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More Favorable Reviews For Huntsman

December 5th, 2011 Posted in Uncategorized

Dec, 05 2011

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In my last posting, I focused on how Jon Huntsman has been the only Presidential candidate to present responsible ideas for regulating the financial industry (Obama included). Since that time, I have read a number of similarly favorable reactions from respected authorities and commentators who reviewed Huntsman’s proposals .

Simon Johnson is the former Chief Economist for the International Monetary Fund (IMF) from 2007-2008. He is currently the Ronald A. Kurtz Professor of Entrepreneurship at the MIT Sloan School of Management. At his Baseline Scenario blog, Professor Johnson posted the following comments in reaction to Jon Huntsman’s policy page on financial reform and Huntsman’s October 19 opinion piece for The Wall Street Journal:

More bailouts and the reinforcement of moral hazard – protecting bankers and other creditors against the downside of their mistakes – is the last thing that the world’s financial system needs. Yet this is also the main idea of the Obama administration. Treasury Secretary Tim Geithner told the Fiscal Times this week that European leaders “are going to have to move more quickly to put in place a strong firewall to help protect countries that are undertaking reforms,” meaning more bailouts. And this week we learned more about the underhand and undemocratic ways in which the Federal Reserve saved big banks last time around. (You should read Ron Suskind’s book, Confidence Men: Wall Street, Washington, and the Education of a President, to understand Mr. Geithner’s philosophy of unconditional bailouts; remember that he was president of the New York Fed before become treasury secretary.)

Is there really no alternative to pouring good money after bad?

In a policy statement released this week, Governor Jon Huntsman articulates a coherent alternative approach to the financial sector, which begins with a diagnosis of our current problem: Too Big To Fail banks,

“To protect taxpayers from future bailouts and stabilize America’s economic foundation, Jon Huntsman will end too-big-to-fail. Today we can already begin to see the outlines of the next financial crisis and bailouts. More than three years after the crisis and the accompanying bailouts, the six largest U.S. financial institutions are significantly bigger than they were before the crisis, having been encouraged by regulators to snap up Bear Stearns and other competitors at bargain prices”

Mr. Geithner feared the collapse of big banks in 2008-09 – but his policies have made them bigger. This makes no sense. Every opportunity should be taken to make the megabanks smaller and there are plenty of tools available, including hard size caps and a punitive tax on excessive size and leverage (with any proceeds from this tax being used to reduce the tax burden on the nonfinancial sector, which will otherwise be crushed by the big banks’ continued dangerous behavior).

The goal is simple, as Mr. Huntsman said in his recent Wall Street Journal opinion piece: make the banks small enough and simple enough to fail, “Hedge funds and private equity funds go out of business all the time when they make big mistakes, to the notice of few, because they are not too big to fail. There is no reason why banks cannot live with the same reality.”

The quoted passage from Huntsman’s Wall Street Journal essay went on to say this:

These banks now have assets worth over 66% of gross domestic product—at least $9.4 trillion, up from 20% of GDP in the 1990s. There is no evidence that institutions of this size add sufficient value to offset the systemic risk they pose.

The major banks’ too-big-to-fail status gives them a comparative advantage in borrowing over their competitors thanks to the federal bailout backstop.

Far be it from President Obama to make such an observation.

Huntsman’s policy page on financial reform included a discussion of repealing the Dodd-Frank law:

More specifically, real reform means repealing the 2010 Dodd-Frank law, which perpetuates too-big-to-fail and imposes costly and mostly useless regulations on innocent smaller banks without addressing the root causes of the crisis or anticipating future crises. But the overregulation cannot be addressed without ending the bailout subsidies, so that is where reform must begin.

Beyond that, Huntsman’s Wall Street Journal piece gave us a chance to watch the candidate step in shit:

Once too-big-to-fail is fixed, we could then more easily repeal the law’s unguided regulatory missiles, such as the Consumer Financial Protection Bureau. American banks provide advice and access to capital to the entrepreneurs and small business owners who have always been our economic center of gravity. We need a banking sector that is able to serve that critical role again.

American banks also do a lot to screw their “personal banking” customers (the “little people”) and sleazy “payday loan”-type operations earn windfall profits exploiting those workers whose incomes aren’t enough for them to make it from paycheck-to-paycheck. The American economy is 70 percent consumer-driven. American consumers have always been “our economic center of gravity” and the CFPB was designed to protect them. Huntsman would do well to jettison his anti-CFPB agenda if he wants to become President.

Mike Konczal of the Roosevelt Institute, exhibited a similarly “hot and cold” reaction to Huntsman’s proposals for financial reform. What follows is a passage from a recent posting at his Rortybomb blog, entitled “Huntsman Wants to Repeal Dodd-Frank so he can Pass Title VII of Dodd-Frank”:

So we need to get serious about derivatives regulation by bringing transparency to the over-the-counter derivatives market, with serious collateral requirements. This was turned into law as the Wall Street Transparency and Accountability Act of 2010, or Title VII of Dodd-Frank.

So we need to eliminate Dodd-Frank in order to pass Dodd-Frank’s resolution authority and derivative regulations – two of the biggest parts of the bill – but call it something else.

You can argue that Dodd-Frank’s derivative rules have too many loopholes with too much of the market exempted from the process and too much power staying with the largest banks. But those are arguments that Dodd-Frank doesn’t go far enough, where Huntsman’s critique of Dodd-Frank is that it goes way too far.

Huntsman should be required to explain the issues here – is he against Dodd-Frank before being for it? Is his Too Big To Fail policy and derivatives policy the same as Dodd-Frank, and if not how do they differ? It isn’t clear from the materials he has provided so far how the policies would be different, and if it is a problem with the regulations in practice how he would get stronger ones through Congress.

I do applaud this from Huntsman:

RESTORING RULE OF LAW

President Huntsman’s administration will direct the Department of Justice to take the lead in investigating and brokering an agreement to resolve the widespread legal abuses such as the robo-signing scandal that unfolded in the aftermath of the housing bubble. This is a basic question of rule of law; in this country no one is above the law. There are also serious issues involving potential violations of the securities laws, particularly with regard to fair and accurate disclosure of the underlying loan contracts and property titles in mortgage-backed securities that were sold. If investors’ rights were abused, this needs to be addressed fully. We need a comprehensive settlement that puts all these issues behind us, but any such settlement must include full redress of all legal violations.

* * *

And I will note that the dog-whistles hidden inside the proposal are towards strong reforms (things like derivatives reform “will also allow end-users to negotiate better terms with Wall Street and in turn lower trading costs” – implicitly arguing that the dealer banks have too much market power and it is the role of the government to create a fair playing field). Someone knows what they are doing. His part on bringing down the GSEs doesn’t mention the hobbyhorse of the Right that the CRA and the GSEs caused the crisis, which is refreshing to see.

If Republican voters are smart, they will vote for Jon Huntsman in their state primary elections. As I said last time: If Jon Huntsman wins the Republican nomination, there will be a serious possibility that the Democrats could lose control of the White House.

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Harsh Reality

November 24th, 2011 Posted in Uncategorized

Nov, 24 2011

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Several years ago, at one of the seven Laurie Anderson performances I have attended, Ms. Anderson (now Mrs. Lou Reed – although I seriously doubt whether she uses that moniker) described her first meeting with Philip Glass. Immediately after meeting Glass, she anxiously asked him: “Are things getting better or are things getting worse?”

These days, that same question is on everyone’s mind. It appears as though the mainstream news media are hell-bent on convincing us that everything is just fine. Nevertheless, many of us remember hearing the same thing from Ben Bernanke and Hank Paulson during the summer of 2008. As a result, we ponder the onslaught of rosy prognostications about the future of our economy with a good degree of skepticism. Regardless of whether there might be some sort of conspiracy to convince the public to go out and spend money because everything is all right . . . consider these remarks by Steve Randy Waldman from a discussion about market monetarist theory:

Self-fulfilling expectations lie at the heart of the market monetarist theory. A depression occurs when people come to believe that income will be scarce relative to prior expectations and debts. They nervously scale back expenditures and hoard cash, fulfilling their expectations of income scarcity. However, if everybody could suddenly be made to believe that income would be plentiful, everyone would spend freely and fulfill the expectations of plenty. The world is a much more pleasant place under the second set of expectations than the first. And to switch between the two scenarios, all that is required is persuasion. The market-monetarist central bank is nothing more than a great persuader: when “shocks happen”, it persuades us all to maintain our optimism about the path of nominal income. As long as we all keep the faith, our faith will be rewarded. This is not a religion, but a Nash equilibrium.

The persuasion described by Steve Waldman has been drowning out objective analysis lately. Obviously, the sovereign debt crisis in Europe has created quite a bit of anxiety in the United States. The mainstream media focus is apparently targeting that consensual anxiety with heavy doses of “feel good” material. One must search around a bit before finding any commentary which runs against that current. I found some and I would like to share it with you. The first item appeared in Bloomberg BusinessWeek on November 22:

Pacific Investment Management Co.’s Chief Executive Officer Mohamed A. El-Erian said U.S. economic conditions are “terrifying” as the nation struggles to recover from recession.

The odds of the U.S. returning to recession are as much as 50 percent, El-Erian said during an interview on Bloomberg Television’s “In the Loop” with Betty Liu. U.S. economic growth was worse than expected and congressional policy makers are gridlocked over what to do about the economy and the deficit, which risk exacerbating an already weak recovery, he said.

“We have less economic momentum than we thought we had and we have no policy momentum,” said El-Erian, who also serves as co-chief investment officer with Pimco founder Bill Gross at the world’s largest manager of bond funds.

“What’s most terrifying,” he said, “we are having this discussion about the risk of recession at a time when unemployment is already too high, at a time when a quarter of homeowners are underwater on their mortgages, at a time then the fiscal deficit is at 9 percent and at a time when interest rates are at zero.”

Let’s not forget that all of this is happening at a time when we are plagued by the most dysfunctional, stupid and corrupt Congress in our nation’s history. President Obama is currently preoccupied with his re-election campaign. His own leadership failures are conveniently re-packaged as products of that feckless Congress. As a result, Americans have plenty of justification for being worried about the future.

One of my favorite commentators, Paul Farrell of MarketWatch, recently shared some information with us, which he acquired by attending an InvestmentNews Round Table, as well as from reading Gary Shilling’s expensive newsletter:

Get it? Main Street America, you should “expect very slow growth” in 2012. That was the response when asked what “scenarios are you painting for your clients?” The panelist at a recent InvestmentNews Round Table then added: “It’s going to be ugly and violent.” Why? Because the politicians “are driving things” and they are “capricious, which leads to volatility.” And clients are “not really happy,” but “they lived through ‘08 and ’09,” so 2012 will be “just a little bump in the road.”

* * *

So don’t kid yourself folks, recent economic and market “ugliness and violence” not only won’t end soon, it’ll get meaner and meaner for years after 2012 elections … no matter who wins. Only a fool would believe that a new bull market will take off in 2013. Ain’t going to happen. That’s a Wall Street fantasy. Fall for that, and you’re delusional.

In fact, you better plan on a very long secular bear the next decade through 2020. With the European banks, credit and currency on the edge of a global financial meltdown, there’s a high probability that a black swan virus, a contagion will sweep the world, making all investing “uglier” and more “violent” for Americans in 2013, indeed for the rest of the decade.

* * *

Shilling sees “a secular bear market really started in 2000 and may persist for a decade as a result of slower GDP growth,” yes, persist till 2020 “with 2% to 3% deflation.” He warns: “Nominal GDP might not gain at all,” like recent flat-lining. Which coincides with the expectations of America’s professional financial advisers.

Are you still feeling optimistic? Consider the closing thoughts from a piece by Karl Denninger entitled, “The Game Is About Done”:

30+ years of lawless behavior has now devolved down to blatant, in-your-face theft. They don’t even bother trying to hide it any more, and Eric “Place” Holder is too busy supervising the running of guns into Mexico so the drug cartels can shoot both Mexican and American citizens.

What am I, or anyone else, supposed to do in this sort of “market” environment? Invest in…. what? Land titles are worthless as they’ve been corrupted by robosigning, margin deposits have been stolen, Madoff’s clients had confirmations of trades that never happend and proved to worthless pieces of paper instead of valuable securities and while Madoff went to prison nobody else has and the money is still gone!

Without enforcement of the law — swift and certain — there is no deterrent against this behavior.

There has been no enforcement and there is no indication that this will change.

It will take just one — or maybe two — more events like MF Global and Greek CDS “determinations” before the entire market — all of it — goes “no bid” as participants simply stuff their hands in their pockets and say “screw this.”

It’s coming folks, and I guarantee you this: Whatever your “nightmare” scenario is for such an event, it’s not bearish enough.

Keep all of this in mind as you plan for the future. I would not expect that you might hear any of this on CNBC.

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Voices Of Reason For An Audience Of Psychotics

September 1st, 2011 Posted in Uncategorized

Sep, 01 2011

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A “double-dip” recession? Maybe not. In his August 30 article for the Financial Times, economist Martin Wolf said the 2008 recession never ended:

Many ask whether high-income countries are at risk of a “double dip” recession. My answer is: no, because the first one did not end. The question is, rather, how much deeper and longer this recession or “contraction” might become. The point is that, by the second quarter of 2011, none of the six largest high-income economies had surpassed output levels reached before the crisis hit, in 2008 (see chart). The US and Germany are close to their starting points, with France a little way behind. The UK, Italy and Japan are languishing far behind.

If that sounds scary – it should. The fact that nothing was done by our government to address the problems which caused the financial crisis is just part of the problem. The failure to make an adequate attempt to restore the economy (i.e. facilitate growth in GDP as well as a reduction in unemployment) poses a more immediate risk. Here’s more from Martin Wolf:

Now consider, against this background of continuing fragility, how people view the political scene. In neither the US nor the eurozone, does the politician supposedly in charge – Barack Obama, the US president, and Angela Merkel, Germany’s chancellor – appear to be much more than a bystander of unfolding events, as my colleague, Philip Stephens, recently noted. Both are – and, to a degree, operate as – outsiders. Mr Obama wishes to be president of a country that does not exist. In his fantasy US, politicians bury differences in bipartisan harmony. In fact, he faces an opposition that would prefer their country to fail than their president to succeed. Ms Merkel, similarly, seeks a non-existent middle way between the German desire for its partners to abide by its disciplines and their inability to do any such thing. The realisation that neither the US nor the eurozone can create conditions for a speedy restoration of growth – indeed the paralysing disagreements over what those conditions might be – is scary.

Centrism continues to get a bad name because two of the world’s most powerful leaders have used that term to “re-brand” passivity.

Martin Wolf is not the only pundit expressing apprehension about the future of the global economy. Margaret Brennan of Bloomberg Television interviewed economist Nouriel Roubini (a/k/a “Dr. Doom”) on August 31. Roubini noted that there is no reason to believe that Republicans will consent to any measures toward restoring the economy during this election year because “if things get worse – it’s only to their political benefit”. He estimated a “60% probability of recession next year”. Beyond that, Roubini focused on the forbidden topic of stimulus. He pointed out that the limited 2009 stimulus program prevented a recession from becoming another Great Depression “but it was not significant enough”. Nevertheless, a real economic stimulus is still necessary – but don’t count on it:

With millions of unemployed construction workers, we need a trillion-dollar, five-year program just for infrastructure – but that’s not politically feasible, and that’s why there will be a fiscal drag and we will have a recession.

Nick Baker of Bloomberg BusinessWeek observed that Dr. Roubini’s remarks negatively impacted the stock market on Wednesday, “offsetting reports showing faster-than-estimated growth in American business activity and factory orders.”

If you aren’t worried yet, the most recent Weekly Market Comment by economist John Hussman of the Hussman Funds might get you there. Pay close attention to Hussman’s distinction between opinion and evidence:

It is now urgent for investors to recognize that the set of economic evidence we observe reflects a unique signature of recessions comprising deterioration in financial and economic measures that is always and only observed during or immediately prior to U.S. recessions. These include a widening of credit spreads on corporate debt versus 6 months prior, the S&P 500 below its level of 6 months prior, the Treasury yield curve flatter than 2.5% (10-year minus 3-month), year-over-year GDP growth below 2%, ISM Purchasing Managers Index below 54, year-over-year growth in total nonfarm payrolls below 1%, as well as important corroborating indicators such as plunging consumer confidence. There are certainly a great number of opinions about the prospect of recession, but the evidence we observe at present has 100% sensitivity (these conditions have always been observed during or just prior to each U.S. recession) and 100% specificity (the only time we observe the full set of these conditions is during or just prior to U.S. recessions). This doesn’t mean that the U.S. economy cannot possibly avoid a recession, but to expect that outcome relies on the hope that “this time is different.”

While the reduced set of options for monetary policy action may seem unfortunate, it is important to observe that each time the Fed has attempted to “backstop” the financial markets by distorting the set of investment opportunities that are available, the Fed has bought a temporary reprieve only at the cost of amplifying the later fallout.

Be sure to read Hussman’s entire essay. It provides an excellent account of the Fed’s role in helping to cause the financial crisis, as well as its reinforcement of a “low level equilibrium” in the economy. In response to those hoping for another round of quantitative easing, Hussman provided some common sense:

The upshot is that it remains unclear whether the Fed will revert to reckless policy in September, or whether the growing disagreement within the FOMC will result in a more enlightened approach – abandoning the “activist Fed” role, and passing the baton to public policies that encourage objectives such as productive investment, R&D, broad-benefit infrastructure, and mortgage restructuring – rather than continuing reckless monetary interventions that defend and encourage the continued misallocation of resources and the repeated emergence of speculative bubbles.

President Obama should look to John Hussman if he wants to learn the difference between centrism and passivity.

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The Monster Is Eating Itself

June 27th, 2011 Posted in Uncategorized

Jun, 27 2011

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Back on February 10, 2009 – before President Obama had completed his first month in office – two students at the Yale Law School, Jeffrey Tebbs and Ady Barkan, wrote an article which began with the point that the financial crisis was caused by the recklessness and greed of Wall Street executives. Tebbs and Barkan proposed a “windfall bonus tax” on those corporate welfare queens of Wall Street, at the very moment when budget-restrained states began instituting their own economic austerity measures so that The Monster could be fed:

Last week, Connecticut Gov. M. Jodi Rell proposed a state budget that slashes crucial public services, including deep cuts to health care for kids and pregnant women, higher education and consumer protection. She says that the cuts are necessary to close our state’s budget shortfall, but she’s apparently unwilling to increase taxes on Connecticut’s millionaires.

That is to say, while your hard-earned tax dollars are funding Christmas bonuses for Wall Street’s jet-set, Connecticut’s government will be cutting the programs and services that are crucial to your health and safety and to the vitality of our communities.

Since that time, “reverse Robin Hood” economic policies, such as the measures proposed by Governor Rell, have become painfully widespread. As an aside: Despite the fact that Governor Rell announced on November 9, 2009 that she would not seek re-election, the conservative Cato Institute determined that Rell was the only Republican Governor worthy of a failing grade on the Institute’s 2010 Fiscal Policy Report Card.

The entity I refer to as “The Monster” has been on a feeding frenzy since the financial crisis began. Other commentators have their own names for this beast. Michael Collins of The Economic Populist calls it “The Money Party”:

The Money Party is a very small group of enterprises and individuals who control almost all of the money and power in the United States. They use their money and power to make more money and gain more power. It’s not about Republicans versus Democrats. The Money Party is an equal opportunity employer. It has no permanent friends or enemies, just permanent interests. Democrats are as welcome as Republicans to this party. It’s all good when you’re on the take and the take is legal. Economic Populist

* * *

The party is also short on compassion or even the most elementary forms of common decency. It’s OK to see millions of people evicted, jobless, without health care, etc., as long as short term profits are maintained for those CEO bonuses and other enrichment for a tiny minority. It’s perfectly acceptable for this to go on despite available solutions. If you don’t look, it’s not there should be their motto.

Beyond that, The Monster’s insensitivity has increased to the point where it has actually become too numb to realize that the tender morsel it is feasting on happens to be its own foot. Until last year, The Monster had nearly everyone convinced that America would enjoy a “jobless recovery”, despite the fact that the American economy is 70 percent consumer-driven. Well, the “jobless recovery” never happened and the new “magic formula” for economic growth is deficit reduction. As I discussed in my last posting, Bill Gross of PIMCO recently highlighted the flaws in that rationale:

Solutions from policymakers on the right or left, however, seem focused almost exclusively on rectifying or reducing our budget deficit as a panacea. While Democrats favor tax increases and mild adjustments to entitlements, Republicans pound the table for trillions of dollars of spending cuts and an axing of Obamacare. Both, however, somewhat mystifyingly, believe that balancing the budget will magically produce 20 million jobs over the next 10 years.

Simon Johnson, who formerly served as Chief Economist at the International Monetary Fund, conducted a serious analysis of whether such “fiscal contraction” could actually achieve the intended goal of expanding the economy. The fact that the process has such an oxymoronic name as “expansionary fiscal contraction” should serve as a tip-off that it won’t work:

The general presumption is that fiscal contraction – cutting spending and/or raising taxes – will immediately slow the economy relative to the growth path it would have had otherwise.

* * *

There are four conditions under which fiscal contractions can be expansionary. But none of these conditions are likely to apply in the United States today.

* * *

The available evidence, including international experience, suggests it is very unlikely that the United States could experience an “expansionary fiscal contraction” as a result of short-term cuts in discretionary domestic federal government spending.

Economist Stephanie Kelton explained that the best way to lower the federal budget deficit is to reduce unemployment:

The bottom line is this: As long as unemployment remains high, the deficit will remain high. So instead of continuing to put the deficit first, it’s time get to work on a plan to increase employment.

Here’s the formula: Spending creates income. Income creates sales. Sales create jobs.

If you think you can cut the deficit without destroying jobs, dream on.

Dr. Kelton has identified the problem: Deficit reduction schemes which disregard the impact on employment. Nevertheless, The Monster is determined to press ahead with a “deficits first” agenda, regardless of the consequences. The Monster will have its way because its army of lobbyists has President Obama under control. As a result, we can expect increased unemployment, a diminished tax base, less consumer spending, less demand, decreased corporate income, lower GDP and more deficits. The Monster’s gluttony has placed it on a course of self-destruction. Perhaps that might be a good thing – if only it wouldn’t cause too much pain for the rest of us.

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Leadership Void

April 11th, 2011 Posted in Uncategorized

Apr, 11 2011

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In my last posting, I re-ran a passage from what I wrote on December 2, which was supported by Robert Reich’s observation that, unlike Bill Clinton, Barack Obama is not at the helm of a country with an expanding economy. As I said on December 2:

After establishing an economic advisory team consisting of retreads from the Clinton White House, President Obama has persisted in approaching the 2010 economy as though it were the 1996 economy.

After I posted my April 7 piece, I felt a bit remorseful about repeating a stale theme. Nevertheless, a few days later, Ezra Klein’s widely-acclaimed Washington Post critique of President Obama’s misadventure in “negotiating” the 2011 budget was entitled, “2011 is not 1995”. Ezra Klein validated the point I was trying to make:

Clinton’s success was a function of a roaring economy. The late ‘90s were a boom time like few others — and not just in America. The unemployment rate was less than 6 percent in 1995, and fell to under 5 percent in 1996. Cutting deficits was the right thing to do at that time. Deficits should be low to nonexistent when the economy is strong, and larger when it is weak. The Obama administration’s economists know that full well. They are, after all, the very people who worked to balance the budget in the 1990s, and who fought to expand the deficit in response to the recession.

Right now, the economy is weak. Giving into austerity will weaken it further, or at least delay recovery for longer. And if Obama does not get a recovery, then he will not be a successful president, no matter how hard he works to claim Boehner’s successes as his own.

President Obama’s attempt at spin control with a claim of “bragging rights” for ending the budget stalemate brought similar criticism from economist Brad DeLong:

To reduce federal government spending by $38 billion in the second and third quarters of 2011 when the unemployment rate is 8.9% and the U.S. Treasury can borrow on terms that make pulling spending forward from the future into the present essentially free is not an accomplishment.

It will knock between 0.5% and 1.0% off the growth rate of real GDP in the second half of 2011, and leave us at the start of 2012 with an unemployment rate a couple of tenths of a percent higher than it would have been otherwise.

Robert Reich expressed his disappointment with the President’s handling of the 2011 budget deal by highlighting Mr. Obama’s failure to put the interests of the middle class ahead of the goals of the plutocracy:

He is losing the war of ideas because he won’t tell the American public the truth: That we need more government spending now – not less – in order to get out of the gravitational pull of the Great Recession.

That we got into the Great Recession because Wall Street went bonkers and government failed to do its job at regulating financial markets. And that much of the current deficit comes from the necessary response to that financial crisis.

That the only ways to deal with the long-term budget problem is to demand that the rich pay their fair share of taxes, and to slow down soaring health-care costs.

And that, at a deeper level, the increasingly lopsided distribution of income and wealth has robbed the vast working middle class of the purchasing power they need to keep the economy going at full capacity.

“We preserved the investments we need to win the future,” he said last night. That’s not true.

The idea that a huge portion of our current deficit comes from the response to the financial crisis created by Wall Street banks was explored in more detail by Cullen Roche of Pragmatic Capitalism. The approach of saving the banks, under the misguided notion that relief would “trickle down” to Main Street didn’t work. The second round of quantitative easing (QE 2) has proven to be nothing more than an imprudent decision to follow Japan’s ineffective playbook:

And in 2008 our government was convinced by Timothy Geithner, Hank Paulson and Ben Bernanke that if we just saved the banks we would fix the economy. So we embarked on the “recovery” plan that has led us to one of the weakest recoveries in US economic history. Because of the keen focus on the banking system there is a clear two tier recovery. Wall Street is thriving again and Main Street is still struggling.

Thus far, we have run budget deficits that have been large enough to offset much of the deleveraging of the private sector. And though the spending was poorly targeted it has been persistent enough that we are not repeating the mistakes of Japan – YET. By my estimates the balance sheet recession is likely to persist well into 2013.

* * *

QE2 has truly been a “monetary non-event”. As many of us predicted at its onset, this program has shown absolutely no impact on the US money supply (much to the dismay of the hyperinflationists). And now its damaging psychological impact (via rampant speculation) has altered the options available to combat the continuing balance sheet recession. While more stimulus is almost certainly off the table given the Fed’s misguided QE2 policy, it would be equally misguided to begin cutting the current budget deficit. Sizable cuts before the end of the balance sheet recession will almost guarantee that the US economy suffers a Japan-like relapse. It’s not too late to learn from the mistakes of Japan.

So where is the leader who is going to save us from a Japanese-style “lost decade” recession? It was over two years ago when I posed this question:

Will the Obama administration’s “failure of nerve” – by avoiding bank nationalization – send us into a ten-year, “Japan-style” recession? It’s beginning to look that way.

Two years down – eight years to go.

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Magic Numbers

April 4th, 2011 Posted in Uncategorized

Apr, 04 2011

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As soon as I got a look at the March Nonfarm Payrolls Report from the Bureau of Labor Statistics on April 1, I knew that the cheerleaders from the “rose-colored glasses” crowd would be trumpeting the onset of some sort of new era, or “golden age”. I wasn’t too far off. My own reaction to the BLS report was similar to that expressed by Bill McBride of Calculated Risk:

The March employment report was another small step in the right direction, but the overall employment situation remains grim: There are 7.25 million fewer payroll jobs now than before the recession started in 2007 with 13.5 million Americans currently unemployed. Another 8.4 million are working part time for economic reasons, and about 4 million more workers have left the labor force. Of those unemployed, 6.1 million have been unemployed for six months or more.

Nevertheless, the opening words of the BLS report, asserting that nonfarm payroll employment increased by 216,000 in March, were all that the cheerleaders wanted to hear. My cynicism about the unjustified enthusiasm was shared by economist Dean Baker:

Okay, this celebration around the jobs report is really getting out of hand. Both the Post and Times had front page pieces touting the good news. The Post gets the award for being the more breathless of the two . . .

Brad DeLong had some fun letting the air out of the party balloons floating around in a brief piece by Gregory Ip of The Economist. Mr. Ip began with this happy thought:

TURN off the alarms. After several weeks when the data pointed to a recovery still struggling to achieve escape velocity, the March employment report provided reassuring evidence that, at a minimum, it is still gaining altitude.

After completely deconstructing Mr. Ip’s essay by emphasizing the painfully not-so-happy undercurrents lurking within the piece (apparently included out of concern that the Federal Reserve might take away the Quantitative Easing crack pipe) Professor DeLong re-visited Ip’s initial statement in the sobering light of day:

There is “recovery” in a sense that the output gap and the employment gap are no longer shrinking — and so that real GDP is growing at the rate of growth of potential output. But this is not reason to “turn off the alarms.” This is not reason to talk about “pieces [of recovery] … falling into place.” And I am not sure I would describe this as “gaining altitude” with respect to the state of the business cycle.

The exploitation of the March Nonfarm Payrolls Report for bolstering claims that economic conditions are better than they really are is just the latest example of how the beauty of a given statistic can exist in the eye of the beholder – depending on the context in which that statistic is presented. Economist David J. Merkel recently wrote an interesting essay, which concluded with this important admonition:

Be wary. Look at a broader range of statistics, and take apart the existing statistics. Don’t just take the pronouncements of our government at face value. They are experts in saying what is technically true, while implying what is false. Be wary.

David Merkel’s posting focused on the positive spin provided by a representative of Morgan Stanley concerning 4th Quarter 2010 Gross Domestic Product. Merkel’s analysis of this statistic included some good advice:

In 4Q 2010 real GDP rose 3.1%, while real Gross Domestic Purchases fell 0.2%. Why? Energy and other import costs rose which depressed the price indexes for GDP versus Gross Domestic Purchases.

Over the long haul, the two series are close to equal, but when they diverge, they tell a story. The current story is that average consumers in the US are doing badly, while those benefiting from high corporate profits, and increasing exports are doing well.

In general, I am not impressed with statistics collected by our government, or how they use them. But it’s useful to understand what they mean — to understand the limitations of the statistics, so that when naive/conniving politicians use them wrongly, one can see through the error.

David Merkel’s point about “understanding the limitations of the statistics” is something that a good commentator should “fess up to” when discussing particular stats. Michael Shedlock’s analysis of the March Nonfarm Payrolls Report provides a refreshing example of that type of candor:

Given the total distortions of reality with respect to not counting people who allegedly dropped out of the work force, it is hard to discuss the numbers.

The official unemployment rate is 8.8%. However, if you start counting all the people that want a job but gave up, all the people with part-time jobs that want a full-time job, all the people who dropped off the unemployment rolls because their unemployment benefits ran out, etc., you get a closer picture of what the unemployment rate is. That number is in the last row labeled U-6.

While the “official” unemployment rate is an unacceptable 8.8%, U-6 is much higher at 15.7%.

Things are much worse than the reported numbers would have you believe.

That said, this was a solid jobs report, not as measured by the typical recovery, but one of the better reports we have seen for years.

On the negative side, wages are not keeping up with the CPI, wage growth is skewed to the top end, and full time jobs are hard to come by.

At the current pace, the unemployment number would ordinarily drop, but not fast. However, many of those millions who dropped out of the workforce could start looking if they think jobs may be out there. Should that happen, the unemployment rate could rise, even if the economy adds jobs at this pace. It is very questionable if this pace of jobs keeps up.

In other words, if a significant number of those people the BLS has ignored as having “dropped out of the workforce” prove the BLS wrong by actually applying for new job opportunities as they appear, the BLS will have to reconcile their reporting with that “new reality”. Perhaps many of those “phantom people” were really there all along and the only thing preventing their detection was the absence of job opportunities. As those “workforce dropouts” return to the BLS radar screen by applying for new job opportunities, the BLS will report it as a “rise” in the unemployment rate. In reality, that updated statistic will reflect what the unemployment rate had been all along. An improving job market will just make it easier to face the truth.

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Turning Point

November 1st, 2010 Posted in Uncategorized

Nov, 01 2010

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As we approach Election Day, many commentators are confirming an observation used as the theme of my posting from September 6:

The steps taken by the Obama administration during its first few months have released massive, long-lasting fallout, destroying the re-election hopes of Democrats in the Senate and House.

Too many people whom the President thought he could count among his supporters have become his biggest critics. One might expect that after eight years of outrage over the antics of the Bush administration, Maureen Dowd would be thrilled about the work done by the Obama White House. Nevertheless, her most recent discussion of Obama’s performance was less than flattering:

In 2008, the message was him. The promise was him. And that’s why 2010 is a referendum on him.

With his coalition and governing majority shattering around him, President Obama will have to summon political skills — starting Wednesday — that he has not yet shown he has.

* * *

With the exception of Obama, most Americans seemed to agree that the “right” thing to do until the economy recovered was to focus on jobs instead of getting the Congress mired for months in making over health insurance and energy policy. And the “right” thing to do was to come down harder on the big banks for spending on bonuses instead of lending to small businesses that don’t get bailouts.

Contrary to the President’s expectations, the voting public has not overlooked the administration’s refusal to heed the advice of Bill Black, Robert Reich, and the roster of economists that included Adam Posen and Matthew Richardson advocating the use of the so-called “Swedish solution” of putting the zombie banks through temporary receivership. To the dismay of everyone in the world (outside of Obama’s inner circle) the new President chose to follow the advice of Larry Summers and put the welfare (as in corporate welfare) of those insolvent, too-big-to-fail banks ahead of the nation’s economic health. When President Obama appeared on The Daily Show with Jon Stewart on October 27, Stewart began the discussion by asking Obama to explain the rationale underlying his appointment of Larry Summers (a retread from the Clinton administration) as director of the National Economic Council. President Obama fell back on his two-year-old claim that to follow any course other than that recommended by Summers, would have resulted in the failure of at least 100 banks. Obama’s claim that the cost of the financial crisis was less than 1% of GDP did not slip past Yves Smith of the Naked Capitalism website. Ms. Smith (who voted for Obama in 2008) didn’t pull any punches in refuting that claim:

I’m so offended by the latest Obama canard, that the financial crisis of 2007-2008 cost less than 1% of GDP, that I barely know where to begin. Not only does this Administration lie on a routine basis, it doesn’t even bother to tell credible lies. And this one came directly from the top, not via minions. It’s not that this misrepresentation is earth-shaking, but that it epitomizes why the Obama Administration is well on its way to being an abject failure.

* * *

The reason Obama makes such baldfacedly phony statements is twofold: first, his pattern of seeing PR as the preferred solution to all problems, and second, his resulting slavish devotion to smoke and mirrors over sound policy.

* * *

But Team Obama is no doubt rationalizing this chicanery: if they can keep from recognizing losses until the recovery takes place, then the ultimate damage will be lower. But Japan’s post bubble record shows that doesn’t work. You simply don’t get a recovery with a diseased financial system. You need to purge the bad assets, only then will meaningful growth resume.

Financial risk management guru, Chris Whalen, recently expressed his anguish over the administration’s unwillingness to restructure the zombie banks:

The reluctance comes partly from what truths restructuring will reveal. As a result, these same large zombie banks and the U.S. economy will continue to shrink under the weight of bad debt, public and private. Remember that the Dodd-Frank legislation was not so much about financial reform as protecting the housing GSEs.

Because President Barack Obama and the leaders of both political parties are unwilling to address the housing crisis and the wasting effects on the largest banks, there will be no growth and no net job creation in the U.S. for the next several years. And because the Obama White House is content to ignore the crisis facing millions of American homeowners, who are deep underwater and will eventually default on their loans, the efforts by the Fed to reflate the U.S. economy and particularly consumer spending will be futile.

The idea that Obama sees “PR as the preferred solution to all problems” surfaced again in a great piece by Peter Baker of The New York Times, which included this observation:

Rather than entertaining the possibility that the program they have pursued is genuinely and even legitimately unpopular, the White House and its allies have concluded that their political troubles amount to mainly a message and image problem.

Baker’s article focused on the most recent gripe made by Obama at another one of his highbrow fundraisers. Remember the blowback from the President’s recent diatribe at a fundraiser hosted by the appropriately-named Rich Richman? Well, something similar happened again. The setting this time was a $15,200-per-ticket affair for doctors at the home of a wealthy hospital executive in Boston. While addressing this audience, the President explained that the reason why the voters have not embraced the Democrats during this election cycle is because the voters are having trouble thinking clearly, as they are “scared”. Not surprisingly, this re-ignited the controversy focused on Obama’s elitism.

The Tea Party spokespeople aren’t the only ones who are accusing President Obama of elitism. The Progressive-oriented TruthDig website, recently published an interesting essay by Chris Hedges, author of Death of the Liberal Class. Hedges points out that elitism is exactly the problem afflicting not only Obama, but the entire group, referred to as “the liberal class”. Consider his argument:

The liberal class, which once made piecemeal and incremental reform possible, functioned traditionally as a safety valve. During the Great Depression, with the collapse of capitalism, it made possible the New Deal. During the turmoil of the 1960s, it provided legitimate channels within the system to express the discontent of African-Americans and the anti-war movement. But the liberal class, in our age of neo-feudalism, is now powerless. It offers nothing but empty rhetoric. It refuses to concede that power has been wrested so efficiently from the hands of citizens by corporations that the Constitution and its guarantees of personal liberty are irrelevant. It does not act to mitigate the suffering of tens of millions of Americans who now make up a growing and desperate permanent underclass. And the disparity between the rhetoric of liberal values and the rapacious system of inverted totalitarianism the liberal class serves makes liberal elites, including Barack Obama, a legitimate source of public ridicule. The liberal class, whether in universities, the press or the Democratic Party, insists on clinging to its privileges and comforts even if this forces it to serve as an apologist for the expanding cruelty and exploitation carried out by the corporate state.

* * *
As long as the liberal class had even limited influence, whether through the press or the legislative process, liberals were tolerated and even respected. But once the liberal class lost all influence it became a class of parasites. The liberal class, like the déclassé French aristocracy, has no real function within the power elite. And the rising right-wing populists, correctly, ask why liberals should be tolerated when their rhetoric bears no relation to reality and their presence has no influence on power.

As Maureen Dowd pointed out, Wednesday is going to be a big day. If President Obama thought he had his hands full going into this election . . . wait until the aftermath.

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Demolition Derby

June 24th, 2010 Posted in Uncategorized

Jun, 24 2010

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June 24, 2010

They’re at the starting line, getting ready to trash the economy and turn our “great recession” into a full-on Great Depression II (to steal an expression from Paul Farrell). Barry Ritholtz calls them the “deficit chicken hawks”. The Reformed Broker recently wrote a clever piece which incorporated a moniker coined by Mark Thoma, the “Austerians”, in reference to that same (deficit chicken hawk) group. The Reformed Broker described them this way:

. . . this gang has found a sudden (upcoming election-related) pang of concern over deficits and our ability to finance them. Critics say the Austerians’ premature tightness will send the economy off a cliff, a la the 1930’s.

Count me among those who believe that the Austerians are about to send the economy off a cliff – or as I see it: into a Demolition Derby. The first smash-up in this derby was to sabotage any potential recovery in the job market. Economist Scott Brown made this observation at the Seeking Alpha website:

One issue in deficit spending is deciding how much is enough to carry us through. Removing fiscal stimulus too soon risks derailing the recovery. Anti-deficit sentiment has already hampered a push for further stimulus to support job growth. Across the Atlantic, austerity moves threaten to dampen European economic growth in 2011. Long term, deficit reduction is important, but short term, it’s just foolish.

The second event in the Demolition Derby is to deny the extension of unemployment benefits. Because the unemployed don’t have any money to bribe legislators, they make a great target. David Herszenhorn of The New York Times discussed the despair expressed by Senator Patty Murray of Washington after the Senate’s failure to pass legislation extending unemployment compensation:

“This is a critical piece of legislation for thousands of families in our country, who want to know whether their United States Senate and Congress is on their side or is going to turn their back on them, right at a critical time when our economy is just starting to get around the corner,” Mrs. Murray said.

The deficit chicken hawk group isn’t just from the Republican side of the aisle. You can count Democrat Ben Nelson of Nebraska and Joe “The Tool” Lieberman among their ranks.

David Leonhardt of The New York Times lamented Fed chairman Ben Bernanke’s preference for maintaining “the markets’ confidence in Washington” at the expense of the unemployed:

Look around at the American economy today. Unemployment is 9.7 percent. Inflation in recent months has been zero. States are cutting their budgets. Congress is balking at spending the money to prevent state layoffs. The Fed is standing pat, too. Bond investors, fickle as they may be, show no signs of panicking.

Which seems to be the greater risk: too much action or too little?

The Demolition Derby is not limited to exacerbating the unemployment crisis. It involves sabotaging the economic recovery as well. In my last posting, I discussed a recent report by Comstock Partners, highlighting ten reasons why the so-called economic rebound from the financial crisis has been quite weak. The report’s conclusion emphasized the necessity of additional fiscal stimulus:

The data cited here cover the major indicators of economic activity, and they paint a picture of an economy that has moved up, but only from extremely depressed numbers to a point where they are less depressed. And keep in mind that this is the result of the most massive monetary and fiscal stimulus ever applied to a major economy. In our view the ability of the economy to undergo a sustained recovery without continued massive help is still questionable.

In a recent essay, John Mauldin provided a detailed explanation of how premature deficit reduction efforts can impair economic recovery:

In the US, we must start to get our fiscal house in order. But if we cut the deficit by 2% of GDP a year, that is going to be a drag on growth in what I think is going to be a slow growth environment to begin with. If you raise taxes by 1% combined with 1% cuts (of GDP) that will have a minimum effect of reducing GDP by around 2% initially. And when you combine those cuts at the national level with tax increases and spending cuts of more than 1% of GDP at state and local levels you have even further drags on growth.

Those who accept Robert Prechter’s Elliott Wave Theory for analyzing stock market charts to make predictions of long-term financial trends, already see it coming: a cataclysmic crash. As Peter Brimelow recently discussed at MarketWatch, Prechter expects to see the Dow Jones Industrial Average to drop below 1,000:

The clearest statement comes from the Elliott Wave Theorist, discussing a numerological technical theory with which it supplements the Wave Theory’s complex patterns: “The only way for the developing configuration to satisfy a perfect set of Fibonacci time relationships is for the stock market to fall over the next six years and bottom in 2016.”

* * *

There will be a short-term rally at some point, thinks Prechter, but it will be a trap: “The 7.25-year and 20-year cycles are both scheduled to top in 2012, suggesting that 2012 will mark the last vestiges of self-destructive hope. Then the final years of decline will usher in capitulation and finally despair.”

So it is written. The Demolition Derby shall end in disaster.

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The Weakest Link

November 2nd, 2009 Posted in Uncategorized

Nov, 02 2009

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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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Where The Money Is

June 1st, 2009 Posted in Uncategorized

Jun, 01 2009

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June 1, 2009

For the past few months we have been hearing TV “experts” tell us that “it’s almost over” when discussing the Great Recession. Beyond that, many of the TV news-readers insist that the “bear market” is over and that we are now in a “bull market”. In his new column for The Atlantic (named after his book A Failure of Capitalism) Judge Richard A. Posner is using the term “depression” rather than “recession” to describe the current state of the economy. In other words, he’s being a little more blunt about the situation than most commentators would care to be. Meanwhile, the “happy talk” people, who want everyone to throw what is left of their life savings back into the stock market, are saying that the recession is over. If you look beyond the “good news” coming from the TV and pay attention to who the “financial experts” quoted in those stories are … you will find that they are salaried employees of such companies as Barclay’s Capital and Charles Schwab … in other words: the brokerages and asset managers who want your money. A more sober report on the subject, prepared by the National Association for Business Economics (NABE) revealed that 74 percent of the economists it surveyed were of the opinion that the recession would end in the third quarter of this year. Nineteen percent of the economists surveyed by the NABE predicted that the recession would end during the fourth quarter of 2009 and the remaining 7 percent opined that the recession would end during the first quarter of 2010.

Some investors, who would rather not wait for our recession to end before jumping back into the stock market, are rapidly flocking to what are called “emerging markets”. To get a better understanding of what emerging markets are all about, read Chuan Li’s (mercifully short) paper on the subject for the University of Iowa Center for International Finance and Development. The rising popularity of investing in emerging markets was evident in Fareed Zakaria’s article from the June 8 issue of Newsweek:

It is becoming increasingly clear that the story of the global economy is a tale of two worlds. In one, there is only gloom and doom, and in the other there is light and hope. In the traditional bastions of wealth and power — America, Europe and Japan — it is difficult to find much good news. But there is a new world out there — China, India, Indonesia, Brazil — in which economic growth continues to power ahead, in which governments are not buried under a mountain of debt and in which citizens remain remarkably optimistic about their future. This divergence, between the once rich and the once poor, might mark a turn in history.

* * *

Compare the two worlds. On the one side is the West (plus Japan), with banks that are overleveraged and thus dysfunctional, governments groaning under debt, and consumers who are rebuilding their broken balance sheets. America is having trouble selling its IOUs at attractive prices (the last three Treasury auctions have gone badly); its largest state, California, is veering toward total fiscal collapse; and its budget deficit is going to surpass 13 percent of GDP — a level last seen during World War II. With all these burdens, even if there is a recovery, the United States might not return to fast-paced growth for a while. And it’s probably more dynamic than Europe or Japan.

Meanwhile, emerging-market banks are largely healthy and profitable. (Every Indian bank, government-owned and private, posted profits in the last quarter of 2008!) The governments are in good fiscal shape. China’s strengths are well known — $2 trillion in reserves, a budget deficit that is less than 3 percent of GDP — but consider Brazil, which is now posting a current account surplus.

On May 31, The Economic Times reported similarly good news for emerging markets:

Growth potential and a long-term outlook for emerging markets remain structurally intact despite cyclically declining exports and capital outflows, a research report released on Sunday said.

According to Credit Suisse Research’s latest edition of Global Investor, looking forward to an eventual recovery from the current crisis, growth led by domestic factors in emerging markets is set to succeed debt-fuelled US private consumption as the most important driver of global economic growth over coming years.

The Seeking Alpha website featured an article by David Hunkar, following a similar theme:

Emerging markets have easily outperformed the developed world markets since stocks rebounded from March this year. Emerging countries such as Brazil, India, China, etc. continue to attract capital and show strength relative to developed markets.

On May 29, The Wall Street Journal‘s Smart Money magazine ran a piece by Elizabeth O’Brien, featuring investment bargains in “re-emerging” markets:

As the U.S. struggles to reverse the economic slide, some emerging markets are ahead of the game. The International Monetary Fund projects that while the world’s advanced economies will contract this year, emerging economies will expand by as much as 2.5 percent, and some countries will grow a lot faster. Even better news: Some pros are finding they don’t have to pay a lot to own profitable “foreign” stocks. The valuations on foreign stocks have become “very, very attractive,” says Uri Landesman, chief equity strategist for asset manager ING Investment Management Americas.

As for The Wall Street Journal itself, the paper ran a June 1 article entitled: “New Driver for Stocks”, explaining that China and other emerging markets are responsible the rebound in the demand for oil:

International stock markets have long taken their cues from the U.S., but as it became clear that emerging-market economies would hold up best and rebound first from the downturn, the U.S. has in some ways moved over to the passenger seat.

Jim Lowell of MarketWatch wrote a June 1 commentary discussing some emerging market exchange-traded funds (ETFs), wherein he made note of his concern about the “socio-politico volatility” in some emerging market regions:

Daring to drink the water of the above funds could prove to be little more than a way to tap into Montezuma’s revenge. But history tells us that investors who discount the rewards are as prone to disappointment as those who dismiss the risks.

On May 29, ETF Guide discussed some of the exchange-traded funds focused on emerging markets:

Don’t look now, but emerging markets have re-discovered their mojo. After declining more than 50 percent last year and leading global stocks into a freefall, emerging markets stocks now find themselves with a 35 percent year-to-date gain on average.

A website focused solely on this area of investments is Emerging Index.

So if you have become too risk-averse to allow yourself to get hosed when this “bear market rally” ends, you may want to consider the advantages and disadvantages of investing in emerging markets. Nevertheless, “emerging market” investments might seem problematic as a way of dodging whatever bullets come by, when American stock market indices sink. The fact that the ETFs discussed in the above articles are traded on American exchanges raises a question in my mind as to whether they could be vulnerable to broad-market declines as they happen in this country. That situation could be compounded by the fact that many of the underlying stocks for such funds are, themselves, traded on American exchanges, even though the stocks are for foreign corporations. By way of disclosure, as of the time of writing this entry, I have no such investments myself, although by the time you read this . . . I just might.

Update: I subsequently “stuck my foot in the water” by investing in the iShares MSCI Brazil Index ETF (ticker symbol: EWZ). Any guesses as to how long I stick with it?

June 3 Update: Today the S&P 500 dropped 1.37 percent and EWZ dropped 5.37 percent — similar to the losses posted by many American companies. Suffice it to say: I am not a happy camper! I plan on unloading it.

DISCLAIMER: NOTHING CONTAINED ANYWHERE ON THIS SITE CONSTITUTES ANY INVESTING ADVICE OR RECOMMENDATION. ANY PURCHASES OR SALES OF SECURITIES ARE SOLELY AT THE DISCRETION OF THE READER.

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