Green shoots or yellow weeds? A trifecta of risks to the early bottoming out of the recession and short-term economic recovery and to the medium-term actual and potential growth prospects of the global economy
Recent data suggest that the rate of economic contraction in the global economy is slowing down and we are closer than six months ago to the trough of the recent severe global recession. But while the rate of economic contraction is now lower than the free fall and near-depression experienced by many economies in Q4 of 2008 and Q1 of 2009 the recent optimism that “green shoots” of recovery will lead to the recession to bottom out by the middle of this year and that recovery to potential growth will rapidly occur in 2010 appears to be grossly misplaced. A careful assessment of the data suggests that rather than green shoots there are plenty of yellow weeds both in the short term and in the medium term. Here there are three important ways that our views differ from the current optimistic consensus.
First, the current deep and protracted U-shaped recession recession in the US and other advanced economies will continue through all of 2009 rather than reaching a trough in the middle of this year as expected by the current optimistic consensus.
Second, rather than a rapid V-shaped recovery of growth to a rate close to potential US and global economic growth will remain sluggish, sub-par and well below trend growth for at least two years into all of 2010 and 2011; a couple of quarters of more rapid growth cannot be ruled out as we get out of this recession towards the end of the year and/or early next year as firms rebuild inventories and the effects of the monetary and fiscal stimulus reach a delayed peak. But at least ten structural weaknesses of the US and the global economy will cause both a below trend growth and even the risk of a reduction of potential growth itself.
Third, we cannot rule out a double dip W-shaped recession with the wings of a tentative recovery of growth in 2010 at risk of being clipped towards the end of that year or in 2011 by a perfect storm of rising oil prices, rising taxes and rising nominal and real interest rates on the public debt of many advanced economies as concerns about medium term fiscal sustainability and about the risk that monetization of fiscal deficits will lead to inflationary pressures after two years of deflationary pressures.
Let me explain next in detail these three serious risks to the US and global economic outlook.
Note first that, after the collapse of Lehman in the fall of 2008, the global financial system went into a near meltdown – literally a cardiac arrest of the global financial system – and the global economy went into a free fall: the rate of economic contraction in Q4 of 2008 and Q1 of 2009 was at near-depression rates in most advanced economies and even in many vulnerable emerging market economies.
Peering into the abyss of a near depression finally global policy makers that had been behind the curve for most of 2007-08 – having misunderstood the severity of this financial crisis and its real effects – got religion and started to use almost of the weapons in the policy arsenal – guns, rockets, missiles, artillery – to prevent a severe stag-deflation ( a combination of a severe stagnation/recession and deflation): significant fiscal policy easing; conventional and unconventional (zero interest rates, quantitative and credit easing, purchase of private and public debts) monetary policy easing; backstop of the financial system (liquidity support, recapitalization, guarantees, insurance) in the trillions of dollars (the US alone committed $12 trillion to the financial system and already provided $3 trillion out of it) to reduce the liquidity and credit crunch; provision of massive support to emerging market economies – some of which were the accidental victims of the financial tsunami and some of which has significant policy, financial and macro weaknesses – via new swap facilities and tripling of IMF resources; policies of forbearance of the banking system to restore credit growth. In the last two months alone one can count over 150 different policy easing actions/programs around the world.
The combination of this policy equivalent of a Powell doctrine of overwhelming force together with the sharp contraction of output and production below final demand for goods and services that led to a sharp contraction of inventories of unsold goods has now led to a slowdown in the rate of economic contraction that sets the stage for a bottoming out of most economies towards the end of 2009 or early 2010.
Short-term yellow weeds – rather than green shoots – imply that economies will bottom out much later than the consensus predicts. Thus, macro news will surprise on the negative before the recessions will be over
Even so the optimists that in 2009 spoke of a soft landing for the US economy (and decoupling of the rest of the world) or a mild V-shaped 8 months recession (like the U.S. ones in 1990-91 and 2001) were proven utterly wrong while those who argued that this would be a longer and more severe U-shaped 24-month recession were correct. In the US we are already in the 18th month of a U-shaped recession; so the V is literally out of the window. If the recession were over by Q4 it will be – at 24 months – three times as long and at least six times as deep – in terms of output contraction – than the previous two. Even if it were over by Q3 it would still be – at 21 months – the most severe US recession in the last 60 years.
Since the consensus was wrong last year about a short and shallow V-shaped recession the new variant of the optimistic view is another variant of the V-shaped recession: according to the consensus the recession will be over by the middle of 2009 (i.e. in a month or, according to some, it is already over by May), positive growth will return by Q3 and be as high as 2% by Q4 and the recovery of growth in 2010 and beyond will be rapid, sustained and close to potential growth with no risk of another economic downturn. All three elements of the new optimistic consensus are flawed.
Let us start with the talk about “green shoots” of recovery and the argument that the recession will be over by mid-year with return to positive growth by Q3. In addition to the talk about green shoots you hear similar bullish variants under the terms of “glimmers of hope”, “positive second derivatives” and “signs of bottoming out, stabilization and recovery”. What is the basis for the argument that the US and global recession will be over soon? Goldman Sachs – a firm that was more bearish than the consensus in 2008 – is the most sophisticated exponent of the “green shoots” hypothesis. In a paper written in mid march the research group of Goldman pointed out to four economic variables/factors/green shoots that were signaling the recession to be bottoming out: initial claims for unemployment benefits (and employment trends), retail sales, industrial production and housing conditions. Out of the four they recognized that initial claims were still high and ugly hoping that they would stabilize and contract soon while they argued that the other three were already signaling green light. Unfortunately the latest US data from the last month have dashed the hope of green shoots and showed them to be yellow weeds.
First, initial unemployment claims (specifically their important four-week average) around 650k and fell towards 610K; Goldman and Robert Gordon (a member of the NBER Business Cycle Dating Committee) even argued that historically the peak of the initial claims is always associated with the end of a recession, thus hinting that the recession was over by May or, at the latest, June. But too bad this is not an ordinary recession and too bad that bankruptcy/production cut-backs by Chrysler and GM over the summer are now likely to lead initial claims to another peak of 700K some time this summer on top of adding another 300K job losses to the already mounting ones. Even the bullishness that job losses will rapidly shrink is altogether misplaced: yes in April “only” 540K jobs were lost as opposed to the 650K of March; but if you exclude 70K temporary government worked hired by the Census private sector job losses were still a whopping 611k in April, a figure as ugly as ever. Also note that in the 2001 recession job losses averaged 150K per month (not 650K as in recent months) and that while the recession was technically over in November of 2001 job losses – being like the unemployment rate a lagging indicator – continued all the way through August of 2003 (20 months after the end of the recession) in a massive job-loss recovery (ditto in the 1990-91 recession). So while one could expect that job losses in the private sector may soon fall the near-depression levels of 600-700k per month even a fall of such job losses to a rate of 300-400k per month some time later in H2 would be still massive and much larger than in the 2001 recession. Even that slowdown in job losses implies that, most likely the unemployment rate will be 10 by the end of the summer and well above 10.5% by the end of the year and peaking around or above 11% some time in 2011. So on the unemployment front there are no green shoots, either in the present or in the likely near future; you can see only yellow or brown weeds.
Second, the optimistic view on retail sales and consumption was based on the January and February retail sales that came positive and better than expected; but after the free fall in the holiday season and given heavy discount a temporary rebound was not unlikely. Again, too bad that all the talk about green shoots in consumption and retail sales was soon smashed by a ugly March retail sales report – showing a sharp contraction – and a similarly ugly April report that showed falling sales and consumption. The green-shooters forgot about the fundamental forces dragging down the US consumer that is shopped-out, saving-less, debt-burdened (debt being 135% of disposable income), with rising debt servicing ratios (up from 10% in 2000 to 15% today), who lost 50% of its equity wealth from the 2007 peak, who has lost 25% of the value of its home (and will lose 40-45% of that value at the peak as home prices are still free falling), who cannot use its home as an ATM machine as home equity withdrawal has fallen from $700 billion in 2005 to 0 today, whose income is challenged and whose jobs are disappearing at the rate of 600-700k per month. It is true that in Q2 there may be some relief for disposable income – and a three month boost to retail sales like in 2008 - via tax cuts ($100 billion coming up), refinancing of mortgages ($20 billion savings in 2009) and the lagged effects of the fall in oil prices. But last year the $100 billion of tax cuts was mostly saved (70 cents of the dollar of it) rather than spent as consumers were worried about jobs, incomes, wealth and running down credit cards and mortgage balances. This year those worries are increased by a power of two and, like last year, at most 30 cents on the dollar will be spent. Add to this dismal outlook the fact that $20 billion of refinancing savings is spare change as household disposable income is well over $10 trillion and that gasoline prices are rising again (25 cents in the last month alone or 10% increase). So retail sales may recover temporarily in the May-July period – like they did in 2008 after the spring tax rebates; but that effect – like last year – will fizzle out by Q3. More importantly for 2010-11 the contraction of consumption and its weak recovery over the medium term and the need to rebuild depleted savings will remain a drag on households for a number of years. So expect yellow weeds for consumers both in the short term and medium term.
Third, the argument that industrial production would soon bottom out in the US and other advanced economies was based on the historical relations between the manufacturing ISM or PMIs (Purchasing Managers Index) and industrial production. In previous business cycles ISM/PMI led industrial production by about a month: so when the ISM bottoms out industrial production starts to bottom out a month later. Thus, since in all advanced economies the PMIs started to bottom out – at near depression levels – around March-April the optimistic consensus predicted a near bottom for industrial production followed by a rapid recovery as the sharp destocking on unsold inventories of Q4-Q1 would be followed by rapid restocking. But, for whatever reasons we don’t fully understand yet (possibly the severity of this recession caused by massive over-leverage), the historical link between PMIs and industrial production has broken down: industrial production in the US and other advanced economies is still sharply falling – but not as fast as the near depression rates of the previous six months – in spite of the PMIs having bottomed out and started to recover. And while the ISM is now well above its near-depression level of 32 it is still well below 50 that signals a continued contraction of the manufacturing sector. So, so far the PMI have provided a “fake head” – a misleading indicator rather than a leading indicator – and industrial production is still contracting at painful – but now no longer depression – rates in most advanced economies.
Finally note that the bullish argument that industrial production will rapidly snap back to rebuild inventories once the recession has bottomed out is predicated on the assumption that final sales of domestic output will rapidly recover once they bottom out. But so far most components of final sales are still falling and have not bottomed out and once they bottom out they are unlikely to grow fast enough to require a surge in production: consumption is still falling, residential investment is still free falling, capex spending by the corporate sector is still free falling, and exports are still sharply falling. The only component of final sales that is modestly rising is government consumption. Thus, the recovery of final sales that would herald a rapid recovery of production is still more in the minds and hopes of the green shooters than in the reality of the recent data. In summary, there are ugly yellow weeds so far rather than green shoots as far as industrial production is concerned.
Fourth, the green-shooters pointed out to the sign of stabilization of the housing recession. Let us leave aside that the optimists – including Bernanke, Greenspan and 80% of sell side research – has been repeating the refrain that the housing slump will bottom out soon since early 2007 (while totally missing its bust that started in mid-2006) and have been proven wrong quarter after quarters for all of 2007, all of 2008 and all of the current 2009. The reality is that, in spite of all the talk of green shoots in housing there is very little evidence for it so far and home prices need to fall at least another 15 to 20% before they bottom out.
This author was the biggest bear on housing in the middle of 2006 when he predicted the worst housing recession since the Great Depression, a fall in housing starts and sales of 50% and a fall in home prices of 20%. But even the biggest bear on housing turned out to be too optimistic: housing starts did not fall 50% (from 2 million to 1 million annual) but to 500K – or 75% from peak – and they are still falling (as well as building permits); new home sales fell even more than starts and are now hovering – for single family homes – around depression levels of 350k. Home prices have fallen –based on Case and Shiller – by 25% from the peak and they are still falling at an annual rate of 20%.
Of course, after three years of the most severe housing depression ever quantities in the housing markets are so low (75 to 80% from peak) that they may soon bottom out: both starts and new home sales are now well below long term averages. But even quantities may not bottom out until the end of the year for two reasons. One, residential investment was still falling at an annual rate above 30% in Q1 and both starts and building permits are still falling. Building permit and starts need to stabilize and start growing again for a while before home completions – the measure of supply of new homes – bottom out a few months later and then start to recover. So, residential investment will be a negative drag on GDP at least until Q4 of 2009 if not later. Two, some measure of price affordability are better now but many others are not: real home prices and price-rental ratios suggest the need for another 15-20% fall in home prices and actual prices are still falling – at an accelerated, not decelerated, rate of 20%. That is important because today 0% down-payment mortgages of the housing craze/bubble are out. Anyone who wants to buy a home needs to put down a 20% of equity. But why would anyone want to buy today a home – even one that he/she could afford – if home prices will fall another 15-20% before they bottom out and thus this home equity will be totally wiped out by 2010? It is rather rational and better to wait until home prices have bottomed out before buying, a behavior that will keep new and existing home sales low even if prices are now more affordable. Note also that 50% of existing home sales are now distressed sales: either short sales or foreclosed properties; thus both new and existing home sales are still showing sharp decreases in prices.
In summary, the existent inventory of new and existing home sales is so large – even if marginally smaller than a year ago – that massive downward pressure on home prices will continue through most of 2010: you could stop producing new homes today and it would take almost a year to clear the inventory of unsold homes. So no wonder that the Case and Shiller index is still showing home prices falling at a 20% annual rate and showing no sign of deceleration of this home price rate of fall; if anything the rate of price deflation has accelerated since 2008 from 17% to 18% to 19% and to the current 20%. And even if new home sales, existing home sales, housing starts and building permits were to bottom out in the next few months – as they should as they are close to 80% down from their bubble peak – their recovery would remain so sluggish and the downward pressure on prices so large – given the inventory of unsold homes – that home prices will have to fall – over the next 18 through the end of 2010 – by another 15-20% – for a cumulative fall of 40-45% – before they bottom out in 2011. So beware of the nonsense about green shoots in housing: the worst housing recession since the Great Depression is still in full swing and the yellow weeds have taken over millions of empty housing lots for the last three years and still going. And any recovery of housing quantities will be weak even after such quantities (supply and demand) will bottom out in H2 while prices will fall through most of 2010 if not longer.
In summary, a careful and detailed analysis of the four green shoots of recovery (employment trends, retail sales/consumption, industrial production and housing) that Goldman Sachs and other proponents of the “green shoots” hypothesis have been branding for 3 months now suggests that all four green shoots are still yellow weeds. Data may improve in the next few months – as aggressive policy stimulus makes a difference – and the economy will bottom out by year end or early 2010; but the widespread view that the bottom of the US recession was now (or next month in June) has been clearly dashed by the most recent macroeconomic data.
For the sake of conciseness we will not discuss in detail the evidence for green shoots for Europe and Japan and other advanced economies. But a recent careful analysis of the data – done by RGE analysts – suggests that the US green shoots are mostly yellow weeds in Europe and Japan and other advanced economies the weeds are even yellower and browner than in the US. Of course the second derivative of most economic indicators is now positive in the US and other advanced economies; if it had remained negative a free falling acceleration of the economic contraction would have implied a depression or near depression. But basing strong optimism on positive second derivatives is totally far-fetched: first derivatives need to become positive for a recession to be over; and if second derivatives are positive a recession can continue for another decade unless those second derivatives become so positive that that the bottom is reached in finite time rather than farther out over the horizon; i.e. second derivatives need to be so large that first derivatives become positive (i.e. expansion rather than slower rate of contraction of economic activity) sooner rather than later.
While the recent debate on the green shoot has concentrated on whether the US and other economies will bottom out mid-year or later that is not a crucial issue. After all even sensible bears (or realists) about the economy see this 24 months deep and severe recession being over by year end or in early 2010; so the gap between the bulls and the bears on when the recession will be technically over is about 6 to 9 months. And bears also recognize that a brief snapback of production and GDP may occur once the US and other economies bottom out: production well below final sales will lead to a recovery of output to rebuild inventories; and the effects of the monetary and fiscal stimulus – by some measure equal to 20% of GDP for the US alone – should give some temporary boost to demand and output.
Medium term risks and vulnerabilities imply that yellow weeds – rather than green shoots – will lead to a mediocre, sub-par, weak and well below potential growth recovery in 2010-2011
But the crucial issue is not whether the global economy will bottom out in Q3 as opposed to Q4 or Q1 of 2010 as the gap between those who are more optimists or more pessimists on the timing of the bottom is only a couple of quarters. The more important issue is, once the bottom is reached, whether the global growth recovery will be robust or weaker over the medium term, say over the 2010-2011 horizon. As argued above one cannot certainly rule out a couple of quarters of sharp snapback of GDP as the inventory cycle and the massive policy boost lead to a short term growth revival. However, a detailed analysis suggests that there are many yellow weeds that may lead to a weak global growth recovery over 2010-2011 horizon. Of course a mediocre global economic recovery would have significant effects on risky asset prices – equities and others – as it would imply a mediocre and sub-par recovery of profits and corporate earnings after their sharp fall during the current recession.
Again the current optimistic consensus sees US economic growth going back in 2010 to a level close to potential (a growth rate above 2% that is close to the 2.75% potential growth rate) and returning to potential by 2011. And many optimists go even further arguing that the snapback of demand and production after the depressed levels of the current recession will lead growth to be well above trend (rather in the 3.5%-4% for a while) for a couple of years as most previous US recessions have been followed by a period of above trend growth once the recovery gets going. Compared to this optimistic consensus a detailed analysis suggests that growth in both advanced economies (US, Europe, Japan and other advanced economies) and emerging markets will remain well below potential for at least two years – if not longer – as the severe vulnerabilities and excesses of the last decade will take many years to mend and resolve. Also, the weak growth of the G3 (US, Europe, Japan) will imply a drag on the medium term growth rate of emerging market economies at rates well below potential as such economies still significantly depend on G3 growth – via trade, commodity prices, credit and financial links, and international investors’ risk sentiment – for their own growth.
Let us discuss in detail the many structural factors and vulnerabilities that will cause mediocre – below potential – economic growth over the medium term even once this severe global recession is over. We will also discuss the factors that may actually lead to a fall in the potential growth rate of many economies and thus further depress economic growth over the longer term. We can identify at least ten such risks and vulnerabilities to medium term global growth.
First, and more importantly, an incorrect interpretation of the causes of this crisis has led to a partially mistaken policy response to it that does not resolve the fundamental causes of this crisis. The right way to think of this crisis is as being caused by excessive over-borrowing and over-spending by households, excessive and risky borrowing and lending by financial institutions and excessive leverage of even a fat tail of the corporate sector in a global economy where housing, asset and credit bubbles got out of hand and eventually went bust. So this is a crisis of debt, credit and solvency, not just illiquidity. The alternative interpretation is that this is a crisis of confidence (an animal spirits driven self-fulfilling recession) that has led to a collapse of liquidity – as counterparties don’t trust each other – and a collapse of aggregate demand as concerned households and firm cut consumption and investment in ways that can turn a regular business cycle recession into a near depression. Note that even those who believe that this a crisis of over-leverage and over-spending do agree that a severe recession triggered by the bust of asset and credit bubbles can turn into a near depression if the collapse of liquidity and credit in financial markets and concerns about survival by households and firms lead them to cut spending even more than justified by those weak financial fundamentals. Thus, even those who believe in an excessive debt & spending view agree that aggressive monetary and fiscal easing is necessary to prevent a severe and unavoidable recession triggered by such excesses from turning into a near depression. I.e. animal spirits, self-fulfilling expectations, coordination failure that lead agent to focalize on bad equilibria, and crises of confidence and trust can lead an unavoidable serious recession into a real depression.
But while monetary and fiscal easing are necessary to avoid the global economy from falling from the cliff into a depression abyss the ability of these over-levered economies to resume lending, borrowing, spending, investment and growth fundamentally depends on the resolution of the real and financial excesses that causes the economic and financial crisis in the first place. And if this was a crisis of excessive leverage the current rhetoric about the deleveraging process is based on fantasy rather than data. In reality, true deleveraging by households, corporate firms and financial institutions has not really even started as private losses and debts of households, financial institutions and even corporations are being socialized and put on the back of the balance sheet of governments. Thus, the lack of true deleveraging – or appropriate debt restructuring – will lead to a corrosive debt deflation and limit the ability of households to spend, of firms to invest and of banks and other financial institutions to lend. In other terms if this is a crisis of credit and solvency rather than just illiquidity and confidence much more is needed than easy money and massive fiscal stimulus to resume high economic growth. Worse, the socialization of private losses – while private debts and leverage are barely reduced – implies that the process of re-leveraging continues with the public sector levering up to pick up the losses of the private sector. So, this policy solution creates – down the line – another dangerous debt and solvency problem, this time for the sovereign, with risks of a more severe financial crisis down the line once a refinancing crisis occurs and/or the ability by the sovereign to borrow more is curtailed. So, this fundamental misinterpretation of the causes of the crisis leads to a partially incorrect policy solution that exacerbates the debt problems of households, financial firms, corporate firms and governments in ways that are discussed in more detail below. The right way to resolve a problem of excessive debt relative to equity capital for households, firms and financial institutions is to reduce such debt and convert it into equity. Corporate debt should be converted into equity; financial sector unsecured liabilities should be converted into equity; and even households debts can be converted into equity by reducing the principal value of such mortgages and providing an equity upside to the mortgage creditor in the form of a warrant. If there is too much debt and too little equity in an economy a sector by sector conversion of debt (unsecured claims of creditors and bondholders) into equity is the right and efficient solution that allows agents buried under a debt overhang to start spend and invest again. Instead of this efficient debt conversion we are socializing the private losses and putting them on the balance sheet of governments and increasing public debts, thus increasing the overall leverage of the economy rather than reduce it and risking to create a sovereign debt problem while not reducing private leverage. This is not the proper growth-inducing way to resolve a problem of excessive debt and leverage.
Second, in current account deficit countries (i.e. in countries where the country spent more than its income and often households consumed than their disposable income) consumers need to cut spending and save more: shopped out, saving-less and debt burdened consumers have been hit by a wealth shock (falling home prices and stock markets), rising debt servicing ratios and falling incomes and employment. These deficit countries where consumers spent too much and saved too little – often because of a housing bubble – include not only the US but many other “anglo-saxon” style economies: UK, Ireland, Iceland, Spain, many emerging Europe economies, Australia and New Zealand. In these economies the retrenchment of consumption and build up in savings to reduce debts, restore net worth and resume robust spending will take several years. In the US consumption averaged 65% of GDP (and household savings averaged 11% of disposable income) for a long time before the latest decade long housing bubble and consumption binge. At the peak of the bubble consumption had risen from 65% to 72% of GDP and the savings rate plunged to zero and even negative for a few quarters. Currently consumption has fallen from 72% to 70% of GDP and saving increased from near zero to about 5% of disposable income. Even if one were – heroically – to assume that consumption will not revert to the long term average a fall from 70% to say 67% is likely and necessary while savings rate go towards double digits. Even greater contraction of the consumption rate and increase of the savings rate would be necessary to restore the depleted net worth of the household sector that has been hit with its biggest wealth contraction in 60 years.
But how can households reduce their debt ratios that have increased from 65% of disposable income in the early 1990s to 100% in 2000 and to 135% today? And these debt ratio risk rising even further as price deflation leads to debt deflation, i.e. the rise in the real value of nominal debts. One solution is income growth that will increase the denominator of the debt to income ratio and thus reduce the overall debt ratio. But given the potential growth of the real income of US households that solution is not feasible. A second solution is to save a lot to reduce debt and rebuilt net worth: after all the change in wealth is by definition equal to the – properly measured – savings rate. But here the “paradox of thrift” prevents this solution to the debt deflation problem. If households sharply and rapidly cut spending and save more the recession becomes a near depression and the ensuing fall in income further increases the debt to income ratio. The only remaining solution is debt default and debt reduction: when firms have too much debt they go into Chapter 11 and have their nominal debts reduced; then they can start producing, hiring and investing again; when countries have too much debt (say Argentina, Russia, Ecuador in recent history) they default, reduce the principal value of their debts and start spending and growing again. The same holds for households: the overhang of excessive debt can be a burden to households’ ability to spend for a long time. Thus, for households buried under a mountain of mortgage debt, credit card debt, auto loans and student loans debt reduction – not just re-stretching of debt maturities or debt servicing relief – is necessary to eliminate the debt overhang and restore robust rate of consumption spending and/or of investment in physical capital (new home purchases).
Third, the financial system – in spite of the massive policy backstop – is severely damaged and the credit crunch will thus not ease very fast. Specifically, traditional commercial banks are severely damaged with a burden of bad loans and toxic securities – and trillions of dollars of peak expected losses – that are still mostly on their balance sheets at the time when such institutions are still severely undercapitalized. Even more important, most of the shadow banking system is either gone or in severe difficulty as the equivalent of a bank run has hit most of the highly leveraged institutions of this system: three hundred non-bank mortgage lenders are bust; all the system of conduits and SIVs is gone; two major broker dealers are gone, one has merged with another bank and the last two have been converted into bank holding companies; money market funds cannot even cover their costs as interest rates are zero and are now under the umbrella of a government guarantee; half of hedge funds may close shop in the next couple of years; even private equity will experience a serious refinancing crisis once covenant lite clauses and PIK toggles run their course; finance companies and insurance companies are also in trouble and need government support and recapitalization. Securitization is – size-wise – a shadow of its recent peaks and attempt to revive it – TALF – have been so far a mixed bag.
Most of US financial intermediation used to occur outside the banking system and into capital markets; but now most of the institutions of this shadow banking system have disappeared or are severely damaged. Of course, compared to the near global financial meltdown that followed the collapse of Lehman conditions in financial and capital markets have improved. But the damage of leverage, toxic underwriting, even more toxic securitization and risk taking of the last few years is still here. Many financial institutions are still severely undercapitalized, in spite of stress tests that were not stressful enough, are saddled with bad loans and bad assets and are in risk retrenchment mode that leads to a persistent credit contraction. Loan losses are spreading from subprime, near prime and prime mortgages to home equity loans, commercial real estate loans, credit cards, student loans, auto loans, industrial and commercial loans, leveraged loans, corporate bonds, muni bond and emerging markets sovereign bonds; and then to the whole slew of assets – CDOs, CMOs, CLOs and the entire alphabet soup of credit derivatives and structured finance products – that securitized these underlying loans.
After $12 trillion dollars of liquidity support, guarantees, insurance and recapitalization most of the US financial system – and a good part of the UK too – is under effective government control. And the policy unwillingness to convert the unsecured claims of creditors into equity as a way to recapitalize banks implies a partial creeping nationalization of a good part of the financial system. And while the liability side of the financial system has been partially addressed through government recapitalization and guarantees of other liabilities, the task of ridding financial institutions of their bad assets has barely started. Financial institutions saddled with low capital, still high leverage that has to shrink, bad assets and risk aversion will not start providing large amounts of new credit to a private sector – households and firms – that are themselves saddled with excessive debt.
The financial sector damage is not limited to the US: most major UK banks – with the exceptions of HSBC and Barclays – are under effective government control or ownership. The IMF estimates massive losses on loans and securities of other European banks, given their exposure both to domestic borrowers and to Emerging Europe, a region on the verge of a broader financial crisis. According to the IMF even Japanese and other Asian banks are not immune to significant losses on loans and securities.
Over time financial institutions in the US and around the world will clean up their balance sheet; but systemic banking crises are not resolved in a few months; they usually last several years and are associated with persistent credit crunch. Given that a lot of economic activity – purchases of durable goods, purchases of homes, capex spending by the corporate sector – is financed with debt/credit the more limited availability of credit, securitization and financial intermediation will inflict persistent damage and restrict over the medium term the ability of private sector agents – households and corporate firms to borrow, consume, spend and invest.
Fourth, a large part of the corporate sector is also under severe financial stress while the overall willingness and ability of the corporate sector to grow production, employment and capital spending will be restricted by poor profitability driven by slow revenue growth, deflationary pressures and rising corporate defaults. Note that, while most US corporations are less leveraged than they were in 2000-2001 there is a large fat tail of the corporate sector – similar to the fat tail of the household sector – that is severely indebted: issuance of junk bonds run in the hundreds of billions of dollars in the last few years while a trillion dollar or more of LBOs at leverage ratios much higher than historical average occurred in the private equity space. Now that high yield spreads have gone from a low 250bps (in 2006 before the crisis) to current levels of 1500bps (down from a recent peak of 2200bps) a massive refinancing crisis is hitting these highly leveraged firms. Firms that in the past would have been able to rollover their loans, bonds and debts coming to maturity now face a liquidity crisis that may lead them into a costly debt restructuring (in court Chapter 11 or out-of-court exchange offers under the threat of bankruptcy); and some firms that would have otherwise gone into Chapter 11 debt restructuring will end up into socially costly liquidation (Chapter 7) because of the lack of private DIP financing. While default rates on high yield bonds peaked at 13% of the outstanding stock in the last two recessions (1990-1991) this time around rating agencies estimate default rates peaking at 20% and if you include out of court exchange offers under the threat of bankruptcy the figure is closer to 24%. At the same time recovery rates that in previous recessions were in the 30 to 40 cents on the dollar range are likely to be in the 20 to 30 range in this recession. This process of corporate debt restructuring or outright liquidation may take years. And recent government interventions in such restructurings – see the Chrysler and GM cases – is leading to concerns that rights of more senior creditors of firms (such as bondholders) are being undermined with preferential treatment of more junior creditors (pension liabilities owed to workers).
But the main constraint to a recovery of capex spending, production and employment in the corporate sector will be a weak recovery of corporate profitability. If the global economy will grow at sub-par rates in 2010-2011 corporate revenues will grow slower than otherwise; if deflationary pressures will remain across the world given the glut of supply relative to aggregate demand pricing power of firms will be limited and profit margins will be further squeezed; the ability to control costs and restore earnings by slashing employment will reach a limit and excessive employment contraction has negative macro effects: less jobs means less income, less consumption, less corporate revenues and less profits/earnings. And a period of time when profits and earnings growth remain under pressure because of low revenue growth, pressure on margins and the burden of high and costly corporate debt is negative for the resumption of capex spending by the global corporate sector that is already saddled with vast excess capacity – because of massive overinvestment by China, Asia and other emerging market economies – and low levels of capacity utilization. That weak recovery of profits/earnings will also be bearish for equity valuations of corporate firms thus increasing the costs of equity financing of capex spending.
Fifth, as discussed above the socialization of private losses and debts implies a sharp rise in public debt burdens. In the US alone the CBO estimates that the public debt to GDP ratio will rise from 40% to 80%, or about 9 trillion dollar. If long term rates will then increase to 5%, the resulting increase in the interest rate bill alone would be about $450 billion or 3% of GDP. I.e. the fiscal primary surplus will have to be permanently increased by 3% of GDP (via an increase in taxes or cut in government spending) to prevent an unsustainable Ponzi increase in the stock of public debt as a share of GDP. The burden of trillions of dollars of additional public debt in the US and other advanced economies will be a medium term drag on growth. High debt levels may be financed only with default (an option that advanced economies have not followed in recent decades), a capital levy on wealth, the use of the inflation tax to wipe out the real value of public debt or a painful increase in regular taxes or reduction in government spending. All these options are costly as they imply distortions on the supply of labor and/or the returns to saving and investing.
And over time rising debt ratios of government will eventually lead to increases of real interest rates that may crowd out private spending and may even lead to sovereign refinancing/default risk. Indeed, sovereign risk that was until recently limited to emerging market economies is now on the rise in advanced economies, especially those in the Eurozone: rise of sovereign spreads relative to safer German Bunds or US Treasuries, downgrades by rating agencies, risks of failed government auction, risk of a refinancing crisis, less ability/willingness to monetize fiscal deficits (especially in a Eurozone where the ECB is hawkish on inflation) are becoming pervasive in many advanced economies; and eventually even the US may face a downgrade of its AAA rating. Sovereign risk is especially serious and rising in the periphery of the Eurozone where you have countries with large budget deficits, large public debt to GDP ratios and banking systems that are both too-big-to-fail and too-big-to-be-saved, i.e. financial systems whose liabilities are so large relative to the resources of the sovereign that the government could not bail out such financial systems unless there is cross border burden sharing (i.e. unless the German and French taxpayer bails out Greece, Ireland and possibly other weak Eurozone members).
If one rules out defaults and the inflation tax as options as their costs in advanced economies would be serious a painful process of increases in taxes and reduction in government spending may reduce the rate of economic growth over the medium term (2010 and beyond); such fiscal adjustment may be necessary to ensure medium term debt sustainability but it immediate effect would lead to a reduction in private and public aggregate demand. So it will be a drag on economic growth over the medium term.
Sixth, the rapid and massive monetization of fiscal deficits – that has been pursued by central banks this year – is not yet inflationary in the short run as there are massive deflationary forces in the world given the slack in goods markets and labor markets; also the collapse in the velocity of money implies that the excess liquidity has been so far hoarded by banks in the form of excess reserves. But if central banks don’t find a clear exit strategy from very easy monetary policies – that have led to the doubling or tripling of monetary base in the US alone – eventually either goods prices inflation and/or another dangerous asset and credit bubble will ensue when the global economy gets out of this severe recession. And some of the recent rise in equity prices, commodity prices and other risky assets prices is already clearly liquidity driven rather than being fully justified by the improving economic fundamentals.
Inflation may indeed become the path of least resistance for policy makers as it is easier to run the printing presses and cause inflation rather than pass politically difficult tax increases or spending cuts in Congress or other legislative bodies. But inflation is not a cheap solution to high public debts and the debt deflation problems of the private sector. If central banks were to allow the inflation genie out of the bottle allowing expected inflation and actual inflation to rise from low single digits to high single digits to double digits at some point a painful Volcker-style recessionary disinflation policy (like the one in 1980-82) would have to be implemented to break the back of inflation expectations and bring back the inflation genie expectation into the bottle. Thus, central banks destroying a quarter of century of achievement of price expectation stability and low inflation credibility to reduce the real value of public and private debts would be a costly solution to these debt problems. And high and variable inflation close to double digits would then lead to much higher real interest rates for government bonds, mortgages and other long term fixed interest rate debts of the public and private sector as investors will have to be rewarded with a high risk premium for high and volatile inflation. So the result would be another dismal low growth decade like the 1970s of high inflation and high and volatile real interest rates.
Seventh, employment is still sharply falling in the US and other economies; according to the OECD in advanced economies the unemployment rate will be close to 10% by 2010. And low medium term growth will lead to only slowly falling unemployment rate once the recession is over. Years of high and rising unemployment rates have corrosive effects on growth. Persistently unemployed workers lose skills, human capital and become less employable. High unemployment rates are associated with lower incomes, lower consumption spending and thus lower growth. The ability of households to service their high debts is corroded by high unemployment rates and sluggish income growth. Default rates and recovery rates on a variety of bank assets (residential mortgages, commercial mortgages, credit cards, student loans, auto loans) are highly correlated to the unemployment rate. And the pressures that globalization, technology and trade are putting on the real wages of lower skilled workers (and even of higher skilled white collar workers subject to the threat of offshore outsourcing of their jobs) will remain a challenge in the years to come. While the integration of 2.3 billion Chindians in the global economy can be over time a major source of long term global growth the challenges of easing the global effects of such addition of 2 billion plus people to the global labor force will be daunting.
Eighth, for the last decade the US and a few other deficit countries (UK, Iceland, Ireland, Spain, Australia, New Zealand, etc.) have been the consumers of first and last resort spending more than their income and running large current account deficits. While China, Germany, Japan, most of Asia and most emerging markets (with the exception of Emerging Europe) have been the producers of first and last resort spending less than their income and running large current account surpluses and thus relying for their growth on the demand of deficit countries to fill the gap between their excess production and domestic spending. But now this party and this system of imbalances is challenged as the consumers in the deficit countries need to retrench, spend and consumer and import less. And for deficit countries to be able to go back to their potential growth while domestic demand is falling relative to GDP you need other components of aggregate demand, namely net exports, to improve over time. The resulting reduction of global current account imbalances implies that the current account deficits of the overspending countries (US and other anglo-saxon countries) will lead to a reduction of the current account surpluses in the oversaving countries (China and other emerging markets, Germany, Japan). But if net exports shrink in surplus countries these countries can go back to their potential growth rate only if domestic demand – especially private domestic demand – rises faster than GDP. Bu if domestic demand does not grow fast enough in the surplus countries the resulting lack of global aggregate demand relative to supply – or equivalently the excess of global savings relative to investment spending – will lead to a weaker recovery of global growth with most economies growing much less than their potential growth rate. In other terms the surplus countries cannot rely anymore on the overconsumption and overspending of the US and of other deficit countries as sources of export led growth. Thus, unless domestic private demand is significantly increased in the surplus countries - a process that may take many years as the high saving rates of the surplus countries are due to structural factors that cannot be changed in the short run – growth in the surplus countries and in the global economy will be well below trend.
Ninth, while the rising role of government is necessary to prevent a severe recession from becoming a near depression mistaken public policies may lead to sub-par growth for years to come. Think of trade protectionism and its potential costs; think of financial protectionism and the likely restrictions to foreign direct investment. Think of rising public debts and deficits leading to higher real rates and the need to raise distortionary taxes to avoid debt sustainability problems. Think of the effects that greater and necessary regulation and supervision of financial institutions will have on credit growth that will remain limited for a long time. Think of the greater degree of government intervention in economic affairs and the risks that this intervention will become excessive and distortive of private sector development and growth.
Tenth, there is a significant risk that, in addition to lower than potential growth over the medium term because of the structural vulnerabilities discussed above we may also observe a significant fall in potential growth in advanced economies. This reduction in potential growth could be the result of several factors. First, it is the result of aging of population and demographic trends. Second, reduction in the rate of human capital accumulation (that increases long term labor productivity) as long term unemployed workers loses skills, younger workers without jobs do not increase such on-the-job skills and lower investment in education and training occurs (as the cost and availability of financing of education shrinks during a protracted credit crunch). Third, several year of sub-par capex spending and less capital accumulation will reduce trend productivity growth. Fourth, the crowding out effects on the private sector of public sector deficit/dissavings and rising real interest rates on public debt will imply less growth. Fifth, a lot of the growth of the last decade in deficit countries was artificial and driven by excessive borrowing, leverage and overspending. If the financial crisis and the ensuing persistent credit crunch lead to less credit growth over time potential growth will be lower than otherwise.
In conclusion, several medium term yellow weeds may constraint the ability of the global economy to return to sustained high growth. Growth may remain for a number of years below potential and even potential growth in advanced economies could shrink because of the factors discussed above. Thus, unless those structural weaknesses are resolved the global economy may grow in 2010-2011 at a rate well below its potential and even experience a reduction of its potential growth.
The risks of a double-dip W-shaped contraction
Finally, we have so far discussed why yellow weeds – rather than green shoot – will cause the global economy to bottom out and get out of its recession later than the optimistic consensus; and why structural weaknesses may led to lower actual and potential growth over the medium term once we are out of this severe economic downturn. But there is a third risk that has to be kept in mind. Once the global economy bottoms out there may be a couple of quarters of faster GDP growth as production is increased to rebuild inventories and as the effects of the policy stimulus reach their peak. But that recovery will be constrained by two factors: first, the medium term vulnerabilities and constraints to robust growth discussed before. Second, the risk of a double dip W-shaped recession as the wings of a tentative recovery of growth in 2010 could be clipped towards the end of that year or in 2011 by a perfect storm of rising oil prices, rising taxes and rising nominal and real interest rates on the public debt of many advanced economies.
First, oil and energy and commodity prices could spike as soon as there are tentative signs of a global recovery if the elasticity of supply of such commodities is inelastic to the price because of limited excess capacity of commodities after years of underinvestment in commodities and especially oil and energy. The resulting spike in commodity prices would be first inflationary but, more importantly, a sharp negative terms of trade effect on commodity importers that will reduce their real income and lead to further demand slowdown.
Second, by the end of 2010 many US tax cuts (on incomes, capital gains, dividends, estates) will expire and will be partially reversed; and the likely introduction of cap & trade will represent an additional tax increase (however necessary to control greenhouse emissions). This incipient tax increase may lead to a slowdown of consumption and investment spending.
Third, concerns about medium term fiscal sustainability and about the risk that monetization of fiscal deficits will eventually lead to inflationary pressures after two years of deflationary pressures could lead to increases in nominal and real interest rate on government bonds thus crowding out consumption, capex spending and a tentative recovery of housing.
Conclusion: significant triple risks to global economic recovery.
In conclusion, there are three major sources of downside risk to early and sustained global economic recovery. First, in the short run the evidence suggests that rather than green shoots there are plenty of yellow weeds. So this severe global recession may not end in the middle of 2009 – as the optimists claim – but rather towards the end of 2009 or some time in 2010. Second, global recovery after this recession may not be V-shaped (as the optimists claim) with rapid return to potential growth. Structural vulnerabilities and the legacy of over-leverage of households, corporate firms, financial institutions and now governments may lead to several year of below potential growth with additional real risks that even potential growth may fall in advanced economies. Third, the wings of global recovery could be clipped towards the end of 2010 or 2011 – and result in a double dip W-shaped recession – if rising oil and commodity prices, rising tax burdens and rising concerns about medium term fiscal sustainability and inflation lead to an early crowding out of private consumption, capex spending and residential investment.
The outlook for the global economy may turn out to be better than the one described in this analysis if appropriate policies – to be discussed in a separate note – are adopted to limit these short term and medium term risks and vulnerabilities. And as discussed above one cannot rule out a couple of quarters of rapid growth as the effects of the massive policy stimulus take hold and as firms that have sharply destocked inventories start to ramp up production once final sales start to bottom out and recover. But such short run recovery risks to be warped by the medium term structural vulnerabilities that wil lead to low actual and potential growth in 2010-2011. And the risk of a double dip W-shaped recession towards 2011 cannot be ruled out either. Thus, the detailed analysis in this paper suggests that downside risks to sustained global growth recovery appear to be greater than to the upside risks.
Over time the global economy will mend its excesses and potential growth in emerging market economies remains high especially if domestic demand growth – rather than sole reliance on net exports – becomes the new source of growth for emerging market economies. The sluggish medium term actual and potential growth of the US, Europe and Japan (unless a new technological revolution boosts potential growth) suggests that emerging market economies cannot rely any more on advanced economies growth as a major source of their own growth. So the medium and long term sustainability of emerging markets growth will partly depend on their ability to develop a new model of domestic demand and/or South-South trade and growth.
257 Responses to “Green shoots or yellow weeds? A trifecta of risks to the early bottoming out of the recession and short-term economic recovery and to the medium-term actual and potential growth prospects of the global economy”
Jason B • May 19th, 2009 at 4:57 am
First
Guest • May 19th, 2009 at 5:18 am
Me second . A very Rare chance.But Prof , the Indian markets are sizzling
BobbyNight • May 19th, 2009 at 5:49 am
what impact on the stock market, please Nouriel?
bamboccioni • May 19th, 2009 at 6:27 am
Sorry, good professor. But why dont’you say – plainly – that the Us government policy (Geithner&co) is inflating another bubble and that’s why we are running the risk of W-shaped recession?
Dan • May 19th, 2009 at 6:44 am
This analysis tells me that the market is behaving as it should. It anticipates that the end is coming within 6 to 9 months and which makes it prudent to start moving from cash to equities.Any comments?
Jason B • May 19th, 2009 at 7:23 am
Huge bubble. As reported P/E on the SP500 is over 60! Earnings will continue to fall.
Alp Hamzagil • May 19th, 2009 at 7:32 am
+1 on this, I totally agree.I wonder how much pressure the government puts on Mr. Roubini for saying out loud all the things he believes in as they in general don’t match what the Treasury, FED or Wall Street experts are saying. All my greetings to you from Turkey Mr. Roubini. You the man!
Hayes • May 19th, 2009 at 7:51 am
Check out the latest at ZHTuesday, May 19, 2009The Flagrantly Visible HandNow with a hearty helping of futures manipulation (courtesy of the SLP?). None of this should be news to Zero Hedge readers. The video below from Fox Business News discusses all you need to know about how to prop a market about to crash. Fast forward to 2 minutes and 30 seconds.”“Something strange happened during the last 7 or 8 weeks. Doreen you probably can concur on this — there was a power underneath the market that kept holding it up and trading the futures. …”http://zerohedge.blogspot.com/2009/05/flagrantly-visible-hand.html
ptm • May 19th, 2009 at 7:54 am
Professor, how about another post on an old topic…You predicted 1,500 bank failures a year or so ago but I have not heard another word on the subject since November 2008.So what happened? Are they just hanging on? Are they whole again with TARP money? Are we now officially like Japan with 1,500 zombie banks?I think we have had just 32 failures this yearhttp://www.fdic.gov/bank/individual/failed/banklist.htmlOther bank references…http://www.economist.com/opinion/displaystory.cfm?story_id=13648968http://www.marketwatch.com/story/report-some-bank-ceos-may-be-replaced-bair-says?siteid=rsshttp://www.latimes.com/business/la-fi-badloans13-2009may13,0,7628577.storyhttp://abcnews.go.com/Business/Politics/story?id=7577774&page=1http://www.huffingtonpost.com/2009/05/08/short-sales-banks-blockin_n_199099.html
Anonymous • May 19th, 2009 at 8:11 am
Nouriel,Thank you for all of your hard work. Could you please talk about the fact that the United States is not manufacturing goods as we did in the past? How can we get out of debt if we buy most of our goods from China? How long can we kid ourselves that we have changed to a “service” economy. It seems this subject has been swept under the carpet, but it seems it is really a core problem that is not being dealt with at all.
The Alarmist • May 19th, 2009 at 8:29 am
9th … Major Doomo seems to be rather loquacious today.First, the collapse of Lehman was not directly what triggered the panic/meltdown. It was what the collapse of Lehman implied, which was that the Bankers realised they couldn’t trust anyone, as they knew that what brought Lehman down was exactly what every one of them had been doing in their own books.The conundrum of why the Fed et al could keep pumping money into the system and see little to no new lending going is explained by that.Now, months later, the banks are lending because they realise they have an unlimited call on the taxpayer in nearly every major jurisdiction. Despite that they are still reluctant lenders. Overall credit in the US, for example, has shrunk for the first time in its recorded history.But it seems to be working in a few places … housing prices in London actually increased in the last month. On the other hand, US housing starts just plummeted. Say what you will, but the UK is an emptier shell than the US, so a brief blip in housing prices is merely interesting.The darker cloud in the US is its transformation into a kleptocracy of bankers and unions, both of whom have been enjoying massive transfers of wealth from the rest of society.And we haven’t even begun to see the evolution of health care (17% of the economy) from private to public hands … I think I’d rather take my chances with greedy, profit-motivated insurance adjusters rather than to wait for rationed health care ala the UK and Canada. But hey, why bother learning from experience??? We have, after all, a mission to install tens of thousands of our friends and supporters in the new healthcare bureaucracy … can’t make everyone a mail-carrier or DMV employee.The macro-economy at this point is almost irrelevant. O is on a mission. Damn the economy and full speed ahead.
Hayes • May 19th, 2009 at 8:58 am
Ninth, while the rising role of government is necessary to prevent a severe recession from becoming a near depression mistaken public policies may lead to sub-par growth for years to come. Think of trade protectionism..and this article from Canada’s Financial Post newspaperU.S. stimulus: patronage and waste”The $800-billion stimulus package pushed through by President Obama has ignited a trade war with Canada, reports The Washington Post. In response to vague “buy American” provisions in the stimulus, “A number of Ontario towns, with a collective population of nearly 500,000, retaliated with measures effectively barring U. S. companies from their municipal contracts — the first shot in a larger campaign that could shut U. S. companies out of billions of dollars worth of Canadian projects.”A trade war is also underway with Mexico, thanks to a provision in the stimulus package that blocked a measly 97 Mexican truckers from U. S. roads. That minor NAFTA violation “caused Mexico to retaliate with tariffs on 90 goods affecting $2.4-billion in U. S. trade,” destroying 40,000 American jobs.Obama’s protectionism echoes Herbert Hoover’s protectionism,..”http://www.financialpost.com/related/links/story.html?id=1602043
Anonymous • May 19th, 2009 at 9:21 am
Dr. Roubini, a lot of us poor peons are counting on you to keep telling the truth… not the goldman sucks, wall street swindler, government/journalistic shill propaganda. please keep speaking out and let us know when you think the macro fundamentals of the economy suggest tiptoeing back into the stock market… thanks!!!
PeteCA • May 19th, 2009 at 9:33 am
It IS a cor problem and we can’t kid ourselves. It’s a major issue right now. As MM_CA likes to say on this blog … “NO JOBS!”.Our auto industry in the USA is dying right now – in front of our very eyes. That takes down all the dealerships, support chains, parts manufacturers. A big hit to the industrial base. Where are these guys going to go out and find new (equivalent) jobs next week??? Nowhere.That’s why it’s a sham for the Fed and the financial elite to try to pretend that the US economy can just bounce back merrily at this stage. At this stage there are two different America’s, and the people running our economy don’t live in the real one.PeteCA
Anonymous • May 19th, 2009 at 9:44 am
the 2001 recession ended in November 2001. But equity markets didn’t start picking up until 2003. I’m not sure why the conventional wisdom is that equity markets start rallying 6 months before the end of a recession. That doesn’t fit the facts.
Basuma • May 19th, 2009 at 9:46 am
First paragraph, “20008″?
ReturnFreeRisk • May 19th, 2009 at 9:51 am
In my opinion, the logic of this article is impeccable. However, we live in a world where we are not only predicting whether all this higher frequency economic data is a) better/worse than the consensus view, and b) what the reaction of the market will be to the eventual release. Today’s housing starts/permits are a good case. New cycle low and much below consensus (aka no shoots of any kind unless they are growing upside down). The market can a) take it as a real bad number that it is or b) put a positive spin on it (the number was low due to multi family homes and the low number means inventory is being worked off – both asinine) and rally. If it does b), remember data was deteriorating in 07 fast and the market ignored it for months (>6) before it came to its senses. So the pain inflicted by a delusional market can be substantial and long.
ReturnFreeRisk • May 19th, 2009 at 9:59 am
I agree. Since 1960, the equity mkt was ahead of 6 upturns and missed or was concurrent with 5 upturns. On calling the tops, it was 5 times it was ahead and 6 that it missed. Conventional wisdom is wrong according to what my facts tell me.
ReturnFreeRisk • May 19th, 2009 at 10:05 am
As long as people keep looking at “operating earnings” instead of “GAAP or as reported earnings” the delusion will continue. The difference between operating and GAAP earnings is the widest ever. Operating earnings is an asinine concept. I would also like to report my trades by taking out all the losers.
FEDup • May 19th, 2009 at 10:22 am
agree! The average investor has either sold on the way down or is still frozen in his tracks and just waiting for market to return to former highs. The insiders have been selling this rally and all the bad news has been ignored by the market. Nobody in their right mind believes this recession will be over in a few months or even a year yet stocks keep rising as if “some flagrantly visible hand” which is invisible to the public has been feeding this rally. Perhaps this is the ultimate plan by our govt to recapitalize the banks: keep raising share prices to pre-crisis levels. Sadly, capitalism has been reduced to a system of elite engineered faux bubbles where the majority of investors stand a better chance of making money in a Vegas Casino than in US markets. And our honest, illustrious leaders in Washington keep playing the Sargent Schultz schtick: “I know nothing, I see nothing, I hear nothing”.
Hilario • May 19th, 2009 at 12:04 pm
Trifecta? Shorter Oxford gives Trifarious, Trio and Tifid, Petit Robert, Tri, Trio and Trifide,Webster not much help either. I suppose I shouldn’t have thrown the Latin dictionary out many years ago.
Morbid • May 19th, 2009 at 12:12 pm
Brace For Hyper-InflationAlso check out the Buffet comments – about Buffet doubling down on his derivative bets.
Guest • May 19th, 2009 at 12:16 pm
CHART OF THE DAY: Green Shoots In Retail? Ha!http://www.businessinsider.com/chart-of-the-day-retail-sales-2009-5
Guest • May 19th, 2009 at 12:43 pm
…will result in a stunning and durable increase in the quantity of base money, which will ultimately be accompanied not by a year or two of 5-6% inflation, but most probably by a near-doubling of the U.S. price level over the next decade.
Using the BLS 1980s method, we have seen 10% inflation for the last three years, so yeah, 10% for 10 years is a doubling.In fact, we will probably see more like 15% to 20% inflation. That would be a doubling in just five years.
MA • May 19th, 2009 at 12:47 pm
no 2 ways about it… inflation (and 100% espeially hyperinflation) can NOT and will not happen while house prices are falling.It just doesn’t work that way.Miss America
MA • May 19th, 2009 at 12:49 pm
Nouriel…Very good article. Nice summaries, connecting the dots, foresight, etc…I think this stands out as one of your best in the last year or so.Just my opinion.Miss America
Mark • May 19th, 2009 at 1:03 pm
Pump ‘N Dump!Mark
JGU • May 19th, 2009 at 1:05 pm
Is it a suckers’ rally, my good professor? Will the stock market be closed for a week to stop the rally? When will all the 800 or so banks go bust? Who is the consensus?
Mark • May 19th, 2009 at 1:08 pm
And soon Mexico will be policing its borders to keep people from entering the US resulting in higher agricultural prices.Between this and oil, expect food prices to outpace all other price increase.Mark
Mark • May 19th, 2009 at 1:10 pm
I’d like to thank you for landing here, you’ve got an excellent understanding of the big picture!Oh, and what a crafty username! 
Mark
Mark • May 19th, 2009 at 1:13 pm
Doubling time is 70 divided by percentage number. 10% inflation would result in a doubling in 7 years; 15 would be a little over 4 1/2 years; 20% in only 3 1/2 years!Mark
Mark • May 19th, 2009 at 1:14 pm
I call it “compost!” (assimilated back into the ground). LOLMark
ReturnFreeRisk • May 19th, 2009 at 1:28 pm
Mark,The 2007 top was marked by deteriorating earnings at banks (writedowns) and not just the credit crunch itself. I see this time around to be the same. Earnings will not come in as expected (65 dollars per S&P share in 2009). The govt is all in (interest rates at zero and fiscal stimulus already in). At that point, the market should realize that there is nothing that can be done but to write down our bad debts and investments.My username refers to government bonds. At some point, they will become a ReturnFreeRisk.
Anonymous • May 19th, 2009 at 2:07 pm
yes, Nouriel? Comments?
Brett in Manhattan • May 19th, 2009 at 2:07 pm
Just a bit of anecodotal evidence. I’ve never seen Manhattan so dead on the weekends, during the day and at night. Where there used to be traffic jams, now, there’s open road.
Anonymous • May 19th, 2009 at 2:14 pm
It was U before it was L before it was V and now it is wannbe W. This prediction business is not believable anymore — I am sorry to say.
Brett in Manhattan • May 19th, 2009 at 2:18 pm
For those here who aren’t horse racing fans and are too lazy to google the word, a trifecta is a type of bet. To win, the bettor must select the first three finishers of a race in exact order. I’m guessing the Prof used this term in honor of the filly, Rachel Alexandre, winning the Preakness Stakes.
Softwarengineer • May 19th, 2009 at 2:25 pm
GREAT TITLE FOR YOUR ARTICLE DR ROUBINII’ve noticed the stock markets today and yesterday remind me of investors using lucky rabbit’s feet or horse shoes to pick when to buy.Yesterday, the home builders’ index went from “12″ to “14″ and Lowes didn’t lose as much as they thought it would; an improvement? But what does it mean? Then I looked up the home builder index definition and discovered anything less than “50″ is dismal. Does that mean we went from an “F-” to another “F-” and things look wonderfully rosy now? LOLToday; its just the opposite. Housing data for April crashed through the floor with Homedepot too and the stocks look like a roller coaster on steroids…LOLThe only thing that makes sense to me for stocks on the short-term uptick is oil prices. I imagine the higher oil gets, the higher item prices can get with the cost of energy factored in, hence, higher profits on a potential/theoretical higher item price base, that is until consumers go bankrupt and stop buying period. LOL
krb • May 19th, 2009 at 2:35 pm
Dr Roubini,Excellent analysis!However, now that you are finally and clearly laying out the medium and long term costs to the short term money printing policies you’ve supported, why do you continue to give a pass to those short term decisions? You make repeated comments like “while the rising role of government is necessary to prevent a severe recession from becoming a near depression mistaken public policies may lead to sub-par growth for years to come”, as if the choice of govt to intervene with printed money to ease our pain is so obvious as to not require an explanation. Maybe I’m stupid, but please explain why these govt interventions in this and every other recession are “necessary”, knowing full well they make the next episode even worse.Now that the massive govt intervention you’ve advocated for has taken place you now seem to want to “hedge” yourself with warnings about what would happen if the large interventions are not appropriately rescinded…..knowing full well that if govt properly “threads the needle” in rescinding prior money printing interventions it would be the first time in history. Please provide an analysis of what you anticipate would happen, or would have happened, had the Austrian schoolers had their way. Thanks.
Guest • May 19th, 2009 at 2:40 pm
Nice article. I think so far you haven”t articulated the pessimistic view, rather it is a realistic view. The pressimistic view would probably consider a few more negative linkages, such as, while defaults on credit cards by the unemployed and the sup-prime borrowers might produce relatively insignificant amount of losses to companies (now at least!), these borrowers with poor credit will retrench further and further as, being unemployed and having no credit available, means lesser and lesser consumer spending. If 15 percent of the workforce is unemployed or working part-time, then we could expect that 8-9 percent would suffer the above fate. Supposing that the workforce is about 60 percent of Americans, this would come to about 5 percent of Americans in the above situation. If these 5 percent of unemployed are forced to reduce their expenditure by about 40 percent, then that would correlate with a 2 percent drop in retail-sales consumption.
Guest • May 19th, 2009 at 2:42 pm
Horse racing betting term.
Cahill • May 19th, 2009 at 2:45 pm
Rich,I agree with you in concept but wouldn’t wage depression and some other areas such as fuel and food costs inflating not net out to true higher inflation (not hyperinflation by any means)?
Guest, also • May 19th, 2009 at 3:09 pm
You are right. I first noticed this on a trip in January wlking around alone one night. It suddenly struck me that things were too quiet, and then I started paying attention to all the closed store fronts and signs advertising space for lease and for sale. This is in a general area I have traveled to for almost 30 years and know well. Up until last fall, all the trends were going the other way. I was back in April and the same streets are even more somber now.
Hayes • May 19th, 2009 at 3:10 pm
Tim Duy had a good article last week, here is an excerpt that addresses inflation (lack thereof:
Even after a recovery gets under way, the rate of growth of real economic activity is likely to remain below its longer-run potential for a while, implying that the current slack in resource utilization will increase further. We expect that the recovery will only gradually gain momentum and that economic slack will diminish slowly. In particular, businesses are likely to be cautious about hiring, implying that the unemployment rate could remain high for a time, even after economic growth resumes.In this environment, we anticipate that inflation will remain low. Indeed, given the sizable margin of slack in resource utilization and diminished cost pressures from oil and other commodities, inflation is likely to move down some over the next year relative to its pace in 2008. However, inflation expectations, as measured by various household and business surveys, appear to have remained relatively stable, which should limit further declines in inflation.Now consider the output gap over the last decade:ChartThe current gap already far exceeds that of the last disinflationary scare, and Bernanke expects it to continue to expand further, and then diminish only gradually. As long as the gap continues to expand, Bernanke’s bias will be in favor of additional easing. The only question is whether he remains content to allow TALF funds to slowly trickle into the economy, or speeds the pace of policy with expansions of longer dated Treasury purchases. Given Bernanke’s past behavior, expecting patience on his part seems unrealistic. Moreover, the last jobs report provides less room for optimism than observers suggest. Importantly, Jim Hamilton notes the decline in hours worked appears unabated; threat of a currency collapse aside, there will be no policy tightening, only easing, until hours worked moves unquestionably and sustainably in a positive trajectory.Bottom Line: The economy looks to be turning a corner relative to the downward cyclical force of last year. But this is only a partial victory, as the factors that that started us down this path – namely, a debt-supported consumer spending dynamic – remain in play, and will likely remain in play for years, arguing for a long period of slow growth, punctuated by short-lived bursts of positive data. In such an environment, and considering the importance of government support to sustain financial stability, the odds favor continued policy easing. Those looking for a more positive scenario are pinning their hopes on either an unlikely rapid return to past patterns of consumer behavior, an unlikely rapid evolution in patterns of economic activity that are not consumer dependent, or a decoupling of emerging market economic activity from the US (which could pose a different set of policy challenges).
http://economistsview.typepad.com/timduy/2009/05/turning-which-corner.html
JGU • May 19th, 2009 at 3:39 pm
The professor is a perfect hedge fund manager! He will hedge whenever needed and possible. All forecasters do, as a matter of fact.
idunno • May 19th, 2009 at 3:40 pm
It’s Back to the Future …
Guest • May 19th, 2009 at 3:43 pm
Write Down OR Write Off ?
PhilT • May 19th, 2009 at 3:53 pm
Brett in Manhattan • May 19th, 2009 at 3:57 pm
Throw in HELOC people who acted like Lottery winners with their loans. These people are now busto.
Mark • May 19th, 2009 at 3:59 pm
Don’t people here find that it’s strangely overly tough to make the call one way or the other?I think that one person (or maybe a couple) offered up the idea that we might actually experience BOTH inflation and deflation concurrently. The more that I watch all of this I have to agree that there’s something to this concept. And today something dawned on me…The split in our societies is clearly intensifying between the haves and the have-nots. Perhaps viewing this inflation vs. deflation debate with this in mind might provide some clarity…To the have-nots, whose incomes are dropping (think multiple-household incomes), everything is getting more expensive (think affordability), everything, that is, except the things that they don’t really need/already have (like cars, houses, TVs etc.).Meanwhile, on the other side of the divide, the haves are able to gobble up assets being shed by the have-nots or those temporarily discounted (new surplus) at reduced costs.Yes, I know that in the classic sense of inflation/deflation it’s about money in circulation, but clearly our classic definitions are failing us. NOTE: there’s also the added complexity of electronic bits being used to fill holes in balance sheets; this is so esoteric/virtual (and maybe is the real reason why none of this makes sense, in which case it spells only certain doom/collapse) that I discount it here.This will play out for a while, until the havenots have no incentive to play the (Monopoly) game anymore (the dollar is meaningless). This devaluation, if I understand it correctly, basically translates to inflation (and in the final death throes of a currency, hyperinflation).Thoughts/Comments?Mark
Mark • May 19th, 2009 at 4:10 pm
Or… people completely losing any confidence in the system, finally understanding that it’s all based on senseless (and unsustainable) consumption and that growth is dead. As things stall, and the SYSTEM is unable to carry more and more unemployed, people will start dropping like flies. Eventually even the most blind will be forced to see this.Wild speculation? No. It’s pretty much how things have always played out historically with collapsing empires (and we could say that since it’s been global that it’s the global empire that will collapse).When viewed in this scale the Dr. is still in fantasy land…Mark
Mark • May 19th, 2009 at 4:15 pm
Not enough of these victories! Makes one long for the not-so-corrupt days of Reagan!Mark
Guest • May 19th, 2009 at 4:50 pm
I hope we are all open minded skeptical empiricists and can assess ideas devoid of the baggage of dogma. Take a 52 minute look at political economist, Jack Rasmus, and I would be happy to see an intelligent critique. This is the “left” perspective, and it is interesting.”The historical roots of the economic crisis” are very important in seeing the big picture.http://www.kyklosproductions.com/video/historical_roots/historical_roots.html
RED • May 19th, 2009 at 4:56 pm
The conventional wisdom relates to inventory recessions. The recession / depression we are in is completely different and bears no relation to the 6 mo. historical end to recession.With the amount of stimulus thrown at the ecomomy worldwide, its no surprise we are seeing “green shoots”. In fact, it would be surprising if we didn’t see them. However, these green shoots need rain to grow, and the economy is still massively imbalanced and capital is not being allocated to profitable business’s. So, green shoots will grow into weeds and the economy will double dip.
econoprophet • May 19th, 2009 at 4:59 pm
The only men who don’t hedge are prophets, and nobody listens to them anyways…
PeterJB • May 19th, 2009 at 6:21 pm
I propose a new IDEOLOGY:EXAMPLE:(Search using Wolfram)Socialism: NounA political theory advocating state ownership ofindustryAn economic system based on state ownership of capital**************************************************PROPOSED:Adaptivism: noun – albeit in transition = verbeA method of governance adopted in 2009 advocating the development of scientific understandings and maxims to govern socio-economic cycles on behalf of the peoples of Earth while respecting the Universal Principles for Individual Rights and the Pursuit of Happiness.A method of governance that minimizes the immediate participation of politicians, bureaucrats, lobby and influence by wealthy and poor alike, personalities.An economic system comprised of the intertwining of the real economy and the risk economies of free enterprise whereby the separation of the relationships are clear and precise and subject to judicial, a priori, review and maintenance with full accountability, at all times.A governing system where the socio-economic forces drive all aspects of civilization but founded in adaptive physics and scientific maxim of emergent and sustainable phenomenon.A governing system that places respect and freedom in its highest order where freedom is defined as keeping one’s hands out of the pockets of all others, while minding ones own business, a priori.A system of governance that recognizes that no man(includes woman) can or should be trusted, a priori.A governance system which is a minimum employer.A governing system that rejects murder, genocide, war, stealth, deceit or any and all orders, types and kinds and rewards corruption, theft and lies with appropriate measure.A governance system that seeks natural leadership as a long term vision that meets the long term benefits for the children of our children’s grandchildren and beyond.A governance system where bankers are properly trained to be efficient in the utility business of capital allocation and distribution.Keywords: ideology | physics | science | adaptive | accord | reason | rights | separation | rights | logic | compassion | governing | freedom | sanityHo hum
Hayes • May 19th, 2009 at 6:33 pm
interesting post by MacroManThe RandomizerSo easy, in fact, that Macro Man wonders if it is even possible to tell the difference between current price action and a random number generator. So he’s determined to find out…http://macro-man.blogspot.com/2009/05/randomizer.html
Brett in Manhattan • May 19th, 2009 at 6:53 pm
While we’re at it, let’s also throw in prudent savers who have watched their interest income disappear. They’re gonna start spending needlessly because?And how about the people who are holding significant CC balances and just had their rates raised by the banks who anticipated the new CC legislation. They’re gonna go even further into debt because?
Guest • May 19th, 2009 at 7:07 pm
GENIUS
Brett in Manhattan • May 19th, 2009 at 7:13 pm
I’m no lawyer, but, I wonder if a case could be made that banks like Citi and Chase violate the spirit of usury laws by setting up entities in states like South Dakota that have high interest rate allowances, even though these banks are really based in New York.
Guest339 • May 19th, 2009 at 7:15 pm
David Rosenberg: The Short-Covering Rally Is Finished, Here Comes The Leg Downhttp://www.businessinsider.com/david-rosenberg-the-short-covering-rally-is-finished-here-comes-the-leg-down-2009-5
Farnorth5 • May 19th, 2009 at 7:17 pm
Well”Alarmist”,when you mention Canada,s Health care system ,it is important to know about the Propaganda involved:To be specific ,Firstly , all Canada,s Doctors continue to operate their own private practices.,Secondly,Canada has 14 Health care systems.(Each Province/State has its own budget)which is used to pay out claims made by the Doctors on a fee for service basis (The same as the Private Plans).In effect,each Province has a “Private /Public Partnership” with the State/Provincial Medical Association outlining fee,s to be paid.The Govt of Canada does not have a Federal System like Cuba where the Doctors /Nurses etc are on Federal Payroll…For your information British Columbia,s current year Budget is $13 Billion (Divide by 2,1 Million Adults comes to $6,190 per year or $515.80 per month.(All children are included)It is not a perfect system and I would not recommend it as there are at least 12 Countries with a better Universal system.The only role the Fed govt plays is to pay 21% of each States annual bill,providing certain minimum wait times are observed and each State Health CareCard is accepted Canada wide..Where does the money come from? Well first of all every Canadian has NO payroll deduction,but when you compare revenue sources between a Canadian State and a U.S.one, you quickly realize we “Overcharge on gas /diesel tax by 30% to pay for the system.”It is not the law but simply evolved over 60 years the State/Provincial system has been in effect..So the information spouted by most “Vested Interests”is simply Propaganda and not Fact,unfortunatly for everyone trying to make sense of a very costly Health Care System.(When you pay $4.00 per gallon ,we pay $5.20)Under the circumstances Canadians drive smaller cars to offset the cost.The most popular being Toyota Corolla and Honda Civic,both made in Canada…
Michelle • May 19th, 2009 at 7:32 pm
Markets are not following fundamentals, otherwise we would’ve hit S&P 400 by now. Lots of evidence that the Fed via Goldman Sachs is pumping up the markets, defying all logic. I have written repeatedly, repeatedly about these crazy CDS auctions, and NOWHERE in the media will any of you hear about them. Here’s the deal: The Fed’s pawns create the liquidity, driving up stock and commodity prices artificially in hopes that confidence will be restored. Prior to large CDS auctions, the pawns back away and let forced-selling take place, as many hedge funds must sell to cover their cash obligations coming due. I have seen it over and over again for the past 8 months, and the larger the auction the harder the fall. The media and Jim Cramer types exclaim “Maybe the market just needed to take a breather!” NOT! The real deal is that this market will keep going higher just until it’s time for another auction, then sell off, and then head back up again. Works like clockwork. Can’t wait for the Chrysler and GM CDS auctions, it’ll be time to back up the truck and buy more stocks on those days. Fundamentals aren’t working in this market.
Guest • May 19th, 2009 at 7:41 pm
Color me clueless, but how or where do you find out when CDS auctions are slated to occur? I’ve searched online when you’ve posted about this in the past few months or so, but either the info isn’t publicly available online, or I’m not using the right keyword combination. Thanks..
Guest • May 19th, 2009 at 7:46 pm
Here is the solution for some of our problems.A climate solution that’s out of this world
One of the newest energy lobbyists claims he has the answer to climate change: spaceships.The government has in its possession “extraterrestrial vehicles,” lobbyist Stephen Bassett said. As in flying saucers.Imagine the power source, he said, behind a 30-foot wide saucer that weighs the same as a tractor-trailer yet hurtles through galaxies at 20,000 miles per hour.”What is the energy system operating that craft?” Bassett said. “They’re not burning kerosene.”He added, “It eliminates oil. It eliminates coal. If it’s as good as we think it is, it transforms everything.”No more ozone hole or melting polar ice caps, Bassett said. And the price of electricity would drop to almost nothing.
In fact judging from the comments on this board I suspect more than one poster here is an extra-terrestial…
Farnorth5 • May 19th, 2009 at 7:46 pm
A tough call to make? You bet,when it,s a manipulated system ,anything can happen and sometime does .Too many people behind the scene have a vested interest in the outcome.Who knows who will be the winners ?Probably the people who make the rules and can change them at will (Read Central Bankers and Associates in the Govt,s of the World) Certainly not the General Public.The “Public Interest”died in the Speakers Chair of our Federal Senate and House 40 years ago….
Guest • May 19th, 2009 at 7:49 pm
Confession: I hovered the cursor over the hyperlink, and was surprised that it wasn’t from The Onion’s URL.
Guest • May 19th, 2009 at 8:01 pm
Quit a post! One way the kleptocratic bankers transfer wealth into their massive monopoly is by using “illiquidity” hype to thwart ongoing banking arrangements with healthy businesses that borrow regularly to meet payroll and repay from incoming receipts. The banks have deliberately crippled firms by refusing them payroll and operating funding, forcing them into quick bankruptcy, and then have bought up their assets and patented property at fire sale rates using their taxpayer bailout funds.The following article from Progress Illinois demonstrates further how the current financial system selects winners and losers, how it can put one business out of business, such as forcing J. Peterman Company in 1999 into bankruptcy over a few days’ funding glitch (read “Peterman Rides Again” by John Peterman), or saving another such as Bloomingdale’s through bankruptcy via Federated in 1990 (http://www.fundinguniverse.com/company-histories/Bloomingdales-Inc-Company-History.html):“Hartmarx And Wells Fargo: The Makings Of The Next Republic Windows?”May 04, 2009 — Last December, financial giant and multi-billion-dollar bailout recipient Bank of America canceled a $5 million line of credit to Chicago-based Republic Windows and Doors, leading the owners to abruptly shut down their Goose Island plant. The 250 unionized workers employed at the factory then pushed back, staging a sit-in at the factory to secure the 60 days severance and unused vacation days they were lawfully owed. After a dramatic victory that drew national media attention, some labor experts and business leaders guessed that the peaceful occupation might set an example for banks and employers considering such short-sighted actions.Apparently, fellow bailout recipient Wells Fargo ignored the uproar, as a similar situation may be brewing around a manufacturer they finance. If the bank ultimately puts short-term profits over the survival of this longstanding Illinois-based company, union workers and Americans at large would have yet another reason to castigate the Wall Street interests who, in Sen. Dick Durbin’s words, “own” Washington.Hart Schaffner Marx (known colloquially as Hartmarx) has been manufacturing high-quality clothing apparel for over 100 years. With 2,000 North American employees — including 1,000 workers at plants in Des Plaines and Rock Island and a warehouse in Michigan City, IN — it’s the only remaining major, high-end, men’s clothing manufacturer in America…But like most manufacturers of luxury goods, 2008 was a particularly tough year. As demand for discretionary apparel purchases shrunk, profits fell. Coupled with the larger problems on Wall Street, the company’s stock price dipped from $2 to $0.20 between late September and late November. And that’s when Wells Fargo — the company’s principal lender of short and long term debt — got active. The bank refused to extend credit to Hartmarx, lowering its borrowing capacity and forcing it to file for Chapter 11 bankruptcy in January.After Hartmarx declared bankruptcy, it took pressure from Rep. PhilHare, House Financial Services Committee Chairman Barney Frank, Sen. Chuck Schumer, and members of the Obama administration to convince Wells Fargo to provide the ailing company with a $100 million “debtor in possession” loan to finance operations during the restructuring.Sources told Women’s Wear Daily recently (subscription required) that Hartmarx is at “a critical juncture in its ability to fund operations,” with finances beyond the delivery of last week’s payroll in question. Liquidation — which would entail selling the company’s inventory, machines, and brand name, while firing the entire workforce — is a real possibility. Hare has suggested it is also the preferred option of Wells Fargo, which accepted $25 billion in TARP funds and recently posted a “record first quarter profit.” Indeed, UNITE-HERE general president Bruce Raynor told WWD that the bank has been further tightening the screws:“As I understand it, these bankers are squeezing the company in an irresponsible fashion,” said Raynor. “They keep tightening the rope and what that does is choke the company gradually.”“The banks were to use this money to accelerate loans to businesses so (the businesses) could keep functioning, to lend money to homeowners and to help companies like Hartmarx that are going through bad times,” Hare said.Hare went further in his comments to WWD:”I will not continue to send money to banks that run people out of their homes and businesses. I’m livid with Wells Fargo. I don’t know what their logic is.”Three bidders — London-based Emerisque, New York-based Mistral Equity Partners, and California-based Yucaipa Cos. — are vying to acquire Hartmarx in a bankruptcy court auction. Company executives favor the Emerisque bid because the London firm is expected to keep Hartmarx largely intact and try to revitalize its brands. Yucaipa — run by billionaire and Bill Clinton buddy Ron Burkle — has a history of leveraged buyouts of grocery store chains and has maintained solid relationships with organized labor, including the United Food and Commercial Workers…The next step before the official bankruptcy court auction is for Wells Fargo to select the bidder it favors — a decision that could come in the next few days…http://www.progressillinois.com/2009/5/4/hartmarx-new-republic-windowsHere is an excerpt, from a Money Morning series in December, that documents further incriminating evidence against bankers in their profit plays triggered by the global financial crisis: “ Billions in U.S. Bank Rescue Funds are Fueling Buyouts Worldwide – Instead of Lending at Home”:Buyouts Already AcceleratingWith all the liquidity the world’s governments and central banks have injected into the global financial system, the pace of worldwide deal making is already accelerating. Global deal volume for the year has already passed the $3 trillion level – only the fifth time that’s happened, although it took about three months longer for that to happen this year than it did a year ago.At a time when the global financial crisis – and the accompanying drop-off in available deal capital (either equity or credit) – has caused about $150 billion in already-announced deals to be yanked off the table since Sept. 1, liquidity from the U.S. and U.K. governments has ignited record levels of financial-sector deal making.According to Dealogic, government investments in financial institutions has reached $76 billion this year [2008] – eight times as much as in all of 2007, which was the previous record year. And that total doesn’t include the $250 billion in TARP money, or other deals…If You Can’t Beat ‘em… Buy ‘em? …Given these incentives, who will be doing the buying? Clearly, the biggest U.S.-based banks will be the main hunters. But The Takeover Trader’s Basenese says that even foreign banks will be on the prowl for cheap U.S. banking assets.Basenese also believes that Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS) will be “big spenders.” Each will use TARP funds to help accelerate its transformation from an investment bank into a bank holding company. The changeover will require each company to build up a big base of deposits. And the best way to do that is to buy other banks, Basenese says.http://www.moneymorning.com/2008/12/05/banking-buyouts/
Michelle • May 19th, 2009 at 8:40 pm
http://creditfixings.com/information/affiliations/fixings.htmlQuite a few coming up, but don’t think they’re very large. But May 13th was the General Growth Properties auction which is the largest I’ve seen in a while, and we saw a significant drop in the stock market the day before the auction. Chrysler isn’t listed yet, and I’m curious about when it might, and will give some insight as to how GM CDS’ might fair.
Guest • May 19th, 2009 at 8:51 pm
Thanks for the link, Michelle, and I wanted to add that I appreciate your periodic input on this blog.
OuterBeltway • May 19th, 2009 at 8:54 pm
Adaptivism.That’s the core of it, right there. It’s the hardest thing to do, and the most fun….once it’s done!I enjoy your writing, PeterJB.
Michelle • May 19th, 2009 at 9:01 pm
No problem. At closer inspection, looks like Syncora is a good-sized auction.
Guest • May 19th, 2009 at 9:29 pm
Dr. Roubini has seriously upped the ainte on how far ahead he is willing to predict!
Anonymous • May 19th, 2009 at 9:41 pm
The pre-Catastrophe system of late world capitalism operated on the artificially stimulated surplus consumption of US population. This is not to say that ordinary Americans lived in luxury they did not deserve. On the contrary, their standard of living had been steadily and irreversibly deteriorating relative to the post-WWII boom which in itself was an historical aberration due to the US benefiting from the destruction of its main capitalist rivals. Following the destruction of the Soviet Union, American workers could no longer benefit from the “crumbles” their capitalist class gave them for loyalty in the life-and-death struggle with socialism. Under Reagan and TINA, capitalists annulled this class contract, easily defeated the weak unions, demoralized by their own anticommunism, and began to ship manufacturing jobs to Mexico, China, and other places with ridiculously cheap labor costs. Life was good, they even proclaimed the end of history, so good they felt. Chinese coolies sweated for the pennies Walmart paid them; American workers grumbled but Walmart prices helped them meet their ends, with CCs’ help. For some time everyone seemed happy or at least OK, even the coolies. But with more and more higher add-on value manufacturing going abroad and the coolies asking ever more for their labor, US capitalists had to face their old nemesis again and stronger than ever: How to realize the surplus value, produced by the coolies? Who will buy the mountains of their merchandise? The buying power of American wages had been declining. And here came the Card and the Low Interest. How else could Capitalism postpone its Last Judgment?Those fascistic free marketeers, like Schiff, Faber, and Rogers, who blame the FR and its gurus for not allowing the free rein of capitalism to sort out its “excesses” and “disbalances,” stop short of explaining that it would take no less than the establishment of a fascist state to prevent an anticapitalist revolution from happening while capitalism is “sorting out” its problems.So what does this view of things can tell us about the future what the V, U, L, and other little theoretical toys of “economics” cannot? 1. The US Debt-centered model of world capitalism is dead. 2. The only thinkable model to replace it in the middle term is a China-centered model of production cum consumption for Asia and a quiet vegetation for the TransAtlantic capitalism. 3. In the medium-long run, the Asiatic capitalism is doomed as well, and its life span will be much shorter than in the West, because it’s a latecomer, with no colonial mankind to exploit. 4. It is highly unlikely that Western capitalism with its Anglo-Saxon core will accept its fate peacefully and in a dignified manner. It will end with a bang, not a whisper.
OuterBeltway • May 19th, 2009 at 9:55 pm
Mark:I’d like to pick up where we left off last evening. You’d asserted that the BrainTrust’s “solution” was a “big solution” and therefore was somehow deficient. I asked you to state your understand of what the BrainTrust is/what our mission is, and you replied:
The “Brain Trust” was commissioned to combat/address the current BIG system’s failings. If I recall correctly, the idea was to come up with some workable replacement “solution.” The problems to “solve” are large in scale, thereby requiring large-scale “solutions/alternatives.”
You went on to say:
There are plenty of existing models out there that work at smaller scales and are, for the most part, independent of governments: the Amish are a fair example; not that, however, I am advocating any system based on religion.If there is no large-scale system in nature (other than the climactic systems), then none CAN exist through man’s hands/brains: humans just think that they are smart.
Let’s start the BrainTrust mission. I’ll repeat it:* Figure out what the economy of the future will be like (rules of the road)* Adapt to them. Generate new business models that can function in the world of tomorrow, and start building them (today)* Do it bottom-up, at the individual, household, and local community levels – where it’s much less necessary to get permission before acting.* Replicate.I see this as Adaptation 101. Basic, simple, fall-off-the-log rational.What is it about this methodology, stated above, that is “Big”?The only thing that’s big is its potential effect if it’s used widely – by lots of different people, on lots of different (relatively small scale) problems.So, it’s a little idea that can scale. Now, if that’s what you mean by “Big” – is that necessarily “bad”? I say that would indeed be “Good”.======= Separately,You stated that Nature has no big systems except for weather. Let me name some for you. Evolution. Life. Migration. The lifecycle of a Salmon. The lifecycle of a virus.Let me name some Human systems that are robust and complex. The Internet. The phone network. The highway, rail, and navigable waterway networks. Language. Each of those examples is very complex, adaptive, fault-tolerant, and functional. And built by humans. So humans actually are capable of managing complexity, up to a point.I do share your rage about the thoughtlessness and plain stupidity of humanity’s current relationship with the natural world. But I believe that your anger is paralyzing you. You seem to speak as if there are no solutions, that nothing’s going to work, and we have to endure a massive calamity in order to smack some sense into humans.You may be right about that, but I have decided that despair and rage are not powerful emotional tools. They weaken me.Instead, I use planning, and discipline, and persistence and drive. For me, those emotional responses work best. But more than the emotions, the tactic I am pursuing is “purposeful collaboration”. I want to be among a team of highly motivated, smart, capable thinkers that can make decisions, and act on them – even if it means months or even years of work to bring something new and useful into being.So if you can improve upon our mission statement or mode of operation, I’d like to hear about it. Please take a moment to learn more about the project before commenting upon it.It’s obvious to me that we (the BrainTrust) have a lot of work to do to improve our communications – at both the message and the delivery system levels. I take some responsibility for the information deficit about the BrainTrust. We’ll attend to it, and in a few months, we’ll get it right. We have a lot on our plates right now.Lastly, you asked me to comment on Richard Duncan’s Olduvai Theory. I don’t know his work; I’ll read up on it before I respond to your next comment.
MR • May 19th, 2009 at 10:35 pm
Japan’s Economy Shrank Record 15.2% Last QuarterDepression !
Green Alan. • May 19th, 2009 at 11:04 pm
It’s gone. See the Green shoots please.
Jason B • May 19th, 2009 at 11:11 pm
Its a hard call because the only thing that makes sense is that the dollar will collapse.
Guest • May 20th, 2009 at 12:14 am
Better than to criticize capitalism, or to label the excesses of monopoly as capitalism, wouldn’t it be more advantageous to you to simply put on your hat and explain the system you are advocating?You’re talking here about Big Government abuse, not capitalism. And what the Obama Administration promises is more big government abuse. Capitalism is an economic system that allows the individual to develop and profit from his own labors. Government protection of corporations that manipulate natural resources and labor around the world, using it for their own benefit, is not capitalism, it’s big government abuse.The activities of Goldman Sachs and Ben Bernanke are not the activities of Jefferson republicanism. FDR’s New Deal and Lyndon Johnson’s Great Society and Barack Obama’s “Yes We Can” are not only anti-capitalistic they are collectivistic.The restrictions on the use of capital by trusts and monopolies were very American because they protected the economic opportunity of the individual. In other words, John D. Rockefeller’s oil monopoly and J.P. Morgan’s U.S. Steel and railroad monopolies and Goldman Sachs’ financial monopoly are anti-capitalist. In other words, permitting them to continue is to deny economic opportunity for individual American citizens to use their own capital to develop their own individual estates and prosper.The point is, it’s not a matter of capital, of wealth. It’s a matter of monopoly. The man being ruined by these trusts of which you speak is the man who invents something, develops something, who has a good business plan, who desires to act on his own behalf in a market-directed economy. But if he is a threat to the monopoly, there will be no funding, there will be no loan offered for the development of his business plan, there will be no reward for burning the midnight oil. This growing social apparatus of coercion, of the state, of monopoly, will use its power to beat him into submission. To call the activities of these bankers and corporationists capitalism is a misnomer.The market, or capitalism, is not a place, a thing, or a collective entity. Market capitalism is a process, of various individuals cooperating under the division of labor where every man’s actions aims at the satisfaction of other people’s needs as well as his own. The system of social or governmental ownership of the means of production is commonly called socialism, communism, planned economy or state capitalism. You cannot use the systems of market capitalism and socialism or communism interchangeably.As Ludwig von Mises points out, “The market economy or capitalism, as it is usually called, and the socialist economy preclude one another…there is no such thing as a mixed economy, a system that would be in part capitalistic and in part socialistic. Production is directed by the market or by the decrees of a production tsar or a committee of production tsars.” Has Barack Obama not already installed a car tsar,a committee of mortgage tsars, have we not long had a finance tsar, and an education tsar, and a welfare tsar…are we not readying for a healthcare tsar?“Stato corporativo,” the economic program of the Italian Fascists after they seceded from the international parties of Marxian socialism, was merely a replica of British guild socialism. Like socialism, it relied on interventionism and turned step by step toward the German system of socialism, i.e., all-round state control of economic activities.Under guild socialism and corporativism, every branch of business forms a monopoly–the guild or corporazione. Each enjoys full autonomy, free to settle all its internal affairs without interference from external factors or from people not themselves members of the guild. Market capitalism is not rooted in socialism.Perhaps America’s problem is that those who would exploit the success of market capitalism have seized monopolistic control of her productive system and have deliberately obfuscated this coup d’etat by the misuse of economic concepts and terms, as you have done.As Oliver Goldsmith wrote in The Bee in 1759, “The true use of speech is not so much to express our wants as to conceal them.”
Guest • May 20th, 2009 at 12:38 am
Well, Buddy, what’s your job? Maybe we can beat the bushes with NAFTA to find someone to replace you and your job.
Anonymous ibid. • May 20th, 2009 at 12:47 am
Dan, you missed the part about a subpar recovery with the risk of a second dip. If this were a normal recession, sure, investing now would make sense. But this is not a normal recession and the recovery will not be normal.The closest historical parallel is probably the 1970s, with oil prices and war deficits choking out real recovery. People made money then, but not by investing blindly.RED’s comment is on target.
PeterJB • May 20th, 2009 at 3:08 am
Reality reading:Unexceptional Americans: Why We Can’t See the Trees or the ForestThe Torture Memos and Historical AmnesiaBy Noam Chomskyhttp://www.informationclearinghouse.info/article22659.htmHo hum
Little Saver • May 20th, 2009 at 4:33 am
Government provides GMAC with a soup of fresh green shoots. Incredibile.Free vegetable soup for every financial business. Is that what they mean when they speak about green shoots and a free market economy?http://www.detnews.com/article/20090520/AUTO01/905200376/-1/rss
Guest • May 20th, 2009 at 4:56 am
another step towards corporate fascism in America…
PeterJB • May 20th, 2009 at 6:08 am
Speaking of rumours:”Rumor reaches us that Citigroup’s London subsidiary lost $30 billion and it is failing. Word is the Fed has already stepped in and is covering the bad collateral.”http://www.theinternationalforecaster.com/International_Forecaster_Weekly/Massive_Imbalances_In_World_Economy_Still_Tipping_Us_DownwardsHo hum
Hayes • May 20th, 2009 at 6:38 am
Guest339 referenced Rosenberg’s latest -Here is the complete text of his report – (note David Rosenberg was formerly chief economist at Merrill and along with Roubini and others, made the correct call on our current economic situation. He has departed Merrill for the boutique wealth management firm of Gluskin Sheff in Toronto and appears to have hit the ground running.Here is the complete David Rosenberg report -This is well worth reading – the guy is good maybe even greatMarket Musings and Data Deciphering (May 19)
Guest • May 20th, 2009 at 8:03 am
Mark does NOT seem to be referring to a specific process or human activity. His BIG problem is the mathematics-of-doubling. You know, like a 5.5% annual growth in oil consumption means that the world’s oil producers will have to produce as much oil in the next 13 years (70/5.5) as has ever been produced since the discovery of oil.So how is BrainTrust going to “market” into that future? If we have to be prepared to live Amish-style while we spend the majority of our wealth on energy for telecommunications, what can drain-bamaged BrainTrust focus on? How to make an oil-free lamp? Grease-less wagon wheels?
Guest • May 20th, 2009 at 8:13 am
I’d like to buy a vowel. Can I get an “I”? As in no recovery for the forseeable future!
SantaClaus • May 20th, 2009 at 9:03 am
Here is UK propaganda again.Made me actually wonder if it was UKthat wanted USA to attack Iraq.Ahmadinejad claims Iran’s new missile is capable of hitting Israelhttp://www.timesonline.co.uk/tol/news/world/middle_east/article6325697.ece
Mahmoud Ahmadinejad claimed today that Iran has successfully test fired a new medium-range missile capable of striking as far as Israel or southern Europe.The Iranian President told a cheering crowd that the military had launched a surface-to-surface missile called Sejil-2 which has a range of about 1,200 miles….
My problem with the writing of this article,also considering the title (the most visiblepart of it), is that that dude Ahmadinejaddid not explicitly say something along the lineof “…and it is capable of attacking Israel,and also southern Europe…”.From the second paragraph (quoted above) I think heactually said something along the line of”…and it has a range of about 1,200 miles”.The “journalist” on the other hand decidedto twist the statement into an outright threatto Israel and Europe.In fact if war starts, the journalists whoencouraged it will have blood on their hands.I would think that any thinking person wouldalso feel insulted from being coaxed intohating a country when there perhaps neverwas quite a reason for it? Esp. when thecoaxing is not with facts but with Bullsh…
Tft • May 20th, 2009 at 9:10 am
from Yahoo!Finance:
Geithner: Consumers need better financial rulesGeithner tells senators that financial service consumers, investors need better protections
ya, right. The first thing to do is getting rid of Heli-Ben, Turbo-Timmy & Co. Show us this then we may consider you are serious.What hypocrisy these people show.
FEDup • May 20th, 2009 at 9:13 am
Market direction: who is right? David Rosenberg (see above) and NR are both well respected and lean on the bearish scenario while Hulbert’s top market timers are in the bull camp. Geithner is currently testifying before Congress citing many improvements in the financial sector. The market continues to rally in the face of a severe recession, drastic decreases in employment and consumer spending, increasing foreclosures and unprecedented levels of debt on the state and federal levels.
Guest • May 20th, 2009 at 9:18 am
Roubini is wrong.Markets will continue to rally.Roubini lost more money for his readers than anyone.Sorry, but it’s true.
Guest • May 20th, 2009 at 9:20 am
California Rejects Schwarzenegger’s Budget MeasuresMay 20 (Bloomberg) — California voters rejected a package of budget-balancing measures that Governor Arnold Schwarzenegger said were needed to keep a $15 billion deficit from widening to $21 billion. A proposal to limit lawmaker pay passed…“The fact is, right now, Californians do not trust Sacramento or the political process by which the budget is crafted, and they cannot afford higher taxes,” Meg Whitman, the former EBay Inc. chief executive officer who plans to run for California governor, said in a statement.The budget approved in February raised $12 billion in taxes, cut $16 billion in spending and spent $8 billion of federal stimulus money. It also relied on $6 billion that would have been raised had the ballot measures won…California Treasurer Bill Lockyer petitioned U.S. Treasury Secretary Timothy Geithner to arrange for the federal government to become a standby purchaser of the short-term loans in the event of default.http://www.bloomberg.com/apps/news?pid=20601087&sid=aifDs4ujaV7Q&refer=home
Guest • May 20th, 2009 at 9:37 am
The Wall Street Journal May 18 editorial got it right in “California Reckoning: Tax and spend governance may finally hit the wall.” Yesterday, it hit the wall. Said WSJ editors on Monday:Californians head to the polls Tuesday (May 19) to decide the fate of six ballot initiatives, all of which are ostensibly designed to combat the Golden State’s budget crisis. If the polls are right, all but one of these measures will crash and burn — and by wide margins. A reckoning for liberal tax and spend governance may finally be arriving.We have some sympathy for Governor Arnold Schwarzenegger, who was elected to fix this mess six years ago. His original mistake was to accept a token bipartisan fix when he was most popular, and once the unions crushed his reform initiatives in 2005 he had little leverage over the Democrats who run the legislature. So he’s now decided to settle for the lowest common denominator reform that both parties can agree to, which isn’t nearly enough considering the magnitude of the state’s fiscal and economic problems.By far the most consequential initiative is Proposition 1A, which is favored by most of the Sacramento political class. Prop 1A creates a rainy day fund of up to 12.5% of the budget and imposes a new annual spending cap. It would divert 3% of revenues during economic boom years into the rainy day fund that can only be spent during recessions. Mr. Schwarzenegger is correct that this is a sensible reform, because for 40 years the state has endured revenue booms and busts.Alas, the cap is far weaker than the Gann Amendment that passed with 74% of the vote in 1979, as the sister initiative to Proposition 13, and helped usher in a decade of budget surpluses. The Gann Amendment — until public unions neutered it in the early 1990s — imposed a ceiling on spending at the level of population growth plus inflation; when revenues exceeded that limit, the money was returned to taxpayers.By contrast, Prop 1A allows revenues and thus spending to grow each year at the average rate of growth of tax receipts over the previous decade, or at the rate of population growth plus inflation, whichever is greater. Revenues above that amount are pushed into the reserve fund to be spent at a later date. This gives incentives to legislators to raise taxes whenever possible, because the spending cap rises along with revenues. Prop 1A also allows the legislature to raid the rainy day fund to pay for “capital outlay purposes” — roads, bridges, schools and even pork projects.Even to get this minimal spending cap, voters must also approve a two-year $16 billion extension of this year’s tax hikes. The 0.25% income-tax surcharge (to 10.55%) and the near doubling of the car tax would be extended through 2013, and the one percentage point sales tax hike (to 9%) would be extended through 2012.Even worse is Prop 1B, which would divert $9.3 billion from the rainy day fund to the education spenders in Sacramento and thus exempt half the general fund budget from any belt tightening. This would refortify the teachers unions, which have spent $2.7 million to pass the measure and are the very group most responsible for California’s fiscal mess. Teacher pay and benefits are already 35% above the national average.Then there are the gimmick Propositions 1C, 1D and 1E, which would raid trust funds and use any surpluses to pay current general fund bills. The preposterous 1C would raise $5 billion today by securitizing future lottery revenues. That would add more than $350 million of new debt payments annually for at least the next 20 years. What’s next, selling the silverware in the Governor’s mansion?Given all of this trickery, it is no wonder polls show Props 1A-E are likely to lose. The only initiative ahead in the polls, Prop 1F, would block pay raises for lawmakers if they fail to balance the budget. One recent poll found that 72% of Californians agreed that “if the measures on the special election ballot are defeated, it would send a message to the governor and the legislature that voters are tired of more government spending and higher taxes.” (It passed.)That’s a good message to send. California politicians have operated for years as if the purpose of government is not to provide reliable public services at low cost, but to feed public employee unions. Sacramento also needs to rethink its highly progressive antigrowth tax code, where the tax rates are the highest outside of New York City. The Golden State now ranks worst or second worst on most ratings of state business climate. This drives away entrepreneurs and high-income taxpayers, which in turn leads to lower revenues.If the voters do reject these false fixes, there will be wails of despair in Sacramento. Assembly Speaker Karen Bass, who never saw a spending or tax increase she didn’t like, says “California, frankly, is going to be in a world of hurt.” Mr. Schwarzenegger says he will be forced to release 30,000 criminals from jail, and to lay off teachers, troopers and firefighters. Look for the state to ask Washington for another bailout “stimulus.”But voter rejection may be precisely the jolt of reality that California needs to inspire real reform. Start with a new Gann Amendment to cap total spending, and add a flat-rate income and sales tax of 5% or 6%, which is roughly the national average and will stop driving business from the state. A flat tax would help to stabilize revenues over time, avoiding boom and bust.Drilling for oil offshore would also bring in billions of dollars of revenues.This kind of reform will only come from Golden State voters who aren’t yet on the public dole or the public payrolls. Howard Jarvis led such a charge 30 years ago. It needs to happen again for California to break out of its tax and spend death spiral.http://online.wsj.com/article/SB124259847829628121.html
Guest • May 20th, 2009 at 9:42 am
another step toward guild socialism in America, with reliance on state intervention.
Mark • May 20th, 2009 at 9:47 am
Sorry that you missed the point of my irony. Keep trying (sometimes I say things to force people to think, sometimes it doesn’t work).Mark
Mark • May 20th, 2009 at 9:51 am
I agree with you Jason!Much of my point is to identify how silly the entire inflation/deflation argument is. As they say, recession is when your neighbor is unemployed, depression when YOU are. Those who are manipulating things will always shine the light according to their position: never mind that they could be the only ones standing in the light while everyone else is in the dark, they will still proclaim we’re ALL in the light!Mark
Guest • May 20th, 2009 at 9:51 am
Preposterous!
Mark • May 20th, 2009 at 9:54 am
Look up Murray Bookchin.Mark
Guest • May 20th, 2009 at 10:01 am
All of America’s property has been commandeered by a handful of banker oligarchs for use as they see fit to enrich themselves. Even the peasantry under the monarchies had more rights to their personal property than we, we who no longer have a representative body unless we reside on the government dole or payroll. Bernanke has more power than a king or a despot, is accountable to no one, save the banking oligarchy, the financial interests.Americans are facing dependent poverty.
Guest • May 20th, 2009 at 10:11 am
BLS Has One Letter Too Manyby Richard DaughtyMay 20, 2009 — The big news, of course, is that the Bureau of Labor Statistics at the Department of Labor reported that non-farm payroll employment continued to fall in April, and 539,000 jobs were lost, which probably explains why they later note that “Overall, private-sector employment fell by 611,000” and that “the unemployment rate rose from 8.5 to 8.9 percent.”Nevertheless, since December 2007 (when the recession began), they figure that 5.7 million jobs have been lost, and “since September 2008, manufacturing has lost 1.2 million jobs,” which is Very, Very Bad (VVB), because manufacturing is how economies work; you make something that somebody wants at a price that gives you a profit.The really ugly news is that all of these job losses were are all private-sector jobs, since government hiring still goes up and up, every month, helping to make things worse and worse.Later on we get the surprising news that “The civilian labor force participation rate rose in April to 65.8 percent, and the employment-population ratio was unchanged at 59.9 percent.”I don’t know what “civilian labor force participation rate” means, actually, but judging from my own experience and watching other people at work over the years, we are a lazy bunch of whiners, and we seem to participate in actually working about two-thirds of the time, so this 65.8% thing looks about right to me! Hahaha!But it was the “employment-population ratio” being unchanged that got me, as it seems that, mathematically, the only way that it can stay unchanged when employment is falling is if the population went down!I was also surprised to see that the BLS reported that “Average weekly earnings, total private” is $614.53, whereas the average workweek is 33.2 hours.Now, I look at this and I scratch my head in puzzlement, and after grabbing a calculator and beating it into submission by repeatedly punching in $614.53 a week times 52 weeks to find the “average” annual income, I see that the average income is $31,955.56 a year.And yet when you look at the salaries of those who get paid through taxation or self-imposed fees on customers and/or taxpayers, they make at least twice that! And sometimes it is whole multiples of that, as it is not uncommon for some agency or college or city manager butthead to pull down a quarter million bucks a year! Sometimes more! Hahaha!My disrespect for “public servants” who make more than their employers (the taxpayers) while doing an obviously poor job aside, in the category of “professional and business services,” that industry lost 122,000 jobs in April. The report notes that “Half of the April decline occurred in temporary help services,” which is a particularly bad omen.To make sure that you understand that inflation in healthcare will continue at its staggering pace, the report also notes, “Health care employment grew by 17,000 in April. Job gains in health care have averaged 17,000 per month thus far in 2009, down from an average of 30,000 per month during 2008.”Of course, employment in federal government jobs “rose by 66,000 over the month largely due to the hiring of temporary workers for Census 2010 preparatory work,” which means that these people will be on the payroll in 2009, 2010, and probably 2011 as they fan out to identify where everybody lives and force them to answer a lot of embarrassing questions, like, “Would you describe your house as a ‘pigsty’ or an ‘eye-sore?’…”The Really, Really Bad News (RRBN) is when you look at the U-6 estimate of unemployment, which includes “Total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian population plus all marginally attached workers,” and which was 15.8%!No wonder, then, that John Williams at shadowstats.com figures that unemployment is actually running closer to 20%!There were also some big downward revisions for prior months, and the laughable Birth/Death Model assumed, for no particular reason that anybody can actually discern, that another 226,000 “hypothetical jobs” were created in April, including 76,000 jobs in leisure & hospitality, 65,000 on professional & business and 38,000 in construction! Hahaha!http://lewrockwell.com/daughty/mogambo11.html
PeteCA • May 20th, 2009 at 10:19 am
We’ll see.But I can tell you one thing.Americans still have to pay off all those credit cards and consumer loans. They didn’t go away in the last few weeks, and they’re going to vanish any time soon. Likewise, unemployed people don’t pay mortages, high rents, credit card bills, or auto loans. Think those delinquency rates are going down. Not time soon. Washington DC and Wall St are trying to spin their way past a crash in consumer credit. But you can’t spin bills that are not getting paid. And you can’t spin lost wages … or the disappearance of high-paying jobs. I tend to think that Brian Pretti’s recent point may have some validity – unemployment may actually be a leading indicator right now.PeteCA
Mark • May 20th, 2009 at 10:21 am
First thing that came to mind: Flying PigsMark
PeteCA • May 20th, 2009 at 10:25 am
Japan and Europe are getting hit very hard by two factors: (1) The financial downturn (2) The peg between the Chinese yuan and the US dollar. As the dollar trends down (due to the Fed’s fascination with buying US debt), so does the yuan. China can keep this up so long as they are willing to tolerate rising inflation rates in their country. In the mean time in puts a lot of stress on the economies of Japan and Europe.I’ll add my vote to the theory that this level of economic stress could well cause a major social shift in Japan. That would mean the election of a new Japanese Gov’t that is less user-friendly towards US policies – esp. economic ones. And it would trend towards the Japanese dumping US debts.PeteCA
SantaClaus • May 20th, 2009 at 10:33 am
European countries have government paid social security. How come they are not severely suffering?And besides, US of A could well afford their social security payments…if they stopped feeding so much money to Pentagon. This would require that they stopped the fear-mongering about enemies everywhere first.AND: if US of A wants to have more money to give to Pentagon, they would need to make sure that their economy is supported by domestic manufacturing. There is no “service economy” – such a thing does not exist. In fact who-ever invented that concept should be hanged from his balls (most likely a dude anyway, and we would not want to hang a lady for such a thing).BESIDES: how comes the Eurozone is able to CONTINUE providing its citizens:A. government health careB. subsidized (in some countries: free) university educationC. 4+ weeks vacationsHOW COME EUROZONE HOSPITALS ARE NOT “SEVERELY SUFFERING” LIKE THE B.S. PROPAGANDA FED IN AMERICA SO OFTEN WOULD INDICATE?How come the Eurozone economy (which is often called “socialistic” – look at A, B, and C above) is capable of supporting multiple car manufacturers (MB, Porsche, Audi, VW, Peugeot, Citroen, etc) while the U.S. economy (which is quite capitalistic – with a minimum amount of benefits for its workers) is not even able to support 3 of them. Yes the Eurozone car manufacturers may have had to lay of people lately – but they have not been requiring hundreds of billions of $$ like their U.S. counterparts (which STILL suffer after all that money).HOW COME THE EUROZONE IS NOT RUNNING A TRILLION+ DOLLAR DEFICIT?NO NEED TO ACTUALLY ANSWER THESE QUESTIONS – THEY ARE HERE TO GET THE READER TO THINK.
Guest • May 20th, 2009 at 10:35 am
I’m not completely sure, but I don’t think he was talking to you, Mark. I think he was responding to the original poster in reference to the stance that protectionism is a ‘mistaken public policy’. His point being that if the feeling is that protectionism is a mistake, then the original poster should have no issues with someone outside of the U.S. replacing him at his own job.
Guest • May 20th, 2009 at 10:37 am
Oh wait, never mind, I see what you’re getting at. Sorry, haven’t had my morning ‘stimulus’ yet, lol.
SantaClaus • May 20th, 2009 at 10:42 am
…and don’t come and tell me that “the taxes in Europe are very very high compared to USA”. I am originally from Scandinavia and have worked now (as an IT consultant) in Netherlands, Sweden, Finland, Switzerland, UK, USA, and Australia…and in every one of these countries my income tax has been about 30%. OK I guess if I would have been a SAP consultant and a contractor at the same time I perhaps could have earned so much that my taxes would have been 50% in Eurozone – so there is some difference between Eurozone and USA. But I do not think that for MOST workers that difference matters.In USA I lived at one point in Florida, and later in Oregon. No real major difference in income tax between those two states. About the same level as in Europe.On another hand, I liked that renting a townhouse was cheaper in Oregon than some parts of Europe and Australia. But in some places renting a townhouse in USA can be still just as expensive as in Eurozone or Australia.
Guest • May 20th, 2009 at 10:43 am
List of the Bilderberg meeting in Vouliagmeni/Greece from 14.-17.5.2009.Translation from the greece newspaper TO VIMA (http://www.tovima.gr/default.asp?pid=2&artid=268290&ct=32&dt=16/05/2009 ) to german.I cant find an english version.Beatrix – Königin der NiederlandeSofia – Königin von SpanienKonstantin – ehemaliger König von GriechenlandPhilipp – Prinz von Belgien, Mitglied des Club of RomeJoseph Ackerman – Vorstandsvorsitzende der Deutschen BankKieth Alexander – Direktor der US National Security Agency (NSA), grösster Geheimdienst der WeltGeorgios Alogoskoufis – ehemaliger Wirtschafts- und Finanzminister GriechenlandRoger Altman – Vizefinanzminister unter Präsident ClintonEfstratios-Georgios A. Arapoglou – Zentralbankchef GriechenlandAli Babacan – Aussenminister Türkei, Koordinator für die Beitrittsverhandlungen der Türkei mit der EUDora Bakoyannis – Aussenminister Griechenland+Jon Frederik Baksaas – Chef von Telenor NorwegenFrancisco Pinto Balsemão – Portugisischer MinisterpräsidentNicolas Baverez – Herausgeber Le Point FrankreichFranco Bernabè – Chef von Telecom Italia, stellvertretender Vorsitzender von Rothschild Europe-Xavier Bertrand – Generalsekretär der UMP Partei FrankreichNils Daniel Carl Bildt – Aussenminister SchwedenJan Arne Björklund – Bildungsminister, Parteivorsitzenden der Folkpartiet liberalerna SchwedenChristoph Blocher – ehemaliger Bundesrat und ehemaliger Parteichef der SVPAlexandre Bompard – Journalist Radio Europe 1 Frankreich+Vendeline von Bredow – Wirtschaftsjournalist The Economist+Oscar Bronner – Herausgeber Der Standard Österreich+Max Boot – Autor, Berater, Historiker, Ober-Neocon und CFR Mitglied-Ana Botín – Tochter des Präsidenten der Banco de Santander Emilio Botín+Henri de Castries – Chef der AXAJuan Luis Cebrián – Chef er PRISA Group of Media Spanien-W. Edmund Clark – Chef Toronto-Dominion Bank Kanada-Kenneth Harry Clarke – ex-Finanzminister GrossbritannienLuc Coene – Chef der belgischen Nationalbank+Timothy C. Collins – Chef von Ripplewood HoldingsGeorge David – Präsident CocaCola GriechenlandSir Richard Billing Dearlove – ex-Chef des britischen Geheimdienstes MI6Anna Diamantopoulou – Parlamentsmitglied der PASOK GriechenlandMario Draghi – Chef der italienischen Zentralbank+Nicolas N. Eberstadt – American Enterprise InstituteAnders Eldrup – Chef und Präsident von DONG Energy DänemarkJohn Jacob Philip Elkann – Vizepräsident des Fiat-KonzernsThomas Enders – Chef AirbusJosé Manuel Entrecanales – Chef des Baukonzerns Acciona Spanien+Werner Feymann – Bundesparteivorsitzender der SPÖ österreichischer Bundeskanzler-Isidro Fainé Casas – Präsident der Caixa Bank und SEAT BeraterNiall Ferguson – Professor für Wirtschaft an der Havard Business School-Timothy Franz Geithner – Finanzminister der USADermot Gleeson – Berater der irischen Regierung und GeschäftsmannDonald E. Graham – Chef der Washinton Post-Alfred Gusenbauer – ex-Bundeskanzler ÖsterreichVictor Halberstadt – Professor für Wirtschaftswissenschaften Uni LeidenErnst Hirsch Ballin – Justizminister der NiederlandeRichard Holbrooke – Sonderbeauftragter für Pakistan und Afghanistan für Obama+Jan H.M. Hommen – Vorsitzender ING BankJaap de Hoop Scheffer – NATO-GeneralsekretärJames Logan Jones Jr. – Sicherheitsberater von Präsident ObamaVernon Eulion Jordan – ehemaliger Sicherheitsberater von Präsident Clinton-Robert Kagan – US-Regierungsberater für Sicherheitspolitik, Terrorismus und den BalkanJyrki Katainen – Finanzminister Finnland-Henry Alfred Kissinger – ex-US-Sicherheitsberater und US-Aussenminister, Chef von alles+John M. Keane – SCP Partner, ex-US-General+Muhtar Kent – Präsident der Coca Cola Company+John Kerr – Mitglied des House of Lords, Vizevorsitzender Royal Dutch Shell+Eckart von Klaeden – MdB, Aussenpolitischer Sprecher der CDU/CSU+Klaus Kleinfed – Präsident von Alcoa Inc.Mustafa Koç – Vorsitzender der Koç Holding der grösste türkische MischkonzernRoland Koch – hessischer MinisterpräsidentSami Kohen – aussenpolitische Kolumnist der türkischen Zeitung MilliyetHenry Kravis – Hudson InstituteMarie-Josee Kravis – Hudson InstituteNeelie Kroes – EU-Kommissar für WettbewerbOdysseas Kyriakopoulos – Präsident des Verbandes Griechischer Industrien+Christine Lagarde – Ministerin für Wirtschaft, Industrie und Arbeit Frankreich+Pascal Lamy – Generaldirektor Welthandelsorgansation WTOManuela Ferreira Leite – Chefin der portugiesischen Sozialdemokraten PSDBernardino León – spanische Staatssekretär für auswärtige Angelegenheiten+Peter Löscher – Chef Siemens AG+Peter Mandelson – Wirtschaftsminister GB-Jessica Tuchman Mathews – Präsidentin der Carnegie Endowment for International Peace DenkfabrikPhilippe Maystadt – Präsident der Europäischen Investitionsbank (EIB)+Edward McBride – Wirtschaftsredaktor The EconomistFrank McKenna – Vizevorsitzender der TD Bank Financial GroupJohn Micklethwait – Wirtschaftsredakteur The EconomistThierry Montbrial – President des l’Institut français des relations internationalesMario Monti – Präsident der Wirtschaftsuniversität Luigi BocconiMiguel Ángel Moratinos – Aussenminister SpanienCraig Mundie – Chefstratege MicrosoftEgil Myklebust – ex-Vorsitzender der SAS, Norsk Hydro ASA, Mitglied des Weltwirtschaftsrat für Nachhaltige EntwicklungMatthias Nass – Stellvertretender Herausgeber “Die Zeit”+Juan Maria Nin Génova – Präsident la Caixa BankDenis Olivennes – Direktor Nouvel Observateur Frankreich+Jorma Ollila – Vorsitzender Royal Dutch Shell+George Osboren – Schatzkanzler GBFrederic Oudea – Chef Societe General Bank Frankreich-Cem Özdemir – Bundesvorsitzender der Partei Bündnis 90/Die GrünenTommaso Padoa-Schioppa – ex-Finanzminister Italien+Alexis Papahelas – Journalist KathimeriniDimitris Papalexopoulos – Chef Titan Cement Company S.A. GriechenlandJannos Papathanasiou – Wirtschafts- und Finanzminister GriechenlandRichard Perle – Sicherheitsberater unter George W. Bush, Hauptverantwortliche für den Irakkrieg-David Petraeus – US-Viersternegeneral, Kommandeur des US Central Command, zuständig für den Nahen Osten und ZentralasienManuel Pinho – Minister für Wirtschaft und Inovation Portugal+Jean Pisani-Ferry – Direktor von BruegelRobert S. Prichard – Chef der Zeitung Toronto Star KanadaRomano Prodi – ex-Ministerpräsident Italien, ex-Präsident der Europäischen Kommission+Hanna Rajalahti – Chefredakteur Talouselämä-Olli Rehn – EU-Erweiterungskommissar FinnlandHeather Reisman – Chefin Indigo Books & Music Inc KanadaEivind Reiten – Generaldirektor des Petroleumskonzerns Norsk HydroMichael Ringier – Verwaltungsratspräsident der Ringier Holding AG, grösster Verlag der SchweizDavid Rockefeller – Banker, Gründer der Council on Foreign Relations und Trilateralen Kommission, Capo di tutti Capi-Dennis B. Ross – Direktor des Washington Institute for Near East Policy DenkfabrikBarnett R. Rubin – Director of Studies and Senior Fellow Center of International Cooperation-Alberto Ruiz-Gallardòn – Bürgermeister von MadridSuzan Sabancı Dinçer – Chefin der Akbank TürkeiIndira Samarasekera – Präsidentin der University of AlbertaRudolf Scholten – Mitglied des Vorstandes Österreichische Kontrollbank AG-Jürgen Schrempp – ex-Vorstandsvorsitzender der DaimlerChrysler AG+Josette Sheeran – Diektor UNO Welternährungsprogramm+Domenico Siniscalco – Vizevorsitzender Morgan Stanley Int.Pedro Solbes Mira – ex-Wirtschafts- und Finanzminister Spanien-Sampatzi Saraz – türkischer Banker-Sanata Seketa – Kanada+James B. Steinberg – US-Vizeaussenminister+Björn Stigson – Präsident des Weltwirtschaftrats für Nachhaltige Entwicklung (WBCSD)+Yannis Stournaras – Direktor bei der Foundation for Economic & Industrial Research (IOBE)-Dominique Strauss-Kahn – Chef des Internationalen Währungsfonds-Lawrence Summers – ex-Chefökonom der Weltbank, ex-Finanzminister unter Clinton, Wirtschaftsberater von ObamaPeter Denis Sutherland – ex-EU-Wettbewerbskommissar, Vorsitzender von BP and Goldman Sachs International+Nobuo Tanaka – Direktor Organisation für wirtschaftliche Zusammenarbeit und EntwicklungMartin Taylor – ex-Chef der Barclays Bank, Vorsitzender von Syngenta, ex-Generalsekretär der Bilderberg GroupPeter Thiel – ex-Chef PayPal, Clarium Capital Management+Helle Thorning-Schmidt – Parteichef der Sozialdemokraten Dänemark+Thomas Thune Andersen – Chef Maersk Oil Dänemark+Andreas Treichl – Chef Erste Group Bank AG ÖsterreichJean-Claude Trichet – Chef der Europäischen Zentralbank+Loukas Tsoukalis – Sonderberater von Kommissionspräsident Barroso, Chef der ELIAMEPAgah Ugur – Chef Borusan Holding TürkeiMatti Vanhanen – Premieminister FinnlandDaniel Vasella – Chef von NovartisJeroen van der Veer – Chef Royal Dutch Shell-Guy Verhofstadt – ehemaliger Premierminister BelgienPaul Volcker – ehemaliger Fed Chef, Wirtschaftsberater von Barack ObamaJacob Wallenberg – Bankier und Grossindustrieller SchwedenMarcus Wallenberg – Bankier und Grossindustrieller SchwedenNout Wellink – Chef der niederländischen Zentralbank, Mitglied der Europäischen ZentralbankGerardus Johannes Wijers – Chef von AkzoNobel, ex-Wirtschaftsminister der NiederlandeMartin Wolf – Journalist der Financial TimesJames David Wolfensohn – ehemaliger Präsident der WeltbankPaul Wolfowitz – ex-Präsident der Weltbank, Berater von George W. Bush, und stellvertretender ex-Verteidigungsminister der USA, Ober-Neocon und Hauptverantwortlicher für den Irakkrieg-Fareed Zakaria – Chefredakteur von Newsweek International und politischer Kommentator bei ABC News, New York Times, Wall Street Journal, New Yorker und CNNRobert Zoellick – Präsident der Weltbank
Mark • May 20th, 2009 at 10:46 am
Yes, that’s pretty much it, simplified. We’re trying to solve big problems with big solutions in the face of declining resources. We should know better, diversity is the answer. Sometimes it’s best NOT to replace some thing or system, but to adjust to not having it. The answer is simple: remove yourself from the collapsing building- GET OUT AS SOON AS YOU CAN! Don’t rebuild the burning building!Some quotes from a very wise man, Eric Sevareid:The chief cause of problems is solutions.If you find a good solution and become attached to it, the solution may become your next problem.Mark
Mark • May 20th, 2009 at 10:48 am
As usual Pete, you highlight the perils/twists and turns of the Big Shuffle very well! Mark
Guest • May 20th, 2009 at 10:50 am
Thanks for posting a link to the complete report!
Mark • May 20th, 2009 at 10:56 am
We don’t need Their SUVs, Their HDTVs or Their money! No, we don’t need THEM!We Don’t Need ThemMark
Mark • May 20th, 2009 at 11:05 am
The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be ledto safety) by menacing it with an endless series of hobgoblins, all of them imaginary. – H.L. MenckinAs protectors of the powerful elites, it is the job of the government to distract its citizens from the thievery that is being waged against them (citizens).Mark
Guest • May 20th, 2009 at 11:09 am
Dr Roubini, you ask, “But how can households reduce their debt ratios that have increased from 65% of disposable income in the early 1990s to 100% in 2000 and to 135% today?”And answer, “The only remaining solution is debt default and debt reduction: when firms have too much debt they go into Chapter 11 and have their nominal debts reduced; then they can start producing, hiring and investing again; when countries have too much debt (say Argentina, Russia, Ecuador in recent history) they default, reduce the principal value of their debts and start spending and growing again. The same holds for households: the overhang of excessive debt can be a burden to households’ ability to spend for a long time. Thus, for households buried under a mountain of mortgage debt, credit card debt, auto loans and student loans debt reduction – not just re-stretching of debt maturities or debt servicing relief – is necessary to eliminate the debt overhang and restore robust rate of consumption spending and/or of investment in physical capital (new home purchases)”Debt reduction as you suggest here, Dr. Roubini, is really debt shifting, shifting the burdens from the guilty to the innocent; forcing the responsible to pick up the tab for the irresponsible.Restrictions on banks in the current credit card legislation sailing through Congress, for example, just means many of the problem card holders get their burdens shifted to the rest of us in higher fees and fewer choices. Anyone who thinks the credit card companies are going to reduce their returns because of this legislation just isn’t paying attention.Dr. Roubini, IMO, this is not a solution. This is an extended message from Larry Summers to tell us he has to go deeper into pockets, to take more—particularly from those who matched their appetites to their means and from the frugal who postponed purchases to fund future necessities and to save for their retirement years. As government and corporations continue to rape and destroy private pension plans, many private sector wage earners will have only Social Security and what little they can save to live on.
Guest • May 20th, 2009 at 11:10 am
http://www.guardian.co.uk/world/2009/may/17/charlie-skelton-bilderbergOur man at Bilderberg: ‘You are not allowed to take pictures of policemen!’Charlie Skelton is scared, jumpy and hacked off at the police state built around Bilderberg. So hacked off, in fact, he has asked the police to stop following him. Bad move.• Read all of Charlie Skelton’s Bilderberg files
Guest • May 20th, 2009 at 11:52 am
More good news!http://www.nytimes.com/2009/05/21/business/economy/21pension.html?hpPension Guarantee 33 billion in hole!!!Dear Professor:We just need to nationalize the whole financialsystem and start from scratch with Utility-type Banksand Equity Risk Takers without bailouts. Taleb is right!! How can reform happen when the foxes own the hen house!!! Democracy is failing!
Mark • May 20th, 2009 at 11:53 am
Yeah, you said it so it MUST be true!Mark
FEDup • May 20th, 2009 at 12:03 pm
excellent points! Perhaps we should call this chapter of history the era of “Spinomics”?
Guest • May 20th, 2009 at 12:12 pm
Ah, now I see. Our form of government has become a Spinocracy.
Guest • May 20th, 2009 at 12:16 pm
http://www.reuters.com/article/marketsNews/idUSN1943201720090519TALF for legacy commercial securities
ptm • May 20th, 2009 at 12:39 pm
Hi Michelle,I think I understand a CDS (http://en.wikipedia.org/wiki/Credit_default_swap), but I am not sure about a CDS auction.If a credit event occurs, then the CDS issuer owes cash to the counterparty. So why would anyone want to buy a CDS obligation?
PeteCA • May 20th, 2009 at 1:14 pm
LETTER FROM A DODGE DEALER – WORTH CONTEMPLATINGThe following letter was posted on Jim Sinclair’s site MineSet. Thanks to http://www.dollarcollapse.com for picking up the link.First, the letter below shows the very high emotional pain that is being caused by the bankruptcy of the US auto makers. There are no easy answers to some of the issues raised by this dealer.However, there is another important issue. Think about the financial losses that will happen when this Florida dealer closes, due to business and inventory losses. These will be transferred right back into the banking system as losses on commercial loans. Then multiply that set of losses by all the delaerships around the country that are being focred to close. The impact here is not just in higher levels of unemployment. The total financial losses are significant when these chains of auto dealers go bankrupt.———————-Letter from a Dodge dealerMay 19, 2009My name is George C. Joseph. I am the sole owner of Sunshine Dodge-Isuzu, a family owned and operated business in Melbourne, Florida. My family bought and paid for this automobile franchise 35 years ago in 1974. I am the second generation to manage this business.We currently employ 50+ people and before the economic slowdown we employed over 70 local people. We are active in the community and the local chamber of commerce. We deal with several dozen local vendors on a day to day basis and many more during a month. All depend on our business for part of their livelihood. We are financially strong with great respect in the market place and community. We have strong local presence and stability.I work every day the store is open, nine to ten hours a day. I know most of our customers and all our employees. Sunshine Dodge is my life.On Thursday, May 14, 2009 I was notified that my Dodge franchise, that we purchased, will be taken away from my family on June 9, 2009 without compensation and given to another dealer at no cost to them. My new vehicle inventory consists of 125 vehicles with a financed balance of 3 million dollars. This inventory becomes impossible to sell with no factory incentives beyond June 9, 2009. Without the Dodge franchise we can no longer sell a new Dodge as “new,” nor will we be able to do any warranty service work. Additionally, my Dodge parts inventory, (approximately $300,000.) is virtually worthless without the ability to perform warranty service. There is no offer from Chrysler to buy back the vehicles or parts inventory.Our facility was recently totally renovated at Chrysler’s insistence, incurring a multi-million dollar debt in the form of a mortgage at Sun Trust Bank.HOW IN THE UNITED STATES OF AMERICA CAN THIS HAPPEN?THIS IS A PRIVATE BUSINESS NOT A GOVERNMENT ENTITYThis is beyond imagination! My business is being stolen from me through NO FAULT OF OUR OWN. We did NOTHING wrong.This atrocity will most likely force my family into bankruptcy. This will also cause our 50+ employees to be unemployed. How will they provide for their families? This is a total economic disaster.HOW CAN THIS HAPPEN IN A FREE MARKET ECONOMY IN THE UNITED STATES OF AMERICA?I beseech your help, and look forward to your reply. Thank you.Sincerely,George C. JosephPresident & OwnerSunshine Dodge-Isuzu—————————-PeteCA
PhilT • May 20th, 2009 at 1:18 pm
Michelle – At the height of toxic asset crisis, Elisa Parisi of this blog, was quite articulate in explaining the intricacies of the CDS market place. I hope that she is reading this thread and can write an article that responds to your brilliant observations.
Hayes • May 20th, 2009 at 1:22 pm
Geithner’s testimony to the Senate Banking Committee May 20:We don’t have to pay the TARP money back!http://cspan.org/Watch/Media/2009/05/20/HP/R/18809/Committee+Hears+that+AIG+may+need+more+funding.aspxscroll to 01:48:00 of the linked video (CSPAN) (about five minute duration)Senator David Vitter questions Geithner on what happens to the the TARP money that is paid back.Geithner responds: “Our reading of the law is that a dollar that comes back goes to the general fund but does create additional room in the TARP, but we will use it carefully” “according to Statute 115-a and Section 106-E”__________also see Senator Jim DeMint question Geithner on what becomes of the paid back TARP money:scroll to 01:39:00Geithner responds “every dollar that comes back goes to the general fund but that does still create additional headroom under the $700 billion authority for us to make additional investments”Senator DeMint responds: “Your understanding of what we did was that the treasury now has $700 Billion of taxpayer money that it can use permanently rotating in and out of the capital markets as you see fit”Geithner responds “uhh I’m not quite sure of permanent, but you’re right the way it was designed as our lawyers look at it … if a dollar comes back and goes in the general fund it still leaves us the ability to make an additional agreement (with a bank) going forward”
Michelle • May 20th, 2009 at 1:27 pm
There are lots of reasons to buy and sell CDS, just look at AIG. For them it looked like easy money via premiums, just until the real estate market tanked and their obligations far exceeded their capital. Hedge funds also believed the same thing, then learned real quick what the risks were of holding them. So as a hedge, they shorted the stocks of the very counterparties for which they may be obligated and could make money this way as well.General Growth Properties is a prime example of how lucrative a CDS position can be. The lenders bought CDS contracts on GGP’s debt, and when GGP filed bankruptcy, the lenders collected on the CDS auction and STILL hold the debt intact. The derivative world truly is a casino and encourages unethical behavior as it’s often more lucrative to force a company into bankruptcy, thus triggering an event, and collecting on the CDS payout, than to restructure debt.Chrysler is having this problem currently, as the hedge funds holding CDS are angry about disclosure of their identities at the request of the Obama administration. They didn’t want a Chrysler restructuring but instead wanted a bankruptcy filing, and the same is happening to GM. This is why you are currently seeing the Obama administration working frantically to regulate these instruments – to help alleviate what appears could be an endless glut of corporate bankruptcy filings, and it’s previously been too easy to make this happen given all the naked short-selling and driving companies into the tank just to make a quick buck. We will be seeing a lot of regulations being put into place over time, the uptick rule some form be restored, and continued upward manipulation in the stock markets to squeeze the shorts.
Guest • May 20th, 2009 at 1:38 pm
The document ‘Breakfast With Dave 051909 v5′ has been deleted
Mark • May 20th, 2009 at 1:39 pm
Opportunity Cost. Opportunity Cost!Think of all the untold millions(?) who have been slaughtered/oppressed in order to maintain the car culture!Mother Nature is starting to push through all the B.S.. Environmental damage and resource depletion is screaming for the car culture to die. Governments and “businesses” be damned!If you haven’t done so, read the Chomsky article that PeterJB was so good to provide above. I’ll provide it here for convenience:Why We Can’t See the Trees or the Forest: The Torture Memos and Historical AmnesiaIt gets into the roots of much of our ills, as only Chomsky seems able to do.Mark
Hayes • May 20th, 2009 at 1:40 pm
More from the Senate hearings today with Geithnerscroll to minute 55:40http://cspan.org/Watch/Media/2009/05/20/HP/R/18809/Committee+Hears+that+AIG+may+need+more+funding.aspxSenator Bunning questions Geithner May 20: “Did anyone in your department or administration threaten or attempt to intimidate Chrysler or GM creditors to give up their contractual rights or priorities in bankruptcy?”Geithner: “Ahhh I do, do not believe ahhhhhh anyone did what you suggested”Has there been any influence by your department or the administration on which auto dealerships are being dropped?”Geithner: “We are “trying” very carefully not to be invloved”Has there been any influence on which auto plants are to be closed or sold by Chrysler of GM?”Geithner: “same answer”
Hayes • May 20th, 2009 at 1:45 pm
I posted links from today’s hearings below — Geithner evaded the question about the administration influencing what dealerships were to be closed.
Guest • May 20th, 2009 at 1:47 pm
Welcome to Obamanomic -> big gov + spending screw everyone. you all get what you voted.
Guest • May 20th, 2009 at 1:50 pm
If you click on the next link below it, on that page, the document appears to be available. Unless I’m missing something. Link here
Mark • May 20th, 2009 at 1:54 pm
Sigh, but if properly scrutinized, the ENTIRE system is a scam, a ponzi scheme!All those who might be cornered will use the “Just following the ‘law’ [orders!]” defense.A few will be tossed in the slammer to distract the masses from seeing that a new scam is being erected to displace the currently collapsing one.Mark
Morbid • May 20th, 2009 at 2:05 pm
The Worlds “Free” Trade RideDear SantaClaus (NOT),You seem to bite the hand that “frees” you by attacking the USA’s military spending. The fact of the matter is that if it wasn’t for the stability that USA provides as a superpower there would not have been a global economy and this business of so-called “free” trade. So the national treasure of the USA provides cover so all the rest can spend only on producing goods, etc. If the rest of the world had to cough up their fair share of up to 20% of GDP for their part of payment to this effort then you too would not be able to afford all the social spending you do.I say bring the USA boys & girls back home to the USA – close all our foreign bases. Let Europe deal with a nuclear Iran and a threatening Russia. Let China and Japan deal with a nuclear North Korea and a Pakistan India conflict. Let the global economy fail – it should never have gotten started in the first place as it is unsustainable. Let the Somalian pirates raid the shipping lanes if you folks want to still keep up the “free” trade bull shit Ponzi scheme.
Mark • May 20th, 2009 at 2:06 pm
You may be right about that, but I have decided that despair and rage are not powerful emotional tools. They weaken me.You’re playing with words here, basically attacking the messenger to keep from addressing the message.If you’re not angry you’re not paying attention!But to suggest that my actions are ruled by pure emotion, well, I think that’s a pretty cheap/worthless shot.How you are strengthened with or without some emotional activity is YOUR issue.Like I have stated before, I don’t question your intentions, I think that they are noble. But if there’s one thing that has repeatedly popped into my brain over the years it’s that women are right about men: they [men] tend to view everything as a problem needing to be solved.It’s not always wise to engage in a fight until you know your enemy (issue) thoroughly. I know what the real “enemy” is.Mark
Softwarengineer • May 20th, 2009 at 2:12 pm
BANKS RAISE $48 BILLION TODAY?Is the real private money or just federal bailout handouts or stock buys recently given to them?
Mark • May 20th, 2009 at 2:23 pm
The fact of the matter is that if it wasn’t for the stability that USA provides as a superpower there would not have been a global economy and this business of so-called “free” trade.Sorry, there are no parallel universes in which we can peek into to check your claim. WE DO NOT KNOW THIS TO BE CERTAIN! Further, if you were to really analyze things you would find that the US’s military actions have made things worse for everyone (except defense contractors and politicians)!Those Somali “pirates” happen to be more blow-back. Not necessarily US-generated, but direct consequences of modern commerce’s externalizations (over-fishing of local waters; and dumping of hazardous waste offshore of a country that has no real voice in the world [since its government collapsed]).And more about blowback… Iran does NOT have any nukes! Read up on (factual) history and you will find that it was the US who was jamming nuclear energy down the throats of the Iranians after they (US) overthrew Mosaddeq. A two-pronged strategy: prop a dictator in place for better negotiations for oil; and, get them using some other energy source so that they use less oil, so that more is available for “the global [read 'US'] marketplace”).Yes, the “global economy” isn’t sustainable.No, I’m not defending Europe. But, just because a country isn’t as militaristic as the US doesn’t mean that it’s doing so based solely on economics (these people saw MORE war than the US is EVER going to see). This sort of argument just gets us into the “ours” is “bigger than yours” argument, which only escalates/perpetuates the deadly game.Mark
Mark • May 20th, 2009 at 2:25 pm
Please, let’s hear what YOUR model is.Mark
ptm • May 20th, 2009 at 2:36 pm
Thanks, Michelle that was very insightful. I believe that the history Leveraged Buy Outs (LBOs) over the last 20 years have had led to significant decrease in the quality of our corporations (e.g., holding cash and using it for long-term planing makes the company a LBO target.)As I understand it, General Growth Properties (http://en.wikipedia.org/wiki/General_Growth_Properties) was a great company; a classic American success story grown from a family business in Iowa.But now you have just added another dimension to the destruction of corporate America, the “CDS squeeze play.” LBOs can be rationalized as survival-of-the-fittest, but there is no justification for using the press to bad mouth, then short sell (http://www.deepcapture.com/) then collect on your “credit event” and then collect again on bankruptcy debt!The financial system is literally eating our country from the inside out as if it were a huge parasite.But I still have one question about CDSs. When a credit event occurs, who is auctioning what? Is it a company that has some good and bad CDSs and they are auctioning off the good ones for collateral to pay the bad ones?Thanks again
Guest • May 20th, 2009 at 3:26 pm
A dollar dive, and finally a gold-bug reactionhttp://ftalphaville.ft.com/blog/2009/05/20/56082/a-dollar-dive-and-finally-a-gold-bug-reaction/
Guest • May 20th, 2009 at 3:32 pm
Mark, at DemocraticUnderground.com, half the bloggers there consider Mr. Joseph and all shop owners parasites, too. Take a perusal. Hopefully, the low class verbal filth streaming from their socialist frenzies won’t pollute your environment. For a sample of thread replies of caring liberalism to Mr. Joseph’s plight, try these:Dealerships fought for monopolistic laws protecting them, they didnt complain then..Im sure that part of the franchising contract he signed covered this eventuality.Everyone has a story……anybody with two working brain cells, will realize this guy is a thiefI’ll give him ten cents on the dollar for it.I am astonished people here are falling for this. It is clearly fake.What does this have to do with the government?What a bunch of @#$%! #$%@* they have over there!Nothing. And that’s what these sad sack pieces of @!#$%@ fail to grasp. Their ideal economic…Car dealers suck. #@*%*#The local dealer franchise model is outdated and antiqueThe dealrships are nto being given to new ownersA dollar to a doughnut this guy votes RepublicanI bet FOX was on all the TVs in the service centerBanging the Republican Drum for decades will do this….”This is a private business not a government entitity”…. and yet you seem to think the Govt.A free-market economy is *exactly* how this can happen,Rewards of a Republican Government.This is phoney — another RW propaganda pieceAmerican Thinker is a far right wing siteIt’s called “Bankruptcy”. Little sympathy for a business-person who is ignorant of the concept.How dare a business be allowed to fail in a free market economy?This is probably allowed by his dealership agreement with Dodge. And this is 100% free market.For more direct pot shots, the dealership can be found at:http://www.sunshinedodgeisuzu.com/staff.htmlhttp://www.democraticunderground.org/discuss/duboard.php?az=view_all&address=389×5688088
Guest • May 20th, 2009 at 3:41 pm
What an economy… Stop the world, I want to get off.John Paulson bets on property recovery with new fundJohn Paulson, the hedge fund manager who made an estimated $3.7bn (£2.4bn) shorting the US housing market ahead of its collapse, is placing a firm bet on a medium-term property recovery with the launch of a new fund.May 18, 2009 — Paulson & Co. is in the early stages of raising money for the new fund. In a departure for the firm, which tends to be more focused on running hedge funds, the new venture will be a private equity fund.Documents recently filed with the Securities and Exchange Commission will allow Paulson & Co. to begin talking to investors about the fund for the first time – with fundraising expected to begin shortly.Although a cap on the fundraising has not been decided, it is expected that the initial size of the fund will be a couple of hundred million dollars.Mr Paulson has hired Mike Barr, a former managing director in Lehman Brother’s $25bn-plus real estate private equity practice in New York, to manage the fund.Mr Barr is being assisted by former colleague Jonathon Shumaker in managing the fund, which will be known as the Paulson Real Estate Recovery Fund.The life of the fund is expected to be seven years, with investments to be made in both the residential and the commercial property sectors…http://www.telegraph.co.uk/finance/financetopics/financialcrisis/5344169/John-Paulson-bets-on-property-recovery-with-new-fund.html?dbk
Guest, also • May 20th, 2009 at 3:49 pm
How about this for one solution to one problem, that of ‘bigness’ in control of government.If you are not a registered voter, you can not make a political campaign contribution. Period, end of story. No more corporate money, lobbyist money, labor money, foreign money (Yes, I do realize that is already illegal) – only voter money, and limit that, too. Every contribution to be posted on the web within 24 hours.Suddenly, politicians would have to raise money in a far different way, and campaign, in new ways, too. Suddenly, we would get a whole new class of leadership. Look, folks, this is really not so hard. There is a permanent class of bureaucrats to run things. we just need real people with real values to oversee things. People who are not bought and paid for, and not afraid to point at an Emporer with no clothes. What is hard is to root out the corruption that so permeates Federal and State governments.I respectfully submit that this would solve an immense number of our problems over time, and would have prevented much of the distress we witness now.I also submit that if we can’t accomplish that change, we are done.We have been robbed blind and our leadership won’t even prosecute the criminals. I bet that if they could not take money from them, they would be building the scaffolds right now for the banksters, and patting themselves on the back for protecting the people (voters).
Guest • May 20th, 2009 at 3:49 pm
Monday, May 18, 2009The Destructive Implications of the Bailout – Understanding EquilibriumJohn P. Hussman, Ph.D.One of the features that has enabled the bureaucratic abuse of the public during the past year has been the frantic, if temporary, flight-to-safety by investors. The Treasury has issued an enormous volume of debt into the frightened hands of investors seeking default-free securities. This has allowed the Treasury to finance a massive and largely needless transfer of wealth to bank bondholders so easily over the short-term that the longer-term cost has been almost completely obscured. But by transferring wealth from those who did not finance reckless loans to those who did – providing monetary compensation without economic production – the bureaucrats at the Treasury and Federal Reserve have crowded out more than a trillion dollars of gross investment that would have otherwise have been made by responsible people in the coming years, shifted assets to the control of those who have proven themselves to be irresponsible destroyers of capital, and have planted the seeds of inflation that will cut short any emerging recovery.In order to understand the impact of these interventions, you have to think in terms of equilibrium – recognizing that all securities that are issued must also be held by someone – and then follow the money. Initially, suppose you have a banking system with $12 trillion in assets, financed with about $7 trillion in deposits and other liabilities to customers, about $4 trillion in debt to the bondholders of the banks, and about $1 trillion in shareholder equity as a buffer against insolvency.Now, suppose that the value of the assets deteriorates by $1 trillion, effectively wiping out the shareholder equity and putting much of the banking system in an insolvent position. Suppose also that government bureaucrats refuse to properly take receivership of insolvent banks, to impose haircuts on the debt to bondholders or to require them to swap debt for equity. Instead, suppose these bureaucrats prefer to defend the private bondholders who funded the bad loans from experiencing any loss whatsoever, and are willing to use public funds to do it.In order to do this, the Treasury issues $1 trillion in government debt, with a preference toward shorter “money market” maturities (since it doesn’t want to drive up long-term interest rates at the same time the Fed hopes to invigorate the housing market). It may seem like this means that there is $1 trillion of new “liquidity” in the economy, but you have to think carefully. …http://www.hussmanfunds.com/wmc/wmc090518.htm
Mark • May 20th, 2009 at 4:09 pm
Levers of power will always be sought for corrupt gain.Need more people to read/understand Chomsky.Mark
Guest • May 20th, 2009 at 4:52 pm
all of them have been corrupt since kennedy. Media makes them non human fairy tale super heroes.
PeterJB • May 20th, 2009 at 5:02 pm
Speaking of the impossible (for most):Thought”One thought could change your life, your wealth, your trading day, your happiness. Mostly they come and go, but few stay. This is something that you can find useful, it’s not only about trading, but it could change your feeling of the market and make you become more resistant to “green shoots”, government stupidity, manipulation and many other things. There is no need to comply with these thoughts, the purpose is to start thinking.”http://zerohedge.blogspot.com/2009/05/guest-post-one-thought-could-change.htmlKeywords: thought | food-for-thoughtHo hum
Gloomy • May 20th, 2009 at 5:05 pm
ISN’T IT OBVIOUS1. Obama meets with the heads of the 19 largest banks in a closed door meeting (remember that?), the bogus stress test results are announced shortly thereafter, and markets go on a tear, allowing banks to raise capital.2. The government can manipulate the market for a few months at most before the game is up. This fall looks to be a repeat of last fall3. The government will in the coming months need another market swoon to panic Congress in to TARP II and Stimulus II-they are probably already game planning around the market crash to make the most of the opportunity.4. Even if all of the above is incorrect, the PTB could not allow a V shaped recovery. The “green shoots” have caused a large spike in commodity prices. Even if the economy was to recover modestly, $150 dollar/barrel oil and food crises would soon follow, leading to a massive political crisis.Isn’t it blindingly obvious where markets are going? This is a great time to start accumulating additional put options.
Guest • May 20th, 2009 at 5:11 pm
Mark please elaborate what is the real enemy? I’m curious. Thank You
Guest • May 20th, 2009 at 5:15 pm
chomsky plays good cop mark.
Guest • May 20th, 2009 at 5:35 pm
well said mark
Hayes • May 20th, 2009 at 6:37 pm
this is the best link I’ve found in weeks:link
Guest • May 20th, 2009 at 6:43 pm
Seems just as obvious to me as it does to you. It’s only a matter of the time and a decision regarding spin and alphabet-acronyms.
Guest • May 20th, 2009 at 6:54 pm
Hussman for Treasury Secretary AND Fed Chairman. Never mind, the banksters would probably just poison him.
Guest • May 20th, 2009 at 7:41 pm
Why would an ATM dispense a barbarous relic?
Guest • May 20th, 2009 at 7:55 pm
Interesting. I take it they don’t experience much in the way of people stealing ATMs over there?
Hubbs • May 20th, 2009 at 8:05 pm
Add another emotion to the investment dictates besides greed and fear. (Actually someone on this blog once astutely said greed is just a derivative of fear…fear that you are going to miss out on juicy gains. Call it greed or whatever.)Anger. Pissed that after 15 years I decided I had to get out of domestic stocks 2 years ago since I am a firm believer in passive indexed investing, or at least was. Now pissed that I have missed a 30% binge…but alas, it is all hindsight. Would I short the market right now? No. Too much meddling by the FED and Banksters. Would I go long? Hell no.Pissed that I feel basically any attempt in the future to save or invest will send these funny money paper pushers laughing all the way to the bank.Translation: Forget about retirement. Anything you save will be taxed, stolen, or inflated away. Just pay as you go, and you , your kids, and your grandkids are on the way to a life of financial servitude.
Hubbs • May 20th, 2009 at 8:09 pm
Green shoots, then yellow weeds, now yellow flakes.
Guest • May 20th, 2009 at 8:20 pm
I just saw a commercial that, at first, I took as a statement on what’s happening (or going to happen) to our currency. A guy was racing out of his house in his robe, carrying a transparent garbage sack filled with paper cash, yelling “wait, wait” to the guys operating the garbage truck. Tossed it in the back and hurried back in, calling out a ‘thanks’ over his shoulder. Turned out to be for Sprint, admonishing people not to throw away their money with other phone companies–I would’ve liked it better if it had said at the end “Don’t Let the Government Trash Your Cash”.
PhilT • May 20th, 2009 at 8:57 pm
@PTM – I have read your posts in the past and you seem quite knowledgeable. A while back the Guide linked below helped me to understand certain aspects of CDS events/markets on a foundational level. Hope this helps.Guide to Credit Default Swaps
Guest • May 20th, 2009 at 9:25 pm
Major League Baseball and the NFL each enjoy exemptions from Anti-Trust Laws of the USA that enable the owners to basically run their own little countries in a business format. The shadow financial system firms do as well.With almost a divine worship mentalilty, 10′s of millions of American citizens admire and revere the leadership of these groups – Major Sports Team owners & Shadow Financial Industry Execs.- who have this level of command.It is up to the average person to awaken & realize that he/she are celebrating and worshiping these “leaders” who are in turn creating the demise for their loyal followers.
Anonymous • May 20th, 2009 at 9:35 pm
It’s the Obama nation of desolation
Morbid • May 20th, 2009 at 9:42 pm
Don’t get me started.
PhilT • May 20th, 2009 at 9:43 pm
Dear OuterBeltway -It is wonderful that the Brain Trust now has it’s articles posted here in Roubini’s RGE website.I am wondering if you are wondering if it might be useful to direct these interactions concerning the Brain Trust to the most recent Brain Trust blog location in this site ???Once a Brain Trust event is triggered in Roubini’s current thread, a Brain Trust member replies in that thread and then includes an active link to the most currently posted Brain Trust thread in RGE with the goal to continue the discussion there. The intention being to drive more traffic to and hopefully retain more contributors at the RGE designated space for the Brain Trust.Whaddya think?Best wishes -
OuterBeltway • May 20th, 2009 at 10:06 pm
Mark:Read it again. Here’s what I said:
I do share your rage about the thoughtlessness and plain stupidity of humanity’s current relationship with the natural world. But I believe that your anger is paralyzing you. You seem to speak as if there are no solutions, that nothing’s going to work, and we have to endure a massive calamity in order to smack some sense into humans.
To which you replied:
But to suggest that my actions are ruled by pure emotion, well, I think that’s a pretty cheap/worthless shot.
It wasn’t my shot. I said your anger is preventing you from generating solutions. I stand by my assessment, and I don’t make that statement to be mean or belittling. I also said that I’m angry, too. I just choose to channel the anger into action. I think that works better in the long run.So I am not attacking your message. I am saying that you’d be even more effective if you’d go beyond your message, and convert that knowledge embodied in your message into a new version of a functional economy – specifically, new kinds of businesses that express those values – the ones in your message. Bring it to life.Somebody on this blog, I think it was Mother of God, said something like “we’re losing energy with all this being against things; we need to generate new energy by being FOR something”.I want to be FOR something. I want to build a new economy that works, and I really do think it’s possible to do that.That’s it. You’re a smart guy, and I know for sure you want good things to happen for others.Why don’t we make a deal. How about if you actually take the time to understand what we’re doing – really understand it.Then you can write an article, called “Why The BrainTrust Is a Really Stupid Idea”, and we’ll publish it on our website.Once you get more insight into our work, you may very well decide not to write that article – and that would be great. But if you can help us see why our work is mis-guided, you’ll save each of the BT members a great deal of time and effort.What do you say?And if you decide not to write that article about how stupid the BrainTrust is, maybe you’ll consider writing one entitled “Who The Enemy Actually Is”?If it’s good stuff, maybe we’ll publish both of them.
OuterBeltway • May 20th, 2009 at 10:17 pm
PhilT:That is a great idea. I’ll begin including that link in subsequent posts with content germane to BT.BTW, Phil, I really wish you’d help us write our next few articles. There are some perfectly smashing topics on-deck, contributed by many of your friends here at RGE.Mark, if you’re reading this, there’s a spot for you, too. You’ve got a great mind….sure could use some “loyal opposition” to liven up the party.Give it some thought, OK?For those that are new to BT, here’s a link to our last article, posted here at RGE.
Michelle • May 20th, 2009 at 10:22 pm
These are dutch auctions that include only the CDS of the referenced entity’s underlying debt, and I don’t think there’s any way to distinguish a “good” CDS versus a “bad” CDS as it all depends on the terms, but in my book they are all bad! The buyers (bidders) of these CDS tend to be the same big names we hear over and over again – JPM, GS, Deutsche Bank, Citigroup, Morgan Stanley, etc. and it appears they bid on the cheap, forcing an even larger cash payout. What’s insane is that these bidders are the very ones that securitized the debt to begin with, so not only did they collect the upfront fees, they are also collecting when the debt goes bad, and if this isn’t moral hazard I don’t know what is.Who wants to venture a guess that exotic financial instruments are past their prime after all this distrust? No doubt the credit markets are frozen for a reason, making the Fed (read taxpayer)the last and only lender of resort.
ptm • May 20th, 2009 at 10:31 pm
Thanks for the pointer PhilT, but your posts are more knowledgeable than mine.And thank you Michelle for taking the time to answer my questions. It was very helpful.
Michelle • May 20th, 2009 at 10:36 pm
Now that explains why banks hold ATM CASH deposits!
Guest • May 20th, 2009 at 10:45 pm
Bill Fleckenstein, one of the long held bears who got the recent rally right. Recommends extremely thought-provoking articles.”A born-again gold bull”http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/a-trio-of-views-to-guide-investors.aspxAs for Gold PeteCaWhen I sold my gold you said some other lucky person got it. It’s looking more and more like I made a big mistake selling my gold. As for those who say gold is a barbaric relic and hate it, should read again the following.“Sixth, the rapid and massive monetization of fiscal deficits – that has been pursued by central banks this year – is not yet inflationary in the short run as there are massive deflationary forces in the world given the slack in goods markets and labor markets; also the collapse in the velocity of money implies that the excess liquidity has been so far hoarded by banks in the form of excess reserves. But if central banks don’t find a clear exit strategy from very easy monetary policies – that have led to the doubling or tripling of monetary base in the US alone – eventually either goods prices inflation and/or another dangerous asset and credit bubble will ensue when the global economy gets out of this severe recession. And some of the recent rise in equity prices, commodity prices and other risky assets prices is already clearly liquidity driven rather than being fully justified by the improving economic fundamentals.”Our Professor from “The Almighty Renminbi?”Said Gold is still a barbaric relic whose value rises only when inflation is high.MA, still hoping your short term gold call is correct, but referring to your comment under Morbid on 2009-05-19 12:12:09“no 2 ways about it… inflation (and 100% especially hyperinflation) can NOT and will not happen while house prices are falling.It just doesn’t work that way.”Miss AmericaHide replies Reply to this comment By MA on 2009-05-19 12:47:03 “This does not ring true in my opinion. For example, when real estate was going up, inflation was not reflected in official numbers. And 2, I agree with the professor (sixth) “eventually either goods prices inflation and/or another dangerous asset and credit bubble will ensue.” Question is, will the dollar strengthen soon or will you miss that call. Seems to depend on the Fed, and helicopter Ben is still in control.Fighting inflation with high rates will make things worse with housing/economy.I seem to think Schiff is going to get the inflation call right. The question is will he get the inflationary depression right?hlowe
black changer • May 20th, 2009 at 11:25 pm
Sucking bears you need to change.
Guest • May 20th, 2009 at 11:59 pm
I agree. If people are sucking bears, they definitely need to change. Bears can be dangerous and sucking on them is not recommended.
Plongka10 • May 21st, 2009 at 4:46 am
The Times is owned by Rupert Murdoch – and you are surprised to see AIPAC-speak in it? I would humbly suggest a little research into the ownership of meeja outlets may give some insight into the games being played out around us.
Plongka10 • May 21st, 2009 at 5:05 am
Good response Mark, and on the button. However, I agree with Morbid; you Should repatriate your forces. But we all know that does not fit with the hegemonic tendencies of TPTB, so it ain’t gonna happen anytime soon.PS Its all a distraction to keep your eye off the ball.
Plongka10 • May 21st, 2009 at 5:13 am
Did the poster add “Capo de tutti Capi” after David Rockefeller’s name? Interesting to see Petraeus was at the meeting. Come to receive his orders maybe?
OuterBeltway • May 21st, 2009 at 6:15 am
If massive deleveraging is really occurring, and it seems to be, that destroys credit and thereby reduces the money supply. So if all this deleveraging runs to completion, should we not still be in equilibrium – lower asset values, and smaller money supply.Why is that inflationary, unless:a. After the deflation process ends, rates are kept near zero (hasn’t happened yet) and bank loan leverage is left at 30:1 (has this changed?)b. After the deflation process ends, Fed keeps supplying “replacement” demand (hasn’t happened yet)c. The asset values don’t fall in proportion to the money supply – the money supply shrinks “less fast” than the asset values fall, leading to higher prices for the assets (inflation). This may be happening now, but the game (asset re-valuation) isn’t over yet.What other scenarios are there that will produce inflation?How would we get the numbers to comparea) reduction in money supply from deleveragingb) change in asset value
OuterBeltway • May 21st, 2009 at 6:27 am
As I consider it, even if the Federal Government continues to supply “replacement demand” – to make up for what the consumers aren’t spending – it’s not necessarily inflationary.If the Government spends borrowed money on projects whose economic impact is to increase the value of our nation’s assets – say, by energy or transportation or educational investments – that is not necessarily inflationary.Why? Because the Government must borrow from the existing pool of dollars – they sell debt which just transfers dollars from one bank account to another. There’s no leverage is at play here.It’s not increasing the amount of dollars in circulation, so it’s not inflationary.Is that assertion true?
Hayes • May 21st, 2009 at 7:52 am
Capped, traded and scammed by fake marketsThe Waxman-Markey cap-and-trade bill is worse than the Obama fuel standard link to article and a link to the 900 plus page bill referenced in the articleAmerican Clean Energy and Security Act of 2009 (PDF warning)
Hayes • May 21st, 2009 at 8:02 am
Day of reckoning looms for the U.S. dollar“The U.S. dollar’s day of reckoning may be inching closer as its status as a safe-haven currency fades with every uptick in stocks and commodities and its potential risks – debt and inflation – are brought under a harsher spotlight.Ashraf Laidi, chief market strategist at CMC Markets, said Wednesday a “serious case of dollar damage” was underway.”We long warned about the day of reckoning for the dollar emerging at the next economic recovery,” Mr. Laidi said in a note.Mr. Laidi said economic…”
Hayes • May 21st, 2009 at 8:24 am
a should watchDavid Rosenberg on Bloomberg (video)
Hayes • May 21st, 2009 at 8:34 am
Global Economy Free-Fall May Be Ending, Krugman Says (Update1)http://www.bloomberg.com/apps/news?pid=20601100&sid=aUbd7sJLSktQ&refer=germany
Guest • May 21st, 2009 at 8:50 am
Rosenberg is like the professor! Just the facts!Thanks Hayes! The debt overhang is too large to allow a consumption recovery. The Professor has referred to the DEBT OVERHANG problem since his oringinal 10 points. The administration is captured by the banks and instead of debt reduction, they are allowing debt peonage to help save the banks. Example! The credit card bill has no cap on rates. It is a sham bill! No cram down provision of residential first mortgages in Chapter 13. Therefore no principal reduction for the grunts who work for a living, and are debt ridden. No HLOC, but instead mass subsidies for the banks, and they are not lending. The taxpayers are being asked to carry the banks on their back across the river. This is DEBT PEONAGE. The people should be demonstrating saying to their representatives,”IT IS THE DEBT! STUPID! The banks are killing the worker geese with the golden eggs of consumption. The taxpayers are going to pay for the losses at the Banking Speculative Casino, and get into more debt in the process. The solution is simple! The professor has laid it out. The pain must be shared by the banks, even though they have all the power. They must exercise ENLIGHTENED SELF INTEREST. Where is the PATRICIAN DELIVERER WHO CAN MAKE THEM UNDERSTAND THAT IT IS NOT IN THE INTEREST OF THE FINANCIAL ELITE TO SQUEEZE THE POPULATION THIS WAY. They are eventually going to feed the fringe nutcases who resort other methods. We need for the powerful to become ENLIGHTENED FOR THEIR SELF INTEREST.
TfT • May 21st, 2009 at 8:50 am
Bailing On Britain by Jesse:Excerpts:
The survey reported below indicates that many Britains are taking serious steps to leave their country because of the economic conditions and political considerations.A bit overstated perhaps, and talking their book, but certainly a trend worth watching….
Is LB one of the people leaving Britain because of this (partially)? Well, at least he leaves for now and he is definitely quite forward-looking. Jesse did ask the question at the end of his this post: “Have you seriously considered leaving the US within the next four years, seriously enough to actually do some preliminary planning?”Another news about UK today- Britain’s debt outlook lowered to negativeDoes UK precede US?We will see how it plays out.
Morbid • May 21st, 2009 at 9:11 am
No, I’m not defending Europe. But, just because a country isn’t as militaristic as the US doesn’t mean that it’s doing so based solely on economics (these people saw MORE war than the US is EVER going to see).
Yes, Europe is a peace loving place or at least they would like it to be. But that one-sided approach to life got them in TWO world wars – the USA dragged into both – requiring the USA to build up a military industrial complex to save their sorry asses. All I am saying is that a strong national/global defense is a necessary thing in our world of corruption/greed/power seeking despots. Certainly the USA becomes like these despots in its foreign policy and warmongering BS in order to gain access to any and all resources it wants. Plenty of blame to go around. Just not enough ethical or conscious individuals in this world to do what is morally right.
Plongka10 • May 21st, 2009 at 9:31 am
Should be “many Britons”. HTH.
Guest • May 21st, 2009 at 9:34 am
Do You Know Where Your $2 Trillion Has Gone?Since 2008, the Federal Reserve has loaned trillions of dollars in bailout money but refuses to tell Congress where it went. Legislative action is needed.The Federal Reserve Transparency Act would give the GAO the authority to audit the Federal Reserve and report its findings to Congress. The bill was written by Rep. Ron Paul and has 165 cosponsors, mostly Republicans.Democratic Congressman Alan Grayson is now working to get Democratic cosponsors for this bill (see Grayson’s letter here).If you think that it’s time to bring some transparency to our financial system, please endorse the bill and Rep. Grayson’s letter by adding your name to the list.link to petition
Guest • May 21st, 2009 at 9:38 am
new thread
Plangka10 • May 21st, 2009 at 9:38 am
Trouble is, there is one corrupt, greedy, power seeking despot in the game at the moment who doesn’t want to let go of the ball.
Mark • May 21st, 2009 at 10:41 am
There’s clearly a fundamental disagreement here.You don’t accept my “negativity,” and I don’t accept your notion that “being against” things is bad, non-productive.Our world has been too much geared toward relying on positive feedback loops (refer to Daniel Quinn’s writings on this), “positive energy,” or whatever one may wish to call it.I haven’t looked lately, but upon my first views of what you all were charting there didn’t seem to be anything in the way of addressing the issue of growth. Not sure if you’d changed this now, but there didn’t seem any sense of this key fundamental there.Mark
MA • May 21st, 2009 at 10:58 am
sorry for the delay Cahill… Anything is possible. Statistic models fail all the time. The “House” is the largest “net” in the equation by such a large percentage that it doesn’t seem possible.True downturn actually reinforces land ownership to boot….and to answer the inflation/deflation question…EVAPORFLATION!!!That’s what it is. Google it to find my articles.Miss America
MA • May 21st, 2009 at 11:10 am
Hlowe,I hope my guidence helps (and am extremely miffed when I’m wrong). As I’ve stated before, I have nothing (investment wise) at stake , since I do not play that game.From my “semi-crazy” analysis, I’m still short gold. (it’s laughing in my face right now… “sell at 800-850″ and “won’t reach $1,000″)If you gave me a block of gold right now… I would sell it in 1 minute. (and buy (yes buy, buy, buy) productive valued things. Solar panels, energy efficient gizmoes galore!!! …because prices are down across the board. …and if/when inflation strikes, I’d hate to become a slave to the oil/energy cartel.To me, in a deflationary time, this is how you fight the coming storm.I hope all is well.Miss America
Mark • May 21st, 2009 at 11:13 am
I’m calling B.S. on this. Europe didn’t get itself into war. It was the Treaty of Versailles that set the stage for WWII. WWI wasn’t caused by the practice of too much peace, it was caused by meddlings.The USA wasn’t dragged into these wars! It leaped into them! Cause and effect. US industrialists helped build up Germany into the juggernaut that it became.Germany’s aggression would have failed regardless of US involvement. We could argue the point about whether more or less people would have died without the US involvement (have to factor in lost US lives!), but the fact is that Germany would have failed. It is the “accepted wisdom” in the west that it was the US who was most responsible for the turning when in fact it was the godless communists in Russia.I’m constantly amazed at how people who promote “good systems/governance” can think that bad systems/governance can succeed. Germany’s control could never spread and hold. Same for the old U.S.S.R.: Vietnam was about stemming the take-over of the world by communism.All I am saying is that a strong national/global defense is a necessary thing in our world of corruption/greed/power seeking despots.What? The agency that’s responsible for controlling that “strong national/global defense” is the same agency that’s responsible for backing most of the egregious dictators/despots that exist!I believe that it was Bertrand Russell who likened the rationale of promoting arms buildup (specifically MAD) for protection to that of a small village confronted by the ravages of a rabid dog: the townspeople got together and decided to acquire another rabid dog in the hopes that the two of them would take eradicate each other; of course, all that this would do is to expose the townspeople to a higher risk of being bit!The arms industry wants us to believe that we’ve got to have a strong “defense” (yeah, that’s what the attack on Iraq was, “defense”).I recommend reading Randolph Bourne’s “War is the Health of the State”, as well as anything from Chalmers Johnson (and in most cases, Noam Chomsky).Mark
Mark • May 21st, 2009 at 11:52 am
Great piece!This caught my eye:I joined Deutsche Bank in 2006 to build an investment business within its commercial real estate lending operation, and I was generally surprised by the aggressive sales culture within our firm. While many people consider the banking sector’s problems to be caused by residential lending, I witnessed multibillion-dollar loan proposals for commercial property.With funds provided at more than 90 percent loan-to-value, these loans were “priced to perfection” and assumed that property prices and rental rates would continue to rise. For perspective, a single billion-dollar commercial real estate loan is equivalent to 2,000 residential loans of $500,000. Deepak Moorjani (former Deutsche Bank employee)Mark
Mark • May 21st, 2009 at 12:15 pm
“This is more than a marketing gimmick,” said Thomas Geissler, chief executive of TG-Gold-Super-Markt.de, the company planning to set up the 500 gold ATMs at a cost of ¤20,000 ($31,500) apiece.Like anyone pushing something has EVER called what they are pushing a gimmick?Could this be the start to the top of gold? Pretty soon we’ll be seeing TV shows titled “Flip this [gold] coin”!Mark
Mark • May 21st, 2009 at 12:24 pm
Oil is back up to $60/bbl. Gold back up to $945/oz. USD down about 13% against the CAD: I watch this closely. More USDs injected into the system.Does any of this say deflation?Mark
Guest • May 21st, 2009 at 12:43 pm
Instead of names, we could have just substituted the prhase, ruling class. More important, what new plot for world screwing have they come up with?
Guest • May 21st, 2009 at 12:49 pm
Yes, but the dollar is declining. Will we see the world running for dollars agian soon?hlowe
Mark • May 21st, 2009 at 12:55 pm
Yeah, a lot of bankers are leaving, to find work… huh? The financial industry is collapsing, as it should. Reminds me of sports teams threatening to pull out of a city unless their demands are met.But, clearly, Britain, as is the case with many other countries, is starting to hemorrhage (now that cheap energy and resources are no longer available to maintain growth).U.K. May Lose AAA Rating at S&P as Finances Weaken:Britain would become the fifth western European Union nation to lose its rating because of the economic slump, following Ireland, Greece, Portugal and Spain. The U.K.’s debt load next year will be 66.9 percent of GDP, exceeding Canada’s 29.1 percent and Germany’s 58.1 percent, according to April 22 forecasts by the International Monetary Fund. The U.S. will be at 70.4 percent, and the 16-nation euro area at 68 percent, with France at 70.6 percent, according to the IMF.Begs the question: why isn’t the US at risk of being downgraded?Mark
Guest • May 21st, 2009 at 1:23 pm
From the article“The U.S. dollar is going to fall quite a lot, or at least significantly,” he said. “The demand for dollars has been temporarily inflated by the crisis. Good news is actually bad news for the dollar. If things stabilize, then the safe-haven demand for dollars falls off.”China’s government in March suggested the creation of a new international reserve currency to replace the dollar.“I view the Chinese agitation about a new currency as basically an attempt to have somebody rescue them from their own investment decision,” Krugman said. “China bought too many dollars. Now it’s looking at it and saying, ‘we’re going to lose a lot of money on this investment’.”Thanks for all the great links Hayes.hlowe
transparent • May 21st, 2009 at 1:44 pm
@guest”You’re talking here about Big Government abuse, not capitalism.” Lie number 1.”Capitalism is an economic system that allows the individual to develop and profit from his own labors.” Lie number 2. At this point I stopped reading your post.
Guest • May 21st, 2009 at 2:42 pm
The only thing I would add to this article is that Goldman Sach’s may have an interest in inciting economic volatility. During “green shoot recoveries,” this would enable them to lock in higher interest rate loans. During “yellow weed dips,” it would enable them to buy loan portfolios from failing banks more cheaply. With the support of the Treasury, it could shore up potential defaults on those loans.
Guest • May 21st, 2009 at 4:08 pm
So Lie #2 means you actually read the whole post!
PhilT • May 21st, 2009 at 4:31 pm
@ Mark 2009-05-21 10:41:30@ OuterBeltway 2009-05-20 22:06:21It is very compelling reading – your exchange. At a minimum, it demonstrates on an individual level, a gap of some sort, that exists on the macro level as well and is worth paying attention to and learning about.I just posted a link in the Brain Trust blog to an On Point interview from this morning that demonstrates a similar gap between 2-very accomplished British historians (one of whom is Niall Ferguson) on the topic of America’s future.It would be interesting to read each of your opinions of this interview linked @ Current Brain Trust Blogbest
g Anton • May 21st, 2009 at 7:14 pm
So the UK has lost its AAA credit rating and US investors are dumping US dollar-based assets (stocks, bonds, dollars, etc.) on fears that the same thing will happen to the dollar. Looks like Ben Bernanke’s pigeons are coming home to roost. Also, Obama might take the hint that just talking about deficit problems is not going to get it–he actually needs to do something–like maybe cutting military spending in half and stopping transfering Wall Street debts to the US government.
Guest • May 21st, 2009 at 8:47 pm
Its starting, 30,000 of our troops in Germany coming to Texas soon.hlowe
Guest • May 22nd, 2009 at 4:37 pm
Doesn’t the continued drop in housing prices (and I think N.R.’s estimate of another 15 to 20% is conservative) give the policymakers strong impetus to pursue inflationary policies, maybe aggressively so? Which is another way of saying they won’t allow deflation.
Guest • May 22nd, 2009 at 4:40 pm
Mark,Getting the inflation/deflation call right is critical to investing one’s assets. Get this one wrong and you will be caught short, literally.
Cassandra • May 23rd, 2009 at 2:07 pm
Yes. But the cat isn’t the shock exchange, it’s the US economy and polity.
CHRIS DAVIS • May 27th, 2009 at 2:24 am
Important to note key difference between money and price inflation. Usually don’t see price inflation in finished goods until output gap(extra capacity)narrows. Confusingly, as the Fed reflates the money supply while the consumer deleverages, the price of finished goods can fall from lack of demand from the former while the price of financial assets and commodities can rise from the effects of the latter, ie, stocks can go up while the price of autos falls.Also important to note the differnce between an asset swap, eg, Fed purchase of commercial paper, a real asset, vs. true inflation, eg, Fed purchase new Treasuries with printed money.For the most part expansion of Fed balance sheet has been composed of purchase of third-party debt, which, in theory only, some day Fed could turn around and resell.
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