Consider_this

Nationalization: What Does Treasury Really Think?

At least this administration has the intelligence and knowledge that what is says could end up being taken for future action.

Recall last time when Paulson tried to allay fears that takeover simulations with Fannie Mae is only posturing. Since the leak, FNM stock crashed. Less than a fortnight after that, Fannie Mae is in conservatorship.

That was an utterly foolish way of doing it if they hadn't planned on doing it.

Microsoft Rubs Salt: Asks for Some Severance Back

I never thought I'll see the day when clawback happens to IT workers and not to the finance wall streeters seeing that this meltdown is a wall street created monster.

Boy do we have our priorities messed up as a country.

Lessons for the U.S. Banking Authorities

Why not bet both ways?

If nationalize, treasuries should go up in yield as this will effectively unjam this whole crisis.

If not nationalize, then XLF will fly; since the banks will be around for another round; stoking short covering.

I say it's win win!

The Money Supply and the Stock Market

"This means that eventually, as it works its way through the economy, there will be more and more money chasing fewer shares, driving up the level of the stock market."

Japan pretty much followed our playbook. (Actually, more appropriate to say we followed Japan's playbook.)

Let see... The Japanese govt soaked up almost 200% of GDP debt via bailouts and stuff. It never 'worked it's way through" the economy for them. Deflation in 24 years and counting still.

We're currently about 60% dept to gdp ratio, so we have a ways to run if 200% is our future.

I'm still holding my breath on the whiplash from Japanese's debt binge on Japanese currency. *THEN* we can talk about USA.

The end of the day... when the means to do monetary transmission is broken; it's pretty futile to talk about debts in isolation. In the end, even if USA govt SOCIALIZE the whole country -- you still don't get hyperinflation. You at best get no more capitalism in the country and a drop in living standards; *AND* the growth of the govt would seem very insane % wise, but when one consumes the other (govt grow; capitalism segment of economy shrinks; ultimately to zero) there's no inflation in anything.

No Gold Bubble

Your theory (taxi driver, hyperbolic curve) is not a necessary component to a bubble -- only that the bubbles have been allowed to grow and involve people on the streets. There are plenty of bubbles that have burst much earlier before growing to "down to mainstreet taxi driver" status.

You want to test for bubble in gold? Go to SA archives and look at any articles that bash gold. Look at the comments. Then go to any articles that praise gold, look at the comments. Put the "agree" and "disagree" comments appropriately and you'll get your indicator.

My non-scientific observation shows a HUGE number of people following gold -- that is your indicator. You want it to grow and grow by a significant percentage, and if it stagnates and shrinks, your gold investment is in trouble. A leaky bucket in following is a bad scenario to try to grow gold demand.

The number of people who go fanatic about gold is increasing; and their conviction is downright scary in the -- "I'm so sure! It can never happen other way". The last time few times saw this psychology:

1. Oil will go to 200, it can't go below 100!!!! There's no production capacity left! Peak oil!
2. Houses only go up! They aren't making anymore land! Rent and throw money away!
3. Nothing matters except eyeballs and clicks!! pets.com has huge amounts of clicks on first day!! You can't lose! Traditional companies are so passe!
4. Fiber optics mania. The orders for fiber cables have tapped out next 30 years of production!!! Nobody can buy fiber optics fast enough! You can't lose investing in fiber!!!

I say... if you're right, good for you. I choose not to play manias. At some point, you're going to have to buy medicines, food, oil and household goods. When that time comes around, you'll need to talk to "my" companies; whether we exchange in gold or not.

Restoring Balance to the Economy

On Feb 23 02:17 PM The Mad Hedge Fund Trader wrote:

> Our financial markets are now desperately dependent on the Middle
> Kingdom recycling their trade surplus into our bond market.

The dependency relationship is in the eye of the beholder... I'll explain below.

> A Chinese boycott would trigger a collapse in the dollar, and sent
> US interest rates sky high.

A low dollar, a high interest rate is *EXACTLY* the bitter medicine that USA requires to solve this structurally long term; but nobody wants it (not US nor China). This is the mother of all imbalance.

Lets define what we're talking about. Low dollar, high interest means every other currency has to be higher than USD; and everyone else's interest rate lower than USA's. (otherwise USD will become strong again). This is the definition.

Therefore,

Low dollar, high interest solves these fundamental, structural imbalances:
1. It'll make USA labor cost less expensive compared to rest of the world. Which makes it attractive to manufacture and service things in the USA again. This boost in manufacturing and service investment will pretty quickly solve our unemployment problem.

2. It'll discourage borrowing, since the rate is high. The economic "stick" is to save for what you need, not borrow, as borrowing becomes a painful thing. Govt deficits will also actually feel painful and efforts to reduce the country's debts will be more than halfhearted.

3. It'll encourage savings, since rate is high. This is the "carrot" part of the package. Americans will save when it makes sense to do so; higher rates is one of these factors.

4. It'll discourage USA consumption; esp on non-essential stuff; because imports will be relatively more expensive. Instead it promotes production, since foreigners will find USA stuff to be of better value, cheaper.

Yeah, our standard of living will decline, but I think you'll find it more logical to blame that on the craziness that we ran for the last decade instead to the symptom that is the dollar's decline. (do you blame the arsonist for starting the fire, or the actual tongue of flame that consumed your house; or the failure of the firemen in their attempt to save your house?)

The blame game is over anyway, that boat has sailed and we're all in the "effect" phase of "cause & effect". (except nobody wants the effect to happen, so we keeping pressing the pause button.)

The only thing that this really changes, is the relationship between USA and China. In this new picture, China must grow on it's own, no longer able to lean on the USA as a net buyer of it's exports. It has to develop it's own internal market and (as a result) grow more slowly instead of the crazy growth rates we've witnessed.

It's debatable that whether China can survive that transition, with 70% of it's labor in export, export support or "import in order to support export" industries. And that's what got China tied to be so unwilling to face the medicine too (our medicine will be theirs too!) The China Communist Govt may not survive, esp as the rural poor may bear the brunt of this transition. Revolution anyone?

So... Although I'm pretty sure this is the road to long term solution and balance; I'm also pretty sure this is the road the world won't take willingly.

We're in for a LONG LONG wait as everyone tries their best to walk down all the other dead end road first before coming back to this solution.

To Reach Bottom, We Need More Good News

You wrote:

I elevated “good news” to the top tier of turnaround indicators, because most of the items others were looking at in their efforts to “call the bottom” just made no sense. Examples:

* Record-setting VIX levels
* MACD indicators
* AAII’s weekly investor sentiment surveys
* P/E ratios
* the length of the bear market
* the depth of the bear market
* the breadth of the bear market
* ancient support levels

How is any of those a bad indicator???? Weren't these also used on the way down, by optimists to constantly defend that "we've reached the bottom"? Now that these are breached, suddenly it's no good for bears to use them anymore?

You always needs to look at a crash with leading indicators; but you need to look at a recovery with lagging indicators TO CONFIRM THE RECOVERY IS REAL.

Japan had multiple false leading indicators that they've recovered from deflation. It's almost a once per year or once per two year event; and yet they're solidly in their 24th year of economic decline.

Unless you're a volatile loving speculator, I don't see why you need to whiff at the first "possible" scent of recovery. There'll be many false recoveries and false bottoms before the final climb up.

The S&P 500's Incredibly Shrinking Market Cap

Actually, I resent this article's title.

More appropriate topic should be:

"The S&P 500's incredible shrinking earnings! (and the incredibly lagging market cap)"

We'll get to a correct valuation by the end of this year, when all that earnings is correctly reset and reflect the real world instead of a (difficult to project and somewhat unreal) earnings projection.

All any investor's got to do is wait.

Restoring Balance to the Economy

I want people who says tax reduces investment to flip the equation back for a second.

True, I buy that if I increase taxes (corporate and personal), then new investment in resource, or even personal time is less attractive. That thought process is straightforward enough...

However, the reverse is also true: The attractiveness to retrench and outsource, esp if they had marginal benefits to begin with, is even less worth it with increased taxes.

Consider this:

(Assume an already profitable company...)

If tax is 20%; and I outsource a unit of cost / labor, such that I saved $100 of cost. Post tax, my actual gain is really $80. I may be willing to bet on increased company risk and more complicated internal process for $80.

If tax is 40%; the same $100 savings in cost is only really $60 post tax. If my savings is only marginal to begin with, this may dissuade my outsourcing project. It adds to my company complexity and the added risk may not outweigh $60.

In fact, this effect also spills over to investments in resource and technology as well. Companies have been known to invest to avoid revenues from becoming siphoned away as tax dollars. Increase the difference and this effect could become more pronounced.

(i.e. if tax rates climb, and ROTH IRA still exists. The benefits of going Roth is even more.)

Of course, there're limits as well; such that the gain in trying not to lose money to tax and the loss in motivation for incremental effort balance out at some point. What is the tax % where that happens? If I know I should work for the govt. :)

But what I'm trying to illustrate is that not all the effects of higher taxes immediately translates to more or less investment. It may change the thought process and the justifications for different projects.

Restoring Balance to the Economy

I think the equation isn't simply a consideration of "producing more", for if that's the issue, raising taxes would indeed cut production back.

However, think back to the last decade of "growth" or non-growth. What got produced more? Fake companies balance sheets (Enron, Worldcom), fake securities (CDOs, CDS), fake bonuses, fake prosperity (houses always go up!), fake income (bonds with outsized yields. Madoff, Stanford, etc), fake "production" (major export of USA are financial instruments, stocks, debts and bonds)

It seems that although lower taxes encourage people to produce more, when the society have exceeded it's basic "production possibility frontier" and you throw more encouragement, you get up producing risk instead of anything else.

The turtle wins the race, not the hare.

We need to go back to slow and controlled growth. *REDUCING* our wayward and fake production into true products is the way to go, not to encourage more risk taking and maverick maneuvers that (in hindsight) added nothing to production.

Lower, more reliable production of something concrete, *SUSTAINABLE*. Not just higher production without regard of everything else.

Is higher tax the way to get there? Maybe, maybe not. But trying to reuse our broken system that spewed out risks (look at our past decade) is not something I would like us to do again.

On Feb 23 11:47 AM Blackstone wrote:

> When has taxing the businesses and corporations ever induced them
> to produce more? If you tax me more, I'm not going to go throw myself
> headlong into the work force to make more money only so I can give
> it all to the government. Income taxes drive down production.
>

What Will We Do with All That Debt?

On Feb 21 09:44 AM SW Richmond wrote:

> Consider-this,
>
> I agree completely that Chinese mercantilism cannot persist and that
> the Chinese were stupid to pursue it as long as they did; this has
> been a conundrum for me. How did they let themselves get into this
> position? What were they thinking? I have speculated elsewhere
> that there didn't exist, and still doesn't exist, a critical mass
> of financial specialists in China who understood market forces, but
> then again we supposedly had one here and look what it got us. It's
> tempting for me to guess that the Maoists purged anyone with knowledge
> of capitalism, and as a result the Chinese were unprepared for what
> came their way when they unleashed it. We obviously have too many
> here, maybe we could loan some of our "experts" to the Chinese.
> Paulson's available, I hear.

China saw what Japan and 5 tigers could do in the 1980s; so it followed suit, pretty much copying the model. By the time it's apparent that Japanese mercantilism is a dead end and is synonymous to forever being led around by the USA, it's too late to withdraw. It's not a lack of expert advise. No expert can prevent pain, and it's human nature to shy away from pain, so this issue never gets solved. It's like asking how did Social Security become such a big problem? Why didn't anyone tackle it? We don't have a lack of experts: It's against human nature to face significant pain when you don't have to.

>
> It would certainly have been easier for China to make a change during
> boom years. Do they have sufficient reserves to support their domestic
> situation while they shift to domestic consumption? I can't tell
> from where I sit. I can see them beginning to buy up commodity
> producers at depressed prices, and time will tell whether they keep
> this up. I think this is one way they are going to diversify out
> of USD-denominated assets. It makes perfect sense for them to talk
> up their support of the Treasury market while quietly moving out
> of it. Interestingly, their USD reserves and peg to USD helps them
> buy stuff in Australia and elsewhere due to USD strength.

China cannot supplant US Consumer's buying power. US Consumer is 7 times bigger than their internal buying power. They'll have to grow an internal market 300% just to lose more than 50% growth -- and they started too late. Yes, they're doing some pretty drastic things like a 30% govt subsidy for electronics and appliance; mortgage interest discounts and other business loan assistance. But by the time they issued internal stimulus plans, people in exports have already lost jobs. Who buys stuff when you have no job, no matter the discounts or govt subsidy? If 70% of their workforce is in export, export support or imports for export bridging industry (i.e. imports to help support exports) type business, it's an uphill battle to combat growth slowing.

The problem of buying assets with USD doesn't remove USD from the market. So China give Australia USD to buy their company A. Now that chunk of USD is an Australia problem. Thinking it through, it'll show that now Aus have to buy UST instead of China. (or let it's currency raise) Pot-a-toe, Pota-toe who's owner doesn't make a difference to the seller of UST -- the USA.

So there's a limit how many actual resource they can buy before other countries enact protections.

Globally, NOBODY'S (minus USA) is willing to let their currency climb with respect to everyone one. If someone will take that lead (and have the capacity to), he'll become the next superpower. It's the most ironic thing ever: the climb to financial superpower is simply the willingness to let others bank inside yourself; to take up the liability to be someone's bank. (See my next paragraph to see some sense on this)

>
> I have also been exposed to the theories that essentially require
> a reserve currency nation to run perpetual deficits in order to keep
> the world supplied with its reserve currency. Frankly, I'm not sure
> what to make of them.
>

This theory is true to a degree. More concisely, you need someone to run deficit, as long as you have players in the system, that (for whatever reason) wants to save more than they make. This is because you cannot create savings out of thin air in a global system. Your savings is someone else's liability problem, always is, always will be. Think about it and it makes sense.

Even gold backed, this is still true. I can "save" by buying gold and storing it into a celler. This effectively removes that gold from circulation and layers on a "liability burden" onto the whole system by causing slight inflation. (inflation because now there's less gold to chase after goods)

But unless I'm a miser (who saves just because, and not for some future USE) isn't that "savings" simply trusting that this gold can be resold back when I need to spend my savings for something else? "Reselling" at that time is simply claiming the liability back from the system. The slight inflation will now be reset, and I can then claim that difference from my sales.

If the system have no capacity for such liability claim by the time I want to sell the gold (to claim my savings), then my gold will be sold for a pittance or maybe even no demand for the sales. Imagine if there's a plague and very few people is left in the world -- gold won't allow you to buy a new house construction even if I wanted to -- because the ability to build that house no longer exist in the new system. (i.e. "no capacity for such liability claim")

> I overreact when someone tries to tell me that there's a solution
> here for the US that involves more debt, at an accelerated accumulation
> rate, for the US taxpayer. IMO this simply isn't possible without
> US currency devaluation. It may be merely part of a coordinated
> global devaluation, which preserves apparent USD "strength" wrt other
> currencies, but commodities are where this rubber meets the road.
> We are seeing skepticism about this right now in the price of gold.

The solution will not be a "USA" solution, despite how much we want it. Similarly, it won't be a China solution, either. It's going to be some balance that we'll reach, that looking at the system in isolation from with USA side or China side, would seem utterly dysfunctional. But a dysfunctional system can be remarkably stable.

The only way you can get true USA solution, is to cut off global trade period. *FORCE* self-sufficiency within the USA. Everyone's lives will be made worse, but we'll reach an equilibrium that makes more sense analytically than now. But that's trying to make something sensible by forcing it to be.

What Will We Do with All That Debt?

Perhaps you should switch the title and you'll see the different perspective:

"What will *THEY* do with all that debt? (and US dollar)"

This is as big, if not a bigger problem, for the exporters as it is for the USA.

Say the foreign country bought US dollar (to prevent their currency from rising, or to debase their currency); and the USD is used to buy UST.
Now the UST matures. They now get USD back *PLUS INTEREST*, so more USD than before. They now have another problem.

If they should sell the USD on the open market, it'll strengthen their own currency. With the interest and their original manipulation; their currency likely to end up even stronger than what they started with if they sell USD this way. So see the export conundrum I highlighted above.

If they're unwilling to approach this problem; now they have USD to buy US denominated things. In fact, with a running export engine, they probably have even more USD from their own trades, on top of this newed matured UST income. So they have to buy something. (or US Govt will run inflation at 2-3% and kill their raw cash store in 30 years anyhow)

So this is how the story of how an appetite for USD debts grows...

The solution for Asia is simple. Let your currency be strong. But the conundrum is real -- let your populace be unemployed and your economy be wrecked in the process.

Back to the topic of the US Gov... Once it has issued a debt, it has rarely ever completely repaid it and be done with it. (Since the whole UST ballooned from Regan years, only in a brief period in Clinton's years did US debt ever dropped.) Instead, the debt is perpetual like lithgowk said. So the question is not whether we can afford the debt, it's whether we can roll it over to the new debt.

With the Asian conundrum listed above, unless Asia starts to accept a strong Asian currency, the USDs to roll over new debt will exist. This ability will exist until their currency manipulation becomes untenable (long way away from that); or we overwhelm them with the amount of new debt we create (a real danger, but currently not observed yet.. USD is still climbing)

Now... the least painful way to resolve this, is for Asia to lead by having a strong currency and internal market. But the timing's got to be right too... They cannot turn around when the global economy is in the tubes.

Their chance to change is during boom years. The last boom years, China had a chance to switch if it hadn't insisted on serious pegging of it's currency and running exports to sky high growth rates. It didn't listen. So now it's stuck with the decision it made back then.

If the globe ever returns into a growth period agan, then Asia has to start sacrificing export gains and build internal demand. But that's akin to asking a stock addict to not double down when equities are climbing; but to sacrifice gains and diversify instead -- how many of us listen to this???

What Will We Do with All That Debt?

Govt is borrowing on behalf of the country at low interest rate and then handing it to projects and bank bailouts, both of which (if successful) will generate future earnings upwards of the 2% borrowed. In this way there is an increase in production, so saying "the govt doesn't produce anything" is merely a matter of perspective.

Long term currency debasement is currently the schedule program for foreign countries. Look at it this way, The DOW, the S&P, or even the US trade deficit, when graphed using Singapore dollars, Taiwan dollars or Korean Won; hasn't fallen as much as it seemed from a dollar basis and is in fact, trending up.

Be careful about the fallacies of first deciding on a conclusion, and then running research to justify the conclusion. I'm neither saying this will happen, nor it won't; but I won't be so sure to state that every road leads to "currency debasement" that everyone's investment strategy seem to imply.

On Feb 20 02:04 PM SW Richmond wrote:

> Government isn't a business and doesn't produce anything. Your solution,
> then, amounts to relying on currency debasement.

A Whiff of Reflation in the Air, Part II

Looking at how Japan fought their deflation...

1. They deflated.
2. Then barely climbed a little into inflation. (claim victory)
3. Then deflation resumed
4. More small stabilizations, 0% growth or 0.1% pathetic CPI growth.
5. Then more deflation.

It's not like when it turns, it'll never drop back down again.

So the moral of the story. Even if you get whiffs of reflation, or even multiple whiffs, if the overall trend is still solidly deflating, you're still not out of the wood.

With that in mind, I guess if you're a trader or gambler, you must love this volatility. Everyone else must be having a headache.

What Will We Do with All That Debt?

On the same topic as we're discussing here...

Here's another perspective that belongs to the US is not approaching doomsday camp:

Very highly recommended read:

www.atimes.com/atimes/...