News and views from Rosie and others

David Rosenberg on musical chairs:

So let’s get the story correct. We are still in the midst of a credit collapse where there is simply too much debt and debt service globally relative to worldwide income. The fact that we had a year-long respite does not alter this view. It was a respite that was induced by what is now an apparent unsustainable pace of bailout and fiscal stimulus in practically every country on the planet, not just the United States. What has happened was that governments bailed out the banks and massively stimulated the economy but because the revenue cupboard was bare, in part due to the savage effects of the global recession, public sector debt loads exploded at all levels of government, and to varying degrees, in every jurisdiction.

But someone had to buy these government bonds, and who else, but the very same banks that the governments rescued! And, they had a super-steep yield curve to generate profits from this bond-buying activity. Talk about a symbiotic relationship.

Not only that, but because of global bank capital rules, these financial institutions were not compelled to put any new capital into reserve against these government bonds because of their investment-grade status from the ratings agencies, when in fact, very few countries actually deserve the ratings they have when one assesses structural deficit ratios, debt/GDP ratios and interest costs/revenue ratios appropriately. Now, ironically, the governments, having saved the banks, only to then rely on the banks to fund their bloated deficits, are now in a situation where their banks need help again because of the eroding quality of the government debt on these bank balance sheets. Talk about a dangerous game of musical chairs.

Rosie on the downward US GDP revision, the lacklustre recovery in domestic demand, and the stock market:

The equity market may have only figured this out, but outside of inventories, the U.S. economy is barely growing and is actually stagnant in real per capita terms. We are not sure how an 80% rally off the lows could have ever been considered by anyone as being consistent with such an anemic recovery in the real economy. And, if you are wondering how on earth the yield on the 10-year Treasury note can possibly be anywhere remotely close to 3%, it is because that is exactly where the trend in nominal GDP is — and we are well past the peak of all the government stimulus efforts.

and D.R. again, this time from a couple of days ago, on stock market valuations:

CAN WE EXPECT A 30-40% CORRECTION?
There have only been two other times when the stock market ran parabolically up from a low in barely over a year, as was the case this time around (+80% from March 2009 to April 2010): the 112% surge from June 1, 1932 to September 7, 1932; and the 116% runup from March 2, 1933 to July 18, 1933. In the first case, we had a 40% correction and in the second, the correction was 34%. So, we are talking here about the prospect of a pretty hefty reversal in the S&P 500 that could very easily take the index down to as low as 850, if the history of these types of givebacks is any indication.

The problem for Mr. Market is that it went into this latest Europe-induced ordeal with an excessively bullish GDP growth outlook for the U.S.A. – at the April highs, we would argue that a GDP growth rate of 6% was effectively being discounted. How nutty is that?

In the aftermath of the correction, the equity market is now pricing in a growth rate closer to 3.5% — the fact that earnings have been rising while the market has been correcting has helped cut the degree of overvaluation in half, to a 0.5 standard deviation from 1.0 just over a month ago on a Shiller normalized P/E ratio basis. But the ECRI leading economic index is actually foreshadowing a deceleration in real GDP growth, to 1.5% in the second half of the year from the 3.75% average pace since the recession technically appeared to have ended around mid-2009. The S&P 500 level that would be consistent with that sort of pace would be closer to 850 than the current level of 1,074. In other words, there is still more air to come out of the balloon.

also worth reading:

Don't Mess with Aunt Minnie. John Hussman.

the combination of unfavorable valuations and collapsing market internals is a sharp warning to examine risk exposures carefully here...if you've got an overvalued
market which then loses technical support, the outcome can be extremely negative, because technical investors are prompted to sell, but fundamental investors have weak sponsorship at that point, so large price declines are required to induce the fundamental investors to absorb the supply

Hussman also quotes Richard Russell:

"If I read the stock market correctly, it's telling me that there is a surprise ahead, and that surprise will be a reversal to the downside for the economy, plus a collection of other troubles." Speaking in reference to one of his key measures of market internals, he observes "In 50 years, this is the most decisive top I can ever remember... the damage and cost of this reversal will run into the trillions."

and on Europe, Hussman says:

in a situation where the probable amounts repaid by borrowers cannot meet the required debt service on the bonds (or mortgages), one has two choices: either savage the innocents in order to defend the bondholders (and create new government debt or print money to do so), or restructure the debt. For Euro-area countries, the stronger member countries (which are already running fiscal deficits) are being asked to run even larger fiscal deficits to bail out the weaker members. This itself would undermine the Euro. The alternative bailout is for the ECB to effectively print the money, which has the same effect of undermining the Euro by levying an eventual "inflation tax" on the holders of Euro-denominated assets.

Fiscal Crises and Imperial Collapses: Historical Perspective on Current Predicaments. Niall Ferguson, via Peterson Institute for International Economics.

Easy Money, Hard Truths. David Einhorn, NYT.

Hugh Hendry Slams Economist Jeffrey Sachs: I Would Recommend You Stop Going Skiing And Panic. Clusterstock.

Geithner on "Sustaining the Unsustainable"; Bill Gross, Robert Mundell say Sovereign Default Likely Inevitable. Michael Shedlock.
includes this gem: Geithner quoted saying:

"European leaders face the difficult challenge of trying to restore sustainability to an unsustainable system."
Yes Tim, that challenge would indeed be "difficult", in fact, impossible by definition.

IMF Economist Argues Home Prices Still Have Far To Fall. WSJ.

Whitney Tilson's T2 Partners Unveils Latest Mega-Case Against Housing And The Homebuilders. Business Insider.
The entire multi-trillion dollar mortgage market has been nationalized, and yet even that has failed to keep home prices from sliding. Foreclosures are still near record highs, despite the best government efforts to stall and delay the foreclosure process. The mortgage mod program is accomplishing next to nothing, and even when mods are done, it does more harm than good, as recidivism is high --- i.e. even after mods, most end up in foreclosure anyhow. All the government has managed to accomplish is to create this massive overhang of properties that must one day be foreclosed on and brought to market. In the end the banks are going to have to write off all these losses in their mortgage holdings.

Email from Canada: Its Different Up Here -- It Really Is! Michael Shedlock.

Conventional Madness. Paul Krugman, NYT.
discusses, with contempt, the OECD's recommendation that the Fed should be hiking rates this year --- even with unemployment high --- and projected by the OECD to remain high for the next couple of years --- and inflation low --- and projected to remain low for the next couple of years --- so the Fed should hike WHY exactly? to slow the recovery?

Crying Fire! Fire! In Noah’s Flood. Krugman again.

The Realities and Relevance of Japan's Great Recession. Adam Posen, BoE MPC.
topic: what does it mean for an economy to ‘turn Japanese’ and what determines whether it will?

and, finally, just a reminder:
The Aftermath of Financial Crises. Reinhart and Rogoff, Univ of Maryland and Harvard, respectively.
yes, recovery from financial crises is almost always protracted and difficult

Worthwhile reading... and viewing

Wall Street CEOs Are Nuts. James Kwak, The Baseline Scenario.
excerpt:

Wall Street CEOs like to think they are the adults, the big men in the room, the ones who know how the world works. Well, you know what? They screwed up their own banks, the financial system, and the economy like a bunch of two-year-olds. Every single major bank would have failed in late 2008 without massive government intervention — because of wounds that were entirely self-inflicted... The financial crisis should have put to rest for a generation the idea that the big boys on Wall Street know what they’re doing and the politicians in Washington are a bunch of amateurs. Yet somehow the bankers came out of it with the same unshakable belief in their own perfection that they had in 2005. The only plausible explanation is some kind of powerful personality disorder.....

Yes, they [Obama, Geithner, the White House] deserve more gratitude. They saved the bankers twice — once by protecting them from their own mistakes, and again by protecting them from Sherrod Brown, Ted Kaufman, and all the other “populists” who wanted fundamental changes in our financial system. As should be clear, for all my differences with Tim Geithner, I would rather have him calling the shots than Jamie Dimon or Lloyd Blankfein. But Obama and Geithner should know better than to expect gratitude from a bunch of narcissistic, delusional crybabies. And in that sense, both parties to this toxic relationship — the Wall Street bankers and the Obama administration officials — deserve each other.

John Clarke and Bryan Dawe calculate the cost of the European debt crisis. ABC News.

Worthwhile Reading

Lost Decade Looming? Paul Krugman, NYT.

Despite a chorus of voices claiming otherwise, we aren’t Greece. We are, however, looking more and more like Japan.

Richard Russell says Major Crash likely. Bloomberg.
the article no longer contains it, but Russell was quoted as saying:

"Do your friends a favor. Tell them to “batten down the hatches” because there’s a HARD RAIN coming. Tell them to get out of debt and sell anything they can sell (and don’t need) in order to get liquid. Tell them that Richard Russell says that by the end of this year they won’t recognize the country. They’ll retort, “How the dickens does Russell know — who told him?” Tell them the stock market told him."

Seth Klarman, another industry icon, also sees poor outlook for stocks. Reuters.

"Given the recent run-up, I'd be worried that we'll have another 10 years of zero returns"... "I'm more worried about the world broadly than I've ever been in my whole career," Klarman said.

Another crash warning comes from Jeremy Grantham, who "guarantees" gold will crash. Advisor Perspectives.

What makes Grantham so certain gold will crash? Because he just bought some!! In fact, he just bought some despite saying:

“I hate gold. It does not pay a dividend, it has no value, and you can’t work out what it should or shouldn’t be worth,” he said. “It is the last refuge of the desperate.”

That may speak volumes about what he thinks about other asset classes if he's buying gold. So though his gold-crash guarantee was tongue-in-cheek, his forecast for U.S. large-cap stocks is not:

Long-term PE ratios have averaged 14 and they are currently 22.7. Grantham expects them to go to 15, and that translates to a 5.7% reduction in projected return. Similarly, profit margins have averaged 4.5%. They are currently 5.8% and Grantham generously expects them to increase to 6%, giving rise to a 0.4% increase in total return. Sales growth per share has been 1.8% and is now 1.9%; he expects it to increase to 3.6%, contributing 3.8% to total return. Including the dividend yield of 2.3% produces a total return of 0.3%.

I haven't heard of the following guy before, and don't buy into some of the historical comparisons he makes, but, for what its worth, here's another recent crash call:

Global Macro's Raoul Pal: Here's Why A Crash Is Coming In Two Days-To-Two Weeks. Business Insider.

From market crashes to the economic collapse:
Why the 'Experts' Failed to See How Financial Fraud Collapsed the Economy. James K. Galbraith, Alternet.

Some appear to believe that "confidence in the banks" can be rebuilt by a new round of good economic news, by rising stock prices, by the reassurances of high officials – and by not looking too closely at the underlying evidence of fraud, abuse, deception and deceit. As you pursue your investigations, you will undermine, and I believe you may destroy, that illusion.

But you have to act. The true alternative is a failure extending over time from the economic to the political system. Just as too few predicted the financial crisis, it may be that too few are today speaking frankly about where a failure to deal with the aftermath may lead.In this situation, let me suggest, the country faces an existential threat. Either the legal system must do its work. Or the market system cannot be restored. There must be a thorough, transparent, effective, radical cleaning of the financial sector and also of those public officials who failed the public trust. The financiers must be made to feel, in their bones, the power of the law. And the public, which lives by the law, must see very clearly and unambiguously that this is the case.

On the lighter side:
How did the economy go bad? The Onion.

and this one's for DQ & Jackie:
The Federal Reserve has been abusing derivatives since 1999. Market Skeptics.
Yes, there is a PPT!!


and, finally, a little philosophy/science, with no market implications whatsoever:

From their paper, Unskilled and unaware of it, Cornell Univ scientists Dunning and Kruger:

"People tend to hold overly favorable views of their abilities in many social and intellectual domains. Overestimation occurs, in part, because people who are unskilled in these domains suffer a dual burden: Not only do these people reach erroneous conclusions and make unfortunate choices, but their incompetence robs
them of the metacognitive ability to realize it."

Or, as Charles Darwin once said: "Ignorance more frequently begets confidence than knowledge"

June or July?

Will the BoC hike on June 1, as had been widely expected as of a few weeks ago?

Or will they wait for the July meeting, given they had previously "committed", and reiterated that commitment numerous times, contingent on their inflation projections, to be on hold until the end of the second quarter... and given that economic and market uncertainty --- b/c of the situation in Europe, as well as FinReg in the U.S. --- prevails?

I tend to think that if the Bank was meeting today, given what the ECB is doing, and given what currencies are doing, and given that concerns about the possibility of a global economic double-dip may have mounted in the last couple of weeks, that it would be relatively costless for the BoC to take a wait-and-see approach for another month, whereas it would potentially look odd to hike in two weeks and then perhaps regret it.

That is, of course, if the decision were made today, in the midst of this recent turmoil. But the decision is not today. So that raises the question of what is the likelihood that some meaningful resolution of the European debt crisis is made in the next couple of weeks? In my estimation, this is a problem that is not going away; there is no short-term fix.

That said, there may be band-aids that could be applied that satisfy the market for a while, leading to a bounce-back from the currently oversold condition in stock markets and overbought condition in bond markets. In which case, that raises the question of what is the likelihood that the ECB and European politicians --- who have gotten the market so rattled in recent days and weeks --- actually come to an adequate resolution to satisfy the markets for awhile. Once again, in my estimation, the odds aren't that good; why would they change their stripes over the next week or two?

But let's leave the Euro situation off the table for now. What are the reasons the BoC might hike despite the Euro, and what are the reasons the BoC might hold off?

Hike now:
- by hiking, the Bank would not be tightening so much as starting the process of normalizing rates, and, even with a few hikes, could remain relatively accomodative for some time
- Taylor Rule estimates, based on current levels of CPI and employment, finally suggest that a rate north of 50bp is appropriate
- Q1 GDP is projected to come in up nearly 6% on an annualized basis, following Q4's rise of 1.2% (or 5% annualized)
- Canadian leading economic indicators are up 3% in the 3mths through April and 11% over the last year
- according to the Labour Force Survey, employment has climbed a whopping 148k over the last 3 mths (through April), and even the less volatile Survey of Employment Payrolls and Hours suggests employment has climbed 44k in the 3mths through Februay (pretty consistent with what the LFS said through Feb.)
- retail sales are up 9% YoY through Q1, including up 5.5% ex-autos & gas; retail sales are not just climbing strongly off trough levels, but have surged past the pre-recession peaks
- housing starts and building permits are up significantly off their 2009 lows, and basically back to 2007-type levels
- the Senior Loan Officer Survey says that banks have been easing lending conditions over the last couple of quarters (after a couple years of tightening)
- the Business Outlook Survey suggest future expectations are as positive as they've been over the last decade

Wait and see:
- as of the end of Q4, real and nominal GDP remain 2.5% and 4.4%, respectively, below the peak levels attained in 2008, so even with recent strong growth, the output gap remains substantial
- recent strong growth may be illusory and unsustainable, given that personal consumption accounts for 58% of GDP while personal income accounts for 53% of GDP, so consumption continues to be driven by debt growth;
- similarly, residential investment accounted for 6.9% of GDP at the end of Q4, presumably higher in Q1, and historically has always peaked right around that 7% level, which may portend a housing market due for some cooling
- C$, trading at 94 cents now, is below the BoC's forecasted level of 96-98 cents --- admittedly, it has only been below the Bank's forecast level for a few days, and, admittedly, a lower C$ should actually be stimulative for the economy, giving more reason for the Bank to remove accomodation, but the fact remains that a sharp fall in currency levels could be a telling indicator for the Bank
- further to last, for instance, oil prices have retreated to $70, the lowest level since last July --- which is good for the domestic demand side of the economy, but is a net negative for a net- exporter of oil, and is reflective of commodity prices more generally
- though merchandise trade exports are, through Q1, up 19% from the 2009 trough, they remain 24% below the 2008 peak --- and are sensitive to commodity prices, which have recently been heading down, as noted, and global economic activity, which is at risk
- similarly, wholesale trade is up 9% from the trough, but still down 5% from the previous peak
- though there has been recent job growth, and the number of unempoyed people, at 1.5 million, is down 6% from the worst point in 2009, there are still 42% more unemployed than at the start of the recession; and the unemployment rate, though down to 8.1% from the peak of 8.7%, remains well above the 5.8% pre-recession rate
- both core and headline CPI in Canada are below the Bank's target of 2%, and with the prevailing output gap and the other trends already mentioned, and with U.S. CPI below 1%, there's no clear reason to believe CPI would be escalating rather than be tame or even falling
- that is especially so given that though monetary reserves are up 30% YoY, M1 is up less than half that, at 13.5% YoY, M2 is up about half that, at 6.7% YoY, and M3 is up less than half that, at 2.9% YoY --- so the money multiplier and monetary velocity continue to decline
- indications of a consumer debt bubble in Canada include the facts that mortgage debt as a % of personal income has surged through the 100% level to 116% (vs. a 1990s peak of 84%) and household debt to 170% of GDP, up from 115% in 2000 (apparently Canadians learned nothing from the U.S.)
- the Fed has reiterated that it "continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period", and it is an open question as to how much the BoC can hike without the Fed hiking without currency movements adversely affecting the domestic economy (more than the Bank would be comfortable with)


Really, what it comes down to is how sure is the Bank that recent strong economic trends off recession lows are likely to be sustained?

Personally, I don't buy into the back-to-normal theory, continue to believe that:
- further leveraging (debt growth) in the Canadian economy will make the fall all the worse when it comes
- the U.S. economy has been living off of federal government stimulus for the last year and will soon fall back when (a) that stimulus wanes, and (b) the next round of credit strains (Alt-A and Prime mortgage delinquencies, defaults and related foreclosures) ramps up, and (c) the crisis at the state and municipal levels becomes impossible to ignore
- China is a bubble waiting to burst (details in earlier posts) --- and the recent stock market moves in China may be suggesting that process is underway
- even if Canada, the U.S. and China didn't have their own inherent risks, the linkages in the global economy are too significant for European retrenching not to become problematic for the global economy at large, and European retrenchment will be not just necessary in the PIIGS, but, because of the prevailing bailout mentality, will bring down the European core countries as well (though German exporters will certainly benefit from a weaker Euro, that won't help Canadian or Chinese exporters, so there will be feedback loop impacts)

So, at the end of the day, what do I forecast?

- the Bank does nothing June 1 other than change its commentary to indicate its intention to hike
- the Bank hikes 50bp in July
- the Bank hikes by 25bp once more in early September
- by autumn, things will be visibly messy again
- there will be a European recession, and a double-dip U.S. recession, a significant China slowdown, and, consequently, another Canadian recession
- though domestic demand in Canada will not lead, it will follow; Canadian domestic demand will be the tail, not the dog --- the Canadian recession will not be driven solely by external demand, but the housing and debt bubble in Canada will be pricked by the next global recession
- further BoC hikes will be off the table for a long while, not until the Fed hikes
- the Fed won't hike until perhaps 2014 (yes, Dorothy is not in Kansas anymore; like The Vapors, she, and the FOMC, are Turning Japanese)


p.s. see Canadian Economic Review

Euro Crisis Links

The difficult choices still facing Europe, Mohamed El-Erian, FT Alphaville.

The beneficial impact of last weekend’s $1 trillion “shock and awe” intervention by Europe to save Greece and safeguard the Euro is fading-even more quickly than officials had feared.

The Euro has weakened dramatically in the last few days. Sovereign risk spreads have started to widen again despite considerable (and noisy) buying by the European Central Bank (ECB). And equity markets have given up part of the dramatic gains that followed the policy announcements.

All of this is the result of two main factors: First, having analyzed the news out of Europe in depth, markets recognize that the liquidity-based approach cannot sustainably address what is at heart a solvency problem.... Second, markets are worried about the collateral damage and unintended consequences of the “shock and awe.” Most importantly, they dislike the extent to which the standing and integrity of the ECB are in the process of being sacrificed....

A key dynamic of the past few years-namely, the serial contamination of balance sheets-is hitting the reality of scarcity. Industrial countries are running out of balance sheets that can be levered safely in order to minimize the disruptive impact of past excesses....

Absent a significant change in the European policy mindset, officials will find themselves pulled even more into multi-round dynamics that support debt with more debt and, in the process, contaminate the good with the bad.

The Very Bad Luck of the Irish. Simon Johnson and Peter Boone at The Baseline Scenario.

With the European Central Bank announcing that it has bought more than $20 billion of mostly high-risk euro zone government debt in one week, its new strategy is crystal clear: We will take the risk from bank balance sheets and give it to the central bank, and we expect Portugal-Ireland-Italy-Greece-Spain to cut fiscal spending sharply and pull themselves out of this mess through austerity.

But the bank’s head, Jean-Claude Trichet, faces a potential major issue: the task assigned to the profligate nations could be impossible. Some of these nations may be stuck in a downward debt spiral that makes greater economic decline ever more likely....

There is no simple escape, but if the government hopes to avoid a sovereign default, the one overriding priority should be to stop bailing out the banks. Instead, the government should wind down existing banks in a “bad bank,” while moving their deposit base and profitable businesses into new, well-capitalized banks that can function without a taxpayer burden. This will be messy, but it is far better than a sovereign default.

Two Choices: Restructure Debts or Debase Currencies. John Hussman.

Presumably, the ECB hoped that the 750 billion euro figure would inspire shock and awe, but after a quick rally on Monday, the markets were neither shocked, nor durably awed, as investors began figuring out that the ECB was essentially promising to buy Euro-debt with Euro-debt, and to defend euros with euros.

In the end, as I've argued repeatedly over the years, monetary policy is only as good as fiscal policy. A central bank does not have wealth of its own. It is a zero-sum entity that can only enrich those from whom it purchases debt by debasing the relative wealth of people who hold the existing stock of currency. If a government insists on running deficits, engaging in wasteful spending, and dissipating public resources to bail out private bondholders, it has to find somebody willing to buy its
debt. If it does not, the central bank buys it, and dilutes the currency by doing so. The situation is particularly insidious when the central bank buys low-quality debt, because there is no taxing authority behind it to provide a basis for confidence in the currency.

The End of Fiscal Sovereignity in Europe. Michael Spence, Project Syndicate.

The eurozone’s immediate challenge is declining fiscal stability in a subset of countries whose credit ratings are falling and debt-service costs rising. Absent external assistance and a credible plan for restoring fiscal order, Greek sovereign debt could not be rolled over, forcing a default, probably in the form of a restructuring of Greek debt. Even with external assistance, many view default as a near certainty, because the arithmetic of restoring fiscal balance is so daunting.

Eurozone membership precludes inflation and devaluation as adjustment mechanisms. An alternative is domestic deflation combined with extreme fiscal tightening – that is, a period of slow or negative growth in wages, incomes, and some prices of non-traded goods. But deflation is painful and cannot realistically be pursued for political reasons....

If the EU wants a monetary union in which sovereign debt is relatively homogenous with respect to risk, fiscal discipline must be similarly homogenous. But that also means that it will need a more robust mechanism for countercyclical responses to
shocks.... That will involve a loss of full fiscal sovereignty, but facing up to that reality is required to sustain the monetary union.

But, as Martin Feldstein says in The Washington Post (For a solution to the euro crisis, look to the states):

There is now political consensus in Europe that new rules are needed to prevent large deficits, but there is no agreement on what should be done. The European Commission ... proposed last week that the national budgets of each country be examined by the others before they are approved.

It would clearly be anathema to the German government to have its spending and tax policies approved by France, let alone by Greece and Portugal.

I just don't see that changing.

Return to the abyss. Nouriel Roubini, Project Syndicate.

History ... suggests that financial crises tend to morph over time. Crises like those we have recently endured were initially driven by excessive debt and leverage among private-sector agents... This eventually led to a re-leveraging of the public sector as fiscal stimulus and socialization of private losses – bail-out programs – caused a dangerous rise in budget deficits and the stock of public debt.

While such fiscal stimulus and bailouts may have been necessary to prevent the Great Recession from turning into Great Depression II, piling public debt on top of private debt carries a high cost. Eventually those large deficits and debts need to be reduced through higher taxes and lower spending, and such austerity – necessary to avoid a fiscal crisis – tends to slow economic recovery in the short run. If fiscal imbalances are not addressed through spending cuts and revenue increases, only two options remain: inflation for countries that borrow in their own currency and can monetize their deficits; or default for countries that borrow in a foreign currency or can’t print their own.

Thus, the recent ... global financial crisis is not over; it has, instead, reached a new and more dangerous stage.... Governments that bailed out private firms now are in need of bailouts themselves. But what happens when the political willingness of Germany and other disciplined creditors – many now in emerging markets – to fund such bailouts fizzles? Who will then bail out governments that bailed out private banks...? Our global debt mechanics are looking increasingly like a Ponzi scheme.

Enough said.

Its not ABOUT the markets

I keep hearing from investment managers and dealer desks that Merkel and other politicians should just shut up; that their constant verbal commentary just creates more volatility and worsens the situation.

For instance, Merkel was quoted as saying "We need the financial industry to be honest with us. If we don't get honesty, then we might not do the right thing technically, but we will do the right thing politically."

I don't see anything wrong with those comments of hers. And any criticisms seem based on the premise that politicians should be worried about the markets. Or about banks. American politicians (as long as Geithner & co. are around) may still be inclined to cover-up the problems on TBTF banks' balance sheets and to safeguard those banks' self-interests, but that's been part of the problem for all too long. Its a very good thing that Europeans have a different perspective.

This is a good, constructive process that Europe is going through now; its necessary for their economies.... and its not about the markets.

And anyone who thinks this is just a European problem and shouldn't affect North American valuations likely have another thing coming. This is and always has been about too many people (& too many countries) living beyone their means, borrowing from the future, wracking up too much debt. When you keep borrowing from the future, ultimately the debt has to be paid. Time's up. The global economy has been too Ponzi-like for too long. And the fix won't be short, nor will it be isolated: the problems are systemic, so the solutions will have to be systemic too. And that means not isolated to Europe. Nor China. And that means N.Am. economies are not immune.

In fact, a case could be made that the Canadian economy is more bubblicious than any but China (and probably Australia) right now. Too many consumers living off their "home equity". Why is it we didn't learn anything from the experience of U.S. and European housing markets?! Why are Canadians so inclined to get further into debt to buy bigger houses at bigger prices?! (Did they not read U.S. newspapers/magazines in 2009?)


Despite the sell-off in recent weeks, stock markets remain overvalued. I continue to look for a sub-1000 S&P before reducing some of my hedges; will reduce more at 950 and again at 900 if we get there. Still think fair value is 850 or so, but willing to go to neutral from net short at the 900-level --- but will not go long stocks until at or under 850.

As for the economy, well, headline CPI may be at 2.2%, but core is under 1%, and the Cleveland Fed median CPI is at 0.5%; though the housing market had a nice winter (existing home sales are up about 16%YoY through March), we'll have to see how that evolves now that government inducements have wound up; meanwhile, jobless claims remain resolutely north of that key 400k level (latest at 471k); and delinquencies keep rising (and theres a whole lot of foreclosures in the pipeline and shadow inventory to deal with). As Rosenberg points out, there's some "Scary Math" involved here:

1 in every 10 American homeowners missed a mortgage payment in Q1 (a record)
1 in 6 Americans are either unemployed or underemployed
Over 4 in 10 unemployed Americans have been out of work for at least six months.
1 in 4 Americans with a mortgage have negative equity in their homes.
1 in 10 Americans believe their income will rise in the next six months.
1 in 5 Americans see business conditions improving in the next six months.
1 in 50 Americans plan to buy a home in the next six months.
1 in 8 Americans believe that current government policy is actually helping the economy.
1 in 10 American small businesses have a job opening.
1 in 10 American’s credit card usage is being written off (a record).
There are 5 unemployed workers competing for every job opening (hence downward pressure on wage growth).

Not a pretty list. Despite short-term (sub 1 year) cyclical movements, the mid-term and long-term prospects for the economy and therefore the markets remains down. Down for stock prices and down for government bond yields.


postscript (added May 21)

One of Merkel's other most notable recent comments was "First the banks failed, forcing states to carry out rescue operations. They plunged the global economy over the precipice and we had to launch recovery packages, which increased our debts, and now they are speculating against these debts. That is very treacherous. Governments must regain supremacy. It is a fight against the markets and I am determined to win this fight."

Jesse, from Jesse's Cafe Americain, like me, also approves:

I would that Obama and the Congress had half the courage of Merkel. And that commentators and the middle class would realize the sorry state that their economy is in, held hostage by a bunch of spoiled brats and well heeled thugs, and a government by and for the highest bidder.

"Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the Bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst yourselves, and when you lost, you charged it to the Bank... Beyond question this great and powerful institution has been actively engaged in attempting to influence the elections of the public officers by means of its money...You tell me that if I take the deposits from the Bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin. Should I let you go on, you will ruin fifty thousand families, and that would be my sin. You are a den of vipers and thieves. I intend to rout you out, and by the grace of the Eternal God, I will rout you out."

Andrew Jackson on The Second Bank of the United States which was the Central Bank of his day. A dangerously simplistic view? More like common sense, and the plain spoken truth, at last.

Yawn! Yuan.

Amidst all the speculation that China would have to let its currency appreciate, I predicted at our year-end forecast meeting back in December that China had enough problems of its own (too much productive overcapacity, a real estate bubble waiting to burst, under-stated unemployment), and that it was an export-dependent mercantilist, long accustomed to beggar-thy-neighbour policies, and though the U.S. might like it, I couldn't see how yuan appreciation would further China's own aims; so that China would do whatever it took to keep that export engine of its economy running when the other engines, i.e. credit-fueled unsustainable building bubbles (housing, production capacity and infrastructure), spluttered; so that protectionism and yuan devaluation were much more likely than yuan appreciation.

well, perhaps its already started. Guess the Chinese don't like the fall of the Euro, so are trying to prop it up as best they can ---- and, of course, trying to make the Euro appreciate is no different than trying to make the yuan depreciate.

Rumors That China Is Now DEVALUING The Yuan

Sustainability: Economically and Otherwise

The Case for Economic Doom and Gloom, The New Republic.
Why we’re not out of trouble yet--not even close.

Brenner’s analysis of the current downturn can be boiled down to a fairly simple point: that the underlying cause of the current downturn lies in the “real” economy of private goods and service production rather than in the financial sector, and that the current remedies—from government spending and tax cuts to financial regulation—will not lead to the kind of robust growth and employment that the United States enjoyed after World War II and fleetingly in the late 1990s. These remedies won’t succeed because they won’t get at what has caused the slowdown in the real economy: global overcapacity in tradeable goods production.

Global overcapacity means that the world’s industries are capable of producing far more steel, shoes, cell phones, computer chips, and automobiles (among other things) than the world’s consumers are able and willing to consume. Companies can still sell their goods but at prices that undercut their rate of profit. In the nineteenth century, the redundant and less productive firms would have folded, and as wages fell, and profit rates went back up, the economy would start to revive. But that no longer happens. Firms have become too big and powerful to fail; and the citizens of democratic nations will justifiably no longer tolerate unemployment above 20 percent. Instead, the average rate of profit falls, private and public debt rises, and the danger of a large crash looms....

The bursting of the bubble precipitated the recession, but the underlying condition, which made possible the financial chicanery of the last 15 years, was the global overcapacity in tradeable goods. With American firms no longer eagerly seeking funds for expansion, the banks and shadow banks had to look elsewhere for profitable outlets. And with the economy that produces tradeable goods not producing new jobs, a government that took its responsibility for maintaining employment had to look elsewhere to stimulate demand and growth. Ergo, two bubbles, and two recessions....

Brenner argues, Keynesian spending is at best a palliative that temporarily creates jobs and that, over the long run, exacerbates the problem of excess capacity. This is a crucial point and I want to quote Brenner on it. He says that

Keynesian additions of purchasing power were especially critical in reversing the severe cyclical downturns of 1974-5, 1979-1982, and the early 1990s, which were far more serious than any during the first postwar quarter century and would likely have led to profound economic dislocations in the absence of the large increases in government and private indebtedness that took place in their wake. Nevertheless, the ever increasing borrowing that sustained aggregate demand also led to an ever greater build-up of debt, which, over time, left firms and households less responsive to new rounds of stimulus and rendered the economy ever more vulnerable to shocks. Even more debilitating, it slowed the shake-out of high-cost low profit means of production required to eliminate over-capacity in the world system as a whole and in that way prevented profitability from making a recovery....

Brenner is not saying that the U.S. economy won’t “recover” from this or future recessions... Instead, the world economy, and the U.S. economy, will resemble the post-bubble Japan of the 1990s—with its “L-shaped” recovery writ large.

Theses on Sustainability, Orion Magazine.
some excerpts:

HUMAN CIVILIZATION has been built on the exploitation of the stored solar energy found in four distinct carbon pools: soil, wood, coal, petroleum. The latter two pools represent antique, stored solar energy, and their stock is finite.

SUSTAINABILITY means: “meet[ing] the needs of the present without compromising the ability of future generations to meet their own needs.” This definition contains within it two key concepts. One is the presumption of a distinction between needs and wants, a distinction that comes into sharp relief when we compare the consumption patterns of people in rich and in poor nations: rich nations satisfy many of their members’ wants—indeed, billions of dollars are spent to stimulate those wants—even as poor nations struggle to satisfy human needs. Two: we face “limitations imposed by the state of technology and social organization on the environment’s ability to meet present and future needs.”

WHEN ALL is said and done, can we enlarge the economy’s ecological footprint forever in order to create wealth? Gradually, we are coming to recognize that the answer is no.

AN ECONOMY SUCKS up valuable low-entropy matter and energy from its environment, uses these to produce products and services, and emits degraded matter and energy back into the environment in the form of a high-entropy wake... An economy has ecological impact on both the uptake and emission side. The laws of thermodynamics dictate that this be so. “You can’t make something from nothing; nor can you make nothing from something,” the law of conservation of matter and energy tells us.... But energy is scarce: “You can’t recycle energy,” says the law of entropy.

ESTABLISHING an ecologically sustainable economy requires that humans accept a limit on the amount of scarce low entropy that we take up from the planet (which will also, necessarily, limit the amount of degraded matter and energy that we emit).

ACCEPTING A LIMIT on the economy’s uptake of matter and energy from the planet does not mean that we have to accept that history is over, that civilization will stagnate, or that we cannot make continual improvements to the human condition. A no-growth economy is not a no-development economy; there would still be invention, innovation, even fads and fashions. An economy operating within ecological limits will be in dynamic equilibrium (like nature, its model): just as ecosystems evolve, so would the economy. Quality of life (as it is measured by the Index of Sustainable Economic Welfare, an ecologically minded replacement for GDP) would still improve.

OUR CHALLENGE is to create something unprecedented in human history: an ecologically sustainable civilization that offers a high standard of living widely shared among its citizens, a civilization that does not maintain itself through more-or-less hidden subsidies from antique solar income, or from the unsustainable exploitation of ecosystems and peoples held in slavery or penury, domestically or in remote regions of the globe. The world has never known such a civilization.

Dead Cats

Hope You Enjoyed the Housing Recovery ... Because It's History, Says Suttmeier. Henry Blodgett, Yahoo Finance.

The temporary increase in prices has been driven by government efforts to prop up the housing market, Suttmeier says, and those measures have come to an end. A new wave of foreclosures is hitting the market. Fannie Mae and Freddie Mac have become black holes into which taxpayers must shovel endless billions just to keep the mortgage engine running.Most importantly, as measured by the Case-Shiller index, housing prices are still way too high.

In most major house-price indexes, prices have already begun to roll over and head back down. Suttmeier thinks this trend will continue. In fact, he thinks prices could fall another 25% nationwide.

Whitney Tilson's T2 Partners Unveils Latest Mega-Case Against Housing And The Homebuilders Business Insider.
check out their chart-laden powerpoint presentation

U.S. Mortgage Holders Owing More Than Homes Are Worth Rise to 23% of Total. Bloomberg.

Bank repossessions in the U.S. rose 35 percent in the first quarter from a year earlier to a record 257,944, according to RealtyTrac Inc., an Irvine, California-based company.

Sales of foreclosed properties by banks accounted for more than a fifth of all U.S. home sales in March, Zillow said.

Double-Dip, here we come.

Is the financial system stabilizing? and State budget crisis about to become a catastrophe. Economic Populist.
first link has charts galore on the financial system;
second link has commentary on the human economy

More Than a Million in U.S. May Lose Jobless Benefits, Bloomberg.

About 3.4 million Americans -- approximately the population of Connecticut -- have been out of work for more than a year, according to a study by the Pew Fiscal Analysis Initiative....

[Goldman Sachs] projects that more than 400,000 may soon begin losing benefits every month.

“The political climate is not as conducive to additional expansions as it had been last year,”

Whitney Says Banks Face ‘Tough’ Quarter, Housing Dip, Bloomberg.

“A vast majority of last year’s profits for the banks were government-induced,” Whitney said....
“The government is putting a life guard on duty so that people will play in the pool.”...
“I’m steadfast in my belief there’s going to be a double- dip in housing,” she said. “You will see clearly that the banks are under-reserved when housing dips again.”...
“For the consumer, nothing has changed and the large banks are still weighed down by exposure to consumers,” she said.

For what that all means for the future, see Gerald Celente on Bill Meyer.

As he says, "If people lose everything, and they have nothing left to lose, they lose it."

On to Europe:

The Euro Trap, Paul Krugman, NYT.

The fact is that three years ago none of the countries now in or near crisis seemed to be in deep fiscal trouble. ... And all of the countries were attracting large inflows of foreign capital, largely because markets believed that membership in the euro zone made Greek, Portuguese and Spanish bonds safe investments.

Then came the global financial crisis. Those inflows of capital dried up; revenues plunged and deficits soared; and membership in the euro ... turned into a trap.

What’s the nature of the trap? During the years of easy money, wages and prices in the crisis countries rose much faster than in the rest of Europe. Now that the money is no longer rolling in, those countries need to get costs back in line. But that’s a much harder thing to do now than it was when each European nation had its own currency. Back then, costs could be brought in line by adjusting exchange rates... Now..., however, the only way to reduce Greek relative costs is through ... deflation.

The problem is that deflation — falling wages and prices — is always and everywhere a deeply painful process. It invariably involves a prolonged slump with high unemployment. And it also aggravates debt problems, both public and private, because incomes fall while the debt burden doesn’t.

A Money Too Far, Paul Krugman, NYT.

So, is Greece the next Lehman? No....

That’s the good news. The bad news is that Greece’s problems are deeper than Europe’s leaders are willing to acknowledge,... and they’re shared, to a lesser degree, by other European countries. Many observers now expect the Greek tragedy to end in default; I’m increasingly convinced that they’re too optimistic, that default will be
accompanied or followed by departure from the euro....

So is a debt restructuring — a polite term for partial default — the answer? It wouldn’t help nearly as much as many people imagine, because interest payments only account for part of Greece’s budget deficit. Even if it completely stopped servicing its debt, the Greek government wouldn’t free up enough money to avoid savage budget cuts.

The only thing that could seriously reduce Greek pain would be an economic recovery... If Greece had its own currency, it could try to engineer such a recovery by devaluing that currency, increasing its export competitiveness. But Greece is on the euro.

So how does this end? Logically, I see three ways Greece could stay on the euro. First, Greek workers could redeem themselves through suffering, accepting large wage cuts that make Greece competitive enough to add jobs again. Second, the European Central Bank could engage in much more expansionary policy, among other things buying lots of government debt, and accepting — indeed welcoming — the resulting inflation; this would make adjustment in Greece and other troubled euro-zone nations much easier. Or third,... fiscally stronger European governments could offer their weaker neighbors enough aid to make the crisis bearable.

The trouble, of course, is that none of these alternatives seem politically plausible. What remains seems unthinkable: Greece leaving the euro. But when you’ve ruled out everything else, that’s what’s left.

Europe finds the old rules still apply, Kenneth Rogoff, FT.

In our book on financial history, Prof Reinhart and I find that international banking crises are almost invariably followed by sovereign debt crises. Will the euro prove to be a firewall against this process, or a debt machine that fuels it? It is going to be extremely difficult for some of the peripheral eurozone economies to escape without large-scale defaults on their massive private external debts, public external debts, or both.

Rogoff Says Greece May Not Be Europe’s Last Bailout, Bloomberg.

“The budget cuts needed in Europe in many countries are profound.”

Can the Euro be Saved? Joseph Stiglitz, Project Syndicate.

The Greek financial crisis has put the very survival of the euro at stake. At the euro’s creation, many worried about its long-run viability. When everything went well, these worries were forgotten. But the question of how adjustments would be made if part of the eurozone were hit by a strong adverse shock lingered. Fixing the exchange rate and delegating monetary policy to the European Central Bank eliminated two primary means by which national governments stimulate their economies to avoid recession....

One proposed solution is for these countries to engineer the equivalent of a devaluation – a uniform decrease in wages. This, I believe, is unachievable, and its distributive consequences are unacceptable. The social tensions would be enormous. It is a fantasy. ...

Batten down the hatches for decade of austerity, Reuters.

The scale of the task facing governments in the United States, Europe and Japan to return debt burdens to pre-crisis levels of 2007 could, by some estimates, usher in a decade of severe austerity through the teen years of the new century....

[According to JPMorgan economists], the United States needed a sustained primary surplus of nearly 4 percent of GDP for 10 years to reduce a 2013 debt ratio of 101 percent back to 2007 levels of 62 percent. That compares to an estimated 2010 U.S. primary deficit of some 7 percent of GDP. ...

... governments have the added problem of an expected explosion of entitlement
spending as the baby boomer generation starts retiring in droves over the next
10 years.

It's not just the United States. JPMorgan's calculations show Britain would need even bigger surpluses of up to 5 percent a year for 10 years to 2023 and Japan would need a whopping primary surplus of almost 7 percent of GDP by the same metrics

And, from one of David Rosenberg's recent missives:

Ever since the Obama team bailed out Citigroup and BoA, not to mention GM and GMAC, the markets has become increasingly complacent that for every problem there is a government bailout plan. However, when the majority of governments are now running fiscal deficits of 10% or more relative to GDP and debt ratios at or about to rise above the 100% threshold, the ability to continue along the bailout path becomes increasingly constrained. So, this post-bubble credit collapse carries with it many dimensions, and it is an entire book with many chapters, and now the problems have morphed into sovereign default risks with attendant geopolitical fallouts and the risk of massive currency depreciations, huge haircuts for banks that own the problem government bonds and very likely a move towards trade protectionism. All of this, by the way, is good news for high-quality bonds where you can find them for entities and governments with reasonably long maturity schedules and little in the way of refunding needs over the next few years, and of course, precious metals....

Once we are through with Euroland and the U.K., perhaps the next problem spot will be China where the government is tightening to combat what well could be a significant property bubble. Then it may come right back to the U.S.A. where we have massively indebted State and local governments. And then … well, take a look at the mania in Toronto and Vancouver real estate as an example. Bubbles will be popping....

The operative theme going forward is quite simple: the best way to make money is not to lose it.....

Relative to labour income, [Canadian] home prices are about 1.5 standard deviations above norm (data going back to 1980). The situation is even more dire when we look at resale home prices versus rental prices — this metric is over 2.5 standard deviations above the average, which is very reminiscent of what we saw in the U.S. in 2004-2006. Our statistical work implies that given current income and rent, we could see a price correction of around 15-35% if these ratios were to mean revert, which would certainly be a U.S.-style correction.

Roubini

US faces inflation or default, Nouriel Roubini

There are only two solutions to the sovereign debt crisis — raise taxes or cut spending — but the political gridlock may prevent either from happening

Financial crises have occurred very often in history. They are caused by unsustainable bubbles that go bust, and from excessive risk-taking and debt-leveraging by the private sector during the bubble. Then in the wake of, and as part of the response to, the economic downturn, government debts and deficits grow to unsustainable levels that can lead to default or inflation if not corrected. The crisis we are going through now follows this pattern.

Today there is a lot of talk about "de-leveraging", yet the data shows that de-leveraging has barely begun. Debt ratios in the corporate sector as well as households in the US have essentially stabilised at high levels.

At the same time, we are seeing a massive "re-leveraging" of the public sector with
budget deficits on the order of 10 per cent of GDP. The IMF and OECD are projecting that the stock of public debt in advanced economies is going to double and reach an average level of 100 per cent of GDP in the coming years.

This is all actually quite typical of what happens in a financial crisis. What explains this re-leveraging? First, "automatic stabilisers" (such as unemployment compensation) came into play during the recession. Second, countercyclical fiscal policies (such as tax cuts and spending increases) have been implemented by government to avoid depression because private demand is collapsing. Third, we have decided to socialise some of the private losses in the financial, corporate and housing sectors and put them on the balance sheet of the government.

So, there is a massive buildup of public debt. And the lesson of history is that unless this buildup of sovereign debt is tackled eventually by raising taxes and controlling spending, then there are only two outcomes: default or high inflation.

Historically, we have seen a series of defaults and sovereign debt crises in both advanced and emerging market economies. If you are a country like the US, the UK or Japan that can monetise its fiscal deficits, then you won't have a sovereign debt event but high inflation that erodes the value of public debt. Inflation is therefore basically a capital transfer from creditors and savers to borrowers and dissavers,
essentially from the private sector to the government.

While the markets these days are worrying about Greece, it is only the tip of the iceberg, or the canary in the coal mine of a much broader range of fiscal crises. Today it is Greece. Tomorrow it will be Spain, Portugal, Ireland and Iceland. Sooner or later Japan and the US will be at the core of the problem, shaking the global
economy.

We need to recognize that we are in the next stage of financial crisis. The coming issue is not private-sector liabilities, but public-sector liabilities.

Revived economic growth alone will not generate enough tax revenue to relieve this sovereign debt crisis. Fiscal deficits are huge and structural. They are not due solely to a cyclical downturn in growth but to long-term commitments such as pensions, social security and health care. To avoid default or high inflation, the advanced economies will require some combination of raising revenues through taxes and cutting government spending.

In Europe, where tax rates are already very high, the right adjustment is cutting spending instead of raising taxes further. In the US, the average tax burden as a share of GDP is much lower than in other advanced economies. The right adjustment for the US would be to phase in revenue increases gradually over time so that you don't kill the recovery while controlling the growth of government spending.

What worries me most is the political gridlock in Washington. While everyone agrees that $10 trillion deficits... for the next decade are not sustainable, there is no political will to act. The two parties are completely divided. Effectively, the Republicans are against any form of revenue increases. The Democrats are against spending cuts, especially of entitlements.

If the Republicans take control of the House of Representatives in the next election and refuse any revenue increases while the Democrats veto spending cuts, the path of least resistance will be runaway fiscal deficits which will then be monetised by the Federal Reserve, which has already embarked on this path. In just the last year alone, the Federal Reserve has bought $1.8 trillion of Treasury securities and agency debt, a course that will inevitably lead to high inflation if sustained. It is what is popularly known as printing money.

In Greece... or Spain or Portugal, the bond markets are forcing an adjustment. In spite of the recession, the markets are telling them to either straighten out their problems or go bankrupt.

Unfortunately, there is no such adjustment being forced upon Washington at the moment because the bond market has not woken up to the dangers ahead. You can borrow at a zero percentrate on the short end and 3.6 per cent on the long end. As a result, the political system is going to resist fiscal consolidation.

This means the risk of something serious happening in the US in the next two or
three years is significant.

To-Read List

On the to-read list:

People-First Economics: Making a Clean Start for Jobs, Justice and Climate

No one could have predicted-or planned-the revolution that we're in. For it is a revolution--not just a temporary aberration or passing hurricane. Capitalism as we know it is falling about our ears, and the world will never be the same again.

Perverse as it may sound, this is a tremendous opportunity for the human race. It's a chance to alter our relations to each other and to the planet. People-First Economics looks at what the crash means and could mean for us all. It's about economics--and about a lot more. It's about radical changes that are social, moral, ecological, and philosophical, too--changes that are already beginning to happen.

In a series of plain-speaking contributions, David Ransom brings together exciting and radical activists and thinkers, such as Naomi Klein, Walden Bello, and Susan George, to set the agenda for "economic democratization." Launching New Internationalist's World Changing imprint, People-First Economics covers everything from the green revolution and feminist economics to what we can learn from history and a ten-step economic detox. In doing so, it provides the opportunity to rethink what really matters in life.

The Real World Economic Outlook: The Legacy of Globalization - Debt and Deflation

Real World Economic Outlook is a yearly publication that reviews issues in the global economy from a different, radical and more realistic perspective. In stark contrast to the output of other institutions like the IMF and World Bank, this annual report is written in an accessible way, informing and offering alternative analyses of the global economy to a wide audience. With contributions from high profile and leading thinkers, it sets out to integrate economic, environmental, and gender themes to transform mainstream economic thinking and offer alternative analyses and solutions. Real World Economic Outlook will appear annually with changing themes. This year's is globalization's true legacy: debt deflation. Globalization is examined not as a spontaneous event of economic and technological combustion, but as a deliberate strategy to place finance at the centre of our communities whether local, national or global. The legacy of this strategy has proved disastrous for the environment but also for many millions of individuals, corporations and governments.

Globalization's other great achievement falling prices for wages, goods and services, will make it more difficult for individuals, households, governments and corporations to repay their growing debts. They have collectively been lured into a quagmire of debt and deflation. Worse, a finance centred economy has led to a dramatic increase in human inequality both within and between countries. This edition analyzes the foundations of globalization, explores how it works in different parts of the world, explains the impact, and suggests alternative approached. DANI RODRIK JOSEPH STIGLITZ HERMAN DALY GITA SEN ZO RANDRIAMO JOS OCAMPO JOMO KS JAYATI GHOSH JANET BUSH ERINC YELDAN DEAN BAKER MICHAEL HUDSON ROBERT WADE PETER WARBURTON

It Could Happen Here: America On The Brink

The severe economic downturn has been blamed on many things: deregulation, derivatives, greedy borrowers, negligent lenders. But could there be a deeper problem that is so severe, so long-lasting, and so dangerous that it makes these problems look like minor swerves in the road? Could we be facing an existential challenge to the promise of America, and to our system of government?

Inequality in America has reached historical highs. Throughout human history, this level of disparity has proven intolerable, almost always leading to political upheaval. Though many believe that America will never face a second revolution, that our politics are stable, in It Could Happen Here, Yale School of Management senior faculty fellow Bruce Judson makes the case that revolution is a real possibility here, driven by a thirty-year, unprecedented rise of inequality through six presidencies, three Fed chairmen, three recessions, and many years of expansion.

The last time inequality rivaled current levels was in 1928, just before the Crash and the Great Depression. Today we are in worse shape, divided into a tiny plutocracy of super-rich, on the one hand, and a fragile, indebted, unprotected "former middle class" on the other. As Judson shows, revolutions can occur suddenly, as happened with the Soviet Union's 1991 dissolution, and America today exhibits the central precursors to a collapse-extreme economic inequality and an increasingly impoverished middle class. He makes the most disturbing case yet for why our economics are leading us inevitably toward a devastating crisis.When Franklin Roosevelt faced a similar situa-tion, he was saved by World War II. This time, the conflict may be at home, not abroad.

I.O.U.: Why Everyone Owes Everyone And No One Can Pay

The wildest story in the world these days is not fiction, it's what's really happening all around us as the world's global economy has gone into freefall. How did we get here? What does it all mean? How could so many smart people be so dumb and believe their own hype? Accessibly, cleverly, and with mordant humour, Lanchester trots the globe in search of the answers to these questions - to Iceland, the scene of catastrophic bank collapse, to Hong Kong, the city of his birth built at the altar of free-market capitalism, to the high-stakes leveraging of Wall Street and to the tragedy of lost homes in small-town America. And in his capable hands, we see and understand what went wrong and why. Lanchester believes that this crisis gives us an opportunity to bring about much-needed change and that a stonger and more compassionate system can emerge from the wreckage.

Colossus: The Rise and Fall of the American Empire

Acclaimed historian Niall Ferguson ranges across the entire history of America''s foreign entanglements and delves into all the dimensions of American power -- military, economic, cultural, and political. The result is a book whose conclusions are as convincing, and troubling, as they are original. Ferguson demonstrates that America has always been an empire in denial and shows the fateful consequences of its special brand of imperialism. He examines the challenges to the United States from its principal rivals, the European Union and China, and offers a compelling analysis of the connection between the country''s domestic economic health and its foreign affairs -- the bottom line of imperialism, American style. "Colossus" is a peerless reckoning with American power that should be read by any thinking citizen of this unspoken empire

The Coming Generational Storm: What You Need to Know about America's Economic Future

In 2030, as 77 million baby boomers hobble into old age, walkers will outnumber strollers; there will be twice as many retirees as there are today but only 18 percent more workers. How will Social Security and Medicare function with fewer working taxpayers to support these programs? According to Laurence Kotlikoff and Scott Burns, if our government continues on the course it has set, we''ll see skyrocketing tax rates, drastically lower retirement and health benefits, high inflation, a rapidly depreciating dollar, unemployment, and political instability. The government has lost its compass, say Kotlikoff and Burns, and the Bush administration''s spending and tax policies have charted a course straight into the coming generational storm.

Kotlikoff and Burns take us on a guided tour of our generational imbalance: There's the "fiscal child abuse" that will double the taxes paid by the next generation. There's also the "deficit delusion" of the under-reported national debt. And none of this, they say, will be solved by any of the popularly touted remedies: cutting taxes, technological progress, immigration, foreign investment, or the elimination of wasteful government spending. Kotlikoff and Burns propose bold new policies, including meaningful reforms of Social Security and Medicare, that are simple, straightforward, and geared to attract support from both political parties.

The Ultimate Suburban Survivalist Guide: The Smartest Money Moves to Prepare for Any Crisis

If you want to continue your lifestyle AND make smart money moves, then The Ultimate Suburban Survivalist Guide is the book for you. Saving money and profiting means understanding the many aspects of life where problems can strike, and this book will be your guide. In the face of disaster it is better to plan than panic. A bulletproof plan will protect you from the disastrous surprise of a mishap-from shakeups in the stock market to the next oil crisis to fires and floods.

Author Sean Brodrick of Weiss Research reveals the simple things you can do that will help you prepare and profit in this changing economic landscape. The Ultimate Suburban Survivalist Guide is your tool to understanding a myriad of key concepts.

Offers practical advice for overcoming some of the worst possible disasters

Contains in-depth information on protecting yourself, your family, and your assets from uncontrollable events

Details money saving strategies that will help you get through the difficult times
The time to plan for any crisis is before it happens. The Ultimate Suburban Survivalist Guide is filled with the tips and tools you''ll need to survive potential disasters and save money during tough times.

Worthwhile Reading

The Fiscal Crises of the States: The Morning After Greece. Michael Blim

Another breathless fortnight, another looming crisis averted. It seems best to say averted, rather than solved. The massive Greek public debt is still there and will continue to grow. The new agreement promises to slow its growth by raising taxes, laying off government workers, reducing state salaries, and cutting pension benefits, among other actions. More loans from EU creditor countries and the IMF, a stand-in for the rest of Greeks international creditors, now guarantee the accumulated Greek government debt, much of which is held by European banks and the European Central Bank. The EU-IMF mission of mercy is thus an object lesson in collective self-interest, for the loans enable Greece to pay back the European banks, especially in Germany and France, that stood to lose billions without the new loans. European and world capital invested in Greece is saved, and its security enhanced. Rather than the debts endangering the finances of European and other world banks, the loans now return to the asset side of their ledgers, if not once more as silk purses, surely no longer as sow’s ears....

As yet another act in the world economic drama concludes, and another troop of actors prepares to take the stage, the basic point of the play is being lost.... we are overlooking the fact that we are living through the most massive redistribution of wealth rich societies such as ours have seen since the Gilded Age at the end of the 19th Century. The massive debts of private capital are being socialized. States are taking on society’s debts at a rate not seen since the Second World War. They are creating public debt to pay off or at least absorb the debts arising from asset crashes, bank and brokerage failures and near-failures, and massive unemployment triggered by recession. Banks and other financial institutions could not carry their own debt, so now the government is carrying it for them, either directly or by providing them with new credit at no cost with which they can become profitable again. The banks and other brokerage institutions have effectively cleaned up their balance sheets with newly created public debt, while the U.S. and European central banks have laundered their bad debts.

...It is unlikely that the United States will find itself in a debt-driven crisis of the magnitude proportionately that afflicts Greece now, but the transformation of US finance capital’s private debts into US public debt has created a crushing burden for American citizens for generations to come. And the wealthy, once more, will likely come out of the crisis unscathed, unlike the rest of us.

As if the U.S. won't have its own problems!

Consumption is, as Jake puts it, Not Sustainable! check out his charts of Consumption vs Income.

GDP Deflator at 5-decade low while income inequality at record highs, and A double-dip ahead? A view from the Consumer Metrics Institute. both via Jesse.

The methodologies used by the BEA when measuring factory production are ill suited to capturing an economy in such rapid transition. In the 4th quarter of 2009 the production side of the economy was topping (reflecting the topping of our measurements on the demand side in August 2009). The first quarter's production environment was at a much more dynamic spot in this particular economic cycle, and the subsequent monthly revisions by the BEA may be significant.

From our perspective the GDP is only confirming where our numbers were in November -- which is, relatively speaking, ancient history. Since then we have seen our "demand" side numbers slip into contraction

.... if there is a "second dip" it may very well be unlike anything we have seen recently. Instead of a "call-911" type of event in 2008 or the "hiccup" witnessed in 2006, we may be seeing a "walking pneumonia" type of contraction that has legs

Fannie and Freddie are wards of the state, and they backed 96.5% of all home loans last quarter: U.S. Role in Mortgage Market Grows Even Larger WSJ. Well, at least delinquencies fell modestly in March from February.

Bank Failures. Barry Ritholtz. check out first graph.

Also at Barry's The Big Picture, Bob Bronson has some charts on the difference between GDP and the core business cycle, putting into question the notion of a V-shaped recovery.

And, Repaying Taxpayers With Their Own Cash, Gretchen Morgenson, NYT.

As we inch closer to a clearer understanding of the products and practices that unleashed the credit crisis of 2008, it’s becoming apparent that those seeking the whole truth are still outnumbered by those aiming to obscure it.

Who’s Got Those Pitchforks?, James Kwak, Baseline Scenario

people who (at least according to them) followed the rules, worked hard, paid their taxes, made a fair amount of money, etc. — and just saw the economy almost collapse because of what they see as the shenanigans of a tiny, tiny elite that plays by a different set of rules.

Well, the Tea-Party folk have stayed relatively civil so far, but if change doesn't come soon (yes, real change, Mr. Obama), then James Howard Kunstler, for one, in his column Worse than 1789? thinks pitchforks may come in handy:

It seems to me lately that the crack-up we've entered is liable to play out more gruesomely for our privileged elites than the orgy of bloodletting that attended the French Revolution. That historical moment was a sharp transition between old, settled social relations and the new political realities of imminent industrialization and a rising middle class. The elites in charge of things to that moment, an ossified aristocracy, responded to rising discontent with utter feckless stupidity. To make matters worse, a great many of them were hunkered down in the fantasy-land Royal Palace of Versailles, enjoying what was for practical purposes a non-stop mega house party. They must have thought they were safe twelve miles outside Paris.

The French Revolution actually got off to a better start than it is remembered for. A progressive opposition put together a new legislature, the National Assembly. They undertook the writing of a constitution. But it all fell apart rather quickly since the dim-witted King and his cohorts didn't really get into that old changing times spirit and their lack of cooperation -- not to mention their decadence -- provoked the more violent factions of the common people to form that kraken of politics, the mob. What a goddamned mess it turned into -- a revolving cast of mob masters, each worse than the last, whipping up the crowds to ever more horrible enormities of human vivisection -- a political process that had gone hopelessly out of control. Despite the agile precedent of their friend, the new USA, quickly resolving its own rebellion into a functioning government of law, France opted for a bloody clusterfuck -- which went on for eight more years.

The France of 1789 and the USA of today have a few important elements in common: a striking inability to sort out any national problems, an arrogant, depraved ruling elite resistant to reform, and an intellectual underclass motivated by blind fury....

As JFK once said, "Those who make peaceful revolution impossible make violent revolution inevitable."

Meanwhile, in the U.K.:

Mervyn King warned that election victor will be out of power for a generation, claims economist. Guardian.

Mervyn King is warning that the victor in next week's election will be forced into austerity measures that will keep the party out of power for a generation, according to the US economist David Hale. Dragging the Bank of England governor unwittingly into Britain's political battle, David Hale said he had been told by King at a private lunch about the likely fiscal pain ahead.

And, to compensate, therefore, Bank rate 'will stay low for four years' Times Online.

Nonetheless, former BoE MPC member David Blanchflower thinks U.K. Budget Cuts May Lead to Depression, Bloomberg.

And, for the stock markets:

Equity rally not driven by the usual investors, Leigh Skene of Lombard Street Research, via FT.

The outperformance of risk assets over the past year suggests investors appear to believe that all credit problems have been solved – but nothing could be further from the truth, says Leigh Skene at Lombard Street Research.

“Rising stock markets and narrowing credit spreads depend on buyers being more anxious to buy than the sellers are to sell,” he says. “So who are the enthusiastic buyers of risk assets?”

Surprisingly, says Mr Skene, surveys show that the usual investors in major rallies – pension funds, hedge funds and retail investors – have not been net buyers of equities. And he says the most likely explanation for this anomaly in the biggest stock market rally since the 1930s is that major investment banks are the anxious buyers.

“Their buying would appear to be for one of two reasons. Firstly because they think the authorities will prevail in their (so far unsuccessful) efforts to inflate their way out of debt liquidation; or secondly because they are too big to fail and so can afford to take a huge gamble that enough buying will convince others to rush in and buy their inventory of risk assets at even higher prices.

“Huge economic slack in most developed nations and falling money supplies in the two biggest currency areas indicate that government efforts to inflate will continue to be unsuccessful – so reason number one is bearish for risk assets; number two is catastrophic.”

Henry David Thoreau gets the last word:

"Most of the luxuries, and many of the so-called comforts of life, are not only indispensable, but positive hindrances to the elevation of mankind. With respect to luxuries and comforts, the wisest have ever lived a more simple and meager life than the poor. The ancient philosophers, Chinese, Hindoo, Persian, and Greek, were a class than which none has been poorer in outward riches, none so rich inward."

but for more words of wisdom, check out this compilation at The Financial Philosopher.

Why Trade Figures Do Not Prove China Is Rebalancing. Samuel Sherraden, New America Foundation

China’s trade surplus declined in the first quarter, and during March the country ran a deficit of $7.2 billion, its first monthly trade deficit since 2004. Contrary to some analyses, this is not proof that the economy has made significant progress toward rebalancing or a reason for the United States to back away from pushing China on yuan appreciation.

The short-run decline in the trade balance was driven by seasonal effects, a slowdown in China’s export markets, and a surge in raw materials imports - none of which indicate that China is making a transition to an economy driven by greater consumer demand.

....the increase in imports reflects an intensification of investment-driven growth and demand for commodities and materials, not a move to greater consumer demand.[1] Fixed asset investment grew 25.6% in the first quarter of 2010 compared to the first quarter of 2009. Partly as a result, China imported $27.6 billion more commodities and materials in March 2010 than in March 2009, an increase of 77.1% YOY......

Excessive bank lending since the beginning of 2009 incentivized stockpiling of commodities and materials and the development of spare capacity. A tightening cycle could force enterprises in China to reduce imports and rely on existing commodity stockpiles and excess capacity to increase exports, leading to a rise in the trade surplus.

LEH Redux? MacroMan

Greece - GIIPS - Eurozone - Big Problem. Rebecca Wilder.

The original bailout will likely be offered to satisfy Greece’s near-term obligations. However, in the meantime the probability that the liquidity crisis spreads across the GIIPS (Greece, Italy, Ireland, Portugal, and Spain) - especially Portugal with a 2009 current account deficit equal to 10.3% of GDP, making it shockingly susceptible to capital outflows - is rising.

We’re in crisis mode – the calm before the storm. I see the Eurozone disaster happening in three waves:

First, there is a liquidity crisis in Greece (already underway).

Second, it turns into a full-fledged financial crisis for the GIIPS. The capital account drops precipitously with investor confidence in GIIPS markets, leaving the very vulnerable countries, like Portugal and Spain with current accounts very much in the red, seriously short of cash.

What Germany wants out of Greece (and any bailout thereafter) is the equivalent of an economic anaconda. It will force Greece to meet the limits of the EMU Stability and Growth Pact (3% of GDP) by some period, let’s say 2012.

Of course that cannot happen without an epic surge in exports. Here’s the death spiral: sharp austerity measures translate into unemployment, economic contraction, deflation, and yes, higher deficits. There’s just no way out of it.

.....So we get to the final stage, GIIPS go depressionary, and the economic contagion spreads across the Eurozone, hitting yes, Germany.

Facing the Threat from the Far Right, Noam Chomsky Says He 'Has Never Seen Anything Like This'. Chris Hedges, TruthDig.

as our nation’s most prescient critic of unregulated capitalism, globalization and the poison of empire, he enters his 81st year warning us that we have little time left to save our anemic democracy. “It is very similar to late Weimar Germany,” Chomsky told me when I called him at his office in Cambridge, Mass. “The parallels are striking. There was also tremendous disillusionment with the parliamentary system. The most striking fact about Weimar was not that the Nazis managed to destroy the Social Democrats and the Communists but that the traditional parties, the Conservative and Liberal parties, were hated and disappeared. It left a vacuum which the Nazis very cleverly and intelligently managed to take over.”.... "I don’t think all this is very far away. If the polls are accurate it is not the Republicans but the right-wing Republicans, the crazed Republicans, who will sweep the next election.”.....

He reminds us that genuine intellectual inquiry is always subversive. It challenges cultural and political assumptions. It critiques structures. It is relentlessly self-critical. It implodes the self-indulgent myths and stereotypes we use to elevate ourselves and ignore our complicity in acts of violence and oppression. And it makes the powerful, as well as their liberal apologists, deeply uncomfortable.

Chomsky reserves his fiercest venom for the liberal elite in the press, the universities and the political system who serve as a smoke screen for the cruelty of unchecked capitalism and imperial war. He exposes their moral and intellectual posturing as a fraud...

“I try to encourage people to think for themselves, to question standard assumptions,” Chomsky said when asked about his goals. “Don’t take assumptions for granted. Begin by taking a skeptical attitude toward anything that is conventional wisdom. Make it justify itself. It usually can’t. Be willing to ask questions about what is taken for granted. Try to think things through for yourself. There is plenty of information. You have got to learn how to judge, evaluate and compare it with other things. You have to take some things on trust or you can’t survive. But if there is something significant and important don’t take it on trust."

I don't know who Alex Carey is, but he had this great quote:

The 20th century has been characterized by three developments of great political importance: The growth of democracy, the growth of corporate power, and the growth of corporate propaganda as a means of protecting corporate power against democracy.

which I found in Jesse's column The Economic Policy Error Behind the Stock Market Rally and the Next Phase of the Financial Crisis

just a brief excerpt:

The lack of productive investment and genuine stimulus for the real economy seen so far in the enormous subsidies put forward is appalling. Bernanke and his colleagues Larry Summers and Tim Geithner would have us believe that they had no choice. But informed and experienced commentators such as William K. Black have told us how they have misrepresented their choices.

Their current policies seem to lead the US into a 'zombie economy' at best, in which the Banks are doing well, but almost everyone else suffers from stagflation, particularly the lower and middle classes who obtain their income from productive labor. At worst, the bubble bursts again, and there is another, more furious, leg down, with greater and more lasting damage done to the ordinary people.So what would have worked? The Fed and Treasury could have backstopped the public instead of the Wall Street banks.

onto something totally different:

Richard Dawkins answers the question: "Should the pope resign?"

No. As the College of Cardinals must have recognized when they elected him, he is perfectly - ideally - qualified to lead the Roman Catholic Church. A leering old villain in a frock, who spent decades conspiring behind closed doors for the position he now holds; a man who believes he is infallible and acts the part; a man whose preaching of scientific falsehood is responsible for the deaths of countless AIDS victims in Africa; a man whose first instinct when his priests are caught with their pants down is to cover up the scandal and damn the young victims to silence: in short, exactly the right man for the job. He should not resign, moreover, because he is perfectly positioned to accelerate the downfall of the evil, corrupt organization whose character he fits like a glove, and of which he is the absolute and historically appropriate monarch.

No, Pope Ratzinger should not resign. He should remain in charge of the whole rotten edifice - the whole profiteering, woman-fearing, guilt-gorging, truth-hating, child-raping institution - while it tumbles, amid a stench of incense and a rain of tourist-kitsch sacred hearts and preposterously crowned virgins, about his ears.

W.B. Yeats:

Things fall apart; the centre cannot hold;

Mere anarchy is loosed upon the world,

The blood-dimmed tide is loosed, and everywhere

The ceremony of innocence is drowned;

The best lack all conviction, while the worst

Are full of passionate intensity.