Celebrating the 'Recovery': I'm Disgusted [View article]
In the history of bubbles and financial dilusions, the cycle has never ended until the object of affection is treated with revulsion. When home ownership drops well below the historical average in the low 60% area, that will be the equivalent of revulsion and a centennial bottom bottom will be in. When less than 20% to 30% of Americans own stocks, that will be the equivalent of revulsion.
Anything less than drastic devastation of what would be considered "normal" will just constitute an extension of the bubble, be it houses or stocks. There is no reason why these bubbles can not extend for a long time, with only partial deflations from time to time. But if you want 60 years like the last 60 years, the bubbles have to go flat and start over. Otherwise the two markets (houses and stocks) will have significantly lower returns going forward than we have become used to.
The structure of unemployment (not just the extent) and the extent of home price depreciation are just two of the factors that make this recession difficult to compare to prior downturns post WWII. The charting observations made by bbro, which I have documented in articles, are indeed correct. In the past, these would be much easier to interpret. However, the factors listed below are just three of the reasons this time is different:
1. In the recession considered to be the worst before this one (1981-82), the total number of jobs lost was 1.661 million (would be 2.22 million adjusted for today's higher population). Of these 45% (approximately 1 million relative to 2009 total population) were permanent.
The corresponding numbers today are 8.39 million jobs lost (more than 3.75 times as many) and 56% are permanent (4.70 million, 4.7 times as many).
We have to deal with 4.7 million jobs that are never coming back. This is a dislocation much more severe than ever experienced in post WW II history.
2. The second dislocation much greater than anything since the Great Depression is the unprecedented decline in home values. With median values dropping at least 20% in many regions, and more in some, the economic distress on consumers is draconian. The fact that prices still have not returned to long-term trend lines is indicating that further problems may occur, in spite of government efforts to put in a floor for the market.
3. The collapse of the financial system we have seen is like a 100 year flood. When the firms saved only by unprecedented government support through assumption of substantial government ownership are included, the financial crisis dwarfs even the magnitude of the Great Depression. I have written articles making these comparisons last summer.
We all tend to interpret situations based on our past experiences. We have so many factors outside of the range of experience of those living today that there are bound to be many false projections. That is why a few, like John Mauldin, continue to examine our situation with viewpoints outside the box of our common experiences to our great benefit.
The fact that we are in uncharted waters and will remain there for some time is simply not appreciated by many.
As usual, a well constructed set of arguments with plenty of good supporting data.
I particularly want to comment on the education discussion. From the data you present it is obvious that we do a mediocre to poor job of education K-8 (9th and 15th out of 45). We follow that up with secondary education that is non-existent. Two years later the rankings are (22nd and 28th out of 39). The 10th grade performance is probably achieved with only the poor material assimilated two years earlier.
In two years (8th to 19th grades) we go from 67th percentile to 28th percentile (using math performance). We need to stop no child left behind and start allowing more children to get ahead. How about starting with the 3Rs? Little else should be taught until functional reading, writing and math skills are learned. We have somehow lost the basics.
We risk the New Normal being 50% functional illiteracy (3Rs). When I was a youngster, magazines like Popular Science talked about the future having high levels of automation, allowing great amounts of leisure for the populace. This leisure would permit people to have greater time for recreation and intellectual activities. The presumption was that the intellectual activities would add value to the economy and provide a source of income for the "leisure class". What has happened is that we are at close to 50% leisure class (unemployed or not in the work force), but the vast majority of these are at subsistence levels in or near poverty, or dependant on the employed 50%, and many have not received the education necessary to engage in any intellectual activity more complex than peeling bananas and opening beer cans.
Sorry for the long rant, but education is a hot button with me.
I have read many of the excellent comments in this thread, but decided to come back to yours to make a couple of additional points because you most directly address the areas I want to expand.
A. You wrote:
<<This means for the US economy that lower interest rates and government incentives aimed at boosting consumption work as pure poison. Instead of more consumption, more savings, less consumption and fewer imports are needed.>>
A dollar spent on consumption is "one and done". A dollar invested for future utility has a multiplication factor.
High taxes in the post WWII years served two purposes: (1) pay down the high debt levels from WW II and Korea and (2) fund infrastructure at home and abroad.
Lower taxes in the past thirty years have not had a long lasting economic benefit because tax revenues have increasingly been spent on consumption. Infrastructure has decayed. The future has been ignored.
See seekingalpha.com/artic... for a graphical representation of the declining multiplicative factor for debt over recent decades.
Borrowing for consumption instead of for production is a cousin to the practice of lending to someone who won't repay in order to receive a commission for the transaction when you personally won't suffer the default loss because you sell the loan to a third party.
B. The final paragraph above brings me to a second point: The incentives that have developed for compensation at the top levels today are perverse. Those in the positions with the most economic power are richly compensated for taking risks, even reckless risk, and suffer no economic loss when the operation fails. We can not hope to build a structurally sound financial and economic system until those who reap the outsized rewards of risk personally bear the consequences of failure.
I left a more lengthy comment today on this topic on an Instablog by Elliott Morss seekingalpha.com/insta... and will not repeat it here.
Here are some things that must happen for the Fed model to be applicable now:
1. The steeper yield curve, which normally increases bank profitability, must be accompanied by increased lending in order to have the normal effect.
2. We must get close to a bottom in housing prices, both time and price.
3. The slide underway in worldwide economies must stabilize within the next 12 months.
4. The uncertainties about banks' insolvencies must end.
There may be some more things necessary to get the same reaction to the yield curve as in the past seven recessions, but these certainly are important factors.
In order for past results to be achieved we must have conditions similar to the past. It is not clear that this is happening here yet.
$200 Oil Is Coming While We Waste a Perfectly Good Crisis (Part 3) [View article]
Jim - - -
If we don't solve the energy problem, nothing much else matters. There is no one individual solution, but the whatever the solutions they must have the same characteristic: they must build capacity faster than oil production fades.
One factor that is not much discussed is the value of oil as a chemical. Every barrel we burn is another barrel of raw material for tars, asphalt, polymers, plastics, composites and petrochemicals that is gone forever. Yes, we can get carbon raw material from coal, but at a great deal larger cost and environmental impact.
You have written about the energy problem before and you should keep making the case for action. Too many people are arguing that we shouldn't put effort into developing alternative energy sources because current costs (for alternatives) are 2x, 3x, 4x (I have even heard arguments of 10x) current coal and oil costs. To me, these arguments have as much merit as saying the roof leak doesn't have to be repaired because it isn't raining. We're going to start when oil is $150 again? Or when it is $200 or $300 or even higher?
Environmental factors may be important, but, in my mind, they are trumped by the economic issues. If climate factors are mitigated and polution is diminished, that is a bonus to keeping a viable socio-economic model working.
No One Saw This Economic Crisis Coming? [View article]
Jeff Nielson - - -
You wrote: "The author's suggestion that this was simply a case of "good" people with "bad" models who made an "honest" mistake is UTTER NONSENSE."
Exactly where did I say that? That is exactly not what I intended to say. My intent was to suggest people should question whether or not economic policy gurus that hold banking and governmental power have been using the right tools. I clearly suggested they, at the very least, lacked complete understanding, and, it could be inferred from my commentary, perhaps they lacked general competence.
You further wrote: "The author is nothing more than another Wall Street apologist looking to explain-away (through specious arguments) the largest corporate crime-wave in global history (see "U.S. bank-fraud SYSTEMIC and INTENTIONAL - William Black"
Jeff, did you read this article? Did you understand it? Have you read my many articles condemning the corruption that has transpired? Until you do, please confine your comments to your opinions, my expressed opinions and the facts as you understand them. If you do all the homework that you have not done, then I will welcome a discussion of opinions you want to impute to me. At that point in time, the discussion would be worthwhile. Right now, the personalization of your comments are beneath the intellectual capacity that you have shown on other occasions.
Jeff, this is a serious comment that I hope can lead to future productive discussions. Please read my comment above again if you have any doubt about my intent here.
How the World Almost Came to an End on September 18, 2008 [View article]
Perhaps the most important questions have not been asked (or answered):
1. Who were the withdrawers?
2. Where did the money go?
The answers to these questions might reveal some surprises.
For example, if the withdrawers were significantly domestic and quite large in number, the actions taken appear appropriate. If the withdrawers were few in number and/or foreign, we should question whether the actions were appropriate. In this second case, direct intervention with the withdrawers via central banks might have been indicated.
Finally, if the money withdrawn was largely converted to hard assets, that would be evidence of a concerted plan to bring down the U.S. That goes back to the central question: Where did the money go?
Coming Soon: Banking Crisis of Historic Proportions [View article]
Castle - - -
I also trade (though not in banks at the moment) and I agree with your process for trading. You'll note that I did not try to give any investment advice here. I will give an opinion on trading when I see some technical analysis factors indicating the recent momentum (up) is turning. John Paulson has just revealed large positions in banks (especially BAC). I don't know if he thinks he is investing or trading. The thought has occurred to me that this could be a case of pump and dump. I'll ask this question again in a few months when his actions will reveal his strategy.
I also hope I am wrong. I don't want to see my worse case scenarios. I am afraid that my most likely good scenario (2 -2.5% GDP annually over the next few years) will not avoid significant banking pain. The ERCI leading indicators are pounding the table for a blowout recovery. I am afraid that the ECRI methodology may be failing to properly discount the drag of the deflating credit bubble. Government and Fed policies are keeping some of the air in the bubble that, if it were to escape more quickly, would give a short term shock, but longer term would be much more accommodative to healthy economic growth.
On Aug 16 07:58 AM castle wrote:
> Most of us here are not fortune tellers but traders. Traders trade > what they see. The financials have been in a rally for while now. > Most are trading above there moving averages. I see no reason to > exit my positions until they cross to the downside. This is basic > trading fundamentals. Lets hope your analysis is in error, it would > not be good for any of us.
Forget Goldman, Start Worrying About the Government [View article]
Edward - - -
You are so right in this article. I do not intend that you take this as an insult, but you are just stating the obvious. What I like about the obvious in this article, though, is that you you present it with saber precision and sledgehammer impact. Well done.
I am reminded of the sound bite from Senator Dick Durbin (D, Illinois) earlier this year, referring to Capitol Hill: "This place is bought and paid for." I would offer another thought: Change the name from "Capitol Hill" to "Capital Hill". After all, isn't that where capital has been invested by the rich and powerful?
The Velocity of Money and Its Implications [View article]
John - - -
Excellent analysis and use of parable. This week you have a piece that is even more thought provoking than usual.
I find it extremely interesting that a return to the money velocity level that was the norm for 30 years (1950-1980) and the average for the past 110 years should be considered a problem. Without further analysis this should be a good thing.
The difference now is the extreme debt to GDP ratio, which you discuss. With debt considered a component of velocity, the "normal" velocity is artificially high compared to the "effective" velocity: the velocity of exchange referred to by Brian Morris.
The "effective" velocity would not be what is shown in your graph. I would rename the graphs you have presented as "Nominal Velocity of Money". I am not sure at this point how to calculate the "effective velocity of money". I will have to do some thinking about this. You may already have some thoughts in this regard so I may be looking at ground you have already plowed but not discussed publicly.
All these thoughts bring me back to a question I have broached but never properly answered. How does high leverage of financial instruments that have no basis in the production of things of economic utility effect the balance of the economy. Just as it can be argued that high government borrowing can "crowd out" private capital, it seems logical to me that there should be a negative effect on non-financial commerce when financial instruments become leveraged upon themselves and "crowd out" investment in "real" production.
Stating this another way, have we been seduced by the ease of making money through financial engineering compared to the process of investing in production of new goods and services that will require additional time and effort to make the investment pay off?
Have we been seduced into becoming a nation of coupon clippers? Have we become like a team of all stars who believes they can win by simply "mailing it in" instead of practicing hard and developing a game plan to win the next contest?
Pardon me for introducing a sports analogy. It is just my contribution to March Madness.
In conclusion, let me refer to a popular saying: Deleveraging is hell. If that is true, then I would propose that we are not yet in hell, merely purgatory, and still await the final flames. The final retribution for the credit bubble is yet to come.
Coming Soon: Banking Crisis of Historic Proportions [View article]
chap08 - - -
Good points. We have a legitimate debate on a couple of points and not so much on others.
1. You are correct, but is that necessarily a good thing? Might it not have been cheaper (for the taxpayer) and much quicker to resolve if the "system" (the too big to fail oligarchy) had been put in receivership by the government and reorganized into solvent and insolvent parts, with the solvent parts already coming back into private ownership? Certainly a more quickly reorganized AIG and C would have been helpful. After that, we could debate who else might have gone under. Maybe no one else, maybe BAC.
I have an alegory for what has happened involving forestry. The course of action taken to save the forest has been to spend all of the effort to try to save a few diseased old growth trees while ignoring the rest of the vegetation. The result is that (1) younger growth that might have been nurtured to more strength has been allowed to whither in neglect; (2) the disease has spread to more trees; and (3) the original diseased trees are still afflicted.
My question is: Have we "saved the system" only to perpetuate its weaknesses?
2. I agree, but for the same (or less) government $ deflation could have been contained at least as well as it has been to date and we could have already have addressed structural defects that are still present. Another metaphor: I fear we have just put new siding on a house still infested with termites.
3. Again I agree. But the steep yield curve will not help much if banks are not increasing credit, a problem we (temporarily, I hope) have now.
4. The only fire power the Fed has is printing money. There is high risk of casualties from friendly fire in that action.
5. The failure rate for banks which I am fearing would only be a small part of the problems in the economy if it occurs. In fact, I would characterize it as a symptom of economic problems, not a cause. I am not suggesting that bank failures are a major risk to the economy; I feel that the economy may produce a major risk of bank failures. This viewpoint was not well developed in my article.
Thanks for bringing up these discussion points. It has helped my understand weaknesses in my presentation.
On Aug 16 09:15 AM chap08 wrote:
> While I dont disagree with the facts in this article, it really says > nothing new and it ignores some key facts: > > 1. Systemic failure is now far less likely than it was last year. > > 2. The Fed has avoided hard defaltion and will continue to move towards > inflation. This will help the banks. > 3. A steep yield curve will also be held in place by the Fed - ideal > for the banks to make money. > 4. The Fed will take further action as it needs to - it has a lot > more fire power if it needs it. > 5. Banks that can be allowed to fail will be allowed to fail. There > is a severe risk to individual bank shares but you over estimate > the risk to the wider economy. The remaining banks will have more > pricing power and be stronger. The costs will be picked up by future > consumers and tax payers.
Suburban Housing Markets Are Unsustainable (Part 2) [View article]
Jim - - -
Excellent article and a great reference for many analysts. What you didn't mention explicitly, and commenters such as Charles Lieberman are not recognizing, is that we may well be headed for a "new normal" (widely discussed lately, not my phrase), not what we have thought of as normal for the past 30 years. No one knows what this new normal is yet, but you have described some of the parameters that will define it.
Market Pessimism Is Distorting the Facts [View article]
CBP - - -
Your title about distorting facts could just as well have been "Unwarranted Optimism is Distorting the Facts".
The facts are equivocating and anyone who does not see that is not adding value to the discussion. If there is anything less useful than a two handed economist ("on one hand....but on the other...") it is a one handed economist that can only see five fingers. It limits his ability to do higher math. On that basis, the best economists go barefoot to increase computing power.
It is an incomplete statement to say that the current weekly initial claims level is a positive condition when you write:
<<<"Jobless claims over the past 8 months have moved in a very narrow range, far below the levels of this same period one year ago, signaling an economy that likely is growing at a relatively moderate and stable pace.">>>
That is an incomplete statement because it does not point out the obvious: the stable pace indicated by this metric is the same as the depths of the recessions of 1990-91 and 2001. Even a one handed discussion should mention this.
In fact, we have reached a negative point in the WIUC. The range of results has just been breached to the upside. We can only hope that this is a blip and we get back into the range that you find so admirable and I find to be a serious constraint on recovery that must be overcome for more economic upside.
I am all for glass half full vs. glass half empty debates. However, the debate loses meaning if the half full mark can not be agreed on and I think that is where we would find ourselves if we debated. You seem to think that metrics at the depths of past recessions constitute half full today. I feel we must exceed prior low points to approach a glass half full discussion.
Celebrating the 'Recovery': I'm Disgusted [View article]
Anything less than drastic devastation of what would be considered "normal" will just constitute an extension of the bubble, be it houses or stocks. There is no reason why these bubbles can not extend for a long time, with only partial deflations from time to time. But if you want 60 years like the last 60 years, the bubbles have to go flat and start over. Otherwise the two markets (houses and stocks) will have significantly lower returns going forward than we have become used to.
If This Is a Recovery... [View article]
1. In the recession considered to be the worst before this one (1981-82), the total number of jobs lost was 1.661 million (would be 2.22 million adjusted for today's higher population). Of these 45% (approximately 1 million relative to 2009 total population) were permanent.
The corresponding numbers today are 8.39 million jobs lost (more than 3.75 times as many) and 56% are permanent (4.70 million, 4.7 times as many).
We have to deal with 4.7 million jobs that are never coming back. This is a dislocation much more severe than ever experienced in post WW II history.
2. The second dislocation much greater than anything since the Great Depression is the unprecedented decline in home values. With median values dropping at least 20% in many regions, and more in some, the economic distress on consumers is draconian. The fact that prices still have not returned to long-term trend lines is indicating that further problems may occur, in spite of government efforts to put in a floor for the market.
3. The collapse of the financial system we have seen is like a 100 year flood. When the firms saved only by unprecedented government support through assumption of substantial government ownership are included, the financial crisis dwarfs even the magnitude of the Great Depression. I have written articles making these comparisons last summer.
We all tend to interpret situations based on our past experiences. We have so many factors outside of the range of experience of those living today that there are bound to be many false projections. That is why a few, like John Mauldin, continue to examine our situation with viewpoints outside the box of our common experiences to our great benefit.
The fact that we are in uncharted waters and will remain there for some time is simply not appreciated by many.
The Debt Conundrum, Part 2 [View article]
As usual, a well constructed set of arguments with plenty of good supporting data.
I particularly want to comment on the education discussion. From the data you present it is obvious that we do a mediocre to poor job of education K-8 (9th and 15th out of 45). We follow that up with secondary education that is non-existent. Two years later the rankings are (22nd and 28th out of 39). The 10th grade performance is probably achieved with only the poor material assimilated two years earlier.
In two years (8th to 19th grades) we go from 67th percentile to 28th percentile (using math performance). We need to stop no child left behind and start allowing more children to get ahead. How about starting with the 3Rs? Little else should be taught until functional reading, writing and math skills are learned. We have somehow lost the basics.
We risk the New Normal being 50% functional illiteracy (3Rs). When I was a youngster, magazines like Popular Science talked about the future having high levels of automation, allowing great amounts of leisure for the populace. This leisure would permit people to have greater time for recreation and intellectual activities. The presumption was that the intellectual activities would add value to the economy and provide a source of income for the "leisure class". What has happened is that we are at close to 50% leisure class (unemployed or not in the work force), but the vast majority of these are at subsistence levels in or near poverty, or dependant on the employed 50%, and many have not received the education necessary to engage in any intellectual activity more complex than peeling bananas and opening beer cans.
Sorry for the long rant, but education is a hot button with me.
The Third Depression? [View article]
I have read many of the excellent comments in this thread, but decided to come back to yours to make a couple of additional points because you most directly address the areas I want to expand.
A. You wrote:
<<This means for the US economy that lower interest rates and government incentives aimed at boosting consumption work as pure poison. Instead of more consumption, more savings, less consumption and fewer imports are needed.>>
A dollar spent on consumption is "one and done". A dollar invested for future utility has a multiplication factor.
High taxes in the post WWII years served two purposes: (1) pay down the high debt levels from WW II and Korea and (2) fund infrastructure at home and abroad.
Lower taxes in the past thirty years have not had a long lasting economic benefit because tax revenues have increasingly been spent on consumption. Infrastructure has decayed. The future has been ignored.
See seekingalpha.com/artic... for a graphical representation of the declining multiplicative factor for debt over recent decades.
Borrowing for consumption instead of for production is a cousin to the practice of lending to someone who won't repay in order to receive a commission for the transaction when you personally won't suffer the default loss because you sell the loan to a third party.
B. The final paragraph above brings me to a second point: The incentives that have developed for compensation at the top levels today are perverse. Those in the positions with the most economic power are richly compensated for taking risks, even reckless risk, and suffer no economic loss when the operation fails. We can not hope to build a structurally sound financial and economic system until those who reap the outsized rewards of risk personally bear the consequences of failure.
I left a more lengthy comment today on this topic on an Instablog by Elliott Morss seekingalpha.com/insta... and will not repeat it here.
End of the Recession in 2009? [View article]
1. The steeper yield curve, which normally increases bank profitability, must be accompanied by increased lending in order to have the normal effect.
2. We must get close to a bottom in housing prices, both time and price.
3. The slide underway in worldwide economies must stabilize within the next 12 months.
4. The uncertainties about banks' insolvencies must end.
There may be some more things necessary to get the same reaction to the yield curve as in the past seven recessions, but these certainly are important factors.
In order for past results to be achieved we must have conditions similar to the past. It is not clear that this is happening here yet.
What Housing Bubble? [View article]
I would submit that equilibrium is nirvana and that 99% of the time we are experiencing various aspects and degrees of disequilibrium.
$200 Oil Is Coming While We Waste a Perfectly Good Crisis (Part 3) [View article]
If we don't solve the energy problem, nothing much else matters. There is no one individual solution, but the whatever the solutions they must have the same characteristic: they must build capacity faster than oil production fades.
One factor that is not much discussed is the value of oil as a chemical. Every barrel we burn is another barrel of raw material for tars, asphalt, polymers, plastics, composites and petrochemicals that is gone forever. Yes, we can get carbon raw material from coal, but at a great deal larger cost and environmental impact.
You have written about the energy problem before and you should keep making the case for action. Too many people are arguing that we shouldn't put effort into developing alternative energy sources because current costs (for alternatives) are 2x, 3x, 4x (I have even heard arguments of 10x) current coal and oil costs. To me, these arguments have as much merit as saying the roof leak doesn't have to be repaired because it isn't raining. We're going to start when oil is $150 again? Or when it is $200 or $300 or even higher?
Environmental factors may be important, but, in my mind, they are trumped by the economic issues. If climate factors are mitigated and polution is diminished, that is a bonus to keeping a viable socio-economic model working.
No One Saw This Economic Crisis Coming? [View article]
You wrote: "The author's suggestion that this was simply a case of "good" people with "bad" models who made an "honest" mistake is UTTER NONSENSE."
Exactly where did I say that? That is exactly not what I intended to say. My intent was to suggest people should question whether or not economic policy gurus that hold banking and governmental power have been using the right tools. I clearly suggested they, at the very least, lacked complete understanding, and, it could be inferred from my commentary, perhaps they lacked general competence.
You further wrote: "The author is nothing more than another Wall Street apologist looking to explain-away (through specious arguments) the largest corporate crime-wave in global history (see "U.S. bank-fraud SYSTEMIC and INTENTIONAL - William Black"
Jeff, did you read this article? Did you understand it? Have you read my many articles condemning the corruption that has transpired? Until you do, please confine your comments to your opinions, my expressed opinions and the facts as you understand them. If you do all the homework that you have not done, then I will welcome a discussion of opinions you want to impute to me. At that point in time, the discussion would be worthwhile. Right now, the personalization of your comments are beneath the intellectual capacity that you have shown on other occasions.
Jeff, this is a serious comment that I hope can lead to future productive discussions. Please read my comment above again if you have any doubt about my intent here.
How the World Almost Came to an End on September 18, 2008 [View article]
1. Who were the withdrawers?
2. Where did the money go?
The answers to these questions might reveal some surprises.
For example, if the withdrawers were significantly domestic and quite large in number, the actions taken appear appropriate. If the withdrawers were few in number and/or foreign, we should question whether the actions were appropriate. In this second case, direct intervention with the withdrawers via central banks might have been indicated.
Finally, if the money withdrawn was largely converted to hard assets, that would be evidence of a concerted plan to bring down the U.S. That goes back to the central question: Where did the money go?
Coming Soon: Banking Crisis of Historic Proportions [View article]
I also trade (though not in banks at the moment) and I agree with your process for trading. You'll note that I did not try to give any investment advice here. I will give an opinion on trading when I see some technical analysis factors indicating the recent momentum (up) is turning. John Paulson has just revealed large positions in banks (especially BAC). I don't know if he thinks he is investing or trading. The thought has occurred to me that this could be a case of pump and dump. I'll ask this question again in a few months when his actions will reveal his strategy.
I also hope I am wrong. I don't want to see my worse case scenarios. I am afraid that my most likely good scenario (2 -2.5% GDP annually over the next few years) will not avoid significant banking pain. The ERCI leading indicators are pounding the table for a blowout recovery. I am afraid that the ECRI methodology may be failing to properly discount the drag of the deflating credit bubble. Government and Fed policies are keeping some of the air in the bubble that, if it were to escape more quickly, would give a short term shock, but longer term would be much more accommodative to healthy economic growth.
On Aug 16 07:58 AM castle wrote:
> Most of us here are not fortune tellers but traders. Traders trade
> what they see. The financials have been in a rally for while now.
> Most are trading above there moving averages. I see no reason to
> exit my positions until they cross to the downside. This is basic
> trading fundamentals. Lets hope your analysis is in error, it would
> not be good for any of us.
Forget Goldman, Start Worrying About the Government [View article]
You are so right in this article. I do not intend that you take this as an insult, but you are just stating the obvious. What I like about the obvious in this article, though, is that you you present it with saber precision and sledgehammer impact. Well done.
I am reminded of the sound bite from Senator Dick Durbin (D, Illinois) earlier this year, referring to Capitol Hill: "This place is bought and paid for." I would offer another thought: Change the name from "Capitol Hill" to "Capital Hill". After all, isn't that where capital has been invested by the rich and powerful?
The Velocity of Money and Its Implications [View article]
Excellent analysis and use of parable. This week you have a piece that is even more thought provoking than usual.
I find it extremely interesting that a return to the money velocity level that was the norm for 30 years (1950-1980) and the average for the past 110 years should be considered a problem. Without further analysis this should be a good thing.
The difference now is the extreme debt to GDP ratio, which you discuss. With debt considered a component of velocity, the "normal" velocity is artificially high compared to the "effective" velocity: the velocity of exchange referred to by Brian Morris.
The "effective" velocity would not be what is shown in your graph. I would rename the graphs you have presented as "Nominal Velocity of Money". I am not sure at this point how to calculate the "effective velocity of money". I will have to do some thinking about this. You may already have some thoughts in this regard so I may be looking at ground you have already plowed but not discussed publicly.
All these thoughts bring me back to a question I have broached but never properly answered. How does high leverage of financial instruments that have no basis in the production of things of economic utility effect the balance of the economy. Just as it can be argued that high government borrowing can "crowd out" private capital, it seems logical to me that there should be a negative effect on non-financial commerce when financial instruments become leveraged upon themselves and "crowd out" investment in "real" production.
Stating this another way, have we been seduced by the ease of making money through financial engineering compared to the process of investing in production of new goods and services that will require additional time and effort to make the investment pay off?
Have we been seduced into becoming a nation of coupon clippers? Have we become like a team of all stars who believes they can win by simply "mailing it in" instead of practicing hard and developing a game plan to win the next contest?
Pardon me for introducing a sports analogy. It is just my contribution to March Madness.
In conclusion, let me refer to a popular saying: Deleveraging is hell. If that is true, then I would propose that we are not yet in hell, merely purgatory, and still await the final flames. The final retribution for the credit bubble is yet to come.
Coming Soon: Banking Crisis of Historic Proportions [View article]
Good points. We have a legitimate debate on a couple of points and not so much on others.
1. You are correct, but is that necessarily a good thing? Might it not have been cheaper (for the taxpayer) and much quicker to resolve if the "system" (the too big to fail oligarchy) had been put in receivership by the government and reorganized into solvent and insolvent parts, with the solvent parts already coming back into private ownership? Certainly a more quickly reorganized AIG and C would have been helpful. After that, we could debate who else might have gone under. Maybe no one else, maybe BAC.
I have an alegory for what has happened involving forestry. The course of action taken to save the forest has been to spend all of the effort to try to save a few diseased old growth trees while ignoring the rest of the vegetation. The result is that (1) younger growth that might have been nurtured to more strength has been allowed to whither in neglect; (2) the disease has spread to more trees; and (3) the original diseased trees are still afflicted.
My question is: Have we "saved the system" only to perpetuate its weaknesses?
2. I agree, but for the same (or less) government $ deflation could have been contained at least as well as it has been to date and we could have already have addressed structural defects that are still present. Another metaphor: I fear we have just put new siding on a house still infested with termites.
3. Again I agree. But the steep yield curve will not help much if banks are not increasing credit, a problem we (temporarily, I hope) have now.
4. The only fire power the Fed has is printing money. There is high risk of casualties from friendly fire in that action.
5. The failure rate for banks which I am fearing would only be a small part of the problems in the economy if it occurs. In fact, I would characterize it as a symptom of economic problems, not a cause. I am not suggesting that bank failures are a major risk to the economy; I feel that the economy may produce a major risk of bank failures. This viewpoint was not well developed in my article.
Thanks for bringing up these discussion points. It has helped my understand weaknesses in my presentation.
On Aug 16 09:15 AM chap08 wrote:
> While I dont disagree with the facts in this article, it really says
> nothing new and it ignores some key facts:
>
> 1. Systemic failure is now far less likely than it was last year.
>
> 2. The Fed has avoided hard defaltion and will continue to move towards
> inflation. This will help the banks.
> 3. A steep yield curve will also be held in place by the Fed - ideal
> for the banks to make money.
> 4. The Fed will take further action as it needs to - it has a lot
> more fire power if it needs it.
> 5. Banks that can be allowed to fail will be allowed to fail. There
> is a severe risk to individual bank shares but you over estimate
> the risk to the wider economy. The remaining banks will have more
> pricing power and be stronger. The costs will be picked up by future
> consumers and tax payers.
Suburban Housing Markets Are Unsustainable (Part 2) [View article]
Excellent article and a great reference for many analysts. What you didn't mention explicitly, and commenters such as Charles Lieberman are not recognizing, is that we may well be headed for a "new normal" (widely discussed lately, not my phrase), not what we have thought of as normal for the past 30 years. No one knows what this new normal is yet, but you have described some of the parameters that will define it.
Market Pessimism Is Distorting the Facts [View article]
Your title about distorting facts could just as well have been "Unwarranted Optimism is Distorting the Facts".
The facts are equivocating and anyone who does not see that is not adding value to the discussion. If there is anything less useful than a two handed economist ("on one hand....but on the other...") it is a one handed economist that can only see five fingers. It limits his ability to do higher math. On that basis, the best economists go barefoot to increase computing power.
It is an incomplete statement to say that the current weekly initial claims level is a positive condition when you write:
<<<"Jobless claims over the past 8 months have moved in a very narrow range, far below the levels of this same period one year ago, signaling an economy that likely is growing at a relatively moderate and stable pace.">>>
That is an incomplete statement because it does not point out the obvious: the stable pace indicated by this metric is the same as the depths of the recessions of 1990-91 and 2001. Even a one handed discussion should mention this.
In fact, we have reached a negative point in the WIUC. The range of results has just been breached to the upside. We can only hope that this is a blip and we get back into the range that you find so admirable and I find to be a serious constraint on recovery that must be overcome for more economic upside.
I am all for glass half full vs. glass half empty debates. However, the debate loses meaning if the half full mark can not be agreed on and I think that is where we would find ourselves if we debated. You seem to think that metrics at the depths of past recessions constitute half full today. I feel we must exceed prior low points to approach a glass half full discussion.