Why a Higher Stock Market Will not Help the Consumer

It seems like Thursday has become the big breaking news day lately. There is plenty of ground to cover tonight, and perhaps more than most nights, some real food for thought.

Cognitive Reinforcement
In my last two posts titled "Silent Liquidity" and "The Solution to the Recession" I highlighted two major themes:
-Banks have plenty of cash to put into play, they need cover to make it happen (via a rising stock market, lending standards relaxation)
-Fannie Mae is a black hole that will never cease to astound to the downside and the hilarity of keeping it running

As if to show that I am not totally making things up as I go along (well, mostly) there are two stories I would point you towards as addendum's.

First up, the sad state of Fannie Mae:
Fannie Mae to Tap $10.7 Billion in Treasury Capital
Fresh off an almost 15 Billion dollar 2nd quarter loss, FNM has to tap further government credit lines to facilitate more losses. Naturally, the penny stock is up huge on the news. Here is 60% of the mortgage market folks, and you and I own it.

The second additive piece is this one via Clusterstock:
A Return To "Innovative" Lending
Payday loans and credit default swap linked credit lines are the latest fractal iteration of predatory lending by the banks using their new found money.

Both items are surreal.

Putting it All Together
Here at Economic Disconnect we have discussed why confidence is so important. We have covered in detail why debt fueled consumption is really not in a sane person's best interest. We have tried to explain that the music has to stop at some point, and many will not find a chair. Spread out across posts over time, the message may be diluted or lose it's coherence. Luckily, we have a writer that has put it all together.

Tim Iacono, author of the site The Mess That Greenspan Made, has been a regular read of mine for over 3 years. The content quality has always been top notch. Today Tim has a post that ties all the elements we have been discussing together in a way that made me step back and say "I wanted to say that, but could never put it together!".

I will not excerpt such a work, it needs to be read in its entirety. Make sure you set aside 30 minutes for the thought provoking article:
Confidence Games and Ponzi Schemes
A must read, and there may well be a quiz!

It is Only a Conspiracy Theory if there is no Proof
A late developing story has emerged that has major implications going forward.

Us Bond auctions used to be boring affairs that only staffers at bond desks noticed. As the US has to place debt issuance never seen before, these activities have become very important to a American universe unable to function without ample, cheap money. Perhaps the added attention is not welcomed at this juncture.

Last Thursday (yes another Thursday!) I had made an observation on the 7 year bond auction:

The 7 year sale went just fine, though one would have to wonder why 5 year notes were less than chased, but 7 year notes were a hot item. What's two years between friends? This kind of disconnect is hard to figure out.

I left the thought at that, as I had covered many times that it was my position (amongst many others) that the US Axis Powers (FED/Treasury) were in cahoots to buy debt issuance should bids not surface, or even to buy them should yields become unattractive. This kind of thinking was tolerated by some, and called part of the "tin foil hat brigade" by most market observers.

Tonight we may have final evidence of our own government's explicit play with the bond auctions.

Let may state up front, this is not the end all of the question. There may well be(and I would expect an attempt) to make some kind of innocent explanation of this information. It might even be true. At this point I think the data and facts stand on their own, so I will present a quick summary.

Chris Martenson has done all the legwork, and for that his original article should be your first stop.

Through published record sleuthing, and amazing cross record matching, Mr. Martenson shows:
-Primary Dealers were the bulk of the "indirect" bids at the auction
-The Axis powers coordinated a buyback of EVERYTHING they purchased a mere week later
-This is monetization of debt, if you are interested

This story is very big and has ginormous ramifications for many aspects of the markets going forward. For more information I would point you to Zero Hedge and Market Ticker, who both have summaries up which should help further study of this event.

Why a Higher Stock Market Will not Help the Consumer
It is funny. All day I had planned to write about the following topic, and then I was hit with items that fit with my recent posts, a work of real significance, and a breaking story that needed attention! Oh well, I will go on with a shorter option of my idea. That is the real time information world, and I love it!

It should be obvious by now that the stock market is THE vehicle by which the confidence game will be manipulated. Headlines of "DOW over 9000", "S&P up 40% in 3 months" and "Nasdaq on 30% tear" are eye catching. After the very recent real estate bust, a resurgence in property prices may well be impossible (but the stock market is not? I digress..), so a Wall Street led rally in stocks is seen as an avenue for growth in confidence.

I think there are a bunch of problems with that line of thought, but I will limit it to one item only:

401K's

In the late 90's boom, which led to the tech crash in 2000, there were indeed many regular people that were knee deep in stocks. I have covered why the stock bust then did not require a full on response from the government, it was the small retail investor that took the losses, the banks and Wall Street had off loaded all those stocks on the public, so no reason to help.

And this is a key point.

You may see a stat that states "70% of Americans own stocks" and I have no issue with that number at all.

But how do they own them?

Through a brokerage account they actively manage?
Through an online account they are in and out of daily? Weekly?
Through a managed account by a Wall Street firm?

While there will be some number that can answer "yes" the answer for the majority will be "No".

The major stock holdings of most Americans are held through company 401k's and pension plans.

I would like to focus on 401k's in this discussion.

It is my contention that a renewed stock market bubble will have little to no effect on consumer spending.

The reason for this is twofold. After getting burned for something like 30-40% over the past year, many will not see a rise in 401k value as beneficial. Just closing the gap as it is.

The second reason is that plenty of any 401k appreciation is already spoken for, and thus will never enter the economic cycle.

Here is what I mean.

The real estate bubble sucked in many. Money flowed into homes in a way never seen before. Faced with price competitions (seems silly now) and a feeling of "losing out" many looked to a source of capital they normally would not touch.

The 401k.

From Wikipedia:

Many plans also allow employees to take loans from their 401(k) to be repaid with after-tax funds at pre-defined interest rates. The interest proceeds then become part of the 401(k) balance. The loan itself is not taxable income nor subject to the 10% penalty as long as it is paid back in accordance with section 72(p) of the Internal Revenue Code. This section requires, among other things, that the loan be for a term no longer than 5 years (except for the purchase of a primary residence), that a "reasonable" rate of interest be charged, and that substantially equal payments (with payments made at least every calendar quarter) be made over the life of the loan. Employers, of course, have the option to make their plan's loan provisions more restrictive. When an employee does not make payments in accordance with the plan or IRS regulations, the outstanding loan balance will be declared in "default". A defaulted loan, and possibly accrued interest on the loan balance, becomes a taxable distribution to the employee in the year of default with all the same tax penalties and implications of a withdrawal.

So what happens when someone borrows from their 401k to buy home and;
- The home is now 30% cheaper on the market
- A big tax hit is coming, or a payback of the full amount?

Personally I know three couples that are in this boat. Anecdotal, I am aware of about 10 others.

I think the consumption the FED/Treasury/Keynesian's are looking for from a rising stock market was used up in the last debt expansion salvo.

With so much to digest, I leave it at that. Be sure to get your Friday Night requests in (anything goes) and I will comply to the best of my ability.

Have a good night.

The Solution to The Recession

Plenty of areas to take a look at tonight, so we will just get started.

A Word About the Health Care "Debate"
If you do not like anything political, skip to the next section.

I try my best to stay away from anything political here, unless it has direct bearing on economic matters. While Health care may be 1/5th to 1/6th of the US economy (estimates vary) whether or not there is "reform" makes little cost difference, so this issue is a wash on that level.

What I wanted to point out instead is the way the "debate" is being carried right now. It seems those opposed have particular gripes (some very important, others less so) but that there are clearly issues that have a difference of opinion. I myself am against the health care reform bill, as written, for a myriad of reasons.

The problem comes when one side decides that they are "smarter" or more "intelligent" than the other side and then the whole basis for their arguments is that the opposing view is "stupid" or "dumb". Just today I have seen officials pretty high up on the scale relegate the health care debate to "if you are against this bill you are a neanderthal".

I wanted to say thanks to the supporters of health care reform for their help. While I would have liked to debate the issue, I now see that debate is impossible because I cannot think. I came to my position on health care by reading chain emails and watching YouTube. My whole life I have been trying to find my way, find out who I am, and find out just what I feel about many things in this crazy world, but now I know I am a brainless automaton with no ability to reason. This should make things simple for me going forward, so I wanted to say thanks!

Further Evidence of the Real Credit Market
When I read the following article this morning I thought that a better example for just how far from functioning the credit markets are without government support. After reading this disgusting piece, you need to take a shower, so maybe save it until the last thing you read before bed:

Fannie Mae, Freddie Mac Likely to Be Wound Down, Moody’s Says
The U.S. government is likely to decide within 18 months that Fannie Mae and Freddie Mac need to be wound down and replaced with a similar entity that would support U.S. housing, Moody’s Investors Service said.

The government-chartered mortgage-finance companies, which were seized by regulators in September 2008 and since have used $85.7 billion of their capital lifelines, face mounting losses that will mean “it could take a decade or longer” before they are able to emerge from U.S. control as “viable standalone entities,” the New York-based ratings company said in a report.

The increasing losses that will be caused in part by government efforts to use Washington-based Fannie Mae and Freddie Mac of McLean, Virginia as tools to stem the housing slump, as well as the probability it will be “politically untenable to resurrect” the firms, mean the U.S. will likely create a new organization that won’t be owned by shareholders to play a similar role in the economy, Moody’s said.

“This is not bad news for Fannie Mae and Freddie Mac bondholders as the U.S. government has become entwined with these companies and the creation of a new entity to support housing finance likely means the orderly conclusion of Fannie Mae and Freddie Mac,” Brian L. Harris, Craig A. Emrick and Robert Young, Moody’s analysts, wrote in the report yesterday.

Moody’s rates the companies’ senior debt Aaa because of their “very strong” government support, the report said. The companies can tap up to $200 billion of taxpayer capital, and can turn to an emergency financing facility at the U.S. Treasury through at least yearend. The Federal Reserve is buying as much as $1.45 trillion of the debt and mortgage securities through yearend in an effort to lower home-financing costs.

The companies own or guarantee about $5.3 trillion of the $12 trillion in U.S. residential mortgage debt.

So while Fannie and Freddie (both up over 25% today alone!) are too far gone to stay alive for more than a decade, never fear, a new entity will be made up instead.

As for the failing companies themselves, no worries either. The US Government is behind their debt 100%, and thus bondholders should sleep easy. No haircuts here.

Remember this story the next time you see a "credit markets thawing" report.

The Solution to The Recession
I spend a ton of time trying to bring attention to the many dangerous aspects of our debt fueled economy. In late 2007 it seemed nobody would listen because they were too busy buying homes. Last fall it seemed nobody would listen because they were too panicked to hear. Here we are in the late summer and now nobody will listen because they just want it to go away. With the indices on a never ending tear to the upside, any talk about underwater home owners, banks with heavy exposure to commercial real estate, falling real wages, and plenty of other areas of concern just are glossed over. Lost in space as it is.

As an example of just how pie in the sky the thinking is right now, consider this snippet from an article about the "Cash for Clunkers" program:

"...The unemployment rate is already at a 26-year high of 9.5 percent, and economists expect it to top 10 percent by the end of the year -- even if the economy starts growing again.

Rising unemployment and stagnant or shrinking wages mean Americans will stay fairly cautious about spending in the months ahead. They are "many quarters away from a shop-until-you-drop phase," predicted Paul Kasriel, economist at Northern Trust Global Economic Research.

Analysts predict the economy will start to grow again this quarter, mostly because of businesses restocking inventories. Last quarter, businesses reduced them at a record pace, setting the stage for a pickup in production.

In the second half of this year, experts figure the economy will grow at roughly a 2 percent to 4 percent annual rate. They estimate the $3 billion from "cash for clunkers" could provide a lift of 0.25 to 1 percentage point.

For a sustained recovery to take hold, businesses and people must spend and invest at normal levels again, and banks have to lend more freely. The housing market must get back on its feet. And unemployment needs to ease.

Economists are counting on the government's $787 billion stimulus package to help. One piece of it, spending on big public works projects like road repairs, should help spur job creation next year.

To be fair, the article is a pretty broad take on the many issues facing the economy. It is just lacking in any remedy ideas, just some quotes from "experts".

The solution to the recession is simple:
For a sustained recovery to take hold, businesses and people must spend and invest at normal levels again, and banks have to lend more freely. The housing market must get back on its feet. And unemployment needs to ease.

Translated;
For a recovery to be sustained we have to get the US consumer to go back down the debt accumulation road.

Of course how this happens frames current policy attempts by our leaders to get spending going no matter the results. No questions as to the "Why?" just the "How?".

Next week is another stuffed to the gills bond auction session. This is the mechanism of the "How?" The Housing Time Bomb covers today's 35 Billion short term (70 day) paper auction and reports:

Quick Take:
The bid to cover wasn't bad but look at the lack of participation by the indirects(China and the other FCB's)! Only $5 billion of the $35 billion auction was bought by the world. This is pathetic and very frightening. It tells you that they are running for the hills when it comes to buying our treasury debt!

China has been warning for weeks that they planned on diversifying out of treasuries. Folks, if we lose the indirect bidders we are going to start seeing failed bond auctions. At that point the economy will be toast.

The lack of indirect bidders is very troubling. Very recently the reporting of indirect bidders was changed, and at first this was causing the indirect bidder number to be much higher than normal. After a few more auctions, the indirects are now much lower than usual. Seems even trickery has its limits!

Issuing government debt chasing a dream of a return of spending by consumers back to the highest possible level in history seems like a losing bet. Rather than have a backup plan, or even clearly articulated end points for just how far they will go, the numbers just get bigger every month. It seems it is bubble or bust for the US economy. The race has been on since last fall. We are heading into the home stretch and the consumer is far behind. The government will attempt to spend enough money to allow the consumer even more time to catch up, but they not see that the consumer has stopped trying to gain.

Have a good night.

Tuesday Note

Home a bit late tonight and I have some paper work I have to go through, so no post tonight. Plenty of news out there, use the comments to post interesting stories and I will try and get caught up tomorrow.

People Like Angry Looking Cars
Came across this story today via The Big Picture, and it was very cool so I will include it for an off topic item.

Why people like cars with ‘angry faces’

I knew it!

Have a good night.

Silent Liquidity

Now that was a long weekend! Late night concert Friday night and then plenty of errands all weekend. When I got to work this morning it seemed like I had never left.

PIMCO Puts the FED in Their Place
Last week there were some voices from the FED trying to play the "we may raise rates" game. This is of course absurd, and it is puzzling why anyone at the FED would bother with such silliness. Today the bond giant PIMCO put the FED in their place by not only forecasting ZIRP until 2011, but going on the record that their investment portfolio is geared for just such a thing. As PIMCO is the Goldman Sachs of the bond market, it should be finally clear to any and all that there will be no drainage of FED liquidity any time soon. So stop saying otherwise, you are making my head hurt:
Fed Won’t Raise Rate Till 2011, Pimco’s McCulley Says

Aug. 2 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke won’t raise borrowing costs before 2011 as the threat of deflation remains for the U.S., said Pacific Investment Management Co., which runs the world’s largest bond fund.
Benchmark rates will not rise “before 2011 and I’m not only forecasting that as a professional forecaster, but positioning portfolios on that proposition as well,” said Paul McCulley, 52, managing director at Pimco, in an interview that was broadcast by the Australian Broadcasting Corp. today, and taped earlier in the week. “What I’m worried most about is simply a shortfall in global aggregate demand relative to supply potential.”

Bond Auctions Over, Dollar May Now Resume it's Slide
After the massive debt issuance of last week, it came as a surprise to this blogger that the dollar was not lifted higher before the bond auctions. The delicate balancing act of keeping a stock market moving ever higher, yet maintaining the dollar in and around the 80 mark on the index can be tough. Of course now that the sales are done, the dollar has resumed it's slide downward, with a nice two step drop today alone:

While the downdraft has picked up some momentum, I would not get concerned until 75 on the index is breached. Should that happen, the dollar will become a big story. You may not hear much about it as stocks will be flying high at that time, but it would bear watching.

Not that you need to look very far for fundamental reasons for the dollar weakness, but if you want a nasty headline, check out this piece (hat tip reader Watchtower):

Biggest tax revenue drop since 1932
WASHINGTON – The recession is starving the government of tax revenue, just as the president and Congress are piling a major expansion of health care and other programs on the nation's plate and struggling to find money to pay the tab.

The numbers could hardly be more stark: Tax receipts are on pace to drop 18 percent this year, the biggest single-year decline since the Great Depression, while the federal deficit balloons to a record $1.8 trillion.

Other figures in an Associated Press analysis underscore the recession's impact: Individual income tax receipts are down 22 percent from a year ago. Corporate income taxes are down 57 percent. Social Security tax receipts could drop for only the second time since 1940, and Medicare taxes are on pace to drop for only the third time ever.

The last time the government's revenues were this bleak, the year was 1932 in the midst of the Depression.

"Our tax system is already inadequate to support the promises our government has made," said Eugene Steuerle, a former Treasury Department official in the Reagan administration who is now vice president of the Peter G. Peterson Foundation.

"This just adds to the problem."

I did not know most corporations paid income tax, so that was news to me! There is a nice graph in the story worth a look as well.

Silent Liquidity
The current period has been marked by debt destruction and deflation as it pertains to money supply velocity. Many of the inflation mindset see a graph like this one (I have seen this a few times just today, click for large view):

And wonder just how all this money is not finding a way into the market place. I wonder the same thing myself.

Much of the FED/Treasury inspired liquidity has been tied up by banks "hoarding" the cash. The argument is that banks will not lend out because they are fearful and still concerned over losses. This has resulted in money velocity falling precipitously. Hence no credit expansion.

This line of thought assumes that banks are both 1.) fearful of anything except making a killing and 2.) have real concerns over future losses.

The "Stress Tests" were concocted to give a free pass to the banks to conduct business as usual. If you have not been seized by now, you are either too small to bother with, or you are not going to be seized. The massive TARP bailout for the banks against overwhelming public opposition has surely emboldened the banks going forward. Goldman Sachs has had no problem posting monster profits with a straight face.

I think the banking system has been waiting for the right kind of story to materialize before they begin to deploy all of their new shiny capital. The recent crossing of 1000 on the S%P 500 and moving over 2000 on the NASDAQ has all the right looks of a speculative ramp up.

The banks will not flood enough money into the system through the stock market however. There needs to be an more diffusive method. I think the model the government will look to use is the wildly successful "Cash for Clunkers" hand out. Depending on how much the car being bought costs, the $4500 giveaway can represent anywhere from 10% to 25% of the purchase price.

One may wonder why the $8000 tax credit for first time home buyers was not such a good show. The $8000 is a small percentage of a home price, and it was a tax credit which is in now way as tangible as cash money in the hand.

Looking ahead I think we are going to see expansion of the "Cash for BLANK" model. You can already see how giddy the politicians are whenever they discuss the program and how well they think it is working. Here are some possible items I would expect to see:
-$4500 towards any car purchase, not just a clunker retirement
-$25,000 towards a new home purchase
-Revival of the Television money program, now expanded to $1000 to get rid of your old TV if you buy a new one
-Business tax credits for heavy equipment orders
I could go on.

Am I being sarcastic? I think a little. I do think we have not seen the end of the "Cash for BLANK" program idea. Seeing the response from the government and sadly a public looking to take on more debt just because it is 20% off has really changes my mind about frugality going forward.

Of course, should the indices continue to rise (they will) and several or more of the "Cash for BLANK" programs generate artificial demand for all sorts of items, we come to see that silent liquidity sitting in the bank vaults come into the marketplace. The banks need cover and renewed demand (forced by rebate lures) and a rapidly escalating stock market (has there been a down day in 3 months?) may be the all clear they were looking for.

One might wonder just how a higher debt burden will impact the unemployed. One might worry about wages which have been falling for a few years. One may be concerned that a flood of money into useless consumer items to present goosed GDP growth will not address our economic base problems.

The solution, as preferred by the government, is to target numbers. Whether you are talking about the indices, GDP, ISM, etc those numbers are going higher. Under the surface nothing has changed, nothing has been fixed. Plow Trillions of dollars into any economy and reward gambling and consumerism and you are bound to get some kind of a pop. The question is now that some kind of a superficial recovery is close at hand, will all that money finally make it into the economy?

I think that it will. Keep an eye on that dollar chart and remember, the DOW could be at 20,000, but that may not work out quite the way you think it will.

Have a good night.

Saturday Night Live

I have to say that Depeche Mode is amazing in live concert. The sound quality is unreal, and the energy the band puts out should be bottled and used as jet fuel. I had a great time! I am going to post a few small items, but not too much hard economics tonight. It is the weekend and i will jump into the entertainment.

GDP Numbers
Friday brought news that GDP only fell 1% in the second quarter, better than the never wrong estimates of -1.5%. Naturally this was seen as just aces, and all was rosy and fine. Zero Hedge has the best take down on the whole thing, and I would point you there. Final summation excerpt:

"..It is a sorry state where the only thing that is propping the world's greatest economy are promises of improvement and confidence games via the traditional media, with hopes of propping up a stock market which has long since ceased to be an indication of economic reality. The convergence between the S&P and the underlying fundamentals is, unfortunately for the administration, inevitable, especially since the government has now single-handedly taken over a key portion of major GDP output industries. Numerous empirical studies, especially from communist block countries, demonstrate just how "effective" the government is, when it decides to get directly involved in running a substantial portion of the economy."

Right on!

Clunker Cash Really Annoys Me
I thought I was about as disgusted as possible when the whole "mortgage modification" process started up. That level of sickness may have been surpassed by the "Cash for Clunkers" program which for some reason has really irked me to no end. A few random thoughts on this program:
-How desperate is the US government to be seen as doing something to help the economy? I mean in an hour they pass a 2 page proposal to restock the program after funding was projected to run out.
-How many cars and buyers really qualify for this? The $4500 is only good if your car is worth less than that, as you get no additional trade in value?
-A side angle I have not seen covered is that seeing that the government is behind this program 100% it is quite probable that banks will rush to make these car loans. Why do you ask? Because when anywhere from 10-30% of these car loans go bad the banks that made them can get the US government to pay them full price because it was their idea in the first place! Think of it as a pre-existing backstop.

Further reading on this topic can be found;
The Automatic Earth
"Its a good idea, but it's wrong"

Mish Shedlock win the "headline of truth award" with:
Free Money Runs Out, Congress Authorizes More

Saturday Night Entertainment
Some items for your amusement for the weekend.

Writing Sample
Recently at a lunch meeting with a good friend of this blogger, I was asked what I would like to do with my life, career, etc. While I imagine I will work in biotech for some time, I was really unprepared for the question. Since then I have tried to think about that more.

I love science, but I have been doing it for some time. I am somewhat limited on the upside because i would need higher degrees to get much further in my field, and I have zero interest in going to school again.

I think being an analyst for stock and market research would be great fun. I would be perfectly suited for pharmaceutical/biotech analysis. My attachment and study of the precious metals may be a good area too. I would never want to manage other people's money however! I am quite good enough at losing my own, no need to help others lose theirs!

When I think about it being a writer would be great. A have a story I have wanted to write since I was in 4th or 5th grade after I drew a sketch of a design I had thought up. The sketch is long lost, but the idea behind it is very wild (to me) and over time I have thought up a whole story around it. It has always been called "the device" in my mind. Life is so busy, I never get to follow through.

Anyways, at the concert last night I was struck by how moved I was by live music. I have not seen a live show in over 8 years! While I was listening to the music, the following words just popped into my head and I wanted to get them down someplace before I forget them. Please bear with my as I submit for your critique a small writing sample:

The drums.
The detail that struck out to me was how very different the drums sound in an open air arena. The sound cannot be matched through the channels of vinyl, tape, CD, or ipod. With every beat the drums came to life, a life of their own. Pumped through mega watt amplifiers, the stretched skin percussion pieces called out a sharp and declarative tone. I closed my eyes and could almost hear an undertow of joy as the drums were set loose upon the air, no longer muted and silenced by a recording that was played back. I even could sense a twinge of anger, anger at being restrained and having their message filtered. No, the drums were awake tonight, and they had plenty to say.

The guitar.
No longer just a sound on a track, the guitar is a muse that must be handled to produce magic. I could hear the hands of the player moving over the neck, I could hear the fingers tapping the frets. Touch a guitar just right, and it may respond with affection. And Respond it did. As each chord was played and sent aloft, it was as if the notes themselves wanted to stay and hear more. I looked skyward and for a moment I could see the aura of the chords as they floated up, but not out. The formed a sort of tapestry for the sounds played just moments before. It seemed as if they wanted an encore unto themselves. I clapped even harder to try and lend them some support.

Remember to be nice, I am very sensitive! And no I was not on any illegal substances!

Rock Blogging
An extended music section is now in order.

Here is the very song that inspired the written section above. Enjoy Depeche Mode and Personal Jesus:


Loyal reader Watchtower requested a song by Queen, Under Pressure, and even provided a link to a wonderful live performance of said song. Only truly great bands/performers can boast that their live shows are as good as or better than the studio albums. Queen, led by Freddie Mercury, clearly makes the cut. Makes my job easy, enjoy:


From the department of "I had no idea who sings this" I love the song Sundown by Gordon Lightfoot but I had no idea who the performer was:


I have featured Bett Midler's classic tune The Rose here before, but I did find a live performance of it that is no less moving and beautiful:


Another band I have seen live and can vouch for their great skill is Radiohead. Please enjoy a live version of Karma Police Super Sweet!:


You may have noticed the all live version theme, lets keep it up with L.A. Guns and Over the Edge, as song I have very recently begun to love:


Last Call!!!

I will close the show with one of the greatest live show bands ever, Iron Maiden. Few crowd energies can match a Maiden show. They will usually open with Aces High, and so we will close with their open:


Have a good night.

Thursday Questions, Follow Ups, and Media Observations

The wife and I will be attending the Depeche Mode concert tomorrow night so there will be no post and no Friday Night Entertainment. I may do a post on Saturday or Sunday instead, so leave some requests for material in the comments.

Question for Economist's View
Up front let me say that I have nothing but the greatest respect for Mark Thoma, the author of the blog Economist's View. With that in mind I was going to write about an article posted today but soon found that I would be writing about it for about 5 hours. I have boiled down my thinking about the post to two questions, and if Mr. Thoma for some reason that I cannot fathom should ever come across this blog, I would be most interested in his reply.

But first, the post in question. You can read the entire piece here and I would suggest you do. Mr Thoma cites Tim Duy in a discussion about keeping steady monetary policy for some time. This means ZIRP for as long as well into 2010, as stated here at Economic Disconnect for over a year. The major reason Economist's View sees inflation as a non issue is low to no wage growth. Excerpt of the summary at the end of the article:

"..Lacking a story that leads to strong wage growth in the near - or even medium - term, the Fed is almost certainly on hold at least through this year and likely well into 2010, allowing the size of the balance sheet to adjust according to the needs of the financial markets while keeping interest rates at rock bottom levels. That doesn't mean all that easy money will not show up somewhere - technical analysts are looking for US equities to explode on the basis of recent market action. But will the Fed lean against such an explosion without clear and convincing evidence that the labor market is poised for strong, sustainable improvement? I doubt it - and for those looking for it, therein lies the ingredients for making the next big bubble."

My two questions are:
1.) In the 2002-2007 time frame wages were flat to lower yet inflation was a real issue. How does your central argument (no wage pressure = no inflation) account for such a recent example that disproves it?
2.) If wage increases are the driver of inflation and bubbles, how can reconcile the 2002-2007 wage issue with the credit driven housing bubble? May there be other drivers of asset values, namely cheap credit and easy access to money? If so, how is accommodating FED policy here a "good" thing?

I am of two minds here. I would love to hear the response, yet I am terrified to get my butt kicked by a real professional! We shall see!

Follow Up on Last Nights Stories
Last night I covered two issues that had some additional information added today so I will expand on those ideas.

China Learns Fast
In the last article I highlighted the China stock market drop this way:

The Chinese learn fast. The best way to influence monetary policy here in the US is for the market to throw a "hissy fit" to the tune of down 5% in response to any take away of the punch bowl. Greenspan was a total sucker for this play, and recently the TARP was passed on it's second attempt after a daring market drop played out by Wall Street.

Today we get a policy "clarification" from the Chinese central bank on the issue of liquidity (via Clusterstock):

China Can't Take Away The Punch Bowl
Monday's 5% drop in the Shanghai market was a stark warning to the credit-happy central government: do a U-turn on cheap money, and this is what you get.
So the government is already sending out signals that it won't be tightening any time soon.

The article excerpts a Wall Street Journal piece which cites an analyst with thus:

"China's top policymakers have repeatedly assured that the current policy stance will be maintained. Note that the People's Bank of China, unlike the Federal Reserve or European Central Bank, is just part of the government and there is no way for the PBOC to run counter to the president or the cabinet"

See, no worries. The money will flow (just like the spice! Obscure reference).

The economic proverb is now:
"Ask and you shall receive...the ladle to the punchbowl" Book of Greed 3:16

Bond Auctions
After the poor 5 year bond auction yesterday, all eyes were looking towards today's 7year offering. This morning I had the following exchange on SA with loyal reader Manya05:
Many05;
Treasury auction, what do you make of it? time to jump back into TBT and PST? too soon? or should we do it before they are outlawed?

While I never like to do specific ticker discussions, I offered this note:
Economic Disconnect:
Manya05,
I would say the auction went bad, but that it does not matter. The key will be today's 7 year sale; if the US government cannot get some interest after a poor auction (via arm twisting) then we may indeed have an issue developing, not that the markets (equity) will care anyway. I would say TBT/PST are a great short term play (like hours, never hold overnight) if you think there will be an issue with the 7 year today. I think the sale will go very well, so I would not run with those today. But that's me.
The 7 year sale went just fine, though one would have to wonder why 5 year notes were less than chased, but 7 year notes were a hot item. What's two years between friends? This kind of disconnect is hard to figure out.

Media Searches for Reasons for Market Rise
Last article I showed how two durable goods reports were handled in two very different way depending on how they came out. Tim Iacono over at The Mess That Greenspan had a great catch today that showed a similar gaff relating to today's jobless claims. Check it out here.

At first I was worried my story was scooped, but it appears there is enough media funny business to go around.

This morning at 10am I saw the market opening much higher and looking really strong. I had scanned some articles in the morning and failed to see much that would have pushed such a rally from the get go. I stopped at Yahoo Finance at about 10:05 am and saw this leader (click for larger view):

The headline attributed the stock market surge as related to the dollar declining and the China rebound:
"The US market rises Thursday morning as the dollar declines and China rallies,.."

Now with an eye towards the 7 year bond sale, I was greatly interested if the dollar was declining and by how much. This might provide some clues as to interest in the sale later in the day.

I loaded up the dollar chart and here is what I saw at about 10:07am (click for larger view):

Notice the huge dollar drop at the right hand end at 9am-10am. Oh, you missed it? Well, maybe the chart was delayed or something. It should be clear on the one day chart:

Clearly there was no large move in the dollar at all.

The biggest tell that something is wrong is the plethora of reasons being offered for the markets fast rise. A big gap up in the morning had to be for some reason and Yahoo tried it's best to find one. The markets have an active partner in the media, and this example should show how far things have gone.

Have a good night.

Durable Goods Report May vs. June Spin Cycle

Three straight days of super muggy air up here. I will not complain at all after this past winter and the very delayed start to summer so far. Heat is heat and i will take it!

5 Year Bond Auction Results
I failed to include the results of yesterdays 2 Year auction because I was both short on time and the final results were far from clear, at least to me. This evening the results of the 5 Year auction are known, and with a little help from a friend I can offer some discussion.

The Housing Time Bomb has a compilation chart up that covers the auction in detail (reproduced with permission):

The authors take:

"As you can see above, the bid to cover was a measly 1.92! This was not officially considered to be a failed auction even though many economists will tell you that anything under a 2 BTC is considered to be a failure.

The primary dealers "(Goldman, Morgan Stanley, etc.)" were forced to eat more then half of the auction as world demand plummeted. They had to put up $24 billion of their own cash in order to close out the auction. Indirect bidders(China and the other FCB'c) gobbled up only $14 billion.

Folks, the fact that the indirect bidders are disappearing this early in the year is frightening. We still need to sell over a trillion dollars worth of debt. I have been screaming "how are they going to sell all of this stuff all year?"

The indirect bidder component here is very important. Very recently the rules for just who was an "indirect bidder" were changed and that metric shot up over the past couple of bond auction rounds. Many ascribed this to the rule change, which made comparison hard with past results. The key point is that indirect participation was much higher under the new rules until today's result.

This is a development worth watching in tomorrows sale of 7 Year notes. The market was unimpressed with today's poor showing, but then again nothing scares this market anyway.

US Durable Good Reports - A Study in Contrast
Today the US durable good report was released and came in a bit short of expectations. Estimates were for a 0.5% decline, but the print was a 5X larger 2.5% screamer to the downside. So this kind of target miss to the downside was a problem right? Not so fast.

Immediately upon release all kinds of disclaimers were put out with it attributing the miss to aircraft orders and other such items, and the better than expected part of the report was instead all the focus. This put me in a mind of last months repost which came in better than expected, again mainly on defense and aircraft items. I thought it might be instructive to see how one news outlet handled both releases and in what manner they were both reported.

Cast your mind back to last month. Green shoots were all the rage and light was seen across the economic landscape of second derivatives. CNN Money on June 24, 2009 had this take on the upside surprise of the durable goods number:

Durable orders in surprise gain
WASHINGTON (Reuters) -- New orders for long-lasting U.S. manufactured goods rose by a much stronger-than-expected 1.8% in May, Commerce Department data showed Wednesday, providing further evidence that the battered U.S. economy was finding its feet.

Analysts polled by Reuters had forecast durable goods orders would decline 0.6% last month. May's increase, the third gain in 4 months, followed a revised 1.8% gain in April, previously reported as a 1.7% rise.

New orders excluding transportation advanced 1.1% last month, compared with a forecast for a 0.4% decline, buoyed in part by a 7.7% rise in new machinery orders. This was the largest percentage increase in that category since March 2008, the Commerce Department said.

And now today's CNN Money durable goods report:

Durable goods orders tumble 2.5%
WASHINGTON (Reuters) -- New orders for long-lasting U.S. manufactured goods fell more sharply than expected in June, notching their biggest decline in five months as demand for communications and transportation equipment slumped, a government report showed on Wednesday.

The Commerce Department said durable goods orders fell 2.5%, the largest drop since January, after rising by a revised 1.3% in May, previously reported as a 1.8% surge. This was worse than market expectations for a 0.6% decline. Orders had advanced for two straight months.

New orders excluding transportation unexpectedly rose 1.1% in June, after climbing by 0.8% in May. Excluding defense, orders slipped 0.7% in June, after two months of straight gains.

Analysts polled by Reuters had expected orders excluding transportation to be flat.

To be fair with CNN Money, they presented all the relevant data, and one with an eye for these things could have seen the hard quantitative facts here. What I would like to point out is that when the May durable goods report came out better than expected, CNN Money had this qualitative note to add to the numbers;
"..providing further evidence that the battered U.S. economy was finding its feet."

So one would expect the same treatment for a 5X miss to the downside after today's number. Maybe a line like;
"..in new evidence of a contracting economy"
or
"..eroding recent signs of recovery"
would have made the piece as a qualitative note.

Instead the CNN article just reports the numbers as is with no leading statements or inferences at all, just as any economic reporting should do when not an opinion piece.

Any positive data will be piled on and puffed up, while anything negative will be pushed out without commentary. I could have dug up any two posts on the topic from many sources and the treatment would have been the same. Cheerleading should not be an active part of financial reporting.

The Two Markets
I read an item over at The Mess That Greenspan Made today that got me thinking:
Shanghai Surprise
The big news out of China this morning is that share prices saw their steepest decline in eight months after rumors swirled that the government was about to clamp down on the excessive bank landing that has led to excessive speculation in stocks and housing.

The Shanghai composite index was down almost eight percent earlier in the day before closing with a loss of about five percent following a huge public offering for China State Construction Engineering, the nation's largest homebuilder, where more than 4 billion shares changed hands - about four times the total trading in the Standard & Poor’s 500 Index.
If the China growth story is real and there are underlying structural pillars upon which the monster rise in the stock market was supposedly based on, why the huge flight on the mere rumor the government might, just might, pull back some of the easy money?

The Chinese learn fast. The best way to influence monetary policy here in the US is for the market to throw a "hissy fit" to the tune of down 5% in response to any take away of the punch bowl. Greenspan was a total sucker for this play, and recently the TARP was passed on it's second attempt after a daring market drop played out by Wall Street.

What this shows is that there is no real lift in China, nor America that is not entirely based on government spending. If Bernanke and Geithner announced tomorrow that TALF, the discount window, TGLP, and any 2 other support programs were ending on Monday, the indices would go to "lock down" at the opening drop. And then repeat it a few times.

I try to keep this in mind while all the cheerleaders are waving their pom poms and heralding the new recovery. Recovery bought and paid for by the government. Of course there is no such thing as "the government" really, just taxpayers paying to get robbed.

An article on Minyanville today by Minyan Peter touched upon this game as well and the ending stuck with me all day long:

"..But while banks were busy taking whatever securities-related profits they could from their balance sheets, their core banking businesses were decidedly mixed. On the good-news front (unless, of course, you're a saver), banks lowered deposit rates and raised transaction fees left and right.

At the same time, loan portfolios showed continued credit deterioration across the board. Worse, loan loss reserves appear to have been sized for an immediate recovery, rather than positioned for any kind of continuing economic malaise.

As I have written before, I don't believe that accounting changes the ultimate outcome -- just the timing. In the second quarter, as the tide back came in, banks accentuated the positive and postponed the negative.

Should a sustainable recovery occur, no one will likely ever know the difference. But realize: That's the bet. And from where I stand, the bank “gain cupboard” is now officially bare.

What struck me, and it fits in with the China story, is that clear manipulation and fungible number play is right now being accepted; pair this with the government backing of all things financial and we see there are indeed two markets. The base free market which is much lower, and the current supported market which is much higher.

As Minyan Peter says the bet is that some kind of recovery will come from some place that will more closely align these two markets, which right now are worlds apart in price. I would offer that recovery had better show up real soon.

Have a good night.