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

I have been very critical of Obama for following Bush’s bankster bailout policies. And I thought his reliance on Robert Rubin & the RR Choir (Summers, Geithner, et. al) was ill advised.

But I don’t understand those on the far right who seem to believe that deficits were created on January 20th, 2009.

Consider this chart — it shows the National Debt as a percentage of GDP. Its pretty telling:

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National Debt Graph

click for larger chart

Chart courtesy of zFacts.com

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See also
Government debt explosion hits turning point
http://finance.yahoo.com/news/Government-debt-explosion-apf-3157069187.html

I have no idea if the following boast is true, but, how is this algo driven trading performance remotely possible ?:

“The founder of Tradebot, in Kansas City, Mo., told students in 2008 that his firm typically held stocks for 11 seconds. Tradebot, one of the biggest high-frequency traders around, had not had a losing day in four years, he said.

11 second average holding time, and never a losing day in 4 years? Sounds like bullshit to me . . .

NY Times via FT

These are astonishing:

April PPI unexpectedly fell .1% m/o/m but rose .2% ex food and energy. Headline and core were both expected to be up .1%. The y/o/y gain in PPI is up by 5.5% headline and 1% core. Inflation in the pipeline remains high as intermediate goods prices rose .8% m/o/m and 1.1% ex f&f. Core goods, the 1st stage of production, saw prices fall 1.2% but ex f&f they rose 4% and are up 49.5% y/o/y. However, tomorrow’s CPI is much more relevant to the market as consumer prices are the focus of the Fed and is the stat most cited in the inflation/deflation debate. A benign # will give the Fed more license to be easy but the longer this lasts, the less benign inflation will appear to be. On easy comparisons, the y/o/y CPI is expected to be up 2.4% and with rates at zero, REAL interest rates remain firmly negative.

In the last housing start data point reflecting activity before the Apr 30th expiration of the tax credit, Apr starts totaled 672k, 22k above expectations but permits were 74k below the estimate as builders plan for an inevitable hangover. The gain in starts from Mar were solely in the single family (88% of total) category as multi family starts saw a drop. Permits totaled 606k, the lowest since Nov ’09 as single family permits fell to the lowest since Oct ’09. Permits fell the most in the two regions that have the highest foreclosure rate and thus the greatest competition, the West and the South. While a building slowdown is inevitable as the tax credit pulled many sales from the future, yesterday’s May NAHB builder sentiment figure reflects builder optimism that the worst is over and the lack of a tax credit won’t result in a double dip. With still huge inventories out there, the last thing I want to see is builder optimism and more starts.

“You mean to tell me that the success of my program and my reelection hinges on the Federal Reserve and a bunch of f***** bond traders?”
-Former US President, Bill Clinton, said early in his first term

“We now see herd behavior in the markets that are really pack behavior, wolf pack behavior.”
-Finance Minister Anders Borg of Sweden, speaking on the Greek crisis

¡Defenderé el peso como un perro! – “I will defend the peso like a dog!”
-Former Mexican President Jose Lopez Portillo, prior to a major peso devaluation and bank nationalization in 1982

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Dogs, wolves, whatever. Corrupted as they may be by government-derived moral hazard, the markets are the last line of defense against what really is a hundred year accelerating tide of fiscal governmental irresponsibility.  Greece faced an unpleasant reality. It couldn’t roll over its debt. The markets wouldn’t cough up the money. That’s the bottom line.

Politicians always come up with self-serving condemnations of the markets. They should be careful. Supposedly, once he retired President Jose Lopez Portillo for the rest of his life couldn’t go anywhere in public without being barked at.

As I wrote in the last Dismal Optimist, if present trends continue Greece is the future. Greece is just the first.

In a widely quoted book entitled The End of History, Francis Fukuyama wrote about the intellectual and practical triumph of democracy as a system of government. No further political paradigm shifts would be required. Democracy was the omega end point of the historical process of human sociopolitical evolution. Great reading, perfect for the 1990s when American triumphalism and the Washington Consensus reigned supreme. But Fukuyama seems to have overlooked the tendency of modern democracies with universal suffrage to glacially move towards bankruptcy by promising their voters entitlements that these governments cannot afford. Barry Eichengreen, in his widely acclaimed Golden Fetters, argued that universal suffrage granted during World War I made a return to the gold standard impossible. The newly expanded electorates wouldn’t stand for a submission of national monetary policy to the stateless discipline of gold. Could Eichengreen have gone one further and argued that universal suffrage and national fiscal discipline were incompatible?

More questions: Are we headed into a post-Fukuyama world where universal suffrage inevitably leads to universal state bankruptcy? Or will the bond (and currency) vigilantes preserve Fukuyama’s world by forcing fiscal prudence?  Will the “advanced” nations take the latest Greek tragedy as a warning and get their fiscal houses in order? Are the markets to be the ultimate saviors – or the terminators – of democracy?

Meanwhile back on the US side of the Atlantic the CEO of Goldman Sachs sat like a deer in the headlights before Senator Carl Levin to answer for transgressions so arcane that armies of lawyers will have trouble understanding. (Of course they will be paid handsomely for trying.) Not that the general public had trouble. When bubbles burst, the public wants scapegoats and throughout the ages moneymen have served quite well for this purpose.  As I watched this, I kept imagining Levin, with his massive jowls overflowing, attired in the black and white Dominican robes of a medieval Inquisitor. And I kept asking myself, where were Goldman Sach’s coconspirators? For example Fannie Mae and Freddie Mac. And how about the SEC itself that in 2004 let the big investment banks leverage up to their eyeballs. That would make for an interesting legal case – the SEC vs. the SEC.  Or Allan Greenspan’s Federal Reserve that held interest rates down and poured monetary kerosene on the housing bubble. Or the Chinese, who to bolster their exports to the US, held down the value of their currency and poured dollars back into the United States. Or President Nixon for that matter who blew up the semi-gold standard Bretton Woods System in 1971.

Read the rest of this entry »

In order for the Euro to survive the current travails, all involved know that fiscal budget rules must be followed and enforced unlike the close your eyes mentality of the last 10 years. Today, European finance ministers will likely agree to tough budget rules as “it is now very important to reinforce confidence in the euro economy” according to the EU’s Rehn. Even the French are thinking of raising the retirement age eligibility for pensions in order to save money. If there was doubt about the ECB’s ability to sterilize, it should be put to rest for now as they had 162.7b euros of demand for their 16.5b euros of one week term deposits on offer used to pull out the money they injected into the sovereign bond markets. The euro is higher as are European stocks notwithstanding Germany’s weaker than expected ZEW investor confidence # in their economy 6 months out. US inflation data is out today and Wed with PPI and CPI.

Is a replay of the 1987 crash a realistic likelihood?

Well, it depends upon who you ask. And even more important, when you ask them.

Consider these two WSJ articles, one published (online yesterday) in today’s print WSJ, one in 2007. A mere 3 years — and a 7,500, 56% Dow crash — separates the two publications. How do you think that impacted participants’ perspectives of the current environment versus 1987?

The 2007 article came four years into a cyclical bull market. Housing and credit was shaky, but the impact on the market was — at the time — only modest. The Dow was approaching 14,000. The dominant psychology bullish, the interviewees upbeat — despite plenty of warning signs.

Yet no parallels to 1987, or any other market dislocation, could be discerned. This article was published on October 15, 2007 — 20 years after the ’87 crash, and a few days after the peak of the 2003-07 bull run — just weeks before the onset of one of history’s ugliest bear crashes.

Flash forward 3 years — after a 56% drop in indices. Given what we know if the Recency Effect, would you be surprised to learn that people are now seeing parallels to 1987?

“On May 6, “The velocity of the volatility was stunning, beyond anything I had ever seen, with the exception of October of 1987, when I was on the trading floor,” said Ted Weisberg, president of Seaport Securities in New York.

“There’s a strong parallel between the Black Monday crash and the flash crash,” said Michael Wong, an analyst at Morningstar who tracks stock exchanges.

That is how we are hard wired. We tend to look backwards, not forwards. We over-emphasize the recent, and extrapolate from there.

After the 2008-09 crash, wouldn’t you guess that the similarities to 1987 are easy to spot?

On Oct. 19, 1987, the Dow Jones Industrial Average tumbled more than 20%, and the swoon extended into the following day, before a rebound. Floor traders, working by telephone, dominated the action and computer-generated trading was still in its infancy. Dark pools and high-frequency trading were the stuff of science fiction. Trading reached 600 million shares, according to the SEC.Fast forward to May 6, 2010: The worst part of the lightning descent lasted roughly 10 minutes and the decline hit 9.8% at its worst. Trades, many executed in milliseconds, reached 19 billion shares.

In both cases, troubles first appeared in the stock futures market, which precipitated a decline in the regular “cash” market. The two created a feedback loop, dragging both markets lower.”

A mere three years earlier, when the same technological factors were driving the markets, we get a different perspective from the market pros, who are all too human. Compare the above paragraphs with what the experts said in this 2007 WSJ article, on the 20th anniversary of the ’87 crash. The subhed noted that “Despite the housing slump, Crashes such as 1987 are likely to stay memories.”

Let’s look at parts of that 2007 article:

“With the stock market booming lately, many investors are putting aside worries about the housing slump and the summer’s credit crunch. At the same time, some are thinking about a looming anniversary. . . .

“But some of the root causes of the 1987 crash appear to be missing today. A big problem 20 years ago was that stocks had risen too far, too fast. At their August high, the Dow industrials were up more than 43% for 1987 alone, a stunning short-term gain. They slipped after that, falling especially heavily just before the crash.

This year, the stock gains have been more moderate. At their record close of 14164.53 last Tuesday, the Dow industrials were up 14% for the year. The Dow finished on Friday at 14093.08. Instead of declining as October wears on, stocks have rebounded.

Stocks don’t look as overpriced today as they did in 1987. Today, the companies in the Standard & Poor’s 500-stock index trade only a little above the historical average of 16 times profits for the past 12 months. In 1987, the S&P 500 was at more than 20 times profits. Interest rates are much lower than they were then and inflation, which was causing the Federal Reserve to fret in 1987, appears to be moderating, at least for now.”

The key differences have nothing to do with who was quoted, or the articles authors or their editors. What had changed was the psychology of the moment. And THAT, more than anything, impacts how people perceive the world . . .

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Sources:
How the ‘Flash Crash’ Echoed Black Monday
SCOTT PATTERSON
May 6 Selloff Had Parallels to 1987; Electronic Trading Magnified Selling Pressure This Time
WSJ, MAY 17, 2010
http://online.wsj.com/article/SB10001424052748704314904575250602626326346.html

Exorcising Ghosts of Octobers Past
E.S. BROWNING
Despite Housing Slump, Crashes Such as in 1987 Likely to Stay Memories
WSJ, OCTOBER 15, 2007
http://online.wsj.com/article/SB119239926667758592.html

Great infographic, courtesy of Visual Economics:

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click for ginormous graphic

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Hat tip Mike R

This is a slide from the very fascinating field guide to “Cognitive Biases – A Visual Study Guide by the Royal Society of Account Planning.”

You can see the full guide here:  The Visual Guide to Cognitive Biases

click for larger guide

Hat tip Cory

Cognitive Biases – A Visual Study Guide by the Royal Society of Account Planning