The markets continue the melt down today, after yesterday 12 year lows which saw the Down drop by 4%. Today the Dow dropped again with the after hours market dropping another 100 points!
Since Feb 10th, when the technical indicators all lined up for a sell, the Dow has dropped almost 20%!
Extreme caution in going long in these markets.
Investors have lost confidence; lost confidence in the banks, in business and the government. The market will not climb when there is no confidence.
I have been hoping for a rally, but continue to be disappointed. Hoping is not the way to invest.
On the next rally, whenever it does occur, raise cash. This thing is far from being over.
Tuesday, March 3, 2009
WSJ - Heard on the street
Forget gold bugs. True doom-mongers buy shares in Smith & Wesson Holding, maker of Dirty Harry's favored firearm. Despite Monday's market rout, the stock is up 30% since Feb. 19, compared with a 10% drop in the S&P 500. (Even gold is down 5%.)
Some bulls cite fears of slump-inspired social unrest. More likely, the risk of tighter gun controls in the future has fueled sales, with retail investors then jumping on the bandwagon.
And don't forget, S&W's stock is down more than half since last May. True, reports of looting might boost it further. But would that really make your day?
Some bulls cite fears of slump-inspired social unrest. More likely, the risk of tighter gun controls in the future has fueled sales, with retail investors then jumping on the bandwagon.
And don't forget, S&W's stock is down more than half since last May. True, reports of looting might boost it further. But would that really make your day?
Monday, March 2, 2009
'Atlas Shrugged': From Fiction to Fact in 52 Years
By STEPHEN MOORE
Some years ago when I worked at the libertarian Cato Institute, we used to label any new hire who had not yet read "Atlas Shrugged" a "virgin." Being conversant in Ayn Rand's classic novel about the economic carnage caused by big government run amok was practically a job requirement. If only "Atlas" were required reading for every member of Congress and political appointee in the Obama administration. I'm confident that we'd get out of the current financial mess a lot faster.
Many of us who know Rand's work have noticed that with each passing week, and with each successive bailout plan and economic-stimulus scheme out of Washington, our current politicians are committing the very acts of economic lunacy that "Atlas Shrugged" parodied in 1957, when this 1,000-page novel was first published and became an instant hit.
Rand, who had come to America from Soviet Russia with striking insights into totalitarianism and the destructiveness of socialism, was already a celebrity. The left, naturally, hated her. But as recently as 1991, a survey by the Library of Congress and the Book of the Month Club found that readers rated "Atlas" as the second-most influential book in their lives, behind only the Bible.
For the uninitiated, the moral of the story is simply this: Politicians invariably respond to crises -- that in most cases they themselves created -- by spawning new government programs, laws and regulations. These, in turn, generate more havoc and poverty, which inspires the politicians to create more programs . . . and the downward spiral repeats itself until the productive sectors of the economy collapse under the collective weight of taxes and other burdens imposed in the name of fairness, equality and do-goodism.
In the book, these relentless wealth redistributionists and their programs are disparaged as "the looters and their laws." Every new act of government futility and stupidity carries with it a benevolent-sounding title. These include the "Anti-Greed Act" to redistribute income (sounds like Charlie Rangel's promises soak-the-rich tax bill) and the "Equalization of Opportunity Act" to prevent people from starting more than one business (to give other people a chance). My personal favorite, the "Anti Dog-Eat-Dog Act," aims to restrict cut-throat competition between firms and thus slow the wave of business bankruptcies. Why didn't Hank Paulson think of that?
These acts and edicts sound farcical, yes, but no more so than the actual events in Washington, circa 2008. We already have been served up the $700 billion "Emergency Economic Stabilization Act" and the "Auto Industry Financing and Restructuring Act." Now that Barack Obama is in town, he will soon sign into law with great urgency the "American Recovery and Reinvestment Plan." This latest Hail Mary pass will increase the federal budget (which has already expanded by $1.5 trillion in eight years under George Bush) by an additional $1 trillion -- in roughly his first 100 days in office.
The current economic strategy is right out of "Atlas Shrugged": The more incompetent you are in business, the more handouts the politicians will bestow on you. That's the justification for the $2 trillion of subsidies doled out already to keep afloat distressed insurance companies, banks, Wall Street investment houses, and auto companies -- while standing next in line for their share of the booty are real-estate developers, the steel industry, chemical companies, airlines, ethanol producers, construction firms and even catfish farmers. With each successive bailout to "calm the markets," another trillion of national wealth is subsequently lost. Yet, as "Atlas" grimly foretold, we now treat the incompetent who wreck their companies as victims, while those resourceful business owners who manage to make a profit are portrayed as recipients of illegitimate "windfalls."
When Rand was writing in the 1950s, one of the pillars of American industrial might was the railroads. In her novel the railroad owner, Dagny Taggart, an enterprising industrialist, has a FedEx-like vision for expansion and first-rate service by rail. But she is continuously badgered, cajoled, taxed, ruled and regulated -- always in the public interest -- into bankruptcy. Sound far-fetched? On the day I sat down to write this ode to "Atlas," a Wall Street Journal headline blared: "Rail Shippers Ask Congress to Regulate Freight Prices."
In one chapter of the book, an entrepreneur invents a new miracle metal -- stronger but lighter than steel. The government immediately appropriates the invention in "the public good." The politicians demand that the metal inventor come to Washington and sign over ownership of his invention or lose everything.
The scene is eerily similar to an event late last year when six bank presidents were summoned by Treasury Secretary Hank Paulson to Washington, and then shuttled into a conference room and told, in effect, that they could not leave until they collectively signed a document handing over percentages of their future profits to the government. The Treasury folks insisted that this shakedown, too, was all in "the public interest."
Ultimately, "Atlas Shrugged" is a celebration of the entrepreneur, the risk taker and the cultivator of wealth through human intellect. Critics dismissed the novel as simple-minded, and even some of Rand's political admirers complained that she lacked compassion. Yet one pertinent warning resounds throughout the book: When profits and wealth and creativity are denigrated in society, they start to disappear -- leaving everyone the poorer.
Mr. Moore is senior economics writer for The Wall Street Journal editorial page.
Sunday, March 1, 2009
Market Comments....from Butch Cooley
I think Butch has some good insights.
Why are we paying companies moneys (bailouts to GM and Chrysler(a private company) to continue to produce vehicles that no one is buying?
Come on! Let's get real. This sort of behaviour by govts can not last without reducing the people's standard of living.
However, we need to note that it does enrich certain businesses, business leaders and govt officals.
So there are some very powerful influences to manage the the economy, which I say is not for the great good, not for the people, but only for those that control. And in the process, hurts the people.
**************
It was another week full of news items, and many had a definitive effect on the stock markets. First was Presidents Obama's tax cuts, $400 for individuals and $800 for couples. Supposedly we will "feel the effects" of these cuts by April 1. That may be, but the markets and I most definitely have doubts. The average family in the US will have $13 a week more in their pay checks in 2009 and less than $8 in 2010. Hard to find that very stimulating. It's "Burger King" money!! "Chump Change", and hardly stimulating.
Then President Obama's Auto Industry Task Force basically said the industry needs an overhaul. That is just not news!! The real question is how much money is this Administration willing to continue to give GM and Chrysler and for how long, and what terms and at what price now and at what price later. We don't know the answer to that yet. And the markets do not like conjecture for very long. Rumors are fine though!! This is no longer a rumor, this is trouble down the road.
Then we had a ton of news regarding the banks, and how much money we might be willing to hand over to them. I do believe all this talk is meant to put some stability in the stock markets, particularly the financial sector. But it's still a nothing plan. It's not even vague at this point, it is simply a lot of talk. Even the so called "Stress Test" for banks is vague and ambiguous. Discussion about how it works.....I have no clue yet. Terms like "extra cushions", "well capitalized", and "consistent, forward looking and conservative." What the heck does any of this mean?? We, as a nation, are buying stock in banks, and I think we as taxpayers now own some 36% to 40% of Citibank. The fear in the markets is "nationalization" of these banks. Treasury says no, the Fed says no way, the White House isn't considering this as an option. But that seems to me to be exactly where we are headed. And the markets do not like that idea. But I honestly believe it's the only option open to the Treasury and Fed to keep a lid on just how much money is "debt" or "toxic waste" in these banks. Anyway I look at it, it's a bad deal.
And hidden away in the 1071 pages of "stimulus" is a $4 billion plan for the Department of Housing and Urban Development to give grants to all 50 states to be divided up by different cities to buy foreclosed homes. But again, we have a government equation as to how the money is given out. California has twice as many foreclosures as Florida, but will get the same amount of money, about $500 million. It will help local communities for sure, but it's just not enough money to amount to anything substantial. On the other hand, Vermont will be getting $20 million, but claims only 150 foreclosed homes in the entire State. None of it makes sense. It all makes good headlines, but when the numbers get crunched, nothing makes sense. If this is any indication of how the stimulus is going to work, we are in serious trouble. We are anyway.
Bernanke boosted things a little with his statements that banks would not be nationalized. But it was short lived. But Bernanke has been making statements regarding this economy and banking issues and money for 2 years, and very little of what he has to project comes to be reality. So the boost he gave the markets just didn't last long. Lifting my spirits is ok, but if I can't make money, my spirits don't remain lifted for long!!
President Obama promised the nation on Tuesday night that he would lead it from a dire "day of reckoning" to a brighter future, summoning politicians and public alike to shoulder responsibility for hard choices and shared sacrifice. "The time to take charge of our future is here." Nice speech, but just rhetoric. No substance. He claims he is going to stimulate the economy, put up to 4 million people back to work, by spending $787 billion over a 3 or 4 year period. He proposes a budget nearly 4 times that of President Bush's last budget, $1.75 trillion, but he is going to cut the deficit, and cut spending. It is not exactly a contradiction, but there is no plan, no understanding of just how this going to work. All this talk lacks detail, and it may make the average Joe in America a little less worried, but the stock markets are not buying it. To say the very least, his budget proposals are daring and bold. But as long as there are lobbyists, health care is going to stay health care as we know it. He plans to cut Medicare and Medicaid. There are an awful lot of Congressmen and women who are up for re-election. This is not going to be an easy path. He wants to raise taxes on the richest 5% of America. I don't know, but my guess would be those are some of the very people who pay the lobbyists.
I do believe some of this budget will get passed in some fashion. This is a Democratic Congress and a Democratic Administration and a country that is just a little bit anti Republican right now, and holding on to a lot of hope. But the rich don't pay. Middle class America pays. And if they aren't working...good luck. Oh yeah, more bad news on the unemployment line this week too. I made the statement before the elections that Presidents don't make laws, Congress does. Maybe Nancy Pelosi and Senator Reid are going to vote for this type of stuff, but it's going to be a real fight with the rest of our Congressmen and women. And the stock markets are not liking any of it. Hence a close on Friday on the Dow of 7063, and S&P of 735. The Dow was just off it's lows of the week, but the S&P closed at its lows. Question now is can we hold these lows? Or are we going lower? I have to say it, I'm betting we go lower. 6,500 to 6,800 on the Dow. I don't see how we can't go there. But then question #2 is will we hold that? Jury is still out. There is still much of bad news out there people. And there are way too many "zeros" being thrown around.
Butch Cooley Market Comments (Butch is founder of Leg Up House and the Butch Cooley Worldwide Hunting and Fishing . He has been an active trader for decades.)
Why are we paying companies moneys (bailouts to GM and Chrysler(a private company) to continue to produce vehicles that no one is buying?
Come on! Let's get real. This sort of behaviour by govts can not last without reducing the people's standard of living.
However, we need to note that it does enrich certain businesses, business leaders and govt officals.
So there are some very powerful influences to manage the the economy, which I say is not for the great good, not for the people, but only for those that control. And in the process, hurts the people.
**************
It was another week full of news items, and many had a definitive effect on the stock markets. First was Presidents Obama's tax cuts, $400 for individuals and $800 for couples. Supposedly we will "feel the effects" of these cuts by April 1. That may be, but the markets and I most definitely have doubts. The average family in the US will have $13 a week more in their pay checks in 2009 and less than $8 in 2010. Hard to find that very stimulating. It's "Burger King" money!! "Chump Change", and hardly stimulating.
Then President Obama's Auto Industry Task Force basically said the industry needs an overhaul. That is just not news!! The real question is how much money is this Administration willing to continue to give GM and Chrysler and for how long, and what terms and at what price now and at what price later. We don't know the answer to that yet. And the markets do not like conjecture for very long. Rumors are fine though!! This is no longer a rumor, this is trouble down the road.
Then we had a ton of news regarding the banks, and how much money we might be willing to hand over to them. I do believe all this talk is meant to put some stability in the stock markets, particularly the financial sector. But it's still a nothing plan. It's not even vague at this point, it is simply a lot of talk. Even the so called "Stress Test" for banks is vague and ambiguous. Discussion about how it works.....I have no clue yet. Terms like "extra cushions", "well capitalized", and "consistent, forward looking and conservative." What the heck does any of this mean?? We, as a nation, are buying stock in banks, and I think we as taxpayers now own some 36% to 40% of Citibank. The fear in the markets is "nationalization" of these banks. Treasury says no, the Fed says no way, the White House isn't considering this as an option. But that seems to me to be exactly where we are headed. And the markets do not like that idea. But I honestly believe it's the only option open to the Treasury and Fed to keep a lid on just how much money is "debt" or "toxic waste" in these banks. Anyway I look at it, it's a bad deal.
And hidden away in the 1071 pages of "stimulus" is a $4 billion plan for the Department of Housing and Urban Development to give grants to all 50 states to be divided up by different cities to buy foreclosed homes. But again, we have a government equation as to how the money is given out. California has twice as many foreclosures as Florida, but will get the same amount of money, about $500 million. It will help local communities for sure, but it's just not enough money to amount to anything substantial. On the other hand, Vermont will be getting $20 million, but claims only 150 foreclosed homes in the entire State. None of it makes sense. It all makes good headlines, but when the numbers get crunched, nothing makes sense. If this is any indication of how the stimulus is going to work, we are in serious trouble. We are anyway.
Bernanke boosted things a little with his statements that banks would not be nationalized. But it was short lived. But Bernanke has been making statements regarding this economy and banking issues and money for 2 years, and very little of what he has to project comes to be reality. So the boost he gave the markets just didn't last long. Lifting my spirits is ok, but if I can't make money, my spirits don't remain lifted for long!!
President Obama promised the nation on Tuesday night that he would lead it from a dire "day of reckoning" to a brighter future, summoning politicians and public alike to shoulder responsibility for hard choices and shared sacrifice. "The time to take charge of our future is here." Nice speech, but just rhetoric. No substance. He claims he is going to stimulate the economy, put up to 4 million people back to work, by spending $787 billion over a 3 or 4 year period. He proposes a budget nearly 4 times that of President Bush's last budget, $1.75 trillion, but he is going to cut the deficit, and cut spending. It is not exactly a contradiction, but there is no plan, no understanding of just how this going to work. All this talk lacks detail, and it may make the average Joe in America a little less worried, but the stock markets are not buying it. To say the very least, his budget proposals are daring and bold. But as long as there are lobbyists, health care is going to stay health care as we know it. He plans to cut Medicare and Medicaid. There are an awful lot of Congressmen and women who are up for re-election. This is not going to be an easy path. He wants to raise taxes on the richest 5% of America. I don't know, but my guess would be those are some of the very people who pay the lobbyists.
I do believe some of this budget will get passed in some fashion. This is a Democratic Congress and a Democratic Administration and a country that is just a little bit anti Republican right now, and holding on to a lot of hope. But the rich don't pay. Middle class America pays. And if they aren't working...good luck. Oh yeah, more bad news on the unemployment line this week too. I made the statement before the elections that Presidents don't make laws, Congress does. Maybe Nancy Pelosi and Senator Reid are going to vote for this type of stuff, but it's going to be a real fight with the rest of our Congressmen and women. And the stock markets are not liking any of it. Hence a close on Friday on the Dow of 7063, and S&P of 735. The Dow was just off it's lows of the week, but the S&P closed at its lows. Question now is can we hold these lows? Or are we going lower? I have to say it, I'm betting we go lower. 6,500 to 6,800 on the Dow. I don't see how we can't go there. But then question #2 is will we hold that? Jury is still out. There is still much of bad news out there people. And there are way too many "zeros" being thrown around.
Butch Cooley Market Comments (Butch is founder of Leg Up House and the Butch Cooley Worldwide Hunting and Fishing . He has been an active trader for decades.)
Saturday, February 28, 2009
Berkshire Hathaway....Not Doing Great Either
Berkshire Hathaway has worst year in company's history, results show
By Alistair Barr, MarketWatch
Chairman Warren Buffett told shareholders Saturday that the economy would remain in "shambles" during 2009 and beyond, offering no prediction about the future may hold for U.S. stocks.
In his annual letter to shareholders -- eagerly anticipated by investors for the insights it may hold into his thinking -- Buffett said neither he nor Charlie Munger, his long-time partner in running Omaha-based Berkshire (BRKBBerkshire Hathaway Inc can predict winning and losing years in advance -- and no one else can either.
"We're certain, for example, that the economy will be in shambles throughout 2009 -- and, for that matter, probably well beyond -- but that conclusion does not tell us whether the stock market will rise or fall," Buffett wrote.
Buffett, known as the "Oracle of Omaha," admitted to mistakes last year. "During 2008 I did some dumb things in investments," he said. One such error, he said, was the purchase of a large amount of Conoco Phillips Inc. stock when oil and gas prices were nearing peak levels.
"I in no way anticipated the dramatic fall in energy prices that occurred in the last half of the year," he said. "I still believe the odds are good that oil sells far higher in the future than the current $40-to-$50 price. But so far I have been dead wrong. Even if prices should rise, moreover, the terrible timing of my purchase has cost Berkshire several billion dollars."
Buffett also said his acquisition of shares in two Irish banks have turned out badly -- with losses of more than 89%.
On the positive side, the investor is pleased with buys totaling $14.5 million in fixed-income securities issued by General Electric Co.
We very much like these commitments, which carry high current yields that, in themselves, make the investments more than satisfactory. But in each of these three purchases, we also acquired a substantial equity participation as a bonus."
The per-share book value of both Class A and Class B shares of Berkshire fell 9.6%, Buffett said.
The company's net income fell to $4.99 billion from $13.21 billion in 2007.
The 78-year-old billionaire said that although the market value of bonds and stocks the company still holds have dropped dramatically along with the broader market, Berkshire is not bothered by those decreases. "Indeed, we enjoy such price declines if we have funds available to increase our positions. ... Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down."
On the lookout for inflation 'Whatever the downsides may be, strong and immediate action by government was essential last year if the financial system was to avoid a total breakdown. Had that occurred, the consequences for every area of our economy would have been cataclysmic. Like it or not, the inhabitants of Wall Street, Main Street and the various Side Streets of America were all in the same boat.'
— Warren Buffett
Commenting on the federal government's actions to resolve the economic crisis, Buffett said: "Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel. These once-unthinkable dosages will almost certainly bring on unwelcome aftereffects."
Inflation is likely to be one such effect, Buffett said.
"Moreover, major industries have become dependent on federal assistance, and they will be followed by cities and states bearing mind-boggling requests. Weaning these entities from the public teat will be a political challenge. They won't leave willingly."
By Alistair Barr, MarketWatch
Chairman Warren Buffett told shareholders Saturday that the economy would remain in "shambles" during 2009 and beyond, offering no prediction about the future may hold for U.S. stocks.
In his annual letter to shareholders -- eagerly anticipated by investors for the insights it may hold into his thinking -- Buffett said neither he nor Charlie Munger, his long-time partner in running Omaha-based Berkshire (BRKBBerkshire Hathaway Inc can predict winning and losing years in advance -- and no one else can either.
"We're certain, for example, that the economy will be in shambles throughout 2009 -- and, for that matter, probably well beyond -- but that conclusion does not tell us whether the stock market will rise or fall," Buffett wrote.
Buffett, known as the "Oracle of Omaha," admitted to mistakes last year. "During 2008 I did some dumb things in investments," he said. One such error, he said, was the purchase of a large amount of Conoco Phillips Inc. stock when oil and gas prices were nearing peak levels.
"I in no way anticipated the dramatic fall in energy prices that occurred in the last half of the year," he said. "I still believe the odds are good that oil sells far higher in the future than the current $40-to-$50 price. But so far I have been dead wrong. Even if prices should rise, moreover, the terrible timing of my purchase has cost Berkshire several billion dollars."
Buffett also said his acquisition of shares in two Irish banks have turned out badly -- with losses of more than 89%.
On the positive side, the investor is pleased with buys totaling $14.5 million in fixed-income securities issued by General Electric Co.
We very much like these commitments, which carry high current yields that, in themselves, make the investments more than satisfactory. But in each of these three purchases, we also acquired a substantial equity participation as a bonus."
The per-share book value of both Class A and Class B shares of Berkshire fell 9.6%, Buffett said.
The company's net income fell to $4.99 billion from $13.21 billion in 2007.
The 78-year-old billionaire said that although the market value of bonds and stocks the company still holds have dropped dramatically along with the broader market, Berkshire is not bothered by those decreases. "Indeed, we enjoy such price declines if we have funds available to increase our positions. ... Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down."
On the lookout for inflation 'Whatever the downsides may be, strong and immediate action by government was essential last year if the financial system was to avoid a total breakdown. Had that occurred, the consequences for every area of our economy would have been cataclysmic. Like it or not, the inhabitants of Wall Street, Main Street and the various Side Streets of America were all in the same boat.'
— Warren Buffett
Commenting on the federal government's actions to resolve the economic crisis, Buffett said: "Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel. These once-unthinkable dosages will almost certainly bring on unwelcome aftereffects."
Inflation is likely to be one such effect, Buffett said.
"Moreover, major industries have become dependent on federal assistance, and they will be followed by cities and states bearing mind-boggling requests. Weaning these entities from the public teat will be a political challenge. They won't leave willingly."
Government's Role?
Democratic leaders in Washington, they place their hope in the federal government. We place our hope in you, the American people. In the end, it comes down to an honest and fundamental disagreement about the proper role of government. We oppose the national Democratic view that says the way to strengthen our country is to increase dependence on government. We believe the way to strengthen our country is to restrain spending in Washington, to empower individuals and small businesses to grow our economy and create jobs." --Louisiana Gov. Bobby Jindal
Where are we going?
What is the economic model that we are turning to?
Expanded government control of private assets, production dictated to achieve political objectives, operations dictated by non-shareholders, conditions designed to produce failure and increased reliance upon public funding...
What is it?
It is an economic model in which the state dictates the utilization of privately held assets to achieve public policy goals.
That is the way we are heading.
Expanded government control of private assets, production dictated to achieve political objectives, operations dictated by non-shareholders, conditions designed to produce failure and increased reliance upon public funding...
What is it?
It is an economic model in which the state dictates the utilization of privately held assets to achieve public policy goals.
That is the way we are heading.
Insight: The flight of the long run
Historically...Bonds are doing better than equities for past 5, 10 and 25 years!
Need to rethink of our investing views.
***************
By Peter L. Bernstein
The “long run” used to be one of the most popular topics among investors, particularly institutional investors. In recent months, discussion of the long run has disappeared from view.
Indeed, the possibility the long run has run away is one of the few pieces of good news I have been able to find in the financial and economic turmoil of recent months.
The cold statistics have hardly been encouraging for the traditional view. On a total return basis, the Ibbotson data show that the S&P 500 has underperformed long-term Treasury bonds for the last five-year, 10-year, and 25-year periods, and by substantial amounts.
These data are not to be taken lightly.
If the long-run expected return on bonds in the future were higher than the expected return on equities, the capitalist system would grind to a halt, because the reward system would be completely out of whack with the risks involved. After all, from the end of 1949 to the end of 2000, the S&P 500 provided a total annual return of 13.1 per cent, while long Treasuries could grind out only 5.8 per cent a year.
But does this history really tell us anything about what lies ahead? Neither the awesome historical track record of equities nor the theoretical case is a promise of a realised equity risk premium. John Maynard Keynes, in an immortal observation about the future, expressed the matter in simple but obvious terms: “We simply do not know.”
Relying on the long run for investment decisions is essentially relying on trend lines. But how certain can we be that trends are destiny? Trends bend. Trends break. Today, in fact, we have no idea where any trend lines might begin or end, or even whether any trend lines still exist.
As Lord Keynes in one of his best known (and wisest) observations, reminded us: “The long run is a misleading guide to current affairs. Economists set themselves too easy, too useless a task if in the tempestuous seasons they only tell us that when the storm is past the ocean will be flat.” To Lord Keynes, the tempestuous seas are the norm. We cannot escape the short run.
There is an even deeper reason to reject the long run as a guide to future investment policy. The long-run results we can discern in the data of stock market history are not a random set of numbers: each event was the result of a preceding event rather than an independent observation. This is a statement of the highest importance. Any starting conditions we select in the historical data cannot replicate the starting conditions at any other moment because the preceding events in the two cases are never identical. There is no predestined rate of return. There is only an expected return that may not be realised.
Recent experience raises a different but perhaps an even more serious question relating to the long run. How do you frame a view of the long run from early 2009? The world has a ruptured financial system showing only fragile signs of recovery. The economic recession now encompasses the whole world. The speed of economic decline is without precedent. Government intervention is also without precedent, in its magnitude, depth, and complexity. Fiscal deficits are reaching numbers no one dreamed about even 12 months ago, yet they will have to be financed.
What kind of a long run is this mess going to produce? Was Bill Gross correct when he wrote for the December 2008 issue of Pimco’s Investment Outlook that “capitalism is and will remain a going concern, that risk-taking – over the long run – will be rewarded, but only from a starting price that correctly anticipates the economy’s growth and its share of after-tax corporate profits within it?”
Can capitalism remain “a going concern” after an extended period characterised by massive government intervention into the economy – and bail-outs of firms that would otherwise have failed? To what extent will the “going” in Mr Gross’s vision be tied to government intervention in these forms and magnitude? Or is Mr Gross’s optimism justified? Will we be able to unwind the role of government in the capitalist system as we know it and go back to the status quo ante?
Will our economy and society emerge so risk-averse after these experiences that years will have to pass before we return to a system naturally generating vibrant economic growth and a renewed willingness to both borrow and lend? Or will we head in the opposite direction, where faith in ultimate bail-outs will justify the wildest kind of risk-taking? Or will the entire structure collapse from government debts and deficits that turn out to be so unmanageable that chaos is the ultimate result?
We can neither answer those questions nor can we claim they are a complete list of the possibilities. The unknown today seems more than usually unknown. Then my whole point remains the same. The long run is an impenetrable mystery. It always has been.
Peter L Bernstein is the founder and president of Peter L Bernstein Inc, economic consultants, and author of 10 books on economics and finance.
Copyright The Financial Times Limited 2009
Need to rethink of our investing views.
***************
By Peter L. Bernstein
The “long run” used to be one of the most popular topics among investors, particularly institutional investors. In recent months, discussion of the long run has disappeared from view.
Indeed, the possibility the long run has run away is one of the few pieces of good news I have been able to find in the financial and economic turmoil of recent months.
The cold statistics have hardly been encouraging for the traditional view. On a total return basis, the Ibbotson data show that the S&P 500 has underperformed long-term Treasury bonds for the last five-year, 10-year, and 25-year periods, and by substantial amounts.
These data are not to be taken lightly.
If the long-run expected return on bonds in the future were higher than the expected return on equities, the capitalist system would grind to a halt, because the reward system would be completely out of whack with the risks involved. After all, from the end of 1949 to the end of 2000, the S&P 500 provided a total annual return of 13.1 per cent, while long Treasuries could grind out only 5.8 per cent a year.
But does this history really tell us anything about what lies ahead? Neither the awesome historical track record of equities nor the theoretical case is a promise of a realised equity risk premium. John Maynard Keynes, in an immortal observation about the future, expressed the matter in simple but obvious terms: “We simply do not know.”
Relying on the long run for investment decisions is essentially relying on trend lines. But how certain can we be that trends are destiny? Trends bend. Trends break. Today, in fact, we have no idea where any trend lines might begin or end, or even whether any trend lines still exist.
As Lord Keynes in one of his best known (and wisest) observations, reminded us: “The long run is a misleading guide to current affairs. Economists set themselves too easy, too useless a task if in the tempestuous seasons they only tell us that when the storm is past the ocean will be flat.” To Lord Keynes, the tempestuous seas are the norm. We cannot escape the short run.
There is an even deeper reason to reject the long run as a guide to future investment policy. The long-run results we can discern in the data of stock market history are not a random set of numbers: each event was the result of a preceding event rather than an independent observation. This is a statement of the highest importance. Any starting conditions we select in the historical data cannot replicate the starting conditions at any other moment because the preceding events in the two cases are never identical. There is no predestined rate of return. There is only an expected return that may not be realised.
Recent experience raises a different but perhaps an even more serious question relating to the long run. How do you frame a view of the long run from early 2009? The world has a ruptured financial system showing only fragile signs of recovery. The economic recession now encompasses the whole world. The speed of economic decline is without precedent. Government intervention is also without precedent, in its magnitude, depth, and complexity. Fiscal deficits are reaching numbers no one dreamed about even 12 months ago, yet they will have to be financed.
What kind of a long run is this mess going to produce? Was Bill Gross correct when he wrote for the December 2008 issue of Pimco’s Investment Outlook that “capitalism is and will remain a going concern, that risk-taking – over the long run – will be rewarded, but only from a starting price that correctly anticipates the economy’s growth and its share of after-tax corporate profits within it?”
Can capitalism remain “a going concern” after an extended period characterised by massive government intervention into the economy – and bail-outs of firms that would otherwise have failed? To what extent will the “going” in Mr Gross’s vision be tied to government intervention in these forms and magnitude? Or is Mr Gross’s optimism justified? Will we be able to unwind the role of government in the capitalist system as we know it and go back to the status quo ante?
Will our economy and society emerge so risk-averse after these experiences that years will have to pass before we return to a system naturally generating vibrant economic growth and a renewed willingness to both borrow and lend? Or will we head in the opposite direction, where faith in ultimate bail-outs will justify the wildest kind of risk-taking? Or will the entire structure collapse from government debts and deficits that turn out to be so unmanageable that chaos is the ultimate result?
We can neither answer those questions nor can we claim they are a complete list of the possibilities. The unknown today seems more than usually unknown. Then my whole point remains the same. The long run is an impenetrable mystery. It always has been.
Peter L Bernstein is the founder and president of Peter L Bernstein Inc, economic consultants, and author of 10 books on economics and finance.
Copyright The Financial Times Limited 2009
Friday, February 27, 2009
Thursday, February 26, 2009
The Speed of Trust
Trust is pretty well gone, done and over with, as a result, the economic system is slowing down, and slowing down fast.
*******************
By Adrienne Toghraie
Most are familiar with Stephen Covey’s now classic book, The Seven Habits of Highly Effective People. In that book, Covey wrote about his son, also named Stephen Covey, who has written a wonderful and equally important book, The Speed of Trust. In this book, the younger Covey discusses the fact that trust is essentially the lubricant that moves individuals, organizations and societies forward. Without it, everything slows down:
If I cannot believe what you say, I will need to take the time to verify it.
When everyone along the line has to verify, the machinery grinds to a halt.
This is what is happening now in the US economy. One after another, the people and institutions we trust to manage our money by employing the principles of honesty, integrity, and strict fiduciary guidelines established by law, the Bernie Madoffs who exemplified those qualities, have sidestepped those principles in the name of pride, greed, and expediency. The entire system of credit ultimately depends upon trust; and without trust, the system has crumbled.
But, the problem has gone deeper than merely our financial institutions. A growing cadre of the elected officials we entrusted with the responsibility to lead us, to make our laws and ensure their enforcement, to use our tax money to protect and support us and to protect our constitution and its implementation, have broken that trust. They have been caught hiding bribe money in the refrigerator, selling congressional positions to the highest bidder, and just about every nefarious and illegal act imaginable.
We have even learned to distrust the source of our food supply. Foodstuff from foreign sources that do not adhere to our safety requirements has infiltrated our system. Lethal E-coli bacteria and salmonella infected countless citizens. Shortcuts taken in the raising, production, and processing of our food have led to the contamination of our basic necessities of life.
People have started looking around and asking themselves, “Whom can we trust?”
What does all of this have to do with making money in the markets? The gears that drive a investment are greased with trust.
What about those annual reports? On the basis of the financial statements made by a company’s top executives and signed off by their lawyers and accountants will determine the investment decisions made by investors who do not have the resources to personally investigate the financial condition of each and every company on the exchange. Regardless of how deep or shallow the pockets are of those who are making investment and trading decisions, lives will be seriously and adversely affected if the accounting firm that signs off on the audit is being paid generously to cook the books. When you discover the ruse, you lose trust. You are then forced to stop and reconsider your entire investing strategy.
Suppose you discover that the single most important source of information about the markets can no longer be trusted, what do you do? Where do you go for the information vital to your decision-making? For many loyal readers, their major city newspaper’s imprimatur on a story was the very guarantee of authenticity. Then, in recent times, stories began to circulate about the lack of fact-checking and editorial rigor and of political and personal bias that colored reporting and pushed politically embarrassing stories to the back of the paper or simply off the radar. The result has been a decline in readership due, in part, to a lack of trust. In the news business, trust is the coin of the realm. One major newspaper in the US that is not experiencing a decline in readership is the most trusted source for business news, The Wall Street Journal (and no, this is not an advertisement for TWSJ). But, just suppose that you could no longer depend upon it?
The speed of trust goes all the way down to the people who clean your offices at night. If you cannot trust them not to go through your files, hack into your computer or steal the money in your desk drawer, you will be forced to clean your own offices after work hours.
As we watch in amazement at how rapidly the speed of trust is slowing down, we ask ourselves if there is a way back out of this mess. The answer is yes. It starts with each of us showing the people around us that our word is unimpeachable, that we are willing to do what we promise to do, that we are following the rules (our own rules as well) and that we can be trusted. Then, we can rightfully demand the same from those upon whom we depend. Reagan said it well so long ago: trust but verify.
Each and every one of us is hurt by the broken trust of one of our colleagues. Our profession is smeared with the same brush. We can, however, restart the speed of trust by raising the bar, by expecting and demanding more trustworthiness, and by verifying that we are getting it. If we do not do this, if we simply wring our hands in dismay, we will not be able to get the machinery back up and running. And we must do this across the board. We need to hold our elected officials accountable and let them know that government by the wink-wink-nod-nod process of governance is not acceptable and we will not allow the game to be played by those rules. The trillions of dollars being borrowed from our children and grandchildren to “jump start” the economy cannot be distributed like a shell game or we will all be the losers as trust further erodes and, instead of being jump started, the economy will lay down and slip into unconsciousness.
*******************
By Adrienne Toghraie
Most are familiar with Stephen Covey’s now classic book, The Seven Habits of Highly Effective People. In that book, Covey wrote about his son, also named Stephen Covey, who has written a wonderful and equally important book, The Speed of Trust. In this book, the younger Covey discusses the fact that trust is essentially the lubricant that moves individuals, organizations and societies forward. Without it, everything slows down:
If I cannot believe what you say, I will need to take the time to verify it.
When everyone along the line has to verify, the machinery grinds to a halt.
This is what is happening now in the US economy. One after another, the people and institutions we trust to manage our money by employing the principles of honesty, integrity, and strict fiduciary guidelines established by law, the Bernie Madoffs who exemplified those qualities, have sidestepped those principles in the name of pride, greed, and expediency. The entire system of credit ultimately depends upon trust; and without trust, the system has crumbled.
But, the problem has gone deeper than merely our financial institutions. A growing cadre of the elected officials we entrusted with the responsibility to lead us, to make our laws and ensure their enforcement, to use our tax money to protect and support us and to protect our constitution and its implementation, have broken that trust. They have been caught hiding bribe money in the refrigerator, selling congressional positions to the highest bidder, and just about every nefarious and illegal act imaginable.
We have even learned to distrust the source of our food supply. Foodstuff from foreign sources that do not adhere to our safety requirements has infiltrated our system. Lethal E-coli bacteria and salmonella infected countless citizens. Shortcuts taken in the raising, production, and processing of our food have led to the contamination of our basic necessities of life.
People have started looking around and asking themselves, “Whom can we trust?”
What does all of this have to do with making money in the markets? The gears that drive a investment are greased with trust.
What about those annual reports? On the basis of the financial statements made by a company’s top executives and signed off by their lawyers and accountants will determine the investment decisions made by investors who do not have the resources to personally investigate the financial condition of each and every company on the exchange. Regardless of how deep or shallow the pockets are of those who are making investment and trading decisions, lives will be seriously and adversely affected if the accounting firm that signs off on the audit is being paid generously to cook the books. When you discover the ruse, you lose trust. You are then forced to stop and reconsider your entire investing strategy.
Suppose you discover that the single most important source of information about the markets can no longer be trusted, what do you do? Where do you go for the information vital to your decision-making? For many loyal readers, their major city newspaper’s imprimatur on a story was the very guarantee of authenticity. Then, in recent times, stories began to circulate about the lack of fact-checking and editorial rigor and of political and personal bias that colored reporting and pushed politically embarrassing stories to the back of the paper or simply off the radar. The result has been a decline in readership due, in part, to a lack of trust. In the news business, trust is the coin of the realm. One major newspaper in the US that is not experiencing a decline in readership is the most trusted source for business news, The Wall Street Journal (and no, this is not an advertisement for TWSJ). But, just suppose that you could no longer depend upon it?
The speed of trust goes all the way down to the people who clean your offices at night. If you cannot trust them not to go through your files, hack into your computer or steal the money in your desk drawer, you will be forced to clean your own offices after work hours.
As we watch in amazement at how rapidly the speed of trust is slowing down, we ask ourselves if there is a way back out of this mess. The answer is yes. It starts with each of us showing the people around us that our word is unimpeachable, that we are willing to do what we promise to do, that we are following the rules (our own rules as well) and that we can be trusted. Then, we can rightfully demand the same from those upon whom we depend. Reagan said it well so long ago: trust but verify.
Each and every one of us is hurt by the broken trust of one of our colleagues. Our profession is smeared with the same brush. We can, however, restart the speed of trust by raising the bar, by expecting and demanding more trustworthiness, and by verifying that we are getting it. If we do not do this, if we simply wring our hands in dismay, we will not be able to get the machinery back up and running. And we must do this across the board. We need to hold our elected officials accountable and let them know that government by the wink-wink-nod-nod process of governance is not acceptable and we will not allow the game to be played by those rules. The trillions of dollars being borrowed from our children and grandchildren to “jump start” the economy cannot be distributed like a shell game or we will all be the losers as trust further erodes and, instead of being jump started, the economy will lay down and slip into unconsciousness.
The Risk in Europe
Europe and the Euro are in trouble
*************************
By John Mauldin - Feb 20, 2009
I mentioned last week that European banks are at significant risk. I want to follow up on that point, as it is very important. Eastern Europe has borrowed an estimated $1.7 trillion, primarily from Western European banks. And much of Eastern Europe is already in a deep recession bordering on depression. A great deal of that $1.7 trillion is at risk, especially the portion that is in Swiss francs. It is a story that could easily be as big as the US subprime problem.
In Poland, as an example, 60% of mortgages are in Swiss francs. When times are good and currencies are stable, it is nice to have a low-interest Swiss mortgage. And as a requirement for joining the euro currency union, Poland has been required to keep its currency stable against the euro. This gave borrowers comfort that they could borrow at low interest in francs or euros, rather than at much higher local rates.
But in an echo of teaser-rate subprimes here in the US, there is a problem. Along came the synchronized global recession and large Polish current-account trade deficits, which were three times those of the US in terms of GDP, just to give us some perspective. Of course, if you are not a reserve currency this is going to bring some pressure to bear. And it did. The Polish zloty has basically dropped in half compared to the Swiss franc. That means if you are a mortgage holder, your house payment just doubled. That same story is repeated all over the Baltics and Eastern Europe.
Austrian banks have lent $289 billion (230 billion euros) to Eastern Europe. That is 70% of Austrian GDP. Much of it is in Swiss francs they borrowed from Swiss banks. Even a 10% impairment (highly optimistic) would bankrupt the Austrian financial system, says the Austrian finance minister, Joseph Proll. In the US we speak of banks that are too big to be allowed to fail. But the reality is that we could nationalize them if we needed to do so. (And for the record, I favor nationalization and swift privatization. We cannot afford a repeat of Japan's zombie banks.)
The problem is that in Europe there are many banks that are simply too big to save. The size of the banks in terms of the GDP of the country in which they are domiciled is all out of proportion. For my American readers, it would be as if the bank bailout package were in excess of $14 trillion (give or take a few trillion). In essence, there are small countries which have very large banks (relatively speaking) that have gone outside their own borders to make loans and have done so at levels of leverage which are far in excess of the most leveraged US banks. The ability of the "host" countries to nationalize their banks is simply not there. They are going to have to have help from larger countries. But as we will see below, that help is problematical.
Western European banks have been very aggressive in lending to emerging market countries worldwide. Almost 75% of an estimated $4.9 trillion of loans outstanding are to countries that are in deep recessions. Plus, according to the IMF, they are 50% more leveraged than US banks.
Today the euro rallied back to $1.26 based upon statements from German authorities that were interpreted as a potential willingness to help out non-German (in particular, Austrian) banks.
However, this more sobering note from Strategic Energy was sent to me by a reader. It nicely sums up my concerns:
"It is East Europe that is blowing up right now. Erik Berglof, EBRD's chief economist, told me the region may need €400bn in help to cover loans and prop up the credit system. Europe's governments are making matters worse. Some are pressuring their banks to pull back, undercutting subsidiaries in East Europe. Athens has ordered Greek banks to pull out of the Balkans.
"The sums needed are beyond the limits of the IMF, which has already bailed out Hungary, Ukraine, Latvia, Belarus, Iceland, and Pakistan -- and Turkey next -- and is fast exhausting its own $200bn (€155bn) reserve. We are nearing the point where the IMF may have to print money for the world, using arcane powers to issue Special Drawing Rights. Its $16bn rescue of Ukraine has unravelled. The country -- facing a 12% contraction in GDP after the collapse of steel prices -- is hurtling towards default, leaving Unicredit, Raffeisen and ING in the lurch. Pakistan wants another $7.6bn. Latvia's central bank governor has declared his economy "clinically dead" after it shrank 10.5% in the fourth quarter. Protesters have smashed the treasury and stormed parliament.
"'This is much worse than the East Asia crisis in the 1990s,' said Lars Christensen, at Danske Bank. 'There are accidents waiting to happen across the region, but the EU institutions don't have any framework for dealing with this. The day they decide not to save one of these one countries will be the trigger for a massive crisis with contagion spreading into the EU.' Europe is already in deeper trouble than the ECB or EU leaders ever expected. Germany contracted at an annual rate of 8.4% in the fourth quarter. If Deutsche Bank is correct, the economy will have shrunk by nearly 9% before the end of this year. This is the sort of level that stokes popular revolt.
"The implications are obvious. Berlin is not going to rescue Ireland, Spain, Greece and Portugal as the collapse of their credit bubbles leads to rising defaults, or rescue Italy by accepting plans for EU "union bonds" should the debt markets take fright at the rocketing trajectory of Italy's public debt (hitting 112pc of GDP next year, just revised up from 101pc -- big change), or rescue Austria from its Habsburg adventurism. So we watch and wait as the lethal brush fires move closer. If one spark jumps across the eurozone line, we will have global systemic crisis within days. Are the firemen ready?"
While Rome Burns
I hope the writer is wrong. But the ECB is dithering while Rome burns. (Or at least their banking system is -- Italy's banks have large exposure to Eastern Europe through Austrian subsidiaries.) They need to bring rates down and figure out how to move into quantitative easing. Europe is at far greater risk than the US.
Great Britain and Europe as a whole are down about 6% in GDP on an annualized basis. The Bank Credit Analyst sent the next graph out to their public list, and I reproduce it here. (www.bcaresearch.com) In another longer report, they note that the UK, Ireland, Denmark, and Switzerland have the greatest risk of widespread bank nationalization (outside of Iceland). The full report is quite sobering. The countries on the bottom of the list are also in danger of having their credit ratings downgraded.
Aggregate Sovereign Credit Risk
This has the potential to be a real crisis, far worse than in the US. Without concerted action on the part of the ECB and the European countries that are relatively strong, much of Europe could fall further into what would feel like a depression. There is a problem, though. Imagine being a politician in Germany, for instance. Your GDP is down by 8% last quarter. Unemployment is rising. Budgets are under pressure, as tax collections are down. And you are going to be asked to vote in favor of bailing out (pick a small country)? What will the voters who put you into office think?
We are going to find out this year whether the European Union is like the Three Musketeers. Are they "all for one and one for all?" or is it every country for itself? My bet (or hope) is that it is the former. Dissolution at this point would be devastating for all concerned, and for the world economy at large. Many of us in the US don't think much about Europe or the rest of the world, but without a healthy Europe, much of our world trade would vanish.
However, getting all the parties to agree on what to do will take some serious leadership, which does not seem to be in evidence at this point. The US almost waited too long to respond to our crisis, but we had the "luxury" of only needing to get a few people to agree as to the nature of the problems (whether they were wrong or right is beside the point). And we have a central bank that could act decisively.
As I understand the European agreement, that situation does not exist in Europe. For the ECB to print money as the US and the UK (and much of the non-EU developed world) will do, takes agreement from all the member countries, and right now it appears the German and Dutch governments are resisting such an idea.
As I write this (on a plane on my way to Orlando) German finance minister Peer Steinbruck has said it would be intolerable to let fellow EMU members fall victim to the global financial crisis. "We have a number of countries in the eurozone that are clearly getting into trouble on their payments," he said. "Ireland is in a very difficult situation.
"The euro-region treaties don't foresee any help for insolvent states, but in reality the others would have to rescue those running into difficulty."
That is a hopeful sign. Ireland is indeed in dire straits, and is particularly vulnerable as it is going to have to spend a serious percentage of its GDP on bailing out its banks.
It is not clear how it will all play out. But there is real risk of Europe dragging the world into a longer, darker night. Their banks not only have exposure to our US foibles, much of which has already been written off, but now many banks will have to contend with massive losses from emerging-market loans, which could be even larger than the losses stemming from US problems. Plus, they are more leveraged. (This was definitely a topic of "Conversation" this morning when I chatted with Nouriel Roubini. See more below.)
The Euro Back to Parity? Really?
I wrote over six years ago, when the euro was below $1, that I thought the euro would rise to over $1.50 (it went even higher) and then back to parity in the middle of the next decade. I thought the decline would be due to large European government deficits brought about by pension and health care promises to retirees, and those problems do still loom.
It may be that the current problems will push the euro to parity much sooner, possibly this year. While that will be nice if you want to vacation in Europe, it will have serious side effects on international trade. It clearly makes European exporters more competitive with the rest of the world, and especially the US. It also means that goods coming from Asia will cost more in Europe, unless Asian countries decide to devalue their currencies to maintain an ability to sell into Europe, which of course will bring howls from the US about currency manipulation. It is going to put pressure on governments to enact some form of trade protectionism, which would be devastating to the world economy.
Large and swift currency swings are inherently disruptive. We are seeing volatility in the currency markets unlike anything I have witnessed. I hope we do not see a precipitous fall in value of the euro. It will be good for no one. It is a strange world indeed when the US is having such a deep series of problems, the Fed and Treasury are talking about printing a few trillion here and a few trillion there, and at the very same time we see the dollar AND gold rising in value. Which all serves as a good set-up to the next section.
***********
John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to: http://www.frontlinethoughts.com/learnmore
*************************
By John Mauldin - Feb 20, 2009
I mentioned last week that European banks are at significant risk. I want to follow up on that point, as it is very important. Eastern Europe has borrowed an estimated $1.7 trillion, primarily from Western European banks. And much of Eastern Europe is already in a deep recession bordering on depression. A great deal of that $1.7 trillion is at risk, especially the portion that is in Swiss francs. It is a story that could easily be as big as the US subprime problem.
In Poland, as an example, 60% of mortgages are in Swiss francs. When times are good and currencies are stable, it is nice to have a low-interest Swiss mortgage. And as a requirement for joining the euro currency union, Poland has been required to keep its currency stable against the euro. This gave borrowers comfort that they could borrow at low interest in francs or euros, rather than at much higher local rates.
But in an echo of teaser-rate subprimes here in the US, there is a problem. Along came the synchronized global recession and large Polish current-account trade deficits, which were three times those of the US in terms of GDP, just to give us some perspective. Of course, if you are not a reserve currency this is going to bring some pressure to bear. And it did. The Polish zloty has basically dropped in half compared to the Swiss franc. That means if you are a mortgage holder, your house payment just doubled. That same story is repeated all over the Baltics and Eastern Europe.
Austrian banks have lent $289 billion (230 billion euros) to Eastern Europe. That is 70% of Austrian GDP. Much of it is in Swiss francs they borrowed from Swiss banks. Even a 10% impairment (highly optimistic) would bankrupt the Austrian financial system, says the Austrian finance minister, Joseph Proll. In the US we speak of banks that are too big to be allowed to fail. But the reality is that we could nationalize them if we needed to do so. (And for the record, I favor nationalization and swift privatization. We cannot afford a repeat of Japan's zombie banks.)
The problem is that in Europe there are many banks that are simply too big to save. The size of the banks in terms of the GDP of the country in which they are domiciled is all out of proportion. For my American readers, it would be as if the bank bailout package were in excess of $14 trillion (give or take a few trillion). In essence, there are small countries which have very large banks (relatively speaking) that have gone outside their own borders to make loans and have done so at levels of leverage which are far in excess of the most leveraged US banks. The ability of the "host" countries to nationalize their banks is simply not there. They are going to have to have help from larger countries. But as we will see below, that help is problematical.
Western European banks have been very aggressive in lending to emerging market countries worldwide. Almost 75% of an estimated $4.9 trillion of loans outstanding are to countries that are in deep recessions. Plus, according to the IMF, they are 50% more leveraged than US banks.
Today the euro rallied back to $1.26 based upon statements from German authorities that were interpreted as a potential willingness to help out non-German (in particular, Austrian) banks.
However, this more sobering note from Strategic Energy was sent to me by a reader. It nicely sums up my concerns:
"It is East Europe that is blowing up right now. Erik Berglof, EBRD's chief economist, told me the region may need €400bn in help to cover loans and prop up the credit system. Europe's governments are making matters worse. Some are pressuring their banks to pull back, undercutting subsidiaries in East Europe. Athens has ordered Greek banks to pull out of the Balkans.
"The sums needed are beyond the limits of the IMF, which has already bailed out Hungary, Ukraine, Latvia, Belarus, Iceland, and Pakistan -- and Turkey next -- and is fast exhausting its own $200bn (€155bn) reserve. We are nearing the point where the IMF may have to print money for the world, using arcane powers to issue Special Drawing Rights. Its $16bn rescue of Ukraine has unravelled. The country -- facing a 12% contraction in GDP after the collapse of steel prices -- is hurtling towards default, leaving Unicredit, Raffeisen and ING in the lurch. Pakistan wants another $7.6bn. Latvia's central bank governor has declared his economy "clinically dead" after it shrank 10.5% in the fourth quarter. Protesters have smashed the treasury and stormed parliament.
"'This is much worse than the East Asia crisis in the 1990s,' said Lars Christensen, at Danske Bank. 'There are accidents waiting to happen across the region, but the EU institutions don't have any framework for dealing with this. The day they decide not to save one of these one countries will be the trigger for a massive crisis with contagion spreading into the EU.' Europe is already in deeper trouble than the ECB or EU leaders ever expected. Germany contracted at an annual rate of 8.4% in the fourth quarter. If Deutsche Bank is correct, the economy will have shrunk by nearly 9% before the end of this year. This is the sort of level that stokes popular revolt.
"The implications are obvious. Berlin is not going to rescue Ireland, Spain, Greece and Portugal as the collapse of their credit bubbles leads to rising defaults, or rescue Italy by accepting plans for EU "union bonds" should the debt markets take fright at the rocketing trajectory of Italy's public debt (hitting 112pc of GDP next year, just revised up from 101pc -- big change), or rescue Austria from its Habsburg adventurism. So we watch and wait as the lethal brush fires move closer. If one spark jumps across the eurozone line, we will have global systemic crisis within days. Are the firemen ready?"
While Rome Burns
I hope the writer is wrong. But the ECB is dithering while Rome burns. (Or at least their banking system is -- Italy's banks have large exposure to Eastern Europe through Austrian subsidiaries.) They need to bring rates down and figure out how to move into quantitative easing. Europe is at far greater risk than the US.
Great Britain and Europe as a whole are down about 6% in GDP on an annualized basis. The Bank Credit Analyst sent the next graph out to their public list, and I reproduce it here. (www.bcaresearch.com) In another longer report, they note that the UK, Ireland, Denmark, and Switzerland have the greatest risk of widespread bank nationalization (outside of Iceland). The full report is quite sobering. The countries on the bottom of the list are also in danger of having their credit ratings downgraded.
Aggregate Sovereign Credit Risk
This has the potential to be a real crisis, far worse than in the US. Without concerted action on the part of the ECB and the European countries that are relatively strong, much of Europe could fall further into what would feel like a depression. There is a problem, though. Imagine being a politician in Germany, for instance. Your GDP is down by 8% last quarter. Unemployment is rising. Budgets are under pressure, as tax collections are down. And you are going to be asked to vote in favor of bailing out (pick a small country)? What will the voters who put you into office think?
We are going to find out this year whether the European Union is like the Three Musketeers. Are they "all for one and one for all?" or is it every country for itself? My bet (or hope) is that it is the former. Dissolution at this point would be devastating for all concerned, and for the world economy at large. Many of us in the US don't think much about Europe or the rest of the world, but without a healthy Europe, much of our world trade would vanish.
However, getting all the parties to agree on what to do will take some serious leadership, which does not seem to be in evidence at this point. The US almost waited too long to respond to our crisis, but we had the "luxury" of only needing to get a few people to agree as to the nature of the problems (whether they were wrong or right is beside the point). And we have a central bank that could act decisively.
As I understand the European agreement, that situation does not exist in Europe. For the ECB to print money as the US and the UK (and much of the non-EU developed world) will do, takes agreement from all the member countries, and right now it appears the German and Dutch governments are resisting such an idea.
As I write this (on a plane on my way to Orlando) German finance minister Peer Steinbruck has said it would be intolerable to let fellow EMU members fall victim to the global financial crisis. "We have a number of countries in the eurozone that are clearly getting into trouble on their payments," he said. "Ireland is in a very difficult situation.
"The euro-region treaties don't foresee any help for insolvent states, but in reality the others would have to rescue those running into difficulty."
That is a hopeful sign. Ireland is indeed in dire straits, and is particularly vulnerable as it is going to have to spend a serious percentage of its GDP on bailing out its banks.
It is not clear how it will all play out. But there is real risk of Europe dragging the world into a longer, darker night. Their banks not only have exposure to our US foibles, much of which has already been written off, but now many banks will have to contend with massive losses from emerging-market loans, which could be even larger than the losses stemming from US problems. Plus, they are more leveraged. (This was definitely a topic of "Conversation" this morning when I chatted with Nouriel Roubini. See more below.)
The Euro Back to Parity? Really?
I wrote over six years ago, when the euro was below $1, that I thought the euro would rise to over $1.50 (it went even higher) and then back to parity in the middle of the next decade. I thought the decline would be due to large European government deficits brought about by pension and health care promises to retirees, and those problems do still loom.
It may be that the current problems will push the euro to parity much sooner, possibly this year. While that will be nice if you want to vacation in Europe, it will have serious side effects on international trade. It clearly makes European exporters more competitive with the rest of the world, and especially the US. It also means that goods coming from Asia will cost more in Europe, unless Asian countries decide to devalue their currencies to maintain an ability to sell into Europe, which of course will bring howls from the US about currency manipulation. It is going to put pressure on governments to enact some form of trade protectionism, which would be devastating to the world economy.
Large and swift currency swings are inherently disruptive. We are seeing volatility in the currency markets unlike anything I have witnessed. I hope we do not see a precipitous fall in value of the euro. It will be good for no one. It is a strange world indeed when the US is having such a deep series of problems, the Fed and Treasury are talking about printing a few trillion here and a few trillion there, and at the very same time we see the dollar AND gold rising in value. Which all serves as a good set-up to the next section.
***********
John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to: http://www.frontlinethoughts.com/learnmore
Wednesday, February 25, 2009
Some Detail...as to what needs to be done
[This is the first in a series of articles that seeks to provide the intelligent layman with sufficient knowledge of sound economic theory to enable him to understand what must be done to overcome the present financial crisis and return to the path of economic progress and prosperity.]
A disastrous economic confusion, one that is shared almost universally, both by laymen and by professional economists alike, is the belief that falling prices constitute deflation and thus must be feared and, if possible, prevented.
The front-page, lead article of The New York Times of last November 1 provides a typical example of this confusion. It declares:
As dozens of countries slip deeper into financial distress, a new threat may be gathering force within the American economy — the prospect that goods will pile up waiting for buyers and prices will fall, suffocating fresh investment and worsening joblessness for months or even years.
The word for this is deflation, or declining prices, a term that gives economists chills.
Deflation accompanied the Depression of the 1930s. Persistently falling prices also were at the heart of Japan's so-called lost decade after the catastrophic collapse of its real estate bubble at the end of the 1980s — a period in which some experts now find parallels to the American predicament.
Contrary to The Times and so many others, deflation is not falling prices but a decrease in the quantity of money and/or volume of spending in the economic system. To say the same thing in different words, deflation is a general fall in demand. Falling prices are a consequence of deflation, not the phenomenon itself.
Totally apart from deflation, falling prices are also a consequence of increases in the production and supply of goods, which are an essential feature of economic progress and a rising standard of living. In such circumstances, falling prices are not accompanied by any plunge in business sales revenues or profits, by any increase in the difficulty of repaying debt, or by any surge in bankruptcies. All of these phenomena are the result purely and simply of deflation, not falling prices.
Indeed, under a full-bodied, 100-percent-reserve gold standard, falling prices, caused by increased production, are likely to be accompanied by a modest elevation of the rate of profit and a somewhat greater ease of repaying debt, both owing to the increase in the production and supply of gold and thus in the spending of gold. Under such a gold standard, prices fall to the extent that the increase in the production and supply of ordinary goods and services outstrips the increase in the production and supply of gold and the consequent increase in spending in terms of gold.
While this must certainly come as a surprise to The Times, and to everyone else who does not understand the nature of deflation, falling prices are in fact so far removed from being deflation that they are the antidote to deflation. They are what enables an economic system that has experienced deflation to recover from it and thereafter to enjoy the fruits of economic progress.
This conclusion can be demonstrated Socratically, by means of a simple question that could be used on an economics exam for sixth graders.
Thus, imagine that prior to the present financial downturn, Bill used to go shopping once a week in his local supermarket. When he went there, he could afford to spend $10 for bottled water. At the prevailing price of $1 per bottle, he was able to buy 10 bottles. Now, in the midst of the downturn, when Bill visits the supermarket, he can afford to spend only $5 for bottled water.
Here's the question: At what price per bottle of water would Bill be able to buy for $5 the 10 bottles of water he used to buy for $10? Answer: 50¢.
As this question and its answer make clear, a fall in prices enables reduced funds available for expenditure to buy as much as previously larger funds could buy.
This point applies even when lower prices do not result in greater purchases of the particular item whose price has fallen. Thus, suppose that the price of a gallon of milk is $8 and now falls to $4. Yet Bill and his family do not need more than one gallon in any given week, and so won't buy any larger quantity of milk at its now lower price. The fall in its price still helps economic recovery. It does so by freeing up $4 of Bill's funds to make possible the purchase of other things, that he wants but otherwise couldn't afford because of the lack of available funds.
Another, similar example is that of a fall in the price of gasoline or heating oil, which helps to increase the ability of people to spend in buying products throughout the economic system.
As indicated, in sharpest contrast to falling prices, deflation is a process of financial contraction. In our present crisis, it is a contraction of credit and of the spending that depends on credit. A fall in prices and, of course, in wage rates too, is the essential means of adapting to this deflation and overcoming it.
Nevertheless, the prevailing bizarre confusion of falling prices with deflation, stands in the way of economic recovery. In regarding falling prices, which are the effect of deflation and at the same time the remedy for deflation, as somehow themselves being deflation, people are led to confuse the solution for the problem with the problem that needs to be solved.
On the basis of this confusion, they advocate government intervention to prevent prices from falling. The prices they want to prevent from falling are, variously, house prices, farm and other commodity prices, and, above all, wage rates. To the extent that such efforts are successful, and prices are prevented from falling, the effect is to prevent economic recovery. It prevents economic recovery by preventing the reduced level of spending that deflation represents, from buying the larger quantity of goods and services that it would be able to buy at lower prices and wage rates.
Just as falling prices are so far from being deflation that they are the remedy for deflation, so too preventing prices from falling is so far from preventing deflation that it actually worsens the deflation. This is because it leads people to postpone buying even in instances in which they have the ability to buy. They put off buying in the expectation of being able to buy on better terms later on, when prices and wage rates have fallen to the extent necessary to permit economic recovery.
By the same token, when prices and wage rates finally do fall sufficiently to permit economic recovery, an increase in spending in the economic system will almost certainly occur. This is because the funds that people had been withholding from spending, awaiting the fall in prices and wages rates, will now, in the face of the necessary fall, be spent. Thus the necessary fall in prices and wage rates achieves economic recovery by means of creating greater buying power for a reduced amount of spending. It also brings about a partial restoration of spending and thereby definitively ends the deflation.
Just how far it is necessary for prices and wage rates to fall in order to achieve economic recovery depends on the change that has taken place in what Mises calls "the money relation." This is the relationship between the supply of money and the demand for money for holding.
During the boom, inflation and credit expansion increase the supply of money and at the same time reduce the demand for money for holding. Then, in the subsequent bust phase of the business cycle, the demand for money for holding rises and the supply of money can actually fall. Both of these factors make for a decline in total spending in the economic system and thus the need for a correspondingly lower level of wage rates and prices to achieve economic recovery.
How far these processes might go in our present circumstances and what might be done, consistent with the principle of economic freedom, to mitigate them, is too large a subject to explain in this one article.[1] However, I must state here that a decrease in the quantity of money can be altogether prevented and that this would dramatically limit the extent of the decline in overall spending in the economic system.
Whatever the reduced levels of spending that the changed money relation will support, the freedom of wage rates and prices to fall can achieve not only economic recovery but more than economic recovery. It can achieve the employment of everyone able and willing to work, i.e., full employment. And it could do so with no decline in the real wages of the average worker in the economic system, indeed, with a significant rise in his real wages. Unfortunately, this too is a subject too large to discuss further in the present article.[2]
Bailouts
Before closing, I must say a few words about the present efforts of the government to overcome the crisis by means of "bailouts" and their associated financing by budget deficits. Ultimately, these efforts are an attempt to overcome the effects of a rise in the demand for money for holding by means of a sufficiently large increase in the supply of money. In its campaign, the government appears to care for nothing but overcoming the crisis of the moment, without regard to the fuel it is providing for the next crisis.
The government today has unlimited powers of money creation. And so it is highly likely, given its evident willingness to use those powers, and the overwhelming public support that exists for using them, that the increase in the supply of money it brings about will ultimately outweigh the present increase in the public's demand for money for holding. When and to the extent that that happens, and business sales revenues and profits begin to rise and employment and wage rates begin to rise, the public's demand for money for holding will once again begin to fall.
At that point the massive increase in the quantity of money the government is currently bringing about will fuel sharply rising prices and give birth to a new crisis. This time, a crisis of inflation. Then, the government will either have to be content with a US economy that resembles the economic system of a Latin American country or it will have to rein in its inflation. If it chooses the latter quickly, we'll be back to the situation that prevailed in the early 1980s and have to undergo a fresh economic contraction, though probably one of much greater size than then, because of the unfinished business left over from the present crisis.
If the government delays too long in reining in its inflation, then when it finally does decide to do so, it may be confronted not only with prices rising as rapidly as they did in Latin America decades ago, but also with the massive unemployment rates that accompanied the efforts to rein in such major inflation. At that time, prices rising at a rate of 20, 30, or 50 percent or more were accompanied by comparably high unemployment rates. (To understand how such a thing can happen, imagine total spending and prices both rising at the rate of, say, 50 percent per year. Now the government, in an effort rein in inflation, succeeds in reducing the increase in spending to 15 percent. If the rise in wage rates and prices has any kind of significant inertia, such as continuing at 40 percent, the effect will be a drop in production and employment to a level equal to 1.15/1.4, which represents a drop of about 18 percent. In the nearer-term future, unemployment will be promoted by any additional powers the government may give to labor unions, who will use them to raise wage rates even in the midst of mass unemployment, as they did from 1932 on in the Great Depression.)
Of course, given the prevailing readiness massively to expand the powers of government in order to deal with short-term crises, it is also possible that the government will enact wage and price controls in its efforts to fight the consequences of its inflation. If and when the controls are subsequently removed, there will again be a crisis of rising prices that, if not accompanied by still more inflation, will be followed by a major financial contraction. If the price controls are not removed, the economic system will be paralyzed and ultimately destroyed.
The upshot is that there is no good way out of the present crisis other than by meeting it through the free-market's means of a fall in wage rates and prices, mitigated to the maximum extent possible in ways consistent with the principle of economic freedom. What is required is a way out that once and for all ends the boom-bust cycle of inflation and credit expansion followed by deflation and contraction. The free market, a freer market than we have had up to now, is the only such solution.
Economic freedom and economic recovery both require that prices and wage rates be free to fall and that all legal obstacles in the way of their falling be immediately removed. In order for that to happen, as many people as possible must understand that falling prices are not deflation but the antidote to deflation.
A disastrous economic confusion, one that is shared almost universally, both by laymen and by professional economists alike, is the belief that falling prices constitute deflation and thus must be feared and, if possible, prevented.
The front-page, lead article of The New York Times of last November 1 provides a typical example of this confusion. It declares:
As dozens of countries slip deeper into financial distress, a new threat may be gathering force within the American economy — the prospect that goods will pile up waiting for buyers and prices will fall, suffocating fresh investment and worsening joblessness for months or even years.
The word for this is deflation, or declining prices, a term that gives economists chills.
Deflation accompanied the Depression of the 1930s. Persistently falling prices also were at the heart of Japan's so-called lost decade after the catastrophic collapse of its real estate bubble at the end of the 1980s — a period in which some experts now find parallels to the American predicament.
Contrary to The Times and so many others, deflation is not falling prices but a decrease in the quantity of money and/or volume of spending in the economic system. To say the same thing in different words, deflation is a general fall in demand. Falling prices are a consequence of deflation, not the phenomenon itself.
Totally apart from deflation, falling prices are also a consequence of increases in the production and supply of goods, which are an essential feature of economic progress and a rising standard of living. In such circumstances, falling prices are not accompanied by any plunge in business sales revenues or profits, by any increase in the difficulty of repaying debt, or by any surge in bankruptcies. All of these phenomena are the result purely and simply of deflation, not falling prices.
Indeed, under a full-bodied, 100-percent-reserve gold standard, falling prices, caused by increased production, are likely to be accompanied by a modest elevation of the rate of profit and a somewhat greater ease of repaying debt, both owing to the increase in the production and supply of gold and thus in the spending of gold. Under such a gold standard, prices fall to the extent that the increase in the production and supply of ordinary goods and services outstrips the increase in the production and supply of gold and the consequent increase in spending in terms of gold.
While this must certainly come as a surprise to The Times, and to everyone else who does not understand the nature of deflation, falling prices are in fact so far removed from being deflation that they are the antidote to deflation. They are what enables an economic system that has experienced deflation to recover from it and thereafter to enjoy the fruits of economic progress.
This conclusion can be demonstrated Socratically, by means of a simple question that could be used on an economics exam for sixth graders.
Thus, imagine that prior to the present financial downturn, Bill used to go shopping once a week in his local supermarket. When he went there, he could afford to spend $10 for bottled water. At the prevailing price of $1 per bottle, he was able to buy 10 bottles. Now, in the midst of the downturn, when Bill visits the supermarket, he can afford to spend only $5 for bottled water.
Here's the question: At what price per bottle of water would Bill be able to buy for $5 the 10 bottles of water he used to buy for $10? Answer: 50¢.
As this question and its answer make clear, a fall in prices enables reduced funds available for expenditure to buy as much as previously larger funds could buy.
This point applies even when lower prices do not result in greater purchases of the particular item whose price has fallen. Thus, suppose that the price of a gallon of milk is $8 and now falls to $4. Yet Bill and his family do not need more than one gallon in any given week, and so won't buy any larger quantity of milk at its now lower price. The fall in its price still helps economic recovery. It does so by freeing up $4 of Bill's funds to make possible the purchase of other things, that he wants but otherwise couldn't afford because of the lack of available funds.
Another, similar example is that of a fall in the price of gasoline or heating oil, which helps to increase the ability of people to spend in buying products throughout the economic system.
As indicated, in sharpest contrast to falling prices, deflation is a process of financial contraction. In our present crisis, it is a contraction of credit and of the spending that depends on credit. A fall in prices and, of course, in wage rates too, is the essential means of adapting to this deflation and overcoming it.
Nevertheless, the prevailing bizarre confusion of falling prices with deflation, stands in the way of economic recovery. In regarding falling prices, which are the effect of deflation and at the same time the remedy for deflation, as somehow themselves being deflation, people are led to confuse the solution for the problem with the problem that needs to be solved.
On the basis of this confusion, they advocate government intervention to prevent prices from falling. The prices they want to prevent from falling are, variously, house prices, farm and other commodity prices, and, above all, wage rates. To the extent that such efforts are successful, and prices are prevented from falling, the effect is to prevent economic recovery. It prevents economic recovery by preventing the reduced level of spending that deflation represents, from buying the larger quantity of goods and services that it would be able to buy at lower prices and wage rates.
Just as falling prices are so far from being deflation that they are the remedy for deflation, so too preventing prices from falling is so far from preventing deflation that it actually worsens the deflation. This is because it leads people to postpone buying even in instances in which they have the ability to buy. They put off buying in the expectation of being able to buy on better terms later on, when prices and wage rates have fallen to the extent necessary to permit economic recovery.
By the same token, when prices and wage rates finally do fall sufficiently to permit economic recovery, an increase in spending in the economic system will almost certainly occur. This is because the funds that people had been withholding from spending, awaiting the fall in prices and wages rates, will now, in the face of the necessary fall, be spent. Thus the necessary fall in prices and wage rates achieves economic recovery by means of creating greater buying power for a reduced amount of spending. It also brings about a partial restoration of spending and thereby definitively ends the deflation.
Just how far it is necessary for prices and wage rates to fall in order to achieve economic recovery depends on the change that has taken place in what Mises calls "the money relation." This is the relationship between the supply of money and the demand for money for holding.
During the boom, inflation and credit expansion increase the supply of money and at the same time reduce the demand for money for holding. Then, in the subsequent bust phase of the business cycle, the demand for money for holding rises and the supply of money can actually fall. Both of these factors make for a decline in total spending in the economic system and thus the need for a correspondingly lower level of wage rates and prices to achieve economic recovery.
How far these processes might go in our present circumstances and what might be done, consistent with the principle of economic freedom, to mitigate them, is too large a subject to explain in this one article.[1] However, I must state here that a decrease in the quantity of money can be altogether prevented and that this would dramatically limit the extent of the decline in overall spending in the economic system.
Whatever the reduced levels of spending that the changed money relation will support, the freedom of wage rates and prices to fall can achieve not only economic recovery but more than economic recovery. It can achieve the employment of everyone able and willing to work, i.e., full employment. And it could do so with no decline in the real wages of the average worker in the economic system, indeed, with a significant rise in his real wages. Unfortunately, this too is a subject too large to discuss further in the present article.[2]
Bailouts
Before closing, I must say a few words about the present efforts of the government to overcome the crisis by means of "bailouts" and their associated financing by budget deficits. Ultimately, these efforts are an attempt to overcome the effects of a rise in the demand for money for holding by means of a sufficiently large increase in the supply of money. In its campaign, the government appears to care for nothing but overcoming the crisis of the moment, without regard to the fuel it is providing for the next crisis.
The government today has unlimited powers of money creation. And so it is highly likely, given its evident willingness to use those powers, and the overwhelming public support that exists for using them, that the increase in the supply of money it brings about will ultimately outweigh the present increase in the public's demand for money for holding. When and to the extent that that happens, and business sales revenues and profits begin to rise and employment and wage rates begin to rise, the public's demand for money for holding will once again begin to fall.
At that point the massive increase in the quantity of money the government is currently bringing about will fuel sharply rising prices and give birth to a new crisis. This time, a crisis of inflation. Then, the government will either have to be content with a US economy that resembles the economic system of a Latin American country or it will have to rein in its inflation. If it chooses the latter quickly, we'll be back to the situation that prevailed in the early 1980s and have to undergo a fresh economic contraction, though probably one of much greater size than then, because of the unfinished business left over from the present crisis.
If the government delays too long in reining in its inflation, then when it finally does decide to do so, it may be confronted not only with prices rising as rapidly as they did in Latin America decades ago, but also with the massive unemployment rates that accompanied the efforts to rein in such major inflation. At that time, prices rising at a rate of 20, 30, or 50 percent or more were accompanied by comparably high unemployment rates. (To understand how such a thing can happen, imagine total spending and prices both rising at the rate of, say, 50 percent per year. Now the government, in an effort rein in inflation, succeeds in reducing the increase in spending to 15 percent. If the rise in wage rates and prices has any kind of significant inertia, such as continuing at 40 percent, the effect will be a drop in production and employment to a level equal to 1.15/1.4, which represents a drop of about 18 percent. In the nearer-term future, unemployment will be promoted by any additional powers the government may give to labor unions, who will use them to raise wage rates even in the midst of mass unemployment, as they did from 1932 on in the Great Depression.)
Of course, given the prevailing readiness massively to expand the powers of government in order to deal with short-term crises, it is also possible that the government will enact wage and price controls in its efforts to fight the consequences of its inflation. If and when the controls are subsequently removed, there will again be a crisis of rising prices that, if not accompanied by still more inflation, will be followed by a major financial contraction. If the price controls are not removed, the economic system will be paralyzed and ultimately destroyed.
The upshot is that there is no good way out of the present crisis other than by meeting it through the free-market's means of a fall in wage rates and prices, mitigated to the maximum extent possible in ways consistent with the principle of economic freedom. What is required is a way out that once and for all ends the boom-bust cycle of inflation and credit expansion followed by deflation and contraction. The free market, a freer market than we have had up to now, is the only such solution.
Economic freedom and economic recovery both require that prices and wage rates be free to fall and that all legal obstacles in the way of their falling be immediately removed. In order for that to happen, as many people as possible must understand that falling prices are not deflation but the antidote to deflation.
Water Footprints
“We live in an age in which, for better or worse,” explains Chris Mayer, “people of all kinds are obsessed with reducing their ‘carbon footprint.’ Now there are more footprints to worry about: water footprints.
“If you are a longtime reader, you will know exactly what that means. The Wall Street Journal recently gave some examples:
“It takes roughly 20 gallons of water to make a pint of beer, as much as 132 gallons of water to make a 2-liter bottle of soda and about 500 gallons of water, including water used to grow, dye and process cotton, to make a pair of Levi’s stonewashed jeans.”
“Other examples include the nearly 35 gallons of water behind every cup of coffee, the 700 gallons behind the typical dyed T-shirt and the 630 gallons to produce a single hamburger.
“There is a lot more attention focusing on reducing this water footprint, especially since water scarcity issues are cropping up a lot more these days. You know the numbers: Two-thirds of the world’s populations face water shortages by 2025, according to the U.N. And according to the U.S. GAO, about 36 states face water shortages by 2013.
“This is an important issue for industrial users of water all over the world. Nike, Pepsi, Starbucks, Levi’s and about 100 other companies recently held a conference in Miami on reducing water footprints. So this is serious business.”
“If you are a longtime reader, you will know exactly what that means. The Wall Street Journal recently gave some examples:
“It takes roughly 20 gallons of water to make a pint of beer, as much as 132 gallons of water to make a 2-liter bottle of soda and about 500 gallons of water, including water used to grow, dye and process cotton, to make a pair of Levi’s stonewashed jeans.”
“Other examples include the nearly 35 gallons of water behind every cup of coffee, the 700 gallons behind the typical dyed T-shirt and the 630 gallons to produce a single hamburger.
“There is a lot more attention focusing on reducing this water footprint, especially since water scarcity issues are cropping up a lot more these days. You know the numbers: Two-thirds of the world’s populations face water shortages by 2025, according to the U.N. And according to the U.S. GAO, about 36 states face water shortages by 2013.
“This is an important issue for industrial users of water all over the world. Nike, Pepsi, Starbucks, Levi’s and about 100 other companies recently held a conference in Miami on reducing water footprints. So this is serious business.”
Hillary's meeting with China's President...
Hillary Clinton met with China's President Hu Jintao in the palace in Beijing. She sat grim-faced as China's president issued a stern warning. The last thing the Obama administration wants to hear right now is that Communism doesn't work."
Today's Quotes...
"Everyone wants to live at the expense of the state. They forget that the state lives at the expense of everyone." --French economist, statesman and author Frederic Bastiat (1801-1850)
"With the exception only of the period of the gold standard, practically all governments of history have used their exclusive power to issue money to defraud and plunder the people." --economist Fredrich von Hayek (1899-1992)
"Liberals claim to want to give a hearing to other views, but then are shocked and offended to discover that there are other views." --commentator, author and founder of National Review William F. Buckley Jr. (1925-2008)
"With the exception only of the period of the gold standard, practically all governments of history have used their exclusive power to issue money to defraud and plunder the people." --economist Fredrich von Hayek (1899-1992)
"Liberals claim to want to give a hearing to other views, but then are shocked and offended to discover that there are other views." --commentator, author and founder of National Review William F. Buckley Jr. (1925-2008)
Omaba's is staying with his promises...
From the WSJ....
We were promised...and we will get..
***************************
"Anyone who thought the recession and financial market turmoil would moderate President Obama's policy ambitions discovered the opposite last night. Far from suggesting limits on Congress or federal spending, the new President made clear in his first State of the Union address that he believes in government power as the answer to our current difficulties, and he intends to use it. ... Mr. Obama is slowly revealing himself as a President who meant what he said going back to the primaries. He believes in the power of the state to drive prosperity, to reform the financial system and health care, and even to transform the entire energy economy. Mr. Obama said at one point that he didn't believe in government for its own sake, but his policy emphasis showed otherwise. ... Mr. Obama clearly believes the recession has created a political moment when Americans are frightened enough to be open to a new era of expanded government. The question is whether his vast ambitions will allow the private economy to grow enough even to begin to pay for it all." --The Wall Street Journal
We were promised...and we will get..
***************************
"Anyone who thought the recession and financial market turmoil would moderate President Obama's policy ambitions discovered the opposite last night. Far from suggesting limits on Congress or federal spending, the new President made clear in his first State of the Union address that he believes in government power as the answer to our current difficulties, and he intends to use it. ... Mr. Obama is slowly revealing himself as a President who meant what he said going back to the primaries. He believes in the power of the state to drive prosperity, to reform the financial system and health care, and even to transform the entire energy economy. Mr. Obama said at one point that he didn't believe in government for its own sake, but his policy emphasis showed otherwise. ... Mr. Obama clearly believes the recession has created a political moment when Americans are frightened enough to be open to a new era of expanded government. The question is whether his vast ambitions will allow the private economy to grow enough even to begin to pay for it all." --The Wall Street Journal
History Repeats
Need to assess your risks in this economy / market. History indicates that the good times do not last. Question is how prepared are you?
Elliott Wave - Expect Sharp / Fast Rally Up
Let's hope so!
Exits all shorts...and go long.
But this is only short term trade. Be prepared to sell.
*********************
Feb. 24 (Bloomberg) — Elliott Wave International Inc.’s Robert
Prechter, who advised shorting U.S. stocks three months before the bear
market began, said investors should now end those bets following the
recent market sell-off.
Prechter, chief executive of the market forecasting firm, warned in this
month’s ‘Elliott Wave Theorist’ that a rebound in stocks could be "sharp
and scary" for anyone who is so-called short. In a short sale, investors
borrow stock and agree to sell them at a later date on hopes of
capturing profit by replacing the shares after prices fall.
"This is an environment of escalating financial chaos," wrote Prechter,
who first shot to fame in the 1980s after cautioning investors that
stocks would crash two weeks before Black Monday. "Our main job is to
keep the money we have. If we exit now, we will do that."
Exits all shorts...and go long.
But this is only short term trade. Be prepared to sell.
*********************
Feb. 24 (Bloomberg) — Elliott Wave International Inc.’s Robert
Prechter, who advised shorting U.S. stocks three months before the bear
market began, said investors should now end those bets following the
recent market sell-off.
Prechter, chief executive of the market forecasting firm, warned in this
month’s ‘Elliott Wave Theorist’ that a rebound in stocks could be "sharp
and scary" for anyone who is so-called short. In a short sale, investors
borrow stock and agree to sell them at a later date on hopes of
capturing profit by replacing the shares after prices fall.
"This is an environment of escalating financial chaos," wrote Prechter,
who first shot to fame in the 1980s after cautioning investors that
stocks would crash two weeks before Black Monday. "Our main job is to
keep the money we have. If we exit now, we will do that."
Tuesday, February 24, 2009
Is It Any Surprise that More Bailouts are Required?
Hey....it should not be a surprise....business will all line up for as much hand outs / bail out funding that they can get.
As long as the government is funding them...they do not have the requirement to fix their problems.
So....it will continue..
******************
U.S. Is Pressed to Add Billions to Bailouts
By EDMUND L. ANDREWS, ANDREW ROSS SORKIN and MARY WILLIAMS WALSH
The government faced mounting pressure on Monday to put billions more in some of the nation’s biggest banks, two of the biggest automakers and the biggest insurance company, despite the billions it has already committed to rescuing them.
The government’s boldest rescue to date, its $150 billion commitment for the insurance giant American International Group, is foundering. A.I.G. indicated on Monday it was now negotiating for tens of billions of dollars in additional assistance as losses have mounted.
Separately, the Obama administration confirmed it was in discussions to aid Citigroup, the recipient of $45 billion so far, that could raise the government’s stake in the banking company to as much as 40 percent.
The Treasury Department named a special adviser to work with General Motors and Chrysler, two of Detroit’s biggest automakers, which are seeking $22 billion on top of the $17 billion already granted to them.
All these companies’ mushrooming needs reflect just how hard it is to stanch the flow of losses as the economy deteriorates. Even though the government’s finances are being stretched — and still more aid might be needed in the future — it is being forced to fill the growing holes in the finances of these companies out of fear that the demise of an important company could set off a chain reaction.
The deepening global downturn is dragging down all kinds of businesses, and, with no bottom to the recession in sight, investors sent the the Dow industrials down 250.89 points, or 3.7 percent, to 7,114.78, a 3.7 percent drop for the day and a loss of about 50 percent from their peak in the fall of 2007. Asian markets followed suit on Tuesday by flirting with the lows they hit last October, with stocks in Hong Kong dropping more than 3 percent, and Japan's Nikkei 225 index dropping more than 2 percent before rebounding slightly.
In an unexpectedly assertive joint statement after two weeks of bank stock declines, the Treasury Department, the Federal Reserve and federal bank regulatory agencies announced that the government might demand a direct ownership stake in major banks that do not have enough capital to weather a deeper downturn. The government will begin conducting a test of the banks’ financial health this week.
Administration officials emphasized that nationalizing any of the major banks was their least favorite solution to the banking crisis, but they acknowledged that some banks might be both too big to fail and too fragile to endure another round of shocks without substantial help.
Banks that fail the test will have to raise additional capital. If they are unable to raise capital in the private market, they would have to take money from the government in exchange for preferred stock that would be convertible into common shares, thus giving the government a bigger stake.
The administration is debating how big a role to play in the auto businesses, what concessions the companies should make in return for aid and whether bankruptcy should be considered, though it prefers a private sector solution.
On Monday, Steven Rattner, co-founder of a private equity firm, the Quadrangle Group, was named an adviser to the Treasury on the auto industry.
As the administration takes bigger stakes in companies, the value held by existing shareholders is being diluted, which could make it even harder to attract private money in the future.
Timothy F. Geithner, the secretary of the Treasury, recently outlined a bank recovery plan that included a program to attract a combination of public and private money to buy troubled mortgages and other assets.
A.I.G. serves as a cautionary note about the difficulty of luring private investors when the size of the losses is unknown. In the months since the government initially stepped in last fall to take an 80 percent stake in the insurer, the company has suffered deepening losses and has been forced to post more collateral with its trading partners.
The company, according to a person close to the negotiations, is discussing the prospect of converting the government’s $40 billion in preferred shares into common equity.
The prototype could turn out to be Citigroup, which is negotiating with regulators to replace the government’s nonvoting preferred shares with shares that are convertible into common stock.
“We absolutely believe that our private banking system is best off being in private hands and we are trying our best to keep it that way,” said one senior administration official, who spoke on condition of anonymity. But, he continued, the government is already deeply involved in propping up the banking system and may have no choice.
Officials said they were bracing for the possibility of new problems that might indeed require the government to take a more aggressive stance.
“Given our involvement at this particular stage, there is an element, a possibility over time, that we will end up with some ownership of these institutions,” the official said. “This is really about aggressive anticipatory action. It is an acceptance that the future is uncertain, but that we can plan on a certain basis for it.”
Acquiring common stock would give the government more control, but expose it to more risk. Armed with voting shares, government officials would have more power to replace management and change company strategy. But the Treasury would lose its claim to dividend payments, which in Citigroup’s case amount to more than $2.25 billion a year.
A.I.G. declined to provide details of its new financial problems, citing the “quiet period” just before it issues fourth-quarter results. But some people familiar with A.I.G.’s negotiations said it was on the brink of reporting one of the biggest year-end losses in American history.
Such losses lead to a bigger problem. A further credit rating downgrade would force the company to raise more capital, according to a person involved in the negotiations. The losses appeared to be across the board, unlike the insurer’s losses of last September, which were confined mostly to derivative contracts called credit-default swaps.
A.I.G. has not been writing new credit-default swap contracts, and had tried to put the swaps disaster behind it. In November the company worked out a relief package with the Federal Reserve Bank of New York, in which the most toxic of its swap contracts were put into a kind of quarantine, so they could no longer hurt its balance sheet. But A.I.G. had written several other classes of credit-default swaps, which it kept on its books.
If the latest round of losses severely weaken A.I.G.’s capital and its creditworthiness, then its swap counterparties may be entitled to demand that A.I.G. come up with a large amount of cash for collateral — precisely the problem that brought the company to its knees last September.
“They stand, unfortunately, to bring others down with them if they go down,” said Donn Vickrey of Gradient Analytics, an independent research firm.
The difficulty of shoring up A.I.G. must weigh on the administration at this moment. The administration’s banking statement amounted to a plan of action demonstrating a way to demand a major and possibly a controlling stake in systemically important banks like Citigroup and Bank of America.
“They are desperate to not nationalize the banks,” said Robert J. Barbera, chief economist at ITG. “They know what happened when they took Iraq and they would just as soon not take over the banks, because if you own it, you gotta fix it.”
As long as the government is funding them...they do not have the requirement to fix their problems.
So....it will continue..
******************
U.S. Is Pressed to Add Billions to Bailouts
By EDMUND L. ANDREWS, ANDREW ROSS SORKIN and MARY WILLIAMS WALSH
The government faced mounting pressure on Monday to put billions more in some of the nation’s biggest banks, two of the biggest automakers and the biggest insurance company, despite the billions it has already committed to rescuing them.
The government’s boldest rescue to date, its $150 billion commitment for the insurance giant American International Group, is foundering. A.I.G. indicated on Monday it was now negotiating for tens of billions of dollars in additional assistance as losses have mounted.
Separately, the Obama administration confirmed it was in discussions to aid Citigroup, the recipient of $45 billion so far, that could raise the government’s stake in the banking company to as much as 40 percent.
The Treasury Department named a special adviser to work with General Motors and Chrysler, two of Detroit’s biggest automakers, which are seeking $22 billion on top of the $17 billion already granted to them.
All these companies’ mushrooming needs reflect just how hard it is to stanch the flow of losses as the economy deteriorates. Even though the government’s finances are being stretched — and still more aid might be needed in the future — it is being forced to fill the growing holes in the finances of these companies out of fear that the demise of an important company could set off a chain reaction.
The deepening global downturn is dragging down all kinds of businesses, and, with no bottom to the recession in sight, investors sent the the Dow industrials down 250.89 points, or 3.7 percent, to 7,114.78, a 3.7 percent drop for the day and a loss of about 50 percent from their peak in the fall of 2007. Asian markets followed suit on Tuesday by flirting with the lows they hit last October, with stocks in Hong Kong dropping more than 3 percent, and Japan's Nikkei 225 index dropping more than 2 percent before rebounding slightly.
In an unexpectedly assertive joint statement after two weeks of bank stock declines, the Treasury Department, the Federal Reserve and federal bank regulatory agencies announced that the government might demand a direct ownership stake in major banks that do not have enough capital to weather a deeper downturn. The government will begin conducting a test of the banks’ financial health this week.
Administration officials emphasized that nationalizing any of the major banks was their least favorite solution to the banking crisis, but they acknowledged that some banks might be both too big to fail and too fragile to endure another round of shocks without substantial help.
Banks that fail the test will have to raise additional capital. If they are unable to raise capital in the private market, they would have to take money from the government in exchange for preferred stock that would be convertible into common shares, thus giving the government a bigger stake.
The administration is debating how big a role to play in the auto businesses, what concessions the companies should make in return for aid and whether bankruptcy should be considered, though it prefers a private sector solution.
On Monday, Steven Rattner, co-founder of a private equity firm, the Quadrangle Group, was named an adviser to the Treasury on the auto industry.
As the administration takes bigger stakes in companies, the value held by existing shareholders is being diluted, which could make it even harder to attract private money in the future.
Timothy F. Geithner, the secretary of the Treasury, recently outlined a bank recovery plan that included a program to attract a combination of public and private money to buy troubled mortgages and other assets.
A.I.G. serves as a cautionary note about the difficulty of luring private investors when the size of the losses is unknown. In the months since the government initially stepped in last fall to take an 80 percent stake in the insurer, the company has suffered deepening losses and has been forced to post more collateral with its trading partners.
The company, according to a person close to the negotiations, is discussing the prospect of converting the government’s $40 billion in preferred shares into common equity.
The prototype could turn out to be Citigroup, which is negotiating with regulators to replace the government’s nonvoting preferred shares with shares that are convertible into common stock.
“We absolutely believe that our private banking system is best off being in private hands and we are trying our best to keep it that way,” said one senior administration official, who spoke on condition of anonymity. But, he continued, the government is already deeply involved in propping up the banking system and may have no choice.
Officials said they were bracing for the possibility of new problems that might indeed require the government to take a more aggressive stance.
“Given our involvement at this particular stage, there is an element, a possibility over time, that we will end up with some ownership of these institutions,” the official said. “This is really about aggressive anticipatory action. It is an acceptance that the future is uncertain, but that we can plan on a certain basis for it.”
Acquiring common stock would give the government more control, but expose it to more risk. Armed with voting shares, government officials would have more power to replace management and change company strategy. But the Treasury would lose its claim to dividend payments, which in Citigroup’s case amount to more than $2.25 billion a year.
A.I.G. declined to provide details of its new financial problems, citing the “quiet period” just before it issues fourth-quarter results. But some people familiar with A.I.G.’s negotiations said it was on the brink of reporting one of the biggest year-end losses in American history.
Such losses lead to a bigger problem. A further credit rating downgrade would force the company to raise more capital, according to a person involved in the negotiations. The losses appeared to be across the board, unlike the insurer’s losses of last September, which were confined mostly to derivative contracts called credit-default swaps.
A.I.G. has not been writing new credit-default swap contracts, and had tried to put the swaps disaster behind it. In November the company worked out a relief package with the Federal Reserve Bank of New York, in which the most toxic of its swap contracts were put into a kind of quarantine, so they could no longer hurt its balance sheet. But A.I.G. had written several other classes of credit-default swaps, which it kept on its books.
If the latest round of losses severely weaken A.I.G.’s capital and its creditworthiness, then its swap counterparties may be entitled to demand that A.I.G. come up with a large amount of cash for collateral — precisely the problem that brought the company to its knees last September.
“They stand, unfortunately, to bring others down with them if they go down,” said Donn Vickrey of Gradient Analytics, an independent research firm.
The difficulty of shoring up A.I.G. must weigh on the administration at this moment. The administration’s banking statement amounted to a plan of action demonstrating a way to demand a major and possibly a controlling stake in systemically important banks like Citigroup and Bank of America.
“They are desperate to not nationalize the banks,” said Robert J. Barbera, chief economist at ITG. “They know what happened when they took Iraq and they would just as soon not take over the banks, because if you own it, you gotta fix it.”
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