Econ 2009

[jasonp]

More digging (plus a picture) here

[ewmayer]

Originally Posted by jasonp

More digging (plus a picture) here

LOL @ the comment about the (alleged) identities of the 2 Japanese nationals: "The two were later identified as Tim Geithner-san and Ben Bernanke-san."

One poster mentions "similar scams originating in the Philippines", but doesn't seem to have read the articles mentioning the apparently-extensive provenance-related paperwork accompanying at least a lrage chunk of the bonds in the current case.

And again with respect to counterfeiting - who in their right mind is going to take a billion-dollars or more in bonds as payment without doing some really thorough background checking? A billion bucks buys a whole of due diligence ... well, perhaps unless you're an ex-client of Bernie Madoff.

[ewmayer]

In one of his blog posts today, ZeroHedge`s Tyler Durden links to the following outstanding article in Caijing (a Beijing-based independent finance & economics magazine) about recent market action - Really good stuff, I provide the (to my tatse) juiciest snips in the quotes below but the full article is a worthwhile read. The existence of an independent, highly critical financial periodical like Caijing is all the more remarkable given the constraints they must operate under, many of which are described in the Wikipedia entry I linked above. For example:

Also at issue is whether the magazine will be sued due to so-called "false reports." According to the academic paper "Media Defendants in the Chinese Courts" by Professor Zhiwu Chen, specializing in finance at the Yale School of Management, judges in China tend to put protection of people's reputation as a top priority. So facing any court case with accusations of false reporting, if Caijing could not prove that its entire article was true, then the judge would most likely treat the article as false and side with the plaintiff. Caijing has already lost one trial with Shiji Xinyuan, a listed company, following this judicial line of reasoning. A report in Caijing claimed the company manipulated its financial statements to hide financial weaknesses. Shiji Xinyuan then sued Caijing and won because a small part of the article was "false," though the majority was true.

Andy Xie: Tight Spot for Fed, Blind Spot for Investors: Market chatter over green shoots and rising prices has fueled a bear market rally that won't last, despite policymaker 'noise.'

A combination of growth optimism and inflation fear has catapulted asset markets in the past few weeks. These two concerns should drive markets in different directions: Inflation fear, for example, should limit room for stimulus and prompt stock markets to retreat. But the investment camps expressing these opposite concerns go separate ways, each pumping up what seems believable. As a result, stock and commodity markets are mirroring the behavior seen during the giddy days of 2007.

Regardless of what investors or speculators say to justify their punting, the real driving force is the return of animal spirit. After living in fear for more than a year, they just couldn't sit around any longer. So they decided to inch back. The resulting market appreciation emboldened more people. All sorts of theories began to surface to justify the market trend. Now that the rising trend has been around for three months globally and seven months in China, even the most timid have been unable to resist. They're jumping in, in droves.

When the least informed and most credulous get into the market, the market is usually peaking. A rising economy and growing income produces more funds to fuel the market. But the global economy is now stuck with years of slow growth. Strong economic growth won't follow the current stock market surge. This is a bear market rally. People who jump in now will lose big.
...
Over the past three weeks, the dollar dove while oil and treasury yields surged. These price movements exhibited typical symptoms of inflation fear, which is complicating policymaking around the world. The United States, in particular, could be bottled in. The federal government's fiscal stimulus and liquidity pumping by the Federal Reserve are twin instruments for propping up the bursting U.S. economy. The fiscal deficit could top US$ 2 trillion (15 percent of GDP) in 2009. That would increase by one-third the total stock of federal government debt outstanding. Such a massive amount of federal debt paper needs a buoyant Treasury to absorb. If the Treasury market is a bear market, absorption becomes a huge problem.

U.S. Treasury Secretary Timothy Geithner recently visited China to, among other things, persuade China to buy more Treasuries. According to a Brookings Institution estimate, China holds US$ 1.7 trillion in U.S. Treasuries and GSE paper (about 15 percent of the total stock). If China stops buying, it could plunge the Treasury market into deep bear territory. If China does not buy, the Treasury market will get worse. But China can't prop up the market by buying.

In the past few years, purchases by central banks around the world have dominated demand for Treasuries. Central banks have been buying because their currencies are linked to the dollar. Hence, such demand is not price sensitive. The demand level is proportionate to the U.S. current account deficit, which determines the amount of dollars held by foreign central banks. The bigger the U.S. current account deficit, the greater the demand for Treasuries. This is why the Treasury yield was trending down during the bulging U.S. current account deficit period 2001-'08.

This dynamic in the Treasury market was changed by the bursting of the U.S. credit-cum-property bubble. It is decreasing U.S. consumption and the U.S. current account deficit. The 2009 deficit is probably under US$ 400 billion, halved from the peak. That means non-U.S. central banks have much less money to buy, while the supply is surging.
...
A massive supply of Treasuries would only worsen the market. The Federal Reserve has been trying to prop the Treasury market by buying more than US$ 300 billion – a purchase that's backfired. Treasury investors are terrified by the inflation implication of the Fed action. It is equivalent to monetizing national debt. As the federal deficit will remain sky-high for years to come, the monetization could become much larger, which might lead to hyperinflation. This is why the Treasury yield has surged in the past three weeks.

One possible response is to finance the U.S. budget deficit with short-term financing. As the Fed controls short-term interest rates, such a strategy could avoid the pain of high interest rates. But this strategy could crash the dollar.
...
The Fed may have to change its stance, even using token gestures, to assure the market it won't release too much money. For example, signaling rate hikes would soothe the market. But the economy is still in terrible shape; unemployment may surpass 10 percent this year. Any suggestion of hiking interest rates would dampen growth expectations. The Fed is caught between a rock and a hard place.

[ewmayer]

Continuation from above post:

Stagflation in the 1970s spawned the development of rational expectation theory in economics. Monetary stimulus works by fooling people into believing in money`s value while the central bank cheapens it. This perception gap stimulates the economy by fooling people into demanding more money than they should. Rational expectation theory clarified the underpinning for Keynesian liquidity theory. However, as they say, people can`t be fooled three times. Central banks that tried to use stimuli to solve structural problems in the `70s saw their stimuli didn`t work. People saw through what they tried again and again, and began behaving accordingly, which translated monetary stimulus straight into inflation without stimulating economic growth.

Rational expectation theory discredited Keynesian theory and laid the foundation for Paul Volker`s tough love policy, which jagged up interest rates and triggered a recession. The recession convinced people that the central bank was serious about cooling inflation, so they adjusted their behavior accordingly. Inflation expectations fell sharply afterward. The credibility that Volker brought to the Fed was exploited by Alan Greenspan, who kept pumping money to solve economic problems. As I have argued before, special factors made Greenspan`s approach effective at the same. Its byproduct was asset bubbles.
...
While inflation expectations are causing some in the investor community to act, the rest are betting on strong economic recovery. Massive amounts of money have flowed into emerging markets, making it look like a runaway train. Many bystanders can't take it any longer and are jumping in. Markets, after trending up for three months, are gapping up. Unfortunately for the last-minute bulls, current market movements suggest peaking. If you buy now, you have a 90 percent chance of losing money when you try to get out.

Contrary to all the market noise, there are no signs of a significant economic recovery. So-called green shoots in the global economy are mostly due to inventory cycles. Stimuli might juice up growth a bit in the second half 2009. Nothing, however, suggests a lasting recovery. Markets are trading on imagination.

The return of funds flowing into property is even more ridiculous. A property burst usually lasts for more than three years. The current burst is larger than usual. The property market is likely to remain in bear territory for much longer. The bulls are talking about inflation as the bullish factor for property. Unfortunately, property prices have risen already and need to come down even as CPI rises. Then the two can reach parity.

While rational expectation is returning to part of the investment community, most investors are still trapped by institutional weakness, which makes them behave irrationally. The Greenspan era has nurtured a vast financial sector. All the people in this business need something to do. Since they invest other people`s money, they are biased toward bullish sentiment. Otherwise, if they say it`s all bad, their investors will take back the money, and they will lose their jobs. Governments know that, and create noise to give them excuses to be bullish.

This institutional weakness has been a catastrophe for people who trust investment professionals. In the past two decades, equity investors have done worse than those who held U.S. market bonds, and who lost big in Japan and emerging markets in general. It is astonishing that a value-destroying industry has lasted so long. The greater irony is that salaries in this industry have been two to three times above what`s paid in other sector. The key to its survival is volatility. As markets collapse and surge, possibilities for getting rich quickly are created. Unfortunately, most people don`t get out when markets are high, as they are now. They only take a ride.

Indeed, most people who invest in the stock market get poorer. Look at Japan, Korea and Taiwan: Even though their per capita incomes have risen enormously over the past three decades, investors in these stock markets lost money. Economic growth is a necessary but not sufficient condition for investors to make money in the stock market. Most countries, unfortunately, don`t possess the conditions for stock markets to reflect economic growth. The key is good corporate governance. It requires rule of law and good morality. Neither is apparent in most markets.
...
The world is setting up for a big crash, again. Since the last bubble burst, governments around the world have not been focusing on reforms. They are trying to pump a new bubble to solve existing problems. Before inflation appears, this strategy works. As inflation expectation rises, its effectiveness is threatened. When inflation appears in 2010, another crash will come.

My Comment: The associated ZeroHedge reader comments make for interesting reading. My favorite is one reply to Xie`s 2nd paragraph in the post above:

I disagree completely. We`ve not yet had a genuine capitulation event; the animal spirit never died. Capitulation, an emotional event, was thwarted by intervention. Bullish sentiment never really died, and that was one of the purposes of the intervention. Sure, people moved around a shitload of money. But people continued to believe in the markets and the future, and the movements were short term. People continue to believe in the power of the Fed. Greatest economic catastrophe ever, and we`re recovering after a year and a half? Doesn`t anyone study history anymore? When people call their brokers en masse and say "fuck you, gimme back my money, you lying cheating son-of-a-bitch", that`s capitulation.

[cheesehead]

"What Board Games Taught Us About the Economy: The not-so-great financial lessons we learned as kids."

http://www.thebigmoney.com/slideshow...-about-economy

[ewmayer]

Originally Posted by cheesehead

"What Board Games Taught Us About the Economy: The not-so-great financial lessons we learned as kids."

And coming soon to a Toys-R-Us near you, the hottest financial board game in years: “Bernanke Panky!”

[__HRB__]

Originally Posted by cheesehead

"What Board Games Taught Us About the Economy: The not-so-great financial lessons we learned as kids."

http://www.thebigmoney.com/slideshow...-about-economy

Originally Posted by Caitlin McDevitt

"What Board Games Taught Us About the Economy: The not-so-great economic understanding of a socialist nincompoop."

Monopoly has taught us that financial institutions are invincible. The game's banker cannot go bankrupt, according to the rules: "The Bank never ‘goes broke.' If the Bank runs out of money, the Banker may issue as much as needed by writing on any ordinary paper."

What this socialist specimen ignores, is that the 'Bank' is short for 'Central Bank' which has the sole purpose to supply money. Because players keep money under their pillows, there is no financial intermediation, no deposits, no lending, no risk of default, and without risk there can be no bankruptcy.
Paying out $200 for passing 'Go' is a time-dependent increase in money supply and highly correlated to economic growth, since players use the money to purchase properties and build houses and hotels.
The reason the game works so well, is because the rules are compatible with reality. The players develop properties by putting houses on them, and if they don't develop properties and stay in hotels they cannot afford, they go bankrupt.
If someone inflates the growth of money supply to e.g. $200,000 for passing 'Go', players have a reduced incentive to create wealth, because the differences between owning every property on the board with hotels on them, and being a hobo are zero, since the hobo gets a free ride and can afford the same lifestyle of living in a hotel roughly half the time (22/40 - statistical jail time), without worrying about repairs, paying taxes, etc. Lesson: High inflation creates the incentive to become a hobo.

The economic illiteracy rate among socialists is not surprising - if they were literate, they wouldn't be socialists.

[ewmayer]

Obama Lays Out `Sweeping Overhaul' of Financial Oversight Following Crisis: President Barack Obama said his plan to refashion supervision of the U.S. financial system is needed to fix lapses in oversight and excessive risk taking that helped push the economy into a prolonged recession.

The proposal, much of which will be subject to approval by Congress, sets out the biggest overhaul of market rules in more than seven decades, adding an additional layer of regulation for the biggest firms. It would create an agency for monitoring consumer financial products, make the Federal Reserve the overseer of companies deemed too big to fail, and bring hedge and private equity funds under federal scrutiny.

“This was a failure of the entire system,” Obama said in prepared remarks for a White House event with the leaders of the Treasury, Fed and other regulatory agencies. “An absence of oversight engendered systematic, and systemic, abuse.”

The announcement marks the beginning of what promises to be a political battle that’s likely to alter the president’s plan. Obama, who has called the “sweeping overhaul” of regulations one of his top domestic priorities, said wants to sign legislation to enact it by the end of the year.

My Comment: While I agree that the US financial-regulatory system is in dire need of an overhaul, two points:

1) Most of the "failure of the entire" system could have been prevented if longstanding common-sense regulatory frameworks, many forged in the wake of the market meltdown which led to the Great Depression (e.g. the Glass-Steagal Act, repealed on Clinton`s watch), had not been dismantled in a multi-decade orgy of ideologically-driven deregulatory frenzy, and if the remaining regulators (SEC, OTS, the Fed) had not been led by similar deregulatory laissez-faire ideologues like Greenspan at the Fed (a trend which reached its peak under W. Bush). The existing regulations would have worked just fine, had they actually been actively enforced.

2) The Fed is absolutely the last institution which should be given even *more* power in this area. It was the Fed (mostly the Greenspan-led one, but Bernanke was a longtime loyal acolyte of the Greenspan Dogma) which caused one speculative asset bubble after another - each one bigger and more potentially ruinous that the last - to be blown in the past 2 decades, and which did everything in its power to encourage excessive borrowing-driven economic "growth", reckless and unsustainable lending practices, and the replacement of large sectors of what used to be an actual productive economy with the Ponzi-finance FIRE economy (finance, insurance, real estate).

But (2) is perfectly in accord with Mish Shedlock`s Fed Uncertainty Principle, corollary 2:

"The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing."

[ewmayer]

Karl Denninger has an update on the saga of the Bearer Bonds which raises more questions that it answers. U.S. Treasury officials say "fake", but confirm there is a whole lot more of genuine BBs still out there than had been previously admitted. Question of why someone would eve attempt to forge a $500M bearer bond remains open. According to KD's sources, the 2 Japanese nationals have been released, which if true is even more bizarre, because (if we take the Treasury folks` words as truth, which I am not ready to do at this point due to the weirdness of the whole thing) this would be by far the biggest counterfeiting attempt in history.

The whole affair is bizarre beyond words...

Barry Ritholtz has some major problems with the Obama proposal for financial-sector regulatory reform - I give only the headline items he discusses in detail:

Some very obvious omissions from the plan include:

1) No major changes for the ratings agencies!

2) Turn Derivatives into Ordinary Financial Products: The Obama team does a series of minor steps for Derivatives, but they don’t go far enough.

3) If they are too big to fail, make them smaller.”

4) The Federal Reserve, Despite its Role in Causing the Crisis, Gets MORE Authority:

5) Require leverage to be dialed back to its pre-2004 levels.

6) Restore Glass Steagall

My Comment: Barry also has some perspective on the truly massive amounts of money committed to bailouts of players in the current crisis by the U.S. Government:

It is exceedingly difficult to convey exactly how much we are spending on all these bailouts. Whenever I start talking trillions (versus mere billions), I get puzzled looks from people. Humans have a hard time conceptualizing any number that large. I wanted a graphic way to clearly show how astonishingly ginormous the amounts involved were.

So I once again went to Jess Bachman at Wallstats. I gave him my list of expenditures (inflation adjusted of course!) and he went to work. This early Bailout Nation graphic shows the the total costs to the taxpayer of all the monies spent, lent, consumed, borrowed, printed, guaranteed, assumed or otherwise committed.

It is nothing short of astonishing.

It includes the total outlay for all the bailouts to date. In just about one short year (March 2008 - March 2009), the bailouts managed to spend far in excess of nearly every major one time expenditure of the USA, including WW1&2 (omitted from graphic), the moon shot, the New Deal, total NASA budgets (omitted from graphic), Iraq, Viet Nam and Korean wars — COMBINED.

206 years versus 12 months. Total cost: ~$15 trillion and counting ...

[And BR adds this in the comments section]

For those of you too lazy to click thru to the older post about the dollar amount:

• Marshall Plan: Cost: $12.7 billion, Inflation Adjusted Cost: $115.3 billion
• Louisiana Purchase: Cost: $15 million, Inflation Adjusted Cost: $217 billion
• Race to the Moon: Cost: $36.4 billion, Inflation Adjusted Cost: $237 billion
• S&L Crisis: Cost: $153 billion, Inflation Adjusted Cost: $256 billion
• Korean War: Cost: $54 billion, Inflation Adjusted Cost: $454 billion
• The New Deal: Cost: $32 billion (Est), Inflation Adjusted Cost: $500 billion (Est)
• Invasion of Iraq: Cost: $551b, Inflation Adjusted Cost: $597 billion
• Vietnam War: Cost: $111 billion, Inflation Adjusted Cost: $698 billion
• NASA: Cost: $416.7 billion, Inflation Adjusted Cost: $851.2 billion

TOTAL: $3.92 trillion

My Comment: The above list omits the cost estimates for the major wars, so allow me to supplement it with data from this nifty U.S. Navy webpage detailing the Costs of Major U.S. Wars: - some of the numbers (compare e.g. Korea and Vietnam to the above) differ a bit but overall seem to be in line (where we have overlapping data) with the above. This shows that the total committed bailout monies in fact do amount to "in excess of nearly every major one time expenditure of the USA, including WW1&2", and in fact including every major war the U.S. has ever fought. "Over 100% of GDP" is a lot of money, irrespective of what a current-year dollar will buy (less every year these days)...

War    /   Years of War Spending              Total Military Cost of War       Cost % of GDP (Peak Year)
                                            Current Year$   Constant FY2008$   Year  War   Total Defense
------------------------------------        --------------------------------   --------------------
American Revolution        1775-1783         101 million       1.83 billion     NA            NA
War of 1812                1812-1815          90 million       1.18 billion    1813: 2.2%     2.7%
Mexican War                1846-1849          71 million       1.80 billion    1847: 1.4%     1.9%
Civil War: Union           1861-1865        3183 million      45.20 billion    1865:11.3%    11.7%
Civil War: Confederacy     1861-1865        1000 million      15.24 billion          NA       NA
Spanish American War       1898-1899         283 million       6.85 billion    1899: 1.1%     1.5%
World War I                1917-1921          20 billion        253 billion    1919:13.6%    14.1%
World War II               1941-1945         296 billion       4114 billion    1945;35.8%    37.5%
Korea                      1950-1953          30 billion        320 billion    1952: 4.2%    13.2%
Vietnam                    1965-1975         111 billion        686 billion    1968: 2.3%     9.5%
Persian Gulf War           1990-1991          61 billion         96 billion    1991: 0.3%     4.6%
Iraq                       2003-Present      616 billion        648 billion    2008: 1.0%     4.2%
Afghanistan/GWOT           2001-Present      159 billion        171 billion    2007: 0.3%     4.0
Post-9/11 Domestic Security 2001-Present      28 billion         33 billion    2003: 0.1%     3.7%

[cheesehead]

Originally Posted by ewmayer

According to KD's sources, the 2 Japanese nationals have been released, which if true is even more bizarre, because (if we take the Treasury folks` words as truth, which I am not ready to do at this point due to the weirdness of the whole thing) this would be by far the biggest counterfeiting attempt in history.

It's simple, Ernst.

The case is "TOO BIG TO PROSECUTE".

World War II               1941-1945         296 billion       4114 billion    1945;35.8%    37.5%

Winner and still champion ...

[AES]

The bearer bonds were counterfeit, the Japanese nationals are innocent, and the stars are aligned for prosperity.

Move along. There's nothing to see here. Move along.