Old Turk

Obama's Role in the Market's Next Breakout

A trillion dollar stimulus might create (or prevent the loss of) 2.5-3 million jobs for a couple of years. At our current rate of monthly job losses, this will apply a 5 month Band-Aid, and all with borrowed money. Fixing our collossal credit/housing meltdown requires saving over debt-fueled spending, and TIME measured in years. Unless our government continues to prop up failed institutions (a la Japan in 1990s to present), in which case our recovery could also require decades. Most investors' horizons don't go out more than a year or two. If the market rises on the news of the stimulus, it might be wise to take short positions as the rise fades.

Humility of Realism II: Seven Thoughts about Our Whole System

David, a very good post. It will take lots of time (years) to dig out of the hole that the (greedy) financial folks took years to get us into. One big danger is for everyone to sit on his/her behind, waiting for the government fo bail out the working stiffs. The USA must and will get behind new and entrepreneurial efforts that will build us out of the current recession of gross mismanagement. Healthcare will be transformed in the next 10 years (stem cells, RNAi technology, monoclonal antibodies, telomerase inhibition, etc.), and will create millions of new jobs, and as our life expectancy increases yet further, millions of associated jobs will be created. The same can be said for IT and haptics. We are going to soar! But it will not happen in 2009. Let's continue with our switch from consumption to saving and creating.

What Obama Needs to Do to Correct His Economic Vision

A terrific post! There is a chance that Obama can stop the transfer of funds from the working public into the hands of the annointed few at the top of our political and financial spectrum. To me there is only one political party in the U.S.A.: the ruling elite. The two sides of the ruling elite put up a wonderful charade to make us workers feel that we are being represented, but don't be fooled. The taxpayer's money has so far gone straight into the coffers of the very people at the top who created this mess in the first place, with pitifully little restriction on behavior or responsibility for deployment.

Evidence That Big Inflation Is Coming

Mish, I've followed your stuff for years, and you are terrif. But, hey, can we not broaden the concept of M1 to include the items that are detracting from it?? These TARP and similar rescue funds, do we think that they are adding to M1 (or 2 or 3)? Let's get real: These taxpayer dollars are going into the big banks' black boxes where they get nuked by the toxic waste on their books. These dollars simply disappear (poof!!) in order to make the bank books look better, albeit still terminally ill. This newly created money dies just like the soldiers attacking from trenches in WW1.


On Jan 25 08:23 AM TMM wrote:

> From: globaleconomicanalysis...
>
>
>
> Adam Hamilton at Zeal is predicting Big Inflation Coming.
>
> The growing legions of deflationists see an unstoppable depression-like
> deflationary spiral approaching like a freight train. They cite some
> convincing data. The stock markets have been cut in half in just
> a year. In the past 6 months, some key commodities prices fell farther
> and faster than they did in the entire Great Depression. House prices
> are down by double digits across the nation, with no bottom in sight.
> And credit is a lot harder to come by today than in any other time
> in modern memory.
>
> My Comment: Well yes, that is convincing data. Indeed a perfect 15
> out of 15 conditions experienced in the great depression are happening
> today as discussed in Humpty Dumpty On Inflation.
>
> Of course Humpty Dumpty can and does pretend that deflation is specifically
> about money supply, totally ignoring credit. And those same Humpty
> Dumpties were amazed by the collapse in commodities and were crushed
> shorting treasuries because they did not see this coming.
>
> In light of these universal falling prices, how could we not be entering
> a sustained deflationary period? The case may seem airtight, but
> I’d like to offer a contrarian view in this essay. Believe it or
> not, despite 2008’s price collapse there is plenty of overlooked
> evidence suggesting big inflation is coming. You won’t hear much
> about this on CNBC, but it could have a big impact on your investments
> in the years ahead.
>
> My Comment: I am not sure what Hamilton means by "sustained". We
> have been in deflation for about a year, and maybe it lasts another,
> or five. Then again, perhaps we drift in and out of a slow growth
> recessionary period much like Japan for a decade. We have to take
> this one step at a time.
>
> Inflation and deflation are purely monetary phenomena. Inflation
> is not just a rise in prices, lots of things can drive prices higher.
> Inflation is the very specific case of a rise in general price levels
> driven by an increasing money supply.
>
> My Comment: That last sentence puts the cart in front of the horse.
> Inflation is not rising prices; rising prices are a result of inflation
> (an increase in money supply and credit).
>
> Acknowledging that debt-financed house prices are a special case
> that may indeed be deflationary (contraction of credit), I am focusing
> on stocks and commodities in this essay. From October 2007 to November
> 2008, the flagship S&P 500 stock index plunged 51.9%. About 4/7ths
> of these losses snowballed in just 9 weeks during the stock panic.
> From July 2008 to December 2008, the flagship Continuous Commodity
> Index plummeted 46.7%. Almost half of this mushroomed during the
> stock panic.
>
> Deflationists argue these price drops are proof of deflation, and
> most people today believe this. But they are only deflationary if
> they were driven by a contraction in the money supply. Stocks and
> commodities are generally cash markets. Credit such as stock margin
> can be used, but it is trivial relative to the market sizes. And
> real commodities purchased for industrial uses are paid for in cash
> or near-cash (short-term trade loans), not multi-decade loans like
> houses. So the money supply during 2008’s slides is the key.
>
> My comment: What deflationist has argued that commodity price declines
> are proof of deflation? Can I have a name? Most mainstream media
> is concentrating on prices.
>
> More to the point, no single indicator alone can constitute proof.
> However, 15 out of 15 symptoms one might expect to see in deflation
> should be ample proof for anyone.
>
> If available money to spend indeed contracted, then the deflationists
> are right about seeing deflation in 2008. But if the money supply
> fell by less than stocks and commodities plunged, was flat, or even
> grew, then deflationists are wrong. When prices fall simply because
> demand declines (too much fear to buy anything immediately), this
> is merely supply and demand. If money didn’t drive it, then it isn’t
> deflation.
>
> There is the humpty dumpty argument again. And again I reply that
> it is foolish to ignore credit (debt). Debt is actually more important
> than money simply because it dwarfs base money. And much of that
> debt cannot be paid back and that is why banks are failing.
>
> Come to think of it, I need to add bank failures to my list. That
> makes a perfect 16 out of 16 things.
>
> The key point in this rebuttal is that money supply does not have
> to shrink to cause deflation unless you insist on a humpty dumptyish
> definition that has no real world practical application.
>
> Here is a practical application: There is no money to pay back loans.
> What cannot be paid back will be defaulted on and the default avalanche
> has been triggered. Once an avalanche starts, it is impossible to
> stop.
>
> That avalanche of defaults amounts to deflation if it exceeds the
> expansion of money supply.
>
> Banks are attempting to hide the avalanche by not marking their books
> to market. Citigroup alone is sitting on over $800 billion in SIVs
> of dubious value. However pretending credit will be paid back does
> not make it so, just as ignoring an avalanche does not stop it.<br/>
>
> Hamilton goes on and on with straw man arguments about what deflationists
> believe. In practice I do not know a single deflationist who believes
> the strawman Hamilton is rebutting.
>
> Hamilton also talks about various money supply charts as if they
> are proof of inflation. Here is my rebuttal.
>
> Base Money % Change From A Year Ago
>
>
>
> Hamilton's definition shows there was massive inflation during the
> great depression, starting in 1931!
>
> Of course that is ridiculous. But it is what one must conclude if
> one defines inflation as an expansion of money supply alone.
>
> That chart shows why it is foolish to look at one indicator as proof
> of inflation. A more practical approach and a more practical definition,
> gives more practical results.
>
> Soaring base money supply is not proof "Big Inflation Is Coming"
> soon, just as it was not proof that "Big Inflation" was coming in
> 1931. There cannot possibly be any other logical conclusion when
> confronted with the data.
>
> Mike "Mish" Shedlock
> globaleconomicanalysis...
> Click Here To Scroll Thru My Recent Post List

Distressing Details of the UltraShorts

I suspect that the intrinsic weaknesses of the Ultrashort ETFs and ETNs can provide oversized gains as well as losses over the medium to long term. For instance, you could have bought SKFs (Proshares Ultrashort Financials) in the 70s and 80s in Aug-Oct 2007, and if you had had a sell order in at 204 on Oct 10, 2008, you would have cleared about 170% profit, and it would have been long term capital gains as well.

If an ultrashort ETF is truly operating on a daily basis, whenever there is a gap down from one day's closing to the next day's opening, you are "robbed" because you "miss" the overnight drop. Gapping is much more likely in high volatility markets. But remember, the opposite can also occur, especially in a falling but tranquil market: The next day's opening can be higher than the previous day's close, so that you "double up" on that part of the previous day's drop that is retraced before the tumble continues.

If the ETF does not increase the shares available as demand increases, then there is a premium included in the price, which is caused by demand in excess of supply. And vice-versa for a discount to price.

I still love the ultra ETFs and ETNs, because, unlike options, there is no premium paid for time (rather, some of them actually pay a dividend), and if you hold for over a year you get LTCG rather than STCG tax treatment. It's very important to know the underlying structure of the ETF. For example, for DIG it is simply oil and gas and drilling and refining companies (go to marketwatch.com, search for DIG, then hit profile and you see the exact list), so DIG is going to track its index very well.. For DXO and DAG, it is all futures contracts, where contango and backwardation have huge influences. These ETFs are about as alike as apples and cats.

Of Black Swans and the Cost of Reputation

Hey Dustin, you are right on target IF everyone plays honestly. What we have witnessed in the past 5 years is a coagulum of dishonest rating agencies, dishonest investment banks, greedy mortgage brokers, dishonest home appraisers, and greedy home buyers who didn't have the wherewithal to throw their hat in the ring. And you and I got to pay to watch!! And then to pay even more after the bust!! That was no black swan, that was a predictable event (and our watchdogs were soundly asleep).


On Jan 11 02:44 AM Dustin Currie wrote:

> Taleb's book is hogwash, I should sue Tom Keene to get my thirty
> dollars back (I actually love bloomberg radio). The irony of "The
> Black Swan" is that now is the most predictable time for it to gain
> traction. It's just a bear market book. The truth is we can know
> and control things and we do so very well; hunks of metal and petroleum
> zip us around the earth, acoustic energy from our vocal cords is
> electronically mirrored and reconstructed in loved ones ears. Just
> because we don't know somethings is no reason to through up our hands
> and resign ourselves to a world where the sun might not come up tomorrow.

There's Unemployment ... And Then There's Unemployment

Hi Tony, I share your grimace. The money in the 401k just went poof, disappeared. This is because so many things had been bought on leveraged debt, and now deleveraging is happening. Banks and hedge funds were levered up to 35:1 (let's get the GD regulators we paid for who let THAT happen!). You and I were called dumb if we went 50% on margin in our stock account (that's 1.5:1 leverage). Levels of greed and arrogance that happened are unbelievable. No one should be allowed to get 100M in salary, bonuses, golden parachutes etc. while the company craters. These people (and the ones who "regulated" them) should all be behind bars.


On Jan 10 12:31 PM Tony Chirulescu wrote:

> I believe the unemployment numbers published are off (lower) by 4
> - 6 percent or more.
> Nobody counts the people that exhausted or never qualified for unemployment!
>
> The illegal emigrants do not qualify for any government assistance.
>
>
> My question is where are the money?
> Where are the money we lost in the 401K RIFs etc?
>
> Are we going to be able to retire ever?
> God help us all poor people!
>
> Best wishes to all!

How Central Banks Destabilized the World's Economies

Very insightful article. I agree that the executive branch is the least to blame for the current mess (as long as we exclude Iraq from the definition of "mess"). The worst U.S. president was Wilson, who jammed the creation of the Federal Reserve past the judiciary (and then jammed the U.S. into WWI just as the Europeans were all tiring of the slaughter and were about to seek an armistice, thereby causing a lopsided defeat of the Huns, in turn causing excessive demands for reparations by Germany, in turn causing hyperinflation, followed by the inevitable Hitler). We did not need a Fed, we needed continuation of the gold standard and balanced budgets, and no war. Additional current culprits are Congress, which approved mindless increases in leverage for Fannie and Freddie, the SEC, which lifted constraints on leverage for investment banks around 2003-4, the insanely low fed rates during Greenspan's terminal tenure that caused misallocation of credit and bubbles, and all the greedy mortgage bankers, home appraisers, liars applying for mortgages, investment bank securitization of toxic waste, complete disregard of rational evaluation by all the rating agencies.... Please don't get me started! Bush may not smell like a rose, but in this economic fiasco he is quite far out on the periphery.

A First Look Inside the Fannie / Freddie Bailout Plan

Kudos for the govt plan, as hard as it is for a free marketer to swallow. It covers as many of the open bases as could be covered. Bondholders intact, so no foreign govt runs. Preferred holders scalped but banks can apply for relief regarding capitalization, so FDIC won't look all that much weaker. Common holders OTL, but that's life. Pretty pathetic, but beats standing on the street corner with a tin cup. And 10% return for the taxpayer is about commensurate with risk. Now then, mighty government, let's see how the 800bn swallow in bad MBSs and CDOs generally goes in 2009.

8 Quick Comments on the Freddie/Fannie Bailout Plan

Really good, Mike. What about constitutionality of creation of the Federal Reserve? And money that is not silver and gold? I believe the Constitution specifies that creators of such money shall be put to death.

About the GSE bailout:
1. Insolvency must be strictly shown according to accepted criteria.
2. Taxpayers must come before all debt and equity holders
3. Debt degradation must be structured so that bank holders do not have to immediately take a hit to their capital, and so that CDSs are not immediately triggered.

And for dessert, why the devil doesn't our brave government governance insist that CDSs be traded on a public exchange, to avoid all this unfathomable smelly stuff?

8 Quick Comments on the Freddie/Fannie Bailout Plan

Mike, really good. What about unconstitutionality of creation of the Federal Reserve? About creation of money that is not of silver and gold? I believe the Constitution says such people will be put to death.

About the GSE bailout:
1. Insolvency must be shown using accepted criteria.
2. All equity and debt must be junior to the taxpayer.
3. Timing of debt obligation wind-up must be structured to avoid abrupt debt devaluation (and bank capital write-downs) and triggering of CDSs.
And for dessert?