Iterations of "X"

First super nice day of the year here today. Upper 70's, nice breeze, and abundant sunshine. Makes you want to get the fishing gear together and get after 'em. There will need to be 2 solid weeks of warmer weather to get the fish into the spawn, and then another week or so until they are done. I do not fish and cannot stand fisherman that target spawning bass on their beds!

Loyal reader Kevin pointed me towards a fun blog called Illusion of Prosperity and the writer Stagflationay Mark, while providing a good site, has the best tastes in both film and music. Stop on by if you are so inclined.

Loyal reader Watchtower informed my via the comments that he purchased a muscle car while I was on vacation, then never told me what he bought! Come on Watchtower, spill the beans so I can drool!

Sign of the Apocalypse: I am with Kudlow!
First I found myself agreeing with a bunch of what Paul Krugman has been saying, and now I find common ground with uber bull Larry Kudlow! What's next, me liking the Beatles? (Never gonna happen; I am ultra 2X short BETLS stock)

Writing about the NY FED head resignation, Mr. Kudlow offers some choice words about the TARP:

A parting thought: This whole Friedman episode looks like yet another unfortunate example in a long line of growing TARP corruption. Make no mistake: TARP is a corrosive, corrupting, and demoralizing influence on our banks and the rest of the economy. It is a symptom of the slippery slope we are sliding into with Team Obama’s big-government, bailout-nation vision and agenda. The Friedman mess is merely symptomatic of this growing problem inside our system.
It is time we all opened our eyes to the mess before us. Enough already. We can do much better.

In total fairness to the president, this stuff was in full swing under Bush so the blame is not all Obama's.

A History Lesson with William Black
Associate Professor of Economics and Law at the University of Missouri - Kansas City William Black does not pull punches. The man has strong opinions and he lets them rip without candy coating. There was a time long ago that clear thinking smart people like Mr. Black actually worked in the government! I know, shocking!

In comments about the stress test results Mr. Black is as confused as I am that the gullible investor public have lapped up the "all clear" from the same cast of clowns that brought the following timely predictions:

Fannie and Freddie: In July 2008, Treasury Secretary Paulson testified that Fannie and Freddie were "adequately capitalized" under the test. In August 2008: "even in [Freddie's] most severe stress tests, [show] losses ... less than $5 billion." Actual losses: 20 to 40 times greater.

AIG: "It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of those [CDS] transactions." AIG claimed in 2008 "Using a severe stress test ... losses could go as high as $900 million."
 Actual losses: 200 times greater.



IndyMac: Sold over $200 billion of "liar's loans." Actual losses: 160 times greater than its tests.

Rating Agencies: Their stress tests gave AAA ratings to toxic waste. Actual losses: more than an order of magnitude greater.

Not to worry, I am sure those saying losses are now "containable" have it right this time!

On the Possibility of a "W" Move in the Markets This Year
One of my favorites sites on the web is Miyanville and one of their best writers is Todd Harrison. Mr. Harrison has been as close to spot on over the past two years as one can be, and thus I give serious thought to his observations. Mr. Harrison has been using an idea that I wanted to spend a minute on.

The possibility of a "W" shaped move in the markets in a good possibility says Mr. Harrison. What I take that to mean is that the current rally may have legs still, but a downturn would happen maybe this summer which would bring stocks to spitting distance of the old lows. This would be followed by another ripper to the upside for a round trip journey.

Now understand that Todd Harrison has forgotten more about markets than I am ever likely to know. Thus, I give this strong credence. Whether or not this does play out, I wanted to make a point about IF is does come about.

The markets bottomed around S&P 666 and DOW 6800. Should the rally run to the 1000 and 10,000 mark respectively I would venture that plenty of people breathe a huge sigh of relief. If the markets then collapse anywhere near the old lows again, only to rip to the upside ANOTHER time in a year I think the following will happen:
-Equity buying will be seriously depressed for up to a decade in the 30-50 year old age bracket as the 3rd world market gyrations will scare the jeepers out of anyone
-Near retirement equity holders are going to quit the markets for good
-Market volume will be even more made up of banks trading to each other, making price distortions a chronic issue

Suffice to say I think a "W" move in the markets will have serious long term consequences.

Iterations of "X"
The current consensus is that not only is the US economy close to coming out of the recession, but a "V" shaped recovery is on the way (I know, plenty of letters tonight!). I wanted to flesh out a thought concerning what kind of economic activity is expected by market players and what level of activity is likely.

Assume (uh oh) that an average, sustainable economic activity level is X. This encompasses auto sales, home sales, retail sales, the whole lot. Right now during the credit crunch and unemployment picture say that economic activity is running at 1/3X. For comparison, during the credit boom and real estate money machine mania activity was running at 3X. I arrived at these numbers using really rough estimates, not hard numbers and math because math makes my head hurt.

So if lending standards return to normal, credit flows easier but not out of control, and sales of cars and homes come up to levels around their long term averages economic activity would then be at level "X". This would be a great stabilizing force and things could calm down. So whats the problem?

The problem is that for the super leveraged banks, over expanded malls and chain stores, inventory "challenged" auto and home markets, and many other businesses to to well "X" simply will not make the grade. While a level of "3X" would be ideal for these sectors, a good "2X" is maybe a minimum level needed to be widely profitable. And there is the problem.

It is not going to happen absent insane monetary policy

While not the fastest learner, the American consumer has been burned severely on their biggest purchase (their homes) and that is going to leave a mark. While I do not envision a "thrifty" consumer I do see a move towards not reaching for the stars and going into the kind of debt that one cannot ever escape from. Surely some will still do this, but as a whole I am confident a new era of "controlled overspending" that will limit hot money flows going forward.

It will be the primary mission of the Federal Reserve to make sure this does not happen.

I think this is going to take time to play out. Maybe up to 2-3 years. In the end I am thinking that the FED, confronted with a consumer that will not spend and take on credit at a level consistent with "3X" economic activity, will attempt to force the issue by leaving interest rates at zero (forever?) and perhaps actively devaluing the currency to force spending instead of saving.

If you think I am crazy just consider the current programs (tax incentives up to $15k to BUY a home) and others like it to force buying. While there has been no dollar devaluation as yet, that was surely a disappointed for the FED as dollars became in demand for deleveraging. I am sure there is a secret chapter in the back of the best Keynesian economic textbooks titled:
"Forcing Those that do not Understand Economics to Overspend: The 3X solution in 3 Easy Steps"

Friday Night Entertainment
After a week hiatus, the fun is back on!

Classic Scenes
This scene scared the heck out of me as a kid, and still gives me the chills today. Enjoy Quint tell the tale of the USS Indianapolis in the immortal "Jaws":


From a film which will be regarded as an all time classic in the future (turn up the volume to appreciate the wonderful music coupled with surreal filming) enjoy Paul Newman's last great performance in this scene from "Road to Perdition":


Rock Blogging
Friday is music night to set the weekend up right!

I do not often feature newer music on the blog for two reasons; I do not like many new songs and almost all new music is "embed disabled" on YouTube. I do really like this newer song from O.A.R Titled "Shattered" and it was available:


In the old days performers made their money going out on tour and playing live. In this era of "studio only" artists, take a listen to a small TV show performance by Heart of "Magic Man" and know Ann Wilson can sing without any help from a mixer:


I must be on a ladies night theme, but I love Joan Jett and Cherry Bomb (song starts at 27 second mark):


One of my all time favorites is the Scorpions. Enjoy "Rhythm of Love":


Last one for the night. One of my favorite Iron Maiden songs is called "Stranger in a Strange Land"; great guitar, drums, and lyrics that are totally rocking:


Have a good night.