Monday, June 29, 2009

The Show Must Go On

Saturday was a mad rush of activity because the rain stopped for a 6 hour window. Even though the grass was wet, I had to cut it because it was almost 8 inches tall! Still expecting cruddy weather all week long, the past 2 weeks have been very strange indeed.

Ben Bernanke Detractors and Defenders
I was sure that FED head Ben Bernanke's especially weak appearance in front of Congress last week to discuss the BAC/MER deal would open a debate on his reappointment. The president reiterated his faith in Bernanke, and no serious grumblings were found from the Congress. I found this puzzling because Mr. Bernnke was far from open in his testimony, and his reliance on the good old "I dont recall" line was at best a blatant lie.

Mish Shedlock penned a very harsh piece that was up today and i would ask you to take a look at it. Mish's summary:
Summary:
Bernanke is a disingenuous liar with a memory problem. He is also an economic dunce who does not understand the cause of great depression nor could he spot a housing/credit bubble visible to nearly every blogger in the country. However, like his mentor Greenspan, Bernanke believes that every problem can be cured by throwing money at it. Finally, he is a creative, political power grabbing hack who gives memorable speeches about throwing money out of helicopters.

While the tone of the article is indeed a bit rough, I find it hard to argue with the specific points Mish makes regarding Bernanke's performance.

Of course, not all are of the same mind.

The Mish piece highlights a Caroline Baum article where she sums up the situation:
It would be hard to find someone more suited for the job of Fed chairman than Bernanke. His performance yesterday has nothing to do with his unique qualifications for the position. ... Unless President Barack Obama wants a solo pilot, he would do well to tap Bernanke for a second term.

Mrs. Baum makes no sense with this paragraph. I would wonder if Bernanke being a student of the Great Depression is as much of a bonus as it is claimed. I mean, in what way, shape, or form is the current economic backdrop even remotely similar to the 1929-1940 period?

Also in the "Bernanke is not so bad camp" are Calculated Risk and Jim Hamilton (of Econbrowser). CR related a piece from Econbrowser that he agrees with:
It is one thing to have different views from those of the Fed Chair on particular decisions that have been made-- I certainly have plenty of areas of disagreement of my own. But it is another matter to question Bernanke's intellect or personal integrity. As someone who's known him for 25 years, I would place him above 99.9% of those recently in power in Washington on the integrity dimension, not to mention IQ. His actions over the past two years have been guided by one and only one motive, that being to minimize the harm caused to ordinary people by the financial turmoil. Whether you agree or disagree with all the steps he's taken, let's start with an understanding that that's been his overriding goal.

I can agree that character attacks are over the top, but again we see this idea that just because Ben Bernanke is so smart he must be doing the right thing. As far as I know smart people can make the wrong decisions, it is not a providence for the dumb. Stupid is as stupid does and all that.

My final take: I am not really convinced that Bernanke is doing the things he is to save the ordinary man from turmoil. And if indeed that is his goal he is failing at that anyway. Bernanke and all the powers that be are engaged in an attempt to save the banking system with the minimum pain for those institutions and the maximum risk for the average taxpayer. This much is clear. I think Bernanke is extremely intelligent. I think he is doing exactly what he sees as the best solution to the crisis. I also think he is as wrong as can be.

Wage Deflation in the Current Environment
While readers know my longer term belief that inflation (via dollar devaluation) is on tap in the future, I have no doubt that deflation is ruling the day at present. While deflation can be good in a sense (prices drop as less money is in the system) the worst deflation is wage deflation.

David Rosenberg explains what is happening on the income side of the consumer ruined balance sheet (via Clusterstock):
As wages deflate, workers are looking for ways to supplement their shrinking income base, for example, by moonlighting. Indeed, a poll undertaken by CareerBuilder.com and cited in the USA Today found that one in every ten Americans took on an extra job over the last year; another one in five said they intend to do so in the coming year. These numbers are double for the 45 to 54 year olds who now see early retirement, once around the corner, as an elusive concept.
Most pundits who crow about green shoots and about an inventory restocking in the third quarter giving way towards some sustainable economic expansion live in the old paradigm. They don’t realize, for whatever reason, that the deflationary aftershocks that follow a post-bubble credit collapse typically last for 5 to 10 years. Businesses understand better than the typical Wall Street or Bay Street economist and strategist that everything from order books, to output, to staffing have to now be restructured to adequately reflect a permanently lower level of leverage in the economy.

Faced with evaporated stock market gains, disappearing home equity, and credit that is harder to come by, the average person now will have to contend with wage cuts. I am not sure how this fits in with higher consumption going forward, but I am sure CNBC will have a special show on this topic soon.

The Show Must Go On
I think the surreal serenity of the markets over the past month have resulted in some bored market observers finally coming to grips with reality. While the VIX (a measure of volatility) is at lows not seen in some time it seems people need something to talk about.

It is when they talk that we see what is really going on.

Consider this video (seen on Market Ticker and Zero Hedge) from CNBC where a floor trader quite frankly explains that there is no "market" only government backstopped and manipulated shell of a free market:
Watch It Here. I could not embed, sorry!

Still not convinced?

Consider this post from Zero Hedge which details the country of Norway entering the process the US has made popular, namely having the government buy up mortgages because nobody else will:
Long perceived as a bastion of stability due to their oil-extraction based economy, and socialist system that the US can only dream to emulate, today the Norwegian Central Bank conducted a Dutch auction in which it exchanged NOK10 billion of government securities for residential and commercial mortgage loans. And not just any loans, but including those denominated in SEK, DKK, EUR, USD, GBP and CHF (well, in retrospect, looks like pretty much any loans). Exchange swaps will cover maturities between December 2012 and 2014. But aside from the specifics, it seems that even the Vikings are starting to monetize MBS: a process demonstrated to work phenomenally well at propping up a hollow economy by the likes of economic alchemists such as Bernanke and Geithner.

I am sure Bernanke and Geithner have only the common man at heart, and by extension so must Norway.

Still think the markets are trying to "tell us something" by their rise?

Consider the now scrapped PPIP scheme which will not be used by any bank in their right mind because they cannot scam the system in Bernie Madoff style (via Clusterstock):
When Citigroup heard that the government was planning on financing investors who were willing to buy toxic assets, it came up with the dastardly scheme of using taxpayer dollars to buy the assets from itself. In essence, the Citigroup wanted to recapitalize its collateralized debt obligations with taxpayer dollars. And it would have got away with it too—if not for the heroism of Sheila Bair.
The Wall Street Journal today explains how Citigroup and other banks tried to game the system by buying assets from themselves, their subsidiaries and their parent companies. It was almost the perfect scam, allowing the banks to transfer most of the remaining risk to taxpayers while keeping the upside for themselves. Losses would be socialized, profits privatized and the public befuddled by the complexity of it all.
According to the Journal it was FDIC chair Bair who saw the scam for what it was and put the kibosh on it. And the banks reacted by suddenly becoming unwilling to sell their assets into the public-private partnership program. If it wasn’t a scam, they didn’t want any part of it.

That should about do it.

The markets are not telling us anything other than as long as all assets are backstopped by the government there will be "stabilization" of those asset prices. This effect is of course not built on any foundation. If ever these crutches are removed, the patient will collapse. Those wishfully thinking about a FED "exit strategy" should both take a break from the recreational drug use and wake up.

It seems the show must go on. We have a low volume futures based stock market rally, a government commitment to transfer any and all mortgage losses to the taxpayer, and never ending assistance for the banking sector. That is our market. Any other discussion of things economic must start at this point or the discussion is irrelevant.

I would venture that there was a time limit that the FED/Treasury would have liked to have in place to get out of the market fixing racket. Sadly, I think the idea was that a 3-6 month support would have righted the ship. As with almost every other idea from that duo, they were way off. Government support will now have to remain a structural part of the markets for some time. If history is any guide, this mission creep of government will never really go away. It's time we started talking about that.

Have a good night.

14 comments:

getyourselfconnected said...

Wowza!
I checked and i did not disable the comments section!

Maybe everyone is on vacation for the holiday week?

Best to all!

GawainsGhost said...

Well, I've been busy, and I don't take vacations, not anymore. Back when I was teaching, I got three months of paid vacation. Now, I'm lucky to get a few days off.

The way I look at is this. A calendar year is 365 days. A business year is 360. So there are five days on which I do not have to work. I choose my birthday, the 4th of July, Thanksgiving, Christmas, and Easter.

Couple of interesting articles in BusinessWeek. On the inflation-deflation debate, BW argues that the dramatic expansion of the money supply--114% over the last year!--has been offset by household debt deleveraging. In other words, the money is not going back into the economy, because people are saving more and spending less.

It's hell on retailers, which is why demand destruction leads to price deflation. That's what we're seeing now. But eventually there will be inflation. You can't just keep printing money without it. The only real question is when it will occur.

Another interesting article was BW's annual review of books for summer reading. One, The Billionaire's Vinegar, tells the story of how this guy conned Malcolm Forbes into paying $150,000 for a bottle of wine purported to have been produced in 1787 and previously owned by Thomas Jefferson. Needless to say it wasn't. This goes to show that people will believe anything, and pay good money for what they want to be true.

It's not what you do not know, it's what you think you know which is not true, that is the problem.

There is a real difference between being smart and being intelligent. What Bernanke and Geithner are doing is protecting their butt buddies in the banks. That's smart. I mean, you got to protect your own.

But if they were intelligent, they would be promoting economic growth by focussing on job creation and wage increases. That's the only way out of this recession. Not that anyone in government is smart enough to figure that out.

Finally, there was an interesting article in the local paper down here this morning. McAllen is the only major metropolitan area in the country that saw job creation and wage increases so far this year.

Sucks to be California, doesn't it?

GawainsGhost said...

Here is one of the best descriptions of what is going on with the economy I've read.

http://market-ticker.denninger.net/archives/1175-To-Dennis-Kneale-Youre-An-Idiot.html

Rob Dawg said...

I was on vacation last week. Idiot that I am, I went to... yep... New England. The stairs in the Bunker Hill Monument were wet to the hundreth step.

The Free, yes free parking space was an absolute shock.

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