Econ 2009

[cheesehead]

Originally Posted by ewmayer

Hurrying Into the Next Panic: On top of an already dangerously influential and morally suspect financial minefield is now being added the unthinking power of the machine.

From the article:

So, is trading faster than any human can react truly worrisome?

Cyborgs vs Humans yet?

The answers that come back from high-frequency proponents, also rather too quickly, are “No, we are adding liquidity to the market” or “It’s perfectly safe and it speeds up price discovery.” ...

Those responses disturb me. Whenever the reply to a complex question is a stock and unconsidered one, it makes me worry all the more. . . . l want to address the question of whether high-frequency algorithm trading will distort the underlying markets and perhaps the economy.

It has been said that the October 1987 stock market crash was caused in part by something called dynamic portfolio insurance, another approach based on algorithms. . . .

. . .

By 1987, however, the problem was the sheer number of people following the strategy and the market share that they collectively controlled. If a fall in the market leads to people selling according to some formula, and if there are enough of these people following the same algorithm, then it will lead to a further fall in the market, and a further wave of selling, and so on — until the Standard & Poor’s 500 index loses over 20 percent of its value in single day: Oct. 19, Black Monday. Dynamic portfolio insurance caused the very thing it was designed to protect against.

What was that global computer system in "Terminator"? Oh, yes, Skynet. From the Wikipedia article:

The strategy behind Skynet's creation was to remove the possibility of human error and slowness of reaction time to guarantee fast, efficient response to enemy attack.

[ewmayer]

Lovin` today's rollicking episode of "Bullshit Green-Shoots Spin", in which we find first-time unemployment claims "having stabilized" at a catastrophic level of nearly 600,000 per month is a positive (note that the economy in fact needs to *create* 120,000 new jobs each month just to keep unemployment at a constant level), and continuing claims dropping slightly AS A RESULT OF TENS OF THOUSANDS OF PEOPLE EXHAUSTING THEIR BENEFITS is "great news for the economy!"

Irrational exuberance all over again ... optimism is one thing, but I simply cannot fathom the level of propaganda being pumped by the government/money-management/mainstream-media triumvirate, and the public`s willingness to fall for the same old song and dance once AGAIN. We've had no less than 3 such "delusional hope" rallies in the past year alone, and the first two (the big financial rally that started last March after Bear Stearns was "rescued" and subprime was pronounced "contained", and then the late Fall rally after Fannie, Freddie and AIG all got nationalized and the credit markets nearly completely collapsed) ended badly. Anyone wanna predict how long the current new-bubble insanity will last? Dow to 15,000, maybe?

Delusional.

[ewmayer]

Leading economic-media story today is the allegedly "better than expected" US Q2 GDP numbers (note the previously-reported-as-less-worse-than-expected-Q2-numbers were revised down to -6.4%, big surprise there, eh?) - looking more closely at the components of the GDP calculation, it appears the 2 biggest "pluses" last quarter were:

1) U.S. imports collapsed faster (-15%) than exports (-7%), which is a "positive" for GDP;

2) Military expenditures up a whopping 13% ... so much for Obama decreasing the bloated defense budget. And his fellow democrats aren`t helping in that regard either.


Bankers Reaped Lavish Bonuses During Bailouts: Wall Street’s million dollar club had nearly 5,000 members in 2008, New York’s attorney general reported.

My Comment: As this similar (and more-to-the-point-y) CNN/Money story notes, about a half-dozen of the biggest TARP-money recipients paid out more in bonuses than they made in terms of profits, allegedly in order to retain the top "talent" that did so much to help bring you the global financial crisis.


China Bubble Update:

James Galbraith On China`s Drastically Overstated Trade Surplus

It is no secret that China`s economic numbers are so cooked and unreliable, that they make the constantly changing and optimistically biased economic data out of the U.S. (especially lately) have the credibility equivalent of a Harvard Ph.D. thesis. University of Texas professor James Galbraith discusses one aspect of China`s "booming" economy, specifically the question of China`s Trade Surplus, which as he notes has been drastically inflated since 2002 due to Chinese companies over-reporting profits on exports in order to disguise various investments by foreigners into China, so as to beat capital control restrictions.

Galbraith argues the "fake profits" are so large that China may have actually run a trade deficit in some years, and these figures casts serious doubt on the reported P&L of Chinese companies.

My Comment: Apparently the Chinese were conspicuously absent at the latter 2 of this week`s 3 massive auctions of UST debt (the ones of longer maturity), forcing Bubble Ben to reach deep into his Fast-Feddie bag of tricks to create fake demand for the (in)securities. With another trillion $ in debt still to be auctioned this year, things could get interesting. BB`s strategy (probably the only one which *might* allow the US to weasel out of some of its massive debt without spooking the markets) appears to be "creeping monetization". That` one of the reasons he and the rest of the Fed fraternity who appear all-too-regularly on the MSFM (Rivlin, Kohn, etc) are fighting tooth and nail against Texas congressman Ron Paul`s audit-the-Fed proposal (a.k.a. HR1207), whose support in the House recently passed 50%.


Interesting Twist on the Underwater-Homeowners Statistics:

WSJ: Study Finds Underwater Borrowers Drowned Themselves with Refinancings

Why are so many homeowners underwater on their mortgages?

In crafting programs to prevent foreclosures, policymakers have assumed that the primary reason homeowners owe more on their home than it is worth is that they bought at the top of the market. In other words, they’ve lost equity primarily through forces beyond their control.

A new study challenges this premise and finds that excessive borrowing may have played as great a role.

Michael LaCour-Little, a finance professor at California State University at Fullerton, looked at 4,000 foreclosures in Southern California from 2006-08. He found that, at least in Southern California, borrowers who defaulted on their mortgages didn’t purchase their homes at the top of the market. Instead, the average acquisition was made in 2002 and many homes lost to foreclosure were bought in the 1990s. More than half of all borrowers who lost their homes had already refinanced at least once, and four out of five had a second mortgage.

The original loan-to-value ratio for these borrowers stood at a reasonable 84%, but second and third liens left homeowners with a combined loan-to-value ratio of about 150% by the time of the foreclosure sale date.

Borrowers, meanwhile, took out around $2 billion in equity from their homes, or nearly eight times the $262 million that they put into their homes. Lenders lost around four times as much as borrowers, seeing $1 billion in losses.

“[W]hile house price declines were important in explaining the incidence of negative equity, its magnitude was more strongly influenced by increased debt usage,” writes Mr. LaCour-Little. “Hence, borrower behavior, rather than housing market forces, is the predominant factor affecting outcomes.”

If other housing markets across the country offer similar findings, then the study argues that current “policies aimed at protecting homeowners from foreclosure are misguided” because lenders, and not borrowers, have born the lion’s share of economic losses.

Borrowers that bought homes without ever putting any or little equity in their homes could have seen huge returns on investment simply by extracting cash through refinancing. “Why such borrowers should enjoy any special government benefits such as waiver of the income taxation on debt forgiveness or subsidized loan modifications to reduce their borrowing costs is at best unclear,” the authors write.

My Comment: A.k.a. "Honey, let`s use our home a giant ATM so we can buy that Hummer, eat out every night and take a deluxe cruise each year!"


Friday Funny: Hilarious op-ed by Bloomberg "Goldman Sachs insider" Michael Lewis - I especially like his GS-specific definition of "round to nearest":

Bashing Goldman Sachs is Simply a Game for Fools: America stands at a crossroads, and Goldman Sachs now owns both of them.

[cheesehead]

Originally Posted by ewmayer

2) Military expenditures up a whopping 13% ... so much for Obama decreasing the bloated defense budget.

How about quoting more of that paragraph from The Market Ticker:

So much for Obama destroying military spending eh? Uh, not so fast eh? 13% increase? Not bad. The Federal Government is attempting to pick up the pieces from the private sector, but without success.

It's part of the "stimulus" speeding-up of already-planned spending.

Current-budget military spending is from what was authorized during the Bush administration. FY 2009, which ends Sept. 30, 2009, had to be budgeted before October 2008: before Obama was elected, much less had taken office.

If there's really something in that 13% increase that was only authorized during the current administration, okay, but even the Wall Street Journal recognizes that non-emergency fiscal year budgets are passed before the start of the corresponding fiscal year, which is October 1 of the preceding calendar year.

And his fellow democrats aren`t helping in that regard either.

Fair enough.

[AES]

Originally Posted by cheesehead

Fair enough.

IMO, Yes, they need the money to buy insured, operational automobiles at an inflated price and then pay to transport, crush, and recycle. Am I still allowed to call "BullShit" in this game?

IMO, Bend over bitches, we're buying used cars and wrecking them without taking the first drink.

[AES]

Why not use the CARS model to drive up new house sales? If we collectively pay through taxes to buy and demolish enough established houses, the new house sales figure will have to boom.

[Uncwilly]

Originally Posted by AES

Why not use the CARS model to drive up new house sales? If we collectively pay through taxes to buy and demolish enough established houses, the new house sales figure will have to boom.

Cars are a durable good, but unlike houses, they are generally seen to have a life span of less than 20 years. Houses are seen to have century length life spans.

Paying to place new energy efficient appliances on the other hand is more reasonable.

[__HRB__]

Originally Posted by Uncwilly

Cars are a durable good, but unlike houses, they are generally seen to have a life span of less than 20 years. Houses are seen to have century length life spans.

Paying to place new energy efficient appliances on the other hand is more reasonable.

The federal government just has to pass regulation to the effect that it's a felony to live in a 20-year-old house. This would even create twice the jobs (one guy wrecking, one guy building). Cost control and social justice could be achieved by cutting out the corporate middle man: people who have so strongly exploited the working class that they can afford to buy a house.

[cheesehead]

Originally Posted by AES

IMO, Yes, they need the < snip >

Just to be clear: I meant that the criticism of "his fellow democrats" was fair enough.

[Fusion_power]

Today's economic news includes statements by both Greenspan and Geithner that the economy is at the bottom and has actually trended upward a tiny amount. Jobs creation is lagging and layoffs continue at a very high level. Extending unemployment benefits is on the table as a stopgap measure. There are 1 million unemployed with expired benefits in the U.S. at this time. Presuming each gets $400 per week, that means $400,000,000 per week for at least 6 months or a total bill in the range of $10 Billion.

Putting aside Ewmayer's PermaBear viewpoint, lets ask if the economy is really starting to improve.

1. There are modest signs of housing prices recovering.
2. New unemployment claims are less on average than 3 months ago.
3. There are signs that Ford, GM, and Chrysler are benefitting from the clunker program.
4. Corporate earnings are significantly better than expected.
5. New home construction is actually improving.
6. People are starting to spend money again albeit cautiously.

Balancing that are these negatives:

1. The $bailout and $stimulus are starting to run out for the former and starting to have effect for the latter, neither will sustain growth long term.
2. Credit card defaults have barely started to affect banks. Expect several MAJOR bank failures near term, just not the 'too big to fail' Citi, JPM, etc.
3. Overall debt levels on an individual basis are unsustainably high.
4. Corporate debt is triggering bankruptcy.
5. Government debt has increased to meteoric levels that cannot be sustained long term.
6. Overprinting of money has injected so much new money into the system that inflation is not just a possibility, it is guaranteed.


While there are plenty of other items that could be listed with the above, overall, the positives and negatives seem to be balancing out to at least some extent for some length of time. The one significant conclusion you can reach is that TAXES will INCREASE while inflation erosion reduces buying power. I can see a time when a pauper will make $50,000/year?

Does anyone want to take on the project of identifying ways to 'hedge' against inflation? Putting money in the mattress won't do the job and putting it in a bank at 1% or less interest is barely better.

DarJones

[garo]

Gold! There is gold in them thar hills

But joking aside, I see your positive points but have several rejoinders.

1. I read some analysis that says that we will see a rise in the average price of a house sold because foreclosures and distressed sales are moving up the food chain. As we see more prime and jumbo mortgages default and houses come into the market the "average home price" will rise. The trick is to pay attention to like-for-like sales.

2. True but people are still losing jobs at what is a serious serious recession rate. Remember the economy needs to create 100k+ jobs just for the unemployment rate to stand still.

4. But what is "expected"? The numbers coming out of anal-ysts? They seriously low-balled the projections this time round.