Insiderman

Commerce Department's Revised GDP Shows a Delineated Story for the Recession

I like the revisions BEA did to the GDP calculation methodology; it will do a lot to mitigate the positive GDP impact of natural disasters and better reflect current activity. They'll go back and restate prior periods, which can be annoying if you have older material. It happens every 10 years, so it's no big deal.

What I do find interesting is that the author of this post didn't say anything about the composition of GDP. EVERY category was down big time except government spending, which increased 10%. Essentially, our private sector economy actually got WAY worse, but the Feds pumped us up.

No one wants to make a move when the fiat power of the U.S. government trashes the risk and reward metrics for a market.

Plus, we still have Maiden Lane coming due and a bunch of larger banks that will surely fail if Geithner doesn't get FDIC and OTS under the Fed. Then we have the Fed essentially printing money to help Goldman Sachs, JPM, BA, and the like prop up the equity market.

Sad times for free markets.

We Can't Talk Our Way Out of This Market Mess

Here's a thought: Perhaps the government wasn't just talking up the economy but allowing big TARP borrowers to use unneeded funds to make principal trades. Hmmm. Evidence of that in spikes for Golden and Morgan Stanley?

The S&P 500: Five Things You Probably Don't Know

For cap weighting the index, you have to do it the way you describe:

"But the index’s P/E is not cap-weighted. To calculate the P/E, S&P sums the earnings-per-share for all 500 stocks over the past 12 months—unweighte... uses that raw number as the E in P/E. The numerator P is the index’s value, which as we have seen is cap-weighted. Thus the calculation of P/E is a hybrid: a cap-weighted P divided by an equal-weighted E for the 500 stocks in the index."

When I make an earnings forecast for each company in the S&P 500 and sum those results, I want to be able to multiply by some function of the P/E to know the value of the index.

Employment Is Defining the Shape of this Great Recession

I don't know why this is so hard unless you're a Keynesian! We're heading for 1970's style stagflation brought on by inappropriate macroeconomic fiscal policies. Housing price inflation was brought on by easy credit (enhanced through risk transference to blind third parties) stopped dead in its tracks by a supply shock (credit collapse).

I'm surprised that Obama selected Paul Volcker head of the Economic Recovery Advisory Board because Volcker raised the Fed Funds target to about 20% in 1981 and crashed the economy short-term in preparation for a longer-term growth phase.

This time the Fed wants to inflate us out of the crisis. Woe is us.

Will Deficit Stimulus Spending Help or Hurt Economic Recovery?

Can use a computer graphics package vs. should use a computer graphics package.

1) You inflation adjust one series but not the other?

2) The increase in GDP appears to lead the budget deficits, especially evident at the left side (1941) and right side of the graphic where this is most evident. Perhaps tax cuts or other fiscal leading caused GDP increases, quickly followed by greedy Congressmen spending even MORE (evidence the Reagan years).

Expand your thinking to the broadest possible application of your analysis: We borrow our GDP rather than produce it. We live in a pristine, carbon-emissions free country where we simply borrow from the Chinese to buy everything produced there. Hmmm. How long will that work?

Mind the GAAP

SEC is looking at ways to require option disclosure (in order for you analysts to earn your pay) and the accounting "industry" has proposals on the table to bring these back into earnings.

Average exercise takes about 13.5 months and some options have 10-year terms, so it should be an interesting exercise to standardize accounting for these.

Hull and White from Rotman GS at U of Toronto like expensing on the grant date and mark-to-market in subsequent periods.

www.rotman.utoronto.ca/~hull/DownloadablePub...

This would be conservative accounting, I suppose. Valuation of an option that reloads for the executive presents some valuation challenges, eh?

Why High Inflation Will Not Take Hold

Maybe I missed this in the comments but if V becomes affected by sentiment (and it has), then a rapid increase in V will have to be accompanied by a rapid decrease in M. Unfortunately, rapidly decreasing M requires that the Fed rapidly sell Treasury securities. increasing the reserve requirement (an elephant gun), etc.

How will the Fed sell Treasuries into this market without a HUGE decrease in Treasury prices and consequent increase in interest rates... usually at a lag. So we'll likely have a brief period of inflatiion accompanied by--yet again--a recession.

As a technical addition to the author's formula, if you use T as transactions, then you cannot use Pi as price level. MV = Sum (Pi x Ti) where Pi is the price of the ith transaction Ti. The MV = PQ formulation, where Q is the real value of final expenditures. I prefer the MV = PY formulation because Y can be used to indicate real income or yeal expenditures in the basic GDP model.

So, if V increases dramatically, M must fall dramatically. Typically P and Q will also shift about in the short-term. Unfortunately, government operational, administrative, and recognition lags will tend to cause the adjustment of M to be inaccruate with respect to the impact of V. P and Q fluctuate cyclically in the process.

Making Sense of the PPIP

Sorry "Prudent Man." It is not a market price until you have a willing buyer and a willing seller. A willing buyer with a price does not a market make.

Also, isn't there some sort of prohibition against using the CFA designation without a comma after your "handle?"


On Mar 29 05:21 PM Prudent Man CFA wrote:

> Once an institution gets a bid for an asset that is the market price.
> All institutions must mark to that market, which it is what it is
> and no one can complain.
>
> When that is the case, those institutions on the cusp of failure
> will as they will no longer be able to hide behind failed assets
> that were not marked.

Making Sense of the PPIP

Kudos to the insightful comment about banks accepting the bids, transferring risk from banks to taxpayers, and failing to punish excessive risk taking on virtually anyone's part. On that last note, why is it that CDS protection buyers (Goldman Sachs among others) emerge from this whole. Perhaps they should have split the losses between protection sellers and buyers and left the taxpayers out of it. A protection buyer that does business with a protection seller should bear the counterparty risk, eh? And that applies especially to those who bought naked (no underlying CDO risk).

The Rally, When It Comes, Will Be a Doozy

Athena ... I'm trying to figure out why FAS 157-b will solve the problem? It came out for comment over a year ago and my read on it was to delay implementation for infrequently valued NONfinancial assets/liabilities:

"FASB Statement No. 157, Fair Value Measurements, for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually)."

How will this solve the problem with credit default swaps and CDOs?

The Stimulus Bill: Did the Government Break Our Leg and Offer Us a Crutch?

George Bush a free market person? He allowed more government intervention in more ways than I ever thought possible. Compound that with unsustainably large budget deficits and you call George "free market?"

The credit crisis was caused by unintenteded consequences of government programs to help minority and low income borrowers, Wall Street greed that allowed synthetic securities and swaps to counter the risk in an unregulated market, contributions from the regulated to members of Congress that head committees that regulate them, and Fed-determined low interest rates after 9/11 that made ARMs irresistable.

Why Wall Street Razzed Obama

I took this to be a tongue in cheek editorial.

I think the real reason Wall St. cratered on inauguration eve was because no one wants money on the table when a million people in a 3-mile mall area could kill the guy.

Five Ways the Global Economy Is Rebounding

I'm not at all surprised that we're seeing lower oil prices. One of the reasons asset prices have been falling rather than rising relates to DEflation (lower demand being one of the factors leading to this). Gold is a store of value as well as a safe haven.