Financial Crisis

[Abrak]

Now here is an excellent bit of research from about the best in the business. It primarily focuses on a topic I have touched on a couple of times which is how inflationary expectations effects bond and stock prices. It looks back at history and shows that inflation only benefits stocks to a certain degree (up to 4%). It also touches on the great American default that is inevitable through higher interest rates (and possibly a lower dollar although he doesnt focus on this).

It also tackles financing of the US deficit, deficit levels funding etc. He expects the bear market rally to continue for sometime but the bear market not to end until the S&P is 400 (verses 940 today). The outlook for bonds is for a multi-decade bear market quite naturally as the US inflates away its debt.

Its from yesterday....

CLSA_Rg_SolidGround_20090608.pdf

Now its 23 pages long so here are a few comments from the last page....

How is the US government likely to respond to a situation where the public

debt to GDP ratio of the USA doubles at a time when foreign support for the

Treasury market wanes? Will they default? History suggests that there are

less dramatic ways to rob bondholders than outright default. As we have

seen the US public debt reached an even larger percentage of GDP in the

1945-1948 period. The US government did not default on those obligations

but as Homer and Sylla make clear this was little comfort to holder of US

public debt:

"The greatest of all secular bear bond markets, which began in April of

1946, and probably ended in September 1981, carried prime long

American corporate bond yields from their lowest yields to their highest.

The yield index rose from 2.46% to 15.49% for seasoned prime issues and

up to 16.5% (industrials) and 18.0% (utilities) for high-quality new

issues….If a constant maturity thirty-year 2.5% bond has been available

throughout this second bear market of the century, its price would have

declined from 101 in 1946 to 17 in 1981, or 83%."

A history of interest rates, Homer and Sylla

History makes it crystal clear that a highly indebted government will do

everything in its power to avoid a deflationary creative destruction.

The lesson learnt in the post WWII period was that with

public debt at high levels an inflationary business cycle, whether in the

expansion or contraction phase, was the only way to reduce the

government debt to GDP ratio.

While Treasuries are likely to be a great destroyer of wealth in years to come,

that destruction is likely to begin slowly, as it did in 1946. Investors will come

to realise slowly that the key driver of rising Treasury yields is not the cyclical

uptick in current inflation but a growing institutional necessity to inflate away

the government debt overhang. This bias towards inflation will combine with

the usual political difficulty in retracting fiscal stimulus and a monetary

difficulty in liquidating the Fed’s increasingly illiquid portfolio of securities.

History suggests that investors will only come to realise slowly that this is a

structural and not cyclical bear market. At some stage in that realisation

process rising bond yields will snuff out the current equity rally and force

equities to the low valuation levels seen in 1921, 1932, 1949 and 1982.

Conclusion

The rally in equities will likely continue until inflation nears 4% and the yield

on ten-year Treasuries is in the 5-6.5% range. However when Treasury yields

move into this range, the reality will begin to dawn that Treasuries have

entered a multi-decade bear market. This, along with a final Fed fight against

inflation, will be the catalyst to bring the S&P500 to around the 400 level.

BTW one thing I sort of learned from it is this. Inflating your way out of debt is a deliberate attempt to destroy the real value of all asset classes not just creditors assets. From that perspective investing is going to be very difficult.

Edited June 12, 2009 by Abrak

[12DrinkMore]

Well, to move to another little discussed matter. Maybe the wideboys of the city will loose the freedom they have enjoyed, enabling them to contribute in their own way to the financial crisis.

http://www.telegraph.co.uk/finance/economi...le-with-EU.html

Calls for Brown to go nuclear in City battle with EU

As Europe's leaders prepare to strip Britain of ultimate control over finance, insurance, and securities, defenders of the City have begun to talk darkly of the nuclear option – known in EU lore as the "Luxembourg Compromise".

Although I am basically against more levels of government and regulation, in this case I want these guys brought well under control

There is little doubt that Brussels is exploiting the backlash against finance to bring the City under its thumb. Its own Larosiere Report concluded that hedge funds were marginal players in the credit crisis. Yet that has not stopped it drafting draconian rules for hedge funds as well, with chunks copied from French law. What is the purpose, if not to hobble a successful British industry?

Christen Thomson from the Alternative Investment Management Association said 80pc of Europe's hedge funds are in Britain, supporting 40,000 jobs, and are already regulated by the FSA. "A whole galaxy of hedge fund strategies would be impossible under this law and it is not necessary. The FSA tracks the top 40 funds and knows the level of systemic risk, and it keeps the cowboys out," he said.

IMO the FSA has miserably failed to perform over the last decade, the cowboys are running the show.

And I would really like to know how this "successful British industry" has benefited me and the majority of other Brits, in the short, medium and long term? How is the term "successful" defined in their context?

[12DrinkMore]

(3) I also genuinely believe you dont realize how bad some of the numbers are. If you are going to be permanently bearish of US car sales or think they will fall further you have to start assuming that there will be say 30% less cars on the roads in 10 years time with 10% more people. Sales per capita are the lowest since WW2 - did people have cars before then? Actually the number of cars have gone up in every single year except one for the last 50. But even if you assume the same number of cars on the road in 10 years time, sales have to increase at least 50% from current levels on a monthly basis.

The ten year horizon is a very long time, but maybe cars such as the Tata Nano will start to appear more often? Very cheap to buy, very cheap to run. If this happens, then sales in terms of units will possibly increase, but sales in terms of USDs will fall through the floor. If "peak oil" ever arrives, then the price of oil will also shoot through the roof and further increase the demand for fuel efficiency cars.

And then there is also the question whether it is a basic right for everybody over the age of seventeen to own/have access to a car? 30% percent less cars on the roads sounds actually a very good idea....

Edited June 12, 2009 by 12DrinkMore

[flying]

Dont mean to pick at your statement but for well over a year now we have seen so many say the same. Yet all they have proven is none know for certain where this is headed as none have been down this particular road before. That sadly has become painfully evident this last year.

(3) I also genuinely believe you dont realize how bad some of the numbers are.

Again this is exacty what I am talking about....................

Yes every number seems bad compared to where they were.

Does that mean they are bad compared to where they are going?

I have told my son at least 3 or 4 times in the past year & a half.......He shows me a few new homes & says.........Wow you cannot help but make money on this eh?

I ask him why ? He tells me the same as you.

Yet here we are watching those deals get better & better still?

Yet they still stand with signs out front.

We will see what is a bad number when its gets no worse IMHO

Till then we have no idea of how bad it will be. We can only compare as you did to what has happened in the past.

Yet has *this* ever happened in the past? Folks like to compare this to the

"Even the depression" Who said it will be as mild? Or as wild?

I dont know

[AlexLah]

Dear fellow TV members and contributors to this historic Fred.

I think I got a possible solution for this madness called the financial crisis. As Fly and Midas and some others are mentioning that this situation we are in has not happened before, true. So unconventional situations need unconventional solutions, right?

Have you ever heard about the "Broken window theory" this has everything to do with demand and supply.

I assume most houses have a full insurance against calamities of all sorts (I think nuclear bomb damage is excluded).

How about burning down a large percentage of existing houses, either through riots or arson, something like that.

So company's like AIG have to pay out the insurance which the homeowner then will use to either build a new house or buy another one.

As the supply of houses will shrink the price will go up, more houses are needed so unemployed people can be trained to build new houses.

As the supply of skilled labour to build new houses is small an increase in wages can be expected.

The money that has been payed by the (future) taxpayer to bail out banks and insurance company's is given back to the people in this way and spend to grow the economy. Imagine what a boost in sales this would bring if also cars are burned down.

This is just a rough framework and need some more detailing, but I think this could be a solution.

Just kidding!

[12DrinkMore]

Now here is an excellent bit of research...

...

Thanks for that report.

I will have to reread it a couple of times to understand it all.

But it seems to confirm that China and the BRIC nations will be developing domestic markets, the USD will remain as the reserve currency with support from foreign bond holders for the next couple of years, but afterwards will begin a downward trend. Maybe the statement from Japan

http://www.bloomberg.com/apps/news?pid=206...id=aORSI_CloCxc

Treasuries rose for a second day and the dollar gained after Japanese Finance Minister Kaoru Yosano said his nation’s confidence in U.S. debt is “unshakable” and that the currency’s global status is safe.

also indicates that the USD is not finished.

However, I am much more uncertain about the support the world will offer to the GBP and future UK bonds.

BTW one thing I sort of learned from it is this. Inflating your way out of debt is a deliberate attempt to destroy the real value of all asset classes not just creditors assets. From that perspective investing is going to be very difficult.

Not so sure about that.

Attempting to inflate out of debts has a wide number of facets. I think it more the case that there is a universal and deliberate attempt to inflate away debts, prevent further deflation of the overinflated asset bubble in real estate and try to get the stock markets booming, so that all the pension schemes are back in the black.

If other asset classes lose value, then I think the term for it is "collateral damage".....

[12DrinkMore]

So company's like AIG

Well the "broken window" solution, unless, of course it was cause by a piece of high explosive being lobbed through the window of Our Leaders, is not really an economic solution at all.

But here's an interesting factlet for the day

"AIG history dates back to 1919, when Cornelius Vander Starr established an insurance agency in Shanghai, China. Starr was the first Westerner in Shanghai to sell insurance to the Chinese, which he continued to do until AIG left China in early 1949"

Edited June 12, 2009 by 12DrinkMore

[AlexLah]

12 and Others, where would the US military industry be when there where no wars in Iraq and Afghanistan and a bit of Pakistan?

The US army and the contractors are the biggest employers in the US.

Many cannon fodder available now.

[Abrak]

Again this is exacty what I am talking about....................

Yes every number seems bad compared to where they were.

Does that mean they are bad compared to where they are going?

I have told my son at least 3 or 4 times in the past year & a half.......He shows me a few new homes & says.........Wow you cannot help but make money on this eh?

Actually that is exactly the point I was NOT making. In my view anyone like the CBO or the Fed who makes assumptions about where we are going based on where we have been is fairly foolish because where we were was Disneyland. However it is equally foolish to make assumptions of where we are going based on current demand for cars in the US which is the equivalent on a per capita basis to where we were in 1945 when noone could afford cars, noone could build cars, cars didnt work and for all I know there were hardly any roads.

So lets start making some sensible assumptions. Lets lay down a few facts. Two thirds of cars were bought on hire purchase, that's not going to happen for a while. One quarter of those were upside down meaning the value was less than the loan. They probably wont get a loan again. A car lasts approximately 16 years and cars sales have averaged about 16.5m. At current sales 9.3m annualised per month it would take 28 years to replace the fleet. Out of the last 50 years the car population has increased in every year apart from one - so historically car sales have run ahead of replacement ratio. One of the reasons the car population increased every year was population growth which is slowing, the other was financing opportunities. The life of a car will probably increase cos they are getting better.

So if we take all these facts together where might we be on a base case assumption:

Well historic demand numbers have clearly been overstated by...

1. quite a lot of lending, a lot of which looks pretty sub-prime

And there are a couple of factors going against the overall growth trend...

1. Demographics mean slower population growth and...

2. Better cars mean longer life..

So there is absolutely no way demand can return to historic levels. But all things being equal, it is not unreasonable to expect the same number of cars on the roads in ten years time as there are now with an average life of say 18 as opposed to 16 years. That would imply an annualized car sales rate of 13.7m compared to 9.3m now and 16.5m a couple of years ago. I dont think that is bullish or bearish, just reasonable. If you were a car manufacturer in the US you would consider it a disaster because if the shortfall fell on you it would mean bulldozing half your production. But then again I suspect that's going to happen sometime anyways.

My point is this how half all the US numbers look. You can criticize the analysis as much as you like but get the basic point. Which is that a 10% month on month increase in car sales may look like a green shoot but actually still leaves a shortfall in US equivalent to its entire manufacturing output. That even if sales increase 50% half its capacity may still be redundant and there is not much reason to believe that sales will increase beyond that. That if sales increased 30% next month I wouldnt get too excited on the basis that 30% of nothing is nothing. And that if sales were going to remain at these levels all fall for the foreseeable future the US would be having to undergo an economic collapse only paralleled by Cuba, Burma and Zimbabwe which as holder of the world reserve currency is almost inconceivable.

As far as I can see here there are two bunch of lunatics - the CBO and the FED who are basically arguing that in 3 years time cars sales will be 18m a year as the US returns to fairyland and a couple of guys on the internet that believe the US is heading back to the dark ages.

[teatree]

An audit of the Fed?

http://www.ronpaul.com/on-the-issues/audit...eserve-hr-1207/

[Abrak]

Dear fellow TV members and contributors to this historic Fred.

I think I got a possible solution for this madness called the financial crisis. As Fly and Midas and some others are mentioning that this situation we are in has not happened before, true. So unconventional situations need unconventional solutions, right?

Have you ever heard about the "Broken window theory" this has everything to do with demand and supply.

I assume most houses have a full insurance against calamities of all sorts (I think nuclear bomb damage is excluded).

How about burning down a large percentage of existing houses, either through riots or arson, something like that.

So company's like AIG have to pay out the insurance which the homeowner then will use to either build a new house or buy another one.

As the supply of houses will shrink the price will go up, more houses are needed so unemployed people can be trained to build new houses.

As the supply of skilled labour to build new houses is small an increase in wages can be expected.

The money that has been payed by the (future) taxpayer to bail out banks and insurance company's is given back to the people in this way and spend to grow the economy. Imagine what a boost in sales this would bring if also cars are burned down.

This is just a rough framework and need some more detailing, but I think this could be a solution.

Personally I would like to second this motion. This thread has run 100 pages so we are all clearly experts on the subject and we should look into possible cures rather than simply discussing the issue.

I dreamt up an excellent solution last night, far better, I believe, than Alexlah's but unfortunately I went back to sleep and forgot all about it.

Still I think Alexlah's creative destruction solution is a good start. It should be looked at in many ways like the world wars and how they boosted growth through destruction but without the human collateral.

Obvious there is the temptation to put all the cost on the future tax payer but I am all for a bit of fiscal and monetary responsibility. One solution that has worked very effectively in the past is to declare this a war. Say we were based in the UK we blame the 'bombings' and 'fires' on a bearded extremist cleric hiding in a semi in Boswell with unlimited WMD. On this basis we could issue war bonds to patriotic investors and then render them worthless through inflation.

We would have saved the economy and eventually rid the country of the vicious fiend without any deployment of WMD and the patriotic investor would have made a worthwhile sacrifice for his mother country. Can I be Finance Minister?

[waza]

Again this is exacty what I am talking about....................

Yes every number seems bad compared to where they were.

Does that mean they are bad compared to where they are going?

I have told my son at least 3 or 4 times in the past year & a half.......He shows me a few new homes & says.........Wow you cannot help but make money on this eh?

Actually that is exactly the point I was NOT making. In my view anyone like the CBO or the Fed who makes assumptions about where we are going based on where we have been is fairly foolish because where we were was Disneyland. However it is equally foolish to make assumptions of where we are going based on current demand for cars in the US which is the equivalent on a per capita basis to where we were in 1945 when noone could afford cars, noone could build cars, cars didnt work and for all I know there were hardly any roads.

So lets start making some sensible assumptions. Lets lay down a few facts. Two thirds of cars were bought on hire purchase, that's not going to happen for a while. One quarter of those were upside down meaning the value was less than the loan. They probably wont get a loan again. A car lasts approximately 16 years and cars sales have averaged about 16.5m. At current sales 9.3m annualised per month it would take 28 years to replace the fleet. Out of the last 50 years the car population has increased in every year apart from one - so historically car sales have run ahead of replacement ratio. One of the reasons the car population increased every year was population growth which is slowing, the other was financing opportunities. The life of a car will probably increase cos they are getting better.

So if we take all these facts together where might we be on a base case assumption:

Well historic demand numbers have clearly been overstated by...

1. quite a lot of lending, a lot of which looks pretty sub-prime

And there are a couple of factors going against the overall growth trend...

1. Demographics mean slower population growth and...

2. Better cars mean longer life..

So there is absolutely no way demand can return to historic levels. But all things being equal, it is not unreasonable to expect the same number of cars on the roads in ten years time as there are now with an average life of say 18 as opposed to 16 years. That would imply an annualized car sales rate of 13.7m compared to 9.3m now and 16.5m a couple of years ago. I dont think that is bullish or bearish, just reasonable. If you were a car manufacturer in the US you would consider it a disaster because if the shortfall fell on you it would mean bulldozing half your production. But then again I suspect that's going to happen sometime anyways.

My point is this how half all the US numbers look. You can criticize the analysis as much as you like but get the basic point. Which is that a 10% month on month increase in car sales may look like a green shoot but actually still leaves a shortfall in US equivalent to its entire manufacturing output. That even if sales increase 50% half its capacity may still be redundant and there is not much reason to believe that sales will increase beyond that. That if sales increased 30% next month I wouldnt get too excited on the basis that 30% of nothing is nothing. And that if sales were going to remain at these levels all fall for the foreseeable future the US would be having to undergo an economic collapse only paralleled by Cuba, Burma and Zimbabwe which as holder of the world reserve currency is almost inconceivable.

As far as I can see here there are two bunch of lunatics - the CBO and the FED who are basically arguing that in 3 years time cars sales will be 18m a year as the US returns to fairyland and a couple of guys on the internet that believe the US is heading back to the dark ages.

Hmmm sorry but your logic is based on on incorrect assumptions. Firstly, historially cars were designed and built far more robust, due to poor road surfaces ect. Nowdays, car are usually designed to last 10 year. In addition cars were more expensive, historically, than today. This is evident when one consider the the amount of hours, of paid employment require to purchase a new vehicle then and now. Lastly, the consumers of new vehicles has changed. More and more fleets of vehicles are purchased by corporations, companies and government departments compared with private citizens.

Edited June 12, 2009 by waza

[flying]

Again this is exacty what I am talking about....................

Yes every number seems bad compared to where they were.

Does that mean they are bad compared to where they are going?

Actually that is exactly the point I was NOT making. In my view anyone like the CBO or the Fed who makes assumptions about where we are going based on where we have been is fairly foolish because where we were was Disneyland.

So lets start making some sensible assumptions. Lets lay down a few facts.

My point is this how half all the US numbers look. You can criticize the analysis as much as you like but get the basic point.

As far as I can see here there are two bunch of lunatics - the CBO and the FED who are basically arguing that in 3 years time cars sales will be 18m a year as the US returns to fairyland and a couple of guys on the internet that believe the US is heading back to the dark ages.

Sorry my own point I see was badly stated also.

I should have said

Yes every number seems bad compared to where they were.

Does that mean they are GOOD compared to where they are going?

I agree with what you say about assumptions but not just the FED etc.......Seems everyone from the CNBC experts on up or down now say.............Ahhh Green Shoots or even when you said........

The problem is 3 months is going to tell you nothing because even I can tell you what is going to happen over the next 3 months which is that numbers are bound to improve.

The only thing we do Know is that we dont know.

We have opinions & assumptions yes.

I think none can make any assumptions much less hard stated facts about where we are going or what is going to happen in the next xxx amount of time.

I don't believe we are headed for the dark ages nor do I believe we are headed for a V shaped recovery. I see no green shoots in my world.....yet

They tell us their numbers show a slowing of unemployment number etc.

But that has not translated to anything tangible has it?

Are we producing anything new? Have we somehow un-diluted our hyper diluted currency? Have prices stopped dropping on hard assets?

Have they somehow cured the trillions in poisoned assets they told us existed & needed urgent attention..........sign the bail out?

The flood of foreclosed homes that are hitting the market now & will continue for some time will be sold for pennies on the dollars & that will help the

carpet baggers as always. ( ok well I guess some may call that a green shoot )

But that shoot has a terrible root/downside to it.

I personally have not seen any green shoots in my world.....Perhaps other folks have actual experience in theirs of the opposite?

When you say sensible assumptions & laying down facts............I have no ammo for that as I have said. In my actual world it does not exist ....yet

There are no sensible assumptions & definitely no facts in regards to our current situation.

I do not really care to criticize the analysts as I have no reason to believe anything they say....anymore

When you say........

So there is absolutely no way demand can return to historic levels. But all things being equal, it is not unreasonable to expect the same number of cars on the roads in ten years time as there are now

Personally I cannot even comprehend it at this point.

It is your opinion & it could happen. Factories could open here & hire millions the middle class could continue if they get jobs & buy cars......It is not impossible......but it is not fact either.

Again I am not a doom & gloomer but I am a realist & the reality of this situation has not shown me any reason to assume anything other than more of the same for now.

I would so love to be able to say soon that I do see something promising.

So far it seems we were headed towards a cliff with Bush at the wheel....Then they changed drivers & Obama seems to be flooring it towards a steeper cliff....

Edited June 13, 2009 by flying

[Naam]

I personally have not seen any green shoots in my world... Perhaps other folks have actual experience in theirs of the opposite? There are no sensible assumptions & definitely no facts in regards to our current situation.

that's all a matter of perspective and personal situation. as far as mine is concerned i see facts and therefore no special need for assumptions. these facts are the basis that enables me to make logical conclusions.

caveat! in context with "sitation" i don't use the words "our" but stick to "my" and "mine"

[flying]

that's all a matter of perspective and personal situation. as far as mine is concerned i see facts and therefore no special need for assumptions. these facts are the basis that enables me to make logical conclusions.

caveat! in context with "sitation" i don't use the words "our" but stick to "my" and "mine"

Goes without saying & is in fact just what I said.

But for someone to claim they know prices will rise in 3 months is against all your previous crystal ball/magic dog statements

Edited June 13, 2009 by flying

[Abrak]

Nowdays, car are usually designed to last 10 year.

Well I dont believe this figure but we will use it if you like. There are about 248m registered cars in the US. So for the number to be the same in 10 years time annual sales must average 24.8m compare to a current annualised monthly rate of 9.3 and a peak prior crisis of 18m. Doesnt sound right to me. 40% of US vehicles are over 10 years old but I suppose they were made in the old days when they really could make what we used to call rust buckets.

[12DrinkMore]

Dear fellow TV members and contributors to this historic Fred.

I think I got a possible solution for this madness called the financial crisis. As Fly and Midas and some others are mentioning that this situation we are in has not happened before, true. So unconventional situations need unconventional solutions, right?

Have you ever heard about the "Broken window theory" this has everything to do with demand and supply.

I assume most houses have a full insurance against calamities of all sorts (I think nuclear bomb damage is excluded).

How about burning down a large percentage of existing houses, either through riots or arson, something like that.

So company's like AIG have to pay out the insurance which the homeowner then will use to either build a new house or buy another one.

As the supply of houses will shrink the price will go up, more houses are needed so unemployed people can be trained to build new houses.

As the supply of skilled labour to build new houses is small an increase in wages can be expected.

The money that has been payed by the (future) taxpayer to bail out banks and insurance company's is given back to the people in this way and spend to grow the economy. Imagine what a boost in sales this would bring if also cars are burned down.

This is just a rough framework and need some more detailing, but I think this could be a solution.

Hey Alex,

I'm impressed, you must have a direct line to Obamah, because he is about to implement your solution

http://www.telegraph.co.uk/finance/finance...to-survive.html

US cities may have to be bulldozed in order to survive

[AlexLah]

mmmmm yeah that was sort of an idea that came up after a presentation that I did somewhere last year that showed I achieved a 20% higher production in a 30% smaller production facility...... After all it makes sense right, why waste space with empty buildings?

Same as with this new jet fighter I think production of all different parts is spread out over more than 20 different states and then all these different parts have to be transported to one assembly facility, it is such a waste of money.

So now with the likely re election of the guy in Iran, the fear can be kept alive and this together with the ongoing provocation of North Korea would brew a perfect opportunity to centralise the US manufacturing industry and retool those car factories into something more useful when the time is there. After all something similar happened in WW2........

And some other funny clip I would like to share.

I just love the reaction of the crowd....

[AlexLah]

And have a look here: http://wealth-ed.com/tag/financial-crisis/

Scroll down until half. for the clips

It is an interview with Warren.

In the third clip I noticed something.

Listen to what he is talking about and what he mentions.

[ding]

The US media is owned and run by corporations.

Folks are over-worked, very busy and overwhelmed. So they seek escape and distraction. So people are easy to fool and don't act in their best interest.

Both political parties in the US are manipulated by corporate interests. Democrats and Republicans have non-consequencial differences, mainly in social mores. Wealth and control are prime but side issues get media time.

High functioning people are easy to propagandize. They train easily and quickly. They have good memory. They retain and engrain info deeply. They resist new info that threatens what they already know because they have been praised all their lives for the things they know - therefore - if they think somethin is true, it MUST be true.

Historically, when the reality of their suspension of disbelief hits home with economic desperation they act out. We'll see if X-Box keeps the folks busy and football keeps them distracted.

[flying]

So now with the likely re election of the guy in Iran, the fear can be kept alive

Seems Acorn woks there now too.........

http://www.iranian.com/main/node

Edited June 13, 2009 by flying

[Abrak]

After the Riots and Lynchings have subdued we'll have to start minding our own F***ing Business and develop some self interest and realise we are not a World Power anymore. A Bit of protectionism not unlike the Thais use wouldn't go a miss too.

Angry ? Me ? Too ******* Right.

Isolationism, appeasement and navel gazing didn't serve England too well when Chamberlain tried that route. Maybe the UK isn't a world power but it is in its economic and social interests to ensure that lunatics do not operate terrorist bases in Afghanistan and that it's energy suppliers in the middle east are not interfered with. As well, moral values are worth something. I wouldn't be too hard on the UK because it did the right thing at the time.

Protectionism? Bit too late for that. The house isn't just on fire, it burnt down in the 70's under Labour rule and the embers are cold. The British people gave up on their manufacturing industries years ago when they like everyone else in the west embraced the crappy but cheap goods that flowed out of asian and latin american sweatshops. I remember when I was a kid, my grandfather getting me a pair of oxfords and telling me that when he was a boy he had them and that the British made the best shoes in the world. Are there any shoe manufacturers left to protect now? I still have a woolen RAF scarf one of my family members used in WWII. Little bit worn and shrunk, but I doubt a chinese manufactured scarf would have lasted 65 years or so.

I am not sure that a lack of protectionism hasnt actually helped the UK. If you look at the car manufacturing industry it is producing at least 20% more cars than it was 20 years ago but of course these are mostly foreign owned plants. The UK encouraged this and I suspect manufacturers didnt want to set up in countries like Germany and France which would favour their domestic car manufacturers. The Proton has cost Malaysia a fortune and been very much to the benefit of Thailand. The EU is highly protectionist, if it isnt import duties, then it is direct subsidies to uncompetitive industries like farming.

I guess looking at the UK current account there must have been a general decline in manufacturing but the size of the deficit also reflects, say in 2007/2008, excess consumer demand from the asset bubble. Economists also (maybe rather optimistically) see the decline in manufacturing as 'crowding out' by the success of the capital account - namely the growth of service sectors such as banking (!) or football and presumably the attractiveness of the country to billionaires to bring their ill-gotten gains. So despite constant C/A deficits sterling has actually appreciated to the further detriment of manufacturing competitiveness over the years.

[12DrinkMore]

I guess looking at the UK current account there must have been a general decline in manufacturing but the size of the deficit also reflects, say in 2007/2008, excess consumer demand from the asset bubble. Economists also (maybe rather optimistically) see the decline in manufacturing as 'crowding out' by the success of the capital account - namely the growth of service sectors such as banking (!) or football and presumably the attractiveness of the country to billionaires to bring their ill-gotten gains. So despite constant C/A deficits sterling has actually appreciated to the further detriment of manufacturing competitiveness over the years.

Yep, Labour has seen the growth of the so called service industry as a replacement for the messy manufacturing industry. After all, the banking industry doesn't pollute, doesn't require huge numbers of union organised employees, doesn't require the purchase of commodities and generates humongous profits out of thin air. In fact, it must be the most efficient means of wealth production that the human has ever invented. Pity that so little actually trickles down to the general population.

No wonder there are suddenly billions and trillions of tax payers future earnings available to bail out the odd hiccup along the way. We need this little train to keep us all running into the next century. Once it has been put back in the tracks, we will be saved!!!!

Sterling was strong for two reasons

- a misguided idea that the UK economy was strong

- a much higher interest rate compared to the USD, EUR and JPY.

Once Brown slashed the interest rates, then Sterling collapsed.

[teletiger]

A few things for Osborne to consider, when he takes over from Darling next year.(?)

Ten principles for a Black Swan-proof world

By Nassim Nicholas Taleb

Published: April 7 2009 20:02 | Last updated: April 7 2009 20:02

1. What is fragile should break early while it is still small. Nothing should ever become too big

to fail. Evolution in economic life helps those with the maximum amount of hidden risks – and

hence the most fragile – become the biggest.

2. No socialisation of losses and privatisation of gains. Whatever may need to be bailed out

should be nationalised; whatever does not need a bail-out should be free, small and riskbearing.

We have managed to combine the worst of capitalism and socialism. In France in the

1980s, the socialists took over the banks. In the US in the 2000s, the banks took over the

government. This is surreal.

3. People who were driving a school bus blindfolded (and crashed it) should never be given a

new bus. The economics establishment (universities, regulators, central bankers, government

officials, various organisations staffed with economists) lost its legitimacy with the failure of the

system. It is irresponsible and foolish to put our trust in the ability of such experts to get us out

of this mess. Instead, find the smart people whose hands are clean.

4. Do not let someone making an “incentive” bonus manage a nuclear plant – or your financial

risks. Odds are he would cut every corner on safety to show “profits” while claiming to be

“conservative”. Bonuses do not accommodate the hidden risks of blow-ups. It is the asymmetry

of the bonus system that got us here. No incentives without disincentives: capitalism is about

rewards and punishments, not just rewards.

5. Counter-balance complexity with simplicity. Complexity from globalisation and highly

networked economic life needs to be countered by simplicity in financial products. The complex

economy is already a form of leverage: the leverage of efficiency. Such systems survive thanks

to slack and redundancy; adding debt produces wild and dangerous gyrations and leaves no

room for error. Capitalism cannot avoid fads and bubbles: equity bubbles (as in 2000) have

proved to be mild; debt bubbles are vicious.

6. Do not give children sticks of dynamite, even if they come with a warning . Complex

derivatives need to be banned because nobody understands them and few are rational enough

to know it. Citizens must be protected from themselves, from bankers selling them “hedging”

products, and from gullible regulators who listen to economic theorists.

7. Only Ponzi schemes should depend on confidence. Governments should never need to

“restore confidence”. Cascading rumours are a product of complex systems. Governments

cannot stop the rumours. Simply, we need to be in a position to shrug off rumours, be robust

in the face of them.

8. Do not give an addict more drugs if he has withdrawal pains. Using leverage to cure the

problems of too much leverage is not homeopathy, it is denial. The debt crisis is not a

temporary problem, it is a structural one. We need rehab.

9. Citizens should not depend on financial assets or fallible “expert” advice for their retirement.

Economic life should be definancialised. We should learn not to use markets as storehouses of

value: they do not harbour the certainties that normal citizens require. Citizens should

experience anxiety about their own businesses (which they control), not their investments

(which they do not control).

10. Make an omelette with the broken eggs. Finally, this crisis cannot be fixed with makeshift

repairs, no more than a boat with a rotten hull can be fixed with ad-hoc patches. We need to

rebuild the hull with new (stronger) materials; we will have to remake the system before it does

so itself. Let us move voluntarily into Capitalism 2.0 by helping what needs to be broken break

on its own, converting debt into equity, marginalising the economics and business school

establishments, shutting down the “Nobel” in economics, banning leveraged buyouts, putting

bankers where they belong, clawing back the bonuses of those who got us here, and teaching

people to navigate a world with fewer certainties.

Then we will see an economic life closer to our biological environment: smaller companies,

richer ecology, no leverage. A world in which entrepreneurs, not bankers, take the risks and

companies are born and die every day without making the news.

In other words, a place more resistant to black swans.

The writer is a veteran trader, a distinguished professor at New York University’s Polytechnic

Published in the FT recently, but written before the present crises.

Regards.

[Abrak]

I am not going to argue anymore about green shoots or why we will see a quarters growth out of the US this year because it is too boring. It is forecast by 85% of economists, there good reasons for it, and it will obviously be a surprise if it doesnt happen.

I will make a slightly more interesting argument though which while we might see 1 or 2 quarters of growth, I believe the US will slip back into recession next year and, in fact, may not grow at all. To the extent there should be at least 1 quarter of growth this year, I would expect 1 or more of decline next. So the recession will be W shaped rather than V. This is relatively unusual in that only 6 of 30 recessions (some were very shallow) were W shaped last century, however this is obviously not your average recession.

The reasons are fairly simple (and probably why some people dont believe there will be the growth in the first place) and that is because the growth that will come through will be an inflationary sleight of hand while there is plenty of evidence out there that the fundamentals for a sustainable real recovery are not in place and there are still powerful deflationary forces not for prices but for growth.

It seems if you understand how the bounce in growth is created you should see why it appears unsustainable.

1) End of destocking cycle (if Japanese exports fall 50% over 6 months there must be destocking)

2) Unprecedented fiscal deficit creation (14% of GDP twice the biggest since the war and now structural)

3) Unprecedented monetary expansion QE 0% short term rates, rising inflation expectations.

4) Recession has already been long and deep and many numbers are far below normalised (normalised not being where they were in the past but where they should be eventually.) There should be some pent up demand.

Point 4 may need an explanation. 6 months ago I was told there were 3 types of US consumer 1. who had lost their jobs or seen their mortgage go negative and couldnt spend 2. who feared losing their job and wouldnt spend and 3. had cash but wasnt spending because it looked indecent. With the absence of chaos and fear, 0% interest rates and rising inflation expectations presumably many of 2 and 3 (who have been waiting) say 18 months to buy may well start spending and might even give a misleading picture of recovery. For instance, car sales one month may rise to 12m this year that would be a 30% increase on now (but below average 2008 and well below 18m peak) but they could easily be back down at 10 or 11m by the end of next year. This is why recessions are called V shaped because they often go from -2% growth to +7% in 2qs.

This will not happen this time and I think the economy should slip back into recession. The underlying reason is simple - US economic growth was built on an ever increasing amount of private sector debt and wont recover until private sector lending increases. This isnt going to happen for several years because policy is to substitute private debt by public debt and the banking sector is crippled. All that is happening is that private debt is being crowded out. Worst still the more the policy is persued the less effective for growth or lack of it, it will be.

First of all, consider the size of the numbers - mortgage debt increased US$1trn a year from 2000 to 2008, public sector debt will be US$2trn this year (if the Chinese and Japanese absorb the same as last year, US$500bn, the banks are left with US$1.5trn). So the public versus private debt looks like this.

Now as that graph doesnt really say that much here are some numbers.

Households Businesses State Federal (annualised growth)

1998..... 0.4 5.1 1.8 24.2

1Q 1999 -1.1 -0.3 4.9 22.6

Based on US$33.9tr household, US$11.9tr business and US$9trn Government (Domestic only). Note even falling GDP is dependent on a net buildup of debt. What is needed for private sector lending to recover is a fall in interest rates - the Fed Funds rate fell for 3 years after the last two recessions boosting the recovery. But the Fed funds rate is effectively zero and longer term rates are rising alarmingly as a result of Government issuance.

http://mortgage-x.com/x/ratesweekly.asp

Look at the rise in mortgage rates over the last 6 weeks. Clearly this only increases private sector deleveraging.

Now Bernanke talks about controlling rates through QE - i.e. buying government issuance itself - but the policy is so obviously inflationary I dont see why it would bring down nominal rates. Finally continuous large fiscal deficits become ever less effective to promoting growth. The IMF estimates that when Government debt is 60% of GDP they dont have much effect at all on the basis that people spend or invest less because they will be taxed more in the future.

So I think this is a vaguely solid argument - you cant build real recovery on a large fiscal deficit and high nominal rates - so if there is anyone out there who does think that the recovery we will probably see in the next 6 months is sustainable, I would like to know why. I am surprised that most people are forecasting a sustained recovery.

BTW there is an extent to which this argument is a bit like green shoots - if you believe in it long enough it must come true. To some extent US growth has simply switched from becoming dependent on ever increasing private sector debt to ever increasing and unsustainable public sector debt. Ultimately though they are one and the same as someone must pay for public sector debt. As a growth model it seems bankrupt - it didnt generate any growth without MEW between 2000-2006 when debt was increasing, so I dont see the growth argument now when increases in debt levels simply result in higher interest rates which choke off the growth the debt is aimed to create.

Edited June 14, 2009 by Abrak

[flying]

I am not going to argue anymore about green shoots or why we will see a quarters growth out of the US this year because it is too boring. It is forecast by 85% of economists, there good reasons for it, and it will obviously be a surprise if it doesnt happen.

Based on that 85% alone is a good reason it WILL NOT happen.

Economist................pfffft

Here are the facts for the 1st Q

GDP Q1

I believe the US will slip back into recession next year and, in fact, may not grow at all.

My crystal ball still reads Depression coming no matter how hard I shake it.

3.9% more drop & it will be official

BTW there is an extent to which this argument is a bit like green shoots - if you believe in it long enough it must come true.

If a asphalt parking lot sprouts a few weeds I would not call it a lawn.

Nor would I think with time it would become a lush field

One last thing I wonder if anyone really thinks that a slowing of the rising unemployment figures

somehow equals a increase in employment?

Seems like many of the economist??? & talking heads on TV actually believe that.

Does the loss of jobs have any choice but to slow?

Are there are less & less jobs to lose?

Edited June 14, 2009 by flying

[Abrak]

Does the loss of jobs have any choice but to slow?

Are there are less & less jobs to lose?

As you point out one of the reasons the numbers wont get worse is because they are so bad.

Jobs are actually a bad example because it always lags a recovery by about a year. In the last recession it wasnt until about three years after the end of the recession that unemployment started coming down. I cant see any reason for unemployment to do anything but increase for the foreseeable future. That is why I dont understand the consensus forecast that sees unemployment peaking mid next year.

China, is a huge drag, at least 1% a year I would guess.

[flying]

As you point out one of the reasons the numbers wont get worse is because they are so bad.

Yes but I never said they were done

They are slowing as many have ceased to exist.

But we are in no way done as far as I can see it can in fact get worse.

Edited June 14, 2009 by flying

[flying]

And, of course, I said, instead of putting Bernie Madoff in jail, we should just make him Secretary of the Treasury. Because he's got a lot of experience, exactly the kind that we need, running a Ponzi scheme.

Because the Chinese just mentioned yesterday that they were getting a little concerned about all the money they loaned us and that just maybe we won't pay them back. I'm sure they're a lot more than just a little concerned, because that's what they said publicly. Imagine what they're saying privately.

Because they know we're not going to pay them back. Of course we're not going to pay the Chinese back their money. It's impossible. We can't. We can't possibly.

Can you imagine? Can you imagine if President Obama, giving the following type of speech to the American citizens.

He'll give a national televised address and say, "My fellow Americans, I've got a little news for you today. We're going to have to have a massive, across-the-board tax increase on average working Americans. Any American that still has a job is going to have to pay much higher income taxes.

"And, as a matter of fact, we're going to have to cut Social Security across the board. Forget the Social Security check, we're going to have to reduce it. And remember all my plans about more education and health care for everybody and energy independence, we got to put all those plans on hold, because the Chinese need their money.

"We borrowed a lot of money from the Chinese and we're good for our debts. They worked hard for that money and they loaned it us to and we're going to pay it back. And that's going to require a big sacrifice on our part."

Does anyone think that we're going to do that? What are they, kidding me?

Do you know what we're going to tell the Chinese? We're going to say, "You guys are predators, predator lenders. We need a modification program. We need a cramdown on this. You never should have lent us all this money. You know we can't pay it back. It's not our fault."

The Chinese know this. The Chinese, they can't even vote in our elections. Why are we going to care what they think? We're going to tax voters to pay non-voters? So the Chinese know they're in this box.

The US government, we don't pay our bills. We're like Bernie Madoff. People loan us money. How do we pay it back? We borrow more.

But the stimulus, what is it that the government is trying to do with the stimulus? The government is trying to recreate the conditions that led to the crisis. Because when they talk about stimulating the economy, they're not talking about stimulating economic growth. They're talking about stimulating spending.

They want us going back to the auto showrooms, back to the malls, and buying more stuff. And they want us going deeper into debt to pay for it. And if we're not willing to accumulate the debt on our own, well, then the government will do it for us. As if this is a secret.If they could just spend enough money, then the economy's just going to magically grow again. And that's all nonsense. The only reason it worked before — and it really didn't work — was because we were able to borrow the money from the rest of the world and spend it.

And we were able to live in the delusion that we were getting richer even as we were getting poorer. Because we looked at our asset prices.

We were looking at real estate and stock prices going up, and we said, "Hey, we're actually getting wealthier!" — even as we were getting poorer, because we were spending money instead of saving money. But — and as we spent money, we counted that spending as GDP. And, so, as long as our GDP was rising, we thought our economy was growing.

But the whole time our GDP was actually going up, we weren't measuring real economic growth. We weren't measuring how much wealth we had been destroying or dissipating. We were simply spending. And we thought we were okay because some appraiser said that our house was worth more, or the stock market was still going up.

Long but good read

http://mises.org/story/3493

Edited June 15, 2009 by flying

[Abrak]

But the stimulus, what is it that the government is trying to do with the stimulus? The government is trying to recreate the conditions that led to the crisis. Because when they talk about stimulating the economy, they're not talking about stimulating economic growth. They're talking about stimulating spending.

They want us going back to the auto showrooms, back to the malls, and buying more stuff. And they want us going deeper into debt to pay for it. And if we're not willing to accumulate the debt on our own, well, then the government will do it for us. As if this is a secret.If they could just spend enough money, then the economy's just going to magically grow again. And that's all nonsense. The only reason it worked before — and it really didn't work — was because we were able to borrow the money from the rest of the world and spend it.

Policy is really a case of putting out the fire with gasoline. When the structural problem is caused by overspending, undersaving created by an asset bubble, zero interest rates are designed to reflate the under problem. And a bit like a druggy, more drugs might make him feel better but it certainly wont cure him.

We were looking at real estate and stock prices going up, and we said, "Hey, we're actually getting wealthier!" — even as we were getting poorer, because we were spending money instead of saving money. But — and as we spent money, we counted that spending as GDP. And, so, as long as our GDP was rising, we thought our economy was growing.

But the whole time our GDP was actually going up, we weren't measuring real economic growth. We weren't measuring how much wealth we had been destroying or dissipating. We were simply spending. And we thought we were okay because some appraiser said that our house was worth more, or the stock market was still going up.

Some of the work that Alan Greenspan has done on this is very interesting.

The theory behind mortgage equity withdrawals is an odd one. Shiller has shown a long run correlation between income and housing prices. GDP grows annually at a little under 3% real (well it used to) and the average real yield on bonds has been 2.9% over the last 100 years. Obviously the mortgage rate is higher, so with an interest e only mortgage (50% of the total) you are more likely to destroy rather than create equity in the medium term.

Of course a bull market in prices made people think otherwise - between 2000-2005 the average American household was supplementing his income by around US$2500 p.a. through equity withdrawals. As a result he really wasnt getting richer, in 1960 equity made up 70% of home owners homes by 2006 it made up 50% despite the bull run in prices. If you were to assume a 40% drop in prices since then, equity now makes up 20%. Meaning that the average home has about the same amount of equity as 1960 and around 10x the debt.

Edited June 15, 2009 by Abrak