The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

David R. Kotok
Chairman and Chief Investment Officer
Memorial Day Weekend, May 31, 2010

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“The fact that neither the government nor the public sector was prepared for the blowout of the British Petroleum rig indicates a profound failure of planning, execution and regulation. While Congress and others look for individual causes and scapegoats, the truth is that this was a systemic failure with profound consequences for America’s economy and energy policy. But it is also another indication of broader flaws in how we manage our affairs and think about complex problems.” This is excerpted from the HCM Market Letter, June 1, 2010, www.hcmmarketletter.com, author Michael Lewitt, GIC member and speaker at GIC meeting in Paris on June 17, superb writer and analyst and author of his new book, The Death of Capital, essential reading for any serious investor.

“Top Kill Fails” screamed the headline as Americans awoke to the news on Sunday morning. For many in the five-state Gulf of Mexico (GOM) region and for many others around the US, this holiday weekend started out with the feeling that the nation had just been kicked hard in the stomach. The truth is that it has.

In our series entitled “Oil Slickonomics” (www.cumber.com) we have offered three scenarios: “bad, worse and ugliest.” With the failure to cap the well, we have now clearly gone from bad to worse. Whether or not the ugliest scenario can be averted remains to be seen. To get to this third outcome the oil slick will have to reach the Gulfstream and start to threaten the Atlantic Ocean and the East Coast of the United States. To date there is no evidence of that event, but the risk continues to rise every day as the oil slick enlarges in the GOM. Presently the oil seems to be confined to a large eddy in the GOM and has not entered the Loop Current, according to NOAA; however the latest offshore trajectory forecast suggests it is dangerously close. A half-dozen research ships are tracking the oil plumes in the GOM.

Flow estimates were originally 1000 barrels daily. They were increased to 5000 and are now estimated at 12,000 to 19,000 barrels a day. For perspective we must now consider that between 20 and 40 million gallons of oil have spewed into the GOM and the rate continues between 500,000 and 800,000 gallons a day. Dispersant usage is intensified and fully resumed. Remember that dispersants are a tradeoff. They help break down the oil while adding their own form of toxicity instead. There is no precedent in history for the amount of dispersants being used in the GOM.

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BankruptingAmerica:

According to a recent poll, 74 percent of likely voters are extremely or very concerned about the current level of government spending. And 58 percent think the level of spending is unsustainable.

Is the public right? Is Washington bankrupting America? Some facts from the video:

Spending per household has risen over 40 percent in the last 10 years and is set to do so again in the next 10 pushing debt (and interest on the debt) to unprecedented levels. But that’s just a result of PAST spending…

Our government owes $106 trillion in FUTURE spending commitments – that cannot be paid for.

We can solve it, but politicians will have to make tough choices. Increasing taxes can’t do the trick ($106 trillion is equivalent to taking all of the taxable income from every American nine times over), nor is it fair to saddle taxpayers with a problem created by government irresponsibility.

We need real spending reform. Merely returning to the spending per household levels of the 1990s would balance the budget in three years.

Traders are probably relieved that May is over, and June is finally here:

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via The Chart Store

Pretty awesome:  Deviant Art has plotted the timeline and character interaction of the film, Pulp Fiction:

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Hat tip Flowing Data

Alan Abelson notes this in this week’s Barrons that the top 8 stocks in the POWERSHARES QQQ exchange-traded fund for the Nasdaq 100 — better known as just “The Qs” (QQQQ) — have seen some insider selling.

Abelson specifically notes Alan Newman’s CrossCurrents advisory letter: Newman’s survey of insider transactions in the top eight issues in the ETF performed on May 10 discovered sometihng rather astounding:

“There were 231 sellers and three buyers, which works out to a somewhat lopsided ratio of 77 to 1. All told, the insiders sold 59.8 million shares and purchased 15,200 shares, a sell/buy ratio of 3,933 to l. Not exactly a resounding vote of confidence in the prospects for their companies.

Moreover, Alan notes, analysts are just as positive on the QQQ leaders as they were back in March 2008 before a 37% fall in price. At that time, 74.1% of the recommendations were Buys and 2.9% were Sells. As of May 10, 2010, 77.7% were Buys and 3.6% Sells. The more things change, we guess, the more things stay the same, especially on Wall Street.

Insiders are hardly infalliable investors and, as Alan observes, their investment habits are not a timing indicator. Still, they do tend to know a bit more about the company and its outlook than the analysts or the folks buying the stocks they’re so determinedly selling.

What this says about valuation, the market, or the recovery is up for debate. But its certainly worth thinking about . . .

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Source:
Orgy of Speculation
ALAN ABELSON
Barron’s, May 29, 2010   
http://online.barrons.com/article/SB127508647370598505.html

Chairman Ben S. Bernanke
At the Institute for Monetary and Economic Studies International Conference, Bank of Japan, Tokyo, Japan
May 25, 2010

Central Bank Independence, Transparency, and Accountability

The financial crisis that began nearly three years ago has caused great hardship for people in many parts of the world and represented the most profound challenge to central banks since the Great Depression. Faced with unprecedented financial stresses and sharp contractions in economic activity, many central banks, including the Federal Reserve, responded with extraordinary measures. In the United States, we lowered the federal funds rate target to a range of 0 to 1/4 percent to help mitigate the economic downturn; we expanded the scale, scope, and maturity of our lending to provide needed liquidity to financial institutions and to address dislocations in financial markets; we jointly established currency swap lines with foreign central banks (including the Bank of Japan) to ensure the global availability of dollar funding; and we purchased a large quantity of longer-term securities to help improve the functioning of financial markets and support economic recovery.¹ Looking to the future, central banks around the world are working with their governments to prevent future crises by strengthening frameworks for financial regulation and supervision.

In undertaking financial reforms, it is important that we maintain and protect the aspects of central banking that proved to be strengths during the crisis and that will remain essential to the future stability and prosperity of the global economy. Chief among these aspects has been the ability of central banks to make monetary policy decisions based on what is good for the economy in the longer run, independent of short-term political considerations. Central bankers must be fully accountable to the public for their decisions, but both theory and experience strongly support the proposition that insulating monetary policy from short-term political pressures helps foster desirable macroeconomic outcomes and financial stability.

In my remarks today, I will outline the general case for central bank independence and review the evolution of the independence of the Federal Reserve and other major central banks. I will also discuss the requirements of transparency and accountability that must accompany this independence.

The Case for Central Bank Independence
A broad consensus has emerged among policymakers, academics, and other informed observers around the world that the goals of monetary policy should be established by the political authorities, but that the conduct of monetary policy in pursuit of those goals should be free from political control.² This conclusion is a consequence of the time frames over which monetary policy has its effects. To achieve both price stability and maximum sustainable employment, monetary policymakers must attempt to guide the economy over time toward a growth rate consistent with the expansion in its underlying productive capacity. Because monetary policy works with lags that can be substantial, achieving this objective requires that monetary policymakers take a longer-term perspective when making their decisions. Policymakers in an independent central bank, with a mandate to achieve the best possible economic outcomes in the longer term, are best able to take such a perspective.

In contrast, policymakers in a central bank subject to short-term political influence may face pressures to overstimulate the economy to achieve short-term output and employment gains that exceed the economy’s underlying potential. Such gains may be popular at first, and thus helpful in an election campaign, but they are not sustainable and soon evaporate, leaving behind only inflationary pressures that worsen the economy’s longer-term prospects. Thus, political interference in monetary policy can generate undesirable boom-bust cycles that ultimately lead to both a less stable economy and higher inflation.

Undue political influence on monetary policy decisions can also impair the inflation-fighting credibility of the central bank, resulting in higher average inflation and, consequently, a less-productive economy. Central banks regularly commit to maintain low inflation in the longer term; if such a promise is viewed as credible by the public, then it will tend to be self-fulfilling, as inflation expectations will be low and households and firms will temper their demands for higher wages and prices. However, a central bank subject to short-term political influences would likely not be credible when it promised low inflation, as the public would recognize the risk that monetary policymakers could be pressured to pursue short-run expansionary policies that would be inconsistent with long-run price stability. When the central bank is not credible, the public will expect high inflation and, accordingly, demand more-rapid increases in nominal wages and in prices. Thus, lack of independence of the central bank can lead to higher inflation and inflation expectations in the longer run, with no offsetting benefits in terms of greater output or employment.³

Additionally, in some situations, a government that controls the central bank may face a strong temptation to abuse the central bank’s money-printing powers to help finance its budget deficit. Nearly two centuries ago, the economist David Ricardo argued: “It is said that Government could not be safely entrusted with the power of issuing paper money; that it would most certainly abuse it.…There would, I confess, be great danger of this, if Government–that is to say, the ministers–were themselves to be entrusted with the power of issuing paper money.”⁴ Abuse by the government of the power to issue money as a means of financing its spending inevitably leads to high inflation and interest rates and a volatile economy.

These concerns about the effects of political interference on monetary policy are far from being purely theoretical, having been validated by the experiences of central banks around the world and throughout history. In particular, careful empirical studies support the view that more-independent central banks tend to deliver better inflation outcomes than less-independent central banks, without compromising economic growth.⁵ In light of all these considerations, it is no mystery why so many observers have come to see central bank independence as a critical component of a sound macroeconomic framework, and economists have studied a variety of approaches to enhance the independence and credibility of monetary policymakers.⁶
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Hat tip Paul

Nice chartporn from Kiplingers as to why most Americans will be eating Purina Cat Chow int heir golden years:

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http://www.kiplinger.com/tools/retirement-cost/

James Montier’s latest paper on the insanity of the policy benchmarks, the failures of Yale model, the dangers of risk parity, and an alternative approach.

Republished with permission:

JM-I Want to Break Free

via boing boing