Mystery Economic Theater 2010

[ewmayer]

Bob, you are correct in your take on the budget morass in CA, and the blame for it falling both on the voters and the state government - voters want the state to spend on their various pet programs, and pols are happy to buy votes with promises to do just that. One of the propositions which just passed in the early-November elections is to change the 2/3-vote requirement for passing a budget to a simple majority. That is supposed to help, but given the level of fake-budget-balancing sleight of hand which has gone into the past 2 budgets, merely making it easier to pass a budget isn't going to solve the problem.

Bottom line in California is that over the past decade state spending nearly doubled, revenues (especially now that the RE bubble is over) have not increased nearly fast enough to keep up, and the state's spending priorities have gotten massively out of whack - as the governor noted in his state of the state address earlier this year, over the past 30 years prison spending has gone from 3% to 11% of the general fund, whereas higher-education spending has actually dropped from 10% to 7.5%. The present numbers yield a banana-republic-style ratio. Similarly, the public-employee pension and benefit costs (and even worse, future commitments) exploded under Schwarzenegger's predecessor ... current estimates of unfunded pension liabilities put the number at around a half-TRILLION dollars.

It's not merely the sheer amounts, but even more so the trends, which are dire. I hope you are right and things are really not as bad as many (including me) make them out to be ... but the numbers tell me a different story.

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

In the latest update on the growing expert-network/hedge-fund insider-trading probe, SAC Capital, the outfit run by Steve Cohen, one of Barry Ritholtz`s "people I most admire", has publicized the fact that it too is the target of a Federal subpoena. Barry appears to have a rather different standard of likely-guilt here than with respect to the mortgage-securitization-fraud investigatees:

Sac-ked!: Marketwatch is reporting that SAC Capital Advisors LP told investors in a letter that it got a government subpoena, according to a person who received the update from the hedge fund firm.

I have no idea how Cohen trades, but the rumors are already pinging around trading desks that where there is smoke, there is fire.

Call me old school, but innocent until proven guilty is still the law. If SAC is found guilty, you can tar and feather them, but until then, I’d rather reserve judgment until the evidence is out there (No, we don’t no any business with them).

My Comment: Paraphrastically inspired by Paul`s quoting of Heinlein`s (or Hanlon`s, depending on which of the two main claimants you credit) famous "Razor" epigram yesterday, I posted the following reply in the comments:

"We obviously don't know yet what information the Feds are acting on, but ZeroHedge published some rather specific questions to SAC back on 4. November, which they reprise in their update on the story today:

http://www.zerohedge.com/article/sac...nment-subpoena

Barry, obviously in a court of law the standard is innocent until proven guilty. But given the revelations in the past several years about the real "secrets of success" of some of the biggest names on Wall Street - John Paulson hand-picking worst-of-the-worst crap to stuff into Goldman's abacus CDO and then betting big against it without that being disclosed to buyers of the toxic sludge (I still am baffled as to how Goldman pays the fine and Paulson is considered innocent in the matter), Warren Buffett turning into the biggest bailout whore in history (and not a single person from Moody's yet put on trial for fraud), and on and on - I'm inclined to say that at least as far as the court of public opinion is concerned, it is not unreasonable to apply a standard (to paraphrase Heinlein's Razor) of

'Never ascribe to financial genius that which is adequately explained by insider information.'"

[ewmayer]

Originally Posted by garo

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.

"Best" depends very much on your metric. Size of GDP is one metric, there CA is of course good ... but we rank near the bottom of the 50 in terms of unemployment rate, business climate, housing affordability, etc.

Yeah, for me persoanlly and my region things are better than in most other parts of the country - and of course more than mere economics factors into my personal metric: I very much enjoy the mild climate. Hopefully the 1 in 8 of my fellow employable citizens who is out of work at least enjoys the mild weather, too.

Garo, you are possibly right in that I have become overly pessimistic - not about my own lot, but about that of my state and the U.S. But then I think back to late 2007 and early 2008, when folks were telling me I was too pessimistic about what was then called the "subprime mortgage crisis". Anyway, garo, I will agree with you on one thing - compared to your home country of Ireland, things in CA are going relatively swimmingly.

And even though you've been very busy as you said, a little local perspective form over there when you spare a few minutes would be very much appreciated.

[Fusion_power]

Greece is down
Ireland is down
Who's next?

Arguably, it will be Portugal. The dynamics are different for Portugal than for either Greece or Ireland. Portugal is suffering from a terminally weak economy and has borrowed heavily over the last several years to support socioeconomic programs. The underlying problem is that the debt is approaching an unsustainable level.

When will Portugal's death reflex hit? Sometime between now and February 2011 is most likely for the simple reason that a huge load of debt matures early in 2011. Most of that debt will be refinanced which opens the door to the bond traders who want higher interest rates to support the debt sale. As the interest rate goes up, Portugal's ability to repay goes down. Estimated cost $85 Billion dollars U.S.

What about Spain? Well, Spain is much bigger than Portugal in overall size of economy and in potential to devastate the EU. But Spain is not as likely to tumble...... yet. The unknown factor for Spain is the ongoing weakness in the world economy which is limiting export potential and increasing costs inside the nation. Since their currency is tied to the Euro, they can't just devalue the currency without destabilizing other EU members. It is a very fine line they must walk if they are to avoid a cataclysmic event. Please note that if Spain has to be bailed out, it could have more impact than Greece, Ireland, and Portugal combined.

DarJones

[xilman]

Originally Posted by Fusion_power

Please note that if Spain has to be bailed out, it could have more impact than Greece, Ireland, and Portugal combined.

and no-one dares even think about Italy.

Paul

[dorcheat]

Noticed this headline from the morning of November 24 "Dredge" Report.

http://www.chinadaily.com.cn/china/2...t_11599087.htm

This development is perhaps not important news, but another seeming step downward in the confidence and "portability" of the not, so almighty, anymore, United States currency.

One cannot help but to become quite increasingly concerned about the increasing political and military instability during the last several months (i.e. U.S. elections, just recent Korean incidents, etc.).

[davieddy]

Originally Posted by xilman

and no-one dares even think about Italy.

Paul

No.

Doowop

David

[ewmayer]

On a lighter note (and since this is effectively my Friday this week, since we have the next 2 days off work due to the U.S. Thanksgiving holiday), courtesy of the jokemeisters at (of course) ZeroHedge, we present for your enjoyment:

The Federal Reserve's VISA Card Statement

(My favorite is the name of the PR firm).


Happy and safe Thanksgiving travels to our U.S. readers ... if you happen to be flying, make sure to increase your enjoyment by opting out of the virtual strip search and instead asking for the "serial molester four-handed-grope-and-all-body-frottage special" as your friendly local airport's security line. Think of it as a free full-body massage courtesy of the TSA. It's patriotic, democratic, and lots of fun for the whole family. Take that, you freedom-hating terrorists! And bring on the inevitable body-cavity bombs - all those millions of yearly free pelvic and prostate exams U.S. citizens will enjoy at airports next year as a result will save billions in health care costs. And that's the kind of economic (and pelvic) stimulus package I'm sure we can get bipartisan agreement on.

[ewmayer]

In an exceedingly rare alignment of opinions, both Mish and I find ourselves agreeing with Paul Krugman in suggesting that Ireland should tell the international banking cartel to take their "bailout" and shove it:

In Rare Agreement with Krugman; Onerous "Bailout" Rates of 6.7% Denied; Don't do Stupid Things; "Tell the EU and IMF to Shove It!"

Before the bank bust, Ireland had little public debt. But with taxpayers suddenly on the hook for gigantic bank losses, even as revenues plunged, the nation’s creditworthiness was put in doubt. So Ireland tried to reassure the markets with a harsh program of spending cuts.

Step back for a minute and think about that. These debts were incurred, not to pay for public programs, but by private wheeler-dealers seeking nothing but their own profit. Yet ordinary Irish citizens are now bearing the burden of those debts.

Or to be more accurate, they’re bearing a burden much larger than the debt — because those spending cuts have caused a severe recession so that in addition to taking on the banks’ debts, the Irish are suffering from plunging incomes and high unemployment.

But there is no alternative, say the serious people: all of this is necessary to restore confidence.

Strange to say, however, confidence is not improving. On the contrary: investors have noticed that all those austerity measures are depressing the Irish economy — and are fleeing Irish debt because of that economic weakness.

Now what? Last weekend Ireland and its neighbors put together what has been widely described as a “bailout.” But what really happened was that the Irish government promised to impose even more pain, in return for a credit line — a credit line that would presumably give Ireland more time to, um, restore confidence. Markets, understandably, were not impressed: interest rates on Irish bonds have risen even further.

Ireland is now in its third year of austerity, and confidence just keeps draining away. And you have to wonder what it will take for serious people to realize that punishing the populace for the bankers’ sins is worse than a crime; it’s a mistake.

My Comment: I think Mr. K. may have intended "...is worse than a mistake; it`s a crime" in that last sentence. One can only hope that the Irish people have not woken up to the peril facing them and their children too late.


Please, Santa, Let This Be the Last Christmas in America that’s supposed to “save” the U.S. economy: Santa, please, please, please strangle the idiotic fantasy that Americans buying a bunch of junk (or gift cards for after-Christmas purchases of junk) will “save” the imploding U.S. economy. My Christmas wish to Santa: please let this be the last Christmas in America that is dominated by the propaganda that holiday retail sales have any more impact on the $14.7 trillion U.S. economy than a moldy, half-eaten fruitcake left over from 2007.

Fact: total holiday retail sales were $504 billion in 2009. Holiday sales–National Retail Federation.

That means holiday retail sales are a mere 3.4% of the U.S. GDP.

Despite the Financial and Mainstream Media’s pathological obsession with holiday retail sales numbers as proxies for the “health” of the entire U.S. economy, holiday sales don’t really change much:

2007: (pre-recession) Holiday sales: $516 billion
Holiday sales as percentage of annual retail sales: 19.5%

2008: Holiday sales: $495.5 billion
Holiday sales as percentage of annual retail sales: 18.6%

2009: Holiday sales: $504.8 billion
Holiday sales as percentage of annual retail sales: 19.4%

So the start of the 2008-09 recession saw a drop of $21 billion in holiday sales: statistical noise in a $14.7 trillion economy and a modest 4% decline from pre-recession levels. 2009 saw sales rise by about $10 billon (about 2%), so a rise of 2% from 2009 would return holiday sales to pre-recession levels.

Now the propaganda machine is cranking up to announce that a 2% increase in holiday retail sales means the U.S. economy is off and running. Santa, please, please, please order your reindeer to stomp the life out of the idiotic fantasy that Americans buying a few billion dollars more needless junk from China is any sort of evidence that the U.S. economy is “growing at a healthy clip.”

My Comment: Every year the around-Thanksgiving materialistic madness seems to grow worse. The past decade has seen the post-holiday "Black Friday" shopping elevated to some kind of quasi-patriotic, economy-saving, retail-survival-determining orgy of over-consumption. This year we not only saw the now-expected legions of Black Fridayists camping out overnight outside the local Best Buy and Costco, but an increasing number of retail stores were open on Thanksgiving day itself, so instead of making a point of stepping off the dual treadmills of work and pre-Christmas shopping and making a point of spending some time with family and friends, lots of people were out shopping on the holiday and camped out the night before Thanksgiving. So now Black Friday is preceded by "Shopsgiving", followed two days later by "Cyber Monday", and since Saturday was not yet co-opted by the mercantile festivities, that has now been dubbed "Small Business Saturday" by a retail trade group.

And some of the "fabulous sale" items the camper-outers mentioned in interviews on the local newscasts were simply inane ... some lady mentioned getting pajamas at Target for $9.99, "twenty dollars off the regular price". Suuuuuuuuuuure they were ... and of course retailers have cleverly exploited the collective mania by either posting falsely inflated "regular prices", or selling "Black Friday special" versions of popular items such as electronics which are feature-stripped versions of the items whose "regular price" is being cited, or the classic first-come-first-serve limited quantity item scam.

One healthy sign I saw - which of course was spun as a "worrisome trend for the economy" by the retailers - is that many folks, while still getting up at insane hours to grab that price-cut plasma TV their well-being depends upon, were spending cash rather than abusing their credit cards as in years past. However, I fully expect debt merchants like Visa and Mastercard to report "healthy increases in card usage", just as retailers will report "healthy sales increases" in every conceivable category which somehow do not appear later in the sales tax receipts. Mish has roundup of some stories so far which illustrate the disparity between the breathless "gazillions of rabid shoppers say `what recession?`" headlines and more sober data from actual store-traffic-monitoring systems.

[ewmayer]

FBI raids send warning to hedge funds: (Reuters) - FBI raids on hedge funds were a sign that prosecutors feared evidence in a widening insider trading probe could be destroyed, but the dramatic daytime searches may also have been intended to shake up the secretive hedge fund world, legal experts said.

Investigators most likely swooped down on the funds Monday in Connecticut and Massachusetts because they had a major concern that subpoenas for information would not be properly obeyed, lawyers and investigators said.

The raids served another purpose: warning the broader financial industry that a serious prosecution effort was underway.

"I think there is a desire to send a message to people who are not currently the target of criminal investigations that there is a cost to engaging in this type of potentially criminal behavior," said Ross Gaffney, a former FBI agent in Miami who is now a principal in the forensic consulting firm Gaffney Gallagher Philip.

Gerald Lefcourt, past president of the National Association of Criminal Defense Lawyers, said that the only justification for such search warrants is the government's concern that documents could either be destroyed or simply not produced.

"There may be another motive, but I view this as an improper motive -- and that is to simply scare people," Lefcourt said. "And it certainly does have that effect."

Prosecutors and the FBI need approval by federal judges before carrying out search warrants. They need to show proof that the destruction of evidence is highly probable.

Monday's raids on three large hedge funds in Connecticut and Massachusetts with billions of dollars each under management are a precursor to a series of new insider trading cases to be unveiled, possibly by year end, lawyers with knowledge of the situation said.

Agents searched and removed documents or information from computer servers at Diamondback Capital Management LLC and Level Global Investors LP in Connecticut and Loch Capital Management, a Boston-based firm.

The raids have grabbed headlines and sent shivers through hedge funds just more than a year after prosecutors charged Galleon hedge fund founder Raj Rajaratnam with conspiracy and securities fraud related to suspected insider trading.

U.S. prosecutors described that case as the biggest probe of insider trading at hedge funds in the United States. In all, 23 hedge fund managers, traders, company executives and lawyers were charged. Fourteen have pleaded guilty.

Rajaratnam, who is free on bail, has pleaded not guilty and is expected to go on trial in January.

Lawyers and former agents say the new investigation could go on for weeks or months yet. Potential cooperators could be talking to prosecutors and the FBI behind the scenes, some may come forward, or others may clam up as a result of the raids.

"This is not standard operating procedure in a white-collar case," said Ellen Zimiles, a former federal prosecutor who heads global investigations and compliance at Navigant Consulting. "The fact that three entities were searched at the same time could mean investigators believe there is a connection, or this is a larger investigation. This is a very clear warning shot."

Lawyers and former FBI investigators said decisions to serve search warrants are not taken lightly. One disadvantageous outcome could be investigators overwhelmed with information that might have been pared down by a narrowly targeted subpoena for documents and trading records.

My Comment: I find it highly amusing that Gerald Lefcourt, "past president of the National Association of Criminal Defense Lawyers", believes that "concern that documents could either be destroyed or simply not produced" is an improper motive for using warrant-based searches rather than a more polite (and oh so document-shredder friendly) subpoena-based approach.

[Fusion_power]

Once upon a time....

Banks were banks and they loaned money to people who would work and pay them back with interest.

Then came the great social upheaval.

Where the losses of banks were suddenly the problem of entire nations because failure of a bank could cause great pain..... for the owners of the bank and the other banks that loaned them money.


But Greece was a different story. Greece was a socially overspent economy. It was foundering because of a different set of problems.


Iceland was not like Greece. Iceland was purely a case of private banks that failed. Iceland refused to bail out the private banks.

Ireland is most similar to Iceland. So what should Ireland do?

Eager readers are waiting for the conclusion of this Just So Story.

I am certain that heads will roll before it is done.

DarJones

[ewmayer]

Mish has a nice roundup the goings-on with the "Irish Bailout" ... As he correctly notes, it is really the Irish banks - which should be nationalized and broken up or sold off - and the buyers of all that now-bad debt created by the banks - which includes of course other large banks on the continent - which are getting bailed out. Flat-out idiocy to sign every citizen of the country up for long-term debt slavery rather than starting with healthy haircuts for the investors. Did you think there was no risk attached to all those juicy-yield-promising MBSes? Well, what the bailout as currently constituted says is just that: Profits are privates, but losses will be socialized.

One particular snip related to the terms of the funding especially caught my eye:

Terms of Enslavement; Irish Citizens Say "Default"; Agreement Violates EU and Irish Laws; 50 Ways to Leave the Euro

Ireland first must run down its own cash stockpile and deploy its previously off-limits pension reserves in the bailout. Until now Irish and EU law had made it illegal for Ireland to use its pension fund to cover current expenditures. This move means Ireland will contribute euro 17.5 billion to its own salvation.

My Comment: So just because The IMF and Irish PM Brian "Cowardly Liar" Cowen thinks it`s OK, they can by fiat violate both the laws of the EU and Ireland?

Note that I am firmly of the opinion that some serious level of austerity for Ireland is inevitable, of for no other reason that my preferred solution - default on the banks` accumulated debt, nationalize and break up same banks, leave the Euro - implies that Ireland would be effectively shut out of the international debt markets for at least a decade, and thus would need to live strictly within its means going forward. But to place all of the burden on the taxpayers and none on the banks`s investors is simply nuts. Of course "protecting the rights of the holy bondholders" (read: the international bankster cabal) from any losses on investments gone bad is the number one priority of ECB president Jean-Claude Trichet:

Much Maligned Bondholders Do God's Work; ECB Creates Incentive to Gamble

"Starting today, bondholders need not be concerned with who they lend money to, why, or what risks there are in doing so."

"Not only will this help ease turmoil in the markets, but bondholders can now think in terms of winning rather than the more mundane investing because the ECB and IMF will backstop all losses from trading bonds."

My Comment: Nice try at a clever rewording of bondholders-are-not-investors and describing them in "much maligned" pariah terms which attempt to eliminate any thought of anyone trying to stick them with the losses suffered from their own (non)investments. Mish is so impressed at Trichet`s "commitment to bondholders" that he hilariously spoofs him as going on to add (paraphrasing of Goldman Sachs CEO Lloyd Blankfein`s non-famous non-spoof comment about the holiness of investment banking):

"The debt crisis is over. We are willing to grant Greece and Ireland as much time as they need. If an extra-four-and-a-half years to repay emergency loans proves insufficient, we are willing to wait an extra-hundred-and-a-half years".

When asked if he meant 150 years or 100.5 years, Trichet replied, "I mean as long as it takes to make the ECB whole, forever if necessary. The important thing is for bondholders to never suffer losses. Heaven forbid we should ever unsettle bondholders by insinuating they may have to take some losses. Bondholders in general, not just Goldman Sachs bondholders, do God's work."

My Comment: He did forget to add "There are no American infidel crusader troops in the holy land between the rivers, Iraq. Never!"