The situation in the economy has played out to the point where some trends came come into focus. Equally important,the Obama administration's objective, style, and general level of competence have become clear.
1. For the time being, we have avoided a Depression. While it is still possible for a major terrorist attack or an asteroid strike to trash the economy, the nominal situation today is that most major countries are following a policy of economic stimulation. The recent decision to give the IMF another $1T extends this policy to the international trade system.
2. What we have is easily the worst recession since the 1970s, and is probably the worst recession since the 1930s. It has not hit bottom yet. Nobody expects the bottom much before June, and the consensus is that January, 2010 is when global economic growth will resume.
3. Unemployment will continue to increase, both in the US and in the world generally. The political implications of this are unknown, but probably bad.
4. The Fed is going to have its hands full, as the money supply plays "crack the whip". During the next 6-12 months, the Fed will be expanding the money supply at a high rate, in order to get the financial system working again and in order to prevent a liquidity trap. Then, they will have to contract the money supply at a high rate, in order to prevent inflation. This is not going to be easy.
5. Once this recession is over, things will not return to the previous situation. If Peak Oil has already happened,* then we are going to recover from the current recession into a world of permanently high oil prices and limited capital for non-energy-related investment.
6. The stock market is much harder to predict than the physical economy, but I will try:
The current rally will not last. The DJIA is going to go to 5500. Even if that particular prediction is wrong, you can be sure that the lows will be tested before we see a new bull market. I don't know where the bottom of the market will be, but the rule of thumb is that it occurs at 1/3 the value of the top, adjusted for inflation. The top was 14400, so the bottom should be something like 4800.
The reasons why I expect a recovery in December are kind of boring and technical, mainly focusing on stuff like the TED spread and the shape of the bond yield curve. The bottom line is that the Fed cut interest rates starting last Fall, and there is a 9-18 month lag time before this sort of Fed action causes the physical economy to recover. "Mark your Calendar". The reasons why I do not expect a recovery before December focus on the poor quality of government policy around the world. The US bank bailouts are being done under the rules of "Crony Capitalism", and most of the money is not going to places where it will help real people. The political backlash from that makes it very difficult to provide any more money to future bailout programs**.
The Germans and the Japanese have behaved in a completely irresponsible way, basically hoping for their exports to increase as an excuse to do nothing. The IMF is part of the problem, and the Chinese and French fascination with expanding the role of the IMF is inexplicable. Oh, yeah, the US stimulus package is not going to kick in until October, 2009, and the "leftist wish-list" character of the program makes it very unlikely that any additional stimulus money can be extracted from congress. The long-term situation is dominated by the question of what to do about Peak Oil. One major political problem is that people are aware of the fact that the 1973 and 1979 Oil Crisises and the 2001 Enron Electricity Crisis were all scams, and there are a lot of people who think that Peak Oil is a scam. Another problem arises from the "hair shirt greens" whose entire attitude is that Peak Oil is an excuse to force people to give up their cars and live in smaller houses. Equally problematic are the nuclear people.
I tend to regard the "US Oil Import/National Security" problem as a subset of the "US Government is Extremely Corrupt" problem, but that does not make things any easier to deal with. I am afraid that the political system is part of the problem, both with regard to the banking system bailout and with regard to long-term energy policy.
So, here's the bottom line: Things will get worse for the next six months, then they'll start to get better. When we get renewed global economic growth (in 2010?), the price of oil will skyrocket, which will probably cause growth to be capped for a decade or more. The political system will mostly make things worse.
-dave
=============================================================
* I'm pretty sure that Peak Oil was last year. Even if I'm wrong about that, you can be sure that Peak Oil is less than 20 years away. We have no choice but to deal with it.
** I mean, would _you_ give any more money to AIG?
Wednesday, May 27, 2009
2713: They didn't invite me to this one, either. . .
Pitchforks optional?
http://www.politico.com/news/stories/0409/20871.html
Arrayed around a long mahogany table in the White House state dining room last week, the CEOs of the most powerful financial institutions in the world offered several explanations for paying high salaries to their employees and, by extension, to themselves. "These are complicated companies," one CEO said. Offered another: "We’re competing for talent on an international market." But President Barack Obama wasn’t in a mood to hear them out. He stopped the conversation and offered a blunt reminder of the public’s reaction to such explanations. "Be careful how you make those statements, gentlemen. The public isn’t buying that."
"My administration," the president added, "is the only thing between you and the pitchforks." Ouch, that's funny. This is why we hired Obama.
-dave
http://www.politico.com/news/stories/0409/20871.html
Arrayed around a long mahogany table in the White House state dining room last week, the CEOs of the most powerful financial institutions in the world offered several explanations for paying high salaries to their employees and, by extension, to themselves. "These are complicated companies," one CEO said. Offered another: "We’re competing for talent on an international market." But President Barack Obama wasn’t in a mood to hear them out. He stopped the conversation and offered a blunt reminder of the public’s reaction to such explanations. "Be careful how you make those statements, gentlemen. The public isn’t buying that."
"My administration," the president added, "is the only thing between you and the pitchforks." Ouch, that's funny. This is why we hired Obama.
-dave
2712: I get invited to stuff. . .
I got invited to some G-20 parties, um, sort of.
They did not, however, invite me to the main event. . .
-dave
They did not, however, invite me to the main event. . .
-dave
2711: Aaargh! Geithner Does It Again
OK, here's how it works: The Geithner plan apparently
makes no sense. In particular, the question of who
exactly is going to put up even 5% towards the
"toxic waste" which the banks hold remains unanswered.
This guy has the answer. It's brilliant:
http://www.youtube.com/watch?v=n-arbfLTCtI&feature=player_embedded
Is it correct?
Looks that way to me.
Is it good or bad for the economy?
I'd say it's very bad, because this sort of thing will just
kick the can down the road with regard to actually having
an honest market for these "assets". I have often said that
the CDOs backed by first mortgages are worth 80-90% of
face value, and that CDOs backed by second mortgages are
worth, on the average, maybe 40-50% of face value, but there
is no way we will ever know as long as the banks are allowed
to play "make believe" with special-purpose entities.
-dave chapman
makes no sense. In particular, the question of who
exactly is going to put up even 5% towards the
"toxic waste" which the banks hold remains unanswered.
This guy has the answer. It's brilliant:
http://www.youtube.com/watch?v=n-arbfLTCtI&feature=player_embedded
Is it correct?
Looks that way to me.
Is it good or bad for the economy?
I'd say it's very bad, because this sort of thing will just
kick the can down the road with regard to actually having
an honest market for these "assets". I have often said that
the CDOs backed by first mortgages are worth 80-90% of
face value, and that CDOs backed by second mortgages are
worth, on the average, maybe 40-50% of face value, but there
is no way we will ever know as long as the banks are allowed
to play "make believe" with special-purpose entities.
-dave chapman
2710 Chinese Action II
The Chinese government is taking actions which will
cause a massive global stimulus. This is not being
done out of altruism; the Chinese are attempting to
protect themselves from the expected inflation in
dollar-denominated assets. Here's the deal:
1. The Chinese government (and bankers) have concluded
that the dollar is not a good place to keep over $1T
in assets. They have also concluded that yen, Euros,
gold, Swiss Francs, and pounds aren't looking so good,
either.
So, they decided to buy copper, as in 10% of the
copper in the entire world:
http://www.ft.com/cms/s/0/b1176552-1710-11de-9a72-0000779fd2ac.html
2. Now, there is still some question about exactly how this works.
Allegedly, they have been putting copper ingots equal to 10%
of 2008 world copper production into warehouses in Shanghai.*
This has already driven prices up 35% from their lows, which is to
say, up to around 3/4 of the price 2 years ago. This has also
created a lot of jobs in Chilean copper mines, international ore
carrying ships, and Chinese smelters. Annual production is
15 Megatons of copper, and the recent price is $6000/ton.
Buying 10% of the total copper production (1.5 MT) is $9B.
This program has already produced perhaps 4.5 million jobs,
and has protected $9B if Chinese investments. I'd call it
"a good start".
3. In order to protect the rest of the Chinese national reserves,
and to create jobs, I'd say that the Chinese hard asset purchase
protection team is going to have to buy some other stuff:
Lithium, Cobalt, Vanadium, Manganese, Nickel, Silver, Chromium.
4. This is likely to cause the world economy to rebound.
This is the best economic news is a while.
-dave chapman
================================================================
* I wouldn't put the copper in Shanghai, and I don't believe the
stories about how that's where it is going. I would put it
into certain buildings a couple of hundred km north of Nanjing. . .
cause a massive global stimulus. This is not being
done out of altruism; the Chinese are attempting to
protect themselves from the expected inflation in
dollar-denominated assets. Here's the deal:
1. The Chinese government (and bankers) have concluded
that the dollar is not a good place to keep over $1T
in assets. They have also concluded that yen, Euros,
gold, Swiss Francs, and pounds aren't looking so good,
either.
So, they decided to buy copper, as in 10% of the
copper in the entire world:
http://www.ft.com/cms/s/0/b1176552-1710-11de-9a72-0000779fd2ac.html
2. Now, there is still some question about exactly how this works.
Allegedly, they have been putting copper ingots equal to 10%
of 2008 world copper production into warehouses in Shanghai.*
This has already driven prices up 35% from their lows, which is to
say, up to around 3/4 of the price 2 years ago. This has also
created a lot of jobs in Chilean copper mines, international ore
carrying ships, and Chinese smelters. Annual production is
15 Megatons of copper, and the recent price is $6000/ton.
Buying 10% of the total copper production (1.5 MT) is $9B.
This program has already produced perhaps 4.5 million jobs,
and has protected $9B if Chinese investments. I'd call it
"a good start".
3. In order to protect the rest of the Chinese national reserves,
and to create jobs, I'd say that the Chinese hard asset purchase
protection team is going to have to buy some other stuff:
Lithium, Cobalt, Vanadium, Manganese, Nickel, Silver, Chromium.
4. This is likely to cause the world economy to rebound.
This is the best economic news is a while.
-dave chapman
================================================================
* I wouldn't put the copper in Shanghai, and I don't believe the
stories about how that's where it is going. I would put it
into certain buildings a couple of hundred km north of Nanjing. . .
2708: Stop-Loss Order
Oh, this is brutal. You probably thought it was unfair and cruel to not let the soldiers go home after their tour of duty was finished:
CBS PREVIEWS TONIGHT’S 60 MINUTES INTERVIEW WITH THE PRESIDENT:
In his longest interview since taking office, President Barack Obama tells Steve Kroft that New York’s Wall Street executives need to get out of town to appreciate the public’s anger towards them and that embattled Treasury Secretary Timothy Geithner’s job is safe. The president even joked that were Geithner to tender his resignation, he would say, ‘Sorry Buddy, you’ve still got the job.’
CBS PREVIEWS TONIGHT’S 60 MINUTES INTERVIEW WITH THE PRESIDENT:
In his longest interview since taking office, President Barack Obama tells Steve Kroft that New York’s Wall Street executives need to get out of town to appreciate the public’s anger towards them and that embattled Treasury Secretary Timothy Geithner’s job is safe. The president even joked that were Geithner to tender his resignation, he would say, ‘Sorry Buddy, you’ve still got the job.’
2707: This is Treason
Allegedly, during a secret meeting at the White House with Indian "businessmen", Larry Summers promised them that the exportation of American jobs would continue.
India's corporate leadership raised the issue of H-1B visa restrictions during their first high level interaction with Obama Administration officials and was assured that there would not be a serious setback to the programme unless unemployment rate in US plummets drastically. The issue was raised by the visiting CII's CEO Mission led by Bharati enterprise chairman Sunil Bharati Mittal, who among others met Lawrence Summers, Director of the National Economic Council, at the White House yesterday. During the meeting, the delegation comprising of top Indian CEOs brought to the notice the concerns about the recent developments in the US with regard to H-1B work visa programme and certain provisions in the stimulus bill.
http://www.businessinsider.com/white-house-promises-india-no-new-h-1b-restrictions-unless-unemployment-gets-worse-2009-3
Larry Summer's phone number is :202-456-2807
His admin's number is:202-456-2800
The fax number is:202-456-2223
The main White House number:202-456-1111
The main fax number is:202-456-2461
The White House press number is:202-456-2580
Their fax number is:202-456-5709
The Council of Economic Advisors' numbers include:
202-395-5062
202-395-5036
202-395-5012
202-395-5017
Their fax number is:202-395-6958
Enjoy.
-dave
India's corporate leadership raised the issue of H-1B visa restrictions during their first high level interaction with Obama Administration officials and was assured that there would not be a serious setback to the programme unless unemployment rate in US plummets drastically. The issue was raised by the visiting CII's CEO Mission led by Bharati enterprise chairman Sunil Bharati Mittal, who among others met Lawrence Summers, Director of the National Economic Council, at the White House yesterday. During the meeting, the delegation comprising of top Indian CEOs brought to the notice the concerns about the recent developments in the US with regard to H-1B work visa programme and certain provisions in the stimulus bill.
http://www.businessinsider.com/white-house-promises-india-no-new-h-1b-restrictions-unless-unemployment-gets-worse-2009-3
Larry Summer's phone number is :202-456-2807
His admin's number is:202-456-2800
The fax number is:202-456-2223
The main White House number:202-456-1111
The main fax number is:202-456-2461
The White House press number is:202-456-2580
Their fax number is:202-456-5709
The Council of Economic Advisors' numbers include:
202-395-5062
202-395-5036
202-395-5012
202-395-5017
Their fax number is:202-395-6958
Enjoy.
-dave
2706: Don't Buy Books From Crooks
Nandan Nilekani is a serious corporate criminal. As the head of Infosys, he has been responsible for a crime wave of immigration fraud, labor law violations, and tax evasion. I suspect that he is also involved in money laundering and illegal campaign contributions to American politicians. Mr. Nilekani has just written a book, and is currently on his book tour. You might have seen him on"The Daily Show". He will be speaking on Monday, March 30, in Palo Alto,
http://tickets.commonwealthclub.org/auto_choose_ga.asp?area=62
Maybe we should show up with torches and pitchforks, so as to let him know how much we love him.
-dave
=========================================================
"I just don't understand the amount of hate mail that I get regarding H1-B."
Rep. Zoe Lofgren, at the Commonwealth Club, 29 May, 2003
http://tickets.commonwealthclub.org/auto_choose_ga.asp?area=62
Maybe we should show up with torches and pitchforks, so as to let him know how much we love him.
-dave
=========================================================
"I just don't understand the amount of hate mail that I get regarding H1-B."
Rep. Zoe Lofgren, at the Commonwealth Club, 29 May, 2003
2705: Get Rid of Geitner
Make Sheila the new Treasury Secretary:
http://www.cnbc.com/id/15840232?video=1065871557&play=1
"Too big to fail", indeed.
-dave
http://www.cnbc.com/id/15840232?video=1065871557&play=1
"Too big to fail", indeed.
-dave
2703: AIG. Yes, things can get worse.
With Senator Grassley calling for AIG executives
to commit Hara-kiri, you might think that things
have gone about as far as humanly possible.
You'd be wrong. Just wait until the politicians
find out that more than half of the AIG employees
who received taxpayer-funded bonuses aren't
even US citizens.
-dave
to commit Hara-kiri, you might think that things
have gone about as far as humanly possible.
You'd be wrong. Just wait until the politicians
find out that more than half of the AIG employees
who received taxpayer-funded bonuses aren't
even US citizens.
-dave
2702: Fed Meeting, 17 Mar, 2009
The Fed can't lower interest rates from here.
They're already zero.
The questions right now are ugly:
1. Will the Fed start buying 10-year T-Bonds?
2. Will the Fed start buying State and City bonds?
3. Will the Fed start buying Bank bonds?
4. Will the Fed start buying junk bonds?
Each of these involves political and market problems.
Not doing anything involves problems, too.
I don't see any good choices.
-dave chapman
------------------------------------------------------
"Help me Obi wan Bernanke. You're my only hope!"
They're already zero.
The questions right now are ugly:
1. Will the Fed start buying 10-year T-Bonds?
2. Will the Fed start buying State and City bonds?
3. Will the Fed start buying Bank bonds?
4. Will the Fed start buying junk bonds?
Each of these involves political and market problems.
Not doing anything involves problems, too.
I don't see any good choices.
-dave chapman
------------------------------------------------------
"Help me Obi wan Bernanke. You're my only hope!"
2701: Political Situation, 14 Mar, 2009
We have now had a good enough look at the Obama administration's economic policies to make some preliminary observations. My main conclusion is that they are not a dumb as they look. It would appear that Obama's economic team figures that another Depression is not going to happen, and that Fed actions taken to date will keep the dollar economic system from collapse. They have therefore decided to run the standard economic policy for a new president:
1. Cause or allow a recession in the first year. Recessions are good for the economy, sort-of, and by the time that Obama is up for re-election, nobody will remember 2009 anyway. If people insist on talking about the economy, just blame George W.
2. Arrange for a decent recovery in time for the off-year Congressional elections. (4Q, 2010)
3. Arrange for a boom just before the 2012 election.
It also appears that Obama, whatever his personal feelings or political positions, has decided to allow the Liberals to take advantage of the situation. This is dubious policy, and reminds me of the way that George W Bush's people took advantage of 9/11 to pass a bunch of wiretap bills which had been gathering dust for many years. What's the downside? Simply this:
The odds of an economic recovery in the 3rd quarter are now zero, and the odds of a recovery by December are now 50/50. The job situation is going to be very bad for the next 9 months. What the political fallout is going to look like, I can't say. Meanwhile, the Fed is going to have to figure out a whole bunch of important issues, and they are not likely to get much help from Treasury.
That leaves the Fed. The bad news is that they are going to have to perform a massive over-reach of their authority in order to straighten out the situation. The good news is that nobody who objects to this will be able to get their act together, for the same reasons they were unable to get their act together in general. The two big issues which I do not hear people talking about are the fact that the current US trade deficit is still unsustainably high, and the fact that the European banks are in even worse shape than the US banks. The central problem with the US trade deficit is that it continues to increase the US debt:equity ratio in both the corporate sector and the consumer sector.
Unfortunately, a lot of (foreign) people have become very comfortable with this situation and do not want to see it change. The European banks' problem is simply that the stupid and corrupt banking regulations which the US had during the last 16 years were not as stupid and corrupt as the Basil Accords. Details available on request. The bottom line here is that the Fed is going to have to manage the money supply, even as the velocity of money does the roller-coaster thing. The current Fed chairman got off to a bad start, but I think that he's the kind of guy who learns fast. Let's hope so.
-dave chapman
------------------------------------------------------
"Help me Obi wan Bernanke. You're my only hope!"
1. Cause or allow a recession in the first year. Recessions are good for the economy, sort-of, and by the time that Obama is up for re-election, nobody will remember 2009 anyway. If people insist on talking about the economy, just blame George W.
2. Arrange for a decent recovery in time for the off-year Congressional elections. (4Q, 2010)
3. Arrange for a boom just before the 2012 election.
It also appears that Obama, whatever his personal feelings or political positions, has decided to allow the Liberals to take advantage of the situation. This is dubious policy, and reminds me of the way that George W Bush's people took advantage of 9/11 to pass a bunch of wiretap bills which had been gathering dust for many years. What's the downside? Simply this:
The odds of an economic recovery in the 3rd quarter are now zero, and the odds of a recovery by December are now 50/50. The job situation is going to be very bad for the next 9 months. What the political fallout is going to look like, I can't say. Meanwhile, the Fed is going to have to figure out a whole bunch of important issues, and they are not likely to get much help from Treasury.
That leaves the Fed. The bad news is that they are going to have to perform a massive over-reach of their authority in order to straighten out the situation. The good news is that nobody who objects to this will be able to get their act together, for the same reasons they were unable to get their act together in general. The two big issues which I do not hear people talking about are the fact that the current US trade deficit is still unsustainably high, and the fact that the European banks are in even worse shape than the US banks. The central problem with the US trade deficit is that it continues to increase the US debt:equity ratio in both the corporate sector and the consumer sector.
Unfortunately, a lot of (foreign) people have become very comfortable with this situation and do not want to see it change. The European banks' problem is simply that the stupid and corrupt banking regulations which the US had during the last 16 years were not as stupid and corrupt as the Basil Accords. Details available on request. The bottom line here is that the Fed is going to have to manage the money supply, even as the velocity of money does the roller-coaster thing. The current Fed chairman got off to a bad start, but I think that he's the kind of guy who learns fast. Let's hope so.
-dave chapman
------------------------------------------------------
"Help me Obi wan Bernanke. You're my only hope!"
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