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When the Music Stops

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Forget about all that talk concerning the Mayan calendar and December 21, 2012.  The date you should be worried about is January 1, 2013.  I’ve been reading so much about it that I decided to try a Google search using “January 1, 2013” to see what results would appear.  Sure enough – the fifth item on the list was an article from Peter Coy at Bloomberg BusinessWeek entitled, “The End Is Coming:  January 1, 2013”.  The theme of that piece is best summarized in the following passage:

With the attention of the political class fixated on the presidential campaign, Washington is in danger of getting caught in a suffocating fiscal bind.  If Congress does nothing between now and January to change the course of policy, a combination of mandatory spending reductions and expiring tax cuts will kick in – depriving the economy of oxygen and imperiling a recovery likely to remain fragile through the end of 2012.  Congress could inadvertently send the U.S. economy hurtling over what Federal Reserve Chairman Ben Bernanke recently called a “massive fiscal cliff of large spending cuts and tax increases.”

Peter Coy’s take on this impending crisis seemed a bit optimistic to me.  My perspective on the New Year’s Meltdown had been previously shaped by a great essay from the folks at Comstock Partners.  The Comstock explanation was particularly convincing because it focused on the effects of the Federal Reserve’s quantitative easing programs, emphasizing what many commentators describe as the Fed’s “Third Mandate”:  keeping the stock market inflated.  Beyond that, Comstock pointed out the absurdity of that cherished belief held by the magical-thinking, rose-colored glasses crowd:  the Fed is about to introduce another round of quantitative easing (QE 3).  Here is Comstock’s dose of common sense:

A growing number of indicators suggest that the market is running out of steam.  Equities have been in a temporary sweet spot where investors have been factoring in a self-sustaining U.S. economic recovery while also anticipating the imminent institution of QE3.  This is a contradiction.  If the economy were indeed as strong as they say, we wouldn’t need QE3.  The fact that market observers eagerly look forward toward the possibility of QE3 is itself an indication that the economy is weaker than they think.  We can have one or the other, but we can’t have both.

After two rounds of quantitative easing – followed by “operation twist” – the smart people are warning the rest of us about what is likely to happen when the music finally stops.  Here is Comstock’s admonition:

The economy is also facing the so-called “fiscal cliff” beginning on January 1, 2013.  This includes expiration of the Bush tax cuts, the payroll tax cuts, emergency unemployment benefits and the sequester.  Various estimates placed the hit to GDP as being anywhere between 2% and 3.5%, a number that would probably throw the economy into recession, if it isn’t already in one before then.  At about that time we will also be hitting the debt limit once again.   U.S. economic growth will also be hampered by recession in Europe and decreasing growth and a possible hard landing in China.

Technically, all of the good news seems to have been discounted by the market rally of the last three years and the last few months.  The market is heavily overbought, sentiment is extremely high, daily new highs are falling and volume is both low and declining.  In our view the odds of a significant decline are high.

Charles Biderman is the founder and Chief Executive Officer of TrimTabs Investment Research.  He was recently interviewed by Chris Martenson.  Biderman’s primary theme concerned the Federal Reserve’s “rigging” of the stock market through its quantitative easing programs, which have steered so much money into stocks that stock prices have now become a “function of liquidity” rather than fundamental value.  Biderman estimated that the Fed’s liquidity pump has fed the stock market “$1.8 billion per day since August”.  He does not believe this story will have a happy ending:

In January of ’10, I went on CNBC and on Bloomberg and said that there is no money coming into stocks, and yet the stock market keeps going up.  The law of supply and demand still exists and for stock prices to go up, there has to be more money buying those shares.  There is no other way in aggregate that that could happen.

So I said it has to be coming from the government.  And everybody thought I was a lunatic, conspiracy theorist, whatever.  And then lo and behold, on October of 2011, Mr. Bernanke then says officially, that the purpose of QE1 and QE2 is to raise asset prices.  And if I remember correctly, equities are an asset, and bonds are an asset.

So asset prices have gone up as the Fed has been manipulating the market. At the same time as the economy is not growing (or not growing very fast).

*   *   *

At some point, the world is going to recognize the Emperor is naked. The only question is when.

Will it be this year?  I do not think it will be before the election, I think there is too much vested interest in keeping things rosy and positive.

One of my favorite economists is John Hussman of the Hussman Funds.  In his most recent Weekly Market Comment, Dr. Hussman warned us that the “music” must eventually stop:

What remains then is a fairly simple assertion:  the primary way to boost corporate profits to abnormally high – but unsustainable – levels is for the government and the household sector to both spend beyond their means at the same time.

*   *   *

The conclusion is straightforward.  The hope for continued high profit margins really comes down to the hope that government and the household sector will both continue along unsustainable spending trajectories indefinitely.  Conversely, any deleveraging of presently debt-heavy government and household balance sheets will predictably create a sustained retreat in corporate profit margins.  With the ratio of corporate profits to GDP now about 70% above the historical norm, driven by a federal deficit in excess of 8% of GDP and a deeply depressed household saving rate, we view Wall Street’s embedded assumption of a permanently high plateau in profit margins as myopic.

Will January 1, 2013 be the day when the world realizes that “the Emperor is naked”?  Will the American economy fall off the “massive fiscal cliff of large spending cuts and tax increases” eleven days after the end of the Mayan calendar?  When we wake-up with our annual New Year’s Hangover on January 1 – will we all regret not having followed the example set by those Doomsday Preppers on the National Geographic Channel?

Get your “bug-out bag” ready!  You still have nine months!


 

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Obama On The Ropes

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You’ve been reading it everywhere and hearing it from scores of TV pundits:  The ongoing economic crisis could destroy President Obama’s hopes for a second term.  In a recent interview with Alexander Bolton of The Hill, former Democratic National Committee chairman, Howard Dean warned that the economy is so bad that even Sarah Palin could defeat Barack Obama in 2012.  Dean’s statement was unequivocal:  “I think she could win.”

I no longer feel guilty about writing so many “I told you so” pieces about Obama’s failure to heed sane economic advice since the beginning of his term in the White House.  A chorus of commentators has begun singing that same tune.  In July of 2009, I wrote a piece entitled, “The Second Stimulus”, wherein I predicted that our new President would realize that his economic stimulus program was inadequate because he followed the advice from the wrong people.  After quoting the criticisms of a few economists who warned (in January and February of 2009) that the proposed stimulus would be insufficient, I said this:

Despite all these warnings, as well as a Bloomberg survey conducted in early February, revealing the opinions of economists that the stimulus would be inadequate to avert a two-percent economic contraction in 2009, the President stuck with the $787 billion plan.  He is now in the uncomfortable position of figuring out how and when he can roll out a second stimulus proposal.

President Obama should have done it right the first time.  His penchant for compromise – simply for the sake of compromise itself – is bound to bite him in the ass on this issue, as it surely will on health care reform – should he abandon the “public option”.  The new President made the mistake of assuming that if he established a reputation for being flexible, his opposition would be flexible in return.  The voting public will perceive this as weak leadership.

Stephanie Kelton recently provided us with an interesting reminiscence of that fateful time, in a piece she published on William Black’s New Economic Perspectives website:

Some of us saw this coming.  For example, Jamie Galbraith and Robert Reich warned, on a panel I organized in January 2009, that the stimulus package needed to be at least $1.3 trillion in order to create the conditions for a sustainable recovery.  Anything shy of that, they worried, would fail to sufficiently improve the economy, making Keynesian economics the subject of ridicule and scorn.

*   *   *

In July 2009, I wrote a post entitled, “Gift-Wrapping the White House for the GOP.” In it, I said:

“If President Obama wants a second term, he must join the growing chorus of voices calling for another stimulus and press forward with an ambitious program to create jobs and halt the foreclosure crisis.”

With the recent announcement of Austan Goolsbee’s planned departure from his brief stint as chairman of the Council of Economic Advisers, much has been written about Obama’s constant rejection of the “dissenting opinions” voiced by members of the President’s economics team, such as those expressed by Goolsbee and his predecessor, Christina Romer.  Obama chose, instead, to paint himself into a corner by following the misguided advice of Larry Summers and “Turbo” Tim Geithner.  Ezra Klein of The Washington Post recently published some excerpts from a speech (pdf) delivered by Professor Romer at Stanford University in May of 2011.  At one point, she provided a glimpse of the acrimony, which often arose at meetings of the President’s economics team:

Like the Federal Reserve, the Administration and Congress should have done more in the fall of 2009 and early 2010 to aid the recovery.  I remember that fall of 2009 as a very frustrating one.  It was very clear to me that the economy was still struggling, but the will to do more to help it had died.

There was a definite split among the economics team about whether we should push for more fiscal stimulus, or switch our focus to the deficit.  A number of us tried to make the case that more action was desperately needed and would be effective.  Normally, meetings with the President were very friendly and free-wheeling.  He likes to hear both sides of an issue argued passionately.  But, about the fourth time we had the same argument over more stimulus in front of him, he had clearly had enough.  As luck would have it, the next day, a reporter asked him if he ever lost his temper.  He replied, “Yes, I let my economics team have it just yesterday.”

By May of 2010, even Larry Summers was discussing the need for further economic stimulus measures, which I discussed in a piece entitled, “I Knew This Would Happen”.  Unfortunately, most of the remedies suggested at that time were never enacted – and those that were undertaken, fell short of the desired goal.  Nevertheless, Larry Summers is back at it again, proposing a new round of stimulus measures, likely due to concern that Obama’s adherence to Summers’ failed economic policies could lead to the President’s defeat in 2012.  Jeff Mason and Caren Bohan of Reuters reported that Summers has proposed a $200 billion payroll tax program and a $100 billion infrastructure spending program, which would take place over the next few years.  The Reuters piece also supported the contention that by 2010, Summers had turned away from the Dark Side and aligned himself with Romer in opposing Peter Orszag (who eventually took that controversial spin through the “revolving door” to join Citigroup):

During much of 2010, Obama’s economic advisers wrestled with a debate over whether to shift toward deficit reduction or pursue further fiscal stimulus.

Summers and former White House economist Christina Romer were in the camp arguing that the recession that followed the financial markets meltdown of 2008-2009 was a unique event that required aggressive stimulus to avoid a long period of stagnation similar to Japan’s “lost decade” of the 1990s.

Former White House budget director Peter Orszag was among those who cautioned against a further big stimulus, warning of the need to be mindful of ballooning budget deficits.

By the time voters head to the polls for the next Presidential election, we will be in Year Four of our own “lost decade”.  Accordingly, President Obama’s new “Jobs Czar” – General Electric CEO, Jeffrey Immelt – is busy discussing new plans, which will be destined to go up in smoke when Congressional Republicans exploit the opportunity to maintain the dismal status quo until the day arrives when disgruntled voters can elect President Palin.  Barack Obama is probably suffering from some awful nightmares about that possibility.


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Federal Reserve Bailout Records Provoke Limited Outrage

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On December 3, 2009 I wrote a piece entitled, “The Legacy of Mark Pittman”.  Mark Pittman was the reporter at Bloomberg News whose work was responsible for the lawsuit, brought under the Freedom of Information Act, against the Federal Reserve, seeking disclosure of the identities of those financial firms benefiting from the Fed’s eleven emergency lending programs.

The suit, Bloomberg LP v. Board of Governors of the Federal Reserve System, 08-CV-9595, (U.S. District Court, Southern District of New York) resulted in a ruling in August of 2009 by Judge Loretta Preska, who rejected the Fed’s defense that disclosure would adversely affect the ability of those institutions (which sought loans at the Fed’s discount window) to compete for business.  The suit also sought disclosure of the amounts loaned to those institutions as well as the assets put up as collateral under the Fed’s eleven lending programs, created in response to the financial crisis.  The Federal Reserve appealed Judge Preska’s decision, taking the matter before the United States Court of Appeals for the Second Circuit.  The Fed’s appeal was based on Exemption 4 of the Freedom of Information Act, which exempts trade secrets and confidential business information from mandatory disclosure.  The Second Circuit affirmed Judge Preska’s decision on the basis that the records sought were neither trade secrets nor confidential business information because Bloomberg requested only records generated by the Fed concerning loans that were actually made, rather than applications or confidential information provided by persons, firms or other organizations in attempt to obtain loans.  Although the Fed did not attempt to appeal the Second Circuit’s decision to the United States Supreme Court, a petition was filed with the Supreme Court by Clearing House Association LLC, a coalition of banks that received bailout funds.  The petition was denied by the Supreme Court on March 21.

Bob Ivry of Bloomberg News had this to say about the documents produced by the Fed as a result of the suit:

The 29,000 pages of documents, which the Fed released in pdf format on a CD-ROM, revealed that foreign banks accounted for at least 70 percent of the Fed’s lending at its October, 2008 peak of $110.7 billion.  Arab Banking Corp., a lender part- owned by the Central Bank of Libya, used a New York branch to get 73 loans from the window in the 18 months after Lehman Brothers Holdings Inc. collapsed.

As government officials and news reporters continue to review the documents, a restrained degree of outrage is developing.  Ron Paul is the Chairman of the House Financial Services Subcommittee on Domestic Monetary Policy.  He is also a longtime adversary of the Federal Reserve, and author of the book, End The Fed.  A recent report by Peter Barnes of FoxBusiness.com said this about Congressman Paul:

.   .   .   he plans to hold hearings in May on disclosures that the Fed made billions — perhaps trillions — in secret emergency loans to almost every major bank in the U.S. and overseas during the financial crisis.

*   *   *

“I am, even with all my cynicism, still shocked at the amount this is and of course shocked, but not completely surprised, [that] much [of] this money went to help foreign banks,” said Rep. Ron Paul (R-TX),   .   .   .  “I don’t have [any] plan [for] legislation …  It will take awhile to dissect that out, to find out exactly who benefitted and why.”

In light of the fact that Congressman Paul is considering another run for the Presidency, we can expect some exciting hearings starring Ben Bernanke.

Senator Bernie Sanders of Vermont became an unlikely ally of Ron Paul in their battle to include an “Audit the Fed” provision in the financial reform bill.  Senator Sanders was among the many Americans who were stunned to learn that Arab Banking Corporation used a New York branch to get 73 loans from the Fed during the 18 months after the collapse of Lehman Brothers.  The infuriating factoid in this scenario is apparent in the following passage from the Bloomberg report by Bob Ivry and Donal Griffin:

The bank, then 29 percent-owned by the Libyan state, had aggregate borrowings in that period of $35 billion — while the largest single loan amount outstanding was $1.2 billion in July 2009, according to Fed data released yesterday.  In October 2008, when lending to financial institutions by the central bank’s so- called discount window peaked at $111 billion, Arab Banking took repeated loans totaling more than $2 billion.

Ivry and Griffin provided this reaction from Bernie Sanders:

“It is incomprehensible to me that while creditworthy small businesses in Vermont and throughout the country could not receive affordable loans, the Federal Reserve was providing tens of billions of dollars in credit to a bank that is substantially owned by the Central Bank of Libya,” Senator Bernard Sanders of Vermont, an independent who caucuses with Democrats, wrote in a letter to Fed and U.S. officials.

The best critique of the Fed’s bailout antics came from Rolling Stone’s Matt Taibbi.  He began his report this way:

After the financial crash of 2008, it grew to monstrous dimensions, as the government attempted to unfreeze the credit markets by handing out trillions to banks and hedge funds.  And thanks to a whole galaxy of obscure, acronym-laden bailout programs, it eventually rivaled the “official” budget in size – a huge roaring river of cash flowing out of the Federal Reserve to destinations neither chosen by the president nor reviewed by Congress, but instead handed out by fiat by unelected Fed officials using a seemingly nonsensical and apparently unknowable methodology.

As Matt Taibbi began discussing what the documents produced by the Fed revealed, he shared this reaction from a staffer, tasked to review the records for Senator Sanders:

“Our jaws are literally dropping as we’re reading this,” says Warren Gunnels, an aide to Sen. Bernie Sanders of Vermont.  “Every one of these transactions is outrageous.”

In case you are wondering just how “outrageous” these transactions were, Mr. Taibbi provided an outrageously entertaining chronicle of a venture named “Waterfall TALF Opportunity”, whose principal investors were Christy Mack and Susan Karches.  Susan Karches is the widow of Peter Karches, former president of Morgan Stanley’s investment banking operations.  Christy Mack is the wife of John Mack, the chairman of Morgan Stanley.  Matt Taibbi described Christy Mack as “thin, blond and rich – a sort of still-awake Sunny von Bulow with hobbies”.  Here is how he described Waterfall TALF:

The technical name of the program that Mack and Karches took advantage of is TALF, short for Term Asset-Backed Securities Loan Facility.  But the federal aid they received actually falls under a broader category of bailout initiatives, designed and perfected by Federal Reserve chief Ben Bernanke and Treasury Secretary Timothy Geithner, called “giving already stinking rich people gobs of money for no fucking reason at all.”  If you want to learn how the shadow budget works, follow along.  This is what welfare for the rich looks like.

The venture would have been more aptly-named, “TALF Exploitation Windfall Opportunity”.  Think about it:  the Mack-Karches entity was contrived for the specific purpose of cashing-in on a bailout program, which was ostensibly created for the purpose of preventing a consumer credit freeze.

I was anticipating that the documents withheld by the Federal Reserve were being suppressed because – if the public ever saw them – they would provoke an uncontrollable degree of public outrage.  So far, the amount of attention these revelations have received from the mainstream media has been surprisingly minimal.  When one compares the massive amounts squandered by the Fed on Crony Corporate Welfare Queens such as Christy Mack and Susan Karches ($220 million loaned at a fraction of a percentage point) along with the multibillion-dollar giveaways (e.g. $13 billion to Goldman Sachs by way of Maiden Lane III) the fighting over items in the 2012 budget seems trivial.

The Fed’s defense of its lending to foreign banks was explained on the New York Fed’s spiffy new Liberty Street blog:

Discount window lending to U.S. branches of foreign banks and dollar funding by branches to parent banks helped to mitigate the economic impact of the crisis in the United States and abroad by containing financial market disruptions, supporting loan availability for companies, and maintaining foreign investment flows into U.S. companies and assets.

Without the backstop liquidity provided by the discount window, foreign banks that faced large and fluctuating demand for dollar funding would have further driven up the level and volatility of money market interest rates, including the critical federal funds rate, the Eurodollar rate, and Libor (the London interbank offered rate).  Higher rates and volatility would have increased distress for U.S. financial firms and U.S. businesses that depend on money market funding.  These pressures would have been reflected in higher interest rates and reduced bank lending, bank credit lines, and commercial paper in the United States.  Moreover, further volatility in dollar funding markets could have disrupted the Federal Reserve’s ability to implement monetary policy, which requires stabilizing the federal funds rate at the policy target set by the Federal Open Market Committee.

In other words:  Failure by the Fed to provide loans to foreign banks would have made quantitative easing impossible.  There would have been no POMO auctions.  As a result, there would have been no supply of freshly printed-up money to be used by the proprietary trading desks of the primary dealers to ramp-up the stock market for those “late-day rallies”.  This process was described as the “POMO effect” in a 2009 paper by Precision Capital Management entitled, “A Grand Unified Theory of Market Manipulation”.

Thanks for the explanation, Mr. Dudley.


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The Weakest Link

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November 2, 2009

Everything was supposed to be getting “back to normal” by now.  Since late July, we’ve been hearing that the recession is over.  When the Gross Domestic Product number for the third quarter was released on Thursday, we again heard the ejaculations of enthusiasm from those insisting that the recession has ended.  Investors were willing to overlook the most recent estimate that another 531,000 jobs were lost during the month of October, so the stock market got a boost.  Nevertheless, as was widely reported, the Cash for Clunkers program added 1.66 percent to the 3.5 percent Gross Domestic Product annualized rate increase.  Since Cash for Clunkers was a short-lived event, something else will be necessary to fill its place, stimulating economic activity.  Once that sobering aspect of the story was absorbed, Friday morning’s news informed us that consumer spending had dropped for the first time in five months.  The Associated Press provided this report:

Economists worry that the recovery could falter in coming months if households cut back on spending to cope with rising unemployment, heavy debt loads and tight credit conditions.

“With incomes so soft, increased spending will be a struggle,” Ian Shepherdson, chief U.S.economist at High Frequency Economics, wrote in a note to clients.

The Commerce Department said Friday that spending dropped 0.5% in September, the first decline in five months.  Personal incomes were unchanged as workers contend with rising unemployment.  Wages and salaries fell 0.2%, erasing a 0.2% gain in August.

Another report showed that employers face little pressure to raise pay, even as the economy recovers.  The weak labor market makes it difficult for people with jobs to demand higher pay and benefits.

*   *   *

. . .  some economists believe that consumer spending will slow sharply in the current quarter, lowering GDP growth to perhaps 1.5%.  Analysts said the risk of a double-dip recession cannot be ruled out over the next year.

With unemployment as bad as it is, those who have jobs need to be mindful of the Sword of Damocles, as it hangs perilously over their heads.  As the AP report indicated, employers are now in an ideal position to exploit their work force.  Worse yet, as Mish pointed out:

Personal income decreased $15.5 billion (0.5 percent), while real disposable personal income decreased 3.4 percent, in contrast to an increase of 3.8 percent last quarter. Those are horrible numbers.

The war on the American consumer finally bit Wall Street in the ass on Friday when the S&P 500 index took a 2.8 percent nosedive.  When mass layoffs become the magic solution to make dismal corporate earnings reports appear positive, when the consumer is treated as a chump by regulatory agencies, lobbyists and government leaders, the consumer stops fulfilling the designated role of consuming.  When that happens, the economy stands still.  As Renae Merle reported for The Washington Post:

“The government handed the ball off to the consumer and the consumer fell on it,” said Robert G. Smith, chairman of Smith Affiliated Capital in New York. “This is a function of there being no jobs and wages going lower.”

The sell-off on the stock market also reflected a report released Friday showing a decline in consumer sentiment this month, analysts said.  The Reuters/University of Michigan consumer sentiment index fell to 70.6 in October, compared with 73.5 in September.

Rich Miller of Bloomberg News discussed the resulting apprehension experienced by investors:

Only 31 percent of respondents to a poll of investors and analysts who are Bloomberg subscribers in the U.S., Europe and Asia see investment opportunities, down from 35 percent in the previous survey in July.  Almost 40 percent in the latest quarterly survey, the Bloomberg Global Poll, say they are still hunkering down.  U.S. investors are even more cautious, with more than 50 percent saying they are in a defensive crouch.

*   *   *

Worldwide, investors and analysts now view the U.S. as the weak link in the global economy, with its markets seen as among the riskiest by a plurality of those surveyed.  One in four respondents expects an unemployment rate of 11 percent or more a year from now, compared with a U.S. administration forecast of 9.7 percent.  The jobless rate now is 9.8 percent, a 26-year high.

Even before the release of “good news” on Thursday followed by Friday’s bad news, stock analysts who base their trading decisions primarily on reading charts, could detect indications of continuing market decline, as Michael Kahn explained for Barron’s last Wednesday.

Meanwhile, the Obama administration’s response to the economic crisis continues to generate criticism from across the political spectrum while breeding dissent from within.  As I said last month, the administration’s current strategy is a clear breach of candidate Obama’s campaign promise of “no more trickle-down economics”.  The widespread opposition to the administration’s proposed legislation to regulate (read that: placate) large financial companies was discussed by Stephen Labaton for The New York Times:

Senior regulators and some lawmakers clashed once again with the Obama administration on Thursday, finding fault with central elements of the White House’s latest plan to unwind large financial companies when their troubles imperil the financial system.

The Times article focused on criticism of the administration’s plan, expressed by Sheila Bair, chairwoman of the Federal Deposit Insurance Corporation.  As Mr.Labaton noted, shortly after Mr. Obama was elected President, Turbo Tim Geithner began an unsuccessful campaign to have Ms. Bair replaced.

On Friday, economist James K. Galbraith was interviewed by Bill Moyers.  Here’s what Professor Galbraith had to say about the Obama administration’s response to the economic crisis:

They made a start, and certainly in the stimulus package, there were important initiatives.  But the stimulus package is framed as a stimulus, as something which is temporary, which will go away after a couple of years.  And that is not the way to proceed here.  The overwhelming emphasis, in the administration’s program, I think, has been to return things to a condition of normalcy, to use a 1920s word, that prevailed five and ten years ago.  That is to say, we’re back to a world in which Wall Street and the major banks are leading, and setting the path–

*   *   *

. . . they’ve largely been preoccupied with keeping the existing system from collapsing.  And the government is powerful.  It has substantially succeeded at that, but you really have to think about, do you want to have a financial sector dominated by a small number of very large institutions, very difficult to manage, practically impossible to regulate, and ruled by, essentially, the same people and the same culture that caused the crisis in the first place.

BILL MOYERS:  Well, that’s what we’re getting, because after all of the mergers, shakedowns, losses of the last year, you have five monster financial institutions really driving the system, right?

JAMES GALBRAITH:  And they’re highly profitable, and they are already paying, in some cases, extraordinary bonuses.  And you have an enormous problem, as the public sees very clearly that a very small number of people really have been kept afloat by public action .  And yet there is no visible benefit to people who are looking for jobs or people who are looking to try and save their houses or to somehow get out of a catastrophic personal debt situation that they’re in.

This is just another illustration of how “trickle down economics” doesn’t work.  President Obama knows better.  He told us that he would not follow that path.  Yet, here we are:  a country viewed as the weak link in the global economy because the well-being of those institutions considered “too big to fail” is the paramount concern of this administration.



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Pay Close Attention To This Man

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January 11, 2009

For several years, I have enjoyed following MSN’s Strategy Lab competition.  Strategy Lab is a stock-picking challenge.  They select six contestants: some seasoned professionals, some amateurs and occasionally, one of their own pundits.  Each contestant manages a mock, $100,000 portfolio for a six-month period.  Sometimes, the amateur will out-play the pros.  I always enjoy it when the “conventional wisdom” followed by the investing herd is proven wrong by a winning contestant, who ignores such dogma.

Our current economic situation requires original thinking.  Following the conventional wisdom during an unconventional economic crisis seems like a path to failure.  While checking in on the Strategy Lab website, I noticed an original thinker named Andrew Horowitz.  Mr. Horowitz is a contestant in the current Strategy Lab competition.  He is the only player who has made any money at all with his imaginary $100,000.  Andrew’s portfolio has earned him 13.44 percent as of Wednesday, January 21.  His competitors have been posting dismal results.  One of the regulars, John Reese (nicknamed “Guru Investor”) is down by 41.55 percent.  I think I’ll steer clear of his ashram.  The others currently have losses roughly equivalent to Andrew’s gains.

Andrew Horowitz is the president and founder of Horowitz & Co., an investment advisory firm serving individual and corporate clients since the late 1980’s.  He has written a book, entitled:  The Disciplined Investor.  It is focused on his experiences and what he has learned from twenty years in the investment advisory business.  He has been featured and quoted regularly in the media, including such publications as The Wall Street Journal, The Financial Times, Bloomberg, Barron’s and Reuters.  He also has a blog website with the same name as his book:  The Disciplined Investor.

His recent article for MSN caught my attention.  It is entitled:  “Why invest in this market anyway?” He began this journal entry discussing a “consider the source” approach to evaluating the advice given by those currently encouraging people to buy stocks now, while they are “cheap”.  His “where do we go from here” discussion resonated with my belief about where the stock market is headed:

The fourth-quarter earnings season kicked off with little fanfare last week and a great deal of bad news.  Many have asked if there is a light at the end of this tunnel.  My reply:  Sure there is, but it’s the headlights of a speeding 18-wheeler coming straight for us.  We have the choice of getting run over or stepping aside.

This is not a popular commentary.  I know that many investors would prefer to hear all about opportunities to make money on the “upside,” but until there is one shred of good news, I refuse to throw my hard-earned money into a bonfire just to watch it be incinerated.

Mr. Horowitz also made a point of emphasizing something we don’t hear often enough from those media darlings entrusted to preach the gospel of the brokerage firms:

With all the talk of change coming from our government officials, it is evident that if things continue down this path the only thing that will be left in our pockets is change.  It’s as if investors are waiting for something incredible and magical to be said, but there is only so much that words can accomplish.  Americans need action, assistance and reform in the banking system.

In an era when we are bombarded with investing advice from a multitude of “experts” appearing on television and all over the internet, it becomes difficult to distinguish a good signal from all of the noise.  One’s ability to give good investment advice in a bull market does not necessarily qualify that person to be a reliable advisor in the current milieu.  The performance by Andrew Horowitz in the Strategy Lab competition (so far) underscores the value of that old maxim:  “Money talks and bullshit walks”.  I’ll be paying close attention to what he has to say as we make our way through the treacherous economic times ahead.

The Home Stretch

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October 27, 2008

We are entering the final week of the longest Presidential campaign in our nation’s history.  At the same time, the world economy continues to flirt with chaos and our nation’s equities market indices are diving at a faster pace than Superman’s swooping down from the sky to save Lois Lane from a potential rapist.  Some stockbrokers believe that an abrupt and decisive nosedive in the markets might have a cathartic effect and finally bring us to the long-awaited “bottom”, from which there would be only one place to go:  up.  Rock musician Tom Petty wrote a song about the death of his mother, called: Free Fallin’.  That song has recently become the theme for America’s stock markets.  The situation has become so bad that many fear it may be necessary for the feds to suspend equities trading until all of the nervous investors and frenzied hedge fund managers have a chance to gather their wits.  Would the government really intervene and close the stock markets for a day or more?

There is one authority who earned quite a bit of “street cred” when our current economic crisis hit the fan.  He is Nouriel Roubini, an economist at the Stern School of Business at New York University.  He earned the nickname “Doctor Doom” when he spoke before the International Monetary Fund (IMF) on September 7, 2006 and described, in precise detail, exactly what would bring the financial world to its knees, two years later.  As reported by Ben Sills and Emma Ross-Thomas in the October 24 edition of Bloomberg:

Roubini said yesterday that policy makers may need to shut down financial markets for a week or two as investors dump assets. Trading in futures on the Standard & Poor’s 500 Index and the Dow Jones Industrial Average was limited today after declines of more than 6 percent.

This week brings us more earnings reports and new housing starts that could send already skittish investors (as well as terrified hedge fund managers) on a “panic selling” binge.  Could this trigger a market shutdown by the government as predicted by Dr. Roubini?  If so, we may find the markets closed for the final days before the Presidential election.  The Republicans and their media trumpet, Fox News, would likely seize upon such a development, characterizing it as validation of their claim that the investing public fears a “socialist” Obama Presidency.  In reality, there would be no way to measure the impact of the election results on the equities markets under such circumstances.  If the markets were kept closed until after the election, there would be quite a number of investors, chomping at the bit to dump their portfolios during the hiatus, ready to do so as soon as the markets re-opened.  On the other hand, Stuart Schweitzer, global market strategist at JP Morgan Private Bank appeared on the October 24 broadcast of the PBS program, Nightly Business Report, and explained what to really expect about the impact of the Presidential election on the securities markets.  Schweitzer believes that regardless of who is elected, once we get past Election Day, there will be a sense of certainty established as to who will be making economic policy going forward into the new Presidential term.  This fact in itself, regardless of what that economic policy might become, will eliminate the element of uncertainty that breeds some degree of the fear in the hearts of investors.

If the stock markets really end up being closed during the final days before the election, we would likely see more havoc than calming.  The timing would prove too irresistible for conspiracy theorists to ignore.  Some would see it as a plot by the Republicans to conceal how bad the economy really is.  Others might see it as a ploy by “Washington elites” (a term used by some in reference to Obama supporters) to conceal widespread fear of putting a “communist” in charge of our nation.  The smartest course from here would be for the Federal Reserve Board’s FOMC (Federal Open Market Committee) to undertake a responsible, public relations role when it meets on Tuesday.  They should be ready to explain to the public what has really been happening in the markets:  an unregulated species of investments called “hedge funds” has been causing mayhem on the trading floors.  Many (if not most) of these hedge funds are going broke and they are attempting to secure a place in the line for Federal bailout money.  They have caused equities trading to function more like eBay:  the only market movement that matters over the course of any given day is what takes place during the final three minutes before the closing bell, when the hedge fund managers dump stocks.  On eBay, the winning bid for an item is usually made during the minute before an auction ends.  Unlike eBay, the stock market numbers can go up or down.  These days, the index movement prior to the closing bell is usually seismic (in one direction or the other).   It was never like this before.  These trading patterns often trigger pre-established “stop loss orders” to sell stocks, usually established by individual investors upon purchase of those stocks.  The result is an avalanche of “sell” orders at the end of the day.  The FOMC needs to explain this disease to the public and let us know the Fed is working on a cure.  Closing the markets in the final days before a Presidential election will not be a cure.  Such a move will just create a scab that will quickly be picked away by an investing public that needs to ease up on the caffeine and go out for a walk.