CBFE Economics

Free Labor: I Can't Afford to Work!

2010-04-06T00:43:00.000-07:00

Recent college graduates are really hurting in this current recession. According to anecdotal reports from across the media, young people are having a hard time getting any kind of job. Young people are being forced to compete with older, more experienced workers who have lost their jobs during this recession.

An interesting development related to this phenomenon is the rise of the "unpaid internship." The New York Times business section reported on this in yesterday's edition. The report includes a few personal stories from young college students who have worked in these unpaid internships and it's worth reading just to get a picture of what the job market is like for recent college graduates right now. However, a few things jumped out at me.

The first is this:

In 2008, the National Association of Colleges and Employers found that 83 percent of graduating students had held internships, up from 9 percent in 1992. This means hundreds of thousands of students hold internships each year; some experts estimate that one-fourth to one-half are unpaid.

This is a pretty huge and, in my eyes, significant change to the American labor market. We now have hundreds of thousands of people performing work for free. As the article points out, much of this is clerical or blue-collar labor. In other words, hundreds of thousands of jobs have been eliminated thanks to the proliferation of the unpaid internship. This didn't happen overnight however, this is a product of the past two decades of economic transformation.

The second is this:

Convinced that many unpaid internships violate minimum wage laws, officials in Oregon, California and other states have begun investigations and fined employers.

That's right - many of these unpaid internships are wholly illegal. Unpaid internships are meant to be educational. Employers who take on unpaid interns just so they can get clerical or blue-collar work done without having to pay somebody are in violation of the law. However, if the anecdotes in this article are any indication - this practice is quite widespread. There are six legal criteria that a internship must meet for it to be legally unpaid.

I also thought it was interesting that one student mentioned this practice was particularly widespread in the music and film industries. It makes some sense as it's reminiscent of an apprenticeship program but I also think it explains some of the inefficiencies and lack of professionalism in those industries.

All in all, students who are graduating today face a much tougher economic climate than previous generations. In order to succeed in many professional fields one must be willing to work for free for an extended period of time. Many students, those with families to support or a lack of financial reserves, are simply incapable of making this sacrifice - setting them back even further compared to their peers. I believe the inefficiencies of this system, which benefits established wealth and which removes hundreds of thousands of employment possibilities from the labor force, will manifest themselves in the future and further erode the U.S. economy.

Thoughts?

Update on Brazilian economy

2009-10-06T02:41:00.000-07:00

Note: I am not an investment advisor and nothing I state should be taken as investment advice. Please consult your own private professional financial advisor for help in making investment decisions.

A few days ago I posted about Brazil's economic rise. I wrote that the awarding of the 2016 Summer Olympics to Rio de Janeiro (as well as the fact that Brazil is hosting the 2014 FIFA World Cup) was further good news for an already strong, developing economy.

SeekingAlpha has two articles that support my arguments.

Feel free to read 'em here:
Brazil: Do Olympics Make It a Better Investment?
Why the Olympics Are Good For Infrastructure

Oil and Dollar decoupling - Good news for gold - Ron Paul was right

2009-10-06T01:43:00.000-07:00

Note: I am not an investment advisor and nothing I state should be taken as investment advice. Please consult your own private professional financial advisor for help in making investment decisions.

The Independent newspaper out of Britain has an amazing article called 'The demise of the dollar'.

The gist is that the Gulf states, China, Russia, Japan and France plan to stop using the U.S. Dollar for oil transactions beginning in 2018. The dollar will be replaced by a basket of currencies that will include the Japanese yen, the Chinese yuan, the euro, gold and a new unified currency that will be introduced for all the Gulf Arab states. Brazil and India have shown interest in participating in such a transition.

This transformation will be a pretty big blow against the value and supremacy of the U.S. Dollar.

I subtitled this post "Good news for gold" because the article also states:

The transitional currency in the move away from dollars, according to Chinese banking sources, may well be gold. An indication of the huge amounts involved can be gained from the wealth of Abu Dhabi, Saudi Arabia, Kuwait and Qatar who together hold an estimated $2.1 trillion in dollar reserves.

That means significantly greater demand for gold may be on the horizon. If these "Chinese banking sources" are right. How far on the horizon is an entirely different question. Keep in mind that this transformation isn't likely to take full effect before 2018. If this article is trying to imply that these participating states will buy their gold with dollars, that will only serve to weaken the dollar further and push up the value of gold even more.

I also subtitled this post 'Ron Paul was right.' First of all, Ron Paul is a huge gold bull so there's that. More importantly, Ron Paul has publicly spoken about the oil-dollar relationship for a long time and he warned us that something like this was unavoidable quite a while ago.

I direct your attention to Paul's article: 'The End of Dollar Hegemon y.'

Realizing the world was embarking on something new and mind-boggling, elite money managers, with especially strong support from U.S. authorities, struck an agreement with OPEC to price oil in U.S. dollars exclusively for all worldwide transactions. This gave the dollar a special place among world currencies and in essence “backed” the dollar with oil. In return, the U.S. promised to protect the various oil-rich kingdoms in the Persian Gulf against threat of invasion or domestic coup. This arrangement helped ignite the radical Islamic movement among those who resented our influence in the region. The arrangement gave the dollar artificial strength, with tremendous financial benefits for the United States. It allowed us to export our monetary inflation by buying oil and other goods at a great discount as dollar influence flourished.

This post-Bretton Woods system was much more fragile than the system that existed between 1945 and 1971. Though the dollar/oil arrangement was helpful, it was not nearly as stable as the pseudo–gold standard under Bretton Woods. It certainly was less stable than the gold standard of the late 19th century.

During the 1970s the dollar nearly collapsed, as oil prices surged and gold skyrocketed to $800 an ounce. By 1979 interest rates of 21% were required to rescue the system. The pressure on the dollar in the 1970s, in spite of the benefits accrued to it, reflected reckless budget deficits and monetary inflation during the 1960s. The markets were not fooled by LBJ’s claim that we could afford both “guns and butter.”

The Depression Has Begun

2009-10-04T00:09:00.000-07:00

SeekingAlpha is a great website. The economic analysis offered there is usually several times better than whatever you can get in the mainstream media.

Edward Harrison's new article 'Recession Is Over; Depression Has Begun' is case in point.

Harrison tries to explain the historical roots of our current economic crisis. Harrison challenges conventional thinking and argues that the U.S.'s economic policy of the 1950s-1970s was not really Keynesian, just as our economic policy during the 1980s-2000s was not really free-market. Instead, he tries to take an apolitical perspective and he argues that excessive debt is the root source of the current crisis. The economy's structural problems were masked by "the financialization of the American and British economies." By this he is referring to the growth of the financial sector and the reliance on a series of economic bubbles, inflation and (artificial) asset price appreciation for economic growth. The housing crisis and resulting financial crisis finally forced the economy's structural problems to the fore.

There is nothing terribly new here. Other writers have hit on these points before but Mr. Harrison brings it all together in a very eloquent and well-sourced narrative.

Here is Harrison's summary of the historical events that led to our current situation, in his own words:

1. A depression was borne out of high levels of private sector debt, the unsustainability of which became apparent after a financial crisis.

2. The effects of this depression have been lessened by economic stimulus and government support.

3. Government intervention led to a reduction in asset price declines, which led to stock market increases, which led to asset price stabilization and more stock market increases and eventually to asset price increases. This has led to a false sense that green shoots are leading to a sustainable recovery.

4. In reality, the problems of high debt levels in the private sector and an undercapitalized financial system are still lurking, waiting for the government to withdraw its economic support to become realized.

5.Because large scale government deficit spending is politically impossible, expect a second economic dip within three to four years at the latest.

What does Harrison think of the U.S. government's response to the crisis? He states that all of its efforts essentially boil down to a desperate attempt at increasing asset prices, or at least preventing them from declining further. This is true of the TALF program, the TARP program, the proposed elimination of marking-to-market accounting, near zero interest rates and the Capital Assistance Program. The government is basically trying (and somewhat succeeding at) "reflating" the economy.

In the longer term, Harrison believes that there are only two things that can prevent the American economy from experiencing a significant contraction: (1) prolonged, large-scale government deficit spending to replace contracting private consumption, or (2) transforming the American economy so that it can run a trade surplus. Option #2 is basically impossible to achieve, he argues. Option #1 is politically impossible in the long-term. When that government spending thats propping up the economy ends, expect a serious economic contraction more severe than the first (which will finally convince policy makers and the public that we're in a depression).

Edward Harrison's analysis is without a doubt one of the best I've read in a long time. I seriously encourage you all to go read it in full. However, I have a few questions/comments I would make to Harrison.

1. Harrison doesn't address the possibility that excessive government spending could weaken the U.S. Dollar to the point where its status as the world's reserve currency could be seriously challenged. What does he make of China, Russia and other emerging economies talking about replacing the Dollar for reserve currency purposes? What does he make of Tiger Management's Julian Robertson warning about the Dollar's future? What does he make of the World Bank's president's recent comments? On his biography page it states that Edward Harrison was a diplomat earlier in his career, therefore his insight would be particularly valuable. Is this all just political posturing or is it a serious challenge?

2. I want to focus on one point Harrison makes: he comments on the "financialization" of the American economy. This is a reference to the fact that economic growth in the U.S. (and U.K.) has been very reliant on the manipulations of (and growth of) the financial sector. I think this point deserves deeper examination. As I see it, not only is this not a normal recession, its not a "normal" depression in the sense that our economy is radically different from the way it was in the 1930s. Lets say government spending propped up the economy for an extended period during which much of the private sector's debt could be unwound and paid off, where would growth come from after that period ended? What sector(s) of the economy would be able to sustain the American standard of living after that period ends? Does he expect sectors like construction and retail to come back in full force? Judging from his economic analysis of the years 2000-2006, I doubt it. Does he expect much of the financial sector to be repurposed? And if so, to what ends? Even if most private sector debt is unwound during a prolonged decade-long period of Keynesian support of the economy and slow but steady economic growth returns after that, isn't it true that we would still need a return to trade surplus conditions in order to pay off our public debt which would, by then, probably be massive?

3. Harrison remarks that the U.S. is following the deflationary, secular bear-market model that Japan experienced during the "lost decade(s)." He should explain to laymen such as myself why, after two decades of economic stimulus and propping up the economy through deficit spending and efforts at preventing asset price declines, Japan was still unable to prevent long-term economic contraction and bear-market conditions. What did it do wrong and what is the U.S. doing right or differently which would allow us to succeed? Remember, Japan is still experiencing historic year-over-year deflationary declines as of last month.

4. Harrison comments that we can expect "an unpredictable and violent geopolitical climate and the likelihood of more muscular forms of government" over the next decade as a result of the coming economic volatility/instability. An extremely important point, I think. Nice euphemism by the way ... "more muscular." What are Mr. Harrison's thoughts on cutting military spending and government spending in order to lessen the possibility that desperate and bankrupt governments will turn to war and authoritarianism as a solution to their problems? I'm leaning towards it being a good idea, at least if we can convince the rest of the world (by which I mean, the other big military spending countries besides the U.S.) to go along with it as well. Unfortunately I don't see any politicians from the two major parties who have the political will or foresight to press for something like that on the global stage. I'd be particularly interested in Mr. Harrison's thoughts on this matter since he is a former diplomat.

I really, REALLY encourage you to go read the articl e. Most of the rest of the financial media is still standing amazed at the fact that Wall Street firms are still up to their usual "tricks" (massive derivatives trading, over-leveraged banks, "flash trading," etc). Duh. Did anyone really expect that to change? I expect more from my readers. This article is far more forward-thinking, paints a far broader picture and is much better sourced than most of the junk that the mainstream media is printing.

That's all folks!

Source: http://seekingalpha.com/article/164452-recession-is-over-depression-has-just-begun

Brazil's economy on the rise

2009-10-03T03:56:00.002-07:00

Note: I am not an investment advisor and nothing I state should be taken as investment advice. Please consult your own private professional financial advisor for help in making investment decisions.

The big news yesterday was that the 2016 Summer Olympics were awarded to the city of Rio de Janeiro. I say good for Rio, congratulations!

A lot of the media coverage around this story in the U.S. focused on President Obama's trip to Copenhagen to lobby the International Olympic Committee on behalf of the city of Chicago's Olympic bid. Clearly those efforts failed.

However, I was more interested in another angle: how this announcement relates to the Brazilian economy.

The 2014 FIFA World Cup is also being held in Brazil. The FIFA World Cup actually garners more television viewers around the globe than the Summer Olympics does. Unlike the Summer Olympics, which will take place almost entirely within Rio de Janeiro, the World Cup will be staged in twelve host cities across the country.

So two of the biggest atheletic competitions in the world (possible, the two biggest atheletic competitions in the world) will both be held in Brazil within 2 years of each other. This is great news for the Brazilian economy. Construction will create jobs. Brazil will likely see a multitude of tourists and foreign media visit its country and spend. Brazil will be forced to expand and build up its infrastructure. The economic "multiplier effect" of this infracture spending will likely be considerably greater than it would have been in Chicago, Tokyo or Madrid where infrastructure is already considerably built out and already of a relatively high quality.

The government of Brazil is planning on investing $11 billion into the economy as host. Some analysts have commented that Brazilian commodity producers stand to gain from the massive infrastructure construction. [1]

Reuters India is reporting that a Brazilian government-commissioned study is estimating that the Olympics alone will give the Brazilian-economy a $24.5 billion boost. Furthermore, a U.C. Berkeley study has found that countries that host the Olympics generally have a subsequent growth in exports. [2]

The news goes beyond athletics and international spectacles however.

Just yesterday, the Los Angeles Times reported that Brazil "is leading Latin American nations out of recession." It will have flat to slight growth this year and is projected to grow at a rate of 3.5% in 2010. Compared to another large, industrial Latin American country, Mexico, the differences are stark. The IMF is projecting that Mexico will contract an alarming 7% this year before growing 3% next year. [3]

Of course, these projections are based on the premise that Latin America is indeed going to enter a recovery phase next year. Thats not a given, although it seems more likely than the possibility that the United States will enter recovery next year, in my opinion. Regardless, its clear that Brazil seems to be out-competing many other Latin American countries and is emerging as a strong and dynamic economy in the region.

The Wall Street Journal is painting an even rosier picture. Its reporting economic growth of 1% in 2009, with projected growth of 4.5% to 5% for 2010. However, economists also warn about the dangers of inflation and higher interest rates (despite interest rates being at a historic low at the moment). [4]

I don't mean to sound like a rah-rah cheerleader for Brazil (really!). Brazil still faces major obstacles. The image most Americans have of Brazil is of violent slums, as depicted in the movie 'City of God.' Violent crime is a major issue facing the country. Much of the country lives in poverty and, of those, many are down-right destitute. As is the case in most Third World countries, political and civic corruption is endemic. It has a history of political instability. The list of problems that Brazil faces could go on and on.

However, I think theres some substance to all of the positive reports coming out about Brazil. Normally, when Americans think of large, industrial, developing economies we think of China. However, the Chinese economy is deeply intertwined with the troubled American economy and faces significant structural problems of its own. If you look at my post from yesterday on a possible stock market crash, you'll see that some analysts believe that there is a Chinese commodities bubble. Brazil has many of the positive aspects of an economy like the Chinese one but seems to be a bit less exposed to the type of risks that China faces. Thats my (uneducated) opinion at least, so take it as you will. At the very least, its an economy to keep your eye on.

Of course, who can forget Brazil's two most important assets (nay, national treasures): beautiful Brazilian women and beautiful Brazilian beaches. :)

Sources:
1: http://www.miamiherald.com/business/story/1264538.html
2: http://in.reuters.com/article/worldNews/idINIndia-42874720091002
3: http://www.latimes.com/business/la-fi-brazil-econ2-2009oct02,0,4409341.story
4: http://online.wsj.com/article/BT-CO-20091002-708835.html

Third Poll Results - Healthcare

2009-10-03T03:22:00.000-07:00

The third poll on my blog has ended.

The question I posed was: Do you support healthcare reform in the U.S.?

The results were:

1. Yes, I support instituting a universal healthcare system: 3 votes (3%)
2. Yes, with a public option: 8 votes (8%)
3. Yes, but without a public option: 5 votes (5%)
4. No, not at all. It would cost too much: 3 votes (3%)
5. No, not at all. The government is too inefficient: 15 votes (16%)
6. No, not at all. I don't trust President Obama: 14 votes (15%)
7. No, not at all. I don't trust government, period: 43 votes (47%)
8. Undecided: 0 votes (o%)
9. Other: 0 votes (0%)

91 people voted in total.

According to my own calculations, that means 16 votes (17.6%) were in favor of healthcare reform in some form and 75 votes (82.4%) were against it.

I was surprised to see that not that many people were against healthcare reform because of financial or cost-related issues. Most were against it because they didn't trust the government and/or President Obama or because they thought the government would be too inefficient in administering healthcare.

I'll put up a new poll soon, make sure to vote.

Ten reasons for a stock market crash?

2009-10-02T23:45:00.000-07:00

Note: I am not an investment advisor and nothing I state should be taken as investment advice. Please consult your own private professional financial advisor for help in making investment decisions.

The stock market has taken a dive the past two days. Will that trend continue? I don't know.

What I do know is that on September 24th, SeekingAlpha published an article written by Robert Baggio entitled "Ten Reasons for an Imminent Stock Market Crash." Was Mr. Baggio prescient with his article? Only time will tell but its definitely worth a read.

What are his ten reasons? Well, I encourage you to go over to SeekingAlpha and read the article for yourself but I'll give you a taste here. In my own words, his ten reasons are:

1. Rampant insider selling.

2. Much of the current rally has been (a.) based on trading in bankrupt companies (Fannie Mae, Freddie Mac, Lehman Brothers, etc) (b.) made up of investors trying to cover their shorts and (c.) of a low volume.

3. Most investors are short-term bullish and long-term bearish. Furthermore, market psychology does not currently correlate with the economic fundamentals.

4. A lot of the market is short on the U.S. Dollar and long on ... "everything else."

5. Household incomes are going down while the number of people living in poverty is growing. "Income dispersion" is growing.

6. There is a Chinese commodities bubble. The rise in commodities prices isn't because the Chinese economy is really growing as fast as it appears to be, its the result of the Chinese investing in commodities so as to avoid the U.S. Dollar. The Chinese business model is just as flawed as the American one.

7. Under President Obama we have more government intervention into the economy, there is increased protectionist sentiment and there are "socialist tones" to our political rhetoric.

8. The money supply and credit continue to contract at alarming rates.

9. The market is very complacent and everyone is (falsely) assuming that everything is okay.

10. The European economy is still in shambles despite proclamations from European political leaders that "the recession is over" there. To quote Baggio:
"What happened to Latvia’s currency crisis or the Swedish Banks? Are Hungary and Poland ok? Has the Austrian Banks’ exposure to Eastern Europe disappeared? Is Spain back on its feet? Is the UK solvent again? Are Irish banks lending like there is no tomorrow? How about Germany’s manufacturing base—is it solid with a EUR at 1.48 and the US consumer missing-in-action? Is Deutsche Bank’s $3 trillion balance sheet made up of only physical Gold? Are German banks profitable and healthy again? I guess somebody waved a magic wand and fixed all Europe’s problems overnight!"

This is just a very basic summary of Mr. Baggio's article. This summary doesn't do it justice so I encourage you to go over to the actual article and read it in-depthly.

So there you have it. Are you convinced? What are your thoughts on the future of the stock market?

Source: http://seekingalpha.com/article/163213-ten-reasons-for-an-imminent-stock-market-crash

World Bank President: U.S. shouldn't take Dollar's status for granted

2009-09-28T02:26:00.000-07:00

The President of the World Bank, Robert Zoellick, is asserting that “The United States would be mistaken to take for granted the dollar’s place as the world’s predominant reserve currency." This is according to excerpts of a speech which Zoellick is slated to deliver today to the Paul H. Nitze School of Advanced International Studies at Johns Hopkins University. Zoellick also called for greater international cooperation on economic issues, particularly through a "peer-review" process. Zoellick also criticized central banks and their response to the economic crisis. Zoellick argued that central banks "“argued that damage to the real economy of jobs production, savings and consumption could be contained, once bubbles burst, through aggressive raising of interest rates. They turned out to be wrong.”[1]

Robert Zoellick served as U.S. Trade Represenative and Deputy Secretary of State under the George W. Bush administration. President Bush appointed him to succeed Paul Wolfowitz as President of the World Bank on July 1st, 2007. [2]

Sources:
1: http://www.bloomberg.com/apps/news?pid=20601087&sid=aINN4BM6Fy5w
2: http://en.wikipedia.org/wiki/Robert_Zoellick

Marc Faber Update (9/28/09)

2009-09-28T01:50:00.000-07:00

Note: I am not an investment advisor and nothing I state should be taken as investment advice. Please consult your own private professional financial advisor for help in making investment decisions

Marc Faber is back in the news. Who is Marc Faber? He's the author of the 'Gloom, Boom, Doom Report.' On March 9th, 2009, the S&P 500 hit a 12-year low. On that day, Faber predicted stocks would rally thanks to government stimulus money being pumped into the economy. Since then, the S&P 500 has rallied 55%.

Faber is back in the news today, making the following assertions:

*Stocks have likely peaked for the year and will probably face a 20% correction.
*Faber prefers emerging markets. The Asian economies will continue to grow despite the financial mess in the West.
*Fiscal and monetary stimulus measures have only delayed an inevitable crisis instead of preventing it.
*“The next stage is for total breakdown of the financial system and for an economic and financial crisis that will bankrupt governments.” -Faber
*Gold will face a correction along with equities. Faber "wouldn't be surprised" to see gold settle at $920 an ounce. However, Faber does not plan on selling his holdings in gold.
*Despite being an ultimately doomed currency, the U.S. Dollar is likely to rally amid deflation concerns.

Source: http://www.business-standard.com/india/news/marc-faber-predicts20-fall-in-markets/371403/

Iran, Oil and Energy Security

2009-09-26T00:37:00.000-07:00

If you've been watching the news you know that tensions between Iran and the U.S. are very high. We should consider the possible economic repercussions ...

The first thought that comes to mind is, of course, about oil. Oil prices did rise in New York on Friday as news about Iran's nuclear program went public. However, one analyst noted that while in previous economic periods this type of news could have resulted in a $10 run-up in the price of oil, the recession has significantly weakened the global demand for oil and the oil industry has quite a bit of spare capacity so the effect wasn't that severe. [1] Iran produces less than 3% of the oil consumed daily in the world, so spare capacity could pick up any slack should Iran's oil industry stop exporting for whatever reason. [2]

However, Iran lies on the Strait of Hormuz, through which 20% of global oil exports pass. Remember, the Arabian peninsula (Saudi Arabia, Oman, Yemen) are right across the Persian Gulf from Iran. The real threat to the global economy is if these current tensions transform into a military conflict. At that point, its hard to predict what would happen to the price of oil (other than that it would go up, obviously).

Interestingly, a few days ago the New York Times published an article which stated that China has joined India and a few other countries in selling gasoline to Iran (despite being a net oil exporter, Iran lacks the refining capacity to meet its domestic demand for gasoline). The state-run Chinese firm that is selling oil to Iran also happens to be doing its trade in Euros, answering Tehran's call to move away from use of the U.S. Dollar. These imports would soften the blow that any potential U.S. trade sanctions would exert on the Iranian economy. Ironically, Western sanctions on Iran could turn into a business opportunity for Chinese and Indian companies. [3]

Elsewhere on the globe, the Wall Street Journal warns that Nigeria could pose a bigger energy-related problem for the global economy than Iran does. Nigeria used to produce 13% of the world's sweet crude oil in 2005. However, political instability has reduced output since then. [2]

Sources:
1: http://www.google.com/hostednews/afp/article/ALeqM5gZ12tUUa5j8oeogFUTi2_g7CX1vg
2: http://online.wsj.com/article/SB125392196711142547.html?mod=googlenews_wsj
3: http://www.nytimes.com/reuters/2009/09/23/world/international-us-china-iran-oil.html

What I'm Reading (9/25/09 edition)

2009-09-25T01:50:00.001-07:00

*The founder and Chairman of Tiger Management, Julian Robertson, warned that the U.S. faces a financial "armageddon" if China and Japan stop buying U.S. debt or start selling off the bonds they already own. He advised that the U.S. should "quit spending, start saving, and scale backward."

I think hes probably right but how politically feasible is that? What politician would be willing to publicly promote austerity measures in the U.S. and could still manage to win elected office? Ron Paul maybe? Unfortunately that still seems like a long shot if we're talking about the Presidency.
Read more: US May Face 'Armageddon' If China, Japan Don't Buy Debt

*Citigroup is thinking about closing some of its branches across the country. Apparently Citibank has previously announced plans to close its consumer finance division (news to me). Citigroup's plans for revitalizing itself include figuring out how to collect more deposits and improving customer service. Ingenious, I'm sure it only took an army of consultants a lot of time and money to come to that radical conclusion.
Read more: Citigroup Said to Consider Shrinking Branch Network (Update 1)

*A research firm in Spain is predicting that the Spanish economy will continue to conract for the next three years. They state that the economy is likely to eventually lose 11% of GDP compared to its peak in this decade. Unemployment will peak at 25%. In other words, it is entering a full-fledged Depression. One analyst claims it will take a 10% reduction in salaries to make the Spanish economy better able to compete globally, but the trade unions and current government will fight to prevent any declines. Despite all this, the government continues to claim that the recession will be milder in Spain than in the rest of Europe.

Ambrose Evans-Pritchard blames Spain's membership in the European Monetary Union for having a big role in creating the crisis. Membership in the EMU automatically cut interest rates in half. If this recession/crisis continues, or gets more severe, I expect more cracks to appear in the European Union.
Read more: Spain tips into depression

Liberals Support Animal Torture Videos: A New Low for the Culture of Death

2009-09-24T00:12:00.000-07:00

This blog is normally about economics, although I've written about politics a few times. The following story really caught my attention and I felt compelled to blog about it.

The L.A. Times is reporting that the Supreme Court will hear a case this fall to decide whether or not videos of animal torture are protected by the 1st Amendment. At issue are various types of videos marketed to people with certain sexual fetishes. These videos are meant to sexually stimulate the viewer by showing small animals, kittens and such, being crushed and burned to death. Also at issue are dogfighting-related videos that show animals being trapped and left defenseless only to be killed and torn apart by pit bulls. [1]

Liberals are launching an all-out campaign to overturn federal legislation that makes these types of videos illegal. The American Civil Liberties Union (ACLU) is leading the charge. A coalition representing major media interests, including movie producers and journalists, is providing a ton of legal aid to the producers of these films under the guise of supposedly defending free speech. However, even the extremely liberal L.A. Times points out that their argument is complete baloney. The existing federal law explicitly states that depictions of hunting, fishing and other sportsmen-related activities are not illegal, nor are images that have "religious, political, scientific, journalistic, historical or artistic value" such as, say, a video of a medical/veterinary animal dissection or a documentary on food production. The law is specifically and only aimed at sadistic depictions of animal cruelty, torture or death. The things depicted in these videos would already land their producers in prison in all 50 states under existing animal cruelty laws, were they to be caught in the act of perpetrating them. Yet, Hollywood and corporate media interests are trying to convince the public that somehow your right to free speech will be infringed if these videos are banned.

Where were these liberal champions of free speech when individuals were being arrested for putting up images that depicted President Obama as The Joker? [2] Where were Hollywood's expensive lawyers when corporate interests had a billboard that criticized an insurance company censored and removed in Los Angeles? [3] Nowhere, that's where. So stop and think about that for a second before you take these jokers (heh) at face value. Why is it that they don't seem to give a damn about defending political speech, especially if that political speech criticizes their candidate of choice or challenges powerful financial interests, but they become raging libertarians when it comes to defending the "right" of some degenerate to painfully kill an innocent animal so that they can masturbate? I ask that question in all seriousness because I don't have definitive answers. All I know is that when I look around at contemporary America I see a culture that glamorizes death, promotes moral relativism (often through coercion and almost always undemocratically) and denigrates anyone who dares to believe in the dignity of living things or who dares to live by a moral code.

After all, how many of the people supporting the production of these videos are the same people who criticize anyone who hunts or fishes? When was the last time you saw Hollywood paying for lawyers to defend the 2nd Amendment? When was the last time the ACLU launched a campaign to defend the rights of hunters and fishermen? Apparently, humanely and legally hunting game to feed your family is barbaric but crushing a kitten to death under a woman's high heel (psychoanalyze that fetish, eh? ... better yet, don't) so that you can masturbate is just fine and dandy.

How are we not living in a culture of death?

This brings to mind another low point in Hollywood's history: the execution of Stanley "Tookie" Williams. In case you don't know, "Tookie" Williams was the founder of the Crips street gang who was convicted of four murders. Not only did he admit to shooting an innocent man at point-blank range and finding the man's dying gasps "hilarious," not only did he admit to targeting white and Asian victims solely because of their race, but he is also indirectly responsible (through the creation of the Crips gang) for destroying the lives of an untold number of people and transforming entire neighborhoods of Los Angeles into war zones. Yet, a wide variety of individuals in Hollywood stood by Williams and criticized the state of California for executing him. Liberals gathered in droves outside of San Quentin Prison on the night of his execution to publicly mourn the death of one of the most vile, destructive human beings to walk the earth in recent memory. These are the same people who think that anyone who has any qualms whatsoever over abortion must be a theocratic, far-right fundamentalist Christian that only wants to control women's bodies. No contradiction there, right?

What kind of society not only accepts but commercializes the suffering, misery and death of the weak, defenseless and innocent while simultaneously valorizing and praising violent psychopaths that kill other living things for their own amusement?

Is this the kind of society you want your kids to grow up in? No doubt years from now when kids are perpetrating more acts of violence, when more kids are medicated daily so that they can "deal" with reality, when more kids are psychologically damaged, liberals will blame it on ... not spending enough money on schools. Yep, we need to spend more. The possibility that it could have something to do with growing up in a culture that expresses itself through sadism and cruelty? Nah. You must be one of those old-fashioned moral absolutists. Quit making value judgments.

Am I the only who thinks our society is messed up? Not just messed up but deeply messed up? Who's promoting this culture of death and why?

Sources:
1: http://www.latimes.com/news/nationworld/nation/la-na-cruelty23-2009sep23,0,1482217.story?page=1
2: http://www.thepittsburghchannel.com/politics/20952603/detail.html
3: http://cbfe-econ.blogspot.com/2009/09/truth-is-more-controversial-than.html

China and the future of Gold

2009-09-18T08:29:00.000-07:00

Note: I am not an investment advisor and nothing I state should be taken as investment advice. Please consult your own private professional financial advisor for help in making investment decisions.

The whole world is talking about gold breaking $1,000 in price.

Many people are asking: is this price sustainable? Where will gold go from here?

I can't really answer these questions myself as I'm not an expert on gold or on precious metals in general. I will note that gold is not really an asset in the normal sense, it is quite simply a form of money. So the question of whether or not gold will go higher can also be framed as "Will the U.S. Dollar (or whatever the currency may be where you live) go lower/weaken?" If so, then the answer is likely yes, the price of gold will go higher vis-a-vis that currency.

We all know the U.S. Dollar (USD) is in the dumps. The Federal Reserve's "quantitative easing" policy and climbing federal deficits are working a one-two combo on the USD. This makes me think that the gold rally isn't unwarranted and that a "gold bubble" probably isn't in effect right now, contrary to what some pundits have postulated.

A lot of news about gold has been coming out of Asia as of late.

To begin with, an Internet publication related to the mining industry and precious metals (Mineweb) is reporting that China's state-run Central Television network has aired a news program extolling the benefits of investing in precious metals and seemingly advocating that the Chinese public engage in precious metals investing by promoting the Chinese mint's bullion products. [1] A recent Wall Street Journal article seems to confirm this news report. [2] Several websites are repeating rumors first published by an employee of SinoLatin Capital, a merchant bank which specializes in transactions between Chinese and Latin American firms, that China may attempt to ban the export of gold. [3] These are just rumors and the author mentions that his firm has several Chinese mining companies as clients, so make of that what you will. All of this comes on top of the admission earlier this year that the Chinese Central Bank has been purchasing gold in order to build up its reserves.

If you want to get an idea of what the "gold mania" in China is like at the layman's level, I suggest you read this article. [4] Apparently you can buy gold at most retail bank branches in China and the Chinese mint is opening shops from which to sell bullion in many cities.

Elsewhere in Asia, it was announced today that Pakistan is abolishing import duties on gold in order to encourage legal imports of gold and discourage black market imports. [5]

Now for the "but." In the past I've mentioned the possibility of a debt-fueled deflationary depression in the U.S. (see Debt Deflation and False Dawns) I thus have to bring to your attention this article which states that in a deflationary decline gold would not be a good hedge. [6] The article's authors make a convincing argument, especially if you're a fan of the gold standard and a critic of fiat currencies.

Regardless of what happens in the future, my judgment right now is as follows. We have to remember that the price of gold is notoriously volatile. The fact that gold is so strong right now and so many people are talking about investing in it reveals how little confidence there is in the current financial order and how much unease and uncertainty continues to exist out there. That's the only conclusion I can positively take away from this situation at the moment.

Sources:
1: http://www.mineweb.co.za/mineweb/view/mineweb/en/page33?oid=88452
2: http://online.wsj.com/article/SB125249222381695221.html
3: http://www.commodityonline.com/news/China-may-ban-export-of-gold-silver-21219-3-1.html
4: http://www.sovereignman.com/finance/gold-mania-in-china/#more-650
5: http://www.dailytimes.com.pk/default.asp?page=2009\09\18\story_18-9-2009_pg5_11
6: http://www.speculative-investor.com/new/article060902.html

Post "Cash for Clunkers" demand for autos is "disaster"

2009-09-18T05:48:00.000-07:00

According to Chrysler (now owned by Italian automaker Fiat), sales of its cars are down 19% so far this month.

Chrysler/Fiat's CEO described this development as a "disaster" and said the auto industry would see "harsh reality" this month.

The good news? Apparently Chrysler lots cumulatively have about 1/4 of the inventory on hand compared to a year ago. Chrysler has plans to restock those lots, which presumably means more work for their factories which is good for their employees.

Nonetheless, this development supports the argument many people made: that "Cash for Clunkers" wouldn't create any new demand, it would only cause people who already had plans to buy cars to buy during the program's run thus reducing demand in the months afterward.

You can read Bloomberg's article on this piece of news here: Chrysler Executives Say U.S. Industry Sales Plunging (Update1)

Obama almost surely will get another Supreme Court pick in Spring 2010

2009-09-14T22:30:00.000-07:00

This isn't economy-related but its pretty big news and I'm surprised more people aren't talking or writing about it.

Did anyone else catch this past weekend's The Chris Matthews Show (the Sunday morning political round-table on NBC affiliates, not MSNBC's Hardball)?

A few weeks ago, around September 2nd/3rd, there was a lot of speculation in the media about whether or not U.S. Supreme Court Justice John Paul Stevens was getting ready to retire soon. At that time, it was announced that Stevens had only hired one law clerk for 2010, instead of the usual four, which many interpreted as a sign that 2010 would be his last year on the court.

On The Chris Matthews Show, panelist Howard Fineman (Newsweek's Senior Editor and Chief Political Correspondent) made it clear that the rumors are true: Stevens is almost definitely going to retire in the spring of 2010. Here's the excerpt from the show transcript:

Mr. FINEMAN: There's been talk that Justice John Paul Stevens may retire. I'm told by former clerks of his that it's definite, that by next spring he'll announce that he's leaving, which means that Barack Obama will have more research to do about somebody else to appoint. [1]

Fineman published an article today on Newsweek's website that further verifies this. He writes:

Though there are no sure things in life or judging, Stevens's legion of former clerks are convinced that he will in fact retire late next spring. Stevens is known as particularly punctual and exacting about lining up new clerks early in the year. The fact that he did not do so is a certain indication that he will step down, one of his former clerks told me this week. "There is NO WAY he would go into next year without the full group," said this clerk, who spoke on background out of respect for court tradition and the behind-the-scenes role of clerks. Another former clerk, speaking on the same condition, agreed."He's still vigorous and I think he wants to leave the court that way," this clerk told me. [2]

So there you have it. It looks like Justice John Paul Stevens will announce his retirement next spring and President Obama will get to appoint another Supreme Court Justice.

Stevens is without a doubt a member of the 'liberal wing' of the Supreme Court so President Obama's appointment is unlikely to fundamentally alter the ideological makeup of the court.

However, if Stevens does announce his retirement in the spring it will be at the beginning of the 2010 midterm election cycle. That means his retirement will almost surely have significant political importance and we could see quite a heated political battle. If President Obama's popularity keeps slumping or if Obama loses out completely in the healthcare debate then conservatives will certainly feel emboldened and will politically press for, at least, a Justice who is more conservative than Stevens was. If someone like Justice Anthony Kennedy (who is currently the sole swingvote between the liberal and conservative wings) gets nominated then that will almost surely be seen as a conservative victory. Liberals will fight hard to hold their ground on the court and President Obama will have to make sure and appease them to some degree lest his support among his base constituency further erode.

So who's being seriously considered by the White House? I certainly don't know so I defer to the opinion of Mr. Fineman, a D.C. insider who clearly has connections in the Court. Fineman (among many others in the media, actually) mentions Harold Koh, a Legal Advisor to the State Department and dean at Yale Law School, in his article. He served in various forms under the Clinton and Reagan administrations and was a clerk for former Justice Harry Blackmun (who was appointed by President Nixon and started out as a conservative but latered authored the Roe v. Wade decision). David Bernstein, a conservative law professor at George Mason University, wrote that Koh is a "highly partisan Democrat" but the Yale Conservative Law Students group responded by writing that "Dean Koh has been very supportive of conservative students and conservative student organizations." [3] Koh, who is of Korean ancestry, would be the first Asian-American to serve on the Court.

Mr. Koh is just one possible candidate, albeit a strong one considering the media buzz surrounding him.

Other possibilities that have been mentioned by the media include:
*Diane Wood
*Merrick B. Garland
*Elena Kagan
*Cass R. Sunstein
*Jennifer Granholm
*Janet Napolitano

... among many, many other possible candidates ... there is no real way to predict this, this early. Regardless, it looks like 2010 be a big year politically (and economically! as readers of my blog know).

Sources:
1: http://www.thechrismatthewsshow.com/html/transcript/index.php?selected=1&id=182
2: http://blog.newsweek.com/blogs/thegaggle/archive/2009/09/14/fineman-predicts-justice-stevens-to-retire-next-spring.aspx
3: http://en.wikipedia.org/wiki/Harold_Koh

The Japanese Obama?

2009-09-13T18:31:00.000-07:00

Ambrose Evans-Pritchard, International Business Editor for the Telegraph, wrote an article on the Japanese fiscal situation at the beginning of this month.

The article informs us that, fiscally, Japan is in very dire straights. The article states that:
1. The IMF is expecting the Japanese budget deficit to top 10% of GDP this year (for some perspective, the U.S.'s deficit-to-GDP level will likely end up being around 12% this year).
2. Japan's Gross Public Debt will reach 215% of GDP in 2009, the highest in the world.
3. Corporate tax revenues are negative in Japan due to "a collapse in profits."
4. The Japanese savings rate has fallen from 14% in 1990 to 2% today.

Wow. My perspective? Its important to keep in mind that Japan has reached this point after nearly 2 decades of on-and-off (mostly on) deflationary decline, numerous corporate bailouts and several rounds of attempted fiscal stimulus. Even with all that effort expended, Japan is still experiencing record year-over-year deflation and it has accumulated alarming levels of debt (which, in turn, is alarming bond investors). The Japanese deflationary period is not exactly analogous to the U.S.'s current situation but, in some ways, its a better fit than the Great Depression of the 1930s is. If the stimulus ends up being incapable of resuscitating the economy people should definitely pause, take a look at the Japanese historical experience of the past 2 decades and ask ourselves what exactly happened there and how can we avoid the same fate? That's especially true if policy-makers begin pushing for a second major stimulus package or a string of more "Cash for Clunkers"-type subsidies.

So why'd I label in this post "The Japanese Obama"? Well, as we can see, while in some ways Japan is trending years ahead of us in regard to being in a debt-fueled slump, in other ways they're just catching up.

The Japanese just elected the Democratic Party of Japan (unseating the Liberal Democratic Party for only the second time in the post-war period). The DPJ brings with it Mr. Yukio Hatoyama as the new Prime Minister. Hatoyama and his party were partly elected on the promise of Obama-style social reform including, as Evans-Pritchard's article points out, $180 billion "for child allowances and social policy." The people of Japan have invested a lot of hope in the idea that the new blood of the DPJ will re-invigorate Japan. I think the changes to the savings rate tell us everything. Japanese culture emphasizes saving and frugality. Thats why the savings rate was at 14% in 1990. It didn't come down because the Japanese suddenly became rabid consumers. My supposition is that it came down primarily because people had to utilize their savings to "make ends meet" quite often. According to Evans-Pritchard, PM Hatoyama is already backing away from some of his social policy promises after realizing the costs involved.

A lot of attention is being focused on China. This is justified of course since China is the rising star on the global stage. However, we should still pay attention to the second biggest economy in the world. Considering our similar predicaments, we potentially have a lot to learn from their experience(s).

Read the article here: Bond vigilantes fret over Japan

Marc Faber Foresees Inflation

2009-09-10T23:42:00.000-07:00

What lies in store for the American economy? Inflation or deflation? The financial world has been debating this question for a while now.

Famous investor Marc Faber spoke publicly on Wednesday (9/9/09) and reiterated his opinion that the U.S.'s extremely high deficit, near-zero interest rates and the Federal Reserve's quantitative easing policy will combine to spur inflation in the future.

Faber predicted the current stock market rally last October, when he advised his readers to invest in stocks again. Apparently Faber is still quite bullish on stocks but not because he has much faith in a recovery or in the current state of the economy. Quite the opposite, actually.

“Money printing will be unprecedented because the deficit will need to be financed,” Faber said. “The weaker the economy, the more the stock market will go up because the money that is being printed will go into” speculative assets.

The bold emphasis was added by me. I'm in complete agreement with Faber on this point. I argued that the stock market is not at all an accurate barometer of the nation's economic health in two of my previous posts (Nouriel Roubini and the Future of the Stock Market and Desperate Investors Embrace Risky Moves).

“If the dollar is weak, there is a very good chance that equity prices could rise quite substantially,” Faber said. A weaker dollar is “good for asset prices.”

Faber also recommended investing in precious metals and raw materials as a hedge against a weakening dollar.

Faber also challenged the idea that we're in the midst of the beginning of a recovery, pointing out the continuing weakness in consumption.

Read the entire article at Bloomberg news by clicking here: Faber Says ‘High’ U.S. Deficit Will Spur Inflation (Update1)

Note: I am not an investment adviser and this is not intended to be taken as investment advice.

So, whats your take? Whats the U.S. economy in store for? Inflation? Deflation? Is Faber right or wrong? Why? Make your case here.

Second Poll: Which is the bigger threat to the global economy? Deflation or Inflation?

2009-09-09T23:35:00.000-07:00

For the second poll on this blog, I posed the following question to you readers: "Which is the the bigger threat to the global economy?" The options were (1) deflation and (2) inflation.

148 people voted.

The results were as follows ...

Deflation: 56 votes (37%)
Inflation: 92 (62%)

Its clear that a majority of my readers believe that inflation is currently the biggest threat to the global economy. Yet, a sizable number of readers (nearly 40%) thought deflation was the biggest threat. I'm glad to see that kind of diversity of opinion among my readers. My take? I'm still undecided. I know that sounds like a "cop-out" but its the truth, I see both inflationary pressure and deflationary pressure working on the economy right now. That's one of the reasons why I'm committed to continue covering this topic in the future.

If you voted in this poll (or even if you didn't) feel free to use the comments section attached to this thread to defend your opinion or your take on this question.

----

For my next poll question I've decided to ask about the plan for nationalized healthcare in the U.S. Please vote!

"Truth is more controversial than pornography"

2009-09-09T22:47:00.000-07:00

The Los Angeles Times has an interesting article out today (9/9/09) written by Steve Lopez entitled 'It's funny what passes for offensive these days.'

In the article, Lopez points out the divergent fates of two billboards in Los Angeles.

The first billboard is a stark yellow ad with simple black text that reads "Consumer Watchdog says: 'You Can't Trust Mercury Insurance.'" The text is followed by a referral to Consumer Watchdog's website. Their website features ten objectively factual reasons explaining why Consumer Watchdog believes consumers should be wary of doing business with L.A.-based Mercury Insurance Company. The billboard was located on Wilshire Boulevard in L.A.'s Koreatown.

A few blocks down Wilshire, also in Koreatown, stands another billboard, this one advertising Absolut Mango vodka. This billboard depicts a mango fruit surrounded on two sides by a series of wavy lines. That description might sound innocuous in text but if you look at an image of the billboard (you can see an image by clicking here) you'll see that the artists clearly intended to suggest the shape of a woman's vagina. The image, which is not on a traditional billboard but rather is draped across the side of a building, is described by Lopez as "a 10-story vagina on a building."

So what happened to these billboards? Mercury Insurance Company complained to CBS Outdoor about the Consumer Watchdog one. Even though Consumer Watchdog's billboard (and Consumer Watchdog's website) contains only factual information and the billboard was determined not to be in violation of any laws or of CBS Outdoor's policies when it was first put up, CBS Outdoor caved to Mercury's pressure and pre-emptively pulled it down.

What happened to the Absolut vagina ad? Well ... nothing, really. Its still up there as of today. Apparently Absolut has other, very similar, ad campaigns for it's pear-flavored vodka (image here), citron-flavored vodka (click here), as well as their mandarin-orange and peach flavors (I don't have images for those). Of course, as far as Absolut is concerned, these ads are meant to depict "streams" and not the female anatomy. Apparently, anyone out there who dares to think that a large corporation, especially a corporation that sells alcohol, would dare to use sex to market its products (especially in a veiled, suggestive way) must be deeply cynical and simply projecting their own dirty-mind onto Absolut's noble efforts to promote artistic endeavor. Whats your take on this?

So ... what's the lesson here? Well, if you dare to speak up and criticize the practices of a major corporation in a lawful and objective manner, you can expect big business to leverage its financial and political clout (Mercury Insurance is one of the biggest political contributors in the state of California) in order to silence you and your message, or at least prevent you from airing it in a public environment. What if you drape the image of a 10-story tall vagina on the side of a building in a major metropolitan area? You can expect to sell more products, get rich and face very little public scrutiny. In Los Angeles, economic truth is not welcome in public places but pornography is.

As Harvey Rosenfield, founder of Consumer Watchdog, puts it: "Truth is more controversial than pornography."

Life Settlements Update: "investors are looking for the individuals most likely to die"

2009-09-07T02:07:00.000-07:00

Yesterday I posted about Wall Street's proposal to securitize "life settlements." If you haven't read that post yet, you can find it by clicking here. The post got a huge response. In fact, the initial New York Times article got media attention from around the world. Its pretty clear that this is an issue that resonates strongly with the public. People are angry. Righteously so, in my opinion.

Since this is an issue many of you clearly care about, I thought I would dig deeper and bring you readers some more information.

Some readers pointed out that the concept of "life settlements" isn't new. That's true. They've actually been around since the early part of the 20th century. For most of their history they were known as "viatical settlements."[1] Historically, these kind of settlements were mostly engaged in by "high networth" (read: rich) elderly individuals who were fairly certain they only had a few years of life left (for more on how viatical settlements transformed into the modern form of life settlements, keep reading below). However, we shouldn't dismiss the story just because the concept isn't new. There are a few factors that make this story worthy of people's attention:

(a) Some banks are clearly planning on transforming this into a big business. The New York Times quotes an estimate that states that the market for this type of financial product could grow to $500 billion [2]. The Economist estimates that the market currently stands at about $18-19 billion.[3]

(b)The proposal is to securitize these life settlements into CDO-like securities. Thats the same business model that was used to transform subprime mortages into securities. That ended horribly. Why is Wall Street so insistent on following a business model that has failed so dramatically in the recent past?

(c)Lets look at who is behind this proposal. The New York Times article points to a Jan Buckler at a firm called DBRS as one of the pioneers in life settlement risk management.[2] If we look at Jan Buckler's LinkedIn.com page, [4] we see that she worked for Bear Stearns from 1999 to 2007. The article also points to an individual named Andrew Terrell, who was in charge of Bear Stearn's longetivity and mortality desk, as a major proponent of the idea. Most readers will know that Bear Stearn's was one of the first bank casualties of the recession. These are only two individuals, a tiny fraction of the total number involved in this "industry." However, this illustrates a point: do you trust people who worked for failed banks (that were driven into the ground because of their greed) to employ a business model that has failed dramatically over the past few years to package and trade securities which make it in the investor's interest for an innocent human being to die as fast as possible? Thats a serious question because a lot of the financial media is reporting that this whole proposal is no big deal and they don't understand what the fuss is about.

(d) This idea is being proposed in the middle of a brutal recession that is leaving lots of people out of work and desperate. Wall Street says financial agreements like this help those people make ends meet. Others would say this is just a new way for Wall Street to make a buck off people in one of their weakest and most vulnerable moments.

(e) This idea is being proposed at a time when many seniors are already worried about the proposals for nationalized health care and are suspicious about the possible existence of so-called "death panels" that might refuse healthcare in one form or another to the elderly or very sick. Here, we're talking about a proposal that explicitly puts it in the interest of banks and investors for the elderly and very sick to die as fast as possible. I'm not one for conspiracy theories but even I can't avoid mentioning the fact that Goldman Sachs (which is one of the banks lining up behind this proposal) has a lot of ties to the current administration. Make of that what you will.

Okay, a lot of that was reiterating some of what I said yesterday. I apologize for that but I thought it was necessary to point out why this story isn't just ho-hum or driven by paranoia.

Elsewhere, NJ.com (out of New Jersey) published an article [5] on the topic on Sunday (September 6th). This is the part where I explain how viatical settlements became life settlements. The article states:

The life settlement business grew out of the AIDS crisis of the 1980s. In what were called viatical settlements, people living with AIDS sold their unwanted life insurance policies for sold their unwanted life insurance policies for cash they often used to cover medications or treatments.

As medical breakthroughs extended the lives of many people with AIDS, the industry shifted its focus from the terminally ill and toward seniors in their mid-60s or older, said Scott Gibson, of Lewis and Ellis, an actuarial consulting firm in Richardson.

Part of the reason why the name changed was because viatical statements had gotten a bad rap with both the public (over fraud issues, more on that later) and with investors (because those darn scientists created life-saving medications that allowed people to live longer, cutting into investor profits, dang!). But there was also something of a business model change. When people dying of AIDS could not longer produce a profit for them, investors had to go out looking for new people to buy policies from. I mean, seriously, re-read the above quote and tell me that doesn't sound predatory!

And then theres this beauty:

Seniors also need to understand that their medical records will be examined as part of the sales and that the buyers of their policies will occasionally check on them to determine when to collect the death benefits, she said.

"In this buyers' market, investors are looking for the individuals most likely to die," said Stephan Leimberg, editor of Tools and Techniques of Life Settlement Planning. "They want you old and ripe. That way, they'll pay the fewest premiums and get the best return on their investment."

The bold emphasis was added by me. I'm going to guess that there was some sarcasm intended there, but still ... this is the guy who writes a major industry publication in the world of life settlements and hes joking like this? I thought people should read that.

And, isn't that great? If you enter into of these contracts, you apparently waiver some of your rights to medical privacy and the investors get to periodically check on your health just to see how close to death you really are. Yeah, no potential for abuse there ...

Politics is also involved here. If you follow this link [6] to a blog that focuses on life settlement news, you'll see that, in one week, Connecticut, New York, California and Ohio all considered (or approved) legislation that would normalize and regulate the life settlements business in their respective states. Of course, New York, Connecticut and California alone contain a big chunk of the financial services industry of the United States. On October 8th, 2008, Credit Suisse Life Settlements LLC obstained approval to buy life insurance policies in Florida and Puerto Rico. [7] This brought their total tally to 45 jurisdictions (43 states + D.C. + Puerto Rico). This is what I found in a very quick, basic online search. I'm sure someone with more experience and understanding of the legal and political world could present a more complete picture.

Still reading? Good! I'll end this post with a reference to an article from BusinessWeek published in July of 2007.[8] First of all, BusinessWeek reminds us of the massive potential for fraud:

It all sounds great, except that many of the life settlements that Wall Street firms are buying fall into categories ranging from sketchy to toxic. "They are creating a very risky product," says Janet Tavakoli, a Chicago financial consultant who specializes in advising clients on asset-backed investments. "They may be planning to sell them to sophisticated investors, but they could be roping in people who don't appreciate the risk."

Many life settlement providers, for example, are trying to lure people who don't even hold insurance. In this tail-wagging-the-dog scenario, speculators take out policies on the individuals' behalf, pay them something up front, cover the premiums, and then wait for the people to die so they can collect. At the most outlandish extreme, one outfit devised a plan involving the population of the Federation of St. Kitts and Nevis in the Caribbean.

Investors, meanwhile, have been burned by operators who have misrepresented the profit potential on deals. Two men now awaiting trial in California hatched an allegedly fraudulent scheme aimed at the entire congregation of a black church in South Central Los Angeles. They promised investors 25% annual returns because African Americans die earlier than other racial groups—an ugly pitch that prosecutors say overstated the upside potential.

Bold emphasis added by me.

That didn't discourage the high-powered guests at the New York conference, though. As they tossed back cocktails and dined on pan-seared filet mignon, they enthused about the market's possibilities. "Wall Street firms are here because they know this is an asset class that isn't going away," says David C. Dorr, president and CEO of Life-Exchange Inc. (LFXG), an electronic platform for trading life settlements. "There's big potential.

No. No, I am not making this stuff up. The potential for absurd levels of fraud. Greedy investors targetting black people because they statistically die earlier. Rich people eating filet mignon while they toast their future successes earning profits off of the deaths of the elderly and chronically sick. What more can I really say? What more do I really have to say? I think this all speaks for itself. You *really* should read that BusinessWeek article, it'll surprise you.

Sources:
1: http://dictionary.reference.com/browse/viatical+statement?jss=0
2:http://www.nytimes.com/2009/09/06/business/06insurance.html
3:http://www.economist.com/businessfinance/displayStory.cfm?story_id=13832179
4:http://www.linkedin.com/pub/jan-buckler/8/209/8ab
5:http://www.nj.com/business/index.ssf/2009/09/seniors_raise_cash_by_tapping.html
6:http://lifesettlements.dealflowmedia.com/wires/060908.cfm
7:http://www.pr-inside.com/credit-suisse-obtains-life-settlement-licenses-r850769.htm
8:http://www.businessweek.com/magazine/content/07_31/b4044001.htm

Wall Street To Securitize People's Deaths?

2009-09-06T00:27:00.001-07:00

The New York Times published a pretty creepy article on Saturday (September 5th). The article focuses on Wall Street's new plan to make money. What's so bad about Wall Street making money?

Well, their new plan is to buy life insurance plans from elderly and sick people for cash. The example that the New York Times gives is someone selling a million dollar policy for a $400,000 payout, but the payout amount would all depend on the seller's life expectancy. These "life settlements" would then be bundled together to form bonds that can be sold to investors. The investors would start paying for the person's policy from then on. When the person dies, the investors collect on the policy. Apparently, the faster the person dies, the more money the investors make. However, regardless of whether you die sooner or later, Wall Street firms will profit off of fees collected from creating the bonds and facilitating transactions. You could say that Wall Street is planning to "securitize" people's lives (or deaths, as it may be) into a kind of CDO. And we all know how great that whole CDO adventure played out for Wall Street, right? What could be dangerous about creating a similar class of financial products with sick people's life expectancy as the focus?

Apparently, these type of "life settlement" investments aren't new for banks. They already exist in a lot of portfolios. Whats new is the plan to securitize these "life settlements" and market them as a big-time asset class of their own. Keep in mind, this isn't something banks are just talking about potentially doing. The Times states that Credit Suisse is "building a financial assembly line to buy large numbers of life insurance policies, package and resell them — just as Wall Street firms did with subprime securities." Estimates are putting the market for this class of investment product at $500 Billion, according to the article. I don't doubt it one bit. Considering how many people are losing their jobs or facing pay cuts and how high medical bills are these days, does anyone really doubt that there are a whole lot of elderly and sick people out there who would be eager to sell their life insurance policies for an immediate cash payout? Especially if they foresee a future inability to pay their premiums?

So whats the upside? Right now a lot of people just let their life insurance policies lapse. If they're lucky they'll still get a small payout but its usually not much compared to the premiums they've payed up to that point. Under this "life settlement" proposal, policy sellers get a bigger payout and eventually investors get their payout too. So insurance companies end up paying out on their policies more often than they do now. But, insurance companies could end up just raising rates and premiums to make up for the difference, which could end up leaving the average policyholder worse off. Wall Street profits. Insurance companies profit. The consumer pays up.

Still, its hard to really get that angry over a proposal like this. As I pointed out, these type of "life settlements" are already held in a lot of investment bank portfolios. And, who am I to say what kind of financial relationships elderly and sick people should or shouldn't engage in?

But there are so many disturbing ramifications that come out of this proposal that I can't help but be worried. The article mentions that investors lost out on these type of investments in the '80s when people with AIDS ended up living longer thanks to new medications. It also mentions that risk managers are planning on diversifying these bonds based on illness type. If one bond happens to represent too many people who all have one type of illness, then that bond could prove to be unprofitable if a cure for that illness is ever discovered. Am I the only one who finds it disturbing that it'll now be in the interest of some Wall Street investors for sick and old to people to die faster and for certain medications or medical procedures to be suppressed or kept inacessible to the public if they're too successful at actually making people live longer? I mean, don't some of these major banks also have large stakes in pharmaceutical and healthcare companies? Couldn't that present a very serious and disturbing conflict of interest? The article doesn't address these questions.

Then theres this:

Goldman Sachs has developed a tradable index of life settlements, enabling investors to bet on whether people will live longer than expected or die sooner than planned. The index is similar to tradable stock market indices that allow investors to bet on the overall direction of the market without buying stocks.

So, not only will investors be making money when some people die but some investors will also be making money by simply placing bets on life expectancy in a kind of virtual market. Great. Thank God we bailed out these banks, otherwise they wouldn't have been able to come up with these great investment products that will surely work to make America more economically competitive with the rest of the globe.

Seriously, how predatory can Wall Street get? Whats the thought process here? "I guess if the American consumer is too tapped out to buy our junk we'll just reap profit from his death and place secondary bets on the over/under for his life expectancy"? I mean, people aren't going to sell their policies for "life settlements" just because. Usually its because they have too much debt, lost their job or because they simply can't afford the medical costs of staying alive otherwise. So the American consumer is really being squeezed for every last cent he can cough up here. All of this almost sounds like a slur a communist would attack American capitalism with ("Wall Street profits off of death!") but its reality. I guess that's how deranged and parasitical some aspects of American so-called "free enterprise" have gotten.

Welcome to the Brave New World, I guess? So let me know, how do you feel about this whole plan?

You can find the article here: 'Wall Street Pursues Profit in Bundles of Life Insurance'

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9/7/09 addendum: Like this post? Want to read more about this topic? Read my longer follow-up post which goes more in-depth by clicking here.

Empty Storefronts Repurposed

2009-08-31T14:57:00.000-07:00

If you've been following the financial media, you know that the commercial real estate sector is in trouble. Its basically following the trajectory that the residential real estate market did. Although, to be fair, the commercial real estate mortgage backed securities (MBS) market is much smaller than the residential MBS market is. Regardless, it looks like banks are poised to take another hit thanks to loan defaults. Of course, this all translates into empty storefronts so communities everywhere end up taking a hit.

Blogger Matthew Yglesias wonders why down markets don't result in unused urban storefronts being rented. He concludes that regulation might be partly responsible. Megan McArdle over at the Atlantic responds to Yglesias's post. Interestingly, she mentions a few reasons why malls might fare better than urban storefronts in this recession.

How are some empty stores being repurposed? Some are being used as street-front ad space. Others are being transformed into churches. Pretty interesting stuff.

How is retail doing in your community? Noticed any major changes or transformations?

Is the U.S. Making a Profit Off of it's Bailouts?: Media Spin and Reality

2009-08-31T12:29:00.000-07:00

Today, the New York Times presents us a lovely piece of journalism entitled "As Banks Repay Bailout Money, U.S. Sees a Profit," written by Zachery Kouwe. What an optimistic title! Then we read the first two paragraphs:

Nearly a year after the federal rescue of the nation’s biggest banks, taxpayers have begun seeing profits from the hundreds of billions of dollars in aid that many critics thought might never be seen again.

The profits, collected from eight of the biggest banks that have fully repaid their obligations to the government, come to about $4 billion, or the equivalent of about 15 percent annually, according to calculations compiled for The New York Times.

Wow! That's great, right? Then the "buts" begin ....

The government still faces potentially huge long-term losses from its bailouts of the insurance giant American International Group, the mortgage finance companies Fannie Mae and Freddie Mac, and the automakers General Motors and Chrysler. The Treasury Department could also take a hit from its guarantees on billions of dollars of toxic mortgages.

So, this article reports that the U.S. has earned about $4 Billion in profit from the TARP program. At the same time, the trillions of dollars in other bail-outs, the stimulus program, and the rest of the TARP program have yet to produce much of any kind of positive return. In other words, the overall picture is still negative but you wouldn't be able to deduce that based on the headline and tone of this article.

The naked capitalism blog calls out the New York Times (and the Financial Times, which published a similar story) on their transparent attempts at spin.

In a simply remarkable coincidence of timing, the New York Time running a story with the very same message, namely that bailouts are good for taxpayers because the Treasury has made money on the TARP.

If you believe that, I have a bridge in Brooklyn I’d like to sell you. The fact that we have such patent garbage running as a front page New York Times story says either the reporter and his editors lack the ability to think critically (or find sources who could do that for them) or that we have a controlled press. Given that subscriber-driven Bloomberg has even fallen in line, I am inclined to the latter view, but I am still curious as to how this has been achieved. Is this the price of access journalism, or is something more pernicious at work?

Naked capitalism refutes the idea that the TARP program is transforming into a profitable venture for the federal government:

A quick but not conclusive search suggests that only a small portion of the TARP has been retired, so it is wildly premature to declare victory.
In fact, another source looked at the TARP as of June and estimated that it had lost $148 billion, and had lowered loss total as a result of the repayments. Now bank stocks have rallied since then, but the biggest contributors to the red ink, namely AIG and Citigroup, are not in any better shape fundamentally than they were then. Indeed, the fact that new AIG CEO Robert Benmosche has in a remarkable show of hubris, effectively told the US taxpayer to stuff it, AIG has the dough and is in no particular hurry to return it, nor does it care what the public or Treasury wants, its demands are unreasonable. I wouldn’t hold my breath about having the loans repaid.

I don't want to leech any more of naked capitalism's post, so I encourage you to go over there and read for yourself, there is much more. Another, similar post from earlier in the day can be found by clicking here.

Debt Deflation and False Dawns

2009-08-30T00:55:00.000-07:00

There's a debate raging in the financial world right now over whether the biggest threat to the American economy's health is deflation or inflation.

Off to the top left of the screen you'll see a poll I put up asking that very question. Please vote, if you feel inclined.

Today, somebody linked me to a rather old article from January of this year. Its an interview of economist Dr. Lacy Hunt by the Business Spectator publication from Australia. You can find the article here.

Despite the fact that it was published over half a year ago, I felt strongly compelled to share this article with my readers because it presents a coherent, cogent argument that not only supports the case for deflation but, if true, puts the broader economic picture into sharper focus.

Dr. Hunt essentially argues that:

1. We are entering a period of deflation. Debt deflation to be exact. Other historical instances of debt deflation include (a) the U.S. during the 1870s-1880s, (b) the global Great Depression of the 1930s, and (c) Japan, beginning in 1988 and continuing until the present.

2. What pulled the U.S. out of its debt deflation during the Great Depression was its participation in World War II and not President Roosevelt's New Deal program. Furthermore, the Japanese have also run stimulus programs funded by large deficits over the past two decades which have led to minor, cyclical growth but which have been unable to shake off the stronger, overall deflationary trend.

3. Debt deflation lasts a long time. The deflationary period beginning after 1873 in the U.S. lasted approximately 20 years. The Japanese debt deflation that begin in 1988 is ongoing until today. As a side note, her argument is corroborated by a report from Friday which states that Japan experienced record year-over-year deflation of 2.2% in July. Click here to read a report on this development from Bloomberg. Hunt comments that in her view it is quite possible that we're entering a 15-year deflationary period right now.

4. The markets are very susceptible to what she calls "false dawns." I'll let her explain it:

Well, one of the things that has happened in these debt deflations is you get a number of false dawns. People believe that the normal business cycle is going to take control and you're going to get a cyclical recovery and the model that soon prevails is that you get three to 10 years of expansion. You have one year, maybe a year and a half of a recession or nasty economic conditions, but after a year and a half at most, the economy then has another expansion for 3 to 10 years.

When we have these very rare debt bubbles occurring at these long irregular intervals, the normal business cycle model doesn't really apply. We do get some false dawns. Some intermittent cyclical recoveries but the unwinding of the debt process proves to be very very long and difficult. One of the reasons for that is that borrowers don't know anything about paying back loans in harder times, which is what's now beginning to occur and as a consequence there is a major behavioural shift or there has been historically in which consumers decide to live inside of their means as opposed to living outside of their means and normally the saving rate goes up for a long time.

Keep in mind that this was published on January 30th of this year, when the Dow Jones Industrial Average closed at 8,000.86 points. Today (August 30th, 2009) the DJIA closed at 9544.20 points[1]. This backs up the argument I and others have made that the current rally is unsustainable. Nouriel Roubini refers to it as a "dead cat bounce" while Dr. Hunt refers to it as a "false dawn," but the premise is the same.

5. The government stimulus program is not working and actually may be making things worse. She states:

The most recent academic research that I have seen, published in 2008, indicates that the multiplier on government expenditure is just close to zero. If the government spends an additional dollar it has to fund that dollar either by raising taxes on the private sector or borrowing funds in the capital markets that would have gone to the private sector. Government spending, the government sector in the US, the productivity is at best zero and perhaps slightly negative, so when we enlarge the government sector and shrink the private sector we reduce the growth, potentiality, of the US economy. We shrink the pie and we make things worse off.

She thinks the TARP program could have gone another, alternative way:

The alternative, which the Japanese would have done and the better way to go, is to use the treasury borrowing capacity to protect the depositors and the customers of the banks and the insurance companies and perhaps extend unemployment benefits for their employees that are laid off. Zombie-like institutions intact with wholesale federal dollars, borrowed federal dollars – those institutions are really not able to grow or contribute to the economy. If instead we had protected the savers and the depositors, then institutions would have failed, but the healthy banks and insurance companies would have taken over the business of the institutions that made the mistakes and then we would have a growth trajectory going forward. So it's quite possible that the actions that we've taken and cost hundred of billions dollars, hundreds of billions of dollars have actually not helped the situation and may have had severe unintended negative consequences.

6. The U.S. trade deficit is narrowing and may be eliminated in the next few years.

She also has some advice for investors, but I'll let you visit the site and read for yourself. Overall, I thought Dr. Hunt presented one of the most compelling arguments in favor of deflation. She managed to fit her take on the current crisis into a coherent historical context and made some predictions that are strongly supported by the current financial data available.

Sources:

1: http://finance.yahoo.com/q/hp?s=^DJI&a=00&b=30&c=2009&d=07&e=30&f=2009&g=d

Desperate Investors Embrace Risky Moves

2009-08-27T04:56:00.000-07:00

The other day, I wrote about economist Nouriel Roubini and the on-going stock market rally. I opined that I thought the rally was the result of investors putting aside worries about risk and making short-term investments in the stock market because its one of the few investments out there that offers the prospect of any kind of considerable returns. My overall point was that, because of this fact, the stock market should not be taken as an accurate gauge of the U.S.'s economic health. Furthermore, we're likely to see considerable volatility in the markets because of this phenomenon.

It turns out that the Los Angeles Times has published an article that pretty much directly echoes everything I said. You can read the article here.

I won't paste the whole article, but here are some important excerpts to give you an idea of what I'm talking about.

First, the opening paragraphs:

Stung by punishing losses in the bear market, some individual investors are souring on traditional buy-and-hold investing in favor of aggressive trading aimed at scoring big gains. ¶ Trading at online brokerages has soared in recent months as investors have tried to capitalize on rising securities markets. But individual investors increasingly are embracing strategies that carry outsized risks. ¶ In some cases, for example, investors have ventured into a relatively new type of investment product designed to magnify the movement of the underlying markets. That can sometimes yield big gains if investors bet correctly but bruising losses if they don't. ¶ To critics, the push into aggressive trading is the equivalent of doubling down at a casino to recoup earlier losses. ¶ "It would be a terrible tragedy if people try to recover from the devastation of the financial crisis by creating even more devastation in their personal investment accounts by taking on risks they don't understand and can't afford," said Barbara Roper, director of investor protection for the Consumer Federation of America.

The "relatively new type of investment product designed to magnify the movement of the underlying markets" that they're referring to are ETFs or Exchange-traded Funds. The article continues:

Susan York was fed up with the dismal performance of her 401(k) retirement account. Then her husband saw a Sunday morning infomercial in January touting the benefits of trading options, which give an investor the right to buy or sell stocks and other securities at pre-determined prices.

The 50-year-old from Naples, Fla., had limited investment knowledge but attended several seminars before starting to trade in May. So far, York said, she's up an average of 40% a month and is trading full time.

"It's the best job I've ever had, not just for the enjoyment but from the compensation standpoint," said York, who previously sold telecom equipment. "I've replaced a significant six-figure income."

Trading activity at online brokerages jumped in the second quarter as the stock market began rebounding in early March from its deep sell-off. Compared with a year earlier, activity was up 28% at E-Trade Financial Corp. and 36% at TD Ameritrade Holding Corp.

The article continues to state that apparently some ETFs are being sued by investors for being misleading. Overall, a pretty interesting article that makes a lot of things clearer. I think this article ultimately corroborates my assesment that the stock market is not an accurate measurement of the real American economy's health at the moment.

What I'm Reading

2009-08-26T06:50:00.000-07:00

"Ultimate Crisis Still Coming"
Analyst Marc Faber believes that the ongoing rally is the result of excess liquidity pumped into the economy by central banks. He predicts a year to 18 months of market rally followed by a "ultimate" crisis that will "clean" the system. He advocates firing half of global government workers as one radical solution.

"If you pump money into the system and you create large fiscal deficits, you create volatility," Faber, author of the Gloom, Boom and Doom Report, told CNBC in remarks reported on its website.

"We've seen an intermediate low in March, we'll rally for a year or so or maybe 18 months -- the ultimate crisis will happen much later, and the ultimate crisis would clean the system," he added.

Faber, who did not forecast a precise time for that crisis, told CNBC that firing half the government workers in the world would be one way of dealing with the crisis.
"If you shift government activity to the private sector the economy becomes more dynamic," Faber said.

More Bank Failures Coming?
An analyst by the name of Richard Bove at Rochdale Securities (whom CNBC identifies as a "prominent banking analyst") is predicting a possible 150 to 200 further bank failures in the U.S. 81 banks have already failed in 2009.

Doubts About Dollar Continue
There is nothing new in this article. It simple summarizes why many doubt the stability and value of the dollar. It does mention that Pimco and Berkshire Hathaway Chairman Warren Buffet have come out as high-profile critics of the ballooning debt and how it could lead to negative outcomes for the U.S. dollar. I'm mostly interested in this article because it caps a week where we've seen a ton of articles from the financial media on the value of the dollar, but none with any real news or any "meat" to them. I find that rather curious but I can't explain it.

Senator Warns of Inflaton
Senator Chuck Grassley (R-Iowa) is warning about the possibility of 1980s style inflation, which hit 13.5%. I think its quite possible (maybe even likely) that his prediction will come true. In fact, he might low-balling it a bit at 13.5%. However, I think his public statements are a bad thing, a very bad thing. Grassley doesn't really offer anything new in his analysis and theres nothing in his background that makes him particularly competent to make such a prediction. What we're seeing is the further politicization of fiscal policy and the threat of inflation. When things get politicized, they get emotional and they get polarized and it makes it that much harder to get some actual, positive change for the better since everything becomes part of a political battle between personalities.

Well, thats all for now. Stay tuned for more ...

Nouriel Roubini and the Future of the Stock Market

2009-08-26T04:33:00.001-07:00

Most readers are probably familiar with Nouriel Roubini. Roubini was one of the few academic/establishment economists who predicted the credit crisis and the ongoing recession. Liberals especially embraced Roubini because he advocated for strong Keynesian measures to prevent the economy from going into freefall. He's emerged as one of the most influential economists in the world right now, right along with Paul Krugman. One fact that some of you might not know is that, under the Clinton presidency, Roubini was a senior adviser to Timothy Geithner(who is now Treasury Secretary under President Obama).

Roubini has warned his readers that the ongoing stock market rally has a strong possibility of fizzling out and ultimately being nothing more than a "dead cat bounce." Quite simply, the optimism in the market doesn't jive with the weak expectations for earnings growth. Today, Bloomberg has published an article presenting the viewpoint of some Roubini-skeptics. Apparently, a lot of investors genuinely believe we've entered a bull market and they cast doubt upon Roubini's warnings. In fact, according to Bloomberg, some investors might have missed out on "the biggest rally since the 1930s" because they followed Roubini's advice.

When it comes to the stock market's ongong rally, I agree with Roubini. There's a lot of exuberance around the stock market but it's definitely not based on the 2009 and 2010 projections for the U.S. economy, which are still mostly "doom and gloom." Despite all the talk about recovery and "green shoots," our political and financial leaders still haven't pointed to one industry or one economic sector that they expect to significantly grow and be able to drive a recovery over the next few years.

However, the part of the Bloomberg article that I found the most interesting was the following:

Roubini has “done a very good job on the economy,” Birinyi said in an interview Aug. 24. “Our approach is to try to understand the market and not try to do much more than that.”

Laszlo Birinyi is an investment manager (unlike Roubini, who is an analyst and a scholar at New York University) who also correctly predicted the economic collapse, in 2007 (Roubini warned his audience about troubles in the housing market as early as 2005). The article further states:

“Both of them just have a pretty deep understanding of the history of economic and business cycles,” said Eric Teal, who oversees $5 billion as chief investment officer at First Citizens Bank in Raleigh, North Carolina. “Roubini has just had more of an academic background, whereas Birinyi has been much more in the spotlight managing money and working in capital markets.”

I thought these excerpts were quite telling about so much.

What comes through is that investors perceive a divide between "the economy" and "the markets." To some degree, this explains why so many investors were blindsided by the recession. Investors were so focused on understanding the movements and dynamics of the market that they were unable to see the flawed and unsustainable foundations of the economy on which that market was based. Apparently some things dont change.

At the same time, these investors aren't completely wrong in the way they see things. What happens when a company experiencing distress lays off a significant percentage of its workforce? On the one hand, the American economy as a whole suffers because it adds to unemployment and lowers consumption. On the other hand, the economic situaton of that company might genuinely be better because it has reduced costs and has probably come closer to returning to profitability. When this happens on a mass scale, as is happening now, a kind of decoupling between the economy and the markets happens. The market comes to only represent a certain slice of the American economy. Much of the real economy is no longer reflected by the status of the market. The problem is that the media still tries to present the stock market as if it were an accurate measurement of the health of the real economy, which it isn't.

Finally, these comments show just how desperate investors are right now. A small rise in the Dow Jones Industrial Average would have been understandable considering the national economy did just avoid total meltdown. But a small rise isn't the case. The reality is that we're in the midst of one of the steepest rallies since the 1930s, as Bloomberg points out. There are very few safe havens for investors out there. So, when investors saw that the stock market was rallying they were willing to ignore the obvious signs of risk out there (including overt warnings from Roubini and others like him) and they jumped in with the hope of making at least some returns. The desperation of investors tells us more about the state of the economy than the various indices do, in my opinion. We can also see that, as long as there serious doubts about the economy, we can expect some serious volatility in the markets. As a recent commentary by me points out, the Great Depression bore witness to some of the biggest rallies in history.

So when we see something incredibly contradictory like what we see today: Roubini(who is probably the most influential economist in the United States) voicing major concerns over the future of the economy while the stock market rallies and institutional investors declare a bull market ... I think the only thing we can be sure about is that the recession is still far from over and some severely bumpy road (to say the least) still lies ahead.

Rhode Island To Close State Govt. For 12 Days

2009-08-25T02:38:00.000-07:00

In a previous post, I mentioned that state and municipal governments were facing large deficits across the United States. In order to balance these budgets, many states and municipalities are going to either lay people off, cut hours, cut pay or employ furloughs to cut costs.

Today, the Associated Press reports on an extreme example of this phenomenon.

PROVIDENCE, R.I. – Rhode Island will shut down its state government for 12 days and trim millions of dollars in funding for local governments under a plan Gov. Don Carcieri proposed Monday to balance a budget hammered by surging unemployment and plummeting tax revenue.

The shutdown would force 81 percent of the roughly 13,550-member state work force, excluding its college system, to stay home a dozen days without pay before the start of the new fiscal year in July.

The closures come as the worst recession in decades has eliminated hundreds of millions of dollars in tax collections and pushed unemployment to 12.7 percent, the second-highest jobless rate in the nation behind Michigan.

This past decade, the government sector has been one of the few economic sectors to exhibit strong growth. This phenomenon will severely cut into that. This will further reduce consumption since these workers are being forced to take time off without pay. In other instances, states will surely lay people off and add to the unemployment rolls.

Next year we could see an even greater reduction in tax revenues and more budget cuts. If Rhode Island is shutting down state government for 12 days this year, where will it be next year?

Deflation Danger

2009-08-25T01:13:00.000-07:00

Most of the alternative financial media has focused on inflation as the primary danger for the American economy. The reasons are obvious. The Federal Reserve has released untold amounts of U.S. dollars into the economy through its "quantitative easing" program. On top of that, China and other economies are publicly expressing doubts about the dollar and indicating that they intend to lower their holdings of U.S. dollars, which would surely put inflationary pressure on the dollar.

However, over at Reuters, writer Christopher Swann argues that deflation is still a major danger to the U.S. economy.

First, the argument that deflation is benign:

A swelling dollar can clearly be good news for shoppers as well as for those who are sitting on cash. Deflation is often a result of economic progress — productivity improvements that increase spending power. This was the friendly species of deflation caused by surging Chinese output from the 1990s onwards.

Is this the case now? No.

The current variety of deflationary pressure is far less benign. It stems not from efficiency savings but rather from weak demand. Worse still, it is accompanied by record levels of debt.

Despite frantic efforts to pay off loans, household debt is still around 130 percent of disposable income. This was precisely the combination that Irving Fisher warned about in his celebrated 1933 article on debt deflation.

Under these conditions, the rising real value of debts encourages households and businesses to sell their assets to pay down loans. As fire sales reduce asset prices — stocks and property — real net worth declines further. Output and employment decline, accelerating the slide in prices.

To add to the pain, real interest rates increase whether central bankers like it or not, discouraging borrowing and promoting even more savings.

“The more debtors pay, the more they owe,” Fisher wrote, since “the liquidation of debts cannot keep up with the fall of prices which it causes.”

Swann's argument is compelling. Consumer demand is extremely low in historical terms and appears set to go even lower. However, we can't deny the monumental inflationary pressures that also exist. Swann has hit upon an important point, however: debt is still the primary obstacle to any significant economy recovery.

But with the U.S. economy clawing its way out of recession, surely the danger has passed? Not quite. Prices are the ultimate economic straggler.

In Japan, for example, the country only started to experience falling prices roughly three years after the start of the recession in 1991. Wages didn’t start to fall until 1997. The United States could still follow Japan’s lead.

Proponents of recovery should keep this in mind. The current U.S. recession already mirrors the Japanese "lost decade" in a variety of important ways. What Japan experienced was extremely protracted. We're only one or two years into this recession, depending on perspective. Claiming we're in recovery already is extremely premature, in my opinion, and this historical example supports that perspective.

Downward pressures on prices in the United States continue to intensify, according to the latest research by Capital Economics. Core inflation may have held at a respectable 1.5 percent, but this is deceptive. U.S. goods inflation has defied gravity in part because of hefty increases in tobacco taxes over the past six months. A 28 percent increase in tobacco prices from a year ago is adding one percent to core goods inflation, according to Paul Ashworth of Capital Economics.

“Without this, core inflation would already be matching the lows reached at the end of 2003,” he says. The tobacco effect will soon fade.

Services inflation, meanwhile, has been very weak. Here the key factor has been weak rental prices, which account for about 40 percent of the total core index. Unemployment and foreclosure will continue to put relentless downward pressure on rents. Already the rental vacancy rate is at a record 10.6 percent.

Interesting. I had no idea about tobacco prices keeping up core inflation. When it comes to the rental market, supply is keeping the vacancy rate up and prices down. Homes that individuals and banks are unable to sell are being transformed into rentals until the housing market turns around. Seeing as how there are untold numbers of foreclosed homes that are purposefully being kept off the market by banks at the moment, I foresee continued downward pressure on rental prices for the time being.

Related post: Deflation or Inflation?

Result of First Poll

2009-08-25T00:16:00.000-07:00

For my first poll on this blog, I asked the question "When do you think the current recession will end?"

The results were:

2010: 2 votes (33%)
2011: 0 votes (0%)
2012: 0 votes (0%)
2013: 0 votes (0%)
After 2013: 4 votes (66%)

As you can see, very few readers voted in the poll. Oh well. Not surprisingly though, 66% of those that did took a very bear-ish position and predict an extremely protracted recession (well, at that point it would be a Depression) lasting beyond 2013. A little bit more surprisingly, 33% of voters were quite optimistic that the recession would end next year. No one took any middle ground. Quite interesting and only time will tell at this point.

I'll try and have a new poll up soon ...

Where are the jobs?!

2009-08-23T02:56:00.000-07:00

Today, I'm looking at the Bureau of Labor Statistics unemployment numbers for July. As many have pointed out before, the federal government's numbers don't represent the real number of unemployed people out there. For an understanding of why that is so, you should turn to the Shadow Government Statistics web page on employment. Regardless, here are the government's numbers:

Unemployment Rates for States Monthly Rankings Seasonally Adjusted July 2009^p
Rank	State	Rate
1	NORTH DAKOTA	4.2
2	NEBRASKA	4.9
2	SOUTH DAKOTA	4.9
4	UTAH	6.0
5	IOWA	6.5
5	OKLAHOMA	6.5
5	WYOMING	6.5
8	MONTANA	6.7
9	NEW HAMPSHIRE	6.8
9	VERMONT	6.8
11	VIRGINIA	6.9
12	HAWAII	7.0
12	NEW MEXICO	7.0
14	MARYLAND	7.3
15	ARKANSAS	7.4
15	KANSAS	7.4
15	LOUISIANA	7.4
18	COLORADO	7.8
18	CONNECTICUT	7.8
20	TEXAS	7.9
21	MINNESOTA	8.1
22	DELAWARE	8.2
23	ALASKA	8.3
24	MAINE	8.4
25	PENNSYLVANIA	8.5
26	NEW YORK	8.6
27	IDAHO	8.8
27	MASSACHUSETTS	8.8
29	WEST VIRGINIA	9.0
29	WISCONSIN	9.0
31	WASHINGTON	9.1
32	ARIZONA	9.2
33	MISSOURI	9.3
33	NEW JERSEY	9.3
35	MISSISSIPPI	9.7
36	ALABAMA	10.2
37	GEORGIA	10.3
38	ILLINOIS	10.4
39	DISTRICT OF COLUMBIA	10.6
39	INDIANA	10.6
41	FLORIDA	10.7
41	TENNESSEE	10.7
43	KENTUCKY	11.0
43	NORTH CAROLINA	11.0
45	OHIO	11.2
46	SOUTH CAROLINA	11.8
47	CALIFORNIA	11.9
47	OREGON	11.9
49	NEVADA	12.5
50	RHODE ISLAND	12.7
51	MICHIGAN	15.0

Two observations:

1. Only three states have an unemployment rate below 5% (the Dakotas and Nebraska). If you're looking for a job and willing to relocate, I might begin looking there. I say might because, being of such small size, these states haven't really experienced much economic volatility at all during this recession. They haven't lost that many jobs but they're not job creating engines either. So I imagine just showing up and finding a job would be quite difficult.

2. The states with the lowest unemployment figures are all relatively low-population states with not that many urban centers. The states with the largest populations and most urban centers are the ones with the highest unemployment figures. The one exception is Texas, which is "only" at around 8% unemployment according to the BLS. Economists are saying we're entering a "job less recovery" ... meaning stocks and assets might make gains for investors but it doesn't appear that many jobs are going to be creating in the near future. Even the most optimistic establishment economists are saying that half of the manufacturing jobs that left this country during the recession will never return. That's a very negative job picture for the American public. There is no way the American consumer is going to return in a big way under those conditions, yet that is exactly what this economy needs according to these same economists. This is a major reason why I'm extremely skeptical about a recovery any time soon.

Indian Exports Seek New Markets

2009-08-23T02:46:00.000-07:00

Bloomberg reports:

“About 60 percent of our traditional export markets are in recession,” Sharma told reporters in New Delhi today. India will be looking to expand its markets to “make sure that our exports remain competitive,” he said.

The worst global recession since the Great Depression has cut demand for made-in-Asia goods. Flagging exports are forcing Indian companies in sectors such as jewelry, textiles and leather to cut production, weakening an economy expected by the central bank to expand at the slowest pace since 2003.

The Trade Ministry will announce more assistance for exporters in a policy statement on Aug. 27, Sharma said. India’s exports dropped 27.7 percent in June from a year earlier to $12.8 billion, the ninth consecutive monthly decline. Exports plunged 33.3 percent in March, the biggest fall on record, according to Bloomberg data going back to April 1995.

That's a pretty disastrous drop in exports for India.

August 27th will be an important day. I would advise paying close attention to the markets; it will be interesting to see how they react. India looks ready to diversify to new export markets. Does this represent a decline in confidence in the U.S. consumer (and dollar)?

India is also relying on trade agreements with other countries in a bid to bolster exports as the global recession drags on demand.
India last week signed a trade pact with the 10-member Association of Southeast Asian Nations, a move that may result in trade between the two increasing to as much as $60 billion from $47 billion last year.

The trade deal is “positive from two strategic perspectives: to counter the influence of China in Asean markets and to improve India’s negotiating capabilities at an international level,” said Rohini Malkani, an economist at Citigroup Inc.

Are these the new markets India will pursue? Will we see increased competition between China and India? Just how much money will the Indian Trade Ministry devote to developing these new trade markets?

All questions that will be answered in due time ... This is certainly a bold move by India, or at least it seems that way from this preliminary announcement. If this pays off for India, we could see other countries follow suit and decide to diversify in terms of who they export to. Namely, it will be interesting to see whether or not China responds to this with its own initiative in Southeast Asia.

Forecast Calls For Higher Taxes

2009-08-22T05:11:00.000-07:00

Today, the Toronto Star tells us that:

OTTAWA–The International Monetary Fund says most countries will need to raise taxes to pay off the trillions of dollars they spent fighting the global recession.
IMF chief economist Olivier Blanchard says in an article to be published today that governments acted properly in ramping up spending to stop the worst slump since World War II.
Soon, he says, nearly all countries will have to raise taxes to pay the recovery bill.

I'm not sure why the IMF has to publish an article in order to inform the public of this fact. How else were governments expected to pay for these stimulus programs?

Blanchard, meanwhile, says with the recession virtually over, what is left are deep scars that will take years to heal.

He sees positive growth for most countries in the next few years, but says it will be sluggish.

“The recovery has started,” Blanchard says in the paper released by the Washington-based lender.

“The crisis has left deep scars, which will affect both supply and demand for many years to come.”

In many countries, the potential exists for economies never to return to where they stood before the recession hit, Blanchard states.

I disagree that the recovery has started. None of these officials can point to one sector of the economy that is actually experiencing significant growth, not even the government sector under their control. Nor can they rebut the myriad facts that point towards the economy worsening, not recovering. The only bright point is the ongoing stock market rally. However, the stock market is driven more by investor psychology than by economic fundamentals. For whats it worth, the stock market in China just officially entered a bear market.

A rebalancing among nations is also needed, the IMF says, with countries like the United States increasing imports and economies like China increasing exports.

I'm assuming this is a typo or I'm just reading it wrong. Rebalancing would involve the U.S. increasing exports and China increasing imports, but the chance of that happening is close to nil right now.

Fiscal deficits could feed "worries about U.S. government bonds and the dollar ... causing large capital flows from the United States," Blanchard added.
"Dollar depreciation may take place, but in a disorderly fashion, leading to another episode of instability and high uncertainty" that could derail recovery

No joke: President Obama just raised the 10-year budget deficit projection to $9 trillion from approximately $7 trillion. It's pretty obvious that taxes are going to have to be raised to cover this increasing deficit. As for the fate of the dollar, I covered that in a previous post.

Is the Recession Over in Europe?

2009-08-21T01:15:00.000-07:00

The recession is over in Europe. That's what much of the American and European financial media is declaring. Unlike most industrialized nations in the world, Germany and France actually experienced economic growth during the last financial quarter. That fact, combined with the announcement last week by Eurostat that the Eurozone economies only declined by 0.1% quarter-to-quarter, has many feeling that the recession is on its way out and a recovery is here for Europe.

Are they right? Writer Ulrich Rippert of the World Socialist Web Site says 'no.'

I'll begin with this interesting tidbit:

At the same time there are voices warning of undue optimism about an economic recovery. In its latest edition, the weekly Die Zeit writes: “‘Recovery at last! Investment bankers establish upward trend,’ reads the New York Times. ‘Further progress in the business world,’ reports the Wall Street Journal. ‘Economists see signs of a recovery.’ ‘Powerful rise on the stock markets,’ report others... The headlines appear to come from August 2009. In fact, they are from the year 1931. They were published in the midst of the Great Depression in the US, i.e., in the blackest economic epoch of the 20th century.

This echoes something I've said before: prolonged recessions/Depressions bring about extreme market volatility. The Great Depression bore witness to some of the biggest stock rallies in history. A growth in stock prices, especially an extremely rapid one, does not necessarily indicate that the economy is actually in recovery. It might indicate such a thing, but it is not a given, yet the media is treating it as a given. The reality is that this kind of historical precedent (the experience of the Great Depression) is pretty much impossible to factor into the statistical models that today's investors, analysts and economists employ. Their field of vision is much more narrow. And that's the problem ... understanding the historic point in economic history we're at right now requires a panoramic lens, so to speak.

Rippert continues:

In these declarations there is a combination of self-delusion and calculation. The politicians and financial players have a vested interest in promoting a mood of euphoria to sustain the heady rally on global stock markets. However, there is little in the actual economic situation in Europe and internationally to justify such optimism.

The minimal economic growth reflected in the latest data should come as no surprise, given the manner in which governments across Europe have opened up their treasuries to bail out the banks. Hundreds of billions of euros in public funds have been placed at the disposal of the major financial institutions, without any demands being placed on the banks or a single one of the bankers responsible for the crisis being held accountable.

Not only have the banks dictated their own rescue packages to their respective governments, they have profited handsomely from the process. The billions turned over to the banks are being used as a pool for further speculation, while bailed-out banks impose high interest rates and fees on governments seeking loans to cover their ballooning debts.

The financial elite regards the crisis as an opportunity to dismantle, with the collaboration of the trade unions, all that remains of the social gains won in the course of decades of struggle by the working class.

Nothing surprising here. Europe mirrors the U.S. in a lot of regards. Its interesting to see a self-declared socialist web site criticize trade unions. In the U.S., I disagree that the trade unions are serving to "dismantle" the position of the working class. First off, most blue collar workers are no longer in unions to begin with. Secondly, the trade unions were actually the primary opponents of Governor Schwarzenegger's budget in California. With that being said, I would agree that the unions aren't really playing much of a big political role or offering up anything new in terms of where the economy should go. That's a big difference from the 1930s.

What is the underlying economic reality? Compared to one year ago, the German economy has declined by no less than 7 percent. In a few months, the German “cash for clunkers” scheme will expire, accelerating the decline of the country’s auto and auto-supply industry. The consequences for the German steel, engineering and chemical industries have already been felt.

Up to now, mass redundancies in Germany have been avoided by means of a reduced work-hours scheme, which has been renewed several times. When the 1.4 million employees on short-time work eventually join the ranks of the unemployed, the official unemployment level will rise to 5 million.

...

The constitutional “brake on debt” which was recently passed by the German parliament means that the first priority of any future government will be drastic budget cuts. The promises being made by all of the parties taking part in the national election campaign will be consigned to the waste bin as soon as the votes have been counted on September 27.

...

A glimpse of what is to come was provided by the so-called “Guttenberg Paper,” which was made public just a few days ago. The document, bearing the title “Proposals for a Sustainable Industrial Policy,” was commissioned by German Economics Minister Karl-Theodor zu Guttenberg and lists some of the savage measures which business lobbies are demanding in response to the crisis. Similar measures to those outlined in the “Guttenberg Paper” are already been prepared by the appropriate ministries, but there is an agreement amongst the various political parties that no one raise such themes in the course of the election campaign.

The Frankfurter Rundschau reports that the 52-page document calls for “tax relief for businesses,” “the reduction of supplementary wage costs,” and “increased flexibility in the labour market.” The document urges a weakening of job protection provisions, limits to sick pay and the scrapping of proposals for a guaranteed minimum wage.

Interesting. In short, the German state is basically expending all of its resources to hold up the economy. Even then, the economy is barely above water. It appears that Germany is already on track to experience what California is already facing today ... massive government budget cuts and an end to the various subsidies and measures by which the state propped up the economy. Last week I commented on what awaits places like California and Ireland where the government sector and state welfare policies have been drastically reduced ... and the picture ain't pretty.

I haven't really explored the World Socialist Web Site very much, but I thought this was a pretty good article. It certainly offered one of the best rebuttals to the claim that its all smooth sailing for the European economies from here. In actuality, we can see that they still face a lot of hardship.

Benelux: Less Work, More Productive

2009-08-20T05:40:00.000-07:00

BusinessWeek has an interesting article comparing productivity per hours worked between the United States and Europe.

Europeans on average pocket almost 10 more vacation days than their U.S. counterparts. That's the findings from research by consultants at Mercer, which analyzed the minimum number of vacation days that companies across Europe must provide to staff with 10 years' service, as well as the number of national holidays in each country.

The study reveals the average time off in European Union countries is now 34.4 days, compared with just 25 in the U.S. Overall, employees in Lithuania are entitled to the greatest amount of paid leave, with 41 holidays per year. France and Finland come a close second, with 40.

The article assures us that, overall, the U.S. is still the "most competitive country" in the world. Competitiveness seems like a completely different economic measurement seperate from productivity to me, but I suppose that's beside the point for this article. Europe does give the U.S. a "run for its money," as the article puts it, although BusinessWeek pegs some areas (Eastern Europe) as being less productive per time worked than others.

The clear winners are the Benelux countries though:

Europe's top performers include some of the region's smaller nations. Leading the way are the Benelux countries (Belgium, the Netherlands, and Luxembourg), which outperform the U.S. based on gross domestic product per hours worked each year. According to the Organization for Economic Cooperation & Development, Belgium and the Netherlands, which mandate 30 and 28 annual vacation days, respectively, are almost 2% more productive than the U.S. And Luxembourg, with its highly competitive financial services industry and 32-day yearly vacation allowance, is a staggering 27% more efficient.

Interesting stuff. I wonder why the economic media hasn't explored the Benelux economies more? After all, we hear about Scandinavia and its social democracy all the time. I suppose whether or not these countries are actually as efficient as this article makes it out to seem is debatable and whether or not the U.S. can emulate them in any way is another question altogether. I can't really give my own opinion or take on it without looking at them with more depth, which I might do someday, but for now I leave it at that. On a political note, I wonder why American liberal politicians focus so much on Scandinavia and Britain as models to emulate, especially the recent comparisons between the British National Health Service and the Democrats' proposed health care reforms? There are other countries in Europe (like the Benelux trio) that beat us in terms of economic efficiency while being more social democratic. Maybe liberals should take a harder look at the rest of Europe. What is your take on it (especially my European readers)?

Reuters on the Fate of the Dollar

2009-08-20T03:59:00.002-07:00

A few days ago I responded to a Reuters Blogs posting by writer Agnes Crane regarding the ongoing bull market for U.S. stocks. Crane's perspective was ultimately optimistic - she argued that, while American stocks would face volatility, the rally would continue.

I definitely took notice today when I cruised over to Reuters Blogs and saw a post by the same author entitled 'Getting ready for the dollar's fall.'

I'd like to respond to that article here.

It just won’t go away, this needling worry about the U.S. dollar losing its coveted top-dog status.

No matter that there are plenty of reasonable arguments to support the dollar as the world reserve currency — namely there’s just no alternative — for perhaps decades to come.

Yet, in a world where once-rock-solid assumptions quickly turn to dust, investors should keep an eye on the dollar since changing perceptions are chipping away at its cherished status as currency to world.

Much of the debate so far this year has centered on creating an alternative to the U.S. dollar, championed by China and Russia as a way to wean the world off its dependence on the U.S. as well as buffer individual nations against the missteps of those in developed world. Most recognize creating a new currency will take years and the chances of an existing currency, like the yuan, usurping the dollar anytime soon are remote.

I would argue that Crane needs to reflect a little bit more on her own writings as she answers some of her own questions.

Why won't worries about the dollar go away? Maybe its precisely because we live in a world "where once-rock-solid assumptions quickly turn to dust." We're living in historic times, as some would say. We have already seen a variety of banks, corporations and institutions that were all dubbed "too big to fail", well, fail. Now we have the financial media essentially telling us that the dollar is "too big to fail." And the public is supposed to believe that without question?

Crane also states that there is no alternative to the dollar. A few paragraphs down though, she points out that China and Russia are already contemplating alternatives. Her new argument is that such a large-scale implementation of a new currency would take a long time, years in fact. No doubt that is true. But if Russia and China were to announce their intent to create a new supra-national currency (more on that below) and begin reducing their dollar investments, that alone would destroy much of the value of the dollar before any actual implementation began.

In fact, I would argue with the very premise of this article. The dollar doesn't have to lose its reserve-status. Foreign countries, especially China, could simply begin investing in baskets of other currencies and move away from dollar holdings. That alone would provide a pretty big blow to the American economy in this economic climate.

But that doesn’t mean big money isn’t starting to prepare for world in which the buck isn’t the currency of choice.

Curtis Mewbourne, a portfolio manager at PIMCO, has suggested that investors diversify away from the dollar and to move into other currencies, especially those in emerging markets.

“And while we have not yet reached the point where a new global reserve currency will arise, we are clearly seeing a loss of status for the U.S. dollar as a store of value even in the absence of a single viable alternative,” he wrote in an article published on PIMCO’s website.

Indeed, Bloomberg news has an article on PIMCO's report. Ms. Crane argues that implementation of a new supra-national currency would take a long time. Well, how about this: Bloomberg mentions that Russian President Dmitry Medvedev presented a sample coin for a new supra-national currency at a recent international summit. No doubt its a bit of political side-show but you're definitely not hearing news like that on the economic report of your eleven o'clock newscast.

The financial crisis, however, woke the world up to just how vulnerable those squirreling away dollars — like China and Russia — were to the fortunes of the United States. The bulk of the world’s currency reserves are in dollars, with the euro still a distant second. Foreign central banks, however, could hardly start selling dollar-denominated assets to limit their exposure because such sales would cause prices on their remaining holdings to fall further.

Here, Crane finally makes a good point in favor of her argument, one she should have made at the beginning. This is the critical dillema facing countries like China right now. Its something of a Catch-22. However, if the dollar's value keeps declining China loses either way, so eventually the cost-benefit analysis might tip and make reform the best option for China anyway.

That’s because the loss of reserve status means, among other things, that the United States would lose a crucial crutch that has allowed it to borrow its way into prosperity as well as out of depression with relative impunity. Foreign investment in dollar assets have helped keep a cap on interest rates even though the government’s borrowing binge in recent years has brought new meaning to the word stimulus.

Yes, a dollar dive would be pretty disastrous for the U.S. We would likely see the standard of living of the average American decline (further). The really scary question is ... if the dollar does take a dive where does the American economy go from there? 70% of our economy is consumption and that consumption would be severely impacted by a large decline in value for the dollar. This is why you have so many ultra-bears predicting Doomsday - the effects of hyperinflation would pretty much be ruinous. Of course, some are actually predicing massive deflation as I point out in a previous post.

In an op-ed published in the New York Times today, Warren Buffett railed against the flowing red ink that will push the nation’s debt to roughly 56 percent of GDP from 41 percent in this fiscal year.

Presumably this is something that has also caught the eye of foreign investors.

While the greenback is likely to stay on top for some years, persistent concerns about its reserve status and moves to diversify away from it could usher in a new era for U.S. borrowers, public and private alike — a more painful one where debt costs can no longer be offset by the kindness of foreign investment.

Indeed.

Although I've criticized this article and Agnes Crane, I actually find it quite refreshing that Reuters is tackling this topic. Its quite timely and quite serious but it seems like a lot of mainstream media outlets don't want to touch the topic, either because its too complex for the average American or because the implications are too scary. Overall I would say that this was a decent blog post.

Twitter and it's Parasites

2009-08-19T03:33:00.000-07:00

Over at Reuters Blogs, Jon Cook has an article up entitled 'Is Bit.ly's Twitter advantage unfair?'

Bit.ly and Tr.im are URL-shortening services. As some of you may know, Twitter has a 140 character limit, so these websites exist to make URLs short enough to fit into 'tweets.'

The thrust of the article is that Tr.im finds Bit.ly's special relationship with Twitter (as its default URL-shortener, ooh la la) unfair, and is likely to go out of business because it can't compete.

Here is a quote:

Tr.im further stoked the Bit.ly-Twitter relationship debate, by adding that “Bit.ly has a monopoly position that cannot be challenged with reasonable investment or innovation unless Twitter offers choice. This is a basic reality of challenging monopolies. Bit.ly has deep personal connections and agreements with Twitter that we simply cannot compete with. And it is our humble opinion that this type of favoritism will become an issue for all Twitter developers.”

First of all, as many of the commenters on the Reuters Blog post pointed out, in most other industries this is simply called free competition. Enterprises are free to form preferential relationships with each other ... what exactly makes Tr.im think it deserves some special privelege ... and what makes Reuters' writer Jon Cook think this story is newsworthy?

Secondly, I find this whole issue to be representative of all that is troubling about the "new economy" led by the "creative classes."

I personally find Twitter to be incredibly overhyped. It doesn't really offer anything that existing web services didn't already offer. In fact, it artificially constrains messages to 140 characters for who knows what reason. I suppose it represents the incredibly short attention spans of today's media-crazed populace. Twitter's growth has been mostly driven by hype and social influence ... people try it out because all of the cool people are doing it, not because its actually useful. If you scan through Twitter you'll find that most "tweets" are often just plain junk, that or what are essentially private test messages put out in the open.

Here, however, we're not even talking about Twitter. We're talking about companies that act as parasites on Twitter. Both Tr.im and Bit.ly basically existed to serve the "market" for URL-shortening that Twitter created. The fact that one of these companies is complaining about a "monopoly" would be hilarious if it weren't so pathetic. Do these companies really think theres a viable market allowing for multiple competitors in URL-shortening for Twitter? Isn't Twitter going to eventually buy and incorporate one of these companies anyway? Truly, this is a tragedy of the greatest proportions, LOL.

And yet ... this is what our leaders tell us is the future of the American economy, or at least should be. This kind of "social entrepeneurship" ... this kind of "innovation" (and truly, where would society be without the marvelous innovation of Twitter and Bit.ly?). Even though there are billions of people around the world who need to be fed, clothed, given housing, given transportation, etc. any kind of industrial or physical economy is "dead" in the eyes of many of America's political and economic leaders. Instead, the future many of our leaders would prefer is one where we design new ways to waste time (and to make that time-wasting process more efficient). I seriously wonder whether the people investing millions of dollars of capital into these pointless tech companies and the political leaders heralding them as the greatest thing since sliced bread have ever actually visited and spent time on these sites.

Well, enough ranting for me ... If you agree with me, spread the word about my blog. If you don't, express your differences in the comments.

Addendum: Spoke Too Soon on China/Australia

2009-08-19T03:22:00.000-07:00

In my previous post, I pointed out the dependence of the Australian economy on exports to China. There, I said that as long as the Chinese government's stimulus program didn't change Australia would likely fare fairly well during the rest of this recession.

It seems as if I spoke far too soon.

I was just surfing through Reuters when I stumbled upon this news article:

BEIJING (Reuters) - The Chinese government is attempting to pass the baton of growth from state-funded infrastructure investment to the private housing sector, a risky but necessary move to sustain the economic recovery.

Construction cranes sprouting in big cities, busy furniture shops and soaring property sales all show that the transition is going smoothly so far, though officials are wary that house prices may rise too high, too quickly.

The rest of the article is about the Chinese government's fears about the housing market heating up too fast. No further comment is offered on how state-funded infrastructure investment is being reduced, if in fact it is. I don't know the intricacies of the Chinese economy enough to be able to comment on how this will effect Chinese raw materials imports from Australia. Nonetheless, this seems to complicate the situation and what I stated in my previous post.

Australian Economic Forecast

2009-08-19T02:27:00.000-07:00

The Australian economy doesn't get much attention in the American press. Today, however, I found an interesting article from Forbes on the future of the Australian economy.

The good news is that the Australian economy is nowhere near as over-leveraged as the American and British economies are.

Australian activity has remained surprisingly strong during the global crisis. Monetary and fiscal policy were aggressively switched to stimulus at an early stage. Australian banks were never exposed to the same degree of risky lending as their counterparts in the United States and the United Kingdom. The strong fiscal position enjoyed by the government enabled it to extend guarantees to various parts of the financial system at relatively low cost.

The bad news?

Over the past two years China's share of Australia's merchandise exports has risen from 15-20%.

and

The sharp fall in Chinese exports has not resulted in lower demand for Australian resources, as China's fiscal stimulus has focused on infrastructure, for which Australia is a supplier of raw materials. Although export prices are down from 2008 peaks, total Australian merchandise export volumes have risen in the nine months to June.

So Australia is heavily dependent on the Chinese market for raw goods. Lately, the media has been printing all kinds of troubling news concerning the Chinese economy ... everything from the macro effects of slumping American consumption to the decline in the real estate markets of Shanghai and Beijing. However, China is importing raw goods that are to be used in infrastructure construction. As long as the Chinese government keeps up its fiscal stimulus program and keeps it oriented towards infrastructure construction, the Australian economy should be, more or less, fine.

So, for now, I think the Australian economy will face some pain, but, not quite on the level that the U.S. and U.K. are facing. Of course, if the entire global financial system melts down, this all goes out the window. That's a big "if" of course.

Quick Update: Swine Flu in Japan

2009-08-19T01:08:00.000-07:00

A few days ago I made a post about the effects of the swine flu on the Indian economy.

Today, the Japanese Health Minister has declared that the swine flu has reached pandemic levels in Japan after a third death in the nation from the virus.

At the moment, it doesn't appear as if the virus is having the same major effects on the economy that it had in Mumbai and other parts of India. That doesn't mean that it won't in the near future, however. The Health Ministry might be accurate and the virus could spread at pandemic levels. Or, the Health Ministry might be blowing smoke and being extra cautious. Even then, the media attention has the capability of transforming this into something larger and keeping people away from public places (and thereby from consumption).

In one of my previous posts, I commented on how stock markets are often driven more by psychology than by economic fundamentals. If history serves as a guide, then I would not be surprised in the least if this news affects Japanese investors and drives prices down, if only temporarily. Recently, negative economic news out of China and Japan hurt stock prices in the United States and Europe. That presents a pretty negative prospect, but that's reality in this global economy.

Keep in mind, I'm not predicting a decline in stock prices. Like I said in a previous post, I don't focus on the stock market, I prefer to try and gauge how the so-called "real economy" is doing. I'm merely pointing out that this swine flu is something to keep an eye on, since it definitely has the prospect of affecting economies.

Deflation or Inflation?

2009-08-18T02:18:00.000-07:00

Nathan A. Martin writes the Economic Edge blog. Martin is the author of the 'Flight to Financial Freedom' book and is certainly a guy who knows what hes talking about when it comes to finance and the economy.

I bring his blog up for a reason. During this recession, the alternative and independent media has focused in on the idea that the outcome of this recession will be inflation, if not out-and-out hyperinflation like the Weimar Republic of Germany faced earlier this century. Much of this sentiment originates from the so-called Austrian School of economics. Dr. Ron Paul is one notable politician who has warned about the hazards of hyperinflation (and who I respect quite strongly).

Mr. Martin is also quite pessimistic about the future of the American, and world, economy, judging by his blog posts. However, he argues that, rather than inflation, the U.S. is about to enter a deflationary cycle. I don't really feel capable of answering this question, of predicting whether we'll face inflation or deflation, but I found his argument to be enlightening and educational nonetheless and really quite compelling. So I strongly urge you to visit his website and read his post, which you can find *here*.

Here is an excerpt from his post:

No, I’m not being over-dramatic. It is time to buckle the heck up. The resonant disconnect between reality and the pumping that is going on in the media and among supposed “experts” is at an all time historic, never been here before, Economic Mass Psychosis, HIGH.

To Quote John Kenneth Galbraith, “The majority is always wrong.” Right now the majority believe we are exiting the crisis. They are just plain old fashioned WRONG – again.

To prove my point, I’m going to show you the week in charts courtesy of the St. Louis Fed. This week, however, I’m issuing a WARNING. The evidence in these charts points to the beginning of a DEFLATIONARY SPIRAL. The PPI data comes out next week and will be a key piece of evidence in this regard. The results of a deflationary spiral will be UGLY if entered. You will see another round of deleveraging to go with locked credit markets. Equities will get hammered and the real cleansing of the economy will accelerate. This process will be PAINFUL but necessary to end the malinvestment. It will be the phase where more businesses who were hanging on HOPING for recovery will simply run out of cashflow to maintain operations. The same thing is necessary to cleanse a way over-bloated government and military.

The fallout will affect everyone. These charts are HISTORIC, they are NOT indicative of a short recession. As you view these charts, pay attention to the negative trends and look at them from a historic perspective. Many market callers are looking for immediate inflation due to the money pumping. I challenge them to point out inflation anywhere in these charts besides the money aggregates, which, by the way, are not growing at the rate they were. Those who look solely at the money aggregates are not seeing the destruction of credit which is very real and has hobbled the consumer. Never ending growth was a fantasy and is over for the time being, there is simply too much debt/credit in the system.

*Please* go over and read the rest of his post right now for the rest.

Response to Agnes Crane on Reuters

2009-08-18T01:13:00.000-07:00

Writer Agnes Crane has written an article for Reuters Blogs entitled 'Don't be fooled by global stock stumble.' Her basic argument? Don't lose confidence in U.S. stocks because of today's (8/17/09) stock market drop.

I want to emphasize that I am definitely not a stock market "guru." I personally feel that the stock market doesn't accurately represent the real American economy. To begin with, the stock market does not encompass the entire American economy - small-businesses often drive American economic growth and expansion much more than publicly-owned corporations. Secondly, the stock-market is driven much more by psychology than by economic fundamentals. The various bubbles that have popped or are in the process of popping during this recession were created because individuals ignored the fundamentals of the economy and latched onto blindly optimistic sentiment that grossly overvalued just about everything in our economy. Psychology changes on a whim, but the fundamentals stay basic.

Still, I do follow news concerning the stock market because it does have some relationship with the real economy. I just try and keep a critical mind that attempts to discern between reality and falsehood. With that in mind, I want to respond to Crane's commentary here.

She writes:

Don’t blame global stock markets for being skittish. It is August, after all, a month that has spelled trouble in the past two years.

Recall that, a year ago, Fannie Mae and Freddie Mac started wobbling at the precipice while AIG, desperate for cash, began paying junk-like yields in the corporate bond market. A month later, all hell broke loose.

In August 2007, a shutdown in short-term lending markets forced global policy makers to rush in with a flood of liquidity to keep the lifeblood of the financial system from clotting.

So it’s only natural that, this year, sellers are trigger-happy at the slightest whiff of trouble.

Once again, the argument is entirely psychological. According to her, all that is wrong is that investors are psychologically uneasy because of the significance of August (and presumably, her commentary will serve to destroy this notion and keep you psychologically optimistic and ready to invest in stocks). Is this argument true? Personally, I find it laughable. Lets try to imagine this scenario for a moment ... an investor is watching his money grows as the stock market rallies, suddenly he looks at his calendar and sees its August ... uh-oh, bad things have happened the past two Augusts ... I guess its time to pull all of his money out! Sound realistic? Last week Reuters reported that major "insider" investors were pulling out of stocks. Do we really imagine that big-time investors with lots of experience and lots of money invested in the market are going to pull-out based on what month it is?!

Problems surfaced in the United States last week, when a double-whammy of soft retail sales followed by a drop in consumer sentiment reignited worries that for all the good cheer about an emerging recovery, the exhausted American shopper is still unfit to carry the economy.

These concerns carried over into Monday trading in Asia, where they mingled with homegrown worries. In China, a drop-off in direct foreign investment helped fuel a nearly 6 percent decline in the Shanghai stock index and concerns about the Japanese economy helped trim more than 3 percent from the Nikkei.

U.S. stock indices have followed suit, with the S&P 500 off 2.43 percent and the Dow Jones Industrial Average off 2 percent.

Hmm ... wait, I thought it was all just skittishness on the part of investors? So, Crane admits here that the economy has serious problems that cast major doubt on the viability of the current rally. Should you be worried, like a lot of those "insider" investors are?

Monday was an ugly day, but investors should try to rein in their anxiety about what it means for such big-picture questions as what shape the economic recovery will take. That’s because a battle between bulls and bears, which typically emerges at economic turning points, has taken hold of financial markets — meaning today’s worries about the global economy are likely to morph into tomorrow’s worries about too much stimulus creating dangerous asset bubbles.

It’s a constant tension and one that will continue to push and pull financial markets for some time to come.

Her answer is no. What shes basically saying is that we're in a time of great volatility. Keep in mind that the Great Depression was a period of great volatility as well. The Great Depression saw some impressive stock rallies, which all turned out to be illusory by the way. The author has no way of ascertaining that this is a "turning point" except through hindsight, so it is merely supposition, or wishful thinking, on her part.

“The markets have very selectively reacted to economic data,” says Stephen Stanley, chief economist at RBS. Little more than a week ago, for example, the S&P 500 hit a 10-month high after the U.S. reported “only” 247,000 workers were dropped from payrolls in July.

When do the markets not selectively react to data? The entire housing bubble was caused by "selective reaction." Furthermore, the July unemployment numbers have been challenged for being artificially-low by various sources. I won't go into it now, but if you want to know more about how the U.S. calculates unemployment from payroll sources, I point you to ShadowStats.com's page on the matter.

Given the big run up in risky assets like stocks and corporate debt since March, and last week’s data, it’s not surprising that investors are now worried that the rosier outlooks failed to take into account the growing fixation of the U.S. consumer on savings.

Take price-earnings ratios. Bespoke Investment Group noted last week that the P/E ratio of companies in the S&P 500 climbed to its highest peak since 2004, as earnings failed to keep pace with the optimism that fueled a 50 percent jump in the S&P 500 stock index since March. For earnings to catch up, the consumer will have to shake off worries about high unemployment rates and pitch in with good old-fashioned shopping. So far, that’s looking like a stretch.

So, chalk up the stock declines to correcting what had become overbought conditions and get ready for more choppiness ahead.

This is the messy reality of turning points, not necessarily the foreshadowing of something truly ugly to come. Even if it is August.

I don't have much to add here. The author asks the reader to not be worried and assures us that this is merely a "turning point" towards better times ... yet provides us with nothing but troubling economics forecasts. Where is the positive news to convince the reader to stay invested? It is definitely not present in this article. The author seems to think that by merely explaining the reasons why investors have lost confidence in the market rally that somehow negates those reasons.

Overall, I found this to be a very poorly argued commentary piece and I'm quite disappointed in Reuters. Financial journalism isn't very good these days. More often than not, you're better off reading independent and alternative news sources for actual truth.

Is the Stock Market Rally Over?

2009-08-17T19:13:00.000-07:00

Here are a few reports from Reuters on the current state of the stock market. Here, Reuters reports that:

NEW YORK (Reuters) - Stocks suffered their worst loss in seven weeks on Monday as weak data from Japan and a disappointing outlook from retailer Lowe's Cos (LOW.N) dampened hopes about the economy's growth.

Japan's gross domestic product showed its economy pulled out of recession in the second quarter, but at a slower pace than expected, prompting a sell-off in major Asian markets that spilled over into Europe and North America.

....

The results amplified worries about weak consumer spending following last week's poor data on U.S. consumer sentiment and retail sales.

The health care sector managed to outperform most other economic sectors. Is the stock market rally of the past few months over? Will we see the Dow Jones Industrial Average go below 9,000 points again? Only time will tell. Its pretty clear that the primary reason for the decline is the fact that consumption seems to be on a consistent decline and shows no sign of recovering. The retail sector is struggling especially hard.

Here is another story from Reuters, published last week, that is of interest to anyone invested in the stock market:

NEW YORK (Reuters) - A massive rally in U.S. stocks since March has reawakened bullish spirits, but insiders are jumping out of the market in a sign the run up is getting stretched.

Company executives are selling stock at a rate not seen in two years after a near 50 percent rise in the S&P 500 from a March 9 low. That suggests directors and managers may think stock prices are nearing the top end of their range in the current economic climate.

...

For brokerage Jefferies & Co., a significant increase in insider selling transactions as well as a decrease in short interest across most sectors of the S&P 500 demonstrates the weathering of the bear market rally.

...

Since early March investors have piled back into the stock market in the hope of an economic recovery, bank sector stabilization and expectations many more will follow them.

...

"Insiders historically have a strong correlation on a macro level to buying and selling, said Silverman, who is based in Princeton, New Jersey. "There's a lot of negative signs right now coming from insiders."

It seems like investors should definitely consider the implications of these news stories. While the media and some financial institutions publicly declare that the recession is on its way out and a recovery is here, some major insiders are dumping stock. Who is going to be left holding the bag if the stock market takes a dive again?

Here is one final report, also from Reuters:

Of late there has been an influx of money, but it's not necessarily good news. Recent experience shows that the biggest influx of money comes at the peak, according to Birinyi Associates.

"It's somewhat of a reverse indicator," said Jeff Rubin, market strategist at Birinyi in Westport, Connecticut. "You do want money going in, but you don't want this tremendous shift."

While it hasn't been a tidal wave, money is returning to stocks, according to data from the Investment Company Institute. For the week ended August 5, equity funds saw an estimated inflow of $5.5 billion, compared with an inflow of $3.4 billion the previous week.

In the short term, such flows can bolster heady gains, but larger bouts of optimism are often a sign markets are about to turn.

So there you have it. Quite a negative picture from Reuters on the future of the stock market, at least in the short-term. It seems as if we may have reached another turning point in this prolonged recession the world is experiencing.

Government Sector in Big Trouble

2009-08-15T02:54:00.000-07:00

Over the past few years, three of the economic sectors with the most growth were health care, education and government. Of course, health care and education are often intimately tied in with the government. A lot of people strongly believed that these sectors were "recession-proof" and safe places to develop a career. It appears they might be wrong. Very wrong.

A few days ago the Washington Post published this story:

As states across the country grapple with the worst economy in decades, most have cut services, forced workers to take unpaid days off, shut offices several days a month and scrambled to find new sources of revenue.
The good news is that much of the pain this year has been cushioned by billions of dollars of federal stimulus money, which has allowed states and localities to avoid laying off teachers, prison guards, police officers and firefighters.

The bad news is that for the next fiscal year, beginning in July, the picture looks even bleaker. Revenue is expected to remain depressed, even if the national economy improves. There will be only half as much federal stimulus aid available, and many states have already used up their emergency reserves.

The bold emphasis was added by me. California is the prototypical example of this. The budget recently passed is slated to cut a lot of state jobs. As the recession deepens in 2010, we can probably expect further cuts. That means higher unemployment. The cuts to government services will also surely have a negative effect on consumption.

In California, a great number of teachers have been laid off by the new budget. That means both the "government" and "education" sectors, which were supposedly "recession proof," are going to take a massive hit in 2010. As this article indicates, this isn't just a California problem, we're going to see this kind of thing across the U.S.

Here's a report out of Europe, from Ambrose Evans-Pritchard. I'm not usually a big fan of Mr. Evans-Pritchard but I definitely stand up and take notice when he titles one of his articles 'Fiscal ruin of the Western world beckons.' Quite alarming.

Concerning Ireland:

A further 17,000 state jobs must go (equal to 1.25m in the US), though unemployment is already 12pc and heading for 16pc next year.

Education must be cut 8pc. Scores of rural schools must close, and 6,900 teachers must go. "The attacks outlined in this report would represent an education disaster and light a short fuse on a social timebomb", said the Teachers Union of Ireland.

He continues:

But the deeper truth is that Britain, Spain, France, Germany, Italy, the US, and Japan are in varying states of fiscal ruin, and those tipping into demographic decline (unlike young Ireland) have an underlying cancer that is even more deadly. The West cannot support its gold-plated state structures from an aging workforce and depleted tax base.

He warns:

While I agree with Nomura's Richard Koo that the US, Britain, and Europe risk a deflationary slump along the lines of Japan's Lost Decade (two decades really), I am ever more wary of his calls for Keynesian spending a l'outrance.
Such policies have crippled Japan. A string of make-work stimulus plans - famously building bridges to nowhere in Hokkaido - has ensured that the day of reckoning will be worse, when it comes. The IMF says Japan's gross public debt will reach 240pc of GDP by 2014 - beyond the point of recovery for a nation with a contracting workforce. Sooner or later, Japan's bond market will blow up.

No-brainer here. We should already be suspect of spending as a strategy towards solving a debt-crisis, but pointless spending that does nothing to create a more productive future is obviously futile and probably makes the problem worse.

Go over there and check out his article. It will surely make you think, even if you don't agree with his prescriptions.

Ultimately, this is setting up to be a major blow to the American and European economies, especially in 2010. The mainstream media isn't talking about this very much though, choosing to focus on hyping up a supposed "jobless recovery" and encouraging spending, although it doesn't appear to be working very well.

Quick Link: Suburb Developers Take A Hit

2009-08-14T04:22:00.000-07:00

Over at the Financial Armageddon blog, the author has put up an interesting post about the fate of suburb developers during this recession. The results shouldn't be surprising for anyone who has followed this recession, but it makes for an entertaining read nonetheless. One quick quote from the end of the article he references in the blog post:

Hedlund says his forecasts for 2010 include the possibility that the year could be worse than 2009.

"In the meantime, communities may have trouble maintaining the infrastructure on unused land," he added. "Eventually, many lots will have to be bulldozed."

By the way, I don't agree with everything the author of Financial Armageddon writes, far from it. A lot of what he writes concerning the finer points of finance is also over my head. Nonetheless, you'll usually find something interesting over there.

Solution to recession: more wars?

2009-08-14T03:39:00.000-07:00

Today I stumbled upon this post on a blog called Washington's Blog. I can't say I was familiar with the blog before stumbling upon this post. Taking a quick look around, I can already see that I don't 100% agree with all of the author's opinions. Nonetheless, this is a pretty provocative post.

His post tackles a simple question: will the United States government launch more wars around the world in a last-ditch bid to salvage the American economy? He points to statements made by economist Marc Faber, trends forecaster Gerald Celente (who predicted the current recession) and Justin Raimondo in order to try and answer the question.

Of course, such a move would not be without precedent. Various schools of economics will argue that the Great Depression was overcome not by President Franklin Roosevelt's Keynesian spending but rather by the nation's mobilization for World War II. Of course, political pundits have been making comparisons between current President Barack Obama and FDR for quite some time now.

While I'm willing to consider the arguments presented in this blog post, several questions go unanswered in my mind.

How exactly would any war(s) be funded? Our country is arguably in a much worse off position now than it was at the beginning of World War II. Funding a large-scale war seems practically impossible at this point, unless we're arguing that the entire global financial system will be scrapped.

Would a war actually be able to lift the United States out of its recession (or depression, as it may be)? The United States can't create something like World War II (involving the overall majority of the world's population) out of thin air. It can, however, invade a large nation like Pakistan (the 6th most populous country in the world) on its own. What would be the actual economic impact of such a war on the United States? Keep in mind, the defense industry is not what it used to be, it is no longer a mass-employment engine. It seems like such a war might only increase our national debt load without actually reviving the economy. I suppose if our leaders and the national elites are that rapacious, it doesn't really matter.

Finally, one of the posters comments that such a war is unlikely before 2012 because of the pressing need of re-electing President Obama on the part of the Democratic Party. That seems to be true. However, if the economy is completely wrecked by 2011, might not such a war (and the massive boost of patriotism it would inject into the national consciousness) be the perfect remedy for an ailing campaign? Its impossible to tell from our current vantage point and I sincerely hope none of us ever have to find out.

I ask these questions not to knock the blog post and the ideas it presents, but rather because I take such a provocative proposition quite seriously and, considering how bleak our economy currently looks, think we all should.

Job Growth (?)

2009-08-14T01:44:00.000-07:00

I want to draw your attention to this article from the New York Times. And specifically to this graphic. The Times writes that:

FOR the first time since the Depression, the American economy has added virtually no jobs in the private sector over a 10-year period. The total number of jobs has grown a bit, but that is only because of government hiring.

The accompanying charts show the job performance from July 1999, when the economy was booming and companies were complaining about how hard it was to find workers, through July of this year, when the economy was mired in the deepest and longest recession since World War II. For the decade, there was a net gain of 121,000 private sector jobs, according to the survey of employers conducted each month by the Bureau of Labor Statistics. In an economy with 109 million such jobs, that indicated an annual growth rate for the 10 years of 0.01 percent.

This reveals more about the state of the real economy than any stock index or analyst opinion does. Without jobs there are no consumers, and without consumers there is, in effect, no American economy. Now, of course, there are jobs out there. But with unemployment reaching towards 10% nationally and closing in on 20% in some particular areas, its clear that finding a job is a much harder venture than it was a few years ago.

One comment in the article which I found interesting was:

Hard as it may be to believe, the consumer economy of the United States actually lost retail jobs over the decade, at a rate of 0.2 percent. There were fewer people working in food stores. But the category of general merchandise stores — like Wal-Mart and Costco — showed an impressive gain of 1 percent a year, even though the category also includes department stores like Macy’s, where the number of jobs has fallen.

So even retail, one of the supposed bright spots of the economy, suffered in this decade.

If you look at the graphic, you'll see that the two economic sub-sectors which exhibited the greatest growth were 'Management & technical consulting' as well as 'Home health care.' I'd like to go more in-depth into each of these industries later. Needless to say, I'm skeptical that they will be drivers of economic growth.

In recent memory, one of the primary reasons that management consultants have been hired by corporations is to and fire and downsize. With smaller operating budgets during this recession, I wouldn't be surprised if the use of management consulting declines overall.

Secondly, when it comes to home health care nothing is a 'given.' I keep hearing people trot out facts about the aging boomer population and how they'll need home health care in the near future. Yes, there will be a lot of elderly people in the United States. There are many elderly people around the world, however, and not all of them receive commercialized care (or government care, for that matter). Most are taken care of by their families. If there is no money to pay for commercial home health care, it doesn't matter how many old people you have. Lets just take a look at a few factors:
1. The incredible wealth-destruction that many retirement accounts have been subject to during this recession.
2. The incredible debt load future generations will carry.
3. The dismal jobs situation in the United States.
With these three conditions in mind, how can we be so sure that health care will continue to grow at such a rapid rate and be a job-creator? In my opinion, we can't.

Thus, I see the New York Times job report as being all-around dismal.

Swine flu and the economy

2009-08-13T23:45:00.000-07:00

An article from the Times of India:

MUMBAI: Maharashtra's economy, which only recently started emerging from the shadow of the global meltdown, has been delivered a double whammy with the spread of swine flu and what officials are calling the worst-ever drought to have hit more than two dozen districts.

How is swine flu affecting the economy in India?

While educational institutes and theatres and multiplexes have been closed in the Mumbai-Pune belt, authorities in other districts, too, are facing pressure to shut down all institutions in a pre-emptive attempt to check the spread of the virus.

"The closure in Mumbai and other districts will definitely have an adverse impact on the economy. Major and minor transactions in the entire region have almost stopped. In fact, after the closure of schools was declared, there was sudden drop in attendance in government and private offices too. The epidemic has had a cascading effect on the entire state,'' the NCP minister said.

The so-called "swine flu" took an interesting route through the media. There was a lot of hype and panic over it in the media when it first emerged. However, the American media has a 2-second attention span so the story disappeared as quickly as it emerged. However, in the period after it disappeared from the national media, or was at least moved from the front page, swine flu has emerged as an actual health threat. As of today, Wikipedia is citing some 2,000+ global deaths and 200,000+ laboratory confirmed cases. That's laboratory confirmed. The real number is likely higher.

As the above article states, the response in India has been to shut down schools and other public institutions. Some places of commerce have also been shut down to inhibit transmission of the disease. Of course, when news like this is made public it makes people less inclined to patronize the commercial establishments that actually are open.

Of course, some of you will also know that the Mexican tourist economy was devastated by the swine flu pandemic.

Will the US face something like this? Of course no one really knows, yet. It certainly is possible. A casual Googling reveals that many American schools certainly are preparing for the possible emergence of cases of swine flu amongst their student body when the school year begins. The United States already leads the tally in terms of numbers of confirmed deaths from the disease. If school closures do happen in the U.S., it will be interesting to note what kind of attention a story like that attracts from the national media. If it does get much play in the mainstream media, I would not be surprised to see a further hit to the retail and hospitality sectors of the economy as people stay home instead of vacationing or visiting shopping centers. This is something to watch for as the school year begins again in the next few months.

"Cash for Clunkers" Losing Steam

2009-08-13T15:03:00.000-07:00

Today, Reuters informs us that:

Red hot auto sales under the U.S. government's "cash for clunkers" incentive began to cool as dealer inventories tightened and showroom traffic showed signs of leveling off from its frantic pace of a week ago.
One industry analysis released on Tuesday forecast a steady decline in "clunker" related business even though the Obama administration and Congress added $2 billion to the program in recent days with hopes of matching the success of its first weeks. Sales during that period topped 250,000 and rebates exceeded $1 billion at least, according to government and industry figures.

I have several criticisms of the "Cash for Clunkers" program.

1. Why the auto industry? Practically every sector of the economy in the United States is hurting. Some are hurting very bad. Why did the government choose to subsidize auto sales? Especially considering it has already been quite generous, to say the least, to General Motors and Chrysler. Why not help, say, non-auto-related manufacturing? The auto sector is hurting but there is no indication that it will permanently leave the United States. In contrast, there are some other manufacturing sub-sectors that are more at risk of completely disappearing from the U.S.

2. This program is encouraging consumers to take on additional debt. Of course, if consumers were to devote all of their income to solely working off debt the U.S. economy would likely grind to a standstill. But, still, how smart is it for the government to be haphazardly encouraging consumers to assume additional debt in the midst of a debt-fueled recession?

3. The "clunkers" must be less than 25 years old. So we're not talking about scrap heaps. Anecdotal evidence suggests that many of these cars are still in good, working order. When traded-in, these "clunkers" will all be sent to the junkyard. In short, the government is destroying working assets that still have some value to them. Why? The argument is that these cars have low fuel efficiency and therefore have lost a lot of value in this recession. There are many poor people (and many young people) in this country who could use a cheaply-priced car. Maybe they only need a car to make short trips, or to get them to work, or to go to the supermarket, and the low fuel-efficiency doesn't matter to them. Instead, the government is trying to "protect" consumers and the auto re-sale market from price declines. What gives the government the right to interfere with the economy to that extent? As I see it ... valuable assets are being destroyed, a few consumers get to take on a new government-subsidized debt load, auto corporations (and thus the government, when it comes to General Motors) get a big payday and, worst of all, the economy is prevented from re-purposing valuable assets towards a more efficient use.

Anyway, I thought I would air out my grievances with the program but that's not the real story here. The real story is that even though the federal government is out-and-out subsidizing car sales, the program is already weakening and car sales are already declining from when the program first began. That says a lot about the current state of the American consumer. Not even a few thousand dollars towards your down payment courtesy of Uncle Sam is convincing people to buy cars. Can we imagine what would have happened if this program had been put in place in say, 2005 or 2006?

Feel free to read more in-depth about the Cash for Clunkers program (official name: Car Allowance Rebate System) on Wikipedia.

Analyst Expectations and Reality

2009-08-13T02:00:00.000-07:00

Recently the mainstream media has been full of supposedly good news for the economy. If you've been following the news lately, you probably know what I'm talking about ... it seems like every week we hear of more corporations that are managing to beat analyst expectations in regards to quarterly earnings or profits.

Not familiar with what I'm talking about? A quick Google search of recently published news stories returns the following ... an article from MarketWatch reporting that Applied Materials Inc. beat analyst expectations for quarterly earnings and sales ... an article from the Wall Street Journal reporting that Anheuser-Busch InBev beat analyst expectations for second quarter earnings ... an article from the Epoch Times reporting that Macy's also beat analyst expectations for second quarter earnings ... etc. These examples are just to give you a taste of what I'm talking about. They are all from the past several days. Look for yourself and you'll find many, many more.

It's pretty clear that the media has put a huge spotlight on analyst expectations. I'd like to put my own spotlight on this trend.

The first question I'd like to ask is: why is the media focusing so hard on analyst expectations? There are various reasons that I suspect.

1. A lot of people are very thirsty for any kind of positive economic news. If you read any of these articles you'll see that conditions for most of these corporations are pretty dreary. Most are actually seeing declining sales and earnings. About the only positive thing to report is that they beat analyst expectations.

2. Many of these media organizations are clearly suffering in this downturn as well. A recovery would greatly benefit them. So its in their interest to promote as much positive economic news as possible, possibly in an effort to shift public opinion and promote more economic confidence (regardless of whether it is warranted or not).

3. Many of these media organizations want to paint a positive picture regarding the financial situation of these corporations because they have ties to them. For example, remember the story about Macy's I linked to up top? The retail sector is one of the biggest advertisers in just about every form of media.

4. Its the predominant thinking on Wall Street and these media groups don't want to rock the boat. Call it inertia, if you will.

The second queston I'm asking is: why do we care that a company beat analyst expectations?

What a lot of these news stories are essentially saying is: this company is taking a complete nosedive in every respect BUT it beat the estimates set by a third-party.

What is left out of this type of reporting is:

Who are these analysts? What firms do they work for? What ties do they and their firms have to these corporations? to Wall Street institutions in general?

What were their expectations based on in the first place? What changed for this company that made it beat expectations? Does beating expectations mean that the company's financial situation is actually bettering or was the analyst merely far off the mark?

None of these questions are ever really asked because the point isn't to give you an accurate picture of the health of a company. The point is to offer you a quick soundbite that sounds positive and upbeat and restores confidence. At least thats how I see it right now.

I also want to say that I'm not insinuating that there is any kind of collusion between analysts and corporations. However, I encourage you to remember the role credit-rating agencies played in overestimating the value and security of subprime mortgage-based securities. If you aren't familiar with what I'm talking about, I strongly encourage you to look into it. On top of that, we all know that corporations have tons of way of creatively fudging their books. With that in mind, how can any responsible financial journalist *not* be asking these questions? How can we be sure that these analyst expectations actually represent valuable standards by which to judge the health of a company or of the economy as a whole? Yet, I don't see any of these questions being asked in the mainstream media. I do, however, see the mainstream media using these supposedly positive reports as a basis on which to begin promoting stocks as a great investment again.

The moral of the story? Look deeper. Think critically. Ask the right questions. Don't believe the hype.

Hopefully we will start seeing some better reporting soon, but I'm not holding my breath ...

July 2009 housing statistics

2009-08-13T00:19:00.000-07:00

I'd like to begin with a straightforward post about the housing market. The importance of the housing market to the overall economy is obvious.

Reuters provides us with an image of how the housing market fared in July of 2009.

Foreclosure activity jumped 7 percent in July from June and 32 percent from a year earlier as one in every 355 households with a loan got a foreclosure filing, RealtyTrac said on Thursday.

This is, more or less, unsurprising. It is more evidence that a turnaround in the housing market is nowhere on the horizon yet. Most of these foreclosed properties will take quite a while to make their way onto the market due to the backlog that lenders are facing.

Obama's housing rescue is gaining traction in altering terms of loans for struggling borrowers, but slowly.

Earlier this month the U.S. Treasury Department detailed the progress of the top servicers in modifying loans and prodded them to step up efforts to stem foreclosures.

I thought this was an interesting comment on the part of Reuters. They're referring to this. I'll let them speak for themselves:

Eleven of the largest 25 mortgage service companies are helping less than 5 percent of eligible borrowers, while the most effective servicers are helping as many as one in four eligible borrowers, according to Treasury data.

"It's safe to say we're disappointed in the performance of some of the servicers," said Michael Barr, Treasury assistant secretary for financial institutions. "We expect them to do more."

Bank of America, the biggest U.S. bank by assets, is aiding just 4 percent of eligible borrowers, while No. 4 bank Wells Fargo is reaching only 6 percent, the Treasury said.

This isn't the complete story, of course. Some smaller banks are modifying loans at rates higher than 20%. However, I thought it was an interesting bit of spin. In the context of the July housing article, the government's loan modification program is presented as a positive factor in favor of the housing market. If we dig deeper, however, we see that the program is quite troubled and, in its current state at least, unlikely to make much of an impact in stemming the wave of foreclosures.

Anyway, back to the article on July's housing numbers ....

California, Florida, Arizona, Nevada accounted for almost 57 percent of total U.S. foreclosure activity in July.

Illinois had the fifth-highest total filings, spiking nearly 35 percent from June, in an example of how moratoriums often delay rather than cure an inevitable loan failure.

This is pretty troubling. California alone makes up a huge percentage of economic activity in the U.S. Of course, I'll be the first to state that it'll be nice to see California's housing prices come back in line with reality. However, that kind of correction could come at a pretty steep cost. We'll likely see more destruction of equity and wealth in California as prices continue to decline and in turn we'll see less investment and capital available. Despite what some may think, that *will* have repercussions throughout the rest of the United States.

Meanwhile, things are, well, horrible in Nevada.

Nevada had the highest state foreclosure rate for the 31st straight month, with one in every 56 properties getting a filing, or more than six times the national average.

Tourism, hospitality and, of course, gambling have already taken a huge hit. Now we're seeing that 1 out of every 56 properties in Nevada has gotten a foreclosure filing. Anecdotal evidence, as well as simple population statistics, make it clear that most of those filings are probably in the Las Vegas region. I can't say I envy those of you in Las Vegas right now. Of course, real estate development in Las Vegas is as much commercial as it is residential. Various economists and commentators have already pointed to the commercial real estate market as the next major pillar of the economy to face major problems so we should pay close attention to Las Vegas as a test case of where the national economy might be headed. Times sure are looking tough in Nevada right now.

First Post

2009-08-12T21:44:00.000-07:00

This is my first post on this blog. I intend the focus of this blog to be economics and finances. I will post about economic news that I find interesting and offer my own commentary. That's my plan, anyway. I'm by no means an expert when it comes to these subjects but I am also not a novice. I hope I will offer an interesting perspective to any readers of this site. This blog will serve as a learning experience, of sorts, for myself and hopefully for any readers as well. Of course, these plans may be modified along the way. So ... stay tuned ...