Friday, July 31, 2009

The China Crisis Continues To Metastasize - China's Wholesale Price Collapse Continues To Pick Up Momentum

This is a good week for today's post. The U.S. and China's political leaders are meeting to map out the world's economic future. Or so they think. Wonderfully worded speeches and poses for the camera. All for naught. It seems they forgot to invite the other 5.999999920 billion of us who will really determine the world's future. A future that will be drastically different than either country's politicians could possibly fathom.

This week Secretary Geithner thanked the Chinese leadership for stimulating their economy in an effort to recreate global harmony aka globalization. A statement that clearly tells us just how completely unaware Mr. Geithner truly is to the permanent changes that have developed in the global economy. What were some of Mr. Geithner's primary points of concern at this summit? Intellectual property rights? Manipulation of the yuan? Manipulating export subsidies that cost American companies profits and American workers jobs? The largest counterfeiting operations on earth costing American companies hundreds of billions of dollars? Of course not. We embrace free markets. Instead Mr. Geithner is seeking the liberalization of the Chinese financial system and the opening of this particular market to foreign firms. ie, Wall Street. Financial liberalization? Haven't we already lived this nightmare? And now we wish to make this the centerpiece of our policy discussions with China? It's comforting to see Wall Street fraud plays a primary role in shaping our country's trade policy as well. In more ways than anyone could likely imagine.

Well, another reason this is a perfect week is because many of our favorite clowns pumping investment in China over this last cycle have been on the media tour and are beginning to feel their oats again. How could they not be giddy? The Chinese stock market is up 100% since November. Bliss is just around the corner. It's right there. Hiding right behind ignorance.

The focus of this blog has been generally different than most when it comes to economics. That is because experts, analysts, economists and the prevailing wisdom of the status quo are well too focused on country-specific economic analysis. Such an analysis is both faulty and contains substantial forecasting blind spots. How can anyone rely upon a model which doesn't reflect appropriate dynamics? Oh, I'm sorry. I forgot. That's the very reason we are in this mess. Faulty models.

We are in a global economy. No macro perspective has any substantial validity when viewing a country-specific analysis in a vacuum. But, in fact, this is still what we see. As an example, this incessant focus on housing in the U.S. is ridiculous. Housing is one hell of a mess but it is completely irrelevant to the root cause analysis of this crisis or where the global economy is headed.

The Great Depression wasn't a country-specific event either. It was caused by globalization dynamics still not understood to this day. This lack of appreciation for the global nature of today's crisis has given us an opportunity to accurately anticipate far more global outcomes to this crisis than any economist or expert. While the final outcomes have not yet revealed themselves, every macro analysis or perspective we have discussed on this blog continues to develop as we have anticipated. And none of those perspectives have changed over the years. I think this bears witness to the depth and breadth of our analysis. And the understanding of the root causes driving this global crisis. Causes that continue to build in their intensity.

On that note, let's look at a newly announced data point coming out of China. China's June wholesale price index was released a week or so ago. It is showing another very disconcerting decline. The fact that the Shanghai Index was down 8% at its peak on Wednesday is no coincidence. This is not the behavior of a new bull market.

Surely we are all leery of economic statistics coming out of China. Some data seems plausible but we must remember this is a communist country. The only harmony in China is afforded to those who yield completely and willingly to the state. Truth is irrelevant be it economic statistics or personal property rights or free speech. The wholesale price numbers do come directly from the Bank of China's web site. That said, the reality is likely to be substantially worse - either through incompetence of capturing accurate data or outright misrepresentation.

To get some context to the recently released numbers, let's look at China's year-over-year percentage price changes since this global crisis snowballed last September. Do you possibly see a trend here? Do you understand the substantial ramifications for this trend?

We have warned for years that China's banking system is likely the most unstable of any major economy on the planet. It is substantially more unstable than the U.S.'s. Substantially. So, what happens when an enormously overdeveloped economy sees sustained and substantial price declines? Well, we are about to find out. Maybe an inability to meet its financial obligations? Possibly debts turning sour? Liquidity burning out of the economy at a rapid pace? A banking system collapse? That's a good start. I think they call this an economic bust. Now what have we always said is the largest economic calamity on earth? That would be China. Are you sure we have reached the dawn of the Asian century? The China miracle? That China is going to be a large future buyer of gold? That the yuan is going to play a major role in international commerce? China's currency reserves are a sign of economic stability? A flat earth hypothesized by Thomas Friedman and Mohamed El-Erian? We have refuted all of these myths and more. And they are all myths. The decade-long never-ending media blitz backed by Wall Street, corporate interests and the bamboozled themselves have pummelled society with thousands upon thousands of reports, books, economic analyses, prognostications that were myths.

We have seen a strong bear market rally in China but its market is still down 50%. And, just like in the U.S., China's bear market rally is driven by speculators using free government stimulus to play games in financial markets. Statistics aside, which are horrible, liquidity is draining out of the Chinese economy at a rapid clip - loan growth is up thirty-odd percent(likely much higher) yet monetary aggregates are dropping substantially.(likey much lower) And just like in the U.S., the liquidity driving China's equity market will recede again as future shocks hit the economy. The Shanghai Index's 8% dump on Wednesday could be an early warning sign of this fact. Mr. Geithner is completely wrong in his remarks at the China-U.S. summit. This is not a financial crisis. The financial crisis is a symptom of the collapse in globalization and global finance. But, then this isn't anything new to us.

China's crisis has been building for more than a decade. Those concerned about the loan growth over the last handful of months are missing the forest through the trees. It's a symptom of the communist leadership's attempt to stop the deflationary collapse rolling through China's economy. That very fact is the driver of recent loan growth - an all out effort to avert disaster. The statistics are now telling us the China miracle-that-never-was is officially dead. All of our projections on China are starting to materialize on an outwardly measurable level.

The world is still biding time as this global crisis develops into the economic tsunami it shall become. It is simply being delayed by the race to the bottom of the barrel of propping up exports, tax breaks for exporters, quantitative easing, devaluing currencies, budget-busting stimulus packages, capital infusions into financial institutions and other profligate measurements of green shoots.

Let's hope we don't see volatility spill beyond China's border. But, as we have written, that possibility surely exists. The state needs an external enemy to maintain control. To deflect criticism and sustain its power base. And as we have written, that means China's ire could very well find a large target in the form of the United States. (Sounds mildly similar to the American government's position of military Keynesianism.) Yet nothing could be further from the truth. This is China's crisis and China's problem. As the Chinese economy collapses, will it be the communist government that takes responsibility for their crisis or will it conveniently be blamed on the United States?

Any entity with a significant counterparty position to China is a risk itself in one form or another. That includes the other BRIC countries. It also includes more than economic risk. As an example, North Korea relies substantially on China for food, fuel and foreign trade. A crisis in China becomes an immediate crisis in North Korea. A destabilized North Korea is a serious risk to Japan and South Korea. And, of course, as we have repeatedly remarked, China's financial reserves will more than likely disappear as China deals with its financial crisis. For that we can almost be assured a major yuan devalation in imminent at some point - another nail in the coffin of globalization as counterparties adjust accordingly. And for this very adjustment global liquidity will burn even more. Obviously as we have remarked for years, we expect U.S. interest rates to rise due to this dynamic. Not because of inflation but because of risk induced by burning global liquidity. But these dynamics will also be supportive of the dollar. As we have said, don't confuse the U.S. Treasury market with the currency market. There are flawed arguments constantly being forwarded by those who cannot seem to separate the two markets. Then there are the supply chain shocks we have warned of. The foreign investment in a destabilized China represents what risk? The exposure of international banks? And on and on. Of course, all of this is a rehash of our voluminous posts highlighted again for new readers. And as a confirmation that all of our macro positions continue on track.

This all plays into our theme of ever rising global volatility. There is no economic recovery. There may be positive GDP growth later this year due to trillions in debt-driven stimulus but economic recovery has absolutely no foundation in any economic fact.

Now I am become death, the destroyer of worlds. Oppenheimer's remarks are becoming a little too close for comfort. Let us hope those who seek to harness science, not for the betterment of humankind, but instead for its control, do not gain an upper hand in our future world.

The world is going to become much more interesting. Frighteningly so.

All the while, lazy money on Wall Street takes on more and more and more risk. And that in itself is adding more and more and more risk to the American economy. All courtesy of your favorite politician and central bankers. But remember, it's all good.
posted by TimingLogic at 7:43 AM links to this post

YRC CEO - Reports Of Our Death Have Been Greatly Exaggerated

"Although misinformation about our financial stability creates noise in the marketplace......", YRC CEO Bill Zollars

Now what misinformation might that be? That in the last two years you have reported losses that roughly equate to 50% of 2009's anticipated revenues? Or that you have led the company to the edge of bankruptcy by making some of the worst management decisions? I'm sure the stock dropping 99% is because of "misinformation about our financial stability".

The trucking business is awful right now. The business at poorly managed trucking companies is on life support.
posted by TimingLogic at 7:07 AM links to this post

Thursday, July 30, 2009

Max Baucus Update - The Best Health Care System Money Can Buy

Has anyone ever wondered why a health care reform effort is being managed by politicians and not experts? Let's be serious - politicians that really know no more about how to reform health care than you or I. In actuality, probably less. Regardless of the screaming of those who enjoy the system as it is, we need reform because well too much of the system is broken.

If one was serious about reforming health care, wouldn't one create a nonpartisan committee to identify the problems, objectives and possible solutions? A committee run by experts and not politicians. To run this activity as one would run an engineering project. Because that is really what it is. It is business process re-engineering effort that can be easily run via a defined methodology. To take advantage of all of the intellectual capital available in the United States and around the world, either via public discourse, benchmarking health care systems around the globe, public testimony of experts, etc. And, by public testimony of experts, I don't mean from doctors, lawyers and insurance companies. While I respect everyone's right to speak their opinion, it is really less about their opinion that matters. We generally know their opinion. It is our current health care system. Instead I mean from people who know how to transform a business. Health care and process experts from McKinsey, Accenture, IBM and from academia? Health care experts from Germany, Japan, Switzerland, France and other countries who can share their perspectives? Doctors, lawyers and insurance companies would have an input into the methodology but these inputs would be logically used to improve a process where it made sense rather than used to buy a Congressional vote.

This may sound like an overwhelming process but it really isn't. It just means we would need to decide as a country this is what we are going to do and that all politicians agree in advance to support a nonpartisan expert effort to fix the problems and attempt to keep what is working. In the interim, if politicians are concerned about uninsured or underinsured citizens, simply offer then the Federal government insurance as a stopgap.

Why is it that Congresspeople want to control the health care debate? It's really quite obvious. Because they are able to take advantage of the nearly $2 million a day spent by hundreds of lobbyists seeking to get protect their special interests. Because winning support and using influence is an extremely lucrative process.

I thought our country was about one person, one vote. It seems instead we have a system where if you have, say, $1 million to give, you get all of the votes. There are over 300 former Congressional aides and Congresspeople lobbying on the health care bill alone.

Link here.
posted by TimingLogic at 9:54 AM links to this post

Wednesday, July 29, 2009

Time For A Short -Term Market Dump?

As I wrote on here some time ago, I am beginning to wonder how much of market action is actually long-term investors allocating capital versus Wall Street firms, short-term focused hedge funds and day traders batting stocks back and forth. I am highly dubious of any claims to substantial new long-term cash commitments to stocks regardless of any flow analysis. In other words, I firmly believe this is a trader's market driven by liquidity fueling Frankenstein finance.

So let's do a very simple test. Not a very scientific test. Not one where we can clearly draw any conclusions. But one that might give us some anecdotal indication of how much of recent market action is just batting stocks back and forth amongst traders.

We just hit a twenty hour low in the major indices this afternoon. That will likely trigger some recursive selling by program trading over coming days or longer. If we roll over substantially from here, we might gather some anecdotal evidence that this entire move over the past ten days or so was simply batting stocks back and forth and market manipulation by short-term traders.

I doubt this will work as I would intend it but let's watch and see.

11 AM Thursday Update. Well, that didn't work. Many short term trading algorithms key off of 20 hour moves. I think someone out there realizes that. Is it a coincidence futures traders ran the market exactly when we hit a 20 hour low? As the morning progesses, it appears as though we may still be headed for a dump in coming days.
posted by TimingLogic at 2:47 PM links to this post

10,000 Protesters In China Simply Disappear?

posted by TimingLogic at 1:33 PM links to this post


The scientific and technological might of the United States is staggeringly awesome across every scientific discipline. For those who believe the U.S. has lost its scientific leadership because we don't make flat panel televisions within our borders, here's a small reminder. (Btw, American companies are dominant suppliers of the highly sophisticated equipment used to manufacture those flat screen televisions.)

posted by TimingLogic at 12:49 PM links to this post

Tuesday, July 28, 2009

The Private Equity Bubble Continues To Implode

We said these private debt, er I mean private equity firms were going to take it in the shorts while the media fawned over their brilliance. I can remember Maria Bartiromo on CNBC almost bowing before some of these private equity partners. Using cheap debt with no recourse and shitty loan covenants to buy out companies and then saddle them with debt so you can pay yourself insanely astronomical fees for financial fraud has nothing to do with brilliance. The amount of losses in private equity are staggering. The future losses will also be staggering. As I said before, I would not be surprised to see the private equity business effectively disappear. A wildly out of bounds statement. But one with some plausibility. It will be a near certainty that private equity disappears if the U.S. ends up with a different banking structure as an outcome to this crisis. Private equity is nothing more than crony capitalism. It's based on cozy relationships to gain access to cheap credit that adds no value to society.

Have you ever wondered why unemployment rates amongst many minority groups have been 20+% for ages yet completely stupid dumbasses can get all of the money they want to destroy the economy? Case in point - private equity? It sure as hell isn't because capital was allocated democratically or to those most able, ie a meritocracy. I know plenty of people that could intellectually role Steve Schwarzman and they are either unemployed, underemployed or working average jobs. When we see 20+% unemployment, corruption is in play. This data point highlights very clearly that a segment of the population is and has been starved for capital. We really cannot make any intelligent assessment on what impact these minds would make on society other than we are marginalizing tremendous economic dynamism. The next Albert Einstein or Ludwig van Beethoven or great entrepreneur may be lost in that figure. Maybe even our next President. I referenced this dynamic some time ago and maybe one day I'll post a white paper I put together on access to capital and how it impacts economic opportunity and social belief systems. I'll need to condense it for here and that will take substantial time. But this is really one of the least understood tragedies of our current economic ideology.

One of the private equity buyouts that caught my eye was Freescale. A business I am reasonably familiar with. Look at the write down. Blackstone's $1.2 billion investment written down to $180 million. These guys were even dumber than the mortgage backed securities clowns.

Don't worry. You are paying for all of this whether you realize it or not. Either through unemployment, underemployment, jeopardized retirement funds or whatever. The banks eating any debt write downs are passing the losses along to us. Or they probably securitized much of this and your grandmother is eating it in the higher living expenses criminally foisted upon her. Does this mad hattery mean private equity will give all of their billions in fees back? Fees made by killing the economy? Are you kidding? They are too busy throwing $4 million birthday parties.
posted by TimingLogic at 1:48 PM links to this post

Monday, July 27, 2009

Cash For Clunkers Program Is More Crony Capitalism

The government kicks off another of its attempts to manipulate the economy today. Cash for clunkers. Don't have a job? Can't afford a new car? Eh, get over it.

The government has so screwed up our economy with more and more rules and regulations benefiting special interests that the only recourse to stimulate the economy is to keep passing more and more legislation with more and more loopholes targeted at helping more and more special interest groups bribing er, lobbying the government for economic opportunity. (This is exactly what happened with the deregulation of our banking industry and the relaxation of our monopoly laws.)

I'm waiting on the Sin-O-Rama Stimulus Package written to benefit the mob, Las Vegas, Atlantic City, church bingo parlors, pimps, indian reservations, drug runners or anyone else partaking in the "sin" industry as defined by our morally and ethically enlightened politicians. It will include a stimulus voucher for prostitution, cigarettes, booze, crack cocaine, uppers, downers, mushrooms, bongs and, most importantly, using your home as collateral on the roulette wheel at any casino in North America - winners get their mortgage paid off. In other words, the American people get the same stimulous package that Wall Street has been given over the years due to its deregulation. Pretty much that we can do anything we want to do and its all good.

Then we can all go out in a blaze of glory and blow our remaining savings on one last hurrah.
posted by TimingLogic at 3:10 PM links to this post

The Gambino Crime Syndicate Labels Americans As Ruthless Defaulters

I was blowing bubbles with a friend last week and told him I was going to do what the banksters had done to us. In other words, I was going to load up on credit cards, run them to their limit then just decide I wasn't going to pay them. Now I'm not going to do that. At least not right now. But why is this any different than what Wall Street did? I am completely serious. They ran up debt and leverage on their balance sheets, made hundreds and hundreds of billions in bonuses for this criminal behavior, then they walked away. Ultimately this required a taxpayer bailout. All while this fraudulent activity was rewarded. Wall Street kept all of the bonuses and salaries made by living-large off of corruption.

Now these same crooks are labeling Americans unable to pay their Gambino crime syndicate terms as ruthless defaulters. Instead of working with people to create a plan for repayment, we see attempts of extortion and racketeering. Tactics used by the Gambino crime syndicate. Can't pay 12% rates? Okay it goes to 18%. Can't pay 18%? It goes to 25%. Can't pay 25%, we'll send Bruno out to take care of the situation - take your car, your house, your food, whatever. (No offense to anyone named Bruno) All courtesy of laws passed by our government. Labeling someone as a ruthless defaulter is really funny coming from an industry that is so usurious that it would make any crime syndicate blush with envy.

I'm not an attorney but I suspect fraud abrogates a contract. Frankly, I'm not sure why the American people should be any more obligated to pay their debts than banks. There apparently is no rule of law or at best a selective enforcement of arbitrary laws. Who decides what laws are enforced for whom? Isn't this really a breakdown of society? Where shall it end? It won't end until we see a return to the rule of law for everyone.

Where is the Pecora investigation into the fraud we see today? Where is the transparency into the seamy world of Washington and Wall Street corruption? Where is the lobbyist reform? Where are the salary clawbacks by an outraged government? Ah, it's business as usual in Washington.

It's good to be the king. Not much longer though.
posted by TimingLogic at 11:07 AM links to this post

What The Heck Is Going On In The Stock Market?

I'm glad you asked. As I remarked in the comment section last week, a lot of people were caught unexpectedly by this move. The market was very oversold on a short term basis but I think most people expected a rally then failure. A few big futures traders I know were building large short positions and. I would guess Wall Street saw what many clients were doing and decided to give them some superior customer service by blowing them out of their positions.

One simple data point I like to watch is the SOX or Semiconductor Index. Semiconductors always give us an anecdotal look at sentiment in the market. The SOX is comprised of many highly speculative stocks that are often the last to run to the upside before market weakness. Why is that? When the market neophytes become super-bullish, they have delusional fantasies about a re-ignition of the late 1990s tech boom. If nothing else, semiconductor stocks provide a look at the risk appetite of market participants. Remember there is substantially more data in the SOX than just the price of semiconductors. It contains anecdotal data about the overall market including positions in market options, futures, exposure to risk, etc. In other words, when semiconductors are running, the speculative juices in the market are always flowing. That confirms many other data points showing market participants are taking on substantially more risk. And as we talked about some years ago, semiconductors can also give an overall indication of where money is flowing compared to other industries. At that time money was flowing out of capital equipment and into commodities.

You can see on Thursday we ran right up to the limit of the SOX's Standard Error Channel and on Friday the index fell back. We are told this weakness was because of Microsoft earnings but many companies have recently reported data that clearly foretold of weak PC sales. Microsoft's earnings were not a surprise regardless of the dumb-founded comments in the financial press. The weakness in the SOX is because of traders taking high probability bets off the table at its upper channel. Not because of Microsoft's earnings. That Microsoft fell substantially on Friday was likely due to a pump and dump.

Each time we have hit the upper band of this channel, the market has pulled back. Judging by prior pricing action in the SOX since this channel started developing, we might anticipate coming stock market weakness if this pattern holds. This next few weeks will be interesting because there is also the possibility that a price vacuum was created below this recent move if much of it is from jamming short positions. But, the overall pattern of the SOX has not been broken. ie, No really serious threats of a substantial market correction except the March sell off. This perfect pricing pattern is highly indicative of a trader's market.

By the way, when the likes of Cramer and other uninformed Wall Street personalities were hopping all over technology and harping about a new tech bull market back in 2007, we wrote that it was nothing of the sort. Technology stocks were likely moving higher because they were shielded from the coming liquidity shocks we expected. In other words, it was a rotational move that people like Cramer (Who believe the market is all knowing) misread as being driven by improving fundamentals. That likely contributed to speculation by uninformed investors. ie, Cramer-types. Today many of the carnival barkers are again talking about the same bull-oney about a new run in these stocks based on an expected improvement in fundamentals. As I have said on here for years, fundamentals for technology and semiconductor stocks has been weak for the last decade. Fundamentals are now horrendous and will get worse. These are not the leaders of a new bull market. Just a few months ago order bookings went from years of notable weakness (that we highlighted before the market collapse) to a complete collapse - the worst in semiconductor history. Bookings in the U.S. have now improved to just really bad.

I suspect what we might be seeing is again another rotation similar to the one we talked about before the market collapse. Is there finally a growing realization by some smarter money that we are going to see a commodities bust? (The anecdotal answer right now is that most investors are going down with the commodities ship.) It's too early to tell but many commodity stocks, which were heretofore leaders of this rally, have lost some momentum over the last week or so. The SOX is up 20% in that time frame and has made a new rally high. Fundamentals do not warrant any of the move in semiconductors. So, again we could be seeing pure rampant speculation or speculation accompanying a sector rotation.

If the world's traders and investors are finally starting to wake up to a commodities bust, we could see hot money push into equities and out of commodities. This is a possibility but we need to see more evidence. And given Wall Street firmly believes that commodities are still in a bull market, I am stretching on the rotation possibility. But if some of this money is moving out of commodities, and this rally could have the legs to go higher. Regardless, none of this reflects fundamentals. But who ever said it did? We wrote quite a few months ago the low for the year is likely in and the next low probably isn't until May or October of next year. I'm surprised on one hand but on the other, how are banks supposed to clean up their balance sheets? Make loans in a collapsing economy or rampantly speculate in highly liquid markets they believe they can exit on a moment's notice? (ie continue to steal from society in a rigged market and do so with government endorsement.)

As long as Wall Street has a stream of liquidity flowing into its coffers, financial market action is going to be bullish. Until liquidity is withdrawn again because of a shock in the economy or on Wall Street's balance sheets, this market could remain very unpredictable. On other words, the inmates are running the asylum again. But, remember, the inmates ran the asylum for years during the 1990s technology bubble and really gained control over this past bull market cycle. In other words, stupidity doesn't necessarily give us an indication of market direction. Liquidity does. Liquidity in the global economy is evaporating at a rapid clip. It should also be worrisome that the Fed is drawing down many of their liquidity facilities. The economy is not ready for this potential shock. We shall see future financial market crises. The only question is if it is next week or next year. This environment is very difficult to project more than a week or so in advance because of the tremendous cross currents of collapsing globalization dynamics and a Wall Street pumped up with taxpayer money. There are so many global crises in the making. Forecasting has become completely unpredictable. So we take what the market gives us. For me, that means anyone in the markets should have a time horizon measured in days. Ironically, that is confirmed by the insanity of very short-term trading that is now dominating Wall Street.

It's a mad, mad, mad world.

posted by TimingLogic at 8:27 AM links to this post

Sunday, July 26, 2009

Is It Getting To Be That Time? Time To Short Goldman Sachs?

I have beat the drum repeatedly that the market is turning against Goldman Sach's business model. Frankly, I'm not sure Goldman will survive this crisis. I don't feel like putting a lot into this post but if we have talked about a lot of macro changes over the past four years that are the foundation for my bearishness. But, probably the most important reason to be bearish is that the lobbyist bubble is going to pop. When companies can no longer rig markets by paying for legislation that gives them a corrupt and opaque method of ripping off people and markets, their advantages in the market place are marginalized. That means entities taking advantage of this fact will need to find an honest way to survive in a future world. One with a business model that adds value to the economy. Today, I can honestly say Goldman Sachs adds little to no value to the American economy with any of its lines of businesses.

Goldman is the perfect investment for this environment as we wrote back in 2007. A time when we also wrote that their perceived brilliance has often been associated with coming economic doom. Mergers & acquisitions, hedge funds, investment services to hedge funds, trading, exposure to commodities, investment banking, etc. All of these businesses were, are or again will be in crisis. Likely permanent crisis. The government wasted our capital bailing out a firm that adds no economic value to the American economy. Goldman's business model is strictly one which shifts wealth.

Is Goldman's golden goose about to get cooked? Is the source of Goldman's latest manipulation, wealth redistribution and, as Barry Ritholtz noted, possible stealing, about to be taken away from them?
posted by TimingLogic at 10:26 AM links to this post

The Seance On Wall Street

Economist Dean Baker on Wall Street's con job. Does anyone buy their baloney anymore? It will be a great day of enlightenment when we have all lost faith in Wall Street. Because it was misplaced from the very beginning. I think we are finding out reality is much difference than the perception of brilliance planted over the decades. Brilliance created by easy credit and ignorant economic ideology.
posted by TimingLogic at 7:05 AM links to this post

Saturday, July 25, 2009

The Diamond Business Drops Precipitously

Link here. It's interesting to note that diamond traders have bid prices up substantially since the March equity market lows. A major mistake in my estimation. This is no different than the agriculture industry where the input prices are still rising yet the end product demand remains weak and will eventually weaken further. A required dynamic for a complete bust. Will see see one in diamonds?
posted by TimingLogic at 12:37 PM links to this post

Toyota's Unwinding Begins

Over the last few years we have put up quite a few posts about The Game - basically the dynamics under which companies, countries, individuals and, of course, banks would start to unwind. That process is exactly why we had financial markets collapse. We aren't even close to being at the end of this dynamic. In fact, we just witnessed GM's massive unwinding. It had to sell Saab, Saturn and Opel, shut down Pontiac and Oldsmobile, sell off GMAC, default on its debt and many of its future obligations to its employees.

Now, Toyota starts the process of unwinding. I think it's plausible to conclude Toyota's process will also be a painful one. Toyota's unwinding obviously won't be as painful as GM but closing the NUMMI plant in California is just the start.
posted by TimingLogic at 12:21 PM links to this post

Friday, July 24, 2009

More Market Gamesmanship Courtesy Of Wall Street

As we have said numerous times on here, one should never confuse the market with the economy. Liquidity is driving this rally. The Fed has basically given Wall Street carte blanche to do as they will with plenty of free liquidity. Yet people in the economy are starved for liquidity. It's really quite simple to explain why the market is not reflecting fundamentals. Were the Fed not to have backstopped Wall Street, our society would be a world of chaos right now.

But, given the lack of transparency into the Fed, Wall Street and Washington, we really have no idea what all of the sources of liquidity are or how they are being used. Could the Fed or Washington be leading a policy of monetizing action in the stock market? Are more illegal machinations driving prices? Or is this just a reflection of Frankenstein finance in all of its glory with unlimited liquidity? No one can honestly say. But what we do know is that Wall Street's perceived brilliance can be described by three words - Federal Reserve liquidity. Rather than using liquidity to assist American business and citizens, the policies we see allow Wall Street to once again rampantly speculate in financial markets. Our banking system is truly criminal.

I use my own volume advance-decline line because I choose to calculate it differently than that provided by data providers. So, let's look at my volume advance-decline line (in red) along with the S&P 500 in the graphic below.

I have never seen anything like what we experienced the last week in the stock market. A literally melt upwards on massive volume. This action obviously isn't indicative a normal market. I don't know how to interpret this any other way than a concerted effort at manipulation or a simultaneous mania of nearly every participant in markets (highly unlikely). Anyone who rode the market down surely enjoys making back some of their losses. But, at some point this rally will fail. If this was a hammer applied to a growing bearishness and short positions, we might see a vacuum in price develop relatively quickly. If it is indicative of the substantial government-backed liquidity facilities or manipulation, then it will likely end when we see the next economic or Wall Street liquidity shock. If this is some attempt to levitate markets and recreate much of America's lost savings, it would be a potentially noble effort with damning unintended consequences. Markets this large simply cannot be manipulated forever. In other words, financial markets must eventually converge with fundamentals. Then all of the additional debt, economic mistakes and imbalances created in financial markets and the economy while portraying the illusion of returning prosperity will come pounding down around us. Then the mess will simply be that much larger as we highlighted in the last post. This is the last dying breath of monetarism and the associated lunacy taught in our hallowed schools of finance and economics.

When reality once again sets in, those without an ability to trade the markets will once again lose their savings. Wall Street is still using society's own money to trade against us. It's legalized stealing. Someone has to take the other side of that trade. It's going to be the school teacher, the construction worker, the accountant through their 401Ks, pensions and life savings. Allowing this continued behavior on Wall Street guarantees liquidity in the underlying economy will recede even further. Because these trading schemes have the effect of stealing society's money. ie Draining liquidity from the underlying economy.

Thank you Washington politicians for your substantial and serious attempt at reforming our economy and our financial system. For this the economy will thank you with more substantial pain to come.

posted by TimingLogic at 11:53 AM links to this post

More "Rigging" Of The System By Wall Street?

I believe it's important to continue to highlight the fact that Wall Street does not win in the market place. They do not win based on merit. They impact markets in which they want to play by gaining an informational or legislative advantage. Advantages gained by paying money. They seek to remove transparency and gain an advantage via lobbying or other measures.

Anyone could hire a large group of smart people and rig a market if they can get a monopoly on information or get legislation passed that allows them to execute a strategy of manipulation.

The point is without transparency and a level playing field, all these firms are doing is taking money from society as easily as I could take candy from a baby. Substantial and serious reform must take place. To date, there has been no effort at doing so because Wall Street lobbyist money is more important to our government than are the people of this country. It's just that simple.

So how did Wall Street bounce back so quickly with "trading" profits? Inquiring minds want to know. Apparently, so does the SEC.
posted by TimingLogic at 11:13 AM links to this post

Wednesday, July 22, 2009

The Advertising Bubble Continues To Deflate And A Timely Rant On Society's Belief System And The "Suspended" Year 2000 Economic Collapse

Nielson's latest announcement on global advertising expenditures is available here. Re our prior post on the substantial advertising bubble we see today, the fundamentals are starting to deteriorate significantly in the ad industry. They will get worse. Most likely they will get substantially worse. And this is an ad bubble not a downturn. The data behind that statement becomes more evident every day.

As an aside, these Google Adsense and advertising parties I was constantly spammed about are reminiscent of the residential telephone reseller schemes so prevalent during the internet bubble. I don't know how much of this is buzz and what the participation rate is but I distinctly remember the residential telephone scheme. It was a true pyramid scheme promising quick riches. Money was made by working yourself up layers by getting people beneath you to sell residential phone service. Even though this has little impact on ad revenues, it is indicative of a developing social belief system. One not based on sustainable fundamentals. I think it's fair to say we should expect similar macro outcomes as happened with any pyramid scheme.

Chart courtesy of Nielson

As I state so often on here, one of the objectives of this blog is to encourage individual free-thought - one reason I cover certain topics over and over. In a perfect world no one would believe anything stated by the press or by business or by politicians. One would believe facts or plausible reality from one's own due diligence or experience. Or for anything that cannot be completely proven, to believe what one knows to be true in one's mind. To become as Buddha.

So here I go again with a rant. Now that every economist and financial commentator has had years to develop their remarks, place their bets and share their well-developed financial and economic ideology, I am going to start to re-frame the economic environment by tying together many of the remarks made on here over the last four years. By the time I'm done, you are going to realize just how ideologically-driven everyone is. And, how many of those who have been right to date actually contributed to this crisis with their faulty economic beliefs.

It's not a coincidence I am posting this advertising bubble remark a week after Google's CEO stated the worst of the economic crisis is behind us. Remember, Eric Schmidt (Google CEO) rode the internet bubble while at Sun Microsystems. The management of Sun actually believed they were geniuses during that period of insanity. We see that was a complete mischaracterization given Sun's business imploded in 2000 and management didn't see it coming. I recall some hazy details about Scott McNealy, the then Sun CEO, calling the White House economic team to tell them Sun's business literally collapsed in 2000. And the government needed to act or the economy was going to collapse. Or some similar actions in this same context.

McNealy was right. Those viewing the post 2000 recession as mild from a statistical standpoint were and are completely wrong. Another great economic myth formed by a misunderstanding of economics and the ever dreadful notion that correlation equals causation. The perspective that 2001 was just another recession manifests itself in the near universal belief that we would have had a mild recession if Greenspan weren't so aggressive in 2001 and 2002. This perspective is held by nearly every financial blogger, every economist and even every Nobel Prize winning economist. In fact, a few financial bloggers now seemingly hypothesize Greenspan purposefully created the housing bubble. A position of mild insanity or conspiracy or both.

Here is reality. We were headed for an economic collapse in 2000 and I'll prove it to you. Well, not in this post but at some point.

In the end Greenspan's policies did not reflate the American economy. Because the Fed does not control the economy. They simply reflated the credit cycle. Which is the only metric the Fed does control. That is why we had a jobless recovery post 2000. Because the economy was and is broken. A point we have highlighted repeatedly over the last four years. All Greenspan did by priming the pump post 2000 was put off the inevitable. And in the process make the impending misery that much greater. Yet even today the financial industry and business leaders are once again very bullish. Because they still believe the Federal Reserve has saved the economy. First on this list of Federal Reserve altar boys is Jim Cramer with his recent article thanking Ben Bernanke for saving us from another depression - a completely factless charade.

This is a nice place to post a commentary I found some years ago at the Cleveland Federal Reserve site. Does the Fed Cause Christmas? The article's first paragraph says it all. If anyone believes the Federal Reserve is going to save the economy by pushing money around, they should read this. So, applying the same logic of the aforementioned Fed commentary might we be correct in stating that not only does the Fed not cause Christmas but Cramer's success in the biggest stock market bubble in history does not make him the Bodhissatva?

Back to Sun Microsystems and the 2000 collapse. Sun's perceived brilliance was near universal around year 2000. Their stock had exploded higher. Doubling time and time and time again. This is the management team Jim Cramer pumped in September of 2000 as his best investment idea. Obviously right before the company's business and its stock collapsed. Eventually this was the same management team that led Sun right into the path of marginalization and into the ditch until Oracle bought them some months ago. They still might still be headed for the grave yard as I suspect Oracle really bought Sun for MySQL and other software assets and likely has no strategic plans for Sun's core business. We shall see.

As we have discussed extensively, including our lengthy PwC CEO Survey post, corporate success is influenced substantially by fundamentals outside of most CEO's control. To assign brilliance because of exogenous fundamentals is completely without merit. The CEOs of all of the homebuilders were rock stars on CNBC before the crisis hit, as was the CEO of Countrywide, private equity partners, hedge fund partners, the CEO of Dow, sovereign wealth fund managers and on and on and on. Turns out all of these people didn't have any idea what was about to happen to their own businesses. They were each living in their respective bubbles driven by exogenous fundamentals. And we wrote exactly that about each of these businesses before they imploded. Most of these people are good people. Smart people. Constructive assets to society. But they put their pants on one leg at a time just like everyone else and most don't know the first thing about economics. They did know a lot about hubris. In other words, the assignment of generally superior knowledge to positions of authority or success is most often a false truth. And let's be frank, in the cases cited above, we can actually draw the conclusion that these people were not just uninformed but they completely lost their marbles. This is part of the human condition and an ingrained flaw we all suffer from. In other words, we all have our blind spots. Want to ask a CEO how he deals with work force motivation. They may have a good answer. Economics? Likely just an opinion without any more merit than Joe down at the local coffee shop.

We should encourage and applaud people for achievement. We should applaud Google for all of the wealth, innovation and jobs it has created in society. But the CEO of Google wouldn't likely know any more about an economic recovery than Joseph Stalin knew about burritos. That Schmidt sits on the President's economic advisory council simply means he has more public opportunity to stick his foot in his mouth. Just as homebuilder CEOs, private equity, hedge funds, bank CEOs and others were afforded that opportunity with their short-lived publicity that has instead turned into long-term notoriety.

The sooner society releases its unsubstantiated beliefs and releases these values that aren't warranted, the sooner we will get back to fixing the economy and listening to the people who really know what the problems are. That would be We the people.
posted by TimingLogic at 10:14 AM links to this post

Tuesday, July 21, 2009

Do You Want To Know Why Our Economy Is Falling Off Of A Cliff?

Because we have people like this making policy decisions for our country. Our country is in a meltdown, tens of millions of people are suffering and this is representative of the critical thinking that is going on in our legislature? I must be in serious need of a tranquilizer injection because this clip appears completely insane. And apparently so is Representative Campbell. Insane that is. Would someone please give this guy his medication before he goes on television?

No wonder California is slated to fall into the ocean in 2012. (A poorly placed joke.) Well, unless you are Representative Campbell. I would suppose he believes this to be true.

posted by TimingLogic at 8:55 PM links to this post

Assessment Of TARP Program From Inspector General Neil Barofsky

posted by TimingLogic at 2:42 PM links to this post

Bernanke Testimony On Too Big To Fail Is Too Stupid To Comprehend

I actually like Bernanke as I have remarked many times. I don't like all of the decisions he has made but then were he to have done nothing, we would probably have 35 unemployment right now.

I am semi-listening to Bernanke speak before Congress today. I find this concept of having a regulator for banks too big to fail as ludicrous. For any entity it's ludicrous. I do believe it was the executive branch that thought this concept up. Too big to fail includes the Federal government that has become too big to fail because of its grab on power inside and outside of our country. There are only a handful of countries on earth that have a GDP larger than our military budget of well over $1 trillion. A completely unsustainable metric that serves little purpose of the Constitutional mandate of our country's defense and instead serves the global meddling of the state. The Federal government spends inordinate amounts of money that have nothing to do with serving the will or needs of the people on a wide range of programs. The problem in Washington isn't the social programs targeted as the problem by neoliberal ideologists such as the banksters and anarchists, but it is the meddling the government has granted itself by a very liberal view of its Constutional rights. But I digress. Washington will learn its lesson the hard way.

So this too big to fail regulator for banks serves what purpose? We have had laws on our books for over one hundred years to make sure we don't have too big to fail. That we now want to regulate what was legislated to be illegal is completely absurd. Why is this any different than allowing robbery but regulating it? Oh, I'm sorry. That is a bad example because we do have legalized robbery. It's called derivatives, Wall Street bailouts, compensation packages ripping off shareholders and society, etc.
posted by TimingLogic at 12:27 PM links to this post

The Nasdaq Transportation Index - A Better Dow Theory Index

(I just edited and reposted this. I don' t always spell check or proofread my posts and this one was riddled with mistakes.)

Last week was fun. Victory was snatched from the hands of defeat for the bulls. I think some of the bears were counting their profits a little too far in advance. It is highly unlikely that we would see a substantial market decline in July. Seasonally, that is an extremely low probability. Remember, malaise followed by weakness. But, the speed of last week's rally was very surprising. I think that was about an annualized 400% move in the S&P. I would say we are about out of gas as of today. What happens next will be determined by what happens next. In other words, as I said a few weeks ago, I don't like short term forecasting but rather prefer to take what the market gives. And that is with good reason given my thesis that a short term head and shoulders had developed was kiboshed.

So, this week it appears everyone is bullish again. It's pretty hard for me to be bullish here because the Federal Reserve policy is once again very tight. Sort of wondering out loud, I can't help but wonder if Wall Street is attempting to reflate financial assets with Washington's blessing. Do they believe reflating financial assets will mitigate the wealth problem that has arisen due to in part to the financial market collapse? That really isn't so far fetched if one looks at the Alan Greenspan remark from a recent FT article I posted on here. Greenspan thinks like a central banker, obviously. He believes rising stock markets drive future economic activity re that article. We highlighted the outright ignorance of this position in our post on July 9th. But, there is no doubt in my mind policy makers are desperate. Tax receipts have imploded and the economy is on wooden legs. So could it be a policy tactic? Who knows. But given Greenspan's perspective, it isn't really that bizarre to consider. So, Goldman and others believe they are performing their civic duty by manipulating markets? Haha. That might be fine were wholesale manipulation possible ad infinitum. But, in the end, they will simply make the mess that much larger by encouraging risk taking that is not based on sustainable fundamentals.

So, as we look at the markets assault higher, let's look at a little known index that is highly sensitive to the economy. It's the Nasdaq Transportation Index, ^IXTR on Yahoo Finance. This index is far more representative of the spirit of Dow Theory as subscribed to by Charles Dow that the Dow Transports. In other words, the Dow Transports is a small number of generally large, liquid company stocks that are traded or manipulated by our financial geniuses. The IXTR is less prone to trader and Wall Street gamesmanship because it is composed of far more less-liquid, smaller capitalization equities more reflective of activity in the American industrial economy. In other words, were Charles Dow alive today, he would use the Nasdaq Transportation Index. And, today it is getting smacked pretty hard.

As we look at the NTI on a weekly chart, we see that it hasn't participated in this rally at all. In fact, it would need to rise about 12% to exceed April's high. More importantly, it has not broken out of its downward Standard Error Channels. (We posted prior highlights of the usage and definition of these channels.) This past week's rally was in large, highly liquid stocks or in the case of small capitalization stocks, highly liquid indices such as the Russell 2000 futures.

==>> Traders

posted by TimingLogic at 10:01 AM links to this post

Monday, July 20, 2009

In Rome The Senate Parties While The Empire Crumbles

I like to visualize the pool of economic liquidity like a kitchen sink, with its source as the drain. As the drain is pulled water recedes from anything and everything in the sink. The last to experience the withdrawal of liquidity is the drain. Until all of the liquidity is withdrawn, the drain believes everything is a-okay. Even though the dishes, the sink walls and everything in the sink realized long ago there was no remaining liquidity.

As the pool of liquidity recedes in the economy, its source will be the last to feel the effects and understand its ramifications. That means both Washington and its partner lobbyists from Wall Street and big business feeding at the trough of gluttony have yet to receive their wake up call. I can assure you the tsunami is on its way to Washington and Wall Street.

Do you hear that loud sucking sound yet? If so, we are close to the drain. Politicians, central bankers, most economists and Wall Street think the worst is behind us. They think this was just a liquidity crisis. So, their solution was to re-liquify markets. All is again wonderful or so they think. Uhh, no it isn't because it wasn't a liquidity crisis. The real crisis was that the sink has a hole in it and liquidity has been draining out for a long, long time. And the attempts to re-liquify the markets have been going on for just as long. Yet the hole keeps draining liquidity each time the sink is refilled.

Remember back when no one had heard of liquidity shocks, we were writing that they were coming. They are coming again. And because the Federal Reserve and Washington didn't have the right plan to deal with the crisis, (because they unknowingly created it) and still don't, the flow from the spigot is now a trickle.

When the Federal Reserve started shooting liquidity at anything that moved last September, this was exactly the concern we expressed. No plan and no prioritization in dealing with the crisis would mean we would be unable to effectively deal with serious future shocks. And that is exactly where we are. Wall Street banks are still in serious trouble. The crisis has not been fixed, the spigot ain't got a lot of water in it and now we have even greater debts to manage.

It's good to be the king. But not much longer.
posted by TimingLogic at 3:13 PM links to this post

Businesses Turn Bullish

Booyah! An incredible 86 percent of companies surveyed believe sales have bottomed or will bottom by the end of the year.

I think we already addressed this one before markets imploded with our PriceWaterhouseCoopers Global CEO Survey post. CEOs were wildly bullish throughout 2008 while we were writing of the high probability of a coming credit crunch and a lengthy depression in emerging markets. CEOs were bullish till they were no longer bullish. In other words, they were bullish right up until the global economy imploded. Most modern day CEOs and executives embrace a belief system that is completely faulty.
posted by TimingLogic at 10:54 AM links to this post

Glenn Beck On Government Sachs

Hopefully by now people no longer question while financial bloggers are hammering Goldman Sachs. Corporate personhood and its associated stench, corporate lobbying, has heisted our government. Goldman isn't the only company. And neither is Wall Street the only industry. But Goldman has taken this unsavory practice to a level not accomplished by any other firm I am aware of. This video has been floating around the net and I feel a duty to post it for anyone who has not already seen it. Mostly because its vile and maddening truth contributes to society's enlightenment. (If this tip of the iceberg is what we now see with little transparency into what is really going on in Washington, what incredible unknowns will reveal themselves with greater transparency? How might that actually ever happen? One scenario I could see is possibly if one or both of the major parties are sacked in major elections. Or if a populist President is elected. And I believe a populist President is exactly what is going to happen in 2012.)

Now I want to make a remark as it pertains to this video. Many political and media partisans have tried to marginalize Glenn Beck as a kook or a radical. Or somehow not supportive of a particular political agenda. We should embrace anyone willing to publicly express a voice of reason and concern for our way of life and our democratic values. This ideal is the very foundation of democracy. There are only patriots when it comes to concern of our future and demanding better governance and a better way of life for our fellow citizens. Labeling and marginalizing dissent is exactly what the political machine wants us to. Marginalization is exactly how they created this crisis. By marginalizing cassandras and truth seekers for decades. It won't work any longer because the layers have been exposed and it's more ugly than most anyone could have imagined. Society is well on its way to a great enlightenment. And that very fact cranks the elitist spin machine into overdrive as it attempts to defend and save itself. Embracing those willing to agitate for constructive change is the only way we shall see change. A better tomorrow will not come unless we make it happen.

Does anyone honestly believe the founding men and women of this country were all of the same opinion or political beliefs? There was constant bickering. It is the American way. Yet they were united in a common cause as those with differing views today are united in their desire for change. There is nothing more natural than a disparate society finding common ground to unite them in the desire for morality, justice and good. There is no doubt in my mind we shall prevail.

posted by TimingLogic at 7:25 AM links to this post

Sunday, July 19, 2009

What Kind Of Health Care Do Lawmakers Get?

There is certainly a valid debate to be had as to how we transform health care in this country. Although I would argue there is no ground to stand on to simply let the system continue to operate as it does today.

Handing the administration over to the government probably isn't the best plan longer term. But I cringe at these ideological statements of ignorance as it pertains to health care being run by the government as being a disaster. I know many people from other countries and I haven't heard anyone with national health care state that they want anything like the U.S. system. A dog eat dog system where survival of the cruelest exists.

I definitely don't want a government run administration when corporations, doctors and lawyers are defining what it will look like. That's a little like the fox guarding the hen house. Trust us. Yeah, I've heard that before. That is the very reason we have such a broken health care system in the first place. These special interests have defined its structure. Fix corporate personhood and the associated lobbying will disappear. Then we would likely get a decent debate on health care transformation. But the largest health care insurer in the U.S. today is the government. Be that state, local or federal workers or Medicare and Medicaid. So, would all of these people rather ditch their government plans and fend for themselves with private plans? Hardly. And, as far as this generalized argument that the government can't run anything, I guess state universities are worthless too then? Or national research labs? And maybe our military? And our police and fire departments? And the roads you drive on? And the water you drink? The fear mongering and marginalization tactics of the status quo are endless.

Let's take the flip side. How do you like your banking sector run by private firms? Is that working for you? In my estimation today's private sector health care firms are very similar to our banking system - that would be predatory. Predatory courtesy of our government that allows or even legislated this predation. We can have a vibrant private health care system but not when corporations are paying our public officials to architect a system of corruption at the expense of the people they are supposed to be serving.

We'll talk more about our health care system and some very general parameters for its potential overhaul, none of which are being talked about, but I wanted to pass along this link comparing the plan Washington politicians get to the ones many of us in the private sector have. I pay for my own health insurance. My health care plan sucks. And so does the company that administers it. It seems ironic that public servants live like kings and queens while those who pay their salaries and benefits and whom they serve get the shaft.

Are they really servants? Or is it us that are the servants?
posted by TimingLogic at 12:10 PM links to this post

Nouriel Roubini Calls The Recession's End in Late 2009?

Nouriel Roubini has been one of the few noteworthy economists to be right about the housing market. And to be bearish well enough in advance to alert people before this crisis unfolded. I don't really follow Roubini except for browsing anything that might be reported on a few of my internet feeds but as I understand it, the majority of his analysis is based on a very U.S.-centric view of the housing crisis and its implications. I'm going to repeat a fact that I repeated often over the years for any new readers. There is no such thing as a consumer-driven recession.

Roubini has stated that he was misquoted recently about being bullish, which I obviously understand. But, he is clearly quoted in this Bloomberg article as stating the recession will end in twenty four months and that he anticipates the recession will end yet in 2009. We may technically see the economy eek out some stimulus-driven GDP in 2009 but this crisis is not going to end in 2009. As long as the Federal government is able to fund a war and a massive budget stimulus, there is obviously some point at which we will see year over year positive GDP. That is, assuming the private sector's GDP doesn't take another leg down such that government provided stimulus must reach even more astronomical levels. (Of course, it is surely a reasonable probability that it will.) That doesn't mean the economy is going to return to the economic levels of 2007. The economy will still be operating at substantially below trend until the next crisis hits. And there will be future crises. With a little bit of effort, a very short term forecast of positive GDP growth shouldn't be too difficult as long as we see some continued stabilization. Beyond the next month or two, accurate GDP forecasts are now nearly impossible because the global variables are too many and they are changing way too fast.

All of this thinking about an economic recovery, be it Roubini or otherwise presumes one point in particular. That we can curve fit the future onto the past. So we have economists and pundits generally watching the rate of change of many economic indicators. These people are visually interpreting a substantial slowing in the drop of many indicators as a sign prosperity is just around the corner. They are using extremely faulty rationalizations in their analysis.

In other words, if I showed you a time function on a two dimensional x-y chart, could you visually tell me what that plot would look like in the future? To the right of what was shown? Of course you couldn't. Not without understanding the function. In economics we clearly cannot define the function. That very statement is why Wall Street is blowing up. They thought they could mathematically reason the future. And the "the recession is over or nearly over" prognosticators are unknowingly espousing the same faulty idiocy used to curve-fit the quantitative models blowing up left and right on Wall Street. Someone takes ten or twenty years of data and fits the model to the faulty data. Even if fifty or seventy years of data is used it is completely faulty. And, there are no quantitative models used on Wall Street that I am aware of that use a data set anywhere near fifty or seventy years. And, even if they did, using seventy years of data is still a completely contrived and completely faulty analysis.

When I analyze the curve-fitted data, I see a shape that looks like Humpty Dumpty. So, therefore, I conclude he's going to fall off the wall. You know the rest of the story.
All the kings horses,
And all the kings men,
Couldn't put globalization back together again.

The world has permanently changed. Curve-fit that.
posted by TimingLogic at 7:07 AM links to this post

Saturday, July 18, 2009

The Wall Street Myth Machine - Finally An Expert Who Realizes We Are Going To Witness An Oil Bust

Now, an "expert" who is finally willing to embrace a bust in oil. It's coming folks. I don't care if the dollar goes to zero, which we have written for years isn't going to happen. That's another of Wall Street myths - oil goes up because the dollar goes down. Well, it's wrapped in another myth too - the dollar is going to collapse.

In fact, most everything we see is based on myths - commodity supercycle, China's economic emergence, the emergence of the Asian century, peak oil, the development of the Middle East economies, the genius of sovereign wealth funds, the protection provided by accumulated currency reserves, the safety of bonds, the dollar collapse, the emergence of Russia, the dollar-oil relationship, asset class investing, diversified investing, Wall Street's investment paradigms, Wall Street's quantitative finance, and on and on and on. This has been the biggest bamboozling in our history. And we wrote about all of it being bull-oney and now we get to experience the reality that proves it was all a scheme.

One of the biggest myths remains. That Goldman Sachs is brilliant and actually missed this crisis. Goldman Sachs would be bankrupt right now were it not for taxpayers. They would cease to exist. There are no assets worthy of reorganization. It would be kaput. Even though their alumni are sprinkled all throughout government and banking to pull levers for their benefit. Even though they have paid huge sums of money to government to get legislation and regulation that gives them a huge advantage to perpetuate their schemes. They were an architect of this mess. They participated heavily in buying toxic assets and perpetuating all of the crises we see before us. It was merely luck and connections that saved them. Yet this myth of brilliance continues to be perpetuated by even their detractors.

This perpetuation continues to give credence to the false truth that politicians and our elected leaders should listen to Goldman Sachs because they missed this crisis. So, therefore, they know what they are talking about and their advice is invaluable to dealing with this crisis. A hugely erroneous myth. And one that will ultimately increase the size of the global economic bust as the wrong policies and remedies are applied to the problems. And, ironically, that myth creates an even more challenging future for Goldman itself.
posted by TimingLogic at 10:24 AM links to this post

Friday, July 17, 2009

Paul Wilmott's Attempt To Save Wall Street & Frankenstein Finance

Let's get a post up while it is still relevant. Paul Wilmott, a very influential architect of quantitative finance, is the focus of a Newsweek article of some weeks ago. The topic of the story is Paul's belief that he can save Wall Street's Frankenstein finance.

Let's start this post with a remark I made on here when the world was in love with quantitative finance and the Frankenstein Wall Street had created around it. The remark is from April of 2007, a little more than two years ago.

....Frankly, because I don't believe anyone truly is a derivatives expert. ie, The system has not been tested through to every possible outcome. LTCM proved even simple messes can become exponentially large. ..... I've seen some minor "what if" analysis of a derivatives melt down. Nothing scientifically robust. The problem is I don't really think anyone can test every scenario and guarantee liquidity doesn't melt away if there is some type of derivatives mess. Maybe we won't get one. We have survived decades without much of a problem. ..... Everyone thinks the party on the other side of the trade will provide the liquidity in all scenarios and what if no one does? I am quite confident such an outcome exists. Then the only question is if that outcome will come to pass.

Well, the concern we highlighted on here this is exactly what came to pass. And it is going to happen again. At some point we are going to have to replenish Wall Street balance sheets. Again. Quantitative finance is simply one of many sources of depleted banking capital that will arise in the future. And, I seriously doubt it will take long for the next crisis to manifest itself. A year or less is surely a possibility. When we have a handful of financial institutions batting around these enormous sums of derivatives contracts, the largest risks are contained in the largest firms. There must be winners and losers in any contract. And a major flaw in the ointment is that these firms are so large and their risk profiles are so great that any substantial loser threatens all players in the derivatives game. In other words, any single firm being on the losing side of any large derivatives position will threaten all Wall Street firms. For goodness sake, how often do we as a society need to witness Wall Street gambling away our savings? Literally. In this scheme of pure gambling, if Wall Street wins, society loses by being the contract counterparty. If Wall Street loses, society loses by bailing out the counterparties. Where is any possible upside? What the hell are we doing? Derivatives should be banned or the risk profile involved in using them for specific risk management purposes only should be clearly quantified, clearly limited and highly regulated. Washington is still not serious about addressing these issues because Wall Street is oaying our government officials hundreds of billions of dollars to continue their insane gambling addiction.

Myron Scholes was a major proponent of derivatives. He received a Nobel Prize for his work on derivatives models. I believe he has now blown up three hedge funds employing derivatives. The hedge fund industry continues to lobby against regulation. Well, those that are remaining continue to lobby. In relatively recent remarks, he has said he (his work) was wrong and we need to wipe the financial slate clean and start over. A founder of Frankenstein finance principals has capitulated to the stupidity of his thinking. (I'm paraphrasing rather than spending time to dig up his specific quote.)

There is one thing I feel as though I do understand ad well as anyone. That is the limitations of our understanding and appreciation for unintended consequences and the avalanche effect of complex systems. We simply don't appreciate or seem to be able to quantify that the process is unmanageable when too many unexpected variables harmonically align. And because quantitative finance really doesn't understand the underlying factors or variables, (although they ignorantly believe they do or can manage the process.) they are blindly walking down the path of destruction.

We have railed on this deluded view of reality as it pertains to many topics on here. Three specific ones were futzing around with our food chain or attempting to bio-genetically alter nature without understanding the risks, another is Frankenstein finance which clearly cannot and has not quantified risks, and another is those misquoting of abstract economic theory with this radical notion that we just need to step back and let the world collapse. At that point the system will clean itself out and we will all live happily ever after. This last perspective concerns me more than any. And, it is the underlying economy that is the source of the most significant crisis here. Including for Frankenstein finance. This last position is a completely simpletonian view of the world. One that does not appreciate the scientific complexity of unscientific arguments better known as ignorance is bliss.

Wall Street's quantitative schemes are based on a completely false reality. And Paul Wilmott seemingly shows a lack of appreciation of the enormity of the false thinking associated with this Frankenstein because he believes he can save the monster by re-educating its architects?

There are many people who believe that Wall Street is going to return to the status quo now that it has received a bailout. Wilmott apparently is one of them. I am supremely confident these people are giving us the very argument as to why quantitative finance is going to see even greater crises. Because they clearly don't understand the enormity of the fallacy that their careers were built upon.

Frankenstein lives. We continue to witness a deluded and completely false reality.
posted by TimingLogic at 9:57 AM links to this post

Thursday, July 16, 2009

Paul Krugman - We Need More Debt That We Probably Can't Pay Back

You know, living in the hallowed ivory towers of learning often does something to one's brain. Economists pontificate about theories and abstractions that have no place in the real world. In fact some of Krugman's historical pontifications and theories almost certainly fueled this crisis to a much greater degree than most anything we see today. I'd be more than happy to enlighten Mr. Krugman if he wishes.

How did we get to the point where we are spending society's monies on these ivory tower abstractions? If we took Paul Krugman out of his ivory tower and put him to work in a West Virginia coal mine, he might quit publishing these hair-brained theories and develop a more practical real-world view of economics.

I don't think there is a lot of value in the Nobel Prize for economics since none of the winners in the last twenty years saw this environment coming and most of them don't seem to understand the deficiencies to their pontifications.

Of course, Krugman's theory seems alarmingly similar to Mad Money's Jim Cramer who believes Ben Bernanke has also saved us from Depression with the same line of reasoning. It's good to see a leading economist uses the same rationale as the financial buffoons on CNBC.
posted by TimingLogic at 12:56 PM links to this post

The Home Foreclosure Engine Steams Onward

In a time where Wall Street continues to pay record bonuses for completely screwing up the economy and continuing schemes that are continuing to screw up the economy, home foreclosures continue on their continuing record pace. Just wondering how many times I can say continue in a grammatically correct sentence.

We highlighted Alan Blinder's recommendation of reinstituting the HOLC as a possible measure to deal with the foreclosure problem before the economy fell off of a cliff. In hindsight, that still remains a substantially superior solution. But politicians used taxpayer money to bail out every bank on Wall Street so these firms could continue their heist perpetuated on the American people. All while the American people rot. Wall Street is most assuredly due a future collapse. We'll talk more about the specifics behind this statement in future posts but needless to say, I remain confident Wall Street is far from out of the woods given I have made this statement at least half a dozen times in the last month.
posted by TimingLogic at 10:05 AM links to this post

Congress Is Dragging Its Feet On HR 1207

Congress is dragging its feet on the Audit the Federal Reserve Act and we need to keep up the pressure. The dysfunctional codependency that exists between Congress and the banking industry is self-evident. Only the people of this country can force change in Washington. And that means we need to re-engage in politics in a big way. And if you, your friends or your family are unemployed or underemployed or can't afford to pay healthcare costs or are facing any substantial economic crisis, you may be best served in solving that crisis by engaging in political activism. I believe this legislation could provide a tipping point for regulatory and banking system reform. You don't need to support Ron Paul or even his perspectives on economics or government to support this bill. You just need to believe greater transparency will lead to better governance and accountability to the people of this country.

I just sent another letter to both my Congressperson and Senator. Some people often wonder what to type so below is a sample. This is what I sent to my representatives.

Senator or Congressperson,
I am writing about HR 1207. I would like to know why you are not supporting this bill. It is imperative that the sovereign people of the U.S. know what is going on at the Federal Reserve. A banking system controlled by private financial interests with no accountability to Congress or the sovereign is arguably unconstitutional. It didn't used to be this way and the American people want reform in Washington. As our Federal government careens further down the road towards potential default, the people will remember who supported reform and who did not in government. The economy is going to worsen and the next crisis will surely happen on your watch. Those in Congress who agitated for better governance will be best served in any future elections. I would like an answer as to why you are not supporting this bill. If I do not see any action on your part as it pertains to this bill, I plan to start organizing against your re-election. This is a time when I need to see accountability to the people and action from my Senator or Congressperson. Thank you for your service. Regards,
posted by TimingLogic at 8:59 AM links to this post

Wednesday, July 15, 2009

Federal Reserve Vice Chairman Kohn's Warnings To Congress Are A Complete Joke

I want to comment with a stream of conscience post about Donald Kohn's remarks from last week. And the continuous blather from the likes of Senator Dodd, Bernanke and other keepers of "the system". Dodd came out yesterday with similar remarks about independence and I just have to laugh. I guess that's why Dodd slobbered all over himself to get his ass permanently planted on the Senate Banking Committee. Banking independence, that is. Anyway last week Kohn testified before Congress and continues this generally perpetuated myth about Federal Reserve independence and its importance to our credit rating and stability. Is that a joke? We are in the worst financial crisis in our history, he is responsible for our financial system and he is concerned a change will jeopardize our stability. Am I watching Forrest Gump?

I would like someone from the Federal Reserve to actually explain this concept of independence and exactly how it impacts the economy, the sovereignty of the people and the working of our government. Then in their spare time they can explain how this structure fits into the Constitution. This is one of these mindless defenses of a position that involves no reasoning. It's an autonomic responses spoken without any rationale and the more people realize this, the more we can start to knock down some of these ridiculous beliefs.

When the American Congress and the American people have no idea what the Federal Reserve is doing with other central banks, within our banking structure and even within government, how can we accept that as a democracy? And, how can any banker within the Federal Reserve even attempt to defend such an antithetical position? These people need to go read the Constitution. This isn't the Soviet Union. Although the Federal Reserve under its current structure has many similarly endearing qualities.

It is completely ridiculous to argue monetary independence from Congress. Congress was handed the responsibility coining our money under our Constitution. Not a bunch of Wall Street crooks or unelected bureaucrats like Donald Kohn. So, in what way do I benefit from Kohn's argument of monetary independence? The Federal Reserve often monetizes government debt. The Federal Reserve doesn't offer any bulwark against runaway government spending and in fact perpetuates it. What does this supposed independence buy me? I'll tell you what it buys me. A system under which unelected officials are outside of the control of the American people. They are outside of our vote, our sovereignty, our transparency and apparently our rule of law. Here's what else it buys us. The Federal Reserve does not set monetary policy in the U.S. That is a farce. The Congress does by instituting laws and regulations that benefit the Federal Reserve regulated banks. And even non banks as we see with the shadow banking system. And Congress does so under the influence of hundreds of billions of dollars thrown their way by the impartial and independent banking system. This is all a joke. Donald Kohn should be publicly flogged (figuratively) for being so stupid. This argument of independence is like defending the flat earth society - one has to get a frontal lobotomy to argue it.

We know why we have a privately influenced monetary system. It's quite obvious. Monied interests in the government and banking pushed it through one hundred years ago. That's not a conspiracy. That's just a fact. But beyond that I am beginning to wonder many paranoid thoughts. Most of them have nothing to do with banking but, in fact, have to do with our government. All of this makes me wonder if the Federal Reserve might be monetizing much of the money associated with America's interventionist foreign policy or other equally obtuse activities. Who knows what a completely unaccountable agency is capable of. Oh, yeah. Actually we do know. They'll do whatever they bloody-well please.
posted by TimingLogic at 2:43 PM links to this post

The Agriculture Economy Is In Crisis

This story from Monday's NewsHour with Jim Lehrer highlights exactly what we said would happen in our latest update on Potash and the agriculture business. The exact same market dynamics, pricing dynamics and the exact same economic outcomes that we discussed.

Contrary to the Wall Street and commodities bulls who have been and continue to pump agricultural commodities, agriculture stocks, agriculture trading firms and fertilizer companies, market-based reality doesn't jive with Wall Street's expectations. The agriculture business is extremely unstable right now and we are likely to see substantial business failures and a profits implosion. Click here to be taken to the text or video of the story.
posted by TimingLogic at 11:18 AM links to this post

Tuesday, July 14, 2009

Let's Celebrate Goldman Sachs' Bailouts, Earnings, Low Taxes And Billions In Bonuses With Sasha Abramsky

When you listen to this, remember one thing. The people Sasha speaks of are now indebted to pay for Goldman Sachs and other Wall Street firms trillions of dollars in bonuses paid since 1995. Bonuses that we now find out were and continue to be taxpayer-funded. It's a glorious day because what is good for Wall Street is good for America.

posted by TimingLogic at 1:15 PM links to this post

Goldman Sachs Beats Estimates On Trading. Or Is It Stealing?

Just a few off the cuff remarks. The street knew Goldman was going to beat. The stock is pretty much stuck in neutral today. I just went to the Edgar database to see if their quarterly results were posted yet. Not available yet.

So without quarterly results, I'll just think out loud a little. One, it will be interesting to see how much in taxes they pay this year. Last year Goldman paid a 1% tax rate while receiving massive bailouts both implied and in actual cash from the American people. They give some bullshit answer as to why this is so. Something about international earnings mix. Maybe they could clarify this for us given Americans now have to pay Goldman's bonuses ad infinitum with all of the bailouts they received. Two, much of the earnings was trading. Trading and derivatives contracts are a a zero sum game. So, who lost at Goldman's expense? Well, first of all society lost. Goldman is trading against its clients and the American people. And, secondly, since they almost surely took much of that money from other U.S. financial institutions who are also trading, society lost again if government is invoked to bail out firms again in the future. Additionally, many people are questioning if Goldman is involved in illegal trading that is effectively stealing. Barry Ritholtz remarked on this a week or so ago. And, so have quite a few other bloggers.

It's good to be the king. Not much longer though.
posted by TimingLogic at 11:29 AM links to this post

Hedge Fund Guru Barton Biggs Is Bullish On China And The Global Economy

Let's give someone with a different perspective some air time. Barton Biggs is very bullish on China and the global economy. Click on the graphic of Barton below to be taken to the Bloomberg video.

posted by TimingLogic at 8:21 AM links to this post

Secretary Geithner On Middle East Investment For Future Growth

“The world has yet to fully appreciate the scale of ambition and investment we are seeing in the Kingdom and the Gulf region to lay the foundation for future growth. You are diversifying your economies to build a future less dependent on oil and natural gas.” -- Treasury Secretary Geithner

Oh I think we understand quite well. We have been extremely bearish on the Middle East since this blog's inception. May I get you some ketchup and mustard to help you eat those words?

It's nice to see Secretary Geithner's masters degree in international economics is serving him well.
posted by TimingLogic at 7:53 AM links to this post