Tag Archives: Stock Market Panic

Good News in the Bad News

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wind-turbine-manufacture

The markets got a bit spooked today by the unexpected drop in GDP for the final quarter of 2012. But buried in the numbers are signs of a positive transition from a war to a peace economy.

The drop in gross domestic product was driven by a plunge in military spending, as well as fewer exports and a steep slowdown in the buildup of inventories by businesses…Despite the overall contraction, there was underlying data in the report suggesting the economy is not on the brink of a recession or an extended slump. Residential investment jumped 15.3 percent, a sign that the housing sector continues to recover, for one. Similarly, investment in equipment and software by businesses rose 12.4 percent, an indicator that companies are still spending.

I continue to be very optimistic about the direction of American policy as we emerge from our eight year Interregnum. Imagine if the 11 million undocumented workers emerged from the underground (cash) economy and started paying taxes. What would that do to the actuarial calculations of Social Security and Medicare? Imagine if Lockheed Martin started to manufacture wind turbines instead of fighter jets.

The greatest task of the next ten years will be Economic Conversion, the process of converting from a military economy to a civilian/peace economy. The economist Seymour Melman, who did the most important work on this subject, noted that the task ahead of us will not be easy.

“The problem of conversion from military to civilian work is fundamentally different now from the problem that existed after World War II. At that time, the issue was reconversion; the firms could and did go back to doing the work they had been involved in before the war. They could literally draw the olds sets of blueprints and tools from the shelf and go to work on the old products. At the present time, the bulk of military production is concentrated in industries, firms, or plants that have been specialized for this work, and frequently have no prior history of civilian work”

A larger part of the problem will be that the Military Industrial complex is situated deeply in the Red States, particularly Texas and the Deep South. Alex Bowles has pointed out to me that this could create even more Anti-Obama anger. Any attempt to pacify the South with some sort of Government aid to ease the Conversion, will be met with resistance.

The upshot is the mollifying the GOP will be easier said than done. Their response to the last election (“We’ll just rig the next one”) makes their contempt for both outsiders and democracy explicit. They are becoming, in a very real sense, un-American in that the overarching ideal of Government of, by, and for the people is becoming the focal point for organized rage directed at both the government and the people.
As Alex points out, even the Republicans most ardent anti-tax corporate benefactors will not be comfortable with the right wing pitchfork brigade. Fox’s firing of Sarah Palin is just one sign of the corporate pull back from what Bobby Jindal calls “the stupid party”.
As many of you know, I have had an open battle with some of the Libertarians who commented on this blog, including John Papola. But I must confess I found myself agreeing with the central argument (but not some of the details) of this piece he wrote for Forbes entitled “Think consumption is the engine of the economy, think again”.
Increased investment drives economic growth, while retrenched investment leads to recession and reduced employment–and it always has. Those who blame our stagnation on a lack of consumer demand rely on a toxic brew of dubious data and dangerous theory.
As I have argued for years, if our whole aim of the recovery is just to build “mall fever” again, so people hock their homes and their lives to buying the latest flat screen–then we’re screwed. As I wrote in 2009,
It seems to me that the American public has already made a shift to a culture in which spending at the mall will be a lot less important and yet the politicians are acting like their job is to restore the status quo ante–a world the public no longer cares about. Larry Summers talks about getting the big banks lending again, but what business wants to borrow when there is so much excess capacity? There are too many damn malls. Too many car dealerships. What person in their right mind would start a new retail clothing business today?
Papola points out that GDP is a terrible way to gauge the health of an economy and Rick Turner has been saying the same thing for years. This transition from a consumption and debt economy to a savings and investment economy is going to be painful, but when we emerge from this Economic Conversion we will be a much healthier society.

 

Machines are in Control

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We have been talking here for a while about the perils of automation. Yesterday a “rogue computer algorithm” almost crashed the whole stock market.

“The machines have taken over, right?” said Patrick Healy, the chief executive of the Issuer Advisory Group, a capital markets consulting firm. “When events like this happen they just reaffirm that these aren’t investors, these are traders.”

The errant trades began hitting exchanges almost as soon as the opening bell rang and came from a single New Jersey broker that specializes in computer-driven trading, the Knight Capital Group. Shares of more than 100 companies, including big names like Alcoa, Citigroup and Ford suddenly spiked up or down.

One has to ask the question of whether these “robots gone wild” are distorting the whole purpose of the capital markets to such an extent that we have to re-imagine the stock market. The first and most obvious move is to treat short term capital gains (stocks held less than one year) as ordinary income for tax purposes. I believe this would slow down the High Frequency trading, which has turned Wall Street into a casino that is unfriendly for long term investors.

Obviously the implications of “lights out algorithms” in many other fields are equally troubling. I have mentioned how ad networks are using algorithms to place ads on Pirate Networks in a way the advertiser never intended. Of course all of this bad conduct could be stopped. We just need to wake up before the computers start really causing havoc.

 

Global Stagnation

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It has been my contention since 2007 that global capitalism was entering a period of stagnation that could not be cured by the temporary fix of lowering interest rates. Yesterday’s grim unemployment report in the U.S. only compounded the problems in the rest of the world.

The report on American jobs added to the global pall that has deepened with Europe’s debt crisis and slowing growth in China and India. Global financial markets, weak in early trading on Friday, sank further on the report. The Dow Jones industrial average lost 2.22 percent, or 274.88 points, wiping out its gains for the year, and the main index of the German stock market closed down 3.4 percent.

The American economy since Ronald Reagan first started to push Supply Side economics (sometimes know as trickle-down economics) has increasingly skewed gains to the top 1% and flattened middle and lower class wages. In such an atmosphere the engine of consumer spending could only be fueled by easy consumer credit mixed with aggressive marketing efforts—the classic “keeping up with the Jones’s” routine. Fiscal stimulus depended mostly on aggressive military spending which seemed to grow even in the face of the collapse of the Soviet empire. The financial sector, which was once restricted to aiding the manufacturing economy, gradually became the driving force in the economy. Speculative finance became so important to keeping the dogs of depression at bay, that the Lender of Last resort–The Fed–essentially ended up becoming the backstop to the most egregious kind of derivative trading, pouring hundreds of billions into Wall Street investment banks. Continue reading →

Jamie Dimon’s Gift to Obama

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The biggest political problem Obama has with both the Progressives and the Libertarians is that he pussied out on the Wall Street Bailout. No one went to jail, unlike the Savings and Loan Crisis of the 1980′s. We paid out the banks 100 cents on the dollar for billions of essentially worthless Credit Default Swaps and other forms of insurance written with no collateral behind it.

This week, Jamie Dimon gave Obama a do over. Obama needs to spend the next six months in a populist crusade to enact the Volker Rule is it’s strictest form. A form that would have banned the obviously phony “hedge” that JP Morgan is now going to loose $3 Billion on.

“The timing, prices and particular choice of index that people are saying that J. P. Morgan used seems to support the view that there was more to the trade than just a hedge,” said James Parascandola, a veteran credit-default-swaps trader formerly with MF Global Holdings Ltd. and Barclays PLC.

Already, Republicans like accused inside trader, Representative Spencer Bachus, the most powerful Republican on finance, are coming to Jamie Dimon’s defense.

“Even with this loss, I believe they’re one of the most profitable financial institutions in the country,” Mr. Bachus said at a House hearing on Wednesday morning. “There is no risk from this loss to depositors or to taxpayers.…They remain a very profitable, viable institution.”

Never mind.

For Obama, this is a Teddy Roosevelt moment. Roosevelt gave a speech in Provincetown, Massachusetts right after the Panic of 1907, which eerily mimicks the crash of 2008. He called out “the malefactors of great wealth” and went on to say,

“. . . [these men] combine to bring about as much financial stress as possible, in order to discredit the policy of the government and thereby secure a reversal of that policy, so that they may enjoy unmolested the fruits of their own evil-doing. . . I regard this contest as one to determine who shall rule this free country—the people through their governmental agents, or a few ruthless and domineering men whose wealth makes them peculiarly formidable because they hide behind the breastworks of corporate organization.”

For Barack’s whole administration he has followed his Harvard instincts and stuck with The Establishment. Thats why Geithner and Summers were his economic team and Gates was his defense team. Now, like Teddy he has to risk being called a class traitor and cast off his establishment team in the hopes that he could fulfill Tom Paine’s promise of our Revolution, “We have it in our power to begin the world over again.”

What is remarkable is that Obama essentially can fulfill this promise by doing nothing.

If he is able to defend the laws he already passed—the Affordable Care Act, the Women’s Equal Pay laws and the Sequester passed in the summer of 2011—we will have “begun anew”. Why?

Let’s start with the sequester.

Since 1955, Progressives have tried to cut the Military Budget, without success.But if nothing changes, starting in January the Defense Budget will take huge cuts.

For the Pentagon, that would mean about $50 billion a year in less defense spending from fiscal year 2013 to FY2021, according to the Congressional Budget Office. The CBO baseline already assumes roughly $450 billion in reduced defense outlays, coming from provisions of the Budget Control Act.

Lindsay Graham, Mr. Defense Pork is outraged at the very thought of the cuts.

“I have heard from people after every engagement: ‘why do you need this military?’ only to have to ramp up, go to war without the equipment, send the (National) Guard off with a shell of a force. What happens if China gets bolder, Iran gets a nuclear weapon, (or) we have to go into Yemen?”

I’m sure if Mitt Romney becomes President, Lindsay won’t have to worry.

So what about Bernanke’s notion that the Sequester will drive us off a “Fiscal Cliff” ? Well due to the brilliant negotiating by Barney Frank in the conference committee, there are no cuts to Medicare or Social Security in the Sequester. So does the “fiscal cliff” arrive because we are cutting the military industrial complex? Highly doubtful. The weapons systems now being built are on very long cycles and it is doubtful this employment would slow down. So what happens when the Bush Tax Cuts expire (the other part of Bernanke’s fiscal cliff)? Quite frankly, very little. The rich are not going to stop buying $100 million paintings, just because their income tax rate went up 4%.

So this is all Barack has to do. Push through the Volker Rule and threaten to veto any change to the Budget Control Act of 2011 or the Affordable Care Act.  An America with a radically reduced military budget, a decent and fair universal health care system and a financial sector under control would be able to face the future unburdened with Neoconservative fantasies of being the world’s cop and with an economy not built around speculation but around production and services sold world wide.

Now all Barack has to do is get reelected.

Money, Power and Wall Street

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You owe it to yourself to watch the new Frontline two part special, Money, Power and Wall Street. It is as fine an understanding of where we are and how we got here as anything in our media system today. Part Two comes on next week, but already the major themes are becoming clear.

  • Complexity-No one except the “Quants” (the mathematical geniuses in the Big Investment Banks) who designed the Credit Default Swaps that grew to a $50 Trillion market in 8 years, knew how the securities operated or how risky they really were.
  • Transparency-The only reason the spreads were so big on the CDS market was that it was a totally Dark Market. There was no transparency. No one could tell the real values of the securities.
  • The Committee to Save the World-Rubin, Summers, Paulson, Blankfein, Dimon and Geithner were all part of a club that was going to make sure that none of their members would have to take a haircut on all the crap they owned. The Democrats are just as guilty as the Republicans that this happened.

If Obama’s second term looks like Teddy Roosevelt’s second term and he turns into the trust buster populist President, then eventually this wrong doing will be punished. Until then, watch this show and get really pissed off.

The Road Ahead

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As Merrill Lynch brokers arrived at their desks this morning they were greeted with an urgent memo as to how to deal with the possibility that the stock exchange might not open this morning. Europe and Asia had crashed over night and the futures were showing a possible 1000 point fall at the open, which would trigger curbs that would keep the market from opening. Talk about panic.

It didn’t happen and now the market is fighting back from a 500 point drop. My guess is the fear is twofold. First to hear Greenspan admit that the current crisis “didn’t fit his model” was not exactly confidence building. As Vince Farrell wrote this morning.

Greenspan was “shocked” that managements of financial institutions didn’t look to their own self-interest to protect the capital of their firms. The “shock” is at best naive. Companies don’t have self interest, people do. Since huge bonuses were paid to reward short-term results, the investment bankers were motivated to put out what would sell and sell today. The devil take tomorrow. Protecting the balance sheet was senior management’s job and there was a collective failure on that score. He also bemoaned the fact that the models that had been so reliable turned so bad. The models he used had been compiled during the good times. They should have been stress-tested for bad times. He as much said so. “Beware of geeks bearing models,” Warren Buffett has said. Models pre-suppose rational behavior.The geeks don’t know how else to proceed. Continue reading →

Credit Logjam

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As I said on Oct. 13,the massive injections of liquidity by governments around the world are beginning to calm the markets. The credit markets, which is all I’ve been paying attention to, are beginning to ease, with three month LIBOR falling to around 4%. This is the first real sign that interbank lending is beginning to take place.

No one should mistake this for a sign that the real economy is out of the woods, but it does mean that the stock market can go back to functioning on real valuations of earnings, not panic and fear. Part of the reason there was such a consistent downdraft in the market for the last two weeks is that tomorrow is the settlement day for the billions of Lehman Bros. Credit Default Swaps. Many hedge funds that wrote swaps on Lehman debt had to raise cash in order to pay up to the mortgage bond holders. With that out of the way, maybe things will settle down for a while. However the task ahead of us is great. Vince Farrell notes the following.

In 1980, total household debt was equal to 50% of Gross Domestic Product (GDP). Today, household debt is about 100% of GDP. Looked at from a different angle, since 1983 debt has grown at a rate of 8.9% a year and GDP at 5.9% (from Jim Grant in the Wall Street Journal). From 1983, debt has grown a total of $55 trillion, while GDP grew by about $11 trillion.

Back in July, I wrote that we would inevitably have to “return to the mean”. To go back to the 1980 level of household debt will be incredibly painful for an economy that is 70% based on consumer spending.

 

Adjusting to Hard Times

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The next year is going to cause a major dislocation in many households and on one level it’s not going to be pretty. Jan Hoffman relates the tale of Wendy Postle, a middle class mom with two entitled teenagers.

This year her husband’s 401(k) savings are evaporating. Medical bills are nipping at the couple’s heels. Gas prices are still taking a toll. Mrs. Postle recently decided that although she and her husband had always sacrificed their own luxuries for Zach, 13, and Kaitlyn, 15, the teenagers would now have to cut back as well.

“No” could no longer be the starting gun of family fights. It would have to be an absolute.

“I tried to tell Kaitlyn, ‘We’ll get the Hollister jeans at a thrift store,’ ” Mrs. Postle recalled. “She got angry and said: ‘That’s gross! Other people wore them!’ ”

Indulged. Entitled. Those labels have become hot-glued to middle-class and affluent teenagers born after the last major economic downturn, in the late 1980s. They were raised in comparatively flush times by parents who believed that keeping children happy, stimulated and successful, no matter the cost, was an unassailable virtue. A 2007 study by the Harrison Group, a market research firm in Waterbury, Conn., found that nearly 75 percent of parents caved in to their children’s nagging for new video games, half within two weeks.

A generation of consuming kids are getting confronted with a word they never heard–”No”. This sense of getting back to the basics will involve a cultural shift. But if life does get simpler, research shows that it also might get healthier.

Economic studies suggest that people tend not to take care of themselves in boom times — drinking too much (especially before driving), dining on fat-laden restaurant meals and skipping exercise and doctors’ appointments because of work-related time commitments.

“The value of time is higher during good economic times,” said Grant Miller, an assistant professor of medicine at Stanford. “So people work more and do less of the things that are good for them, like cooking at home and exercising; and people experience more stress due to the rigors of hard work during booms.”

Delusional George Bush

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The Times has a curious article up about our President and his response to the Crash. It is as if he views this crisis as an “Act of God”, which he had no more responsibility for than a hurricane.

Now, as he spends his last months in office trying to avert a global economic collapse, Mr. Bush has been telling people privately that it’s a good thing he’s in charge.

“He said that if it was going to happen at all, he was glad it was happening under his presidency, because he had a good group of people in D.C. working for him,” Dru Van Steenberg, one of several small-business owners who met with Mr. Bush in San Antonio earlier this week.

Could he really be so delusional to think that his reckless borrowing and deregulatory policies had nothing to do with the crisis?

I’m not a psychiatrist, but I know there must be a name for this condition.