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Friday Financial Briefing

Equities defied gravity for yet another day. The S&P 500 gained almost 10 points to close at 1,070.25, while the Dow gained 120 points to close at 10,138.99. Volumes were comparatively low, however. I am mystified as to what is driving the euphoria -- nothing substantial has changed in the world since the equities bloodbaths of last week, so what the hell is going on? The Federal Reserve experts may be right after all: I am just too stupid to understand what is happening here.

So given the mini-rally over the last few days, the inevitable CNBC story asks: Bull market or last gasp before death?. All the people who got the economic signals wrong last time assure you that this time the stock markets are going to the moon. To the moon!

Via Insty, a ray of light for those who think I'm too much of a downer. Matt Ridley assures us that the world will prove me and other cynics wrong. (WARNING: Huff-n-Puff link, but Ridley is always worth reading, so go ye and read thereof.) For what it's worth, I think Ridley is right over the long-term. We are already living in an amazing age, but the technology coming in the next fifty years will change our lives in ways we can barely imagine. It's just that getting over the hump from here to there is likely to be quite painful.

Why all the gloom and doom? In every day and in every way, we're getting better and better! We're good enough, we're smart enough, and doggone it, people like us!

"Markets are very noisy small children", says Willem Buiter. He makes a good point, actually -- equities markets are bipolar, reacting with giddy glee and suicidal despair at every turn in the market. In this age of HFT (high-frequency trading), algos, and arcane derivatives trading, that's even more true.

Further reasons why the huge Chinese AgBank IPO wasn't quite the success-story it's been painted to be. Hint: bad loans. Chinese banks operate under an authoritarian political fiat, not an economic one. There are probably huge numbers of nonperforming loans that are being kept off-book for fear of causing a panic, but they can't be kept hidden forever.

The Chinese need your huge Yankee brain for some IT work in Shanghai. Pretty soon we're going to be the hated job-usurpers who swoop in on a foreign country and put all the locals out of work. Mwah-hah-hah-hah!

Huff-n-Puff posts an article about the limits of the "global economy". (Two articles on the same day! Are they on a roll or what?) The article explains why the concept of the "global economy" is pretty dodgy, actually. International borders and laws still matter, and the differences between them will continue to act as barriers to trade. It's a statement of the obvious, really, but I'm still surprised when Tom Friedman acolytes spout that "the world is flat" nonsense.

Obama's economic policy has had a somewhat more subdued impact than he'd hoped it would.

There is a on-going flight from risk in the investing public, and that flight is taking the form of a rush to bonds and away from stocks. This can be seen in any number of ways: the fact that US Treasuries are still selling well in spite of paying a zero (or near-zero) coupon; the fact that sovereigns are going to great lengths to keep their respective bond-markets healthy; and the fact that the major stock indices are trading on remarkably low volume. The investing public has lost its aggregate appetite for risk, and I think a large part of this is due to a heinous combination of regulatory fuckery, braindead financial legislation (TARP, the auto bailouts, cash for clunkers, the list goes on), and a prevalence of short-term thinking and profit-taking on Wall Street. The big New York financial houses no longer exist to serve their clients; they exist to enrich their employees. The market is broken, and even an idiot like me can see that. I'm on the verge of getting out myself until things change -- this is just madness.

Amity Shlaes says that all the "second Great Depression" talk is off-base, and tends to obscure the focus on the stuff that is the problem. I'm not sure I agree with her thesis except to the point that the next Depression (if we have one) will certainly have different causes than the first one. That is necessarily true because the financial world of today is vastly different than it was then. However, I think she and other economists are far too sanguine about the American economy's resilience in the face of repeated shocks. The grotesque burden of huge debt and entitlement spending is putting stresses on the American economy that increase with time, and the second and third-order effects of those pressures are not well-understood. (Remember, all the bright boys in economics circles were telling us in 2006 and 2007 that there was no housing bubble, and even if there was, it would have little effect on the greater economy.)

Art Laffer again feels compelled to explain something that should be common sense but sadly is not: unemployment benefits aren't stimulus. Pull quote:

On the face of it, the idea that higher unemployment benefits won't lead to more unemployment doesn't make much sense. Imagine what the unemployment rate would look like if unemployment benefits were universally $150,000 per year. My guess is we'd have a heck of a lot more unemployment.

The problem is that to people like Nancy Pelosi and President Obama, the actual economics of the issue are completely beside the point. They are ideologues of the purest kind -- they'd rather see the country burn than admit they're wrong. They are driven by political beliefs so deeply-held that they amount to a religious faith, and no evidence to the contrary will disabuse them. That's why convincing them is a useless exercise; removing them from power is the only route to economic recovery. Laffer offers the real tonic:

My suggestion would have been to take all $3.6 trillion and declare a federal tax holiday for 18 months. No income tax, no corporate profits tax, no capital gains tax, no estate tax, no payroll tax (FICA) either employee or employer, no Medicare or Medicaid taxes, no federal excise taxes, no tariffs, no federal taxes at all, which would have reduced federal revenues by $2.4 trillion annually. Can you imagine where employment would be today? How does a 2.5% unemployment rate sound?

Hallelujah, brother! Preach it! (Also, be sure to read the comments on the article. Many of them are pure comedy gold.)

How in the hell can you fail a test that was constructed specifically to make it almost impossible to fail? (NOTE: This is a rumor at this point, so it might just be twenty pounds of bullshit in a ten pound bag. We'll see.)

NRO brings us this useful primer on how Democrats and debt go together like peas and carrots. Modern Democrats are just carrying on a tradition begun by their Progressive ancestors way back in the 1890's. (Long article, but well worth your time.)

Some interesting background on those huge gold-swaps between the banks and the BIS.

June numbers from retailers ended up like a wet fart: not catastrophic, but still embarassing and needing a quick clean-up. Mish has some additional thoughts.

Also from Mish, reasons why that scarifying BDI number may not be an artifact, but an actual downward trend in international trade.

"Gentlemen, California has overtaken us in the ranks of the Terminally Boned. This is unacceptable! Illinois has a proud tradition of fraud, thievery, cheating, lying, backstabbing, cronyism, perfidy, corruption, dirty-dealing, and governmental incompetence to uphold! I will not allow California to eclipse our great state! I am therefore instructing all state, county, and municipal employees to leave no stone unturned to make our state the shining beacon of failure and hopelessness that it has always been in the past!"

You can add "hospitals" to the list of chumps who got taken by slick-talking Wall Streeters and invested in instruments neither they nor the brokers really understood. But as every Vegas gambler finds out after their first big catastrophe at the tables: the house does not issue refunds. Better luck next time, pal. In Vegas, they call it the "stupidity tax". (The old advice is still the best advice, by the way: if it sounds too good to be true, it probably is.)

Well, my mom always said that if life hands you lemons, make lemonade.

More people are giving their credit cards a breather as unemployment (and fear thereof) makes consumers more leery of debt.

The epicenter of the boned: Oakland girds for the riots that are almost certain to erupt if and when ex-transit cop Johannes Mehserle is not found guilty of first-degree murder of Oscar Grant. (Details on the case can be found easily, so I won't recap them here.) This is financial news as well as cultural, because it will cause a huge hit to the Oakland businesses and residences that will surely be damaged or destroyed in a riot. California will also incur security expenses before, during, and after the event; not to mention cleanup costs and prosecuting the rioters themselves (or at least as many as they can catch and feel able to prosecute). The costs of a significant riot could easily run to the hundreds of millions, or even billions, of dollars. Worse yet, the "riot meme" could spread to other cities. (Later: Ace has the scoop. Involuntary manslaughter. Here we go....)

Alas, poor Harrisburg: we hardly knew ye. May your name live forever in the annals of stupid municipalities who spend too much money on badly-built shit they don't need. (This story would have been so much more perfect if the failed project in question had been a light-rail system, because then I could have whipped out the Simpsons monorail bit.)

I'm a fan of corporate disaster stories, and Microsoft's KIN debacle is a really juicy one. As the article points out, the KIN fiasco was mainly due to the failure of Microsoft to integrate the Danger unit into the corporate body, and a failure of upper management and marketing to understand the audience they were trying to reach with the device. This is a pattern that has been repeated many, many times in the industry. (As a VAX aficionado, I remember when DEC was acquired by Compaq which was acquired by HP, which left both DEC and Compaq gear in the Land of Forgotten Toys.)

Today's briefing brought to you by Robert Mitchum, who is just that cool, Daddy-O.