Mystery Economic Theater 2010

[Fusion_power]

Insider trading scandal: http://www.cbsnews.com/stories/2010/...n7072496.shtml

(CBS) Federal authorities, capping a three-year investigation, are preparing insider-trading charges that could ensnare consultants, investment bankers, hedge-fund and mutual-fund traders and analysts across the nation, according to people familiar with the matter, reports the Wall Street Journal.

The probes are both civil and criminal in nature, say people familiar with the matter.

The investigations have the power to expose a culture of insider-trading within the financial industry. Federal authorities say there are new ways non-public information is passed to traders through experts tied to specific industries or companies.

Firms being examined include Primary Global Research LLC, a Mountain View, Calif., firm that connects experts with investors seeking information in the technology, health-care and other industries. Goldman Sachs and John Kinnucan, a principal at Broadband Research LLC in Portland, Ore., have also been examined.

Kinnucan sent an e-mail on Oct. 26 telling hedge-fund and mutual-fund clients of the FBI visit.

Some charges could be brought before year-end, say the sources.

Any blooming idiot should be able to tell that a huge amount of insider info is being shared. All you have to do is watch the market action just before a buyout or takeover or whatever feat du jour occurs.

DarJones

[ewmayer]

Originally Posted by Fusion_power

So what is the real risk of these countries going belly up? The overall risk is that they will trigger a cascade where France, then England will be swept up which will collapse the EU with resulting financial devastation. Such an event would cause worldwide fallout.

Bingo - Notice that the *real* reason Ireland was dragged/cajoled/threatened into a bailout post haste was not the rocketing rate on its sovereign debt - Ireland has enough previous bailout money in hand to ensure it doesn`t need to issue any new debt until around middle of next year - but rather the very real risk of metastasis on 2 major fronts:

1. It hasn`t just been Irish debt whose yield spreads have been ramping - the yields on the other PIGS have been following Ireland`s higher, and several of those other countries need to go to the debt markets much sooner than Ireland does;

2. I read in several places that banks in other Eurozone countries have $650 billion exposure (via real estate debt, credit-default swaps and the usual array of risk-spreading "financial innovations") to the Iriah banking sector.

Originally Posted by Fusion_power

Insider trading scandal: http://www.cbsnews.com/stories/2010/...n7072496.shtml

Any blooming idiot should be able to tell that a huge amount of insider info is being shared. All you have to do is watch the market action just before a buyout or takeover or whatever feat du jour occurs.

The WSJ had this as the lead article in their weekend edition, and as is their wont, hilariously downplayed the likely amounts of ill-gotten gains in question:

The criminal and civil probes, which authorities say could eclipse the impact on the financial industry of any previous such investigation, are examining whether multiple insider-trading rings reaped illegal profits totaling tens of millions of dollars, the people say. Some charges could be brought before year-end, they say.

My Comment: "Tens of millions"? Excuse me while I spew coffee out my nose. Sorry, "tens of millions" is what a handful of juicy insider tips to hedge funds gets you. Gosh, if I didn`t know better, I`d think the WSJ had some kind of agenda with respect to making as light as possible of the rampant culture of fraud in the financial industry. (They`ve been doing similarly relentless soft-peddling w.r.to the ever-growing dog-ate-my-mortgage-paperwork/securitization/foreclosure-fraud scandal).

Cheesehead, you are spot on with you comment about "All you have to do is watch the market action" ... the problem is, for lo these many years the SEC has very noticeably not been doing so. ZeroHedge provides more examples of blatant insider trading in a typical month than the SEC probably prosecuted during the entire in-bed-with-Wall-Street era which appears to be at last ending. Problem is, the biggest and most pervasive frauds are going on in plain sight and are in many case orchestrated by the federal government or its agents (most prominently the Federal Reserve) itself. Suspension of mark-to-market accounting rules for banks, anyone? Failure to take the legally-required prompt corrective action w.r.to insolvent banks by the FDIC ... the Fed buying-on-undisclosed-terms and holding trillions in securities lacking the required "full faith an credit of the U.S. government" ... the Fed making a mockery of the latter by continually debasing the currency in an ill-advised effort to refloat the insolvent banks, under the guise of "stimulating the economy by encouraging lending" ... the list goes on, and on, and on. (Barry R. mentioned numerous other biggies in his recent "Dear Uncle Sucker" parody of Warren Buffett`s self-serving NYT op-ed).

p.s.: It seems the "Irish bailout" is far from being a done deal ... this issue has a very chance of toppling the government, if enough of the citizenry realize they are about to be sold even further down the river of debt servitude in order to bail out other nations` banks and bond investors. Ireland need to grow a "C" and do like their neighbors to the northwest in Iceland have done. Freeing yourself from the tyranny of international bankers will be painful, but worth it.

[xilman]

Originally Posted by ewmayer

My Comment: "Tens of millions"? Excuse me while I spew coffee out my nose. Sorry, "tens of millions" is what a handful of juicy insider tips to hedge funds gets you. Gosh, if I didn`t know better, I`d think the WSJ had some kind of agenda with respect to making as light as possible of the rampant culture of fraud in the financial industry. (They`ve been doing similarly relentless soft-peddling w.r.to the ever-growing dog-ate-my-mortgage-paperwork/securitization/foreclosure-fraud scandal).

Ernst, shame on you! You are forgetting a golden rule: Never ascribe to malice that which is adequately explained by incompetence.

The sub-editor at the WSJ quite clearly made a typo and used "millions" when he/she/it obviously meant "billions". Only one letter different and the two letters in question are very nearly adjacent on a qwerty keyboard.

Paul

[ewmayer]

Originally Posted by xilman

The sub-editor at the WSJ quite clearly made a typo and used "millions" when he/she/it obviously meant "billions". Only one letter different and the two letters in question are very nearly adjacent on a qwerty keyboard.

True, true ... and the article didn't specify precisely how many tens ... perhaps in the realm of the MSFM different rules apply than in scientific and mathematical discourse, where by stating approximate numbers this way one implies an order of unity constant applied to the order of magnitude being discussed.

It could be that to the denizens of Wall Street "tens of thousands" can substitute for "tens" ... especially if those tens of thousands were rightly and properly swindled away from someone else.

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

NYT op-ed writer Ross Douthat opines on Ireland and her latest spate of troubles:

Ireland’s Paradise Lost

For an American tourist weaned on Gaelic kitsch and screenings of “The Quiet Man,” the landscape of contemporary Ireland comes as something of a shock. Drive from Dublin to the western coast and back, as I did two months ago, and you’ll still find all the thatched-roof farmhouses, winding stone walls and placid sheep that the postcards would lead you to expect. But round every green hill, there’s a swath of miniature McMansions. Past every tumble-down castle, a cascade of condominiums. In sleepy fishing villages that date to the days of Grace O’Malley, Ireland’s Pirate Queen (she was the Sarah Palin of the 16th century), half the houses look the part — but the rest could have been thrown up by the Toll brothers.

It’s as if there were only two eras in Irish history: the Middle Ages and the housing bubble.
...
There was a time, not so very long ago, when everyone wanted to take credit for this transformation. Free-market conservatives hailed Ireland’s rapid growth as an example of the miracles that free trade, tax cuts and deregulation can accomplish. (In 1990, Ireland ranked near the bottom of European Union nations in G.D.P. per capita. In 2005, it ranked second.)

Progressives and secularists suggested that Ireland was thriving because it had finally escaped the Catholic Church’s repressive grip, which kept horizons narrow and families large, and limited female economic opportunity. (An academic paper on this theme, “Contraception and the Celtic Tiger,” earned the Malcolm Gladwell treatment in the pages of The New Yorker.) The European elite regarded Ireland as a case study in the benefits of E.U. integration, since the more tightly the Irish bound themselves to Continental institutions, the faster their gross domestic product rose.

Nobody tells those kinds of stories anymore. The Celtic housing bubble was more inflated than America’s (a lot of those McMansions are half-finished and abandoned), the Celtic banking industry was more reckless in its bets, and Ireland’s debts, private and public, make our budget woes look manageable by comparison. The Irish economy is on everybody’s mind again these days, but that’s because the government has just been forced to apply for a bailout from the E.U., lest Ireland become the green thread that unravels the European quilt.

If the bailout does its work and the Irish situation stabilizes, the world’s attention will move on to the next E.U. country on the brink, whether it’s Portugal, Spain or Greece (again). But when the story of the Great Recession is remembered, Ireland will offer the most potent cautionary tale. Nowhere did the imaginations of utopians run so rampant, and nowhere did they receive a more stinging rebuke.

To the utopians of capitalism, the Irish experience should be a reminder that the biggest booms can produce the biggest busts, and that debt and ruin always shadow prosperity and growth. To the utopians of secularism, the Irish experience should be a reminder that the waning of a powerful religious tradition can breed decadence as well as liberation. (“Ireland found riches a good substitute for its traditional culture,” Christopher Caldwell noted, but now “we may be about to discover what happens when a traditionally poor country returns to poverty without its culture.”)

But it’s the utopians of European integration who should learn the hardest lessons from the Irish story. The continent-wide ripples from Ireland’s banking crisis have vindicated the Euroskeptics who argued that the E.U. was expanded too hastily, and that a single currency couldn’t accommodate such a wide diversity of nations. And the Irish government’s hat-in-hand pilgrimages to Brussels have vindicated every nationalist who feared that economic union would eventually mean political subjugation. The yoke of the European Union is lighter than the yoke of the British Empire, but Ireland has returned to a kind of vassal status all the same.

My Comment: For those of you not familiar with the John Wayne classic "The Quiet Man" - it`s one of my least-favorite of his films, personally speaking - be aware that for an allegedly quiet man, JW`s character sure does a lot of noisy brawling in the movie.

[cheesehead]

Originally Posted by ewmayer

Cheesehead, you are spot on with ... "All you have to do is watch the market action" ...

You meant to credit Fusion_power (DarJones), of course. :-)

- - -

Thank you again, Ernst, for initiating and keeping-up this stream of news and commentary on the financial crisis.

[ewmayer]

Quotable: One of Barry Ritholtz`s readers, "ZackAttack", had this to say about the SEC "expert network" investigation:

A corrupt government taking down a host of worthless rentiers. One can only pray for a tragic collapse of the courtroom that kills all parties involved.

False flag, to take your eyes off securitization fraud.

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

Mish has a potpourri of Eurozone news ... note the title really should read "Irish PM to dissolve government":

Irish PM Dissolves Government; Spanish Banks Face Debt Challenge; Greece May "Shut-Down"; Meaning of "Guarantee"; Should Ireland Ditch the Euro?

100,000 expected to flee Ireland economic crisis: Short-term debt crisis could turn into long-term brain drain crisis

With unemployment at 13 per cent and an EU-led bailout of the banks seemingly a foregone conclusion, the Irish government expects 100,000 skilled workers to leave the country over the next four years.

The new wave of emigration will be a blow to a country which only a few years ago was urging its diaspora to consider returning to work for the 'Celtic Tiger'.

Next week a national protest will call for the government to find alternatives to its plan to cut a further €15bn from the national budget. But many see the writing on the wall and are heading to information fairs where they receive advice on finding work in Australia or Canada.

Sean Heading, an official with the Technical Engineering and Electrical Union responsible for such an event held last night said: "Some have found themselves out of work for a month or two, but we are now starting to see people who have not had work into a second year.

"Giving people emigration advice is not necessarily what we want to be doing, but we are doing it for all the right reasons."

Analysts warn any upsurge in emigration could turn a short-term debt crisis into a long-term brain drain.

Michael Casey, former chief economist of the Central Bank of Ireland and author of Ireland's Malaise says: "Most Irish people want to stay where they are, but if you think about it, the head suggests something else. A brain drain on any scale would be a loss to the country.

My Comment: The fact that the unnamed "analysts" are understating the situation as a "short term debt crisis" - although I suppose on geological time scales that will prove to be true - makes me wonder if many of these same "analysts" were the ones who were so helpful in promoting the notion that a society can grow wealthy merely by selling of overpriced real estate amongst its members, that the massive debt bubble which accompanied that was "healthy credit growth", and to the skeptics that "things are different here".


Barry R. put up this post yesterday commenting on a WSJ op-ed by Burton Malkiel, one of the high priests of "Over the long haul, buy and hold is the best strategy"-ology:

Is ‘Buy And Hold’ Still A Viable Investment Strategy?

Comment: Malkiel is famous for his 1973 classic “A Random Walk Down Wall Street.” In it he argued for the “strong” form of the efficient market hypothesis which states no one person can outperform the market, so don’t try. Just own the indicies for long periods of time and you’ll do as well as any active manager.

Malkiel’s ideas spawned the idea of the index fund, starting with the Vanguard S&P 500 index and eventually the ETF.

In the op-ed above Malkiel is “defending his baby,” asserting that owning indices for long periods is the best investment one can have. Active managerment does not work.

However, as we detailed in our November Total Return Review, data on stock and bonds goes back to 1803 (no typo!) and the last 30 years (1980 to 2010) is the only 30-year period where bonds have outperformed stocks. The charts and table below are from that report.

Malkiel argues that a rebalancing technique will produce superior returns. What he neglects to mention is bonds have outperformed stocks for a generation and counting. How did that happen?

My Comment: I wanted to wait 24 hours to give time for a full round of reader commentary, and was not disappointed - reader "kaleberg" posted this gem of a reply:

It should be obvious why bonds have outperformed stocks for the last 30 years. Until the 1980s, stocks paid dividends and were evaluated on their ability to pay those dividends. Investors often talked about “coverage”, how well the company’s earnings covered their anticipated dividends. Yes, it was possible for a stock price to rise without a corresponding rise in dividends based on the company’s anticipated growth, but this growth was expected at some point to pay off in higher dividends.

In the 1960s and 1970s, a group of theorists argued that dividends don’t matter. We get this in financial circles every so often. Dividends don’t matter. Earnings don’t matter. Blah, blah, blah. If you can convince enough people you can make a killing and then it doesn’t matter, at least not to you, whether earnings or dividends matter or not. Investors and corporate management began to believe this, and dividends suddenly didn’t matter. Consider how much easier it is to cook the books when one doesn’t have to actually ever pay dividends. Ivar Kreuger [ewm: Swedish entrepreneur and industrialist whose partly-legitimate, partly-ponzi financial empire collapsed during the Great Depression] would have retired to Santa Barbara instead of blowing his brains out in Paris.

Actually having to pay dividends does two things. One, it forces a certain level of financial discipline in that the company has to pay its owners their cut of the profits. The money has to be available as cash – all of it, and on time four times a year. Two, it gets the money out of the hands of the corporate management who would otherwise squander it, usually on their own salaries and bonuses, but also on clueless projects that no sane investor using his or her own money would consider.

Bonds, unlike stocks since 1980, require companies to make cash payments as interest.

From an investor’s point of view, the difference is extremely important. Bonds and dividend paying stocks in a climate of dividend competition align management interests with investor interests. Without dividends and dividend competition, corporate ownership has no real meaning.

[R.D. Silverman]

Originally Posted by ewmayer

[b]My Comment: I wanted to wait 24 hours to give time for a full round of reader commentary, and was not disappointed - reader "kaleberg" posted this gem of a reply:

Actually having to pay dividends does two things. One, it forces a certain level of financial discipline in that the company has to pay its owners their cut of the profits.

<snip>

From an investor’s point of view, the difference is extremely important. Bonds and dividend paying stocks in a climate of dividend competition align management interests with investor interests. Without dividends and dividend competition, corporate ownership has no real meaning.

Damn right.

[garo]

Apologies for not being able to provide an insider's take on the Irish situation. Been busy at work! In the meantime, the reports of California's demise are highly exaggerated.
http://finance.yahoo.com/banking-bud...out-california

[ewmayer]

Originally Posted by garo

Apologies for not being able to provide an insider's take on the Irish situation. Been busy at work! In the meantime, the reports of California's demise are highly exaggerated.
http://finance.yahoo.com/banking-bud...out-california

Interesting ... But Arends conveniently glosses over a few small details, including:

- Of the "$90 billion budget", nearly one third is having to be *borrowed*. (Which means that to balance things without further slashing the tax rate would need to spike to well over 15% ... it's easy to keep one's state&local tax burden at a "low, low 10-percent plus" if one is willing to run a massive budget deficit;

- The size of the state GDP is impressive, bit SFW? The only thing that matters in this debate is how much of that accrues to tax revenues;

- "non-partisan Legislative Analysts' Office": Just because they are allegedly non-partisan does not imply that their economic forecasts are anything but delusionally optimistic rubbish. Why do you think this year's budget deficit estimate was revised massively upward almost immediately after the budget was finally and much-belatedly passed?

- Unemployment remains stuck above 12%, and CA is borrowing $40 million PER DAY from the FedGov to help it meet mandatory unemployment-compensation payments. That comes to well over $10 billion per year in new borrowings, which begin to come due next September. Do you think unemployment will have magically plunged by half (roughly what is needed to eliminate the borrowing need here) by then?

- A few quotes from "venerable Tax Foundation" which Arends seems to have found unworthy of inclusion in his piece:

Estimated at 10.5% of income, California's state/local tax burden percentage stands at 6th highest nationally, above the national average of 9.7%...California's 2011 Business Tax Climate Ranks 49th...California's Corporate Income Tax Rate is the Highest in the West...California's Sales Tax Rate Is Highest in the Nation.

- California is so desperate for revenues (and knows it will be unable to raise taxes much more in the current "awesome" state budget climate) that it is busily putting state-owned buildings on sale for short-term-budget-hole-masking leaseback schemes.

- Yes, VC investment and high-tech remain some of the bright spots in the CA economy ... but focusing on that is like reducing the NY state economy to "Wall Street paid record bonuses in 2009".

Anyway, if CA is in such frickin' great shape, perhaps the Boston-based Mr. Arends should actually spend some time here, maybe spend a little time away from the VC suites on Sand Hill Road in Palo Alto volunteering at the local soup kitchens and food-aid centers, which continue to see all-time record demand as their donations base remains stuck in "bad to very bad".

[R.D. Silverman]

Originally Posted by ewmayer

Interesting ... But Arends conveniently glosses over a few small details, including:

<snip>

Anyway, if CA is in such frickin' great shape, perhaps the Boston-based Mr. Arends should actually spend some time here, maybe spend a little time away from the VC suites on Sand Hill Road in Palo Alto volunteering at the local soup kitchens and food-aid centers, which continue to see all-time record demand as their donations base remains stuck in "bad to very bad".

Excuse my ignorance. Most people (me included) do not see very much
of the actual politics of other states. I have however seen some articles
about California. They have suggested that most of the problems are
due to the voters voting themselves "bread and circuses" entitlements
through ballot initiatives. At the same time the laws prohibit the
legislature from making any cuts. This essentially limits the ability of
the legislature to govern. I have seen suggestions that California has
the most disfunctional government of any state: not because of incomptence,
but because their hands have been tied by the voters' passing of so
many entitlements.

If I am wrong, please correct me. Please comment on my remarks.

Tax revenue is down in all states because people are out of work.
California is not alone in this regard.

[garo]

I agree with Bob here. The problem is the voters who pass silly propositions and legislators, particularly the legislators who are either little Endian or big Endian but generally do not make any fiscal sense.

Regardless, CA still has the best economy in the US which, BTW, is NOT totally dependent on FIRE. If CA wanted to balance it's budget all it needs to do is secede from the US and keep all federal tax revenue from its citizens.

I think Ernst that you have perma-bear goggles on and refuse to look at the positive side of anything at all. If not CA, then where? Name a state in the US that is in better shape. And I don't just mean the state budget but the overall health of the economy.