Thursday, August 27, 2009

Two Excellent Questions

It went from 90 degrees and humid to 60 degrees and dry overnight! I had to use the car heater this morning on the drive in. Now we are looking at 7 days of low 70's for temps. Can the fall really roll in so fast? Say it ain't so!

Comic Relief
I realize the current market action can have a depressing effect on those among us that look behind the headlines see many issues still unresolved, or even ignored. I will lead off tonight with two comic relief items that should bring a smile to your face.

Street Lights
Winner of the hilarious headline award for today is an item from Clusterstock which had me almost in tears from laughing early this morning:
We Can't Afford To Keep The Streetlights On
Good news for kids that have to go home when the streetlights come on

The article covers the story of many municipalities cutting back on streetlight power to save money. My mother used to actually say "Come home when the streetlights come on" when I was small, so I was amused.

The winner of the "Understatement Award" goes to this article on Yahoo Finance this morning which explained the jobless claims number in a way that everyone can understand:
New jobless claims and total benefit rolls drop
WASHINGTON (AP) -- The number of newly laid-off workers filing claims for jobless benefits dropped last week, and the number of people remaining on the rolls also fell, evidence that layoffs have eased.
Still, both figures remain above levels associated with a healthy economy, and analysts expect the unemployment rate to keep rising.

A healthy economy does not have new claims at almost all time highs? Say it's not so!

Pushback from Behind the Curtain
As stated here, there is no way the FED will provide data on which banks were involved in loans, nor provide details on what sort of collateral was taken in. While I applaud the judgement made earlier in the week concerning the Bloomberg News case, you knew a push back was on the way. Zero Hedge has a nice summary, which can be read here.

The line from the appeal that struck me as strange was this:
Our members have accessed the New York Fed's Discount Window with the understanding that the Fed will not publicly disclose information about their borrowing, especially their identity. Industry experience, including very recent and searing experience, has shown that negative rumors about a bank's financial condition - even completely unfounded rumors - have caused competitive harm, including bank runs and failures.

I am confused. If the FED discloses that say Bank X took 5 Billion in loans, and exchanged 5 Billion in expired options, than can there be "rumors" about the deal? Would it not be a known quantity? This argument is disingenuous. I will hope the appeal is summarily dismissed and then a presidential executive order denying the request (won fair and square in a court of law) for disclosure. I love democracy, USA style!

Must Read
Mr. Practical, who submits material to Minyanville, is simply the best at explaining complex market forces (derivatives, credit flow, dollar issues, etc) in a way that even I can understand. His posts are infrequent, so when one does come along you should take it in.

Today's lengthy article is a must read, and so I will only offer one snippet to get you hungry for more:

On Capitalism:
If we have too many condos in Florida those with capital say I don’t want to lend money to build more condos because there is too high a risk that they won’t sell and I won’t get my money back. So they raise the price of money; they raise the interest rate they charge to compensate for too much risk.

This is how an economy naturally controls itself. It’s called capitalism: the allocation of capital based on risk and return.

I think you can see how this will be a hard article for a Keynesian clown to stomach. I love it!

Two Excellent Questions
Today one of my favorite authors (and a major inspiration to start my own blog) Tim Iacono of The Mess That Greenspan Made asked a simple question:
What Can Stop This Stock Market Rally?

Tim offers a myriad of well thought out and well supported triggers for a market correction and I think all are both valid and probable.

My own answer to the question is this:
The current market lift is attributed in all aspects to the belief that government support is all of the following:
-open ended
-without intervention by outside forces (think foreign creditors)
-protective of less than savory practices (HF trading, delay of foreclosure action, mark to myth accounting, etc...)
-Recurring stimulus (Cash for whatever, housing subsidy, more to come)
-Safe from revolt from populace

Unless and until one of the above is proven either false or just in doubt, this party will not end.

The second question comes from Ilargi, author of the excellent blog The Automatic Earth (named by Michael Panzer as one of his top 10 best blogs, well deserved, and yes I am jealous!) who has a question truly twisted in both logic and reason:
Is it possible to grow your economy at a 4% rate when 10% of your population in unemployed?

My own answer to the question is this:
First off, if you want to lose an hour or two of your life, spend it trying to figure out just what the heck GDP, as defined, actually is.

After that, if you limit the discussion to the basic formula of:
GDP = private consumption + gross investment + government spending + (exports − imports), or,
GDP = C + I + G + (X − M),
then I would say it is not only possible, but very doable!

Any component where government spending adds to the bottom line is by definition fungible. Not only that, but masses of unemployed generate no inflation (unless they have guns, then they generate massive inflation due to military spending) so they are actually quite a boost.

I understand Ilargi wants a more substantial answer, but that answer is obvious. No doubt with unemployment over 9%, GDP growth is a facade, but please see question one for marching orders.

I leave you, the reader, with these ideas to roll around. I would ask you to both offer your take on these answers, and to make requests for Friday night entertainment.

Have a good night.


getyourselfconnected said...

Late post by Mish, but very good:

I love Mish because we are really at odds. Mish thinks as long as the velocity of money (credit, whatever) is low, there can be no inflation. I would refer Mish to a biolgical phenomena: punctuated equilibrium.

In this, sure things are slow to develope, but only until "normal conditions" are met. Then it is fiat based party time. The real fight will be Sept-Oct. If the bulls hold, all that cash will be loose in short order. If the bears win, well, well I hope you stocked SPAM.

getyourselfconnected said...

puntuated equillibrium:

Lisa said...

Loved the "streetlights" reference. That's what my grandma used to tell us kids, too :)

Will Profit said...

...and that is why I stopped reading Mish months ago. He and Bill Shedlock are wishy washy, Fence straddlers who are more afraid of being wrong than to take a stand on there convictions of the economy going forward.