April 22, 2010
Newsweek’s Daniel Gross is back at it again. His cover story for Newsweek’s April 9 issue is another attempt to make a preemptive strike at writing history. You may remember his cover story for the magazine’s July 25 issue, entitled: “The Recession Is Over”. During the eight months since the publication of that article, the sober-minded National Bureau of Economic Research, or NBER — which is charged with making the determination that a recession has ended – has yet to make such a proclamation.
The most recent cover story by Daniel Gross, “The Comeback Country” has drawn plenty of criticism. (The magazine cover used the headline “America’s Back” to introduce the piece.) At The Huffington Post, Dan Dorfman discussed the article with Olivier Garret, the CEO of Casey Research, an economic and investment consulting firm. Garret described the Newsweek cover story as “fantasy journalism” and he shared a number of observations with Dan Dorfman:
“You know when a magazine like Newsweek touts a bullish economic recovery on its cover, just the opposite is likely to be the case,” he says. “It sees superficial signs of improvement, but it’s ignoring the big picture.”
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Meanwhile, Garret sees additional signs of economic anguish. Among them: More foreclosures and delinquencies of real estate properties will plague construction spending; banks haven’t yet cleaned up their balance sheets; private debt is no longer going down as it did in 2009; both short and long term rates should be headed higher, and many companies, he says, tell him they’re reluctant to invest and hire.
He also sees some major corporate bankruptcies, worries about the country’s ability to repay its debt, looks for rising cost of capital, which should further slow the economy, and expects a spreading sovereign debt crisis.
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Many economists are projecting GDP growth in the range of 3% to 4% in the first quarter and similar growth for the entire year. Much too optimistic, Garret tells me. His outlook (which would clobber the stock market if he’s right): up 0.4%-0.5% in the first quarter after revisions and between 0% and 1% for all of 2010.
“Fantasy economies only work in the mind, not in real life,” he says.
Given his bleak economic outlook, Garret expects a major market adjustment, say about a 10% to 20% decline in stock prices over the next six months. He figures it could be triggered by one event, such as as an extension of the sovereign debt crisis.
David Cottle of The Wall Street Journal had this reaction to the Newsweek article:
Therefore, when you see a cover such as Newsweek’s recent effort, yelling “America’s Back” in no uncertain terms, it’s quite tempting to stock up on bonds, cash, tinned goods and ammunition.
Now, in fairness to the author, Daniel Goss, he makes the good point that the U.S. economy is growing at a clip that has consistently surprised gloomy forecasters. It is. The turnaround we’ve seen since Lehman Brothers imploded has been remarkable, if not entirely satisfying, he says, and he is quite right. At the very least, U.S. growth is all-too-predictably leaving the European version in the dust. Goss is also pretty upfront about the corners of the U.S. economy that have so far failed to keep up: job creation and the housing market being the most obvious.
However, the problem with all these ‘back to normal’ pieces, and Goss’s is only one of many creeping out as the sky resolutely fails to fall in, is that the ‘normal’ they want to go back to was, in reality, anything but.
The financial sector remains unreformed, the global economy remains dangerously unbalanced. The perilous highways that brought us to 2007 have not been sealed off in favor of straighter, if slower, roads. Of course it would be great for us all if America were ‘back’ and so we must hope Newsweek’s cover doesn’t join the ranks of those which cruel history renders unintentionally hilarious .
But back where? That’s the real question.
Meanwhile, the Pew Research Center has turned to Americans themselves to find out just how “back” America really is. This report from April 20 didn’t seem to resonate so well with the rosy picture painted by Daniel Gross:
Americans are united in the belief that the economy is in bad shape (92% give it a negative rating), and for many the repercussions are hitting close to home. Fully 70% of Americans say they have faced one or more job or financial-related problems in the past year, up from 59% in February 2009. Jobs have become difficult to find in local communities for 85% of Americans. A majority now says that someone in their household has been without a job or looking for work (54%); just 39% said this in February 2009. Only a quarter reports receiving a pay raise or a better job in the past year (24%), while almost an equal number say they have been laid off or lost a job (21%).
As economic conditions continue to deteriorate for middle-class Americans, the first few months of 2009 are already looking like “the good old days”. The “comeback” isn’t looking too good.
Too Cute By Half
April 29, 2010
On April 15, I discussed the disappointing performance of the Financial Crisis Inquiry Commission (FCIC). The vapid FCIC hearings have featured softball questions with no follow-up to the self-serving answers provided by the CEOs of those too-big–to-fail financial institutions.
In stark contrast to the FCIC hearings, Tuesday brought us the bipartisan assault on Goldman Sachs by the Senate Permanent Subcommittee on Investigations. Goldman’s most memorable representatives from that event were the four men described by Steven Pearlstein of The Washington Post as “The Fab Four”, apparently because the group’s most notorious member, Fabrice “Fabulous Fab” Tourre, has become the central focus of the SEC’s fraud suit against Goldman. Tourre’s fellow panel members were Daniel Sparks (former partner in charge of the mortgage department), Joshua Birnbaum (former managing director of Structured Products Group trading) and Michael Swenson (current managing director of Structured Products Group trading). The panel members were obviously over-prepared by their attorneys. Their obvious efforts at obfuscation turned the hearing into a public relations disaster for Goldman, destined to become a Saturday Night Live sketch. Although these guys were proud of their evasiveness, most commentators considered them too cute by half. The viewing public could not have been favorably impressed. Both The Washington Post’s Steven Pearlstein as well as Tunku Varadarajan of The Daily Beast provided negative critiques of the group’s testimony. On the other hand, it was a pleasure to see the Senators on the Subcommittee doing their job so well, cross-examining the hell out of those guys and not letting them get away with their rehearsed non-answers.
A frequently-repeated theme from all the Goldman witnesses who testified on Tuesday (including CEO Lloyd Bankfiend and CFO David Viniar) was that Goldman had been acting only as a “market maker” and therefore had no duty to inform its customers that Goldman had short positions on its own products, such as the Abacus-2007AC1 CDO. This assertion is completely disingenuous. When Goldman creates a product and sells it to its own customers, its role is not limited to that of “market-maker”. The “market-maker defense” was apparently created last summer, when Goldman was defending its “high-frequency trading” (HFT) activities on stock exchanges. In those situations, Goldman would be paid a small “rebate” (approximately one-half cent per trade) by the exchanges themselves to buy and sell stocks. The purpose of paying Goldman to make such trades (often selling a stock for the same price they paid for it) was to provide liquidity for the markets. As a result, retail (Ma and Pa) investors would not have to worry about getting stuck in a “roach motel” – not being able to get out once they got in – after buying a stock. That type of market-making bears no resemblance to the situations which were the focus of Tuesday’s hearing.
Coincidentally, Goldman’s involvement in high-frequency trading resulted in allegations that the firm was “front-running” its own customers. It was claimed that when a Goldman customer would send out a limit order, Goldman’s proprietary trading desk would buy the stock first, then resell it to the client at the high limit of the order. (Of course, Goldman denied front-running its clients.) The Zero Hedge website focused on the language of the disclaimer Goldman posted on its “GS360” portal. Zero Hedge found some language in the GS360 disclaimer which could arguably have been exploited to support an argument that the customer consented to Goldman’s front-running of the customer’s orders.
At Tuesday’s hearing, the Goldman witnesses were repeatedly questioned as to what, if any, duty the firm owed its clients who bought synthetic CDOs, such as Abacus. Alistair Barr of MarketWatch contended that the contradictory answers provided by the witnesses on that issue exposed internal disagreement at Goldman as to what duty the firm owed its customers. Kurt Brouwer of MarketWatch looked at the problem this way :
A more useful approach could involve looking at the language of the brokerage agreements in effect between Goldman and its clients. How did those contracts define Goldman’s duty to its own customers who purchased the synthetic CDOs that Goldman itself created? The answer to that question could reveal that Goldman Sachs might have more lawsuits to fear than the one brought by the SEC.