Time For a Review: Economic Power, Authoritarian Capitalism, and the Failure of Governance

"There are quite a few theories and a deepening economic debate swirling around. Even Marx is being selectively resurrected to help explain what is going on. Everything can contribute something, but the less useful parts merely add to the noise and confusion.

I think the situation is a little more simple than many portray, but it is ironically elusive to most people's minds as they distort their models to accommodate the new realities, which are little different from the old realities, at least in the historical context. Reform is a slow horse to leave the gate when the games are still fixed.

Fraud is, after all, a confidence game. But when confidence fails, all the con men have left is fear and greed, and the darker emotions that come with them. So let's talk about anything and everything except what really happened, and make that discussion as complex as possible. Let's not fix what is broken, in small manageable bites. Let's attempt to reinvent and reorganize the entire system. As in corporations, when management fails, time to reorganize and redivide the power amongst the power brokers, rather than actually fix anything.

The sad truth is that most economic models are artificial constructs that crush the life out of reality according to the bias of their authors, and are used to justify behaviours that are in the self-interest in whatever group that promotes them. This is because except for some very basic ideas, macro-economics is not a science, but much more significantly a public policy discussion with some mathematical relationships added, and those largely of a statistical estimation...."

at http://jessescrossroadscafe.blogspot.com/2011/08/time-for-review-economic-power.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+JessesCafeAmericain+%28Jesse%27s+Caf%C3%A9+Am%C3%A9ricain%29

More Legal Woes for BofA: Homeowners Opposes $8.5 Billion Settlement; Different Trustee Sues Over Reps and Warranties

"Bank of Americas’s stock beat a bit of a retreat today as its so called $8.5 billion settlement came under increased fire. Frankly, the number of objections filed prior to late afternoon yesterday and today meant it was dead in its current form. At best, it would take a two or three years and a bigger price tag for any deal to be concluded (although we are in the skeptics’ camp, particularly as far as the currently overly broad waiver of liability is concerned).

Nevertheless, the latest developments pound more nails into the coffin. Yesterday, as we noted, the FDIC filed a minimalist objection, saying the disclosures were inadequate for it to know whether it would oppose the deal or not. Today, a suit by several homeowners, supported by the National Consumer Law Center, flagged an issue that we highlighted in our initial comments on the deal: that the settlement included provisions to manage foreclosures to strict timetables, designed to speed them up. That was one of the “gimmies” to investors, and homeowner advocates are none too happy. Per the New York Times:..."

at http://www.nakedcapitalism.com/2011/08/more-legal-woes-for-bofa-homeowners-opposes-8-5-billion-settlement-different-trustee-sues-over-reps-and-warranties.html

What Does Canada’s Shrinking GDP Say About U.S.?

"Grim news just arrived from north of the border that is telling us something gloomy about our economic health.

New data show Canada’s economy unexpectedly went into reverse gear in the second quarter of the year, declining 0.1%. That’s an annualized drop of 0.4%, down from growth of 3.6% in the first quarter.

It matters because Canada is our principal trading partner. Some politicians hoped that international trade would help the U.S. gets its economic mojo back.

But when we look inside the Canadian data that’s just where the weakness is. The big driver in Canada’s weakness was a huge drop in exports, down 2.1%. At least part of the drop can be explained by a fall in energy sales due to wildfires; and lack of components caused by the earthquake in Japan.

What it also points to is a slowing U.S. economy..."

at http://blogs.wsj.com/economics/2011/08/31/what-does-canadas-shrinking-gdp-say-about-u-s/?mod=WSJBlog

LPL: BE PREPARED FOR A DISASTROUS ISM MANUFACTURING REPORT

"If the “whisper number” for this week’s ISM Manufacturing report is correct then we can expect a disastrous report. According to LPL Financial the regional manufacturing reports are consistent with a contracting ISM figure:

Based on weakness in various regional ISM and Federal Reserve manufacturing sentiment surveys already released for August (Philly Fed, Empire State manufacturing, Richmond Fed, Dallas Fed), the consensus expects the August reading on the ISM to dip below 50 (to 48.5), from the 50.9 reading in July. The so-called “whisper number” among traders (who often informally have their own forecasts for key economic data and events that differs from the consensus estimate culled from economists) is probably closer to 44.0 or 45.0. Thus, expectations for ISM are quite low. A reading below 50 on the ISM has historically corresponded with contraction in the manufacturing sector, while a reading about 50 suggests an expanding manufacturing sector. The last time the ISM was below 50 was in July 2009, the first month of the current economic recovery..."

at  http://pragcap.com/lpl-be-prepared-for-a-disastrous-ism-manufacturing-report

Eurozone Retail Sales Drop 4th Straight Month; Confidence Drop Most Since 2008; EU GDP .2%; Leading Indicators Negative; S&P Fantasyland Forecast

"The Eurozone economy is in shambles. Retail sales are down for the 4th consecutive month, consumer and economic confidence have plunged.

Yet, economic denial runs deep. Government GDP estimates in Spain and Italy are preposterous, as are S&P growth forecasts. Let's take a look at the reports..."

at http://globaleconomicanalysis.blogspot.com/2011/08/eurozone-retail-sales-drop-4th-straight.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+MishsGlobalEconomicTrendAnalysis+%28Mish%27s+Global+Economic+Trend+Analysis%29

25 Signs That The Financial World Is About To Hit The Big Red Panic Button

"The following are 25 signs that the financial world is about to hit the big red panic button....

#1 According to a new study just released by Merrill Lynch, the U.S. economy has an 80% chance of going into another recession.

#2 Will Bank of America be the next Lehman Brothers? Shares of Bank of America have fallen more than 40% over the past couple of months. Even though Warren Buffet recently stepped in with 5 billion dollars, the reality is that the problems for Bank of America are far from over. In fact, one analyst is projecting that Bank of America is going to need to raise 40 or 50 billion dollars in new capital.

#3 European bank stocks have gotten absolutely hammered in recent weeks.

#4 So far, major international banks have announced layoffs of more than 60,000 workers, and more layoff announcements are expected this fall. A recent article in the New York Times detailed some of the carnage....

A new wave of layoffs is emblematic of this shift as nearly every major bank undertakes a cost-cutting initiative, some with names like Project Compass. UBS has announced 3,500 layoffs, 5 percent of its staff, and Citigroup is quietly cutting dozens of traders. Bank of America could cut as many as 10,000 jobs, or 3.5 percent of its work force. ABN Amro, Barclays, Bank of New York Mellon, Credit Suisse, Goldman Sachs, HSBC, Lloyds, State Street and Wells Fargo have in recent months all announced plans to cut jobs — tens of thousands all told.

#5 Credit markets are really drying up. Do you remember what happened in 2008 when that happened? Many are now warning that we are getting very close to a repeat of that.

#6 The Conference Board has announced that the U.S. Consumer Confidence Index fell from 59.2 in July to 44.5 in August. That is the lowest reading that we have seen since the last recession ended.

#7 The University of Michigan Consumer Sentiment Index has fallen by almost 20 points over the last three months. This index is now the lowest it has been in 30 years.

#8 The Philadelphia Fed's latest survey of regional manufacturing activity was absolutely nightmarish....

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from a slightly positive reading of 3.2 in July to -30.7 in August. The index is now at its lowest level since March 2009

#9 According to Bloomberg, since World War II almost every time that the year over year change in real GDP has fallen below 2% the U.S. economy has fallen into a recession....

Since 1948, every time the four-quarter change has fallen below 2 percent, the economy has entered a recession. It’s hard to argue against an indicator with such a long history of accuracy..."

at  http://theeconomiccollapseblog.com/archives/25-signs-that-the-financial-world-is-about-to-hit-the-big-red-panic-button

Europe’s Shaky Foundations

"Slowly, word is getting round – even in Germany – that the financial crisis could destroy the European unification project in its entirety, because it demonstrates, quite relentlessly, the weaknesses of the eurozone and its construction. Those weaknesses are less financial or economic than political.

The Maastricht Treaty established a monetary union, but the political union that is an indispensable precondition for the common currency’s success remained a mere promise. The euro, and the countries that adopted it, are now paying the price. The eurozone now rests on the shaky basis of a confederation of states that are committed both to a monetary union and to retaining their fiscal sovereignty. At a time of crisis, that cannot work..."

at http://www.project-syndicate.org/commentary/fischer65/English

DEEP THOUGHTS FROM ROBERT SHILLER

"Robert Shiller joined Consuelo Mack on WealthTrack this past weekend to discuss the ongoing problems in the economy. Shiller of course is notable for having predicted both the Nasdaq bubble and the housing bubble. He remains one of the few academics who understands how markets and the broader economy relate to one another.

In this interview Shiller explains why he believes the psyche of the investing class and the general economic participants are being negatively impacted by the economic malaise. He refers to it as a positive feedback loop that is very difficult to reverse. In equities, Shiller makes some rather alarming comments. He says the current volatility is not healthy and could very well be preceding a “substantial” decline in equities. He makes no firm predictions, but he maintains that the current fragile environment could result in major downside.

He explains why equities still appear expensive, why housing is likely to remain under pressure, why the general economy is likely to suffer a continuing malaise and why TIPS are his favorite investment currently:..."

at http://pragcap.com/deep-thoughts-from-robert-shiller

J. BRADFORD DELONG: Bernanke Is Living In A Dream World, US Growth HAS Permanently Slowed

"...Finally, Bernanke claimed that “the growth fundamentals of the United States do not appear to have been permanently altered by the shocks of the past four years.”

Frankly, I do not understand how Bernanke can say any of these things right now.

If he and the rest of the Federal Open Market Committee thought that the projected growth of nominal spending in the US was on an appropriate recovery path two months ago, they cannot believe that today. Two months of bad economic news, coupled with asset markets’ severe revaluations of the future – which also cause slower future growth, as falling asset prices lead firms to scale back investment – mean that a policy that was appropriate just 60 days ago is much too austere today.

But let me focus on Bernanke’s fourth statement. Even if we project a relatively rapid economic recovery, by the time this lesser depression is over, the US will have experienced an investment shortfall of at least $4 trillion. Until that investment shortfall is made up, the missing capital will serve to depress the level of real GDP in the US by two full percentage points. America’s growth trajectory will be 2% below what it would have been had the financial crisis been successfully finessed and the lesser depression avoided.

There is more: state and local budget-cutting has slowed America’s pace of investment in human capital and infrastructure, adding a third percentage point to the downward shift in the country’s long-term growth trajectory.

After the Great Depression of the 1930’s, the vast wave of investment in industrial capacity during World War II made up the shortfall of the lost decade. As a result, the Depression did not cast a shadow on future growth – or, rather, the shadow was overwhelmed by the blinding floodlights of five years of mobilization for total war against Nazi Germany and Imperial Japan.

There is no analogous set of floodlights being deployed to erase the shadow that is currently being cast by the lesser depression. On the contrary, the shadow is lengthening with each passing day, owing to the absence of effective policies to get the flow of economy-wide nominal spending back on its previous track.

Moreover, there is an additional source of drag. A powerful factor that diminished perceived risk and encouraged investment and enterprise in the post-WWII era was the so-called “Roosevelt put.” Industrial-country governments all around the world now took fighting depression to be their first and highest economic priority, so that savers and businesses had no reason to worry that the hard times that followed 1873, 1884, or 1929 would return.

That is no longer true. The world in the future will be a riskier place than we thought it was – not because government will no longer offer guarantees that it should never have offered in the first place, but rather because the real risk that one’s customers might vanish in a prolonged depression is back.

I do not know by how much this extra risk will impede the growth of the US and global economies. A back-of-the-envelope estimate suggests that a five-year lesser depression every 50 years that pushes the economy an extra 10% below its potential would reduce average investment returns and retard private investment by enough to shave two-tenths of a percentage point from economic growth every year. As a result, America would not just end this episode 3% poorer than it might have been; the gap would grow – to 7% by 2035 and 11% by 2055..."

at http://www.businessinsider.com/j-bradford-delong-ben-bernankes-living-in-a-dream-world-2011-8?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+businessinsider+%28Business+Insider%29

Wells Fargo Says 12 States in Economic Contraction

"According to a Wells Fargo report, 12 States in Contraction, Alabama in Recession.

The report from the San Francisco-based bank said Alabama was one of 12 states experiencing an economic contraction in July and "likely slipped into a recession."

The report, written by senior economist Mark Vitner and economist Michael A Brown, said more states "are likely to fall into negative territory within the next six months" because of a persistent decline in manufacturing jobs.

Of the 12 states cited in Wells Fargo's report, five were in the South. Joining Alabama were Georgia, South Carolina, North Carolina and Virginia. The other seven states were Michigan, Nevada, Montana, Illinois, Indiana, Vermont, and Alaska..."

at  http://globaleconomicanalysis.blogspot.com/2011/08/wells-fargo-says-12-states-in-economic.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+MishsGlobalEconomicTrendAnalysis+%28Mish%27s+Global+Economic+Trend+Analysis%29

Consumer Confidence Plunges to 44.5, Lowest Since April 2009; Case Shiller Home Index at 2003 Levels, Down 5.9% vs. Year-Ago

"In a healthy economy, consumer confidence would be 90. Instead it is slightly less than half that.

Please consider U.S. Consumer Confidence Falls to Two-Year Low

The Conference Board’s index slumped to 44.5, the weakest since April 2009, from a revised 59.2 reading in July, figures from the New York-based research group showed today. It was the biggest point drop since October 2008. A separate report showed home prices declined for a ninth month.

“This paints a picture of underlying demand weakening,” said Bricklin Dwyer, an economist at BNP Paribas in New York, whose forecast of 45 was most accurate in a Bloomberg News survey. “Consumers are seeing their wealth deteriorate. We’ve seen a huge decline continuing in the housing market. They’ve also been hit on the chin by the equity markets.”

The S&P/Case-Shiller index of property values in 20 cities fell 4.5 percent in June from a year earlier, after a 4.6 percent drop in the 12 months ended in May that was the biggest since 2009..."

at  http://globaleconomicanalysis.blogspot.com/2011/08/consumer-confidence-plunges-to-445.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+MishsGlobalEconomicTrendAnalysis+%28Mish%27s+Global+Economic+Trend+Analysis%29

German Finance Minister Says World Faces "Seven Lean Years" Over Austerity

"17 Nobel laureate economists bickered over the wisdom of austerity measures when they met this weekend in Lindau, Germany and St. Gallen, Switzerland.

The one thing they agreed on is that growth will suck.

German Finance Minister Wolfgang Schaeuble said the global economy may see "seven lean years" as a result of austerity measures..."
at http://www.businessinsider.com/nobel-laureate-economists-lindau-meeting-austerity-2011-8?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+clusterstock+%28ClusterStock%29#ixzz1WRm48Qlw

German President says ECB Bond Purchases "Legally and Politically Questionable"

"How much more Italian bonds can the ECB buy before it runs out of cash, willpower, or completely drains the EFSF €440bn pool of money?

While pondering the above question please note that German President, Christian Wulff, leader of the Christian Democratic Union, says that ECB bond purchases are "legally and politically questionable".

The Telegraph reports on the accusation by Wulff in Germany fires cannon shot across Europe's bows

In a cannon shot across Europe’s bows, he warned that Germany is reaching bailout exhaustion and cannot allow its own democracy to be undermined by EU mayhem.

“I regard the huge buy-up of bonds of individual states by the ECB as legally and politically questionable. Article 123 of the Treaty on the EU’s workings prohibits the ECB from directly purchasing debt instruments, in order to safeguard the central bank’s independence,” he said.

Mr Wulff said the ECB had gone “way beyond the bounds of their mandate” by purchasing €110bn (£96.6bn) of bonds, echoing widespread concerns in Germany that ECB intervention in the Italian and Spanish bond markets this month mark a dangerous escalation.

The blistering attack follows equally harsh words by the Bundesbank in its monthly report. The bank slammed the ECB’s bond purchases and also warned that the EU’s broader bail-out machinery violates EU treaties and lacks “democratic legitimacy”.

The combined attacks come just two weeks before the German constitutional court rules on the legality of the various bailout policies. The verdict is expected on September 7.

The tone of language from two of Germany’s most respected institutions suggests that both markets and Europe’s political establishment have been complacent in assuming that the court would rubberstamp the EU summit deals in Brussels.

Nobel laureate Joe Stiglitz told the forum that the euro is likely to fall apart unless Germany accepts some form of fiscal union. “More austerity for Greece and Spain is not the answer. Medieval blood-letting will kill the patient, and democracies won’t put up with this kind of medicine..."

at  http://globaleconomicanalysis.blogspot.com/2011/08/greece-1-yr-rate-60-finland-retains.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+MishsGlobalEconomicTrendAnalysis+%28Mish%27s+Global+Economic+Trend+Analysis%29

International Monetary Research says "Eurozone Break-Up Certain"; I say Embrace the Fact "Banks Cannot Be Saved"

"
Echoing what I have been saying for years, Christine Lagarde, the new head of the IMF says "Banks Need Urgent Recapitalisation". Unfortunately, much of the rest of what she says is pure nonsense, including the way she wants to achieve that mission.

Please consider European banks set cash test by IMF chief

Christine Lagarde, the IMF’s new chief, set off tremors at the Jackson Hole summit over the weekend with warnings that the global financial system is on very thin ice and vulnerable to the slightest shock.

“We are in a dangerous new phase. The stakes are clear: we risk seeing the fragile recovery derailed, so we must act now,” she said.

“Banks need urgent recapitalisation. If it is not addressed we could easily see the further spread of economic weakness to core countries, even a debilitating liquidity crisis. The most efficient solution would be mandatory substantial recapitalisation,” she said..."

at  http://globaleconomicanalysis.blogspot.com/2011/08/international-monetarty-research-says.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+MishsGlobalEconomicTrendAnalysis+%28Mish%27s+Global+Economic+Trend+Analysis%29

US In Recession Right Here, Right Now

"I am amused by those who think a US recession will come within a year. Even more amusing are those who think a recession will not come at all.

The US is in a recession now. I am not the only one who thinks so.

Last Friday, I received an email from Rick Davis at Consumer Metrics, complete with an Excel spreadsheet that shows that had the GDP deflator been based on the consumer price index (CPI) rather than the BEA's measure of price inflation, the US would already be in the second quarter of contraction.

My friend Tim Wallace noted Davis' explanation would be consistent with Petroleum Distillates Demand Shows "Definite Economic Downturn Starting April/May 2011".

Thus Wallace was not surprised at all.

In the meantime, I received a set of emails from Doug Short. He had already charted what I was about to graph. Let's take a look.

The Deflator Makes Big a Difference

Please consider Will the "Real" GDP Please Stand Up? by Doug Short.

How do you get from Nominal GDP to Real GDP? You subtract inflation. The Bureau of Economic Analysis (BEA) uses its own GDP deflator for this purpose, which is somewhat different from the BEA's deflator for Personal Consumption Expenditures and quite a bit different from the better-known Bureau of Labor Statistics' inflation gauge, the Consumer Price Index..."

at  http://globaleconomicanalysis.blogspot.com/2011/08/us-in-recession-right-here-right-now.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+MishsGlobalEconomicTrendAnalysis+%28Mish%27s+Global+Economic+Trend+Analysis%29

3 Charts From SocGen On Why The "Japanese Scenario" Means Investors Should "Be Afraid, Be Very Afraid"

"Some observations from SocGen, which presents us with three charts explaining why those who believe in the Japanese scenario should "be afraid, be very afraid - If we accept the idea of a three-stage crisis (taking as our starting points 2000/01 + 2007/08 + 2011), we have probably reached a situation similar to Japan’s lost decade of the 1990s. A Japanese-style scenario for the US could gain traction, particularly if there is no real estate recovery in the US, high unemployment levels persist, and economic sentiment remains depressed. Such a configuration would suggest that, in June 2011, we exit a bear market rally, which was fuelled by restocking and QE2. Another 20% drop in the equity indices could then be observed in the coming months if this scenario were to materialise."

Chart 1 on where developed market debt is headed:



SocGen Commentary:

As the debt situation worsens, rates must remain low

The US debt trajectory through 2016 is very worrying, and explains the recent US rating downgrade from S&P from AAA to AA+. US debt bears little resemblance to the structure of German debt or even euro debt, even after the agreement reached in the US between Democrats and Republicans. Hence, we can affirm that the euro crisis is linked directly to the lack of a united front among European leaders rather than the debt situation itself as a whole. With progress (although laborious) being made on austerity plans, rates will probably remain very low for an exceptionally long period of time.

Conclusion 2: 10-year rates will remain low for major western countries

Chart 2



Commentary:

The threat of inflation vanishing in the short term

As expected (see Global Research Alert 2 May) the spectre of deflation has returned to the fore as western governments now focus on austerity measures as a means of restoring confidence. In the US, the property market remains the worrying part of the economy. Although still at 3.6% in the US and at 2.7% in Europe, inflation may drop in the coming months owing to the economic slowdown. Thus, with unemployment still at 9.1%, it seems illusory to expect inflation in the coming 12 months and hence there is no risk of bond yields climbing. The bond market suggests the real thing to worry about is deflation, again calling to mind Japan’s lost decade. This is clearly an extreme scenario but nevertheless a major threat for western economies.

And the chart kicker, which supports the lede paragraph is the following. It needs no elaboration.



at http://www.zerohedge.com/news/3-charts-socgen-why-japanese-scenario-means-investors-should-be-afraid-be-very-afraid

We never really came out of the Recession in many different sectors of the economy

"Marc Faber : I think We never really came out of the Recession in many different sectors of the economy in some sectors we came out , and if you look at the world , the emerging world has continued to grow throughout the period 2008 up to today , there is a slowdown now occurring in emerging economies but the western world western Europe and the US there is hardly any growth and if you look back say 1999 to today the US as an economy macro-economically speaking is of course much worse off than in 1999 courtesy of the federal reserve I may add..."

at http://marcfaberchannel.blogspot.com/2011/08/we-never-really-came-out-of-recession.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+MarcFaberBlog+%28Marc+Faber+Blog%29

THE END OF THE WORLD, PART 1

"The following is an excerpt from John Mauldin’s weekly letter:

In trying to decipher Europe it is hard to know where to start, but let’s begin with some assumptions:
For the euro to survive, one of two things must happen. Either the Germans (and the Dutch and Finns and French) decide to back the concept of some sort of eurobond financing of the balance sheets of the peripheral countries, OR there need to be massive write-downs of insolvent-country debt and the various countries need to backstop their banks, because bank losses will be massive.

The former needs buy-in from German voters. Polls show Germans are against the idea of eurobonds by something like 5-1 (75% against, 15% for). (More on Germany below.) The latter option assumes the peripheral countries will lose access to the private bond markets, thus forcing sudden and enormous austerity (read Depression levels or worse). Will they simply throw in the towel and leave the euro on their own, remaining in the free-trade zone but with their own currencies, much as Denmark, the Czech Republic, or Sweden are now? Or opt to suffer and remain in the euro?..."

at http://pragcap.com/the-end-of-the-world-part-1

Capital Flight Proves Confidence in European Interbank System has Collapsed

"Capital flight from European banks has now reached such a state that for one undisclosed bank needed emergency funding last week for a mere $5 million. Previously, the ECB stepped in to provide $500 million in emergency liquidity measures to non-disclosed banks.

As money flees Europe, it lands in US banks that do not know what to do with it. Capital flight has led to negative interest rates in the US..."

at http://globaleconomicanalysis.blogspot.com/2011/08/capital-flight-proves-confidence-in.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+MishsGlobalEconomicTrendAnalysis+%28Mish%27s+Global+Economic+Trend+Analysis%29

Paul Woolley: "The Market Has Become Dangerous For Humanity...It Isn't Reaching Equilibrium, It Is Falling Into Chaos"

"For anyone who is still confused why the tail-wags-dog reverse relationship of the stock market as a leading indicator to the economy, and to western civilization in general, can be a problem for said civilization (not to mention the former) once the current iteration of central planning loses control over everything, as it always does, here is an interview between German daily Spiegel and Paul Woolley, a one time fund manager, and currently head of the LSE's center for Capital Market Dysfunctionality (sometimes affectionately known as the Princeton Economics department) who explains why things are on the edge of a precipice. His message for anyone who thought that Irene may have been a risk: you ain't seen nothing yet. "The developments in recent weeks have made it quite clear that the markets don't function properly. Things are spinning out of control and are potentially dangerous for society. Only a fraternity of academic high priests connected to the finance markets is still speaking of efficient markets. Still each market participant is pursuing their own selfish interests. The market isn't reaching equilibrium -- it's falling into chaos."

From Der Spiegel:

Financial markets are inefficient and growing to the point of overwhelming the economy, according to Paul Woolley, an expert on market dysfunctionality. In an interview with SPIEGEL he explains why it's up to investors to stop dangerous trends and hold financial institutions accountable.

SPIEGEL: Mr. Woolley, you were fund manager for many years, but went on to found a research institute at the London School of Economics to study why financial markets repeatedly go haywire. Now speculators are once again betting against the euro, and share prices for big companies are falling by 20 percent in a day only to shoot back up again. What is going on?

Woolley: The developments in recent weeks have made it quite clear that the markets don't function properly. Things are spinning out of control and are potentially dangerous for society. Only a fraternity of academic high priests connected to the finance markets is still speaking of efficient markets. Still each market participant is pursuing their own selfish interests. The market isn't reaching equilibrium -- it's falling into chaos..."

at http://www.zerohedge.com/news/paul-woolley-market-has-become-dangerous-humanityit-isnt-reaching-equilibrium-it-falling-chaos

Everyone should hold some gold because it is a form of cash

"Marc Faber : People should buy gold today because there is a huge run in precious metals recently and I think they need to consolidate and shake out the weak holders , everyone should hold some gold because it is a form of cash. Gold is the most honest form of cash..."

at http://marcfaberchannel.blogspot.com/2011/08/everyone-should-hold-some-gold-because.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+MarcFaberBlog+%28Marc+Faber+Blog%29

Widening U.S. Trade Deficit Adds to Fears of Global Economic Slowdown

"The widening U.S. trade deficit surprised analysts last week by reaching a level not seen since October 2008, while the decline in exports added to growing evidence of a global economic slowdown.

The U.S. Commerce Department announced last Thursday that the trade gap grew 4.4%, to $53.1 billion from $50.8 billion in May. Economists had expected it to shrink to $48 billion.

Although both exports and imports declined, economists viewed the drop in exports as another sign of trouble for the global economy, which in turn will exert more stress on the struggling U.S. recovery..."

at http://moneymorning.com/2011/08/16/widening-us-trade-deficit-adds-to-fears-of-global-economic-slowdown/

High Debt Levels Poised to Stunt Growth

"New research suggests the high and rising debt of the U.S., Japan and Europe will stunt economic growth unless countries act quickly to contain it.

A paper presented Friday by three economists at the Bank for International Settlements finds that debt–be it government or corporate–starts to weigh on growth when it rises close to an economy’s annual output, a predicament currently shared by almost all of the world’s largest advanced economies.

Stephen G. Cecchetti, M.S. Mohanty and Fabrizio Zampolli show that public debt begins to hurt once it rises from a range of between 80% to 100% of gross domestic product. The threshold is above 90% of GDP for corporate debt and around 85% of GDP for household debt, though the economists warn the latter is only their best guess..."

at  http://blogs.wsj.com/economics/2011/08/27/high-debt-levels-poised-to-stunt-growth/?mod=WSJBlog

Debt is the Problem and Private Debt is Even More of a Problem

"As many of you know our fund is currently positioned to benefit from a declining stock market. This bearishness is mostly due to the enormous debt built up over the last few decades (total debt-including private debt-- was $11 trillion in 1984 and grew by over $40 trillion to over $52 trillion today). Of that $40 trillion increase over 27 years, $26 trillion came in the last decade..."



at http://www.creditwritedowns.com/2011/08/private-debt-deflation.html

State Officials Starting to Question Securitization Fail, Whether States Should Tax RMBS

"This letter (hat tip Daniel Pennell) by Virginia delegate Bob Marshall is another indicator that mortgage backed securitization issues are not going away any time soon. Notice that the questions are sophisticated and show familiarity with recent litigation.

And look at question 10. I’ve been wondering when cash strapped states might look to the apparent failure of mortgage securitizations to adhere to REMIC rules as a possible trigger for tax assessments. The IRS simply refuses to go there. I was given a pretty close to temporaneous report last year when a lawyer who understood the tax issues contacted the IRS; the enforcement officer who took his call, who was very senior, understood the implications immediately and was very keen. But she reported back later that the question had gone to the White House and the response was “We are not going to use tax as a tool of policy.” So enforcing statutes is somehow abusive? This is either a deeply internalized Wall Street centric view of the world, or just plain corruption, take your pick. The IRS can always defend its stance because tax notions of what constitutes a valid transfer don’t have to map onto the legal treatment.

I don’t actually expect any state to have the guts to charge the investors in RMBS taxes because the trusts didn’t comply with the rules set forth for them to get pass through treatment. It would be a blow up the mortgage industrial complex level event (as in I’m sure any state official who tried going this route would get the political equivalent of death threats). But this issue represents considerable leverage, and there might be creative ways to use it. For instance, several states get together and use the tax threat to get major investors to pressure servicers for real principal mods, which is something the overwhelming majority of investors would favor but have heretofore been too chicken to beat up on Wall Street about it...."

at  http://www.nakedcapitalism.com/2011/08/state-officials-starting-to-question-securitization-fail-whether-states-should-tax-rmbs.html

RAIL TRAFFIC STILL CONSISTENT WITH STAGNANT GROWTH

"The weak trend in rail data continued this week as intermodal traffic and total carloads increased ~1% over last year. In my opinion, this is consistent with a US economy that is stagnant, but not collapsing. Overall, I think this is expected given the balance sheet recession and the easing in government spending. The AAR elaborates on this week’s data:.."

at http://pragcap.com/rail-traffic-still-consistent-with-stagnant-growth

MISUNDERSTANDING THE MONETARY SYSTEM IS BAD FOR YOUR PORTFOLIO

"I’ve been incredibly vocal over the last year about QE2 and its likely impact on the US economy and US government bond market. Time and time again I have said that the policy was largely a waste of time and effort and unlikely to have any real substantive effect on the economy (see here and here). The policy was flawed primarily due to one rather simple mistake – it focused on size and not price. This resulted in no real transmission mechanism through which it could impact the economy and failed to control interest rates.

Most investors did not believe this perspective and maintained that QE2 would not only cause surging inflation, but would also cause US government bond yields to surge when the program ended. This was primarily due to the many myths that have persisted surrounding QE2. These were the myths of “debt monetization“, “money printing” and “stimulus”. These are nothing more than common misunderstandings, but investors who listened to these myths failed to assess how QE2 would impact the asset it targeted – US government bonds. None of these misinterpretations was more famous than Bill Gross who incorrectly analyzed QE1, but also misunderstood QE2. Yesterday, the WSJ discussed the investment performance of the PIMCO Total Return Fund as a result of this analysis:..."

at http://pragcap.com/misunderstanding-the-monetary-system-is-bad-for-your-portfolio

KOO: THE U.S. IS TURNING JAPANESE

"Richard Koo was on Bloomberg this morning discussing his outlook for the U.S. economy. Koo is the most prominent believer in the “balance sheet recession” theory. He says we are looking more and more Japanese and is increasingly concerned about the potential declines in government spending:

It’s beginning to look more like Japan. The amount of house price decline. The commercial real estate decline. They are all following the Japanese pattern very precisely. And very slow GDP growth even with all this monetary easing. QE2, possibly QE3 suggests to me that the USA is going through the same process – balance sheet recession – that Japan went through 15 years ago..."

at  http://pragcap.com/koo-the-u-s-is-turning-japanese

Schwab Sues Bank of America, Citigroup for Manipulating LIBOR Rates; IMF Notes that LIBOR Underpins $400 Trillion in Financial Derivatives

"Investment News reports Schwab sues banks for manipulating Libor rates.

Charles Schwab Corp., the largest independent brokerage by client assets, sued Bank of America Corp., Citigroup Inc. and other banks claiming they manipulated the London interbank offered rate, or Libor, starting in 2007 in violation of U.S. antitrust law.

The banks conspired to depress Libor rates by understating their borrowing costs, thereby lowering their interest expenses on products tied to the rates, according to the lawsuit filed Aug. 23 in federal court in San Francisco, where Schwab is based.

The banks “reaped hundreds of millions, if not billions, of dollars in ill-gotten gains,” Schwab wrote..."

at http://globaleconomicanalysis.blogspot.com/2011/08/schwab-sues-bank-of-america-citigroup.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+MishsGlobalEconomicTrendAnalysis+%28Mish%27s+Global+Economic+Trend+Analysis%29

Bernanke's Invisible Bazooka Ploy

"Bernanke is out of tools that make any sense even to him.

Seriously, what can he do he has not already done? Given that $1.6 trillion in excess reserves did not do a damn thing to spur lending or job creation, what possible good can another $1 trillion do?

The answer is none.

Yet Monetarist fools want more QE. Monetarist fools are also hoping for "Operation Twist", technically not QE but an attempt to drive down long-term rates by buying the long end of the curve and selling the short end..."

at http://globaleconomicanalysis.blogspot.com/2011/08/bernankes-invisible-bazooka-ploy.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+MishsGlobalEconomicTrendAnalysis+%28Mish%27s+Global+Economic+Trend+Analysis%29

8 Trillion Euros in Borrow-Short Lend-Long Madness at European Banks; Circuit-Breaker Silliness; Dash for Cash Sends Short-Term Rates Negative Again

"The Financial Times reports US funds show true state of eurozone banks

Morgan Stanley, calculates that of the €8,000bn funding that is currently in place for the largest 91 eurozone banks, some 58 per cent needs to be rolled over in the next two years. More startling still, some 47 per cent of this funding is less than a year in duration. Much of that is in euros..."

at  http://globaleconomicanalysis.blogspot.com/2011/08/8-trillion-euros-in-borrow-short-lend.html

One Number Says it All

"The number is 0.2%. It is the average annualized growth of US consumer spending over the past 14 quarters – calculated in inflation-adjusted terms from the first quarter of 2008 to the second quarter of 2011. Never before in the post-World War II era have American consumers been so weak for so long. This one number encapsulates much of what is wrong today in the US – and in the global economy..."

at http://www.project-syndicate.org/commentary/roach8/English

Freddie delinquencies tick up for first time in 10 months

"The Freddie Mac delinquency rate increased 1 basis point in July to 3.51%, the first increase since November.

The rate is a percentage of the mortgages backing securities Freddie Mac guarantees. Freddie cut its guarantee book every month since February 2010. It dropped below $1.7 trillion in July, a $9 billion reduction from the previous month and the lowest point since October 2007, according to the Freddie monthly summary..."

at http://www.housingwire.com/2011/08/25/freddie-delinquency-rate-ticks-up-for-first-time-in-10-months?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+housingwire%2FuOVI+%28HousingWire%29

Europe’s Headed For A Crisis, Says FT’s Gillian Tett

at http://www.ritholtz.com/blog/2011/08/europe%e2%80%99s-headed-for-a-crisis-says-ft%e2%80%99s-gillian-tett/

Bombshell Admission of Failed Securitization Process in American Home Mortgage Servicing/LPS Lawsuit

"Wow, Jones Day just created a huge mess for its client and banks generally if anyone is alert enough to act on it.

The lawsuit in question is American Home Mortgage Servicing Inc. v Lender Processing Services. It hasn’t gotten all that much attention (unless you are on the LPS deathwatch beat) because to most, it looks like yet another beauty contest between Cinderella’s two ugly sisters.

AHMSI is a servicer (the successor to Option One, and it may also still have some Ameriquest servicing). AHMSI is mad at LPS because LPS was supposed to prepare certain types of documentation AHMSI used in foreclosures. AHMSI authorized the use of certain designated staffers signing with the authority of AHSI (what we call robosinging, since the people signing these documents didn’t have personal knowledge, which is required if any of the documents were affidavits). But it did not authorize the use of surrogate signers, which were (I kid you not) people hired to forge the signatures of robosigners.

The lawsuit rather matter of factly makes a stunning admission (note that PSA here means Professional Services Agreement, and it was the contract between AHSI and LPS, click to enlarge)..."

at http://www.nakedcapitalism.com/2011/08/bombshell-admission-of-failed-securitization-process-in-american-home-mortgage-servicinglps-lawsuit.html

Why Is the White House Defending the Banks from Investigations?

"Via Outside the Beltway, I see that the administration is pressing New York's attorney general to drop its investigation into dodgy foreclosure practices and settle with the banks. Doug Mataconis, who wrote the post, says "I'm sure the large amount of donations coming from the financial sector into the coffers of the Democratic National Committee and Obama For America have nothing to do with this pressure. I also believe the guy who tells me he has a bridge in Brooklyn to sell me."

at http://www.theatlantic.com/business/archive/2011/08/why-is-the-white-house-defending-the-banks-from-investigations/244131/

DOLLAR MIXED AS HOPES FOR JACKSON HOLE SOLUTION FADE

"Two stimulus-driven stories are shaping up events on Wall Street on the eve of Bernanke’s Jackson Hole address. “Don’t expect Bernanke to offer more support for the economy,” is the warning from former Soros advisor, Richard Medley. He says that rear-view inflation resulting from the first two waves of quantitative easing have created resistance among FOMC members to doing more. But better-targeted relief could be on its way according to a New York Times article characterizing refinancing for millions of homeowners with mortgages backed by government agencies Fannie Mae and Freddie Mac. The loose talk is that qualifying borrowers could have mortgage rates reset to 4% freeing up more in terms of disposable income..."

at http://pragcap.com/dollar-mixed-as-hopes-for-jackson-hole-solution-fade

Economist John Williams of Shadow Stats on Goldseek Radio - Aug. 24, 2011

"John Williams of Shadow stats talks about the road to hyperinflation 2014 and the fake government numbers , the real figures on unemployment the GDP the Inflation the consumer price index and the overall US economy , John Williams who is an independent economist not funded by any government agency , his figures are different from the official figures that the US government shows publicly.....Economist of Shadow Government Statistics and shadowstats.com founder John Williams claims government employment and inflation numbers are inaccurate, and economy is shakier than indicated..."

at http://marcfaberchannel.blogspot.com/2011/08/economist-john-williams-of-shadow-stats.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+MarcFaberBlog+%28Marc+Faber+Blog%29

Double Dip? Not So Quick

"In recent days, market watchers from Bill Gross to Morgan Stanley have warned of the high possibility of a double dip recession for reasons ranging from more regulation and “policy errors,” to slowing consumption, weak economic data and the likelihood of further fiscal tightening..."

at http://seekingalpha.com/article/289628-double-dip-not-so-quick?source=feed

Learning to Live with China’s Economic Dominance

"Is China poised to take over from the United States as the world’s most economically dominant power?

This is an essential question, and yet it has not yet been taken seriously enough in the United States, where, this central conceit still reigns: The United States’ economic preeminence cannot be seriously threatened because it is the United States’ to lose, and sooner or later, the United States will rise to the challenge of not losing it. China may be on its way to becoming an economic superpower, and the United States may have to share the global stage with it in the future. But, the argument goes, the threat from China is not so imminent, so great, or so multifaceted that it can push the United States out of the driver’s seat.

Is this argument valid, though? And what are the implications of an economically dominant China? My piece [pdf] in the latest issue of Foreign Affairs, drawing upon my forthcoming book, Eclipse: Living in the Shadow of China’s Economic Dominance, addresses the first question and some possible implications of a dominant China for the United States.

My column in the Business Standard on August 24 addresses the possible implications of a dominant China for a country such as India. One conclusion of my book (elaborated in Chapters 8 and 9) is that larger countries like the United States and India need to come together to forge multilateral coalitions to engage with China on a range of issues in order to tether China more securely to the multilateral system.

My column concludes thus: “The appealing symmetry in future efforts to engage China is to induce a greater humility in both the United States and India. The United States will have to spurn the temptation— rather shed the delusion—that it can exercise exclusive leadership and dominance in shaping outcomes. India will have to stop coveting the mantle of leadership and instead participate in multilateral co-operation as an important but humble drone rather than as the queen bee.”

at http://www.piie.com/realtime/?p=2339&utm_source=feedburner&utm_medium=%24%7Bfeed%7D&utm_campaign=Feed%3A+%24%7Bupdate%7D+%28%24%7BPIIE+Update%7D%29

MBA: Mortgage Purchase Activity at Lowest Level Since 1996

"The MBA reports: Mortgage Applications Decrease with Purchase Index at Lowest Level Since 1996

The Refinance Index decreased 1.7 percent from the previous week. The seasonally adjusted Purchase Index decreased 5.7 percent from one week earlier and is at the lowest level in the survey since December 1996..."

at  http://www.calculatedriskblog.com/2011/08/mba-mortgage-purchase-activity-at.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+CalculatedRisk+%28Calculated+Risk%29

Europe Update: Greek Bond Yields Surge

"The Greek bailout deal is under pressure ... and the Greek 2 year yield increased to 44% and the 10 year yield increased to 18% this morning...."

at http://www.calculatedriskblog.com/2011/08/europe-update-greek-bond-yields-surge.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+CalculatedRisk+%28Calculated+Risk%29

Moody's Warns Against Collateral Proposal; In Response, Finnish PM Warns Finland will Not Sign Second Greek Bailout Without Collateral; Merkel Madness

"The battle over Greek collateral for additional loans to Greece has heated up on multiple fronts in five countries. Let's start with a look at a warning from Moody's.

FX Street notes Moody's warns that Greek bailout might be delayed

Moody's rating agency warned on Monday that EU countries which demand collateral agreements with Greece might delay the payment of the next 8 billion euro tranche of the rescue fund for Athens, push it into default and hamper the fight against the crisis in the Eurozone.

Last week Finland negotiated a bilateral deal with Greece; soon Austria, the Netherlands and Slovakia demanded similar guarantees. Greek Finance Minister Evangelos Venizelos asked the European Commission, the ECB and the IMF for help with solving possible further disputes with countries demanding collateral agreements..."

at  http://globaleconomicanalysis.blogspot.com/2011/08/moodys-warns-against-collateral.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+MishsGlobalEconomicTrendAnalysis+%28Mish%27s+Global+Economic+Trend+Analysis%29

German Labour Minister Wants Gold Collateral

"The battle over Greek collateral took another interesting turn as the German Labour Minister hopped into the fray asking for gold as collateral.

The Irish Times reports Merkel faces fight to restore order after intervention on collateral

BACKGROUND : Minister’s remarks rapidly sent German officials into full damage limitation mode

URSULA VON der Leyen picked her moment well.

Hours before a crucial meeting of Germany’s ruling Christian Democrats (CDU) yesterday, as a summer storm rolled through the German capital, the labour minister suggested Germany should follow Finland’s lead on Greece.

Rather than simply hand over further loans to Athens, money many Germans believe they will never see again, Dr von der Leyen suggested Berlin should ask for collateral. Gold, preferably..."

at  http://globaleconomicanalysis.blogspot.com/2011/08/moodys-warns-against-collateralfinnish.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+MishsGlobalEconomicTrendAnalysis+%28Mish%27s+Global+Economic+Trend+Analysis%29

Gold "The World's Currency"

"Central bank and government actions around the globe increasingly prove that gold is the place to be.

Here is an interesting Bloomberg headline that shows what I mean: Central Banks to Retain Gold to Manage Debt in Crisis

Central banks, net buyers of gold for the first time in a generation, are likely to retain their holdings even if they need to raise cash to counter an escalating debt crisis, according to Morgan Stanley.

“Once they’ve sold, that’s it, and buying back would be extremely expensive,” said Peter Richardson, chief metals economist at Morgan Stanley Australia Ltd., who’s studied metals markets for 20 years. “They would rather have the backing of a rising asset within their reserve portfolios than use it to reduce debt.”

Gold rallied to a record this week as rising government debt burdens and weakening currencies boosted demand for a haven. Central banks are the biggest gold holders, and Thailand, South Korea, Kazakhstan, Mexico and Russia have added to reserves this year. The precious metal is the “currency of the world” amid the debt crisis, economist Dennis Gartman wrote Aug. 19..."

at  http://globaleconomicanalysis.blogspot.com/2011/08/gold-worlds-currency.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+MishsGlobalEconomicTrendAnalysis+%28Mish%27s+Global+Economic+Trend+Analysis%29

Operation Twist Expectations (or LSAD) Returning With A Vengeance Explains Today's Moves In Stocks And Gold

"Whether the Fed will upgrade QE2.5, or "ZIRP through mid-2013", to QE3, or Operation Twist, the form we have been predicting it would take since May (and here), is still unknown: very few people know what Bernanke will say on Friday, minutes after the first revision to Q2 GDP reveals a sub-1% number. What is known is that while cross-asset correlation has soared over the past few days, the biggest driver of stocks over the past few days has been nothing but the 2s10s30s butterfly, which in turn is driven by On and Off rumblings of Bernanke doing the Twist. And here is the rub: when the Fed announces Twist it will be extending duration, it effectively means selling everything 10 Year and older (yes, QE3 could very well be LSAD or Large Scale Asset Dumping instead of LSAP). The goal of this action: make the 2s10s will go vertical and to pancake the 10s30s: a move that the butterfly is now indicating it is once again pricing in - today alone we have seen a massive 15 steepening in the butterfly: a nearly 20% move in the curve. It also explains why gold is being sold off today, because simplistic investors believe that without an actual balance sheet expansion, the Fed will not be diluting paper. Completely wrong: it will merely do so synthetically, from a duration basis. Furthermore, the market will very soon read through the Fed's intention which will be predicated entirely on asset rotation and not on incremental fiat capital. The final outcome will be QE4 where the Fed will have to match the synthetic duration extension with actual cash bond deliverables, namely monetizing bonds, a move which will be even more critical once the deficit spend starts soaring again in the next 3 months. And when it does, it will have to do so double time, to make up not only for previous synthetic exposure extension, but for future priced in moves. In other words, nothing has changed, and we fully expect stocks to soar if indeed Bernanke mentions "duration extension", together with yet another gold dump. The issue is that Op Twist in the proposed format would be physically limited by the amount of 10 Year+ bonds held in the Fed's SOMA. At last check it was not that many at all. So any surge in stocks will be albeit both painfully transitory..."

at  http://www.zerohedge.com/news/operation-twist-expectations-or-lsad-returning-vengeance-explains-todays-moves-stocks-and-gold

To some extent we are in QE3 already

"Marc Faber : I think what he (Ben Bernanke) will say is that they are monitoring the situation and that they will take "appropriate measures" when they are required and I just like to mention to some extent we are in midst o fQE3 already because by announcing that the FED will keep Zero interest rates until the middle of 2013 they basically encouraged financial institutions to borrow short term and to buy ten years treasuries..."

at http://marcfaberchannel.blogspot.com/2011/08/to-some-extent-we-are-in-qe3-already.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+MarcFaberBlog+%28Marc+Faber+Blog%29

 

Bank of America Default Risk

"Bank of America (BAC) shares have taken a huge hit recently, pushing its price-to-book close to financial crisis levels. Bank of America (BAC) credit default swaps are also getting very close to their financial crisis highs, which is pretty crazy.

The high for BAC 5-year CDS back in early 2009 was 395 basis points (or $395 per year to insure $10,000 worth of BAC debt for 5 years). Yesterday, BAC 5-year CDS hit 380 basis points. Is it headed for 400?




at http://seekingalpha.com/article/289360-bank-of-america-default-risk?source=feed

Philly Fed State Coincident Indexes for July

"I haven't post this in some time, but the map is turning red again ...


Click on map for larger image.

Above is a map of the three month change in the Philly Fed state coincident indicators. Several states have turned red again. This map was all red during the worst of the recession, and all green not long ago. Here is the Philadelphia Fed state coincident index release (pdf) for July 2011..."

at http://www.calculatedriskblog.com/2011/08/philly-fed-state-coincident-indexes-for.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+CalculatedRisk+%28Calculated+Risk%29

Fannie Mae warns of nearing double-dip recession

"Fannie Mae stopped short of forecasting another double-dip recession for the U.S. economy Monday, but warned recent indicators show one could be nearing.

"Key factors, including revisions to gross domestic product data, have revealed that we have a bigger hole to dig out of, which explains the consumer angst over the lack of employment growth," Fannie Mae Chief Economist Doug Duncan said. "Moreover, European financial market and fiscal policy turmoil, coupled with the U.S. debt ceiling debate, have hit on consumer confidence, which is at recessionary levels."

Fannie expects economic growth to drop to 1.4% this year, down from a 3.1% growth last year. In 2012, Fannie doesn't expect the economy to grow at the rate measured in 2010..."

at  http://www.housingwire.com/2011/08/22/fannie-mae-warns-of-nearing-double-dip-recession?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+housingwire%2FuOVI+%28HousingWire%29

Michael Hudson: The State and Local Budget Crisis

"The cost of the 2011 cutbacks in federal spending will fall most directly on consumers and retirees by scaling back Social Security, Medicare, Medicaid and social spending programs. The population also will suffer indirectly, by lower federal revenue sharing with U.S. states and cities. The following chart from the National Income and Product Accounts (NIPA, Table 3.3) shows how federal financial aid has helped cities shift the tax burden off real estate, although the main shift has been off property taxes onto income – and onto consumption (sales) taxes..."

at http://www.nakedcapitalism.com/2011/08/michael-hudson-the-state-and-local-budget-crisis.html

The uncertainty shock from the debt disaster will cause a double-dip recession

"The potentially explosive combination of Eurozone debt contagion, vulnerable banking systems, and European and American political paralysis has pushed stock-market volatility to levels nearly as bad as the days following the 11 September 2001 terrorist attacks. Nobody knows what happens next. This column reviews research on 16 previous shocks and concludes that today’s uncertainty shock will create a short, sharp contraction in late 2011 of about 1% with a rebound coming in spring 2012.

Editor's Note: This is an UPDATE of the column first posted on 9 August 2011
In the ten days that have passed since posting my original warning, stock markets have swung wildly. Market makers are incredibly uncertain about the future.

• Will Democrats and Republicans in the US manage to agree on how to deal with US debts?
• Will Germany bail out the failing southern European governments?
• Are there banks in the US and Europe that are going bust?

When there is this much uncertainty even the smallest rumour generates wild market swings. Mundane news can generate hundred-point swings. Good news sends the markets soaring. Bad news sends the markets crashing.

Six more weeks of panic according to historical patterns

So how long will this stock-market panic last? On average the previous 16 uncertainty shocks have had a 1.9 month half-life – this means it takes almost two months for the peak level of uncertainty to fall back by 50%. Hence, within about six weeks the current panic should have subsided (since it is already about two weeks old).
As I discuss below, this panic is likely to cause a double-dip recession in late 2011. The uncertainty will lead firms to pause hiring and investing until probably early 2012.
But despite my short-run pessimism, I’m very positive on long-run US and European growth. Why?

• First, this disaster will help to push both continents to undertake long-needed reforms of retirement systems (particularly in Europe) and healthcare systems (particularly in the US).

Already countries like Greece are torching swathes of regulations, cutting back the public sector, and delaying retirement. In the US this disaster might be enough to initiate serious reforms to limit healthcare spending, to avoid this breaching 20% of GDP.

• Second, the growth of China and India will continue to drive global growth.

These countries have decades more of high growth, and as they grow they will represent a larger share of the world economy, accelerating global growth.
In fact I am sufficiently optimistic in the long-run that today I even invested my tax rebate in the S&P index. So I certainly hope for a rapid recovery!..."

at http://www.voxeu.org/index.php?q=node/6846

CDS MARKET TO EURO BANKS – THIS IS WORSE THAN 2008

"One of the many enjoyable acronyms that became household names in 2008 was CDS – credit default swap. As most investors know by now, these instruments were created to protect bondholders from default. Of course, what we found out in 2008 was that they really just shifted the risk from one investor to the other. Sort of like tossing a hand grenade in a circle hoping you aren’t the one holding it when it goes boom. And as Wall Street imploded on itself in 2008 this game of toss the grenade became increasingly expensive to play as evidenced by the surging cost to avoid the grenade (surging cost of CDS).

What’s frightening about the developments in Europe in recent weeks is that the CDS market is once again sending the same signals. Someone is going to get left holding the grenade again. And this time, the market is actually telling us that it’s even worse than it was in 2008. The only difference is that the problems appear to be across the pond.

The following chart from Danske Bank shows the 5 year CDS rates for 6 of the largest banks in Europe – SocGen, Unicredit, Barclays, Credit Agricole, Banco Santander and BNP. If this market is giving us a cue its message is more than clear – someone’s paying an awful lot to avoid the inevitable explosion and they’re even more eager to avoid this explosion than they were in 2008. Is the market underestimating the risk of further credit contagion? That would appear to be the message from the CDS market."


Source: Danske Bank

at http://pragcap.com/cds-market-to-euro-banks-this-is-worse-than-2008

BofA Warns Upcoming "Desperate Measures" By Authorities Will Result In Another 2008 Market Collapse

"Last week we had Citigroup warning that the market bottom is about to fall out, as the Fed is more than likely to disappoint already very lofty expectations (according to various estimates from both Goldman and the second Tier banks, i.e., all of them, the market has priced in roughly $500 billion in QE3 already). Today, Bank of America, which may or may not be with us much longer, has taken this desperate alarmism several notches further, and is warning that due to the gridlock in both the fiscal ("fiscal authorities have bombarded the markets with a quadraphonic message of hopelessness") and monetary ("the Fed is out of bullets anyway") stimulative pathways, the likely outcome of anything from DC will be nothig short of a disaster. To wit: "rather than a repeat of 2010, when the Fed saved the day with QE2, we think we are moving closer to a repeat of 2008, when major policy errors devastated the economy." For once we actually agree with Bank of America: "In our view, the pressure to “do something” is now far more likely to result in more desperate or radical measures, even if it is bad policy." Does this mean that we are looking at a TARP "vote down" market reaction this Friday if indeed the chairman disappoints? We will know for sure in about 100 hours, which just may be the longest 100 hours for bulls since the start of the artificial and solely QE inspired bear market levitation in March of 2009..."

at  http://www.zerohedge.com/news/bofa-warns-upcoming-desperate-measures-authorities-will-result-another-2008-market-collapse

Financial conditions are today worse than they were prior to the crisis in 2008

"Marc Faber : Financial conditions are today worse than they were prior to the crisis in 2008, The fiscal deficits have exploded and the political system [in both the U.S. and Europe] has become completely dysfunctional..."

at http://marcfaberchannel.blogspot.com/2011/08/financial-conditions-are-today-worse.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+MarcFaberBlog+%28Marc+Faber+Blog%29

The US Deficit In One Picture

"I like this graphic for several reasons, but especially because it puts everything in proportion with regard to the US' current obligations.

One thing I would like to highlight is the large surplus funds in the Social Security Trust and others. These were 'invested' in a special type of intra-governmental Treasury note.

These funds are not 'gone' anymore than a Treasury bond is 'gone.' It is a sovereign debt holding. If the US defaults on its debt, then it defaults. But let's call it what it is.

The Trust Funds are not the money that the government 'owes to itself.' It is a Trust fund, that is, money held by the government in Trust for others. The Trustees invested it in a special category of Treasury bonds that do not trade on the open market.

So to somehow suggest that Social Security is bankrupt now because the government spent the funds on general obligations is to assert a violation of Trust, a fraud, and a selective default on the sovereign US debt.

And do not think that the world would view it any other way, despite the spin put on it by faux economists, useful idiots, and mainstream propagandists for the money men.

Where would you think they would put a Trust Fund of this size? In a passbook savings deposit account? Federal Reserve Notes? The stock market? It was given to the government to be invested in bonds that were judged to be the least risky form of storing that wealth.

No, the real problem is that the US has malinvested too much of its revenue in too many fruitless and unfunded projects like wars, overseas military bases, and other subsides to oil companies, banks, and multinational corporations. The partnership between the money men, their corporations, and the government has allowed corruption to grow and prosper..."

at http://jessescrossroadscafe.blogspot.com/2011/08/us-deficit-in-one-picture.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+JessesCafeAmericain+%28Jesse%27s+Caf%C3%A9+Am%C3%A9ricain%29
 "

“The Sad Statistic that Trumps the Others”

"Here is my latest column, some of it will sound familiar to readers of TGS:

One bias in the economic statistics — which never shows up in published revisions — is embedded in the health care sector, where third-party payments, subsidies and care quality are hard to monitor and measure. A result is that a dollar spent on health care does not necessarily mean a true dollar’s worth of value added. The United States spends more per capita on health care than any other country, yet without producing measurably superior results. To the extent that some of these expenditures are wasteful, the gross domestic product and productivity numbers overstate economic growth.

Here’s another problem: Expenditures on the military and domestic security have risen since 9/11, but those investments are intended to neutralize external threats. Even if you agree with this spending, it generally doesn’t produce useful goods and services that raise our standard of living.

One of the most commonly cited productivity numbers describes per-hour labor productivity, but this, too, has intrinsic flaws. Labor force participation has been falling for more than a decade, and low-skilled workers are leaving the work force in disproportionate numbers. Taking some lower-paying jobs out of the mix will raise the measure for average productivity, which is hardly the same as increasing the economic gains from a given set of workers or, for that matter, from putting more people to work by making them more productive.

There is more at the link, including points which do not appear in TGS."

at http://marginalrevolution.com/marginalrevolution/2011/08/the-sad-statistic-that-trumps-the-others.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+marginalrevolution%2Ffeed+%28Marginal+Revolution%29

MERKEL: WE WILL NOT BE BULLIED BY THE MARKETS

"Angela Merkel is sending a pretty clear message this weekend – EMU leaders will not be bullied into action just because the markets are throwing a fit about the speed of their actions. Bloomberg provides some highlights of her recent comments:

“At this time — we’re in a dramatic crisis — euro bonds are precisely the wrong answer,” 

“They lead us into a debt union, not a stability union. Each country has to take its own steps to reduce its debt.” 

“Politicians can’t and won’t simply run after the markets,”

“The markets want to force us to do certain things. That we won’t do. Politicians have to make sure that we’re unassailable, that we can make policy for the people.”

at  http://pragcap.com/merkel-we-will-not-be-bullied-by-the-markets

ROUBINI: Capitalism Has Hit A Crisis Point, Global Unrest Will Spread...

"NYU Professor Nouriel Roubini has moved beyond predicting catastrophic economic downturns. Now, he's saying that capitalism itself is threatened.

He also thinks the uprisings that have roiled countries from Asia to the Middle East to Europe will soon spread.

"Recent popular demonstrations, from the Middle East to Israel to the UK, and rising popular anger in China - and soon enough in other advanced economies and emerging markets - are all driven by the same issues and tensions: growing inequality, poverty, unemployment, and hopelessness... Even the world’s middle classes are feeling the squeeze of falling incomes and opportunities."

Roubini went on to say that capitalism is undergoing a crisis that Karl Marx predicted a century ago, driven by an ongoing transfer of wealth and power from labor to capital (in other words, from poor and middle-class people to rich people.)..."

at http://www.businessinsider.com/roubini-revolution-will-spread-2011-8?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+businessinsider+%28Business+Insider%29#ixzz1Vh1nqLd3

Merkel Emphatically Rejects Eurobonds, Debt Unions

"Using even stronger language, Merkel Says She’ll Resist Pressure for Euro Bonds

German Chancellor Angela Merkel attempted to shut the door on common euro-area bonds as a means to solve the debt crisis, saying that she won’t let financial markets dictate policy.

Joint euro bonds would require European Union treaty changes that would “take years” and might run afoul of Germany’s constitution, Merkel said today. While common borrowing might arrive at some point in the “distant future,” bringing in euro bonds at this time would further undermine economic stability and so they “are not the answer right now.”

“At this time -- we’re in a dramatic crisis -- euro bonds are precisely the wrong answer,” Merkel said in an interview with ZDF television from the chancellery in Berlin. “They lead us into a debt union, not a stability union. Each country has to take its own steps to reduce its debt.”

Merkel has stepped up her opposition to euro bonds since returning from her summer vacation last week, making resistance to common European borrowing a campaign theme of Sept. 4 elections in her home state of Mecklenburg-Western Pomerania. Investor calls for euro bonds intensified last week as concerns about the debt crisis and a stuttering global economy drove European stocks to their lowest in more than two years..."

at  http://globaleconomicanalysis.blogspot.com/2011/08/merkel-and-sharkozy-imperial-couple.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+MishsGlobalEconomicTrendAnalysis+%28Mish%27s+Global+Economic+Trend+Analysis%29

Things That Make You Go Hmmm....

"...To sum up:

• It is common practice for most Central Banks to hold part of their gold reserves overseas in ‘gold trading centres’ (read London and New York)
• One of those Central Banks - that of Venezuela - wants its gold back
• That means that a group of banks (mainly in the UK and the USA) who are supposed to have that gold in their vaults need to GIVE it back...
• ...which in turn could potentially trigger a race to repatriate national gold holdings
• Neither Fort Knox nor the Federal Reserve (the world’s two biggest gold depositories) have been independently audited in recent times
• The status of the gold held in the Bundesbank (home to the world’s third-largest hoard) is somewhat unclear
• The practice of leasing gold by Central Banks has been going on so long that it even predates the time when Alan Greenspan advocated sound money
• The gold ‘physical market’ is approximately 100 times the size of the amount of actual underlying metal by which it is purportedly backed
• The top four bullion banks, or ‘commercials’ on the COMEX continue to run what we shall politely call ‘significant’ short positions (chart above)

In the three trading sessions since Chavez made his announcement on August 17th, gold has added almost $100, coming within a whisker of $1,900 before settling back at another record weekly close.

Market weakness? Maybe. Fear of further problems in Europe? Quite possibly. Continuing disgust with the world’s fiat currencies? Highly likely.

The beginning of a race amongst the world’s Central Banks to grab physical gold? Now THAT would be something to see..."

at http://www.zerohedge.com/news/things-make-you-go-hmmm-such-venezuelan-dictator-bringing-down-global-gold-cartel