Pessimistic piece on 2010

More pessimistic than Karl Denninger, but hard to refute his points:

http://theautomaticearth.blogspot.com/2009/12/december-19-2009-death-taxes-and-mr.html

There is no recovery

http://theautomaticearth.blogspot.com/2009/12/december-11-2009-there-is-no-recovery.html

Until I see old, crappy 500 sq ft houses selling for $50K in California like they were 10 years ago instead of $500K+ I won't agree with anyone that housing has stabilized. There is a lot more pain ahead and I'm tired of the manipulated numbers coming out of Washington (e.g. "seasonally adjusted BS") showing how things are improving. They aren't. Sales tax receipts are way, way down. Rail/truck traffic is down y/o/y. Personal income tax receipts are way down. Property taxes are down. Travel is way down y/o/y. Corporate tax receipts are essentially zero. Greece, Italy, Spain, Baltic states, Ireland, Japan, etc. are all running into big trouble. Dubai is cratering. There is no recovery and things are really much worse than they were last year.

Hey, let's spend our way out of the recession

The insanity increases - Obama actually said that we "must continue to spend our way out of the recession" (but I thought Obama said the recession was over . . .). Craziness abounds. Give the drunks more booze until they are sober. Logic is dead.

http://theautomaticearth.blogspot.com/2009/12/december-9-2009-desperate-thing-to-say.html

http://market-ticker.org/archives/1713-Insanity-Doing-The-Same-Thing-Obama.html

And while we're at it why don't we greatly expand Medicare and Medicaid and call it "Health Care Reform" - where is all that money (trillions) going to come from?

Washington DC has become more and more unhinged.

Another case for deflation

Scary interview. Similar to thoughts of Karl Denninger. We are in a lot of trouble.

http://theautomaticearth.blogspot.com/2009/10/october-30-2009-interview-with.html

Why education (and housing) prices kept going up

If the government hands out free money then people will charge more because they can. It's about that simple.

http://globaleconomicanalysis.blogspot.com/2009/10/remarkable-comparison-affordable.html

The City of Houston is bankrupt

http://globaleconomicanalysis.blogspot.com/2009/10/city-of-houston-is-bankrupt-so-are.html

US is a failed state

Listen carefully to the words of Dr. Paul Roberts, a former Assistant Treasury Secretary. He says that the access Geithner is allowing to GS, C, and JPM is unprecedented. “America is a failed government…” He explains that the crooks are now on the inside of government and in a normal situation they reside on the outside of government. Yes, the rule of law is gone. Separate corporations and their money from state!

http://economicedge.blogspot.com/2009/10/dr-paul-craig-roberts-with-max-keiser.html

We are getting closer to the end

Scariest part of the link below is how fast and deep overall credit is cratering. The recovery is a farce. The economy is not being "fixed" the problems (including widescale corruption) are being covered up. I still believe the health care reform is nothing more than a distraction from the much, much bigger issue of the economy. People who are out of a job want a job, not health care reform. The cover-up will end in tears, eventually.

http://economicedge.blogspot.com/2009/10/math-manifests-itself-in-charts.html

Obama is a huge failure on foreign affairs

After reading the text of Obama's speech to the UN today I am convinced he is incompetent as a world leader. His views are naive and myopic and seems to have a complete lack of historical knowledge in terms of national interests and diplomacy. This is what I see as his biggest flaw in logic (excerpt from his UN speech):

The choice is ours. We can be remembered as a generation that chose to drag the arguments of the 20th century into the 21st; that put off hard choices, refused to look ahead, and failed to keep pace because we defined ourselves by what we were against instead of what we were for. Or, we can be a generation that chooses to see the shoreline beyond the rough waters ahead; that comes together to serve the common interests of human beings, and finally gives meaning to the promise embedded in the name given to this institution: the United Nations.

Common intersts of human beings?

I find this quite condescending that he can determine what mine, your, or anyone else's interests are. Just because he thinks something is important doesn't mean anyone else does. For example, Obama calls for the equal rights for women - is this a "common interest" of everyone? Nope. There are millions, maybe billions of people, let alone governments, who don't believe in equal rights for women. I do, but I don't pretend that everyone else does. (Hell, the US never passed the Equal Rights Amendment.)

And this:

Yet I also know that this body is made up of sovereign states. And sadly, but not surprisingly, this body has often become a forum for sowing discord instead of forging common ground; a venue for playing politics and exploiting grievances rather than solving problems.

The logical flaw is this: nations don't have "common interests," they have "national interests." There is a huge difference! Nations can have similar interests or mutual interests, but they are not common. Nations don't function that way.

This guy explains it well:

For an administration whose officials regularly boast of having what they call “the best brand in the world,” there is what Stephen Sestanovich calls growing “frustration with what other countries are prepared to contribute to advancing supposedly common interests.” Personal relations are important, said Mr. Sestanovich, a former Clinton administration ambassador with ties to the current team, but national interests still dominate. “That’s what American presidents generally discover,” he said.

http://thepage.time.com/remarks-obama-at-the-u-n-genereal-assembly/

I don't believe that Obama or his Administration will ever figure that out. Certainly not after reading the UN speech.

http://thepage.time.com/remarks-obama-at-the-u-n-genereal-assembly/

Then we get to Obama's "four pillars" - nuclear disarmament and non-proliferation, the pursuit of peace, combating climate change, and increasing economic development and opportunity.

Again, quite condescending and myopic. These might be important to him, but not to many other countries (or even many of the people in the US).

Suppose you are the leader of Tonga, a small, poor island nation in the Pacific. Which of the four pillars would be your priorities? Nuclear weapons? Hardly. Pursuit of peace? Irrelevent, really to a small island off by itself. Climate change? That's a joke right? Economic development? Sort of, but not in the same context that Obama talked about in his speech. So Obama wants to work cooperatively with the nations of the world to "solve problems" - yet he doesn't seem to see that each nation has their own unique set interests, agendas, priorities, and problems.

So Obama says he's not naive, yet that is exactly how he comes across. And weak. And ignorant. And condescending. Who is he to lecture the world on their behavior?

And on his speech blurb about devloping countries needing to root out corruption please visit this blog post:

http://market-ticker.denninger.net/archives/1461-President-Obama,-Hypocrite-In-Chief.html

Mergers and acquisitions at 15 year low

I guess companies are hunkering down and are very risk averse. I would have thought that with the downturn that there would be quite a bit of consolidation. Not happening. Maybe companies can't get the loans for mergers/acquisitions? Maybe they are purely in survival mode? Interesting though.

http://www.cnbc.com/id/32594269

Learn to be a serf

http://jessescrossroadscafe.blogspot.com/2009/08/fed-official-real-us-unemployment-rate.html

No inflation for now

http://globaleconomicanalysis.blogspot.com/2009/08/misguided-worries-about-inflation.html

More on how the US has become a banana republic

http://www.theatlantic.com/doc/200905/imf-advice

From this confluence of campaign finance, personal connections, and ideology there flowed, in just the past decade, a river of deregulatory policies that is, in hindsight, astonishing:
• insistence on free movement of capital across borders;
• the repeal of Depression-era regulations separating commercial and investment banking;
• a congressional ban on the regulation of credit-default swaps;
• major increases in the amount of leverage allowed to investment banks;
• a light (dare I say invisible?) hand at the Securities and Exchange Commission in its regulatory enforcement;
• an international agreement to allow banks to measure their own riskiness;
• and an intentional failure to update regulations so as to keep up with the tremendous pace of financial innovation.

GDP decline is getting worse, not better

2nd Quarter GDP numbers are absolutely horrid. Governments (city, state, federal) are spending money they don't have to prop it up. Absolutely terrible numbers.

http://market-ticker.org/archives/1276-GDP-Uuuuggghhhh.html

The end of the end of the recession

From Zero Hedge (and he didn't mention much about the disaster of the Commercial Real Estate market, or that the S&P 500 is trading at an overall P/E of 140, or several other trouble areas):

http://www.zerohedge.com/sites/default/files/The%20End%20Of%20The%20End%20Of%20The%20Recession.pdf

A couple of corrections needed for the above slide show.

Not to just pick on the MSM reporting. I was sent (by several readers) a housing analysis yesterday. It was some sort of weird mash up between the excellent David Rosenberg and some blogger. The charts are great, but the analysis is sometimes inaccurate. The "research" made comments like this for the NAHB HMI: “Sales outlook is stuck at 26, and anything under 50 is a contraction”. Not correct. The NAHB index is a sentiment indicator and doesn’t indicate contraction. Any number under 50 indicates more builders view sales as poor than good. See this chart - the index moves with new home sales and housing starts. And another example: "Architectural billings Index slipped five points last month to 37.7 - a sign residential construction is just bouncing along bottom". The ABI is primarily for non-residential construction.

I'm not trying to pick on or embarrass any particular publication or blogger. But it helps to know your sources. And I could be wrong about prices; we will know when the October and November data is released (a six month wait!)


http://www.calculatedriskblog.com/2009/07/few-comments-on-housing-reports.html

Fewer millionaires to tax

One problem with the government wanting to surcharge the wealthy for healthcare (and other programs) is that they are rapidly dissappearing. There are 18% fewer millionaires than last year. Tax revenues are falling tremendously - some areas like California it's over 40%. Where is the money going to come from to continue to prop up government spending? Just wait for the next stock market crash - then things will get very interesting.

http://www.newsweek.com/id/208496

Consulting firm CapGemini conducts an annual census of high-net-worth individuals, defined as people with at least $1 million in investable assets, excluding primary residences. "We've been doing this report for 13 years and haven't seen this kind of loss of wealth since we started," said Ileana van der Linde, principal at CapGemini's wealth-management practice. North America saw an 18.5 percent decline in its high-net-worth population, from 3.02 million in 2007 to 2.46 million in 2008. Even though they were more likely to be diversified in bonds and cash—instead of simply plowing money into stocks—the HNWIs' collective net worth fell from $10.85 trillion in 2007 to $8.44 trillion in 2008, down 22.2 percent. The ultra-HNWIs—those with at least $30 million in assets—suffered even more. That segment of the population fell 25 percent.

The rich get (a lot) richer

Shareholders need to put a stop to the top execs of companies taking much more than what they should be. They are essentially stealing money from the shareholders.

http://www.alternet.org/blogs/peek/141481/executives_receive_one-third_of_all_pay_in_the_u.s./

Executives and other highly compensated employees now receive more than one-third of all pay in the U.S., according to a Wall Street Journal analysis of Social Security Administration data — without counting billions of dollars more in pay that remains off federal radar screens that measure wages and salaries. Highly paid employees received nearly $2.1 trillion of the $6.4 trillion in total U.S. pay in 2007, the latest figures available. The compensation numbers don’t include incentive stock options, unexercised stock options, unvested restricted stock units and certain benefits.

Gee, I wonder if the top execs got the lion share of stock options and other benefits.

And this:

Between 1979 and 2006, the inflation-adjusted after-tax income of the richest 1 percent of households increased by 256 percent, compared to 21 percent for families in the middle income quintile.

Giving bonuses based on stock price is BS - most of the gains and losses have little to do with the performance of the top execs. And now that earnings and revenues are cratering guess who is still raking in bonuses and huge pay. Do you think any of the execs that got big pay-offs in 2006 and 2007 are willing to give any of the money back now that the stock prices for their companies has crashed? Not a chance. Take the money and run (ie take a golden parachute when things get real bad). Shareholders need to put a stop to this crap. It's out of control. The US is rapidly becoming a banana republic.

Rational Expectation Theory

Great article on Rational Expectation Theory and why there will be no V-shaped recovery.

Also, here are a couple of very interesting points in the article:

It’s a widely accepted notion that long term stock investors make money. Actually, this is not true. Most companies don’t last for more than 20 years. How can long term investment make money for you? The bankruptcy of General Motors should remind people that this notion is ridiculous. General Motors was a symbol of the U.S. economy, a century-old company that succumbed to bankruptcy. In the long run, all companies go bankrupt.

Property on the surface is better than the stock market. It is something physical that investors can touch. However, it doesn’t hold much value in the long run either. Look at Japan: Its property prices are lower than they were three decades ago. U.S. property prices will likely bottom below levels of 20 years ago, after adjusting for inflation.

China’s property market holds even less value in the long run. Chinese properties are sitting on land leased for 70 years for residential properties and 50 years for commercial properties. Their residual values are zero at the end. The hope for perpetual appreciation is a joke. If you accept zero value at the end of 70 years, the property value should only be the use value during those 70 years. The use value is fully reflected in rental yield. The current rental yield is half the mortgage interest rate. How could properties not be overvalued? The bulls want buyers to ignore rental yield and focus on appreciation. But appreciation in the long run isn’t possible. Depreciation is, as the end value is zero.

http://english.caijing.com.cn/2009-06-09/110180019.html

10 reasons why there will be no improvement 2H 2009

There are no green shoots. There will be no second half recovery.

http://www.doctorhousingbubble.com/the-financial-and-economic-argument-for-no-green-shoots-no-deus-ex-machina-for-the-economy-10-charts-showing-why-there-will-be-no-second-half-recovery-in-2009/

Why I think deflation wins for now

Update: Interesting comment by Karl Denninger which has me thinking quite a bit:

The fallacy of the "inflationist" viewpoint is that in order for money to circulate it must be borrowed into the economy. Only the first "turn" can come from production - all other "turns" in the MV = PQ equation must come from a loan.When debt service reaches excess income (income less necessities of life) velocity ceases and no amount of "printed" money gets into the economy to do anything.There is no solution to this problem other than the pay down or default the debt that is producing the constriction.

I would add that much that has been produced is now worth zero - like huge SUV's, mcmansions, and other luxury items - nobody can buy them. And even if they were given away for almost nothing people wouldn't take them - they wouldn't be able to afford the maintenance, utility bills, insurance, taxes, or other costs associated with these products. It's a double-whammy on GDP.

Interesting post here:

http://jessescrossroadscafe.blogspot.com/2009/06/price-money-supply-inflation-and.html

and here:

http://www.doctorhousingbubble.com/deflating-our-way-to-prosperity-five-major-sectors-of-our-economy-pointing-to-deflation-education-wages-housing-stocks-and-automobiles/

The conclusion is that there will be big-time inflation.

I tend to disagree for a few reasons. I'm not an economist but I try to use common sense.

Supply of pretty much everything has increased (and will be high for a long time). Demand for pretty much everything has gone down (and will continue to go down for quite a while). This will cause a wave of deflation on its own.

The Fed and the US Government are pumping trillions of dollars into the economy. But where is that money really going? Is the increase in money supply really making to the people? I don't see it. Bond people are getting nervous. I think the bond market wins over the equities and commodities markets. Stock crash is very bad, bond crash is catastrophic.

Look at unemployment. 500,000 people are losing their jobs each month. The median salary is somewhere around $30K - $40K, higher in California which is cratering. With jobs being lost and more people out of work wages can only go down. Also, this is a double hit to states as they lose tax revenue and have to pay out unemployment, food stamps, etc. This can only be deflationary.
People are now saving more and using their money more efficiently (e.g., avoiding luxury purchases). Remember that the GDP is based on 70% consumerism. When money is being removed from circulation (consuming) this action also has to be deflationary.

The US dollar could be devalued (from massive deficits and printing of money). However, most other currencies are in worse shape than the US dollar. I just don't see the US dollar going the way of the Iceland krona. The entire world would collapse if that happened. Also, the debt holders (China, Suadi Arabia, Japan, etc.) all have a vested interest in not seeing the US currency collapse. There will be lots of back-door deal-making among countries to keep some sort of status quo.

The banks like JPM and GS are gaming and propping up the markets (stocks, commodities, etc.) with TARP and other free money. At some point these games will end and the stock market, commodity prices, and other markets will fall dramatically. This will be more destruction of (paper) wealth which will be deflationary.

Housing will continue to deflate (regardless of what the government does) for at least two more years. Also, thousands of mcmansions and commercial properties will end up being abandoned and bulldozed down. There just isn't going to be a market for all of them. Not very many people can afford $2000+ for mortgage or rent (let alone maintenance or maintenance fees). The huge oversupply of houses will continue to cause deflation for a long time.

Commecial real estate, becuase of oversupply and ineffecient properties built is cratering which will cause more deflation.

Tax revenues are plunging and local, city, state governments are going to find ways to increase taxes (hotel taxes, registration fees, increase in traffic tickets issued, gas taxes, you name it). Instead of people using the money to buy stuff it will instead be going to the most inefficient system there is - governments. This will also be deflationary. Governments are going to have to let people go too (especially if other countries decide not to finance our debt as much) - there is no way for the entitlements to continue without some sort of reductions. More unemployment, more deflation.

Loaning of money is decreasing too since fewer people can qualify - this will be deflationary.

Increased bankruptcies and foreclosures also are deflationary as assets are sold off at a discount.
Sure, the government will create public works projects and such but it will not be enough to offset the rampant unemployment and contraction of the economy, it is only a band-aid.

Because of energy costs increasing (mostly due to maniplation and speculation by financial institutions) there will be some inflation in some areas - gas prices, food production, etc. But this increase will also take away money from other consumerism which will increase deflation of other assets even more.

I just don't see the inflationary pressures and I see a whole lot of deflationary pressures. The money being printed up by the Fed and the US Treasury just isn't going to make it into the consumers' pockets any time soon (if ever).

The argument seems to be that if everyone was given $100,000 of freee money then the dollar wouldn't be worth as much - hence inflation. The problem is only very few people (the already very rich) are getting their hands on the newly printed money - and I don't see how that would cause inflation for the typical US citizen.

The worst is yet to come

It appears that history is repeating itself. We are in the 1930-1931 period where everyone thought the economy was recovering, and it was false hope. The worst is yet to come . . .

http://jessescrossroadscafe.blogspot.com/2009/05/worst-is-yet-to-come.html

Take a look at S&P 500 earnings - talk about cliff diving . . .

http://jessescrossroadscafe.blogspot.com/2009/05/better-than-expected-earnings.html

Is America a Banana Republic?

10 signs that we are . . .

http://thebarricadeblog.com/2009/04/11/the-top-10-signs-you-are-living-in-a-banana-republic-and-my-favorite-100-billon-omelet/

William K. Black on the fraud

Good interview on how the big financial institutions are completely corrupt (along with the US Treasury). Black was a prosecuter during the S&L scandal in the 80's. He claims (and he's probably right) that today's scandal is at least 100 times worse.

http://www.pbs.org/moyers/journal/04032009/watch.html

http://finance.yahoo.com/tech-ticker/article/225823/Mortgage-Fraud-Epidemic-How-the-FBI-Blew-It-and-Why-There%27s-No-%27Perp-Walks%27?tickers=JPM,BAC,XLF,MHP,MCO,WB,FAS?sec=topStories&pos=9&asset=TBD&ccode=TBD

The American Dream is changing

Great article here that I agree with - I don't see any way that we are going to return to 2006 type levels of personal spending and debt. The culture is changing. If Obama and company think that they can recreate a culture of 2006 then they will fail. The game is over. What the culture evolves into is anyone's guess, but it will be different. Too bad DC isn't trying to understand the new America.

A shift in the American dream is occurring. During the Great Depression the notion of thrift and staying away from debt ran deep in our culture. This past decade saw the ultimate climax of the opposite. Not only did we shun thrift but also debt was a method of keeping up with the Joneses. Yet this massive pursuit of “things” and “stuff” did not make us happier. How can that be? We had the highest per capita ever, the majority owned their homes, many people had not only one but also two nice cars, most everyone had a television, people were living longer, yet happiness was not there? We had forgotten of the common good. Interestingly enough in 2006 CNN conducted a poll finding 54 percent of Americans thought the American dream was achievable. In 1995 a Business Week/Harris poll found that two-thirds thought the dream would be harder to achieve in the next 10 years. And that is the problem. Each successive generation was under the model of perma-growth and naturally, everyone wants to think that the future is better. Yet we have had periods in our history where things retrograde (Dark Ages anyone?). When the dream was only achievable through debt, many people were willing to risk it all just to have a piece of the delicious financial apple pie. How many times during the bubble did you get mailings to refinance your home and take money out for a vacation you deserved? Or how many credit cards did you get saying that you should go out and buy those expensive shoes because you are worth it? There is the problem. Much of this past decade was so shortsighted and focused on the “me” culture that here “we” are in this global mess.

http://www.doctorhousingbubble.com/wave-goodbye-to-the-bankrupt-joneses-deconstructing-the-american-dream-the-shifting-financial-and-societal-goals-of-a-country-mired-in-debt/

Looks like razing houses will happen

I have claimed that many houses are going to be bulldozed down because there are just too many of them. It looks like some areas are already starting to do it - or at least plan for it.

http://globaleconomicanalysis.blogspot.com/2009/03/americas-abandoned-cities.html

Last year, the city of Youngstown, Ohio, proposed incentives to encourage people to move out of nearly empty blocks and relocate to more populated areas closer to the heart of the city. Some people were offered upward of $50,000, according to news reports.The idea was to shut down entire streets and bulldoze abandoned properties so the city could discontinue services such as police patrols and street lighting, according to a CNN report.

Geithner's toxic debt plan headed for failure

http://globaleconomicanalysis.blogspot.com/2009/03/geithners-plan-gigantic-confidence-game.html

Confidence Game

There have been a lot of intelligent comments by Yves Smith, CalculatedRisk, and Krugman. So far no one has said what I think the plan is: a gigantic confidence game.

This is similar in nature to fraudulent schemes that promise "what's inside the bag is worth $1 million, unless you open the bag".

In this case there may be a few "good bags" similar in nature to salting the mine schemes, but for the most part everyone knows what's in the bag is toxic garbage. What really makes no sense whatsoever is why the government would risk 97% with shared "upside" instead of just buying it all.

Somehow, Geithner (and Obama by implication) believes that igniting a bidding war between hedge funds and private equity over a bag of cow manure will inspire confidence that there's gold in the bag. Such insanity cannot possibly work, which means it won't.

Disturbing news

http://globaleconomicanalysis.blogspot.com/2009/03/paycheck-away-from-ruin.html

A MetLife study released last week found that 50% of Americans said they have only a one-month cushion -- roughly two paychecks -- or less before they would be unable to fully meet their financial obligations if they were to lose their jobs. More disturbing is that 28% said they could not make ends meet for longer than two weeks without their jobs.

So what happens when they lose their jobs? No more mortgage payments. No more car payments. No more credit card payments. No more anything payments.

This spiral down has no end point. Debt destruction continues unabated - the Fed can't print near enough money to cover it.

This isn't a recession. This is a destruction of the American lifestyle. The US became of society of grasshoppers and very few ants. There aren't enough ants to provide for the grasshoppers. The government can only do so much.

I can see bankruptcies exploding this year. People are going to be moving back in with mom and dad. Secondary markets are going to be non-existent. The over-capacities and huge surpluses just aren't going to go away anytime soon.

Companies in trouble are going to leverage up more debt in desparation - and then many will default. Many companies over-expanded and are in the same boat as private citizens - they don't have savings either. I claim that many more businesses will go bankrupt than most people expect. The marketplace is being destroyed.

I can't believe how there are people touting that the recession is over now and everyone should get back into stocks today. Crazy. We are not going to return to a 2007 system anytime soon (and maybe never).

And the rest of the world is in worse shape than the US. Dark days are ahead I'm afraid.

California a long way from recovery

Good post here on why California will continue to crater.

http://www.doctorhousingbubble.com/california-financial-dreaming-5-exhibits-showing-why-california-will-be-in-a-recession-until-2011-revenue-projections-housing-inventory-unemployment-toxic-mortgages-and-consumer-psychology/

I contend that there is another issue that isn't being discussed much which will make the housing crisis even worse in California - Total Cost of Ownership (TOC). Thousands of 5000+ sq ft McMansions were built over the past decade in CA. Who is going to buy them, even at a deep discount? TOC will eat many people alive even if they buy a $1.5 million McMansion for $300K. Utilities, maintenance (pools, jacuzzi's, huge kitchens, etc.), insurance, landscaping, HVAC units, roofing, cleaning, etc. will put a lot of financial stress on the new owners - especially over time.

I read stories that some new developments are being completely abandoned and people go in at night and gut the houses. I contend that many of these McMansions will never be sold, and many that are will end up in foreclosure once again once they have become delapitated. There just isn't going to be a new market for these huge houses - too much wealth has been destroyed.

And does anyone really think wages are going to increase anytime soon will such high unemployment?

As a hypothetical - suppose everyone decided to buy stretch limousines over the past 10 years because they were cool (like big houses) and they were appreciating quickly in value. Then the bottom falls out. Now there are 20 million surplus limousines. What do you do with them? They aren't good commuter cars. They're expensive to maintain. They just aren't designed to be used for much of anything useful.

That is how I see the housing in CA. Why would a family of 2 or 3 or 4 need a 6000 sq ft house? These houses just aren't designed well for living in long-term - they are too big and expensive and there just aren't enough "rich" people to buy them and live in them long-term. As I've read - a house is a place to live, not a speculative investment.

There are areas in CA that have become ghost towns. Ghost towns usually don't make strong comebacks - they die. I think we are going to see a lot of these McMansions bulldozed down at the end.

Potential problem with GLD ETF

I have a gut feel that there is something wrong with the GLD ETF. I stumbled upon the following article that makes me think my gut feel was correct.

GLD ETF Trust supposedly holds more than 1,000 tons of gold. That amount is surpassed only by the United States, Germany, IMF, France, Italy and Switzerland; assuming they have the gold they claim. Under the GLD prospectus and latest 10-K it appears that the Trust neither needs to own actual physical gold that constitutes atomic number 79 nor allow their auditors to see and touch the undefined ‘investment in gold’. I agree with the reader who asserted that ‘it’s hard to imagine they [auditors] didn’t at least send someone to the premises of the Custodian to have a quick peep’. In other words, ‘Just trust us, the gold is there.’ But why believe them?

http://news.goldseek.com/GoldSeek/1235052376.php

DC bought and paid for by financial institutions

Not a surprise but here are some numbers which explains why Washington isn't lifting a finger to investigate and prosecute the thieves (execs at large financial institutions) who are the main culprits in the world-wide economic collapse.

http://jessescrossroadscafe.blogspot.com/2009/03/weekend-reading-how-wall-street-and.html

During the decade-long period:

* Commercial banks spent more than $154 million on campaign contributions, while investing $383 million in officially registered lobbying;

* Accounting firms spent $81 million on campaign contributions and $122 million on lobbying;

* Insurance companies donated more than $220 million and spent more than $1.1 billion on lobbying; and

* Securities firms invested more than $512 million in campaign contributions, and an additional nearly $600 million in lobbying. Hedge funds, a subcategory of the securities industry, spent $34 million on campaign contributions (about half in the 2008 election cycle); and $20 million on lobbying. Private equity firms, also a subcategory of the securities industry, contributed $58 million to federal candidates and spent $43 million on lobbying.

Individual firms spent tens of millions of dollars each. During the decade-long period:

* Goldman Sachs spent more than $46 million on political influence buying;

* Merrill Lynch threw more than $68 million at politicians;

* Citigroup spent more than $108 million;

* Bank of America devoted more than $39 million;

* JPMorgan Chase invested more than $65 million; and

* Accounting giants Deloitte & Touche, Ernst & Young, KPMG and Pricewaterhouse spent, respectively, $32 million, $37 million, $27 million and $55 million.

New blog I like

Here is a good article from the blog:

http://www.doctorhousingbubble.com/the-modern-banking-system-is-like-a-broken-dam-at-8-annual-compounded-growth-it-would-take-us-11-years-to-reach-the-peak-of-the-sp-500-old-ideas-and-prophets-falling-hard/

Too many 6000 square foot houses

I am surprised that there are almost no articles (I haven't found one yet) that talks about the high inventory of 5000+ square foot houses. Sometimes there are mentions of "affordable" housing but that's not al that matters - a 2000 sq ft house on Malibu beach is going to be very expensive to maintain.

The problem I see is that there are way too many large mcmansions out there. I don't understand why anyone is buying these up in California - even at half price. There isn't going to be a good market for them for a long, long time.

As one blogger write houses aren't supposed to be a speculative purchase, it's a place to live. Why would anyone buy a mcmansion to live in? A 6000 sq ft house (with pool, fountains, gardens, etc.) is going to be very expensive to maintain. The total cost of ownership is very high.

Even if you buy a forclosure at half price (say $500K instead of $1 million) you are going to have to dish out serious money for maintenance, utilities, taxes, etc. Recurring costs will kill you.

And then who are you going to sell it to? Less than 20% of Americans make over $100K today - and large percentage of them are not going to be looking to buy a house. So if anyone is buying these houses on a speculative basis then they are going to be stuck - there just isn't much of a market for $500K houses.

So what do we do with all these mcmansions? I'm not sure. But I am definitely not going to buy one - even if it seems to be "bargain" because it isn't.

I don't see the government or private industry addressing the issue. Most people can't afford to maintain a 5000+ sq ft house let alone buy one. Trying to prop up the ridiculous situation is only going to make matters worse.

I think eventually we will see entire neigborhoods of these new mcmansions bulldozed down (especially after many rot away regardless of what the government does).

Nothing coming out of Washington DC is making any sense with regards to housing. It's going to be a horrible mess. Nothing is getting fixed at all.

Deleveraging just beginning

Here is a great article:

http://www.financialsense.com/Market/pretti/2009/0213.html

I agree that the deleveraging process is just beginning and will take over a year (maybe two) to complete. The Federal Government is just muddying the waters with stimulus, TARP's, etc. in trying to get things back to where they were. I also agree that the US (and the world) is resetting to a "new normal" and it will be interesting to see how it plays out. We are in an unprecidented situation now and it is nearly impossible to predict what the end results will be.

However, I do think that the markets have NOT factored in the deleveraging that will take place around the world. We will not see a U-shaped recession - there is going to be a lower-level that we rise up to no matter what Obama, the Fed, Geithner, Congress, etc. do. Steve Balmer said this, "We’re certainly in the midst of a once-in-a-lifetime set of economic conditions. The perspective I would bring is not one of recession. Rather, the economy is resetting to a lower level of business and consumer spending based largely on the reduced leverage in the economy."

I believe Steve is right.

The Federal Government had make some wild and crazy moves to keep the economy from completely collapsing (which it almost did last September it turns out), and the continue to make wild and crazy moves without even knowing what the consequences are (or sometimes I wonder if they even care as long as they are spending money).

I'm betting that the market has not priced in all the deleveraging and asset deflation and will go down over time another 20% to 50%. There is too much wishful thinking out there that the economy will go back to what we knew it to be in 2007. Ain't gonna happen.

Nationalizing banks not politically feasible

Very interesting post here:

http://www.nakedcapitalism.com/2009/02/geithner-bank-bailout-plan-fiasco.html

and here:

http://www.calculatedriskblog.com/2009/02/obama-on-nationalization.html

From Roubini:

[W]hy is the US government temporizing and avoiding doing the right thing, i.e. take over the insolvent banks? There are two reasons. First, there is still some small hope and a small probability that the economy will recover sooner than expected, that expected credit losses will be smaller than expected and that the current approach of recapping the banks and somehow working out the bad assets will work in due time. Second, taking over the banks – call is nationalization or, in a more politically correct way, “receivership” – is a radical action that requires most banks be clearly beyond pale and insolvent to be undertaken. Today Citi and Bank of America clearly look like near-insolvent and ready to be taken over but JPMorgan and Wells Fargo do not yet. But with the sharp rise in delinquencies and charge-off rates that we are experiencing now on mortgages, commercial real estate and consumer credit in a matter of six to twelve months even JPMorgan and Wells will likely look as near-insolvent (as suggested by Chris Whalen, one of the leading independent analysts of the banking system).

Thus, if the government were to take over only Citi and Bank of America today (and wipe out common and preferred shareholders and also force unsecured creditors to take a haircut) a panic may ensue ... Instead if, as likely, the current fudging strategy - of temporizing and hoping that things will improve for the economy and the banks - does not work and in 6-12 months most banks (the major four and the a good part of the remaining regional banks) all look like clearly insolvent you can then take them all over, wipe out common shareholders and preferred shareholders and even force unsecured creditors to accept losses ( in the form of a conversion of debt into equity and/or haircut on the face value of their bond claims) as the losses will be so large that not treating such unsecured creditors would be fiscally too expensive.

So, the current strategy – Plan A - may not work and the Plan B (or better Plan N for nationalization) may end up the way to go later this year. Wasting another 6-12 months to do the right thing may be a mistake but the political constrains facing the new administration – and the remaining small probability that the current strategy may by some miracle or luck work – suggest that Plan A should be first exhausted before there is a move to Plan N. Wasting another 6-12 months may risk turning a U-shaped recession into an L-shaped near depression but currently Plan N is not yet politically feasible.

4 bear markets

Here is an interesting graph of the four worst bear markets in the US since the Great Depression. Interesting to me is that we keep hearing how our current situation is similar in magnitude (if not worse which it may be) than the Great Depression. That lends me to believe that we will follow the path of the DOW in the early 30's and it will go down quite a bit more (regardless of what Obama, Congress, Geithner, and Bernarke do).

http://www.calculatedriskblog.com/2009/02/cliff-diving-us-stocks.html

Apparently the market wasn't too thrilled with Geithner's bail-out "plan" which, of course, has no details in it.

Credit money versus fiat money

The long post below is an excellent essay on a different way to look at our economy. It isn't really based on fiat currency, it is based on credit money. The banks control it and the Fed doesn't have all that much power. It makes sense to me.

http://www.nakedcapitalism.com/2009/02/steve-keen-roving-cavaliers-of-credit.html

Looks like we are heading for Depression

After reading this article,

http://market-ticker.denninger.net/archives/775-Its-A-D,-Not-An-R-Folks.html

it's clear that we are heading into a Depression. There isn't just a supply/demand issue, there are structural issues with today's economy, in the US and the world.

It's a very deep hole we are in and the current solution by the Federal Government is to dig faster. The stimulus package is not - it will be good for growing government but won't do much for the economy.

What's a definition of insanity? Keep doing the same thing over and over and expect a different result. That seems to be what the Federal Government is doing.

The government is not going to be able to print enough money to cover the destruction of fantasy wealth that has been created over the past 20 years. There will be many trillions worldwide (my guess is $50 trillion) that will need to be washed out of the global economy before the world can begin healing again. My guess is that it will take a decade to do so, and we will move farther to the Left and become much more socialistic as well.

When people choose security over freedom the government will easily centralize and expand their power. And this will happen with governments around the world.

Interesting times.

Depressions are a different animal. They come about because of structural problems in the economy, and are always credit-driven.

Credit began as a way for goods producers to get paid for things they needed to make the goods before the goods were made. That sounds circular, and it is. That is, the farmer who has land requires seed, fertilizer, water, sun and labor to produce wheat. Some of those things (labor) he can personally produce in limited quantities, but the rest are either things he must buy or are outside his control (the sun and of course weather - that is, rain.) It is the same for the builder of a television set - he requires plastic, electronic components, electricity to operate his machinery and people to assemble the sets, all of which he must pay for. The farmer with apples to sell must have a way to get them to the store, and he must pay the truck driver to get them there.

Trade credit evolved as a way to provide this short-term financing necessary to take raw materials and turn them into finished goods, or to get finished goods from one place to another. It is referred to as 'self-liquidating' because when the goods are made and sold forward the credit (debt) is retired as a consequence of the sale.

It didn't take long before people realized that credit could be used to finance consumption too. That is, your desire to own a car can be realized through the provision of credit. But this credit doesn't self-liquidate; the car is consumed as you drive it, and when you're done with the car its value is greatly diminished instead of remaining constant or being enhanced. This sort of credit effectively "pulls forward" demand - that is, it allows one to play "Wimpy" and have a hamburger today for which one will pay next Tuesday.

When this sort of financing becomes embedded in an economy there is a very real risk that it will expand almost without limit, based only on the optimism of the people involved. This in turn will create distortions in supply that are irrational and cannot be "worked off" with short layoffs and labor cutbacks.

Automobile demand is a good example. The last few years we've built 14 million cars a year. But our inherent demand to replace destroyed cars (rusted away, crashed, etc) is only 11 million or so. The other three million were "pulled forward" with creative financing - for a while.

We employed hundreds of thousands of people building cars that cannot be sold on a permanent basis. That's a problem.

These distortions cannot happen without active government involvement. Without allowing willfully false statements on 1003s (mortgage documents) you cannot grant $500,000 loans to people who make $8/hour. It simply can't happen, because the inherent risk of default on those loans is so high that absent fraud nobody in their right mind will fund those loans and honest regulators will step in and stop the stupidity before it can get out of hand.

But when these distortions become embedded in the economy as a consequence of government mismanagement, willful blindness and even active complicity in the frauds then you've got a major problem because now laying people off for a few weeks or months won't solve anything. The excess capacity that gets built into the economy is too great and creative destruction has to take place - that is, we must actively destroy that excess capacity to get out of the mess. Worse, since "pull forward" financing has taken place we've got an even bigger problem - the companies that overbuilt wind up bankrupt as they can't service their debt, and the bankers who wrote that credit go under as well.

Thus we need some sort of "systemic reset" to get out of it, lest the spiral become embedded - and the economy experience a Depression.

Finance is a utility - not a profit center

I agree with this post from Market Ticker:

http://market-ticker.denninger.net/archives/765-What-Went-Wrong-Corporate-and-Educational.html

........

If I build a jet engine I have a jet engine. It can propel an airplane, and that has value. But when I take that jet engine and turn it into a discounted cash flow and then slice and dice it into tranches and sell it off into the marketplace via my "financial wizards" I am consigned to get less in total than if I just sold the engine outright.

Why? Because nobody works for free, that's why, and the only way I can pretend to get more value this way than via direct sale is when I cheat. That is, when I invent a model that has too-rosy assumptions, either because I have stars in my eyes - or fraud in my heart.

We as Americans must look at the future differently and discard the ways of the past. We must eschew the institutions who refuse to take responsibility for turning out MBAs by the boatload and consign both their graduates and the institutions themselves to the dustbin of history.

These people and these institutions have not advanced our common wealth and weal - they have destroyed it.

Finance is a utility function and we as Americans had better recognize that as the fact that it is. We need financing of some sort; throughout history there has been a means of financing production over short periods of time.

But financial engineering is not and never can be a profit center. It is a profit drain in that for each hand a deal passes through more value is extracted - not added.

All claims to the contrary are fraudulent on their face and must result in criminal penalties and civil disgorgement of every nickel allegedly "earned".

We would not be here were it not for the "financial engineering" that has been fraudulently sold off to the world as a means of "creating value." If we are to return to financial and economic stability instead of a world where "bubble-blowing" is the meme of the day we must eject both the progeny of these "higher education" institutions as well as the institutions themselves who refuse to accept their share of responsibility for the mess they have both fomented and profited from.

December economic performance - not good

Here are some interesting graphs for the US economy for December 2008:

http://www.calculatedriskblog.com/2009/01/january-economic-summary-in-graphs.html

Iceland's government collapsing

Iceland's government having early elections.

The financial meltdown appeared near to claiming Iceland's government, as the ruling Independence Party called Friday for elections in May -- two years early -- amid increasingly violent protests and the fracturing of its coalition.

I claim that the US stimulus plan, TARP, and other bailouts are not being done primarily to improve the economy or even help the country short-term or long-term. It is specifically being done to prevent revolution (as what was happening in Iceland), keeping people placated, and consolidating and preserving power of those in power now in Washington DC.

Remember that Paulson warned that the US would enter martial law if the original TARP was not passed. The power brokers in DC are running scared and are going to go to any length they feel necessary to stay in power. If they have to print money until there aren't any trees left then that's what they will do.

It also appears that the Dems in Congress are taking every opportunity to put in their pet programs that they've wanted to do for 15 years into the stimulus bills. Again - it has nothing to do with helping the economy - it is consolidation of power and pushing their own agenda.

It will be a very rough ride for the foreseeable future.

Happy New Year

Happy (Chinese) New Year to everyone!

The trouble with CDS

Here are a couple of good blog posts on why something needs to be done pronto with CDS's:

http://market-ticker.denninger.net/archives/743-Cops-and-CDS.html

http://market-ticker.denninger.net/archives/744-More-on-CDS.html

Why aren't these ML execs in jail?

Merrill Lynch Execs Paid Themselves $15 Billion on $21.5 Billion in Losses in 2008

No wonder John Thain was sacked. On the surface it appears that he and his management were 'hiding' or at best unaware of enormous losses that were only revealed after they were purchased by the Bank of America, and the recipient of enormous amounts of government funds.

And to make matters worse, they continued to pay themselves huge salaries and bonuses for the year despite those losses.

It will be interesting to see if there is any meaningful investigation of this. We doubt it very much. The Democratic leadership have shown themselves to be a lot of noise and little meaningful action so far, and almost all the Republicans are outrageous hypocrites.

Such is the state of the deep capture of the government.The problem with Wall Street is that there is reward without commensurate risk, pervasive fraud and the misstatement of numbers without the appropriate discovery and deterrence, and a lack of responsible accountability and disclosure to the American people.

I hope Obama turns out to be a great leader

One thing that has been missing from the US Presidency for a long time is strong leadership. Bush was many things, and opinions about him span the entire spectrum, but, in my opinion, he was not an effective leader. I especially disliked the way Bush used fear as a motivator for his agenda. In my opinion, Reagan was the last president who was a true leader. He created inspiration during his first years as President at a time when the country was in bad shape.

I watched some of Obama's speeches yesterday and thought that he did a fairly good job at creating inspiration. And maybe that is what this country does need now more than "experience" - there is a big need right now for leadership with the economy collapsing, two wars going on, terrorist threats, corruption in government becoming rampant, a broken immigration system, government growth (there are now more people working in government in the US than in manufacturing and construction), an unsustainable growth in medical costs, declining oil and gas production, unemployment, the housing market collapse, etc.

I have issues with many things about Obama's past but today is a new day - for the country and for Obama. I'm hoping for the best and hoping that Obama is a fast learner. His decisions over the next year or two will have major impacts for decades to come, not only in the US but for the world. I hope he is up to the task.

Here is an excerpt from today's Tom Friedman op-ed which I tend to agree with (although I don't think a gasoline tax is a dramatic new initiative):

We can’t thrive as a country any longer by coasting on our reputation, by postponing solutions to every big problem that might involve some pain and by telling ourselves that dramatic new initiatives — like a gasoline tax, national health care or banking reform — are too hard or “off the table.” So my most fervent hope about President Obama is that he will be as radical as this moment — that he will put everything on the table.

Opportunities for bold initiatives and truly new beginnings are rare in our system — in part because of the sheer inertia and stalemate designed into our Constitution, with its deliberate separation of powers, and in part because of the way lobbying money, a 24-hour news cycle and a permanent presidential campaign all conspire to paralyze big changes.

...........

So, in sum, while it is impossible to exaggerate what a radical departure it is from our past that we have inaugurated a black man as president, it is equally impossible to exaggerate how much our future depends on a radical departure from our present. As Obama himself declared from the Capitol steps: “Our time of standing pat, of protecting narrow interests and putting off unpleasant decisions — that time has surely passed.”

We need to get back to work on our country and our planet in wholly new ways. The hour is late, the project couldn’t be harder, the stakes couldn’t be higher, the payoff couldn’t be greater.

Gold confiscation history from 1933

FDR's confiscation of gold in 1933 is very interesting to me. Hopefully we won't repeat this where other things are confiscated from our homes "for the good of the country" - guns, valuables, land, etc. I'm curious to see which paths and directions Obama's administration takes.

While many economists and astute journalists such as H.L. Mencken immediately pointed out the folly of such policies, the New Dealers believed that they had an ace in the hole: inflation. Yes, they reasoned, these are restrictive policies, but if the government could find a way to massively inflate the currency, then somehow people would start buying more goods as their dollars depreciated, and the ensuing spending spree would wipe out unemployment.

The monetary system of the United States at the time of the Depression could not sustain inflation very long because the country was on a gold standard. If people sensed that the government was printing too many paper dollars, by law they could redeem those dollars from the government’s store of gold. Moreover, gold coins circulated along with silver dollars, half-dollars, quarters, and dimes.

If people were exchanging their dollars for gold, then the government’s own gold supply would be diminished. Since the gold standard included requirements that the country’s money supply have at least a 40 percent gold backing, a drain on gold reserves would have forced the government to stop printing so many dollars. Therefore, the plans of the New Dealers ran headlong into the reality of the gold standard and its check on inflation.

Thus, early in his presidency, on April 5, 1933, Roosevelt signed Executive Order 6102, which ordered people to turn in their gold to the government at payment of $20.67 per ounce. While there were some exceptions for dental use, jewelry, and artists and others who used gold in their jobs, most people were not covered. (Individuals could hold up to $100 in gold coins, but the government confiscated the rest.) Furthermore, the president’s order nullified all private contracts that called for payment in gold, something that led Sen. Carter Glass of Virginia to declare that the whole thing was “dishonor.”

Roosevelt based his order on the 1917 Trading with the Enemy Act, which gave the president the power to prevent people from “hoarding gold” during a time of war. Of course, the United States was not at war in 1933, but Roosevelt claimed that it was a “national emergency” and Congress and the courts meekly bowed to the executive.

In earlier times, such an order would have been met with outrage, as freedom-loving Americans would have rebelled against such a confiscatory order from Washington. Certainly, no president before the Progressive Era would have ordered such action for fear of impeachment or being voted out of office at the next election. However, by the time Roosevelt took office in 1933, the courts already had upheld government restrictions on freedom of speech (especially during World War I) and Congress had begun the unconstitutional delegation of some of its lawmaking powers to the executive branch.

Furthermore, given the economic calamity that prevailed when Roosevelt issued EO 6102, many Americans had become convinced that economic and political freedom meant freedom to starve and were willing to give the president whatever he wanted.

Roosevelt attempted to put “teeth” in his order by means of Section 9 of the order, which said that anyone who refused to comply could be fined as much as $10,000 or be sentenced to a maximum of 10 years in prison. (Most Americans did not resist, although some simply hid their gold until the order was repealed 41 years later.) To understand the magnitude of Roosevelt’s actions against individuals, he was threatening serious fines and prison terms against anyone who held on to what historically had been the money of the American people.

Although Roosevelt made it illegal for Americans to redeem their dollars for gold, he also realized that he could not make the same threats against people from other countries. Therefore, representatives of foreign governments still could trade in their dollars for gold, although shortly after issuing his order, Roosevelt increased the price to $35 an ounce. However, given the state of international trade at the time, foreign holdings of dollars were relatively small, something that would not be the case a half century later.

The small burst of inflation generated by Roosevelt’s move did create a bit of an economic boom, as usually occurs in the early stages of inflation, although unemployment remained at about 15 percent. However, Roosevelt’s twin pillars of what historians call the First New Deal were causing havoc among some producers and entrepreneurs, who realized that the NIRA and AAA were stifling entrepreneurship and productivity. In 1935, the U.S. Supreme Court declared both the NIRA and AAA unconstitutional, but by then the New Dealers had shifted from endorsing business cartels to promoting labor cartels through the unionization of workers.

When the U.S. Supreme Court in 1937 upheld the 1935 Fair Labor Standards Act (or Wagner Act), the inflation-induced “boom” ended soon afterward and the economy tumbled into a recession within a depression, a first for the U.S. economy, as unemployment climbed to nearly 20 percent. But while Roosevelt’s seizure of privately held American gold failed to regenerate the economy, it did lay the foundation for further economic deterioration.

http://www.lewrockwell.com/anderson/anderson154.html

It doesn't matter?

Maryland State Senator: It doesn’t matter if Maryland’s broke as long as Obama’s president

Truly amazing. Obama is being set up for failure by all these worshipers - he single-handedly cannot fix everything, can he? Or maybe it doesn't matter to these people as the irrationality of their logic causes them to become more and more deluded as to who Obama really is. Apparently he can do no wrong.

Here is an interesting comment from a conservative at the above link:

So…as of Tuesday, noon, we will witness a new Juneteenth as the Messiah is sworn in to protect and defend the Constitution of the United States from all enemies, foreign and domestic…and the throngs will fully expect to see and receive a lot more than 40 acres and a mule.

This worship of the incoming President is appalling. It is mockery of our history and traditions, and the serious business of governance, in its worst form. Tuesday seems more like a coronation than a Constitutionally required inauguration.

The American Idol Presidency coupled with what seems like an inordinately high expectation of the world suddenly changing to a global community of instant peace, lions laying down with lambs, and every ill being cured certainly isn’t going to enhance our “gravitas” in front of our enemies…and there are a lot of them, in the wings waiting, or confronting us presently.
So, after noon on Tuesday, then what?

Was at a military collectors show this morning, and an acquaintance of over a decade was just oozing about Obama and how everything bad was going to be set right again once that evil Bush and Cheney were out of power. He just couldn’t say enough about how wonderful Obama was. One older veteran, also a friend, asked him simply, name one thing, just one thing, that Obama has accomplished on his own in his entire life…and there was no answer, save for the perfunctory “that’s racist!” from the gentleman in question. A white liberal, totally a party-line Democrat, out here in Ohio actually believes, honestly believes, that the bank failures, the mortgage crisis, the oil crisis, and all the rest, were all staged by Bush so Bush and Cheney could make millions for themselves on the backs of the rest of the country.

Folks, 2010 is not that far away…at what point are Conservatives in this country going to get underway and get this country back on an even keel again? Elected officials such as Lisa Gladden are not the exception…they are the norm these days. Heaven help us all.

coldwarrior

I wish I had Spider Sense

Somtimes I have trouble finding papers on my desk too.

The economy is not a machine that can be "fixed"

I like the following article:

But the whole idea of fixing, running, regulating, designing, or modeling an economy rests on the notion that, if the right smart guys are at the rheostats, the economy can be ordered by intelligent design. But the economy is no mechanism. There is no mission control. Government cannot swoop down like a deus ex machina to explain the inexplicable and fix the unfixable. Why? Because the knowledge required to grasp each of the billions of actions, transactions and interconnections would fry the neural circuitry of a thousand Ben Bernankes. This is what F. A. Hayek called the knowledge problem. Knowledge, Hayek reminded us, is not concentrated among a few central authorities but is dispersed around society. That's why bad unintended consequences follow government interventions like black swans.

A few economists have not succumbed to the "fix it" fixation. They know that society is not like a machine at all, but an ecosystem. Faster than you can say market fundamentalism, a Keynesian will scoff at this metaphor. But his favorite trope has helped to stagnate many an economy; making Rube Goldberg apparatuses out of means-ends networks, perversion out of productivity. As Czech President Vaclav Klaus wisely notes: "The market is indivisible; it cannot be an instrument at the hands of central planners."

And also this one - because most systems that we humans experience are non-linear even though we humans tend to view most systems as if they were linear:

Brad Setser writes,
Facts are facts. The US has already proved it can raise over $1.5 trillion in a single year [in Treasury borrowing]

That is a the sort of statement that could come back and haunt someone. It is along the lines of the guy jumping out of a building from the 10th floor, passing the third floor and saying, "It's all fine so far."

It is amazing what happens when you assume that you live in a linear world. You say that the multiplier for government spending is 1.57.

Really? Over what range? Think of it this way: at which level of additional government spending would the path of U.S. real GDP be the highest?

(a) $100 billion in spending above the baseline
(b) $1 trillion in spending above the baseline
(c) $100 trillion in spending above the baseline

If you use a constant multiplier of 1.57, the right answer is (c). Yet we know that this is not the right answer. At $100 trillion in additional government spending, the United States would be operating like Zimbabwe, with similar results.

So to talk about "the" multiplier, as if it were linear, has to be wrong at some level. Is the multiplier linear over the range between $100 billion of additional spending and $1 trillion of additional spending? I think that is unlikely. Between, say $400 billion and $800 billion, is the incremental multiplier still in a range between 1 and 2? I worry that it is much lower. I worry that it turns negative somewhere in that range.

(Links from Instapundit.com)

New Treasury head "forgot" to pay taxes

What would happen if you or I "forgot" to pay our taxes? Penalties, audits, maybe threat of jail time.

But if Geithner "forgets" to pay? Not so much.

http://michellemalkin.com/2009/01/13/obamas-treasury-secretary-tax-rules-for-thee-but-not-for-me/

Amazing, and there are already apologists to cover for him. And he's going to be in charge of the IRS too? Give's you warm fuzzies doesn't it?

“He’s dedicated his career to our country and served with honor, intelligence and distinction,” incoming White House spokesman Robert Gibbs said. “That service should not be tarnished by honest mistakes, which, upon learning of them, he quickly addressed.”

Geithner failed to pay self-employment taxes for money he earned while working for the International Monetary Fund from 2001 to 2003, the transition official said. In 2006, the IRS notified him that he owed $14,847 in self-employment taxes and $2,383 in penalties from 2003 and 2004.

Transition officials discovered last fall that Geithner also had not paid the taxes in 2001 or 2002. He paid $25,970 in taxes and interest for those years several days before Obama announced his nomination, the transition official said.

Of course a bigger problem is that he "oversaw" (or more correctly, didn't) CitiGroup go into the toilet. The NY Fed was supposed to be in charge of the oversight. Not good.

http://hotair.com/archives/2009/01/14/obama-treasury-nominee-oversaw-citigroups-descent-into-the-toilet/

China's miracle economy? Maybe not

I've read many articles about how China may weather the economic downturn much better than the rest of the world (I've read a few warning that they won't). I don't believe that China is in very good shape because their economy wasn't designed around self-sufficiency, instead it has been designed around selling stuff to the US and other nations. I tend to agree with Douglas McIntyre's assessment of China's economy:

The way that the Chinese GDP was going to roll forward to become the No.1 economy in the world was relatively simple. An expanding global need for cheap goods would drive a massive export machine. An expanding middle class would become rabid consumers of items made both overseas and within China.

The system was fool-proof. Even remarkably intelligent economists and journalists talked and wrote about "the Chinese Miracle." In 2007, the nation's GDP was $3.2 trillion, but was growing at 11%. US GDP was well over $14 trillion that year, but its growth rate was 3%. It was only a matter of time before the lines crossed.

China has been able to draw upon a huge reserve of rural labor. People have moved from rural China to a number of large industrial cities in the interior of the country, many of which now have populations in the millions. Factory complexes were built in these same areas. As long as demand for output moved up, the labor forces in these regions grew. China created its own middle class which made and consumed goods at record rates.

The central government has believed that as the demand for exports softened recently due to the global recession, the country's new middle class would continue to help GDP growth through consumption.

The plan has fallen apart like a cheap watch. According to The Wall Street Journal, "China's exports in December fell 2.8% from a year earlier to $111.16 billion, while imports in the month fell 21.3% to $72.18 billion."

What was unimaginable a year ago has now happened. China has entered a recession and it may end up being deeper than the one in the US. It is not clear that the government can mount and manage a plan to create about 10 million new jobs. This will be an even more difficult task if exports continue to fall sharply. China does not have a service industry which is anywhere close to being as large a part of the GDP as it is in the US.

The illusion developed over the last decade was that China had become an independent power with a population which could make and consume goods at levels which have never been seen before. During the last two quarters, it has become clear that the the opposite is true. China's economy may be the most dependent large economy on earth.

If GDP in the US, EU, and Japan contract at 5% this year, China's economy is very likely to shrink faster. It will be faced with a sharp drop in what it makes and exports. More importantly, large numbers of Chinese are leaving the huge new industrial cities and going back to rural regions where they can at least find work growing their own food. What is more than a trickle now could become a flood. Those who have gone back to non-industrialized sections of the country will not be net consumers at all.

With a short-lived and dwindling middle class, China no longer has the economic core to continue the "miracle." China has just become another big country in trouble.

http://blogs.moneycentral.msn.com/topstocks/archive/2009/01/12/the-big-china-recession.aspx

Sears closing more stores

In my opinion Sears has been one of the worst run companies in the past 20 years. Now they are closing 8 more stores - they announced closing 14 stores in their previous quarter.

http://www.dealerscope.com/article/after-announcing-huge-loss-sears-said-close-stores-quarter-400870_1.html

I think they should just shut down the company altogether. If you can't turn things around in 20 years maybe it's time to give up.

Sears is over-priced, has mediocre merchandise, and has had very poor customer service for a long time. A friend of mine worked there in the 80's when the geniuses at Sears decided to get rid of all their knowledgeable, long-employed salespeople and replace them with minimum-wage folks who knew nothing about what they were selling. Yet their high prices remained. That's when the company started going down big-time.

Wal-Mart, Costco, and other discounters have been eating Sears for lunch ever since.

Their merger with K-Mart was weird - the two losers merging together will make a winner hopefulness. Big surprise, it hasn't worked.

Maybe this major recession will put them under for good. I don't see how they can survive.

Paycheck to paycheck

I read in the latest issue of Document magazine today that about 50% of workers live paycheck to paycheck, and about 25% of people who earn over $100K live paycheck to paycheck. Wow.

Also, the average household has about $8000 to $9000 in credit card debt. That's average.

So that means that over one quarter of people who have mortgages with any kind of balloon payments coming due, or variable mortgages where the payments are going to increase, are going to go into foreclosure. They have no money. And it's a pretty simple guess who has the credit card debt - those who live paycheck to paycheck, or those who don't?

Net usable income is going to be decreasing for most everyone too. Many (millions) are going to lose their jobs. But those who have jobs are going to see income erosion too - small or no bonuses, stock options that are worthless, retirees who have IRA's are going to have smaller withdrawls, some companies are moving toward fewer hours worked in a week, salary and wage freezes and reductions, temporary factory and business closings, increased fees and taxes at the state and local levels, and on and on.

On the other side is a reduction is wealth - house values plummeting (I doubt that many areas are increasing in value these days), IRA's and 401K's losing 10's of percentages, regular stock and bond investments decreasing, future stock options now worthless and can't be counted upon, other assets losing value now that people are saving, there is an over-capacity of many goods, and lots more people are broke.

People in debt and living paycheck to paycheck who have decided to begin to saving are deluded. It's way too late. They won't be able to dig out of their holes anytime soon (it takes many years). They are done. I expect the bankruptcy rate to skyrocket in 2009 and 2010.

Stretched rubber bands break

Let's look at Iceland for a minute:

As a result of the global deflationary debt unwind, Iceland's three biggest banks, Kaupthing Bank, Landsbanki Island and Glitnir Bank have collapsed under the weight of about $61 billion in debts, and its stock market fell has fallen 81% so far this year. Meanwhile, employment has also plummeted as the collapse of the financial sector and large layoffs since October have resulted in a complete standstill in the construction industry. Most importantly, the deflationary collapse has caused the Krona, Iceland's currency, to crash which leading to hoarding of goods at supermarkets and an inflation of 16%.

The Iceland example shows how a nation can experience deflation (crashing stock, bond, and real estate markets) while also experiencing high inflation due to a currency collapse (soon to be hyperinflation when it allows its currency to float again).

At one point not long ago (as recent as 2007) Iceland had one of the highest GDP's per capita and was above the US (and at one point in the recent past was at #6). But it turned out it was all a sham. What do the Icelanders produce anyway? Turns out they were producing BS. Now they are screwed, big time.

Their economic engine threw a rod. It is broken. If they think that all they need is a major tune-up (by way of stimulus packages and bailouts) then they are deluding themselves. The engine has been destroyed. And they are unlikely to be able to rebuild it using the same design. They need a new design for their economic engine in the future.

Will the US follow in Iceland's footsteps? Unknown at this time but that's for a future post.There are some observations that should be discussed though.

The US economic engine based on consumerism (fueled by debt) is another engine that has thrown a rod too. It is broken. It is a bad design. Trying to tune up the engine isn't going to make much difference. We need a new design. The US needs to start producing something again, instead of outsourcing production, providing "services," and "creating" wealth with debt vehicles (credit cards, loans, printing money, etc.).

The US needs to learn how to take care of things again, produce and purchase high-quality, built-to-last items that can be repaired for a fraction of a new one - and people need to learn how to take care of and repair their own stuff. We need to stop being a throw-away society. (I'll address these in a future post too.)

Government spending and entitlement programs are out of control and will destroy the country by themselves if changes aren't made. Medicaid/Medicare costs are increasing at 6% per year and is unsustainable. Many other programs are in the same boat. Other countries are in the same pickle too. At some point people and the governments will have to face up to the fact that everyone is NOT entitled to a job, a college education, top-quality healthcare, a house, more food than they can eat, a TV, a Wii, a car, etc.

Deflation is going to happen. Bailout is a good term for what is happening to "prevent deflation." We see the banks and automakers and others getting "bailouts" but it's like a large boat with a square foot hole in the bottom and people using a small cup to bail out the water. It's a losing battle. The hole is too big!

This collapse occurred after a few decades of rubber band stretching. I believe the destruction of wealth, and deflation, is going to be much worse than most "experts" expect. The creative financing was producing leverage levels of over 100 to 1. There is huge over-capacity of most everything - houses, cars, clothing, strip malls, real estate agents, banks, restaurants, PC's, even milk. Asset inflation of most everything was enormous - just look at housing. The stock market was horribly inflated.

Deflation is going to be huge - and the $1 trillion "stimulus" isn't going to stimulate much of anything. I foresee well over $50 trillion of wealth destroyed over the next several years - these $1 trillion stimulus and bailout packages are going to be just a few drops in the bucket.

So what is the purpose of these stimulus programs and bailouts? My thought is that it has little to do with the economy as such, these are being done to prevent a revolution. If too many people lose their jobs, get thrown out of their houses, go broke, etc., the government could collapse altogether - riots in the streets, cities burning, crime rampant, local governments overthrown - enough people could reach a point where they felt they had nothing left to lose. This is what I believe is scaring the politicians.

Remember that Treasury Secretary Paulson warned Congress that there would be a need for martial law if the first $700 bailout bill didn't pass - maybe he was right. So the question for our "leaders" in the Government becomes, "what is needed to keep the masses at bay?"

The government bails out the Big 3 so that they can continue to produce cars that nobody wants to buy. The government buys milk powder that nobody wants to buy and puts it in giant warehouses. The government gives the banks money so that they can continue to keep people employed to do "financial engineering" and other useless activities.

This becomes a slippery slope. How far can the government get away with paying people to do worthless activities (inside and outside the government) and keep the dollar (and the country) from completely collapsing? Will the government pay people to watch TV too? (Answer: yes - that is essentially what welfare and extended unemployment insurance does.) It seems that the collapse of the dollar is a matter of when, not if, and we will see if the country can survive.

Why isn't Reykjavik burning? It's getting hotter there . . .

The anger expressed by ordinary citizens has been limited, so far. More and more people gather each Saturday in front of the parliament in Reykjavik.

Some of the 6,000 protesters at a demonstration on Saturday threw rolls of toilet paper at the building where a few months earlier the premier had declared that the Icelandic banks were robust and the country's finances were healthy.

Restaurants are getting hammered too

From http://www.calculatedriskblog.com/2009/01/restaurant-performance-index-at-record.html

What's interesting to me is that contraction started over a year ago. I've noticed a dramatic drop-off in restaurant activity during lunchtime in my city just over the past 3 or 4 months. Restaurants that six months ago would have waiting lines by 11:30 am now never fill up during lunch rush. There is contraction going on everywhere. When will we hear pleas for bailouts for restaurants too?

Who can buy a $500K house?

I keep reading how the housing market will bottom out this year - I just don't see it. The days of crazy ARMS, ALT-A, balloon payment sub-prime nonsense is over (for now) so let's look at some simple mathematics.

The conventional wisdom is that nobody should buy a house for more than 3X or 4X their income - personally I think 4X is pushing it but let's use that to do some calculations.

From Wikipedia the breakdown is as follows: 28% of households make $0 to $25K, 27% make between $25K and $50K, 18% make between $50K and $75K, 11% make between $75K and $100K, and 13% make between $100K and $200K and the rest (~3%) make over $200K. There are about 111 million households in the US.

So if we take the 4X rule then a house costing more than $200K (people making over $50K) would only be affordable for 45% of households. Now for a house costing more than $400K there would only be about 16% that could afford the house. That's a pretty small market - about 18 million households (especially when many of these people do not want to or cannot buy a house for various reasons).

If we take the more conservative 3X income rule then the market for a house costing over $400K is only about 7% or 8% of all households - about 9 million households. That's tiny when you really think about it.

When I read about California housing and how the houses are $600K, $700K, $800K , $1.2 million, I just don't understand who is really buying these houses. The whole thing has been a scam. And when you include property taxes, utilities, etc., there is no way most of these people could afford these high priced houses. Just no way.

And if the banks weren't doing crazy stuff then they would have required a 10% down payment too - very few people would be able to come up with the tens of thousands of cash in the first place. Nothing but insanity. Just amazing.

I have also read anecdotes that these $800K type mcmansions really only cost about $200K or so to build, including the property too. That means the increase in "value" was complete nonsense and a scam. If people just sat down with a calculator they could easily see that this inflation of housing prices was unsustainable.

These horribly inflated prices are going to force the prices down hundreds of thousands of dollars in order to find enough of a market for them to sell - especially if what I read about the $200K to build them is accurate. The housing market is going to continue to crater until they become affordable again for a larger market (no more creative financing either - just conventional mortgages).

And to add to the deflation problem is that developers were building thousands upon thousands of new houses for years - the market is completely over-saturated. There is a huge inventory of houses now which will force the prices down too. Foreclosures are also causing prices to drop rapidly. And, or course, the US and the world is in the worst recession since the Great Depression causing further erosion of housing prices.

The housing bubble isn't so much a deflation as it is a correction to sane, reasonable housing prices that should have been there all along. But there will be deflation because developers built too many houses thinking that the price inflation scam would never end - the inventory is huge.

Banks are number one to blame for selling houses to people who couldn't afford them and using the BS creative financing to boot. But everyone was in on the scam - the banks, mortgage companies, appraisers, builders, developers, insurance companies, buyers, investors, real estate companies and agents, city planners, retailers like Home Depot, regulators, auditors, the SEC, states, Congress, the media - everyone. And now the taxpayers get to pay for it all in the end.

The housing market is going to be very ugly for a long time, especially in the really insane areas like Southern California, Phoenix, Las Vegas, and Florida. It's going to be a rough ride.

It wouldn't surprise me at all if city and state governments started to burn down empty houses to lessen supply in an attempt to keep house prices up - after all, property taxes are going to drop significantly with the house price deflation.

http://en.wikipedia.org/wiki/Household_income_in_the_United_States

Commercial real estate headed for collapse

It appears that 2009 will be a horrible year for commercial real estate. Just as with residential housing there are way too many new office buildings and strip malls. In my city about one bazillion strip malls have been built over the past few years and I always wondered who was going to rent them? I think a significant portion will go bankrupt and many others will have to reduce rent to the point that they aren't making much money on them. There are estimates that up to 20% of retailers will go belly-up this year. That's going to create a huge inventory problem for commercial real estate - and the banks who financed all of it. It's going to get ugly.

NEW YORK: Vacancy rates in office buildings exceed 10 percent in virtually every major city across the United States and are rising rapidly, a sign of economic distress that could lead to yet another wave of problems for the beleaguered financial sector.

With job cuts rampant and businesses retrenching, more empty space is expected from New York to Chicago to Los Angeles in the coming year. Rental income would then decline and property values would slide further. The Urban Land Institute predicts 2009 will be the worst year for the U.S. commercial real estate market "since the wrenching 1991-1992 industry depression."

http://www.iht.com/articles/2009/01/04/business/real.php

Update: Office space in Manhattan is cratering.

Jan. 6 (Bloomberg) -- Manhattan office rents fell the most in at least two decades last quarter as securities firms cut jobs and tenants leased less space.

Fourth-quarter rents dropped 4.8 percent to $69.44 a square foot from the third quarter, broker Cushman & Wakefield Inc. said in a report today.

Leasing slid to the lowest since 2001 as companies signed up for 19.1 million feet of space last year. Lehman Brothers Holdings Inc.’s bankruptcy, the acquisition of Merrill Lynch & Co. and the steepest plunge in U.S. stocks since the Great Depression last year contributed to the highest vacancy rates since May 2006.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aZZvAeQPTd_Q&refer=worldwide

Medicaid spending unsustainable

Medicaid is a huge expenditure for both the states (some states it's over 30% of their budget) and the federal government, yet little is being said on adressing this issue during the current crash of the US economy. According to this report Medicaid spending is unsustainable:

http://www.cms.hhs.gov/apps/media/press/release.asp?Counter=3311

“This report should serve as an urgent reminder that the current path of Medicaid spending is unsustainable for both federal and state governments. We must act quickly to keep state Medicaid programs fiscally sound,” Secretary Leavitt said. “If nothing is done to rein in these costs, access to health care for the nation’s most vulnerable citizens could be threatened.”
. . . . . . .
At this rate, Medicaid growth is projected to slightly exceed growth in overall health care expenditures, which is projected by CMS actuaries and economists to increase by 6.7 percent per year over the next 10 years, or over twice the rate of general inflation. Additionally, Medicaid’s share of the Gross Domestic Product (GDP) is projected to reach about three percent in 2017. The combined share of GDP spending for Medicare and Medicaid is projected to be 6.9 percent by 2017.

Now with the contraction occuring in US GDP the percentage numbers are going to be much higher. With deflation now occurring (e.g. housing) it is unclear if there will be deflation in healthcare too (doubtful), especially if the state and federal governments are supposed to pay for it.

I will be very interested to see if state and federal governments actually try to reduce spending for Medicaid and what would they cut? The idea has been that everyone is entitled to excellent healthcare - would the government actually try to take healthcare benefits away from people? I just don't see that happening. If states aren't going to address their #1 budget item then where are they going to cut spending? Or are they instead going to raise every tax and fee they can find to make up for the shortages? Probably the latter - but how well is that really going to work? Where is the money going to come from?