Mystery Economic Theater 2010

[Andi47]

Originally Posted by ewmayer

Denninger has a post on today's "1987 revisited" computer-amplified selloff, which dropped the DJIA over 1000 points (> 10%) for, oh, about 5 seconds there. Not sure if the Dow "circuit breakers" kicked in at that point, or the operators of the gone-haywire HFTs pulled the plug. Nothing to see here, folks, just the highly efficient capital markets doing their usual job of helping the real economy flourish and run more efficiently, and stuff. We probably just need to divert a few billion in stimulus $ to help the poor overworked Wall Street prop trading desks buy even faster supercomputers for their high-frequency trading.

It almost happened again:

Handelspanne bei Deutscher Bank: Schock an Börse in Japan

Ein Computerfehler im Handel der Deutschen Bank hat für Aufregung auf dem japanischen Aktienmarkt gesorgt. Das Institut platzierte an der Börse in Osaka gestern fälschlicherweise Verkaufsaufträge für Derivate auf den Leitindex Nikkei von umgerechnet 150 Milliarden Euro (16,7 Billionen Yen), wie erste heute bekanntwurde.

Die Preise für die Futures gaben daraufhin wie auch der gesamte Nikkei leicht nach. "Wir nehmen diesen Vorfall extrem ernst und tun alles, um sicherzustellen, dass sich so etwas nicht wiederholt", teilte die größte Bank Deutschlands mit, ohne Angaben zur Größenordnung der Orders zu machen.

Größerer Schaden noch vermieden
In ihrer Erklärung führte die Bank die von Experten als peinlich kritisierte Panne auf einen Fehler im internen Handelssystem zurück. Börsianern zufolge wurden mehr als 99 Prozent der fehlerhaften Orders noch gestoppt, so dass nur ein Bruchteil der Aufträge auch tatsächlich ausgeführt wurde.

Vor einem Monat hatte vermutlich ebenfalls ein Systemfehler eines oder mehrerer Marktteilnehmer an den US-Börsen zu einem abrupten Kurssturz geführt. Der Leitindex Dow Jones verlor innerhalb von zehn Minuten sechs Prozent - der genaue Grund ist weiter unklar.

Source: http://www.orf.at/?href=http%3A%2F%2...%2F370563.html

Summarized (I hope I get the vocabs right): Due to computer error at the Deutsche Bank, an order to sell derivates on the Nikkei Index in a volume as high as € 150 billion(!). (Note: german "Milliarde" translates to "billion" in english.). More than 99% of the order has been stopped just in time...

[ewmayer]

Will BP Survive the Oil Spill?

Was discussing the latest on the Gulf of Mexico oil spill - including the newest failed "top kill" attempt to stanch the flow by BP - with some friends this past weekend. One of them argued that despite the magnitude of the spill - now shaping up to be quite possibly the worst in history, at least human history - BP as a company would survive. That led to an "oh, really?" by me and some quick calculation - I concluded that if BP`s liability ends up not being limited by some of the oil-industry-sponsored weasel-word clauses in the relevant U.S. laws, which now seems likely due to mounting evidence of malfeasance (as opposed to mere misfeasance and "acts of God" clauses, i.e. those related to unforeseeable events) - then actual cleanup costs would likely be on the order of ten billion dollars, roughly an order of magnitude higher than the actual cleanup costs of the Exxon Valdez spill. Add in costs of ruined local economies and punitive damages and you`re looking at something in the $50-100 billion range, which is pretty near BP`s market capitalization.

Today`s Wall Street Journal supports this analysis: They note that the final total cost to Exxon for the Valdez disaster was $4-5 billion in today`s dollars, and in the Gulf of Mexico we are talking about an order of magnitude more oil and much more regional-economic impact. Of course the Valdez litigation took nearly 2 decades to resolve, and in corporate-survival terms the rate of compensatory payouts is probably more important than the eventual total. Still, between multibillion-dollar-per-year reparatory payments and reduced future profitability (as a combined result of massive bad publicity for BP and likely much-more-stringent regulatory oversight of the industry), let's just say I wouldn`t recommend buying "sale priced" shares of BP just yet.


The Hidden Price of Gadget-Fetishism

Humans as Assembly-Line Robots ... one more reason I try to keep the number of e-gadgets in my life to a reasonable minimum ("minimum" in very-generous western-household terms: In my case that means two 10-year-old closeout-special TVs, one 7-y.o. DVD/VCR combo, one 20-y.o. stereo, one 15-y.o. microwave, one 3-y.o. WinXP laptop PC, one 1-y.o. Macbook PC, one 5-y.o. "dumb" mobile phone ... shit, that still seems a lot when I list it all, but works out to a little over ~$100 per year worth of gizmos, with the 2 laptop PCs accounting for most of that).

Foxconn Workers Say `Meaningless' Life Spurs Suicides: Ah Wei has an explanation for Foxconn Technology Group Chairman Terry Gou why some of his workers are committing suicide at the company’s factory near the southern Chinese city of Shenzhen.

“Life is meaningless,” said Ah Wei, his fingernails stained black with the dust from the hundreds of mobile phones he has burnished over the course of a 12-hour overnight shift. “Everyday, I repeat the same thing I did yesterday. We get yelled at all the time. It’s very tough around here.”

Conversation on the production line is forbidden, bathroom breaks are kept to 10 minutes every two hours and constant noise from the factory washes past his ear plugs, damaging his hearing, Ah Wei said. The company has rejected three requests for a transfer and his monthly salary of 900 yuan ($132) is too meager to send money home to his family, said the 21-year-old, who asked that his real name not be used because he is afraid of his managers.

At least 10 employees at Taipei-based Foxconn have taken their lives this year, half of them in May, according to the company, also known as Hon Hai Group. The deaths have forced billionaire founder Gou to open his factories to outside scrutiny and apologize for not being able to stop the suicides. Gou built his company into the world’s largest contract electronics manufacturer and now clients from Apple Inc. to Hewlett-Packard Co. are probing the company’s working conditions.

Steve Jobs, Apple’s billionaire chief executive officer, who depends on Foxconn to make the iPhone and iPad, said the suicides are “very troubling.”

“We’re all over this,” said Jobs, speaking yesterday at a technology conference in Rancho Palos Verdes, California. His company does one of the best jobs inspecting suppliers, he said, adding the company is “not a sweatshop.”

My Comment: Sorry, but based on the description of the company facilities and working conditions in the article, it may be a gilded-cage kind of sweatshop - polo-shirted prison garb and a swimming pool for prisonersworkers not too suicidal or exhausted to use it - but a sweatshop nonetheless.

[Prime95]

Originally Posted by ewmayer

If BP`s liability ends up not being limited ... which now seems likely due to mounting evidence of malfeasance.

Does anyone know why BP executives were putting pressure on finishing the well quickly? I know these rigs cost multiple-millions to operate every day, but why would they risk tens of billions in damages to save a month or so to do it right?

Is this, like Wall Street, another case where bonuses were tied to bringing it in on-time and under budget?

[ewmayer]

Originally Posted by Prime95

Does anyone know why BP executives were putting pressure on finishing the well quickly? I know these rigs cost multiple-millions to operate every day, but why would they risk tens of billions in damages to save a month or so to do it right?

Is this, like Wall Street, another case where bonuses were tied to bringing it in on-time and under budget?

George, check out the links in the oil-spill thread next door ... some of those may have what you ask for. I suspect it's the usual suspects: greed, hubris, shortsightedness and perverse incentives. Here`s an article from last week that nicely captures things:

BP had prior warning of Deepwater Horizon blowout

BP, which leased the Deepwater Horizon oil rig, disregarded indications hours before the April 20 blast that the rig might suffer a catastrophic blowout, according to a preliminary report published Wednesday by the House Energy and Commerce committee.

The report showed that the Deepwater Horizon had received evidence of 'kicks' of oil and natural gas coming up the drill pipe several times before the blowout, but disregarded them and went ahead with its effort to cap the well. The report also outlined multiple safety failures on systems involved in making sure that the well remained under control.

On the day of the disaster, the Deepwater Horizon had just finished drilling an exploratory well and was in the process of capping it in order for a different vessel to harvest the oil. Halliburton, which was in charge of capping the well with cement, had just finished putting a cement plug at the well's bottom, and BP wanted to finish the job as soon as possible in order to avoid paying the $500,000-per-day rental fee on the rig any longer than absolutely necessary.

At 5:05 P.M., nearly five hours before the blast, the Deepwater Horizon's crew found unusually low pressure inside the riser pipe connecting it to the ocean bottom, "suggesting there were leaks" in one part of the blowout preventer.

The crew received yet another warning two hours before the explosion, when, after a test that involved reducing the well's pressure, the pipe filled up with three times more fluid than previously expected.

In a follow-up test, the crew found abnormally high pressure on the "kill line," one of the pipes connecting the rig to the blowout preventer on the ocean bottom. Despite the fact that this was an “indicator of a very large abnormality,” BP concluded it was “satisfied" the test was "successful."

At this time, a witness on the rig said the “well continued to flow and spurted,” despite the fact that no drilling was going on. The fact that fluid was being forced up the drill pipe was evidence something was very wrong, and this indication, coupled with the failure of the tests, should have been enough to halt the process and begin an emergency response, including activating some of the valves on the blowout preventer.

But since BP was "satisfied" with the results of the pressure test, it then decided, two hours before the blowout, to replace the heavier drilling mud inside the well with seawater.

While this process was underway, the crew received numerous other direct readings that seawater was flowing up the pipe, including three separate readings, all within an hour of the explosion. Eighteen minutes before the explosion, the rig's pump stopped working.

The House Committee's report noted at this point, the crew attempted "mechanical interventions" in order to control the blowout, meaning they may have tried to activate the blowout preventer.

When this was done, the blowout preventer malfunctioned in several places. The blowout preventer unit, a five-story stack of heavy-duty shutoff valves, was designed to stop the flow of oil and gas in the event of a "kick" like the one that had been observed. The unit included a series of valves, ranging from the light-duty annular valve to the last-ditch shear rams, all of which failed.

The fact that so many systems failed simultaneously, after BP ignored continual warnings and abnormalities, show clear signs of negligence on the company's part. BP wantonly disregarded the safety of its crew, and of the natural environment, in order to cut costs. There is no reason to believe that BP executives on shore were unaware of the test results. It is more likely they ordered the crew to continue capping the well despite ample warnings of a potential disaster.

Witnesses called to testify at hearings held in Washington said they had seen confrontations between representatives of BP, which was leasing the rig, and Transocean, which owned it, over the capping process. One of the witnesses said representatives of BP and other oil companies were often the "outright adversaries" of employees seeking to maintain the safety of the drilling operations.

Transocean's chief mechanic on the rig, Douglas H. Brown, said representatives from BP and Transocean had argued the morning of the disaster over the question of replacing drilling mud with much lighter saltwater, which experts have criticized as particularly risky.

BP Logo Redesign Contest

On a BP-related note, Barry Ritholtz has a link to a nifty gallery of mock redesigned BP logos.For those not familiar with it, the next-to-the-last one - the one mentioned by reader ashpelham2 - contains a silhouetted version of a famous AP photo from the Vietnam War, of a South Vietnamese police officer using his snub-nosed nickel-plated revolver to summarily execute a suspected Viet Cong. It`s a very apt metaphor for the consequences of our economic petroleum addiction.

[I saw the live clip of the same event in a college class - gruesome stuff, especially the brutal matter-of-factness in which the deed was done. That's war for you.] I also like the one 4 from bottom, in which the normal BP logo morphs into a black dripping-oil stain.

[Fusion_power]

Why do glorified accountants so often fall foul of the law? Madoff gave us a textbook example of a man who lived beyond his means.... on other peoples money. There are more waiting to have their 'coming out'.

http://www.thedailybeast.com/blogs-a...ponzi-scheme/1

DarJones

[ewmayer]

Greece to Sell Assets to Help Pay Down Deficit:Greece announced Wednesday its plans for a big sale of state-owned assets, as the struggling government moved to shrink its huge budget deficit and fulfill the terms of an international rescue package

The government will sell 49 percent of the state railroad, list ports and airports on the stock market, and privatize the country’s casinos, the Finance Ministry said after a cabinet meeting in Athens. The government will also sell minority stakes in water utilities serving Athens and Thessaloniki, sell 39 percent of the post office, and combine its vast real estate assets into a holding company to be listed on the stock market.

My Comment: Do the "vast real estate assets" which are to be publicly traded include, say, the Acropolis? Just wondering ... I encourage readers to concoct sample fictitious Real Estate listings for famous Greek sites like the Parthenon: "Unsurpassed views of the Athenian smog from high above it all!"


The SEC`s Giant Insider-Trading Loophole:

Most of you have probably seen news stories about big-company execs selling portions of their share holdings via "pre-planned share sales" ...well, seems that little insider-trading loophole courtesy of the SEC is being fully exploited by the likes of J.P. Morgan:

A confidential memo obtained by Wikileaks shows that not only has the U.S. Securities and Exchange Commission created an insider trading loophole big enough to drive a truck through, but that Wall Street is taking full advantage of it, establishing 'how-to' programs and even client service divisions to help well-heeled clients circumvent insider trading regulations.

Most of us think of insider trading as illegal. It allows those with inside knowledge to tilt the playing field, with the small investors invariably losing to the privileged few. Unfortunately for the small investor, the big boys get to play by different rules, and it has all been made legal, thanks to the SEC.

In 2000 the SEC promulgated Rule 10b5-1. The new Rule was designed to address the confusion caused by a series of court decisions that had left investors uncertain about what constitutes insider trading. Rule 10b5-1 was designed to "clarify" what constitutes illegal insider trading.

But top Wall Street houses were not to be deterred from advantaging their big clients at the expense of their small ones. Wall Street firms like JP Morgan found loopholes in Rule 10b5-1 that allowed them to continue trading on inside information "legally." Indeed, JP Morgan has gone so far as to set up an entire 'selling program' within its Securities division to help their clients profit from the loophole.

My Comment: Nice work if you can get it...


Robert Reich on "America’s Growing Anxious Class":

Former Clinton administration secretary of labor Robert Reich has an excellent blog posting about the behind-the-headlines secular shifts in American labor trends resulting from (or on fast-forward as a result of) the great recession:

Friday’s Job Numbers, And What They Won’t Tell Us About America’s Growing Anxious Class

Last year was a fabulous one for entrepreneurs, at least according to the Kauffman Index of Entrepreneurial Activity released last month by the Ewing Marion Kauffman Foundation. “Rather than making history for its deep recession and record unemployment,” the foundation reported, “2009 might instead be remembered as the year business startups reached their highest level in 14 years — even exceeding the number of startups during the peak 1999-2000 technology boom.”

Another surprise is the age of these new entrepreneurs. According to the report, most of the growth in startups was propelled by 35- to 44-year-olds, followed by people 55 to 64. Forget Internet whiz kids in their 20’s. It’s the gray-heads who are taking the reins of the new startup economy.

And if you thought minorities had been hit particularly hard by this awful recession, think again. According to the report, entrepreneurship increased more among African-Americans than among whites.

At first glance, all this seems a bit odd. Usually new businesses take off in good times when consumers are flush and banks are eager to lend. So why all this entrepreneurship last year?

In a word, unemployment. Booted off company payrolls, millions of Americans have had no choice but to try selling themselves. Another term for “entrepreneur” is “self-employed.”

According to an analysis of Bureau of Labor Statistics data, the number of self-employed Americans rose to 8.9 million last December, up from 8.7 million a year earlier. Self-employment among those 55 to 64 rose to nearly two million, 5 percent higher than in 2008. Among people over 65, the ranks of the self-employed swelled 29 percent. Many older people who had expected to retire discovered their 401(k)’s had shrunk and their homes were worthless. So they became “entrepreneurs,” too.

Maybe this is a good thing. A deep recession can be the mother of invention. These Americans are now liberated from the bureaucratic straitjackets they thought they had to wear. They can now fulfill their creative dreams and find their inner entrepreneurs. All they needed was a good kick in the pants.

But this upbeat interpretation doesn’t include lots of people who don’t particularly relish becoming their own employers, like an acquaintance whom I’ll call George. George was an associate partner at one of the world’s largest technology and consulting firms until he lost his job last year in a wave of layoffs. For months, George knocked on doors but got nowhere because of the deep recession.

Finally, his old firm got some new projects that required George’s skills. But it didn’t hire George back. Instead, it brought him back through a “contingent workforce company,” essentially a temp agency, that’s now contracting with George to do the work. In return, the agency is taking a chunk of George’s hourly rate.

Technically, George is now his own boss. But he’s doing exactly what he did before for less money, and he gets no benefits — no health care, no 401(k) match, no sick leave, no paid vacation. Worse still, his income and hours are unpredictable even though his monthly bills still arrive with frightening regularity.

The nation’s official rate of unemployment does not include George, nor anyone in this new wave of involuntary entrepreneurship.

Friday’s job numbers are likely to show substantial gains but they’ll still be small relative to the army of America’s unemployed and underemployed — and the growing number of anxiously self-employed.

Yet to think of the latter group as the innovative owners of startup businesses misses one of the most significant changes to have occurred in the American work force in many decades.

Typically each year, large numbers of Americans leave their old jobs to find new ones. Unemployment rises during recessions mainly because companies hire fewer workers, not because they lay more people off. But this Great Recession has been different. Layoffs by mid-sized and large companies have surged while hiring has almost disappeared.

These companies have used the sharp downturn as an opportunity to cull their payrolls for good — substituting labor-saving technologies and outsourcing to workers abroad or to contract workers here. This explains why almost half of America’s unemployed have been jobless for more than six months — a greater proportion than at any time since the Great Depression. It also explains why so many people like George have joined the ranks of the self-employed.

Yes, a growing number of Americans went out on their own before the recession, but clearly their numbers have vastly increased. While some are happy about their new status, most are worse off than they were before. It’s one thing to be a contingent worker in good times and when you’re young; quite another in bad times when you’re middle-aged.

[ewmayer]

Well, so much for Mr. Reich`s prediction of "Friday’s job numbers are likely to show substantial gains":

Payrolls in U.S. Climb Less Than Estimated as Confidence in Recovery Wanes:Employers in the U.S. hired fewer workers in May than forecast and Americans dropped out of the labor force, showing a lack of confidence in the recovery that may lead to slower economic growth.

Payrolls rose by 431,000 last month, including a 411,000 jump in government hiring of temporary workers for the 2010 census, Labor Department figures in Washington showed today. Economists projected a 536,000 gain, according to the median forecast in a Bloomberg News survey. Private payrolls rose a less-than-forecast 41,000. The jobless rate fell to 9.7 percent.

Stocks declined and Treasuries surged on expectations a slowing in the labor market will restrain consumer spending, the biggest part of the economy. Federal Reserve Chairman Ben S. Bernanke said yesterday that unemployment was exacting a heavy toll, showing why economists forecast interest rates will remain low.

“Hiring looks soft,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. “It does raise some red flags that businesses are still pretty cautious.”

My Comment: "Hiring looks soft"? There has been no net hiring outside of government temporary make-work [stimulus-project-related and census-related "fraud jobs"] deficit-funded hiring since the Great Recession began. And it looks like many or most of the nearly 10 million jobs that vanished in the past 2 years aren`t coming back, ever. I ask again: When all the economists,politicians and financial-market touts keep blathering about "THE recovery": What recovery are you talking about? The only recovery I see is in Wall Street economic-parasite bonuses ... as far as the broader economy goes, the only "accomplishment" so far has been to avoid total deflationary-depression collapse. So far.

And as Mish points out,the numbers - bad as they were - were boosted by 200,000-plus "imaginary jobs" added by the BLS business-birth/death model, which appears to have morphed from a merely-dubious statistical inference tool to an actively manipulated tool of political/economic policy. That may work - at least in the short run - for propaganda purposes, but people working those imaginary jobs will alas not be using their imaginary paychecks to stimulate real-economic spending.


Hungary Next European Domino to Fall?

Hungary’s Forint Weakens to 12-Month Low; Bonds, Stocks Plunge:Hungary’s forint weakened to the lowest level in a year, the nation’s stocks plunged and government bond yields had the biggest increase since November 2008 after a spokesman for Prime Minister Viktor Orban said the economy is in a “very grave situation.”

Hungary’s economy is in a “very grave situation” because the previous government manipulated figures and lied about the state of the economy, Orban’s spokesman Peter Szijjarto said at a press conference in Budapest today. Talk of a default is “not an exaggeration,” Szijjarto said. European equities and U.S. stock-index futures fell after the comments.

Hungary secured a 20 billion-euro ($24 billion) loan from the IMF, the European Union and the World Bank in October 2008 to avoid default as the global financial crisis spurred investors to avoid the country and sent the economy into a recession.

Orban, who took over May 29 after winning elections by pledging to cut taxes and stimulate the economy, yesterday failed to get EU approval for looser fiscal policy.

My Comment: Gee, that recipe for how-to-become-a-sovereign-debt-defaulter-in-three-easy-steps sounds familiar:

1. Lie about true state of economy;

2. Pander to electorate by cutting taxes, thus hammering badly-needed government revenues;

3. Listen to Keynesian-clown economists and spend even more money you don`t have in an effort to "stimulate" your way back to prosperity without having to make any of the real sacrifices that are needed.

It didn't work in post-RE-bust Japan, and it won't work in the U.S. either, but unless you have the game rigged in your favor by owning the designated global reserve currency, it *really* won`t work, because the currency and bond vigilantes will jump on you immediately. No more grace period of "markets hoping it will work" like Greece enjoyed anymore, either - the bond markets are done with the presumed-innocent approach after having been burnt by lying politicians and central bankers once too often.

[only_human]

Originally Posted by ewmayer

Greece to Sell Assets to Help Pay Down Deficit:Greece announced Wednesday its plans for a big sale of state-owned assets, as the struggling government moved to shrink its huge budget deficit and fulfill the terms of an international rescue package

Harrisburg, Pennsylvania (USA)
http://money.cnn.com/2010/05/28/news...broke.fortune/

The mayor has said the city won't declare bankruptcy, but the governor has vowed not to bail Harrisburg out, leaving everyone wondering what options are left. In the meantime, the city is sifting through its assets, some of which include arcane Western artifacts purchased by the previous mayor with public funds, to see whether there's anything they can put on eBay before the next payment comes due.

[cheesehead]

Originally Posted by ewmayer

My Comment: Do the "vast real estate assets" which are to be publicly traded include, say, the Acropolis? Just wondering ... I encourage readers to concoct sample fictitious Real Estate listings for famous Greek sites like the Parthenon: "Unsurpassed views of the Athenian smog from high above it all!"

"Perfect for fixer-uppers."

[jasonp]

The Acropolis is rather an exception in that it's huge. Most of the other historical sites in Athens are literally parking-lot-sized, with modern civilization literally crowded in across the the street from them on all sides.

As a partial update, most of my extended family lives in Athens and apparently has been spared from much of the turmoil (by and large they are old enough to have pensions already). But one uncle retired from the Greek merchant marine 18 months ago after a lifetime of service and has yet to see any pension benefits. I often look at places like Washington and its suburbs, where just about every high-tech worker is a fed or a contractor or has the US government as its biggest customer (and where even now I am mostly priced out of the real-estate market), and I have a deep sense of foreboding that Greece is the wave of the future even here.

[FactorEyes]

One thing I can't help but wonder is at what point less money for the same work will be ameliorated by falling home prices.

Rents seem to be flat or dropping, yet real estate prices remain grossly inflated due to foreclosure foot dragging by banks and the government takeover of the lending industry. Should prices finally complete their necessary correction to some sensible multiple of incomes, the pain of shrinking wages will be less acute, if still far from a good thing.

The cruelty of subsidies for home prices becomes ever more apparent.

Oh, and if you're priced out of a real estate market, you should be patient. I have a feeling that the priced-out will soon enjoy some real bargains in places they never thought they'd be able to afford. Wait 5-10 years while piling up a decent down payment, and you'll be able to squeeze in to a house with just a modest mortgage.