Former Morgan Stanley Analyst Andy Xie explains why this will not be a regular cyclical recovery following the credit collapse and great Recession:

“In a normal economic cycle, an inventory-led recovery would be followed by corporate capital expenditure, leading to employment expansion. Rising employment leads to consumption growth, which expands profitability and more capex. Why won’t it work this time? The reason, as I have argued before, is that a big bubble distorted the global economic structure. Re-matching supply and demand will take a long time.

The process is called Schumpeterian creative destruction. Keynesian thinking ignores structural imbalance and focuses only on aggregate demand. In normal situations, Keynesian thinking is fine. However, when a recession is caused by the bursting of a big bubble, Keynesian thinking no longer works.

Many policymakers actually don’t think along the line of Keynes versus Schumpeter. They think in terms of creating another bubble to fight the recessionary impact of a bubble burst. This type of thinking is especially popular in China and on Wall Street. Central banks around the world, although they haven’t done so deliberately, have created another liquidity bubble. It manifested itself first in surging commodity prices, next in stock markets, and lately in some property markets. Will this strategy succeed? I don’t think so.”

Full article after the jump

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Source:
Andy Xie: New Bubble Threatens a V-Shaped Rebound
08-20 08:04
Caijing Magazine

http://english.caijing.com.cn/2009-08-20/110227359.html

A growing liquidity bubble that ignores structural facts is the basis for today’s happy talk about a comeback for the global economy.

By Andy Xie, guest economist to Caijing and a board member of Rosetta Stone Advisors Ltd.

The United States is beginning to report data showing strong economic growth. Analysts are upgrading their outlooks for the U.S. economy, which is expected to grow at an annualized pace of 3 to 4 percent. And even before the U.S. revival emerged in the third quarter, China’s data pointed toward a quick rebound in the second quarter.

Is the global economy staging a V-shaped bounce? The buoyant financial market had been expecting a rebound for months. Was the market right?

At the end of last year, I said I expected global stock markets to stage a big bounce in spring 2009, and the global economy to rebound in the second half. I also expected analysts to upgrade outlooks by this time. I warned that the economic pickup was due to inventory cycle and stimulus, and that the global economy would experience a second dip in 2010.

In a normal economic cycle, an inventory-led recovery would be followed by corporate capital expenditure, leading to employment expansion. Rising employment leads to consumption growth, which expands profitability and more capex. Why won’t it work this time? The reason, as I have argued before, is that a big bubble distorted the global economic structure. Re-matching supply and demand will take a long time.

The process is called Schumpeterian creative destruction. Keynesian thinking ignores structural imbalance and focuses only on aggregate demand. In normal situations, Keynesian thinking is fine. However, when a recession is caused by the bursting of a big bubble, Keynesian thinking no longer works.

Many policymakers actually don’t think along the line of Keynes versus Schumpeter. They think in terms of creating another bubble to fight the recessionary impact of a bubble burst. This type of thinking is especially popular in China and on Wall Street. Central banks around the world, although they haven’t done so deliberately, have created another liquidity bubble. It manifested itself first in surging commodity prices, next in stock markets, and lately in some property markets. Will this strategy succeed? I don’t think so.

The lifespan of a bubble depends on how it affects demand. The longest-lasting are property and technology bubbles. The multiplier effect of a property bubble is multifaceted, stimulating investment and consumption in the short term. The supply chain it impacts is very long. From commodity producers to real estate agents, it could stimulate more than one-fifth of an economy on the supply side. On the demand side, it stimulates credit growth and financial sector earnings, and often boosts consumption through the wealth effect. Because a property bubble is so powerful, the negative effects of a bursting are great. Excess supply created during a bubble’s lifespan takes time to consume. And a bust destroys the credit system.

A technology bubble occurs when investors exaggerate a new technology’s impact on corporate earnings. A breakthrough such as the Internet improves productivity enormously. However, consumers receive most of the benefits. Competition eventually shifts temporarily high corporate profitability toward lower consumer prices. Because the emergence of an important technology brings down consumer prices, central banks often release too much money, which flows into asset markets and creates bubbles. While an underlying technology leads to an economic boom, the bubble feels real. More capital pours into the technology. That leads to overcapacity and destruction of profitability. The bubble bursts when speculators finally realize that corporate earnings won’t rise after all.

The cost of a technology bubble is essentially equal to the amount of over-investment involved. Because a technological breakthrough expands the economic pie, the costs of a technology bubble are easy to absorb. An economy can recover relatively quickly.

A pure bubble tied to excess liquidity that affects one or many financial assets cannot last long. Its multiplier effect on the broad economy is limited. It could have a limited impact on consumption due to the wealth effect. As it neither stimulates the supply side nor boosts productivity, whatever story it is based on will have holes that become apparent to speculators. It doesn’t take long for them to flee. Furthermore, a pure liquidity bubble without support from productivity can easily lead to inflation, which causes tightening expectations that trigger a bubble’s burst.

What we are seeing now in the global economy is a pure liquidity bubble. It’s been manifested in several asset classes. The most prominent are commodities, stocks and government bonds. The story that supports this bubble is that fiscal stimulus would lead to quick economic recovery, and the output gap could keep inflation down. Hence, central banks can keep interest rates low for a couple more years. And following this story line, investors can look forward to strong corporate earnings and low interest rates at the same time, a sort of a goldilocks scenario for the stock market.

What occurred in China in the second quarter and started happening in the United States in the third quarter seems to lend support to this view. I think the market is being misled. The driving forces for the current bounce are inventory cycle and government stimulus. The follow-through from corporate capex and consumption are severely constrained by structural challenges. These challenges have origins in the bubble that led to a misallocation of resources. After the bubble burst, a mismatch of supply and demand limited the effectiveness of either stimulus or a bubble in creating demand.

The structural challenges arise from global imbalance and industries that over-expanded due to exaggerated demand supported in the past by cheap credit and high asset prices. At the global level, the imbalance is between deficit-bound Anglo-Saxon economies (Australia, Britain and the United States) and surplus emerging economies (mainly China and oil exporters). The imbalance was roughly equal to US$ 1 trillion, or 2 percent of global GDP. The imbalance was supported by: 1) the willingness of central banks in surplus, emerging economies to hold down exchange rates and recycle their surpluses into the deficit economies by buying government bonds; 2) the willingness of consumers in deficit countries to buy with borrowed money; and 3) Wall Street’s ability to dress up high-risk consumer loans as low-risk derivative products. I am describing these factors to underscore that central banks are unlikely to bring back yesterday’s equilibrium.

Recent data point to a sharp increase in the household savings rate in the United States. Over two years, it rose above 5 percent from minus 2 percent. The current level is still below the historical average 8 percent. If normalization remains on track, it should rise above 8 percent, and probably reach above 10 percent, to bring debt levels down to the historical average.

Some argue that, if low interest rates revive the property market, American households may be willing to borrow and spend again. This scenario is possible but not likely. The United States has not experienced serious property bubbles in the past because land is privately owned and plentiful. A supply overhang from one bubble takes a long time to digest. And American culture tends to swing to frugality after a bubble. One’s outlook either for a normal recovery or a bubble-inspired boom depends on the outlook for the U.S. household savings rate. Unless the U.S. household sector is willing to borrow and spend again, emerging economies will not be able to revive the export-led growth model.

If one accepts that the U.S. household savings rate will continue to rise, emerging economies must decrease their savings rates, increase investment, or decrease production. The best choice is to decrease savings rates. But savings rates are hard to change. They depend mainly on demographics and wealth levels. The quickest possible way out would involve creating an asset bubble that inflates household wealth and decreases savings. Many advocates of inflated property and stock markets in China have this effect in mind. Japan’s bubble after the Plaza Accord in 1985 had its origin in the same dilemma. This approach, if it works, has catastrophic long-term consequences. Japan remains mired in stagnation two decades after its bubble began to burst.

Some analysts are expecting China to repeat Japan’s bubble experience, which occurred in the late 1980s. At that time, Japan’s export-led growth model was stymied by a doubling of its currency value after the Plaza Accord. It tolerated a massive asset bubble to stimulate domestic demand and stabilize its economy. China’s export-led model is facing a rising savings rate and declining U.S. demand for its exports. Asset inflation could be a way out in the short term.

China doesn’t need to repeat Japan’s experience. One reason is that the circumstances are not the same. First, Japan was a developed country when its bubble started getting out of control in 1985. It couldn’t divert its vast savings into infrastructure investment. But today, China’s national urbanization project still has up to 30 percentage points to go. If the right mechanism can be implemented, China could divert more savings into urbanization.

Second, China can decrease its savings rate substantially through structural reforms. Half of China’s gross savings are in the public sector. The government and state-owned enterprises should decrease revenue-raising and increase borrowing to finance investments. For example, China’s high property prices are based on the investment-fund revenue needs of local governments. If China’s property prices were cut by one-third, the national savings rate could decrease by two to three percentage points.

Third, the Chinese government could give its shares in listed state-owned enterprises to the household sector. The subsequent increase in household wealth could lower the national savings rate by three to four percentage points.

China’s exports are down by roughly one-fifth. It needs the national savings rate to fall by about six percentage points for the economy to function normally. Otherwise, the economy will experience either a recession or a bubble. And the purpose of a bubble, as mentioned, would be to temporarily decrease the savings rate.

This discussion may seem to digress from the analysis of sustainability in the current economic recovery. But it brings out two points: The old equilibrium cannot be restored, and many structural barriers stand in the way of a new equilibrium. The current recovery is based on a temporary and unstable equilibrium in which the United States slows the rise of its national savings rate by increasing the fiscal deficit, and China lowers its savings surplus by boosting government spending and inflating an assets bubble.

This temporary equilibrium depends on government action. It does not have a market foundation that would support sustained and rapid growth. Nevertheless, improving economic data will excite financial markets.

China’s stock market is cooling because the Chinese government is jawboning it down, based on fears of a big bubble downside. And the economy is beginning to slow. Markets outside China will likely do well for the next two months; diverging trends reflect that China’s market recovered four months before others, and adjusts before others as well.

Financial markets will turn down again when investors realize that the global economy will have a second dip in 2010, and that the U.S. Federal Reserve will raise interest rates soon. The turning point may well come sometime in the fourth quarter. By then, it would become apparent that China has slowed. U.S. unemployment will not have improved and, hence, its consumption will remain stagnant. And production data that’s pushing expectations now will cool after the inventory cycle runs its course.

Most analysts would argue that central banks won’t raise interest rates before the recovery is on solid ground. The problem, though, is that fiscal stimulus can’t resolve structural problems blocking a sustained recovery. Liquidity is the wrong medicine for the global economy right now. Overusing it encourages its side effect — inflation.

Conventional wisdom says inflation will not occur in a weak economy: The capacity utilization rate is low in a weak economy and, hence, businesses cannot raise prices. This one-dimensional thinking does not apply when there are structural imbalances. Bottlenecks could first appear in a few areas. Excess liquidity tends to flow toward shortages, and prices in those target areas could surge, raising inflation expectations and triggering general inflation. Another possibility is that expectations alone would be sufficient to bring about general inflation.

Oil is the most likely commodity to lead an inflationary trend. Its price has doubled from a March low, despite declining demand. The driving force behind higher oil prices is liquidity. Financial markets are so developed now that retail investors can respond to inflation fears by buying exchange traded funds individually or in baskets of commodities.

Oil is uniquely suited as an inflation hedging device. Its supply response is very low. More than 80 percent of global oil reserves are held by sovereign governments that don’t respond to rising prices by producing more. Indeed, once their budgetary needs are met, high prices may decrease their desire to increase production. Neither does demand fall quickly against rising prices. Oil is essential for routine economic activities, and its reduced consumption has a large multiplier effect. As its price sensitivities are low on demand and supply sides, it is uniquely suited to absorb excess liquidity and reflect inflation expectations ahead of other commodities.

If central banks continue refusing to raise interest rates during these weak economic times, oil prices may double from their current levels. So I think central banks, especially the Fed, will begin raising interest rates early next year or even late this year. I don’t think it would raise rates willingly but wants to cool inflation expectations by showing an interest in inflation. Hence, the Fed will raise interest rates slowly, deliberately behind the curve. As a consequence, inflation could rise faster than interest rates, which is what the indebted U.S. household sector needs.

This fool-the-market strategy may work temporarily. Its effectiveness must be reflected in oil prices; the Fed needs to target oil prices in its interest rate policy. If oil prices run from current levels, it means the market doesn’t believe the Fed. That would force the Fed to raise interest rates quickly which, unfortunately, would trigger another deep recession.

Instead of a V-shaped recovery, we may instead get a W curve. A dip next year, although perhaps not statistically deep, could deliver a profound psychological shock. Financial markets are buoyant now because they believe in the government. The second dip would demonstrate the limits of government power. The second dip could send asset prices down — and keep them down for a long time.

Category: Cycles, Economy, Markets, Psychology

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

64 Responses to “Andy Xie: New Bubble Threatens a V-Shaped Rebound”

  1. Concerned American says:

    This recession/depression has always been about offshoring our good jobs. If we still has the employment and income levels we had before the CEO’s and our own Government decided we needed to send all our good jobs offshore, there would be no recession.

    I agree W isn’t 100% to blame but he is about 80% of it. He did ABSOLUTELY NOTHING to slow that down and actually encouraged it and said it was good for us. It didn’t take a genius to figure out this would be the result.

    Then rather than allow us to go ahead and crash allowing the reset and recovery to begin, he and Obama have decided to throw money stupidly at the problem and kick the can down the road. This will only result in a much worst situation in the future. We can’t recover until we are allowed to crash. The only good thing is that when it does happen many of the very rich won’t escape now either. No one can afford the debt the Nation is in now.

    As long as people will keep voting for one of the major parties NOTHING WILL CHANGE, despite what they say.

  2. jc says:

    So the massive printing of money and 50% US deficit jack up commodity and asset prices in the hopes that it jump starts the US economy and as a bonus a dollar collapse will allow the US to repay the world with US pesos. The uber downside is if the economy doesn’t catch fire and we still have real high unemployment plus runaway inflaion fueled by high commodities – especially oil. Thats when the pichforks come out!

  3. Cohen says:

    @jc

    that would definitely be a nightmare scenario but im operating on the economy doesn’t catch fire, commodities collapse, financials (esp. Europe) relapse, increased debt destruction (deflation), dollar up, China down. Unemployment stays high. Not sure which is less bad but that’s how I’m positioned.

  4. wally says:

    That’s a very thought-provoking article. Thanks for posting it.

  5. VennData says:

    Fired-for-his-anti-Singaporean-comments Andy Xie boldly claims “However, when a recession is caused by the bursting of a big bubble, Keynesian thinking no longer works.”

    Yet in the case of Sweden’s massive real estate bubble cleanup, Keynsian policies DID work. Disproving a claim only needs one counter example. There are others.

    Japan’s post-bubble has given them flat GDP but they’re eating, drinking, exporting Wiis… in other words even that “worst case” is doing fine. Only now after hit by another global shock will they even kick out the incumbent party.

    This more of the typical theatrics economic writers feel they need to bang out: Boom! Bust! Destruction!

    Relax.

  6. call me ahab says:

    “Financial markets are buoyant now because they believe in the government.”

    hysterical line- especially juxtaposed against the banker types who believe in little regulation- so what they believe in is- that the USG will be there to make sure they stay solvent and are able to make large profits and pay large bonuses- but god forbid they stopped them from their reckless dangerous ways-

    such phonies- so full of shit

  7. carmen101 says:

    Who says that the current commodity price action and equity market boom are not going to collapse because there’s no real recovery in jobs? I see treasuryyields going down for a while in spite of all the deficit talk. Genius is whoever can figure out what the source of new well compensated jobs is going to be. I have no clue. So consumer demand, energy demand does not justify high valuations in commodities and stocks.

  8. super_trooper says:

    ZZZZZZZZZ, I fell asleep reading it. How about some succinct writing???
    If I can write and publish a 3 page paper summarizing my last 2-3 years of actual research, is it too much to ask for less writing when it comes to speculation? Foreplay this and that, just get to the action, it’s not like we’re married.

  9. cvienne says:

    @Cohen

    I’m with you…

    The dollar is going to introduce to me that “cold steel” feeling, but I’m sticking with it.

    I always like reading AX

  10. mcHAPPY says:

    I see oil reached a new 2009 high this morning. Call me naive but how the hell can we ease out of a recession like the headlines are screaming with $75 oil? I think the calls for a double dip are warranted, however the end of 2010 might be a little late. The very fact there is no sense in all of this leads me to think the end of this game of Old Maid is nearing as we are running out of cards to play.

  11. Cohen says:

    The UUP play is getting hectic. 23.29 is busted in the pre and im sticking with it too but if it craps through 23, I don’t know

  12. cvienne says:

    @Venn Data

    “Japan’s post-bubble has given them flat GDP but they’re eating, drinking, exporting Wiis”

    Japan’s “post bubble” occurred during a time of unprecedented consumption and credit (worldwide & in America).

    Now that those phenomenon have been hacked off at the knees, we’ll see where the next phase of the saga goes.

  13. call me ahab says:

    cvienne says-

    “Now that those phenomenon have been hacked off at the knees, we’ll see where the next phase of the saga goes.”

    good point

  14. mcHAPPY says:

    Watching the dollar plummet and oil blast off has hacked me off at the knees today.

  15. cvienne says:

    @ahab

    I meant to say more, but it was 9:29 and I was looking at the opening.

    Basically, if Japan wants to EXPORT wii’s & cars to survive (VD mentioned wii’s, I tossed in cars), well let’s see…

    1. The only thing helping with cars has been CFC (which is being terminated on Aug 24th)
    2. Wii’s??? Well, good luck with that too…I heard two pieces of anecdotal evidence on the internet this week. The first was that Sony was dropping prices on Playstations. The second was, that “board game” sales were up at the expense of video game sales (a strange piece, but nevertheless…).

  16. cvienne says:

    @mcHappy

    It’s hacking me too, but I’m sticking with it…

    This has the feel of options pinning, plain & simple. If I’m wrong, I’m wrong.

  17. karen says:

    Xie hits the nail squarely on the head over and over again:

    1. What we are seeing now in the global economy is a pure liquidity bubble. It’s been manifested in several asset classes. The most prominent are commodities, stocks and government bonds.

    2. Financial markets will turn down again when investors realize that the global economy will have a second dip in 2010, and that the U.S. Federal Reserve will raise interest rates soon. The turning point may well come sometime in the fourth quarter.

    3. Conventional wisdom says inflation will not occur in a weak economy: The capacity utilization rate is low in a weak economy and, hence, businesses cannot raise prices. This one-dimensional thinking does not apply when there are structural imbalances.

  18. dead hobo says:

    mcHAPPY Says:
    August 21st, 2009 at 9:19 am

    I see oil reached a new 2009 high this morning. Call me naive but how the hell can we ease out of a recession like the headlines are screaming with $75 oil?

    reply:
    ——————
    Yes. This obvious fact you pointed out is the tar baby nobody likes talking about

    From Wikipedia: Tar-Baby was a doll made of tar and turpentine, used to entrap Br’er Rabbit in the second of the Uncle Remus stories. The more that Br’er Rabbit fought the Tar-Baby, the more entangled he became. In contemporary usage, “tar baby” refers to any “sticky situation” that is only aggravated by additional contact. The only way to solve such a situation is by separation.

    Liquidity is only one part of the oil problem. Inept and incompetent regulations of the derivative markets allow oil to be an asset class as opposed to a commodity. Ponzi economics is an institutionalized part of this scenario. No recovery of any type can begin or will begin until oil prices reflect actual supply and demand for the commodity, as opposed to demand for speculative paper.

    Various aspect of HFT are a second problem. Flash orders and predatory algorithms that create orders that have no purpose except to ping for potential suckers need to be removed from existence. The high volume in the markets corresponds to a high velocity of money in traditional monetary economic. High velocity plus high liquidity equals asset inflation. This is great if you are a trader but the US economy needs investors who will ultimately participate in job and real wealth creation for people others than Wall Street parasites.

    The Fed has decided to ignore their participation in the current oil bubble. I suspect they think “it’s not their problem.” The CFTC and Congress have to deal with this, they likely rationalize. The Fed is innocent. Plus, listen carefully to Bernanke when giving testimony. He likes to point out that the stock market is rising, with the implication his programs are working and he should be thanked for this recovery. Like Greenspan, he is using a bubble to fix a bubble. He should not be reappointed.

  19. mcHAPPY says:

    The hacking is getting mighty close to what makes mcHAPPY smile.

    Also of note, I do not see how inflation can be a concern when home prices are falling. Has there ever been a period of inflation where home prices have been declining? I can’t find any data.

  20. CNBC Sucks says:

    “Many policymakers actually don’t think along the line (sic) of Keynes versus Schumpeter.”

    Most US policymakers have never heard of Schumpeter, or they wouldn’t know what to do with his prescriptions if they did. The only thing policymakers in THIS country know how to do is increase interest rates or decrease interest rates, increase money supply or decrease money supply, blah blah blah. American policymakers would not know what to do with an innovation policy or industrial policy or a trade policy if it hit them in the head, which is why the Department of Commerce is an afterthought.

    That Andy Xie is quite the card for suggesting otherwise.

    Now, the real reason for my return is: cvienne, when the hell are you going to clarify who is in and who is out in your football fantasy league? Putting those of us who are registered in limbo as to whether we have to delete our teams is frankly very gay.

  21. cvienne says:

    @Cohen

    Auto sales down from, what, 16 million just a few years ago, to 11???

    And possibly 9 when clunkers ends…

  22. Mike in Nola says:

    I think he has a generally good analysis of the situation and what the Chinese situation is and what the Chinese government could do to help out their situation.

    The fly in the ointment is that what goverments can do and what they will do are two different things. They try what’s worked in the past. Here, instead of taking down C, etc. and restructuring finance, they are simply trying to create another bubble. Hey, it worked from 2003-2007, so let’s kick the can down the road. China had a successful run during our bubble years amassing a vast pool of dollars by subsidizing exports, so what are they gonna do? Subsidize more exports. A massive national infrastructure program (much bigger than what’s going on now) and giving the average citizen state-owned wealth would be great, but they ain’t gonna happen. They have taken the easy way out be profligate credit creation which has expanded their property bubble that never popped and reinflated their stock market. Their are huge amounts of NPL’s in China, local goverments who make most of their money in land sales are pumping up land values to unsustainable values, and pig farmers are speculating in copper. http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ae8qY8FcYJa4

    Oil is sorta the same story. At some point it will all give way, just a matter of when. Could be when Uncle Ben pulls back a little on QE and some of the big houses have to actually pay for stuff with real money and not borrowed. Could be when some of the speculators in China start to cash out. Could be collapse of some big financial or commodity business that has gotten overextended playing the bubble.

  23. karen says:

    oil is the anti-dollar. it doesn’t get any simpler than that.. i think it has frustrated the gold bugs to some extent, and has been fascinating to watch..

  24. dead hobo says:

    karen Says:
    August 21st, 2009 at 9:47 am

    3. Conventional wisdom says inflation will not occur in a weak economy: The capacity utilization rate is low in a weak economy and, hence, businesses cannot raise prices. This one-dimensional thinking does not apply when there are structural imbalances.

    reply:
    ————
    Assuming the oil markets are never repaired, I think you will see a strange mix of both inflation and deflation.

    Deflation:
    ——————
    Excess capacity and unemployment will will lower the prices of most things. Interest rates will remain low or return to low levels due to a liquidity trap: nobody wants to borrow for anything. This will create a negative feedback loop and cause demand and consumption to lower even more, causing even more unemployment.

    Inflation:
    —————–
    Money need a place to go and will seek a return. Excessive liquidity will be used to fight the liquidity trap and will flow to oil. Commodity prices will continue to rise, even while demand decreases. Some demand may be for stockpiling purposes by speculators – like appears to be common in China at this time. All things made from oil will rise in price, creating inflation. Other asset bubbles will probably appear selectively. Wall Street will make gobs of money. Politicians and the Fed will be mystified.

  25. Cohen says:

    Let’s see what the home sales has to say…shorts prepare to blow your brains out

  26. Mike in Nola says:

    BTW, saw a little piece somewhere, may The FT, that China was now Japan’s biggest trading partner.

    Good luck trying to export to China; China is looking at Japan as an export market alternative to the West, but Japanese consumers are notoriously tight fisted and their economy is much worse than ours: industrial capacity utilization is something like 60%, and that’s up from worse.

  27. I-Man says:

    Gotta love Andy Xie…

    Good morning party people!
    I-Man signs in from vacation… hopping on a flight to the East Coast in a few hours and looking forward to a week at a slow noncommercial SC beach… and hopefully some Hurricane Bill enhanced swells for his board riding pleasure… yeah brah. Sunshine would be better though I guess.

    When I and I went to bed at 11 pacific… wtic was down over 1%, asia was gettin whacked… and all looked good for some dollar rally and crude falter… which would have been nice for my SCO.

    Set a vacation stop on SCO and I and I will let it ride and let the chips fall where they may. I’m with CV on the opex posturing… and although 1013 was kinda “the number” this morning… I’m still feeling inclined to the downside for SPX but if you’re short… in the words of the RZA from Wu Tang… “you gotta protect ya neck”.

    Now that I see WTIC surging up a buck fitty… I might be outta SCO before I finish typing this.

    Kinda wish peeps would just STFU about the dollar for awhile.

  28. Mike in Nola says:

    Existing home sale up, surprising only the credulous. Guess the pigs will be in clover a little longer expecting the return of HELOC and RMBS to finance consumption and bonuses. I wanna see what happens if there’s a hint the QE is being reduced.

  29. manhattanguy says:

    Dollar is making a move. I heard Paulson bought $3 bilion long position on the US Dollar.

  30. ben22 says:

    OT:

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    Yours with appreciation,

    Rob McCord, Treasurer

  31. manhattanguy says:

    We save the world from disaster: Bernanke

    http://www.marketwatch.com/story/we-saved-the-world-from-disaster-bernanke-says-2009-08-21-10100

    Let’s go party like 1990s while we are reminded that it was Mr Bernanke and his clowns who brought us into this mess in the first place. A little too soon to declare victory if you ask me.

  32. karen says:

    What is also hilarious, more or less, is how completely out of touch Bernanke is with the real world.. is no one remembering his commentary thru 2007-2008?! why would they heed his words now, lol.

  33. call me ahab says:

    i-man-

    my daughter just called from OBX and said the waves were 10′ to 15′- SC usually a bit more tame but should be good nonetheless-

    have fun

  34. Mannwich says:

    @karen: Because there is no penalty for being disastrously wrong in this country – - if you’re one of the “royals”, that is. The royals screw up and over and over and over again, but merely revise history to fit their own “facts” or reality if you will, and then move onto the next scam. And we fat, lazy, stupid Americans take it over and over and over again.

  35. Mike in Nola says:

    Ben: that was incredible. We lost your money, so now we have to charge you more.

    Read recently that the State of Texas is on the hook for some billions of dollars for its prepaid tuition plan. It was set up when tuition was much lower. Then, like everywhere else, state tuition was deregulated so the the administrators could gorge. Now, not enough money to pay the inflated tuitions.

  36. Mike in Nola says:

    i-man: keep an eye on this site : even those who don’t get hit often get a good whack
    http://spaghettimodels.com/

    I remember last year Ike missed La. and hit near Houston but caused widespread coastal flooding drenching rains as far east as Fla.

  37. mcHAPPY says:

    My fear is BB gets it right for once. I would love to get real evidence Paulson is long on the dollar.

  38. Mike in Nola says:

    karen: still wanna see BB put his money where his mouth is and pull some QE back.

  39. ben22 says:

    @Mike,

    You called it, the whole letter could have been just that one line. These programs were so flawed from the start.

    re: Bernanke, he’ll live to regret words he’s been using recently imo.

    re: Paulson, can that be verified anywhere? His second quarter purchases which came out recently included a lot of anti-dollar plays. He’s about as good as it gets lately so this would be important if true.

  40. ben22 says:

    Bernanke thanks his lucky stars every day that Bernie Madoff got busted. If he hadn’t, you might hear more shows about how the Fed has been the scam of the century instead of Madoff.

  41. karen says:

    Mike and Ben, thanks for clearing up the letter… i was so taken aback, i thot i misunderstood it; but i also thot ben had a reason for posting it.. so i gave up.

  42. manhattanguy says:

    Re Paulson: I saw that message on Doug Kass’s twitter page. I asked him for a link.

  43. ben22 says:

    karen,

    just trying to expose some more of the bs that is going on out there, that was my only purpose in putting that up, and also to warn people that need to save for kids college, don’t do it that way.

  44. Onlooker from Troy says:

    manhattanguy

    Could that be Bernanke’s “Mission Accomplished” moment? I’m sure this just emboldens him and stokes his arrogance and hubris (and others of his ilk). It will all come unraveled eventually because it’s all based on a sham. Until we get a solid, fundamentally sound national and global economy we’re just living on borrowed time (and money, of course). Ugh

  45. Mike in Nola says:

    ben22: lawyer friend whom I ve mentioned before who finally bailed out only about 20% down had kids college funds in some sort of custodial account at JPM Chase. Lost lots because he didn’t dump their stock funds. Emailed him a few months ago to get ready to bail on those, but doubt it’s gonna happen.

    I imagine there will be a lot of future stress on colleges because the kids don’t have the money and the colleges have been spending anticipating the same growth as the last decade.

  46. AmenRa says:

    One fibo down and one to go before the waterfall. It’s obvious to me now that they will stop at nothing to keep the market going higher. So now I’m looking at 1121 on the S&P. That should in about six weeks (or soon after Sept opex). I’m in cash until then. Currently need a 4% loss to reverse the daily TLB. MACD OSC still moving up also.

  47. Onlooker from Troy says:

    “I imagine there will be a lot of future stress on colleges because the kids don’t have the money and the colleges have been spending anticipating the same growth as the last decade.”

    Mike

    People have got to be much more reticent to borrow the amounts of money for college that had become the norm over the past decade. So many people weighed down by huge debt loads for a degree that’s all too often not gotten them a job that has an income that’s worth the debt. This has got to end. Education costs have to come into line with incomes in the same way as housing does.

    I don’t know exactly what has driven up education costs, but they had better figure out where to squeeze the fat out. I imagine it all goes back to the same bottom line: we have to accept a lower standard of living for a while. So all those fancy buildings, fitness centers, etc. will have to give way to a more utilitarian structure. I think we’ll survive (snark). There just has to be an adjustment in expectations.

  48. cvienne says:

    @CNBC Sucks

    I won’t discuss fantasy football on these threads (unless it is an open thread)…You’ll understand…

    I’ll get back to you guys via the league e-mails…

    You should hold your tongue, YOU are actually in, I’m waiting just on someone who had offered to relinquish the spot…

  49. Mannwich says:

    @Onlooker: What drove up education costs? The same thing that drove up housing costs – cheap & easy credit. Without it, we are in deflation mode everywhere. That’s what the Feds are doing everything in their power to try and avoid.

  50. Mannwich says:

    @cvienne: BR – sorry for the off-topic post. What is the league number again? I’m trying to sign up now and it’s asking me for the league number.

    You can email me at mannwich08@gmail.com

  51. cvienne says:

    @Manny

    I’ll get to you this weekend on it…No more talking about it here, OK?

  52. Onlooker from Troy says:

    Yeah, I agree Mannwich. People were willing to continue bidding up education costs, not knowing that their willingness to borrow, no matter how much it grew to, was the reason for the rise. And who can argue with the thesis that education is necessary and good?

    The data was compelling that you needed the degree to compete and not fall behind in earnings. And college administrators were emboldened to keep borrowing to expand and upgrade because of the demand. And up and up we went. Until the debt burden across the board finally reached unsustainable levels. Now what?

  53. Mannwich says:

    @Onlooker: It became (and still is to a large extent) about how much debt one could service every month, instead of the total figure owed. Individuals and corporations just keep rolling over that debt (think interest only) time and time again. We’re in a collective state of suspended animation.

  54. Mike in Nola says:

    Onlooker: don’t I know it. My daughter wanted to go to law school 5 years ago. Told her don’t. But, what do I know. She says she was scared signing those loan papers, but they told her not to worry: you’ll easily make enough to pay this off. So now she’s settled with 150k debt and working as a paralegal. She’s had to get payments put off several times or make pay token amounts. She’s now probably going to have to stretch out the payments til middle age. Makes me hope for hyperinflation in a few years after I get me another house and some gold.

    What really pisses me off is that this is about the only loan not dischargeable in bankruptcy and it has no statute of limitations. Yet, the TARP money went to bail out the student loan companies while the kids are all left on the hook. It’s disgraceful, but that the American Way.

  55. Mannwich says:

    @Mike: After this debacle and seeing how it is the banking institutions that get bailed out during times of economic stress, while the average person is relegated to debt slavery and modern-day feudalism, millions of Americans (at least the “thinking” ones that are left) will likely swear off debt forever. A quiet backlash against the banks is brewing.

  56. Mike in Nola says:

    Looka this crap. Someone at the Fed wants to make the bailouts facilities permanent, even extending them to “important non-bank firms that are subject to bank-like runs.” i.e. GE and AIG I suppose

    http://www.cnbc.com/id/32509147

  57. Mannwich says:

    @Mike: Of course they do. This will go on forever until some “unforeseen” event or events grinds everything to a halt.

  58. Mike in Nola says:

    Good post on ZH about what’s really going on with the green shoots in EU land.

    http://www.zerohedge.com/article/chinas-credit-bubbleicious-trade-balance-pain

  59. CNBC Sucks says:

    Thanks, cvienne.

    Before I go back into retirement, I have to say you guys – and I do mean guys – play it a lot closer to the vest with your posts since Mount St. Ritholtz went on his 100-comment volcanic eruption. As I wrote Bergsten (and no, ahab, Bergsten is not The Great CNBC Sucks), I think Barry Wuzzy was just missing The Great CNBC Sucks. :( I can empathize; I wuv The Great CNBC Sucks too. :)

    All your base are belong to CNBC…and PIMCO.

  60. manhattanguy says:

    Nice to see you back CNBCSucks, enjoyed reading the updates on your site.

  61. Onlooker from Troy says:

    Mike

    I like this comment from that ZH post:
    http://www.zerohedge.com/article/chinas-credit-bubbleicious-trade-balance-pain#comment-43241

    It’s all just so broken. The world’s gone mad again on the funny money. I give up.

    On the other hand it makes things much more interesting for the next couple of years. We get to watch this crazy bubble spiral the markets up, and then we get to watch another crash some time down the road when it all comes unglued again. What fun.

  62. Lord says:

    That isn’t quite classic Keynes. He recognized the imbalance and proposed public investment to replace the decline of private investment. Perhaps some of his followers though.

  63. VangelV says:

    “Financial markets are buoyant now because they believe in the government. The second dip would demonstrate the limits of government power. The second dip could send asset prices down — and keep them down for a long time.”

    Given the fact that most market players are Keynesians who do not believe in free markets and support government interventions it is likely that they would see the light and figure out that government actions are the problem, not the solution. But it could well be that what we see is a loss of faith by the fiat currencies that governments keep printing to deal with the bursting bubbles. If that is the case we could see price collapses in real terms but hyperinflation in the national currencies that we are looking at. I would still be buying gold and shares in well run energy companies and metals producers with reserves in safe areas of the world.