Thursday, September 24, 2009

And now without further ado, Mr. Martenson

Thursday, September 24, 2009, 12:53 pm,
by cmartenson

The Federal Reserve policy statement yesterday was a masterful blend of contradictory words and ideas.

(tongue in cheek, but only slightly):

Item #1
Information received since the Federal Open Market Committee met in August suggests that economic activity has picked up following its severe downturn.

Translation: "Yes! In the best spirit of government intervention, we've turned $3 trillion in direct spending and $ 8 trillion in future taxpayer promises into a barely detectable statistical uptick. Not just anybody could do that."

Item #2
Conditions in financial markets have improved further, and activity in the housing sector has increased.

Translation: "Well, housing jolly well should have picked up, considering we bought more than 100% of all issued mortgages in 2009 at market-distorting prices."

Item #3
Household spending seems to be stabilizing, but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales.

Translation: "Oh, all that other stuff we just said about the economy stabilizing and picking up? We meant it, just not for households and businesses. Besides those two areas, we meant."

Item #4
Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.

Translation: "Oh, one more thing about that "economy stabilizing and picking up" stuff. We meant "stabilizing and picking up" to be synonymous with the concept of remaining weak for an extended period. We apologize in advance for any confusion this may cause."

Item #5
In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability.

Translation: "All those mysterious Treasury purchases from Caribbean banking centers and the economically ruined island nation of the UK are going to continue. And, yes, we will fight being audited, tooth and nail."

Item #6
The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

Translation: "Okay. Forget what we said earlier about the economy stabilizing and picking up. It actually stinks, and we've just told you twice now, so quit asking us about it. Again, we apologize for any misunderstandings our previous words may have caused. Also, we are going to continue to flood the world with nearly endless amounts of nearly free money. Please plan accordingly."

Item #7
To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt. The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010.

Translation: "...they are going to continue forever."

Item #8
As previously announced, the Federal Reserve’s purchases of $300 billion of Treasury securities will be completed by the end of October 2009. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.

Translation: "We are going to buy a lot more stuff, whenever we feel like it. The Cabella's Master Trust credit card receivables we accepted a while back should give you an indication of where we are headed with all this. Frankly, we headed into this massive program of asset purchases with no exit strategy at all and what we are telling you now is that we still don't have one. Please plan accordingly."

Unwinding dollar carry trade ... through the suit, buddy

By JEANNINE AVERSA (AP) – 44 minutes ago

WASHINGTON — The Federal Reserve on Thursday said it is further scaling back two emergency lending programs as the economy improves.

The Fed will reduce the amount of money available to banks in short-term loans under a program called the Term Auction Facility, or TAF.

The Fed also is cutting back on a program where investment firms can temporarily swap risky securities for super-safe Treasury securities.

The actions respond to "continued improvements in financial market conditions," the Fed said.

A separate report Thursday from banking regulators found deteriorating credit quality in a snapshot of high-risk loans. The annual report found $642 billion worth of mostly large business loans at risk of falling into default or already in default at the end of last year, the highest level on records dating to 1977.

(Risk on! -AM)

It is a consumer in debt stupid

The dollar is the trade.

Fed says no new ponies for you and by the way the ponies already promised are going to be stretched out a bit ... that's dollar positive.

When folks are trading based on the knowledge that it is just a confidence game and that the the fundamentals don't matter, any small crack in confidence can start de-risking, i.e., reducing the 'custodes premium' - that they will use the dollar carry trade to jack asset values into the skies.

At this point at the end of the trend - 2009 low besting the 2002 low breaking a line of lower lows from 1897 up- our prosperity is now in the hands of Fleck's battle of unarmed combatants (currencies) where the U.S. is the dealer (reserve), at least for the near term.

To hold hands with the Federales near term is to be a dollar bull for they of course realize with bubbles needed to bring our troubles to a safe landing, we can't let the confidence proxies (markets) get ahead of the political will for future bailouts. They can signal tightening without tightening, for example by purposely not explicitly stating the context within which reverse repos might occur in the near term.

Such magicians they are with models they built that show no chance of fail when the money is easy and free. It is merely a matter of scale not design. These models rate the probability as 100% that our blessed leaders can manufacture the economic consent of consumers by getting them to add more debt because same consumer will believe that prices will be higher in the future.

These models and the besotted following are both trading without respect to fundamentals.

Inflation expectations were well anchored in the Great Depression.

They also were well anchored in Japan which is presumably the Federales highest probablity target ... flat beer for everyone.

If you believe in the adage 'as above, so below', then one might suggest that the real damage yet to come will be caused by the Federales pushing the pedal again too hard. The rubber band pulled up snaps back, its' pulled harder up and snaps back even harder and then paging ... Dr. Faber, Dr. Grant, Dr. Faber.

What we need is a Holden Caulfield to scratch, 'it is a consumer in debt stupid', on each computer terminal housing such models.

Wednesday, September 23, 2009

More Dragon Tales

Via Todd Harrison @ Minyanville
Orange -Shanghai Comp
White -S&P

Scotty I need the Birth Death Model at Warp 8 or this market's dead

(Ay Captain. -AM)

(Thank God so many unemployed are dropping a grand with the state to incorporate and begin their entrepreneurial dream so the BLS can add all their imaginary positions, per the Birth Death model, to August numbers or else this would spell trouble! -AM)
10:00 a.m. (EDT) Wednesday, September 23, 2009

Employers took 2,690 mass layoff actions in August that resulted in the separation of 259,307 workers, seasonally adjusted, as measured by new filings for unemployment insurance benefits during the month, the U.S. Bureau of Labor Statistics reported today. Each action involved at least 50 persons from a single employer. The number of mass layoff events in August increased by 533 from the prior month, and the number of associated initial claims increased by 52,516.

Mr. Market Pre-Calculates

(James Grant's Interest Rate Observer is always an anticipated read for this blogger. However an eyebrow did arch when I perused his article Saturday morning in the WSJ, 'From Bear to Bull.'

It seemed to be uncharacteristically slapdash and perhaps, conceptually, it was penned in anticipation of setting the tone at the Grant's conference which took place yesterday.

His first point:)

The deeper the slump, the zippier the recovery.

(That would certainly appear to be germane for the markets for as Rosie points out) ,

'Mr. Market has already moved to the bullish side of the debate having expanded valuation metrics to a point that is consistent with 4% real GDP growth and a doubling in earnings, to $83 EPS, which even the consensus does not expect to see until we are into 2012. We are more than fully priced as it is for mid-cycle earnings. '

(Or another way to look at it)

LEX Column
Financial Times
Sept 23

A fair price for an index equals the return on equity times book value per share multiplied by the price-to-earnings ratio. Using the long-run average p/e of 16 and book value per share of $451, the S&P 500 should trade at 867, or 18 per cent below today’s prices.

(So S&P broke the 2002 low and hit ~670. It is now at ~1070 and fair value is around ~870. Got symmetry?)

(The right honorable Mr. Grant's second point :)

To quote a dissenter from the forecasting consensus, Michael T. Darda, chief economist of MKM Partners, Greenwich, Conn.: "[T]he most important determinant of the strength of an economy recovery is the depth of the downturn that preceded it. There are no exceptions to this rule, including the 1929-1939 period."

(As a student of history, one might think Mr. Grant would look at that statement in an inverted fashion - for example, as written on this blog whilst imagining a conversation with Mr. Gann):

Gann :Your recent run from 1982 to 2000 was a bit larger in price gain than 1896-1929..and of course in less than half the time. However the 8 year bull in the 20s that ended on September 3, 1929 increased price by a factor of 6 while your 8 year run from 1992 to 2000 increased prices less than 4 times. After the greatest bull market in history, the greatest bear market in history must follow... my philosophy is that one must look back in order to determine how long the bear campaign might run. Going back over all the records, we find that the greatest bear market had lasted not more than 43 months and the smallest had been as short as 12 months. Some of them had culminated around 27 months,30 months,34 months and in extreme declines,anywhere from 36 to 43 months. You handed me cue cards describing the research since the Great Depression but I can't read your writing...'

AM : 13 recessions since 1929 lasted on average 10 months. The longest,the Great Depression, lasted 44 months. The third longest(1973-1975, 1981-1982) each lasted 16 months, and we're in the second longest and counting. How would you then compare our outcome given yours?

Gann : 'On July 8, 1932, the Dow Jones Averages made a low at 40 and 1/5. This was equal to the April 1897 low and was successfully tested. Several bear market lows were tested and broken on that campaign. In fact we can track a general uptrend of higher lows from this April 1897 and July 1932 low up through the May 2000 highs. This current bear market campaign with highs in March of 2000 and May of 2007 (2007 higher closing but lower intraday) has broken past support similar to our crash in 1929 and subsequent rally. The key will be to see what support holds. So far, the 2002 S&P 500 low of 768 obviously did not hold.'

(Relying on Mr. Darda for an economic prognostication should also carry a disclaimer that his crystal ball has resulted in broken glass being served, for example:)

March 13, 2007
By Michael Darda

The Expanison continues

The latest jobs report is further evidence that the doomsayers aren't right about the state of the U.S. economy...

As always, prosperity has its discontents. With profits and productivity strongly outperforming compensation for most of this cycle, many of the usual suspects have emerged to call for higher tax rates on upper earners, caps on executive pay and other "equalizing" measures. But history shows that profit and productivity cycles always revert to the mean, with compensation playing catch up as the demand for labor rises and unemployment rates fall.

Some argue that the problems in the sub-prime mortgage market and manufacturing are only the beginning of a much broader and more intense slowdown that is likely to undermine the labor market and stifle consumption.

As the drags from housing and manufacturing abate sometime later in 2007, it is more likely than not that the economy will return to an above-trend growth rate powered by strong consumption (via a tight labor market), strong global growth (exports) and a pickup in capital spending (thanks to record profits and still-tight credit spreads).

(I am not sure why Mr. Grant keeps on calling Darda a non-conformist...)

(And Mr. Grant's third point ...)

Economic Cycle Research Institute, New York, which was founded by the late Geoffrey Moore and can trace its intellectual heritage back to the great business-cycle theorist Wesley C. Mitchell. The institute's long leading index of the U.S. economy, along with supporting sub-indices, are making 26-year highs and point to the strongest bounce-back since 1983.

(That certainly seems like a good indicator, however ...)

NEW YORK, Sept 18 (Reuters) - A weekly gauge of future U.S. economic growth rose to a level last seen one year ago, while its annual growth rate hit a fresh record high, feeding hopes of a recovery immune to looming economic threats.

The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index rose to 126.2 in the week to Sept. 11 from an upwardly revised 126.0 the prior week, a figure ECRI originally reported as 125.4.

It was the group's highest index reading since Aug. 29, 2008, when it was 126.3.

(How did September 2008 turn out? Although the ECRI is a black-box it has been reported that stock prices are weighted as a forward indicator ...

Mr. Grant's conversion would be more persuasive if he had bothered to articulate how with falling rents, wages and house prices, large and growing structural employment, and stifling debt levels the recovery will zip up to what Mr. Market is pre-calculating.

Or perhaps surprise,surprise, once again, Mr. Market is Miscalculating.

Tuesday, September 22, 2009

Explaining the game plan

(Gentlemen, subterfuge is needed. -AM)

By Liz Capo McCormick

Sept. 22 (Bloomberg) -- The Federal Reserve has started talks with bond dealers about withdrawing the unprecedented amount of cash injected into the financial system the last two years, according to people with knowledge of the discussions.

Central bank officials are discussing plans to use so- called reverse repurchase agreements to drain some of the $1 trillion they pumped into the economy, said the people, who declined to be identified because the talks are private. That’s where the Fed sells securities to its 18 primary dealers for a specific period, temporarily decreasing the amount of money available in the banking system.

There’s no sense that policy makers intend to withdraw funds anytime soon, said the people.

(Of course they wouldn't comment without that disclaimer, move along nothing to see here. But get the message out ... -AM)

The central bank’s challenge is to decrease the cash without stunting the economy’s recovery and before it sparks inflation. Fed Chairman Ben S. Bernanke said in a July Wall Street Journal opinion article that reverse repos are one tool to accomplish that goal without raising interest rates.

(They want a controlled burn so that the markets retrench slowly but far enough so future consensus for more reflation can be found and if they can hit the sweet spot and just level if off well ... flat beer for everyone! ... -AM)

One thing the Fed has to figure out is if they can launch pilot programs without spooking the market and creating the perception that they are about to tighten,” said Louis Crandall, chief economist at Wrightson ICAP LLC, a Jersey City, New Jersey-based research firm that specializes in government finance. “They are discussing things like accounting issues, and updating the governing documents to the volume of reverse repos the dealer community could absorb.”

“To be effective, the Fed would have to drain several hundred billion dollars worth of funds through these reverse repos, between about $400 and $600 billion,” said Joseph Abate, a money market strategist in New York at Barclays Plc, a primary dealer. “You may have a dislocation in the repo markets due to the supply effect of the Fed injecting such a large amount of extra collateral into the marketplace.”

“The timing is not now for the exit strategies to begin,” said Tony Crescenzi, a market strategist and portfolio manager at Newport Beach, California-based Pacific Investment Management Co., manager of the world’s biggest bond fund. Talk of exit strategies “will all seem very preliminary and conditional upon evidence that the economy is moving toward a self-sustaining and self-reinforcing condition. The proof of that will be some improvement in the labor market picture,” he said.

When the Fed does begin, “it will use reverse repos in tandem with other draining operations,” said George Goncalves, chief fixed-income rates strategist in New York at Cantor Fitzgerald LP, a primary dealer. “The Fed won’t want to totally disrupt the repo markets and the short-term financing of Treasuries given how much debt is coming to market."

Its' a good thing fundamentals don't matter...

Then good luck came a-knocking at my door
Skies were gray but theyre not gray anymore

Blue skies
Smiling at me
Nothing but blue skies
Do I see

(When the Federales provide stats meant to represent future conditions the most heralded by the MSM is the LEI. -AM)

Sept. 21 (Bloomberg) -- The index of U.S. leading economic indicators rose for the fifth straight month, capping the longest stretch of gains since 2004 and signaling a recovery is under way.

(But is the LEI a good indicator? -AM)

The King Report
September 22, 2009 – Issue 3597

The LEI, which has increased for five straight months, is heavily weighted to monetary indicators and the stock market. Its predictive value for the stock market has been poor due to over-used monetary stimulus. The LEI trended lower from 1997 to 2000 as US stocks bubbled. It declined from 2004 to 2008 as the monetary medication carried a diminishing effect on the real economy.

(Is there anything better? -AM)

Zero Hedge blog

Where is Warren Buffett to discuss his one favorite forward looking metric?

The latest data out of the Association of American Railroads has been released. While a month ago the weekly YoY decline hit a very troublesome -17.1%, the last weekly decline added another almost 3% to the deterioration, and is now down -19.8% for Week 36. Cumulative traffic decline is flat at -18.4%. Including intermodal traffic or ton-miles in the calculation does nothing to improve the conclusion. Not a single "carload originated" category has improved, and in fact even the relatively stable ones from the prior update have slumped.

Rosie's take on this indicator: "The data are not seasonally adjusted so when you actually take a look at the levels, they are all the way down to where they were in 1993." Yet recent data undoubtedly had the benefit of the Cash for Clunkers subsidy, which is now dead and buried. Upcoming freight data will be even worse.

(It's a good thing that fundamentals don't matter this time. Nothing but blue skies do I see. -AM)

Monday, September 21, 2009

Pay the man Shirley ...

Charts from

The Deflationary Tortoise and the Inflationary Hare

The controlling trade in the world today: short or long the greenback?

It seems as if almost every asset class is either positively or negatively correlated with it.

In a way it's very fitting, after all at all times and in all ways its' a confidence game.

To be short the dollar, is to be long equities, is to believe in mania. To believe that fundamentals don't matter this time. It's be the bubble grasshopper and enjoy the ride of reflexivity.

It's the evergreen shoots trade.

To be long the dollar amounts to replacing the Principle of Reflexivity with the Principle of Perplexivity - how can the Federales model of debt induced growth possibly work again?

It is ironically where one marries Pimpco's proclamation that they are implementing the 'anti -green shoots' trade with their underlying premise that you have to hold hands with the Federales. That assertion suggests that perhaps there was an agreement at G2 to try and apply some 'risk-adverse' treatment to their reflation bubbling.

Authorities wish for stability; blowing bubbles and then paring with troubles is about all they have to reach their goal of slow and/or statisitical growth.

The question in this humble blogger's mind is will their machinations cause a controlled burn for a future reflate, presumably desired, or an accidental flush?

At some point this deflationary process of asset classes moving in unison ends and differentiation such as dollar going up when equities go up (and vice-versa) occurs.

That will occur, the models suggest, either when the rate of employment or the 'rate of change' of employment reverses ... historical data is mixed on the significance of one over the other.

Back in 1929 anyone who was over 16 and did not have a job was considered unemployed.

What would that equate to today? 20%+?

Or is it truly different this time?

The last time industrial production, and world trade collapsed at this rate ... the last time wealth inequality was so large... the last time debt levels were so high ... the last time was, oh heck , I don't even have to say it do I? That bear campaign took 1929 equity levels all the way down to 1897 pricing.

Will there be a point of deflationary recognition that with falling rents, wages and house prices,large and growing structural employment, and stifling debt levels ... PRICES HAVE TO COME DOWN?

Remember, inflation expectations were well anchored throughout the Great Depression and deflationary Japan. Perhaps reality is the tail risk.

A tail of the deflationary tortoise and the inflationary hare.

Although in this case if the tortoise wins, the owner of the stadium might end up destroying the place (hyperinflating), in order to protect their paying customers.

Saturday, September 19, 2009

How can we have a V shaped recovery if housing is upside down?

By Andy Kroll | Tue September 1, 2009 1:15 PM PST
Mother Jones

Although a few glimmers of hope for the housing market have shown through as of late, several new reports concerning houses with "underwater" mortgages—when a homeowner owes more than the total value of his or her home—foresee bleak times that could undermine a full economic recovery.

Moody's found that 24 percent of all US homes are currently underwater, a 15 percent jump from a year ago, while 8 percent of homes have debt equal to the home's value. Online real estate site Zillow similarly calculated in its own report that 23 percent of homes were underwater. A Moody's analyst told The Washington Independent that her firm's findings mean about 16 million homes are underwater, adding that "Home prices have increased in the last month or two but I think it's too early to call an end to the downturn."

More ominous, though, is a recent projection by Deutsche Bank that a whopping 48 percent of all US home mortgages will be underwater or "upside-down" by early 2011.

The fear with these kinds of statistics is that they'll stunt a more vigorous economic rebound here in the US. The housing market—as the Great Housing Meltdown so painfully illustrated—is inextricably linked to broader economic health, and if staggering totals of underwater mortgages continue to pile up, that will seriously blunt recovery efforts to turn the economy around, like stimulus spending. It also doesn't help that the goverment's mortgage relief efforts—like the largely flawed Home Affordable Modification Program—have done little so far, as the recent Hope Now statistics show.

Yet apart from these relief programs, experts admit that the only way to deal with underwater mortgages is to sit back and wait—which doesn't bode well for a V-shaped recovery anytime soon. (Think more of a W.)

(The higher probability is a livin 'L.-AM )

"For the most part, we have to let it happen. We needed a correction," Deutsche Bank’s Karen Weaver told The Washington Independent. "And, as we let the crisis play out, shore up the rest of the economy with low rates and government stimulus."

Crash me now or crash me later

Chart porn is everywhere.

It's 1930 , no its' 1938.

It's 1987, no its' 1991.

It's 1974, no its' 2003.

Well actually it's 2009.

9 years after the market peak, halfway through a secular bear,we are having a rally irrespective nigh in defiance of fundamentals. It is different again this time, the new paradigm of holding hands with the Federales is in play, and it's time to go all-in.

The Nancy Capitalists chortle that the models show zero chance of fail this time, that bank solvency is being met by the Federales put, that the dollar will lubricate asset appreciation ad infinitum, that performance anxiety will fuel us to the moon, and that J6P won't want to miss this rally.

Let's apply a little common sense to the concept that the solution to the debt crisis is more debt.

ABC News(Via SomeAssemblyRequired Blog): Nearly half the country has had a pay cut or job loss in the last year, according to a new poll from the Washington Post and ABC News. A shocking 41 percent say that in the last year someone in their household has had their pay or work hours cut. Twenty-seven percent say someone in their home has been laid off or lost their job.

Shocking no. Deflationary yes.

So of course all the models say the magicians can restore confidence by giving cash away. Based on the experience of the last 15 years we will have little to no deflation. Based on the experience of between 15 to 60 years ago we will have deflation but it will be moderate. The mistake of the Depression was they didn't throw enough money at it, the mistake of Japan was that they didn't throw enough money at it fast enough : and in both cases once the authorities got the memo and started splurging they pulled it back too quick.

The Federales feel confident that they have learned all the lessons from history that are pertinent. Their lens, in my opinion, is a bit clouded.

Oh, yes, in the end the recovery will be paid for no doubt, barring the discovery of a perpetual motion machine other than the 'electronic' printing press.

No, what our blessed leaders are unaware of, perhaps because they too confuse the institutional manufacture of consent with relevant statistics, is what Henry Ford, notwithstanding his charitable endeavors, recognized about the governed - they needed to be able to afford his cars or the jig was up.

Greenspan, and Bernanke and Paulson have all , at various times in their respective careers, thought that the 'jig was up' and they all, in their respective fashions, have advocated free money and cheap money to keep the cars selling.

They unfortunately have confused folks being able to use cheap money and free money to buy cars as the same thing as folks being able to afford them.

Therein lies the difference between fail and hail.

If 41 percent say that in the last year someone in their household has had their pay or work hours cut, if 27 percent say someone in their home has been laid off or lost their job ... if almost 50 percent of the country has had a pay cut or job loss in the last year then what do you suppose that 50 percent believe they can afford now?

Will these folks believe that they should add more debt because prices are going to go up in the future?

And what of the other 50%? If dat guy over dere is sucking wind will 'the blessed' 50% be cautiously optimistic about a jobless recovery and add more debt because prices are going to go up in the future?

The models says yes. They believe fat,dumb,and stupid, if effectively financed, is a fine and exceptional way to go through life son.

I humbly suggest that reality is the tail risk.

Friday, September 18, 2009

To QE or not to QE

To QE, or not to QE: that is the question:
Whether 'tis nobler in the markets to suffer
The slings and arrows of outrageous fortune,
Or to halt QE against a sea of troubles,
And by opposing end the rally?

To short: to buy;
No more; and by buy to say we end
The heart-burn of the thousand little trades
That this office is heir to, 'tis a consummation
Devoutly to be wish'd.

Mr. Speaker I rated that microphone

SEPTEMBER 17, 2009

Standard & Poor's Ratings Services recalibrated its ratings criteria for collateralized debt obligations, resulting in the ratings firm's putting about 4,790 CDO tranches totaling $578 billion on watch for downgrade.

(That ought to leave a mark wherever zombie accounting does not apply. -AM)

The changes will make the CDO ratings more comparable to ratings in other sectors, S&P said.

The ratings agency will introduce tests - both quantitative and qualitative - to supplement its default-simulation model.

(The default simulation model was initially tweaked in order to stop the darn thing from going upside-down whenever they ran the Monte. Guess they are pulling out version 1.0 as their 'supplement' .-AM)

S&P will also adjust its models to target AAA default rates it believes are commensurate with conditions of extreme macroeconomic stress, such as the Great Depression, as well as BBB default rates consistent with the highest actual corporate defaults over the past 28 years.

(Recession's over! Yeah beer ... wait, that's not beer -AM)

S&P said downgrades are likely to be multiple notches after reviewing the tranches over the coming months, with Chief Credit Officer Thomas Gillis estimating that outstanding synthetic CDOs will likely experience an average downgrade of four notches.


Super senior AAA tranches will probably be affected less, with expected downgrades of two to three notches, while tranches rated AAA will likely be affected more, with an estimated downgrade of four to five notches.

(Shoot, I guess there ain't no such thing as AAAA. -AM)

Of the tranches on watch for downgrade, 3,076 tranches totaling $319.6 billion are from 957 U.S. transactions. Another 1,626 tranches are from 623 European transactions and are $250.5 billion in size.

(Out goes the downgrade and in comes the dollar. Its' liquidity sponge time! Got treasuries? -AM)

"We believe that adding quantitative and qualitative elements to our analysis...will provide a more robust analysis than using only simulation models," Gillis said.

(You ain't kiddin'. Best to be forgettin' that once you were abettin' while the speech is free. -AM)

Strategerizin' at the Office : I Can't Believe It's not Capitalism
Via the King Report
By Matt Latimer

As a speechwriter for George W. Bush during the final years of his presidency, I’d seen crises and controversies. But nothing prepared me for the imminent collapse of America’s free-market system.

I was in the Eisenhower Executive Office Building with another speechwriter, a young man named Jonathan. (His last name was Horn; the president nicknamed him Horny.) We were chatting casually when the president’s favorite speechwriter came in. Chris Michel was in his midtwenties, with sandy blond hair. He was usually chipper, though at the moment his face was so pale he must have been the whitest man in the Bush White House. And that was no small accomplishment. Chris had just come from a secret meeting in the Oval Office, and without so much as a hello he announced: “Well, the economy is about to completely collapse.”

“You mean the stock market?” I asked.

“No, I mean the entire U.S. economy,” he replied. As in, capitalism. As in, hide your money in your mattress.

The secretary of the treasury, Hank Paulson, had sketched out a dire scenario. And Chris said we’d have to write a speech for the president announcing his “bold” plan to deal with the crisis. (The president loved the word bold.)

We had to reassure the American people that everything was going to be okay. As it turned out, Secretary Paulson had a plan that would fix everything: a $700 billion bailout of the financial system. The plan, like the secretary himself (who’d been pretty much a nonperson at the White House), seemed to come out of nowhere, as if it had been hastily scribbled on a sheet of paper in the secretary’s car on his way to work. Basically, it could be summed up as: Give me hundreds of billions of taxpayer dollars and then trust me to do the right thing.

There was no denying it. This plan was certainly “bold.”

As a young political geek growing up in Flint, Michigan, I’d always dreamed of heading to Washington to work for a conservative president and help usher in another Reagan Revolution. As soon as I was able, and with the support of my baffled liberal parents, I packed up my old maroon Dodge Dynasty and said good-bye to my sleepy hometown.

My youthful exuberance cooled as I moved up the rungs of power. On Capitol Hill, I worked for a congressman who “misremembered” basic facts, such as the “Eisenhower assassination.” I worked for a senator who hid from his own staff. I was assigned to coach Republican senators on how to reach out to the media and entertainment world. (You try explaining The View to a group of 65-year-old white Republican men.) At the Pentagon, as chief speechwriter to Donald Rumsfeld, I battled an entrenched civil-service system and an inept communications team.

In 2007 I finally made it to the Bush White House as a presidential speechwriter. But it was not at all what I envisioned. It was less like Aaron Sorkin’s The West Wing and more like The Office. After watching Karl Rove’s bizarre farewell to White House staffers and hearing the president dismiss the conservative movement I believed in (“I know it sounds arrogant to say,” he told me, “but I redefined the Republican Party”), I thought I could muddle through till the end. Washington might not have been the city I had dreamed of, but I figured things couldn’t get much worse.

To this day, I don’t really understand what happened.

In the first months I worked at the White House, I wrote any number of speeches praising America’s economic prosperity. There’d been month after month of uninterrupted job growth, after-tax income was increasing, exports were rising, inflation was down. “The fundamentals of our economy are strong,” we’d write. Because that’s what we’d been told. And as far as I could tell, the president was told the same thing by his economic advisers, led by Secretary Paulson. Paulson had been brought into the administration by Josh Bolten, the White House chief of staff. They’d both worked at Goldman Sachs. Paulson had been one of the highest-paid CEOs on Wall Street, making at least $30 million a year, and had an MBA from Harvard (like President Bush). Paulson was supposed to be a nonideological, pragmatic, sensible type. He was bald with glasses and had a scratchy voice that sounded like he had a thousand-dollar bill caught in his throat.

Yet there were obvious signs that all was not well. The housing bubble had started to collapse, leading to a sharp increase in home foreclosures. And in January 2008, the president proposed an expensive economic-stimulus package, which he ultimately negotiated with Congress and passed, that would send Americans checks for a few hundred dollars.

To look like we were doing more, we announced various initiatives, such as assembling an alliance to encourage lenders to renegotiate loans. For a while, the communications guys—Ed Gillespie and Kevin Sullivan—wanted the president to give a toll-free number for Americans to call for assistance with their mortgages. I thought that was embarrassing, as if George W. Bush were Jerry Lewis. An additional problem was that the president kept botching the phone number. He thought it was an 800 number, but the number actually had an 888 prefix. So the president ended up telling Americans to call the wrong number. Unfortunately, I can’t say any of the president’s top economic advisers struck me as having a firm handle on the economic mess ahead. The economic team the president put together at first included his friend Al Hubbard. He may have been a competent adviser; I really didn’t know him. The only thing I knew about Al was that he went around putting whoopee cushions on people’s chairs in the West Wing.

Bear Stearns. Lehman Brothers. None of the senior officials at the White House had expected to end the second Bush term this way, with what Warren Buffett called an “economic Pearl Harbor.” In fact, Ed Gillespie was mapping out an ambitious schedule of “legacy speeches” for the fall and winter to trumpet all of the administration’s achievements. We could strike “remarks on the robust economy” off the list. Pundits on TV started asking why the president wasn’t saying more and what he was going to do. The answers were: We had nothing to say and no one had any idea.

After Chris, Jonathan Horn, and I learned about the president’s $700-billion-bailout proposal and drafted the remarks announcing it to a stunned nation, Ed said the president wanted to see us in the Oval Office. The president looked relaxed and was sitting behind the Resolute desk. He felt he’d made the major decision that everyone had been asking for. That always seemed to relax him. He liked being decisive. Excuse me, boldly decisive. The president seemed to be thinking of his memoirs. “This might go in as a big decision,” he mused.

“Definitely, Mr. President,” someone else observed. “This is a large decision.”

(Stopping for a moment, putting down my glasses, shaking my head ... pausing ... shaking my head again. Can you believe this @#$@#? -AM)

The president asked his secretary, Karen, to bring him the Rose Garden remarks he’d just delivered that day, September 19, announcing his action plan. He got slightly exasperated when she was delayed in printing them out. When he finally got them, he put his half-glasses on and looked at them. “See, this was fine today,” he said. “But we got to make this understandable for the average cat.” He proposed an outline for another speech that talked about the situation our economy was in, how we’d gotten here, and how the administration’s plan was a solution.

“This is the last bullet we have,” the president said at one point, referring to the bailout. “If this doesn’t work…” He shook his head, and his voice trailed off. That wasn’t good enough for me. If this doesn’t work, then what? We’re done? America is over? I looked around at everyone else. What does that mean?

Ed and the president decided to give a prime-time address to the nation, and Vice President Cheney was sent to the Hill to argue for our bill (a bill he may or may not have believed in) and was apparently hammered by House Republicans. There were reports that only four Republicans out of nearly 200 supported the plan. From what I was starting to glean about the whole scatterbrained operation, four seemed like too many. Hours before the president was to speak to the country, Senator John McCain’s presidential campaign informed Josh Bolten that McCain was going to phone the president and urge him to call off the address and instead hold an emergency economic summit in Washington. If the president did speak that night, the McCain campaign didn’t want him to outline any specific proposal.

Of course, this threw the proverbial monkey wrench into our plans—and at the eleventh hour. I overheard the president call McCain’s plan “a stunt.” Dana Perino said the negotiations were nearly over, and suddenly he was going to swoop in and muck things up? The president’s political adviser, Barry Jackson, was blunt, calling McCain a “stupid prick.”

We were faced with a dilemma: Should Bush still go out and address the nation, or should he cancel? And if he did go out, what should he say? Ed, typically, told us to write two drafts for the address to the nation—one outlining the proposal as originally announced and another that only discussed the “principles” the legislation needed to incorporate to win the administration’s support. Chris and I looked at each other warily. Two versions of a major prime-time address that may or may not be given hours from now? Sure, no problem. Ultimately, Ed decided to go with the second speech. But he clearly didn’t share his plan with the president. When the president came into the Family Theater to rehearse the speech in front of a teleprompter, he didn’t like the idea of just talking about principles. It sounded like the administration was backing away from its own plan (which it was).

“We can’t even defend our own proposal?” the president asked. “Why did we propose it, then?” This was not bold decision making. There were about a dozen people gathered in the theater to watch him rehearse, and all of us remained silent as the president looked at us for an answer.

The president walked over to sip some water from one of the bottles on the table near his lectern. “This speech is weak,” he said. He looked at me and Chris. “Frankly, I’m surprised, to be honest with you.”

There was more silence.

“Too late to cancel the speech?” the president asked into the air. He was joking…I think. Finally, Ed (who hadn’t exactly rushed to jump into the line of fire) explained that we had to make this change to the address because the proposal the president liked might not end up being the one he had to agree to. “Then why the hell did I support it if I didn’t believe it would pass?” he snapped. There was yet another uncomfortable silence.

Finally, the president directed us to try to put elements of his proposal back into the text. He wanted to explain what he was seeking and to defend it. He especially wanted Americans to know that his plan would likely see a return on the taxpayers’ investment. Under his proposal, he said, the federal government would buy troubled mortgages on the cheap and then resell them at a higher price when the market for them stabilized.

We’re buying low and selling high,” he kept saying.

The problem was that his proposal didn’t work like that. One of the president’s staff members anxiously pulled a few of us aside. “The president is misunderstanding this proposal,” he warned. “He has the wrong idea in his head.” As it turned out, the plan wasn’t to buy low and sell high. In some cases, in fact, Secretary Paulson wanted to pay more than the securities were likely worth in order to put more money into the markets as soon as possible. This was not how the president’s proposal had been advertised to the public or the Congress. It wasn’t that the president didn’t understand what his administration wanted to do. It was that the treasury secretary didn’t seem to know, changed his mind, had misled the president, or some combination of the three.

As Chris and I were in our office in the EEOB trying to put in the latest of the president’s edits, there was a steady flow of people coming into the room. The economic team came in. Ed Gillespie, the president’s top communications adviser, came in. Tony Fratto, the deputy press secretary, was there. At one point there were twelve people crowded around our computer, trying to explain how the proposal worked. The economic advisers were disagreeing with each other.

There was total confusion. It was 5:30 p.m. The speech was in three and a half hours.

After finally getting the speech draft turned around and sent back to the teleprompter technicians, we trudged back to the Family Theater, where the president rehearsed. In the theater, the president was clearly confused about how the government would buy these securities. He repeated his belief that the government was going to “buy low and sell high,” and he still didn’t understand why we hadn’t put that into the speech like he’d asked us to. When it was explained to him that his concept of the bailout proposal wasn’t correct, the president was momentarily speechless. He threw up his hands in frustration.

Why did I sign on to this proposal if I don’t understand what it does?” he asked.

(If George Bush wasn't born into this he probably would not have amounted to much more than a mid-level manager that enjoyed playing snap the towels with the waitresses at Applebee's after work.-AM)

The president was clearly frustrated with what was going on, but there was little he could do at this late hour. He went up to take a nap, saying he was beat. He looked it. I’d never seen him more exhausted. His hair was out of place and shaggy. His face looked drained and pale. Even more distressing, he was wearing Crocs. As I looked at him I thought to myself, how many more crises can one guy take?

As the start of the prime-time speech approached, Chris and I went up to the East Room. The large room had been converted into a studio for the address. There was a big group of technicians present, and wires and equipment were everywhere. The president’s lectern was set up so that we were to his left and out of his line of sight. His audience was a gold curtain next to a large portrait of George Washington. As Chris and I were watching the speech get fed into the teleprompter, Josh Bolten walked over to us. He looked like he’d had a long day, and I felt a tinge of sympathy for him. He told us he’d gotten an earful from Speaker Nancy Pelosi and Senate Majority Leader Harry Reid. The Speaker had yelled at him for fifteen minutes and expressed her view that the president’s speech was a mistake and would screw up their deal. “Talking to them is the hardest part of my job,” he said quietly.

Then, with about thirty minutes until airtime, the president showed up, looking transformed. He was in a deep red tie and dark suit. His hair was neatly combed. His demeanor was completely businesslike. He made a few edits to the text and then read it through, flawlessly, from start to finish. He informed us that he’d called both the presidential candidates, Senators Obama and McCain, and asked them to come to the White House the next day for the summit McCain had wanted. Both candidates had agreed. After the president finished his run-through, about ten of us walked over to him, forming a phalanx around him. We had little to say, of course. The speech was in ten minutes, so there wasn’t time for any serious changes. We just wanted to be around him—it made us feel useful. And a few aides liked to be in the pictures that the White House photographers were taking of the president preparing for another historic speech.

Kevin Sullivan, the White House communications director, tried to be of use. “Mr. President, you were standing slightly to the left,” he said.

We all looked at him, confused. So did the president. “What?” he asked.

“On the camera,” Sully explained. “You were standing slightly to the left when you rehearsed.”

The proposal the president announced to the nation that night would be soundly rejected by the House of Representatives. An eventual compromise was reached a week later. And to help get it passed, I had to endure what I considered the biggest indignity of my entire White House tenure: We were now writing remarks for Jimmy Carter, of all people, because we’d been abandoned by nearly everyone else. I’m not sure if Carter ever delivered that statement, but a week later he launched a vicious attack on Bush’s “atrocious” economic policies. It was just one more humiliation. First the administration had had to seek out Carter’s help, and then the White House had been schooled on the economy by the president who’d brought you gas lines, an energy crisis, and high unemployment.

We wrote speeches nearly every time the stock market flipped. Meanwhile, the White House seemed to have ceded all of its authority on economic matters to the secretive secretary of the treasury. The president was clearly frustrated with this. I was told that at one Oval Office meeting, he got very animated and exclaimed to Paulson, “You’ve got to tell me what you’re doing!” (In the weeks that followed, Paulson changed his spending priorities two or three times. Incredibly, he’d been given the power to do with that money virtually anything he pleased. All thanks to a president who didn’t understand his proposal and a Congress that didn’t stop to think.)

The president understood the danger of talking constantly about the economy, especially if he had nothing new to say. “It’s hard to keep that kind of pace,” he said, noting that people would start tuning him out. The real problem, which no one at the White House seemed willing to confront, was that the country already had tuned him out. The president didn’t have credibility anymore. At one point, during another of our marathon speechwriting sessions, Steve Hadley and Fred Fielding, the White House counsel, let us know that the president needed an FDR line—like “We have nothing to fear but fear itself.” The president had his own suggestion for such a line, however: “Anxiety can feed anxiety.” So we produced a speech with no real information and our FDR knockoff line. Here were some of the kinder reviews: “lackluster”; “there is no news here”; “the president should go away for a while.” The stock market dipped further.

As Treasury started to use the bailout funds to invest directly in financial institutions, Ed wanted to come up with a name for the plan that made it sound better to the public, particularly conservatives who thought this was nothing more than warmed-over socialism. Yes, a catchphrase would solve everything. As we were working on this, Ed called a few of the writers on speakerphone with the idea he’d come up with: the Imperative Investment Intervention. “Oh, that sounds good,” one of us remarked, as the rest of us tried not to laugh. We decided that if a catchphrase must be deployed, surely we could come up with something better than a tongue twister with the acronym III. We started out with dark humor: the “I Can’t Believe It’s Not Capitalism” Plan; the MARX Plan. I suggested that we also apologize to the former Soviet Union and retroactively concede the Cold War. Then one of the writers got serious and came up with the Temporary Emergency Market Protection Program, or TEMP. Not bad as gimmicks go, and Ed liked it. But he decided that instead of dropping it into a speech, we’d leak it to the press that this was the phrase we were using internally. Ed’s logic was that anything Bush said would be ignored, but if the press thought they’d got it from a leak, they’d find it more interesting and newsworthy. TEMP never made it as a catchphrase regardless.

When White House press secretary Dana Perino was told that 77 percent of the country thought we were on the wrong track, she said what I was thinking: “Who on earth is in the other 23 percent?” I knew who they were—the same people supporting the John McCain campaign. Me? I figured there was no way in hell any Republican would vote for that guy. John McCain, the temperamental media darling, had spent most of the past eight years running against the Republican Party and the president—Republicans on Capitol Hill and at the White House hated him. Choosing John McCain as our standard-bearer would be the height of self-delusion. It would be like putting Camilla Parker Bowles in charge of the Princess Diana Foundation.

As it turned out, I was the one who was deluded. The people I worked with in the White House were the most loyal of the Bush loyalists. Dana Perino was so sensitive to criticism of Bush that she once said she couldn’t watch the Democratic convention because it would be “too mean” to the president. Yet I watched them embrace McCain enthusiastically—backing a guy who’d worked so hard to undermine them. It was a cynical bargain.

The president, like me, didn’t seem to be in love with any of the available options. He always believed Hillary Clinton would be the Democratic nominee. “Wait till her fat keister is sitting at this desk,” he once said (except he didn’t say “keister”). He didn’t think much of Barack Obama. After one of Obama’s blistering speeches against the administration, the president had a very human reaction: He was ticked off. He came in one day to rehearse a speech, fuming. “This is a dangerous world,” he said for no apparent reason, “and this cat isn’t remotely qualified to handle it. This guy has no clue, I promise you.” He wound himself up even more. “You think I wasn’t qualified?” he said to no one in particular. “I was qualified.”

(I think I need to take a walk. -AM)

The president didn’t think much of Joe Biden either. “Dana, did you tell them my line?” the president once asked with a smile on his face.

“No, Mr. President,” Dana replied hesitantly. “I didn’t.”

He paused for a minute. I could see him thinking maybe he shouldn’t say it, but he couldn’t resist. “If bullshit was currency,” he said straight-faced, “Joe Biden would be a billionaire.” Everyone in the room burst out laughing.

(And if mediocrity were worshiped you would be pope. -AM)

Bush seemed to feel considerable unease with the choice of McCain as well. I think he liked Romney best. (The rumor was that so did Karl Rove.) My guess was the president hadn’t so easily forgotten the endless slights he’d suffered, but there was little he could do. To him, McCain’s defeat would be a repudiation of the Bush administration, so McCain had to win. The president, who had quite a good political mind, was clearly not impressed with the McCain operation. I was once in the Oval Office when the president was told a campaign event in Phoenix he was to attend with McCain suddenly had to be closed to the press. The president didn’t understand why when the whole purpose of holding the event had been to show Bush and McCain together so the press would stop asking why the two wouldn’t be seen together. If the event was closed to the press, the whole thing didn’t make sense.

“If he doesn’t want me to go, fine,” the president said. “I’ve got better things to do.”

Eventually, someone informed the president that the reason the event was closed was that McCain was having trouble getting a crowd. Bush was incredulous—and to the point. “He can’t get 500 people to show up for an event in his hometown?” he asked. No one said anything, and we went on to another topic. But the president couldn’t let the matter drop. “He couldn’t get 500 people? I could get that many people to turn out in Crawford.” He shook his head. “This is a five-spiral crash, boys.”

We tried to move on to something else. But the president wouldn’t let go. He was stuck on the Phoenix event. At one point, he looked off into space and said to no one in particular, “What is this—a cruel hoax?”

Chris and I were tickled by that comment. For weeks, we would look for ways to use it. “They are out of Diet Pepsis at the mess. What is this, a cruel hoax?” I went to dinner with a friend. “They don’t have cheeseburgers?” I said, looking at the menu. “What is this, a cruel hoax?”

If my colleagues at the White House were even momentarily scared straight about McCain over the convention fracas, the clarity wore off just as quickly as it came when the very conservative governor of Alaska, Sarah Palin, was picked as McCain’s running mate. I didn’t have anything against Governor Palin from what I knew about her, which was next to nothing. The instantaneous reaction to Palin at the White House, however, was almost frenzied. I think what was really going on was that everyone secretly hated themselves for supporting McCain, so they latched onto Palin with over-the-top enthusiasm. Even the normally levelheaded Raul Yanes, the president’s staff secretary, was overtaken by Palin mania. He’d been slightly annoyed with me for not jumping on the McCain bandwagon and for saying aloud that I thought McCain would lose. Now, of course, I had to be enthusiastic about the ticket. “You still think we’re going to lose?” he asked me laughingly.

“Yep,” I replied.

Raul looked incredulous. “Well, you obviously don’t believe in facts!”

I was about to be engulfed by a tidal wave of Palin euphoria when someone—someone I didn’t expect—planted my feet back on the ground. After Palin’s selection was announced, the same people who demanded I acknowledge the brilliance of McCain’s choice expected the president to join them in their high-fiving tizzy. It was clear, though, that the president, ever the skilled politician, had concerns about the choice of Palin, which he called “interesting.” That was the equivalent of calling a fireworks display “satisfactory.”

“I’m trying to remember if I’ve met her before. I’m sure I must have.” His eyes twinkled, then he asked, “What is she, the governor of Guam?”

(Have to admit though the fellow has a good sense of humor. He would be a lot of fun at Applebee's -AM)

Everyone in the room seemed to look at him in horror, their mouths agape. When Ed told him that conservatives were greeting the choice enthusiastically, he replied, “Look, I’m a team player, I’m on board.” He thought about it for a minute. “She’s interesting,” he said again. “You know, just wait a few days until the bloom is off the rose.” Then he made a very smart assessment.

This woman is being put into a position she is not even remotely prepared for,” he said. “She hasn’t spent one day on the national level. Neither has her family. Let’s wait and see how she looks five days out.” It was a rare dose of reality in a White House that liked to believe every decision was great, every Republican was a genius, and McCain was the hope of the world because, well, because he chose to be a member of our party.

Toward the end of October, I’d started working with Chris on drafts of the president’s speech for the morning after the election. We’d written a version if the victor was Obama and another if the victor was McCain. But I think only the Obama one ever went for vetting.

As events turned more surreal and staff members played the spin game with each other, I asked myself daily, What more can go wrong? The answer, of course, would be practically everything.

Thursday, September 17, 2009

At all times, and in all ways, it is just a confidence game

(And deflation is the big bad wolf. -AM)

LONDON (Reuters) - The recovery in emerging markets is likely to be weak and growth will remain limited, a senior World Bank official said on Thursday.

"So far there have not been any major policy reversals in emerging markets...recovery is going to be weak, growth slow for the medium term," World Bank managing director Ngozi Okonjo-Iweala told an emerging markets conference.

"Vulnerability to global confidence crises will continue to define emerging markets as an asset class."

Sunglasses check...Shorting the custodes trade ... on

(In December of 2008 my blog entry was: -AM)

Shorting the custodes

Now that the JV Hedge fund between the Treasury and the FED has stated that they will run the carry trade into perpetuity using sovereign scrip as the funding currency one wonders, Quis custodiet ipsos custodes?(a Latin phrase from the Roman poet Juvenal, variously translated as "Who watches the watchmen").

In September of 2007,the FED put out a study in the Federal Reserve Bank of New York’s Economic Policy Review called 'Hedge Funds, Financial Intermediation, and Systemic Risk.'

It stated:

Largely unregulated hedge funds,complicate CCRM (counterparty credit risk management) through their unrestricted trading strategies, liberal use of leverage, opacity to outsiders, and convex compensation structure.

Sound familiar?

Unrestricted trading strategies : B.S. Bernanke states he will monetize a cow
Liberal use of leverage : 53 to 1 and rising
Opacity to outsiders : Bloomberg suit
Convex compensation : Wall Street

(Wow ... back to the future. In light of sovereign CDS being 'liquified' what is today's CCRM? Perhaps the American consumer.. who might start to 'watch the parking meters'. -AM)

Todd Harrison

In the last week, we’ve seen pundits, presidents, policymakers, oracles, corporate chieftains and hedge fund honchos endorse this rally.

Bernanke? The recession is over.

Geithner? The financial industry is on the mend.

Obama? He’s pushed most of his political chips on the table.

Barton Biggs? There’s another 20% to the upside this year.

Buffett? Buying stocks and “getting a lot for his money.”

Pandit? “Little doubt” that Citigroup (C) will return to profitability?

(Bwah ha ha ha ha ha ha ha .... ... sorry. -AM)

Cramer? It’s the “Greatest bull market in history” and “different this time” (not to be confused with the last new paradigm).

On Tuesday, one year after the failure of Lehman Brothers, we asked ourselves what we learned from the financial crisis? The answer, so it seems, is “not very much".

My point—and there is one—is that the government is “all in,” attempting to push risk out on the time continuum, and a plenitude of people in positions of power have slapped their stamp of approval on this tape 59% after the fact.

When I opened up my New York Times this morning and saw a special section dedicated to “Taking A Chance on Risk, Again,” it was clear that the more things change, the more they stay the same. With everyone seemingly on the same side, with uniformity in the view that the worst is behind us, I can't help wonder if the next hazy phase will be a crisis of confidence.

Ponies 'may' be needed for folks too drunk to walk ...

(Thank God Benji is our designated driver! -AM)

By Mike Dorning
Americans plan to refrain from boosting their spending even after the biggest drop in consumption since 1980, signaling concern about the direction of the economy over the next six months.

(All hands ... stalling speed! -AM)

Only 8 percent of U.S. adults plan to increase household spending, almost one-third will spend less, and 58 percent expect to “stay the course,” a Bloomberg News poll showed. More than 3 in 4 said they reduced spending in the past year.

Respondents were divided over whether the economy will get better or stay the same in the next six months; only 1 in 6 said things will get worse. More than 40 percent of those surveyed said they feel less financially secure than they did when President Barack Obama took office in January, outnumbering 35 percent who said they feel more secure.

Wall Street faces a more hostile public as Obama presses for new financial regulations. Half of the Americans surveyed have an unfavorable view of Wall Street, versus 31 percent with favorable views.

Three out of four Americans support government-imposed limits on executive pay at companies that haven’t repaid government bailout money, the poll shows.

(Repaying government bailout money means that the banksters are solvent again yeah! Get folks to ask the wrong questions and you don't have to worry about their answers.-AM)

While banks and financial companies are lobbying to kill Obama’s proposal to establish a Consumer Financial Protection Agency, 56 percent of Americans support the idea, with 31 percent of the poll respondents opposed.

Underscoring consumers’ austere attitudes, 77 percent of respondents said they have cut back on spending during the past year, 59 percent said they have made a bigger effort to pay off debts and 48 percent have put more money aside as savings.

Consumer spending dropped in four of the past six quarters, and is down 1.9 percent from its peak in July-to-September 2007, the biggest retrenchment since 1980.

(However, there are signs of improvement, cautious optimism, a bottoming process,a slower rate of decrease, and glimpses of recovery don't you know.-AM)

Because consumer spending accounted for 70 percent of the American economy since 2001, the speed and strength of a recovery may depend on how quickly Americans loosen their purse strings.

(May? I guess Bloomberg wants to hedge reality with upcoming government reporting. You're more miserable than we say you are? Prove it 'cause we got your stats right here. -AM)

Retail sales in August surged 2.7 percent, the largest monthly jump in three years, fueled in part by the government’s “cash-for-clunkers” auto-purchase program. August sales also probably benefited from sales-tax holidays that some areas offered back-to-school shoppers and may not signal a turning point, said Louis Crandall, chief economist at Wrightson ICAP LLC, a Jersey City, New Jersey-based research firm.

(Perhaps it did signal a turning point ... a complete and utter disregard of any fundamentals because this time it is different, 2003 on crank, the new paradigm of holding hands with the Federales. -AM)

“There are lots of reasons to expect consumer spending to remain soft,” Crandall said, citing rising unemployment and drops in home values and household wealth.

By 62-34 percent, Americans said high unemployment is a greater danger than inflation over the next two years.

(Dear Federales , you better ratchet up them communications if you wish to drag the leash of well anchored expectations past the deflationary beast . Reckon that y'all better be fixin' to make sure equities never go down. Ya hear? -AM)

Not to worry ... the Federales can always hand out gift cards

(And then claim the breakage as a gain in next year's budget. -AM)

Wall Street Journal

A recent survey by CIT Group Inc. of small and medium-sized companies found that about two-thirds of responding retailers foresee offering greater discounts this Christmas than in 2008. They also expect to stock less inventory, reflecting the 1% drop in business inventories in July from the prior month, to a seasonally adjusted $1.33 trillion, the Commerce Department reported Tuesday.

Despite the first gain in underlying retail sales in six months and a lift in positive consumer sentiment, retail sales are still 5.3% lower than a year earlier. And retail executives maintained a sober outlook for the coming months, according to a recent survey by BDO Seidman LLP, an accounting and consulting firm. Half of the 100 chief financial officers at leading U.S. retailers anticipate that total sales, as well as sales at stores open at least a year, an important measure of retail health, will decrease in the second half of 2009, compared with a year ago.

Tuesday, September 15, 2009

Resistance is futile

(For Ganniacs, time is more important than price. -AM)

By Jeff Cooper

Today is 90 degrees from 666
just as the March low was 90 degrees from 666.

We are 3 revolutions in price up from the 666 low PLUS
a 90 degree overshoot.

We are 540 degrees (true square or cube of 90 degrees X 6 sides) from the Bear Stearns shot over the bow of the USS Crisis.

Alulu Brother Kevin

"We will not go back to the days of reckless behavior and unchecked excess."
- President Barack Obama, speaking on "Financial Rescue and Reform" at Federal Hall in New York City, Sep. 14, 2009

"That's it; my days of reckless behavior and unchecked excess are over."
- Kevin Depew, speaking early in the morning to no one in particular on hundreds of separate occasions.

By Kevin Depew
via Minyanville

Not many Americans know this, but Wall Street is actually just a dead-end corridor of 1,500 feet carved like a small notch into the side of lower Manhattan. One end is capped by the East River, the other by Trinity Church. The dark, narrow length between is crowded by tall, stone buildings that send down shadows of such fierce certitude that you're sure no ray of sunlight has ever once dared to intrude; like some kind of fiscal Stonehenge.

It's possible to escape these shadows by no fewer than half a dozen side streets and alley openings, but there's no shaking the creeping uneasiness that something you can't quite comprehend is taking place all around you.

Of course, what passes for escape is nothing more than silent complicity. True deliverance from Wall Street comes only two ways -- the river or the church.

It's just past noon on a crystalline Monday in New York City, and even as he's standing inside Federal Hall on Wall Street and Nassau, nearer the church than the river, it's not quite clear President Barack Obama grasps this crucial point. The occasion is to mark the one-year anniversary of The Crisis, an ill-defined, loose-fitting moment that no one, not even the president, seems to be able to pin down.

The Wall Street Journal this morning neatly packaged everything into one box: The Crisis, a Year Later. Similarly, the New York Times is running with Financial Crisis: One Year Later. The Washington Post is Taking Stock.

And yet, paging through all these stories -- digital pile after digital pile of them -- it's still unclear what The Crisis means. No one even knows what tense to use when writing about it because no one is really sure if it's over, let alone when it started. As a result, we've resorted to creating a number of extraordinary myths to help explain to ourselves what has happened.

Before we get to The Anniversary itself, let's figure out what is The Crisis? Is it Lehman's collapse? Is it toxic mortgages? Is it housing? Is it lending? Is it credit? Is it debt? Is it regulation? Is it consumption? Is it financial engineering? The answer is, yes. It's all of those things.

And so this anniversary is really no anniversary at all; we're commemorating the wrong thing. In fact, the anniversary of The Crisis is one of the myths we've created to help explain to ourselves what it is that's happened -- ironically, while we go about doing more of the very things that caused it to happen in the first place.

This is not to say that the collapse of Lehman Brothers wasn't a significant event. It was. But it was a culminating crash of a wave that had been building for years, which brings us to one of the more widely perpetuated myths from no less of a source than the chairman of the Federal Reserve.

In a speech delivered before the London School of Economics last January, Federal Reserve Chairman Ben Bernanke outlined a subtly more in-depth and critical view of the origins of The Crisis than anything he had publicly stated previously.

According to Bernanke, although the subprime debacle triggered the crisis, the developments in the US mortgage market "were only one aspect of a much larger and more encompassing credit boom whose impact transcended the mortgage market to affect many other forms of credit." Indeed.

This view further explicates and builds on the one he first stated before the Economic Club of New York in October 2007. At that time, Bernanke, like many public finance officials, had just spent months and months prior to October 2007 describing the financial crisis as "well contained" to subprime lending; an isolated outlier of what, at that time, were routinely accepted as perfectly normal credit market conditions. Of course, by January of this year, Bernanke recognized it was far deeper than that.

In January, Bernanke admitted that the negative aspects of this "more encompassing credit boom" involved "widespread declines in underwriting standards, breakdowns in lending oversight by investors and rating agencies, increased reliance on complex and opaque credit instruments that proved fragile under stress, and unusually low compensation for risk-taking."

Naturally, Bernanke didn't take the next step and acknowledge that the Fed itself was a co-conspirator in the credit orgy, but at least he did back away from the earlier assertion that everything somehow hinged on subprime lending.

The reality is that subprime lending was the inevitable consequence of The Crisis, not the cause of it. (Poor always crack first. -AM)

Housing is just a manifestation of the long-running credit boom. It's the largest piece, true, but still, it is just one piece.

As the shadow inventory of houses -- those off the market as lenders who have foreclosed on them figure out how to proceed -- becomes apparent, the magnitude of this crisis as a debt crisis rather than a housing bubble will become more apparent.

When looking at household savings along with debt-to-income levels and debt-servicing ratios, things are actually a little more worrisome today than iduring the Great Depression. Unlike the Great Depression, when insolvency was largely concentrated among farming families and mortgages (which made up a very high percentage of the population), insolvency today is not only deeper and more pervasive, but far more difficult to engage from a policy standpoint precisely because of a lack of concentration in any one industry.

I suspect we will be able to look back in hindsight and view this present debtor insolvency (and oversupply of houses) in terms of a massive degree of over-consumption that was difficult to evaluate because we were actually living in it; a bit like trying to see the back of your head while staring into a mirror.

(Pay the man Shirley.-AM)

According to this myth, bailing out the financial system was a matter of practicality. Despite the fact that there are six billion people in the world, somehow we've come to believe that the tiny fraction who work in banking have made it impossible to live without them. Would it be difficult? For a few months, probably. But impossible? That's ridiculous on its face.

The globalization of finance and supposed diversification of the global financial and risk management industry was an appealing element of the credit boom. But today the apparent complexity of the financial system is used as a reason to prop up otherwise failed institutions.

You can build a hamburger with one ingredient -- ground beef -- or you can use 100, but in the end it is still just a hamburger. Our credit system has hundreds of ingredients these days, but it's still just a hamburger... one that's been doctored up with all of these fancy ingredients.

Think about it this way. The word credit comes from the Latin "credere," which means, literally, "to believe, or to trust." That is really all you need to know about the modern financial system. When the credere is gone, the whole thing unravels, and it works both ways, from lender to borrower, and from borrower to lender. This is why monetary and fiscal policies aren't working.

Credit is nothing but a belief. That belief, credere -- stretched to its limits by the policies of endless credit expansion -- was weakened to such an extent that it's developed what may be likened to an autoimmune disorder, a condition where the immune system mistakenly attacks itself, destroying even healthy body tissue in the process.

Under normal circumstances, without excessive credit expansion policies, the system's immunity defenses would attack and destroy the toxic substances -- such as subprime mortgages -- and leave the healthy tissue alone. However, the system now has turned on itself and is attacking healthy body tissues and toxins because it can no longer distinguish between the two.

Unfortunately, autoimmune disorders often results in the destruction of the body itself (the financial system), or abnormal growth of an organ (government and regulation) and/or changes in an organ's function (the banking system).

Finally, the most dangerous myth of all; that The Crisis itself has passed.

On one hand, government has the right to take credit for "the economic recovery;" it's totally responsible for it. I mean that. One hundred percent of global economic activity is due solely to fiscal stimulus. And according to Gluskin Sheff's David Rosenberg, an estimated 80% of world gross domestic product growth is due to government contribution.

Unfortunately, government intervention and support of credit markets has, to a large degree, been successful. Credit spreads have narrowed in unprecedented fashion from a year ago as credit buyers have fallen all over each other to buy corporate and government debt. Wait, what do I mean by unfortunately? Well, unfortunately, we're rapidly moving right back to the same place we were before the real issues facing us in The Crisis became apparent. In other words, all that has happened is that the doctor (the government) has been successful in treating the symptoms of the disease (failed institutions and widespread insolvency), but in doing so the disease itself (too much debt) has actually worsened.

Inevitably, there will come a point when the symptoms of the disease stop responding to treatment. About the Great Depression, someone once said, "Just when we thought it was over, it was really only beginning."

Saturday, September 12, 2009

VXX, Benjamin, VXX

(VXX is an exchange traded note and a proxy for VIX.

However, as in many of these tracking instruments, there is a 'time delay' or contango cost that can diminish performance over time whilst still capturing the trend if you can pick the turning point.

VXX is based off of the VIX futures, if the futures carry a premium over spot, the VXX can fall even as the VIX rises. -AM

Sept. 11 (Bloomberg) -- Odds of a U.S.-led “relapse” into global recession may be as high as one-in-three if any shock to the world’s biggest economy adds to depressed consumer demand, according to Stephen Roach of Morgan Stanley.

(You mean current depressed consumer demand isn't depressed enough? We'll see. -AM)

Economies emerging from recession need a “growth cushion” to avoid the possibility of a repeated slump, Roach, chairman of Morgan Stanley Asia, said in an interview in Dalian, China, yesterday, where he was attending a World Economic Forum event.

(They do ... 'my friend Harvey' statistics with chinese characteristics. -AM)

The consumer is still dead money, the consumer is not coming back,” Roach said. “I’d put the relapse odds one in four, maybe as high as one in three,” he said, referring to the danger of a renewed global slowdown stemming from a shock to the U.S. economy.

(Hold on a second.. let me if I can illustrate the 80/20 rule.

The US consumer and state/local government are about 80% of GDP. That's about 20% of world GDP. Is growth here? Bueller?

After the Federales have monetized all the cows what will be left to give milk? -AM

U.S. household incomes decreased in 2008 and the poverty rate rose to the highest since 1997, boosting concern that consumer spending will play a limited role in leading any recovery from the worst recession since the 1930s. Plunging home values and stock prices have fueled a record $13.9 trillion loss in household wealth in the U.S. since the middle of 2007.

The Federal Reserve this week said 11 of its 12 regional banks reported signs of a stable or improving economy in July and August, adding anecdotal evidence that the worst U.S. recession in seven decades is over. (Spin a din din. -AM)

The world’s largest economy contracted 1 percent from April through June, according to the Commerce Department. The drop was the fourth in a row, making it the longest contraction since quarterly records began in 1947.

Roach said that the “anemic” recovery in the U.S. will make the economy more vulnerable to shocks -- anything from storms to strikes (or time and price -AM) -- that could drag down global economic growth next year.

While he didn’t rule out the possibility of a relapse into recession, he said he wasn’t “calling for a double-dip because I’m not calling for a shock.”

(The shock will be if the NBER even calls this blip a recovery. A jobless recovery is an oxymoron. -AM)

“The recovery is going to be so anemic, especially in the U.S., that the economy on an underlying basis is going to be a lot closer to the stall speed than would be the case in a normal V-shaped recovery,” Roach said. “Stall-speed economies are risky economies because if you have one of these shocks out of the blue and you’re barely growing at the stall speed or a little bit faster, you can have a relapse pretty darned quickly.”

(When I think of stall speed I do think of a V shape. An upside down V that is. -AM)

Officials from the Group of 20 nations this month expressed caution on the world economic outlook and judged it premature to start unwinding record-low interest rates and about $2 trillion in fiscal stimulus.

(Hocus pocus of keeping those inflation expectations anchored. Guide the deflationary beast by the pied piper of appropriate communications. -AM)

Over the next three to five years, given the savings imperatives of the American household sector, I think that the growth rate is going to be cut in half,” Roach said, referring to U.S. consumption. “For export-led economies in China and elsewhere in the region, the biggest source of external demand is going to be growing at best, half the clip.”

(We have not made adjustments for this new level, this new normal. Half a clip perhaps but from a level that has not yet been determined. -AM)

Treasury Secretary Timothy Geithner on Sept. 9 said the U.S. savings rate climbed to an average of 5 percent during the second quarter of this year from 1.2 percent at the beginning of 2008.

(It could hit 20%. To quote the Boss

...Now main streets whitewashed windows and vacant stores
Seems like there aint nobody wants to come down here no more
Theyre closing down the textile mill across the railroad tracks
Foreman says these jobs are going boys and they aint coming back to
Your hometown... -AM