Saturday, May 30, 2009

All pumped up--could a dump be coming?

Via: Ben Stein (of all people--there were other sources but I chose Ben's graph for the bright color) and

As confidence levels increase (next "animal spirits" update next weekend, but the Conference Board and Michigan Consumer Sentiment numbers behaved according to forecast this week), especially as captured for the stock market by the long-term Coppock momentum oscillator, yet the stock market soars to unheard of heights upon fairly overt market manipulation, the masters of the universe are confronted with yet another opportunity to fleece the American public of its wealth--having bid the market up to these ridiculous heights by sucking the small investors back in, according to allegedly reliable reports, they now have the opportunity to blow them away with a carefully orchestrated sell-off into summer weakness--shorting all the way--and then to rejoin the party long in late summer or fall to pick up the rest of the momentum move of the cyclical "expansion" (term used loosely) before the next slump of the tortured American business cycle arrives--which your faithful analyst will alert you to a year in advance, if our models continue to function as they have.

I don't know why the graphs show different values. I looked up the P/E on the S&P in Barron's and it said 123.

Neither these graphs nor the commentary constitute specific investment advice. The data provided are from sources believed to be reliable but cannot be guaranteed. You invest at your own risk, unlike the masters of the universe, the "too big to fail" financial institutions, who also invest at your risk, because you are just a powerless taxpayer, and your elected representatives don't give a fig what you think.

Disclosure:  no position U.S. equities

More via:  Market-Ticker

What Was THAT? (Friday Market Close)

Friday's close was "interesting", to put it mildly.

Here's a chart of Friday's price action in the /ES, the S&P 500 "Electronic" Futures:

Notice the huge volume spike (the blue underlay) on the chart at the close.

There were 146,083 contracts traded in that one-minute period between 14:59 and 15:00 (Central); the next minute, when the real dislocation hit, traded 91,774 - after the cash market bell had rung.

The closing bell is usually busy.  But this sort of volume is absolutely unheard of.  To put it in perspective yesterday the same time recorded 26,540 contracts, and 36,642 the minute after.

Volume was light all day, as is somewhat common in the summer on a Friday.  The close started its usual increase, and was up to 23,000 contracts at 14:57 with two minutes remaining.

Then all hell broke loose.

"Paper", or institutional representation, was stalking the close; the pit audio feed so stated.  Directly in front of the bell 1,000 contracts were bought - as near as I could tell at the market.

Those are "Big" contracts, each being 5 of the /ES minis; this was, in effect, a 5,000 contract /ES market order.

The reaction was instantaneous.  The offer side of the market collapsed and the /ES rocketed higher.  In the pit, trades went off as high as 925, but on the E-Mini trades were recorded as high as 927.75.  As quickly as it got there, it collapsed back to 922 - a nearly six-handle (3/4 of one percent) straight-up and down spike.

Now here's the problem:

For me to believe this was "organic", that is, this was an un-forced order, I have to believe that someone wanted to go home net long the equivalent of 5,000 /ES contracts into the weekend at a severely disadvantaged price.  The market had been calm all day; if you wanted to buy 1,000 spoos (equivalent to 5,000 E-Minis) there was plenty of opportunity to do so all day long.  This sort of market order was guaranteed to dislocate the market - so the buyer had to simply not give a damn what sort of price they got.

How bad of a fill was this?  To put this in perspective each /ES point is worth $50 per contract.

Each single point that was disadvantaged to the buyer by this execution cost him a cool quarter-million bucks, and on average, the "disadvantage" was likely around five full handles, meaning that the buyer of these contracts, if this was an "organic" order, willingly ate $1.25 million dollars.

I don't believe for one second that is what happened.

There are only two possibilities that I can come up with, and both demand answers:

  1. "Someone" was forcibly liquidated out of a short position - a fairly big one.  1,000 S&P "big" contracts has a maintenance margin requirement of $22,500,000 - that's not a small position, and each point, as noted, has a $250,000 move associated with it.  Who was it and why?
  2. "Someone" who didn't give a damn if they lost a sizable amount of money intentionally wanted to shove the cash market up through the 200DMA, a critical technical level.  They were 1 minute late; they succeeded in doing so in the futures, but not the cash!

#2 makes for great conspiracy theories, but my money is on scenario #1 - someone got forcibly liquidated into the close, perhaps a big customer, perhaps a hedge fund, but someone.

Whoever it was the coupling between the pit and the Globex futures guaranteed the result.  There are computers and traders looking for differences between the pit and E-minis every day who try to pick up those nickels in front of a steamroller.  When the offer side collapsed the computers took over and stops got run all the way up to 927.75 before quickly collapsing back down to 922.

Here's the cash chart, as of the close this afternoon:

That's a very pretty potential double-top in the oval, and it coincides with the 200MA.

This is not to say that this level will necessarily hold.  We are, in fact, only at the 38.2% retrace from the decline that initiated last fall!  It would not be unusual for a bear market rally to go as far as the 61.8% retrace before its over, which is up around 1060ish, or the 50% retrace around 990.

What does this all mean?  A few things:

  1. The stops up there are gone.  They were potential rocket fuel for next week and the propellant to take us to - and potentially through - the 200DMA on the cash.
  2. A bunch of someones had a lot of contracts that were short taken out on them.  Those nearly 250,000 E-mini contracts did change hands, and odds are a very large percentage of them constituted stop-loss orders on contracts sold short from when we were up toward 933 a few weeks ago.  Those traders are going to be quite pissed off, but that's the risk of the game.

Next week is very likely to be extraordinarily violent, especially Monday.  /ZN (10 year Treasury futures) has seen an insane drop in open interest over the last few weeks.  This little game undoubtedly severely damaged open interest in the E-Mini /ES contract.

Thin markets are dangerous markets.  While the E-Mini still is very liquid, the removal of these stops from the order book leaves the door open for both little resistance if the market decides to move higher early next week, and also provides the potential for irritated shorts to re-establish their positions short, driving the market lower.  Those who wound up long during that little ramp job are likely to be rather nervous as well.

For my part I shorted that spike.  Not large, and I am fully prepared to hedge it Sunday evening if necessary or just take it down, as there is every possibility, this close to the 200MA, that we will at least hit it on the cash, and blowing through it on volume and continuing higher cannot be ruled out.

I will note, however, that the last time we saw this sort of dislocation activity start up into the close it it too began with these sorts of "rocket shot" moves higher - and once the shorts were all blown out by having their stops run, the market essentially pancaked.

Look sharp - the sharks are in the water and you taste good.

Disclosure: Mildly short (~5% position) the broad market.

Thursday, May 28, 2009

Slope of yield curve and growth

With all the hoopla about rising Treasury yields, it is worth remembering that the slope of the yield curve has been a pretty good predictor of future real growth.  Click on graph for larger image.


Growth might accelerate into 2011 and then level off or decline.  If “inflation” of the traditional wage-price variety accelerates, while not likely given the state of the labor market, that would pose a danger in that the Fed would presumably have to tighten to control it.  (The Fed doesn’t tighten to control asset inflations.)  The current steepening of the yield curve is entirely consistent with our last “animal spirits” update forecast of “no recession [in the NBER sense] in sight”; the next update comes in June after the May unemployment release.  Real growth will accelerate to maybe 2 percent.

The higher yields at the long end and increasing risk aversion among foreign debt buyers (but not the Fed!) should push Treasury sales further into the short end, so short run, Treasury wins, perhaps.  But if there are indications of accelerating inflation at all, a classical rush to the short end and inversion of the yield curve might presage Obama becoming a one-term president.  Hence, it is in the Democrats’ interest, regardless of their rhetoric, to keep the labor market down.  The President’s continuing appeasement of the ruling class would seem to guarantee this; he hasn’t breathed a word about doing away with George Bush’s tax cuts for the rich in ages (see this for my take on the big picture, if you haven’t already).  So much for shared sacrifice.

At some point either the labor market will kick back and inflation happen, or the economy will implode again as bad debts transferred onto the taxpayers’ tab cause demand to fail—the dollar will collapse—and foreign investors will demand even higher rates.  If the current social contract remains in place, this will be the coup de grace for the American middle class—there won’t be one anymore.  There will be a rich elite (the top ten percent of Americans now take half of all national income) and a captive working class, still better off than the poor in the less developed countries, but without access to the educational opportunities and social connections required to jump to the upper class except in rare instances.  The rich will grumble about paying the lion’s share of taxes, as they do now, while taking a pig’s share of all income.

Hence, we stick to our adherence to the Strauss and Howe hypothesis of a renegotiation of the American social contract culminating in a massive crisis over the next dozen years or so (see this and this).

Wednesday, May 27, 2009

Bailout nation

Links h/t Zero Hedge & yves

Tuesday, May 26, 2009

Millionaires Go Missing

Evidence of our broken social contract (see this).  The American ruling class lacks class—a better descriptor might be “crass.”  Greed is good.  Nab ‘em at the federal level. 

Via:  Wall Street Journal 

Here's a two-minute drill in soak-the-rich economics:

Maryland couldn't balance its budget last year, so the state tried to close the shortfall by fleecing the wealthy. Politicians in Annapolis created a millionaire tax bracket, raising the top marginal income-tax rate to 6.25%. And because cities such as Baltimore and Bethesda also impose income taxes, the state-local tax rate can go as high as 9.45%. Governor Martin O'Malley, a dedicated class warrior, declared that these richest 0.3% of filers were "willing and able to pay their fair share." The Baltimore Sun predicted the rich would "grin and bear it."

One year later, nobody's grinning. One-third of the millionaires have disappeared from Maryland tax rolls. In 2008 roughly 3,000 million-dollar income tax returns were filed by the end of April. This year there were 2,000, which the state comptroller's office concedes is a "substantial decline." On those missing returns, the government collects 6.25% of nothing. Instead of the state coffers gaining the extra $106 million the politicians predicted, millionaires paid $100 million less in taxes than they did last year -- even at higher rates.

No doubt the majority of that loss in millionaire filings results from the recession. However, this is one reason that depending on the rich to finance government is so ill-advised: Progressive tax rates create mountains of cash during good times that vanish during recessions. For evidence, consult California, New York and New Jersey (see here).

The Maryland state revenue office says it's "way too early" to tell how many millionaires moved out of the state when the tax rates rose. But no one disputes that some rich filers did leave. It's easier than the redistributionists think. Christopher Summers, president of the Maryland Public Policy Institute, notes: "Marylanders with high incomes typically own second homes in tax friendlier states like Florida, Delaware, South Carolina and Virginia. So it's easy for them to change their residency."

All of this means that the burden of paying for bloated government in Annapolis will fall on the middle class. Thanks to the futility of soaking the rich, these working families will now pay Mr. O'Malley's "fair share."

Via: The News Tribune

America's poor are its most generous givers, surveys show

Last updated: May 21st, 2009 05:05 AM (PDT)

When Jody Richards saw a homeless man begging outside a downtown McDonald's recently, he bought the man a cheeseburger. There's nothing unusual about that, except that Richards is homeless, too, and the 99-cent cheeseburger was an outsized chunk of the $9.50 he'd earned that day from panhandling.

The generosity of poor people isn't so much rare as rarely noticed, however. In fact, America's poor donate more, in percentage terms, than higher-income groups do, surveys of charitable giving show. What's more, their generosity declines less in hard times than the generosity of richer givers does.

"The lowest-income fifth (of the population) always give at more than their capacity," said Virginia Hodgkinson, former vice president for research at Independent Sector, a Washington-based association of major nonprofit agencies. "The next two-fifths give at capacity, and those above that are capable of giving two or three times more than they give."

Indeed, the U.S. Bureau of Labor Statistics' latest survey of consumer expenditure found that the poorest fifth of America's households contributed an average of 4.3 percent of their incomes to charitable organizations in 2007. The richest fifth gave at less than half that rate, 2.1 percent.

The figures probably undercount remittances by legal and illegal immigrants to family and friends back home, a multibillion-dollar outlay to which the poor contribute disproportionally.

None of the middle fifths of America's households, in contrast, gave away as much as 3 percent of their incomes.

"As a rule, people who have money don't know people in need," said Tanya Davis, 40, a laid-off security guard and single mother.

Certainly, better-off people aren't hit up by friends and kin as often as Davis said she was, having earned a reputation for generosity while she was working.

Now getting by on $110 a week in unemployment insurance and $314 a month in welfare, Davis still fields two or three appeals a week, she said, and lays out $5 or $10 weekly.

To explain her giving, Davis offered the two reasons most commonly heard in three days of conversations with low-income donors:

"I believe that the more I give, the more I receive, and that God loves a cheerful giver," Davis said. "Plus I've been in their position, and someday I might be again."

Herbert Smith, 31, a Seventh-day Adventist who said he tithed his $1,010 monthly disability check - giving away 10 percent of it - thought that poor people give more because, in some ways, they worry less about their money.

"We're not scared of poverty the way rich people are," he said. "We know how to get the lights back on when we can't pay the electric bill."

In terms of income, the poorest fifth seem unlikely benefactors. Their pretax household incomes averaged $10,531 in 2007, according to the BLS survey, compared with $158,388 for the top fifth.

In addition, its members are the least educated fifth of the U.S. population, the oldest, the most religious and the likeliest to rent their homes, according to demographers. They're also the most likely fifth to be on welfare, to drive used cars or rely on public transportation, to be students, minorities, women and recent immigrants.

However, many of these characteristics predict generosity. Women are more generous than men, studies have shown. Older people give more than younger donors with equal incomes. The working poor, disproportionate numbers of which are recent immigrants, are America's most generous group, according to Arthur Brooks, the author of the book "Who Really Cares," an analysis of U.S. generosity.

Faith probably matters most, Brooks - who's the president of the American Enterprise Institute, a conservative Washington policy-research organization - said in an interview. That's partly because above-average numbers of poor people go to church, and those who attend church give more money than non-attenders to secular and religious charities, Brooks found.

Moreover, disproportionate numbers of poor people belong to congregations that tithe.

Less-religious givers such as Emel Sweeney, 73, a retired bookkeeper, say that giving lights up their lives.

"Have you ever looked into the face of someone you're being generous to?" Sweeney asked with the trace of a Jamaican lilt.

That brought to mind her encounter with a young woman who was struggling to manage four small, tired children on a bus.

They staggered and straggled at a transfer stop, along with Sweeney, who urged the mother to take a nearby cab the rest of the way. When the mother said she had no money, Sweeney gave her $20, she said. The mother, as she piled her brood into the cab, waved and mouthed a thank-you.

"Those words just rested in my chest," Sweeney said, "and as I rode home I was so happy."

Pastor Coletta Jones, who ministers to a largely low-income tithing congregation in southeast Washington, The Rock Christian Church, thinks that poor people give more because they ask for less for themselves.

"When you have just a little, you're thankful for what you have," Jones said, "but with every step you take up the ladder of success, the money clouds your mind and gets you into a state of never being satisfied."

Brooks offered this statistic as supportive evidence: Fifty-eight percent of noncontributors with above-median incomes say they don't have enough money to give any away.

What makes poor people's generosity even more impressive is that their giving generally isn't tax-deductible, because they don't earn enough to justify itemizing their charitable tax deductions. In effect, giving a dollar to charity costs poor people a dollar while it costs deduction itemizers 65 cents.

In addition, measures of generosity typically exclude informal giving, such as that of Davis' late mother, Helen Coleman. Coleman, a Baltimore hotel housekeeper, provided child care, beds and meals for many of her eight children and 32 grandchildren, Davis said.

Federal surveys don't ask about remittances specifically, so it's hard to know how much the poorest fifth sends back home. Remittances from U.S. immigrants totaled more than $100 billion in 2007, according to Manuel Orozco, a senior researcher at the Washington policy institute Inter-American Dialogue, who specializes in remittances.

By comparison, individual giving to tax-deductible U.S. charities totaled about $220 billion in 2007.

Much of the money remitted comes from struggling U.S. immigrants such as Zenaida Araviza, 42, a Macy's cosmetics clerk and single mother in suburban Arlington, Va.

Araviza, who earns $1,300 a month, goes carless, cable-less and cell phone-less in order to send an aunt in the Philippines $200 a month to care for Araviza's mother, who has Alzheimer's.

"What can I do?" asked Araviza, an attractive, somber woman. "It's my responsibility."

Carmen De Jesus, the chief financial officer and treasurer of Forex Inc., a remittance agency based in Springfield, Va., said low-income Filipino-Americans such as Araviza were her most generous customers.

"The domestic helpers send very, very frequently," she said. "The doctors, less so."

Why are they so generous? Christie Zerrudo, a cashier who handles Filipino remittances at Manila Oriental, a grocery/restaurant/remittance agency in Arlington, offered this explanation:

"It gives the heart comfort when you sit down at the end of the day, and you know that you did your part," Zerrudo said. "You took care of your family. If you eat here, they eat there, too. It would give you stress if they couldn't. But you love them, they are your family, and your love has had an expression."


If parents want to raise generous children, what works? Years of looking into which youth experiences best predict giving by adults offer some clues.

Independent Sector, a group of major nonprofit organizations, found the activities below the most closely linked to adult generosity. They're in only rough rank order because respondents could name multiple activities.

-Seeing an admired person who isn't a family member help others.

-Seeing a family member help others.

-Doing volunteer work.

-Raising money door to door.

-Being active in student government.

-Belonging to a youth group, such as the Boy Scouts.

-Being active in a religious organization.

-Being helped by others.

The biggest deterrent to generosity: not seeing a family member help others.

Source: Giving and Volunteering in the United States survey.

-Frank Greve

Via:  AP  As predicted.

Consumer confidence soars in May

Consumer confidence soars past expectations in May, reaching the highest since last September

NEW YORK (AP) -- Consumer confidence extended its rebound in May, soaring to the highest level since last September as shoppers are seeing glimmers of hope for the economy.

The Conference Board said Tuesday that its Consumer Confidence Index, which had dramatically increased in April, zoomed past economists' expectations to 54.9 from a revised 40.8 in April. Economists surveyed by Thomson Reuters were expecting 42.3. The reading marks the highest reading in eight months when the level was 61.4. The levels are also closer to the year-ago reading of 58.1.

The Present Situation Index, which measures how shoppers feel now about the economy, rose to 28.9 from 25.5 last month. But the Expectations Index, which measures shoppers' outlook over the next six months, climbed to 72.3 from 51.0 in April.

Economists closely monitor consumer confidence because consumer spending accounts for more than 70 percent of economic activity.

"Looking ahead, consumers are considerably less pessimistic than they were earlier this year, and expectations are that business conditions, the labor market and incomes will improve in the coming months," Lynn Franco, director of The Conference Board Consumer Research Center, said in a statement. "While confidence is still weak by historic standards, as far as consumers are concerned, the worst is now behind us."

Sunday, May 24, 2009

Memorial day 2009: RIP, the American empire

Via:  Jesse’s Cafe Americain  h/t yves 

Sometimes someone else, two people in this case, say it better.  It is now clear that President Obama is a clever puppet of the ruling class, the military-industrial-financial complex.  As regular readers know, our working hypothesis is that we’re on the leading edge of the ending of the American republic as we have known it since World War II (see this and this).  What will come next, and how will it be achieved?  Who will win, the ruling class or democracy?  These are the questions of the next decade.  Immediately, we need to raise marginal tax rates on incomes over $1 million to 90 percent to bring the ruling class down to earth before America is turned into a feudal state.  But this is not likely.  Our social contract is broken.  Total upheaval is coming.

Why the U.S. Has Really Gone Broke [via]

This is a difficult essay for an American of this generation to read, because we have grown up with the assumption that the security of the United States is intimately tied to massive amounts of spending for military preparedness. The first response to any essay such as this is often an emotional one: "What about the troops?"

It requires an effort to realize that the vast majority of this spending has absolutely nothing to do with what the troops want or need. The recent examples of the lack of adequate armor on vehicles carrying troops, to the abysmal conditions in the military hospital system, are more than just anomalies. The military industrial complex, of which we had been warned in the farewell address of Dwight Eisenhower, does not value the troops, the US citizen army, highly in its equations.

The United States has reached its limit. It can no longer aspire to be 'the world's policeman.' We are not able to do this and maintain a viable and healthy democracy at home. We are not protecting ourselves and our liberties; we are promoting the interests of pseudo-american global corporations around the world. As Mussolini observed, corporatism is fascism.

The global corporate complex, though nominally based in part in the US, exists for its own purposes, serves its own purposes, and consumes everything which we the American people hold most valuable: our lives, our liberties, and our pursuit of peace and happiness with justice for all.

"Some of the damage can never be rectified. There are, however, some steps that the U.S. urgently needs to take. These include reversing Bush's 2001 and 2003 tax cuts for the wealthy, beginning to liquidate our global empire of over 800 military bases, cutting from the defense budget all projects that bear no relationship to national security and ceasing to use the defense budget as a Keynesian jobs program. If we do these things we have a chance of squeaking by. If we don't, we face probable national insolvency and a long depression."

Why the U.S. Has Really Gone Broke
Chalmers Johnson
Le Monde Diplomatique
February, 2008

Global confidence in the US economy has reached zero, as was proved by last month’s stock market meltdown. But there is an enormous anomaly in the US economy above and beyond the subprime mortgage crisis, the housing bubble and the prospect of recession: 60 years of misallocation of resources, and borrowings, to the establishment and maintenance of a military-industrial complex as the basis of the nation’s economic life

The military adventurers in the Bush administration have much in common with the corporate leaders of the defunct energy company Enron. Both groups thought that they were the “smartest guys in the room” — the title of Alex Gibney’s prize-winning film on what went wrong at Enron. The neoconservatives in the White House and the Pentagon outsmarted themselves. They failed even to address the problem of how to finance their schemes of imperialist wars and global domination.

As a result, going into 2008, the United States finds itself in the anomalous position of being unable to pay for its own elevated living standards or its wasteful, overly large military establishment. Its government no longer even attempts to reduce the ruinous expenses of maintaining huge standing armies, replacing the equipment that seven years of wars have destroyed or worn out, or preparing for a war in outer space against unknown adversaries. Instead, the Bush administration puts off these costs for future generations to pay or repudiate. This fiscal irresponsibility has been disguised through many manipulative financial schemes (causing poorer countries to lend us unprecedented sums of money), but the time of reckoning is fast approaching.

There are three broad aspects to the US debt crisis.

First, in the current fiscal year (2008) we are spending insane amounts of money on “defence” projects that bear no relation to the national security of the US. We are also keeping the income tax burdens on the richest segment of the population at strikingly low levels.

Second, we continue to believe that we can compensate for the accelerating erosion of our base and our loss of jobs to foreign countries through massive military expenditures — “military Keynesianism” (which I discuss in detail in my book Nemesis: The Last Days of the American Republic). By that, I mean the mistaken belief that public policies focused on frequent wars, huge expenditures on weapons and munitions, and large standing armies can indefinitely sustain a wealthy capitalist economy. The opposite is actually true.

Third, in our devotion to militarism (despite our limited resources), we are failing to invest in our social infrastructure and other requirements for the long-term health of the US. These are what economists call opportunity costs, things not done because we spent our money on something else. Our public education system has deteriorated alarmingly. We have failed to provide health care to all our citizens and neglected our responsibilities as the world’s number one polluter. Most important, we have lost our competitiveness as a manufacturer for civilian needs, an infinitely more efficient use of scarce resources than arms manufacturing.

Fiscal disaster

It is virtually impossible to overstate the profligacy of what our government spends on the military. The Department of Defense’s planned expenditures for the fiscal year 2008 are larger than all other nations’ military budgets combined. The supplementary budget to pay for the current wars in Iraq and Afghanistan, not part of the official defence budget, is itself larger than the combined military budgets of Russia and China. Defence-related spending for fiscal 2008 will exceed $1 trillion for the first time in history. The US has become the largest single seller of arms and munitions to other nations on Earth. Leaving out President Bush’s two on-going wars, defence spending has doubled since the mid-1990s. The defence budget for fiscal 2008 is the largest since the second world war.

Before we try to break down and analyse this gargantuan sum, there is one important caveat. Figures on defence spending are notoriously unreliable. The numbers released by the Congressional Reference Service and the Congressional Budget Office do not agree with each other. Robert Higgs, senior fellow for political economy at the Independent Institute, says: “A well-founded rule of thumb is to take the Pentagon’s (always well publicised) basic budget total and double it” (1). Even a cursory reading of newspaper articles about the Department of Defense will turn up major differences in statistics about its expenses. Some 30-40% of the defence budget is “black”,” meaning that these sections contain hidden expenditures for classified projects.

There is no possible way to know what they include or whether their total amounts are accurate.
There are many reasons for this budgetary sleight-of-hand — including a desire for secrecy on the part of the president, the secretary of defence, and the military-industrial complex — but the chief one is that members of Congress, who profit enormously from defence jobs and pork-barrel projects in their districts, have a political interest in supporting the Department of Defense. In 1996, in an attempt to bring accounting standards within the executive branch closer to those of the civilian economy, Congress passed the Federal Financial Management Improvement Act. It required all federal agencies to hire outside auditors to review their books and release the results to the public. Neither the Department of Defense, nor the Department of Homeland Security, has ever complied. Congress has complained, but not penalised either department for ignoring the law. All numbers released by the Pentagon should be regarded as suspect.

In discussing the fiscal 2008 defence budget, as released on 7 February 2007, I have been guided by two experienced and reliable analysts: William D Hartung of the New America Foundation’s Arms and Security Initiative (2) and Fred Kaplan, defence correspondent for (3). They agree that the Department of Defense requested $481.4bn for salaries, operations (except in Iraq and Afghanistan), and equipment. They also agree on a figure of $141.7bn for the “supplemental” budget to fight the global war on terrorism — that is, the two on-going wars that the general public may think are actually covered by the basic Pentagon budget. The Department of Defense also asked for an extra $93.4bn to pay for hitherto unmentioned war costs in the remainder of 2007 and, most creatively, an additional “allowance” (a new term in defence budget documents) of $50bn to be charged to fiscal year 2009. This makes a total spending request by the Department of Defense of $766.5bn.

But there is much more. In an attempt to disguise the true size of the US military empire, the government has long hidden major military-related expenditures in departments other than Defense. For example, $23.4bn for the Department of Energy goes towards developing and maintaining nuclear warheads; and $25.3bn in the Department of State budget is spent on foreign military assistance (primarily for Israel, Saudi Arabia, Bahrain, Kuwait, Oman, Qatar, the United Arab Republic, Egypt and Pakistan). Another $1.03bn outside the official Department of Defense budget is now needed for recruitment and re-enlistment incentives for the overstretched US military, up from a mere $174m in 2003, when the war in Iraq began. The Department of Veterans Affairs currently gets at least $75.7bn, 50% of it for the long-term care of the most seriously injured among the 28,870 soldiers so far wounded in Iraq and 1,708 in Afghanistan. The amount is universally derided as inadequate. Another $46.4bn goes to the Department of Homeland Security.

Missing from this compilation is $1.9bn to the Department of Justice for the paramilitary activities of the FBI; $38.5bn to the Department of the Treasury for the Military Retirement Fund; $7.6bn for the military-related activities of the National Aeronautics and Space Administration; and well over $200bn in interest for past debt-financed defence outlays. This brings US spending for its military establishment during the current fiscal year, conservatively calculated, to at least $1.1 trillion.

Military Keynesianism

Such expenditures are not only morally obscene, they are fiscally unsustainable. Many neo-conservatives and poorly informed patriotic Americans believe that, even though our defence budget is huge, we can afford it because we are the richest country on Earth. That statement is no longer true. The world’s richest political entity, according to the CIA’s World Factbook, is the European Union. The EU’s 2006 GDP was estimated to be slightly larger than that of the US. Moreover, China’s 2006 GDP was only slightly smaller than that of the US, and Japan was the world’s fourth richest nation.

A more telling comparison that reveals just how much worse we’re doing can be found among the current accounts of various nations. The current account measures the net trade surplus or deficit of a country plus cross-border payments of interest, royalties, dividends, capital gains, foreign aid, and other income. In order for Japan to manufacture anything, it must import all required raw materials. Even after this incredible expense is met, it still has an $88bn per year trade surplus with the US and enjoys the world’s second highest current account balance (China is number one). The US is number 163 — last on the list, worse than countries such as Australia and the UK that also have large trade deficits. Its 2006 current account deficit was $811.5bn; second worst was Spain at $106.4bn. This is unsustainable.

It’s not just that our tastes for foreign goods, including imported oil, vastly exceed our ability to pay for them. We are financing them through massive borrowing. On 7 November 2007, the US Treasury announced that the national debt had breached _$9 trillion for the first time. This was just five weeks after Congress raised the “debt ceiling” to $9.815 trillion. If you begin in 1789, at the moment the constitution became the supreme law of the land, the debt accumulated by the federal government did not top $1 trillion until 1981. When George Bush became president in January 2001, it stood at approximately $5.7 trillion. Since then, it has increased by 45%. This huge debt can be largely explained by our defence expenditures.

Our excessive military expenditures did not occur over just a few short years or simply because of the Bush administration’s policies. They have been going on for a very long time in accordance with a superficially plausible ideology, and have now become so entrenched in our democratic political system that they are starting to wreak havoc. This is military Keynesianism — the determination to maintain a permanent war economy and to treat military output as an ordinary economic product, even though it makes no contribution to either production or consumption.

This ideology goes back to the first years of the cold war. During the late 1940s, the US was haunted by economic anxieties. The great depression of the 1930s had been overcome only by the war production boom of the second world war. With peace and demobilisation, there was a pervasive fear that the depression would return. During 1949, alarmed by the Soviet Union’s detonation of an atomic bomb, the looming Communist victory in the Chinese civil war, a domestic recession, and the lowering of the Iron Curtain around the USSR’s European satellites, the US sought to draft basic strategy for the emerging cold war. The result was the militaristic National Security Council Report 68 (NSC-68) drafted under the supervision of Paul Nitze, then head of the Policy Planning Staff in the State Department. Dated 14 April 1950 and signed by President Harry S Truman on 30 September 1950, it laid out the basic public economic policies that the US pursues to the present day.
In its conclusions, NSC-68 asserted: “One of the most significant lessons of our World War II experience was that the American economy, when it operates at a level approaching full efficiency, can provide enormous resources for purposes other than civilian consumption while simultaneously providing a high standard of living” (4).
With this understanding, US strategists began to build up a massive munitions industry, both to counter the military might of the Soviet Union (which they consistently overstated) and also to maintain full employment, as well as ward off a possible return of the depression. The result was that, under Pentagon leadership, entire new industries were created to manufacture large aircraft, nuclear-powered submarines, nuclear warheads, intercontinental ballistic missiles, and surveillance and communications satellites. This led to what President Eisenhower warned against in his farewell address of 6 February 1961: “The conjunction of an immense military establishment and a large arms industry is new in the American experience” — the military-industrial complex.

By 1990 the value of the weapons, equipment and factories devoted to the Department of Defense was 83% of the value of all plants and equipment in US manufacturing. From 1947 to 1990, the combined US military budgets amounted to $8.7 trillion. Even though the Soviet Union no longer exists, US reliance on military Keynesianism has, if anything, ratcheted up, thanks to the massive vested interests that have become entrenched around the military establishment. Over time, a commitment to both guns and butter has proven an unstable configuration. Military industries crowd out the civilian economy and lead to severe economic weaknesses. Devotion to military Keynesianism is a form of slow economic suicide.

Higher spending, fewer jobs

On 1 May 2007, the Center for Economic and Policy Research of Washington, DC, released a study prepared by the economic and political forecasting company Global Insight on the long-term economic impact of increased military spending. Guided by economist Dean Baker, this research showed that, after an initial demand stimulus, by about the sixth year the effect of increased military spending turns negative. The US economy has had to cope with growing defence spending for more than 60 years. Baker found that, after 10 years of higher defence spending, there would be 464,000 fewer jobs than in a scenario that involved lower defence spending.

Baker concluded: “It is often believed that wars and military spending increases are good for the economy. In fact, most economic models show that military spending diverts resources from productive uses, such as consumption and investment, and ultimately slows economic growth and reduces employment” (5).
These are only some of the many deleterious effects of military Keynesianism.
It was believed that the US could afford both a massive military establishment and a high standard of living, and that it needed both to maintain full employment. But it did not work out that way. By the 1960s it was becoming apparent that turning over the nation’s largest manufacturing enterprises to the Department of Defense and producing goods without any investment or consumption value was starting to crowd out civilian economic activities. The historian Thomas E Woods Jr observes that, during the 1950s and 1960s, between one-third and two-thirds of all US research talent was siphoned off into the military sector (6). It is, of course, impossible to know what innovations never appeared as a result of this diversion of resources and brainpower into the service of the military, but it was during the 1960s that we first began to notice Japan was outpacing us in the design and quality of a range of consumer goods, including household electronics and automobiles.

Can we reverse the trend?

Nuclear weapons furnish a striking illustration of these anomalies. Between the 1940s and 1996, the US spent at least $5.8 trillion on the development, testing and construction of nuclear bombs. By 1967, the peak year of its nuclear stockpile, the US possessed some 32,500 deliverable atomic and hydrogen bombs, none of which, thankfully, was ever used. They perfectly illustrate the Keynesian principle that the government can provide make-work jobs to keep people employed. Nuclear weapons were not just America’s secret weapon, but also its secret economic weapon. As of 2006, we still had 9,960 of them. There is today no sane use for them, while the trillions spent on them could have been used to solve the problems of social security and health care, quality education and access to higher education for all, not to speak of the retention of highly-skilled jobs within the economy.

The pioneer in analysing what has been lost as a result of military Keynesianism was the late Seymour Melman (1917-2004), a professor of industrial engineering and operations research at Columbia University. His 1970 book, Pentagon Capitalism: The Political Economy of War, was a prescient analysis of the unintended consequences of the US preoccupation with its armed forces and their weaponry since the onset of the cold war. Melman wrote: “From 1946 to 1969, the United States government spent over $1,000bn on the military, more than half of this under the Kennedy and Johnson administrations — the period during which the [Pentagon-dominated] state management was established as a formal institution. This sum of staggering size (try to visualize a billion of something) does not express the cost of the military establishment to the nation as a whole. The true cost is measured by what has been foregone, by the accumulated deterioration in many facets of life, by the inability to alleviate human wretchedness of long duration.”
In an important exegesis on Melman’s relevance to the current American economic situation, Thomas Woods writes: “According to the US Department of Defense, during the four decades from 1947 through 1987 it used (in 1982 dollars) $7.62 trillion in capital resources. In 1985, the Department of Commerce estimated the value of the nation’s plant and equipment, and infrastructure, at just over _$7.29 trillion… The amount spent over that period could have doubled the American capital stock or modernized and replaced its existing stock” (7).

The fact that we did not modernise or replace our capital assets is one of the main reasons why, by the turn of the 21st century, our manufacturing base had all but evaporated. Machine tools, an industry on which Melman was an authority, are a particularly important symptom. In November 1968, a five-year inventory disclosed “that 64% of the metalworking machine tools used in US industry were 10 years old or older. The age of this industrial equipment (drills, lathes, etc.) marks the United States’ machine tool stock as the oldest among all major industrial nations, and it marks the continuation of a deterioration process that began with the end of the second world war. This deterioration at the base of the industrial system certifies to the continuous debilitating and depleting effect that the military use of capital and research and development talent has had on American industry.”

Nothing has been done since 1968 to reverse these trends and it shows today in our massive imports of equipment — from medical machines like _proton accelerators for radiological therapy (made primarily in Belgium, Germany, and Japan) to cars and trucks.

Our short tenure as the world’s lone superpower has come to an end. As Harvard economics professor Benjamin Friedman has written: “Again and again it has always been the world’s leading lending country that has been the premier country in terms of political influence, diplomatic influence and cultural influence. It’s no accident that we took over the role from the British at the same time that we took over the job of being the world’s leading lending country. Today we are no longer the world’s leading lending country. In fact we are now the world’s biggest debtor country, and we are continuing to wield influence on the basis of military prowess alone” (8).

Some of the damage can never be rectified. There are, however, some steps that the US urgently needs to take. These include reversing Bush’s 2001 and 2003 tax cuts for the wealthy, beginning to liquidate our global empire of over 800 military bases, cutting from the defence budget all projects that bear no relationship to national security and ceasing to use the defence budget as a Keynesian jobs programme.

If we do these things we have a chance of squeaking by. If we don’t, we face probable national insolvency and a long depression.

(1) Robert Higgs, “The Trillion-Dollar Defense Budget Is Already Here” , The Independent Institute, 15 March 2007, ...
(2) William D Hartung, “Bush Military Budget Highest Since WWII”, 10 February 2007, ...
(3) Fred Kaplan, “It’s Time to Sharpen the Scissors”, 5 February 2007, ...
(4) See ...
(5) Center for Economic and Policy Research, 1 May 2007, ...
(6) Thomas E Woods, “What the Warfare State Really Costs”, ...
(7) Thomas E Woods, Ibid.
(8) John F Ince, “Think the Nation’s Debt Doesn’t Affect You? Think Again”, 20 March 2007, /

Thursday, May 21, 2009

Income inequality, debt, crisis and depressions

The recent award of the Bates medal to Emmanual Saez led us to his home page where we encountered this amazing graph of income inequality as measured by the share of income going to the top 10 percent:


Source:  Emmanual Saez’ home page.  The income measure is personal tax return based, so is roughly based on household income, as I understand it. 

We know that, based on the unemployment rate at least, Roosevelt’s policies did not end the Great Depression.  Unemployment remained on average in the high teens through 1940 (BLS source).  With adjustments for measurement differences it was probably higher.  Two things happened simultaneously to end the Depression.  There was the apparently miraculous reduction of income inequality in 1942, 1943, and 1944 that coincided with the end of the depression as measured by unemployment rate.  And there was the huge fiscal stimulus of the war.

We know that high income people save more of their income.  So, other things equal, there will be less production and consumption with an unequal income distribution.

To those who say “we need the rich because they save and fund investment,” I say, “You think they’re going to invest in the United States, when the big growth is all abroad?  There’s nothing keeping their money here (except fear, right now).”

Now I am not a “Keynesian,” or a “monetarist” or a Republican or a Democrat.  All those positions are far too cartoonish for your sophisticated interlocutor. 

But I have concluded in a non-academic way but upon I think sufficient amounts of empirical observation and common sense, the cause of the last depression and the cause of this nascent one to be severe income inequality and the distortions of aggregate demand that result—namely the lower income classes accumulating more debt than they can handle as they try to maintain relative position with the upper crust, as all wealth and poverty are ultimately relative (as Jesus knew).  The debt explosion may also result from everyone taking on debt to counter slowing growth in the economy due to said demand distortions, to keep getting the same relative kick from growing consumption.  Here’s the picture of debt load then and now—note the similarity to income inequality:

Source:  Credit Suisse

Nota bene: The real GDP growth rate has fallen from about 4 percent to about 2 percent over the postwar period during the run-up to our current indebtedness.

So how do you make an income distribution more equal without a world war with an enemy everyone bands together to fight?  I really don’t understand what happened in an economic sense during the war to equalize outcomes so much, and invite references in comments.

One possibility, with a remote chance of happening so long as Congress is bought and paid for by moneyed interests, would be to raise marginal tax rates on incomes over, say, $1 million to 75 or 90 percent.  Why?  Because our moneyed elite has come to believe they are above the law—managements have made it a practice to loot public corporations, with the full complicity of their accountants; financial service firms largely in New York have perpetrated multiple massive frauds upon the world’s financial markets (and to think that these people didn’t know it was fraud is to give them too little credit for intelligence—after all, many of the biggest winners also got Nobel Prizes).  Anytime one party walks away from a deal with a huge wad of cash and leaves all the risk with someone else, the alarum should sound.  But these people were good, slick beyond disbelief; and anyway, their friends (the rating agencies, insurance companies selling CDSs, wealthy clients of hedge funds, etc.) were getting rich too, so why spoil the party?

American marginal tax rates were highest in the 1950s, 90 percent frequently, at the time of the country’s greatest postwar growth rates.  So the argument that high marginal tax rates kill growth does not pass the sniff test.  In fact, top marginal tax rates have moved inversely over the postwar period with economic growth.  It’s almost as if in the early postwar years when the country was paying off its war debt that people actually believed that, from those to whom much has been given, much is expected.  Imagine that.

Source: Matt Yglesias

Raising marginal tax rates on these people might bring them down to earth and make them realize we’re all in the same boat.  America, love it or leave it!  Especially the hedge fund managers, who, as Warren Buffet points out, pay a lower percentage of income in taxes than their administrative assistants.

But this is not what we see happening.  Instead we see massive amounts of federal debt being piled on the tax-paying stressed-out middle classes, who are trying to deleverage and save, further reducing consumption demand. 

What’s the Benign Brodwicz program?  A poverty level dole and free health care for the unemployed or bankrupt while they look for another job while continuing to support domestic consumption and investment demand and safeguarding the health of the next generation.  Take care of the people, lose the macroeconomists who can never agree on anything anyway.  Academic economists are ideological cheerleaders not useful for practical work.  Obama’s deficits are insane given our position as world’s greatest debtor nation.  Lower business taxes.  Take care of the people and get the budget on a pay-go basis.  We’re a fabulously rich country, there’s plenty to go around.  The planet is groaning under the demands for ever-increasing consumption (see Sornette and Johansen for the really big picture).

It’s time for a new paradigm.  Keynesians, you’re firing your blanks at the wrong bogey-man.  Pumping up aggregate demand without addressing income inequality will just put more money in the pockets of the New York slicksters—as has happened with the banking bailouts—and the upper crust across the land, and sink everyone else in debt or indentured servitude to taxes.  And they’ll take the money and invest it where they can get the highest rate of return, which won’t be here.

Note the sequence: there’s an inequality increase and run-up of debt; then a collapse of effective demand, debt deflation and depression; households slowly deleverage; inequality vanishes in a crisis; growth takes off with a renewed social contract with the upper crust willing to bear their share of the burden. 

Massive fiscal stimulus applied to a country with a broken social contract invites massive corruption.  And our social contract is broken.

When will a sense of “democracy” return to the workplace? Here’s the picture of CEO pay relative to average worker pay.  These people must think they’re gods!  Any reader with experience of latter-day corporate America knows the feeling that one is expected to genuflect in the presence of top management.

Source:  New York Times

As a first step, our policies should be aimed at helping households to deleverage. 

The pension funds holding the assets of American workers might think about reining in executive pay.  (Fat chance, the money managers are part of the game.)

But to foster that sense of togetherness, I say tax the upper crust, knock ‘em off their pedestals.  Make ‘em remember what it means to be a member of the human race again. 

The two great tasks facing America now are to deleverage the households and to restore a sense of fairness to compensation and taxation.  Only then can massive fiscal stimulus be responsibly contemplated.

We will limp along, if we don’t commit fiscal suicide, until these problems are solved.  Massive debt-financed fiscal stimulus on a highly unequal, unfair, politically compromised economy will make the inequality—the root cause of depressions, in our view—worse.

IMHO.  Cheers.

Tuesday, May 19, 2009

The long and short of it

Why Europeans are getting taller and taller-and Americans aren’t  h/t
The Speed of Short People – h/t Kedrosky

WARNING: United States Credit Risk

Via: Market-Ticker   h/t

Federal financial fascism on the march:  a federal government backstop to the states and localities is being contemplated.  Sooner or later America’s fiscal policies will cause a sell-off of the dollar, at which time it will be probably unbearably tempting to trick up some international chaos in the form of some sort of war or terrorist event to drive investors back to the good old greenback.   In this context Paul Krugman’s lecturing of the Chinese on currency valuations (who took us off the gold standard, Paul?) is truly bellicose.  See Krugman in China for this story.

In the context of our working hypothesis that the American social contract is broken and heading toward a crisis in about ten years, the implications of federalization of state and local debt (“financial fascism”) are these:  the states and localities are invited into moral hazard, just like Fannie and Freddie, as the article points out; the Constitution is further abrogated, as the states are strong-armed into obeying the federal government; the potential for vastly misguided macro policies at the national level is elevated and macro volatility increased (the Founders seemed to understand that sparsely connected networks are more stable than densely connected ones); ultimately, even after we’ve tried to scare the world into greenbacks, the BRICs, Euroland and Japan will figure out a way to go around us, and we will run up a good inflation to depreciate the debt while the BRICs are taking it out of our hide in currency devaluation; and without further change in the income distribution (see Debt and income inequality for some graphs suggesting that the real reason for our current collapse of effective demand is that income inequality has become so great most people simply don’t have enough money to spend to support recent levels of output)—that is to say, without a fundamental renegotiation of the American social contract such as occurred miraculously during World War II, that America a generation from now will be a banana republic with a tiny ruling class who will send their children to the right schools to get the right jobs in the right businesses and government agencies with the high pay that will be denied to the vast majority of working stiffs, who will be locked out of this calcification of the American dream in a class system that will be effectively feudal.  There will be lords and ladies, and serfs serving them, is the way it will feel.  Sound familiar?  Could get much worse.

How might a new social contract come about, when our elected representatives lie to us so easily (“Yes we can!”), so powerless themselves to change the status quo?  (I credit President Obama with making health care his top priority, as the bottom half are going need help as the depression matures.)  How we truly change America is the question for the next decade.  Think about it, and please don’t hesitate let us know your thoughts.  For background see this and this.

Warning: United States Credit Risk

Yes, it really is at risk.

Through the first seven months of the fiscal year, the federal deficit has mounted up to a record $802.3 billion, compared with $153.5 billion at the same time last year. Income-tax receipts are down nearly 31% for the fiscal year so far.

People who are not making money - who are either unemployed or if self-employed are not profitable - don't pay taxes.

Ramping spending into such a situation is idiotic.  It is similar to you losing your job and going on a spending spree, running your credit cards to the moon before they are cut off.

You may rest assured that they WILL be cut off if you continue this behavior for very long.

Perhaps Japan is warning us of an impending cut-off?

Japan has been a major buyer of US government bonds, helping the US finance its Federal budget deficits.

But, he added, it would continue to buy bonds only if they were denominated in yen - the so-called samurai bonds.

We have not issued any so-called "samurai" bonds.  They should be better-called "Seppuku Bonds", because that is what they will do to The United States if we ever issue them.

To be fair, Japan's Democratic Party has poor prospects in their upcoming elections.  But should they actually gain enough sway to change policy, things get very interesting very fast for The United States, and not in a good way - more in a "Chinese Curse" sort of way.

See, in order to have a hyper-inflationary collapse of an economy, such as Weimar Germany, you must have debt denominated in some currency other than your own.  Iceland, for example, blew up in no small part due to a decent amount of their debt being denominated in other than their native currency.  Borrowers in Eastern Europe have discovered recently the danger of home mortgages written in Swiss Francs.

Such foreign-denominated debt seems to foreign borrowers to be "more fair" in that it places the risk of currency devaluation on the nation that undergoes it.  But what is often missed is that currencies don't always change value due to the actions of just one nation - that is, Japan's Yen could strengthen due to the actions of Japan, just as the the dollar could weaken due to the actions of The United States.

The insidious (and dangerous) reality of such a circumstance is that it creates a perverse incentive for the nation buying the debt denominated in its own currency to take actions that strengthen their currency, because doing so increases the value of the note they hold!  That is, they can increase your indebtedness by practicing fiscal restraint in their nation.

To permit such an event to occur is akin to walking around with a loaded pistol in your mouth with the slide gripped between your teeth, offering the grip end to anyone who walks by.

That is not a recipe for a long, healthy life.

Speaking of The United States doing dumb things that could destroy the nation, we've got this:

Fox Biz is reporting that the House Financial Services Committee is set to take up legislation this week that would establish a federal backstop for all Municipal bonds and muni insurance.

This would, of course, represent another massive expansion of the government's guarantees and turn all states into Fannie and Freddy.

Oh no, this bill is much worse than that.

Does anyone remember the "Drive 55" game the government played back during the energy "crisis"?  The threat was simple: either pass a 55mph speed limit for all roads, including those that were not interstate and thus not under federal jurisdiction in any way, shape or form, or lose all federal highway funding.

So what is this really about?  Let's be clear: It is about The Federal Government attempting to finalize the full federalization of every state in the union, removing any and all remaining sovereignty.

This sort of action is a blatant and outrageous attempt to rewrite The Constitution without actually doing so, by making the states subservient to The Federal Government's demands under threat of having their heroin supply interrupted.

This must not stand; those states that have passed or are considering resolutions declaring their rights under The Constitution must immediately upgrade those "resolutions" to laws, and be prepared to back them up with whatever is necessary.

Our Republic was designed with relatively strong states and a relatively weak Federal Government for a reason.

Simply put, it is more difficult to corrupt a government that is closer to the people.  An example can be found here:

The Washington Post reported last month on more than $150 million in federal funds that Murtha directed to the airport, which has six arriving and departing flights per day. Among the improvements, Murtha directed the Pentagon to give the airport a new, $8 million, state-of-the-art radar tower that has not been used since it was built in 2004, and $30 million for a new runway and tarmac so the airport could handle large military planes and become an emergency military base in case of crisis.

Now if The State Government wants to appropriate $180 million in state tax revenues for improvements based on those funds bringing more than $180 million in benefit to the state, so be it.

But when The Federal Government appropriates these funds they can take them from people 2,500 miles away, who have no use for the project and derive no benefit from it.

Another example of the same sort of outrage comes in the laws for state-chartered banks in many states that prohibit a state bank from accepting a deposit while that bank has a negative net equity position - that is, while it is insolvent.

There is no such law at the federal level, which is part and parcel of why we are in this economic mess and why over a trillion dollars, including $180 billion "passed through" AIG, was literally stolen from each and every American.

The Federal Government must not be allowed to insert its talons into each and every state's funding mechanisms. 

If it does, we will no longer be a union of states; the separation of states and their governments will quite literally disappear, and our nation will have been irretrievably damaged, no longer conforming to The Constitution as set forth by The Founders more than 200 years ago.

And you can bet that "Seppuku Bonds" will, subsequent to that act, once The Federal Government has placed the noose around the neck of the several states, be issued.

The clock for our republic is running out.

Disclosure: Can I short The United States?

Monday, May 18, 2009

What Does Your Credit-Card Company Know About You?

Via:  New York Times  In the world of bad debt collection, a soft voice and intimate knowledge of your life situation works better than threats.

Rudy Santana’s day began recently, as almost all his working days begin, with a name on a screen. The name that April morning belonged to a Massachusetts man in his mid-30s. He owed money on a credit card and a second mortgage, the screen told Santana, and was separated from his wife. He was behind in paying back $28,900.97 in debt. Which was why he was on Santana’s screen.

When Santana reached him by phone, the man quickly began talking about his ex-wife. “Listen,” the man said. “I called her about this debt, and a guy picked up — a guy I’ve never heard before — and when I asked for her, he hung up on me. Can you believe that? We used that money to renovate the kitchen! And now she won’t even talk to me! Who the hell was that guy who answered the phone?”

“So you’ve spoken to your wife?” Santana asked, his voice soft and gentle. “Were you able to have a good talk with her? Even when you’re angry, it’s important to talk. Did you talk about the debt?”

“Yeah, we talked about it,” the man replied. He paused and released a small sob. “You know, she told me we would be together until we died. I know I have to pay this. But I’m not going to pay her half. I won’t damn pay it.”

“I know,” Santana said. “This is difficult, and I’ll be honest — I think you’re doing a great job. You’re really strong. But the thing is, to the bank, they don’t make a distinction between you and your wife. To them, it’s just debt. They just want to get paid.

“I think I can do something for you, though,” Santana continued, glancing at his screen. It was filled with information about the man, including the fact that he had recently sold his home at a loss. Some of this information had been sent by the man’s bank to Santana’s employer, Sunrise Credit Services, which collects delinquent debts for companies like Citigroup, Bank of America and HSBC. Santana’s company had added notes, too, including helpful tips — he is easier to reach in the mornings, for example — and new ways to contact him.

“Look,” Santana said. “I know you’re angry at your wife. One step to ending that anger is putting this debt behind you. It will really help you find peace. You owe about $29,000. How much do you think you can pay?”

“Well, how much are you gonna help me?” the man shot back. “These banks got all this taxpayer money from the government, and they’re the ones who ruined the market for my house! I helped bail them out. I think the banks should be paying me, instead of trying to suck all the life out of us they can!”

It was the first of numerous blowups that Santana would confront that day. Bill collectors don’t tend to encounter many pleasantries, even in the best of times. And these are nowhere near the best of times, for borrowers or for the banking and credit-card industries that lend to them. After two decades of almost constant expansion and profitability, card companies today are in deep trouble. Monstrous losses — estimated to top $395 billion over the next five years — are growing as cardholders, brought low by the recession, walk away from their debts. And Congress and President Obama are pushing for legislation that would make it much harder for companies to hike up interest rates and charge many of the sneaky fees that have been an easy source of revenue for years.

So credit-card firms are changing their business plans. Gone are the days of handing out cards willy-nilly and hoping that the cardholders who dutifully pay up will offset the losses from those who default. Today companies are focusing on those customers most likely to honor their debts. And they are looking for ways to convince existing cardholders that if they only have enough money to pay one bill, it’s wiser to pay off their credit card than, say, the phone.

Put another way, credit-card companies are becoming much more interested in understanding their customers’ lives and psyches, because, the theory goes, knowing what makes cardholders tick will help firms determine who is a good bet and who should be shown the door as quickly as possible.

Luckily for the industry, small groups of executives at most of the large firms have spent the last decade studying cardholders from almost every angle, and collection agencies have developed more sophisticated dunning techniques. They have sought to draw psychological and behavioral lessons from the enormous amounts of data the credit-card companies collect every day. They’ve run thousands of tests and crunched the numbers on millions of accounts. One result of all that labor is the conversation between Santana — a former bouncer whose higher education consists solely of corporate-sponsored classes like “the Psychology of Collections” — and the man from Massachusetts. When Santana contacted the man last month, he was armed with detailed information about his life and trained in which psychological approaches were most likely to succeed.

Eventually, the man from Massachusetts called Santana back with a proposal. He had spoken to his ex-wife, he said. They wanted to wipe out their debt by paying just $10,000 — only 35 percent of what they owed.

Continue reading at New York Times

Friday, May 15, 2009

U.S. consumers' mood rises in early May: survey

As predicted.

Via:  Yahoo Finance

By Chris Reese

NEW YORK (Reuters) - U.S. consumer confidence rose in early May to its strongest since the September failure of Lehman Brothers, with rising expectations the economy may be in the last stages of the recession, a survey showed on Friday.

The Reuters/University of Michigan Surveys of Consumers said its preliminary index of confidence for May rose to 67.9 from 65.1 in April. This was above economists' median expectation of a reading of 67.0, according to a Reuters poll.

The index of consumer expectations jumped to 69.0 in early May, its highest since October 2007 and up from 63.1 in April.

"Consumer confidence rose in early May as consumers became increasingly convinced that the economy is in its final stages of contraction, and paradoxically, that their personal finances would remain dismal and keep their spending at reduced levels for the foreseeable future," the Reuters/University of Michigan Surveys of Consumers said in a statement.

Confidence remained shaky overall however, with the majority of consumers in early May reporting their financial situation had worsened due primarily to income declines, shorter work hours and lost jobs, according to the survey.

The gauge of current economic conditions eased in early May to 66.2 from 68.3 in April.

"Yes we are still in a recession, but we may be in the stage of pre-recovery," said Andrew Richman, fixed income strategist at SunTrust Private Wealth Management in Palm Beach, Florida.

U.S. Treasuries were largely unmoved by the data, trading steady at lower levels while the Dow and NASDAQ stock indexes added to gains.

Thursday, May 14, 2009

Ben’s first bubble

It is now clear, by our “animal spirits” lights and the granddaddy of all long-term momentum oscillators (see last two posts), that as it concerns Depression II, history is going to repeat as farce.

You cannot have the degree of simultaneous stimulation from monetary and fiscal policy that we have now without it hitting something, sooner of later.  As we sagely commented yesterday, it would appear that Ben’s First Bubble will be in the stock market.

This follows in the Greenspan (modern Fed chief model) tradition.  Old Alan the Appeaser’s first bubble was in the stock market.  As his first official act, Greenspan blew the Stock Market Bubble of 1987 that appears so like a mini-bubble to modern eyes, so quaint and harmless and quickly reflated.  Since the Crash of 1987 occurred at a time of very high, actually peaking, “animal spirits,” (see this) in our view the fabled Plunge Protection Team was entirely unnecessary—but what the hell, Arch, when you got an opportunity to blow up a bubble, you blow.  We’ve had bubbles in stocks, housing and commodities just in this decade.

So here is our view:  A tsunami of liquidity is going hit the stock market in a few months.  Why not housing?  Once burned, twice shy, plus they’ve tightened credit so ordinary folks can’t play the leverage game the rich can play, and the securitization markets are dead and the banks won’t book the trash.  Just when we beginning to have fun!  Why not consumer goods—good old-fashioned inflation?  Too much labor market fear and slack, dummy!  People are taking pay cuts, for crying out loud!  Sure, we’re starting to see stagflationary increases in commodities, like food and energy, but they don’t count, stupid!  They’re not core [inflation]!  Why not commodities?  We’ve got supertankers sitting off Singapore harbor inventorying oil, that’s why!  Glut glut glut!  So what does that leave?  The stock market!

Now, I feel the pain of the investment bankers who’ve lost their world as much as the next guy (not much), but there’s still Goldman and Morgan Stanley, and I know that other at-liberty IBs are joining hedge funds.  Yes, the big money folks are applying their blades to their whetstones in anticipation of extracting further wealth from the American economy.  At some point someone’s going to make a killing shorting the American dollar (not anytime soon, in our view) while blaming the entire thing on the American government.

We urge President Obama and the Congress to consider addressing the needs for food, shelter and health care for the American people, because the next crisis is going to be worse than this one, and you, Mr. President, and your bought-and-paid-for Congress, bless your hearts, do not have the power to stop the big money vandals from gutting our economy again.  And how about raising marginal tax rates on incomes over $1 million to 90 percent to bring these people down to earth?  What do they think they are, gods?  This is getting old.

We hope to be proven wrong. 


Wednesday, May 13, 2009

The granddaddy of momentum oscillators

The Coppock indicator is the granddaddy of long-term momentum oscillators.  When it turns up from a negative reading, the stock market usually enters a bull market.  The one false signal in the postwar period was given in this decade, in 2002, but after a stutter, the market recovered and was higher three years later than at the time of the false signal.  The Coppock indicator is at its lowest level of the postwar period, but has not turned up yet.  Given the strength of the recent run-up, I’d kind of expect a stutter-step before we get Ben’s First Bubble continuing in the stock market.  The Coppock curve is below, gratis.  This is another indicator of pent-up yin-yang. Let the panic buying begin!  Just remember:  bulls make money, bears make money, pigs get slaughtered in the next down leg to new lows.

Click to enlarge.  This is research, not investment advice.  Trade at your own risk.


‘Animal spirits’ in America and the stock market oscillator

Yesterday we introduced the “animal spirits” stock market oscillator that shocked us with its apparent prediction of a “real” bottom in the stock market.  (Remember that our models are literally models of emotion, not rational decision making.)  Today for your viewing pleasure we offer a graph of the consumer confidence measure together with the stock market oscillator.  What it shows is remarkable:  the current simultaneous apparent bottoming of the confidence indicator and the stock market oscillator is a fairly rare occurrence.  Since 1960 it happened only in 1970, 1974, 1982, 1990, and with the stock market bottom lagging the real economy bottom, in 2001-2002.

Click to enlarge.  This is research, not investment advice.  Invest at your own risk.


What would drive this rally?  Sheer liquidity, just like all the other rallies recently.  There are trillions of dollars on the sidelines.  Helicopter Ben is printing money like mad, and there’s a huge carry-trade opportunity for well-heeled borrowers.  If the market makes a massive head-and-shoulders top between now and 2011 or 2012, the next crash will probably be worse than this one—just as the 1973-1974 bear market was worse than the sharp 1970 bear, and was followed by the 1980-1982 double dip, recessions that quenched the ‘Sixties guns-and-butter inflation.  It will take several market crashes and failures of effective demand to wring the bad debt out of the system.  Activist macroeconomic policy, thy name is Volatility.

The current situation is that Americans are tired of being down (“been down so long it looks like up to me”) and their “animal spirits” are rebounding.  This rally is a dangerous bear market rally with the ultimate bottom still years away.  Our long-term view is that we Americans are going further down and must confront and defeat our deepest demons of greedy national identity to emerge safely.

So the next inflation, it seems, will be an asset inflation (“Ladies and gentlemen, place your bets”), a super-suckers’ rally that will probably end up transferring wealth from working people to Wall Street, contributing to the expropriation of the assets of working Americans in the monetary shell game run by the Fed, and leading to the critical distributional inequities that we believe will precipitate the next great American crisis.

Tuesday, May 12, 2009

Introducing the ‘animal spirits’ stock market oscillator

As a relatively new blogger, we have been judiciously restrained in our pronouncements on the stock market, the Great Casino of our highly leveraged times.  However, today we are going to reveal for the first time our “animal spirits” stock market oscillator, that uncovers the secret inner yearnings of the stock market.  And guess what?  Just as yang follows yin, and the “animal spirits” of Americans are irrationally improving according to our general confidence model, the “animal spirits” of the stock market are poised to go—absolutely berserk, if our model is correct!

Now, this result surprised us, as we are in the perma-bear camp on the long-term prospects for our beloved country that seems to be in the throes of being gutted by Wall Street oligarchs while assuming further levels of indebtedness requiring future taxation that will almost certainly provoke a second American Revolution in a decade’s time or so.

But, as we’ve said before, spring has sprung, and the stock market appears ready to blow a gasket.  Or to continue to blow a gasket, given the run-up so far.  This is shocking!  Welcome to the Eternal Bubble!  As the physicists say, the universe is just a bubble in the quantum foam, so why shouldn’t the stock market bubble on? 

This is research, not investment advice.  Trade at your own risk.  Click to enlarge.


Left axis is log(SPX), right is A, the '”animal spirits” metric.

Biden insults President Obama’s dog at Syracuse

Our more discerning readers may have noticed that our mascot, Tyler (to the left, not a picture of the author) is a Portuguese Water Dog.  President Obama’s new dog is a Portuguese Water Dog.  Vice President Biden has a new dog as well, in the fight, so to speak, which (speak) the Veep did, in Syracuse, insulting the Presidential pooch quite handily, before backpedaling as quickly as he could.

Via: Christian Science Monitor

It was as though Vice President Biden time-warped back to last fall. Because on Sunday he was in full campaign attack mode.

Oh, it was an idyllic setting. Nobody saw it coming. The vice president had just finished delivering the commencement address at Syracuse University and stopped by to chat with students at Bellevue Elementary School.

During the intense question and answer period, one child asked the vice president if he had ever petted a dog.

“Yeah, but guess what? I’ve got a dog that lives with me,” Biden replied. “The smartest, coolest dog in the world.”

Normally, you’d leave it at that. You’ve praised your dog. Why denigrate another?

Because in campaigns you have to differentiate yourself from your opponent. And campaigns are in Biden’s blood. That’s when he let it be known that Bo Obama was a dolt.

“The new dog I have is only five months old and his name is Champ,” Biden told the schoolkids.

“My dog is smarter than Bo, his dog,” he jabbed.

“I think so,” he taunted. Yeah, I do.”

An astute politician, Biden apparently didn’t want to be seen as a mudslinger so he conceded that “Bo’s a beautiful dog too.”

To watch the full shocking video, click here.  To understand what Vice President Biden meant to say, watch Robert Gibbs’ press briefing tomorrow.

‘Animal spirits’ and risk premia update


“NegA” = –A, our “animal spirits’ metric.  The risk premium (RP) is the Moody’s Baa - Aaa  spread.  We continue to see an exploitable trade going long the high yield and short the investment grade.  As pointed out in yesterday’s update, we see a high probability of the economy stabilizing and growing (slowly) over the coming year, which should promote confidence and a lowering of risk premia.

This is research, not investment advice.  Trade at your own risk.

Monday, May 11, 2009

‘Animal spirits’ update, May 11, 2009

Even if the unemployment rate goes to 11.9 percent over the coming year, the “animal spirits” or confidence levels of Americans are forecast to improve.  The bottoming of confidence levels is also seen in the Michigan Consumer Sentiment series.


Our yield-curve-plus-“animal spirits” recession forecasting model shows the recession coming to an end (keep in mind that this model has correctly predicted in real time the beginning and end of the last recession and the onset of this one, and performs similarly on every recession since 1957 in backtesting).  The “probability” of negative real growth continuing is nil by these lights.


Note that the model does not foresee a “double dip” within the next 12 months, while it clearly signaled the 1982 relapse.  The very severity of the declines of many output variables makes it more likely that they will be able to find a bottom.


More detail on the model is available here.

Discussion:  It is very common at the extreme points of economic and stock market cycles to assert that “it is different this time.”  The recession forecasting model is a single equation model with parameters estimated on data available before 1990, so for its parameters to change the world would in fact need to be very different in this cycle.  That is possible, and we shall soon have the answer.  What distinguishes this cycle is its global debt-deflationary aspect, which has exacerbated the downturn everywhere.  Countering this, however, is the stated and demonstrated willingness of monetary authorities to provide credit.  Commercial and industrial lending slowed after the last two recessions (as I showed here) as businesses and lenders alike become more risk averse.  Given the debt load on consumers, businesses and government, the recovery can be expected to be slow.  Much of the “real” GDP growth of this decade was financed by a huge and unsustainable run-up in consumer debt, so the country appears to be dropping back to a “pay-go” level of consumer spending (as they say within the Beltway) with some saving.

My personal opinion on the financial sector:  the lunatics are running the asylum in Washington.  Perhaps because he isn’t a financial person, President Obama brought on board the very actors who opened the Pandora’s box of deregulation, Larry Summers and Tim Geithner.  The greatest danger now is that the government throws more good taxpayer money after bad private debts; I subscribe to the IMF view that America is close to a tipping point of debt-deflationary implosion with respect to government spending.  It is better to do nothing than to bail out more banks.  There are plenty of healthy banks that can meet needs of business as recovery unfolds.  It is clear that the big money institutions control this administration, and the people are up in arms about throwing good money after bad, so Congress is letting it all happen under the table, through the Fed and the FDIC.  The problem with activist cries like Paul Krugman’s to clean up the mess is who would be doing the clean up.  Bad private debts need to charge off, not be added to the public debt at par or something close to it, and private investors need to take the hit.  It is these very same private investors who “own” Congress, however.

Long term, it is my surmise that the inequality of the income distribution will continue to cause “failures of effective demand” like the current one.  (See this.)  A disproportionate amount of money gets sucked out of the economy by the rich, who control the financial system, manipulate the markets, and tell the government what to do.  In a society in which personal assets are required for access to education and opportunity, the majority of the population can be kept in a pseudo-meritocratic servitude.  Already one third of American students do not complete high school, a characteristic of a feudal society or a banana republic.  Nothing President Obama is doing will reverse this, in my opinion; nor will anything less than a total breakdown and renegotiation of the social contract make fundamental change possible.  The rich have their hooks too far into the economy and the government for that to happen.  Hence I subscribe to the thesis of Strauss and Howe that we’re heading toward a national crisis in about ten years that will define a new America, with a new social contract.  The present one is broken.  (See here and here for background on Strauss and Howe’s historical long wave theory.)  In the meanwhile, over the next decade we can expect to see failures of effective demand like the one we’re in now, over and over again, until we reach the crisis point.