finance noise

Investors were not ready to make a 180-degree turn

noreply@blogger.com (Anonymous) — Mon, 7 May 2012 00:09:00 -0700

Treasury prices fell Tuesday when news that the U.S. manufacturing sector unexpectedly grew at its strongest pace in 10 months cast doubt on views the U.S. economy was faltering and would need more stimulus from the Federal Reserve.
The Institute for Supply Management said its index on nationwide factory activity rose to 54.8 in April, up from 53.4 in March.
"The ISM index was a notable contrast to the mostly weaker data we have seen over the past month or so, so stocks rallied and you saw a mild sell-off in U.S. Treasuries following this number," said Eric Stein, vice president and portfolio manager at Eaton Vance Investment Managers in Boston.
"The market was taken offside by the strong ISM number," said Jeffrey Given, managing director and portfolio manager at John Hancock Asset Management. "Most of the early manufacturing indicators pointed to a weaker number, not a stronger one, so the stronger-than-expected ISM index diminished some of the concerns about the growth outlook.

"That was negative for Treasuries because if other data start to look more like this number, it potentially takes QE3 off the table or at least pushes out the timing for QE3," Given said, referring to the possibility that the Fed would undertake more large-scale asset purchases to try to stimulate economic growth and employment.
Treasuries also took a breather after a bit of month-end buying, said Wilmer Stith, portfolio manager at Wilmington Trust Broad Market Fund.
"We just got finished with month-end, so people who might have had to buy Treasuries yesterday did that and now you have a little lull," he said.
Benchmark Treasury yields have been moving in a range between 1.9% and 2.15%. With yields near the low end of that range, "it's no surprise that we're off here," Stith said.
With the April jobs report due Friday, however, investors were not ready to make a 180-degree turn.
Treasury yields rose, but recession in much of Europe and high U.S. unemployment argued against a big exit from Treasuries.
The Labor Department will release its April jobs report at 8:30 a.m. Friday. Economists estimate employers added 170,000 jobs last month, a subdued view after a disappointing 120,000 gain in March.
The lackluster March employment report helped fuel a rally in Treasuries during April and contributed to "a little bit of an overbought condition" in the bond market, said Brian Levitt, economist at Oppenheimer Funds in New York. "Ten-year rates have rallied from 2.3% to almost 1.9% as the market priced in a pretty weak economic outcome in the United States."

The Reserve Bank of Australia

noreply@blogger.com (Anonymous) — Sat, 5 May 2012 07:13:00 -0700

A bigger-than-expected rate cut in Australia, spurred by domestic weakness, reminds investors that the U.S. and Europe are not alone in the global-economic jitters.
The Reserve Bank of Australia on Tuesday cut its benchmark overnight lending rate by 50 basis points to 3.75%. The size of the rate cut was a surprise to most analysts, who had expected just 25 basis points.
"This decision is based on information received over the past few months that suggests that economic conditions have been somewhat weaker than expected, while inflation has moderated," said Reserve Bank Gov. Glenn Stevens in a statement.
Indeed, the RBA does have more to worry about than inflation.

New-home sales fell a month-over-month 9.4% in March to the lowest level in more than 10 years, according to a report Monday from Australia's Housing Industry Association.
And Australia's big-city housing prices fell 4.5% in the first quarter, compared with a year earlier.
Stevens' statement acknowledges global problems, but he says that the world economy is not facing a deep downturn at this time.
That's good news for a country whose bread-and-butter business is the export of raw materials such as coal and iron ore, as well as machinery and industrial equipment.
Still, Australia has its problems. The RBA's move was spurred by domestic concerns, says Glenn Levine, senior economist at Moody's Analytics in Sydney. He cites three reasons for the central bank's aggressive move.
"First and most importantly, ongoing problems in wholesale credit markets have increased borrowing costs for banks, who have passed this on through higher lending rates.
"Recent central bank rate cuts have only been partly passed on. A 50-basis-point cut means that at least 30 basis points will be passed on to borrowers, which is about what the RBA wants.
"Secondly, yes, it is likely that the RBA have access to some information or data that indicates that the Australian economy is weaker than they'd thought and that they are slightly more concerned about growth.
"Finally, the April statement indicated that they wanted to cut (the central bank held off), but that they also wanted confirmation that inflation was cooling. Australia only releases numbers quarterly.
"Since Q1 CPI (released a couple of weeks ago) was weak, it gave the RBA the chance to cut in two consecutive meetings by 25 basis points, or they could just opt to send a clear signal and go for 50, which they did."
Australia's markets reacted pretty much as the U.S.' would in a similar circumstance. The All Ordinaries stock index climbed 0.8% to a six-month high, although volume declined compared to the prior session.
The Australian dollar, which has been climbing off and on the past few years on the strength of high yields, fell across the board.

Market volatility increases

noreply@blogger.com (Anonymous) — Thu, 3 May 2012 07:09:00 -0700

Even though market volatility increased recently, Nike (NKE) continues to do the sideways shuffle.
The stock is in a flat base with a 113.07 buy point. Nike has been in a seven-point range since hitting an all-time high March 20. It has dipped below its 50-day line intraday, but has yet to finish below the line.
Despite its recent sideways action, Nike has an up-down volume ratio of 1.6. This indicates that buyers are in control. The demand gauge was at 1.4 three weeks ago.
Nike is the world's largest marketer of athletic shoes and apparel. Thanks to innovative products and brand strength, the company has delivered year after year of growth. Even in tough economic times in 2008 and 2009, Nike reported top- and bottom-line growth.
The company is on track for a second straight year of double-digit earnings growth. Nike has a three-year Earnings Stability Factor of 3, signaling a steady stream of profits.

In late March, Nike delivered fiscal Q3 profit that grew 11% to $1.20 a share. Revenue climbed 15% to more than $5.8 billion. The Beaverton, Ore.-based firm noted strong demand across all geographical segments, except for Japan.
During the quarter, Nike launched a number of new footwear designs, including the Foamposite Galaxy shoe. The $220, glow-in-the-dark sneaker caused a riot at a Florida mall.
The company also introduced its Nike+ FuelBand, which tracks movement and calories burned.
On a down note, Nike's gross margin dropped to 43.8% in its February-ending quarter from 45.8% a year ago.
Nike has paid shareholder dividends since 1984. It has increased its payout for 10 straight years. The company last raised its dividend in November at a rate of 36 cents a share each quarter from 31 cents. Its payout has more than doubled in the past five years.
On an annualized basis, Nike pays $1.44 a share for current yield of about 1.3%. It has one of the lowest yields among the five dividend-paying firms in the Apparel-Shoes & Related Manufacturing group. But Nike is one of the highest-rated stocks in the group. It sports a Composite Rating of 85.

look at this stock

noreply@blogger.com (Anonymous) — Wed, 2 May 2012 05:45:00 -0700

A handful of Big Cap 20 stocks are near buy points.
Being near the price of an entry, though, is no guarantee the stock will reach that price and clear it in strong volume. That's why a disciplined investor will always wait for the breakout.
Comcast (CMCSA), the No. 1 U.S. cable TV provider, is starting its fifth week of a potential flat base. On the weekly chart, though, the stock is only a day away from the five-week minimum.
If the flat base is completed, the buy point would be 30.51. A breakout in volume at least 40% above average would be required to validate the buy point.
Comcast is in the Telecom Services-Cable Satellite industry group, which was No. 41 of 197 groups, as of Monday's IBD. However, there's another way to look at this stock — as an indirect housing play.
An increase in housing naturally boosts cable sales. At Comcast's earnings call in February, CEO Brian Roberts said, "We don't see housing growth at the moment, but someday, that's going to happen."

Earnings rose 18%, 18% and 21% in the past three years. The Street expects 19% growth this year.
Return on equity was 9.6% last year, up for a sixth straight year. However, that's well below the 17% minimum associated with elite stocks.
Visa (V) recently bounced off its 50-day line. Daily volume was below average, but the weekly volume was up about 10% from the previous week.
The move arguably sets a secondary buy zone up to the previous high plus 10 cents, or 123.78. The stock remains in the buy zone.
The world's No. 1 credit card processor grew earnings 28% or better in each of the past six fiscal years ended in September. Revenue growth ranged from 10% to 46% in the same period.
Analysts expect 20% EPS growth this year and 11% revenue growth.
Two medical sector stocks also are basing.
Alexion Pharmaceuticals (ALXN) is in the sixth week of a flat base. The potential buy point is 95.11.
The biopharmaceutical company has enjoyed a steep run-up since mid-2009. Earnings increased 92%, 45% and 55% in the past three years. Revenue leapt 49%, 40% and 45% in the same period.
The Street expects 30% EPS growth this year on a revenue pop of 39%.
Valeant Pharmaceuticals (VRX) sketched a flat base within a larger consolidation. The flat base could be seen as a handle in the bigger base. The buy point remains 55.90 in both cases.
The drugmaker edged over the entry recently in meek volume. It's now back under the buy point.
EPS rose 24%, 17% and 38% in the past three years. Revenue grew 8%, 44% and 109% in the same period.

Low interest rates

noreply@blogger.com (Anonymous) — Tue, 1 May 2012 03:47:00 -0700

As the world begins recovering from the worst financial crisis in 70 years, an odd couple of winners have emerged: stocks and gold. So far this year, the Dow Jones Industrial Average, a bet on economic recovery, is up 14%. Gold futures, a bet on calamity, are up 19%. The reason: Low interest rates and heavy government stimulus have poured cheap money into financial markets, helping both the economy and stocks. But the creation of all that money, together with the Federal Reserve’s maintenance of near-zero benchmark interest rates and the prospect of heavy government borrowing to fund deficits, threatens to weaken the dollar and fuel inflation and economic volatility later.
Dangerous Side Effects of Ultra-Easy Money (pinecarr)
In order to engineer a 180-degree turnaround in trader psychology, from the chronic fear of meltdowns last year, to the opposite side of the spectrum – the euphoric illusions of V-shaped recoveries, the “Group-of-20” have committed $12-trillion of taxpayer money, equivalent to a fifth of the entire globe’s annual economic output. The G-20’s largesse
has been used to fund capital injections into banks, soaking-up toxic assets, guaranteeing financial company debt, and flooding the world credit and stock markets with ultra-cheap liquidity.
Gold Market Reaching The Breaking Point (pinecarr)
On October 29, 2008, the TOCOM added a ‘physically backed commodity ETF’ as a possible physical for EFP (Exchange of Futures for Physicals) transactions at the exchange. An exchange for physicals (EFP) transaction is when a client gives an IOU for a physical commodity to a broker and that broker opens a short position on the futures exchange in that commodity. Normally, Exchange for physicals is the legitimate process used by producers to sell futures against their future production. However, if the IOU portion of the EFP is not from a commodity producer (ie: borrowed a GLD Ishares), then you have a problem.]
China and Brazil trade in yuan (saxplayer00o1)
China and Brazil have started to trade in yuan, Kazakhstan Today agency reports citing the Russian information resource NEWSru. According to NEWSru, China and Brazil established international payments in national currency of the Peoples Republic of China. Geli Corporation has already received from San Paolo a few million yuans. According to Vice President of the Brazilian branch of Bank of China, all formalities required by the local bodies of control have been met
Ravitch Says States Face Total Deficits of $500 Billion in 2011 (saxplayer00o1)
Oct. 28 (Bloomberg) — New York Lieutenant Governor Richard Ravitch predicted states across the U.S. would face deficits totaling as much as $500 billion in 2011 after the federal government stops paying them economic stimulus grants. Ravitch, 76, a real estate developer and former chairman of New York’s Metropolitan Transportation Authority, said the looming nationwide fiscal crisis would first become apparent as states’ credit ratings falter, making it more expensive to borrow money
Moody’s May Downgrade Mortgage Bonds With New Outlook (saxplayer00o1)
The company will boost its loss projections for prime- jumbo, Alt-A, option adjustable-rate and subprime mortgages backing bonds issued between 2005 and 2008 after seeing higher losses per foreclosure than expected, Moody’s said today in a statement
Common Currency Weighs on Airbus (saxplayer00o1)
Since 2001, when Air France agreed to buy ten of the world’s biggest passenger jets, the euro has strengthened by more than 60% against the dollar. That means Airbus, which translates all its finances into euros, is pocketing significantly less revenue per plane than it initially expected. And since Airbus books most of its costs in euros, the currency swings go straight to its bottom line. “This situation is critical for a company like EADS, which has costs in euros and sales in dollars,” EADS Chief Executive Louis Gallois recently told a French parliamentary committee. EADS estimates that a 10-cent drop in the dollar against the euro wipes €1 billion off earnings.
Why The Foreclosure Crisis Is Unsalvagable (M.W.)
States that have been devastated by unemployment are seeing dramatic increases of foreclosures that are much harder to salvage because those people have no income and no federal loan program will help. The demographics of the foreclosure crisis are changing and affecting people who were blue collar and entry to midlevel white collar. If you’re unemployed, you don’t qualify for a loan modification. The first wave {of foreclosures] was caused by bad loan products, while the second will be driven by unemployment. Right now, we’re at the beginning of wave two.
U.S. Home Vacancies Rise to 18.8 Million on Defaults (Vinny A.)
About 18.8 million homes stood empty in the U.S. during the third quarter as banks seized properties from delinquent borrowers and new home sales fell in September. The number of vacant properties, including foreclosures, residences for sale and vacation homes, rose from 18.4 million a year earlier and 18.7 million in the second quarter, the U.S. Census Bureau said in a report today. The record high was in the first quarter, when 18.95 million homes were vacant. The homeownership rate, meaning households that own their own residence, stood at 67.6 percent.
Malpass Says U.S. Economy Will Slow, Enter ‘Gloomy Period’ (Vinny A.)
Economic growth in the U.S. will slow after the rebound in the third quarter and enter “a very gloomy period” of high unemployment, said economist David Malpass, president of Encima Global in New York. “We are moving into this very gloomy new normal” of 2 percent growth and a “very high unemployment rate,” Malpass said today in an interview on Bloomberg Radio. As a result, “Washington will reach around and thrust around desperately” for new programs to boost growth.
Long Live The Gold Basis (Claire H.)
According to some reports independent auditors, at the insistence of parties holding expired forward purchase contracts to deliver gold, are descending on ETF’s and check their vault’s contents against their books. The noose is tightening around the neck of fraudulent banksters caught in the short squeeze.
The Right Way To Break Up With Your Credit Card (M.W.)
It’s a frequent question for American consumers these days. Half of all account holders say they’ve been hit either with a higher rate or a lower limit in recent months. While consumers are customarily given the choice to decline the new terms and close the account, doing so flies in the face of all standard advice from personal finance experts because closing credit cards usually has a negative impact on credit scores. So which bad choice is right for consumers? The answer is perhaps even more maddening than the question: “It depends” and “there’s no surefire way to know ahead of time.” But there are some clear guidelines that can help and strategies for minimizing the negative impact once you do so.

Place in investing

noreply@blogger.com (Anonymous) — Mon, 30 Apr 2012 10:16:00 -0700

The term "value" can be highly subjective when it comes to investing. In the world of options trading some of that determination can be increased in its authority, if we see a situation, which sports relative value when comparing one contract to other surrounding contracts. Typically, traders using calculated values from a trading platform of their choice will simply notice the implied volatility of the contract, either a call or put, in question, is priced differently than other nearby options.
An alternative means to recognizing this kind of value can be accomplished by lining up synthetic markets. This is a useful exercise for traders looking to remain sharp and reliant on their own mental facilities and a skill, which still has a place in investing, despite all the whiz-bang technology out there.
Hypothetically, let's consider a call market in conjunction with stock to form a synthetic put and compare it to the pricing of a real listed put contract. When the call is examined as part of this
relationship (a synthetic put) and appears cheap versus the actual put contract, there's a good but not guaranteed case for having uncovered relative value.
Why would or how could this disparity occur? Typically, it's one of two factors or possibly both. For one, traders might be seeing some temporary order flow in a less liquid name. In this type situation there won't ordinarily be much in the way of customer paper and / or demand. As much, market makers update those quotes in a mostly hands off manner by inputting implied volatilities initially and then leaving the product to be quoted and updated automatically with nary any further human intervention.
Secondarily and when it comes to a call looking cheap in relation to its synthetic equivalent of the same strike and other surrounding calls, a trader could be seeing a hard-to-borrow situation. When shares are "HTB" or impossible to short, calls can quite often trade at a theoretical discount to puts as the natural hedge to reduce delta or directional risk is with short stock, which is unavailable to borrow short.
When shares to short can't be located by one's broker, traders wishing to get long or short deltas without this meddlesome restriction will trade long puts in conjunction with long stock. This action or demand brings increased value to the puts, which goes beyond theoretical considerations and into the realm of real world applications.
Depending on those traders' directional outlook or fresh positions after establishing this long put / long stock combination, he or she can adjust deltas effortlessly by selling some existing long stock inventory. That's in stark contrast to the long call trader who at the same time may be quickly realizing his or her "bargain" is less than they bargained for when needing a quick hedge.

The strategy is inconclusive

noreply@blogger.com (Anonymous) — Fri, 27 Apr 2012 05:37:00 -0700

The Royal Bank of Scotland has added the first exchange traded note to its "Trendpilot" ETN family that ventures abroad.
RBS China Trendpilot ETN (TCHI) — like RBS' six other ETNs — tracks its underlying index when it's trading above the 100-day simple moving average. If the index falls below that key line for three days straight, it switches to tracking three-month U.S. Treasury bills. TCHI will switch back to tracking the BNY Mellon China Select ADR Total Return Index when it trades at or above the 100-day for three consecutive days.
The note aims to capture most of the upside when the index is rising and avoid most of the downside when it's falling. RBS touts that its ETNs let you apply an actively managed strategy without
incurring short-term capital gains. TCHI charges an annualized expense ratio of 1.1% when it's tracking the index and 0.5% when it tracks T-bills.
ETNs are designed to offer exposure to an index without any tracking error. But investors are subjected to risk of default by the issuer.
Whether investors benefit from the strategy is inconclusive. RBS U.S. Large Cap Trendpilot ETN (TRND), tracking the S&P 500, returned 10.56% year to date, in line with the S&P 500's 10.82% gain. But TRND lost 0.6% in the past 12 months while the S&P gained 8.45%. In 2011, TRND lost 6.8% while the S&P rose 2.11%. It started trading in December 2010 and has gathered the most assets, $69 million, among its group.
RBS Gold Trendpilot ETN (TBAR), tracking the yellow metal, rose 2.88% year to date and 6.78% in the past 12 months. Meanwhile, SPDR Gold Trust (GLD), the flagship gold ETF, is up 4.82% year to date and 9.17% the past year. TBAR gained 9% in 2011 vs. 10% for GLD.
RBS also offers Trendpilot ETNs tracking large drug companies, the Nasdaq 100, oil and mid cap stocks.
Top 10 Holdings RBS China Trendpilot ETN And Portfolio Weights:
1. China Mobile Ltd (CHL) 11.14%
2. PetroChina Co (PTR) 7.68%
3. CNOOC Ltd (CEO) 7.59%
4. Baidu (BIDU) 6.63%
5. China Life Insurance Company Ltd (LFC) 6.11%
6. China Petroleum & Chemical Corp (CNOOC) 5.89%
7. China Unicom (Hong Kong) Ltd (CHU) 3.90%
8. China Telecom Corp (CHA) 3.75%
9. NetEase (NTES) 3.09%
10. Yanzhou Coal Mining Co (YZC) 2.91%

The stock has now fallen

noreply@blogger.com (Anonymous) — Mon, 23 Apr 2012 01:39:00 -0700

Wall Street ended mixed Friday after the major indexes faded heading into the close. Bellwether tech stock Apple (AAPL) sank 2%, ending just above its 50-day line.
The Nasdaq turned a 0.9% gain earlier in the day into a 0.2% loss, wrapping up the third straight down week for the tech-heavy index.
The S&P 500 and Dow Jones industrial average both snapped two-week losing streaks despite slipping from earlier highs. The S&P 500 rose 0.1%, slicing an earlier 0.8% gain, while the Dow climbed 0.5%, easing off a 0.7% intraday rise. Turnover was higher on the NYSE, but lower on the Nasdaq.
Despite the market's pullback, some leaders continued to hold strong.
Firearms maker Sturm Ruger (RGR) rose more than 3% to close near its session high. It's now 14% past a 46.78 buy point from a flat base cleared March 22. That lift was in reaction to news that the
gun and rifle maker stopped accepting new orders due to overcapacity. Analysts see Q1 profit surging 62% to 68 cents a share when it reports results May 1.
Sturm Ruger also recently found support near its 10-week line, which sets a secondary buy zone up to 53.39.
Shuffle Master (SHFL), rose 1% after rebounding 3% earlier. Shuffle Master found support at its 10-week moving average last week. Last month, the gaming equipment maker beat expectations with a 56% gain in Q1 earnings and a 28% rise in sales. It also announced that it was buying poker firm Ongame Network.
Under Armour (UA) maintained a 5% gain. Before the open, the athletic apparel maker said that it earned 28 cents a share in the first quarter, up 22% from a year ago. It beat views by 4 cents. Sales, which also beat views, climbed 23% to $384.4 million. The company raised its revenue outlook to $1.78 billion to $1.88 billion vs. expectations of $1.8 billion. Under Armour found support at its 10-week moving average last week.
On the downside, Mellanox Technologies (MLNX) stumbled more than 6% as it pulled back from Thursday's huge gain. On Thursday, the Israeli chip designer flew 52% in reaction to blowout Q1 results from late Wednesday. The stock is still about 64% past a 37.60 buy point.
InvenSense (INVN) lost 6%, just above its session low. The stock has now fallen for four straight weeks and is at its lowest level in nearly three months. InvenSense breached short-term support near 15. The stock has now given back most of gains from its Jan. 9 breakout from an IPO base.
Chipotle Mexican Grill (CMG) shed 3%, its biggest single-day percentage loss in four months. The stock came under pressure despite late Thursday's better-than-expected Q1 results. The burrito chain's earnings grew 35%, the best in five quarters. Sales climbed 26%, the best in years. But costs for food and packaging jumped 32%. The stock snapped a 17-week win streak.
SXC Health Solutions (SXCI) turned lower and gave up 1%. Earlier the stock hit a new record high and was up as much as 3%. It still ended the week with a gain of 22%. On Wednesday, the pharmacy benefits manager agreed to buy rival Catalyst Health Solutions (CHSI) for $4.4 billion in cash and stock. The stock cleared a three-weeks-tight buy point of 76.52 on April 3.

Returning to business

noreply@blogger.com (Anonymous) — Sun, 22 Apr 2012 07:41:00 -0700

If anyone mentions the just-released 3.5% U.S. third quarter GDP growth, just throw this chart in their face. Cash for Clunkers clearly distorted the U.S. economic figures in an unsustainable fashion.
According to the Bureau of Economic Analysis (BEA), motor vehicle output spiked a seasonally-adjusted 157.6% quarter on quarter. This is completely unprecedented. Vehicle output is clearly going off a cliff next quarter. The question will be how low can the blue line below go.

Next quarter, we won’t just be returning to business as usual for auto output. Don’t forget that Cash for Clunkers pulled future auto demand, ie. some of Q4 demand, into Q3. Thus Q4 is likely to be very weak since many people who planned to buy a car in Q4 probably took advantage of Clunkers and bought in Q3.
To put this into GDP terms, according to the BEA the spike you see below added 1.66% to the U.S. GDP growth figure reported. Thus without it, GDP growth would have been only 1.89% (3.5% – 1.66%) in Q3.
Now imagine if next quarter the blue line below goes down into negative territory as it did just two quarters ago. Next quarter, not only are we unlikely to get Q3′s boost, but motor vehicle output data could subtract from GDP as well. So watch out for the cliff…

Positive territory for the year

noreply@blogger.com (Anonymous) — Wed, 18 Apr 2012 06:00:00 -0700

Below is an updated snapshot of 2012 equity market returns for 78 countries around the world. Of the 78 countries shown, 64 are in positive territory for the year, while 14 are in the red. The average YTD percentage change for all countries shown is 7.11%. Of the G7 countries, Japan, Germany and the US are outperforming the overall average.
Four of the G7 countries are significantly underperforming the average. The UK and Canada are currently up just over 1% year to date, France is up just 0.93%, and Italy is down 4.84%. Spain has been the worst of any country in 2012 with a year to date decline of 15.36%.

Many issues surrounding strip-malls

noreply@blogger.com (Anonymous) — Mon, 16 Apr 2012 23:35:00 -0700

In what can be seen as a good sign, strip-mall vacancy has fallen for the first time in seven years. Despite the positive news, Reis states that it is too early to claim that this is a rebound. As you may know, this area of real estate was battered by the housing crisis and the subsequent recession.
Senior economist for Reis, Ryan Severino spoke on the topic:

Vacancies finally began to fall during the first quarter, declining by 10 bps. This is the first

quarterly decline in the vacancy rate since the second quarter of 2005. In the periods leading up to the recession, excess building was to blame for the increase in vacancies. Since the advent of the recession, supply growth has been virtually nonexistent, but anemic demand drove vacancies upward.

Severino then goes on to warn that this does not indicate that a recovery for shopping centers is underway. There are still many issues surrounding strip-malls, one mainly being that new completions are still near historically low levels. Regardless, this is at least some positive news in what has been an extremely negatively affected aspect of real estate over the past number of years.

Balance was revised

noreply@blogger.com (Anonymous) — Fri, 13 Apr 2012 02:52:00 -0700

Analysts predicted that the trade deficit would narrow to $51.8 billion in February from $52.6 billion in January.
Statistics released last month indicated that the trade deficit had significantly expanded in January to its widest since 2008.
Last month's trade balance was revised narrower only slightly, to $52.5 billion.
While many see a widening trade deficit as a negative sign, historically an expanding trade deficit has been found to correlate directly with a rising GDP.
From the Census Bureau:

The U.S. Census Bureau and the U.S. Bureau of Economic Analysis, through the Department of Commerce, announced today that total February exports of $181.2 billion and imports of $227.2

billion resulted in a goods and services deficit of $46.0 billion, down from $52.5 billion in January, revised. February exports were $0.2 billion more than January exports of $180.9 billion. February imports were $6.3 billion less than January imports of $233.4 billion.

In February, the goods deficit decreased $6.0 billion from January to $61.4 billion, and the services surplus increased $0.5 billion from January to $15.4 billion. Exports of goods decreased $0.6 billion to $128.0 billion, and imports of goods decreased $6.5 billion to $189.4 billion. Exports of services increased $0.8 billion to $53.2 billion, and imports of services increased $0.2 billion to $37.8 billion.

The goods and services deficit increased $0.6 billion from February 2011 to February 2012. Exports were up $15.4 billion, or 9.3 percent, and imports were up $16.1 billion, or 7.6 percent.

Returning to business

noreply@blogger.com (Anonymous) — Tue, 10 Apr 2012 05:29:00 -0700

CHART OF THE DAY: Cash-For-Clunkers MASSIVELY Distorted GDP

The spread of fear in the market

noreply@blogger.com (Anonymous) — Fri, 6 Apr 2012 02:22:00 -0700

Whether you approve of his style or not, Karl Denninger cuts through the BS and says it like it is. The corruption and self-dealing in these bailouts is disgraceful. One must wonder whether there is any integrity left in government or our financial system. You and I and all other taxpayers are bailing these crooks out instead of sending them to jail.

More Arrogation Of Power?

Bloomberg has an interesting story up on the AIG derivative “payoff” mess I’ve repeatedly written about:

Beginning late in the week of Nov. 3, the New York Fed, led by President Timothy Geithner, took over negotiations with the banks from AIG, together with the Treasury Department and Chairman Ben S. Bernanke’s Federal Reserve. Geithner’s team circulated a draft term sheet outlining how the New York Fed wanted to deal with the swaps — insurance-like contracts that backed soured collateralized-debt obligations.

….
Part of a sentence in the document was crossed out. It contained a blank space that was intended to show the amount of the haircut the banks would take, according to people who saw the term sheet. After less than a week of private negotiations with the banks, the New York Fed instructed AIG to pay them par, or 100 cents on the dollar. The content of its deliberations has never been made public.

Where did the NY Fed get this authority? Remember, this wasn’t the NY Fed’s money – it was ours. Where was it appropriated by Congress? This was not part of TARP – AIG was separate.

All appropriation bills must originate in The House.

This one didn’t originate at all. It was simply arrogated by The Federal Reserve and the NY Fed.

Section 13(3) of The Federal Reserve Act allows The Fed to lend to anyone under “unusual and exigent circumstances.” But this was not a loan. It was a pass-through payment to Goldman Sachs and other banks for credit-default swaps that were in fact functionally worthless, as AIG was functionally bankrupt. Why was it done?

One reason par was paid was because some counterparties insisted on being paid in full and the New York Fed did not want to negotiate separate deals, says a person close to the transaction. “Some of those banks needed 100 cents on the dollar or they risked failure,” Vickrey says.

So what?

And which of those banks were at risk of failure? Goldman? Merrill? Deutche Bank or Soc Gen?

This deal was even worse than it first appeared. The Fed also took a bunch of assets (which, it appears, is flatly illegal) and set them forward in an “off balance sheet” thing called Maiden Lane. How are they doing?

According to a quarterly New York Fed report on its holdings, the $29.6 billion in securities held by Maiden Lane III had declined in value by about $7 billion as of June 30.

Remember, Bernanke has repeatedly told us that The Federal Reserve was highly unlikely to lose any money on any of their programs.

In reality it looks like the loss – so far – has been 75%.

If that’s “unlikely” I’d like to know what “likely” is.

More to the point, this appears to be an unauthorized appropriation of funds in fact by The Federal Reserve and NY Fed in which not only United States asset losses but those of FOREIGN INTERESTS were effectively transferred to the US Taxpayer without Congressional review or approval.

“I think the Federal Reserve was trying to stop the spread of fear in the market,” Poole says. “The market was having enough trouble dealing with Lehman. If you add, on top of that, AIG paying off some fraction of its liabilities, a system which is already substantially frozen would freeze rock-solid.”

The Fed created this mess. “Loose money” along with willful blindness to reasonable regulatory requirements and in fact black-letter statutory requirements under the law to apply “prompt corrective action”, along with wanton and reckless refusal to supervise and impose controls on firms levered 20 or even 30:1, especially given that Henry Paulson lobbied the SEC to remove the investment bank leverage limits in 2004, were the actual and proximate cause of all the failures.

Fannie, Freddie, AIG, Bear Stearns and Lehman - all were levered at more than the former 14:1 limit when they blew up by at least two and in three cases more than five times. Every one of these failures is directly traceable to excessive leverage, a policy enabled by and lobbied for by Hank Paulson before he was appointed as Treasury Secretary.

That The NY Fed refused to step in and prohibit firms under its regulatory authority from engaging in counterparty transactions with AIG until and unless AIG had first proved it was sufficiently capitalized to honor all of it’s commitments, is a gross dereliction of regulatory duty.

The argument that The Fed was “powerless” to regulate AIG itself is immaterial – The Fed absolutely had the ability to regulate those firms under it jurisdiction in their trading with AIG.

In allowing systemic leverage to be concentrated and ramped up to 20, 30, even 80:1 or more against actual capital as was the case with Bear Stearns, Lehman and AIG, The Fed was explicitly involved in both setting the table and assembling the financial nuclear device that went off on Bear’s, Lehman’s and AIG’s balance sheets.

Then you have Friedman:

Friedman’s role remains controversial. In December 2008, weeks after the payments to the banks were authorized in November, Friedman bought 37,300 shares of Goldman stock at $80.78 a share, according to SEC filings. On Jan. 22, he bought 15,300 more at $66.61.

That’s nice.

“We limited our overall credit exposure to AIG through a combination of collateral and market hedges,” Viniar said. “There would have been no credit losses if AIG had failed.”

If that’s true then Goldman double-dipped and owes the taxpayer the full amount paid it through AIG.

If that’s false then one wonders whether SarBox, which is supposed to prohibit false statements by company executives, has any meaning at all.

The NY Fed and Federal Reserve must be compelled to open their books – not only on this sordid mess, but on all of their activities.

If these institutions are going to be transacting with the public’s checkbook the public has a right to know exactly what they’re doing, never mind that the black letter of The Constitution requires that all appropriations – that is, public spending – originate not in some smoky room at the NY Fed but rather in The Halls of Congress.

Actual price of the metal can go

noreply@blogger.com (Anonymous) — Thu, 5 Apr 2012 04:22:00 -0700

I have been a big fan of using gold and silver positions to protect against the deterioration in the specifically the dollar and all fiat currencies in general.
There are several ways one can invest in precious metals. The first is to actually take physical possession of the metal. You buy bullion bars or coins. A second way is to invest in mining stocks. A third way is to invest in ETF’s like GLD or SLV that track the underlying metals. Each offers its own particular advanatages and disadvantages.
Buying the metal is the safest method because you have physical possession. It is also somewhat clumsy, involves storage problems and reduces your ability to get in or out of the market quickly. Mining stocks afford ease of in/out of the market, but expose one to major market moves and risks/events particular to the mining company itself. In up or down moves in the underlying metal, mining stocks often move multiples of the metal itself. ETFs offer the advantages of quick in/out
trades and high correlation to metals prices. However, they also expose you to what might be termed “Madoff” risk. While these ETFs purport to have 100% metal backing, it is unlikely, if not impossible, for that to be the case.
I use all three methods. I do have concerns about the potential for a “Madoff” problem with the ETFs so I always have stops in place below where I think the actual price of the metal can go. Thus, if I believe gold or silver itself might be in a trading range that includes a bottom of, say 10% off of current prices, I use a stop at 15% or 20% below the current ETF price. While that type of loss is not comfortable, nor is it a guarantee that one will even get out at that price, it provides some downside protection in the event that Jim Willie’s analysis below is correct. Remember, a stop gets triggered at a specific price, but a trade does not necessarily execute at that price. In panic selling, your sale might occur much lower than your stop. While I have no idea how probable Willie’s analysis might be, it is something that ETF investors should consider s a possibility. Remember, even the impossible has a 20% probability, especially in the uncharted waters we now fish.

THE COMPLETED PICTURE OF E.T.F. GOLD FRAUD
Fraudulent games have expanded in the gold market. In the last few months, much publicity has come (except to mainstream media) of how the COMEX can legally use Street Tracks GLD shares from their Exchange Traded Fund to satisfy short futures contracts in need of a buyer. Instead of rolling over the short contract, they ‘close it out’ by placing a GLD share in offset. So the corrupt pyramid of short gold futures contracts has been co-mingled with GLD shares from the ETFund. Challenges will soon come. The COMEX players and controllers do not locate and purchase gold bullion in order to satisfy the short contracts. They essentially infect the GLD shares instead. So would the real gold depository of the Street Tracks GLD fund please stand up???
In the last couple weeks, the London CME officials have had a terrible time avoiding a default. Some large players want the gold from their long futures contracts, in gold bullion from physical delivery. The Bank of England and one other unidentified central bank from the European Union have tried desperately to supply the delivery demand. In the process, they have provided and handed over more than a little ancient substandard gold bars. The London CME officials even offered a 25% dividend bonus if the gold contracts were satisfied in cash, rather than gold delivery in physical form. This entire incident centered on very high volume for gold also, not a trifling amount. Sounds like gold is worth $1300 per ounce to me!
This story grows worse, and again involves the Street Tracks GLD fund. Likely accounting fraud accompanies other efforts to confiscate their GLD backing of deposits held in gold.
The counter-parties in deep trouble are JPMorgan and Deutsche Bank, each heavily short gold and unable to produce it in the face of delivery demands. Central banks are probably aiding the plunder of private gold accounts. All integrity is at risk of being lost. Simultaneous irregularities have taken place during the LBMA ‘gold delivery incidents’ and official Gold Bar Lists maintained by the Street Tracks GLD exchange traded fund. Evidence points to the GLD gold bullion inventory taken to satisfy the London demand for gold delivery. Independent audits have begun in earnest by large private interests (mostly Arabs). Word came today the JPMorgan is accepting gold bullion in order to establish margin foundation for commodity futures trading accounts. They are indeed desperate, since a margin failure for clients would produce to JPM the gold.
So one might conclude that GLD shares are corrupted by virtue of satisfying the COMEX gold futures short contracts. So one might conclude that GLD deposits of gold as backing for the fund are corrupted by virtue of selling their gold bullion to the Gold Cartel in satisfaction of futures contract delivery demands. That seems to undermine the entire GLD fund, and to expose it as an Exchange Traded FRAUD. Fraud in physical gold deposit management is not the sole province of the Untied States and the Untied Kingdom. An Asian Depository has found ‘Good Delivery’ gold bricks to be gutted and filled with tungsten, another heavy metal. See Rob Kirby’s article entitled “Central Banking: A Blight on Humanity” and also “Blight on Humanity Addendum”.What great financial forensic analysis work!
In time the GLD might be exposed as having little or no gold, and certainty inadequate amounts to back their fund for legitimacy. In time, my forecast is that the GLD fund will eventually sell at a 25% discount to the gold spot price, due to suspicion of fraud in its gold deposit management. Later, my forecast is that the GLD fund will eventually sell at a 50% discount when the investor lawsuits pile up and formal challenges are lodged. The weapon to pry open the vaults will be discovery and ordered independent audits with teeth. The final chapter of the GLD in my view will be its liquidation, with extreme discounts paid to angry investors. Their laziness and stupidity will be worthy of a footnote in history. The managers of the GLD fund and that for the SLV silver fund, are both main members in the Gold Cartel. JPMorgan is custodian to the GLD fund. Barclays manages the SLV fund. Those who believe the tactics and activity behind the curtains are different are indescribably naïve. They too deserve a meat cleaver outing with Sir Darwin on personal wealth.

Expansive influence of speculative finance

noreply@blogger.com (Anonymous) — Tue, 3 Apr 2012 01:29:00 -0700

Doug Noland’s latest post regarding “The Newest Abnormal” tracks many of the past buzzwords applied to the economy. Past terminology applied to economics and markets shows up in hindsight to be little more than post-crises rationalization at best. At worst, it was a form of Madison Avenue spin to entice unwary investors back into markets.
He details some of the history of this “marketing” and concludes that, despite clever phrases, we are still trying to blow bubbles. Here are a couple of excerpts from his piece:

The “miracles” were – without exception – belatedly recognized as Bubbles.
I’m thinking more “The Newest Abnormal”. To be sure, there have been some popped Bubbles. But we remain trapped in the same old Bubble-inciting paradigm of activist central banking and government intervention. I have expounded the view that a “government finance Bubble” emerged with the bursting of the Wall Street/mortgage finance Bubble. I would argue that Bubble dynamics have taken firm hold in China, throughout Asia, and in the “developing” economies more generally.
The New Normal implies more monetary order, while the Newest Abnormal suggests unrelenting Monetary Disorder. The proponents of the New Normal would tend to view extreme government intervention as a stabilizing force
appropriate for a (deflationary) post-Bubble landscape. From the Newest Abnormal perspective, massive government deficits and market interventions inaugurate a dangerous new stage of global inflationism. Newest Abnormal analysis posits that a more stable New Normal backdrop would, at this point, likely arise only after a major government debt crisis.

The full article can be read by following the links below.

The Newest Abnormal:

The eighties brought us Japan’s “miracle economy”. The ’88 Dukakis presidential campaign delivered the “Massachusetts miracle” – not many years later renamed “Massachusetts miserable.” The Asian Tiger “miracle economies” (and markets!) were all the rage in the mid-90s – until their systems blew apart. Here at home, there was all the “New Paradigm” and the “New Era” hoopla. And until the recent crisis and double-digit GDP downdraft, many bravely trumpeted Ireland’s Celtic Tiger miracle.
It’s as if there’s a contest to coin a catchy phrase that will gain popular acceptance. There was “muddle through” to describe the expected course of the post-tech Bubble economy. The “Great Moderation” lauded newfound policymaker success in moderating economic (and inflation) variability. And who can forget the vaunted “stable and desirable” global monetary “system” – “Bretton Woods II” – analysis that rationalized Credit Bubble excesses. Then there was the pride and joy of coining “the shadow banking system.” Now it’s “The New Normal.”
I must be a grump, as I’m rarely fond of popular economic catchphrases. The “miracles” were – without exception – belatedly recognized as Bubbles. Bullish visions of new eras and paradigms were similarly Bubble delusions. I never bought into the post-technology bust notion of a “muddle through” economy. It was just inconsistent with Bubble analysis – and the dynamic of a more powerful Bubble throughout mortgage finance emerging from the tech wreck. Bubbles tend to not muddle.
I scoffed at “The Great Moderation.” The framework from which it originated was flawed. An optimistic view held that astute central banking had become quite adept at tinkering with interest rates. Students of economic history found this disconcertingly reminiscent of the fateful view from the “Roaring Twenties” that central banking had conquered the business cycle. Central banking has repeatedly been given way too much Credit, while the expansive influence of speculative finance is always easily ignored.
There was no disputing the impressive potency central bank rate cuts had attained (over the past 20 years) for reigniting and sustaining economic growth. Yet rigorous analysis of the Credit system would have illuminated the newfound role of the Wall Street firms, Fannie Mae, Freddie Mac, the FHLB, the massive securitization marketplace, derivatives, and the hedge funds. Central bankers hadn’t become smarter or even more sophisticated. But never had they enjoyed such a powerful monetary policy tool – an expanse of aggressive players keen to stimulate Credit expansion, the markets and the economy at a moment’s (or 25bps) notice. Over a period of many years the Credit system – and the Fed’s transmission mechanism to the real economy – had been completely transformed. It should have appeared shadowy only to those that had clung to a narrow focus on banking system Credit.
“Bretton Woods II” propaganda really rubbed me the wrong way. “How can intelligent analysts not see that the U.S. has exported its Credit Bubble to the rest of the world,” I would mumble to myself at the time. There was certainly nothing stable or desirable about the arrangement of the U.S. massively inflating Credit – using these IOUs to feed asset Bubbles and over-consumption. Especially with foreign central banks content to monetize these dollar flows, in the process dangerously inflating their asset markets and economies. Again, the key to sound analysis was rigorous analysis of underlying Credit structures and financial flows.
Which brings me to the latest and greatest: “The New Normal.” It’s not that I have huge issues with the analysis – it’s certainly not “miracle,” “New Era,” or “Bretton Woods II” silliness. I just sense it’s incomplete and misses some important aspects of the unfolding backdrop. From Bill Gross: “We’re transitioning due to popped bubbles and de-risking of portfolios and balance sheets… A simple way to look at it is that private market capitalism simply went too far over the last 10-20 years, and now we’re in the process of pulling back and accommodating deleverging, regulating and de-globalization.”
From my perspective, the “New Normal” appears more like the old than something new: I’m thinking more “The Newest Abnormal”. To be sure, there have been some popped Bubbles. But we remain trapped in the same old Bubble-inciting paradigm of activist central banking and government intervention. I have expounded the view that a “government finance Bubble” emerged with the bursting of the Wall Street/mortgage finance Bubble. I would argue that Bubble dynamics have taken firm hold in China, throughout Asia, and in the “developing” economies more generally. New Normal reminds me too much of “muddle through.”
“Deleveraging” is at this point overrated. Our federal government issued about $1.9 TN of additional debt over the past year. In my book, that’s “leveraging.” The Fed’s balance sheet has become much more leveraged. The mortgage businesses of Fannie, Freddie, Ginnie and the FHA have become much more “leveraged.” The Newest Abnormal is about massive synchronized global government Credit expansion and extreme monetary looseness. The Newest Abnormal sees massive “private” Credit expansions in China, India, Brazil, and the “developing” markets. The Newest Abnormal is fueling historic Credit and economic Bubbles in China.
The Newest Abnormal has seen a major resurgence in the global leveraged speculating community. The Newest Abnormal is acting with great speed to impair the dollar as the world’s reserve currency – taking unfettered financial “globalization” to a whole new level. The Newest Abnormal has animal spirits that could give the old ones a run for their “money”.
Mr. Gross’s New Normal – constrained by “deleveraging and reregulation” – seems to imply a more subdued and therefore stable Credit landscape. Such a backdrop would be consistent with lower average economic growth and lower investment returns. The Newest Abnormal – with varieties of newfangled Bubbles, excesses and uncertainties – would point to ongoing financial and economic volatility. The “averages” may indeed be lower going forward – but it may be the divergences that prove most noteworthy (hard asset returns vs. securities; non-dollar vs. dollar; China GDP vs. U.S., for example).
The New Normal implies more monetary order, while the Newest Abnormal suggests unrelenting Monetary Disorder. The proponents of the New Normal would tend to view extreme government intervention as a stabilizing force appropriate for a (deflationary) post-Bubble landscape. From the Newest Abnormal perspective, massive government deficits and market interventions inaugurate a dangerous new stage of global inflationism. Newest Abnormal analysis posits that a more stable New Normal backdrop would, at this point, likely arise only after a major government debt crisis.
It was a Newest Abnormal kind of week. For months now, unprecedented global government intervention has spurred a stampede back into risk assets. Buoyant risk markets then sparked a run of bullish optimism. Not surprisingly, everyone ended up on the same crowded side of the reflation trade. This week, global equities, emerging market bonds, commodities, and most currencies were rocked by heavy selling pressure. Those borrowing in yen to leverage higher-yielding currencies in, for example, New Zealand or Sweden, had their heads handed to them. The reflation bet definitely had some air kicked out of it. And many believing, with two months to go, that they had great years in the bag are now recalling that sick 2008 feeling. It’s a reasonable bet that heightened uncertainty and market volatility have returned and will be sticking around a while.

Greater part of our economical institutions

noreply@blogger.com (Anonymous) — Sat, 31 Mar 2012 06:28:00 -0700

Frederic Bastiat was probably the most influential economic essayist ever. He died in 1850. His “broken window fallacy” is probably the single most important principle in economics. It anticipated Keynesian economics and vitiated most of it before Keynes was born. Still today, one need only pick up the newspaper to find multiple violations of the principle. Ditto with economic speeches, especially by government-owned economists. Read Bastiat’s original essay and learn the single most important principle behind sound economics. This is an Econ 101 post. It probably should be sent to 500 plus people in Washington, DC who don’t or won’t understand this principle.

The Broken Window

“Neither industry in general, nor the sum total of national labor, is affected, whether windows are broken or not.”

Have you ever witnessed the anger of the good shopkeeper, James B., when his careless son happened to break a square of glass? If you have been present at such a scene, you will most assuredly bear witness to the fact, that every one of the spectators, were there even thirty of them, by common consent apparently, offered the unfortunate owner this invariable consolation: “It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?”
Now, this form of condolence contains an entire theory, which it will be well to show up in this simple case, seeing that it is precisely the same as that which, unhappily, regulates the greater part of our economical institutions.
Suppose it cost six francs to repair the damage, and you say that the accident brings six francs to the glazier’s trade — that it encourages that trade to the amount of six francs — I grant it; I have not a word to say against it; you reason justly. The glazier comes, performs his task, receives his six francs, rubs his hands, and, in his heart, blesses the careless child. All this is that which is seen.
But if, on the other hand, you come to the conclusion, as is too often the case, that it is a good thing to break windows, that it causes money to circulate, and that the encouragement of industry in general will be the result of it, you will oblige me to call out, “Stop there! Your theory is confined to that which is seen; it takes no account of that which is not seen.”
It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way which this accident has prevented.
Let us take a view of industry in general, as affected by this circumstance. The window being broken, the glazier’s trade is encouraged to the amount of six francs: this is that which is seen.
If the window had not been broken, the shoemaker’s trade (or some other) would have been encouraged to the amount of six francs: this is that which is not seen.
And if that which is not seen is taken into consideration, because it is a negative fact, as well as that which is seen, because it is a positive fact, it will be understood that neither industry in general, nor the sum total of national labor, is affected, whether windows are broken or not.
Now let us consider James B. himself. In the former supposition, that of the window being broken, he spends six francs, and has neither more nor less than he had before, the enjoyment of a window.
In the second, where we suppose the window not to have been broken, he would have spent six francs in shoes, and would have had at the same time the enjoyment of a pair of shoes and of a window. Now, as James B. forms a part of society, must come to the conclusion, that, taking it altogether, and making an estimate of its enjoyments and its labors, it has lost the value of the broken window.
Whence we arrive at this unexpected conclusion: “Society loses the value of things which are uselessly destroyed,” and we must assent to a maxim which will make the hair of protectionists stand on end — to break, to spoil, to waste, is not to encourage national labor; or, more briefly, “destruction is not profit.”
What will you say, Moniteur Industriel? What will you say, disciples of good M. F. Chamans, who has calculated with so much precision how much trade would gain by the burning of Paris, from the number of houses it would be necessary to rebuild?
I am sorry to disturb these ingenious calculations, as far as their spirit has been introduced into our legislation; but I beg him to begin them again, by taking into the account that which is not seen, and placing it alongside of that which is seen.

$50 $44

“Stop there! Your theory is confined to that which is seen; it takes no account of that which is not seen.”

The reader must take care to remember that there are not two persons only, but three concerned in the little scene which I have submitted to his attention.
One of them, James B., represents the consumer, reduced, by an act of destruction, to one enjoyment instead of two.
Another, under the title of the glazier, shows us the producer, whose trade is encouraged by the accident.
The third is the shoemaker (or some other tradesman), whose labor suffers proportionately by the same cause.
It is this third person who is always kept in the shade, and who, personating that which is not seen, is a necessary element of the problem. It is he who shows us how absurd it is to think we see a profit in an act of destruction. It is he who will soon teach us that it is not less absurd to see a profit in a restriction, which is, after all, nothing else than a partial destruction. Therefore, if you will only go to the root of all the arguments which are adduced in its favor, all you will find will be the paraphrase of this vulgar saying — what would become of the glaziers, if nobody ever broke windows?

Credit burdens are too large to be supported

noreply@blogger.com (Anonymous) — Sun, 25 Mar 2012 23:06:00 -0700

The bailout fiasco is just now starting to show up for the act of desperation that many suspected it was. Instead of allowing markets to resolve a severely over-leveraged and distorted economy, the government decided to try to “bluff” its way through one more time. This strategy has been one used for almost 5 decades. Each time the credit stimulus required is bigger than the last. Each time the distortions to relative prices is made worse. Each time the misallocation of resources becomes greater. Each time the credit levels of individuals and government expand. Each time inflation becomes a bigger problem. Finally, a time comes when malinvestment and credit burdens are too large to be supported. It is probable that we have reached that point. To appreciate how far we have come regarding the abuses of credit creation, one need only note that since the Federal Reserve was created in 1913, the dollar has lost about 96% of its purchasing power. Most of that loss (probably in excess of 90%) has occurred since 1980.
There are still many that believe that government actions will get us out of our predicament. They won’t. When we come out of this mess, it will be in spite of these actions. They will serve to make the problem worse and cause it to last much longer. Japan has been employing similar stimuli for two decades, and its economy has still has not recovered.
As time passes, it will become apparent to all but the dullards that these interventions were non-helpful and actually harmful. Most understand economics only experientially. Events as discussed in the following post by Rolfe Winkler today are what will continue to surface with the passage of time and provide enough instances for the experiential learners.
Besides being a terrible decision that will cost taxpayers dearly, the article also talks about the unintended consequences of drawing deposits away from smaller, solid banks to the weaker GMAC. The unintended consequence is to weaken the stronger banks.

liberal intellectuals had to make a choice

noreply@blogger.com (Anonymous) — Mon, 19 Mar 2012 04:56:00 -0700

Who were these people?

They were like scientists trying to address a convention of witch doctors.

They gave up career and fame to stick with the truth and say what had to be said.

… it is very dangerous for an economist to seek fame and fortune and to work closely with political establishments, simply because, in [Hayek's] experience, the most important trait of a good economist is the courage to say the unpopular thing. If you value your position and privileges more than truth, you will say what people want to hear rather than what needs to be said.

They chose freedom even when it was at the expense of their own bank accounts and even though their choice brought professional decline and risked failure in the eyes of their colleagues.

… the man who is willing to do what is right regardless of the circumstances.

It takes more than technical knowledge to be a good economist. It takes moral courage, and that is in even shorter supply than economic logic.

These were a remarkable group of economists that valued truth over fortune. In our materialistic, relativistic world, there are few like them today in any field. Too many economists have become “rent-an-economist,” willing to say or do anything for advancement and income. Other professions, including the physical sciences, have their whores as well, but the nature of the social sciences provides greater opportunities for such behavior.
To find out more about these people and their counterparts, read the following article.

Economics and Moral Courage

Hans Mayer (1879–1955)

It must be really painful to be an economist of the mainstream today — at least, it should smart to some extent. In a financial and economic calamity of the current scale, people naturally want to know who issued the warnings about the real-estate bubble and its likely aftermath.
When private-sector jobs have not grown at all in ten years, and when ten years of domestic investment is systematically undone in the course of 18 months, when housing prices in some sections of the country collapse 80 percent, and when formerly prestigious banks go belly up or receive many billions in rescue aid, people want to know which economists saw this coming.
Perhaps it is these economists — the ones who had long issued the warnings, and not the ones
relentlessly consulted by the media — who should be giving the guidance about going forward. Maybe they ought to be weighing in on whether the new stock-market boom is a reflection of reality, or another bubble developing within a bust that could lead to a secondary depression.
Among the mainstream, however, no one saw it coming. That is because they have never learned the lesson that Bastiat sought to teach, namely that we need to look beneath the surface, to the unseen dimensions of human action, in order to see the full economic reality. It is not enough just to stand back and look at points on a chart going up and down, smiling when things go up and frowning when things go down. That is the nihilism of an economic statistician who employs no theory, no notion of cause and effect, no understanding of the dynamics of human history.
So long as things were going up, everyone thought the economic system was healthy. It was the same in the late ’20s. In fact, it has been the same throughout human history. It is no different today. The stock market is going up, so surely that is a sign of economic health. But people ought to reflect on the fact that the highest performing stock market in the world in 2007 belonged to Zimbabwe, which is now home to a spectacular economic collapse.
Because of this tendency to look at the surface rather than the underlying reality, the business-cycle theory has been a source of much confusion throughout economic history. To understand the theory requires looking beyond the data and into the core of the structure of production and its overall health. It requires abstract thinking about the relationship between capital and interest rates, money and investment, real and fake saving, and the economic impact of the central bank and the illusions it weaves. You can’t get that information by watching numbers blow by at the bottom of your TV screen.
Then when the crisis hits, it comes as a complete surprise every time, and economists find themselves in the role of forging a plan to do something about the problem. This is when a crude form of Keynesianism comes into play. The government spends what money it has and prints what it doesn’t have. Unemployed people are paid. Tricks to prop up failing industries abound. Generally, the approach is to gin up the public to engage in some form of exchange, in order to keep reality at bay.
Austrians counsel a different approach, one that takes account of underlying reality during the boom phase. They draw attention to the existence of the bubble before it pops, and once it goes away, the Austrians suggest that it does no good to blow another bubble or otherwise keep uneconomic production and plans going.
The Austrians in the late 1920s and early 1930s found themselves having to explain this again and again, but it was the onset of the age of positivism — the method that posits that only what you see on the surface really matters — so they had a very difficult time making points that were more sophisticated. They were like scientists trying to address a convention of witch doctors.
The same is true today. The Austrian account of economic depression requires thinking on more than one level to arrive at the truth, whereas economists these days are more likely to be looking for obvious explanations and even-more-obvious solutions, even when these neither explain nor solve anything.
This puts the Austrians in an interesting position within the intellectual culture of any time and place. They must go against the grain. They must say the things that others do not want to hear. They must be willing to be unpopular, socially and politically. I’m thinking here of people like Benjamin Anderson, Garet Garrett, Henry Hazlitt, and, on the Continent, L. Albert Hahn, F.A. Hayek, and, above all, Ludwig von Mises. They gave up career and fame to stick with the truth and say what had to be said.
Later in life, when speaking before a group of economics students, Hayek bared his soul about this problem of the moral choices economists must make. He said that it is very dangerous for an economist to seek fame and fortune and to work closely with political establishments, simply because, in his experience, the most important trait of a good economist is the courage to say the unpopular thing. If you value your position and privileges more than truth, you will say what people want to hear rather than what needs to be said.
This courage to say the unpopular thing marked the life of Ludwig von Mises. Today, his name resonates around the world. The tributes to him pour out on a monthly and weekly basis. His books remain massive sellers. He is the standard-bearer for science in the service of human freedom. Especially after Guido Hülsmann’s biography of Mises appeared, the appreciation for his courage and nobility have grown.
But we must remember that it was not always so, and it did not have to be so. This kind of immortality is granted in no small measure because of the discrete moral choices he made in life. For if you had asked anyone about this man between 1925 and the late 1960s — the bulk of his career — the answer would have been that he was washed up, old school, too doctrinaire, intransigent, unwilling to engage the profession, attached to antique ideas, and his own worst enemy. They called him the “last knight of liberalism” as a way of conjuring up images of Don Quixote. When Yale University solicited opinions on whether it should publish Human Action, most people answered that this book should never see the light of day because its time was long past. It was thanks only to the intervention of Fritz Machlup and Henry Hazlitt that Yale bothered at all.

“The most important trait of a good economist is the courage to say the unpopular thing.”

Mises was as undaunted then as he had been throughout his life, and as he remained until his death. He had made a moral choice not to give in to the prevailing winds.
Before going into that choice more, I would like to speak of another economist who was a contemporary of Mises’s. His name was Hans Mayer. He was born in 1879, two years before Mises. He died in 1955.
While Mises worked at the Chamber of Commerce because he was denied a paid position at the University of Vienna, Mayer served as one of three full professors there, along with socialist Othmar Spann and Count Degenfeld-Schonburg.
Of Spann, Mises wrote that “he did not teach economics. Instead he preached National Socialism.” Of the count, Mises wrote that he was “poorly versed in the problems of economics.”
It was Mayer who was the truly formidable one. Yet he was no original thinker. Mises wrote that his “lectures were miserable, and his seminar was not much better.” Mayer wrote only a handful of essays. But then, his main concern had nothing to do with theory and nothing to do with ideas. His focus was on academic power within the department and within the profession.
Now, people outside of academia may not understand what this means. But inside academia, people know all about it. There are people in every department who expend the bulk of their efforts on the pettiest form of professional advancement. What is at stake? Not that much. But as we know, the smaller the stakes, the more vicious the fight.
Among the prizes are better titles, higher salaries, the ability to get the best possible teaching times, to reduce one’s teaching load (ideally to zero) and office hours, to advance one’s favorite people, to get a larger office with a puffier chair, to know all the right people in the profession, and, best of all, to lord it over others: to be able to reduce the influence of your enemies and increase the influence of your friends in a way that can cause people to become your lifetime minions and supplicants.
With the state, there are even more prizes: to be close to politicians, to get outside gigs in which you serve as an expert in drafting legislation or in legal proceedings, to testify before Congress, to get called by the mainstream media to comment on national affairs, and the like. The point is not to advance ideas, but rather to advance oneself in a professional sense.
Outsiders imagine that university life is all about ideas. But insiders know that the real battles that take place within departments have very little to do with ideas or principles. Strange coalitions can develop, based entirely on the pettiest of issues. Professional ambitions are the driving force, not principles. There are people in every department who are highly accomplished, but whose accomplishments have nothing to do with science, teaching truth, or pursuing a vocation as a real scholar.
This has been the case for many centuries in academia, but it may be worse now than ever. These pursuits are often well rewarded in this life, while those who eschew them in favor of truth are pushed aside and relegated to a permanent low status. These are just some of the facts of life. This is what Hayek was referring to. And Mises’s life illustrates the point perfectly.

“Outsiders imagine that university life is all about ideas. But insiders know that the real battles that take place within departments have very little to do with ideas or principles.”

But let’s return to Professor Mayer. The main energies of Mayer were spent on an open war against his rival for power, Othmar Spann. This consumed him almost completely. He believed that he had to keep Spann at bay in order to advance himself. Mayer smeared Spann in every possible place and way, in a war to the knife. Note here that Mayer and Spann did not disagree on any matter of policy in any substantive way. It was all about position and power.
When he wasn’t consumed with passionate hatred for and plots against Spann, Mayer spent the remainder of his energy building up his power base within the University of Vienna. It began well for him as the acknowledged successor to Friedrich von Wieser, who was the previous power broker. Mayer had established himself as the most groveling student of Wieser’s. His reward was that Wieser named him as his successor, bypassing not only Mises but also the remarkable Joseph Schumpeter.
Then began Mayer’s march. He called the shots. Mises himself was on the enemies list, of course. Mayer was in part responsible for denying Mises a full-time teaching position and salary. But that wasn’t enough for him. He treated Mises’s students very badly during examinations. For this reason, Mises even went so far as to suggest that his seminar participants decline to be officially registered, if only to prevent them from being harmed by Mayer. Mayer also worked to make it nearly impossible for any student in the department to write a dissertation under Mises. The politics were vicious and relentless.

What was Mises’s attitude? He writes in his memoir, “I could not be bothered by all of these things.” He just kept on doing his work. One can easily imagine scenes from this period. Mises is in his office writing and reading, trying to hammer out and perfect the theory of the business cycle or reflect on the problem of economic methodology. A student would come in to let him know about Mayer’s latest antics. Mises would look up from his work, sigh with exasperation, and tell the student not to worry about it, and then go on with his work. He refused to be drawn in.
The Mises Circle was aghast by the goings-on, but the members did their best to make light of it all. They even made up a song, set to a traditional Viennese melody, called the “Mises-Mayer Debate” that featured the two economists talking past each other and sharing no common values at all.
At one point, Mises’s circle grew into a full-blown economic society associated with the university. Mises could only be vice president, since Mayer would, of course, be president, since he was the master of the universe as far as economics in Vienna was concerned. And he never missed a chance to underscore who he was and what he could do.
Mises’s position as vice president would not last. The time came when Nazism grew in influence in Austria. As an old-time liberal and a Jew, Mises knew that his time was limited. Sensing the possibility of even physical harm, Mises accepted a new position in Geneva and left for his new home in 1934. The society declined in membership and otherwise floundered.
In 1938, Austria was annexed to the German Third Reich. Mayer had a choice about what he would do. He could have stood by principle. But why would he do that? It would have meant sacrificing his self-interest for the greater good, and that is something that Mayer had never done. Quite the opposite: his entire academic career was about Mayer and Mayer alone.
So, to his ever-lasting disgrace, he wrote to all members of the Economic Society that all non-Aryans were hereby expelled. This meant, of course, that no Jews were allowed to continue their membership. He cited “the changed circumstances in German Austria, and in view of the respective laws now also applicable to this state.”
So you can see, then, that all of Mayer’s power over his underlings was bested by the greater power of the state, to which he was unfailingly loyal. He thrived before the Nazis. He thrived during the Nazi takeover. He helped the Nazis purge the Jews and the liberals from his department. Note that Mayer was no raging anti-Semite himself. His decision was a result of a series of discrete choices for position and power in the profession against truth and principle. For a time, this seemed harmless in some way. And then the moment of truth arrived and he played a role in the mass slaughter of ideas and those who held them.
Perhaps Mayer thought he had made the right choice. After all, he maintained his privileges and perks. And after the war, when the Communists came and took over the department, he thrived then too. He did all that an academic was supposed to do to get ahead, and achieved all the glory that an academic can achieve, regardless of the circumstances.
But consider the irony of all this power and glory. In the bigger picture of Continental economics in general, the Austrians were not highly regarded by the profession at large. Since the turn of the century, the German Historical School had captured the mantle of science. Their empirical orientation and stance against classical theory had, over the decades, melded nicely with the rise of positivism in the social sciences.
Never forget that the phrase Austrian School was coined not by the Austrians but by the German Historical School, and the phrase was used as a put-down, with overtones of a school mired in scholasticism and medieval deduction rather than real science. So our friend Mayer thought that he was master of the universe, when he was a very small fish in an even smaller pond.
He played the game and that was all he did. He thought he won, but history has rendered a different judgment.
He died in 1955. And then what happened? Justice finally arrived. He was instantly forgotten. Of all the students he had during his life, he had none after death. There were no Mayerians. Hayek reflected on the amazing development in an essay. He expected much to come out of the Wieser-Mayer school, but not much to come out of the Mises branch. He writes that the very opposite happened. Mayer’s machine seemed promising, but it broke down completely, while Mises had no machine at all and he became the leader of a global colossus of ideas.
If we look at Mark Blaug’s book Who’s Who in Economics, a 1,300-page tome, there is an entry for Menger, Hayek, Böhm-Bawerk, and, of course, Ludwig von Mises. The entry calls Mises “the leading twentieth-century figure of the Austrian School” and credits him with contributions to methodology, price theory, business-cycle theory, monetary theory, socialist theory, and interventionism. There is no mention of the price he paid in life, no mention of his courageous moral choices, no mention of the grim reality of a life moving from country to country to stay ahead of the state. He ended up being known only for his triumphs, about which not even Mises was ever made aware during his own life.
And guess what? There is no entry at all in this same book for Hans Mayer. It is not that his status is reduced, not that he is noted and dismissed, not that he is put down as a minor thinker with enormous power. He is not called a Nazi collaborator or a Communist collaborator. Not at all. He isn’t even mentioned. It is as if he never existed. Mayer’s legacy vanished so fast after his death that he was forgotten only a few years later.
It is so bad for Mayer today that Wikipedia doesn’t even have an entry for him. In fact, this talk has given more attention to him and his legacy than probably any other in 50 years. You might wait forever for another mention.
The Mayer line ended. But the Mises line was just beginning. He left for Geneva in 1934, accepting a dramatic pay cut. His fiancée followed and they were married, but not before he warned her that though he would write much about money, he would never have much of it.

“It is so bad for Mayer today that Wikipedia doesn’t even have an entry for him.”

And in Geneva he stayed for six years, having left his beloved Vienna and watched the world go through a shredding of civilization. The Nazis ransacked his old apartment in Vienna, and stole his books and papers. He lived a nomadic existence, unsure of where his next position would be. And this was the way he lived in the prime of his life: he was in his mid-50s and he was nearly homeless.

But as he dealt with the Mayer problem during those years in Vienna, Mises would not be distracted from his important work. For six years, he researched and wrote. The result was his magnum opus, a massive treatise on economics called Nationalökonomie. In 1940, he completed the book and it was published in a small print run. But how intense was the demand in 1940 for a book on the economics of freedom written in German? This was not destined to be a bestseller. He surely knew this while writing it. But he wrote it anyway.
Instead of book signings and celebrations, Mises faced another life-changing event that year. He received word from his Geneva sponsors that there was a problem. There were too many Jews taking refuge in Switzerland. He was told that he needed to find a new home. The United States was the new safe haven.
He began to write letters for positions in the United States, but think what this would mean. He was a German speaker. He had a reading knowledge of English, but he would need to learn it to the point that he could actually lecture in it. He had lost his notes and files and books. He didn’t have any money. And he didn’t know any powerful people in the United States.
There was a serious ideological problem in the United States too. The country was completely enthralled with Keynesian economics. The profession had turned. There were almost no free-market economists in the United States, and no academic to champion his cause. There were a few leads he had on jobs, but they were only promises and there was no discussion of pay or any kind of security. He ended up having to leave with no assurances at all. He was almost 60.

But in the United States, Mises did have a major champion outside of academia. His name was Henry Hazlitt. Let me review Hazlitt’s history here, too. He began his work as a financial journalist and book-review editor for New York papers. He became so well-known as a literary figure that he was hired as the literary editor for The Nation before the New Deal. His free-market views were not a special problem for him in those days. But after the Great Depression, liberal intellectuals had to make a choice: they had to adhere to free-market theory or embrace the industrial-planning state of FDR.
The Nation went with the New Deal. This was a major reversal for this organ of liberal opinion that had long championed freedom and condemned industrial statism. The New Deal was nothing if not the imposition of a fascist system of economics, but The Nation set a precedent for the American Left that this ideological tendency has followed ever since: all principles must eventually yield to the one overriding imperative of opposing capitalism, no matter what.
Hazlitt refused to go along with the change. He argued with his colleagues. He pointed out the fallacies of the National Industrial Recovery Act. He patiently tried to explain to them the absurdities of the New Deal. He wouldn’t give in. They fired him.
H.L. Mencken saw the greatness of Hazlitt’s work and hired him as his own successor at the American Mercury before turning over full control. Sadly, this didn’t work out either, because the ownership of that publication did not like Hazlitt’s Jewishness or free-market bent, and sent him packing yet again.
In different ways, in different sectors, and in different countries, it seemed like Mises and Hazlitt were living parallel lives. At each crossroad in life, they had both chosen the path of principle. They chose freedom even when it was at the expense of their own bank accounts and even though their choice brought professional decline and risked failure in the eyes of their colleagues.

Hazlitt moved to the New York Times, which back then did not have nearly the prestige it has today, however undeserved. He used his position to write about Mises’s books like Socialism. This grabbed the attention of a handful of American business people like Lawrence Fertig, who later became — like Hazlitt — a very generous donor to the Mises Institute. It was Fertig and his friends who knew of Mises’s arrival in America, and they were thrilled. They had seen what a devastating blow FDR and Keynesianism were for free-market ideas. They put together a fund that would provide Mises a position at New York University, where he could teach and write. He was not paid by the university, where he was always a visiting professor, but through a private endowment.
Do you see how all of this links up? Hazlitt took the moral road, the courageous road, the road of sacrifice and principle. It was because of this that Mises, who had taken a similar road, could find safe haven in the United States. It was not the position that he deserved. He would be treated much worse than the Keynesians and Marxists. But it was something. It was an income to pay the bills. It was a chance to teach and write. He had the freedom to say what he wanted to say. That’s all he needed.
So we see how these two men of principle, worlds apart, ended up being drawn to each other because they recognized a type: the man who is willing to do what is right regardless of the circumstances. Each could have gone another way. Mises might have been every bit as famous and powerful as Mayer had been, but he would have thrown away the immortality of his ideas in the process. Hazlitt could have been a high-status writer with a major outlet, but he would have had to surrender every ounce of integrity in order to do so.
Working together, they were able to overcome.
One of the people who had been drawn to Mises through Hazlitt’s writing was the head of Yale University Press, Eugene Davidson, who had approached Mises about doing an English-language edition of his magnum opus from 1940. Mises had already dedicated six years to that book and it had sunk without a trace. Now he was being asked to translate it into English. It was a daunting task, but he agreed in principle. Yale then set out to find referees to approve such a huge publishing risk. Yale first went to Mises’s old colleagues, and they were about as disappointing as referees as they were in other aspects of their careers. They wrote that there was no need to publish the book. Mises’s ideas were old and superseded by Keynesian theory. But Yale persisted. Hazlitt finally managed to assemble a group of people who would endorse the book’s translation, and Mises got to work again.
We all know the frustration that comes with losing a file on one’s computer and having to recreate it. Imagine what it was like for Mises to lose a 1,000-page book, lose it to history in dark times, and to be asked to recreate it in another language.

But he was undaunted. He got to work, and the result appeared fully nine years later. The book was called Human Action. By academic standards, it was a best seller and remains so sixty years later.
Even so, Mises remained at his unpaid, unofficial position. He gathered around him students for his seminar, even though other professors warned the students not to take the class or attend the sessions. They discouraged their students from having much to do with him at all. The dean seconded their hostility. For Mises, who had navigated the wars at the University of Vienna, this was small potatoes, nothing to pay attention to at all.
Slowly his fame spread, but we need to remember that even at its height then in the United States, it was tiny compared with what it is today. In fact, Mises died a year before what is usually considered the Austrian revival, which is often dated from 1974 when Hayek received the Nobel Prize, a prize that was entirely unexpected and that had to be shared with a socialist — and that shocked a profession that had no interest in the ideas of either Mises or Hayek, whom they considered to be dinosaurs.

It is interesting to read Hayek’s acceptance speech, which the Mises Institute published this year. It is a tribute to a profession to which he wanted closer ties. But it was not a loving presentation of the glories of academia. In fact, it was the opposite. He said that the most dangerous person on earth is an arrogant intellectual who lacks the humility necessary to see that society needs no masters and cannot be planned from the top down. An intellectual lacking humility can become a tyrant — and an accomplice in the destruction of civilization itself.
It was an amazing speech for a Nobel Prize winner to give, an implicit condemnation of a century of intellectual and social trends, and a real tribute to Mises, who had stuck by his principles and never given in to the academic trends of his time.
A similar story could be told about the life of Murray N. Rothbard, who might have become a major star in an Ivy League department but instead decided to follow the lead of Mises in economic science. He taught for many years at a tiny Brooklyn college instead, at very low pay. But as with Mises, this element of Rothbard’s life is largely forgotten. After their deaths, people have forgotten all the trials and difficulties these men faced in life. And what did these men earn for all their commitments? They earned for their ideas a certain kind of immortality.
What are those ideas? They said that freedom works and freedom is right, that government does not work and that it is the source of great evil in the world. They proved these propositions with thousands of applications. They wrote these truths in scholarly treatises and popular articles. And history has vindicated them again and again.

$50 $43

We are living now through another period of economic planning and we are seeing economists split on both sides. The overwhelming majority is saying what the regime wants them to say. To depart too much from the prevailing ideology of power is more of a risk than most want to take. A small minority, the same group that warned of the bubble, is again warning that the stimulus is a fake. And they are going against the grain in saying so.
I’m with Hayek on this point. To be an economist with integrity means having to say things that people don’t want to hear and especially to say things that the regime does not want to hear. It takes more than technical knowledge to be a good economist. It takes moral courage, and that is in even shorter supply than economic logic.
Just as Mises needed Fertig and Hazlitt, economists with moral courage need supporters and institutions to back them up and give them voice. We must all bear this burden. As Mises said, the only way to fight bad ideas is with good ones. And in the end, no one is safe if civilization is sweeping to destruction.

This is the fourth Crisis period in American history

noreply@blogger.com (Anonymous) — Sat, 17 Mar 2012 00:52:00 -0700

The always interesting and provocative James Quinn:

This is the fourth Crisis period in American history. The prior three were the American Revolution, the Civil War, and the Great Depression/World War II. We’ve experienced two revolutions and one world war that killed 65 million people. There is no way to avoid what awaits us. Like the seasons, we must go through Winter before we can experience Spring again. The only question is what events will transpire to generate the public fury that always occurs during the Crisis era. Will it be a foreign conflict over oil that transforms into a World War? Will it be a nuclear missile exchange in the Middle East? Will it be a nuclear device detonated within the U.S. borders? Or, will it be a domestic civil war due to a total collapse of our economic system? The conflict is likely to be triggered by natural resources or lack thereof.

Europe is in real trouble

noreply@blogger.com (Anonymous) — Fri, 16 Mar 2012 01:41:00 -0700

Why Everyone Is Wrong About the Inflation/Deflation Debate

Jim Bradley
Let’s face the facts about the inflation/deflation debate:

1 – No one really knows or can possibly know what the “endgame” will be …
2 – The goal for investors is to be “future independent” as much as possible: a strategy that wins in nearly any market.
Consider the real issues facing the authorities right now:
1 – If they allow significant price deflation banks could fail in great numbers, and then they may be forced to really monetize which could ignite hyperinflation
2 – If they push in significant price inflation, the currency will collapse, and they may be forced to really deflate to bring back confidence (the “austerity” plans)
In sum, the Fed is facing a cliff on both sides of the path. They will try and stay in the middle.
That means the Fed will end up oscillating policy between price inflation and deflation with a bias toward whichever risk (U.S. government creditors or the banking system) they perceive as the greater.
Now consider the dollar. It is bad, except:
1 – Everyone else is in real trouble and in more trouble than the U.S. !
2 – The Euro is the only substitute in tradeable size against the dollar, and Europe is in real trouble!
The financial elite hold far more wealth in financial dollar assets than they possibly can hold in real goods. How are they going to hedge the risk that things might get out of hand if the dollar “must” devalue?
Let’s get a quick answer.
You might note that savvy market players, with the help of the central banks, can push markets to extremes and this helps the nimble set up to benefit from the other side (sell high, buy low).
Consider the fact that, in 1998, the real estate tax exclusion was quietly passed and the Fed subsequently allowed huge increases in mortgage credit.
Now, what is the one market, that recently was busted, that can take the kind of money flows that the big boys have stored in financial assets? After all we are talking trillions …
Hmmmmm.
In other words, the big boys can prepare for the risk of devaluation by buying cheap real estate and stocks of banks “that will survive” at near dirt cheap prices. This offsets the risk that things get out of hand (necessitating rapid price inflation) before (if) a global currency is introduced. If a solid global currency is introduced, then, in my view, the dollar is really toast.
So how to invest?
1 – Buy gold. It will benefit from a collapse in assets and from devaluation. Note that the dollar price of gold has almost nothing to do with “price inflation” and “price deflation” (convince yourself of this by noting the huge fall in the price as inflation continued for decades). It is more sensitive to whether there is a solid foundation under dollar assets – and the foundation can be broken by either a higher risk of price inflation or price deflation.
2 – Hold cash.
3 – Determine when your income is (1) price inflation advantaged or (2) price inflation disadvantaged or (3) price deflation advantaged or (4) price deflation disadvantaged.
For earners in industries that are doing well in price inflation and price deflation, hold medium amounts of real estate debt. Since income tends to hold steady, price deflation means other expenses drop and the debt is affordable; if there’s price inflation there’s an increase in income allowing a real return. This can take the place of some gold investment.
For any other combination, lean toward more cash, severely limit use of debt, build up a cushion, gain alternative income sources, and put some money in gold or alternatives like gold that are not someone’s liability. While you may decide to bet on one side of the market, the premise here is that it is difficult to know the outcome.
4 – Keep in mind that the authorities face real trouble with both price inflation and price deflation, so they may administer “survival” (they already have) and let some financial institutions fail which will curtail the price inflation effects when giving out lifelines financed with printed money.
5 – Remember, the purpose of the Fed is to benefit the banks and elite finance. They do that by providing a market for treasuries so that Congress can overspend. But now that the Fed can issue it’s own perpetual debt (paying interest on reserves!) the next step is to insulate themselves from U.S. government control and U.S. government insolvency.
6 – Remember, the most logical outcome is oscillation of price inflation and price deflation. When one seems to be reigning, operate with the other side in mind. In other words, during high and slowing inflation (indicating a peak), accumulate cash invested in shorter term assets in preparation for price disinflation. During price deflation, pick up bargains. Worst case, you will likely do better than those that believe the trend will be in one direction.
Good luck investing.
Disclosure: Author holds a position in Gold ETFs.

Which led to asset price stabilization

noreply@blogger.com (Anonymous) — Fri, 16 Mar 2012 00:47:00 -0700

A depression was borne out of high levels of private sector debt made apparent by a financial crisis.
The effects of this depression have been lessened by economic stimulus and government support.
Government intervention led to a reduction in asset price declines, which led to stock market increases, which led to asset price stabilization and more asset price increases. This has led to a false sense that green shoots are leading to a sustainable recovery.
In reality, the problems of high debt levels in the private sector and an undercapitalized financial system are still lurking, waiting for the government to withdraw its economic support to become realized
Because large scale government deficit spending is politically impossible, expect a second economic dip within three to four years at the latest.

While I might quibble with his time frame and the necessity of government spending (a bit too Keynesian), it is a valuable piece that provides background for those attempting to understand better what has happened and what the future may hold.

Savings via currency depreciation

noreply@blogger.com (Anonymous) — Thu, 15 Mar 2012 03:37:00 -0700

“We concluded a decade ago that governments can always make money worth less by printing it faster than we, its citizens, can increased its value by our industry. For us it’s the same day over and over again: crash after crash, yet no deflation spiral. Instead we see a slow, steady destruction of the purchasing power of our income and savings via currency depreciation–a gradual, perpetual, stealthy dollar debt default. We call this stealth default, hidden in plain sight, The Game.”

Adding liquidity to the system

noreply@blogger.com (Anonymous) — Thu, 15 Mar 2012 03:27:00 -0700

“By using our balance sheet, the Federal Reserve has been able to overcome, at least partially, the constraints on policy posed by dysfunctional credit markets and by the zero lower bound on the federal funds rate target. By improving credit market functioning and adding liquidity to the system, our programs have provided critical support to the financial system and the economy. Moreover, we have carried out these programs responsibly, with minimal credit risk and with close attention to the exit strategy. Our activities have resulted in substantial changes to the size and composition of our balance sheet. When the economic outlook has improved sufficiently, we will be prepared to tighten the stance of monetary policy and eventually return our balance sheet to a more normal configuration.”

Investors know where we stand on the topic

noreply@blogger.com (Anonymous) — Thu, 15 Mar 2012 03:21:00 -0700

In this particular case, “V” stands for Valuation because every basis point of this 60% rally in the U.S. equity market from the lows has been due to an unprecedented expansion in P/E ratios. In fact, by some measures, the S&P 500 is already trading at valuation levels that would ordinarily be consistent with an economic expansion that is five-years old as opposed to a recovery that, at best, is in its infancy stages.
ONE OVERVALUED MARKET
There has been plenty of debate over whether equities are overvalued or not, and certainly we would assume that many investors know where we stand on the topic. Let’s look at the facts now that the September data are in.
On an operating (“scrubbed”) basis, the trailing P/E multiple on the S&P 500 has expanded a massive 10 points from the March lows, to stand at 27.6x. Historically, when the economy is taking the turn away from contraction towards expansion, which indeed was the case in Q3, the trailing P/E multiple is 15x or half what it is today (and that 15x is also calculated off depressed earnings level of prior recessions – we have more on the historical comparisons below). While we will not belabour the point, when all the write-downs are included, the trailing P/E on “reported” earnings just widened to its highest levels in recorded history of nearly 140x, which is three times the levels prevailing during the height of the tech bubble.
It is interesting to hear market bulls talk about how distorted it is to be using trailing multiples that include ‘recession earnings’ (even though using ‘forward’ earnings means relying on consensus forecasts on the future and these are rarely, if ever, correct). It is also interesting that the last time the multiple was this high was back in March 2002, again after a huge countertrend rally that deployed ‘recession earnings’ from the 2001 downturn. If memory serves us correctly, this was right around the time that the bear market rally started to roll over and in fact, six months later, the S&P 500 was hitting new lows and 34% lower than it was when the multiple had expanded to … today’s level!

finance noise

Investors were not ready to make a 180-degree turn

The Reserve Bank of Australia

Market volatility increases

look at this stock

Low interest rates

Place in investing

The strategy is inconclusive

The stock has now fallen

Returning to business

Positive territory for the year

Many issues surrounding strip-malls

Balance was revised

Returning to business

CHART OF THE DAY: Cash-For-Clunkers MASSIVELY Distorted GDP

The spread of fear in the market

More Arrogation Of Power?

Actual price of the metal can go

Expansive influence of speculative finance

The Newest Abnormal:

Greater part of our economical institutions

The Broken Window

Credit burdens are too large to be supported

liberal intellectuals had to make a choice

Who were these people?

Economics and Moral Courage

This is the fourth Crisis period in American history

The always interesting and provocative James Quinn:

Europe is in real trouble

Why Everyone Is Wrong About the Inflation/Deflation Debate

Jim Bradley Let’s face the facts about the inflation/deflation debate:

Which led to asset price stabilization

Savings via currency depreciation

Adding liquidity to the system

Investors know where we stand on the topic

Jim Bradley
Let’s face the facts about the inflation/deflation debate: