Wednesday, September 30, 2009

Whether Deflation or Inflation, Things are Going to Change

It is going to be very cold tonight, so you can imagine how happy I am about that. I am feeling marginally better today (thanks for asking!) and hope to continue to improve this sinus issue.

Star Wars in Concert
I wanted to pass along thanks to a very good friend of mine who alerted me to what could be one of the greatest ideas of all time. I give you:
Star Wars in Concert
Economic Disconnect will be on the computer when tickets go on sale Saturday morning for the Boston show, and no matter what I will be going to see this!

Breaking Bank of America News
This story is just coming online as I write, so I thought I would offer my two cents on it (link for Zero Hedge edition of saying goodbye):
Ken Lewis is Gone
Mr. Lewis will leave BAC by years end (that soon?) and if seems rushed to you, then you think like me.

This is some kind of ploy to take the heat off all the legal cases involving the BAC/MER deal. Sadly I think it will just that. I am not a legal scholar and have no idea how this will affect things, but politically the heat will not be turned down on anything involving BAC over the past year. Which is too bad.

Whether Deflation or Inflation, Things are Going to Change
Trolling around the financial world I was overwhelmed with the continued raging debate over deflation, inflation, or some monster born from the two. I have covered that debate too many times to really wade in again. To be honest, we are just not going to know the real answer for some time (think 5 years out) so a daily grind of data points is wearing me thin.

What cannot really be debated is that our system is going to change because of the financial crisis made possible by a careless government and reckless banks armed with liquidity which had no end. If we can all agree on that, I think that may be a good start.

I think my favorite part of the deflation/inflation debate is that you, the ordinary person, will find the real world effects almost identical to your daily life. I think most of the emotion about this area of contention is the belief that one may be able to position themselves in such a way to be insulated (to whatever degree) should either scenario unfold in earnest. On that, allow me to offer some advice.

If you are extremely well to do, or rich, then forget all this stuff and carry on. In a major deflationary episode you will either be in control of hard assets (which no one can buy) but will have utility and cash that has gained a significant amount of purchasing power (which you will not want to spend). If we enter a major inflationary phase, you are already way ahead of most chasers, and can buy hard assets for protection and move your value losing cash into another vehicle.

If you are the other 90% of the population, you will just have to do the best you can.

I stand by this call. In deflation, everything costs less and dollars are worth more as spending falls off a cliff. Of course, so does wages, so with less dollars that will buy more, you are struggling to get what you need. In inflation, everything costs more, and you of course will get paid more in dollars that will buy less, so again you will struggle to have what you need.

What's the debate?

Economic Disconnect prides himself on the very keen observations of the readership that frequent the site. If you would like to add to this debate, here is the question that may change the debate to more real world terms:
-If you only had $20,000 today, in what way would you try and prepare yourself for;
A) Deflation
B) Inflation

That's it. $20k. No leveraging the house, no liquidation of your entire net worth, just $20k. And no poking at people that "should have saved more in their life", they did not so it is not relevant. I might add that $20k is far beyond the immediate cash position of many, many families and individuals.

I look forward to the ideas.

Have a good night.

Tuesday, September 29, 2009

Don't Stop Consuming

I read around 15 articles today that were important one way or another, but they all had a common denominator: All are well known problems that for the moment are being treated like they do not matter. Whether it is the FDIC taking in fees ahead of schedule to Fannie Mae delinquencies skyrocketing at an alarming rate, none of this matters right now. Rather than cover all these items tonight, I will instead focus on a concept I have thought about and mentioned here from time to time.

Don't Stop Consuming
The title of the section is a play on the Journey song "Don't Stop Believing", and you can sing the new words if you like.

I was reminded again today about the fragile way the US economy has evolved over time. We are told to no end that consumer spending is fully 70% of GDP in this country and the reasons how that all came about is beyond the scope of this article. Suffice to say that when the system is set up this way, spending must be a constant flow.

I was thinking about this today when I read a Mish Shedlock piece that highlighted a story unfolding in Japan:
Japan to Buy Pork to Boost Prices After Demand Drops
Now the pork angle is not my main point here, though the government rushing in to support prices is somewhat related.

We have seen the savings rate in this country go from an all time low of about zero for a while to a paltry 5% over the past year. 5%. With even a 5% reduction of money flow (and this is very simplified) our economy is dead in the water and relies on massive government spending to keep things afloat. 5%.

Another crazy percent story is if home prices fall, on average, 10% almost every bank in the mortgage business is flat out busted. 10%.

Notice a pattern here?

Unless you, the average man/woman on the street whom I believe 90% of my readers to be, are separated from basically all of your earnings the structure of the economy is put under stress. In a strange feedback loop, you have to work more just to keep your job so that consumption does not fall and then you lose your job. This is a winning plan.

Now I understand that all economies rely on spending to some degree and that commerce fuels growth and all that. We are talking about a 5% change is money flow (again WAY simplified) and the US is a mess.

Back when technology stocks were trading at unimaginable highs, the description most used was that they were "priced to perfection". What that actually was supposed to mean I am not sure, but it was clear after the bust those firms were not priced quite right. In a similar manner, the US consumer has been "Tapped to Perfection" which means they are expected to spend all of their income in this economic model.

As with most things, this works great until it does not. It is not hard to imagine a consumer that has:
-Seen their investments crater and burn 2 times in the last 10 years
-Seen their home value gyrate wildly and now sitting at multi year lows
-Seen their tax money given away to banks
-Seen their job shipped overseas
-Seen their bank close overnight
-Seen their future earnings burdened by overwhelming bailout guarantees
Decide it may be time to tone things down on the spending front.

This is a key point.

While we are deluged with FED officials and economists trying desperately to "stimulate demand" we have no discussion on the idea of demand at all. Maybe the days of 5 televisions (all plasma) per home are gone. Maybe the days of 4 cars per family of 4 are over. Maybe people will not swap out of their home every 3.5 years. Maybe people will stash 5% or more of their income in annuities or bonds instead of the stock market lottery game. Maybe people will make do with less. This would be perfectly reasonable, and one may even argue (I would) long overdue.

The problem is our system in no way can function this way. I call it "The Paradox of Intelligence". If the US consumer ever figures out that they are being gamed to spend every cent they have, they may not. If they do not the economy will suffer. Again, nice feedback loop. It is almost like it was designed that way!

I guess science officer/first officer Spock would urge:
"Spend all, and prosper"

Have a good night.

Monday, September 28, 2009

Monday Snippets

I am a bit under the weather this evening and will take the night off from a full post. I am armed with second generation antibiotics, so I hope to make some progress against my sinus infection.

Over 100 Articles on Seeking Alpha
Over the weekend my Seeking Alpha article count reached past the 100 mark. I am happy to have material posted over there, and the readership of that site is a pretty savvy crew. A personal milestone.

Mr. Practical Article
You know things must be crazy because Mr. Practical is posting more than usual. In today's missive on Minyanville, Mr. Practical again covers deflation in response to a pointed reader email he received. Well worth a look:
Money Can Indeed Perform Vanishing Acts
The title is misleading, I know full well money can vanish; it is what happens to most of my investments!

Job Creation Reality Check
I had this post up in the comments section last night, but in case you missed it it is very important. Clusterstock covers the math of John Mauldin about jobs, namely we will need to create over 250,000 a month to return to 5% unemployment in 5 years. As a reference the average 30 year monthly job creation number is 50,000. Even during the go go tech boom (1991-2000) job creation ran at 150,000 jobs a month. This seems like it may be a problem, but I am the alarmist sort.
Another Reason We Won't Have A V-Shaped Recovery: Jobs

Gold Manipulation in History
Zero Hedge had this leading headline on this morning:
Exclusive Smoking Gun: The Fed On Gold Manipulation
Naturally I was very excited.

The post covers in detail that the US FED, along with the Treasury, and strangely enough, the CIA, were indeed engaged in plenty of gymnastics in regards to gold prices and allocation. The only problem is this information is from the mid 1970's! While the content was clear and provocative, it is also seriously outdated. Sadly, we will have to wait another 20-30 years to find out what is going on behind the scenes today. Where's the Flux Capacitor when you need it most? Where is my Leonora Christine?

I am of the firm opinion that world central banks care very much about the price of gold. I am also of the firm opinion that gold over $1000 an ounce is not desired for the most part because of what that means in regards to fiat currencies. I think it is beyond question that gold plays a large role in top level government banking policy. And yes, my lead lined tin foil hat is on straight.

Have a good night.

Sunday, September 27, 2009

Sunday NFL Wrap Up

As it seems many readers are into football as much as I am, a quick wrap up of the games and a new comments section. "Ben-Hur" was on last night on the classic movie channel and I forgot how much I love that film!

Wrap Up
The New England Patriots really got back to their roots (not 2007 roots!) and looked much better this week. The defense was actually pretty solid and finally, FINALLY they ran Fred Taylor who is the key in my mind for this team. Tom Brady is nowhere near back to form, and the Pats must give him time to grow into the game again. Big win over and NFC top tier team. Next up, the Baltimore Ravens who looked scary today. 2-2 is not bad though after 4 games, right?

I really cannot believe the Saints won in Buffalo. It is not that I think the Bills are better, but as a LONG time Saints fan these types of games they almost always lose. If the Saints running game is for real (it has been for 3 games) they are my favorites for the NFC.

We all had a bit of fun when I offered the question whether the Bengals could shock the Steelers. I had a funny feeling about that game, but really did not think it would happen. It happened. The hardest thing in my mind about being the champs is every team you play will play like it is the Superbowl to them. That is why repeating title runs is rare. I have to check the schedule, but the Ravens-Steelers games now take on way more importance after Pittsburgh's 2nd loss.

Miami has now had 2 games where they dominate time of possession (1st half anyway) but fail to really accomplish anything with the ball other than move it. Their defense also seems to have lost a step. With a brutal schedule ahead, I think the Dolphins are facing a real challenge.

Hello, Denver 3-0? I am a bit surprised here. While Josh McDaniels is an offensive genius, the Broncos seem to be defending pretty well, which was their issue last year. Whenever they play San Diego is a huge game.

The Titans lost to the Jets due to a span of 30 seconds. A silly touchdown call on a Mark Sanchez run into the end zone led to a fumbled kickoff as well. The Titans are in a bad spot.

I really cannot believe the Vikings and Brett Favre pulled off that win. Wild. This loss aside, the 49ers are for real this year. They should tell Michael Crabtree to enjoy the draft for the 2nd time next year! Next week, Green Bay vs Minnesota in the ultimate grudge match!

Hats off to the Detroit Lions who won for the first time since 2007 today. Great job guys!

Tonight the Colts and the Cardinals could be an explosive display of offense. Worth a look!

That is about it. I said this year would be the most competitive ever and nothing I have seen so far would change my mind. It is wide open for anyone. Lot's of fun.

Have a good night.

Friday, September 25, 2009

Over My Head Friday

I am not sure if it is my sinus congestion, the sudden cool down in the weather, or if financial stories got very complicated in one day but I feel a bit lost! I will offer up a few items that had me confused (what's new?) and then off to the Friday night usual fun. At least I get that part.

A Bubble in Gold Bubble Stories
Between this blog, Illusion of Prosperity, Bill Bonner of The Daily Reckoning, and a myriad of other sites the only thing I can say with 100% confidence is that there is a bubble in "Gold Bubble" stories! At this point I am firmly with Mr. Bonner when he says:
Too many ‘possibles.’ Too many things we know we don’t know. And too many things we don’t know we don’t know too. And too many things about which we have no clue. We’re tired of thinking about it.
Sounds about right!

I have a new poll question up for a vote: Where is gold on the bubble scale?

Deflation is a Riddle Wrapped in a Mystery Inside an Enigma
Thanks to Winston Churchill! Starting off the "dazed and confused" parade is the concept of deflation. Economic Disconnect wants to be honest and admit this animal is a hard one to fully appreciate. No wonder all governments aim for inflation, it just makes more sense!

We will begin with an expansive piece my Mish Shedlock. You will need a spare half an hour to really read the entire detailed post, but it is worth it.

Now you would think that after that great primer on deflation, all would be clear. I guess I am a slow learner!

As if I needed more help, one of my favorite writers anywhere is Mr. Practical (who posts on Minyanville infrequently). Today Mr. Practical weighs in on deflation and offers this juicy nugget:
In deflation, there’s too much debt. If the economy is slowing down, it makes it more difficult to pay back that debt and you would expect more to default. The more debt that forfeits, the more dollars are destroyed. The more dollars destroyed, the more they’re worth.

Now I understand this in principle. What I am having a real issue with is this idea applied to our "printing press" gunners at the FED. Thus far we have seen zero, count them zero, limits on the US ability to print as much money as we darn well please. If dollars are destroyed, just make more. To round this out, if deflation results in a stronger currency then:
-Would it not make sense to have rampant deflation for some time, allow the dollar to rise to some obscene number on the index, then use those extremely valuable dollars to buy the entire world?

How come nobody has thought of this before? I will take full credit for the original idea here!

All kidding aside, what are the limits to what I just outlined? At some point this all gets silly (if say $10 could buy Japan) so there must be something else I am missing. Where are the traps? Where does it hit a wall? I would really like some creative ideas in the comments on this one all.

Economists Love Bubbles
Maybe I am naive, and maybe I am just so nice on the inside that I would imagine an economist would strive to find sustainable growth, a stable currency, job creation, and maintenance of a standard of living to be ideal goals. I get a bit confused when they openly are looking for some kind of bubble to achieve their goals instead of long term solutions to problems.

Today's whopper comes from a recurring contributor to this award, Economist's View. My second favorite Keynesian (gaining ground on Krugman all the time though) Mark Thoma highlights a piece by Tim Duy and just goes right out and says what we all knew anyway; these guys are praying for another bubble. Short excerpt so I do not throw up:
So, given the unemployment outlook is sad, wage growth continues to deteriorate, core inflation is falling, and we seem to lack an institutional arrangement to force higher prices, should they even emerge, into higher wages, what is the Fed thinking? Should they really be worried about winding down programs? Are they really confident enough that an inventory correction that will undoubtedly spike GDP numbers will also translate into sustainable growth? Even knowing full while that after the last recession, the US economy languished despite the inventory correction, only to be revived on the back of the housing bubble? In effect, the Fed looks to be putting much weight on the cyclical story playing out, while ignoring the structural story of the necessity of asset bubbles to fuel growth.

Advice for the economists: start using your vast superior intelligence to SOLVE problems instead of inventing ways to MASK them and I will apologise for everything I ever said about your profession. I am serious. And don't call me Shirley.

Lost in the Ether
The two following tales are so over my head I am just going to provide the links and allow you the honor of wrapping yourself around the twisted path that MBS are looking at right now:
Mortgage Bonds: It's a Trap via Accrued Interest

PPIP Get's its Debut via Rortybomb

Good Luck!

Friday Night Entertainment
After that parade of confusion, lets move on to the easy stuff!

Gift for that Special Lady
What do you get that special lady in your life to say "Thanks for tolerating me?" Diamonds are to expensive. Coach bags MUST be matched to the lady perfectly and by this I mean she has to buy it or tell you exactly which one to get, and that's no surprise! Here is a suggestion, a teddy bear jacket:

I think this could be huge this Christmas. Story and ordering information via Geekologie.

Special Delivery
Economic Disconnect is in the market for a new kitty as you know, but I was shocked that Amazon has so much confidence in their 1 day shipping policy that they would chance this kind of package:
funny pictures of cats with captions
see more Lolcats and funny pictures
I am just KIDDING!

Film Clips
I am not sure anyone really checks this section out, but I get a kick out of it and it leaves my favorite clips someplace I can easily find them, so it goes on.

A film that not many people have seen is "The Prophecy". I love the film (NOTE: I am not religious, just love the film). Here are some clips of Christopher Walken playing Archangel Gabriel:

I love the film "The Outsiders". Take a look at the opening credits and see the that this cast became the heart of Hollywood for the next era:

Rock Blogging
Ending the night with the music!

My message to the markets, provided by Hall and Oates, is "Out of Touch":

I finally found out the name and artist of a song from the film Heat that I really liked. Enjoy New Order (featuring Moby) and "New Dawn Fades":


I have had this one before, but the piano music ran into my head this week, so enjoy "Tubular Bells" made well known in the film "The Exorcist":

Last one, I am a bit out of steam!

Closing the show with another song from a movie! At least I am consistent!

I loved the film "At Close Range" with Sean Penn and the already mentioned Christopher Walken (was he in everything??). Madonna wrote this song for the film, so try out "Live to Tell" along with plenty of cool clips from the must see film:

Have a good night.

Thursday, September 24, 2009

Taxpayers as Mouse Models

It is Thursday night and I am both pretty happy and worn out. My mother has been at home for two days and is doing very well. Thanks to all for the kind sentiments. I am myself fighting a sinus issue that is making breathing all kinds of fun. Add to this an entire spectrum of news to cover, and you have a tough mix. I will see what I can do.

Existing Home Sales and Research in Motion: Failure to Clear End of World Expectations
You know the drill: talking heads and our own officials let us know that estimates for various numbers and earnings are were priced for the "end of the world" scenario and thus as stocks and data either beat those marks or just get worse at a lower rate then the markets meteoric rise is not only justified, but lagging behind the recovery. All was going very well as fractal 5th derivative rates o change were looking great and estimates of losses of the GDP of Japan by the Nasdaq were overshot by a wide margin. A great tale indeed.

Then you get two non performers today, I mean, did they not get the memo?:
RIM results, outlook disappoint, shares tumble
Existing-home sales drop 2.7% in August to 5.1 million pace

In regards to RIMM, I cannot figure their report out anyway, a huge one time charge and other baloney, but guidance was lower, and that does not fit the mold.

The housing numbers were especially bad as this is the sweet spot for sales and for the $8k bonus pool to be helping things along. Guess what the NAR wants? An extension of course!

These two items were blames for a move down was the conventional wisdom, but I really do not think either point was the culprit. I see many adjusting charts and wave counts getting excited about a 1% drop in the indices. I think the bearish sort underestimate the suspension of disbelief at this time.

Taxpayers as Mouse Models
As a molecular biologist I focus my attention to science on the very small scale. I design experiments that can be tightly controlled. I use test samples to try out new ideas. I keep things "in vitro" which means "in glass". I am responsible for early testing of many ideas. As things progress, and only after exhaustive testing do things progress to the "in situ" or "in vivo" level which means testing either cell lines or even using mouse models to study experiments. In classical science this is how things are done.

Enter economics. Here testing is done on a grand scale by a central bank. Unfortunately the public are the real live mouse models. To be fair, math models and theory presentations can never really reflect the real world (though this is how they get their ideas) and thus their pool of test subjects is very limited.

The first example of yet another creative FED program was unveiled today through various rumor channels. This is always done to gauge opinion before an action is taken. Early in the week many thought a large exodus of cash from money market(MM) funds was due to:
-expiration of the money market guarantee by the government
-a move into equities
-some combination of the two

As with most things, it just seems those in the know were first to move. What am I talking about? How about this:
Fed's exit strategy may use money market funds
The Fed would borrow from the funds via reverse repurchase agreements involving some of the huge portfolio of mortgage-backed securities and U.S. Treasuries that it acquired as it fought the financial crisis, the newspaper reported, without citing any sources.
This would drain liquidity from the financial system, helping to avoid a burst of inflation as the economy recovered.
You have my attention! I will be checking in with my MM managers and make it clear if they accept MBS as collateral on a swap from the FED I will withdraw my funds. More:
The Fed is considering whether to conduct a pilot scheme, but worries such a test might be seen as a signal that the central bank was about to drain liquidity on a large scale, the newspaper said. In the near term, a big drain remains unlikely, it added.
I could ask why, if the market is doing great and all is well, any minor hint of any liquidity reversal would cause a panic. I could ask that. Moving on:
The central bank is now considering dealing with money market funds because it does not think the primary dealers have the balance sheet capacity to provide more than about $100 billion, the Financial Times said.
Money market mutual funds have about $2.5 trillion under management so they could plausibly provide between $400 billion and $500 billion, it said.
I feel sick.

And the grand plan is revealed. Foreign debt holders have swapped their MBS/Agency debt for treasuries the FED has taken them onto their balance sheet. Add to that mix all the garbage collateral they have from the banks in the "Operation Restoration of Liquidity" assault and we are talking big numbers.

Instead of the public serving as a backstop, it seems their most trusted place holder of investor cash, the money market, will now serve as the long term storage facility for much of this kind of toxic debt. Call it the Yucca Mountain of MBS if you will.

What could go wrong?

Any serious call on the MM reserves may force selling of these instruments which while I am sure they are all triple dog AAA rated, may find it hard to find a buyer at par who is not named THE FED (roundabout, yes?). If that happens, the "breaking of the buck" may occur again, and it was this very item that really almost ended the financial world as they know it. Sorry, as "we" know it.

Zero Hedge offers this:
Heaven forbid PDs [Primary Dealers] have to sell any of the Treasuries they are sitting on to free up some cash. One also wonders just how much in excess reserves the PDs are currently in possession of. But that would be counterproductive to the Fed's every day scam of running the markets higher. How can PDs, and banks in general keep buying equities, if they are forced to give cash to the Fed? Furthermore, if regular investors perceive some threat to the MM liquidity pool, it will of course pile into other riskier assets.

All in all, the Chairman is determined, come hell or high water, to part consumers with their savings: whether it be through zero deposit interest rates, through money market guarantee removals, through talk of inflation or, ultimately, through actions like these. After all, America has gotten to the point where the Fed is beating the drum on the need to keep blowing the capital market bubble bigger and bigger: anything less, and just as Madoff investors discovered, the entire pyramid collapsed overnight, and where people thought there was $50 billion, there was really $0.
A great summary.

Last night I was in a debate with my friend from Illusion of Prosperity and I had left this line of thinking in the comments section:
We are fast approaching a time where the Keynesian's may finally have an answer to the age old question: "Can a central bank in good standing create all the money they want?"

While thus far the money created by the FED has not made its way into the money supply (for various reasons) it is an easy breezy argument that it indeed has caused massive inflation. How so? Imagine home prices without the FED help? Imagine stock prices without government backstop. Imagine banking without the taxpayer safety net. While deflation in real terms is occurring right now, relatively inflation of asset prices is running very high indeed (as opposed to where they would be). Again, leave the inflation out and I think about it terms of eventual dollar devaluation.
I think this is another example of experimenting in real time on real people.

What I am looking at is the FED/Treasury/Associated Agents have papered over bad debts with created money, but that money has only replaced destroyed capital (or as Mish thinks, just barely made a dent). This has lead to no real inflation as that money never really existed and never entered the money supply per se. But I wonder why can this not be done all over the world everywhere at all times? Have a rough year due to low oil prices in Russia? Print up 300 Billion, swap it for the losses in the business world, have them pretend they only lost 1/10th of that, and carry on the game. Can losses always be squared as long as money does not enter the system? Where are the problems? How can that be possible?

This is a dangerous game being played right now. Where it not for our "reserve currency" get out of jail free card this game of Monopoly ended long ago. You can do whatever you want right up until the point you cannot. Would you guess we are closer to the point when this ability started, or closer to the point when it ends?

All Inclusive Gold Article
I have never before read an article by the author Laurie McGuirk, but his offering on Minyanville today really encapsulates my thinking on gold in many ways. Check it out here.

Have a good night.

Wednesday, September 23, 2009

Wednesday FOMC Day

I got a sense there was more attention than usual to the FOMC announcement today. I have no idea why that would have been. I will try and make some sense of it all tonight.

Reason Number 1,245,678 to Vote Against Every Incumbent Everywhere: Hypocrisy
Back in time around late 2003 Massachusetts had a Republican Governor. There was a huge fear by the 92% democrat held state government that if John Kerry should beat George Bush for the Presidency, the governor would appoint a Republican senator to replace him. The state legislature immediately went out and over the course of 2 weeks changes the longstanding rule to allow for a special election to fill the seat.

The argument was that the will of of the people must be followed, not the whim of a partisan governor. Ok, I'll play. While I think changing an almost universal rule was an over reaction, I allowed that the argument that lack of representation until a special election better fits a state like ours. Fair enough.

Fast forward to today, 2009. Senator Kennedy has recently passed, and the special election is set for this late fall. But now of course, the ability of a democrat governor is impaired by the very rule the 92% majority forced through as law an this of course cannot stand. Again, in the space of two weeks the law has been changed to allow the governor to appoint a replacement on temporary basis, until the special election. And what happens should another republican win the top office? I think you can figure that out.

I point this out to highlight hypocrisy. I am sure the same games go on in heavily republican states with the same kind of intellectual dishonesty. What can you do? Easy, vote against every single incumbent come next election. That way at least you are sure to get new hypocrites.

The Bubble in Gold Debate
I really wanted to leave this one alone, but of course "Just when I thought I was out, they pull me back in". My good friend over at Illusion of Prosperity wonders in last nights offering "Is There a Gold Bubble?" The author writes:
In my opinion, in order to justify gold's current price then inflation better show up at some point. Further, if inflation does show up there are probably better things to hoard than something that has already risen by a factor of four. Toilet paper continues to come to mind. Just a thought.

I know this isn't going to be popular with the gold bugs, but I just call it like I see it. I'm not saying gold is in a bubble, but I certainly have no interest in buying it (again) at these prices. There is serious risk at these levels and that is not something I look for in a "safe" store of value. Maybe that's just me.
My first thought is "it is far too hard to identify bubbles as they are forming, but better to try and mop up the mess after they have burst"...I am kidding! That was the FED's answer to the DotCom bust!

Because I know the author well I can guarantee he is not a gold hater by any means, he just sees better opportunities right now. Given the current market mess, I think anyone espousing putting all your eggs in one basket is asking for trouble as well.

My answer about a golden bubble was written on March 27th of this year. In a post titled "Will the Next Asset Bubble Please Stand Up?" I laid out the following criteria for a bubble to happen ( I hate to quote myself!):
To find that next great chance at a lottery winner, we must first describe some criteria that have to be met for the next bubble to really take off. Here are some qualities I think would be needed:
- Exciting (E): to foster attention and participation said bubble has to have an element of excitement. Junk bonds are so boring, you know?
- Leverage Access (L): for a bubble to really get going you need access to leverage to expand buying power above and beyond that which is directly available to the buyers.
- Believability (B): the next bubble needs a believable storyline, well at least a good story. We all know beanie babies are not going to cost 1 million dollars, but a condo in North Dakota? Maybe!
- Low Entry Threshold (T): the next bubble will not be in some kind of hedge fund that requires 100 million in assets to qualify for participation.
- Displayable Results (R): like YHOO stock rolling up 30% every month or a home going up in price 20% every 3 months, there has to be some way for the masses to show their awesome investment skills off to the world.

With an eye on this criteria, lets look at some possible candidates and score (1 lowest, 10 highest) them on each category.

I looked at Oil, Real Estate (again!)and Gold. On gold, here was my scoring:
Candidate 3: Gold
E score: 9
Gold is about as exciting as it gets. Shiny and never changing, gold gets the blood pumping
L score: 4
While ETF's can be bought on margin, real bullion sellers will not play loose with the leveraged buying only by all but the big boys.
B score: 9
If you think paper money the world over is backed by mostly nothing, gold sells itself. That gold has been money since the dawn of man is a solid tale.
T score: 3
A little gold is easy and cheap. Any real amount gets expensive, fast.
R score: 9
Gold prices run on most market tickers and eBay can always get you excited about how much you could auction your gold off at.
Total score: 34

In reference, Gold scored higher than Oil, but below a replay of Real Estate.

I think the leverage issue is a major one. The main point to take home is still how small an investment gold is for almost the entire US market.

Can gold be overpriced right now? Yes, it can. Can gold have much further to go to the upside? Of course. If gold is indeed a bubble, it was the slowest expanding bubble in history. We have yet to have the blow off top where taxi drivers are telling you to buy gold!

The debate is always fun, but as always a balanced portfolio with out all bets on one sector has always been my position. If you are of the end of the world bent, items other than gold will be far more useful. Scope out Survival Blog to understand just what the minimum would require.

Wednesday FOMC Day
The FED announced nothing earth shattering today. The only change was some language about some pick up in economic activity. The FED said they will extend MBS purchases out longer, but in smaller amounts. That was about it.

The market I think was front running some kind of expansion of both the treasury buying and MBS buying. The sell off after the news would back this up. I would caution the bears about getting excited here, by tomorrow the bulls will have a new story to rally around.

As far as the FED, they in no way hinted at any exit strategy, no matter what you will read across the media today. They all but bold typed the "we reserve the right" to expand these programs. In light of the dollar beating that has been going on, the FED should play for time before rolling out more market support, and that is all they did today. The end of October (treasury purchases) is still far off, and March of next year (MBS buys) may well be 2020 for how long that will seem in economic terms.

For all the economists out there that can summon cool charts and make awesome graphs I would offer you a homework assignment. Figure out how far "below capacity" the US economy would run at even historically "normal" interest rates. Try out a FED rate of even 2%, 3%, and all the way up to 5%. Still think a rate hike is coming before 2012? Run those numbers again.

Have a good night.

Tuesday, September 22, 2009

Corrupted Data Sets

Hello all! Back in the writers chair this evening. Things are looking positive at this point, and the patient should be going home tomorrow. Follow up work later will provide more answers.

In a sure sign of colder weather I have a sinus congestion party going on and I made my first crock pot dinner today.

Newspaper Bailout: Propping Up Another Failed Industry
With the current movement towards making a government intervention to prop up the newspaper industry, there are two major issues that come to mind:
-If newspapers are reliant on the government for funding, how objective can they be?
-The "free market" has decided that newspapers are a dud, and people have voted with their mouse clicks for other content. Trying to maintain something just to maintain it is poor policy, but the usual first instinct for our government.

I will forgo the independence and objectivity discussion. That one is clear and cannot be denied by any rational thinker. Instead I would like to focus on the "why" of supporting the newspaper industry.

Ilargi of The Automatic Earth offers his usual insight that is a must read. Small excerpt:
President Obama thinks he can help: he considers bailing out newspapers, ostensibly to promote journalistic notions such as truth-finding:

"I am concerned that if the direction of the news is all blogosphere, all opinions, with no serious fact-checking, no serious attempts to put stories in context, that what you will end up getting is people shouting at each other across the void but not a lot of mutual understanding,"

But that of course is the horse a mile and a half behind the cart. And in left field to boot. The reason the blogosphere has gained so much attention is that "serious fact-checking" is a long forgotten part of American journalism. And -financial- government involvement in the news industry, whatever else it may indeed accomplish, is not exactly the most obvious way to get a reporter to go digging in that same government's dirt. What Obama complains about in the blogosphere, that it's all about opinions, doesn't describe that sphere, it describes the news industry that is no longer able to deliver any shrapnel of news without having first run it through the opinion wringer of its editors and ownership.

I could not agree more.

In a related note, I wrote about the time in history that the metal aluminum became easy to make and how the aluminum industry could have lobbied for a perpetual bailout from that day on:
Where Was Aluminum's' Bailout?
By now we are tired of hearing that home prices need to be supported, stock prices need to rebound, and that baseball cards are actually very undervalued. The mania to get asset prices up is running full throttle. Historically this was not always the case. Take the poor metal aluminum.

Clusterstock Hates Gold
The site Clusterstock is a daily multi stop for me. I enjoy the various topics they cover, and they inject a bit of fun into matters financial. That said, they seem to have two writers that are determined to write at least one article a day about how gold is "worthless".

From today, Gold Demand Is All Speculative, Joe Weisenthal argues that almost ALL interest in gold right now is driven by speculative bets: "Earlier we noted a worrisome sign for bulls: On-net, all speculation is on the long side. There are virtually no portfolio managers willing to go against gold."

While Joe leaves out the enormous concentrated short positions in both gold and silver by the big banks, he is harping on another theme he and Vincent Fernando like to champion "Gold is only worth what someone will pay for it". I mean that is just ground breaking right?

While Economic Disconnect is 100% sure that frenzy buying of stocks like AIG, FNM, and C are all solid fundamental plays, the notion that gold is different from any other financial instrument in that it is only worth what a buyer will pay is silly. Mr. Fernando has stated that companies can always have value for their stocks based on cash flow or other metrics. Well Mr. Fernando, you show me 10 stocks on the S&P 500 that are trading at cash flow and I will be very surprised say the least.

Economic Disconnect is a big fan of the metals (I hold various positions in gold and silver) but of course any investment carries the risk of valuation "re-adjustment" up or down. To pretend that BAC stock is somehow different in risk than gold is not quite correct in my eyes.

Corrupted Data Sets
I have been reading Calculated Risk for over 4 years now. The quality of the site is unmatched and the insight offered is top notch. As of late I have noticed something of a change over there (maybe you have too?) where the author has been ignoring key aspects of government policy and looking only at data as if the data itself exists in a vacuum. Now I am not going to pick on CR here, I really cannot fault his logic in the post in question, but I can argue that the omission of serious factors colors the data.

So what am I talking about? From September 17th CR writes:
The Impact on Mortgage Rates of the FED Buying MBS
There are some charts worth a look. His summary:
I think the impact on mortgage rates from the Treasury purchases is minor. This suggests to me that mortgage rates will rise by about 35 bps, relative to the Ten Year yield, when the Fed stops buying MBS.

How is that for a whopper? "I spent 1.3 Trillion on MBS and all I got was a 35bps rate reduction" does not quite fit on a T-shirt!

To be fair here, CR notes that the relative spread of mortgage rates to the Ten year yield will be only a 35bps difference, so in that he is surely correct.

But where is the notation about the government owning fully 80% (or more) of the mortgage market? With a taxpayer backstop rates are low, but what would rates be if banks had to lend themselves for residential real estate? I think it would not matter what the 10 year was at if left up to them!

And this makes me think about financial reporting in this era of bailouts, giveaways, and backstops. One cannot simply say "car sales went way up in August, maybe the consumer is returning" because you need to qualify it with the Cash for Clunkers program. Maybe home sales are going up, but that includes the $8k giveaway as a tempter. Anything real estate related is tainted by record government intervention on rates, final backstop of mortgages, and banking support to mask real losses. Even inventory is an unknown, as shadow inventory looms large.

To close, I would just state that most data sets that have been in use are no longer useful on a comparison basis. There is simply too much at work to influence them to pretend they provide the same look as they once did.

Have a good night.

Saturday, September 19, 2009

Saturday Night Note of Thanks

Hello All!

For anyone not checking the comments, I have been busy attending to a very serious medial emergency in the family. I can gladly say tonight that things are looking good, and the area of major concern is being pushed back. I thank you all for the kind sentiments and concern, I really think my favorite part of this blog has been the great people I have "met" during writing.

I have some free time tonight (the patient is resting very comfortably across the river 5 minutes away at the best hospital north of Boston) and I am in need of a mind changer for a brief period. No financials tonight, but a few selections of various sort.

As a pick me up, I often think of great fights. Most of my own boxing matches I try to forget (did I really get hit that much? I was 47 (30 by KO) wins and 2 loses!) but super fights are all time classics.

Enjoy perhaps the greatest single round in the history of boxing, Marvin Hagler vs. Thomas Hearns round 1:

I still, to this day, get chills watching that round.

When Julio Cesar Chavez stopped Meldrick Taylor with 10 seconds to go in the 12th and final round of a fight he could not win on points, lets just say I was extremely excited that Chavez saved the day, video of an HBO special on the fight (listen to the crowd noise!):

Chavez, while behind, effectively finished Taylor as a top flight fighter. Please just listen to the crowd noise, very special!

Mark, from Illusion of Prosperity, has the speech from "V for Vendetta" up tonight, and I would point you that way to catch that item. Very meaningful and moving message. My own dialogue that gets me through the harder times comes from the film "Matrix Revolutions". I have featured this item before (here) but feel I needed the lift again (ignore the subtitles) and I might add that Hugo Weaving does the acting for both clips:

Maybe a little music, yes?

For the Mom, her favorite song "Pretend You Dont See Her":

In no more logical order, I would appreciate opinions on all these songs. I close the show with the greatest song ever recorded live, so enjoy and thanks!:

Have a good night.

Thursday, September 17, 2009

Economists Can Only Answer How, Not the Why

It is going to be a two topic post tonight, as I found two items that require attention. Neither will be very market related, and I feel I have nothing to add on that front anyways. There was at least 5 stories today that highlighted baloney coverage of junk statistics that were pumped by the media. There were several hard hitting items concerning some very suspect games being played by Wells Fargo.

Please note that I will be attending a dinner function tomorrow night, and am not sure that I will be able to post the usual Friday night festivities. Perhaps a Sunday post to make up for it, but no guarantees, the NFL has several huge games this weekend!

In Communist Russia, Government Educates YOU!
Economic Disconnect has spilled enough pixels detailing how the US government is now responsible for 80% of all home sales via mortgage guarantees, and really 100% by keeping rates artificially down in the mortgage market. Maybe an entire generation of home owners will owe their payments towards a government backed entity, and another whole generation will rely on the government to supply loans for a home purchase. If your primary place of residence, and your ability to access one is not too much authority to place in the government, how about the higher education of your young adults?

In a process that started in earnest quite a long time ago (and covered here) the US government is ready to make their next step (via Clusterstock):
Congress Ready To Make Student Loan Industry 100% Government Controlled
As with housing, funding education is one area where the government has never wanted to let the market set prices.
Is it any shock, then, that at the college level, with the federally-backed student lending machine, that inflation has outstripped that of the general economy?
Now the government looks set to make this problem worse, as the House is prepared to vote on a bill that would eliminate the role of private student lenders altogether, bringing all funding under government control, where it can be expanded with ease and targeted politically. There's already lots of "No child should ever be denied..." rhetoric.
Is this more evidence that the government is eager to keep expanding the bubble in student loan debt? You bet.

What I find to be the most galling, the most annoying, the most bang your head against a wall until the wall itself collapses stupefying is the belief that by offering lower finance charges, thus making something "cheaper", the thing gets cheaper. Like most strongly held economic beliefs, very little hard evidence backs it up, and most real world examples refute it entirely.

Perhaps in older times business was not as savvy as they are today, or maybe they were just not as greedy. If a supplier of an item knows you are getting a deal on financing, they just jack up the price.

I should have warned on the outset that this post is going to get very nasty, well, too late!

Get a load of the mess of ideas and total incoherence of policy in this Yahoo Finance piece:
House college aid bill would boost Pell Grants, kill subsidized student loans
WASHINGTON (AP) -- The House voted Thursday in favor of the biggest overhaul of college aid programs since their creation in the 1960s -- a bill to oust private lenders from the student loan business and put the government in charge.

I already feel sick. Moving on:
...The measure ends subsidies for private lenders, boosts Pell Grants for needy students and creates a grant program to improve community colleges, among other things...
...Ending loan subsidies and turning control over to the government would save taxpayers an estimated $87 billion, according to the Congressional Budget Office. Lawmakers would use that money to help make college more affordable, increasing the maximum Pell Grant by $1,400 to $6,900 over the next decade.

Whatever the increase in the grant amount, I hereby guarantee college tuition will eclipse said increase by over 30% in the same time frame. Any takers?. Moving on:
"The choice before us is clear. We can either keep sending these subsidies to banks or we can start sending them directly to students," said the bill's sponsor

I really had to stop laughing on this one. Now the US congress is ready, willing, and able to say no to padding bank pockets at the expense of the public!? This is almost comedy that cannot be topped.

To end this segment, I will just say when you relinquish access to the government for anything of vital need, you are making a mistake. How long until political influences start to affect who gets what loan? You may think this no big deal, but imagine if a very liberal president and congress filter funding to favor crappy liberal arts program students. What if a crazy righty gets the top office and wants to subsidise evangelical schools only? I think you get my point. This move is wrong, and there is no real defense of it on economic or philosophical grounds. I am ashamed there is not any opposition to this at all. As I have said many times, you get what you deserve, and we shall, exactly.

Economists Can Only Answer How, Not the Why
I warned you above this post would be snarky, if you are ready for more, then read on by all means!

My own parable:
A man sits at a bar, and strikes up a conversation with the fellow next to him. He discovers the stranger is an economist, which delights the man, as he has a business quandary he needs help with. The man offers the economist a beer in exchange for advice on his current endeavor. The man asks "I am thinking about building this huge mall, that will sit vacant because business is so bad, but I just thought why not? Do you think this makes sense?. What do you think?"
To this the economist answers "I really cannot advise you on that at all, I have no opinion."
The man, a little put off, asks the economist "How can you have no opinion! I need to do this to save my company! How can it be done?"
At this the economist perks up and answers "My dear sir, you did not ask my why at first, but now you are asking me how, and on that I can greatly advise!".

Yes, very simplified, but still true to the core.

Ask an economist today about the "output gap" or the unemployment rate, and they will effuse mountains of words describing how to restore the old "normal". Ask them if the old normal is sustainable, or if it was a gross application of capital, and all you get is a shrug. Some science.

I bring this up in light of an article by my second favorite Keynesian Mark Thoma of Economists View. Today the blog had a very special piece of absolute garbage up, and it even referenced a more useless piece of work as well. Lets dig in.

In Mr. Thoma's post he seems confused as to why this recession does not look like all those in his textbooks, and why policy to this point is not making the difference he would expect:
As this picture (see link) from the SF Fed shows, the employment series does not yet display the "fishhook" shape shown in other series that are the source of the declarations that the worst is behind us. And as the experience of the last recession in the graph below shows, the trough in employment can be far behind the trough in output.

So this economist admits himself the current atmosphere does not match the textbook case. I agree. Sadly, the writer lashes out and uses a textbook piece to try and reconcile all of his beliefs in Keynes:

Will Obama, Fed tolerate another jobless recovery?
-GYSC, with this title, you know this will be bad. As if the FED or Obama can really influence real job creation, but anyways, moving on:
NEW YORK — Politicians, pundits and even the Federal Reserve chairman have declared the recession over, but what's coming next is likely to prove as vexing as the deep economic crisis that Americans hope to leave behind.

I interrupt here because this intro is actually pretty neutral and leads you to believe the piece will tackle some real issues. We shall see:
As the economy begins to grow again, the nation faces a huge challenge: Consumers drive roughly 70 percent of U.S. economic activity, but job growth is expected to be quite slow even as the recovery gains steam. Without a rebounding job market, consumer spending is unlikely to return to robust levels, slowing a return to full employment.
Think of it as America's chicken-and-egg dilemma: The economy needs a big jump in consumer spending to spur exceptional growth, but that won't happen as long as unemployment remains high.

This section sounds harmless, but here we already see no discussion of the fact that a credit fueled real estate bubble binge of consumption may not be easily replicated. And so:
"Unless the economy grows significantly faster than its longer-term growth rate," which economists peg at about 3 percent annually, "it will be relatively slow in creating jobs over and above people coming into the labor force," Bernanke said. "And therefore the unemployment rate would tend to come down quite slowly. That's a risk, a possibility."

Even PIMCO is looking at less than 3% annually, but whatever here we have a rainbow watcher:
Not all analysts are glum. James Glassman, senior economist and managing director at JP Morgan Chase, the nation's strongest large bank, thinks that the Federal Reserve and the Obama administration will do what it takes to improve the jobs outlook.
"We're going to have to grow faster than trend to get unemployment to come down, which means that it is going to happen — unless you believe zero (percent) interest rates don't matter," Glassman said in an interview at bank headquarters.

Three things, 1.)zero rates have not helped yet 2.)this is a director at JP Morgan saying this junk and 3.) still think metals are stupid? See the phrase "which means its going to happen" which translates "anything is on the table to improve statistics". As if you need more:
His logic goes like this: Because the Fed has held its benchmark interest rate near zero since last December and is expected to leave it there for quite a while longer, lending rates across the economy will remain unusually low as the Fed tries to engineer full employment, which economists consider to be when the jobless rate is around 5 percent.
"The economy is not going to have the same robustness that it normally has. Returning to 5 percent (unemployment) is a national goal. That means they are not going to take their foot off of the gas until they can see that coming into view," Glassman said.
"It doesn't take a brain surgeon to figure out that you should gun it to get the economy to full employment. And it's not a Republican idea or Democrat idea, because we've seen both the Bush and Obama administrations do it," he said.

Thanks be to all the gods being an economist is not brain surgery.

I highlight these items tonight so that you can see where we are headed. The so called best minds all see things the same way. In their world there are no bond revolts, bad allocations of wealth, nor rabbit holes with no end. They only see the HOW and never ask WHY or SHOULD.

Stock toilet paper, soup, or BBY preferred shares, but I would think Au and Ag would be a better idea when all the pretending stops.

Have a good night.

Wednesday, September 16, 2009

Debts in Many Forms

I had the day off from work for some dental attention. I think work is more fun. The air up in the northeast today has the cool, fall smell to it and I think I am going to throw up if I go back outside.

Reader Catch
Loyal reader Kevin alerted me to Mr. Practicals latest missive. I would like to say that the new format over at Minyanville (where Mr. Practical usually posts) takes forever to load, is hard to find the new articles, and is just too busy for my tastes. Just my 2 cents.

In any case, Mr. Practical offers another informative take on our present state of affairs, and while you should read the whole thing, I will temp you with this snippet:
When the market realizes that the Fed can't create inflation (a full monetization of the majority of debt; something that would make even Ben blink), it'll see that the S&P 500 is really trading at 20 times earnings that are not growing.

Always a great read.

It is not Even Halloween Yet
It is well known that Economic Disconnect is of the bearish bent as it relates to stocks and government intervention. I am also not a believer that we need the big banks to be saved so that we can survive at more than a neolithic standard of subsistence using rocks and growing potatoes (until the Monolith arrives of course). Still, I would say I am more of a "gloomer" than a "doomer".

Today I read two articles, both my writers I respect at the highest level, that scared me. I would not say they were terrifying by their content, but through their logical explanation of how some scenarios may unfold.

First up was a Market Ticker offering by Karl Denninger today which highlighted the very real possibility of an outright deflationary collapse should the problems of bad debt not be addressed. There are charts galore and plenty of math to support his contentions. Read at your own risk!

The second item comes from Jesse's Cafe, and to me it is more scary because it follows my own line of thinking in many ways. Jesse argues that the dollar can and will break down. The author also covers a not so distant in history purposeful currency devaluation (Russia 1998) and how it may apply to the US should we have to go that route. An interesting read.

Debts in Many Forms
I came across yet another article today that focused on looking at external debt by the good old method of Debt/GDP ratio. The piece on Clusterstock was titled:
If We're Screwed By Our Debt, Then So Is The Rest Of The World
The author lets us know that:
The Economist's latest debt clock, highlighted by Lawrence earlier today, makes it clear that while the US debt is a huge problem, most of the industrialized world sits in a similar boat.
According to The Economist's 2010 forecast data, the USA's debt to GDP ratio will indeed be high, though it will be similar to that of Canada, Spain, the UK, and Germany. It will be lower than that of France, Italy, and Japan.

And this sure sounds great! Why all the tomfoolery about debt when it really is no big deal, and besides, every body's doing it.

So first stop is the external (total public and private debt) debt held by countries the world over, kindly provided by Wikipedia (and yes I have a job).
List of countries by external debt
The table is far too long to include here, but it offers both the total amount of debt as well as the debt/GDP ratio for every country in the world.

So just looking at Debt/GDP ratios, here are some that matter:
United States: 95%
Canada: 60%
Spain: 151%
UK: 375%
Germany: 160%

The UK print of 350% is astounding.

The champions:
Ireland: 961%
Monaco: 1844%

So judged on this basis alone, then yes, the USA does not look like it has debt problems.

Lets take a look at absolute debt number now (all amounts in dollars, and I rounded).
The World: as of 2008, $54 Trillion dollars of external debt
United States: $14 trillion
United Kingdom: $13 Trillion
So here we see that $27 Trillion of the worlds $54 Trillion of debt is held by just two countries. That is 50% of it all belongs to us and the Brits.

Compare with a country like China, with a debt/GDP ratio of 5%, and more importantly they hold only $363 Billion in debt. That's nothing! That is a small stimulus bill here, or the Quantitative Easing cash burn. No sweat!

What I am trying to point out is that the debt/GDP ratio is fine, but the absolute debt needs to be considered as well.

Moving away from these set numbers, one must consider the quality of debt as well. If all outstanding consumer debts (mortgage, credit cards, car loans) are going to be paid back in full, I can agree that we are not great shape, but not terrible shape to be sure.

Too bad that is not the case.

We were just witness to the biggest credit driven bubble in recorded history. Many countries participated in the real estate bonanza of debt fueled growth. You already know all the other ways credit was leveraged form home price extraction and plowed into unproductive uses. Now that home prices have fallen and will continue to do so, the quality of the debt still on the books tumbles downhill fast.

Add to this all the notional instruments (derivatives, CDO's) written against this debt and I think a far more troubling picture emerges about all things finance. Nobody really knows what number to assign to such things.

Putting it all together, we must understand that the US economy is a service based economy. We make very little by way of manufacturing, and our export income cannot support the economy in any way. We must make exotic financial instruments and sell them to the world at huge premiums to bring the money in. We need banks to lend money aggressively to any and all to allow purchases of big ticket items like cars and homes. In turn, these items fuel the service economy, by, well, servicing them. The US must eat out frequently, go to the movies, and buy video games to make the show go on. This is our service economy.

With unemployment at almost 10%, consumer spending trending down for the first time in over 20 years, the savings rate going up, and foreign players with money repudiating US financial engineering products, it is not as easy to feel comforted by a lower than our peers debt/GDP ratio.

Have a good night.

Tuesday, September 15, 2009

Can the Market Stay Irrational Longer than the FED can Stay Solvent?

It was just a crazy night of football here in Massachusetts. After 3 and a half quarters of terrible defense and uninspired play the New England Patriots were down 11 points with 5 minutes to go. Faced with a huge upset loss and a loss in the division (important for tiebreaks) Tom Brady goes to the huddle and says "We are going to win this game." Now of course what would you expect him to say? Maybe not "We are done boys, lets knock off early" but seriously. Of course every quarterback would say the same thing, but Brady pulled it of in no small part to a huge blunder by the Buffalo Bills on fumbled kick off. While very exciting to watch, I came away feeling this years team will be a work in progress, not a well oiled machine. Still 15 games to improve. The Pats may need them all.

Can the Market Stay Irrational Longer than the FED can Stay Solvent?
Lost among all the 1 year anniversary musing about the fall of Lehman Brothers was this small snippet from an Ambrose Evans-Pritchard article for the Telegraph (several bloggers picked it up):
As of last week, the ABX index of sub-prime mortgage debt showed that AAA-rated securities from early 2007 were trading at 28 cents on the dollar – AA was at 4 cents, near all-time lows. No one can say that $2 trillion (£1.2 trillion) of sub-prime and Alt-A debt is still trading at panic levels, exaggerating losses. The dust has settled. What we can see is that creditors will never recoup their money.

So a year out from the alleged apex of the "panic" and this kind of mortgage debt is still selling (Who's buying? Look in Mirror for answer) at "distressed" prices.

Karl Denninger sums things up as:
More than a year later, it is clear: There was no panic; this was a JUSTIFIED level of trading and reflects the ugly reality - the investors in those bonds will NEVER get their money back.

So what does this all mean?

On a day when Ben Bernanke is calling the end of the recession, it may be a good exercise to look again at one of the most ardently held tenets by those in the FED and Treasury.

When the credit crisis really blew up, the government players were all very confident that the collapsing prices for mortgage backed paper were fantasy. They were out almost daily explaining that distressed prices were not reflective of real value, and that this liquidity crimp could be relaxed by central bank intervention and Treasury assistance for the banking sector.

It sounds pretty good, and heck, if that were the case you may (I said may) have even persuaded me to go along to help a short term crisis in the markets.

The problem is, and always was, that this mortgage paper is almost worthless. The values reported are very real. When you see mountains of foreclosures, and they are still rising, you know these securities are toast.

So it seems we are stuck at an impasse where the banks continue to hold this paper at almost full par value, and the FED even accepts this stuff as collateral for loans (maybe not the worst stuff, but plenty of the paper was taken. How much? Audit the FED to find out). Now if the assets are held to maturity, perhaps they will recoup some more value, but certainly no where near full price.

And this is the exact game that is on right now. Even a year out from the blow up, things are still looking bad. They will next year as well. I think 2013 will not look much better. Where do you stop? The banks have full backing of the FED and Treasury to hold off on recognizing losses on these assets. They are going to wait it out.

So while many are praising the efforts of all those involved in saving the entire world from collapse, understand they have not really saved anything. All that has been done was sweeping the issue under the rug in the hopes "rationality" came back to the markets. Maybe those values are indeed rational, and the government is irrational. With foreign interest in buying this kind of paper non existent, the FED will have to buy it all eventually. I am glad they are the "Buy and Hold" type.

Tornado Distraction
These pictures of Tornado's are a great distraction:
The astonishing twisters captured by storm-chasing photographer

Have a good night.

Monday, September 14, 2009

Monday Station Break

With the New England Patriots opening up tonight on Monday Night Football, and at a 7pm start, I will not have the time to post this evening.

Some items for review:

Kevin Depew's Five Things You Need to Know reviews some myths and misconceptions still lingering a year after Lehman.

Plenty of coverage was given to Singapore's Ghost Fleet of anchored freight transport ships, and it certainly is a contrarian take on the "All is Well" mindset.

Judge Rakoff refuses to play ball and allow the SEC to pretend they are doing their job by rejecting the BAC/SEC settlement and moving forward with a trial. This is going to have to go away very soon unless you want to replay "systemic risk" marathon.

As I am a Wikipedia addict and read probably over 50 articles a day, I tend to come across little tidbits here and there. While learning about president Hoover this morning, I found it interesting to learn that FDR ran against Hoovers' policies, then later adopted said policies and expanded them! Relevant section (under the Economy Header section):
Franklin D. Roosevelt blasted the Republican incumbent for spending and taxing too much, increasing national debt, raising tariffs and blocking trade, as well as placing millions on the dole of the government. Roosevelt attacked Hoover for "reckless and extravagant" spending, of thinking "that we ought to center control of everything in Washington as rapidly as possible," and of leading "the greatest spending administration in peacetime in all of history."[37] Roosevelt's running mate, John Nance Garner, accused the Republican of "leading the country down the path of socialism".[38]

These policies pale beside the more drastic steps taken later as part of the New Deal. Hoover's opponents charge that his policies came too little, and too late, and did not work. Even as he asked Congress for legislation, he reiterated his view that while people must not suffer from hunger and cold, caring for them must be primarily a local and voluntary responsibility.

Even so, New Dealer Rexford Tugwell[39] later remarked that although no one would say so at the time, "practically the whole New Deal was extrapolated from programs that Hoover started."

As usual, common held beliefs (FDR saved the country by ending Hoover's "hands off" approach) are not exactly that simple.

Have a good night.

Saturday, September 12, 2009

NFL Opening Sunday

It is a rainy, dreary and cold day here so I thought why not punch some buttons and do a post.

Revealing Week
I had held off on a rant that was brewing since Thursday for a few reasons. One, I really hate to put anything at all that relates to things political on the blog. I think this is a financial (and miscellaneous fun stuff) site and not a ideological platform. Two, I find it best to keep one's own personal idea about politics to themselves so as not to turn off major parts of an audience to to garner attacks. That all said, I will say a few words about what was really bothering me last week, so if you are easily offended just skip down to the football section.

During my daily readings on Thursday and Friday I was alarmed by the sheer volume of blogger posts by economic sites which were overtly political in content. Many from the blogroll listed here along with many other stops I make had clearly written purely political sections. Now this is not a big "No No" to me, I just found it strange that in 4 years of reading some site I had never seen even one post like these.

To add to this, I was very surprised to see a clear liberal bent to all of the said sections. Economic Disconnect is a staunch Libertarian and of the firm belief that we have the Democrat party, and a Democrat Lite party known as the Republicans. But even this is no big deal to me, what do I care what kind of ideology people subscribe to?

No, what bothered me the most was the ridiculous defense of something like Universal Government run health care by the same sort of writers that have been amazing at pointing out how terribly the government has run things like the FDIC, the SEC, the FED, the Treasury, and the bailouts. I find it intellectually dishonest to argue against poorly run government monster entities on the financial side, and to then say everything will be just fine with health care.

Another thing that was really driving me insane was the orgasmic response many financial writers had to the presidents speech on Wednesday night. So President Obama can read a prepared speech off a teleprompter and sound good doing it. I mean, BFD. Descriptions included things like "powerful oratory" and "soaring rhetoric". Are you kidding me? Sadly coverage of the speech content was missing, I guess folks were too exhausted from being stimulated by President Obama's words to do any analysis. Former President Ronald Reagan was a much better orator that President Obama, yet I fail to remember people falling all over themselves after one of his speeches. What's the difference?

Anyways, sorry to chime in on this sort of thing, but it has been bothering me a lot and I wanted to get something written about it.

NFL 2009 Season Begins!
The only good thing about the return of the cold weather is that it will be football season!

I came to be a football fan pretty late. I never watched a game until sophomore year in high school and I never played on an organized team. We did used to play pick up games in the school parking lot because the parking lines could serve as distance and down markers. Getting tackled on cement does make you run a lot faster!

I fell in love with the New Orleans Saints in 1991. They had one of the all time great defenses and allowed only 211 points in 1991, and 202 points in 1992. Sadly they were not so hot on offense, and tended to choke in the playoffs. Still, the "46 defense" is my favorite way to play and I wish teams had the balls (and the personnel) to play it today.

Returning to the present, I think this year could be the most competitive season I have ever seen. I am not going to do my usual season long projections because I just do not think I have enough feel for how this season is going to go without seeing some games. There are at least 6 teams I think have a real shot at winning the Superbowl this year, and maybe another 2 or 3 that could even make a run. Usually I would put at most 4 teams at that level, not this year.

And now some random Football topics.

Most Dangerous Men in the NFL - Offense
When I study a team before a Patriots game (yes, sadly I do review tape and check formations, patterns, etc.) there are times you have to single out one player form the other teams offense as the absolute must stop. While there are many great players in the league, here are my 3 most dangerous men in the NFL on offense (no particular order):

1. Adrian Peterson, Minnesota Viking, RB
Every time Peterson gets the football, I hold my breath. This guy can go all the way every time he carries the ball. He is not a cutback or finesse runner, he just hits the hole and goes. In a league that has basically given up on running the ball (the Vikings and the Giants are exceptions) Adrian Peterson is easily the most dangerous running back in football.

2. Randy Moss, Wide Receiver, New England Patriots
On any play under 20-25 yards Moss would not make my list of top receivers. He is a below average blocker and he is not an "in traffic" kind of player. So how does he make the list? The field is longer than 25 yards of course! Randy Moss, once down the field, is almost uncoverable. Teams MUST commit their corner back on that side, the free safety has to be set 30 yards down field, and often times teams must rotate the other safety over to shade the Moss side, or play a dime package. If Moss was not so dangerous there would be no need to have 3 guys trying to watch him all game long. And he still gets open!

3. Brian Westbrook, Philadelphia Eagles, RB
Westbrook is not an every down player, nor is he a huge threat to carry the ball 25 times a game. Which is good for Eagle opponents, because Westbrook scores touchdowns. That what he does. He can catch them or he can run them in (the best goal to go runner in the NFL). teams must be aware of this guy to have success.

Most Dangerous Men in the NFL - Defense
While the offensive stars get all the coverage and all the girls, defense wins titles. You have to play defense to win in this league no matter how good your offense is (hearing me Saints and Patriots?). When I am looking at opponents, these players become number one priority to block, play away from, or try to trade for to avoid playing against them!:

1. Troy Polamalu, Pittsburgh Steelers, S
Note: Sadly Polamalu suffered a knee injury on opening night and will miss some games
Polamalu can come up and stuff the run as good as a middle linebacker. So he is big and slow? Hardly. Polamalu can cover one on one any receiver in the league. If you saw opening night, he can even make an interception with one hand while falling down. Clearly, when game planning for the Steelers you have to know where #43 is or you are in for a long night.

2. Albert Haynesworth, Washington Redskins, DT
While on a new team, he is still Albert Haynesworth. The most dominating lineman in the league, teams MUST account for him and commit a line blocker and a tight end or back for protection. Haynesworth is so disruptive on the line, most teams actually change the offense to an up tempo short game to avoid giving him time to work. I think Haynesworth will have a harder time this year in the NFC East (better lines, better blocking backs) but he is still very dangerous.

3. Baltimore Ravens, Entire Defense
Statics say there are better defenses, but really there is no finer a unit than the Ravens defense. When the Ravens are on defense, there is an air of danger for the offense. They hit hard, suffocate with pressure, and their secondary play (with Ed Reed in the lineup) forces turnovers at an amazing rate.

My Two Favorites
My two favorites are the New Orleans Saints and the New England Patriots. I guess I just like "New" in a teams name! Here are my takes on them this year.

The Saints
We know the offense can score. We know the defense cannot stop. What will change? The Saints did add some new blood on defense, and perhaps another year under their belt will help, but clearly they have issues still. That said, if the Saints can stop their turnover problems, I think they can overcome their defensive issues and return to the playoffs. Reggie Bush has yet to hit his full potential, and Drew Brees is the best QB you never heard of. Inconsistency is the major issue facing this team.

The Pats
A new, younger and faster defense will take some time to settle in. Led by Jarod Mayo at middle linebacker, this will be the most inexperienced defense New England has put on the field in years. Will it gel? I think it will take 8 weeks or more to see where this unit is going to be.

On offense, Tom Brady returns. Again, I think it will take a few weeks to see how Brady is coming back, but with Welker and Moss ready to go there should be plenty of fireworks this year. A top tier team, but the key will be the running game. If Fred Taylor can do what he has done his whole career, the whole picture changes. A bona fide running attack will only amplify Moss on the outside and take pressure off the defense. This is the key question for this team.

Random Items
Various things I am thinking about for the year.

-The NFC West and AFC West should surrender their guaranteed division winner playoff spot and be judged on record alone. The NFL really has to look at this as the West's of both conferences are terrible divisions, while divisions like the NFC East and NFC Central are highly competitive.

-We need a clear "in the grasp" rule on QB's. With the emergence of larger quarterbacks, they are wrapped up but not down and are allowed to try and extend the play. Someone is going to get hurt doing this.

-I cannot believe how well Michael Vick is being received and I do not think Donovan McNabb can like this no matter what he says openly.

-This is the last time I want to hear about the San Diego Chargers being the best team in the NFL. Everyone is healthy, so no more excuses. Put up or shut the heck up. This team is simply not as good as they look on paper, results bear me out.

-Will the Detroit Lions win a game? I hope not in week one (vs Saints) and I have one of those "bad" feelings about this game!

-Can football really be football without John Madden covering the game?

-Are the Atlanta Falcons going to have a slump, or be even better than last year? I think better.

-I have never seen a season taking shape to be so up in the air as this year. Anything, and everything could happen. I think the Superbowl winner this year may not be the best team (per se), but the team that can get through a tough season and playoff games against stand out opponents with the least amount of wear. Read as "those with an easier way to go" may wind up on top.

-I am just excited.

That's about it for tonight. Tomorrow here in the Northeast we get the Miami Dolphins vs. Atlanta Falcons for the early game (awesome game!) and the afternoon game will be the New York Giants vs. Washington Redskins (could care less). The night game promises to be awesome as the Chicago Bears (with Jay Cutler!) play the Green Bay Packers in a huge match up in the NFC Norris division.

Have a good night.

Friday, September 11, 2009

Friday Night Weekly Wrap Up

It is Friday! A short 4 day week, but it certainly seemed to go by very slowly. I just received my Allen Brothers USDA Prime Beef order by UPS. Included are Prime Beef hamburgers for opening NFL Sunday as well as 8 8oz Filet Mignons that have been aged to perfection for the last cookout of the year next weekend. Take that all you vegetarians!

While readership has been light on the site for a while, I did notice that I have not heard from the original loyal reader Kevin for a while. i hope all is well and Kevin is just on vacation. Gawains Ghost has also been MIA, but I imagine he is feverishly preparing for the NFL opening weekend.

I am a bit burnt out tonight, so I think I will cover some items that caught my eye and then move on to the more fun stuff we always have on Friday nights.

Weekend Reading
The Automatic Earth has a true work of art up today, and I would recommend you spend some time reading the entire article (Ilargi's intro and the J.S Kim expansive commentary) because it captures what is truly at risk now that the market manipulation has many thinking all is well.
Through The Prism of Fraud and Poverty
Truly, there is no Plan B.

Deflation Conquers All
It seems the ravages of deflation excoriates all in it's path:
States Face Drop in Gambling Revenues
Impossible! Inconceivable!

The Real Evil of Purposeful Inflation
There exists a line of thinking that to escape the huge debt load of the US, we could inflate it away over time by engineering "elevated" inflation. I will not debate such thinking as it implies the central bank can in fact target anything with any success. Instead I found out what the real evil of sustained inflation could be (from Clusterstock):
New America Foundation Urges US To Inflate Our Way Out Of Debt
A new paper from the New America Foundation urges that US to adopt a policy of moderate inflation in order to allevieate the massive public and private debt burden.
Authored by Chris Hayes, the Washington DC editor of the Nation, the paper argues that too much debt will have a deadening effect on the economy, as people are consigned to “debtor serfdom” and the government cannot afford to provide basic services because of the cost of making its debt payments.
“The surest way to avoid such a fate is to jettison a central, indeed the central axiom of post-1970s neoliberal global capitalism, and that is to embrace a period of moderate, sustained inflation,” Hayes argues.
Ok, so whats the possible downside?:
Fortunately, not everyone in DC is jumping on board the inflate our way to debt-freedom bandwagon. Daniel Indiviglio a the Atlantic spells out a number of problems with the idea.
Ready for the lead off item of terrible consequences?:
It would more or less make future Keynesian stimulus spending from debt impossible.
No more Keynesian stimulus! This evil must be opposed at all costs! I mean, Paul Krugman would be out of a job if this happens.

China and Gold
There has been plenty of rumblings about China and what they may or may not be doing min regards to gold. Zero Hedge has a great guest post up that covers all the bases:
Guest Post: What The Heck Is Going On With China

Friday Night Entertainment
Time to move on to more pressing matters, like a mixed bag of fun!

Movie Quotes Restructured for Finance
This week I had a bit of interaction with the great site Illusion of Prosperity and the author Stagflationary Mark. I had remarked, regarding all the commercial properties being built in China that had nobody to lease them:
"If you build it, they will come? Maybe they could try baseball fields on the roofs of the buildings?"
To which Stag Mark responded:
GYSC, Field of Ponzi Dreams! ;)

And this got me thinking about a certain scene near the end of the film "Field of Dreams" and how a perfect quote could be made by substituting some words. Here is what I came up with:
Closing scene when the poor retail trader sees his long since debt imploded dad as a younger entry in the ponzi scheme:
"I had not seen him until later in the pyramid, worn down by redemption's!"

Of course I could not think of anything else but this kind of word play all week and so I offer two more modified movie lines for your enjoyment (hopefully!).

From Star Wars; A New Hope (Episode IV):
The scene when Darth Vader is told how the Death Star is now the ultimate power in the universe, so he responds:
"Don't be too proud of this high frequency trading technological terror you've constructed. The ability to front run your own clients is insignificant next to the power of the derivatives market."

Last one is from "The Godfather II" and the scene is when Michael wants Tom Hagen to agree to kill Roth at the airport:
"Mike, is it worth it? You've won. You got paid out at 100 cents on the dollar for your hedges. Do you want to wipe everybody out?
"I don't feel I have to wipe everybody out, Tom. Just my counter parties."
A little attempt at humor. Very little!

From the Department of Cool
Forget "run flat" tires and just go airless instead:

Very Wild!

How about a 5mm diameter gold piece hammered into a sheet a half meter square (small nugget at bottom of photo):

Now you know what malleable means.

It is not the size of the chicken in the fight, but the size of the fight in the chicken. Remember, size matters not!:
funny pictures of cats with captions
see more Lolcats and funny pictures

Film Clips
Inspired by Stagflation Marks unicorn cartoons, I found the key scene form the animated film "The Last Unicorn" in which King Haggard tells where all the unicorns have gone. Voice work by Christopher Lee (Count Dooku, Sauroman):

While not a film, one of my favorite scenes anywhere is a flash back scene from "The Highlander" series. Skip ahead to the 2:15 mark and you will see a tension filled head to head meeting between long time foes that cannot hide how much they hate one another:


Rock Blogging
After I was inundated with requests (haha) I will try and find some playable music for the masses.

Starting off with a great song that was on the "Silence of the Lambs" soundtrack, minus the disturbing imagery, try out Q. Lazarus with "Goodbye Horses":

I stumbled upon this wicked live show at Donnington of AC/DC and "Thunderstruck":

In the face of the manipulated bull market that will not quit, I will channel Dido and never throw up the "White Flag":

A song I used to listen to while boxing training was Iron Maiden's "The Loneliness of the Long Distance Runner" because it is inspirirng. For the best part, skip ahead to the 3:00 minute mark for the ultimate "keep going" push:

Last call! Time to close the show for tonight.

A little while back I gave some grief about somebody bringing up "Waynes World" in the comments section. I will credit the film with one major achievement, the band Queen finally got some of the credit they richly desreve as one of the finest bands of all time. Here is the song that caught most by surprise, but not if you already loved the band, "Bohemian Rhapsody:

Leave a comment, any comment, if you had a good time and....

Have a good night.