The Mess That Greenspan Made

Sick around the world

noreply@blogger.com (Tim) — Fri, 13 Nov 2009 02:27:00 +0000

PBS reran this 2008 Frontline documentary the other day that looked at health care systems in other developed countries around the world and, if you're interested in seeing how we compare, it's well worth 50 minutes of your time.

The fact that personal bankruptcy due to unpaid medical bills is virtually unheard of in the entire developed world except for the U.S. is, in itself, very telling.

Monetizing the housing debt

noreply@blogger.com (Tim) — Thu, 12 Nov 2009 18:12:00 +0000

In reading the newspapers over the last eight months, since the Federal Reserve decided to print money on a massive scale in order to buy $300 billion in U.S. Treasuries along with about a trillion and a half dollars in mortgage related debt, these two groups of purchases have been viewed quite differently.

The former is seen as a particularly bad thing for a central bank to be doing as this money created "out of thin air" is used to directly fund government spending, spurring comparisons to Zimbabwe and Weimar Germany where similar efforts led to hyper-inflation.

However, the latter is viewed as something of a benign undertaking (by comparison, at least), widely perceived as providing needed support for housing in the U.S. by creating a market for housing debt that might not otherwise exist.

After all, would you buy 2003-2008 vintage mortgages that have been "securitized" by Wall Street firms or one of the two wards of the state - Fannie Mae and Freddie Mac - if the Fed wasn't buying the stuff too?

I wouldn't.

Is there really that big of a difference between these two?

Since the U.S. government and their "too big to fail" banking friends now essentially own the entire domestic mortgage market (causing understandable confusion as to which way the arrow would be pointing on a hypothetical org chart that included the U.S. government and "quasi-government" organizations like Citibank and Bank of America) is there really that much of a distinction between U.S. debt and U.S. housing debt?

By buying all this stuff, isn't the central bank effectively monetizing the housing debt?

And shouldn't a lot more people (particularly in China and Japan) be concerned?

As shown below in the now familiar depiction of the Federal Reserve's balance sheet, since the financial crisis has ebbed and banks are able to pay back some of the money they had to borrow when it looked like the entire world was going to implode, the only items that continue to grow are U.S. Treasuries, mortgage-backed securities (MBSes), and agency debt in the form of loans to Fannie and Freddie.
Clearly, there are big differences between U.S. debt and these two forms of housing debt.

For example, when the government sells Treasuries to the central bank in exchange for newly printed money, it does so with the tacit understanding that the money will never have to be paid back.

But, when the Fed does the same thing in exchange for Fannie and Freddie bonds, then...

Well, actually, these two appear to be one and the same. The GSEs are fundamentally bankrupt, a characterization that, save for its ability to borrow and print money, applies to the U.S. government as well, and there would seem to be little chance of all the GSE bonds owned by the Fed being redeemed at full value unless the government steps in with borrowed money or, in the oddest of all circuitous monetary routes, with money it received from the central bank itself.

However, there is a distinction between U.S. debt and mortgage backed securities. In the case of the latter, newly created money is paid to whoever used to own the securitized loan - Fannie, Freddie, Citibank, Bank of America, etc. - and then, in theory at least, the central bank sees returns based on homeowners making their mortgage payments.

The only thing is, more and more homeowners are no longer able to make their payments and, as a result, the value of these securities would have tumbled to unknown depths if not for the central bank coming to the rescue and paying what others won't.

What is the true value of these mortgage backed securities?

In theory, we'll find out early next year when the Fed stops buying them, but, like the homebuyer tax credit, don't be surprised if this wildly popular program is extended, perhaps indefinitely as waves of foreclosures come ashore in 2010 and 2011.

Perhaps it would help to consider the similarities between the Fed using its printing press to buy Treasuries and to buy MBSes.

On the one hand, you have a government that got itself into a jam by spending more money than it could bring in or borrow at low interest rates, so the central bank had to print up money to make up the difference, trading newly created U.S. dollars for U.S. Treasuries.

On the other hand, you have a housing market that got itself into a jam, enabled by the 30-year government drive for higher rates of homeownership which was financed by the government ~~sponsored~~ owned mortgage giants and banks now deemed too big to fail, all of this culminating in one more in a long series of bursting asset bubbles that appears to be business as usual in recent decades for the U.S. economy.

That the Federal Reserve has to print money "out of thin air" to buy $1 trillion or so of this souring mortgage debt shouldn't come as too big of a surprise.

In both cases it's a matter of throwing good money after bad, the odds of the Federal Reserve getting anywhere near what it paid for these MBSes (if and when it ever goes to sell them) being about as good as the odds of the U.S. government running a sufficient surplus to pay back any of the $300 billion that was given to it by the central bank.

The system wasn't set up to work this way.

If the founding fathers knew that we had created yet another central bank and, not only was it printing up money to fund government spending but it was buying up home loans, they'd roll over in their graves (except maybe for Alexander Hamilton).

Since its founding almost a hundred years ago, the central bank has, for the most part, done its job simply by buying and selling treasuries, a fact that is clear to see in recent data below.
But, over the last year or so, there's been a radical change in what the central bank buys with money it creates with a simple keystroke and, now that housing and government activities have been so intertwined, is there any real difference between the U.S. government's finances and the finances of the nation's housing market.

It's one thing to step in and provide support for commercial paper markets and money markets, but it's quite another to step in and support the housing market that is now almost wholly owned by the U.S. government in one way or another.

You don't just "unwind" this kind of support.

Of course, if home prices zoom back to their 2005-2006 highs, it's quite possible that the GSEs will spring back to life despite being in the hole by over $100 billion with the red ink still flowing freely. In this case, the Fed could probably sell all its MBSes back into the market and all would be square.

But, that seems about as likely as the U.S. government running a surplus.

If the mortgage backed securities do get sold back into the market in the coming years at anywhere near the price the Fed paid, then all we'll have succeeded in doing is re-inflating the housing bubble, which, come to think of it, is probably the current plan.

But, more likely than not, all this new money that has and will continue to be conjured into existence to buy bad assets - be they U.S. treasuries, bonds issued by Fannie and Freddie, or home loans made against overpriced houses - will all just make the rest of the U.S. money currently in existence less valuable simply because there is more of it.

Maybe a lot less valuable.

Marc Faber is conflicted about the gold price

noreply@blogger.com (Tim) — Thu, 12 Nov 2009 16:25:00 +0000

Depending upon where you get your news, Gloom, Boom, and Doomer Marc Faber thinks that, after the recent run-up, the price of gold will either:

Dip to as low as $800 an ounce, or
Never sink below $1,000 again

There appears to be very little middle ground. Commodity Online and a few other news outlets report that a weak U.S. economy will soon pull the price of the yellow metal down.

Legendary investing guru Marc Faber says gold price is rising without any fundamental factors and thus the price of the yellow metal will plunge to $900-$800 levels.

Faber, celebrated author of Gloom, Boom & Doom Report says that gold prices will dip in the short term, falling to $800 an ounce from current values around $1,117.

"The US economy will require further stimulus packages, which will weaken the dollar, thus making government debt also a bad investment choice in the short term. Commodities such as oil and gold have been rallying on a weak dollar, but that will change as prices must correct," Faber wrote in a recent column.

Apparently, in this case, a weaker dollar will not be supportive of the gold price, a very curious statement indeed since many think that nearly everything is now rising in price because of the steady weakening of the U.S. currency.

(BTW - Is it just me or do others hear Dr. Faber's thick accent in their head whenever they read something in quotes attributed to him?)

On the other hand, gold bulls will take heart in this report from Bloomberg today that has the good doctor singing a completely different tune about the future of the gold price.

Gold won’t fall below $1,000 an ounce again after rising 27 percent this year to a record as central banks print money to help fund budget deficits, said Marc Faber, publisher of the Gloom, Boom & Doom report.
...
“We will not see less than the $1,000 level again,” Faber said at a conference today in London. “Central banks are all the same. They are printers. Gold is maybe cheaper today than in 2001, given the interest rates. You have to own physical gold.”

China will keep buying resources including gold, he said.

“Its demand for commodities will go up and up and up,” he added. “Emerging economies will grow at the fastest pace.”

In contrast, Western countries will be lucky to avoid economic contraction, while the Federal Reserve will maintain interest rates near zero percent, he said.

Again with the accent when reading between the quotes...

Hopefully, that seed hasn't been planted in your head as well after reading this, though, it really isn't all that bad a thing to have happen to you now and then.

Home prices in China march higher

noreply@blogger.com (Tim) — Thu, 12 Nov 2009 14:45:00 +0000

What Americans wouldn't give for a chart of home prices that looks like the one below from this report in CHINADaily. Granted, a year-over-year increase of 3.9 percent isn't much compared to what was seen during the halcyon days of the global credit bubble a few years ago, but for 2008 to 2009, it's pretty good.

The cost of a home in China rose sharply in October, with the price surging up at its fastest rate for 14 months.

According to the National Bureau of Statistics (NBS), property prices in 70 Chinese mainland cities rose by an average of 3.9 percent when compared to their price last October.
Nationwide, the price of new homes rose in 62 cities in October compared to a year earlier. Guangzhou reported the biggest rise - 12.1 percent - followed by Jinhua, Zhejiang province, which jumped by 11 percent.

As a point of reference in the U.S., as of August, the 20-city S&P Case Shiller Home Price Index was reported at about 11 percent below year ago levels.

It's nice to see that, in some parts of the world at least, the housing bubble has not died a complete death. In fact, in parts of China, it appears to be alive and well.

Experts say property prices - especially in Shanghai - could continue to go up at a fast rate during the next few months because of a buying spree triggered by talk of the possible removal of the favorable mortgage policy.

Fang Xinghai, director of Shanghai's financial services office, suggested at an annual financial meeting last Monday that the government might be prompted to tighten its loose monetary policy in a bid to clamp down on excessive speculation. Experts fear such speculation could feed a property market bubble.

Fang's observation was taken seriously by many would-be homebuyers.

Thirty-year-old Luo Yan and her husband raced to complete the purchase of a three-bedroom apartment in Shanghai with the help of an 800,000 yuan ($117,000) mortgage. The amount they borrowed was the maximum they qualified for.

"I am afraid that if we don't do something now, we will certainly miss the boat," Luo said.

Joe Zhou, research head at property consultants Jones Lang LaSalle, said in the following months, "we expect house prices will remain at a high level, bolstered by increasingly strong demand and limited supply."

Joe Zhou sounds a lot like a 2005-era David Lereah of the National Association of Realtors.

Thursday morning links

noreply@blogger.com (Tim) — Thu, 12 Nov 2009 14:27:00 +0000

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Thank God things are back to normal

noreply@blogger.com (Tim) — Wed, 11 Nov 2009 23:12:00 +0000

From the Tom Toles collection at the Washington Post:
Maybe it's me, but, doesn't that kind of look like Karl Rove?

Junior Gold Miners ETF launches

noreply@blogger.com (Tim) — Wed, 11 Nov 2009 18:11:00 +0000

Earlier today, the new Market Vectors Junior Gold Miners ETF (NYSEArca:GDXJ) from Van Eck Global began trading in New York. This is the first exchange traded fund to focus on the small- and mid-cap gold/silver mining sector and follows the very popular Market Vectors Gold Miners ETF (NYSEArca:GDX). More details are provided by Business Wire:

“Junior miners represent an early stage opportunity similar to a venture capital investment, the potential exists for high growth, but significant risks exist as well,” said Jan van Eck, Principal at Van Eck Global. “At a time when global gold production has been dropping while demand has been on the rise, nimble young companies with attractive projects are potentially both a key source of new gold production and attractive takeover targets for more established players in the field.”

As they are typically early–stage companies, there are several risks associated with investing in junior miners. Many juniors operated at a loss in 2008 and approximately a third of the companies in the Fund’s underlying index had negative cash flow on a trailing 12-month basis as of June 30, 2009. Juniors are particularly vulnerable to the price trend of gold as a drop in gold prices could affect their profitability as well as their ability to secure financing to develop new and existing properties, among other things.

GDXJ seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the Market Vectors™ Junior Gold Miners Index (ticker: MVGDXJ), a rules-based, modified market cap-weighted, float-adjusted index comprised of a global universe of publicly traded small- and mid-capitalization companies that generate at least 50% of their revenues from gold or silver mining. The Fund carries a gross expense ratio of 0.68% and a net expense ratio of 0.60%.

There's more from Van Eck Global here.

William White: "It's 2003 all over again"

noreply@blogger.com (Tim) — Wed, 11 Nov 2009 16:22:00 +0000

In today's commentary at Bloomberg, Caroline Baum consults with former Bank of International Settlements chief William White on the similarities between today's liquidity-fueled ascent of asset prices and the last time something like this happened.

Yes, that would be the same 2005 era "chicken little", Austrian-leaning William White who, after the financial market meltdown last year, people started listening to instead of higher profile retired economists as noted here a few months back.
It's funny how dramatically reputations can rise and fall based on financial market developments and prospects for the future, a future that it now seems clear will not have ordinary Americans wealthy beyond their wildest dreams simply because they owned a piece of real estate.

Anyway, here's Caroline:

Imagine you are a central banker. You arrive at the office each morning and scan the daily financial pages and newswires. You read that markets -- stocks, junk bonds, gold, oil -- are positively giddy due to “all the liquidity sloshing around that has to go somewhere,” or something to that effect.

That would be the liquidity you created.

You may be starting to feel pangs of anxiety before you’ve had that first cup of coffee. You know from your crash course in economic-survival medicine that cleaning up after a burst asset bubble isn’t as easy as it sounds. If you learned anything over the last two decades, it’s that today’s palliative can become tomorrow’s poison, that treating busts with prolonged periods of easy money leads to bigger bubbles, and that an ounce of prevention may prove to be the best cure.

So what’s a policy maker to do? The U.S. economy is still facing major obstacles to sustained growth, credit isn’t flowing to sectors and businesses that need it, and the financial system is far from self-supporting.

Surely there’s a better way than orchestrating alternating periods of asset bubbles and busts.

“It’s 2003 all over again,” says William White, chairman of the Economic Development and Review Committee at the Organization for Economic Co-Operation and Development in Paris.

White was referring to the “inflection point” in 2003 when, following an extended period of ultra-low interest rates - - 1 percent in the U.S., 2 percent in Europe, close to 0 percent in Japan -- monetary stimulus ignited a rally in asset prices, the mother of all housing bubbles and a crisis that brought the financial system close to the brink of collapse.

It’s very tempting to do what’s worked before, even if it makes things worse in the long run, White says. “We’re at the end of the road we embarked on in 1987, if not before, relying on credit bubbles, associated increases in asset prices and unwise spending every time there was a problem.”

Lowering interest rates, expanding the federal deficit: It may work in the short run but in the long run (yes, we’re all dead, but our children aren’t) it creates a mountain of debt and a lot of stuff no one needs or wants.

No central banker or government official is brave enough to look the public in the eye and speak the truth, especially when presenting two, unappealing options: Either we suffer through a long period of stagnation, with easy money and government spending cushioning the fallout, even at the risk of creating new imbalances; or we take our medicine in one large dose and suffer a shorter, more painful period of contraction and restructuring that wrings the excesses out of the system.

“It takes a very brave man if the choices are stagnation versus a painful adjustment,” White says. “I suspect there are no takers for the second one.”

No, probably not.

Fred Sheehan on Alan Greenspan

noreply@blogger.com (Tim) — Wed, 11 Nov 2009 15:30:00 +0000

Fred Sheehan clearly dislikes former Fed chairman Alan Greenspan even more than yours truly, now having written two books on the subject. Recently released Panderer to Power: The True Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession follows Sheehan's earlier work, co-written with Bill Fleckenstein, with the more succinct (but more damning) title of Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve.

There's a new blog too where Fred answers a few questions:

Five Questions for Frederick J. Sheehan,
Author, PANDERER TO POWER

Q. What was Alan Greenspan’s greatest influence on the United States?

FS: Alan Greenspan was the kingpin in the impoverishment of the American people. The middle class barely exists today, though the barrage of government spending prolongs the illusion of stability. As Federal Reserve chairman, Alan Greenspan’s pronouncements were sacrosanct. He told the American people they were getting richer when they were becoming poorer. It is axiomatic that when savings are depleted and debts are rising the person, or company, or government is poorer.

It's hard to argue with that summary.

And a few more questions in which it becomes clear that the former Fed Chairman was the perfect fit for the late-20th century U.S. economy, then in the process of completing its transformation to one based on finance more than ever before, unfortunately, to the detriment of the hundreds of million of non-finance sector Americans.

Q. How did Greenspan create an illusion of recovery, based on complex math-designed products, rather than the creation of goods and real jobs?

FS: The American economy’s recovery from the early 1990s was financial. This was a first. The recovery was a product of banks borrowing, leveraging and lending to hedge funds. The banks were also creating and selling complicated and very profitable derivative products. Greenspan needed the banks to grow until they became too-big-to-fail. It was evident the ‘real’ economy – businesses that make tires and sell shoes – no longer drove the economy. Thus, finance was given every advantage to expand, no matter how badly it performed. Financial firms that should have died were revived with large injections of money pumped by the Federal Reserve into the banking system.

The change in the American economy can be seen in how profits shifted from manufacturing to finance. In 1950, 59% of U.S. corporate profits were from manufacturing; 9% from financial activities. During the past decade (2000 -2008), 18% of profits were from manufacturing and 34% from finance.

Middle management, a staple of the middle class, had lost considerable ground during the early-1990s. Companies hollowed out middle management to cut costs. A large portion of those who were laid off never recovered financially. The same was true after the recession that followed the stock market bubble that popped in 2000, particularly among technology workers. Many have never recovered.

Q. What role did Greenspan play in the financialization of the economy?

FS. He cut the fed funds rate from nearly 10% in early 1989 to 3% by late 1992. This was the platform from which the financial firms borrowed at low short term rates and invested at higher long-term rates. This also chased the middle class into the stock market. Net cash flows into stock-mutual funds rose from $8 billion in 1985 to $79 billion in 1992 and to $127 billion in 1993. In 1992 and 1993, money market funds suffered net outflows. This was unusual: individuals were pouring money into the stock market when their incomes were falling (according to the Census Bureau). In addition to incomes falling, so had returns on fixed investments. They were chased into the stock market by the Federal Reserve.

Q. Did Greenspan continue to influence destructive consumer behavior?

FS. Behind closed doors, at FOMC meetings, the Federal Reserve Open Market Committee] Alan Greenspan was told (in 1994) by Federal Reserve governor Lawrence Lindsey: “[T]he non-rich, non-old live paycheck to paycheck, quite literally.” In 1995: “[T]here has been a lot of easing of credit terms. At some point this is going to stop.” In 1996, Lindsey lectured Greenspan: “I think there is a long-term social cost we are going to pay from all this…. [T]he price we are paying is the increasing fragility of the underlying financial structure of the household sector.”

How did Alan Greenspan respond? “[T]his big increase in installment credit” is a product of the mortgage market. “[L]arge realized capital gains…have been financed in the mortgage market. Those funds are going disproportionately into the financing of consumer durables.”

That was in 1996, when he told the FOMC: "I recognize that there is a stock market bubble problem at this point.... We do have the possibility of raising major concerns by increasing margin requirements. I guarantee that if you want to get rid of the bubble, whatever it is, that will do it.” He soon retreated and claimed central banks could not see a bubble until it popped. Greenspan needed the stock market bubble to support the economy. Greenspan was no dummy when it came to enticing the public to speculate when interest rates fell. Again, behind closed doors, to the FOMC: “The sharp decline in long-term yields has struck me as quite extraordinary.... [W]e are getting issues of 100-year bonds…. The fact that some borrowers are issuing these bonds is terrific. Until you get somebody dumb enough to buy them...."

Q. Has Greenspan learned any lessons from the stock market bubble?

FS. He certainly remembered how to lure the public into an inflating bubble: cut interest rates. The platform for wild housing speculation was the fed funds cut from 6.5% in 2001 to 1.0% in 2003. Money always chases the rising asset class, especially when so much of the money is superfluous to the “real” economy: From the time Greenspan was named Federal Reserve chairman until he left office, the nation’s debt rose from $10.8 trillion to $41.0 trillion. The “real” economy only grew by a fraction of that rate-of-growth. Alan Greenspan had turned the country into a gambling casino.

The median cost of an existing, single-family house in California rose from $237,060 in 2000 to $542,720 in 2005. We can see the consequences are spreading far beyond the housing market. The state of California is cutting costs by laying off workers, not fixing sewers, and plans to release 40,000 prisoners. California leads the other states in trends. Greenspan’s legacy will be how he turned the United States into a third world country.

Fred has obviously read quite a few Fed meeting minutes...

The evolution of U.S. nonfarm payrolls

noreply@blogger.com (Tim) — Wed, 11 Nov 2009 14:45:00 +0000

Curious about how the major U.S. nonfarm payroll categories have changed since record keeping began in 1939, the chart below was prepared. Note that the lowest growth categories are listed at the top and the highest growth categories are at the bottom.
Obviously, the demise of manufacturing and the rise of education and health care are the most significant aspects of the data. But, the government category and the professional and business services categories were a bit surprising, expansion in the former expected to be larger and growth in the latter expected to be smaller.

Surely, many counted in professional and business services work for companies that contract with the federal, state, or local government, however, this number is not broken out in the Labor Department data.

Wednesday morning links

noreply@blogger.com (Tim) — Wed, 11 Nov 2009 14:11:00 +0000

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Guess the year-end price of oil and gold!

noreply@blogger.com (Tim) — Tue, 10 Nov 2009 23:00:00 +0000

Welcome to the seventh (wow!) semi-annual "Guess the price of oil and gold contest" where readers can compete to win a free one-year subscription to the companion investment website Iacono Research by providing the closest combined guesses for the year-end price of crude oil and gold. Past contests have produced the following results:
That was quite a move to the right over the last few months and, looking back over the last few years, with the obvious exception of the late-2008 meltdown in the price of oil, the overall direction has been decidedly up and to the right.

Also note that the biggest moves tend to occur during the second half of the year - another one now clearly underway.

The last contest was won by ycching who is now enjoying the benefits of the subscription site, the results of that contest shown in the graphic below.
Your host is hopefully at the end of a cold spell, having come in 70th place and then 68th place during the last two contests. This follows a string of three top tens, so, the potential is clearly there. [Note: If I ever did win this thing, I'd get braggin' rights only and the second place finisher would receive the first place prize.]

This time around the rules are the same as they've always been.

The contest is based on the combined percentage differences between the guessed values and the closing prices on December 31st, 2009 using the near-month (February) Nymex futures contract for WTI crude oil and the COMEX closing bid price for gold bullion.

Entries may be made either by posting them in the comments section of this post or sending mail to either tim-at-iaconoresearch.com or tliacono-at-yahoo.com.

All entries must be received no later than Thursday, Nov. 19th

Sorry about the short window, but I'm getting a late start.

There will be two more notices such as this one as reminders and current subscribers can win a free one-year extension to their existing subscription should their guesses be the closest.

The winner will be announced on December 31st - good luck to all!

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To learn more about investing in natural resources using commonly traded ETFs,
stocks, and mutual funds, see this description at Iacono Research.
For subscription details, click here.

Life on severance

noreply@blogger.com (Tim) — Tue, 10 Nov 2009 20:20:00 +0000

This is a fascinating read and, fortunately, for those who were formerly WSJ subscribers and have had to cut back lately, the story is in the free section of the online paper.

Paul Joegriner hasn't worked since March 2008, when he was laid off from his $200,000-a-year job as chief executive officer of a small bank. But you wouldn't know it by appearances.

His wife, Marzena, shuttles their two young children to private school every morning. The family recently vacationed in Virginia Beach, Va., and likes to dine on Porterhouse steaks. Since losing his job, Mr. Joegriner, 44 years old, has had several offers. He's turned each down in hopes of landing a position comparable to what he held before.

The family's lifestyle over the past year and a half has been propped up by a $200,000 severance package and another $100,000 in savings -- funds the family has burned through rapidly. By Mr. Joegriner's own calculations, the family will be out of money in six months if he doesn't find work.

"It will be D-Day," he says. "But on the outside, no one has any idea that we're in trouble."

Mr. Joegriner is a member of what might be called the severance economy -- unemployed Americans who use severance pay and savings to maintain their lifestyles. Many lost their jobs in 2007 and 2008, and thought they'd soon find work. Now, they're getting desperate.

Wow - almost 200 comments over at the WSJ. While I haven't read them, my guess is they are an equal mix of sympathetic views and those thinking Mr. Joegriner should make his own coffee now that he's about down to his last few dollars.

IEA whistleblowers and our energy future

noreply@blogger.com (Tim) — Tue, 10 Nov 2009 18:35:00 +0000

Yes, the image below is a bit over the top, but, it was just too irresistible given recent revelations about fudged energy reserve statistics from the IEA that have come to light after whistleblowers talked to reporters at the Guardian newspaper and this report was filed.
You see, Mel Gibson's early days as a screen star were all about competition for scarce energy resources and, while the world's energy future won't necessarily include guys like this, it could be a radical departure from the last few decades, making last year's $147 crude oil and $4 gasoline look quite tame by comparison.

The Guardian report is included in its entirety below.

Key oil figures were distorted by US pressure, says whistleblower

The world is much closer to running out of oil than official estimates admit, according to a whistleblower at the International Energy Agency who claims it has been deliberately underplaying a looming shortage for fear of triggering panic buying.

The senior official claims the US has played an influential role in encouraging the watchdog to underplay the rate of decline from existing oil fields while overplaying the chances of finding new reserves.

The allegations raise serious questions about the accuracy of the organisation's latest World Energy Outlook on oil demand and supply to be published tomorrow – which is used by the British and many other governments to help guide their wider energy and climate change policies.

In particular they question the prediction in the last World Economic Outlook, believed to be repeated again this year, that oil production can be raised from its current level of 83m barrels a day to 105m barrels. External critics have frequently argued that this cannot be substantiated by firm evidence and say the world has already passed its peak in oil production.
Now the "peak oil" theory is gaining support at the heart of the global energy establishment. "The IEA in 2005 was predicting oil supplies could rise as high as 120m barrels a day by 2030 although it was forced to reduce this gradually to 116m and then 105m last year," said the IEA source, who was unwilling to be identified for fear of reprisals inside the industry. "The 120m figure always was nonsense but even today's number is much higher than can be justified and the IEA knows this.

"Many inside the organisation believe that maintaining oil supplies at even 90m to 95m barrels a day would be impossible but there are fears that panic could spread on the financial markets if the figures were brought down further. And the Americans fear the end of oil supremacy because it would threaten their power over access to oil resources," he added.

A second senior IEA source, who has now left but was also unwilling to give his name, said a key rule at the organisation was that it was "imperative not to anger the Americans" but the fact was that there was not as much oil in the world as had been admitted. "We have [already] entered the 'peak oil' zone. I think that the situation is really bad," he added.

The IEA acknowledges the importance of its own figures, boasting on its website: "The IEA governments and industry from all across the globe have come to rely on the World Energy Outlook to provide a consistent basis on which they can formulate policies and design business plans."

The British government, among others, always uses the IEA statistics rather than any of its own to argue that there is little threat to long-term oil supplies.

The IEA said tonight that peak oil critics had often wrongly questioned the accuracy of its figures. A spokesman said it was unable to comment ahead of the 2009 report being released tomorrow.

John Hemming, the MP who chairs the all-party parliamentary group on peak oil and gas, said the revelations confirmed his suspicions that the IEA underplayed how quickly the world was running out and this had profound implications for British government energy policy.

He said he had also been contacted by some IEA officials unhappy with its lack of independent scepticism over predictions. "Reliance on IEA reports has been used to justify claims that oil and gas supplies will not peak before 2030. It is clear now that this will not be the case and the IEA figures cannot be relied on," said Hemming.

"This all gives an importance to the Copenhagen [climate change] talks and an urgent need for the UK to move faster towards a more sustainable [lower carbon] economy if it is to avoid severe economic dislocation," he added.

The IEA was established in 1974 after the oil crisis in an attempt to try to safeguard energy supplies to the west. The World Energy Outlook is produced annually under the control of the IEA's chief economist, Fatih Birol, who has defended the projections from earlier outside attack. Peak oil critics have often questioned the IEA figures.

But now IEA sources who have contacted the Guardian say that Birol has increasingly been facing questions about the figures inside the organisation.

Matt Simmons, a respected oil industry expert, has long questioned the decline rates and oil statistics provided by Saudi Arabia on its own fields. He has raised questions about whether peak oil is much closer than many have accepted.

A report by the UK Energy Research Centre (UKERC) last month said worldwide production of conventionally extracted oil could "peak" and go into terminal decline before 2020 – but that the government was not facing up to the risk. Steve Sorrell, chief author of the report, said forecasts suggesting oil production will not peak before 2030 were "at best optimistic and at worst implausible".

But as far back as 2004 there have been people making similar warnings. Colin Campbell, a former executive with Total of France told a conference: "If the real [oil reserve] figures were to come out there would be panic on the stock markets … in the end that would suit no one."

Note that the Paris-based IEA (International Energy Agency) is not to be confused with the U.S.-based EIA (Energy Information Administration), otherwise known as the Energy Department, though it's possible that they were somehow involved in the above.

Copper on pigfarms and giant lots of new cars

noreply@blogger.com (Tim) — Tue, 10 Nov 2009 17:23:00 +0000

This story just in from Politico (hat tip SL) in which Chinese pig farmers storing rolls and rolls of copper wire (that have helped to keep commodity prices lofty, widely viewed as an indication of a growing economy) now have company in the form of the Chinese government that is suspected to be storing giant parking lots full of brand new cars (that show up as "sold" in their economic statistics, widely viewed as an indication of a growing economy).

The conventional wisdom in Washington and in most of the rest of the world is that the roaring Chinese economy is going to pull the global economy out of recession and back into growth. It’s China’s turn, the theory goes, as American consumers — who propelled the last global boom with their borrowing and spending ways — have begun to tighten their belts and increase savings rates.
...
“Purchases of U.S. consumers cannot be as dominant a driver of growth as they have been in the past,” Treasury Secretary Timothy Geithner said during a trip to Beijing this spring. “In China, ... growth that is sustainable will require a very substantial shift from external to domestic demand, from an investment and export-intensive growth to growth led by consumption.”

That’s one vision of the future.

Yes, that's the rosy scenario. The "less than rosy" view of things arises from clear signs of overcapacity and a Chinese consumer that appears to be a reluctant spender in ways that do not show up in government statistics.

The conditions on the ground may be quite different than the conditions reflected in the official economic data and at least one bear is ready to move in.

The China bears could be dismissed as a bunch of cranks and grumps except for one member of the group: hedge fund investor Jim Chanos.

Chanos, a billionaire, is the founder of the investment firm Kynikos Associates and a famous short seller — an investor who scrutinizes companies looking for hidden flaws and then bets against those firms in the market.

His most famous call came in 2001, when Chanos was one of the first to figure out that the accounting numbers presented to the public by Enron were pure fiction. Chanos began contacting Wall Street investment houses that were touting Enron’s stock. “We were struck by how many of them conceded that there was no way to analyze Enron but that investing in Enron was, instead, a ‘trust me’ story,” Chanos told a congressional committee in 2002.

Now, Chanos says he has found another “trust me” story: China. And he is moving to short the entire nation’s economy. Washington policymakers would do well to understand his argument, because if he’s right, the consequences will be felt here.

Chanos and the other bears point to several key pieces of evidence that China is heading for a crash.

First, they point to the enormous Chinese economic stimulus effort — with the government spending $900 billion to prop up a $4.3 trillion economy. “Yet China’s economy, for all the stimulus it has received in 11 months, is underperforming,” Gordon Chang, author of “The Coming Collapse of China,” wrote in Forbes at the end of October. “More important, it is unlikely that [third-quarter] expansion was anywhere near the claimed 8.9 percent.”

Chang argues that inconsistencies in Chinese official statistics — like the surging numbers for car sales but flat statistics for gasoline consumption — indicate that the Chinese are simply cooking their books. He speculates that Chinese state-run companies are buying fleets of cars and simply storing them in giant parking lots in order to generate apparent growth.

There's a bit more to this and it's well worth the look, including a frightening comparison of the U.S. subprime collapse to a coming "overcapacity" collapse in China.

"Kill all the bankers" iPhone app

noreply@blogger.com (Tim) — Tue, 10 Nov 2009 14:31:00 +0000

Spotted via Patrick.net over at The Huffington Post is what should be an increasingly popular way for people to pass the time as we close in on Wall Street bonus season.

The game's description on iTunes reads:

Defend the White House and save the US taxpayers' money before it gets stolen! It's time for you to give them what they deserve! [...] It's your only chance to really take revenge on bankers for the recession they caused [...] Explore many different ways to beat bankers: tap, grab, or shake them in the air.

Note the very large banker that appears at about the one-minute mark in the clip above and the means used to defeat him. It's too bad there isn't something like that in the real world.

Related reading: Banker's bonuses: 40% bigger this year

Tuesday morning links

noreply@blogger.com (Tim) — Tue, 10 Nov 2009 14:17:00 +0000

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GLD adds a little metal

noreply@blogger.com (Tim) — Tue, 10 Nov 2009 00:17:00 +0000

It's funny that, for about four or five months earlier in the year, news outlets like Reuters would cite any changes to the inventory at the SPDR Gold Shares ETF (NYSEArca:GLD) in their morning report on the gold market, sometimes in the headline.

That doesn't happen much anymore for reasons that should be clear in the chart below.
The "tonnes in the trust" did tick up earlier today, the 6.1 tonne addition being the biggest increase in over a month, following an addition of 4.9 tonnes four days ago.

Maybe this is the start of some serious "catching up" for the world's most popular gold ETF as the holdings now sit at the same level as when the price of gold was almost $200 lower.

Vanderbilt and Buffet , railroads and stocks

noreply@blogger.com (Tim) — Mon, 09 Nov 2009 20:05:00 +0000

In this otherwise excellent WSJ story about "Commodore" Cornelius Vanderbilt's 19th century railroad empire as it relates to Warren Buffet's acquisition of Burlington Northern, in which you learn a lot about the history of the railroads as well as that of the stock market, the little, offhand, parenthetical comment highlighted below has stuck with me...

Mr. Buffett's approach to investment often seems to parallel the Commodore's. Vanderbilt accepted no salary as an executive, but took only the dividends on his personal stock. (In his era, investors expected steady dividends, not rising share prices.)

To prosper, he had to make his corporations profitable, year after year. He bought lines with permanent advantages—those that ran through developed regions that provided local traffic, for example, and that had low grades, which reduced operating expenses. So, too, does Mr. Buffett look to the long term.

It seems that, back in the olden days when money and credit didn't flow quite as freely as they do today (for better or worse), instead of buying stocks in hopes that the share price would go up, investors bought stocks to get a share of the company's profits in the form of a dividend stream.

That is, good 'ol fashioned income - a higher stock price was a bonus.

Today, investors use company earnings (real or imagined, since accounting has become much more "flexible" in the last hundred years) to determine whether a stock's price is fair, then they root for that price to go higher while receiving little or nothing in the form of dividends.

Isn't there something fundamentally wrong with this sort of "progress".

How nations spent their stimulus money

noreply@blogger.com (Tim) — Mon, 09 Nov 2009 18:24:00 +0000

Here's an interesting graphic from a recent IMF report(.pdf) that shows how countries around the world spent their stimuls money. Generally speaking, the more developed the economy, the more it spent on direct aid and the less it spent on investment.
It would have been nice to ditch the scale on top and have the length of the bars represent the stimulus as a percent of GDP in which case, if memory serves, nations such as China, the U.S., and the U.K. would have the longest bars.

Another rejection of Greenspanism

noreply@blogger.com (Tim) — Mon, 09 Nov 2009 16:26:00 +0000

Just in case there was any doubt, Brad DeLong, a professor of Economics and chair of the Political Economy major at the University of California, Berkeley, former Deputy Assistant Secretary of the United States Department of the Treasury in the Clinton Administration under Lawrence Summers, research associate of the National Bureau of Economic Research, and visiting scholar at the Federal Reserve Bank of San Francisco, rejects "Greenspanism" in the strongest of terms (as best as I can tell based on this item the other day):

For reasons that should be obvious, I just can't get enough of this kind of stuff.

Bankers are like bookies

noreply@blogger.com (Tim) — Mon, 09 Nov 2009 14:39:00 +0000

Peter Brown of MM&K talks to CNBC about the similarities between bankers and bookies and how bonuses are not really bonuses at all but, rather, profit sharing.

Oh yeah, and this too - Goldman Sachs Head Says Banks Do 'God's Work'

Monday morning links

noreply@blogger.com (Tim) — Mon, 09 Nov 2009 13:54:00 +0000

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Fixing what's broken by breaking it yet again

noreply@blogger.com (Tim) — Sun, 08 Nov 2009 19:59:00 +0000

The op-ed section of the weekend edition of the Wall Street Journal offers another look at Austrian economics as it relates to the ongoing economic crisis in this commentary by hedge fund manager Mark Spitznagel.

The Man Who Predicted the Depression
Ludwig von Mises was snubbed by economists world-wide as he warned of a credit crisis in the 1920s. We ignore the great Austrian at our peril today.

Mises's ideas on business cycles were spelled out in his 1912 tome "Theorie des Geldes und der Umlaufsmittel" ("The Theory of Money and Credit"). Not surprisingly few people noticed, as it was published only in German and wasn't exactly a beach read at that.

Taking his cue from David Hume and David Ricardo, Mises explained how the banking system was endowed with the singular ability to expand credit and with it the money supply, and how this was magnified by government intervention. Left alone, interest rates would adjust such that only the amount of credit would be used as is voluntarily supplied and demanded. But when credit is force-fed beyond that (call it a credit gavage), grotesque things start to happen.

Sadly, as the economic crisis enters its second (or third?) year, the Journal Opinion page is about the only place in the mainstream financial media where you'll see this sort of thing, along with the occasional call for a hard money standard and, from time to time, some vitriol directed at the Federal Reserve.

Is there any other field of endeavor in the world (with the possible exception of religion) where there is a school of thought that is so diametrically opposed to conventional wisdom that most adherents to the status quo will immediately dismiss it out of hand rather than contemplate what it might really mean for their profession?

There is perhaps no better example of cognitive dissonance than when mainstrem economic theory confronts "Austrian" economic theory.

Government-imposed expansion of bank credit distorts our "time preferences," or our desire for saving versus consumption. Government-imposed interest rates artificially below rates demanded by savers leads to increased borrowing and capital investment beyond what savers will provide. This causes temporarily higher employment, wages and consumption.

Ordinarily, any random spikes in credit would be quickly absorbed by the system—the pricing errors corrected, the half-baked investments liquidated, like a supple tree yielding to the wind and then returning. But when the government holds rates artificially low in order to feed ever higher capital investment in otherwise unsound, unsustainable businesses, it creates the conditions for a crash. Everyone looks smart for a while, but eventually the whole monstrosity collapses under its own weight through a credit contraction or, worse, a banking collapse.

The system is dramatically susceptible to errors, both on the policy side and on the entrepreneurial side. Government expansion of credit takes a system otherwise capable of adjustment and resilience and transforms it into one with tremendous cyclical volatility.

"Theorie des Geldes" did not become the playbook for policy makers. The 1920s were marked by the brave new era of the Federal Reserve system promoting inflationary credit expansion and with it permanent prosperity. The nerve of this Doubting-Thomas, perma-bear, crazy Kraut! Sadly, poor Ludwig was very nearly alone in warning of the collapse to come from this credit expansion. In mid-1929, he stubbornly turned down a lucrative job offer from the Viennese bank Kreditanstalt, much to the annoyance of his fiancée, proclaiming "A great crash is coming, and I don't want my name in any way connected with it."

We all know what happened next. Pretty much right out of Mises's script, overleveraged banks (including Kreditanstalt) collapsed, businesses collapsed, employment collapsed. The brittle tree snapped. Following Mises's logic, was this a failure of capitalism, or a failure of hubris?

Mises's solution follows logically from his warnings. You can't fix what's broken by breaking it yet again. Stop the credit gavage. Stop inflating. Don't encourage consumption, but rather encourage saving and the repayment of debt. Let all the lame businesses fail—no bailouts. (You see where I'm going with this.) The distortions must be removed or else the precipice from which the system will inevitably fall will simply grow higher and higher.

Mises started getting some much-deserved respect once "Theorie des Geldes" was finally published in English in 1934. It is unfortunate that it required such a disaster for people to take heed of what was the one predictive, scholarly explanation of what was happening.

But then, just Mises's bad luck, along came John Maynard Keynes's tome "The General Theory of Employment, Interest and Money" in 1936. Keynes was dapper, fresh and sophisticated. He even wrote in English! And the guy had chutzpah, fearlessly fighting the battle against unemployment by running the currency printing press and draining the government's coffers.

He was the anti-Mises. So what if Keynes had lost his shirt in the stock-market crash. His book was peppered with fancy math (even Greek letters) and that meant rigor, modernity. To add insult to injury, Mises wasn't even refuted by Keynes and his ilk. He was ignored.

Fast forward 70-some years, during which we saw Keynesianism's repeated disappointments, the end of the gold standard, persistent inflation with intermittent inflationary recessions and banking crises, culminating in Alan Greenspan's "Great Moderation" and a subsequent catastrophic collapse in housing and banking. Where do we find ourselves? At a point of profound insight gained through economic logic, trial and error, and objective empiricism? Or right back where we started?

With interest rates at zero, monetary engines humming as never before, and a self-proclaimed Keynesian government, we are back again embracing the brave new era of government-sponsored prosperity and debt. And, more than ever, the system is piling uncertainties on top of uncertainties, turning an otherwise resilient economy into a brittle one.

How curious it is that the guy who wrote the script depicting our never ending story of government-induced credit expansion, inflation and collapse has remained so persistently forgotten. Must we sit through yet another performance of this tragic tale?

All indications are that the answer to that last question is a resounding 'yes'.

This piece attracted some 125 comments over at the WSJ at last count. Having read through about the first 30 or so, a defense of the status quo has yet to be offered.

Like selling apples in the Great Depression

noreply@blogger.com (Tim) — Sun, 08 Nov 2009 00:15:00 +0000

Anyone who has lived in the southwestern part of the U.S. for any length of time over the past few decades will surely appreciate how grave the situation has become for some Americans when considering that the ranks of day laborers standing on street corners in the morning are no longer restricted to recent immigrants and illegal aliens.

It should be clear to even the most casual observer that the biggest busts have occurred in parts of the country where the biggest booms once flourished - that would be California, Nevada, and Arizona - where tales of woe are now spreading as fast as home prices rose back in the first half of the decade.

The poll to the right from a recent story in the Las Vegas Sun (hat tip EU) reflects the current state of affairs for 551 people in and around Sin City where many are now hoping that the wave of foreclosure sales - homes that once sold for $300,000 now flying off the shelf at around $100,000 - will somehow revive the city's economy to its mid-decade glory.

At this point, they'd probably be happy with simply getting back to a slightly larger fraction of the activity that was seen in the Nevada desert four or five years ago, economic statistics produced during those halcyon days likely to be seen only in history books for many, many years to come.

Anyway, it seems that the Smiths and the Joneses are joining the Rodriguezes and the Hernandezes outside of Home Depots.

To wit:

The new faces of day labor
U.S. citizens are joining immigrants in store parking lots

It sounds like a George Lopez joke.

“Times are so bad that I saw an Anglo day laborer standing outside Home Depot the other day.”

Except it’s true.

In the latest sign of the Las Vegas Valley’s economic free fall, U.S. citizens are starting to show up in the early mornings outside home improvement stores and plant nurseries across the Las Vegas Valley, jostling with illegal immigrants for a shot at a few hours of work.
Experts say the slow-starting but seemingly inexorable trend is occurring nationwide.

“It’s the equivalent of selling apples in the Great Depression,” said Harley Shaiken, chairman of the Center for Latin American studies at the University of California, Berkeley.

But it is not only a sign of the times, they add. If the numbers of citizens among the day laborers in cities across the country continue to grow, it’s likely to increase the ire of followers of TV host Lou Dobbs and others who will see illegal immigrants as stealing food off the tables of the nation’s native-born or naturalized poor.

The whole thing is worth a look, the plight of "americanos" such as 50-year old Ken Buchanan (pictured above) doesn't appear to be all that uncommon around the country with the trend expected to continue for some time.