Mystery Economic Theater 2010

[wblipp]

Originally Posted by Fusion_power

The market is experiencing negative feedback. As most of you mathematicians know, negative feedback results in instability.

Actually, negative feedback is used for stability. We get into language problems trying to talk about it applied to social systems, though. "Negative Feedback" in the control theory sense means the feedback is the opposite sign of the output. So negative results would result in positive additional inputs, and positive results would result in negative additional inputs.

What you are experiencing is runaway feedback, with negative results leading to even more negative results. The language trap is to describe this runaway feedback of negative results as negative feedback - not the control theory sense of "negative."

Sorry you have to work through such times. I can only manage it by developing a detachment from work - itself a negative input because I no longer care so much about results, contributing to the runaway feedback.

[garo]

Alan Grayson does it best:

http://www.youtube.com/watch?v=t0_TtYQEDTo

[only_human]

Originally Posted by wblipp

Sorry you have to work through such times. I can only manage it by developing a detachment from work - itself a negative input because I no longer care so much about results, contributing to the runaway feedback.

A supermarket manager after their big strike said something similar to me (except for the feedback semantics) and I feel that similar feelings in the current economy are becoming endemic. Here's to hoping that your detachment is a more lighthearted one.

Ross

[ewmayer]

Originally Posted by garo

Alan Grayson does it best:

http://www.youtube.com/watch?v=t0_TtYQEDTo

Karl Denninger - while admitting to being entertained by this latest delicious Graysonian rant - has a somewhat different take on the practicability of the idea. It`s an interesting question: Say we were able to magically end our involvement in Iraq and Afghanistan (and started no new "replacement" wars) in the next few years ... without any appreciable driver for significant private-sector jobs creation, what is the resulting significant fraction of service personnel who retire from active duty going to do?

--------------------------

Bonfire of the Quangos:

On the government-insolvency front, oday`t interesting econo-factoid, courtesy of the New York Times:

"...about 3,700 retired public workers in New York are now getting pensions of more than $100,000 a year, exempt from state and local taxes ... Thirteen New York City police officers recently retired at age 40 with pensions above $100,000 a year; nine did so in their 30s."

That sort of looniness is clearly unsustainable. For an advance peek of the kind of harsh austerity (to use everyone's favorite latest econo-buzzword) coming to state and local - and eventually but surely lastly, federal - governments across the U.S., we need look no further than across the pond, where what`s coming has been dubbed the "bonfire of the quangos" (which to my American ears sounds like a kind of Australian barbecue):

Up to 700,000 jobs in public sector face the axe: At least 300,000 Whitehall and other public sector workers may lose their jobs as the coalition government sets to work cutting the £156 billion budget deficit.

--------------------------

Defaults on Apartment Building Mortgages Held by U.S. Banks Rise to Record:Defaults on apartment-building mortgages held by U.S. banks climbed to a record 4.6 percent in the first quarter, almost twice the year-earlier level, as more borrowers failed to repay debt approved near the market peak

My Comment: As Mish notes, this trend has led to some curious side effects, mirroring bank-sanctioned "long-term defaulter squatting" in the residential real estate market.

--------------------------

Financial "Reform", Swiss-Cheese Style:

Senate passes financial reform bill:Vote represents major policy victory for President Obama

WASHINGTON - Prodded by national anger at Wall Street, the Senate on Thursday passed the most far-reaching restraints on big banks since the Great Depression. In its broad sweep, the massive bill would touch Wall Street CEOs and first-time homebuyers, high-flying traders and small town lenders.

The 59-39 vote represents an important achievement for President Barack Obama, and comes just two months after his health care overhaul became law. The bill must now be reconciled with a House version that passed in December. A key House negotiator predicted the legislation would reach Obama's desk before the Fourth of July.

The legislation aims to prevent a recurrence of the near-meltdown of big Wall Street investment banks and the resulting costly bailouts. It calls for new ways to watch for risks in the financial system and makes it easier to liquidate large failing financial firms. It also writes new rules for complex securities blamed for helping precipitate the 2008 economic crisis, and it creates a new consumer protection agency.

My Comment: Sounds pretty good, don`t it? Well, not so fast ... on the it`s-as-full-of-holes-as-a-donut-factory front, Denninger summarizes thusly:

Who are these guys trying to kid?

The most-important part of the bill, stopping derivative abuse, was watered down to the point of irrelevance. The exceptions and exemptions that remain for OTC trading are big enough to drive 200 West Street through - sideways - and Goldman will do exactly that.

Nor did we re-impose a hard leverage cap. You know, the one that existed before 2004?

Nor did we reinstate a hard deposit cap limitation.

Nor did we fix The Fed illegally usurping the appropriation power of Congress or impose an actual audit on them.

Nor did we fix the off-balance sheet or "mark to fantasy" BS - in short, the outright lies printed in so-called "financial reports" every quarter.

And if you don`t like his style or political slant, perhaps you prefer to hear most of the same objections from former Clinton-administration labor secretary Robert Reich, who has some especially pointed things to say about derivatives reform (or better, the likely lack thereof in the version of the bill which will eventually get signed into law):

Which brings us to the third structural idea, advanced by Senator Blanche Lincoln. She would force the banks to do their derivative trades in entities separate from their commercial banking.

This measure is still in the bill, but is on life-support after Paul Volcker, Tim Geithner, and Fed chair Ben Bernanke came out against it. Republicans hate it. The biggest banks detest it. Virtually every major Wall Street and business lobbyist has its guns trained on it. Almost no one in Washington believes it will survive the upcoming conference committee.

But it's critical. For years the big banks have relied on taxpayer-funded deposit insurance to backstop their lucrative derivative businesses. Obviously they want the subsidy to continue. Bernanke argues that "depository institutions use derivatives to help mitigate the risks of their normal banking activities." True, but irrelevant. Lincoln's measure would allow banks to continue to use derivatives. They just could not rely on their government-insured deposits for the capital.

Requiring banks to do derivative trading in separate entities would force them to raise extra capital. But if such trading is so useful, banks should foot the bill, not taxpayers. Bernanke and others say the measure would give foreign banks a competitive advantage. Even if he is right, since when is it up to taxpayers to guarantee profitability at America's largest banks relative to foreign ones?

The trading of derivatives is not so crucial to the US economy that taxpayers should subsidize the practice. If the past two years have taught us anything, the lesson is just the opposite. Derivatives can generate huge risks unless carefully regulated.

Wall Street's lobbyists have fought tooth and nail against these three ideas because all would change the structure of America's biggest banks. The lobbyists won on the first two, and the Street has signaled its willingness to accept the Dodd bill, without Lincoln's measure.

The interesting question is why the president, who says he wants to get "tough" on banks, has also turned his back on changing the structure of American banks -- opting for a regulatory approach instead.

It's almost exactly like health care reform. Ideas for changing the structure of the health-care industry -- a single payer, Medicare for all, even a so-called "public option" -- were all jettisoned by the White House in favor of a complex set of regulations that left the old system of private for-profit health insurers in place. The final health care act doesn't even remove the exemption of private insurers from the nation's antitrust laws.

Regulations don't work if the underlying structure of an industry -- be it banking or health care -- got us into trouble in the first place. Wall Street's big banks are just too big, and their ability to draw on commercial deposits for investment banking activities, including derivatives, will make them even bigger. It will also subject the economy to greater and greater risks in the future. No amount of regulation can cure that.

[garo]

Gotta disagree with Karl there. The money that is saved - and bombs and helicopters and fuel to run them is pretty darn expensive - perhaps more so than the 30k your average soldier makes - goes into tax cuts for the poorest. And they spend the money and stimulate the economy creating jobs! Yaay!

[cheesehead]

Originally Posted by garo

Gotta disagree with Karl there. The money that is saved - and bombs and helicopters and fuel to run them is pretty darn expensive

... but which, unlike soldiers, require no jobs with salaries to support themselves and families.

Karl is addressing the ongoing personal incomes that would continue even if we stop dropping bombs and burning fuel to fly helicopters that get shot-up over a war zone.

- perhaps more so than the 30k your average soldier makes

... but with bombs, etc. the cost is over once they're designed and manufactured, aside from minor maintenance expense while they're unused.

- goes into tax cuts for the poorest

deficit reduction.

The poorest, in the U.S., already pay no income taxes. The official poverty levels are substantially below the bottom taxed income bracket.

[S485122]

Originally Posted by ewmayer

"...about 3,700 retired public workers in New York are now getting pensions of more than $100,000 a year, exempt from state and local taxes ... Thirteen New York City police officers recently retired at age 40 with pensions above $100,000 a year; nine did so in their 30s."

Ernst, you forgot the complete quote : "The plan’s public information officer said that the very young retirees had qualified for special disability pensions, which are 50 percent larger than ordinary police pensions. He said several dozen of the highest-paid New York City police retirees had disabilities related to 9/11 and the rest of the disabilities resulted from injuries in the line of duty." So you are speaking about disability compensation not about pensions...

Jacob

[R.D. Silverman]

Originally Posted by ewmayer

<snip>

And if you don`t like his style or political slant, perhaps you prefer to hear most of the same objections from former Clinton-administration labor secretary Robert Reich, who has some especially pointed things to say about derivatives reform (or better, the likely lack thereof in the version of the bill which will eventually get signed into law):

I am of the opinion that all derivatives and derivative-style
financial products should be banned outright.

[R.D. Silverman]

Originally Posted by R.D. Silverman

I am of the opinion that all derivatives and derivative-style
financial products should be banned outright.

I will go even further. I think short selling should be banned as well.

Let's get back to old-style value based investing.

So you want to invest in XYZ Corp? Fine. When it does well,
you do well. When it loses money, you lose money.

I'd also like to see guarantees that a certain minimum percentage of
profits gets returned to shareholders in the form of dividends.
Yes, a company can have retained earnings. Yes, a company can
re-invest in itself (i.e. new infrastructure, R&D, etc). Yes, a company
can use profits to award bonuses (but only with stockholder approval).
But limits need to be put in place.

We need to give control of public corporations BACK to the owners
(the stockholders).

I'd also like to see rules put in place that mandate that if a layoff
is necesarry, that it be done from the TOP DOWN. If senior execs
want big bucks as a reward for running a company well, then they have
to be the first ones to go when a compnay does badly.

[R.D. Silverman]

Originally Posted by garo

Gotta disagree with Karl there. The money that is saved - and bombs and helicopters and fuel to run them is pretty darn expensive - perhaps more so than the 30k your average soldier makes - goes into tax cuts for the poorest. And they spend the money and stimulate the economy creating jobs! Yaay!

Meanwhile one gets many many many laid off high-tech workers who,
in turn, wind up paying almost nothing in state or federal taxes (because
they have no income) and thus increasing the deficit.

[ewmayer]

Originally Posted by S485122

Ernst, you forgot the complete quote : "The plan’s public information officer said that the very young retirees had qualified for special disability pensions, which are 50 percent larger than ordinary police pensions. He said several dozen of the highest-paid New York City police retirees had disabilities related to 9/11 and the rest of the disabilities resulted from injuries in the line of duty." So you are speaking about disability compensation not about pensions...

Jacob

While the 9/11-related-disability issue makes them more sympathetic, it does not alter the fact that paying someone what amounts to a six-figure welfare payment in perpetuity - for many of these guys that could on for 50 years or more - is simply nuts. I`ve got nothing against covering the legitimate work-related-disability medical expenses of police officers and firefighters as we do for military-service personnel, but to add an actual disability pension higher than the person`s full-time salary (and tax-free on top of that) is too much. Imagine if we'd applied similar largesse to (say) returning veterans of WW2 ... pretty much any veteran who saw combat could claim post-traumatic-stress disability, and with a big fat pension-check-forever awaiting them, would have ZERO incentive to ever work again. Unaffordable is unaffordable, no matter how much we might "like to do the right thing".

--------------

Another rough day for the economic optimists ... Eurozone still busily unraveling, Spanish banks crumbling, saber-rattling on the Korean peninsula...a perfect time to load the boat with discount-priced stocks, so you don`t miss out on the impending runup to Dow 36,000.

ZeroHedge asks an interesting question about a key part of the financial reform bill today, namely:

Is The Consumer Protection Bill Just One Huge Governmental Subversion Of Privacy Ploy?


CNN/Money`s Paul LaMonica asks the question which is on many investors` minds ... Note that he posted this around 1 pm New York time yesterday (I intended to post to this thread before leaving work yesterday but never got around to it), just as the markets looked about to turn green for the day - sorry, Paul, no last-minute stick save this day. But on to the blizzard of bullish spin:

Is this the start of a new bear market?

Stocks were mixed Monday as a better-than-expected jump in existing home sales in April seemed to outweigh fears about the debt crisis in Europe. Still, the S&P 500 is now down about 9% in May.

So what now? Is the May malaise merely a long-awaited correction or the start of a new bear market that could last months or years? Is it time to buy in June and sing a happy tune?

Several market experts are guardedly optimistic that things won't get significantly worse. That's the good news.

"The most immediate concerns are transitory. They are important but they will get resolved soon," said David Joy, chief market strategist with Columbia Management in Boston. "It's important to have a well diversified portfolio and be prudent. But there's no need to exit the stock market."

...Unless you`re one of those weirdos whose investment objectives include "capital preservation", that is ... thankfully, if you're a client of Mr. Joy`s, that is highly unlikely to be the case. So let`s move on to all the other good reasons why now is the best time ever to be be investing in real estate the stock market:

Bruce McCain, chief investment strategist with Key Private Bank in Cleveland, added that he thinks there is little room left for stocks to fall from here. In fact, he said it's possible the market may have already hit bottom.

"This could be a surprisingly short correction," he said.

That`s right, after a 70% rally off the March 2009 lows, stocks are clearly still massively oversold, especially given the unbelievable robustness of the economic recovery going on in ... well, somewhere.

The bad news though is that the market may remain choppy for the foreseeable future.

"Volatility is a given. As far as Europe is concerned, there is a lot going on and many questions that are unanswered," said Matt O'Reilly, chief investment strategist with People's United Wealth Management in Bridgeport, Conn.

O'Reilly is confident that stocks will eventually bounce back, but he said it's no surprise that many individual investors are still sitting on the sidelines. The memory of 2008's meltdown is still fresh and events like the May 6 flash crash do little to help restore faith in the markets.

"Investors have still yet to recognize what their tolerance for risk is. Every time there is a rapid response in the markets to news, it undermines their confidence and makes them more wary," he said.

Ah, so the flash crash was not an out-of-control computer-algo-driven stop-loss cascade but rather "a rapid market response to news"? Interesting ... I hadn`t heard that one before. My, these modern markets truly *are* efficient, to be able to digest news so quickly that they undergo an entire market-correction-and-resumption-of-the-uptrend-cycle in a matter of minutes ... no more of that tedious waiting-for-weeks to see how things shake out, eh?

The biggest problem is that Europe is a big massive unknown. Are the issues facing the PIIGS nations a mere hiccup on the road to economic rebound or a precursor to another worldwide downturn?

"The one thing we don't know is what impact the decline in Europe will have on the global recovery. I don't think we are going to have a double-dip recession. But the pace of growth may slow," said Phil Dow, director of equity strategy RBC Capital Markets in Minneapolis.

My Comment: Well, since the European economy is, like "small" or something, Greece is an isolated (basket) case, and Spain, Portugal, Ireland, France and the UK are in fact in much greater shape than reality would indicate, things are looking pretty "contained-tastic". As Phil here is obviously the most bearish analyst of the bunch, clearly the worst that could possibly happen is a slight slowing in all this frickin` huge economic growth that`s going on. Buy, people, buy! Dow to 36,000 by end of the year!! American consumer is back and better than ever!!!

Now, for a *slightly* more bearish view, let`s check out James Howard "prophet of doom" Kunstler`s latest:

Clusterfuck Nation: Something Happened

Something snapped in the world last week and a lot of people around the world sensed it -- especially in the organs of news and opinion -- but this ominous twang was not very clearly identified. It was, in fact, the sound of the financial becoming political. The macro-swindle of a worldwide Ponzi orgy now stands revealed and the vacuum left in its place is about to suck everything familiar into it -- standards-of-living, hopes, dreams, not to mention lives. The political action will be a desperate scramble to determine who and what is able to escape getting sucked into this black hole of annihilation. It's very suddenly shaping up to become an epic in human history.
...
What has gone on in Europe the past few weeks is nothing more complicated than a waking-up to how broke they are. We're not quite there yet on this side of the Atlantic. They fired one last bazooka of wishfulness at the enveloping monster of debt and the monster laughed at them, and now they are standing in the windows of palatial edifice of the Euro Union waiting to see who will jump first. Here in the USA, we're still dazed and confused. What for a long time had looked like a game of musical chairs is morphing into something more like a national Chinese fire drill, a pointless running around in circles in the hope that sheer motion will be an adequate substitute for conscious action. In any case, both Europe and the USA are out of bazooka ammo now. Nobody can bail out so much as another lemonade stand. From here on governments really start to crumble.

My Comment: To get a sense of which left-field and how-far-out-in-it Kunstler is coming from, here`s the Publisher's Weekly blurb on Amazon.com for Kunstler`s book The Long Emergency - I note that many of his predictions seem just a tad less extreme in the present post-peak-credit-bust world than they did when he first published them in 2005.