As a United States taxpayer I am not pleased with the progression of the bailout to date. The first TARP fund has largely been squandered. I commend Bernanke for thinking outside the box however the American public was unprepared to quickly accept his prescriptions and therefore he was a bit constrained.
As an outsider analyzing the situation, it has become rather evident to myself and other economists most notably those concerned with reality including Roubini, Shiller and the likes that the US banking system is effectively insolvent. The best course of action is to follow Sweeden, nationalize the banks, differentiate between good and bad assets, and ensure that the necessary regulatory stops are put in place. Once that is completed in a couple years sell the assets to the private sector. Perhaps the term bridge bank is more fitting.
Thursday, January 29, 2009
Tuesday, January 13, 2009
Proshares Ultrashort Barrons One-Day Wonders Report
Something to look into before purchasing a Proshares Ultra ETF. The performance of some leveraged funds, including China ultrashort, is based on only the DAILY performance results of the underlying index, not long-term returns. Let's say Index A goes up 10% on Day One, then drops 9% on day two, for a two-day return of about 0%. On Day One, a leveraged short fund based on this index would go down 20%. On Day Two, it would jump 18% (two times the index's 9% drop). But because that rise would be from a base equaling only 80% of your original investment, you would now have less than 95% of whatever you had anted up. In other words, while Traditional Index A broke even, the UltraShort Index lost 5.6%.
Monday, January 12, 2009
United States Finding Its Way Again
Below is Dr. John Hamre of the Center for Strategic and International Studies latest memo...
Washington is unusually vibrant these days because of the upcoming change of government. Announcements are made every day about new people coming into office, and messages come of current public servants who are returning to private life. But this year seems bigger than usual. There is a sense that we are at a fundamental turning point in American politics.
Government these days seems very important and fresh. This sense of enormous moment draws me to reflection, and that in turn takes me back to a fabulous little speech that Senator Bob Dole gave back in 1997. He had been defeated by President Bill Clinton, who in turn honored Senator Dole by bestowing on him the Presidential Medal of Freedom the following January.
At the awards ceremony, Bob Dole delivered one of the finest little speeches of the past half century. It is so good, that I am just going to share it with you in its entirety.
“Mr. President, no one can claim to be equal to this honor, but I will cherish it as long as I live, because this occasion allows me to honor some others who are more entitled.
“At every stage in my life, I have been a witness to the greatness of this country. I have seen American soldiers bring hope and leave graves in every corner of the world. I have seen this nation overcome depression and segregation and communism, turning back mortal threats to human freedom. And I have stood in awe of American courage and decency – virtues so rare in history, and so common in this precious place.
“I can vividly remember the first time I walked into the Capitol as a member of Congress. It was an honor beyond the dreams of a small town. I felt part of something great and noble. Even playing a small role seemed like a high calling, because America was the hope of history.
“I have never questioned that faith, in victory or in honest defeat. And the day I left office, it was undiminished. I know there are some who doubt these ideals. And I suspect there are young men and women who have not been adequately taught them. So let me leave a message to the future.
“I have found honor in the profession of politics. I have found vitality in the American experiment. Our challenge is not to question American ideals, or replace them, but to act worthy of them.
“I have been in government at moments when politics was elevated by courage into history—when the Civil Rights Act was passed, when the Americans with Disabilities Act became law. No one who took part in those honorable causes can doubt that public service, at its best, is noble.
“The moral challenges of our time can seem less clear. But they still demand conviction and courage and character. They still require young men and women with faith in our process. They still demand idealists, captured by the honor and adventure of service.
They still demand citizens who accept responsibility and who defy cynicism, affirming the American faith, and renewing her hope. They still demand the President and the Congress to find real unity in the public good.
“If we remember this, then America will always be the country of tomorrow, where ever
day is a new beginning and every life an instrument of God’s justice.”
Thank you, Bob Dole. These are remarkable days, and these wonderful words reflect what we all feel in our hearts. We are bound together in a common destiny. This must be a time for unified purpose.
Washington is unusually vibrant these days because of the upcoming change of government. Announcements are made every day about new people coming into office, and messages come of current public servants who are returning to private life. But this year seems bigger than usual. There is a sense that we are at a fundamental turning point in American politics.
Government these days seems very important and fresh. This sense of enormous moment draws me to reflection, and that in turn takes me back to a fabulous little speech that Senator Bob Dole gave back in 1997. He had been defeated by President Bill Clinton, who in turn honored Senator Dole by bestowing on him the Presidential Medal of Freedom the following January.
At the awards ceremony, Bob Dole delivered one of the finest little speeches of the past half century. It is so good, that I am just going to share it with you in its entirety.
“Mr. President, no one can claim to be equal to this honor, but I will cherish it as long as I live, because this occasion allows me to honor some others who are more entitled.
“At every stage in my life, I have been a witness to the greatness of this country. I have seen American soldiers bring hope and leave graves in every corner of the world. I have seen this nation overcome depression and segregation and communism, turning back mortal threats to human freedom. And I have stood in awe of American courage and decency – virtues so rare in history, and so common in this precious place.
“I can vividly remember the first time I walked into the Capitol as a member of Congress. It was an honor beyond the dreams of a small town. I felt part of something great and noble. Even playing a small role seemed like a high calling, because America was the hope of history.
“I have never questioned that faith, in victory or in honest defeat. And the day I left office, it was undiminished. I know there are some who doubt these ideals. And I suspect there are young men and women who have not been adequately taught them. So let me leave a message to the future.
“I have found honor in the profession of politics. I have found vitality in the American experiment. Our challenge is not to question American ideals, or replace them, but to act worthy of them.
“I have been in government at moments when politics was elevated by courage into history—when the Civil Rights Act was passed, when the Americans with Disabilities Act became law. No one who took part in those honorable causes can doubt that public service, at its best, is noble.
“The moral challenges of our time can seem less clear. But they still demand conviction and courage and character. They still require young men and women with faith in our process. They still demand idealists, captured by the honor and adventure of service.
They still demand citizens who accept responsibility and who defy cynicism, affirming the American faith, and renewing her hope. They still demand the President and the Congress to find real unity in the public good.
“If we remember this, then America will always be the country of tomorrow, where ever
day is a new beginning and every life an instrument of God’s justice.”
Thank you, Bob Dole. These are remarkable days, and these wonderful words reflect what we all feel in our hearts. We are bound together in a common destiny. This must be a time for unified purpose.
Tuesday, January 6, 2009
Dr. Doom Weighs In...
Today I read Marc Faber's (gloomboomdoom.com) newsletter The January 2009 MMC
The title is amusing...
'The Future of Pessimism Has Never Looked Brighter'
Faber expects the market to rebound near-term but eventually sell off later in the year as additional poor economic data arrives.
He favors buying a basket of resource companies such as CVRD (RIO), Freeport McMoran (FCX), Newmont Mining (NEM), BHP (BHP), Rio Tinto (RTP), Oil Service Holders (OIH) and United States Oil Fund (USO) as they have been hammered in the second half of 2008 and the amount of money being printed should drive gold and other commodities up.
The title is amusing...
'The Future of Pessimism Has Never Looked Brighter'
Faber expects the market to rebound near-term but eventually sell off later in the year as additional poor economic data arrives.
He favors buying a basket of resource companies such as CVRD (RIO), Freeport McMoran (FCX), Newmont Mining (NEM), BHP (BHP), Rio Tinto (RTP), Oil Service Holders (OIH) and United States Oil Fund (USO) as they have been hammered in the second half of 2008 and the amount of money being printed should drive gold and other commodities up.
Saturday, January 3, 2009
Recession, recovery, trade war and artificial life – welcome to 2009
Interesting link to what lies ahead in 2009. Published by the Financial Times...
http://www.ft.com/cms/s/13ee30ee-d66f-11dd-9bf7-000077b07658,dwp_uuid=73adc504-2ffa-11da-ba9f-00000e2511c8,print=yes.html
http://www.ft.com/cms/s/13ee30ee-d66f-11dd-9bf7-000077b07658,dwp_uuid=73adc504-2ffa-11da-ba9f-00000e2511c8,print=yes.html
Puget Energy Finally Comes Through
The state regulators finally okay'd the merger. Here is a good article summarizing the process...
http://seekingalpha.com/article/112848-merger-review-puget-energy?source=yahoo
http://seekingalpha.com/article/112848-merger-review-puget-energy?source=yahoo
Comments from Nouriel Roubini
Below is Nouriel Roubini's latest. He was among the few who foresaw the recent turmoil in the markets. He is likely right in economic terms however the real question is has the market already discounted the slowdown ahead. My intuition tells me that we will likely see a good start to the year as there is a large amount of money on the sidelines and people coming into the markets after tax loss selling. However I suspect the markets will fade after that and the S&P could see an new low as investors come to terms with the depth of the cycle ahead. I have played the January bounce correctly however I suspect I will get out of the trade sooner rather than later as I believe the markets are poised to head lower.
Jan. 1 (Bloomberg) -- The global financial system in 2008
experienced its worst crisis since the Great Depression of the
1930s. Major financial institutions went bust. Others were bought
up on the cheap or survived only after major bailouts. Global
stock markets fell by more than 50 percent from their 2007 peaks.
Interest-rate spreads spiked. A severe liquidity and credit
crunch appeared. Many emerging-market economies on the verge of a
crisis had to ask for help from the International Monetary Fund.
The global financial system literally went into a cardiac
arrest after the Lehman Brothers Holdings Inc. collapse and a
meltdown was barely avoided through very aggressive policy
responses. So what lies ahead in 2009? Is the worst behind us or
ahead of us?
Unfortunately, the worst is ahead of us. The entire global
economy will contract in a severe and protracted U-shaped global
recession that started a year ago. The U.S. will certainly
experience its worst recession in decades, a deep and protracted
contraction lasting at least through the end of 2009. Even in
2010 the economic recovery may be so weak -- 1 percent growth or
so -- that it will feel terrible even if the recession is
technically over.
Recession Spreads
There also will be recessions in the euro zone, the U.K.,
continental Europe, Canada, Japan and the other advanced
economies.
A hard landing for emerging-market economies may also be at
hand. Among the so-called BRICs, Russia will be in an outright
recession in 2009. Growth in China will slow to 5 percent or
less, representing a hard landing for a country that needs
expansion of close to 10 percent to move 10 million to 15 million
poor rural farmers into the urban industrial sector every year.
Brazil will barely grow in 2009. Even India will experience a
sharp slowdown.
Most other emerging market economies will suffer a similar
hard landing. This severe global recession will morph into a
stag-deflation, a deadly combination of economic
stagnation/recession and deflation. In the advanced economies,
with aggregate demand falling below growing aggregate supply,
slack in goods markets will lead to deflationary pressures as
companies’ pricing power is restrained.
Likewise, rising unemployment will constrain labor costs and
wage growth. These factors, combined with sharply falling
commodity prices, will cause inflation in advanced economies to
ease toward negative territory, raising concerns about deflation.
Danger of Deflation
Deflation is dangerous as it leads to a liquidity trap:
nominal policy rates can’t fall below zero, so monetary policy
becomes ineffective and even quantitative easing may not work.
Falling prices mean that the real cost of capital is high
and the real value of nominal debts rise. This leads to further
declines in consumption and investment, thus setting in motion a
vicious circle in which incomes and jobs are squeezed,
aggravating the fall in demand and prices.
As traditional monetary policy becomes ineffective, other
unorthodox policies will continue to be used: policies to bail
out investors, financial institutions, and borrowers; massive
provision of liquidity to banks in order to ease the credit
crunch; and even more radical actions to reduce long-term
interest rates on government bonds and narrow the spread between
market rates and government bonds.
Triggering Event
Today’s global crisis was triggered by the collapse of the
U.S. housing bubble, but it wasn’t caused only by it. America’s
credit excesses were in residential mortgages, commercial
mortgages, credit cards, auto loans and student loans.
There were also massive excesses in the securitized products
that converted these debts into toxic financial derivatives; in
borrowing by local governments; in financing for leveraged
buyouts that should never have occurred; in corporate bonds that
will suffer massive losses as defaults surge; in the dangerous
and unregulated credit default swap market.
Moreover, these pathologies weren’t confined to the U.S.
There were housing bubbles in many other countries, fueled by
excessive and cheap lending that didn’t reflect underlying risks.
There was a commodities bubble and private-equity and hedge-funds
bubbles.
Shadow Banks
We now are seeing the demise of the shadow banking system,
the complex of non-bank financial institutions that looked like
banks as they borrowed short term and in liquid ways, leveraged a
lot, and invested in longer term and illiquid ways. As a result,
the biggest asset and credit bubble in financial history is going
bust, with overall credit losses likely to be more than $2
trillion.
Unless governments rapidly recapitalize financial
institutions, the credit crunch will become even more severe as
losses mount faster than recapitalization and banks are forced to
constrain credit and lending. Equity prices and other risky
assets have plunged from their peaks of late 2007, but there are
still significant risks for more declines.
An emerging consensus argues that the prices of many risky
assets -- including equities -- have fallen so much that we are
at the bottom and a rapid recovery will occur. But in the next
few months the macroeconomic news, the earnings and profits
reports, and the financial sector news from around the world will
be worse than expected. This will put more pressure on prices of
risky assets, with a chance of a 20 percent fall in global equity
prices.
Meltdown Averted
While the odds of a systemic financial meltdown have been
reduced by the actions of the Group of Seven and other economies,
severe vulnerabilities remain.
The credit crunch will persist and spread beyond mortgages.
Deleveraging will continue, as thousands of hedge funds -- many
of which will go bust -- and other leveraged players are forced
to sell assets into illiquid and distressed markets, thus causing
price declines and driving more insolvent financial institutions
out of business. Credit losses will mount as the recession
deepens. And a few emerging-market economies will certainly enter
a full-blown financial crisis.
So 2009 will be a painful year of global recession and
further financial stresses, losses and bankruptcies. Currently,
the probability of an L-shaped, stag-deflation is now rising to a
third, while the probability of a severe U-shaped recession is
two-thirds. Only aggressive, coordinated and effective policy
actions by advanced and emerging-market countries can ensure that
the global economy starts to recover -- however slowly --in 2010,
rather than entering a more protracted period of economic
stagnation.
Jan. 1 (Bloomberg) -- The global financial system in 2008
experienced its worst crisis since the Great Depression of the
1930s. Major financial institutions went bust. Others were bought
up on the cheap or survived only after major bailouts. Global
stock markets fell by more than 50 percent from their 2007 peaks.
Interest-rate spreads spiked. A severe liquidity and credit
crunch appeared. Many emerging-market economies on the verge of a
crisis had to ask for help from the International Monetary Fund.
The global financial system literally went into a cardiac
arrest after the Lehman Brothers Holdings Inc. collapse and a
meltdown was barely avoided through very aggressive policy
responses. So what lies ahead in 2009? Is the worst behind us or
ahead of us?
Unfortunately, the worst is ahead of us. The entire global
economy will contract in a severe and protracted U-shaped global
recession that started a year ago. The U.S. will certainly
experience its worst recession in decades, a deep and protracted
contraction lasting at least through the end of 2009. Even in
2010 the economic recovery may be so weak -- 1 percent growth or
so -- that it will feel terrible even if the recession is
technically over.
Recession Spreads
There also will be recessions in the euro zone, the U.K.,
continental Europe, Canada, Japan and the other advanced
economies.
A hard landing for emerging-market economies may also be at
hand. Among the so-called BRICs, Russia will be in an outright
recession in 2009. Growth in China will slow to 5 percent or
less, representing a hard landing for a country that needs
expansion of close to 10 percent to move 10 million to 15 million
poor rural farmers into the urban industrial sector every year.
Brazil will barely grow in 2009. Even India will experience a
sharp slowdown.
Most other emerging market economies will suffer a similar
hard landing. This severe global recession will morph into a
stag-deflation, a deadly combination of economic
stagnation/recession and deflation. In the advanced economies,
with aggregate demand falling below growing aggregate supply,
slack in goods markets will lead to deflationary pressures as
companies’ pricing power is restrained.
Likewise, rising unemployment will constrain labor costs and
wage growth. These factors, combined with sharply falling
commodity prices, will cause inflation in advanced economies to
ease toward negative territory, raising concerns about deflation.
Danger of Deflation
Deflation is dangerous as it leads to a liquidity trap:
nominal policy rates can’t fall below zero, so monetary policy
becomes ineffective and even quantitative easing may not work.
Falling prices mean that the real cost of capital is high
and the real value of nominal debts rise. This leads to further
declines in consumption and investment, thus setting in motion a
vicious circle in which incomes and jobs are squeezed,
aggravating the fall in demand and prices.
As traditional monetary policy becomes ineffective, other
unorthodox policies will continue to be used: policies to bail
out investors, financial institutions, and borrowers; massive
provision of liquidity to banks in order to ease the credit
crunch; and even more radical actions to reduce long-term
interest rates on government bonds and narrow the spread between
market rates and government bonds.
Triggering Event
Today’s global crisis was triggered by the collapse of the
U.S. housing bubble, but it wasn’t caused only by it. America’s
credit excesses were in residential mortgages, commercial
mortgages, credit cards, auto loans and student loans.
There were also massive excesses in the securitized products
that converted these debts into toxic financial derivatives; in
borrowing by local governments; in financing for leveraged
buyouts that should never have occurred; in corporate bonds that
will suffer massive losses as defaults surge; in the dangerous
and unregulated credit default swap market.
Moreover, these pathologies weren’t confined to the U.S.
There were housing bubbles in many other countries, fueled by
excessive and cheap lending that didn’t reflect underlying risks.
There was a commodities bubble and private-equity and hedge-funds
bubbles.
Shadow Banks
We now are seeing the demise of the shadow banking system,
the complex of non-bank financial institutions that looked like
banks as they borrowed short term and in liquid ways, leveraged a
lot, and invested in longer term and illiquid ways. As a result,
the biggest asset and credit bubble in financial history is going
bust, with overall credit losses likely to be more than $2
trillion.
Unless governments rapidly recapitalize financial
institutions, the credit crunch will become even more severe as
losses mount faster than recapitalization and banks are forced to
constrain credit and lending. Equity prices and other risky
assets have plunged from their peaks of late 2007, but there are
still significant risks for more declines.
An emerging consensus argues that the prices of many risky
assets -- including equities -- have fallen so much that we are
at the bottom and a rapid recovery will occur. But in the next
few months the macroeconomic news, the earnings and profits
reports, and the financial sector news from around the world will
be worse than expected. This will put more pressure on prices of
risky assets, with a chance of a 20 percent fall in global equity
prices.
Meltdown Averted
While the odds of a systemic financial meltdown have been
reduced by the actions of the Group of Seven and other economies,
severe vulnerabilities remain.
The credit crunch will persist and spread beyond mortgages.
Deleveraging will continue, as thousands of hedge funds -- many
of which will go bust -- and other leveraged players are forced
to sell assets into illiquid and distressed markets, thus causing
price declines and driving more insolvent financial institutions
out of business. Credit losses will mount as the recession
deepens. And a few emerging-market economies will certainly enter
a full-blown financial crisis.
So 2009 will be a painful year of global recession and
further financial stresses, losses and bankruptcies. Currently,
the probability of an L-shaped, stag-deflation is now rising to a
third, while the probability of a severe U-shaped recession is
two-thirds. Only aggressive, coordinated and effective policy
actions by advanced and emerging-market countries can ensure that
the global economy starts to recover -- however slowly --in 2010,
rather than entering a more protracted period of economic
stagnation.
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