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July 15, 2010

Thursday Financial Briefing

I want to make a point about the equities markets before I move into my links. I've often said that equities markets only matter to the real-world economy to the extent that they're an indicator of public mood. In real-world terms, equities are pipsqueaks compared to the debt and fixed-income markets. If you want to know where the real economy is going, look to the bonds, commercial paper, and related instruments -- and the news there is not good at all. There is a barge-load of debt out there, and few people can give straight answers as to how that debt (both public and private) is going to be repaid. Remember this when you hear the happy-talk on CNBC or some other financial outlet. The Dow could go to 15000 tomorrow and it wouldn't improve America's finances by much. (And given how volatile things have been this year, it could plummet right back down to 10K a few days later as the hedgies take their profits.)

Equities ended their weeklong run yesterday, closing basically unchanged from Tuesday. The Dow closed at 10,366.65 and the S&P 500 closed at 1,095.17. Optimism over good corporate earnings from the likes of Intel was tempered by downbeat remarks on the economy coming out of the Fed.

Some good advice on how to get a real economic recovery underway. Hint: Keynesianism isn't it.

A good book review from the NYT that might appeal to people here mostly for this quote:

The world’s financial situation remains precarious. “But after a while when you wake up each day,” HFM says, “and sun still rises, there’s still food, it’s not ‘Mad Max’ with Australian guys with mohawks driving up and down the roads killing you for gas ... and people start to feel better.”
The ascent of Lord Humongous shall not be denied, unbeliever! He finds your plans puny and mock-worthy!

Some blogger of obscure stature and reputation notes that the Fed has finally admitted what the rest of us have known for a couple of years now: that the recovery is "slower than expected". The Fed is like the Oracle of Delphi, truly. Cryptic, vague, and unanswerable to any authority other than the Gods.

America is a huge manfucturing power (either the biggest or second only to China, depending on who you ask), and it's been doing quite well this year, even in the midst of the worst downturn in seventy years. But there are some signs that the manufacturing sector is starting to weaken as well.

Here's why you should treat CNBC as a comedy show and not financial news. Pull quote:

Before the show, the bank economist and I shared our views in the Green Room. I outlined my case for a major recession, and, to my shock, his response was, "I think that pretty much is the consensus." We got on the air, I gave my recession pitch, and he proclaimed a booming economy for the year ahead. He was a good economist and knew what was happening, but he had to put out the story mandated by his employer, or he would not have had a job. More recently, following an interview on a major cable news network (not CNBC), I was advised off-air by the producer that they were operating under a corporate mandate to give the economic news a positive spin, irrespective of how bad it was." And now you know that watching stations like CNBC for anything more than just comedic value is hazardous to your health and wealth.

More Eeyores think that the current equities rally is based on unfounded optimism about the underlying fundamentals in both America and Europe.

We all knew the Council of Economics Advisers report was going to be great big cart full of gaily-steaming bullshit. That was inevitable. But they didn't even try to make it look good! They just keep trotting out that "saved or created" nonsense that's already been debunked ad nauseam. Romer, Obama's devoted acolyte, lives in the same Bizarro universe where ruinous government spending and taxation somehow stimulate the economy.

Feel like flying into Baghdad and trying some of Mad Ali's Sheep Kebab for yourself? Lufthansa will take you there. It speaks volumes about the improvement in the situation over there that commercial carriers are again dipping a toe into the water.

Private real-estate is still in a world of hurt. That's not going to change anytime soon, either. We have a huge oversupply of private dwellings with few buyers. No one really knows what is going to happen to all that unsold housing stock, either (which is steadily depreciating even as we speak). There are entire subdivisions in California, Arizona, and Florida that are essentially ghost-towns. I'm betting that many of those houses will in the end either be sold for a song or even demolished.

The angst over China's economic ascent continues to smell rather strongly of the same panic the US felt over Japan in the 1980's. I respond to this panic in two ways: 1) I am happy for the average Chinese citizen, who is finally seeing some benefit from their labor after 400 years of failure and ineptitude -- they deserve any success that comes their way; and 2) America is in the enviable position of being able to worry about unlikely hypotheticals because we are the world's largest economy and will continue to be so for much of the 21st century and perhaps beyond. We face severe problems -- public spending being #1 among them -- but our competitors also have problems, in many cases more dire than our own. We as a people have a habit of overestimating our own problems and underestimating those of our adversaries. Don't begrudge the Chinese people some measure of success; just hope that they can cast off their Communist government and move towards being a freer people. There may come a time when the US and China square off as enemies rather than just competitors, but that outcome is not inevitable.

Fitch agrees with me about taking the whole "China is taking over the world" thing with a grain of salt. The Chinese are hiding an enormous amount of bad debt. If China hopes to succeed beyond their export-driven economy, their finances are going to have to become more transparent. And when/if this happens...look out below. That crash is going to make our little economic vacation of the past couple of years look mild in comparison.

Greece manages to roll some short-term debt, but as the linked article points out, only 20% of the issue was picked up by foreign investors, and even then only because of the implicit ECB backstop on Greek debt.

What's behind the big rally of the last couple of weeks? A freshly-printed river of cash probably has a lot to do with it.

This is a solid plan and I endorse it.

The New American Dream: a doublewide trailer on a corner lot, a pickup with a gunrack, a good dog, a bad woman, and Friday nights down at Don Ho's Urban Luau Lounge. You suburban rubes are only now finding out what rednecks have known for decades. Mindy Lou, Bo, Breck, Shay, Dani, Tuck, and Buford can get the GED and be bringing in money before your pampered young 'uns are even in their second year of their Avante Garde Theater major.

Many of the world's financial problems are structural in nature, and are going to be very difficult to solve. I think that we are finding that our modern banking and securities system, as well as runaway social welfare and entitlement spending, are doomed to complete collapse sooner or later. We've built a massive engine that can only run in a high-debt environment (read: easy credit). The problem is that, human nature being what it is, overextension and overleverage are the inevitable outcomes.

Lying liars who tell lies often have trouble getting people to believe their lies. The next step is usually to just knock the doubters on the head, take their money, and run away. The Obama Administration run their operation like the three-card monte guys near the bus-station downtown.

Punish the prudent and reward the incompetent. It's the Democrat way!

I can't wait for the day when a cornerstone of my investing strategy will be shares in legal marijuana (NYSE: SPLIFF). I'll also take up huge positions in the Frito, Cheeto, and frozen-burrito ancillary markets.

Many Americans think that we're still mired in a recession. We're not, because GDP is no longer contracting; but that doesn't mean the economy is in good shape. Quite the reverse. If you fall off a cliff and then hit the ground, obviously you're no longer falling, but it wasn't the fall you were worried about, it was the sudden stop at the end. We didn't get a V-shaped recovery, and may not even get a U-shaped recovery. Instead, we may bump along the bottom for a long while before we start trending back up again.

World banks are taking the Botox cure. Only as Nancy Pelosi's face so ably demonstrates, any curative power is temporary and has some frightening side-effects.

The great iron bell tolls again: DOOM! DOOM! DOOM!

One of the very few areas in which Paul Krugman and I are in agreement: HFT (high frequency trading) trading brings very little benefit to individual investors. It seems to exist mainly to benefit brokers and investment banks. (If HFT is so great, why is trading volume down so much? If HFT was really all about efficiency and value-add, wouldn't volume go up?) I also question the systemic risk involved in HFT. Human beings program computers, and human programmers make mistakes in their code. Highly-interconnected HFT systems pose a risk where a single rogue or runaway program could wipe out tens of billions, maybe hundreds of billions, in value in just a few seconds. I remember an old adage when I think of trading algos: speed kills. Worse yet, the programmers themselves often cannot audit or trace problems in their code because it is "adaptive" and changes its behavior procedurally as it runs. The "flash crash" in May may only have been a harbinger of what is to come. It does no good to bitch about it because HFT is here to say, but I view this as simply another argument for getting out of the market altogether. The markets have become a deadly jungle where individual investors are viewed as either prey or bait. Quants were behind a lot of the fuckery on Wall Street in the late 90's and early 00's (CDO and CDS, and other arcane derivatives); now they're screwing up the trading floors. Efficiency isn't everything, even in (perhaps especially in) financial markets.

Clip this article and hand out a copy to your Congressman, alderman, or city councilman next time you hear them complain that it's just not possible to cut government spending.

Albion gets a brisk kick in the yarbles. 'Ere's one for ya, ya tosser!

The debt primarily consists of the cost of public sector and state pensions, and of payments promised to private contractors under private finance initiatives. It far exceeds any of the figures so far published for the national debt, the largest current estimate for which is £903bn. That is projected to rise to £1.3trn by 2015.
Emphasis mine.

This is like finding out that the cheerleader you had a crush on back in high school grew a luxuriant moustache and put on roughly five thousand pounds while you were away at college.

Today's briefing brought to you by the story of my life.

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posted by Monty at 06:28 AM

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