Benjamin Disraeli , the prime minister of the British Empire from 1874-1880, was reported by Mark Twain to have uttered this brilliant quote on statistical analysis: “There are three kinds of lies: lies, damn lies, and statistics.”
Todays' GDP data, GDP = 4.9% is just about the worst thing I've seen in along time.
Yeesh!
Thursday, November 29, 2007
Tuesday, November 27, 2007
Don't look now: Here comes the recession
NEW YORK (Fortune) -- The cash registers were ringing on Black Friday, but make no mistake: American consumers are jittery, and seem all but certain to push the U.S. economy into recession.
After years of living happily beyond their means, Americans are finally facing financial reality. A persistent rise in energy prices will mean bigger heating bills this winter and heftier tabs at the gas pump. Job growth is slowing and wage gains have been anemic. House prices are sliding, diminishing the value of the asset that's the biggest factor in Americans' personal wealth. Even the stock market, which has been resilient for so long in the face of eroding consumer sentiment, has begun pulling back amid signs of deep distress in the financial sector.
With consumer spending accounting for about three-quarters of U.S. economic activity, some economists say it is inevitable that the economy will stop growing at some point in the coming year, for the first time since the mild recession of 2001. "Right now, the question is how bad it's going to get," said David Rosenberg, chief North American economist at Merrill Lynch. "The question is one of magnitude."
After years of living happily beyond their means, Americans are finally facing financial reality. A persistent rise in energy prices will mean bigger heating bills this winter and heftier tabs at the gas pump. Job growth is slowing and wage gains have been anemic. House prices are sliding, diminishing the value of the asset that's the biggest factor in Americans' personal wealth. Even the stock market, which has been resilient for so long in the face of eroding consumer sentiment, has begun pulling back amid signs of deep distress in the financial sector.
With consumer spending accounting for about three-quarters of U.S. economic activity, some economists say it is inevitable that the economy will stop growing at some point in the coming year, for the first time since the mild recession of 2001. "Right now, the question is how bad it's going to get," said David Rosenberg, chief North American economist at Merrill Lynch. "The question is one of magnitude."
Wednesday, November 21, 2007
17 Reasons America Needs A Recession
Excellent article that "hits the nail on the head". America's excesses must be purged from the financial system so that we can start fresh. After all, that's what recessions are for.
ARROYO GRANDE, Calif. (MarketWatch) -- Yes, America needs a recession. Bernanke and Paulson won't admit it. And investors hate them. We're all trapped in outdated 1990s wishful thinking about a "new economy" and "perpetual growth."
But the truth is, not only is a recession coming, America needs a recession. So think positive: Let's focus on 17 benefits from this recession.
To begin with, recession may be an understatement. Jeremy Grantham's GMO firm manages $150 billion. In his midyear report before the credit crisis hit he predicted: "In 5 years I expect that at least one major 'bank' (broadly defined) will have failed and that up to half the hedge funds and a substantial percentage of the private-equity firms in existence today will have simply ceased to exist."
He was "watching a very slow motion train wreck." By October, it was accelerating: "Train hits end of track at full speed."
Also back in August, The Economist took a hard look at the then emerging subprime/credit crisis: "The policy dilemma facing the Fed may not be a choice of recession or no recession. It may be between a mild recession now, and a nastier one later."
However, the publication did admit that "even if a recession were in America's long-term economic interest, it would be political suicide" for Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson to suggest it.
Then The Economist posed the big question: Yes, "central banks must stop recessions from turning into deep depressions. But it may be wrong to prevent them altogether."
Wrong to prevent a recession? Why? Because recessions are a natural and necessary part of the business cycle. Remember legendary economist Joseph Schumpeter, champion of innovation and entrepreneurship?
Economists love Schumpeter's "creative destruction:" Obsolete firms get destroyed and capital released, making way for new technologies, new businesses, like Google. And yet, nobody's willing to apply Schumpeter's theory to the entire economy ... and admit recessions are a natural part of the business cycle.
Instead, everyone persists in the childlike fairy tale that "all growth is good" and "all recessions are bad," a bad hangover of the '90s "new economy" ideology. So for the folks at the Fed, Treasury and Wall Street, "eternal growth" is still America's mantra.
Unfortunately, the American investors' brain has also developed this blind obsession with "growth-at-all-costs," coupled with a deadly fear of all recessions, as if recessions are a lethal super-bug more powerful than Iran with a bomb.
Our values are distorted: It's OK to be greedy and overshoot the market on the upside -- grab too many assets, take on too much debt, make consumer spending a religion, live beyond our means, ignite hyperinflation along the way. Growth is good, even in excess.
And yet, recessions are a no-no that drives politicians, economists and investors ballistic.
Well, folks, you can block all this from your mind, you can argue that recessions are not a part of Schumpeter's thinking, that they are inconsistent with your political ideology. But the fact is, we let the housing/credit boom become a massive bubble, it popped and a recession is coming. So think positive, consider some of the benefits of a recession:
1. Purge the excesses of the housing boom
No, it's not heartless. Not like wartime calculations of "acceptable collateral damage." Yes, The Economist admits "the economic and social costs of recession are painful: unemployment, lower wages and profits, and bankruptcy." But we can't reverse Greenspan's excessive rate cuts that created the housing/credit crisis. It'll be painful for everyone, especially millions of unlucky, mislead homeowners who must bear the brunt of Wall Street's greed and Washington's policy failures.
2. U.S. dollar wake-up call
Reverse the dollar's free fall and revive our global credibility. Warnings from China, France, Iran, Venezuela and supermodel Gisele haven't fazed Washington. Recession will.
3. Write-offs
Expose Wall Street's shadow-banking system. They're playing with $300 trillion in derivatives and still hiding over $100 billion of toxic off-balance sheet asset-backed securities, plus another $300 billion hidden worldwide. A lack of transparency is killing our international credibility. Write it all off, now!
4. Budgeting
Force fiscal restraint back into government. America has been living way beyond its means for years: A recession will cut back revenues at all levels of government and cutbacks will encourage balanced budgeting.
5. Overconfidence
A recession will wake up short-term investors playing the market. In bull markets traders ride the rising tide, gaining false confidence that they're financial geniuses. Downturns bruise egos but encourage rational long-term strategies.
6. Ratings
Rating agencies have massive conflicts of interest; they aren't doing their job. They're supposed to represent the investors, but favor Corporate America, which pays for the reports. Shake them up.
7. China
Trigger an internal recession in China. Make it realize America's not going into debt forever to finance China's domestic growth and military war machine. A recession will also slow recycling their reserves through sovereign funds to our equities.
8. Oil
Force the energy and auto industries to get serious about emission standards and reducing oil dependency.
9. Inflation
Expose the "core inflation" farce Washington uses to sugarcoat reality.
10. Moral hazard
Slow the Fed from cutting interest rates to bail out speculators.
11. War costs
Force Washington to get honest about how it's going to pay for our wars, other than supplemental bills that are worse than Enron-style debt financing.
12. CEO pay
Further expose CEO compensation that's now about five hundred times the salaries of workers, compared with about 40 times a generation ago.
13. Privatization
Stop the privatization of our federal government to no-bid contractors and high-priced mercenary armies fighting our wars.
14. Entitlements
Force Congress to get serious about the coming Social Security/Medicare disaster. With boomers now retiring, this problem can only get worse: A recession now could avoid a depression later.
15. Consumers
Yes, we're all living way beyond our means, piling up excessive credit-card debt, encouraged by government leaders who tell us "deficits don't matter." Recessions will pressure individuals to reduce spending and increase savings.
16. Regulation
Lobbyists have replaced regulation. Extreme theories of unrestrained free trade plus zero regulation just don't work; proven by our credit crisis, hedge funds' nondisclosures, private-equity taxation, rating agencies failures, junk home mortgages, and more. Get real, folks.
17. Sacrifice
"We have not seen a nationwide decline in housing like this since the Great Depression, says Wells Fargo CEO John Stumpf. As individuals and as a nation Americans have always performed best in crises, like the Depression or WWII, times when we're all asked to make sacrifices. Pampering us with interest-rate cuts and tax cuts during the Iraq and Afghan wars may have stimulated the economy temporarily, but they delayed the real damage of the '90s stock bubble while setting the stage for this new subprime/credit crisis.
Wake up, the train wrecked. Time to think positive, find solutions, demand sacrifices.
ARROYO GRANDE, Calif. (MarketWatch) -- Yes, America needs a recession. Bernanke and Paulson won't admit it. And investors hate them. We're all trapped in outdated 1990s wishful thinking about a "new economy" and "perpetual growth."
But the truth is, not only is a recession coming, America needs a recession. So think positive: Let's focus on 17 benefits from this recession.
To begin with, recession may be an understatement. Jeremy Grantham's GMO firm manages $150 billion. In his midyear report before the credit crisis hit he predicted: "In 5 years I expect that at least one major 'bank' (broadly defined) will have failed and that up to half the hedge funds and a substantial percentage of the private-equity firms in existence today will have simply ceased to exist."
He was "watching a very slow motion train wreck." By October, it was accelerating: "Train hits end of track at full speed."
Also back in August, The Economist took a hard look at the then emerging subprime/credit crisis: "The policy dilemma facing the Fed may not be a choice of recession or no recession. It may be between a mild recession now, and a nastier one later."
However, the publication did admit that "even if a recession were in America's long-term economic interest, it would be political suicide" for Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson to suggest it.
Then The Economist posed the big question: Yes, "central banks must stop recessions from turning into deep depressions. But it may be wrong to prevent them altogether."
Wrong to prevent a recession? Why? Because recessions are a natural and necessary part of the business cycle. Remember legendary economist Joseph Schumpeter, champion of innovation and entrepreneurship?
Economists love Schumpeter's "creative destruction:" Obsolete firms get destroyed and capital released, making way for new technologies, new businesses, like Google. And yet, nobody's willing to apply Schumpeter's theory to the entire economy ... and admit recessions are a natural part of the business cycle.
Instead, everyone persists in the childlike fairy tale that "all growth is good" and "all recessions are bad," a bad hangover of the '90s "new economy" ideology. So for the folks at the Fed, Treasury and Wall Street, "eternal growth" is still America's mantra.
Unfortunately, the American investors' brain has also developed this blind obsession with "growth-at-all-costs," coupled with a deadly fear of all recessions, as if recessions are a lethal super-bug more powerful than Iran with a bomb.
Our values are distorted: It's OK to be greedy and overshoot the market on the upside -- grab too many assets, take on too much debt, make consumer spending a religion, live beyond our means, ignite hyperinflation along the way. Growth is good, even in excess.
And yet, recessions are a no-no that drives politicians, economists and investors ballistic.
Well, folks, you can block all this from your mind, you can argue that recessions are not a part of Schumpeter's thinking, that they are inconsistent with your political ideology. But the fact is, we let the housing/credit boom become a massive bubble, it popped and a recession is coming. So think positive, consider some of the benefits of a recession:
1. Purge the excesses of the housing boom
No, it's not heartless. Not like wartime calculations of "acceptable collateral damage." Yes, The Economist admits "the economic and social costs of recession are painful: unemployment, lower wages and profits, and bankruptcy." But we can't reverse Greenspan's excessive rate cuts that created the housing/credit crisis. It'll be painful for everyone, especially millions of unlucky, mislead homeowners who must bear the brunt of Wall Street's greed and Washington's policy failures.
2. U.S. dollar wake-up call
Reverse the dollar's free fall and revive our global credibility. Warnings from China, France, Iran, Venezuela and supermodel Gisele haven't fazed Washington. Recession will.
3. Write-offs
Expose Wall Street's shadow-banking system. They're playing with $300 trillion in derivatives and still hiding over $100 billion of toxic off-balance sheet asset-backed securities, plus another $300 billion hidden worldwide. A lack of transparency is killing our international credibility. Write it all off, now!
4. Budgeting
Force fiscal restraint back into government. America has been living way beyond its means for years: A recession will cut back revenues at all levels of government and cutbacks will encourage balanced budgeting.
5. Overconfidence
A recession will wake up short-term investors playing the market. In bull markets traders ride the rising tide, gaining false confidence that they're financial geniuses. Downturns bruise egos but encourage rational long-term strategies.
6. Ratings
Rating agencies have massive conflicts of interest; they aren't doing their job. They're supposed to represent the investors, but favor Corporate America, which pays for the reports. Shake them up.
7. China
Trigger an internal recession in China. Make it realize America's not going into debt forever to finance China's domestic growth and military war machine. A recession will also slow recycling their reserves through sovereign funds to our equities.
8. Oil
Force the energy and auto industries to get serious about emission standards and reducing oil dependency.
9. Inflation
Expose the "core inflation" farce Washington uses to sugarcoat reality.
10. Moral hazard
Slow the Fed from cutting interest rates to bail out speculators.
11. War costs
Force Washington to get honest about how it's going to pay for our wars, other than supplemental bills that are worse than Enron-style debt financing.
12. CEO pay
Further expose CEO compensation that's now about five hundred times the salaries of workers, compared with about 40 times a generation ago.
13. Privatization
Stop the privatization of our federal government to no-bid contractors and high-priced mercenary armies fighting our wars.
14. Entitlements
Force Congress to get serious about the coming Social Security/Medicare disaster. With boomers now retiring, this problem can only get worse: A recession now could avoid a depression later.
15. Consumers
Yes, we're all living way beyond our means, piling up excessive credit-card debt, encouraged by government leaders who tell us "deficits don't matter." Recessions will pressure individuals to reduce spending and increase savings.
16. Regulation
Lobbyists have replaced regulation. Extreme theories of unrestrained free trade plus zero regulation just don't work; proven by our credit crisis, hedge funds' nondisclosures, private-equity taxation, rating agencies failures, junk home mortgages, and more. Get real, folks.
17. Sacrifice
"We have not seen a nationwide decline in housing like this since the Great Depression, says Wells Fargo CEO John Stumpf. As individuals and as a nation Americans have always performed best in crises, like the Depression or WWII, times when we're all asked to make sacrifices. Pampering us with interest-rate cuts and tax cuts during the Iraq and Afghan wars may have stimulated the economy temporarily, but they delayed the real damage of the '90s stock bubble while setting the stage for this new subprime/credit crisis.
Wake up, the train wrecked. Time to think positive, find solutions, demand sacrifices.
Thursday, November 15, 2007
Wall Street Playing With More Funny Money
NEW YORK (Fortune) -- Banks' exposure to illiquid, hard-to-value assets jumped sharply higher in the third quarter, a development that deepens concerns about the transparency and strength of bank balance sheets.
Recently, banks have been required to show in financial statements which of their assets and liabilities rarely trade and are therefore valued according to in-house estimates. These so-called level three assets ballooned at banks in the third quarter as markets for many mortgage-related assets seized up, with Merrill Lynch posting the highest increase - a nearly 70% jump - in its level three assets from the second to the third quarter, according to a Fortune survey.
It might sound like an increase in assets is a positive thing for a bank. But no financial institution wants to record a big increase in illiquid assets, because pricing and selling them is difficult and, if the credit crunch persists, many of them could be a source of large losses in coming quarters.
Investors have long been skeptical about the values that the banks themselves place on their level three assets, and that mistrust deepened after both Merrill and Citigroup (Charts, Fortune 500) recently revealed huge mortgage-related losses that were much bigger than outsiders had expected.
Changes in the values of all assets and liabilities typically create a gain or loss in a bank's income statement. At banks, assets classified as level three have been hurt to differing degrees by the credit crunch. Least hit, so far at least, are private equity stakes and real estate holdings, but the level three bucket also includes leveraged buy-out loans, as well as seriously problematic assets like subprime mortgages and collateralized debt obligations (CDOs), which are securities that pool together asset-backed bonds.
Investor frustration about the lack of transparency in banks' balance sheets have contributed to the recent slump in bank stocks, which are down 12% since the end of Sept., according to the KBW Banks Index. And even if credit markets stabilize for some assets, and lead some banks to record non-cash, unrealized gains on level three assets, those profits won't be considered anywhere near as dependable as earnings from more liquid assets. Indeed, many level three assets were deemed to be reliable earners until very recently; in the first half of this year, level three assets were a big driver behind earnings at several banks, as Fortune first reported in September.
So, how much did level three assets increase in the third quarter? Merrill's 69% jump took level three assets up to $27 billion. A big part of that increase was due to a shift of $6 billion in subprime mortgage-related assets to level three from level two, the classification for assets that are theoretically more liquid than level three assets but still don't get valued according to prices in active markets. (Only level one assets are valued on a bank balance sheet according to quoted prices in liquid markets.)
Merrill (Charts, Fortune 500) says it moved assets to level three from level two because they became less liquid. At $27 billion, Merrill's level three assets are equivalent to 70% of Merrill's equity (which is the net worth of a bank after liabilities are subtracted from assets).
Of course, no bank's level three assets are going to be marked down to zero, so the comparison with equity doesn't mean these assets could potentially wipe away all or most of a bank's net worth. However, since future losses are most likely to come from level three asset markdowns, a comparison with equity makes sense, because the losses will immediately cause a hit to equity - and banks need strong equity to grow and maintain high credit ratings.
To get a better grip on how level three assets might affect a bank, it makes sense to look at what exactly makes up level three assets, though this can be hard because of banks' limited disclosure. In the case of Merrill, for example, we know that a sizable share of level three assets are distressed mortgages and CDOs, which are likely to be subject to further losses in the fourth quarter.
Goldman Sachs' level three assets leapt by a third in the third quarter to $72 billion, which is equivalent to 184% of equity. That looks high. However, Goldman spokesman Lucas van Praag responds that roughly half the increase was due to leveraged loans. These loans are nowhere near as toxic as subprime mortgages and CDOs. Van Praag adds: "It's worth noting that, since the end of the quarter, the leveraged loan market has eased somewhat and pricing inputs are more readily available."
Citi's write-downs: When did it know?
With its nearly $90 billion of level three assets equivalent to 255% of equity, Morgan Stanley looks particularly exposed to illiquid assets. In response, a Morgan Stanley spokesman notes that much of the level three total isn't in distressed mortgage assets, but assets like private equity and real estate. In announcing $3.7 billion of losses on subprime in the two months ended Oct. 31, Morgan Stanley disclosed a remaining net subprime mortgage exposure at Oct. 31 of $6 billion. The subprime assets that give that exposure are all in level three, the bank says.
But focusing only on level three assets would be a mistake, because banks could also be holding assets at disputable values in their level two buckets. For example, some of the CDOs that Merrill marked down in its third quarter were shifted from level two to level three. To be sure, in the second quarter, those CDOs may have been correctly classified as level two, but the movement of assets between levels at Merrill shows that these regulatory classifications are frustratingly fluid. Since banks typically don't disclose gains and losses from level two assets, this part of their balance sheet is likely to remain opaque.
Much hope has been placed on banks' auditors making sure that assets are properly valued, especially those marked according to internal guesstimates. In October, the Center for Audit Quality, which represents the auditors, warned brokerage managers and company directors that they had no choice but to abide by a recently introduced accounting rule for valuing illiquid assets.
But even a well-resourced auditor can't be expected to properly scrutinize the huge amount of level two and three assets sitting on banks' balance sheets. For the seven banks Fortune surveyed, level three assets totaled over $430 billion, equivalent to 110% of the banks' combined equity. That number will likely increase in the fourth quarter, making bank balance sheets even harder to read. Yes, that's right: Wall Street's black hole is getting bigger.
Wednesday, November 14, 2007
Analysis of November 13th Stock Market Rally
Bill King is bang on with his assessment of investor stupidity that led to the huge market rally yesterday.
"Ironically, or rather idiotically, traders poured into stocks on Blankfein’s assertion that Goldie is doing well because Goldie is short mortgage-backed securities and CDOs. Blankfein believes the financial situation will worsen: “...many institutions don’t understand what the credit crunch is going to do to earnings and their balance sheets.”
So what we have is a huge rally because Goldie will profit from the US economy and financial system going to hell. And people pay fortunes to go to Ivy League schools and B-schools to learn how to play the new economy!?!?! Apparently a critical mass of traders believes that not only what is good for Goldman is good for America but as long as Goldman profits everything else is immaterial...
Wal-Mart admits that customer visits declined in Q3; but food sales increased 5.3% and pharmacy sales jumped 7.9%. Thank God for food & drug inflation that is not recorded in official inflation!
Recession, inflation, dollar collapse, financial system implosion – no problemo, Goldie is making money so pour into stocks! And let’s be merry and jiggy now because Wal-Mart is booking Christmas sales weeks before Thanksgiving and food inflation is virulent enough to significantly boost revenue!"
Friday, November 09, 2007
The Bearish Financial Advisor
Ben Stein does a fine job of ending his career in this August 18 video where he recommends financial stocks right before they got destroyed. But just in case, Peter Schiff is there to stick the knife in and twist.
Remember - this is from August 18, 2007. And we all know what happened since then.
Bottom line - Fox and other channels are full of idiots who have no idea what they're talking about. What is truly unbeleivable is the venom that a bearish advisor (Peter Schiff) faces when he attempts to render a negative opinion about the market.
Ron Paul - The Truth is Out There!
As I've noted in my blog many times in the past, Ron Paul is running for President. He is fighting for the Republican nomination. He came 4th in fundraising in the last quarter. He just set the Republican record for most fundraising dollars in a day (almost $5 million) through an internet campaign.
Who is Ron Paul and why is his message gaining traction? Ron Paul is a Congressman from Texas that has been telling the truth about inflation, the devaluation of the U.S. Dollar, and the mess that the Federal Reserve has made over the years.
His supporters have been labelled as "fringe" and "loony" so that the real message doesn't spread. It's getting harder to contain because of the internet and specifically Youtube videos that have been circulating lately. Enjoy Ron Paul crucifying Ben Bernanke and try to understand Bernanke's lame responses to his legitimate questions.
Wednesday, November 07, 2007
Monday, November 05, 2007
Supermodel Dumping Dollar!
Once the supermodels start to clue in, you know that officially the last people are understanding the problem with the U.S. Dollar!
Nov. 5 (Bloomberg) -- Gisele Bundchen wants to remain the world's richest model and is insisting that she be paid in almost any currency but the U.S. dollar.
Like billionaire investors Warren Buffett and Bill Gross, the Brazilian supermodel, who Forbes magazine says earns more than anyone in her industry, is at the top of a growing list of rich people who have concluded that the currency can only depreciate because Americans led by President George W. Bush are living beyond their means.
Even after the dollar lost 34 percent since 2001, the biggest investors and most accurate forecasters say it will weaken further as home sales fall and the Federal Reserve cuts interest rates. The dollar plummeted to its lowest ever last week against the euro, Canadian dollar, Chinese yuan and the cheapest in 26 years against the British pound.
``We've told all of our clients that if you only had one idea, one investment, it would be to buy an investment in a non- dollar currency,'' said Gross, the chief investment officer of Pacific Investment Management Co. in Newport Beach, California, and manager of the world's biggest bond fund. ``That should be on top of the list,'' said Gross, whose firm is a unit of Munich- based insurer Allianz SE.
Nov. 5 (Bloomberg) -- Gisele Bundchen wants to remain the world's richest model and is insisting that she be paid in almost any currency but the U.S. dollar.
Like billionaire investors Warren Buffett and Bill Gross, the Brazilian supermodel, who Forbes magazine says earns more than anyone in her industry, is at the top of a growing list of rich people who have concluded that the currency can only depreciate because Americans led by President George W. Bush are living beyond their means.
Even after the dollar lost 34 percent since 2001, the biggest investors and most accurate forecasters say it will weaken further as home sales fall and the Federal Reserve cuts interest rates. The dollar plummeted to its lowest ever last week against the euro, Canadian dollar, Chinese yuan and the cheapest in 26 years against the British pound.
``We've told all of our clients that if you only had one idea, one investment, it would be to buy an investment in a non- dollar currency,'' said Gross, the chief investment officer of Pacific Investment Management Co. in Newport Beach, California, and manager of the world's biggest bond fund. ``That should be on top of the list,'' said Gross, whose firm is a unit of Munich- based insurer Allianz SE.
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