Revenge of the Squints

From this mornings' King Report

The American Banker: Revenge of the Accounting Authorities?

The Financial Accounting Standards Board took plenty of heat in April for loosening mark-to-market guidelines, a move that critics assailed as a gift to the financial industry and a nod to political pressures. The FASB's latest idea, however, if seen to completion, would go a long way toward silencing accusations that the rulemakers have gone soft on banks.

Under consideration: an unprecedented proposal to vastly widen the use of mark-to-market accounting, so that it becomes the default method for valuing financial instruments, including loans that banks plan to hold to maturity. If adopted, the rule could set off a new wave of writedowns at a time when investor confidence in banks is fragile at best.

(The SEC and FASB were on track or at least saying that they were on track {see below} to reduce the 'extreme complexity' of the current system prior to Representative Paul 'it would have been the end of our political system and economic systems as we know it' Kanjorski bludgeoned the squints into perpetuating mark to farce.

How will the Nancy Capitalists stop this?

Bray of Pigs versus Revenge of the Squints at the Federales multiplex. -AM)


Independent Commmunity Bankers of America
www.icba.org

Speaking at a national conference of the American Institute of Certified Public Accountants, the heads of the Securities and Exchange Commission and the Financial Accounting Standards Board discussed steps their organizations are taking to make accounting less complex.

SEC Chairman Christopher Cox said that the SEC, FASB and the Public Company Accounting Oversight Board are looking for ways to make accounting rules and their application more clear, straightforward and transparent. The current financial reporting system is the cumulative product of pressure from different constituencies, he said. While that is a strength, the complexity of modern financial transactions often calls for a detailed set of regulatory requirements. Over time, the resulting level of accounting detail has led to one of the current system's weaknesses, its extreme complexity, he said.

Both Cox and FASB Chairman Robert Herz summarized steps their organizations are taking. FASB is reassessing specific standards in major areas where rules fail to provide transparent information. FASB is working to pull together the existing literature to establish a single source for all GAAP material while trying to contain the growth of new pronouncements from multiple sources.

Herz said that the complexity of the current system provides fertile ground for structuring form-over-substance arrangements to obtain desired accounting outcomes. Complexity has also added to financial reporting costs and burdens, which fall disproportionately on small and private companies and their auditors, he said.

Cox also expressed concern about lack of competition for audit services for large companies. The "Big Four" firms audit 80% of all public companies in the U.S. and their audit clients account for 99% of all public company annual sales. Cox noted that there are many medium- and small-sized accounting firms that provide high quality audit services. He said that regulators have a stake in seeing that their rules promote, rather than restrict, competition in the audit industry.

Chairman Cox's speech is available at www.sec.gov; Chairman Herz's speech is available at www.fasb.org.

Oh where oh where has my little growth gone?

By Steve Matthews

Aug. 10 (Bloomberg) -- Declaring the U.S. recession over may take more than a year because of the risk that recent signs of stabilization will prove short-lived, according to the head of the group charged with making the call.

“We are serious about being sure that the apparent upturn is not just a part of a longer decline,” Robert Hall, who heads the National Bureau of Economic Research’s Business Cycle Dating Committee, said in an interview. The group will “wait for activity to surpass its previous peak,” which may take 18 months or more to determine, he said. (As Minyan Peter at Minyanville recently stated, it is going to be a living L. -AM)

Hall’s comments signal he’s less willing than other members of the committee to soon say the recession, which began in December 2007 and is the worst since the 1930s, has ceased. Fellow panel member Jeffrey Frankel last week said the smaller drop in employment and decline in the jobless rate indicated the slump may have ended in July.

“For an exceptionally deep recession, a longer waiting period makes sense,” Hall said. This time around, it is “more important” for the group to adhere to the principle of not calling an end to the recession until after economic growth has surpassed its previous peak, he said.

Declaring the 2001 downturn over was complicated by ongoing job losses, and that may happen again, Hall said. The group took until July 2003 to declare that slump had ended, 20 months after the fact. (And by the way the S&P gain since July 2003? About 2%. -AM)

Complicating a recovery call is the possibility that renewed declines in financial markets or home prices will cause the economy to shrink again, Harvard University economist Martin Feldstein, former head of the NBER and a member of the committee, said in an interview this month.

“There is a risk that we will have a couple good quarters and then suffer a temporary setback at the end of 2009 or start of 2010,” said Feldstein.

'We're Not Dead Yet' Mania

(The Cooper Report at Minyanville is a great daily read. -AM)

By Jeff Cooper
August 10, 2009
Cooper's Market Report

Mania (from the Greek “to rage, to be furious) is a condition characterized by extremely elevated mood alternating with episodes of major depression. Mania in an individual magnifies hope and desperation. Mania in a crowd is reinforced. The mind of a crowd can merge to form a way of thinking. Individual enthusiasm in a crowd is increased as a result.

The mass mind of the market is subject to contagion and control. Fear breeds fear; greed breeds greed; momentum begets momentum. An object once in motion will tend to stay in motion. The question that cannot be ignored is whether purposeful propaganda or a real change in the facts has set the object of mass psychology in motion.

The more market participants around us who are buying in response to the way the news is shaped, the more believable the story becomes, the more realistic a rally phase appears (and vice versa). It becomes difficult to distance ourselves from the beliefs of the crowd. The more prominence a story receives by the media, the more attracted market participants are to what may be a mass psychological trap. We tend to attract ourselves to things and people that may be the wrong decision in order to dispel a sense of uncertainty: any attachment, right or wrong, feels better than uncertainty and the unknown.

Volume hasn’t contracted like this since the summer of 1989. The fall of that year marked a swift selloff. When stocks explode higher on dwindling volume and suspect fundamentals, the risk of a collapse rises.

Market observer, Tyler Durden did the math and figures that the recent 50% explosion in the S&P had nothing to do with economic ‘recovery’, but was more of Fed shenanigans. Durden noticed that the money that’s been streaming into stocks hasn’t correspondingly depleted the money markets and states:

“Most interesting is the correlation between Money Market totals and the listed stock value since the March lows: a $2.7 trillion move in equities was accompanied by a less than $400 billion reduction in Money Market accounts! Where, may we ask, did the balance of $2.3 trillion in purchasing power come from? Why the Federal Reserve of course, which directly and indirectly subsidized U.S. banks (and foreign ones through liquidity swaps) for roughly that amount. Apparently these banks promptly went on a buying spree to raise the all important equity market, so that the U.S. consumer whose net equity was almost negative on March 31st, could have some semblance of confidence back and would go ahead and max out his credit card. Alas, as one can see in the money multiplier and velocity of money metrics, U.S. consumers couldn’t care less about leveraging themselves any more.”

Not this time. Been there done that in 2003. While Ben refuses to be the ‘Fed chief who will preside over the next Great Depression, and main-lines green shoots into the market while the consumer has either gone cold turkey or has collapsed veins.

Conclusion: Along with the jaws of declining volume versus sharply rising prices, CBOE put/call shows the highest level of bullishness on a down day in 2 ½ years. Sentiment readings reflect the highest level of bulls since the October 2007 peak.

Where did you go Joe?

The bullishtness of the July employment report was crafted by some one-offs, a million three in seasonal adj - did about the same in July 2008 - and the decline in the civilian participation rate of .2% which translates to 422,000 thousand jobs.

The MSM off-handedly suggests that if some of those folks are just 'taking the summer off' (sipping sarsaparillas no doubt) then they might add to the rolls in the fall.

Enquiring minds might wish to reflect upon the chart above for a few moments and consider where exactly did all these folks go - especially given annual population growth.

Shuffling through an old file I came across a comment from The Northern Trust Company here in Chicago from January 10,2006:

Noteworthy Aspects About the Participation Rate (2000-2005)

The labor force participation rate has dropped each year in the 2000-2004 period and held virtually steady in 2005. This is an atypical event because during economic recoveries the participation rate rises as more people enter the labor force. There is no conclusive research explaining the reasons for the downward trend...tentative conclusions are that increased enrollment in school in the group aged 16-24 and women aged 25-34 dropping out of the labor force for child rearing are the new events explaining the drop in the participation rate. Additional research and time will help to sort out this issue.

Well certainly time has passed, one wonders what research has wrought?

A: Not much but conjecture.

More folks in prison, more disability payments, less baby boomers ... not much in the way of a definitive explanation has been made as to why folks seem to keep on disappearing and never coming back (in aggregate and most especially if one considers population growth).

A breakdown by month this century can be had from:

http://data.bls.gov/PDQ/servlet/SurveyOutputServlet?data_tool=latest_numbers&series_id=LNS11300000

Look into the eyes of the Dragon, and despair...

(Will Chinese contraction be the point of recognition? -AM)

By Garry White
Published: 4:38PM BST 07 Aug 2009
telegraph.co.uk

Earlier this week Ian Ashby, head of iron ore at miner BHP Billiton, said at the Diggers & Dealers conference in Australia that Chinese restocking of iron ore was at an end.

Mr Ashby said that supplies at the country's ports were enough to sustain a month of consumption.

(Baltic Dry Index is droppin' like its' October '08, Grant reports that the BIC{Russia is too insolvent to spend}countries have private sector contraction band-aided by profligate public spending which can only work for a limited time, and China? ... How many pumps does the dragon have left before investors are dumped by yet another bubble? -AM)

Ask your doctor about indeflation ...

(Perhaps the most challenging prognostication one can make today : Inflation or deflation?

As I posted on November 25, 2008
Remember the movie, 'It's a mad,mad,mad, mad, mad world'?
At the end of the movie that generation's inglorious bastards were all gripping a fire ladder as the motor blew up and the ladder lurched viciously throwing them 'akimbo'.
The vicious movements from left (inflation) to right (deflation) best mirror our market action.
We are at the cusp of being at the most volatile period (per volatility indexes) ever. As in ever since we've had a stock market.
This volatility is mostly driven by shifting perceptions of inflation and deflation.
The compression of time frames within which this inflation/deflation switch gets flipped on and off can only result in one name for our current economic malaise : Indeflation.

Now about 9 months later my gut feeling is still yes to both. In the absence of any meaningful 'reform' , which of course we will recognize once we, like pornography, 'see it' ... it is likely we will lurch from deflationary scares (Great Recession or Late Depression?) to inflationary bullishtness (pay no attention to the value of the dollar in your pocket).

Every member of the bloggenklatura has a few voices they follow on a regular basis. My list includes Marc Faber, James Grant, Bill Fleckenstein, David Rosenberg, Kevin Depew, Bill King and Todd Harrison.

Of these folks perhaps the most adamant in suggesting that we face a hyperflationary future is Faber. Grant is unsure whether we have deflation first but is confident inflation will follow. Fleck is convinced the deflationary shock is over and inflation is inevitable. Rosenberg, King, Depew and Harrison all articulate the
balancing act between these forces : Rosenberg and King sticklers for facts over market fantasy and cognizant of lessons from previous cycles with Harrison and especially Depew anticipating a 'point of recognition', i.e., this ain't your fathers' recession before the bonds and/or the dollar get smashed.

Present within all of these worldviews is the argument that the U.S. government will default on their obligations either through selective default perhaps (lookin' at you Franron), a seismic shift (dragon bonds et. al) or the 'pernicious' default of inflation.

Below however is a counter-argument to the debt-inflation gospel from UBS economist Paul Donovan. As mentioned Faber is the most adamant that we face a hyperflationary future ... a conclusion that seems less preposterous when considering Donovan's note below: -AM)

Via FT Alphaville:

While most investors today acknowledge that deflation is likely to be a feature for the OECD economies during the second half of 2009, inflation pessimists cling resolutely to the belief that inflation will inevitably return. “Fiscal deficits are rising dramatically” goes the argument. “Governments will have to create inflation to reduce debt:GDP ratios, as they have done in the past.”

The problem with the idea of governments inflating their way out of a debt burden is that it does not work. Absent episodes of hyper-inflation, it is a strategy that has never worked.Government debt: GDP burdens tend to be positively correlated with inflation. Market mythology has created the idea that inflation will help reduce government debt ratios. The facts do not support the myth. OECD government debt rises as inflation rises. Meaningful reductions in government debt will require a low inflation future.

The fundamental obstacle to governments eroding their debt through inflation is the duration of the government debt portfolio. If all outstanding debt had ten years before it matured, then governments could inflate their way out of the debt burden. Inflation would ravage bond holders, and governments (with no need to roll over existing debt for a decade) could create inflation with impunity, secure in the knowledge that existing bond holders could do nothing to punish them. In the real world, of course, governments roll over their debt on a very frequent basis. As a result, governments are vulnerable to higher debt service costs if market interest rates change. If markets move to price in the consequence of higher inflation by raising nominal interest rates, then the debt service cost will rise and increase the debt. Thus a period of high inflation will tend to raise both the numerator and the denominator of the debt:GDP ratio.

The idea that governments can readily inflate their way out of their debt problems is a misnomer — arising, perhaps, from confusion between the fate of the individual bondholder and the response of the collective market. An individual holder of a long duration bond will lose out as a result of inflation. However, modern governments can not rely on markets to remain collectively indifferent to inflation. Inflation will raise the nominal cost of borrowing (of course) but through the inflation uncertainty risk premium it will also add to the real cost of borrowing.

The higher debt service cost becomes a problem for a government that is pursuing an inflation strategy because government debt does have to be rolled over. Unless a government is willing to pursue hyper-inflation as a strategy, raising inflation will not reduce the government debt burden. Indeed, history indicates that the reverse result will be achieved.

(Hence the Faber thesis that they will ultimately end up hyper-inflating ... -AM)

Indy ... the fire is going out

http://www.trivisonno.com/withholding-taxes-chart