November 17

The inimitable John Hussman, as always, provides great insights (and is always able to come up with new ones) and has a wonderful way with words. Read his whole commentary, The Cliff; but I couldn't resist excerpting this:

From my perspective, an "economic recovery" that requires a tripling in the Fed's balance sheet, continues to average 450,000 new unemployment claims weekly, and relies on fiscal stimulus to counter utterly stagnant personal income, is ipso facto (by the fact itself) not a "standard" economic recovery. We have swept an enormous volume of bad debt under rugs, behind dams, and in back of curtains (not to mention in off-balance sheet vehicles such as Maiden Lane that were created by the Federal Reserve). But it is all effectively still there, festering. Meanwhile, our policy makers are trying to reignite financial bubbles in order to create an illusory "wealth effect" to propagate spending patterns that were inappropriate in the first place.
It is a bizarre notion that a credit crisis can be solved by bailing out lenders while doing nothing about the obligations on the borrower side. Think about it - what we have said to lenders is, here you have these homeowners who can't pay for their houses. Foreclose on them, sell the homes at half the price, and the public will make
you whole (largely through Treasury bailouts to Fannie and Freddie, made necessary by Federal Reserve purchases of these securities).
Heck, if the public is going to be on the hook anyway, at least notice that at equivalent cost to the public, the mortgage could simply be written down to half its value, with the homeowner now able to pay the balance off and the lender getting the public handout to make up the difference. But of course, that would reward the homeowner. So instead, we simply make the lenders whole while people lose their homes and foreclosure investors flip the homes at a profit in return for providing liquidity at the auction. That way, the same amount of public funds can be spent through the back door without Congress even getting involved.
Memo to Ben Bernanke - throwing money out of helicopters isn't monetary policy. It's fiscal policy. How is this not clear?
The proper way to deal with a major debt crisis - indeed, the only way nations have ever successfully dealt with major debt crises - is through debt-equity swaps, restructuring and writedowns. There are numerous ways to achieve this with mortgages. My preference would be swaps of principal for pooled property appreciation rights (administered, but not subsidized by the Treasury). In any event, until our policy makers wake up to the need to restructure debt, so that the obligation is modified for both the debtor and the creditor, our financial system will
increasingly tend toward a giant Ponzi scheme. We are racing toward the financial equivalent of a mathematical singularity, where the quantities become so large and outcomes become so sensitive to small changes that the whole system becomes unstable.

November 15

A PIGS 5-fer:
Europe stumbles blindly towards its 1931 moment. Ambrose Evans-Pritchard.
love this quote:

“This is a breath-taking mixture of suicidal irresponsibility and farcical incoherence”

which for some reason reminds me of Martin Luther King, Jr.'s quote:

"Nothing in all the world is more dangerous than a sincere ignorance and conscientious stupidity."

Sovereign default system makes sense. John Dizard, FT.

Within a month or so, the seize-up in the peripheral bond markets will lead to serious and immediate operating issues for the financial system. So the political leadership has no choice but to clarify how Europe will deal with sovereign default, and banking system insolvency.

Europe’s Monetary Cordon Sanitaire. Simon Johnson and Peter Boone, Project Syndicate.

Given the vulnerability of so many eurozone countries, it appears that Merkel does not understand the immediate implications of her plan. The Germans and other Europeans insist that they will provide new official financing to insolvent countries, thus keeping current bondholders whole, while simultaneously creating a new regime after 2013 under which all this debt could be easily restructured. But, as European Central Bank President Jean-Claude Trichet likes to point out, market participants are good at thinking backwards: if they can see where a Ponzi-type scheme ends, everything unravels.

Portuguese hint at euro exit as cost of debt soars and Greek debt crisis 'worse than ever'. both from the Independent.


Wow -- Check Out How Blatantly Our Government Misled Us With The October Jobs Numbers! Henry Blodget. NFP surprised to the upside because BLS changed its seasonal adjustment factor

Open letter to Ben Bernanke. WSJ. the authors of this letter lost all credibility once they included Malpass as a signatory! and (Dow 36,000) Kevin Hassett! And Michael Boskin (who blamed Obama in late 2009 for the stock market crash)!

other fare:
Obama to switch party. Michael Collins.

QE outlook

The early evidence: QE does more harm than good. TPC.


I do not believe that QE will have any positive impact on the broader economy, and, as per last, and as with past examples of unintended consequences of ill-advised government policy, will likely cause more damage than benefit; to wit:

- QE has had a psychological impact on asset prices, including equities and commodities, but has not changed fundamentals in any way
- if QE does not help the economy, then the boost to stock prices will have been ill-founded and subject to downward revision
- the dollar-debasement-fear impact on commodity prices will help commodity producers, but will impair margins for commodity-user-companies and will effectively impose a tax on consumers
- companies will therefore be less inclined to expand their workforce and consumers will be less inclined to expand their discretionary spending
- aggregate demand will continue to be lacklustre and hence below aggregate supply
- upside commodity price shocks have historically caused economic slowdowns; the last commodity price shock preceded the recession; this time around, the economy is much more vulnerable, given that core CPI is already below 1% and U6 is already near 10%
- propping up asset prices to revive the economy was the failed strategy of the 2000s (housing); the definition of insanity is doing the same thing over and over again and expecting different results
- excess reserves do not in any way motivate bank lending; deleveraging will persist, driven by both reluctant lenders and reluctant borrowers
- theoretical wealth effects from stock prices have been disputed (Shiller), and, in any case, to the extent that household wealth remains below the past peak, even with recent stock price gains, it is quite likely that homeowners are still perceiving a negative wealth effect (though the hole might not be quite as deep now that stocks are up 10%, they're still in the hole)
- meanwhile, aging baby boomers are a few years closer to their hoped-for retirement age, are twice-bitten, thrice shy of stocks (ICI reports that as of Nov 10 there were 27 straight weeks of outflows from domestic equity mutual funds), and need to continue to save to replenish their coffers
- interes rates are very low, so interest income has been degraded, implying that even more has to be socked away
- misguided concerns that QE is money-printing means dollar debasement could provide a near-term boost to export growth as U.S. export-products become more attractively priced in foreign currencies, but (a) yuan is not budging much, so will not help trade deficit with China, (b) euro has appreciated, but outlook for euro area is not promising and implies risk of currency turnaround, and, most importantly, (c) geopolitical tensions about QE could cause real trade frictions and protectionist backlash
- to the extent that easy monetary policy gets exported to emerging market nations, principally w.r.t. asset prices, those emerging market nations may be forced to impose domestic monetary restraint which will at the margin impair global growth, offsetting *any* "expansionary benefits" of unconventional Fed easy money policies


all in all, though the Fed likely does WISH to reflate the economy, there is little evidence to support the assumption that they have the CAPACITY TO DO SO --- not until the unsustainable debt burden built up over the last decade has been whittled down to levels that are manageable given prevailing income levels and given the demographic outlook; if this viewpoint is reasonable, then this is not likely to be a 2-5 year process but one that lasts rather longer


what if I'm wrong? what should we look for as signs of successful reflation?
- broad-based increase in cap-ex
- sustained increase in lending
- consistent increases in hiring (evidenced in both the household and institutional surveys) in excess of population growth

November 11

must read explanation of QE:
Just what is Bernanke up to? L. Randall Wray.

With QE2, the Fed proposes to buy longer-term treasuries. Since these are not toxic, it will not help the banks. It is like transferring funds from CDs they hold at the Fed to their checking accounts, thereby reducing their interest earnings. I suppose the idea is that the Fed is going to reduce bank income, impoverishing banks to the point that they will finally throw caution to the wind and begin to make loans to struggling firms and households. It is simultaneously a strange view of banking and also a scary remedy to a financial crisis that was created by excessive bank lending to those who could not afford the loans. It’s sort of like sending a covey of nymphomaniacs to the hospital bed of a nonagenarian suffering from myocardial infarction initiated by an age-inappropriate tryst.

Fasten your seatbelt. John Taylor.

On the day after the Fed’s move, [Bernanke] wrote in a Washington Post editorial piece that QE2 would push up the equity market, bonds, and other risky securities thereby stimulating consumption and economic activity. Even Greenspan did not publicly proclaim his “put,” but now Bernanke has made it the centerpiece of US strategy. Equities are already overpriced, with profit margins at all-time highs and PE ratios far above average. Speculation is now more American than apple pie – but this is a very risky time to practice it.

It’s Going to Be Another Long, Hard Winter in Housing. Zillow Real Estate Research.

Annual State of the Residential Mortgage Market in Canada. CAAMP.



other fare:
Robert Reich makes some excellent points about why Obama should take a stand, but Reich is naive if he thinks Obama will do so --- he's clearly gonna cave in.

Oh, look at that, it might as well be official --- the Huffington Post says White House gives in on Bush tax cuts.

November 10

Steve Keen And Chris Martenson Explain Why "It's All About The Debt". zerohedge.

IEA acknowledges peak oil. Early Warning.

November 9

Bernanke: Chumps! Bruce Krasting.

I got a laugh out of the $600b number. The dealers were polled on their expectations last week. The response was an even half trillion. So with that as a bogie the Fed does 600 large. They wanted to do just a bit more than was actually expected. So they added on an extra 100b. They gave the market what it wanted and a little bit of extra cream on the top.

Understanding the mechanics of a QE transaction. Pragmatic Capitalism.

Recent Decisions of the Federal Open Market Committee: A Bridge to Fiscal Sanity? Richard Fisher, FRB of Dallas.

I agree that we are indeed in what is referred to in economic parlance as a liquidity trap. Yet, I think it worth noting that we already have low interest rates, and spreads against risk-free instruments are historically narrow. Despite their theoretical promise, reductions in interest rates to Lilliputian levels have not done much thus far to spark loan demand. Loans are desirable when business see an opportunity for tapping credit markets to earn a return on investment that significantly outpaces the cost of credit and other risk factors. Even with the low rates that already prevail, businesses lack confidence that they will earn a superior ROI by investing so as to expand their domestic workforce, in comparison to what they might earn from alternative investments abroad or by buying in their stock or cleaning up their balance sheets. For their part, consumers will borrow when they believe it makes sense to shift consumption forward. But after the sobering experience of the past
three years, they are restrained by a lack of confidence that their future income streams will be sufficient to cover their payment obligations.
On the supply side, we know that businesses are floating on a sea of liquidity. Banks already hold over $1 trillion in excess reserves; holdings of government securities as a percentage of total assets on bank balance sheets are growing; loans as a percentage of assets are declining.
If we had a level of bank reserves or liquidity in the marketplace that was binding or inhibiting loan growth, I could understand the impulse to relieve that stricture. Further quantitative easing through additional asset purchases will surely increase the level of bank reserves, lower rates marginally and add more liquidity to markets while weakening the dollar. The more germane question is whether this works to the benefit of job creation and wards off financial excess....
The remedy for what ails the economy is, in my view, in the hands of the fiscal and regulatory authorities, not the Fed. I could not state with conviction that purchasing another several hundred billion dollars of Treasuries—on top of the amount we were already committed to buy in order to compensate for the run-off in our $1.25 trillion portfolio of mortgage-backed securities—would lead to job creation and final-demand-spurring behavior. But I could envision such action would lead to a declining dollar, encourage further speculation, provoke commodity hoarding, accelerate the transfer of wealth from the deliberate saver and the unfortunate, and possibly place at risk the stature and independence of the Fed.

Bubble, Crash, Bubble, Crash, Bubble... John Hussman.

The Japan syndrome goes global. Stephen Roach, Morgan Stanley.

Warning: retirement disaster ahead. Brett Arends, WSJ.

Bank of America edges closer to tipping point. Jonathan Weil.