Posts filed under “Think Tank”

A Discourse on the Method . . .

. . . of Rightly Conducting the Reason and Seeking Truth in Contemporary Economies & Markets, with sincerest apologies to the memory of Rene Descartes.



Seventeenth century medicine, Moliere observed, was a field where most men died of their remedies and not of their diseases. So too, twenty-first century interventionist monetary policy seems to kill more wealth than if recessions were left alone to run their course. Instead of bloodletting, our “physicians” pump us full of liquidity until we explode, and then pump more into us as we lay gushing.

In the US our chief surgeon, the Fed, has been able to operate unilaterally, virtually unencumbered by Congressional restrictions or mandates, so that Wall Street banks (its literal owners and first constituency) don’t die. And the Fed needn’t worry about claims of malpractice because, as we now see, when push comes to shove its insurance carrier is the US Treasury, which is another way of saying the same taxpayers that lay bleeding.

Transitive properties still hold: if A equals B and B equals C, then A must equal C. Applied here: if US taxpayers (A) fund the US Treasury (B), and Treasury backs the Fed (C), and the Fed backs Wall Street banks (D), then US taxpayers (A) back the ongoing profitability of Wall Street banks (D). Perhaps this explains why all those crisp new electronic dollars created from thin air last fall went directly to creditor banks rather than to debtor homeowners?

Saving the system was generally perceived then to be saving the US economy or saving the commercial paper market or saving depositors from losses. In fact these systems were never at risk given the Fed’s willingness to print money and cover all bets. Whether carefully designed or the result of impulsive reactions, there was a decision made at the highest levels of government. The only conclusion to draw was that the “system” saved was the system of government intermediation into the private sector economy and it was accomplished by saving the government’s ports of entry — Wall Street’s largest and most influential banks.

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Category: Think Tank

Sept Retail Sales

Sept Retail Sales were better than expected as they fell just 1.5% m/o/m, .6% better than forecasts, as the CARS program ended (motor vehicles, parts fell 10.4%). Ex the influence of auto’s, sales rose .5%, .3% more than expected and ex auto’s and gasoline, sales were up .4%, .2% higher than estimated. Component supplier Intel…Read More

Category: MacroNotes

Impressive earnings, impressive execution but how’s end demand?

Solid execution with big upside in revenues from INTC and JPM provides an interesting backdrop to the Retail Sales data today. Intel has benefited from inventory rebuilding, especially ahead of the Windows 7 launch (replacement cycle hopes) and netbook sales. The question of sustainability will be sell through to the end consumer and the Retail…Read More

Category: MacroNotes

Vice Chairman Donald L. Kohn: The Economic Outlook

Vice Chairman Donald L. Kohn

At the National Association for Business Economics, St. Louis, Missouri
October 13, 2009

The Economic Outlook

I’m pleased to be here at the National Association for Business Economics. Most of you are in the business of making or using economic forecasts to inform the strategies of your organizations as they try to meet their objectives. So am I, and I thought this would be a good opportunity to discuss my view of the outlook and the implications that I draw for monetary policy. I’ll start with a brief overview of recent developments and the near-term outlook. Then I’ll turn to a few of the issues that bear on the medium to longer-run outlook. I emphasize that the views you are about to hear are my own and not necessarily those of my colleagues on the Federal Open Market Committee.1

In broad terms, the data that we have in hand indicate that economic activity turned up in the third quarter. To some extent, the pickup in activity in recent months reflects the dissipation of some of the forces that had been exerting downward pressure on the economy during the preceding several quarters. Perhaps the most important of these downward forces was the turmoil in financial markets that began in late 2007, which not only tightened credit availability and reduced wealth, but also undermined confidence, especially when conditions took a decided turn for the worse in the fall of 2008. The stabilization, and more recently the improvement, in risk appetites and financial conditions, in part responding to actions by the Federal Reserve and other authorities, has been a critical factor in allowing the economy to begin to move higher after a very deep recession.

A turn in the inventory cycle is another key element in the recent firming in aggregate activity. During the second half of 2008, many firms were apparently surprised at the sharp falloff in demand. In response to a buildup of unwanted inventories, they began aggressively liquidating stocks by slashing production well below the level of sales. The pace of liquidation intensified through the middle of this year. More recently, however, with inventories now less burdensome, firms have begun boosting production to slow the pace of inventory destocking and bring output into closer alignment with expected final sales. This process is particularly evident in the motor vehicle industry, where the stock of cars and trucks on dealers’ lots had become extremely lean, prompting increases in assemblies from the very low levels seen at midyear. More broadly, the slower pace of inventory liquidation likely provided an appreciable boost to manufacturing production in July and August, and should continue to push up factory output further in the near-term.

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Category: Federal Reserve, Think Tank

The Fed’s Vice Chairman says nothing new but he rarely does

The Fed’s Vice Chairman Kohn speaking on the economic outlook is not saying anything new. He discusses the signs of improvement that will lead to growth in Q3, “dissipation of some of the forces that had been exerting downward pressure on the economy during the preceding several quarters,” inventories, stabilized housing, business spending on equipment…Read More

Category: MacroNotes

What Will The Inflection Point Look Like?

October 9, 2009 A client asked the following question above …. Jim, yes, same page, “inflection” point = March rally over. I missed the conf call so you may have touched upon it. Will have time to review this weekend. I think you believe rally is over when Fed “pulls” liquidity, i.e, rate high, etc….Read More

Category: Think Tank

Andy Xie: Here We Go Again

Former Morgan Stanley Analyst Andy Xie explains why China is a potential bubble: ~~~ Asset bubbles come and go. Each begins with a story: Japan as No. 1, the East Asian miracle, dotcom mania, how financial innovations eliminate risk – just to mention the latest four. Each begins with a plausibly bullish story, which is…Read More

Category: Think Tank

Another day, another $ drop

Another day, another 14 month low in the $ index and record high in gold. This comes even after the Oct German ZEW investor confidence figure in their economy was almost 3 points less than expected and unexpectedly fell from Sept, below forecasted inflation data in France and the UK and a comment from an…Read More

Category: MacroNotes

On the Cusp of a Fascinating Earnings Season

Good Evening: The major U.S. stock market averages rose for a sixth straight day today, and the S&P 500 set a new closing high for 2009 in the process. I will first breeze through today’s events before examining what I think could be a fascinating earnings season. Since there are important similarities and differences between…Read More

Category: Markets, Think Tank

Quarterly Review and Outlook – Q3 2009

I look forward at the beginning of every quarter to receiving the Quarterly Outlook from Hoisington Investment Management. They have been prominent proponents of the view that deflation is the problem, stemming from a variety of factors, and write about their views in a very clear and concise manner. This quarter’s letter is no exception, where they once again delve into the history books to bring up fresh and relevant lessons for today. This is a must read piece.

Hoisington Investment Management Company ( is a registered investment advisor specializing in fixed income portfolios for large institutional clients. Located in Austin, Texas, the firm has over $4-billion under management, composed of corporate and public funds, foundations, endowments, Taft-Hartley funds, and insurance companies. And now let’s jump right in to the essay.

John Mauldin, Editor
Outside the Box

Ponzi Finance

The Federal Reserve reported that as of June 30, 2009 total U.S. debt was $52.8 trillion. Total U.S. debt includes government, corporate and consumer debt. Importantly, however, it does not include a few trillion in “off balance sheet” financing, contingent unfunded pension plans for corporate and state and local governments, or unfunded liabilities of the U.S. government for such items as Medicare, Social Security and other programs. Currently GDP stands at $14.2 trillion, so there is approximately $3.73 in debt for every dollar of output in the United States, a level unprecedented in our history (Chart 1). Normally, debt levels as a percent of GDP would be uninteresting and immaterial; however, the current level of debt is unique in two ways. First, the asset side of the balance sheet purchased by the debt is falling in price. Second, the money that was borrowed to purchase those assets was often fraudulently expended. Neither the borrower nor the lender really expected the debt to be serviced. Rather, each party expected the asset price to rise extinguishing the debt.


This type of financial arrangement was correctly analyzed by the famous American economist Hyman Minsky in his paper, “Financial Instability Hypothesis”, in which he described three phases of debt financing. The first is “hedge finance”, where the lender expects a return on both principal and interest. The second is “speculative finance” where the lender expects to get interest on the loan but perhaps not the principal. The third case, where the lender expects neither the principal nor interest to be returned, is referred to as “ponzi finance”. This was typified in the last business cycle by loans issued without documentation, no down payment home loans, extremely low cap rates on commercial real estate, and the high leverage borrowing ratio of private equity funds. Even ponzi finance works as long as asset prices are rising. But once the bubble is pricked, the debtor is left with declining asset values that preclude the rollover of their obligations.

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Category: Think Tank