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

Whenever I travel, I always seem to find interesting stuff to read that I save for the plane. Here’s the current list of things to read later:

• The Men Who Ended Goldman’s War (NYT)

• China Passes U.S. as World’s Biggest Energy Consumer (WSJ)• Hulbert: Inflation down, deflation (Marketwatch)

• June Unemployment Rates, by State: Most Regions Show Improvement (Real Time Economics)

• Kass Takes on Nouriel Roubini  (TheStreet.com)

• THE VOLCKER RULE (New Yorker)

• Hussman: Stocks are not cheap (Hussman Funds)

• Analysts Get SAD Too: The Effect of Seasonal Affective Disorder on Stock (InformaWorld)

• Interview with Mr. Jack Schwager, author of Market Wizards (CIO)

What are you reading ?

The market is getting a boost here on a story from somewhere that the Fed is going to announce that they will stop paying interest on reserves where they are currently paying .25%. This would be the Fed’s attempt to force banks to lend money instead of parking it at the Fed. In my opinion, this is the last bullet in the gun of the Fed and therefore is not going to be used so soon. An ISM going from 59 to 56.2 or the ISM services going from 55.4 to 53.8 for example is not going to move the Fed into such a dramatic phase of their policy. While I have no doubt that Bernanke will eventually go down this path, I think there is no way it happens for a while as the data is going to have to be really bad for them to spend their last shot in terms of shock, awe and impact.

Huge investigative piece in the Washington Post into
“A hidden world growing beyond control” — National Security Inc. — about the massive expansion of the private and government intelligence and counterterrorism activities.

What was historically sensitive government-only activities has been outsourced to for-profit vendors, with a variety of problems associated with this:

“To ensure that the country’s most sensitive duties are carried out only by people loyal above all to the nation’s interest, federal rules say contractors may not perform what are called “inherently government functions.” But they do, all the time and in every intelligence and counterterrorism agency, according to a two-year investigation by The Washington Post,”

I  found the interactive graphic most interesting:

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click for interactive graphic

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Source:
National Security Inc
Washington Post,  12:24 AM, 7/20/2010
http://projects.washingtonpost.com/top-secret-america/articles/

Jeremy Grantham’s latest missive is out, and as always, its well worth a read: The 2Q Letter is a collection of six essays on topics ranging from “Finance Goes Rogue (But Volcker Wins a Round,” to “The Fearful Speculative Market,” to “Everything You Need to Know About Global Warming in 5 Minutes.”

I particularly liked this part:

“In 1965, 3% of GDP that was made up of financial services [and that] was clearly sufficient to the task, the proof being that the decade was a strong candidate for the greatest economic decade of the 20th century. We should be suspicious, therefore, of the benefits derived from the extra 4.5% of the pie that went to pay for financial services by 2007, as the financial services share of GDP expanded to a
remarkable 7.5%.

This extra 4.5% would seem to be without material value except to the recipients. Yet it is a form of tax on the remaining real economy and should reduce by 4.5% a year its ability to save and invest, both of which did slow down. This, in turn, should eventually reduce the growth rate of the non-financial sector, which it indeed did: from 3.5% a year before 1965, this growth rate slowed to 2.4% between 1980 and 2007, even before the crisis.”

Yes, the bottom line is that we over-extended on leverage, driving the finacial sector to be an outside chunk of the economy. The deleveraging process should take that back down, if not to 3%, well then certainly towards 5%.

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Source:
Summer Essays
Jeremy Grantham
GMO, July 1010
https://www.gmo.com/America/MyHome/

Keith McCullough believes the government should dramatically cut back on spending. But Barry Ritholtz warns that we could face another recession.

I had a long discussion with Keith McCullough of Hedge Eye and Eric Schurenberg of CBS about the topic of when to put austerity into effect and when not to cut spending or raise taxes.

You can see it under the video tab, or just click here.

This is the epic battle between two mightiest warriors in history. King Leonidas, the brave King of Sparta who defied a ‘God’ of Persia at the assault for the invasion of Sparta. Chuck Norris, the most talked about hero. Chuck Norris can just about do anything, apparently Chuck Norris lost his virginity before his father which tells a lot about the man. Well this is the battle

June Housing Starts at 549k annualized were below the consensus estimate of 577k and vs 578k in May but shouldn’t be surprising considering other housing data points seen and the end of the home buying tax credit. Almost all of the decline from May was in the multi family category as single family was only down a touch, albeit a very low level (lowest since May ’09). Permits were 11k above expectations at 586k vs 574k in May, notwithstanding the expiration of the home buying tax credit. Regionally, starts rose in the South and West, ironically the areas with the biggest foreclosures and thus greatest competition but permits for future building in these areas didn’t rise. With an industry still saturated with existing homes and still lackluster demand, lower starts is what we need to see.

I have been adding some additional charts to my powerpoint for this afternoon.I am choosing amongst the areas I want to discuss, when an email came in regarding my presentation.

One of the conference participants made the following challenge to me:

“Can you support your position, in a fast, easy way, why the US housing boom was NOT caused by Fannie and Freddie, or the CRA? I understand all the factors you laid out in the book — but I would like to see more evidence to support your view.”

Well, its difficult to prove a negative — supporters of the “FNM/FRE/CRA caused it” should have to prove their case, as I did in Bailout Nation.

However, I have always found this chart to be quite compelling:

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Chart via BIS by way of NewObservations.net

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Pray tell what caused the same boom and bust in these other nations?

And how could Fannie/Freddie or the CRA be responsible — that only applies to the US — when you have the same, global, coordinated rise in prices?  (And you can add Korea and New Zealand to the chart above).

For those of you who still believe the political talking point that it was FNM/FRE/CRA’s fault, the question remains: What caused these other nations to boom the same time the USA did?

And if you can’t answer that, then what hope do we have that you will offer up empirical evidence that Fannie/Freddie/CRA caused this in light of the above?

(This is what I mean by squishy thinking . . .)

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UPDATE: July 21, 2010 10:35am

In a discussion with some of the more vocal “FNM/CRA caused the crisis” advocates, I made the following point that seems to have resonated with a few of them:

We must distinguish between US legislative policy — and that includes Fannie/Freddie and the CRA — with the monetary policy of the US Federal Reserve, and its impact around the world.

American legislative policies had some impact domestically, but the total result of the CRA was not global, not was the GSE impact Global. Hence, how could FNM/FRE/CRA cause a global housing boom & bust? Answer, it didn’t.

The US Federal Reserve’s monetary policy, on the other hand, did have a global impact. The US has the world’s reserve currency, the biggest economy and the most important central bank.  When the Fed took rates down to 1%, it had an ginormous impact on everything priced in debt, dollars or leverage. That includes housing, around the world.