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

Satyajit Das, author of Traders, Guns and Money: Knowns and unknowns in the dazzling world of derivatives, has a new book out:

Extreme Money: Masters of the Universe and the Cult of Risk.

The book was named to the longlist for the 2011 FT and Goldman Sachs Business Book of the Year award.

Some reading to end your holiday shortened week:

• More insider trading: Investors Bullish on Fed Tips (WSJ) see also Alleged Rigging of Libor Rate Dogs London Banks (Bloomberg)
• How to Invest Like a Millionaire in 2012 (WSJ)
• Shiller: The Neuroeconomics Revolution (Project Syndicate)
• Private Markets Offer Valuable Service but Little Disclosure (DealBook)
• China’s Super-Rich Buy a Better Life Abroad (Businessweek)
• European Banks Get ‘False Deleveraging’ in Seller-Financed Deals (Bloomberg) see also Dodd-Frank Law May Hinder Crisis Response by U.S. Policy Makers (Bloomberg)
• Physics or Fashion? What Science Lovers Link to Most (Scientific American)
• At Apple, Cloud Experts Wanted (WSJ)
• How to Ease Your Transition to Google Voice (Lifehacker)
• Universe Expands While Minds Contract (Scientific American)

What are you reading?

>

Clever, clever Turkeys

Initial Jobless Claims totaled 393k, 3k above estimates and last week was revised up by 3k to 391k but it is the 3rd week in a row below 400k and the 4 week average is now 394k from 398k last week. Continuing Claims rose by 68k and were 70k higher than expected but Extended Benefits fell a net 7k. Bottom line, while the economic dark clouds in Europe are spreading, US employers, either because they’re already lean and/or optimistic that things will get better, have become more reluctant to fire workers. Oct Durable Goods orders fell .7% headline but rose .7% ex transports, both were better than expected but Sept was revised down by a similar amount so taken together, the figures were about in line with expectations. The key disappointment though were in orders for Non Defense Capital Goods ex Aircraft, the core cap ex component, which fell 1.8% vs the estimate of down 1.0% and Sept was revised to a gain of just .9% vs the initial read of 2.4%. Shipments, which get directly plugged into GDP, did rise 1.3% and with a .5% rise in inventories, the inventory to shipments ratio ticked down to 1.81 from 1.82.

Paul Craig Roberts served as Assistant Secretary of Treasury in the Reagan White House — his claim to fame was being a co-founder of Reaganomics.” Roberts is former editor for the Wall Street Journal, Business Week, and Scripps Howard News Service. Roberts has been a critic of both Democratic and Republican administrations.

~~~

The economic mess in which the United States and Europe find themselves and which has been exported to much of the rest of the world is the direct consequence of too much economic freedom. The excess freedom is the direct consequence of financial deregulation.

The definition of free markets is ambiguous. At times it means a market without any regulation. In other cases it means markets in which prices are free to reflect supply and demand. Sometimes it means competitive markets free of monopoly or concentration. “Free market” economists have made a mistake by elevating an economy that is free of regulation or government as the ideal. This ideological position overlooks that regulation can increase economic efficiency and that without regulation external costs can offset the value of production. Before going further, let’s be clear about what is regulated. Economists reify markets: the market did this, the market did that. But markets don’t do anything. The market is not an actor; it is a social institution. People act, and it is the behavior of people that is regulated. When free market economists describe the ideal as the absence of any regulation of economic behavior, they are asserting that there are no dysfunctional consequences of unregulated economic behavior.

If this were in fact the case, why should this result be confined to economic behavior? Why shouldn’t all human behavior be unregulated? Why is it that economists recognize that robbery, rape, and murder are socially dysfunctional, but not unlimited debt leverage and misrepresentation of financial instruments? The claim, as expressed by Alan Greenspan along with others, that “markets are self-regulating” is an assertion that unrestrained individuals are self-regulating. How did anyone ever believe that?

When Federal Reserve Chairman Alan Greenspan, Treasury Secretary Robert Rubin, Deputy Treasury Secretary Larry Summers, and SEC Chairman Arthur Levitt browbeat Brooksley Born, head of the Commodities Future Trading Commission, and prevented her from doing her duty to regulate over-the-counter derivatives, they committed one of the most stupid policy mistakes in economic history.

The financial crisis that resulted has spread its devastating effects everywhere. The explosions in public debt and money creation, resulting from efforts to bail out the financial system from its own stupidity, have brought the U.S. dollar and the euro, the two reserve currencies of the international financial system, under pressure, undermining confidence in the reserve currency status of the currencies and the international financial system, as the price of gold indicates.

Obviously, the lack of financial regulation was dysfunctional in the extreme, and the social costs of the policy error are enormous.
Thirty-three years ago in an article in the Journal of Monetary Economics (August 1978), “Idealism in Public Choice Theory,” I developed a model to assess the benefits and costs of regulation. I argued that well-thought-out regulation could be a factor of production that increases GNP. For example, regulation that contributed to the quality and safety of food and medicines contributed to specialization in production and lower costs, and regulations enforcing contracts and private property rights add to economic efficiency.

On the other hand, bureaucracies build their empires and extend their regulations into the realm of negative returns. Moreover, as regulations increase, economic managers spend more time in red tape and less in productive activity. As rules proliferate, they become contradictory and result in paralysis.

I had hopes that my analysis would result in a more thoughtful approach to regulation, but to no avail. Liberals continued to argue that more regulation was better, and libertarians maintained than none was best.

The ongoing financial crisis has given us a taste of what the absence of regulation can produce. Despite the enormous cost, the financial system remains unregulated. As soon as Wall Street devises a new financial instrument and finds new suckers, it will happen again.

The ambiguous concept of freedom in economics has laid other minefields. Until the Clinton administration, economic concentration was seen as impinging on economic freedom. As late as the Reagan administration, AT&T was broken up. The Clinton administration permitted the concentration of the media. Formerly, this concentration would not only have been considered “in restraint of trade,” but also contrary to the American tradition of a diverse and independent press. Today mergers and concentration of economic power are no longer seen as encroachments on competitive markets but as necessary to maintain global competitiveness. In the George W. Bush and Obama administrations, we have witnessed enormous financial concentrations.

One consequence has been that financial corporations can no longer be held accountable as they “are too big to fail.” Thus, the economists’ story of how the market weeds out the failures can no longer be told. The failures accumulate and are subsidized with public money. This is the antithesis of economic efficiency.

The dispersed power that made the market a socially functional institution is disappearing. For example, capital is free to concentrate, but labor unions, a “countervailing power” to capital, are being destroyed. Jobs offshoring has destroyed the manufacturing unions, and now politicians are using the state and local budget crises to destroy public sector unions.

Developments since the collapse of the Soviet Union twenty years ago have confused economists and produced results that threaten the edifice of economic theory. Economists have confused jobs offshoring with free trade. However, jobs offshoring is not trade at all. It is labor arbitrage. Free trade theory is based on comparative advantage. Labor arbitrage is the pursuit of absolute advantage. Profits resulting from jobs offshoring raise questions about economic theory’s justification of profit maximization. Theoretically, profits are justified, because they are evidence that resources were efficiently used in producing consumer satisfaction and are a measure of the economic welfare of the society. This conclusion no longer holds when profits are produced by rendering a country’s work force unemployed. Offshoring separates
consumers from the incomes and careers associated with the production of the goods and services that they consume. The profits from offshoring reflect the economic welfare of the foreign country. Therefore, the edifice that economists have built that justifies market capitalism as the deliverer of economic welfare to society no longer stands.

Source:
(The Case for Regulation
by Paul Craig Roberts
International Economy, Fall 2011

If ever you need as an illustration why bank bailouts are such a misguided idea, one need look no further than Fraudclosure and RoboSigning. The sunk cost of the bailouts have completely skewed government officials priorities. Hence, enforcement of laws and imposing criminal penalties has become verbotten, as it undercuts the prior monies.

Why do I suspect that the hand of former NY Fed president and current Treasury Secretary Timothy Geithner is behind this?

So far, only Attorneys General in six five states have questioned the rush to settlement before full investigations have been completed. In addition to California, the AGs in Delaware, Massachusetts, Nevada and New York are raising questions about any settlement prior to a full and thorough accounting of exactly how such massive illegality took place at the nations’ largest banking institutions and law firms. Florida’s prior AG was actively investigating fraudclosure, but the new AG, Pam Bondi, has apparently sold her soul to the notorious Lender Processing Service. She fired the Fraudclosure investigators, and I continue to search for evidence she is not corrupt public official, more or less in vain.

Regardless, the banks are hoping to head off further investigations by writing a check in amounts between $18-25 billion dollars.

“Bank representatives and government officials are working on a broad settlement of most state and federal foreclosure-practices investigations that could move forward without the participation of California, long considered a key to any deal, people familiar with the negotiations said.

The terms of the deal remain fluid. Banks have proposed a deal excluding California that would carry a value of $18.5 billion, though the final outcome remains uncertain, people familiar with the discussion said.

Negotiators are continuing to make a push to persuade California to join a settlement valued at $25 billion among federal officials, state attorneys general and the nation’s five largest mortgage servicers: Ally Financial Inc., Bank of America Corp., Citigroup Inc., J.P. Morgan Chase & Co. and Wells Fargo & Co. The talks center on the banks’ use of “robo-signing,” in which employees approved legal documents without proper review, and other questionable foreclosure practices.

The dollar value would include the value of principal write-downs, interest-rate reductions and other benefits to homeowners as well as cash penalties.

But negotiators now are discussing how to structure an agreement if California remains on the sidelines. Until recently, it seemed unlikely that a settlement would be possible without the participation of California Attorney General Kamala D. Harris. She left the discussions in late September, calling the deal then on the table inadequate. The state accounted for 13.1% of all mortgages outstanding at the end of September and 10.8% of all loans in foreclosure, according to the Mortgage Bankers Association.”

California has two million+ underwater homes, according to CoreLogic.

>

Previously:
Florida Attorney General Report on Fraudclosure (January 2011)

The Foreclosure Zoo (November 2010)

Source:
Foreclosure Talks Push Ahead Absent California
RUTH SIMON And NICK TIMIRAOS
WSJ, November 23, 2011  
http://online.wsj.com/article/SB10001424052970203710704577054550234461744.html

See also:
Florida Asst AG Andrew Spark Scathing Memo

Assistant attorney general resigns after memo blasting Florida AG’s office

Here is a new release that I cannot imagine selling a single copy: A 3 disc, $150 box set version of Some Girls.

Super Deluxe Edition contains the digitally remastered and expanded two CD Deluxe Edition of the album PLUS a bonus DVD, 7″ vinyl single, hardback book, a set of postcards, Helmut Newton prints, and a poster. Digitally remastered edition of the Rolling Stones’ 1978 masterpiece. A fresh, uncompromising attempt to incorporate then-modern pop techniques into the band’s familiar sound, Some Girls opens with the Disco sass of “Miss You” and closes with the self-destructive punk of “Shattered.” In between, you have an album that solidified their reputation as the world’s greatest Rock ‘n’ Roll band. Some may cite Exile On Main Street as their finest ’70s moment, but Some Girls is it’s equal, if not a smidgen more exciting.

I love the album, but seriously? $150, 2 CD, 1 DVD set? I’ll add it to my wish list, but this one looks like its for top 1% hard core fans only . . .

click for updated futures

>

Geez, it seems like we are doing this quite often lately, doesn’t it?

• Federal Reserve is requiring another round of stress tests;

• Germany failed to reach its maximum sales target of 6 billion euros ($8.04 billion) at a bund auction. Bids were for only 35% of 10 YR bunds available.

• China, the world’s 2nd largest economy, is slowing, as manufacturing slows and  home sales slide.

• EuroZone Industrial Orders for September fell the most in 3 years (-6.4% vs estimates of -2.7%)

•  The mining sector is falling on the proposed 30% tax by Australia on coal & iron ore profits.

The Wall Street Journal – EU Pushes Scenarios for Euro Bond

As Rescue-Fund Expansion Falters, Idea Is Floated; but Germany Opposes
As the euro zone’s debt crisis threatens to draw in more victims and a plan agreed to expand the currency’s bailout fund looks set to disappoint, the European Union’s executive arm will this week float proposals for joint issues of bonds among the currency’s 17 governments. The proposal to end the crisis from the European Commission calls for the euro zone to use its combined strength in the bond markets to replace some or all of the fund-raising currently being done by national governments. The proposals for common bond issues are unlikely to gain traction soon: Germany, the strongest economy in the common currency, remains resolutely opposed to the idea, fearing it would be stuck with the bill for other governments’ spendthrift ways. But the commission’s discussion document appears designed to trigger debate on one of the few ideas that economists think offers the prospect of ending the crisis.

The New York Times – Europe Fears a Credit Squeeze as Investors Sell Bond Holdings

Nervous investors around the globe are accelerating their exit from the debt of European governments and banks, increasing the risk of a credit squeeze that could set off a downward spiral. institutions are dumping their vast holdings of European government debt and spurning new bond issues by countries like Spain and Italy. And many have decided not to renew short-term loans to European banks, which are needed to finance day-to-day operations. If this trend continues, it risks creating a vicious cycle of rising borrowing costs, deeper spending cuts and slowing growth, which is hard to get out of, especially as some European banks are having trouble meeting their financing needs.

Comment

Recall the reason we are having the European debt crisis (page 10):

The problem in Europe is simple – they created a common currency – the euro. For years, the market erred. It thought that meant that every sovereign debt had the same rating as Germany. I was buying Greek bonds. I was buying Irish bonds. I was buying Italian bonds. But I thought I was buying German bonds. Then, a couple of years ago, I had an epiphany – no, I was not buying German bonds; I was buying Greece, Italy, and Ireland, or whatever, not Germany.

Those countries, recognizing that they could borrow into infinity because everybody thought they were lending to Germany, pretty much did that and expanded their welfare states to the point where they cannot pay their debts.

With this in mind, let me repeat part of the highlighted passage above:

Germany, the strongest economy in the common currency, remains resolutely opposed to the idea, fearing it would be stuck with the bill for other governments’ spendthrift ways.

If a Eurobond market comes with with strict discipline/rules on borrowing and paying debt back, it might work.  Unfortunately no one will agree to a Eurobond market with strict discipline/rules.

If a Eurobond market comes with no discipline/rules, then it is just another way to trick the market into thinking they are buying German Bunds.   It will “work” for a while as the crisis will ease until everyone borrows too much money and then comes back much worse.

So how do you fix the Euro crisis?  Unfortunately there are only three solutions and all are distasteful:

Call off the union and go back to legacy currencies.  This destroys the banking system who will be paid back with devalued/nearly worthless currencies.

Massive austerity.  This option is very unpopular among the electorates and will cause a bad recession/depression.

Fiscal union.  This is a nice way of saying Germany finally wins WW2.  Is the rest of Europe now ready to take orders from Berlin?  Didn’t they fight two wars to prevent this?

The only reason ECB printing keeps being mentioned is because the three options above are untenable and money printing is the only other thing they can think of.  Money printing does NOT fix anything, it just makes the problem better for a while until it comes back worse than before.

Source: Arbor Research

This will surprise many.  Der Spiegel reports that Germany’s fiscal management is not as “exemplary” as most perceive.

…Last week, the suspicions of international investors reached the stable core of the euro zone. Investors embarked on a massive selloff of securities issued by supposedly model countries like Finland and Austria and sought refuge in German government bonds.

Role Model Position at Risk
But it is debatable how much longer Germany can be seen as a refuge of stability and security. In reality, German government finances are not nearly in as good shape as the chancellor and the finance minister would have us believe. The way that certain important indices are developing suggests that Germany may not retain its position as a role model in the long term. Government debt as a percentage of GDP is already at more than 80 percent, which compared to other European Union countries is by no means exemplary, but in fact average at best.

When it comes to their debt-to-GDP ratios, even ailing countries like Spain are in better shape, with values significantly lower than 80 percent. Critics, irritated by Merkel’s and Schäuble’s overly confident rhetoric, are beginning to find fault with Europe’s self-proclaimed model country. “I think that the level of German debt is troubling,” says Luxembourg Prime Minister Jean-Claude Juncker, whose country has a debt-to-GDP ratio of just 20 percent.

And this before Germany has recapitalized its banks.   Deutsche Bank’s leverage ratio scares the you know what out of us.   Of course they’ll argue their sovereign holdings are risk-free and do not need capital, they have hidden reserves, blah, blah, blah……

Do these economic and market indicators mean anything to you? (They don’t mean much to me, but look what a pretty graphic it makes)

Can they help you to assess market trend? Do they provide any investing advice? Let’s say you wanted to create a dashboard like the one below. What data would you include in it?