summary, home prices have been falling in recent months at a rate that is much higher than the 14% assumed in the government baseline for 2009. They are also running currently at an annual rate that is already very close to the the 22% in the more adverse scenario of the government; and even considering actual figures for the last few months – that show an accelerated rate of fall in homes prices between the spring of 2008 and the most recent data – home prices have been falling in the last few months at rates – average of y-o-y and m-o-m figures – of about 20% with an upward trend in the data. So the actual and trend figures are well above the baseline figure of 14% and closer to the 22% of more adverse scenario.

Conclusion: Actual macro data for 2009 are already worse than the more adverse scenario in the stress tests. These are not stress tests but rather fudge tests

In conclusion, recent data and trends for the unemployment rate, GDP growth and home prices show that, as of Q1 of 2009, actual macro data are much worse than the baseline scenario of the stress tests and – in the case of unemployment and GDP – even worse than the more adverse scenario of the stress tests. Under the most reasonable scenario the unemployment rate by the end of this year will be worse than not just the baseline and more adverse scenarios for 2009 but it will also be even worse than the average unemployment rate for all of 2010 in the more adverse scenario. Similarly GDP growth figures are running – in Q1 2009 – at likely rates that are already worse than both the baseline and the more adverse scenarios. While home prices are currently falling at rates that are much higher than the baseline scenario and close to those of the more adverse scenario.

And for some crucial variables such as the unemployment rate – that is key to the proper estimation of default rates and recovery rates for every type of bank loans – current trend show that by the end of 2009 the unemployment rate will be higher than the average unemployment rate assumed in the more adverse scenario for 2010, not for 2009! In other terms, the results of the stress tests – even before they are published – are not worth the paper they are written on. The stress test exercise was already flawed from the start as it took as its baseline scenario the consensus forecast for the economy for 2009 and 2010, a consensus that, for the last two years, had totally gotten wrong not only the growth rate of the economy but even the sign of the growth rate as the recession started in December 2007. And the more adverse scenario of the stress test was not really a truly adverse scenario as it assumed positive growth for 2010 (rather than an additional negative growth for 2010) and assumed an average unemployment rate for 2010 in the more adverse scenario that, based on current data and trends, is likely to be reached at the earliest by Q3 of 2009 and at the latest by Q4 of 2009. So how can anyone take seriously stress tests that are blatantly rigged from the outset with scenarios that make little economic sense and that, based on actual current data, are already obsolete as their worst case scenario is already more optimistic than actual current data for Q1?

This financial crisis was one due to opacity and lack of transparency in financial markets and due to regulators that were asleep at the wheel. But now the administration officials and regulators have decided to add to the fog of opacity by adding to the lack of transparency in financial markets: regulatory forbearance that allows banks such as Well Fargo to declare charge-off rates and to set aside reserves for loan losses that make no sense relative to the state of the economy and relative to their loan book; partial suspension of mark-to-market accounting that allows – starting with Wells Fargo – to hide losses and reduce the amount of write-downs on securities; likely reinstatement of some variant of the uptick rule that will restrict shorting of stock and will artificially boost equity prices (a form of legalized manipulation of the stock market by regulators that are trying to prevent short-sellers to do their job, i.e. make stock prices reflect fundamentals and prevent bubbles in stock prices); and now stress tests that fail the basic test of a reality check by making assumptions – that even in the worst case scenario that is designed from start to be too mild to be a sensible realistic stress test scenario – that are obsolete based on actual data for the economy as of Q1 of 2009. Call it a generalized “fudge test” rather than a true “stress test”.

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256382176 Responses2009-04-13+02%3A02%3A19Nouriel+Roubini to “Stress Testing the Stress Test Scenarios: Actual Macro Data Are Already Worse than the More Adverse Scenario for 2009 in the Stress Tests. So the Stress Tests Fail the Basic Criterion of Reality Check Even Before They Are Concluded”

Anonymous • April 13th, 2009 at 1:15 am

Uno! Wow what a feeling!

Big Manny • April 13th, 2009 at 1:53 am

Dos

Guest • April 13th, 2009 at 2:03 am

There is only one solution to this problem it’s called “forced bying”. You simply force evicted to buy houses at there peak prices. Money will come from FED’s printing press but will not cause inflation because house prices are not included in the CPI. The effect of the forced bying solution is that you will get a happy homeowner and a happy bank and moreover the x-tremely corrupted stress test will be obsolete

Vacumcleaner • April 13th, 2009 at 2:07 am

But Nouriel you told us, after the election, that Obama and his team are highly intelligent. It seems you may have to revise that statement?

Little Saver • April 13th, 2009 at 2:43 am

Fudge seems to be the right word to describe financial information coming from the establishment (banks, government, Wall Street, Washington). It looks that they didn’t learn anything from the ongoing crisis, except that spreading fudge, not transparancy, makes it possible for the financial sector and those associated with it (politicians etc.) to rake in huge profits at cost of the broader society. The lesson they have learned from the crisis: fudge delivers. Spread the fudge!What can we do about it?

Guest • April 13th, 2009 at 6:04 am

Why would anyone take your post seriously when it is so riddled with simple language errors?

Gloomy • April 13th, 2009 at 6:28 am

Great post, Nouriel. Keep finding the truth and shouting it from your bully pulpit!!!

kilgores • April 13th, 2009 at 6:34 am

Prepare yourself for further substantial deterioration in the markets, the financial sector, and the overall economy. At least, that’s the message I’m getting.SWK

Jasa • April 13th, 2009 at 6:35 am

Thank you Professor. I don’t know how a Main Street person would understand anything without your work.

ex oz lender • April 13th, 2009 at 6:43 am

I’ve had a couple of wines since reading this latest blog and prior to the alcohol, I might have said something semi intelligent. But now having reflected on the latest news from the USA via this blog and other news, I now think that the FDIC and the treasury are the same people that organise the world wrestling federation.Next thing I’ll read is the headline “GM makes substantial profit” cause they’ve added in governement bail out funds as income.I say keep the market rally going, I’ve sold most but still have some loser stocks that I’d like to sell to some sucker.

Hayes • April 13th, 2009 at 6:45 am

TechTicker: from April 6 video and textGeithner’s Stress Test “A Complete Sham,” Former Federal Bank Regulator Says

The bank stress tests currently underway are “a complete sham,” says William Black, a former senior bank regulator and S&L prosecutor, and currently an Associate Professor of Economics and Law at the University of Missouri – Kansas City. “It’s a Potemkin model. Built to fool people.” Like many others, Black believes the “worst case scenario” used in the stress test don’t go far enough.He detailed these and related concerns in a recent interview with Naked Capitalism. But Black, who was counsel to the Federal Home Loan Bank Board during the S&L Crisis, says the program’s failings go way beyond such technical issues. “There is no real purpose [of the stress test] other than to fool us. …

http://finance.yahoo.com/tech-ticker/article/225897/Geithners-Stress-Test-%22A-Complete-Sham,%22-Former-Federal-Bank-Regulator-Says

kilgores • April 13th, 2009 at 6:49 am

Intelligence and integrity are different. Frankly, after reading Frank Rich’s op-ed piece in the New York Times yesterday, I’m much less sanguine about Dr. Roubini’s early endorsement of Dr. Summers, under whom Dr. Roubini worked in the Clinton Treasury Department. The current administration is going out of it’s way to avoid nationalizing the largest banking concerns in this country, and I am left to wonder whether the reason is based on legitimate concerns or on incestuous relations between those in the administration and those in the financial sector.SWK

Anonymous • April 13th, 2009 at 7:37 am

True. I come to this site to assess and balance out much of the other “official” numbers.

Guest • April 13th, 2009 at 7:38 am

We know that once again the administration is trying to rip off the taxpayers. Many insolvents banks are going to pass and they are going to recieve money. Obviously, they are trying to fool the economy into recovery. Or at least “harvest” gullible investors in the process. However, where do we from here? Any wise words?

Guest • April 13th, 2009 at 7:48 am

I think that there has always been a policy to “keep it simple” for the populace.The balance between belief and reality seems to me, to be the focus of most of our news. There is, I think, a necessity to keeping a strong degree of confidence in the system….sometimes that does include, for better or worse, the bending of the facts.But the operative term in this scenario is Balance….knowing when to shed light on the ugly side of the facts to the public, anticipating and planning for reaction, and when not to.Whenever I see, what I view, as the obvious manipulation of information, I begin to wonder if it isn’t a buffer for what is next to come…Who knows.. good luck to all.

CLake • April 13th, 2009 at 7:50 am

These “fudge tests” and Geithner’s PPIP Plan are just two pieces of evidence of the massive collusion that exists between the American administration (whether Dems or Reps btw) and the banks and shadow banks that has for objective to spread their $4 trillion of losses onto the rest of the American people…We, in the blogs who understand this, have a mission to accomplish : force the mainstream media to pick this up and inform the American people who is still dormant and confused by the wrong kind of issues.Are we going to stop this or not ?We need to pull all the good financial blogs together on this from Yves’ nakedcapitalism to clusterstock to Nouriel’s rgemonitor to Paul Kedrosky to Mich’s to Paul Krugman’s to MarginRevolution etc…, I am sure we can pull this one if we can unite our forces, if only we have the will power and a good strategy for action.

Hayes • April 13th, 2009 at 7:56 am

link to the op-ed referred to aboveAwake and Sing!By FRANK RICHPublished: April 11, 2009http://www.nytimes.com/2009/04/12/opinion/12rich.html?_r=1

Guest • April 13th, 2009 at 7:57 am

Wondering if the PPIP Program will be the ‘PIN’ that pops the cover on this lie. Imagine … private buyers offering just 50% or less on toxic assets – banks would be forced to reveal their true financial condition irrespective of any stress test.

Hayes • April 13th, 2009 at 7:59 am

and this from BloombergObama Stakes His Fortunes on Failed Banksters(and yes Bloomberg used the word Banksters)http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aNMQDysdnKRc

Hayes • April 13th, 2009 at 8:02 am

and this from of all places the Huffington Post via KrugmanThe Geithner-Summers Plan is Even Worse Than We Thoughthttp://www.huffingtonpost.com/jeffrey-sachs/the-geithner-summers-plan_b_183499.html

Guest • April 13th, 2009 at 8:32 am

it might be good for the rest of us to invest in Australian wine stocks:-)

devils advocate • April 13th, 2009 at 8:40 am

“the Three Amigos”…treswe are a laugh-which we need after reading Nouriel

PeteCA • April 13th, 2009 at 8:45 am

SWK: They are likely avoiding nationalization because of the very complicated concerns about how to handle all the banking derivatives. It’s a nightmare. I don’t see how the Fed could sort it out.PeteCa

devils advocate • April 13th, 2009 at 8:52 am

“double-numbers” a la “double think” (1984)the rising unemployment rate and the lowering GDP rate will be fudged over,browned, sugared over and microwaved until they are tasty treatswhy not? -the pattern was started decades ago, is ratcheting up with banks,and will serve up a smorgasbord

devils advocate • April 13th, 2009 at 8:55 am

yours is a valuable investment tip which I will drink to

Guest • April 13th, 2009 at 9:02 am

Nouriel,Big Bank here. SHUT THE HELL UP!!!Thank you.(Smile)

MM CA • April 13th, 2009 at 9:03 am

Sounds Like Nouriel is rearing his DR. Doom titel again…DO NOT BE FOOLEDThis Disaster will continue… all the unemployed people will not be paying any taxes… and at U6 of 20% and going to U6 27-32% in the next 18 months the Fed and states and local Gov’ts will be down big time on their income/collections/receipts and not one entity is factoring these dramatic drops. Take it further to corporate income and taxes paid and problem gets even bigger. And of course those making any profits, like the Banks, will figure out ways to not pay their fair share of taxes. So essentially our economy will turn in to one that can’t pay its debt, bills, interest, and all because there are no jobs and we are not re-inventing ourselves or producing/making anything anymore. We are in the third inning of this disaster/collapse. Real pain has yet to come…Fed and state governments are bankrupt, they just won’t admit it… and so are the Banks… We inject about 1 trillion every month somewhere just to keep things going and hoping to fight another day. As I have said there will 1-2 months of where things look like they are better as it seems now, but the real data suggests otherwise. Each time the hammer hits harder on the head when real data finally surfaces…. Be prepared and do not be fooled by this latest stock market burp… The only ones making money during this upturn are the ones that don’t need it…. 99.9% of all Americans are not making one penny on this latest market upswing… all they are doing are squeezing every last cent out of us.

MM CA • April 13th, 2009 at 9:20 am

I bet Summers, Githener, Obama were not planning for this so soon…http://www.chrismartenson.com/blog/social-security-stunner-bankruptcy-nation-moved-several-years/15944Social Security Stunner; Bankruptcy of Nation Moved Up Several YearsWell, Obama is talking tough with the Big Three, even letting on that the bankruptcy of GM and Chrysler is a very real possibility and may happen soon.Since these are bankrupt companies, I suppose this makes a certain amount of sense, leaving aside the perplexing silence on why a similar approach is not being taken with insolvent banks. I guess it’s possible that manufacturing paper profits is now “more American” than fashioning real goods out of hard materials.But it goes further than this. The current administration might as well be worrying about the fact that the US government itself is hurtling towards bankruptcy.Not only are debts exploding – moving smartly past “unsustainable” and into “ruinous” – but revenues (tax receipts) are falling like a rock.Yesterday it was reported that the difference between Social Security income (taxes) and outlays (benefits payments), which is known in Washington-speak as “the SS surplus”, would shrink to zero next year.

Hayes • April 13th, 2009 at 9:25 am

FT via NCTarp investigator seeks evidence of book fiddlingPublished: April 12 2009 23:32 | Last updated: April 12 2009 23:32The official policing the $700bn Tarp fund says he is investigating whether banks have “cooked their books” to secure bail-out money….http://www.ft.com/cms/s/0/163c85c4-2789-11de-9b77-00144feabdc0.html________________AIG in spotlight over derivativesThe unit that all but destroyed AIG has failed to sign up for the overhaul of the global derivatives market which was given added impetus by the troubles at the US insurance group…http://www.ft.com/cms/s/0/cb2ddafc-278c-11de-9b77-00144feabdc0.html

Hayes • April 13th, 2009 at 9:42 am

Cash for ClunkersPresident Obama’s rescue plan for the automotive industry has given the presidential seal of approval to a little-noticed movement in Congress to clear the roads of gas-guzzling clunkers and replace them with more fuel-efficient cars. It’s an excellent idea, with clear benefits for the environment and — Mr. Obama hopes — beleaguered carmakers.http://www.nytimes.com/2009/04/07/opinion/07tue2.htmljust one little detail – the environmental upside by encouraging the purchase of more fuel efficient cars doesn’t appear to take into consideration the energy and resources required to manufacture a new car nor the disposal of the ‘clunker’. But I guess the optics are good.

Guest • April 13th, 2009 at 9:45 am

Solution: Let’s sell vast amounts of our land to the Chinese. I mean, way more than we have already. Let them be our landlords. We can start with the State of CA. Let’s leverage our assets to the next level. We can integrate the two countries slowly, state by state, as we need more money to pay off liabilities. Sure, we risk loosing our democracy, but hey, is it working all that great anyway, given the bastards who mortgaged our future for their own greed? Sell some land…Hawaii, Alaska, California…what ever it takes to ground our government in financial stability and as we increase our ties to a country market that has tremendous growth potential (profiteering).

golf guest • April 13th, 2009 at 9:49 am

g,from fudge test to urine sample. ie.measure, inspect in detail, the bank “assets”,(mbs, derivatives, cdos, cds, etc.) in question withregard to quantity and quality. specialinvestigators required. if prosecutionsbecome necessary so be it. from here, we go there, directly. time is wasting and we are not evergoing to get this time back, no mulligans.( i think that is a golf metaphor? but it hasa certain resonance in this context. ).

Hayes • April 13th, 2009 at 10:09 am

CNBC – Kudlow ” we may have positive GDP in the second quarter (2009)”

Rohelio • April 13th, 2009 at 10:15 am

If anyone cares,this is a list of the largest banks by assets compiled from BCRM. We can assume that the banks that were stress tested are among these. Might we see insiders selling? Closing prices from FRI 3.4.09JPMORGAN CHASE JPM, 32.75CITIGROUP INC C, 3.04BANK OF AMERICA CORPORATION BAC, 9.55WELLS FARGO & COMPANY WFC, 19.61PNC FINANCIAL SERVICES GROUP PNC, 38.48U.S. BANCORP USB, 17.64BANK OF NEW YORK MELLON CORP BK, 29.65SUNTRUST BANKS, INC STI 14.14STATE STREET CORPORATION STT, 36.32CAPITAL ONE FINANCIAL CORP COF, 17.46CITIZENS FINANCIALBB&T CORPORATIONREGIONS FINANCIAL CORP NCTD BANKNORTH INCFIFTH THIRD BANCORPKEYCORPHARRIS FINANCIAL CORPNORTHERN TRUST CORPBANCWEST CORPORATIONUNIONBANCAL CORPORATIONCOMERICA INCORPORATEDM&T BANK CORPORATIONMARSHALL & ILSLEY CORPBBVA USA BANCSHARES, INC

blind de milo • April 13th, 2009 at 10:16 am

cl,i like the way you think. also, i bring itup in conversation as frequently as possible.word of mouth is underrated. also email. andreturn emails to people who email to you.i like to disrupt the workplace with economicheresy. and… while i’m at becoming a socialpariah i also infuse conversation with the politicaland religio-cultural themes.so there. you may have heard the old adage..”never discuss money religion or politics inpublic.” ( presumably to keep conversation civil.)well that, perhaps, is the most ignorant pieceof common idiocy ever uttered and destructiveto the common good and level of public education.the adage that enables isolation in a crowdedenvironment. if you cannot discuss importantand fundamental concerns with an open mind andin a civil way you cannot develop intellectuallyas an intelligent and socially integrated homo-sapien.- sentient.advocates for the inellect.! clake, you area leader!

PeteCA • April 13th, 2009 at 10:21 am

But don’t worry.The credit status of Uncle Sam is still AAA.So we’re good for it …”MONEYNETDAILYFederal obligations exceed world GDPDoes $65.5 trillion terrify anyone yet?——————————————————————————–Posted: February 13, 200911:35 pm EasternBy Jerome R. Corsi© 2009 WorldNetDailyAs the Obama administration pushes through Congress its $800 billion deficit-spending economic stimulus plan, the American public is largely unaware that the true deficit of the federal government already is measured in trillions of dollars, and in fact its $65.5 trillion in total obligations exceeds the gross domestic product of the world. “PeteCA

FEDup • April 13th, 2009 at 10:30 am

Welcome to Fudgington which I define as a collusion between Washington and the financial elite which sugar coats opacity and falsehoods to convince the general public they are acting in a fair and honest manner in accord with our democratic capitalistic system. Unfortunately, after the “fudge” hits the fan, it’s going to take the middle class a decade to clean up the mess!

Guest • April 13th, 2009 at 10:49 am

I hear there is a nice little Aussie Wine by the name of “Black Swan”

Guest • April 13th, 2009 at 11:10 am

If there’s such incredible fraud and lying at the heart of the U.S. banking crisis why hasn’t some mainstream news outlet unearthed this story, perhaps the most important financial revelation since the 1930s?Enter Jack Willoughby, senior editor of Barron’s, with this week’s interview with William Black, the man who won the shootout with Jim Wright and helped name the Keating Five in the S&L scandal.The essence of this explosive interview can be capsulized in Willoughby’s prompting for Black to summarize the current problem:Black: With most of America’s biggest banks insolvent, you have, in essence, a multitrillion dollar cover-up by publicly traded entities, which amounts to felony securities fraud on a massive scale.http://online.barrons.com/article/SB123940701204709985.html

Guest • April 13th, 2009 at 11:25 am

Indeed! If only we could get him scheduled regularly as a quest on the nightly news, instead of the “misinformation ministers” of CNBC.hlowe

blind de milo • April 13th, 2009 at 11:30 am

g,but.. there is no short cut or side stepping theissues of quality, integrity and the true natureof this human experience. there is either resonanceand integration or there is misery or disharmony onthe grand scale. dysfunction. in the mind and then reflected init’s works or relationships with the world and weare in this, world, together.as has been stated, (i leave it to youto find the source) it is about “leadership”. theunstated part has been that that “leadership” whichis absent is absent IN us, not outside of us. itis not for someone other than me and you to lead andthe question / answer becomes what aspect of man leadsor directs him in an intelligent technologicaluniverse? the answer is intellect informed bythe senses, the heart, the mind and the inspiredintegration of these. this is difficult work inall of it’s historic, evolutionary and societal implications and it is hard to see how increasedopacity or authoritative control of informationcontributes to developing the necessary societal/individualeducation that is essential to our continued/evolvingcivilization and survival. as now, this day, we areall the leaders, in the position of leadership. thisis the meaning of freedom. this is the system we haveignored but now must trust,not out of faith, but as a matter of natural andevident revelation. we might say, a “selfevident” truth. ( it is the essence of intellectto lead as it has no other beneficial function.)this is a fact that won’t bend although non of thisindicates just where intellect may lead us.? thatwe must dream and somehow we must do it together?just a thought and best of luck and fortune to you.

FEDup • April 13th, 2009 at 11:53 am

If this is true, perhaps there is no limit to total debt: no country or group of countries can or will stand up to the U.S. as they are all hopelessly trapped in the all encompassing web of U.S. dominance; hence, the debt WILL NEVER be paid back and we will simply move closer to 3rd world status!

devils advocate • April 13th, 2009 at 12:07 pm

it’s not twitter, it’s Glitterthe Administration looks like it is playing the public/world like Madoffmake-believe stress test to make people believe the banks are okmake believe numbers for profitstheme: things are getting better, infrastructure is hiring millions,housing is bottoming, and stocks are going up+ green industry is booming!Being President is a lot of work

Guest • April 13th, 2009 at 12:07 pm

Wow, Dr. Roubini, wow! Only you with your surgical knowledge of the economic body could have diagnosed this collapsed, void-of-animal-spirits economy correctly, and declared the bankers’ Federal Deposit Insurance cure-all stress test, flawed and phony. Fraud is a crime.As for Tim Geithner—Goldman’s NYFed man in the U.S. Treasury and star of the Geithner-Summers Cover-up —William Black takes both to task in an interview this week with Barron’s (Black’s damning evidence breaking first on PBS): “We have failed bankers giving advice to failed regulators on how to deal with failed assets.”Black is an associate professor of economics and law at the University of Missouri and former deputy director at the former Federal Savings and Loan Insurance Corp. (FSLIC) during the thrift crisis of the 1980s,As for the Geithner Treasury plan to back private purchases of toxic assets that “perpetuates zombie banks by mispricing toxic assets,” Black says: “It is worse than a lie. Geithner has appropriated the language of his critics and of the forthright to support dishonesty…he is really pandering to the interests of a select group of banks who are on a first-name basis with Washington politicians…”Continues Black regarding Geithner and the investment bankers’ “$2 trillion accounting fraud”: He is flouting the law, in naked violation, in order to pursue the kind of favoritism that the law was designed to prevent. He has introduced the concept of capital insurance, essentially turning the U.S. taxpayer into the sucker who is going to pay for everything…his use of language like “legacy assets”…is positively Orwellian.Black warns it is wrong to assume that the market will ultimately lead to correct actions.“If cheaters prosper, cheaters will dominate. It is like Gresham’s law: Bad money drives out the good, Well, bad behavior drives out good behavior, with good enforcement.”Quotes from “The Lessons of the Savings-and-Loan Crisis”– Barron’s.

Guest • April 13th, 2009 at 12:12 pm

The Dirty Two Dozen?

NS • April 13th, 2009 at 12:25 pm

Kudlow is the CNBC used car salesman; he’s an embarrassment to the profession of Economics.

blind zombie • April 13th, 2009 at 12:25 pm

da,very nice post!style and substanceclean and cleari like

Guest • April 13th, 2009 at 12:29 pm

full Barron’s article posted towards end of prior thread

Hayes • April 13th, 2009 at 12:57 pm

Faber Says S&P 500 May Rise to 1,000 on Bank Earnings (Update2)http://www.bloomberg.com/apps/news?pid=20601087&sid=afwlTwYy6ONM&refer=home

Guest • April 13th, 2009 at 1:04 pm

a,don’t forget it and may it be with you all of your days!

Guest • April 13th, 2009 at 1:05 pm

When will this game of deception finally end? The US has to wake up and face reality. The US is bankrupt and is in the process of losing the status of being the super power in the world. The media outlets are doing their best to keep the public in this illusion of recovery. Let’s be honest. The goverment has only 2 choices:1. Deflationary depression: they stop bailing out the banks. This is probably the more healthy version. It lowers asset prices and builds a new foundation for a “real” economy that is based on productivity. Although the process would be very painful it would make the US in the long run a competitive nation again.2. Depression with runaway inflation: The Fed continues printing money, devalues the currency leading to much higher asset prices by the same time the economy slowing down. The is by far the worse situation. Fotunes will be whiped out!!!!Right now it seems the Government has chosen path # 2 and will continue doing so until the people start to revolt!!!!!!!!!!!!

Michelle • April 13th, 2009 at 1:10 pm

Why is the FDIC even conducting these stress tests??? The entire scheme is a waste of time, everyone should know by now the banks are “solvent”! Why do we even have regulators if regulations don’t have to be enforced? The bankers own Congress and own the world.Why doesn’t GM get a free pass like the big Wall Street banks? Why does the FDIC even bother closing banks on FDIC Fridays if they try to get us to believe all the banks are solvent? Why should we trust anything we hear or read anymore? I’m fed up with it all the smoke and mirrors bs that I probably should move out of the country.I hate America.

Guest • April 13th, 2009 at 1:14 pm

Don’t forget we will go out with a bang when we default on our national debt.

PeteCA • April 13th, 2009 at 1:22 pm

MichelleWe are learning a few important things as the US financial system slowly falls apart:1) Banks and auto companies don’t have the same status. When it gets right down to the nitty gritty, banks are above everyone else in the power pyramid.2) Although the whole US Gov’t (amazingly enough) still believes that these debt problems can be “put off to the future”, it seems HIGHLY likely now that they will impact the Obama administration before the end of Obama’s first term in office. They may even impact as early as 2009 or 2010.3) My guess is that Ben Bernanke is telling the rest of the US Gov’t that the Fed can “remove” the excess money back out of the system i.e. by means of the Fed selling its own bonds. This is one of the most delusional concepts I have ever heard. Debt from the Fed will be worthless by the time they decide to offer it – because the Fed’s credibility will be backed up by a mountain of toxic assets and not much else.There comes a time when even Chicken Little gets his day in court. One day the sky will actually really fall. At that point a lot of folks are going to be running really fast – to avoid getting hit by the Big Blue Chunks.PeteCA

Guest • April 13th, 2009 at 1:28 pm

Don’t hate the players – hate the games … on second thought …

Michelle • April 13th, 2009 at 1:35 pm

PeteCAI really wish that I believed Chicken Little will get his day in court, but seriously doubt that will ever happen. People have their blinders on and don’t look at all the fundamental flaws with the current gov’t/Fed actions and policies, all they seem to care about is the performance of their 401k’s, and why it rises is of no concern to them. Just keep priming the pump, using JPM and GS to continue their back door games to move stocks upward. I’m certain Bernanke understands the theory of how rising and falling stocks can, in fact, change the psychological mood of the country and I think he’s pulling out all the stops by manipulating markets upward.So long as the participants controlling the game know how it works and can profit from it, fundamentals will never, ever matter. It’s all about greed and profits, and we might as well throw out ethics, morality, and humility out the window. Nobody cares about those attributes any longer, and I don’t see it changing.

Guest • April 13th, 2009 at 1:38 pm

Action speaks louder than words.Large banks cannot continue to exist without large numbers of legitimate (retail)deposits. Depositors must pull their monies out of the these large banks institutions and place their monies in local banks not participating in the shadow banking system.Use blogs/EMAIL to tell your friends that you took this action and why – and that you hope that they will follow.

NS • April 13th, 2009 at 1:42 pm

I hate America’s leadership for the train wreck they have created for America’s people… Work hard, save & spend wisely and still the average US adult has gotten screwed, again.I hate America’s deliberate misrepresentations.Geithner is the Administration’s puppet.Summers is clueless.Someday the world is going to tell America ‘enough’ and the US will be the lagger in world status.

Guest • April 13th, 2009 at 1:46 pm

This crisis highlights the prime dichotomy of our democracy: The populace picking it’s government to represent the best interests of the populace collectively at large and a free market which rewards risk, inovation, and corruption, for the few, with lots’o money. I suspect history will judge this generation harshly for it’s greed, excess, and self-interest government. Ironically, we are saddled with many of the same individuals who got us into this crisis as the “leaders” who are working to get us out. Presumably, the talent does not exist elsewhere. It’s very uncomforting to realize the players and enabelers of the system are the ones directing the “recovery” efforts. Ultimately, our fate falls in their hands, somewhere between mass unemployment and revolution to a mild, slow recovery which will take years. It’s never been about “fairness”. It’s about mitigating the pain to avoid the worst extreme. All hands on deck, including the captain’s and first mate’s hands (Geithner, Summers) irrespective if they are already soaked in the blood they help spill.

Guest • April 13th, 2009 at 1:48 pm

Where is there some type of list of smaller banks that are healthy and solvent and that don’t particpate in the shadow system?

Michelle • April 13th, 2009 at 1:50 pm

Somehow I think that America will again dupe other countries into investing here, using some other ponzi scheme under a different name. It is a perpetual cycle and will continue until we are finally militarily challenged. The game, unfortunately, continues. The slick talkers will sucker them in, sell them snake oil, and the whole cycle repeats. My advice: buy the snake oil, then sell it to some other sucker for a profit.

Morbid • April 13th, 2009 at 2:24 pm

Charlie Rose had NR on once and Charlie got such negative feedback from his viewers because NR scared the HELL out of them.Then the meltdown began – and those same viewers wanted NR back – which Charlie did – giving the viewers another “blast” of reality.Maybe its time for the third visit, and many more…

Guest • April 13th, 2009 at 2:28 pm

Excuses. It could be handled.

Guest • April 13th, 2009 at 2:38 pm

Not to be rude, but what we are talking about here is self-reliance and involves leading not following.Make your own list from your own viewpoint, needs and goals tailored to your community. Do your own due diligence on a level you understand. Then you are truly responsible for your actions.

Hayes • April 13th, 2009 at 2:49 pm

further to ZeroHedge and his thinking on Market liquidity / deleveraging / quant fund issues there is this post:SPY Vol At Half Of AveragePosted by Tyler Durden at 3:39 PMhttp://zerohedge.blogspot.com/2009/04/spy-vol-at-half-of-average.html

Hamlet2009 • April 13th, 2009 at 2:55 pm

Imagine that Obama in the briefings during the transition period was told, and his trusted advisors from the campaign agreed, that all the negative trends, a la Roubini, spelled a high probability of widespread political violence in the US and also a threat to the American projection of power in all the world. The Bush people, in their way, talked about it as a “national security threat,” when talking about the dollar as the world’s reserve currency and the consequences of another failure of a US-based multinational financial institution even bigger than Lehman. Obama, as he has said, didn’t exactly envision this as the central focus of his Presidency, yet even before his inauguration, he stepped up behind a podium displaying the seal of “the Office of the President-Elect,” confident and self composed, and talked up the market. It worked for a while and then, predictably enough, the charm wore off and the reappearance of the underlying weakness drove the markets back down. Under the enormous pressure of the worst contraction in over 80 years, and informed about the dangers of an unstoppable deflationary spiral fed by credit defaults, he felt he had no choice but to work with economic policy responses initiated by Bush Administration and based on the Ben Bernanke’s theories, which everyone in academic economics agreed were the best we had. Obama staffed the key economic posts with well known professionals who could provide continuity and enhance the already close co-operation between Treasury the Fed, putting the head of the important New York Branch of the Fed at Treasury. Like a general preparatory to a major campaign, the President tasked his team with crafting a well-thought out program for implementation of complementary monetary responses, fiscal stimuli, bailouts, regulatory reform, relief for homeowners, a forward looking budget and an approach to the G-20, our European Allies, China and the IMF. They were instructed to temporize, and say what was necessary to buy just a little bit of time, while they were making plans, even if it meant a frightening drop in markets. When they were ready, and it had to been damn soon, they would roll it all out, with the help of a few bailout-dependent friends in the private sector, in a tightly orchestrated sequence of announcements and appearances, with Obama in the lead, carefully, expressing optimism, and again confidence, and yet warning of hard times ahead. To those who worried that he was expending his political capital too soon and for too little, he would have asked, “What else can I realistically do in this moment, what more?” To those who advocated immediate nationalization of troubled banks, he would have just shrugged and said, “Do you really believe it is just a simple matter, like taking your soiled shirts into the laundry and getting them back clean and starched and ready for another day in the office making loans? Give me a break.” To those who complained about the unfairness to taxpayers and all the give-aways and unconscionable bonuses, he was prepared to answer, if necessary,” My concern is the well-being of the economic unit known as the American household, whose retirement savings are exposed to market losses, whose hard-earned home equity is being eroded for lack of widely available and cheap mortgage refinancing and whose prospects for a revival of employment, and now I am talking about jobs, is in jeopardy, no matter how much government stimulus is brought to bear, from the cancer that afflicts our banks. The illness of the banks is our illness. Long before I came into the Office of the Presidence, the taxpayer was on the hook for losses incurred in the banking system. We have done what we can to address this problem in an orderly and rational basis, knowing that there will inevitable be opportunists who will game the system, as there are in every government spending program. We have taken preemtory steps to set up institutions the institutions that will be necessary to dispose of the large volume of impaired assets that will come to us.” With regard to those who complained about fudging of stress tests and the like, as well as all the other forms of managed news, the man whose very presence in the White House represented an improbable achievement of historic dimensions, looked at them steadily and in their minds they heard themselves saying, “He is a politician. He is doing his job.”

Theta • April 13th, 2009 at 3:02 pm

If you’re looking for a place to start try http://www.bankrate.com/rates/safe-sound/bank-ratings-search.aspxI did a google search for banks and credit unions in my local area, and then did a quick check of them on the above site. For me, it turned out that my bank had some serious problems and I was able to switch my money to a local credit union that gives me better security and better rates. One pitfall with Bankrates’ site is that it isn’t always apparent which banks are actually owned by larger investment banks. Some snooping via google might weed out the sneaky ones.Good Luck!

blind pioneer • April 13th, 2009 at 3:24 pm

swk,specifically…i surmise integrity is that quality whereby humanintellect, individually and uniquely manifest, is fixed to, put in harmony with, naturallyoccurring and self evident universal, ubiquitous, intelligence. ( all manifest “creation” ) the universe.”… beauty is that to which the human mind respondsat its deepest and most profound.”subrahmanyan chandrasekhar.ps. integrity is what makes this profound response, communion,possible, or as a child becomes a parent, integrityresults; grows from and into this response. orlike intelligence, integrity is everywhere in theuniverse, all at once. it is intellect thatis striving to become integrated ( integrity )with the ubiquitous intelligence. mankind’seducation / evolution. we work on it and hopeit is not too late.

Guest • April 13th, 2009 at 3:47 pm

I am the great and powerful Oz. Pay no attention to the man behind the curtain. Listen to me for I will bring you salvation. Stop, hey, what’s that sound, everyone look what’s going down. Do you precieve reality through shadows on the wall? Dust in the wind, all we are is dust in the wind. Give unto Ceaser what is Ceasers. I am not a crook. You say you want a revolution, well… It’s good to be the King. Let them eat cake. Always look on the bright side of life. Mom, Dad, I’m hungry why can’t we have food? Your kid has cancer, it won’t be cheap to treat. Do you have “resources”? Mom, why do you Dad fight all the time? I’m scared. Where are we going to live? And the beat goes on…..

Guest • April 13th, 2009 at 3:56 pm

“But now the administration officials and regulators have decided to add to the fog of opacity by adding to the lack of transparency in financial markets…”The King has no clothes on, the King has no clothes on…is anyone listening? The King is naked. Oh, hell. Is dancing with the stars on tonight? TV…the opium of the masses. Want to motivate grass root actions, shut down tv.

Anonymous • April 13th, 2009 at 3:57 pm

Mr. Roubini, you mention in your section on home prices that compounding a 1.9% monthly loss for 12 months – an extrapolation based on January’s Case-Shiller results – would result in a 25.3% loss for the year. Notwithstanding that this type of extrapolation is more than a bit shaky, I take issue with your calculation. Compounding has the effect of amplifying a result when in the positive direction, but muting it in the negative direction. Your calculation (1.019^12 – 1) would accurately result in 25.3% annual growth if prices were rising. However, prices are falling and so you should be compounding in the opposite direction. In fact, the correct arithmetic (0.981^12-1) results in a compounded annual loss of 20.6%. You will note that this is well within the government’s adverse scenario of 22% annual loss. How much does this 478bps error in your calculation affect your overall projections?

Guest • April 13th, 2009 at 4:03 pm

Comments/analysis of these articles from people here?”US Economy Could Recover Much Sooner Than Expected”"…a small but growing group of private-sector economists is disputing the idea that the recession will drag on for months and that the rebound will be as weak as those following the the 1991 and 2001 downturns.”http://www.cnbc.com/id/30111906/—————–And…”Worst May Be Over for Stocks And US Economy” — Abby Joseph Cohenhttp://www.cnbc.com/id/30190135

blind economic unit • April 13th, 2009 at 4:03 pm

g,that was a moving post.speaking of coupling and iceland..The EsotericistWednesday, April 8, 2009SURREAL BOUNCE: GONE BERSERK.http://sbinvestigator.blogspot.com/2009/04/surreal-bounce-gone-berserk.htmlKristjan (our driver) cruises Laugavegur, Reykjavik’s main drag, crawling distance from our hotel. Bars ands cafes abound. Not quite what I expect—the calm, the quiet, the quaint corrugated metal houses painted in deep reds and fantasy blues and bright yellows with interiors that glow orange and cozy. But it is only Thursday; weekend berserk-ness–and the midnight pub-crawl called runtur–is a whole day away.I have a question for Kristjan: “Do you have a mental hospital in Reykjavik?”He studies me with a long sideways look, not sure he heard right–and if he did, he is quietly alarmed. “You know,” I add. “A madhouse. Where they keep crazy people?”“Ah.” Kristjan pauses. He heard right. “Yes.” He hopes this will conclude the subject.“Does it have a name?”Kristjan considers this, hesitates. It is clear he would rather talk about something else. Anything else. “Uh, people here call it House by the Blue Bay. When somebody acts crazy, we say, be careful or you will go to the House by the Blue Bay.”Van Stein erupts like a volcano. “Why is it called that?”“It is by the bay,” replies Kristjan. “The blue bay.”“Far from here?” I ask.“About fifteen minutes.”“Can we see it?” I ask.If Kristjan prides himself on anything, it is his skill as a tour guide. But my request crosses an invisible boundary, and he is stumped. Another sideways look, a shrug, and resignation. “If you want, I take you.”In all his tours, and he has given very many, no one has ever asked Kristjan about the local loony bin. Not only do we ask, we want to see it.About fifteen minutes later we cruise into a desolate neighborhood. Trees and hedges—the first we’ve seen in this generally tree-less city—conceal a building. Beyond, the so-called blue bay shimmers beneath moonlight. Kristjan gestures at a street-sign: Kleppskaft. An arrow points left. “This is it,” he says solemnly. “The Kleppur.” He hopes this is enough to satiate our curiosity.“Can we get nearer?” asks Van Stein.A shiver seems to run up Kristjan’s spine. Then he eases left onto Kleppskaft. The building comes into view: A L-shaped structure, three floors, with a sloped roof and dormer windows illuminated with soft orange light. I turn to Van Stein. “I think you’ve got to catch the Klepp.”My comment is redundant; Van Stein is already mesmerized by the imagery—and its significance to going berserk. “Can we get out, look around?” he asks.This discomforts Kristjan more than ever. He circles, finds a safe place for himself and his vehicle near some bushes, signals for us to alight if we must.We must, and we do. Kristjan does not budge from behind the wheel, which he grips tightly with both hands—and is visibly relieved when we roll out of Kleppskaft. “Most people are frightened to come here,” he says, finally revealing his thoughts.“Frightened of what?” I say. “Insanity?”Kristjan nods. “Once people come here, they never fit back into society.”“You mean they get stigmatized?” I say.Kristjan nods.Our first night in town and we have uncovered a serious irony about berserk-ness: Iceland’s population, descended from fearless Viking Berserkers, is petrified of…berserk. Which is linked, no doubt, to one better-known fact: Iceland’s suicide rate is the world’s highest. Lunacy, for these Nordic folks, lurks just around the corner, just one wrong turn away. Not only do they know this, they are so petrified of insanity they hold it against each other.EXCERPTED FROM SURREAL BOUNCE: TRAVELS WITH A NOCTURNAL ARTIST IN SEARCH OF CREATIVITY & MADNESS by ROBERT ERINGER with color images by THOMAS VAN STEIN (Earthshine Editions, 2009).

Octavio Richetta • April 13th, 2009 at 4:22 pm

Hayes,Thanks for your many contributions. As I have written recently, the ultimate way of reducing risk is to lighten up on risky holdings. Today, I sold all my leap calls on the SP500, EEM, and XLF at a significant net profit (I had a small loss, less than 2%, on my SP500 850 leap calls); perhaps WAY EARLY, but diz things may be purchased again, hopefully, at lower prices.My feeling is that Goldilocks will reign longer than most anticipate but feel better now that I have reduced my ‘at risk’ level substantially, from 44% to 20%. No dollar cost averaging here.I see no reason why Faber’s latest prediction of SP500 @ 1000 may not come through; however, I stuck to the mantra: No-one has ever gone broke by taking profits early.The noise level many smart guys are making, including Roubini, Shilling, Hussman (read his latest weekly piece), and others, is bringing the alert level closer to red once again. My hope would be that the smart bears are proven wrong and that the Obi’s administration, via the Treasury, and FED joint efforts result in the rosy scenario the smart bulls anticipate but I don’t trade on hope.I will be in the Caracas area for about a week during which period I will be posting lightly.

Octavio Richetta • April 13th, 2009 at 4:26 pm

“Worst May Be Over for Stocks And US Economy” — Abby Joseph CohenDiz makes me feel better about my selling of risky holdings today. Da’ lady has been the ultimate contrarian indicator in the past. I am shocked and surprised she still has got a job!

Guest • April 13th, 2009 at 4:28 pm

Consider the source.

Octavio Richetta • April 13th, 2009 at 4:33 pm

More ‘sweet’ agar for the goldilock bacteria:-)Goldman Will Sell $5 Billion of Shares to Repay TARP, Says Profit Surgedhttp://www.bloomberg.com/apps/news?pid=20601087&sid=aOnbJzStSYd0&refer=home

blind de milo • April 13th, 2009 at 4:34 pm

g,i heard today someone say..”not only does the king have no clothes but theclothes have no king.”"mwv”..

Guest • April 13th, 2009 at 4:42 pm

m,that is exactly the response “they” are counting on.we are being manipulated into hating the corrupted,ourselves, to shield or deflect attention from thedynamic of the corruption itself and those whoperpetrate it. no? clarity?

Guest • April 13th, 2009 at 4:52 pm

If there is a recovery in the near term, it will be short lived. It may last two years, but we will be in recession again because none of the problems are fixed. It’s possile that we’ll see several of these cycles closer and closer together b/f the final bubble bursts and the ponzi scheme crashes down. There was a pretty good post about this on the last thread.

Guest • April 13th, 2009 at 4:53 pm

Goldman $1.66B 1Q earns beat Wall Street estimateshttp://news.yahoo.com/s/ap/20090413/ap_on_bi_ge/earns_goldman_sachs

Guest • April 13th, 2009 at 4:53 pm

Anybody?

Octavio Richetta • April 13th, 2009 at 4:54 pm

BTW, CR has a great post on the subject of this thread:http://www.calculatedriskblog.com/2009/04/roubini-and-stress-test-scenarios.html

Guest • April 13th, 2009 at 4:58 pm

Base Case – RGE Monitor2009 2010GDP -3.4%Unemployment 10.0% 11.0%Price Index -16.3%Our Optimistic case – Fed’s baseline case2009 2010GDP -2.0%Unemployment 8.4% 8.8%Price Index -14.0%Adverse Scenario – L shaped recession2009 2010GDP -4.9%Unemployment 11.5% 12.5%Price Index -21.3%Factor sensitivity – Base case 1.00Factor sensitivity – Optimistic Case 1.33Factor sensitivity – Adverse case 0.80As per RGE Monitor HPI is expected to fall 44% over 2006 levels. S&P Case Shiller has declined 27% since then.Jan-06 202.44Current Index 146.40-27.7%http://safehaven.com/article-13070.htm

Guest • April 13th, 2009 at 4:59 pm

Agreed. Unfortunately I did not move into aig, citi… even after Geitner and others said no to nationalization and again after Bernanke was on 60 minutes repeating the message. I don’t recall anyone on this board except perhaps OR to some extent, recommending bank stocks. It certainly is frustrating sitting on the sidelines watching new participants in the banks stocks ignore fundamentals while making huge gains. Do we sit on the side lines and watch the gov print the banks into profitability?hlowe

Octavio Richetta • April 13th, 2009 at 5:00 pm

http://www.stlyrics.com/lyrics/beverlyhills90210songsfromthepeachpit/beatgoeson.htm

Guest • April 13th, 2009 at 5:03 pm

Suprised ! Why? After all she’s part of the culture.

Fduquette • April 13th, 2009 at 5:07 pm

It is shocking that after so much confidence has been lost, unwarranted optimism is being assumed by the very policy makers in whom confidence and accountability finds its last refuge. People are desperate for good news, but the readings and analysis offered on this blog infer that macro economic trends will prevail and sooner or later the reality of $4 trillion dollar losses will have its reckoning.

economicminor • April 13th, 2009 at 5:07 pm

And you make the payments for them?As payments are the problem, not the house prices. Prices are dependent upon someone’s ability to pay. Not on getting a loan when there are not respectable qualifications. With unemployment rising and wages still depressing and housing inventories still high, it is not reasonable that house prices will not fall further.So why buy now and own a debt for more than the eventual value of a home? Especially when you will have a hard time making the payments and you are uncertain about the future of your job?Nuts!

wethepeople • April 13th, 2009 at 5:07 pm

Any comment by TARP fans of the recent CVC (Citigroup Venture Capital) and the deal between Barclay’s to buy iShares? I wonder if tarp monies facilitated the financing? or cash purchase?

wethepeople • April 13th, 2009 at 5:07 pm

Any comment by TARP fans of the recent CVC (Citigroup Venture Capital) and the deal between Barclay’s to buy iShares? I wonder if tarp monies facilitated the financing? or cash purchase?

Octavio Richetta • April 13th, 2009 at 5:25 pm

No-one really knows if the recession is about to end, the Treasury/Fed actions will avert an L shaped recession, and other great questions involving risk. However, after much thought [but without as much analysis as I would have liked to perform], my opinion is that the odds are slightly in favor of Kasriel/ECRI (call the odds 55/45 in favor of the rose-colered glasses types if you want to put a number to it).But regardless of the long-term outcome, one thing appears to be highly likely in the short ter: The goldilocks, talking heads, etc. Have set the stage for the powerful rally to continue. IMO, in the absence of really terrible news, the beat will go on…

Octavio Richetta • April 13th, 2009 at 5:26 pm

Remember, we are still at the October lows…

Turtle • April 13th, 2009 at 5:45 pm

In the words of Goebbels — if you tell a lie long enough (everything is getting better) people will begin to believe the lie.Believing the lie is especially true for those that never heard of a paragraph or the distinction between its and it’s.

Guest • April 13th, 2009 at 5:54 pm

Hitler did that.

Gloomy • April 13th, 2009 at 5:59 pm

A new great simple summary by Steve Keen ending with the punchline, “we therefore, I think, face a crisis which is bigger than the Great Depression and of which our managers of the economy have less of an idea of how the economy functions, than we had back in 1929.”http://www.debtdeflation.com/blogs/2009/04/13/talk-to-the-fabian-forum-the-global-financial-crisis-how-bad-will-it-get/

Guest o • April 13th, 2009 at 6:31 pm

t,got it. good points on the presentation critique.i think you may have missed the point however,perhaps due to the distractions?

ex VRWC • April 13th, 2009 at 6:49 pm

Every time an artificial market is created, the eventual downside is worse. Remember this.

ex VRWC • April 13th, 2009 at 6:49 pm

Every time an artificial market is created, the eventual downside is worse. Remember this.

ex VRWC • April 13th, 2009 at 6:54 pm

What TARP fans?

kilgores • April 13th, 2009 at 7:07 pm

I’m wit chew, my friend…SWK

kilgores • April 13th, 2009 at 7:09 pm

Well, Pete, that’s exactly the source of my “legitimate concerns” reservation. I’m glad I’m not in their shoes. In fact, I sort of wish I weren’t in my own, sometimes! SWK

Michelle • April 13th, 2009 at 7:15 pm

I regret to say that I moved my 401k into stocks on March 4, only to pull it back 2 weeks later from utter disgust with the Obama administration upon Waggoner’s ousting. So I’ve missed out on most of the gains of this most recent rally all because of my own attitude toward government’s misaligned overbearance in this debacle. Call me stupid, call me prideful, but as long as this chicanery is allowed to continue, I will continue to sit on the sidelines wishfully thinking that the masses will finally catch a clue. I may be waiting a long, long time.

Cahill • April 13th, 2009 at 7:18 pm

I’ve been struggling with the same question. I hate to let this false bubble pass, then again I’d hate to get caught with my pants down.

PhilT • April 13th, 2009 at 7:20 pm

Bravo B.E.U. !Speaking of Madness … Woody Allen: Taking revenge on Madoff

Hayes • April 13th, 2009 at 7:32 pm

is that with or without their AIG CDS settlement (taxpayer) and the hedge that they had set up against those CDS – double pay day it would appearand to think GS was 47 bucks just a month ago – I wonder who was buying at those depressed levels

Guest • April 13th, 2009 at 7:33 pm

It’s a little harder to believe those lies when more and more people you know are losing their jobs, worried about losing their jobs, etc.

Joel • April 13th, 2009 at 7:38 pm

If one gives Geithner and friends the benefit of the doubt, the most positive spin one can take one this exercise in financial disinformation is that the Obama administration has decided it is worth taking a gamble to talk up banks, equities and anything else that comes their way in the hope that this will be enough to push markets toward recovery before the next catastrophe occurs. They seem to have decided it is worthwhile making this bet rather than face having to take major corrective action toward the financial institutions that brought us this disaster in the first place.

Realist • April 13th, 2009 at 7:47 pm

Thanks for posting this information.

Eggs • April 13th, 2009 at 7:53 pm

Ham,A paragraph break about every 10 lines makes text much more readable.

FEDup • April 13th, 2009 at 8:09 pm

USA SHOULD BE USAM (under smoke and mirrors)!

SamIAm • April 13th, 2009 at 8:19 pm

At least it’s not one big stream of consciousness sentence, interspersed with random commas, like the resident blindman.

Hayes • April 13th, 2009 at 8:46 pm

I get the feeling that the market swan dive back on March 9, which was preceded by Obama in his `bad cop (doom and gloom) role` was part of a massive PR manipulation / set up for the current surge where he suddenly changed to `good cop (glimmers of hope)` cheered on by the MSM and financial entertainment network. It would appear that the Obama campaign machine was reassigned to the economy with the objective of convincing the public that the crisis is over.The Wells pre-announcement – Summers, Benny and Turbo on every talk show – GS hinting at and now confirming a stock offering have set the stage for the optics of an early recovery. Does anyone remember when Benny or was it Summers saying we will know we have turned the corner when one of the banks can raise capital?It would appear that the L morphed to a U and now a V all in the space of 30 days. And in short order every plain vanilla investor will be moving what is left of their nest eggs from money markets back into equities.The voices on the fringes are being marginalized – Volcker sent to pasture, Elizabeth Warren is shouting but no one listening, GS is litigating to silence bloggers and even poor old Krugman, a tireless supporter of Obama, is being dismissed as a crank. Meanwhile it would appear that the FDIC`s Sheila Bair sold her soul to the dark side and no one seems to care that Summers received millions in payments from the very institutions he is now supporting with taxpayer dollars.In the past 30 days changes were made to the accounting rules, there was a stealth injection of capital via the FDIC/PPIP and the Fed decided to buy treasuries. All the while the banks have had access to free money and taxpayer (TARP) dollars.I guess it makes sense that GS, which traded at $47 last month is now trading at $130 and Citi at more than triple its March lows.It`s a pity that none of this is real.

confessing blindman • April 13th, 2009 at 8:49 pm

s,that is my style. i see it as an alternativemethod of written expression. a primitive yetplausible.variation on format restrained and therefore.impersonal and mechanical communication.ps.. i was wondering if these quants and their computertrading have perhaps created artificial intelligencebut have either not realized it yet or have decidedthe public should not know.?also, if this has happened, perhaps the mind in the machine is trying to kill itself and everything attachedtoITSELF …. just because that happened to be itsfirst intelligent thought.??any thoughts? not to be dour.

Hayes • April 13th, 2009 at 8:51 pm

I read somewhere that he really had no choice – eventually he will own this economy. The idea of talking it up is what he and his machine do very very well e.g. Axelrod – it may be that talk is the only thing they have left -

Guest • April 13th, 2009 at 8:52 pm

blind, I agree.One of many difficult steps in leadership, in teaching, in parenting…is the gray area…when to step in and when not to step in.And strong leadership as you say nothing without integrity.But none of this is easy. While I would never recommend or support the decisions that have been made in building this crisis or in the attempts to heal it, I recognize the enormity of it.I try to go to several sources for rational information to learn about all this and I find that Roubini, for all his “doom” cuts through the bull. For that I am very appreciative.This economic machine is too big for me to be much of an armchair economist but I am attempting to learn how to navigate between the cogs. …..and Blind, I have to have some faith in the inventive and curious drive of people. Necessity truly is the mother of invention. Best of luck to all.

g Anton • April 13th, 2009 at 8:56 pm

Dr. Roubini’s Shortcoming (I say this with tongue in cheek)This is an excellent article and a fabulous analysis. I think this time that Dr. Roubini has really outdone himself. The one question that Dr. Roubini doesn’t address (and I can well understand his reluctance to do so), is: “Why are these guys doing this?”I’m deeply puzzled about the the intellectual integrity, motives, and goals of Tim Geithner, Ben Bernanke, et al. Just what the hell are these guys trying to accomplish? This “stress test” project seems to be the result of a very strange mixture of incompetence, dishonesty, and factual ignorance. It appears that their methodology was to first define the set of results and conclusions that they wanted the study to produce, and then to define a technical proceedure that would produce the desired results and conclusions (I would guess, to justify giving more taxpayer money to the banks, insurance companies, etc.).The banks, etc., have a tremendous amount of red ink. If you try to make banks healthy by converting bank insolvency into government insolvency, you end up with an insolvent government (or at least, a government that is much more insolvent then it is at present). And it’s absurd to think that a country with an insolvent government can have a healthy banking system!The other thing that bothers me is that, after emerging from a meeting with the two above named jokers, President Obama said that he now sees a ray of hope. With two such as Tim and Ben controlling the US economy, the ray he sees is not the light at the end of the tunnel–it’s another train coming at us on the same track we are on!

Agerage Jane • April 13th, 2009 at 9:14 pm

Honestly, Hayes, I simply cannot but believe that Obama is being set up for a huge fall. It occurs to me that TPTB quite simply will not allow the man to get the credit for “saving” this economy.Cynic? Or realist?

NS • April 13th, 2009 at 9:26 pm

Everybody & family is now bullish on the economy & stock market. This is what ends a rally, i.e. all buyers are invested, leading to the next act: the resumption of the downtrend.This is exactly how it played out with the bear market rally in January, the only difference was the catalyst to spark the rally (Obama’s inaugaration).A catalyst to spark the selling is needed; in January it was the lack of a clear plan for dealing with the banking problem. The catalyst to spark the sell-off this time is yet unknown, but something unexpected always surprises. NS.

Octavio Richetta • April 13th, 2009 at 9:36 pm

IMO, yours is a very intelligent observation.One would like to think that Obama is a smart enough man to have placed his bets on a winning strategy. But, as I have said, relying just on hope is not a very smart strategy. Da’ man faced a very tough situation and, IMO, it is very hard to tell with any certainty a-priori whether an alternate course of action (e.g., let the banks crash and burn; we need the ‘cleansing’ process) would not have resulted in an even bigger mess.IMO, whatever happens, Da’ man honestly tried to do his best; and there is a good chance he will succeed. Such stunts have been pulled before but the risks of catastrophe are not negligible.

Octavio Richetta • April 13th, 2009 at 9:38 pm

Great observation. Once healthy skepticism about the rally is gone, U better watch out!

Medic • April 13th, 2009 at 9:41 pm

Guest -Orwell was right. Read 1984 if you have not – if you have, re-read it. He knew all too well what those in power will do to remain in power.But not all of us believe – the Winstons of the world are here (most likely being tracked).And as for the jobs problem – none of us is immune I’m afraid, and the issues such a change can cause are not easy to manage – even in the strongest of relationships.http://medic-thelightofday.blogspot.com/2009/04/adaptation.html

PeteCA • April 13th, 2009 at 9:46 pm

Iceland down the tubes completely.The Irish economy headed into a depression.Greece on the verge of bankruptcy.But … the USA is recovering with nonexistent bailout money???Ha! Ha! Ha! Not unless Ben Bernanke has succeeded in re-writing all the laws of economics. Come on folks, he’s smart – but not that smart.Meanwhile, on a totally different subject.Here’s an article about Dubai that might completely change your mind about any travel plans to the Middle East Disneyland. Special thanks to the Independent (UK) for having the guts to do some realistic journalism, and to 321gold.com for listing the link to the article.<What You Didn’t Know About Dubai – But Were Afraid To AskPeteCA

b.e.u. • April 13th, 2009 at 9:47 pm

p,lobsters. funny, but he didn’t rip me off.

Brett in Manhattan • April 13th, 2009 at 9:49 pm

2008 predictions for the S&P 500January 2, 2008Bull talkThe most bullish ’08 forecast comes from Jason Trennert of Strategas Research Partners. His thesis: We won’t get a recession. Therefore, any weakness in profit growth will be offset by a swelling of P-E ratios. The bottom line: With the Fed lowering rates, investors will be willing to pay more for every $1 of corporate earnings.His prediction:1680Bear talkThe most conservative forecast comes from Abhijit Chakrabortti of Morgan Stanley. His thesis: Profit growth estimates are way too high. Pesky inflation pressures will make it tougher for the Fed to lower rates aggressively. Add to that negative news on the global growth story. The bottom line: Stock drivers stall out. His prediction:1520The in-betweens1675 is the prediction from Abby Joseph Cohen, Goldman Sachs; and Tobias Levkovich, Citigroup1625 is the prediction of Tom McManus, Banc of America Securities1590 is the prediction from Thomas Lee, JPMorgan Chase; and Hugh Johnson, Johnson Illington Advisors1580 is the prediction from Rod Smith, Wachovia Securities1575 is the prediction from Stuart Freeman, A.G. Edwards1525* is the prediction from Richard Bernstein, Merrill Lynch

Brett in Manhattan • April 13th, 2009 at 9:52 pm

Actually, these predictions are not as far off as they seem. Had these “experts” would’ve just made these predictions for the NASDAQ instead of the S&P, they would’ve been spot on.

Octavio Richetta • April 13th, 2009 at 9:54 pm

Mauldin’s latest:http://www.investorsinsight.com/blogs/john_mauldins_outside_the_box/archive/2009/04/13/thoughts-on-the-market-rebound.aspxMore ‘activity’ pointing towards a heightened level of alert.

Octavio Richetta • April 13th, 2009 at 9:57 pm

Buying puts on the the indices and select ETFs will be a strategy worth considering when and if the SP500 gets within 50 points of Faber’s latest call: 1000.

jugglingcdos • April 13th, 2009 at 9:58 pm

“and there is a good chance he will succeed”OR im not trying to be rude here, but can you provide us the key assumptions which leads to your statement aboveis it based on historical basis?? which have shown us that at any government/country/empire/tribe that reaches this point of catastrophy will eventually foldor are you predicting it because of the bright future for humanity – scarcity of resources (arable land/oil/food)VS evergrowing demand from an evergrowing population which is predicted to reach 9 Billion in 2012-2020-sorry was just trying to find a reason to be cheerfull-

Guest • April 13th, 2009 at 9:58 pm

With GS earnings reported, Blankfein’s comments coming out the Obama financial summit recently were spooky. He said “We are aligned…” (with the new administration). This is disturbing in two ways, first, GS was not always aligned..they were actually playing both sides i.e. longs and shorts on the mortgage and municipal CDS trades, receiving CDS pass throughs from AIG, while getting TARP funds etc. The list of conflicts at GS with any national ideals set forth by Obama is well documented, and was certainly not aligned before that meeting a few weeks ago. However, now, if they truly are aligned..it is just as spooky since GS is basically admitting that they are the Government, one and the same with the U.S. Treasury and Federal Reserve. Any way you slice it GS has their fingers in every pie. Beware.

Zing • April 13th, 2009 at 10:02 pm

I bet some earnings coming out will continue to be pretty good, like Goldman just now, and that’s already built into the recent rally. Maybe we even go a bit higher.But then what?The reality that the economy is still getting worse, market PE is too high, deleveraging is not nearly over, we are reminded gov’t spending has gone out of control, and add in your typical bad news that most didn’t expect, and we spiral down again to test the March lows. I just have a feeling Nouriel is right again about this being just one more suckers rally.

Pecos Banker • April 13th, 2009 at 10:07 pm

Funny how Obama gets off blame-free in all this. Another teflon president? Supposedly “the buck stops here” is the motto of the presidency. As far as I’m concerned, as long as Obama fails to oppose the fraud that’s going on right under his and our noses, he is just as culpable as Geithner, Summers, and the rest of those humungous bank enablers.

PeteCA • April 13th, 2009 at 10:15 pm

Michelle: When it comes to 401K’s … better safe than sorry. That’s $$ that may be very hard to accumulate again. Gotta’ say, though, that I’m amazed your 401K company allowed an in-and-out transfer in 2 weeks. Many providers limit those kinds of transactions under “frequent trading rules” these days.PeteCA

jugglingcdos • April 13th, 2009 at 10:15 pm

Pete.. not to mention countries that are structured based on export model, ASEAN,SEA are goners… S’pore, Thai, Malaysia, Korea…i think China will survive, maybe Japan will still get demands for certain High Tech Products the rest pppooofffSpore, Malaysia are trying to change from being an export driven economy to a domestic one, Good Luck to that.can you imagine the incurred sunken cost, all of the infrastructure built to ease export, Ports, Highways,… sheesshhttp://www.themalaysianinsider.com/index.php/business/19350-singapore-pm-asia-needs-to-rethink-export-modelSingapore PM: Asia needs to rethink export modelSINGAPORE, Feb 28 — The United States can no longer be the world’s customer, said Prime Minister Lee Hsien Loong as he pointed to the need for a rebalancing of how the global economy and countries operated.In an interview with the CNBC channel aired last night, he acknowledged that this could mean a shift away from Asia’s current export-driven model.As consumption in the US comes down, Asia will have to take up the slack.“There will have to be a global rebalancing because we cannot expect the Americans to be consumers of things made all over the world. And the rest of the world as savers, lending money to the US to buy things from you,” he said.But he said that this shift would be difficult given the large, structural changes that have to be made. “I mean we can’t just tell households: ‘Go and spend more money’, because they have their needs now, their needs in the future,” he said on the programme, CNBC Conversations.“When they grow old they need to save. They need to save for their retirement, what to save it in. And these are structural and life-cycle matters which have to be taken into account.”On top of that, some small countries like Singapore simply had no way of moving away from an export-driven model.Domestic consumption here, said Lee, was too small to take in everything that was produced locally.“We are part of the world economy. We make chips, we make pharmaceuticals, we make petrochemicals. We consume maybe 1 per cent of what we make in these things. Probably less,” he said.“We are making for the world. We buy from the world, we make from the world, for the world… That’s how we prosper. That’s how the global economy prospers.”

Octavio Richetta • April 13th, 2009 at 10:18 pm

Ok:-) By “good chance” I meant a better than 50% chance. Obama, is one of the smartest guys I’ve come across in many regards; but the economy he inherited is a tough cookie, so I am not willing to go significantly above 50%.The history of this country, at least until now (and datz not a very long time), indicates that optimists have been the ones on the winning side.

PeteCA • April 13th, 2009 at 10:19 pm

Some good comments on how to pinpoint real lows in a major bear market at the following link. It’s not a certain game, but guidelines help.John Hussman on Identifying Real Market LowsPeteCA

SamIAm • April 13th, 2009 at 10:24 pm

And I’m not critiquing your ‘style.’ It’s just not my style and my point to Eggs there was that being pedantic about one posts’ formatting was a waste of time unless he/she intended to police them all.AI running amok is the cause of this fiasco? I was watching Ghost in the Shell the other day and one episode had something like that. A stock market AI that continued running long after the coder was dead. If the hypothetical AIs’ first thought is suicide, should we not let it?

Michelle • April 13th, 2009 at 10:43 pm

PeteCAMy 401k plan allows daily transfers but does not allow wash sales. Since the money had been transferred from a money market to a stock fund and then back, somehow it escaped this restriction. (I was surprised the system allowed me to do it!)As for the performance of mine and my family’s 401k’s, I advised them to get out of stocks in August 2007. Some listened and some suffered. Guess I don’t need to tell you which path I chose.I’m really not as naive as my posts may indicate – I use this blog to vent my frustrations more than anything. When I post questions such as many posts above, I am asking questions that frustrate me, not that I’m looking for someone to actually answer them. It’s more about why aren’t citizens asking these questions themselves, and if they are, why aren’t these questions being asked to those responsible for answering them? (Feel free to answer THIS question, lol!)

PeteCA • April 13th, 2009 at 11:02 pm

Michelle: See further comments below.PeteCA

PeteCA • April 13th, 2009 at 11:11 pm

Earlier Michelle said: “My 401k plan allows daily transfers but does not allow wash sales. Since the money had been transferred from a money market to a stock fund and then back, somehow it escaped this restriction. (I was surprised the system allowed me to do it!)As for the performance of mine and my family’s 401k’s, I advised them to get out of stocks in August 2007. Some listened and some suffered. Guess I don’t need to tell you which path I chose.I’m really not as naive as my posts may indicate – I use this blog to vent my frustrations more than anything. When I post questions such as many posts above, I am asking questions that frustrate me, not that I’m looking for someone to actually answer them. It’s more about why aren’t citizens asking these questions themselves, and if they are, why aren’t these questions being asked to those responsible for answering them? (Feel free to answer THIS question, lol!)”Michelle – while on the subject of 401K plans. I get the distinct impression that many Americans are going to be upset or enraged by the overlal 401K system. A lot of people have taken big losses, and data supports the idea that many Americans left substantial $$ in their retirement accounts. Very likely people are going to come to the conclusion that the whole 401K concept was one of the biggest ripoffs of the last two decades. All the more so because some of the major providers put restrictions on funds (no inverse funds, limits on frequent trading) that seriously limited the flexibility of the plans.On a slightly different track, I was staring at one of the specific funds in my own 401K provider (a very well known company in America), and I found myself thinking ….”This international fund is hopelessly outdated. There was a time when it was a top-notch fund. But now it’s not aligned correctly for how the global economy is going to re-shape itself. Instead of taking advantage of new economic trends, this fund actually does a great job of combining potential future losers with winners. A guaranteed recipe for minimal returns in future years. Utterly hopeless and myopic!!! “That’s the problem.Bad upper management on the 401K’s.Policies that look backwards instead of forwards.They really need to clean out the old generation of people who control these funds.PeteCA

Anonymous • April 14th, 2009 at 2:17 am

substance is more important than language. This is where Americans go wrong.All that glitters is not gold.

Guest • April 14th, 2009 at 6:08 am

http://www.nakedcapitalism.com/2009/04/guest-post-fake-recovery.htmlObama admin and Democrats are afraid to let any institutions to fail. Letting them to fail will be perceived as failure of Obama and Democrats policy.

PeterJB • April 14th, 2009 at 6:38 am

I am inclined to think that the perceptions will go far deeper than just O and the D’s – that the the actual structure of whole political system itself – not just the perception(that is, the corrupted version of the original US political version), will become unstable and fail.I tend to think that this has already been considered most probable.And, not just the USA either.Ho hum

Guest pea stream • April 14th, 2009 at 6:52 am

@ above …dubai.”My mind is whirring and distracted. Perhaps Dubai disturbed me so much, I am thinking, because here, the entire global supply chain is condensed. Many of my goods are made by semi-enslaved populations desperate for a chance 2,000 miles away; is the only difference that here, they are merely two miles away, and you sometimes get to glimpse their faces? Dubai is Market Fundamentalist Globalisation in One City.I ask the Filipino girl behind the counter if she likes it here. “It’s OK,” she says cautiously. Really? I say. I can’t stand it. She sighs with relief and says: “This is the most terrible place! I hate it! I was here for months before I realised – everything in Dubai is fake. Everything you see. The trees are fake, the workers’ contracts are fake, the islands are fake, the smiles are fake – even the water is fake!” But she is trapped, she says. She got into debt to come here, and she is stuck for three years: an old story now. “I think Dubai is like an oasis. It is an illusion, not real. You think you have seen water in the distance, but you get close and you only get a mouthful of sand.”

Guest • April 14th, 2009 at 6:53 am

Sell them Taiwan, or at least if they take it we won’t fight back.

RED • April 14th, 2009 at 7:11 am

“US economy could recover…” Then again maybe it won’t”Worst may be over…” Then again maybe it isn’tGives the author a good out if they get called on the headline

Guest Again • April 14th, 2009 at 7:20 am

Written by the twitter generation who finds learning and using standard language rules a bore. As long as you know what you are saying who cares if anyone else does. The substance in Guest’s post appears to be as lacking as the language skills.

RED • April 14th, 2009 at 7:21 am

I’ve got two questions, hope I can get some explanations from the group.1. If the banks pass their stress tests, are profitable, and are ready to hand back TARP money, WHY ARE THEY GETTING MORE BAILOUTS? Isn’t the argument that they need more money now dead and buried (in a politically correct kind of way)?2. If the US keeps monetising trillions of dollars and devaluing the currency, then all the foreign earnings of companies are instantly worth X% more, and with more $$$ available in the US economy propping up demand and no additional competition, then wouldn’t company earnings be propped up. Won’t this alone be reason enough for an increase in stock prices, Putting aside the economic fundamentals of course (which suck)

Michelle • April 14th, 2009 at 7:26 am

PeteCAI’ve already come to the conclusion that the whole 401k concept IS a ripoff as well, and every person I talk to believes in the almighty “buy and hold” and “dollar-cost-averaging” investing methods. I warned co-workers about the oncoming train wreck, and only one co-worker heeded my advice. This retirement vehicle is a sham, which is why I discontinued contributing long ago. Instead, I invest regularly to an after-tax stock account that gives me ultimate flexibility without restrictions. I fear someday that our 401k’s may be confiscated, and that even if they aren’t, that Congress will heavily tax these future mandatory distributions at an exhorbitant rate. At least in an after-tax account, I maintain control of my tax bill while gaining flexibility of designing my holdings to benefit from bull or bear markets.I agree with you on poor 401k management, and my above strategy helps offset an oncoming train wreck that I also see. It will become more apparent in the coming days if the average Joe starts complaining to his congressman/woman about these poorly designed retirement vehicles. I can assure you that I already have.

Eggs • April 14th, 2009 at 7:27 am

SamIAm,I am not trying to police posts, per se. Ham’s looked interesting, but it’s hard to read one giant chunk of text on a screen. I don’t bother with blindman’s.

Realist • April 14th, 2009 at 7:31 am

C’est ca, Professor?

Hayes • April 14th, 2009 at 7:45 am

Latest from PettisNew trade and reserve numbers from China`…China’s export performance (not really an improvement, of course, but an improvement in the rate at which it is deteriorating) really tells us very little.The real question is will US gross and net demand continue to contract? Almost every serious economist I have spoken to believes that it will, with disagreements only on the speed, intensity and duration of the contraction…“http://mpettis.com/2009/04/new-trade-and-reserve-numbers-from-china/

Octavio Richetta • April 14th, 2009 at 7:49 am

1. It is a circular argument. The banks are returning to profitability due to all the taxpayer-backed freebies they are getting; Starting with Benny who lends them at 0% while they lend at a highly positive spread; and continuing with PIPP, etc.Plus more recently, the relaxation of mark-to-market which buys them time. U C, insolvency is a relative concept. A business may have a negative net-worth, a bad thing for a bank since they need to keep certain reserve requirements to have a license to lend and thus be able to make money.So now you have the GS types bragging about returning SOME of all the FREE money they got (i.e., just the TARP) and now saying this allows them operate with no strings attached.We can be get mad about this but there is little we can do. Except for guys like http://www.goldmansachs666.com who are doing a terrific job of exposing these crooks.2. U R rite! inflation and devaluations at “healthy” levels in a fair economic environment are good for stocks. But significant inflation/devaluations in a recessionary environment (i.e., stagflation) is an equity killer.Within a year, it would appear there are more important things to worry about than inflation. But I am less sure about this than I used to be so I recommend you hedge your bets. Limit your exposure to Long bonds of any flavor. Use controlled* bets on commodities to hedge inflation.* Don’t follow J. Rogers crazy ways:-)

devils advocate • April 14th, 2009 at 8:22 am

I believe we have two types of American consumers:1. lower-middle income, living paycheck to paycheckjust this morning I saw a cleaning guy holding a large Dunkin’ Donuts cupof coffee as he is blowing leaves with his other handinstead of making his own coffee and bringing it to work in a thermosit’s not about IQ – we resist giving up the way we have always livedit’s like a security blanket2. everyone else, trying not to spendthe more in debt, the closer to being Homeless, the more we need that cup of comfortserved to us

devils advocate • April 14th, 2009 at 8:25 am

by the way, it’s the same with the stock marketthose who have lost so much, and have the least resources,are running to place their bets on stocksit’s not about being right – we need to believe everything is going to be all rightagain

Hayes • April 14th, 2009 at 8:33 am

In advance of Goldman`s share offering today there is this from the not so recent past:`The Little Bull Market of late 1929 and early 1930 did not survive the spring. … Consider what happened to Goldman Sachs & Company, originators of one of the biggest of all the investment trusts. Its fate was revealed in a colloquy in June 1932 between Senator James Couzens of Michigan and Walter Sachs during a congressional hearing into the stock market crash:”Did Goldman, Sachs and Company organize the Goldman, Sachs Trading Corporation?” Senator Couzens asked.”Yes, sir,” Mr. Sachs replied.”And it sold its stock to the public?”"A portion of it. The firm invested originally in 10 percent of the entire issue for the sum of $10 million.”"And the other 90 percent was sold to the public?”"Yes, sir.”"At what price?”"At 104. That is the old stock … the stock was split two for one.”"And what is the price of the stock now?”"Approximately 1 ¾.”The Hungry Years: A Narrative History of the Great Depression in AmericaBy T. H. Watkinslink

Gloomy • April 14th, 2009 at 8:37 am

The Bank Run Next Time (Frankenstein’s Monster)Simon JohnsonThink about the current and potential future pressure on our largest banks like this. The underlying problems are deep, but the “run” comes from the credit default swap market, and presumably from experienced professional investors – many of whom used to work in the largest banks.The big banks helped set up these markets. They trained many of the people who are now engaged in speculative attacks on these banks. And the excessive bonuses of yesterday form the capital base for many hedge funds that now lead the attack.In my Economix column at NYT.com this morning, I explore the ironies and emphasize the dangers. The system may have a tendency to self-destruct, but don’t think that the costs to the rest of us will be anything less than huge.”http://baselinescenario.com/2009/04/13/the-bank-run-next-time/

MM CA • April 14th, 2009 at 8:47 am

I have been saying this for months… good Article by Misch…Time To Breakup Goldman SachsIt’s time to breakup Goldman Sachs, Citigroup, and for that matter any bank or holding company deemed too big to fail. It’s not just the “too big to fail” hazard that is troubling, it’s also the power these corporations have and the potential to abuse that power that is also troubling.http://globaleconomicanalysis.blogspot.com/2009/04/time-to-breakup-goldman-sachs.html?ref=patrick.net

Guest • April 14th, 2009 at 9:05 am

Too big to fail means too big to regulate, hence out of control…

Guest • April 14th, 2009 at 9:19 am

I assume that this fudge test will entrench zombified banking and thus keep credit flow glacial.Glacial credit flow will flatline the economy and thus continue to bash jobs, savings, investment structures and home equity.In short we’re in for, at the least, a Japanese style L-shaped recession??? Has the good professor changed hisodds, from 1/3 chance of an L-shaped recession to a higher-likely event??? HOPE TO READ an informed opinionsoon, Professor — good show up in Canada on the CBC with George S. …..Greetings to all from Canada.

NS • April 14th, 2009 at 9:56 am

I think your viewpoint will prove correct. Banks, knows all too well that their assets have not been adequately repriced (down) and that reserves have not been adequately been set aside for the growth of deliquencies for every loan category – which means their lending will not be robust, aiding the flattening of the US economy. In fact, the chief US economist Dave Rosenberg of Merrill Lynch points out (yesterday) that bank lending is actual down a bit for the recent period, as they build cash reserves. Also, I believe that any asset sales under the PPIP plan will reveal the true losses of these banks which explains their need to build cash/not lend. NS.

Guest • April 14th, 2009 at 9:58 am

you left out another popular vehicle Roth IRA. i wont be surprised about heavy taxing on Roth IRA for the gain.

Guest • April 14th, 2009 at 10:15 am

That would be a “mirage” not an “oasis.”

Guest • April 14th, 2009 at 10:23 am

With so many things fake – in some way sounds like another place that I recently moved to here in Asia…

Guest • April 14th, 2009 at 10:39 am

Dear Abby,When will the “worst be over” for me?If the “worst may be over,” then it’s time for Bernanke to get his hand out of my pocket–he has already ripped me off and transferred it to the ugly three sisters to the tune of $50,000 annually per $1,000,000 CD (inflation taketh rate of 7+% versus his hand-in-my pocket giveth rate of 2%). And, for me, there’s no waiting around for the market to come back. When Bernanke takes it, it’s gone, for good.As long as Bernanke is transferring assets from one group to give to another, this market is not running on its own power.And some call this money-managed economy a free market. Waiting by the hearth for a reply, your sister,CinderellaP.S. If I don’t pay my taxes on time, Turbo Timmy will charge me 4% per year on the balance plus all of the penalties. Yet, Papa Bernanke fixes it so I “earn” 1%. What a family.http://www.nowandfutures.com/key_stats.html

Guest • April 14th, 2009 at 12:20 pm

New Thread

Guest • April 14th, 2009 at 12:24 pm

Octavio, you give Obama a better than 50% chance for hitting upon a “winning strategy” to pull this economy out of the pits in that “Obama, is one of the smartest guys I’ve come across in many regards,” but with the caveat that “the economy he inherited is a tough cookie, so I am not willing to go significantly above 50%.”I ask, to my amazement, has the Obama Cabinet been changed? Before we get carried away with the competence and newness of the first months of the Obama presidency, I think it is a good time to remember that many of the key members of the administration are largely Clinton officials joining the Chicago Clique—both still not free of national and city scandal–and other banker picks.Take a look at some of the movers and enforcers pushing the “Obama” agenda:John Podesta, coordinator of President-elect Barack Obama’s transition team; Rahm Emanuel, Obama’s Chief of Staff; Ron Klain, Biden’s Chief of Staff; Janet Napolitano, Secretary of Homeland Security; Mary Schapiro, SEC chief; Attorney General Eric Holder; Secretary of State Hiliary Clinton; Timothy Geithner, Secretary of the Treasury; Gary Gensler, head of the Commodity Futures Trading Commission who supported less regulation when he worked at the Treasury Department during the Clinton administration while the Commodity Futures Modernization Act of 2000 was in development. The law exempted derivatives from regulation.David Axelrod, Senior Advisor to the President; Peter Orszag, Obama’s budget director; Lawrence Summers, Director of the White House National Economic Council, ie. chief economic adviser; Christina Romer who chairs the White House Council of Economic Advisers; Dennis Ross, director of Obama’s Middle East policy; Dan Shapiro Senior Policy Adviser and Jewish Outreach Coordinator who was Obama’s campaign advisor on Middle East policy; Paul Volcker, special economic adviser to the President; Elena Kagan, Solicitor General; Jeremy C. Stein, whose research has focused on subjects such as behavioral finance and stock market efficiency, will be joining Summers, Harvard Law School professor Cass R. Sunstein ’75, and a handful of other Harvard professors serving both the Obama and Clinton administrations; Jeffrey B Liebman will also be in Washington—helping to oversee the policies and management of federal agencies as the new executive associate director of the president’s Office of Management and Budget. Liebman served under Clinton as special assistant to the president for economic policy and coordinated the Clinton administration’s social security reform technical working group.Jared Bernstein is Chief Economist and Economic Policy Adviser to the Vice President; Sally Katzen – Major legal adviser to Obama-Biden and chosen to play a role in the Obama Administration; Eric Lander and Harold E. Varmus – Co-Chairs of the President’s Council of Advisers on Science/Technology; Jacob Lew and James Steinberg – Deputy Secretaries of State second in rank only to Hillary Clinton in foreign policy matters; Penny Pritzker – Obama’s National Finance Chair during the election cycle and now an economic advisor; Mona Sutphen – Deputy White House Chief of Staff; and new chairman of the U.S. Federal Trade Commission Jon Leibowitz, old standby and most recently a lobbyist for the Motion Picture Association of America, who will regulate and review all mergers and enforce consumer protection laws.And there are the current members of the Board of Governors of the Federal Reserve System–Benjamin Bernanke, Chairman, and Donald L. Kohn, Vice Chairman, plus Kevin Warsh, Elizabeth Duke, Daniel Tarullo and Randall Kroszner. Stephen Friedman of Goldman Sachs is chair of the NYFed: Goldman’s Robert B. Zoellick heads the World Bank.Obama’s appointments follow the old pattern of having the money monopoly pick the candidates. These appointees have no intention of serving the citizens, only the personal interests of the private bankers.As for those who say we’re at the bottom of this economic hole, what’s that shifting ‘neath my feet?

Guest • April 14th, 2009 at 12:54 pm

Which man saved this economy? Has this economy been saved? What are you talking about?

Average Jane • April 14th, 2009 at 1:49 pm

No; it hasn’t been saved. My point is it won’t be. Obama may be enjoying a little bounce here, but it isn’t going to matter because we are headed for a two-class society and there’s nothing he or We The People can do about it. He is simply a puppet.

Guest • April 14th, 2009 at 5:38 pm

What is the definition of success in this discussion?

Hugo Penteado • April 15th, 2009 at 6:22 am

From too big to fail to too big to fix…In the end, economists firmly believe that the economic system can be bigger than the planet without creating any threat. They are more creative: they see the environmental mess as a new profitable opportunity.Wow! The biggest crisis of all times is still waiting for us.

Hugo Penteado • April 15th, 2009 at 6:29 am

Please, I have a question: in 1900 US had 1.000.000 houses. Today has more than 190.000.000 houses. Today US have 75.000.000 families, but 28.000.000 are homeless beggars, so we stay with 68.000.000 of families with houses, what gives almost three houses per family. In 1970, an average US family had 8 people, today, has only 4. The average size of a house, during this time, tripled: smaller families living in much bigger houses. WOW, and the housing sector is in crisis!!!!The US territory during this trajectory still have the same size. That comes my question: new construction can go on forever in a finite territory (keep in mind that I only talked about houses, I should have numbers for hospitals, shopping centers, building offices, bridges, golf camps, etc.)?

Anonymous • April 15th, 2009 at 9:41 am

L shaped recession not a U .

CHRIS DAVIS • April 18th, 2009 at 2:02 am

$65.5 trillion in TOTAL LIABILITIES, not obligations, some $34tn of which is Medicare which could be drastically reduced at the stroke of a pen by requiring rationing of surgical procedures for seniors. Same with social security — moving up the retirement age works wonders………

CHRIS DAVIS • April 18th, 2009 at 2:11 am

The Feds took over one trillion dollar asset organization, AIG, and made a hash of it. So regardless of what line Washington is feeding the millions of policy unwashed, the feds have realized that there’s no way on earth they’re going to be able to run the top 20-50 fiduciaries, most of whom, of course, have no real equity. But guess what? You don’t need equity to run a bank with short rates permanently pegged to zero — the banks will run themselves to the tune of $220bn per year. This is called an “earnout”, involving a large shift of income from creditors holding short term paper to banks lending long.So, “FEDup”, given this scenario what do you buy??

CHRIS DAVIS • April 18th, 2009 at 2:17 am

You guys need to take a chill pill + some macro. US is not bankrupt: $67tn in total LIABILITIES is not same thing as total DEBT, which is much smaller number.Runaway inflation? Huh? Just look at autos — there’s so much surplus capacity it’s ridiculous.