Tag: Monday Business Edition

The Battle of the Greecey Grass

Monday Business Edition

Crossposted from The Stars Hollow Gazette

We’ve seen this play before.  All of a sudden trillions of dollars of ‘notional’ value turn into meaningless scraps of paper (or ephemeral photons if you prefer) suitable for lining litter boxes or wrapping fish.

Except it’s not even very good at that.

The biggest losers in the casino will turn to taxpayers to make good their losses or simply pretend that they don’t exist.  Markets plunge because the trust in magic evaporates and suddenly skeptical children refuse to clap for dying confidence fairies anymore.

Folks, it’s just a fucking light bulb on a string.

Sooner rather than later people are going to take their Greek bets off the table, followed shortly by Spain, Italy, France, and Germany.  The Euro will collapse, no longer a threat to the Dollar as a reserve currency.  Countries will struggle to rebuild ‘national’ financial systems.

This is all because governments, led by the United States, refused to force banks to deleverage and accept their losses in a timely fashion.

There won’t be another 2008 bailout.  In Europe, where there is already violent rioting, Bankers and Ministers will be hung from lamp posts first.  In the United States the suicide would be political.

Austerity will not make the losses good either, everything everyone in the bottom 50% owns is a mere $1.4 Trillion.  Taking it all won’t solve the problem.  Our elites are faced with a decline in their own standard of living that squeezing the poor can’t mitigate.

Good say I.

What will work is more Socialist than Keynesian.  Mark to market and vaporize ‘notional’ value.  Seize assets and aggressively tax wealth to force investment.  Stimulate production by increasing demand.

Real estate values in Greenwich are going to decline and yachts rust in the harbor, but you know, it’s better than selling apples on a street corner worrying that someone is going to cut you for your fancy ass Rolex and that’s next.

(Supporting documentation, which I strongly urge you to read, below.)

Exchange Traded Funds

Crossposted from The Stars Hollow Gazette

Lots of people think, as I did until recently, that ETFs are relatively low risk, low cost investments that track well understood and popular market indexes like the S&P 500 without forcing individual investors to actually assemble a portfolio of the underlying assets.

Not so much.

Terry Smith has put together a list of 4 problems with ETFs as they are traded today of which I think #3 is the biggest-

Because you can exchange trade these funds, they are used by hedge funds and banks to take positions and they can short them. Because they can apparently rely upon creating the units to deliver on their short, there are examples of short interest in ETFs being up to 1000% short i.e. some market participant(s) are short 10 times the amount of the ETF. If the ETF is in an illiquid sector, can you really rely upon creating the units as you may not be able to buy (or sell) the underlying assets in a sector with limited liquidity? The danger of allowing short sales which are a multiple of the value of a fund in an area where it may not be possible to close the trades by buying back the stocks are clear, but amazingly, during the debate in which I have been engaged by various cheer leaders for ETFs, they have claimed that there is no such risk in shorting ETFs. They clearly do not understand the product they are peddling, and if they can’t what chance has the retail investor got?

In other words leverage is creating notional supply in excess of the actual supply of an asset which leads to illiquidity when the demand exceeds it.

I’m sorry, you can’t buy anymore X at any price.

Now economists would argue that there is always a price at which a supply of X is available and on certain theoretical levels they are correct, but there is a practical level at which the price becomes too expensive and someone, somewhere is either deprived of the item they had a contract to purchase OR is forced to spend lots of money making good those promises.

This is apparently what happened at UBS.

The $2 Billion UBS Incident: ‘Rogue Trader’ My Ass

Matt Taibbi, Roling Stone

POSTED: September 15, 8:39 AM ET

Investment bankers do not see it as their jobs to tend to the dreary business of making sure Ma and Pa Main Street get their $8.03 in savings account interest every month. Nothing about traditional commercial banking – historically, the dullest of businesses, taking customer deposits and making conservative investments with them in search of a percentage point of profit here and there – turns them on.

In fact, investment bankers by nature have huge appetites for risk, and most of them take pride in being able to sleep at night even when their bets are going the wrong way. If you’re not a person who can doze through a two-hour foot massage while your client (which might be your own bank) is losing ten thousand dollars a minute on some exotic trade you’ve cooked up, then you won’t make it on today’s Wall Street.

In the financial press you’re called a “rogue trader” if you’re some overperspired 28 year-old newbie who bypasses internal audits and quality control to make a disastrous trade that could sink the company. But if you’re a well-groomed 60 year-old CEO who uses his authority to ignore quality control and internal audits in order to make disastrous trades that could sink the company, you get a bailout, a bonus, and heroic treatment in an Andrew Ross Sorkin book.

In other words, “rogue traders” are treated like bad accidents and condemned everywhere from the front pages to Ewan McGregor films. But rogue companies are protected at every level of the regulatory structure and continually empowered by dergulatory legislation giving them access to our bank accounts.

Sooner or later, this is going to blow up in our faces, and it won’t be one lower-level guy with a $2 billion loss we’ll be swallowing. It’ll be the CEO of another rogue firm like Lehman Brothers, and it’ll cost us trillions, not billions.

‘Rogue trader’? That’s the same as ‘rogue reporter’

The ‘rogues’ are those who get caught while people presiding over systems that go wrong say: ‘How deplorable’

Michael White, The Guardian

Friday 16 September 2011 06.40 EDT

A “rogue trader” in a City of London bank is really like a “rogue reporter” on the News of the World. He’s the one who gets caught and sent to jail when the people who presided over the system that allowed him to lose $2bn – or, in Clive Goodman’s case, to hack some royal phones – say “how deplorable” before business as usual is restored.

Have we learned nothing? Apparently not. Adoboli is 31, with less visible expertise and experience than his evident ambition to make money. Who left him in charge of the tea money? Yet he was able to lose $2bn in a corner of the investment market known as exchange traded funds (ETFs), which even the FT is having a struggle explaining to its more ignorant readers (bank chairmen, people like that) in today’s edition.

Apparently, they’re the hottest thing since the collateralised debt products that blew up Lehman and others in 2008. The FT columnist Gillian Tett says she wrote a column in May warning that ETFs were heading for a scandal, but not quite this soon.

A rogue trader at UBS or a rogue bank?

by John Gapper, Financial Times

September 15, 2011 3:45 pm

Given the recent history of UBS, it is fair to ask if Kweku Adoboli is a rogue trader or his employer is a rogue bank.

(T)he bank’s entire senior layer of management was forced out following its involvement in the 1998 collapse of Long-Term Capital Management, the US arbitrage hedge fund run by John Meriwether. UBS had pressed to be closely associated with an operation it regarded as smartly and safely run.

There are similarities between the products relating to the LTCM case and the trading desk on which Mr Adoboli worked. As Izabella Kaminska of FT Alphaville points out, banks’ Delta 1 desks traded and hedged exchange-traded derivatives in  ways that involve complex – and difficult to monitor – risk-taking. Mr Kerviel worked on SocGen’s Delta 1 desk.


Crossposted from The Stars Hollow Gazette

Monday Business Edition

That, dear readers, is the interest rate the United States is paying on it’s 10 year Treasuries today after the downgrade.  This is LESS than we were paying on Friday.

Frankly it could and should be 0%.  Far from being a neoliberal, I fall on the modern monetarist side of the fence and can find no rational explanation that we issue debt at all except outdated emotional attachments to a Gold Standard that hasn’t existed for almost 40 years and a conscious, if unspoken, government policy of subsidizing the extremely wealthy.

Our Masters of the Universe aren’t particularly bright.  I find their constant caterwauling about “uncertainty” particularly revealing.  Far from being brave risk takers, they’re cowardly morons miserably longing for the days of the “carry trade” when you could get Yen at 0% interest, convert it, and park it in Treasuries at 5% with zero risk.

They only like fixed games and the natural and desired state of capitalism is government sanctioned mercantilist monopolies using the military and police power of the nation to eliminate competition.

East India Company anyone?  There’s your real Tea Party.

What the market is telling us today is that there is in fact NO risk that the United States will not pay off its debts in dollars, the currency in which they’re incurred.  The market is also telling us that the almighty Dollar has NO SUBSTITUTE as the International Reserve Currency.  It is the only one that exists in sufficient quantity to do the job and we are the only nation that is willing to accept the penalty in terms of a permanent trade deficit.  Last week both China (incidentally lower rated than the U.S.) and Switzerland explicitly acted to limit the use of their currency for this purpose, because they aren’t willing to cede control of it to the market.

In fact what was the strongest candidate to replace the Dollar, the Euro, is taking a pummeling today despite the European Central Bank finally deciding to use their market power to limit the allowable decline in value (and consequent rise in interest) of Spanish and Italian bonds.

Yup, they’ve decided to “print” their way out and despite immediate negative impact there is no doubt that over the short and medium term the bond vigilantes, particularly those who have taken leveraged short positions, are going to get a buzz cut if not a shaving.  In other words a thoroughgoing asskicking.

Marshall Auerbeck

Even with our existing legal constraints (predicated on a now non-existent gold standard system in which we are forced to sell bonds before Treasury spends), Treasury/Fed have other tools to counteract the alleged effect of this downgrade.  Mr. Bernanke can simply call up the NY Fed and gives Mr. Dudley instructions to buy all the 10-year UST on offer to keep the US 10 year at, say 2.5%. It is an open market operation, which the Fed performs all the time. And the banks cannot lend out these reserves, so it’s not inflationary (see here for more explanation). Then, as Rob Parenteau and I have noted before, every time some so-called “bond market vigilante” tries to push it above 2.5% by shorting Treasuries, the Fed can slam their face into the concrete by having the open market desk buy the hell out of UST until the 10 year yield is back to 2.5%. Burn Fido enough times, yank his chain enough times, and like the Dog Whisperer, he gets it and stops.

Credibility, Chutzpah And Debt

By PAUL KRUGMAN, The New York Times

Published: August 7, 2011

(T)he rating agencies have never given us any reason to take their judgments about national solvency seriously. It’s true that defaulting nations were generally downgraded before the event. But in such cases the rating agencies were just following the markets, which had already turned on these problem debtors.

And in those rare cases where rating agencies have downgraded countries that, like America now, still had the confidence of investors, they have consistently been wrong. Consider, in particular, the case of Japan, which S.& P. downgraded back in 2002. Well, nine years later Japan is still able to borrow freely and cheaply. As of Friday, in fact, the interest rate on Japanese 10-year bonds was just 1 percent.

These problems have very little to do with short-term or even medium-term budget arithmetic. The U.S. government is having no trouble borrowing to cover its current deficit. It’s true that we’re building up debt, on which we’ll eventually have to pay interest. But if you actually do the math, instead of intoning big numbers in your best Dr. Evil voice, you discover that even very large deficits over the next few years will have remarkably little impact on U.S. fiscal sustainability.

The truth is that as far as the straight economics goes, America’s long-run fiscal problems shouldn’t be all that hard to fix. It’s true that an aging population and rising health care costs will, under current policies, push spending up faster than tax receipts. But the United States has far higher health costs than any other advanced country, and very low taxes by international standards. If we could move even part way toward international norms on both these fronts, our budget problems would be solved.

What the market is also telling us is that our economy sucks.  That these huge corporate earnings are largely illusionary in the absence of demand and that Washington’s austerity policy, endorsed by Barack Obama and the Democratic Party, is a flat, abject failure.

Why do you think stocks are going down and (downgraded) bonds are going up?  It’s because they are less attractive investments than the 2.48% Treasuries in a continuing Depression.

How bad is it?

Crossposted from The Stars Hollow Gazette

Monday Business Edition

G.D.P. Shocker: U.S. on Verge of Double-Dip Recession

Posted by John Cassidy, The New Yorker

July 29, 2011

When healthy, the American economy grows at an annual rate of close to three per cent. The Commerce Department’s latest report on the gross domestic product (pdf) shows that between April and June, it expanded at an annual rate of 1.3 per cent, and between January and March it grew at an annual rate of just 0.4 per cent. The first-quarter figure is particularly stunning. Previously, the Commerce Department had estimated growth in the period at 1.9 per cent. What is to prevent a similar downward revision to the second-quarter figures? Nobody can say.

Consumer spending, which is the driving force of the American economy-it makes up more than two thirds of G.D.P.-has stalled badly. After expanding at an annual rate of more than two per cent for the previous year and a half, it was essentially flat in the second quarter. Unless consumers spend more readily in the second half of the year, there is no prospect of an economic rebound. But with gas prices still high, unemployment ticking up again, and their elected representatives in Washington paralyzed, it seems unlikely that American families will be flocking back to the malls anytime soon.

Retail sales hardly grew at all in June. Wall Street analysts who had been predicting growth of close to three per cent for the rest of the year are now busy trimming their estimates. Industrial production, the other item that the N.B.E.R. watches closely, has also been showing weakness. The Fed’s index of industrial production declined slightly in April and May, before rising slightly in June. Manufacturing, the biggest component of industrial production, had its weakest quarter since the previous recession ended in mid-2009.

In one sense, the new G.D.P. figures are even worse than they seem. Bear in mind that they are all annualized. This means the government statisticians take the actual growth rate in the quarter and (roughly speaking) multiply it by four. Reversing the process (dividing by four) reveals that the economy expanded by just 0.1 percent in the first quarter and by roughly 0.3 per cent in the second quarter. These figures are so small as to be trivial.

Zandi (no Keynsian he) has predicted a loss of 1.1 million jobs from current policy, an analysis reinforced by Goldman Sachs.

We know what happens from implementing austerity policies in a Lesser Depression from the examples in Britain-

British Economy, After Austerity, at Zero Growth in the Past Nine Months

By: David Dayen, Firedog Lake

Tuesday July 26, 2011 8:15 am

What’s amazing about this debt limit debate, and the headlong rush to austerity, is that we have empirical evidence of what can result, in this kind of economy, when you massively roll back spending. We even know what happens when you do that amid the threat of a debt downgrade rather than the fundamentals of the financial markets. All you have to do is look to Britain, which has never been the same since their austerity package was unveiled by the Tories.

Britain rolled back demand during a time when the economy was already weak, and they are suffering through the consequences. Instead of looking at this as a problem to be avoided, US policymakers are on the verge of emulating it. And not even in a good way: the British plan was at least somewhat balanced, with tax increases along with the spending cuts. This shows that the idea of a “balanced approach” is still flawed, because either way, you’re reducing demand during a time with a demand shortfall.

And in States

Conservative Budget Cuts Bad for State Economies

  • Bigger State Spending Cuts == Higher Unemployment Rates
    • Each 10% Cut == .04% Increased Unemployment

  • Bigger State Spending Cuts == More Private Employment Losses
    • Each 10% Cut == 1.6% Lost Private Employment

  • Bigger State Spending Cuts == Weaker Economies
    • Each 10% Cut == 1.6% Economic Contraction

State spending data are adjusted for inflation using the GDP price index. National changes have been removed from data on state unemployment rates, private payroll employment, and inflation-adjusted GDP growth to more clearly identify state-level economic performance. The analysis in the three charts weights each state’s data by population size to give a better reflection of a national average effect of cutting state government spending on economic performance. Weighting the analysis as such does not materially change the significance or size of the effect of cutting state spending.


Sure Cure for the Debt Problem: Economic Growth


Published: July 30, 2011

Before its economy crashed, Ireland was a star of this sort of debt reduction. In the 1980s, Ireland’s debt dwarfed its economy. Over the next two decades, though, that debt shrank to about a quarter of gross domestic product, largely because the economy went gangbusters.

“Ireland went from being, you know, the emerging market in a European context, to a very dynamic economy,” says Carmen Reinhart, a senior fellow at the Peterson Institute for International Economics and co-author of “This Time Is Different,” a history of debt crises.

The same happened during the prosperous 1990s, which began with deficits and ended with surpluses. Former President Bill Clinton is often credited for that turnabout, as he engineered higher tax rates. But most economists attribute the surplus years primarily to extraordinarily rapid growth.

While it may be difficult or impossible to grow our way out of debt, the G.D.P. figures announced on Friday suggest that we could quite possibly shrink our way into bankruptcy. The austerity measures that Congress is debating would almost certainly slow growth further. That, in turn, might actually worsen the debt problem – the exact opposite of what their proponents suggest.

The problem is that reducing spending or raising taxes just now would hurt the already fragile economy. Another recession would not only be painful for ordinary Americans but would actually worsen the debt problem by reducing tax revenue.

Don’t believe it? Consider this: Of the $12.7 trillion in additional federal debt that was accumulated over the last decade, about a third came from the souring economy.

Back in the Great Depression, Washington tightened its belt with disastrous results. Congress severely reduced spending in 1937, plunging the economy back into the hole. Ultimately, that meant even more federal borrowing.

Leaving aside the moral bankruptcy of starving the poor and elderly to death while leaving the wealthiest one tenth of one pecent untouched and accelerating their robbery of the middle class, this is bad, bad, bad economic policy.

And Barack Obama and the Democrats know it.  The People know it too.

Obama Approval Drops to New Low of 40%

Similar to his approval rating for handling the debt ceiling negotiations

by Jeffrey M. Jones, Gallup

July 29, 2011

PRINCETON, NJ — President Obama’s job approval rating is at a new low, averaging 40% in July 26-28 Gallup Daily tracking. His prior low rating of 41% occurred several times, the last of which was in April. As recently as June 7, Obama had 50% job approval.

Though Americans rate Obama poorly for his handling of the situation, they are less approving of how House Speaker John Boehner and Senate Majority Leader Harry Reid are handling it. Gallup does not include ratings of Congress or congressional leaders in its Daily tracking, and thus, there is no overall job approval rating of Boehner, Reid, or Congress directly comparable to Obama’s current 40% overall job approval rating.

Obama’s job approval rating among Democrats is 72%, compared with 34% among independents and 13% among Republicans. In the prior three weeks, his average approval rating was 79% among Democrats, 41% among independents, and 12% among Republicans.

Americans’ Ratings of the Economy Also More Negative Amid Stalemate

The debt crisis may be contributing to a generally sour mood for Americans that stretches beyond political ratings. For example, Gallup’s Economic Confidence Index, which is also tracked daily, averaged 49 July 2628, down 8 points in the last week and down 19 points since early July. The current index score is the worst Gallup has measured since March 2009.

The index consists of two questions, measuring Americans’ ratings of current economic conditions and their assessments of whether the economy is getting better or worse. Currently, 52% say economic conditions are poor, the highest since August 2010. And 75% of Americans say economic conditions are getting worse, a level not seen since March 2009.

Electoral victory my ass.

Bad Policy, Bad Politics- Part 1

Monday Business Edition

Crossposted from The Stars Hollow Gazette

Economy Faces a Jolt as Benefit Checks Run Out

By MOTOKO RICH, The New York Times

Published: July 10, 2011

Close to $2 of every $10 that went into Americans’ wallets last year were payments like jobless benefits, food stamps, Social Security and disability, according to an analysis by Moody’s Analytics. In states hit hard by the downturn, like Arizona, Florida, Michigan and Ohio, residents derived even more of their income from the government.

By the end of this year, however, many of those dollars are going to disappear, with the expiration of extended benefits intended to help people cope with the lingering effects of the recession. Moody’s Analytics estimates $37 billion will be drained from the nation’s pocketbooks this year.

“If we don’t get more job growth and gains in wages and salaries, then consumers just aren’t going to have the firepower to spend, and the economy is going to weaken,” said Mark Zandi, chief economist of Moody’s Analytics, a macroeconomic consulting firm.

Job growth has remained elusive. There are 4.6 unemployed workers for every opening, according to the Labor Department, and Friday’s unemployment report showed that employers added an anemic 18,000 jobs in June.

Consumers account for an estimated 60 to 70 percent of the country’s economic activity, but two years into the official recovery, businesses are still complaining that people simply are not spending enough.

Because benefit payments tend to be spent right away to cover basic needs like food and rent, they provide a direct boost to consumer spending. In a study for the Labor Department, Wayne Vroman, an economist at the Urban Institute, estimated that every $1 paid in jobless benefits generated as much as $2 in the economy.

Government Aid Dissipating, Damaging Economic Performance

By: David Dayen, Firedog Lake

Monday July 11, 2011 6:55 am

The Times story tells a simple tale, one rooted in elementary macroeconomic theory, and one which has escaped everyone in Washington. If you reduce benefits on those who have the highest propensity to spend money, that money gets taken out of the economy, and GDP suffers. And GDP has a direct bearing on unemployment. Our automatic stabilizers actually worked decently during the Great Recession. In fact, most of the stimulus went to tax cuts and beefing up those stabilizers, through aid to states and expanded benefits (in fact, too much so, as public investment in jobs was barely a sliver of the total stimulus). No doubt Republicans will see this article as some evidence of lazy Americans living on the dole, but it’s a direct result of an intelligently designed system to provide a safety net when the bottom drops out of the economy.

Herr Doktor Professor

Regular readers of this blog know that I make a big deal of the failure of interest rates to rise despite massive government borrowing. There’s a reason for that: what happens to interest rates is a key indicator of which economic model, and hence which economic policies, are right.

The Very Serious position has been that government borrowing will drive up rates, crowd out private investment, and impede recovery. A Keynes-Hicks analysis, by contrast, says that when you’re in a liquidity trap, even large government borrowing won’t drive up rates – and hence won’t crowd out private investment. In fact, it will promote private investment by raising capacity utilization and giving firms more reason to expand.

What we usually get in response to this seemingly decisive data are a series of excuses – most recently, that rates were low because the Fed was buying all the bonds. Well, that program has ended, and interest rates are still low.

More Herr Doktor Professor on excuses

The fact is, the United States economy has been stuck in a rut for a year and a half.

The truth is that creating jobs in a depressed economy is something government could and should be doing.

Our failure to create jobs is a choice, not a necessity – a choice rationalized by an ever-shifting set of excuses.

Excuse No. 1: Just around the corner, there’s a rainbow in the sky.

  • Remember “green shoots”? Remember the “summer of recovery”? Policy makers keep declaring that the economy is on the mend – and Lucy keeps snatching the football away. Yet these delusions of recovery have been an excuse for doing nothing as the jobs crisis festers.

Excuse No. 2: Fear the bond market.

  • Two years ago The Wall Street Journal declared that interest rates on United States debt would soon soar unless Washington stopped trying to fight the economic slump. Ever since, warnings about the imminent attack of the “bond vigilantes” have been used to attack any spending on job creation.

    But basic economics said that rates would stay low as long as the economy was depressed – and basic economics was right. The interest rate on 10-year bonds was 3.7 percent when The Wall Street Journal issued that warning; at the end of last week it was 3.03 percent.

Excuse No. 3: It’s the workers’ fault.

  • (I)f there really was a mismatch between the workers we have and the workers we need, workers who do have the right skills, and are therefore able to find jobs, should be getting big wage increases. They aren’t. In fact, average wages actually fell last month.

Excuse No. 4: We tried to stimulate the economy, and it didn’t work.

  • Everybody knows that President Obama tried to stimulate the economy with a huge increase in government spending, and that it didn’t work. But what everyone knows is wrong.

    What happened to the stimulus? Much of it consisted of tax cuts, not spending. Most of the rest consisted either of aid to distressed families or aid to hard-pressed state and local governments. This aid may have mitigated the slump, but it wasn’t the kind of job-creation program we could and should have had. This isn’t 20-20 hindsight: some of us warned from the beginning that tax cuts would be ineffective and that the proposed spending was woefully inadequate. And so it proved.

Neoliberal Economics has as much credibility as Stalinist Genetics.