Economic Disconnect Special Exclusive Interview

It will be the maiden voyage of my new fishing kayak tomorrow. If I do not post something by 7pm tomorrow maybe something went very wrong! Wish me luck!

I am now officially on a 4 day mini vacation. There was plenty of important things going on today in the financial world, but I am already half way out the door on that mindset! A few links, thoughts, and a special exclusive interview will be the content tonight. As always, Friday night is in full effect so get your requests in and if I do not drown I will have the big show up tomorrow night.

Best of the Best
I think I have had my fill of debating small details and following daily gyrations of most things. At this point I am confident in my macro views going forward and all evidence and data supports my view, in my own mind of course! Going forward I would like to spend more time and more pixels writing larger essays instead of snippets and small items of news. I used to do this almost exclusively but time constraints became an issue. We shall see how it goes.

As such, tonight I will feature some more thought provoking essays I came across that will serve as the kind of writing I think is most important to being able to really make your own decisions on things going forward.

Back when I just was out of college and started working I was a political junkie. I loved the stuff. After a bit I saw all the crap that it all really was and lost interest. A fellow I used to read quite a bit for his great sense of balance and truthful speaking was Charles Hugh Smith. As of late I re-discovered his work and lucky for me he has now devoted more and more of his time to things economic. Tonight I offer without excerpt:
The Root of the Housing Bubble Remains Unchanged
When I read this today I felt it was like a huge clue bat to swing at the never ending garbage calls of a "rebounding housing market". Mr. Smith now has a spot on the blogroll, so don't miss him!

Dr. Housing Bubble has also been on fire as of late and returns to the Must Read column. Nobody does housing number breakdown and original research like the Doctor. Nobody. As we enter into the next dip in real estate, his work will become very important. Today's missive is on the ginormous volume of home sales the FHA has to handle to keep things from falling apart. See it here.

No stranger making an appearance here, Jesse has yet another great article covering the money supply and all that entails. Take a look.

Other Tidbits
The blog everyone loves to hate, Zero Hedge, has all kinds of items up tonight so just keep scrolling.

I had to share this one! I almost laughed the soda out of my nose this morning when I read this one.

Barry Ritholtz of The Big Picture was ill yesterday into today, probably from a little food poisoning. We have all had it, it is not fun. The comments section provided the kind of nasty, hilarious humor that is bad taste, but you cannot help but fall apart laughing.

Barry wrote:

I seemed to have eaten something yesterday — breakfast and lunch from the same deli — that caused quite a bit of intestinal distress. I thought I might actually go to the hospital last night to check for Appendicitis.
Flushed out my system with lots of liquids instead.

A few comments down came this one:

NolansDad Says:
May 27th, 2010 at 9:46 am
Barry. These things happen all the time. The guy who made your sandwich probably just got a little chit on his hand when he was wiping his ass and didn’t wash his hands. He than wiped the chit by accident on your sandwich. What you have to be careful about are tapeworms because many illegals have worms and pass it to coworkers. Now if it was a lady who made your sandwich she may have
been bloody and wiped herself and you picked a bacteria. Either way I would make sure to get my hands on the tapeworm pill. No charge for the free advice. You are on my team and I am looking out for you.

OMG, that was so bad but too funny.

Economic Disconnect Special Exclusive Interview
At a time when so much seems to be so confusing I thought I would seek out a voice of calm and advice. I was granted an interview under the following conditions:
-Quite a few pictures would be shown
-The interview would not interfere with bedtime
-The guest did not have to leave the couch
-A milkbone would be provided as compensation, and not the really small ones

I agreed to all terms and so here is our special guest for the evening, my Pug.

GYSC: Welcome Pug!

Pug: Hello, and hello to all the readers. Let's do this, "Milo and Otis" is on at 9pm.
GYSC: Again? Ok, lets start.
Pug: Yes, Lets.
GYSC: A major concern right now is that the debt problems of some Eurozone nations will cause the breakup of the Euro currency and result in chaos in the world. What is your take?
Pug: It will not happen.
GYSC: Care to elaborate?
Pug: I guess, it's your milkbone. It will not happen because it CANNOT happen. You get me?
GYSC: Not really, can you help me out?
Pug: Oh boy. Ok, if the Euro splintered what would happen? A total madhouse for a while, yes? So it will not happen and any effort needed in that regard will be performed.
GYSC: What if things really get bad in Spain and ....
Pug: Let me stop you right there. All the major US banks are insolvent by any reasonable measure, correct?
GYSC: I guess so...
Pug: Well, you can guess, but I can talk so they are. So what has happened?
GYSC: They are all open and getting record bonuses.
Pug: I have to lay down for this one, it's going to bend your mind:

Pug: Nothing has happened because IT CANNOT HAPPEN. You understand? In any system built on confidence and notional values of things as important as money and debt, keeping the game going is not that hard when you get down to it. I mean, who wants the stone age? Who wants a lowered living standard? Who wants to miss their DVR? The whole show is set up this way. Another example because I can tell you are not quite there. With all the crazy forex moves up and down as well as bond spreads moving in ways rarely seen how come not one hedge fund has blown up?
GYSC: That's a good question.

Pug: Yeah, Ya think? With an 80% rally off the lows are you to think not one fund was way off on that and blew up? Maybe a few baby ones, but not one with any connections. Systemic Risk prevention is like that. Wonder why all those reserves are just sitting at the banks? Maybe they are spoken for.
GYSC: I never thought about that way, nifty.
Pug: Yeah, I know. What else.
GYSC: Please do not do that.
Pug: Do what?
GYSC: Sit like that, it looks almost like you are a person and it is creepy.

Pug: Look, sitting like this helps my lower back. Are we going to continue?
GYSC: I guess. What do you make of the action this week?
Pug: I saw no action that you had.
GYSC: I meant the markets, smartass.
Pug: My bad. Well it is a sign of a solid market when some rumor that China wants to "re-evaluate" their Euro bond position causes a sell off , but when they say they are not doing that it, it ignites a huge rally. Markets move up and down 3% daily all the time.
GYSC: Come on, this is supposed to be a serious interview.
Pug: Yes, and you think your hair is serious, HAHAHA! Sorry could not help it. Ok, when everyone knows the game is up all want to hit the exit first, hence the overreaction to things both silly and maybe true. Of course nobody wants to miss a move up, so they cannot stay away.
GYSC: Some would call this a "stock pickers" market, what's your take?
Pug: It's a donkey market. You should write a fake headline on a popular blog comment thread with a fake headline like: "China says no more US bonds; Commies hate Capitalists as well as the Socialist USA!". See if you get a move in the futures.
GYSC: Are you serious?
Pug: Try it. Look leave a paper out on the garage floor instead of the doggy pad, when I pee during the day on the markets section just buy those stocks. Especially for Mondays and Fridays.
GYSC: You are indeed cynical.
Pug: It's called realistic. Anything else? I am getting bored.
GYSC: Ok. A never ending debate is between the outcomes of inflation, hyper or regular, or deflation, regular or extra sugar, HA!
Pug: Was that a joke?
GYSC: A small attempt.
Pug: Yes, very little. To be honest I just do not think about those things.
GYSC: Why not?
Pug: Look, I live what, 12-16 years? How much have biscuits changed in price in that time? Maybe in Zimbabwe, but here its not an issue. I have heard the tales from my super-great-grandfather that a box of biscuits in 1918 cost 1 cent. Today it is $4.99. So what? Who lives that long?
GYSC: Now how could you know your super-great-grandfather?
Pug: It is passed through our genes like stories. You dummy humans need cave paintings, hieroglyphs, and books to record history, us pugs just know.
GYSC: Well assume you did live longer.
Pug: Explain both to me in terms I can understand.
GYSC: In inflation the price of biscuits goes up so fast that an income, say MY INCOME, cannot keep pace and thus I cannot buy them.

Pug: WHAT????
GYSC: Oh, now you perk up?
Pug: Well that's nuts, tell me about deflation.
GYSC: In deflation things get way cheaper...
Pug: Praise be the god of dogs....I am SAVED!
GYSC: Let me finish! In deflation things get way cheaper, but MY INCOME gets smaller and all my assets shrink....why are you chuckling?
Pug: Your ass shrink? Not since you stopped hitting the boxing bags buddy!
GYSC: OK Mr. Smarty Man, let me finish. In deflation things get way cheaper, but MY INCOME gets smaller and all my assets shrink so I cannot spare any money for things like dog biscuits.
Pug: I'm sorry, what's the difference?
GYSC: Semantics I guess, plus some think if they buy certain things if either happens they can be safe.
Pug: Well it sounds the same to me. Terrifying!

Pug: Can't you just stockpile biscuits now while you have money? What about those shiny metal things I always see you counting and polishing?
GYSC: Down low Pug, Down low! I could, but I think we are ok for a bit.
Pug: So you say. It bed time. Can I ask a question?
GYSC: Why not? Go ahead.
Pug: Is it true that you and my human mother are going to get another pug to usurp my authority here at my castle?
GYSC: Well, we may get another pug, but....
Pug: Be careful on the stairs usurper!
GYSC: Hey, come back, lets talk about this!
END OF INTERVIEW.

NOTE: The opinions of the Pug are his own, but may reflect some of mine, his human mom's, and various other voices. This post was inspired by a doggie related post over at Kid Dynamite's site.

Have a good night.

Rate of Change Declines and Asymptotes

I am sure nobody that reads this blog is unaware, but today is indeed the final day to submit your 2008 tax returns. As collections are running pretty low, you should do all you can to support government bailouts, I mean public services. You know ALL those services you use every single day. Like.., well I mean..., well there must be some!

Macro Versus Micro Viewpoints
While many seem positively giddy about all the "green shoots" of slowing contraction sprouting up all over the place this may be a good time to compare and contrast what I call "macro" and "micro" viewpoints.

Trading types and technical analysts are good at micro views. Swift changes, wild swings, and sentiment figure into their methodology more than fundamentals and forecasting. Micro viewpoints cannot answer the questions of "why" or "what will be the end result" and they do not profess to care about either to be fair. This type of market technique is great for the nimble and those not interested in big picture analysis.

Macro analysis looks at data, long term trends, and basic rules and attempts (at least tries real hard) to formulate a viewpoint of where things will stand at some point in the future. This type of analysis can offer answers to the questions "why" and what will be the end result".

Both investment strategies are solid when done well. Both have their own peculiar issues that are drawbacks. This is not a commentary on either mode of action, just an observation.

With this in mind, one of the best long range macro views I have seen in a long time was featured over at Jesse's Cafe Americain today. The article was issued by Delta Global Advisors and I urge you to read the entire thing. Key summary excerpt:

Thus, our economy has become more addicted than ever to low interest rates. But because bank assets will now be collecting income at record low rates, when and if the Fed tries to raise rates it will only be able to do so on the margin. If Bernanke raises rates substantially to fight inflation, banks will be paying out more on deposits than they collect on their income streams. Couple that with their already distressed balances sheets and look out!

Additionally, not only do the consumers need low rates to keep their Financial Obligation Ratio low, but the Federal government also needs low rates to ensure interest rates on the skyrocketing national debt can be serviced. Our projected $1.8 trillion annual deficit stems from the belief that the government must expand its balance sheet as the consumer begins to deleverage. In fact, both the consumer and government need to deleverage for total debt relief to occur, else we're just shuffling debts around and avoiding a healthy deleveraging entirely.

In order to have viable and sustainable growth total debt levels must decrease, savings must increase and interest rates must rise. But that would require an extended period of negative GDP growth-a completely untenable position for politicians of all stripes. Ben Bernanke would like you to believe inflation will be quiescent and he can vanquish it if it ever becomes a problem. Just make sure you don't invest as though you believe him.

Great piece.

My only addition to it would be another example of the restrictions the FED is now shackled with in regards to credit costs. Take home prices for example. With 30 year mortgage rates at anywhere from 4-5% there may be some ability to put some kind of artificial floor under housing. How would one ever get out of such easy money policy? At a minimum the FED rate must stay at the 0% level for at least 3 years. This must remain so even in the face of Trillion dollar deficits. Looking ahead, imagine what mortgage rates of 7-9% would do to any home price recovery. It is easy to imagine the FED funds rate to stay at 0-1% for 8 or more years. This is clearly going to be an issue. Not today, not next week, but rest assured it will be an issue.

Micro Analysis Textbook Case
As a contrasting way to look at things, take the exuberance displayed today at the FED Beige Book report. Reading the headlines about all the "hope" and "signs of recovery" I was very interested to check over the text myself.

I found it to be less than reassuring, but it serves as a classic micro view case. This companion Yahoo Finance article shows just how amazing looking hard at something long enough can play tricks on what you think you are seeing:

Fed survey finds faint signs of hope
Fed survey finds scattered signs that steep plunge in economic activity starting to moderate
WASHINGTON (AP) -- The Federal Reserve said Wednesday there are some faint signs the steep plunge in economic activity that began last fall is starting to level off.
The Fed's latest survey of business conditions nationwide found five of its 12 regional banks reporting a moderation in the pace of the economic decline.
Several regions "saw signs that activity in some sectors was stabilizing at a low level ... (but) overall economic activity contracted further or remained weak," the Fed said.
The survey, known as the Beige Book, struck a slightly more positive tone than last month's report, which described an economy plunging rapidly after the financial shocks that occurred last fall.

So now 5 of 12 regional banks saw some signs of a decline in the pace of contraction in some areas in some way. Got that? Less than half of the banks polled saw some moderation of CONTRACTION in some sectors. More article:

In one sign of a possible rebound, the report said while home prices and new home construction declined in most parts of the country, the number of people shopping for homes was beginning to rise, leading to a scattered pickup in sales in a number of districts.
The Fed also said several districts observed a slowdown in the pace of manufacturing declines. The Cleveland, New York and Dallas regions reported a leveling off in the pace of declines in new orders.

More great news. More people walked through homes on tours! This is exciting! Still more to come:

The nation's job market, though, is not improving. "Labor market conditions were weak and reports of layoffs, reductions in work hours, temporary factory shutdowns, branch closures and hiring freezes remained widespread across districts," the report said.
The Fed found a silver lining in that as well, noting that the job losses have eased worries about inflation being generated by rising wage pressures.
The report also said the credit squeeze that has occurred as banks suffered mounting loan losses did not show any significant improvement. Demand for business loans remains weak.

Trust me the FED would dearly love to see any INFLATION right now on the heels of a highly deflationary PPI number. At least out of work folks can rest easy that inflation will not eat up their savings that are needed to be spent on the economy. Final section:

Still, private economists said the new Fed survey reinforced a slightly more upbeat view on the economy.
"This is good evidence that activity is becoming less bad across the country," said Jennifer Lee, an economist at BMO Capital Markets. "Granted, things are still bad, but less so."
The new survey was based on information each of the regional banks collected in March and early April. It will be used when Fed policymakers next meet to consider their stance on interest rates and other monetary issues on April 28-29.
The Fed is widely expected to keep a key interest rate at a record low of near zero while continuing to supply massive amounts of money to the banking system in the hopes of combatting the worst financial crisis to hit the country in seven decades.

So things are bad, but less bad. Not to worry, the FED is on the case and in a affirmation with the macro piece highlighted above, we see there is no way for the FED out of this mess for a long time to come.

In a micro view, the rate if decline is going lower. By implication, this is taken to mean that things will stop declining and then, of course, resume an upward trajectory. While I am not much of a mathematician, I do seem to remember a theorem about what is known as approaching zero asymptotically. Reduced to ultra basics, as one approaches 0 or 100 on a given scale, you continue to reduce the rate of change and approach 0 or 100 ever more closely but never quite get there.

In a graph format, assume the top right quadrant is the rate of change of any parameter on its way to zero:

Note that after a steep decline, the rate of change towards zero flattens out and slows to a crawl towards zero.

I am not saying that manufacturing, consumer spending, or home sales are going to zero. That is not my point. What I am trying to show is that while the rate of decline may be (or may not be, ask the other 7 regional banks of the Beige Book) declining, that rate may decline for quite some time but just get "less bad". Something to keep in mind.

I am sure I will get torn apart by the more mathematically inclined out there, but that is what the comments section is for!

Have a good night.