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Sunday, July 18, 2010

Links, July 18

as always, read John Hussman:
Implications of a likely economic downturn and Misallocating resources.

the latter includes this gem:

There is little question that we have, for more than a decade, squandered our productive resources in the pursuit of bubbles. Almost unbelievably, real private gross domestic investment is lower today than it was 12 years ago, and much of the gross domestic investment that we have made in the interim has been destroyed in mispriced speculative activity such as residential construction and commercial real estate development.

If our only response to excess consumption is to pull out all the stops trying to "stimulate" consumption every time it falters; if our only response to reckless lending is to defend the bondholders every time their poor allocation of capital threatens to produce a loss for them, then quite simply, we will destroy our economy, our future, and our standard of living. The last thing I want to be is a cheerleader for the bears here. But quite honestly, it's difficult to envision a return to long-term saving, productive investment, and thoughtful allocation of capital until - as happens every two or three decades - the speculative elements of Wall Street are crushed to powder.
while the former includes this:

Over the short and intermediate-term, credit crises are invariably deflationary, because they prompt a frantic demand for default-free government paper, which raises its value relative to goods and services (another phrase for deflation). So despite the huge increase in government obligations during these periods, you generally don't see inflationary pressures in the early years because that supply is eagerly absorbed. Short-term interest rates are pressed near zero, and monetary velocity tends to collapse. Commodities are usually hard hit as well, so investors who are concerned about inflation risk or are chasing gold here may have the long-term story right, but they probably have it too early to weather the interim volatility comfortably.

Over the long-term, massive increases in government liabilities do have inflationary impact. This imposes a real burden, not simply a paper one. If the holder of government currency can command a certain stock of real goods and services, and then the government debases that currency so that it can command a lesser stock of real output, then it is undeniable that the difference in real value has been implicitly
transferred to the government to finance its spending. While I do expect that TIPS, commodity exposure and precious metals will be important inflation hedges in the years ahead, investors chasing these assets here may have a difficult road. It is best to accumulate such assets when they are in liquidation, not when they are being chased on the basis of overly simplistic theories of inflation.
as well as this:

Meanwhile, I continue to believe that both Bernanke and Geithner's hands should be tied quickly. If we have learned anything over the past 18 months, it is clear that these bureaucrats can misallocate an enormous quantity of public resources with mind-numbing speed. The diversion of public resources to the bondholders of failing financials - to precisely the worst stewards of capital in society - is not stimulative, but ruthless. A second economic downturn should encourage the repudiation of the policies that Bernanke and Geithner pursued during the first.

By all appearances, Ben Bernanke has a four-second tape in his head that says "We let the banks fail during the Depression, and look what happened." Then the tape repeats. There is no subtlety that says, "yes, but we let the banks fail in the most disruptive and disorganized way possible, forcing them into piecemeal liquidation as Lehman had to do. Today, the FDIC is fully capable of preserving and transferring the operating entity while properly cutting away the failing bondholder and stockholder liabilities so that depositors and customers are not affected." This understanding would prove useful in the event we observe further credit strains.

Basic ethical principle dictates that policy makers should not burden ordinary Americans to pay the losses that well-informed bondholders voluntarily took when they lent money to failing institutions
Musings on China and Japan. Vitaliy Katsenelson via ZeroHedge.
significantly excerpted:

China is not a black swan, because a black swan is a rare, significant, and unpredictable event. However, the consequences of what is transpiring in China and Japan are for the most part predictable (especially if I am writing about it). We don't know when they will play out, but they are predictable.

Nassim Taleb, one of my favorite thinkers, who brought the black Swan to life in his books Fooled by Randomness and The Black Swan,... solved my dilemma with China by creating a new swan: "grey"– a rare, significant, but predictable event (though the timing is still unknown, or perfectly known only with the benefit of hindsight.)...

What really amazes me is how people who would not trust the US or European governments to do their laundry, have unconditional faith in Chinese government involvement in its very complex economy.

The Chinese government brainwashes its people the same way the Russians and Soviets brainwashed theirs: by controlling and censuring media... However, I am amazed that the Chinese government has been able to brainwash people who reside outside of China.

No, an economy in large part controlled by the state is not superior to ours. Greater control over their economy allows the Chinese government to pull the economy out of recession a lot faster than in the democratic countries, but there is no free lunch. Their actions will just lead to greater excesses and imbalances down the road.

It seems that as Westerners we have an inferiority complex when it comes to Asian cultures. Chinese uniqueness is praised today the same way Japanese superiority was in the 1980s. I even remember reading Russian newspapers in Russia, in 1989, praising the Japanese work ethic and their unique culture and spouting predictions of the continuance of Japanese dominance. I can only imagine how the mainstream press in the US was caressing Japanese uniqueness in the late ’80s, especially as the
Japanese were invading (buying) Times Square and the State of California.

What is very interesting about it is that today all those Japanese cultural advantages are looked upon as disadvantages. For instance, “saving face” did not allow Japan to deal sufficiently with failed companies; their economy was full of semi-dead, zombie companies, which did not allow the healthy ones to prosper. Their employment-for-life system that was praised to the heavens during the Japanese golden age is now killing productivity of the economy....

Back to China. Even if the Chinese are harder-working and more entrepreneurial than Americans and Europeans, that doesn't mean the laws of economics are somehow suspended in China – they are not. The Chinese economy was geared for high global growth, while now much lower growth is in the cards. The excesses created by 14% of GDP being “stimulated” into the economy through a fire hose have led to significant overcapacity. It will take time for these excesses to be dealt with, even in a country full of super-hard-working people...

Government is not and never will be an efficient allocator of capital. It empowers bureaucrats, which in turn leads to corruption, which further misallocates capital. The size of the bribe or strength of the personal relationship decides the flows of capital instead of the invisible hand that funnels capital from low to high uses.

I keep thinking about the possible consequences of the Chinese overcapacity bubble pop. It is relatively easy to understand what will happen in Japan: deflation will quickly turn into hyperinflation as government is forced to print money to service its debt and social obligations. They'll announce and may even execute austerity measures, but those will be a decade or two too late. The Japanese yen will likely decline, though maybe not right away, as Japan owns a lot of US dollars and may be forced to sell them.

The Chinese situation is far more complex. China has tremendous overcapacity, but overcapacity is deflationary. It will drive prices for commodities down, and prices of Chinese-made goods will likely decline as well. Demand for industrial goods will collapse, pushing their prices down. But China will also have to deal with a lot of bad debt and will likely have to print money to do so – which is inflationary.

The popping of both the Chinese and Japanese bubble economies will lead to higher US, and likely global, interest rates.

I don't normally post full articles, just links with excerpts, but the following two commentaries moved me to post them in full:

Obama is barely treading water. Mort Zuckerman, US News.

The hope that fired up the election of Barack Obama has flickered out, leaving a national mood of despair and disappointment. Americans are dispirited over how wrong things are and uncertain they can be made right again. Hope may have been a quick breakfast, but it has proved a poor supper. A year and a half ago Obama was walking on water. Today he is barely treading water. Then, his soaring rhetoric enraptured the nation. Today, his speeches cannot lift him past a 45 percent approval rating.

There is a widespread feeling that the government doesn't work, that it is incapable of solving America's problems. Americans are fed up with Washington, fed up with Wall Street, fed up with the necessary but ill-conceived stimulus program, fed up with the misdirected healthcare program, and with pretty much everything else. They are outraged and feel that the system is not a level playing field, but is tilted against them. The millions of unemployed feel abandoned by the president, by the Democratic Congress, and by the Republicans.

The American people wanted change, and who could blame them? But now there is no change they can believe in. Sixty-two percent believe we are headed in the wrong direction­—a record during this administration. All the polls indicate that anti-Washington, anti-incumbent sentiment is greater than it has been in many years. For the first time, Obama's disapproval rating has topped his approval rating. In a recent CBS News poll, there is a meager 15 percent approval rating for Congress. In all polls, voters who call themselves independents have swung against the administration and against incumbents.

Even some in Obama's base have turned, with 17 percent of Democrats disapproving of his job performance. Even more telling is the excitement gap. Only 44 percent of those who voted for him express high interest in this year's elections. That's a 38-point drop from 2008. By contrast, 71 percent of those who voted Republican last time express high interest in the midterm elections, above the level at this stage in 2008. And these are the people who vote.

Republicans are benefiting not because they have a credible or popular program—they don't—but because they are not Democrats. In a recent Wall Street Journal / NBC poll, nearly two thirds of those who favor Republican control of Congress say they are motivated primarily by opposition to Obama and Democratic policy. Disapproval of Congress is so widespread, a recent Gallup poll suggests, that by a margin of almost two to one, Americans would rather vote for a candidate with no experience than for an incumbent. Throw the bums out is the mood. How could this have happened so quickly?

The fundamental problem is starkly simple: jobs and the deepening fear among the public that the American dream is vanishing before their eyes. The economy's erratic improvement has helped Wall Street but has brought little support to Main Street. Some 6.8 million people have been unemployed in the last year for six months or longer. Their valuable skills are at risk, affecting their economic productivity for years to come. Add to this despairing army the large number of those only partially employed and those who have given up their search for work, and we have cumulative totals in the tens of millions.

Many people who joined the middle class, especially those who joined in the last few years, have now fallen back. It's not over yet. Millions cannot make minimum payments on their credit cards, or are in default or foreclosure on their mortgages, or are on food stamps. Well over 100,000 people file for bankruptcy every month. Some 3 million homeowners are estimated to face foreclosure this year, on top of 2.8 million last year. Millions of homes are located next to or near a foreclosed home, and it is the latter that may determine the price of all the homes on the street. There have been dramatically sharp declines in home equity, representing cumulative losses in the trillions of dollars in what has long been the largest asset on the average American family's balance sheet. Most of those who lost their homes are hard-working, middle-class Americans who had lost their jobs. Now many have to use credit cards to pay for essentials and make ends meet, and they are running out of credit. Another $5 trillion has been lost from pensions and savings.

But it is jobs that have long represented the stairway to upward mobility in America. For a long time, it was feared they were vulnerable to offshore competition (and indeed still are), but now the erosion is from economic decline at home. What happens as those domestic opportunities recede? Middle-class families fear they have become downwardly mobile and have not hit the bottom yet. The financial security that was once based on home equity and a pension has been swept away.

In a survey just released, the Pew Research Center explored the recession's impact on households and how they are changing their spending and saving behavior. Nearly half the adults polled intend to boost their savings, cut their discretionary budgets, and cut their debt loads. The report concludes that the present enforced frugality will outlast the recession and its overhang. Fully 60 percent of those ages 50 to 61 say they may delay retirement. What does that mean for the young would-be employees entering the labor force over the next few years?

The administration's stimulus program, because of the way Congress put it together, has created far fewer jobs than anyone expected given the huge price tag of almost $800 billion. It was supposed to constrain unemployment at 8 percent, but the recession took the rate way above that and in the process humbled the Obama presidency. Some 25 million jobless or underemployed people now wish to work full time, but few companies are ready to hire. No speech is going to change that.

Little wonder there has been a gradual public disillusionment. Little wonder people have come alive to the issue of excess spending with entitlements out of control as far as the eye can see. The hope was that Obama would focus on the economy and jobs. That was the number one issue for the public—not healthcare. Yet the president spent almost a year on a healthcare bill. Eighty-five percent in one poll thought the great healthcare crisis was about cost. It was and is, but the president's bill was about extending coverage. It did nothing about the first concern and focused mostly on the second. Even worse, to win its approval he accepted the kind of scratch-my-back deal-making that suggests corruption in the political process. And as a result, Obama's promise to change "politics as usual" disappeared.

The president failed to communicate the value of what he wants to communicate. To a significant number of Americans, what came across was a new president trying to do too much in a hurry and, at the same time, radically change the equation of American life in favor of too much government. This feeling is intensified by Obama's emotional distance from the public. He conveys a coolness and detachment that limits the number of people who feel connected to him.

Americans today strongly support a pro-growth economic agenda that includes fiscal discipline, limited government, and deficit reduction. They fear the country is coming apart, while the novelty of Obama has worn off, along with the power of his position as the non-Bush. His decline in popularity has emboldened the opposition to try to block him at every turn.

Historically, presidents with approval ratings below 50 percent—Obama is at 45—lose an average of 41 House seats in midterm elections. This year, that would return the House of Representatives to Republican control. The Democrats will suffer disproportionately from a climate in which so many Americans are either dissatisfied or angry with the government, for Democrats are in the large majority in both houses and have to defend many more districts than Republicans. In any election year, voters' feelings typically settle in by June. But now they are being further hardened by the loose regulation that preceded the poisonous oil spill—and the tardy government response.

The promise of economic health that might salvage industries and jobs, and provide a safety net, has proved illusory. The support for cutting spending and cutting the deficit reflects in part the fact that the American public feels the Obama-Congress spending program has not worked. As for the healthcare reform bill, the most recent Rasmussen survey indicates that 52 percent of the electorate supports repeal of the measure—42 percent of them strongly.

It is clear that the magical moment of Obama's campaign conveyed a spell that is now broken in the context of the growing public disillusionment. Obama's rise has been spectacular, but so too has been his fall.

The dangers of a failed presidency. Michael Krieger, via ZeroHedge.

I have been calling Barrack Obama’s Presidency a failure for at least six months now and it seems that I now have considerable company in this assessment as it becomes obvious to most. It is not a failure because of the Republicans. It is not a failure because of events beyond his control. It is a failure because this was a man that filled a depressed and downtrodden nation with the audacity of hope. When I voted for the man I knew it was against my personal financial interests. It was clear what he would do with taxes. Nevertheless, I got to the polls and voted for this fifth avenue creation thinking maybe, just maybe he might do some of the things he said. Most important to me were two issues related to the military-industrial complex (see Eisenhower’s warning on this during his Farewell Address http://www.youtube.com/watch?v=8y06NSBBRtY) and civil liberties. George W Bush was turning America into a depressed police state with perpetual war and consolidation of power between a corporate oligarchy and entrenched political class. A nation where the masses voluntarily gave up many of the liberties the founding fathers fought for merely to ease the fear that consumed them and which was propagated by the administration and the media. I and many others that voted for him even though they disagreed strongly with his economic policies thought he would at least reverse this trend. Why did we think this? Cause he said so. How foolish we were.

That being said, the real answer was certainly not John McCain as I think we would be in just as bad shape with him. I think that what this experience has taught us is that the President of the United States answers to others behind the scene. There are many theories on who these others are but I will keep it very simple. There is clearly a power elite that consists of a union between big corporate and financial oligarchs and career bureaucrats in Washington D.C. These are the folks that pull the strings of all administrations. All you have to do is look at the trends that have been in place since George W Bush and continue under Obama to see what these players want. Bigger government and thus more Federal power, more wealth for the oligarchs (thank you Federal Reserve) and an erosion of the middle class, and reduction of civil liberties in the name of the 1984-like never-ending “war on terror.” I believe in a war on terror of my own. A war against the terror that Washington D.C. is constantly trying to inject into your head so that you sheepishly give away all you rights and power to them. That’s my war on terror.

Ok, so what do I mean by “The Dangers of a Failed Presidency.” I mean that it is July of an election year and Obama’s magic spell that held sway over the American people and the world for about three months has completely washed away. I mean that the printed money mirage recovery that we have had to tragically watch is ending and we have no job growth to speak of other than a few hundred thousand census workers. The public has no appetite for more spending and Bernanke has no cover to print more money (yet). As such, if people think things are in freefall now for this administration just wait and see how the next several months pan out. This then brings me to the following quote:

The bottom line here is that Americans don’t believe in President Obama’s leadership,” says Rob Shapiro, another former Clinton official and a supporter of Mr Obama. “He has to find some way between now and November of demonstrating that he is a leader who can command confidence and, short of a 9/11 event or an Oklahoma City bombing, I can’t think of how he could do that.”

I found this quote in an FT article earlier in the week and it sent chills all over my body. This is how the strategists in Washington D.C. think. They are sick, twisted people. This guy doesn’t even realize how sick and twisted what he said is which is why he said it. Imagine what they say off the record! You can take this quote in many different ways but none of them are good. I am not going to say anything beyond the fact that I would be VERY suspicious if some sort of event occurred before the elections. Google the term “false flag.” Also remember Rahm Emmanuel’s famous quote of “you don’t ever want a crisis to go to waste; it’s an opportunity to do important things that you would otherwise avoid.” Think about this deeply. This doesn’t mean do what the public wants, or follow the constitution. It means that that those pulling the strings of power have the opportunity to do what THEY want, what fits THEIR ideology. Hitler is the most famous modern example of a leader that used a crisis to form his fascist state. Again, I am not talking about Obama in isolation. I am referring to the power structure that has been firmly in place since the 9/11 attacks. Many call it a silent coup. I agree with this assessment.

This email is not meant to create fear. It is actually meant to get people ready if things get crazy for whatever reason. It is a challenge to people. I challenge everyone to think about how they would react should another terrorist attack or something along those lines occur. I was there for 9/11 and I saw the buildings go down in person. I know what it was like to be manipulated by my own government and media in the wake of such an emotional trauma. I also see that what we have done since, with things such as the Patriot Act and two wars that are still ongoing, and I have reflected on how they have changed America for the worse and provided a fertile ground for the elite to take away more of our rights and our wealth. So my rallying cry is that we must be strong and fearless in the face of fearful events. In the wake of anything that may occur in the years ahead we must not react on emotion and NEVER give away our inalienable rights in the name of protection from big brother. Be fearless, strong and resolute. Spend more time with your neighbors and build things up at the local level. If we have those supports then we will be less inclined to cry to the magicians in D.C. and the Federal Reserve for “help.”

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