Fail

So, health care reform is going to fail because the President has failed to express an underlying principle (is it cost reduction, or is it expansion of coverage -- the message is mixed up). Meanwhile, he has committed to a surge strategy in Afghanistan and we remain forever in Iraq. And the TARP banks are repaying despite the fact that they haven't shrunk enough to cease posing systemic threats to the entire world economy.

Oh, and new jobless claims were up again.

Fail.

Interviews

I hate job interviews. I believe I could sell anything, but when it comes to marketing myself, I have a full blown panic attack. The reasons for this remain elusive, but I am certain about one thing. If the goal was to be as self-critical as possible, I think I would be the best interviewee ever.

Intentional Ambiguity in Heraclitus

I have been pondering Heraclitus' first fragment all weekend. Commentary beginning with Aristotle points out the ambiguity in the first line: "Of this Word which holds forever men prove uncomprehending." Is forever modifying holds or men? The meaning is altered slightly depending on how you approach the grammar.

Yet, there is another ambiguity that puzzles me. Word, or Logos, can have two meanings. Logos has a metaphysical and an epistemological meaning. Metaphysically, Logos refers to the power of creation or to the act of creation. It also may refer to the power of the creator enduring into perpetuity. Epistemologically, Logos means science and reason. It can also mean prophecy and revelation.

The metaphysical and the epistemological meanings are almost inimical to one another. Creation becomes a subject of materialism, externality, and sensory perception. The epistemological meanings are about uncovering the hidden, transcendental knowledge, and abstract thought.

All weekend I have been asking myself, does Heraclitus mean Reason or Creation? Heraclitus is big on reconciliation of opposites. In the first sententence of the fragment, the philosopher uses a universal (Logos) and a particular (men). A universal is a type of extreme, so it must be reconciled with the particular. Likewise, a human is a discrete unit, and must be reconciled with the whole.

The fragment seems to express despair about human cognition. Some humans understand and thereby divide and classify (form particulars for understanding the Logos). Other humans experience life with the same transcience and Lethe-ward slackness of sleeping.

Though this Word is true evermore, yet men are as unable to understand it when
they hear it for the first time as before they have heard it at all. For, though
all things come to pass in accordance with this Word, men seem as if they had no
experience of them, when they make trial of words and deeds such as I set forth,
dividing each thing according to its kind and showing how it is what it is. But
other men know not what they are doing when awake, even as they forget what they
do in sleep. (from heraclitusfragments.com)

If Heraclitus is making a social commentary, then he is expressing a pro-science outlook. The world should be inspected and understood through a trial of words and deeds. This is a reasonable interpretation. But, this is the first fragment, and such a banal criticism would not befit the beginning of a book (now lost, of course) concerning metaphysics and logical paradoxes.

Rather, Heraclitus is laying the groundwork for understanding understanding, and for understanding the universe. Logos can be heard, but will not understood despite its manifest truth. In fragment two, Heraclitus argues that the Logos is universal, but people live as if each had her own received wisdom. Even those who attempt understand the Logos through inspection, argument, and experiment will fall short of total comprehension.

The great mass of humanity represents the particularity of the created world. The world is not created to understand itself. Men do not understand when they hear. Science and argument will not reveal the truth of creation. Passivity of thought will not naturally bring you to the origins of truth.

Like the Bhakti saints and Sikh Gurus two thousand years later, Heraclitus endorses understanding through introspection. The created world will not reveal the highest truth. How does Heraclitus know Logos: He sought the oracle inside himself (fragment 101). What he does not tell us, however, is whether his Logos is everyone's Logos or if he is trapped in the same folly as every other man, unknowing of the Words that endure forever.

Karzai and the CIA

http://www.nytimes.com/2009/10/28/world/asia/28intel.html?em

Whenever I talk to anyone who has had interactions with high level officials in foreign lands, they are always quick to mention who is on the CIA's payroll. At first I was skeptical. Having seen time and again those rumors and gossip statements ultimately proved correct, I conclude that the CIA is only covert in one country -- the USA.

He's Hot

I have a man crush on Martin Wolf:

http://www.ft.com/cms/s/0/9165b8b0-b82a-11de-8ca9-00144feab49a.html

I wish the US had just one MSM finance/economics writer with as much perspicacity. Lewis comes close, I guess.

But, to discuss Wolf's argument, he seems to suggest that nations should better utilize the Special Drawing Rights (or some other basket of currencies) for the purposes of international trade and reserve holdings. Makes sense. If the IMF governs the basket, it could be reweighted quarterly or annually to reflect changes in GDP. Hmm, the more I think about it, the more I like it.

Gold

I almost feel bad for the gold bugs. Don't they know they're riding high on a commodities bubbles fueled by Chinese stockpiling? Once the market discounts the inevitable Chinese pullback from minerals, gold will take a major hit.

So many of the gold bugs are buoyed not by market fundamentals, but by market principles. They mistake their politics for the way of the world. Sorry, fellas, they ain't gonna end the Fed. They ain't gonna go back to the gold standard. And, eventually, the hyperinflationary threat will be quashed and the dollar will find footing because America's capital markets will still be attractive.

Yes, I know, I've been saying it myself: the dollar will lose strength against most currencies. So what? Could be worse. Wait til the commodities bubble really bursts, then you'll see a lot more currency pain.

Deflationary Threat

Remember, here's the game. The financial system is on life support. We won't know the extent of the damage for at least two more years. Until then, the government will be lending free money to the banks (whether through the discount window at the Fed, or through purchases of agency debt -- which provides liquidity to the lending market). That's just how it's going to be.

To prevent dollar destruction, we will see propaganda against oil and we will see continued worry about deflation.

How to invest in this climate? Don't. If you must, just go beta.

See Mishkin's take:
http://www.cnbc.com/id/33308407

It's Not You, It's Me

Enjoyable op-ed on the potential fallout from red versus blue state health care debates:

http://finance.yahoo.com/insurance/article/107941/let-the-red-states-secede.html

Though it is a stretch to suggest that health care could be solved by dissolving the polygamous marriage of 50 states, the thinking is not reductio ad absurdum.

Some food for thought:

But America is starting to resemble those other countries where two or more
"nations" coexist unhappily within a single state -- like the English and the
Scottish, the Spanish and the Catalans, or even the English-speaking Canadians
and the Quebecois. In most cases, greater autonomy for the two halves usually
has been found to make both sides happier.

Bloomberg Editorial

Worth a quick read, but stick around for the punchline:

http://www.bloomberg.com/apps/news?pid=20601039&sid=aBG26d6aO25U

Money

Ambrose Evans-Pritchard has been blogging with ferocity lately. Common sense dictates that the dollar is facing a huge decline, and many important actors are positioned for such an eventuality.

One would think that the Federal Reserve would be listening to this and tightening up QE and interest rates.

But you have to think bigger before blaming the Fed. Assess these facts:
1. The finance industry is profitable only because of low interest rate borrowing.
2. The finance industry is stabilized because of phony accounting standards, meaning we won't know the true extent of loan losses for at least 2 more years.
3. The finance industry is buoyed by Agency and Treasury debt, much of which is being bought by the Fed. The Fed's purchase of these securities allows FNM and FRE to buy more mortgages and convert them to taxpayer-backed securities, which creates some fine collateral (currently trading at more than par -- if you can believe that).
4. The price of oil will determine the speed of economic recovery.

How do these facts fit together? It means two things. The Fed has to continue QE to keep the finance industry afloat until the loan losses from the subprime/Alt A fiasco can be realized. This means there has to be a justification for continued money printing, which can only come from a perceived deflationary threat. It also means that the dollar has to continue to remain strong in order to keep oil down. QE and strong dollar don't match, you might say. And you're right -- but only over the long term.

Expect this: continued talk of deflation, continued Fed purchases of T-Bills and Agency MBS, and lot's of propaganda about increased supply of oil and larger than expected oil inventories. We will see inflation, and it will be painful, but it will not come for at least two years.

The Weather

This market is like the weather. Everyone with good eyes can see the clouds are still forming, but just right now it's balmy with a slight sea breeze. Let's have a picnic and eat some GE and FNM. Wash it down with some commodities ETFs.

Those clouds are there, and prudent minds remain risk averse. We just hope that if the storm does pass, there will be enough left at the table.

Numberwang -- Funny Why?

If you haven't seen That Mitchell and Webb Look, you don't know Numberwang. And you're missing out.

Numberwang is absurdist comedy in the tradition of Monty Python or the sketches SNL shows in the last five minutes of the program. A gameshow, contestants must guess the correct number in a variety of challenges. Losers suffer humiliation or even injury. But how does one win? That's numberwang. Let's rotate the board.

Of course it makes no sense whatsoever.

So why is it funny?

Numberwang is funny, in one way, simply because it makes no sense. Watching it, you don't know what's coming next, and you are baffled why "eleventy-six" is the correct number. Or why a black contestant is wearing lederhosen.

In another light, Numberwang makes fun of game shows in general. All you need is a competition with blinking lights, playful colors, an enthusiastic host, buzzers, and spinning wheels. It works. I mean, look at Let's Make a Deal, which is a stripped down (pardon the pun) version of the standard gameshow. Yet it's hugely popular and has revived Howie Mandel's corpse from the cemetary of dead laughter.

The genius of Numberwang is that we are the subjects of comedy. Numberwang is funny because of a ridiculous tendency in human nature to sit and watch any competition. Mix together some competitors, a running score, and some threat of jeopardy. That's all. We'll watch it. Add blinking lights and a raucous theme tune and we're transfixed. Watching Numberwang, we get it. Game shows are dumb. We're dumb for watching them. It's absurd!

And that is the joy of absurdist comedy done well.

Follow Numberwang on Twitter:
http://twitter.com/numberwang

Cupcakes

Great piece on the cupcake bubble:

http://www.slate.com/id/2227216/

Is the Fed Broke?

In certain circles, it is generally assumed that the Federal Reserve is broke. As in, Citi broke or Lehman Brothers broke. You look at what they've taken as collateral, or the ABS that they've taken on their books in exchange for Treasuries, and you have to wonder . . .

Anyway, here is an article about the subject in a relatively mainstream outlet:

http://www.thebigmoney.com/articles/judgments/2009/08/25/next-credit-bubble-now

No wonder they don't want to be audited.

Stimulus

What annoys me the most about the stimulus efforts is the lack of focus. I would have been much happier if the bulk of the money had been spent on a national project, something enduring and which would propel the nation into the 21st or 22nd century. Instead, all the craptacular pet pork projects have reified our national status as a 20th century giant. Alas, time passes by, drowning some, sweeping others along. America stays put while Scandinavia, China, India, and South Korea project their nations into the future.

China has the world's only carbon-positive city (or should that be carbon-negative?). Americans could trade a Buick for a Hummer. India fits its trucks with natural gas engines. America can't get high speed rail. Finland is wireless; Comcast offered me a landline. New Zealand cut taxes while my country can't reform health care because of counter-propaganda lies about death panels.

The stimulus and the bailouts, on top of the Social Security and Medicare demographic time bombs, have made it impossible for the nation to position itself as the leader of the 21st century. Unless we all agree to have our taxes raised . . .

Pimco's El-Arian on the Dollar

El-Arian speaks, at last. Not that he was holding his tongue or anything, but his inflation expectations remain steady. Key points of the article:

• Inflation is coming, and it is necessary,
• Which means a weaker dollar,
• And more stimulus has hit the states than most people expect.

I take issue with the third point. There's a whole lot more stimulus coming. States' utilization of federal money is basically minimal. They're acting like they don't know there's free money for the taking. Yet at the same time, his statement is fact-driven, I assume. This means that next week or the week after we'll start hearing about the liquidity trap again.

How many decades are we prepared to lose?

Checking My Words

I like to periodically check on my predictions. Otherwise, what's the point of making them?

From July 6:
1. Unemployment will be revised upward any day now to about 9.7%. Well, Cash 4 Clunkers plus the Census temps have put a momentary stop on the downward slide. No real jobs have been made, though. Layoffs are driving the stock market spike. Good stuff, right?
2. The political masses will call for a second stimulus. (Biden is already greasing the wheels) Again, the surprising success of Cash 4 Clunkers has delayed further calls for the second stimulus. Or, in the alternative, Cash 4 Clunkers IS the second stimulus. In which case, we're in deep fiscal trouble.
3. Borrowing rates to support the stimulus will reach critical levels as investors demand a greater risk premium than the USG is prepared to offer. As I've covered recently, there is a lot of pressure on government bonds. Only the extreme bears and the politically entangled are touching them.
4. Fed loses credibility as it suddenly buys up Treasury debt to make up for weak demand. I like how the press is reporting that the Fed is winding down recovery programs related to debt purchases when in fact they are extending them for an additional month. How this distortion happens is beyond my comprehension.
5. Inflation chicken littles (myself included) and bond vigilantes (Gross, et al.) will issue even more dire warnings about fiscal projections. Yesterday's investor pages were littered with discussion about soaring interest rates in the near term (2011). I'm still waiting on the next play by Gross and El-Arian -- any day now.
6. Stock market volatility (as measured by the VIX) will be back to 2008 levels. VIX insanity!
7. Oil producing nations, Russia in particular (especially as it faces the threat of bond default again), will slash production. The resultant price of crude will keep recovery forecasts for the US economy pessimistic. Inventories are high everywhere, but so-called speculators are still bullish on crude, thus delaying threats of production reduction. Russia is in trouble, though. They may threaten a reduction just to drive oil up past $100/barrel. How else are they going to prop their banks?
8. Even CNBC will talk about the liquidity trap. Simply, the threat of inflation is not enough to get sideline money back in the game because there is still too much fear. Cramer says CITI is a must buy. Infer what you want about that tidbit, but inflation talk will creep up again, especially when the pro forma October pullback comes and the Fed is forced to buy crates of government bonds to support another round of bailouts and stimulus.

Bond Pressure

The last big auction was a big success, driven by TARP banks' willingness to play nice and purchase a bunch of Treasury debt at underperforming yields. But it looks like the market is speaking again:

http://www.ft.com/cms/s/0/6f48312a-85cd-11de-98de-00144feabdc0.html

My Problem with Krugman

He's smart. He's articulate. He writes well. He's got a great beard.

But why do I think he's wrong about debt spending and a Keynesian solution to the economic crisis?

In simple terms, the Keynesian approach during the Great Depression failed. After all of our competitors were destroyed, of course the US economy -- in relative terms -- skyrocketed. If a busload of Olympic swimmers gets in to a horrific wreck, and only one escapes serious injury, you know he's going to win the next race.

The second reason his prescriptions scare me is because there has been very little stimulus spending to this date. Great volumes of taxpayer lucre were shoveled into the banks, but the big guys didn't even need it. Of the big banks, only BoA and Citi actually needed a bona fide bailout. Maybe Wells Fargo, too -- but maybe Wells isn't too big to fail. Of the ARRA, though, only a miniscule fraction of the allotment has been sent out to do anything in mainstreet.

So, what is the cause of the rally since March?

Value seeking, investor boredom, stronger-than-expected dollar, illusions of recovery in China. In this preceding list, where is the domestic stimulus?

Cash for Clunkers Saved the Day?

It appears that my irritation and panic over jobs was a result of underestimating Americans' desire to buy cars. Good work, President Obama. But, uh, what are you going to do to save autumn from a collapse? America, where citizens get paid to shop.

How It Begins?

For those of you who know my outlook on the country, you might recognize this story as one of the indicators of the beginning of the national dissolution. The problem is not the imposition of Federal troops on state jurisdiction, but rather the fiscal failure of a locality to defend itself from its own citizens. Meanwhile, we fight two foreign wars, occupy bases all around the world to protect our trading partners from the Soviets, and pay our citizens to shop. It would be nice to blame someone, but we're all in it now.

End of Vikings, End of Capitalism?

The Old Gods required greater fortitude in their practice. Die with a sword in your hand, or no promised land. The simple salvation of Christianity was more desirable for the sheeple masses. Likewise, American Capitalism is meeting its demise. Neither Capitalism's warrior elite nor its sheeple consumers are willing to abide by the downside risk inherent in the practice.

Will State Capitalism bring salvation?

More on the Liquidity Trap (PIMCO's Take)

Paul McCulley opined on pre-collapse work done by Krugman and Bernanke (hat tip to ZeroHedge). One thing that continues to irk me on the subject of the liquidity trap is the the failure to understand that money can exit a market and never return. Inflation is a closed system, bound by internal, national parameters. Same with interest rates on government bonds. But, equity ownership and real business investment is global.

Simply put, the central bank's effort to reflate a battered economy through monetary policy will fail -- no matter what! -- if there is no confidence in the business environment. The sideline cash can go to China, India, or South Korea. Peru or Botswana. It can fund Swedish bailouts of the Baltic banks. It can buy farmland in SE Asia. It can dump itself in oil futures. It can wait for US companies to relocate to Switzerland, then invest in their equity.

In the US, this means one thing only. Jobs. If the jobs do not return soon, the taxation war will scare off investors. If jobs do not return soon, the liquidity trap will morph into full scale deflation. If jobs do not return soon, the American way of life will take a permanent step back. We will work harder, make less, and have less to show for it socially.

I really think there is only one solution to this mess. Extreme tax cuts. We're already running a deficit, why not let the people earning money stow a little away, or spend some, or pay down their debt? Let the next President raise taxes back up. Confidence returns immediately because businesses will have instant increased demand. Increased demand will mean business expansion, which means jobs.

'Nother Jobz Rant

This time on the WSJ, complete with some detailed criticisms of the unemployment stats. People are watching. This summer better show some signs of improvement, or there will be revolt against the President's policies. Stagnation won't be good enough.

Stop It Already!

I agree with this guy. I wish the Gov't would just say "enough" and let Americans find our way through this mess. The financial industry is stable-ish. Good enough. Now everyone get back to work!

Instead, investors and job hunters and entrepreneurs are all wondering what the Gov't is going to do, how the rules are going to change, and which industries are going to get puffed up with taxpayer money. People are standing around watching Citi, AIG, BoA, GM, and California flounder, uncertain whether these entities will default on their promises. Meanwhile, the federal deficit grows and grows. My son better get used to working three jobs because that's what it will take to pay off the Baby Boomers' debt.

The first stimulus package was not a stimulus package. It was a vote-getting fund for Congress. It was a profile in achieving graft, waste, and corruption. Why would round two be any better?

On a side note: why is it expected that liberals are also Keynesian?

Uh oh?

It has to be said. If Obama can't cap the job losses, his presidency will be a colossal failure. And if you think it's getting bad now, imagine what the next buffoon will do . . .

Message to the President: forget tomorrow's problems. Today's are worse.

Here is how the summer is about to unfold.

1. Unemployment will be revised upward any day now to about 9.7%.
2. The political masses will call for a second stimulus. (Biden is already greasing the wheels)
3. Borrowing rates to support the stimulus will reach critical levels as investors demand a greater risk premium than the USG is prepared to offer.
4. Fed loses credibility as it suddenly buys up Treasury debt to make up for weak demand.
5. Inflation chicken littles (myself included) and bond vigilantes (Gross, et al.) will issue even more dire warnings about fiscal projections.
6. Stock market volatility (as measured by the VIX) will be back to 2008 levels.
7. Oil producing nations, Russia in particular (especially as it faces the threat of bond default again), will slash production. The resultant price of crude will keep recovery forecasts for the US economy pessimistic.
8. Even CNBC will talk about the liquidity trap. Simply, the threat of inflation is not enough to get sideline money back in the game because there is still too much fear.


Deja vu all over again?

Jobs plz.

What do I keep saying about jobs?

http://online.wsj.com/article/SB124645016745579363.html#mod=testMod

Inflation Itself Caused the Credit Bubble?

Martin Wolf analyzed a recent GS research paper. Conclusion: Inflationary policies under Bush/Greenspan led to the credit bubble. How: inflation here decreased savings and increased borrowing.

Net result: inflation led to inflation, which led to devaluation (naturally, as a correction), but which has led to drastic inflationary policies to prevent depression. Maybe those gold bugs got it right after all.

If America can't compete globally as a manufacturer or farmer, our economy is doomed to stagnation, decreased wages, and general loser-ness.

Definition of Leadership

I found this on Paul Kedrosky's blog. Naturally, he defined it as group think/mob behavior. I'm an optimist. The first dancer is a leader.

Bond War: Krugy, Fergy, and Grossy

Daniel Gross opined on the ongoing battle to interpret the spike in long-term T-Bill rates. Is the spike a signal from the market that the USG's long term health is at risk (Ferguson's view)? Or, does it signal a retreat from safety (Krugman's view)?

My take on the matter was that it was a combination of factors. There are technical reasons to take cash out of 30 year Treasurys and reinvest them in foreign denominations. Namely, the US will lead the recovery, but it will still face a long and painful period of economic stagnation. This US-led recovery will enable smaller, more vibrant economies to flourish. In the short run, it will keep China afloat. In the long run, though, this means the US equity market and currency is overvalued. For an investment, it makes sense to take some portion out of the US.

I have come to realize, also, that many big money investors are extremely ideological and are tied to long-standing perceptions that Democrats are bad for business, despite the historical trends that suggest otherwise. There are bond vigilantes. They are Bernanke's audience.

Gross offers a rather different point of view, and one that I find convincing:

Both the Fergusonians and the Krugmanites (of whom I count myself one) err in
reading too much into short-term fluctuations in bond prices. There's so much
more at work. Randall Forsyth of Barron's explains a technical reason for the short-term spike in 10-year and 30-year rates. Banks and financial institutions that own mortgages hedge their exposure to refinancing by buying and selling Treasury bonds. When mortgage rates start to rise, as they've done in recent weeks, institutions do
the opposite and sell. "While mortgage investors previously had bought
noncallable Treasuries to offset the risk of their mortgages, mortgage investors
have unwound that hedge, selling their Treasuries," Forsyth writes.

If nothing else, this three-way exchange demonstrates the difference between finance and economics.

This

The Dollar -

Someone sent out the hounds, using fear of a weakening dollar as propaganda against the administration's policies. Yet as I have mentioned before, problems persist in the global economy (especially the European part of it). All major currencies will have to devalue themselves in the coming months. As the business cycle continues its downward trajectory, wise big money investors will continue to see the dollar as a safe haven.

Scorecard: America still leading by a nose. Chinese horse soon to be disqualified for steroids. European entry suffering from anemia. Latin American horses unsure whether the race track runs clockwise or counterclockwise. Indian steed making gains. Vitamin-rich Canadian and Australians making promising strides. Poor, limping Japanese mount -- why can't it catch a break?

Note for the Medievalists, aka Gold Standard Dummies

Hello Ron Paul moonies, I would just like to point out that a gold standard can be manipulated in exactly the same ways as a fiat currency. Market forces have no more impact on a gold-based currency than a fiat currency.

Those who favor a return to the gold standard (you know, the good ol' days before 1933) are in the same position as certain French or Japanese nobles were during the 16th century, arguing in favor of heavy infantry in a gunpowder age. The French adapted and became a world power for several centuries. The Japanese closed their borders and became a backwater until reality hit them in the face.

Like it or not, we live in a world where central banks wield enormous power. The policies of these central banks are transnational in effect. Coordination amongst these banks (undemocratic actions indeed) are necessary to prevent systemic collapses.

What we have learned in this crisis should reify the role of the central bank in international conflict resolution. Watch in the coming months as China gets pressured into the modern world as the coordinated quantitative easing by the Fed, the ECB, and the various national European central banks forces the renmimbi up in value.

Jobs, and a Call for Revolution

Bridgewater and John Mauldin are spreading the word. As I have mentioned before, the only priority right now should be job creation and establishing a backstop for the unemployed. This is all that matters right now. Forget North Korea and Iran. Let the DoJ handle the torture issue. Let FDIC raise funds for the eventual disintegration of one or more of the big banks.

Jobs.

Without them, we'll plunge into a depression that will destroy the Union of 50 States. Without them, the world economy will step back thirty years.

Here's what a Bridgewater analyst says:

“Normally, labor markets lag the economy because incremental spending
transactions are financed via debt, stimulated by interest rate cuts. But as
long as credit remains frozen, spending will require income, and income comes
from jobs. And debt service payments are made out of income. Therefore, in a
deleveraging environment job growth becomes an important leading, causal
indicator of demand and other economic conditions."

In short, fixing finance won't fix the economy. This is a very important point to digest. Wall Street and the markets attract the big media buzz, and the Fed/Treas/SEC/FDIC are dedicated to the repair and growth of Dow Jones. They will all fail if Obama does not zero in on the jobs issue.

All unemployment benefits need to be extended indefinitely. This will be the only way to allow the country to delever and devalue still-bubbled assets. Companies that came in above expectations for Q1 did so on the cost-cutting power of layoffs. Sad, but true. There needs to be more of it. A lot more of it.

Is this contrary thinking to my shrill cry for more jobs? No. We need a backstop for job loss. We need to let companies regain their footing in a world where everything's being re-priced.

At the same time, we need to give the recently unemployed the opportunity for new ventures. Health care costs and business startup costs must be made reasonable. The recently unemployed have skills and experience that should not be put to waste. Untold innovation and improvement is being kicked to the curb.

I am calling for revolution. A small business revolution.

Obama Reading Roubini?

I guess the President was reading Roubini's NYTimes Op-Ed.

President Barack Obama, calling current deficit spending “unsustainable,” warned of skyrocketing interest rates for consumers if the U.S. continues to finance government by borrowing from other countries.

“We can’t keep on just borrowing from China,” Obama said at a town-hall meeting in Rio Rancho, New Mexico, outside Albuquerque. “We have to pay interest on that debt, and that means we are mortgaging our children’s future with more and more debt.”

Holders of U.S. debt will eventually “get tired” of buying it, causing interest rates on everything from auto loans to home mortgages to increase, Obama said. “It will have a dampening effect on our economy.”

Thankfully, he doesn't make the mistake of saying the sky is falling on the dollar and instead places the emphasis on the fiscal component -- too much borrowing.

I sometimes wonder if it would make more sense for the US to default now rather than try to pay back all the obligations. Chapter 11, national style. If we had the national will to accept a lower standard of living and become an exporter nation, defaulting would be feasible. As it is, though, it would just be chaos.

So, everyone, rally around a reduction in spending. Or a sizeable increase in taxes. It comes down to a simple couple of questions: do you want less, or do you want to pay for what you're getting?

Roubini in Forbes

Nuriel Roubini (Someone buy this man a pink or yellow suit! Too much gloom dampens the intellect, Professor) captured the worldwide state of the economy in Forbes. Not a bad article, and I found myself nodding while reading it. Typically, his articles make my face scrunch up. Plus, having doublechecked his math, I tend to treat his proclamations with great skepticism.

Of course, economics is a very complicated subject, and it's easy to get caught up in contradictions. Roubini is no exception.

His piece in the NYTimes described the coming collapse of the dollar. Yet, he forgets the simplest concept in foreign exchange: currencies are measured against each other. Consider all the debt issuance already done by the Fed/Treas. Why hasn't the dollar already collapsed? Two reasons: measured against other currencies, the dollar stays strong because of two factors: 1) The USA's GDP is shrinking less than its major competitors (and you have to consider that China's numbers are fanciful at best), and 2) other central banks are also printing money in their respective local currencies (increased supply on both sides of the value comparison). Roubini's Forbes piece captures these two phenomena quite succinctly.

As time goes by, the American financial sector will recover. When it does, the Fed will pull back the excess liquidity to take some of the steam out of inflation. At the same time, other countries will have to do the same thing (decoupling is a myth not unlike the Montauk Monster), and probably with steeper interest rate targets. Inflationary pressures will be much stronger in Europe and China than in the US. This fact alone will keep the dollar atop the list of favorite currencies. Yes, the US will see inflation, but it will be a result of competition with Brazilian, Indian, Korean, Japanese, and some other -- yet unknown (rubles, anyone?) -- currencies. Those countries will export stuff we like -- or perform services we think are useful. Their national balance sheets will be stabilizing. Plus, cost of production and transporation (OIL!) will drive up prices at the wholesale and consumer levels.

Net result: dollar still reigns, despite inflation. But, there will be greater parity.

Small Business Gandhi

The markets fear Obama too much. Like Foch, they're fighting the last war. Obama is not FDR or LBJ.

His vision of wealth redistribution is retrospective and idealized, but not in a Marxist way. Think of him as small business Gandhi.

Gandhi believed, perhaps accurately, that the cultural soul of India was found in the villages and rural farming communities across the country. Likewise, Obama sees America's vitality coming from small businesses and entrepreneurs. If banks won't lend to small businesses, then the SBA will compete directly with the banks. He targets Wall Street, not as an enemy of labor unions, but as an enemy to the commonsense managers and proprietors of businesses on Main Street. In the Obama model, innovation is created by the Jerry Yangs of the world rather than the Vikram Pandits.

Is he right? Only if the necessary conditions for supporting an entrepreneurial model are in place. There are enormous barriers to entry caused by the confusing tax code and health care costs. One should not need to pay a lawyer and an accountant just to do business. It should be possible for a sole proprietor to keep her own books without losing competitive advantage to those who can afford to hire sophisticated accountants and lawyers. Right now, you need to have money to make money. Adding financing opportunities without addressing the tax code just places entrepreneurs into a deeper leveraged position than is warranted.

The cost of maintaining a small business is compounded by escalating health care costs. I don't know the solution, but this has to be addressed. Furthermore, many enterprising people are deterred from quitting their jobs and starting a new business because they don't want to lose their health benefits, which are too burdensome to afford on their own. Nationalizing health care would be the best thing ever for small businesses and innovation.

Gandhi's vision scared the modernists of his country. That's why he got shot. I fear that Obama's vision, should it continue to be qualified as "socialist" or "fascist" (make up your mind, people!), will pose a threat to the entire country. I do hope that the message gets out that he's targetting an entrenched class of million- and billionaires, not business as a whole. Obama is not riding with Stalin and the Bolsheviks, gunning for managers. Let's be real here. Without a better attempt at selling his vision of the new capitalism, however, his initiatives will be as effective at reforming the economy as Gandhi's white dhoti was at preventing the Kashmiri wind from chilling his skin.

What Now?

If the chatter is correct, and the big money behind the recent rally was mostly composed of short covers, then we're in for a pullback. Day traders got confused by the rally and ran up the prices on financials and oil. Both are under-valued, but both are suspect for quality. I still believe that oil prices will skyrocket again in the future, but the short run prospects are hard to gauge. I think I would get excited if a barrel of crude came back down to about $45.

Financials, though. Why not go to Vegas? Well, there's a reason financials are better than gambling: the gov't is backing them. Part of me thinks that a basket of about 19 financials corresponding to the big TARP institutions would stand to grow about 500% over the next fifteen years. But that's a big risk. No one knows what will become of the industry -- will consolidation wash out the weaker players? Will regulation kill the risk, and therefore the profit potential? I, for one, wouldn't touch the financials unless I had money to burn.

I still stand my statement that the market bottomed in March. The economy, meanwhile, is still losing. My intuitive take is that we will not see a full recovery for about a decade. Interestingly, this corresponds with the (now former) head economist of Merrill Lynch's analysis. Rosenberg thinks we're at the halfway point of an 18 year bull market. Good times all around.

Immigration and Self Doubt

Maybe the earlier sunlight is triggering neuroreceptors in some novel way. Lately I have been more reflective. I wish I had more time to spin these thoughts out and look at them, but I don't.

American Immigration:
The archetype of the ingenious, hard-working, self-sacrificing immigrant forming the backbone of America is incomplete and inadequate. This personality type has gone a long way to forming the culture of America. Yet, it does not explain the fanciful optimism coloring the perception of the American Dream. Two of the three ancestral strains that compose my family heritage immigrated on the hard worker boat. The remaining one came to avoid conscription. Looking back, indeed, there were a large number of British (and others, but I'm thinking in particular of Benjamin Franklin's warning against slackjaws and wastrels immigrating to the colonies) who came across the ocean looking for opportunities. Yet, we must not discount the large numbers who came without a country, having been exiled or persecuted for their religion or politics. They came here out of sheer desperation, holding close the vision of a promised land or even just a reprieve from the punishments of the nations they left.

Recent immigrations have this same dynamic. There are many who come from south of the border looking for better pay. There are a lot of enterprising Nigerians, Chinese, and Indians ready to apply business skills and highly technical knowledge. Yet, there are also a lot of Southeast Asians who fled destruction (or who had no country, like the Hmong), refugees from the Balkans, Somalia, Central Asia. A lot of the immigrants from my wife's community fled state-sanctioned persecution in the world's largest democracy back in the 80s.

On the face of it, America has a lot of trauma that is continually processing and integrating. Perhaps that is the wellspring of the optimism that marks the national character. A therapeutic nation? Or, perhaps something more Freudian is in play, as populations sublimate their own disillusion and pain associated with the old country, and impose an improbable level of hope onto their vision of the new world. ?

Self Doubt:
Self doubt is a weird thing. On one side of the scales you have a cautious, measured nature prone to analytics. A boon. The other side of the scales is weighed down by unproductive self-criticism and unrealistic expectations. Finding a proper balance only keeps the crazy side in check. The thoughts still persist.

Being analytical does not seem to help the problem because a lot of the unrealistic expectations and self-criticism have deep roots. Once you've trekked the river to its source, often you find the only way back is by the same arduous path and you lack the means to plow a more efficient route back to civilization. Instead, you have to wind back through the dark woods and clamber over brambles.

I think of Brennus fixing the scales so that the Romans could never put enough gold to satisfy his demand for loot. As the elders complained, he retorted "Vae victis!" Woe to the vanquished. I think Brennus provides the proper model for dealing with self doubt. Impose an iron will, let no self criticism ever tilt the scale. Rather, let all the pricking thoughts and reminders be of no consequence, no weight at all, and the measured, analytical part of the mind shall bear all the value.

How Time Changes Things

I once swore to myself that if I ever wore Dockers, I would shoot myself. Now, I own two pairs of Dockers pants, one pair of Dockers shoes (brown, endorsed by some podiatrists), and a Dockers belt. I have to say, they make a good product.

Personal Note

Every day on my way home as I approach where 50 meets the BW Parkway, I realize a little bit of me has died. Here I am spending my favorite time of day stuck nose-to-ass with my fellow commuters. We all hate each other. It's perfectly natural.

Cheaper Than Wind Down

If you're stomach gets tied up in knots at the injustice and perhaps corruption of the bank bailouts, just consider one thing. Banks are not like other companies. When they fail, they are unwound via the FDIC, not through bankruptcy. FDIC has all the powers of a bankruptcy judge, plus the powers of a U.S. Trustee. Plus, it has its own (federally backed) money on the line.

Chrysler's impending bankruptcy will cost a lot, but the people taking the biggest hit are investors and employees. Through bankruptcy, contracts such as leases can be dissolved by the judge.

If, for example, Citi goes into receivership (the bank equivalent to bankruptcy), the FDIC will insure all the covered deposits and sell off all remaining assets to cover other major creditors. Most likely, the FDIC would be left holding onto all the toxic assets because there is no demand for them.

When you think it through, it becomes apparent that there is a sense of imperative to kickstart the secondary market for securitized loan assets. Not only does it preserve the capital standing of the banks, it provides a preventative balm in case any of the major banks do in fact go under. If there is a functioning secondary market, the FDIC could auction off the assets to make creditors whole, or it could preserve them on its own books, taking the income stream to supplement the fees it charges to FDIC participating banks.

But, we're still a long way off from having a functioning secondary market. Right now, all of our hard earned tax dollars are sitting on the books of the banks to keep their capital levels in compliance. That money is not being used for lending or for buying securitized loans from other loan originators. But, merely surviving, the banks are paying interest on that money. Interest that goes back to the Treasury.

If we just let the creative destruction of capitalism runs its course, the tax payer would still be out all that money (and probably more) as the FDIC takes on losses it cannot absorb, and there would be no hope of recovering any of that money. This way, at least we get interest.

Quick Note on Unemployment

In a downturn, unemployment rates are an indicator of how bad the economy is performing. Side note: in a steady state unemployment rates reflect national labor and tax policies (among other things).

So, when looking at the numbers tallied by BoL, remember that the major category of job loss nationwide is in construction and industries related to home repair and sales. Included under that umbrella are a lot of positions that had previously been held by undocumented laborers who were paid under the table or through other shifty means. Needless to say, those workers aren't in line to get state and federal benefits (which is good, I guess, from a fiscal perspective).

I would hate to speculate just how bad the unemployment rate would be if all who lost their jobs were counted. Would 10% be too high?

Toxic Assets and Insolvency

It has become axiomatic that the major players in finance are insolvent. Insolvent can mean different things, depending on how you define it. Let's be absolutely clear about one thing: none of the major banks are insolvent -- except from one perspective.

Insolvency is a statement reflecting data on an institution's balance sheet, on which are listed assets, liabilities, and cash reserves. Thanks to the FDIC, all banks in the US have more than enough cash reserves. Where banks are weak is in the assets category. This will remain true even with the easing of the mark-2-market rules, all thanks to toxic assets. Here's why.

In our era, toxic assets are derivatives, the value of which ultimately reflecting the performance of various loans, including the dreaded subprime mortgages. As those loans go sour, the bundles of loans (MBS, ABS), take a hit. Now, a bundle of loans has a diminishing value over time anyway, resulting from the fact that as people pay down their loans there is a diminished future cash stream associated with the bundle. Think of it this way, a bundle of 100 separate $300k mortgages (each with the same interest rate) is worth 300k plus 30 years of compounded interest. Fifteen years later, the bundle has lost half of its total value (from a creditor's perspective).

But, these toxic assets are mostly full of relatively recent loans, so pay down over time is not a material factor in the reduction of bank assets. What about foreclosure and delinquency? Yes, this is certainly a factor in some of the MBS and ABS -- especially those underwritten with a lot of 2005 to 2007 mortgages originated in CA, FL, NV, and AZ. But, this amounts to a reduction in value in the 10-40% range, not a total wipeout.

Back to basics, then: the vast majority of mortgages and commercial loans are performing. Therefore the bonds created by bundling them (and the subsequent derivatives created in relation to that bond) should be maintaining 60-90% of their value. Why, then, are they not?

First. Consider fear. Not fear of blank-eyed zombies with blood smeared down their shredded French cuff shirts. Rather, consider fear of 10% unemployment and bottomless foreclosures. Consider plunging home values due to lack of demand (and lack of liquidity) for mortgages. Consider fear that major institutions currently dragging the corpses of subprime lenders may not make it through the year. Most importantly (from the perspective of toxic assets), consider the fact that the ratings on all MBS and ABS are suddenly deemed meaningless. Consider the political fear of zombie banks.

Now, couple that fear with the real failures of IndyMac and Bear Stearns. And the stupidity of AIG being a net seller of CDS without holding a cash reserve like it does for its properly regulated insurance products. The result is WaMu. WaMu was crushed because depositors left unprotected (at that time) by FDIC insurance pulled out their money because of rumors of WaMu's imminent demise. WaMu overnight became the first and only insolvent commercial bank during this crisis. Failure came to it.

Now, in that climate, what do you think WaMu's and IndyMac's ABS and MBS would fetch on the secondary market? I have heard the going rate was 5 cents on the dollar. With mark-to-market rules in place, everyone holding similar assets has to mark down the value of those assets to reflect the going rate. In an instant, the top 20 banks in the country, the top 100 banks in the world, have shrunk the assets on their balance sheet by a considerable margin.

Basic accounting: Equity = Assets - Liabilities.

If you listen to Goldman, you might think that there's no problem at all because CDS and the CDOs they spawn should cancel out the risk created by underperforming MBS and ABS. In the abstract, that's true, and I believe that most of the remaining banks will pull through, despite the recklessness and hubris of the liquidity bubble.

In reality, however, problems remain. All those derivatives have other uses than sale, resale, and hold to maturity. They are also collateral.

Picture yourself owning a pawnshop. Uriah comes in looking for some cash to borrow. He's going to take that cash and make a bunch of smaller loans to some dudes he knows, at a higher interest rate than the pawn shop is charging him. Everyone wins. He tells you he can pledge his 60" plasma TV and a crate of canned tuna to secure the loan. You knows plasmas are good and will resell at a good price if Uriah defaults. And you can always eat the tuna.

Just after Uriah leaves, you turn on the TV and watch a news report telling you that new research shows that plasma TVs cause eye cancer. Sales are expected to plummet. By the time you get ahold of Uriah on his cell phone to tell him he's either gotta pledge more collateral or return a big bunch of money pronto, he's already loaned the cash out. You know one thing, the next guy coming in with a TV for collateral is getting kicked to the curb.

The funny thing is, a couple of Uriah's dudes were using the cash to buy smaller plasma TVs, with the idea being that Uriah would take the TVs off their hands if they fail to pay him back.

As a pawnbroker, what do you do? Wait to see if Uriah pays you back? If he pays you back all, or most, then the crisis is averted. If he only pays you back ten percent, then you're stuck with a plasma TV that you can't resell, plus you're out the cash you loaned to Uriah. You better hope you have enough cash in reserve to pay the rent on your commercial real estate lease.

What does Uriah do? Some of his friends pay up. Some are late. Some don't pay at all and Uriah can take possession of the TVs they bought. No matter what, he's burned. He'll either go out of business altogether, or only lend out money under stricter conditions in the future. Uriah has become risk averse.

You have a sister who specializes in eye cancer. It is clear to her that Plasma TVs do not in fact cause eye cancer, or if they do, the risk posed is minimal. Yet, you are still stuck with a TV that has no market value because there is no demand for them. The intrinsic worth of the TV still holds: you can watch the hockey playoffs in hi-def; PS3 blows your mind, etc. Knowing that the health threat is overblown, you want your business partners and creditors to let you keep the asset value of the TV up near what you paid for it (the amount originally loaned to Uriah).

That's where the banks are today, which is why the m2m rules have been eased. It's the equivalent of you, the pawnbroker, placing a $500 dollar price tag on the TV in your store, but no one would pay more than $10 today for it.

A month goes by and Uriah hears on the radio (not watching TV, of course, because he doesn't want eye cancer) that there is actually only a small chance of plasma TVs causing eye cancer. Suddenly the market for plasma TVs rebounds. Not robust like it had been (everyone's still wary, wondering what if the next news will be bad news), but product is moving again. He has already sold most of the repossessed TVs at a huge loss. He recoups a little bit by selling the remaining repossessed TVs are the lifted market price, but he'll never get back to where he thought he would be. His friends are out cash and have no TV (yes, people who have lost their homes to foreclosure).

Meanwhile, you learn of the improved market conditions. You get a bunch of bidders on the TV, some are even willing to pay $700 for it. Things are looking up, right?

Well, here's where the problem is. What if you learn that the TV is health-friendly, but by this time the eye cancer scare has led to dramatic increase in layoffs in the TV and TV-related industries. Those layoffs lead to decreased spending, which leads to other business failures completely unrelated to plasma TVs. Soon, unemployment is up, spending is down, and everyone's looking at everyone else with extreme suspicion (hence the run up in corporate bond yields). Okay, great, go ahead and try to sell that TV, buddy.

That's where the banks will be. That's why Goldman's reassurances are to be taken as a best-case scenario. That's why the government needs to do only one thing right now: cure the ills of unemployment (either with benefits or job creation, or both). That is all that matters in our current era. Every other problem can wait.

The intrinsic value of the reference entities of the toxic asset is still good. Therefore the banks are still solvent, except from a regulatory perspective that requires banks to maintain certain capital requirements (of which these assets play a part in determining). But, without a leveling off of unemployment or a means to ease the pain of unemployment, the economy will continue to deteriorate, and more people will fail to pay their debts (diminish the values of reference entities in derivatives), further deteriorating the value of the toxic assets.

I Should Be Paid More

On the morning of March 4, the S&P 500 was just under 700. It is now trading at just under 840. Yeah, a 20% gain.

What is the significance of March 4? Simply this: that is the day I called the bottom. Granted, the S&P 500 went down another 20 points in the week following my pronouncement, but it has only gone up since. Pretty good for a petty bureaucrat.

Why am I awesome? Well, go read the news from the week leading up to my bottom call and tell me you would have made the same call. You would not have done so. Admit it ;-).

I revisit this today as a followup, not just as an opportunity to brag. The credit markets will now completely thaw thanks to the mark-to-market rule revisions. For the record, I do not favor the revision, but it will help to stabilize the secondary market and shore up major banks' capital positions. Of course, it's all smoke and mirrors, but that's the way it's gonna be.

There are still more gut-wrenching job loss statistics on the way, but I truly believe that these figures are a lagging indicator. The news will ask the question: why is Factor X (whether it be the stock market, consumer spending, consumer confidence, whatever) increasing while unemployment is still so high?

All of these good tidings will soften the coming fall of GM and Chrysler. Hopefully they will be disaggregated expeditiously.

Will we see another 20% increase over the next month? Maybe. I wouldn't be surprised. I won't make any pronouncements about it, though.

"The world"

"The world," is often the answer I proffer when my wife asks me of the cause of my scowl. It's an all encompassing answer, and one which she offers reciprocally to my questions of concern.

I know it's important to keep one's cool, to lift the mind above the details of uptick rules, carbon emission standards, toxic assets, and national burn-on-burn politics (Grassley with the cross-over, Frank with the pump fake). Yet, from an altitude of perspective, things really do not look all that good. A few years ago, I could rise up and see a flattening of world sorrows from here to the horizon. This too shall pass away with time.

Now, though, all I can see is the churn. The world is changing, like it or not. The last great change like this began with the Great Depression and ran through the Korean War, with aftershocks in Czechoslovakia, Vietnam, the Cultural Revolution, and the political troubles in Central America.

Demographically speaking, the pillars that kept the world aloft during the past eighty years are in a state of peril. Russia is shrinking. Europe's whites are grey, and the young are brown. America's immigration iteration takes us farther and farther away from Jefferson's plantation. People think of China as the next great power, but that is incorrect. Their population will age and decline dramatically in the next quarter century; the young are too male. China is hemmed in by nuclear powers -- it's army and national police will have no local imperial outlet. The threat or promise of a great Chinese power is overstated at best. Woe to be a Chinese peasant, though, at the mercy of a police state powered by a fiat economy.

Even without pillars, the world will stand. But it will be an ad hoc structure resembling bazaars in India or Brazil. Chaotic, inefficient places that somehow produce results.

Yet I fear for a world increasingly beholden to the third law of thermodynamics. I fear it because it's unknown and unfamiliar. I fear it because I have a child. As the churn grows and foments popular yearning for change, visions of calamity begin to take shape. To build a better world, which is what billions are now demanding, requires uprooting the weeds that threaten to choke off water and light. Those in power now will not relinquish their standing so easily. As the energies of billions coalesce, the vehicles of differences amongst the innumerable world tribes will crash against each other. I fear that inevitable friction -- and its sparks -- more than I fear whatever perfect world might result after the churn flattens down again.

QE

The Fed announced plans to buy up $300B in Treasury bonds. Now to be clear, the Fed is not buying up existing holdings of Treasuries, but is instead planning to be a buyer in imminent debt issuances by the U.S. Government. This means that the Fed still has one arrow left in its quiver.

I am grappling with the timing of the Fed's move. The stock market sustained a rally until the news of the Fed's plans hit the net. Investors were starting to feel the bottom. Now, the uncertainty that has dogged the market for over three quarters is back.

Why now? A strong dollar in the short run is still a good thing. It keeps energy prices low and provides a stable backbone to the world economy. A strong dollar maintains the sense of safety inherent in Treasury bills and supports confidence in the U.S. as a government and as an economy.

According to form, QE is implemented when a zero interest rate regime fails to stimulate economic activity. The central bank then needs to scare people out of currency and into assets, and the best way to do that is to weaken the currency. So, if the market is rallying, which signifies a return to risk-taking, then there is no need to scare people into buying assets. Contrariwise, a rational investor (are there any rational investors left?) would interpret QE in the midst of a rally as a signal that the economy is still too dangerous for play.

Furthermore, for the stimulus to be effective, stuff needs to be purchased. With a weaker currency, the stimulus money will buy less. And who believes that the difference will be made up by increased exports?

"Hello, my name is liquidity trap."

Unless investors perceive the Fed's move as immaterial, or a signal that the worst is behind us (meaning that the economy is leveled out and we can move on to inflating our debt away), then the market rally should continue. If the Fed's move is interpreted as a move to correct even greater underlying problems (e.g., a fear that there won't be enough buyers of U.S. debt; i.e., China; cf. Italy), then investors will return to the sidelines, content to lose a little against inflation instead of losing a lot against a still-retreating market. Where does that leave us? With tiptoes tickling the iron jaws of a liquidity trap.

Smick on WaPo

If you are familiar at all with Smick's thinking, he is suspicious of populism/protectionism. He might be right here.

Smick lives in the land of geniuses, and doesn't seem comfortable integrating the sources of populism and protectionism. Namely: voters/constituents. It's hard to fault Americans who want to see financial institutions held accountable for their misdeeds. I would qualify Smick's article by adding that Obama needs time to build the case that either a) the banks are solvent; or b) the banks are insolvent. The former needs time to see if markets will rebound in the face of continued uncertainty. The latter requires investigation into the counterparty risk and maximum toxic exposure of the big banks. If the banks are truly insolvent, and Obama has to get all Swedish on 'em, there can't be allegations that he's a commie. Hence the plans to report all findings on the Treasury's website. If the banks are broken beyond repair, and taxpayers are going to take a bath, there must be nearly unanimous support for the necessary actions to place the banks into receivership and pay out all their obligations to bond holders (on top of whatever amount FDIC has to cough up for depositors).

So, please, take your time, Mr. President. Keep it all transparent.

Oops, No New China Stimulus

Something is not right here:

China targets 8% growth despite crisis: (courtesy of FT) Apparently China will not increase its deficit spending. Wen says that China will meet its 8% growth target based on the previous stimulus initiatives. Plus, the Chinese are sending peaceful overtures to Taiwan, while significantly increasing military spending.

What am I not seeing? I know the world leaders have been waiting on Obama to save the American economy, remembering the countless times the American industrial/financial machine has buoyed the world economy. Yet, at the same time, how could anyone see the Recovery Act as a sign of improvement? Plus, Geithner and Bernanke are warning of further catastrophe, even though the banking industry has shown increased signs of stability.

I think back to Spring 2007 when the housing market began its collapse, and the regulators and financial industry leaders thought everything would be contained. Contagion spread as the derivatives house of cards collapsed, and now the economy is in a mild depression. Worldwide, the problems are more severe as half of Europe faces national defaults. Russia is not even a country any more (well, maybe that's a little harsh, but it is certainly teetering on the brink of dissolution). China increasingly relies on its military army and its army of police to tamp down unrest. Et cetera.

I guess I just don't understand how the leaders of China, Canada, France, and Germany are failing to see the urgency to take action rather than wait for America to get straightened out. Maybe I'm wrong and Rome isn't burning. Yet, somehow, it would not surprise me at all to learn that the world is led by a coterie of Neros.

Back to China. Much of their allocated spending will be directed internally. Building schools and supporting local industry. In my estimation, this is exactly what China should be doing right now. It corrects global imbalances while putting inland Chinese to work. But is it enough? Maybe the question, and the answer, is whether China can do more.

Cramer versus Obama

I tend to agree with Cramer here. The Recovery Act is full of junk and lacks vision. Obama let others craft a plan portrayed as a strategy to stimulate the economy, but which is instead a debt creation initiative to be paid down by future generations. Of course, a worse (and more likely) scenario is that future generations will see today's balance inflated away.

Obama is capable of something more. The country is changing; the whole world is changing. By letting Congress choose the direction of federal outlays, Obama deferred to the status quo, which we all know is broken.

As I predicted, China would gauge the winds before deploying their own stimulus. They have done so, and the initial reaction by the investor class is positive. I'm going to look at some of the details before lending my own opinion, but I would suspect that people who are long on oil will find something to smile about. Of course, a China stimulus repairs the status quo, it does not project the world economy into the future.

Sadly, there will be more breakage in the economy before things will get set right. Obama missed his chance to be the architect of the future economy. Rather, he sowed the seeds for the inevitable breakup of the Union of Fifty States. More on that subject some other time.

The Bottom

I'll be laughed at, probably, but the bottom of the market is here. We will still see a lot of volatility, and an upward trend won't be discernible for another 9 months at least. But, now would be a good time to go in for a low cost, domestic index fund. I'd do it myself except that my liabilities (college debt) grow at a greater rate than any asset would appreciate. So, like the banks, I'm still deleveraging.

The TALF will freeze toxic asset prices as institutions swap CDOs and other junk for Fed money. This should jump start the securitization market beyond what Freddie and Fannie have been ordered to do.

But there's still systemic problems requiring a lot of time and anguish (and legislation) to resolve. Beware anything remotely resembling a bubble: energy, biotech, green stuff, discount retail, etc.

10 year plan?

I have been puzzled all day on the timing of Obama's 10 year spending plan. Is Obama being moralistic in telling us up front about the higher taxes and reduced defense spending that is due to follow? Or did Jindal's failure to offer a significant rejoinder the other night give Obama the clout to dump all the softballs out onto the green, knowing full well that the GOP lacks a slugger?

Or maybe it's politics of another variety. This morning I was pondering what would trigger ratings agencies to downgrade the US. I still don't know the answer to that particular question, but maybe Obama's plan hints at it. There's really no other reason to lay down the reality of fiscal responsibility in this time. Yes, we're that close to the brink. The president is telling the bond analysts and CDS spread geeks not to worry about the country's future ability to pay its obligations. I wonder if the dollar will rally or sink in light of this?

The anti-globalism rhetoric is heating up, as I predicted it would. The next fallout will be as governments fail to make a difference, populist anti-government anger will increase. Any and every country will have to watch out for its very own Timothy McVeigh.

In Europe, labor markets will become less fluid as foreigners are blamed for stealing the remaining jobs. That will not end well.

Here in the U.S., the housing bubble is still not deflated all the way. Obama will put America's real estate market on life support, much to the annoyance of those of us who acted responsibly by NOT buying a house during the bubble. Quite frankly, unless Obama can take the bull by the horns and rework the system itself, the country is sunk (as in the 70s, rather than Bolshevism). I hate to sound so dire, but that is where we are at here.

The anti-government crowd is going to get bigger and louder unless Obama can do most of the following:

• Quickly and aggressively place all zombie banks into receivership.
• Allow Detroit to fail.
• Provide an unemployment benefits backstop for the workers who lose their jobs.
• Maintain a tax structure that creates incentives for innovation and hiring; and
• Catch Osama bin Laden.

The current path, which coddles obstructionist Republicans and gives Pelosicrats too much power, will only lead to failure. Obama's desire to create unity is the right approach for another era. Right now, the country needs leadership and vision, which is what we thought when we went to the polls in November.

Nadir or Abyss?

I thought we were entering into the nadir of the financial crisis, but reading Geithner's proposal makes me think we're still on the edge of an abyss. Great.

Big Inflation

Here's an article on inflation -- not deflation -- on Seeking Alpha.

Calling the Bottom (psych!)

I earlier pointed out that Sonders of Schwab could have called the bottom, but didn't. The market has now lost all the recent gains and is negative for the year and appear to be going lower yet. How could that be, if the major funds have all delevered and sold to meet losses? Shouldn't there be nowhere else to put money besides equities? Well, that's because a) this is a credit crisis like none other, b) other investors are hoping for Obama's stimulus package to bring the same magic to the economy that his team brought to the campaign, and c) we are in the midst of an economic correction without historical parallel.

With that, who in their right mind would call a bottom at this time? No one can possibly know.

Who Knows The Economy?

The real question is not who knows or understands the economy. The question is who understands the fall, and who understands the way through the trough, and then who knows the way up again. Any given economic or market genius may only know one part of the cycle. For example, check this out if you want to see someone who understands what brought us down, but has lately shown little comprehension of the trough or the way through it.

Or, think of Krugman railing against tax breaks. Please tell me, Mr. Nobel, how does a stimulus alone make up for the coming wage deflation? It doesn't. The only way to get people to simultaneously delever and consume is to put more money in their pockets.

I just got around to reading The World Is Curved. I am curious to see what Smick sees about the next phase.

Sonders Calling a Bottom?

Schwab's Sonders has a great article/analysis available.

I think if it weren't for the economic chaos, she'd be calling a market bottom based on some of the facts: hedge funds deleveraged, hedge funds' and mutual funds' redemptions having peaked, etc. No one in their right minds (yeah, I'm calling you out, Professor Siegel!) would think that there is a quick V-shaped turnaround coming, though.

Maybe we're at the bottom, I don't know. I suspect we're bottom-ish, but there's just too much uncertainty remaining. Obama's stimulus, the effect of four more years of mortgage resets coming, inflation/deflation, corporate solvency in the coming two quarters, etc. Oh, and did I mention that at some point the War Bubble in the DC metro area is bound to pop? That's a good thing on balance, of course. Peace is always preferable to war. But, economically, it's one more detriment looming.

I've got a prediction: We've already begun a Depression. We won't know it for another year, though. In thinking of the business cycle, it is impossible to compare Bush's America to Hoover's America. It's like comparing a Hummer to a Model T. If you take a step downward from a Hummer, you're still driving a Jeep or a Nissan Xterra. Retreat from a Model T and you're hoofing it. So, if you're looking for GD2, you have to think in today's terms.

Spitzer on Slate

Oh how I wish he had kept his ego health in line:

http://www.slate.com/id/2207920/

To add to his ideas for transformative stimulus projects, I would mention that WalMart is ready to roll out a nationwide network of nongas stations. Would it be so bad if WalMart saved our country? I could live with that.

Thanks Slate and FP!

Slate and Foreign Policy are now under the same umbrella. Here's five economists noting all the reasons why we still have a long way to go before economic recovery ensues:

http://www.foreignpolicy.com/story/cms.php?story_id=4590

I couldn't be more thrilled to see such a perspicuous collection of notes, thoughts, and analyses. Look at the names, too: Roubini, Shiller, Smick, Roach, and Baker. Big brains.

The one thing lacking from the analysis is the possible ameliorating effect of Obama's stimulus plan. I don't fault the economists, though, because there is no way to predict how an inchoate rescue plan will operate. I hope in ten months' time these same analysts will be singing the praises of Obama's proper application of Keynesian stimulus. Somehow, though, I think we're in for a rough ride with an uncounted number of stimulus projects being marred by graft and waste.

Of particular note is the emphasis on an inflation bomb (Baker), weak commodities (Roach), and the overwhelming absence of a valuble asset in the marketplace right now. It's as though for fear of a bubble emerging, nothing is worthy buying. That is a crisis of confidence. Only time will restore fundamentals to the world economy and restore reasonable prices to assets and goods.

Globalism Update

As I mentioned in an earlier post, globalism itself will come under fire. Here's the first stirrings, albeit from a source that is presumbably very pro-globalism:

http://www.foreignpolicy.com/story/cms.php?story_id=4592

Here's Roach's statement statement on globalism:

A second megaforce at work is globalization—the cross-border linkages that
during the past decade have increasingly taken the form of trade flows, capital
flows, information flows, and labor flows. The credit crisis itself is
essentially a powerful cross-product contagion—a virus that began with subprime
mortgages but then quickly spread to asset-backed commercial paper,
mortgage-backed and auction-rate securities, and other instruments throughout
the credit markets. But because financial engineers were so adept at
distributing the complex products they created, there is a critical cross-border
dimension to this crisis as well. Little wonder this is the worst financial
crisis in 75 years.

In a conversation with my wife, I posited that failure to recycle is not that big of a deal because eventually some economic event will transpire that incentivize raiding landfills for reusable materials. Such an event could be triggered if we see any notable combination of protectionism and scarcity wrought by war and strife.

Please note that the image appearing above is an illustration done by Nenad Jakesvic for Foreign Policy Magazine. Link: http://www.foreignpolicy.com/story/cms.php?story_id=4595

Pearlstein Gets It Wrong

Through most of the financial meltdown Steven Pearlstein showed perspicacity. He ended the year with a dud, though, suggesting that pay cuts may be desirable across the board -- not just for auto workers.

I have several problems with the argument. First, let me up front: We Will See Wage Deflation. This will come in the form of wage stagnation (which amounts to wage deflation in the face of some inflation, which we will probably see again in a month or three), or in the more social-psychologically detrimental form of the recently unemployed failing to find work that pays in the ball park of the their former positions. Boo hoo for the buy side derivatives geniuses, right? But they comprise only a small part of the picture. You have to consider all the realtors, construction workers, contractors, furniture sales people, mortgage analysts, financial planners, landscapers, et al. I saw that Talbots in my mall is hiring (even though the chain is shuttering other stores). To go from realtor -- and the life you led with that level of income -- to folding clothes in the mall is a huge step back. And think of all the people scrambling for what little comparable work remains in the sectors creamed by the meltdown.

Wage deflation by fiat or by some widespread voluntary measure will not help anything. In the industries not directly affected by the meltdown, it will not ensure solvency of the company. Rather, it would create greater insolvency in the financial world as the wage-deflated workforce fails to make its collective payments on mortgages, car loans, and student debt.

Further, using biglaw as a model is ludicrous. These are the same overachieving, overeducated, overselfesteemed types of people that created the overblown derivatives market. Comparing biglaw to workers in the broader economy is like comparing a Kardashian with Rodney King in a competition for Biggest Media Whore. The Kardashians are everywhere. I know this even though I have never seen any show that features one of them. That tells you how desperate they are to get attention. They have my attention and I don't even know who they are or what they have done to be famous. Did they cure cancer or something?

On the other side of life, Rodney King was assaulted by the powers that be and was thrust in to the limelight only because someone caught his beating on tape. Biglaw attorneys will do anything to make huge paychecks, annual bonuses, and solidify their standing for one day becoming partner. They would even sacrifice using their immense talent for serving the public. Conversely, "regular" workers are trying to keep afloat and make sure they can live a life of comfort. The powers that be -- the real powers on Wall Street and its lobbyist fifth column -- have mobbed the workers and beat them into the ground. In the coming months, all of this will be caught on tape and given to us in the nightly news.

I wonder if Pearlstein isn't suffering from the same regulatory capture epidemic that has infected the Fed and the other bank regulators.

What annoys me the most about Pearlstein's column is that he gets it exactly backwards. What we need is across the board pay raises. The stock market is so battered, many analysts are looking at solvency rather than profitability. The simple truth of the matter is that most major corporations are either still profitable, or have sufficient cash reserves to carry them through for a couple years.

Why can't these corporations show some patriotism -- after all, they benefit in millions and billions of ways from the American system and culture -- by doing a private-side stimulus package? Give everyone a 10% pay raise this year, corporate America. Not only will you bring people's wages up to historical standards (relative to inflation), but you will save the system as a whole because people can spend half of the pay raise on reducing leverage and the other half on buying stuff. Yes, consumerism would return again, and companies would remain solvent, and the Obamas wouldn't have to stack another trillion of debt onto my son's shoulders. Then, once everything gets bullish again, you can go back to shafting your employees. Problem solved.

My god, I am so irate the more I think about this.