ES -- DX/CL -- isee -- cboe put/call -- specialist/public short ratio -- trinq -- trin -- aaii bull ratio -- abx -- cmbx -- cdx -- vxo p&f -- SPX volatility curve -- VIX:VXO skew -- commodity screen -- cot -- conference board

Friday, July 31, 2009


GDP for 2q2009

james hamilton at econbrowser hits the data note that one need know from this report:

In terms of specific factors contributing to the 2009:Q2 growth rate, consumption spending, housing, nonresidential fixed investment, inventory change, and exports each subtracted almost 1%-- had it not been for the positive contribution from falling imports and increasing government spending, the Q2 number would have been -4.3% instead of -1%. Should we be cheering the fact that falling imports were a key factor preventing GDP from declining even more? Falling U.S. imports can create problems for those countries trying to export to us and are a symptom of a very weak U.S. economy. But lower U.S. imports are a necessary element of our longer run adjustment process, and indeed, if the increase in U.S. private saving were just matched by the decrease in U.S. imports, we'd be exactly where we want to be in both the short and the long run.

falling net imports are also gradually denting the capacity of the united states to fund itself with borrowed foreign deposits.

the pace of decline moderated in the second quarter, to be sure. next quarter is likely to see government spending tick up as well, and the decline in residential development flatten out. but i wouldn't put a lot of hope into inventory rebuilding -- without an uptick in end demand, stuffing the channel in third quarter means a deeper contraction in the fourth. and the PCE data in the report gave no indication of a consumer end-demand uptick. as to whether we get a positive print for GDP in 3q2009, i think it's certainly possible and perhaps even probable. but the ongoing debt deleveraging is still slowly gathering momentum -- just one look at the FRED series for total loans and leases tells you so, even distorted as the series is by the reclassification of the assets of washington mutual, as run led to failure and purchase by jpmorgan chase, from the universe of thrifts to that of commercial banks in october 2008, creating the attendant huge spike in the data -- and that will depress consumption perhaps to a degree widely underestimated at this writing.

there's a potentially interesting series to watch here, which is the seasonally-adjusted deposit components of the commercial banking system, released monthly in the h.6. this FRED chart shows the change from the previous period for the h.6 components. perhaps predictably, deposits skyrocketed from september to december 2008. but there's since been what one might think of as a disappointing increase in deposits. deposits are the result of income, which are the result of both the quantity and velocity of money and credit in the system. if the government stimulus is too small to overcome debt deleveraging, it should show up in deposits. and this data is estimated on a weekly basis by the fed.

the change in the total of all five is charted here with an eight-week moving average. there's clearly a massive rush to save in 4q2008 which contributed heavily to the crush in consumption and investment (and perhaps asset prices) in that quarter. but the following two quarters don't show anything like that much saving -- indeed the increase in deposits is frequently less than seen previous to the crash, a period of noted and lamented dissaving. some would-be savings inevitably were fed into the huge surge of securities issuance in the first and second quarters, but this will bear watching in any case. if fiscal stimulus and balance of trade improvements are too small to offset the further contraction of investment and consumption, i would think deposits should show the effect.

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galbraith on china

now this is provocative -- via zero hedge.

University of Texas professor James Galbraith discusses one aspect of China's "booming" economy, specifically the question of China's Trade Surplus, which as he notes has been drastically inflated since 2002 due to Chinese companies over-reporting profits on exports in order to disguise various investments by foreigners into China, so as to beat capital control restrictions.

Galbraith argues the "fake profits" are so large that China may have actually ran a trade deficit in some years, and these figures casts serious doubt on the reported P&L of Chinese companies.

one can only hope for the brad setser response.

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Gaius, TPC here from The Pragmatic Capitalist. I sent you an email using the yahoo address you left on my site, but I am not certain if its correct. If you could shoot me an email I'd appreciate it. - I have a quick question for you.

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specialist short sales

this is a dataset i've only recently begun to track, so i've no idea what if any predictive value it might contain. the top link group includes this link to NYSE's data page, and i've pulled some figures from it into a spreadsheet figuring to observe the ratios of specialist short sales in comparison to non-specialist and odd-lot short sales. the theory behind the indicator is articulated pretty well elsewhere on the web -- though between the development of supplemental liquidity providers (or SLP) performing a quasi-market-making role and the dying role of floor specialists in general i'm not sure what if any consistency from the data can be expected.

in any case, on yesterday's break and reversal specialist short sales spiked to about 220% of its 20-day moving average. this might be an indication of impending reversal -- or not -- as it arguably was on june 29.

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I'm not sure you can equate the TAF with "liquidity".

The entire 2008 increase in the monetary base was left in excess reserves. There was no "liquidity creation" to go into the stock market.

In a rate targeting-regime, the banking system can borrow unlimited funds overnight at the target -- zero percent. If banks wanted "liquidity" for themselves or their customers to speculate on securities, there was, theoretically, any amount to be had at zero cost. How much did they borrow on these terms? Zero. How much of the excess reserves were lent out or used to buy securities? Again, in aggregate, zero.

There are lots of reasons why we might be in a vicious bear market rally, but I don't think Fed "liquidity" has anything to do with it. Now, PBOC liquidity, well, that's another story...

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dp, as i understand it the expansion of the fed balance sheet -- eg, creating excess reserves -- is less important in this respect than the change in funding character that repo auctions like TAF allow.

bank ABC can through TAF take some questionable former-AAA assets -- which it had been able to use as collateral to fund for years but can now do nothing with in the private market -- and borrow (indefinitely?) from the fed for 30-90-day terms. if the fed had (rather than ballooning the balance sheet to enable TAF, which is what it did) sold off treasury securities from its permanent portfolio to keep its balance sheet at the same size and excess reserves to nil, the capacity to fund these impaired, rerated securitizations would have been an invaluable liquidity provision for the bank.

in other words, TAF is less about credit creation -- which, so far from being helped, has gone into reverse -- than about funding the banks, preventing their forced collapse as private wholesale borrowing markets collapsed. that liquidity, the provision of which is ostensibly a central bank's job in crisis, saved many banks from collapse but also (with private sector loans contracting) left the banking sector very liquid. some of that liquidity is likely now driving equity and securitization asset purchases.

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Thursday, July 30, 2009


hulbert on ned davis

mark hulbert offers a synopsis of the typically solid analysis of ned davis.

Now is a particularly good time to check in with Davis, since earlier this week he finished a seven-part series in which he compared the March 9 low with the famous secular lows of decades past. Davis was able to identify seven dimensions that he could use to compare the March 9 low to those past secular lows:

  • "Monetarily, money should be cheap and amply available:" Neutral. You might think that this factor should be rated as "bullish," given how accommodative the Federal Reserve is currently. But Davis notes that banks are also significantly tightening their lending standards. Given the heavy load of debt under which both consumers as well as corporations suffer (see next criterion), banks are finding it "increasingly hard to find 'credit-worthy' borrowers."

  • "Economically, the debt structure should be deflated." Bearish. This is the most negative of any of Davis' seven dimensions, since by no means is the debt structure deflated. On the contrary, Davis calculates that the total credit-market debt load right now is nearly four times the size of gross domestic product, and that it takes more than $6 of new debt for our country to produce just $1 of GDP growth. That's almost double the amount of debt required in the 1990s.

  • "There should be a large pent-up demand for goods and services." Bearish. Davis acknowledges that there has been improvement along this dimension from where things stood at the beginning of the bear market. But he is particularly worried by the ratio of total Personal Consumption Expenditures to Non-Residential Fixed Investment, which currently stands at a record high. At the secular bear market low in 1982, in contrast, this ratio was at a record low.

  • "Fundamentally, stocks should be clearly cheap based upon time-tested, absolute valuation measures." Neutral. Though the stock market "got undervalued at the March lows," it never became "dirt cheap."

  • "Psychologically, investors should be deeply pessimistic, both in terms of the stock market and the economy." Bullish. Davis says that past secular market lows were accompanied by an extreme amount of pessimism, and his indicators show a similar extreme existed earlier this year.

  • "Technically, major investor groups should have below-average stock holdings and large cash reserves." Neutral. While foreign investors have record-low stock holdings, according to Davis, household holdings -- while low -- are not nearly as low as they were at prior secular bear market lows. And institutional investors' stock holdings "are only down to an average weighting historically."

  • "A fully oversold longer-term market condition in terms of normal trend growth and in terms of time." Neutral. Davis believes that, though many of the excesses of the real-estate bubble have been worked off, some still exist. That's particularly a problem, he says, given that the stock market bubble of the late 1990s never completely deflated either. "As we saw in Japan after 1990, a double-bubble in stocks and real estate leaves it difficult to put 'humpty dumpty' together again."

The bottom line? Only one of the seven foundations of a secular bull market is in place. Three more are neutral, and the remaining three are bearish.

this is not a market-timing call, hulbert makes clear. but even if S&P 666 represented the low point in price of this bear market, it remains likely that equities will trade in sour fashion until most of davis' criteria are met.

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I agree with Ned Davis... the early March scenario doesn't feel like a real bear market bottom. The only thing that justified going long was an analysis of sentiment and technicals. With clearly oversold conditions and very bearish market and economic sentiment, it seemed like going short didn't have a nice risk/reward.

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Wednesday, July 29, 2009


revisiting skew and fear

early in july i cited jason goepfert and his analysis of the CSFB fear index. goepfert:

There have been four other times during a bear market when we've seen a divergence like this, when the VIX is at a multi-month low, but the CSFB Fear Index is at a multi-month high. Over the next three months following those four instances, the S&P averaged -9.2%, and with a risk that averaged more than 6 times greater than the average reward.

today zero hedge updates that reading by running a comparison chart to the VIX.

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psychology of the housing market

calculated risk has put forward a couple of interesting posts on the reportage surrounding the latest case-shiller house price index release.

his view on the fate of prices is much like mine own longstanding -- prices follow peaks in starts and inventory at several quarters of lag.


The reason I bring this up is the Case-Shiller report today really bothered me. To be more accurate, the reporting on the Case-Shiller report bothers me. As I mentioned earlier today, there is a strong seasonal component to house prices, and although the seasonally adjusted Case-Shiller index was down (Case-Shiller was reported as up by the media) - I don't think the seasonal factor accurately captures the recent swings in the NSA data.

I have no crystal ball - and maybe prices have bottomed - but this potentially means a negative surprise for the market later this year - perhaps when the October or November Case-Shiller data is released (October will be released near the end of December). If exuberance builds about house prices, and the market receives a negative surprise, be careful.

and more today:

These are influential writers.

Streitfeld has been writing about the housing bubble and collapse for years. The Atlantic named him "The Bard of the Bubble" in 2006.

Hong has only been covering housing for a couple of years, but he has also done a very good job.

Of course I think house prices will continue to decline in the Fall, and that the May report was distorted by seasonal factors.

please consider that, over the next several months, we are going to witness the closure of hundreds of banks as the collapse of american commercial real estate feeds through the financial system. these banks, especially in the aftermath of the collapse of mortgage securitization, are important originators to the residential mortgage market. over time, surviving american banks in an environment of inadequate fiscal stimulus have great potential to be funding constrained as deposits decline and current account deficits narrow, promoting asset liquidation. further given the massive trauma suffered by household balance sheets and incomes in this depression, with the historical pattern of housing busts cited above as context, housing is very likely to have a long tail of price decline under these circumstances.

and yet, there is actual optimism about a bottom in house prices in press reportage over this first seasonal uptick in three years.

bubble psychology dies hard -- i still remember sitting in the dentist's chair back in late 2001 fielding questions from him as he scraped my teeth about when lucent technologies would "come back". a return to "normal" is part of the human preconception of all stressful times. much harder for most people is to realize that the aberration is not in the crash but in the bubble which preceded it. and it would appear that remnants of bubble psychology is still hanging on, even at this late date.

UPDATE: calculated risk examines the insufficiency of the current seasonal adjustment in the case-shiller series given the volatility of house prices in recent years.

[L]ook at the last couple of years. The SA dashed line is very close to the NSA line, even with the wild NSA swings. This suggests to me that the seasonal adjustment is currently insufficient and I expect that the index will show steeper declines, especially starting in October and November.

Even with the wild NSA swings, most media reports used the NSA data and not the SA data (Streitfeld at the NY Times used both).

this is a similar observation to the one i made in examining the standardization factors for the LEI as related to the explosion in m2. how the data is being adjusted using historical series volatility as a baseline in this new environment of radical volatility is coloring the interpretation of data. it's important to try to see through these statistical effects to get a clearer picture of what's happening.

UPDATE: alphaville with the criticism of free exchange. i comment:

free exchange misses it, i think. CR is basically arguing that the volatility of house prices changes has increased materially beyond that which was witnessed in the historical series section which was used to derive the adjustment. it's not that the seasonal factor has intensified so much as the movement of prices has intensified -- they've become unsticky, as it were, and i don't know too many people who would argue the point.

for so long as this is true -- which i imagine will be the duration of the delevering of the american banking system and household at least -- one should expect SA to not quite do the job.

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Good points--and I love that one about Lucent. The winner in my brokerage training class stock pitching contest in 2001 was a kid from northern NJ pitching LU. His rational was "Hey, it's Lucent. The stock is nine bucks (or whatever)."

He won by the vote of the other trainees--the perception of normal is even more dangerous when it is perceived to be so despite any rational consideration that it "should" be so.

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Behold the Toronto house pictured above.

The lot is 25 feet wide – not enough for a driveway, so there’s a parking pad for two vehicles on the front lawn. The exterior is stucco over mystery materials. The inside features a new kitchen, pot lights, fireplace, three bedrooms and ‘an interior and exterior sound system.’

Property taxes are just under $10,000 a year. 35 Coulson Ave. was listed for $1.329 million, and sold for $1.329 million. Days on market: 4.

God help us.

Yup, That gonna be ugly

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Fu*^ing insanity.

Houses: 19 million vacant
Houses: 4-5 million in inventory

Current condition:

Wave 2 Alt-A's and Option Arms and CRE, together 1.5 and 3.5++ trillion. If 1.5 trillion did this what will 5+++ trillion do.

Also, who the f*&( is going to get loans to buy this mega inventory? Wait, wait, don't tell me, the people who had subprime mortgages, or maybe the poor folks who lost their jobs and sent their keys jingling in, or maybe the folks who went BK?

Come on! These reporters should eat their keyboard and get a job washing car windows on a busy bridge.

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ECRI going all out on housing, the economy, everything .

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Charts here

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Tuesday, July 28, 2009


LEI deconstructed -- update

others did a better job than i did in deconstructing the leading economic indicators, but it won't hurt to revisit this analysis in light of widely commented improvement in the LEI.

from my previous analysis:

of the real economy leaders, i've already discussed the tenuous optimism of weekly claims. what of the others?

so how are these elements faring three months later? as can be seen in taking up the component contributions, there was a definite improvement in the "real" economic activity indicators beginning with april's report even if not so pronounced as suggested by the credit- and stock-related metrics i unpacked. the effect of m2 is now notably diminished -- money supply has, perhaps ominously been a negative contribution in two of the last three months as the fed shrinks its balance sheet and credit extended by banks declines.

nevertheless, whereas the reported LEI level has recovered to its pre-crash levels of july 2008, the unpacked measure net of credit inputs (red line) is back only to december levels -- and further net of stock prices and closely-correlated consumer expectations (yellow line), the LEI level has retraced only to january.

it might be interesting to see how this set of unpacked indexes moves through the recovery. one might hope as an investor to get a point where the "real" components LEI is outperforming the measure which includes monetary and market sentiment contributions -- such a condition could be thought to constitute a "stealth" economy recovery beneath a veneer of pessimism and credit headwinds. one might interpret february's blip in exactly that fashion. i'm not at all sure that such a condition will reliably arise, but it will be worth monitoring.

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JOC-ECRI index is showing an improvement.

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Good stuff Gaius. Excellent posts lately.

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consumer confidence

via bloomberg econoday -- an unexpected july fall to 46.6, outside even the downside range of consensus forecasts. confidence would appear to be following the economy even as the stock market, a leader of confidence, rallies at a slower pace off the march low. the massive positive divergence between present situation and future expectations noted last month remains essentially intact -- however, future expectations did fall to 62.0 from 65.5, which had fallen from the may high of 71.5.

this is in marked contrast to the state street investor confidence index:

The report notes a building confidence that the global recession will ease more quickly than expected: "Investors are now adding risk to their portfolios at an impressive rate, faster than we have seen in several years."

UPDATE: pragmatic capitalist charts both the state street investor confidence series as well as the latest AAII survey.

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Something to really think about is the feedback loop. When companies attempt to shrink themselves to profitability on a grand scale, what do you suppose happens in the months afterwords? The former employees are faced with insurmountable problems. First, they cannot easily find a job precisely because companies in general are pursuing these massive cost cutting strategies. They are therefore unemployed for much longer periods of time than would otherwise be the case. Second, they cannot continue to live as they did before being let go. Drastic reductions in personal consumption must be made. This is particularly bad, and we've already seen the savings rate go parabolic to reflect this change in behavior, after a gigantic, prolonged credit bubble.

So if this were a turned based simulation with the following conditions:
- The economy employs 1000 workers.
- The mean income for each employee is 100 per round.
- The mean expenditure for each employee is 100 per turn, or 100%.

Round 1.
- There are 1000 workers employed, making $100 000, and spending $100 000, or 100%.

Round 2
- Companies fire 10% of the workers, or 100 workers.
- The economy employs 900 workers, making $90 000, and spending $90 000, or 100%.

Round 3
- Workers grow concerned over job security and decide to save money. They now spend only 90%.
- The economy employs 900 workers, making $90 000, and spending $81 000, or 90%.

Round 4
- Companies grow concerned over growth forecasts and decide to cut costs, firing another 100 workers.
- The economy employs 800 workers, making $80 000, and spending $72 000, or 90%.

Round 5
- Workers freak out! Dual income households are down to a single income. Everybody knows somebody that lost a job. Many are helping friends and family out. The savings rate increases again. Now only 80% of income is spent.
- The economy employs 800 workers, making $80 000, spending $64 000, 80%.

Round 6
- Companies freak out! They've been beating bottom line estimates by cutting jobs, but they can see their top lines getting hammered. With no end in sight, they cut another 100 people.
- The economy employs 700 workers, making $70 000, spending $56 000, or 80%.

Round 7
- Where and how this self fulfilling destructive cycle ends nobody can know for sure. It happened during The Great Depression and it was not pretty.

Sounds about right to me and where we are and where this is headed.
The Problem is and has been too much debt.


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in defense of high frequency trading

following on the controversy over high-frequency trading stirred at zero hedge but now breaking in mainstream media as well -- an excellent and informed counterpoint by kid dynamite via clusterstock noting that much of the indignation over HFT and supplemental liquidity provision may be more heat than light, ignoring that liquidity rebates and penny scalping done by HFT is in fact a significant improvement over the days of specialists scalping eighths. he also addresses flash orders, which he notes have a long and distinguished history in open outcry. while retaining the proviso...

The problem is if systems receiving flash orders can then turn around and hit that bid in front of the seller. That is blatant front running, and needs to be stopped.

... kid dynamite effectively ends the debate over HFT. i would offer that much of the insecurity surrounding market mechanics has found its way into concerns over goldman sachs, SLP and HFT; much of that might be related to the clear failure of regulatory competence rather endorsed by the bush administration on some level and clearly at work in many aspects of the late-stage boom (as in all late-stage booms). the lack of clarity for many outsider participants in how exactly markets work feeds this insecurity, which is one reason the SEC, as well as its analogs and compliments, has such an important role to play in investor confidence.

at the end of the day, goldman and other SLP designees are changing the way markets are made -- in many ways for the better. that is going to generate friction, however, which as alea has sometimes noted is something old-line market makers and institutional traders can take advantage of.


insightful analysis, the antidote to hysteria, thank you.

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Monday, July 27, 2009



via ed harrison -- more with jeremy grantham.

Jgletter All 2q09

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IMF-latvia deal foundering

latvia continues to fight devaluation, but things took a dramatic turn today as the demands of the IMF to be met in return for continuing to fund the country first looked to be met, but then weren't. alphaville:

Danske Bank’s chief analyst Lars Christensen commented on the about turn:

This is very bad news. Not only does this show that Dombrovskis does not really have a mandate from the different coalition parties to negotiate with the IMF, but it should also raise serious concerns within the IMF and the EC about the political situation in Latvia. Both the IMF and the EC have for a long time demanded broad political backing for the fiscal reforms. The ongoing farce about the IMF deal shows that such a consensus is nonexistent. This makes it increasingly hard for the IMF to continue negotiations — and it will probably also raise serious concerns both in Brussels and Stockholm.

pressure is continuing to build behind the euro currency pegs in eastern europe. meanwhile, via edward harrison, iceland looks to be rebounding with the help of a currency collapse.

The main point of [Ambrose Evans-Pritchard's] article is that Iceland is emerging from crisis and depression in a relatively healthy state due to a fifty percent currency devaluation. While, GDP will shrink by 7% this year in Iceland, Ireland, Latvia, Estonia and many other European countries will fare far worse. When you look at unemployment, Iceland looks good yet again.

Is this the way forward for the likes of Lithuania? Apparently not because the Baltics want into the Euro come depression or high water. In the case of Spain or Ireland, they are already in. America certainly wishes it could depreciate the currency as well. But, since its main problem on the currency front is in Asia and those currencies are mostly pegged, the U.S. couldn’t really organize a devaluation, even it wanted. Moreover, competitive currency devaluation is an outlet only for small countries – Iceland: yes, Switzerland: perhaps, America: forget about it. That would certainly trigger major retaliation.

some conclusions that might be reached:

  • the depegging of these euro-periphery currencies is an eventuality, concretizing large losses for the european banking system;

  • euro members deprived of the avenue of currency devaluation -- including ireland but more importantly southern europe -- are faced with riding out tremendous "internal devaluations", which is to say deflationary depressions;

  • the united states, being unable or unwilling as yet to force a depegging of the chinese renminbi as well as seeing flight-to-safety/carry trade unwind inflows in times of instability, is also faced with a measure of internal devaluation as its currency remains strong in crisis while new fiscal stimuli properly sized to the extent of the american problem are off the table -- and this will deepen the american economic crisis even as it aids the wholesale funding crisis of the american banking complex (preserving banks like citigroup from a fate faced by parex and other latvian banks).

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civilization and population

edward hugh cites ronald bailey of reason.

Recent fertility trends strongly suggest that the simple biological model of human breeding is wrong, or at least, is wrong when the institutions that support economic freedom and the rule of law, e.g., markets, price stability, honest bureaucracies, security of private property, and the fair enforcement of contracts, are well-developed. Economic freedom and the rule of law are the equivalent of enclosing the open access breeding commons, causing parents to bear more and more of the costs of rearing children. In other words, economic freedom actually generates an invisible hand of population control.

in other words, civilization sows the seeds of its own demise. one can hear the echoes of the pleas of the augustan period of ancient rome for roman nobility to breed lest they be (as they ultimately were) overrun and extinguished by the baseborn new men of the empire. falling birth rate was a significant difficulty for the later roman empire and other exemplary empires which eventually declined and were overrun. this almost seems a minsky correlative to population dynamics.

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Interesting, GM. And thanks for all of the posts today. Having and raising children is a huge imposition on a woman who has other choices--and as nations (or subsets of them) get richer the difficulty in getting women to breed large numbers of children increases.

If we prize physical beauty and youth as a culture, no one will want to get old (or look old). Our eventual failures are planted by our successes.

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the return of mark-to-market?

pragmatic capitalist highlights jonathan weil and movement on the FASB changes instituted in the panic of early 2008.


It was only last April that the FASB caved to congressional pressure by passing emergency rule changes so that banks and insurance companies could keep long-term losses from crummy debt securities off their income statements.

Now the FASB says it may expand the use of fair-market values on corporate income statements and balance sheets in ways it never has before. Even loans would have to be carried on the balance sheet at fair value, under a preliminary decision reached July 15. The board might decide whether to issue a formal proposal on the matter as soon as next month.

“They know they screwed up, and they took action to correct for it,” says Adam Hurwich, a partner at New York investment manager Jupiter Advisors LLC and a member of the FASB’s Investors Technical Advisory Committee. “The more pushback there’s going to be, the more their credibility is going to be established.”

The scope of the FASB’s initiative, which has received almost no attention in the press, is massive. All financial assets would have to be recorded at fair value on the balance sheet each quarter, under the board’s tentative plan.

This would mean an end to asset classifications such as held for investment, held to maturity and held for sale, along with their differing balance-sheet treatments
. Most loans, for example, probably would be presented on the balance sheet at cost, with a line item below showing accumulated change in fair value, and then a net fair-value figure below that. For lenders, rule changes could mean faster recognition of loan losses, resulting in lower earnings and book values.

The board said financial instruments on the liabilities side of the balance sheet also would have to be recorded at fair-market values, though there could be exceptions for a company’s own debt or a bank’s customer deposits.


FASB knows they made a mistake and got pressured by politicians and the Treasury to change the rules in the middle of the game. Well, now they’re considering changing them back (kind of). The rule change would have sweeping effects on the banks and as regular readers know, I believe would have an enormously positive impact on the long-term well being of the country.

Are we beginning to see the opposite of the March rally where regulatory action lined up in favor of a market rally? When the mainstream media finally starts reporting this story don’t be shocked if the bank stocks fall under pressure or experience a general bout of weakness amidst the uncertainty. And without the banks, it’s unlikely that this market will go anywhere fast. Stay tuned.

these changes were a key piece of the radical rewrite of the regulatory environment which put a floor under the spiraling collapse that reversed (at least for now) in march. maintaining the ability of the banks to hold no reserves against severely remarked securitizations was essential; the banks in the end, courtesy of the FASB, got to have their cake and eat it too, not having to recognize losses on securities while not being forced into massive capital reserving. pragcap might be right about the long-term effect of these huge proposed reversals -- but the anticipation of the short-term effect might help explain the recent underperformance of financial shares in the market.

in the end, as david merkel has said, you can't account away cash flows -- if these securitizations don't pay back principal and interest, the accounting treatment is just a delay. but these changes would re-accelerate the realization of the damage on bank balance sheets and remove a significant time cushion.

UPDATE: i should have added a link to this earlier post wherein david goldman noted the accumulation of high-yielding securitizations on the books of banks as they seek recapitalizing yield. it's hard to imagine FASB winning this war.

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UBS first to refuse inverse ETF

it will be interesting to see if what previously quiet aspect of wall street dysfunction comes to the fore in light of this -- but if you think that the rally from march has had all along a significant element of manipulaive orchestration, this was an eventuality and UBS won't be the last. via zero hedge:

IMPORTANT NOTICE: Inverse, Leveraged and Inverse-Leveraged Exchange Traded Funds are no longer available for new or additional purchases at UBS

Effective July 27, 2009, UBS is suspending the offering of Inverse, Leveraged and Inverse-Leveraged Exchange Traded Funds (ETFs). You will no longer be able to make new or additional purchases and will only be able to liquidate current positions through UBS at this time. Any attempt to execute a trade of such ETFs will be rejected.

Please contact your Financial Advisor with questions.

UPDATE: more from alphaville.

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Thursday, July 23, 2009


implied correlation

via bill luby at vix and more -- the CBOE will start printing two maturities of an implied correlation index based on the S&P 500 next week.

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now for distribution?

on the heels of goldman's market call -- jeff cooper:

Conclusion: Until proven otherwise, up spikes in a bear markets are for selling and breakouts in bear markets after a substantial move are for distribution.



"we are now in the early stages of a depression"

the better to lick my wounds having gone short this morning into the latest fed liquidity dam-burst to pour into the S&P -- earnings and guidance such as provided by UPS this morning simply no longer matter, folks, until eventually they suddenly do again, perhaps following some more significant fed balance sheet retraction -- here is the latest from eric sprott via zero hedge.

further, pragmatic capitalist links to a talk by UCLA's didier sornette on the origins of the financial crisis and of bubbles in general. the slides early in the discussion are really quite terrifying in their bluntness. particularly important is the slide correlating ken rogoff and carmen reinhart's work on long-term measurement of the percentage of nations in default with a measure of international capital mobility. in the context of the work of richard duncan, whose major insight in my view is the relationship of large unbalanced crosscurrency capital flows with financial/economic bubbles and busts, this makes a great deal of sense. but the implication, of course, is that the unwinding of the excesses of the deregulatory/globalizing period bounded approximately by 1980 and 2007 necessarily will involve a severe reduction/reversal of crossborder flows, capital mobility and global trade -- regardless of the stopgap measures being undertaken by governments around the world.

UPDATE: alea links to the BIS first quarter international banking statistics, including this chart of crossborder claims.

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I feel your pain on that short position although I use mutual funds Grxxz and Bearx off set with Hsgfx and psafx these are long term positions and I don't trade individual stocks. I wouldn't be surprised to see a 50% retrace of the entire move down one bit that would be about 1120 on the S&P.
Get everyone sucked into the bull market mania.

I could be wrong but I'm a gambler and a speculator just like everyone else:-)
Enjoy your blog by the way.

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Wednesday, July 22, 2009


CIT bankruptcy assured

via calculated risk -- august 17 is the key date.

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Tuesday, July 21, 2009


more revenue misses

via pragmatic capitalist:

Coke - $8.27B in revenues vs estimates of $8.66B. A $400MM MISS.

Caterpillar - $7.98B in revenues vs estimates of $8.86B. Nearly a $1B MISS.

DuPont - $7B in revenues vs estimates of $7.15B. A $150MM MISS.

United Technologies - $13.2B vs estimates of $13.92B. A $700MM MISS.

caterpillar is particularly frightening -- that is a massive revenue miss for a very cyclical but excellently managed company.

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Monday, July 20, 2009



the monument of the mistral, the peak of petrarch's ascent, the giant of provence -- coming this saturday. it is, as a matter of understatement, "not like other climbs". the forecast high for carpentras on saturday is 95 degrees.

To race over the bare summit of the mountain in a heat wave is to defy death itself.

(photo via aaronirish -- more here.)

Driven around this area...incredibly tough terrain.

Will pass by on my way to Spain this August :)

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goldman's market call

via zero hedge, regarding goldman sachs' prominent market call of this morning.

... up until this point the firm has been at least slightly sensitive about catching marginal end buyers. Now the guns are blazing, and as all Wall Street professionals tongue-in-cheekly know all too well, a forceful upgrade is when any firm (Goldman most definitely included) starts to sell into a call (in this case its own). So buyers please beware: you are now implicitly buying the shares that Goldman and other brokers have been accumulating over the past 4 months.

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I am taking the goldman call as a contrarian indicator. Perhaps now people are starting to become really bullish about asset prices and the economy. We may have the final ingredient for an actual bear market sell-off, not a mere correction.

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Friday, July 17, 2009


whalen on banking

via big picture -- chris whalen on CNBC. read the notes, probably whalen's own, on the crawler as well:

  • 2q09 likely to contain more earnings spin and accounting gimmicks than q1
  • banking sector is not out the woods, total restructuring needed
  • for larger firms, we expect to see continued positive operating results
  • despite strong operating results, all major banks will have rising credit losses
  • cash flow from assets is falling
  • its hard for banks to survive without debt to equity swaps
  • citi can be restructured short of bankruptcy but we need real leadership
  • "pretend and extend" was good policy for the fist half of this year
  • CIT bankruptcy will surprise people by how disruptive will be
  • CIT should not be bailed out the company needs to be restructured
  • jp morgans honeymoon is coming under a lot of stress
  • goldman sachs is paranoid and nimble a winning combination

great color on marshall and ilsley as well after 4 minutes. whalen recommends waiting on banks like M&I in spite of their slowing loss reserve build -- it might pick up again soon.

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2q earnings so far

via clusterstock, karl denninger:

Stocks are, at their core, priced on earnings growth, with the most-common ratio used for such metrics being P/E/G, or Price-to-earnings-growth.

But earnings are not growing, they're contracting - dramatically - in percentage terms over year-ago levels. How can it be otherwise? Even with no inefficiencies due to firms having too many employees for the revenue contraction that is occurring, a 30% reduction in business done should lead to a 30% decline in profits earned.


don't know how long we have to continue to put up numbers like this before people wake up, but wake up they eventually will. When Harley Davidson ships 30% fewer motorcycles, when GE sells 17% less "stuff" (including their financial cooking) and when company after company, including Intel, IBM and others come out with revenue numbers that are down double-digit percentages on an annualized basis, there is no possible way you can justify the multiples that these firms are selling at.

When The Port of Long Beach shows container shipments down nearly 30%, when freight carloadings are down nearly 25% year over year, when sales tax receipts are down in the double digits and when income tax collections, both personal and corporate have effectively collapsed there is simply no argument that "the recession is over" or that "trend growth is around the corner."

denninger is absolutely correct, in my view -- but pragmatic capitalist has (as usual) played this very well.

At the end of the day it’s still earnings that matter most. As the expectation ratio has shown, the stock market has remained resilient primarily due to the fact that expectations for earnings have become very low and more corporations are outperforming the low hurdles. But a look under the hood has shed some light on the true strength of these earnings. We’ve seen a common trend of late. Companies are missing top line estimates and handily beating bottom line estimates. ...

Cost cuts are no recipe for organic growth. That can only be achieved through top line growth. The implications here are that we are likely to see another quarter of “better than expected” bottom line earnings as analysts have adjusted their EPS estimates very little over the prior quarter. This could further juice the stock market. The more important factor to keep in mind, however, is that this is no recipe for long-term growth. We will need to see a sharp expansion in the economy before revenue growth returns to the earnings picture. For now, the positive results are nothing more than defensive posturing by corporations. If the economy doesn’t turn up sharply heading into Q3 and Q4 it’s likely that investors will turn fearful of this false bottom line growth.

that's likely just where we're at.

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Thursday, July 16, 2009


CIT lessons

minyan peter:

1. As I've often said, while capital wounds, liquidity kills. And CIT's an interesting example of a supposedly highly capitalized institution unable to obtain private funding.

2. Being a bank-holding company doesn't guarantee survival. And one need only look at the other 50+ bank holding companies that have failed this year to see this.

3. "Too big to fail" has been replaced with "too entwined to fail." And in CIT's case, while large in terms of assets, it wasn't adequately tied to other firms. (Now this isn't to say that CIT is unimportant economically, and unless others step up to take its place -- either directly or through the purchase of CIT's key businesses -- there will clearly be an economic impact.)

4. The finance-company model is dead. And in this, those non-banks that recently converted to bank-holding companies need to be seriously concerned, especially those without access to the Temporary Loan Guarantee Program (or TLGP).

Which brings me to my final point: the TLGP.

5. Of all of the alphabet-soup programs implemented during this crisis, I expect that economic historians will debate the TLGP the most. As we saw yesterday, the market has determined that those with access to it have ensured survival while those without access to it can fail. But with the word "temporary" in its name, the program is meant to have a finite life.

At the risk of going too far out on a limb, I'd offer that unless the new non-bank bank-holding companies are able to replace their existing unsecured debt with government-insured deposits, they have no exit strategy from the TLGP. Put simply, the commercial-paper market and the medium- and long-term debt capital markets no longer afford these firms' sustainable, stand-alone, cost-effective funding.

To my mind, the Treasury just threw a very large rock in the pool. And while I'm certain they looked at the ripples associated specifically with CIT, I don't believe that they saw the bigger wave they created. And unfortunately, from where I sit, they just made the financial system more, not less, dependent on government support.

As a result, extricating our financial markets from this crisis just became considerably more difficult.

in my view, the critical understanding of the jeopardy in which the financial system remains has much less to do with assets and equity than with funding. liabilities, and how they are managed, will determine how this crisis finally plays out.

it wasn't until lawrence summers and tim geithner affirmatively backstopped the banks with the combined efforts of the federal reserve, FDIC and therefore treasury in march that the death spiral of finance touched off by the housing bust and bear stearns was stanched. the status of the funding guarantees which make up this backstop is all-important. CIT demonstrated all too well that to be beyond the perimeter is extremely hazardous.

the commercial paper market has unwound at a dizzying pace since september as large financial institutions have rapidly issued TLGP debt to replace part of this funding -- $339bn worth through june 30, 43% of the program's cap. this is notably the same level as prevailed at the end of march. fully 61% of this is in notes of at least two years duration.

this flight from the private funding markets to the government is ultimately a consequence of another movement in international capital flows -- that is, the jeopardized wholesale funding market consists in aggregate of deposits borrowed from overseas through the current account deficit. as the current account deficit has diminished over the duration of the crisis, wholesale bank funding has got harder to obtain. despite the efforts of many governments, this is likely to continue as american households reduce consumption and increase savings. those savings, in the form of deposits, will become funding for depository banks and bank holding companies to replace their more expensive wholesale funding; for non-depository financial institutions like CIT, however, this is a one-way street to illiquidity and bankruptcy. and, as minyan peter notes, as the TLGP winds up, it becomes a hazard for even depository institutions who lose the battle for deposits and remain heavily dependent on wholesale funding. this potentially and most notably include former investment banks and large money center banks.

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The shift is actually more pronounced; all funding will soon enough be from cash flows rather than intermediaries.

This will change receivables and stifle vender notes, etc.

Even if 'solvent' it is hard to see how many of CIT's clients will be able to finance themselves day to day particularly as CP evaporates. Just try to get a line of credit from a bank.

More bankruptcies, more vacant stores, more pressure on CRE; the train wreck continues ...

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automatic stabilizers

per economic perspectives -- how can government spending, with the fiscal stimulus of the obama administration still largely unspent and backloaded into 2010, be preventing a deeper deflationary collapse? the answer is what keynesians call "automatic stabilizers" -- unemployment benefits and other social programs increase outlays with increased need, while tax revenues collapse, forcing wide government deficits. this of course counteracts the hugely increased savings impulse of the private sector, allowing it to save without sparking a wholesale implosion of GDP while effecting the process of private sector balance sheet repair.

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CIT fallout: insurers

via clusterstock -- it has been argued here, thanks to david goldman, that letting financial institutions fail is not a viable course of action because the primary party to be damaged by such a course would be insurers. many demutualized insurers are woefully undercapitalized in the aftermath of the 2008 crash as it is; further undermining their balance sheet with an attack on bank and financial company junior debt would likely send some significant segment of the industry over the brink into bankruptcy, creating further waves of financial panic and potentially necessitating a whole new series of expensive federal government backstops for the american insurance industry.

case in point would appear to be CIT, as investigated by bloomberg. john carney:

It looks like a bunch of big insurance companies are going to take a hit if CIT goes down. And that seems pretty damn certain right now.

So who has been left holding the debt. Well Aflac had about $240 million in CIT senior debt at the end of March. That's the equivalent of 12 percent of the company's excess capital. Does it still hold that much? No one is saying. But CIT had suffered 7 straight quarterly losses (it's up to 8 now) by then, and that didn't convince Aflac to dump the bonds. So was 8 a charm?

Then we've got Genworth Financial, which has about $178 million of the notes, according to a KBW analyst who spoke to Bloomberg. That amounts to about 13 percent of Genworth’s $915 million of excess capital.

MetLife had about $148 million in CIT notes. But since MetLife is so huge, that's a much smaller percentage of its capital. Only about 1.6 percent of estimated excess capita.

Lincoln National Corp. of Philadelphia had about $99 million in CIT bonds, according to KBW (again via Bloomberg).

It's possible that these company's have taken out credit default swaps on this debt. But that's become an expensive proposition lately.

i'll go ahead and say that there's zero chance the insurers bought massively expensive hedges for CIT in recent months; such was the pricing, if such hedges were even available, that they would have been of little aid. there remains the open possibility of an insurer-led crash, though the opening of TARP to insurers will hopefully reduce that possibility.

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rail loadings fall further

following on earlier comments -- via pragmatic capitalist -- rail freight volumes are falling off steeply.

The rail data remains severely depressed and is showing no signs of recovery. It is practically impossible to see a sharp economic recovery without improvement in this kind of data. Yesterday’s data from JB Hunt confirms the weakness.

there remains very little evidence of economic green shoots. in combination with (via ed harrison) an unexpected increase in unadjusted weekly claims and (via calculated risk) a bit of a relapse in the philly fed manufacturing indicator for june, there may actually be a bout of further economic weakening underway from june.

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Wednesday, July 15, 2009


CIT fail

via zero hedge.

UPDATE: clusterstock:

Reportedly, a struggle had broken out between Treasury Secretary Tim Geithner and FDIC chair Sheila Bair. Geithner favored the rescue, citing dangers to small businesses. Bair opposed extending FDIC credit to the weak firm that many believe could fail without causing major systemic upheavals.

While CIT and U.S. regulators spent worked through the night discussing details of a potential recue, a bank run was underway. Customers reportedly drained hundreds of millions of dollars from the lender in the past few days, drawing down on credit lines they had with CIT. The run seems to have been prompted by news over the weekend that CIT had hired lawyers to prepare for a bankruptcy filing.

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immaculate recovery

this is the phrase calculated risk tags to the outlook presented in the latest FOMC minutes. his take is skeptical.

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bob rodriguez

via zero hedge -- a half-hour with bob rodriguez of first pacific capital. comments on the economy begin after 10:15.

after 15 minutes, he calls "green shoots" a "head fake", and FPA has stayed out of all but the highest quality credits.

after 19, his comments on the "explosion" of the treasury market he sees coming after the current crisis, in "five to seven years". more after 23:45.

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mcnamara and rubin

harold meyerson in the washington post reflecting on the failure of "hyper-rationalism" finance in comparison to the failure of hyper-rationalism in the vietnam war, and on the role of the architect in each by identifying robert rubin with robert mcnamara.

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goldie mac

the morning's story is intel exceeding expectations (in spite of revenue having declined 15% YoY), but there is another lively news current regarding goldman sachs.

the wall street journal today attacked GS over its profits based on a government-guaranteed funding profile even as CIT totters in bailout negotiations. the WSJ makes a point often iterated elsewhere in the aftermath of the government's post-lehman steps but perhaps new to its pages: the entire financial system of the united states, most particularly its keystone large banks, is essentially now a GSE akin to fannie mae or freddie mac.

goldman's record quarter is on some level a sure sign of the massive success of the summers/geithner plan to backstop the banks. the question is really whether its been a bit too successful. massive risk-taking of a kind thought to have left for good a few months ago yielding titanic profits on low cost-of-funding with essentially zero risk of a run is a formula for rapid balance sheet repair, and goldman is clearly leading the pack in that respect. it has accumulated a cash pile which would be the envy of many small countries.

there's a lot to argue about here. for example, why the hell should GS have the backing of the FDIC as a bank holding company when it takes virtually no public deposits? but the most disturbing part is what clusterstock described as analyst "rage" over the cash that goldman continues to build.

In short, we witnessed first hand the investor demand for risk and leverage.

indeed, but what does that say about sentiment? even in the more-or-less immediate aftermath of the greatest bout of capital destruction since the second world war?

Goldman’s answer to all these questions was so consistent you could tell David Viniar had it written down in his notes. It amounted to three points:

* Market Risk. The world is still a dangerous place, so Goldman wants to have a lot of liquidity stored away in case the credit pipeline dries up again.
* Regulatory Risk. Regulators may increase capital requirements or change the way a firm’s capital levels are calculated. It’s a good idea to have a bunch of extra cash on hand to hedge the regulatory risk.
* Unwilling Sellers. The values just aren’t there. Banks may whine about illiquid assets, but the problem is that they are still hanging onto distressed debt at levels that make it too risky for Goldman to buy it. It’s the equivalent of Nantucket homeowners refusing to sell at anything below the prices they paid at the boom. Goldman, like our own Henry Blodget, would like to own a cottage in Nantucket but not at these prices.

david goldman also noted the hoarding of high-yielding securitizations in the banking system. thanks to the changes in mark-to-market rules -- again being tested in europe amongst insurers -- banks are not compelled to unwind. this is less a case of goldie mac than of ameri-mac, and it will likely continue until or unless one of two things happen:

  1. the banks succeed in fully resolving their balance sheet issues -- a process likely to take years;
  2. the government finds through exogenous events in the treasury market that it cannot fund the backstop it has put in place.

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Tuesday, July 14, 2009


volatility curve warning again

following up on this post of three weeks ago -- h/t to adam warner for noticing that the front-month forward contract for the VIX is trading at a premium level that has in the past indicated proximity to a market top. particularly interesting is how the premium is continuing to expand even as the S&P trades lower from the june high. this holds true of the 3-month forward as well, and a similar condition was a feature of the august 2008 top.

warner further comments on the coincidence of both the forward futures premium and the high implied volatility measured by the VIX as compared to the 20-day historical volatility, as analyzed by lawrence mcmillan.

Going back to 1993, The McMillan letter found 35 instances where the VIX vs. 20 day HV differential was 10 points or more. Obviously it has to resolve in some fashion, either HV picking up or IV falling, as the market will not overbid for options forever. McMillan found that in 31 of the 35 times, it resolved with HV perking up.

So fast forwarding to now, sounds like odds sure favor an increase in stock volatility.

But before you jump to conclusions that volatility = down market, consider this. When those 35 instances above resolved, there was little predictive ability as far as the market is concerned. He found the market lower 10 times, unch. 10 times, and higher 15 times.

Now he goes another step and relates HV to VIX futures, and VIX futures premiums and does find that when you get VIX premiums to HV high as above AND VIX blended futures at a premium, it provided a good market signal. Down. Problem is there are only five instancs thanks to the fact VIX futures are only 3 years old.

jason goepfert also comments on the shorter-term channel of the VIX.

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PPI curve updated

following on last month's analysis -- YoY change in finished goods moderated from (-5.0%) to (-4.6%), making for the second-worst reading in fifty years. intermediate goods YoY continues (-12.5%), crude goods a tick up to (-40.0%). chart continues to be here.

and -- via calculated risk -- following a june retail sales report where, ex-autos and gasoline, sales were down yet again, more appalling reporting in the redbook and ICSC/goldman metrics -- well under expectations yet again, indicating that the retail slump which characterized june is continuing into july.

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Saturday, July 11, 2009


CIT nears bankruptcy

via zero hedge.

UPDATE: some color via clusterstock.

UPDATE: and on its similarity to GE.

UPDATE: baseline scenario on reported talks between the US government and CIT.

What happens to CIT will help define exactly where we are with regard to “too big to fail.”

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Friday, July 10, 2009


chinese loan growth

michael pettis with an excellent contextual retrospective at banking crises and their origin in speculative lending -- including a wonderful excerpt from will durant’s "history of roman civilization and of christianity from their beginnings to AD 325" on the topic of the year 33 roman banking collapse. pettis:

It seems that few things are more dangerous than the belief that governments can eliminate or sharply reduce the risk of financial crisis. The idea that a country’s financial system can act as crazily as it likes as long as the government is willing to protect it from its folly runs not only into the problem of undermining government credibility as bad debts surge, but the very belief almost guarantees that the financial system will act in a crazy way.

china is indeed not only backstopping its banking system but attacking the collapse of finance by forcing loans into its economy, very likely with no consideration of need or quality.

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Thursday, July 09, 2009


american ten-year demographics

david goldman's outline of the demographics of the united states have been mentioned here before and again just this week. today goldman offers another worthwhile bit in comparing the inevitable and irreversible demographic change that will be visited on the united states in the next ten years with the infamous 1990s baby bust of japan.

Back during Japan’s lost decade of 1990-2000 (the first lost decade, that is), Japan’s population had just began to age dramatically. In 1990 the elderly dependency ratio stood at 17%, but it had risen to 25% by 2000. As the Japanese aged their appetite for savings grew, and as their stock portfolios and home values crashed, they saved more and more. The more they saved, the worse the economy did. Interest rates of 0.25% or less and spectacular government deficits couldn’t make a dent in the vast shift towards a propensity to save. The result was deflation: falling asset values and a strong yen.

Fast forward to America in 2010, with an elderly dependency ratio of 19%, right around where Japan was in 1990. By 2020, it will rise to 25%, almost as fast as Japan’s.

this was also a topic from a book i recently revisited, bill bonner's 2004 "financial reckoning day", wherein bonner clearly charts japan as the forerunner of a demographic collapse soon to afflict virtually every western nation. there's much more to say, but little to be done -- except to make immigration into the united states from the third world as easy as possible for the next decade in an attempt to soften the blow. that has of course been the opposite of implemented policy.

bonner is also founder of and regular contributor to the daily reckoning.

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At a time when emerging markets are showing significant growth, an increasing number of them are staying behind. Earlier this decade, I was told by my grad school advisor of a big drop in grad school applicants from Asian countries. Many of the elite students there find sufficiently remunerative job opportunities after completing their undergraduate programs that the attraction of coming to the U.S. is diminished.

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I agree with the poster above. Expecting to solve this with immigration is wishful thinking.

Japan has already shown us what our our immediate demographic future will be like.

But what can japan do next - they need a new way forward now their exports are collapsing. I think they'll have to try mankiw/buiter's ideas vis a vis -ve nominal interest rates.

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except to make immigration into the united states from the third world as easy as possible for the next decade in an attempt to soften the blow.

Lou Dobbs is gonna be pissed off at you gm.

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true enough, rb, scep -- i'm looking more for mitigation than solution.

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then i'm certainly doing something right, ccd. :)

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going with what RB said, has there been any attempt to study/consider a situation where emmigration negates any positive effect from loosening the borders? If lucrative jobs are identified in emerging markets and perception of the US immigration policy leans toward the US cynically attracting workers in an effort to simply prop up a failing social safety net for its residents, where would that lead?

Unlikely I suppose.

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Somewhat older data here.

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commodities rolling over

ambrose evans-pritchard in the telegraph highlights some of the more obscure shipping data as a potential tell.

Amrita Sen at Barclays Capital says the number of Baltic Dry ships waiting to berth — mostly in China and Australia — has begun to fall after peaking at 154 in mid-June.

The Capesize Iron Ore Port Congestion Index (a new one for me, I must confess) is replicating the pattern seen a year ago just before the commodity boom tipped over.

“The anecdotal evidence we are hearing is that vessel queues have been falling. There are reports of cancelled tonnage from China pointing to a slowdown in Chinese buying of coal and iron ore.

“We are definitely expecting a correction. People have been building stocks of iron ore too quickly in anticipation of the stimulus package in China,” she said.

The Baltic Dry Index measuring freight rates jumped 450pc in the first half of the year on the China rebound, but has begun to fall back over the last two weeks. (Sen doubts freight rates will recover much since 1000 new ships are hitting the market this year and again next year, compared to 300 in normal years. There is obviously a horrendous shipping glut).

Over at Naked Capitalism they are reporting that international port traffic for containers (ie finished goods) is as dire as ever. The rates for 40-foot container from Asia and America’s West have actually fallen this year from $1,400 to $920.

“There has never been a decline like this before,” said Neil Drecker from the Drewry Report. “The container industry is looking at a $20-billion black hole of losses. We can expect a lot of casualties.”

unlikely to be merely coincidental, a screen of recent commodities shows a big selloff underway in june. it's most pronounced in agricultural commodities, but very evident in industrials -- crude oil (-19%), unleaded gasoline (-20%), aluminum (-8%), copper (-11%), lumber (-17%), and platinum (-15%).

it is a commonplace that china was a massive mover in q2 with stimulus-induced commodity stockpiling. while statistical reporting from china in times of crisis is perhaps of the quality one expects out of a mildly totalitarian government, it does appear that a massive impulse of forced bank lending and forced borrowing has provide an impulse to the chinese economy of some kind. the intermediate-term concern is that the chinese banking system just got saddled with a pile of highly questionable loans; short-term, however, is the worry of what happens when the impulse stops.

this indeed would appear to be taking place now in china, per ft alphaville.

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Wednesday, July 08, 2009


the foreclosure backlog

calculated risk:

Ramsey Su (REO broker in San Diego) sent me some data today. He wrote:

[Pent Up Foreclosures - a stat Ramsey follows] measures the difference between foreclosures completed versus defaults. This gap is widening as a result of government intervention. ... If they do not ACCELERATE the foreclosure process and release some of the pressure now, the consequences will be disastrous.

beware false bottoms -- in my view there's no good reason to buy a house yet.

UPDATE: via clusterstock, securitization trusts are preparing to hammer the housing market with deeply discounted properties in hihg foreclosure areas.

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regulation and unintended consequences

john carney points up a very painful admission for many who see the firm hand of regulation as a solution to what has transpired in the markets in recent years.

The new enthusiasm for government regulation of the financial sector often rests on a double standard that sees markets as fever swamps of irrationalism and government as the well of refreshingly rational guidance. Unfortunately, there's no justification for this view of things.

In fact, regulatory pressure helped get us into the mess we're in. Sometimes this was an unintended consequence of regulations. Think risk capital requirements encouraging banks to manage risk through credit default swaps or off-balance sheet vehicles. Sometimes it was an intended consequence--such as the government pressuring bankers to make loans on "flexible" underwriting standards.

hard truths: regulators are neither rational nor particularly adept at avoiding unintended consequences. indeed, if they were, we would not have experienced this terrible bubble and bust. we've seen this cyclicality of mania run its course many times, and each time the aftermath has been characterized by a well-meaning and sometimes quite effective regulatory impulse. that hasn't yet ever prevented the next bubble.

it is profoundly misguided to place blame, as carney sometimes implies, for the mortgage bust on the head of the community reinvestment act. but there's little doubt that the broader regulatory effort to promote homeownership in the united states played a major role, especially through fannie mae and freddie mac, in creating the mortgage bubble -- particularly through its heavy efforts in 2002-3. there's little doubt that regulatory changes (most notoriously, the alternative net minimum capital rule for broker-dealers) subsequently gave rise to the wall street private-label mortgage securitization titan. there's further little doubt that the regulatory zeal of the FDIC for pinching capital reserves, in a well-meaning effort to keep banks from managing earnings through the cycle, has left the banking sector terribly vulnerable to the downturn we're now seeing.

there's no easy answer here. particularly with western political and social institutions in the condition they have devolved into, the process of reconciling regulation with both eternal law and the long experience of institutional memory is nearly impossible. rather, our society is given over to throwing a bowl of populist spaghetti at the wall and seeing what sticks, often without much notion or care of the complete consequence set provided the bread shows up and the circus opens on time. such are the exquisite hazards of demotic government.

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"western political and social institutions in the condition they have devolved into"

When you write this is reads as if you are harkening back to some better more enlightened time. When was that?

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for the life and health of western institution and society -- i would suggest several hundred years ago, though the full-blown collapse of decadence and rapid decline of the successor institutions under which we now live dates more obviously to the first world war.

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So I would have to disagree here, as the Age of Regulation in America, from the mid-30's to the late-70s, never-I repeat never-experienced such speculative bubbles as we have had in modern times.

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i would say, anon, that the lack of bubbles in the era of bretton-woods had less to do with the effectiveness of regulation than a de facto gold standard which visited terrible economic pain on any currency bloc which dared to run a significant current account imbalance over time. by severely circumscribing (until 1971) the imbalances that could exist and persist in global flows, bretton-woods -- and before it, the gold standard -- prevented bubble finance from arising, instead extracting much more sudden and harsher slowdowns from violating economies.

even the great depression -- which many link to the gold standard or even blame upon it -- was in its genesis i think very much about the massive international flows that the abandonment of the gold standard from 1914-24 enabled in order to finance the first world war. these imbalances -- improperly handled by britain and the united states -- led to the debt bubble of the late 1920s which ultimately crashed throughout the 1930s.

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Tuesday, July 07, 2009


take the long view

via zero hedge, david rosenberg on CNBC -- few people make more sense to me at this juncture. expect massive secular changes -- expect the unwind of the credit bubble to proceed not as an event but as a process, one spanning years. expect at some point to see deleveraged equities scrape along at generational-low multiples, something below 8x the oft-discussed detrended S&P earnings promoted by robert shiller. deleveraging these assets can and probably will produce prices as extreme on the downside as they were on the upside.

it's particularly interesting to hear rosenberg question the practical efficacy of short-term fiscal stimulus. there's not exactly an explanation of ricardian equivalence there, but the tone is there. and of course his point of long-term productivity is essential.

one thing i haven't heard rosenberg expound upon, though, is the expectation of the closure of the american current account deficit in time. the accumulated effect of years of trade deficit, as opposed to surplus, is one of the big differences between 1990 japan and 2008 america.

right now, the dollar sees strength in downturns. this is in part because the dollar, with ZIRP in place in the united states, is an excellent carry trade funding currency; rich world risk aversion should manifest as dollar strength much as it has traditionally (since the institution of ZIRP in japan) meant yen strength. as richard duncan has outlined, there is also no lack of destination for dollars obtained by east asian or middle eastern exporters -- massive treasury debt issuance remains more than enough to soak up diminished trade dollar flows even as private credit unwinds, obviating a potential source of pressure on the dollar.

in time, however, the american financial system will have to shrink as the headwaters of a full third of its funding profile -- namely, the current account deficit -- dries up in this great global rebalancing. this process has only just begun with the collapse of world trade flows and the rise of the american savings rate. it has been massively retarded by the federal reserve since once threatening to correct in one fell swoop back in september 2008. but one of the remaining major adjustments figures to be the eventual and gradual revaluation of the chinese renminbi and other dollar-pegged currencies, as they grow less dependent on export volumes to the united states for economic growth.

this eventual devaluation of the dollar sits at odds with most conceptions of deflation, but it is worth noting that many depressed economies of the 1930s experienced large-scale devaluations without experiencing anything like inflation. i would expect to see similar outcomes this go-round -- with the adjunct possibility of policy rate increases to stage a traditional defense against the kind of disorderly currency collapse that paul samuelson, among others, believes likely.

By the way, I don't want you to think that I think that everything for the next 15 years will be cozy. I think it's almost inevitable that, with a billion people in China wide awake for the first time, and a billion people in India, there's going to be some kind of a terrible run against the dollar. And I doubt it can stay orderly, because all of our own hedge funds will be right in the vanguard of the operation. And it will be hard to imagine that that wouldn't create different kind of meltdown.

UPDATE: david goldman on the contributions of deteriorating demographics:

It seems quite plausible that the dollar will fall sharply against some other currencies, notably the Asians, and against gold and other commodities. That may not, however, interrupt the deflationary tendencies which predominate, for to have actual inflation, someone has to take cash and buy goods rather than (for example) securities. If everyone hypothetically wanted to buy securities rather than goods, prices of goods would crash.

Something like this is happening, of course. An aging population increases its purchases of securities and decreases its purchases of goods as it saves for retirement. Americans have saved nothing for the past ten years, and the capital gains that they considered savings-substitutes have vanished. That means that an enormous savings deficit accumulated over more than a decade has been exposed, and that Americans must attempt to correct it quickly and under the worst of circumstances.

That creates a deflationary shock that a few trillion dollars’ worth of stimulus cannot begin to mitigate. America may have the worst of both worlds: currency devaluation AND price deflation, as in the 1930s. That is why TIPS and other nominal inflation hedges do not convince me. Gold, oil, commodities, and Chinese blue-chips are my preferred hedges against a dollar crash. Most of my portfolio remains in high-quality fixed income. I have sold lower-rated credit and taken profits in anticipation of further market weakening.

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more on option premium skew

following on earlier comments -- jason goepfert with a review of credit suisse's index measuring skew.

CSFB created a new index that compares the premiums in calls versus puts, digging a layer deeper than the VIX does. When the index was first unveiled, its movements didn't make a lot of sense when compared to the VIX, but recently an article on Bloomberg highlighted one potential use for it - identifying times when the VIX is masking underlying sentiment.

We're seeing that now.

There have been four other times during a bear market when we've seen a divergence like this, when the VIX is at a multi-month low, but the CSFB Fear Index is at a multi-month high. Over the next three months following those four instances, the S&P averaged -9.2%, and with a risk that averaged more than 6 times greater than the average reward.


Investors are spending the most since August 2008 to protect against a 10 percent decline in the Standard & Poor’s 500 Index versus wagers on an advance, according to data compiled by Bloomberg. That’s one month prior to New York-based Lehman’s bankruptcy. The premium on so-called put contracts increased even after the Chicago Board Options Exchange Volatility Index, a gauge of U.S. options prices known as the VIX, fell 40 percent last quarter.

... The widening gap between bullish and bearish options belies the VIX’s retreat to below its level when Lehman collapsed and comes as U.S. companies prepare to report second-quarter earnings this week. ...

Traders are more inclined to buy insurance against stock market losses than they are to speculate on more gains, options trading shows. The implied volatility for contracts that lock in profits if the S&P 500 falls at least 10 percent in three months was 29.03 on June 29, according to data compiled by Bloomberg.

That compares with 20.20 for “call options” that pay off if the index rises at least 10 percent in the same period.

The difference between the prices of the two contracts, known as the implied volatility “skew,” steepened to 44 percent, the biggest premium since Aug. 28. The skew between contracts expiring in six months reached a nine-month high.

worth noting that this measure of skew -- comparing the difference in the implied volatility of out-of-the-money calls to like puts -- is different than downside skew, which compares the difference in implied volatility of out-of-the-money puts to deep-out-of-the-money puts. both types of skew, however, are showing the same thing -- the options market is paying premium to bet on a fall.

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Friday, July 03, 2009


all you really need to know about CNBC

via tradermark at fund my mutual fund, marion maneker reports for slate.

Thursday, July 02, 2009


june jobs (-467,000)

on the heels of yesterday's disappointing ADP number, a big miss for NFP. per alphaville:

Economists in a Reuters survey had forecast that 363,000 jobs would be lost in the month.

Revisions added 8,000 to payroll figures previously reported in May and April.

The report also showed the jobless rate jumped to 9.5 per cent, the highest since August 1983, compared with 9.4 per cent in May. Economists had expected the unemployment rate to rise to 9.6 per cent, which would have been the highest since June 1983.

But for green shoots enthusiasts and devotees of the second derivative, the drop in payrolls will nonetheless reassure, since it reflects a decline in the pace of job losses: the economy shed an average of 691,000 jobs a month during the first three months of the year. Monthly job losses, as measured by the Labor Department, peaked at 741,000 in January. Employers have cut 6.5m jobs since the recession officially began in December 2007.

Less reassuring is the steady and continued decline in the average number of hours worked, suggesting employers are also cutting their payroll burden by reducing the number of hours available to workers. The average work week fell to 33 hours, the lowest level since records began in 1964, from 33.1 hours in May.

the headline number not only missed the median but fell outside the range of forecasts tracked by bloomberg, the worst guess at which was (-435k).

i've also recently commented on AWHI.

as i tweeted yesterday, i'm rather irresponsibly short at the moment, having levered further into the position yesterday. today will be a thin holiday tape, so a recovery of morning losses would not surprise -- perhaps using factory orders in a few minutes here as a jumping-off point. but there have been some fairly serious wounds inflicted on the green shoots argument as the tape has stalled out since the start of may. i expect a test of the neckline around 885 of the S&P head-and-shoulders formation that everyone is eyeing. presuming we get there straightforwardly, how we react at that neckline will be the determinant on future trading direction.

as might be obvious to any regular reader, i am not optimistic about the reaction to 885 -- as just one example, as noted by pragmatic capitalist and richard russell, the lowry report measure of buying power is now approaching its march low point even as the S&P is fully 240 points north of there. in short there has been nearly no real buying interest in support of the rally -- only a moderate contraction of selling interest. should any degree of selling interest return, the possibility for big chunks of the S&P to come off in a short time is certainly there; in my opinion the systemic balance sheet remains under great stress and capacity to meet determined sales from derisking players or even a reversal of momentum traders really does not exist.

UPDATE: ed harrison conveys video of PIMCO's bill gross.

His basic point is this: no jobs and no wage growth equals no recovery.

We need to see incomes rise in order to get consumers to spend. If the Obama Administration wants recovery, they need to do more to increase incomes and worry less about bailing out the banks.

amen to that. we'll be revisiting in the public square in a few months' time the idea of the third fiscal stimulus package that everyone now calls "off the table".

UPDATE: factory orders came roughly in line, eliciting no immediate reaction against the NFP impulse. there's little in the way of news on the calendar now until next friday's international trade report, so the market will have time to digest this.

UPDATE: an excellent commentary from justin wolfers at the new york times freakonomics blog, relating to the meaning of the AWHI decline.

The latest employment numbers are out, and they are dreadful. Those commentators who saw “green shoots” out there had been focusing on the fact that in May, the economy “only” shed 322,000 jobs, which is good news when compared with the fact that the economy had been losing over 600,000 jobs per month in January, February, and March. Squint hard enough at the black line in my chart, and you can see why many were hopeful that job losses were slowing down.

But counting the number of people who lost their jobs misses an important part of the story. Focus instead on the purple line, which is the index of aggregate weekly hours worked and also counts those who’ve lost only part of their jobs. The decline in aggregate hours worked has been frighteningly consistent over recent months. Any evidence of “green shoots” appearing in recent months disappears in this broader measure. The recession continues apace. If current trends continue, we are in for a frightening time.

put simply, there are not only no green shoots -- there's not really even been a slackening of the pace of contraction. both wolfers and paul krugman take this jobs report as reason to start planning the third stimulus.

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Strangely, despite David Rosenberg's piece today being as bearish as ever, he suggests the March lows will probably hold and that S&P 800 may even be a buying opportunity. I'm really not sure what the basis is and agree with you on likely stock market downside -- however there's of course the possibility that it would take years rather than months to occur.

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pragcap had some of his comments, hbl. scary.

on the market -- it can do anything, of course. it's possible that, in spite of the lack of buying initiative, selling just doesn't materialize in size and we drift on low vol. or perhaps stimulus is better received and more effective than everyone thinks and we get an upside surprise GDP print. but i do think that the ultimate destination is delevering, and delevering means less balance sheet room for natural equity buyers.

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Others looking at the 800 level as a buying opportunity .

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Congrats on being short! Nice trade. I actually think that this quarters P/L will be OK because companies have been laying off--does wonders for cash flow in the short run. . . Also because managements were able to throw out some of the balance sheet trash in Q4 2008 and Q1 2009 when everyone was losing money/having a bad quarter. Now they need to show good performance again and they have some closet space to hide the bad stuff in--do I sound too cynical?

BTW, I'm seeing more talk of a government "gift card" distributed to all households in an effort to "get things moving again."

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funny bwdik -- that gift card is about the same idea that our office threw around of money with expiration coupons. but in the end, it's gresham's law: that "money" will get spent while cash is put to canceling debt, and little net effect. just speeds up delevering.

i'll wager that, as q2 earnings start rolling in over the next few weeks, the primary focus will NOT be bottom-line improvement (which i agree should be entrained) but top-line revenue. without revenue growth, no improvement in earnings is sustainable -- you can't cut costs indefinitely to shareholder advantage.

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For those with short positions, this is good news... lol... as my parents took my advice to open a large short position in the beginning of june.

However, I was actually expecting an improvement on the second derivative. I just thought investors would simply give up pumping up the stock market --even if there is "good" job market news -- and "accept" deflation - a world of lower real returns on assets, and possibly increasing larger risk premiums on equity assets. Although Japan had weak economic growth and relatively stable during its deflation, its market dropped. I was expecting a weak recovery, a stabilizing job market, AND a falling stock market despite the latter too.

Well, gm is correct, top line earnings will be very important as it is an upper bound. Eventually cost-cutting will lower earnings. I doubt companies would make money by selling in emerging markets if they engage in protectionism. I wonder if the disappointing equity market would attract people with "risk capital" to go to emerging markets or alternative energy and hope for the best in those sectors or hope for greater fools.

hbl... on your thoughtofferings blog... do you want to do a post on gold? i am not a gold bug (i.e. one of those libertarians who want a gold standard and rant against those evil "welfare statists," but a non-Austrian deflationista like Steve Keen and Richard Koo [Mish is obviously an Austrian deflationist]). I do expect it do well during deflation (because the opportunity cost of holding it is low during deflation, and high during periods of economic growth), and there is a potential for it to become the next bubble like gold in the early 1980s and dot-com stocks. I do agree with you that there would be point where certain gold investors (who bought it because they were so sure of hyperinflation) would sell their gold and buy assets with cash flow but we are not there yet. I see gold more as a put option whose value rises when there is a lack of confidence in currencies instead of an inflation hedge.

hbl... i do admire you. you are way ahead of the curve-- way ahead of those "contrarian" Austrian school inflationistas. I do like the appreciation of banks buying long-dated government bonds to profit from the "fat spread" (and possibly interest rate declines) and steepness of the yield curve.

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Hi Aki,

Thanks for the positive words, though for the most part I just try to synthesize what I read and avoid ideological bias. And gm's blog here is one of the top notch sources of info! FYI, I have been seeing the generalized "banks buying treasuries" theme showing up from several commentators recently (especially Rosenberg), though I still haven't gotten feedback on whether the balance sheet examples on my treasuries post are valid in the real world.

I hope to get around to more posts but I'm not sure how much I have to say on gold. It just seems so speculative and dependent on expectations rather than fundamentals... I understand that it has done well in deflation in the past but I'm not convinced (as of now) that relationship will always hold. My sense is that the "gold is money" religious disciples are a small fraction of the market (versus those worried about 70s stagflation or Zimbabwe). But international demand from populace in unstable countries, stubbornly unassailable inflation expectations in the US, etc, could give it a good run as you suggest. If I had to choose a direction I'd put the odds in favor of gold prices halving as more likely than doubling (at least as a first result, given the scale of aggregate deleveraging needed), but I wouldn't put any money on that. I can see that it could be useful as "insurance", though.

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