Market Process

Weekend Review: The Death of Capitalism (tear)

2008-04-20T12:11:00.000-07:00

Barry Ritholtz at The Big Picture found this "bouncing around currency trading desks on Wall Street":

Recent Economic Reports

The Mess That Greenspan Made: The week's economic reports

"Summary: It was really just more of the same last week for bad economic news - weak retail sales with higher energy prices, more contraction in both the manufacturing and housing industries, soaring prices at the wholesale level, and rising consumer prices that show up almost everywhere but in the headline consumer price index.

There were three bright spots last week, however, though none of these portend a major rebound for the U.S. economy. A continuing high rate of capital flows into the U.S. indicate that foreigners have not yet tired of supporting the huge debt that continues to be racked up by government, businesses, and individuals. Also, worker productivity unexpectedly improved and the Conference Board's index of leading economic indicators posted its first gain in six months, rising 0.1 percent.

There hasn't been much good economic news lately - this is about as good as it gets.

The Week Ahead: In a relatively light week of data, the coming week will be highlighted by two reports on the nation's troubled housing market - existing home sales on Tuesday and new home sales on Thursday. Also scheduled for release are reports on durable goods orders on Thursday and consumer sentiment on Friday."

The Big Picture: Disappearing Economic Indicators

"Let's draw the appropriate conclusion from this: First M3 reporting stopped, and shortly thereafter, M3 skyrocketed. Next was the attempt to stop aggregating general economic information, and then we learned that GDP fell off the cliff.

Now comes the attempt to reduce the reporting of hours and earnings data. Gee, can you guess what coincidence is about to happen?"

Markets

Equities

CapitalHD: Poised For Growth

"The above title, "Poised for Growth" is an infamous phrase from management that let's investors and shareholders know that they've seriously f^&d up and it can't possibly get any worse. Only this time around it's analysts that are optimistic, not the CEO's."

Credit

Naked Capitalism: Stressed Banks Underreporting Libor Rates

"The Journal mentions another consequence, that Libor-indexed borrowers are getting a better rate than they deserve. But it misses an implication that is ultimately more serious: as more and more statistics and benchmarks come into doubt, it creates uncertainty and undermines planning, which in turn is a deterrent to investment.

I saw this when working briefly in Mexico in 1984. The local McKinsey office confirmed that there was no reliable data in the entire economy. As one colleague noted, "We do a lot based on feelings." It made the US premium for equity-related investing (10-15% over the local equity premium) seem entirely logical. Similarly, marked inflation also corrodes the usefulness of quantitative information."

Commodities

Econbrowser: Why new oil price highs?

"I also find it implausible to attribute the commodity price increase to a surge in demand. The economic news over the last three months has been very convincing that output is slowing, not accelerating.

Instead I believe that the price of oil, like the price of all the other storable commodities, and for that matter the dollar cost of a euro, is primarily responding to the Fed's decision to move the real interest rate strongly into negative territory.

But once again the Fed has a golden opportunity to prove me wrong. Fed funds futures prices currently reflect an expectation that the Fed will make one more cut to 2% at the meeting at the end of this month, and then stay there. Here's a prediction for you. If the Fed surprises the markets by holding steady at 2.25%, all those commodities will begin to crash within hours of the news."

Death of Capitalism

Ron Paul at Mises.org: Has Capitalism Failed?

"Capitalism should not be condemned, since we haven't had capitalism. A system of capitalism presumes sound money, not fiat money manipulated by a central bank. Capitalism cherishes voluntary contracts and interest rates that are determined by savings, not credit creation by a central bank. It's not capitalism when the system is plagued with incomprehensible rules regarding mergers, acquisitions, and stock sales, along with wage controls, price controls, protectionism, corporate subsidies, international management of trade, complex and punishing corporate taxes, privileged government contracts to the military-industrial complex, and a foreign policy controlled by corporate interests and overseas investments. Add to this centralized federal mismanagement of farming, education, medicine, insurance, banking and welfare. This is not capitalism!

To condemn free-market capitalism because of anything going on today makes no sense. There is no evidence that capitalism exists today. We are deeply involved in an interventionist-planned economy that allows major benefits to accrue to the politically connected of both political parties. One may condemn the fraud and the current system, but it must be called by its proper names — Keynesian inflationism, interventionism, and corporatism."

FT Alphaville: Sell Capitalism

"Someone alert the Economist. Support for the free market is dropping.
And these numbers were taken before last year’s credit crunch and associated misery. Imagine what next year’s readings by GlobeScan might look like.

Overall support for the free market fell in 10 of the 18 countries regularly polled, including sharp falls in Turkey, South Korea, and Chile. More moderate declines were recorded in China, Britain, Brazil, Mexico and Kenya.

Contrary as ever, France (excluded, for some reason, from the GlobeScan graph) was the only country to exhibit increased affection for the free market and all that it stands for."

Economic Nerdery

VOX: Eight hundred years of financial folly

"The economics profession has an unfortunate tendency to view recent experience in the narrow window provided by standard datasets. With a few notable exceptions, cross-country empirical studies of financial crises typically begin in 1980 and are limited in other important respects.² Yet an event that is rare in a three-decade span may not be all that rare when placed in a broader context.

In a recent paper co-authored with Kenneth Rogoff, we introduce a comprehensive new historical database for studying debt and banking crises, inflation, currency crashes and debasements.³ The database covers sixty-six countries across all regions. The range of variables encompasses external and domestic debt, trade, GNP, inflation, exchange rates, interest rates, and commodity prices. The coverage spans eight centuries, going back to the date of independence or well into the colonial period for some countries."

Yves Smith at Naked Capitalism discusses the synopsis of the Reinhart/Rogoff paper:

"Although the new paper is descriptive, the implications are not pretty for the US. Recurrent financial crises are the norm; it seems that countries get drunk regularly on too much capital inflows, go bust, sober up, and fall off the wagon again. In fairness, individual countries aren't necessarily recidivists, but the financiers and policymakers, who ought to know better, instead rationalize that each time that current circumstances differ from the not-too-distant past."

Jörg Guido Hülsmann at Mises.org explains The Political Economy of Moral Hazard

"In the present paper we will criticize this conventional approach and propose an alternative. We will argue that information asymmetries are just one among several causes of moral hazard. Most importantly, they entail disequilibria and the expropriation of third parties only accidentally and ephemerally, because these third parties can avoid them by better judgment (by anticipation). By contrast, moral hazard also results from government interventionism; and in this case it creates disequilibria and expropriation of a sort that cannot be avoided, not even in the absence of informational asymmetries."

What I'm reading

2008-04-17T13:34:00.000-07:00

An Enquiry into the Nature and Effects of the Paper Credit of Great Britain (1802)

by Henry Thornton (1760-1815)

The two summaries for this book from The Online Library of Liberty:

"It is a work by the early 19th century English merchant banker and philanthropist Henry Thornton (1760-1815). Thornton was a member of the Clapham Sect of evangelical social reformers who were active in movements such as the abolition of the slave trade. His book, An Enquiry into the Nature and Effects of the Paper Credit of Great Britain (1802) was regarded by Friedrich Hayek as one of the most important books on money and banking in the 19th century."

"An important work on banking and money which was produced in reaction to the crisis of 1797 when the Bank of England suspended cash payments due to the costs of the wars against France. It has an equally important introduction by Friedrich Hayek."

Humor for finance/econ nerds 4-17-08

2008-04-17T11:51:00.000-07:00

Mish's Global Economic Trend Analysis: Consumer Spending Mirage

"Like personal consumption expenditures, GDP also includes the government imputed value of "free" checking accounts and the value homeowners receive from renting their own house. Calculation of the latter is based on a survey of homeowners asking them what they would pay to rent their own house if they did not own it. This is as preposterous as counting the value of free sex one gets from one's lover as opposed to what one might have to pay visiting the local red light district. Heck, why not count the value added for mowing one's own grass vs. hiring someone to do it? What about free backrubs?"

FT Alphaville: Muppets on tour

"Whatever the message John Thain wanted to put out with his first quarter results, it didn’t involve muppets. Unfortunately someone in Merrill Lynch’s IT department - perhaps one of the 4,000 staffers facing the axe - thought the day Mr Thain announced a $1.97bn Q1 loss was the day to put the muppets on the front page of the company’s web site."

ibankcoin.com - flyblog: Inflation is Dead!

"It’s a fascinating thing with INTC. Lots of poor folk are without rice, due to high prices. Apparently, those same people are forgoing food, in order to stockpile INTC chips. That is very shrewd thinking on their behalf."

Until next time...words of wisdom:

“Never under any circumstances take a sleeping pill and a laxative on the same night”

- Dave Barry

(Source: thinkexist.com)

Daily Top Five 4-17-08

2008-04-17T08:00:00.000-07:00

1) Housing Wire: Double Take: JPMorgan Quietly Raising $6 Billion (Hat-tip Calculated Risk)

"Lehman sold $4 billion of preferred shares earlier this month. Citi has raised capital via preferred shares as well, paying 8.13 percent on stock it sold back in January. There are others, obviously. But none had the apparent audacity to file a preliminary prospectus only hours after an important quarterly earnings call, without so much as mentioning anything about a plan to do so during the call."

2) CapitalHD: Housing Pain

"A credit burdened consumer in a slowing economy should be reluctant to enter new housing contracts, so predicting an increase in home sales is a bit stretched."

3) Naked Capitalism: Why the Happy Talk About the Credit Crisis?

"Central bankers have thrown a lot of firepower at the problem of a money market seize-up, yet illiquidity persists. What more can they possibly do if we move into another acute phase?"

4) The Mess That Greenspan Made: Mike Norman? At Hard Assets Investor??

"What's a guy who sold his gold at $400 doing hosting a debate on "Gold as an investment class" at the Hard Assets Investor website, taking the negative side of the debate against Peter Schiff?"

5) Big Picture: What's Wrong With Billionaire Fund Managers?

"And by earned, I mean these guys earned it. They have figured out how to make money for their partners and clients. Their skill sets add value."

Had enough? If not, there's always Abnormal Returns for more links.

Until tomorrow, I leave you with some daily words of wisdom:

“We shall not grow wiser before we learn that much that we have done was very foolish”
- Friedrich August Hayek

Source: (thinkexist.com)