Fin/Inv

Muddle Through, R.I.P?

Savings Equal Investments

Japanese Disease

Who Will Buy the Debt?

The New Muddle Through Economy

I first wrote about the Muddle Through Economy in 2002, and the term has more or less become a theme we have returned to from time to time. In 2007 I wrote that we would indeed get back to a Muddle Through Economy after the end of the coming recession. If you Google the term, at least for the first four pages more than half the references are to this e-letter. I get a lot of flak from both bulls and bears about being either too optimistic or too pessimistic. Being in the muddle through middle is comfortable to me.

Last week I expressed my concern that we as a country are taking actions that could indeed “Kill the Goose” of our free-market economy. I rightly got letters asking me how I could maintain Muddle Through in the face of that letter. I have given it a lot of thought and research. How likely are we to muddle through in the face of $1.5 trillion and larger deficits? Today we take another look at Muddle Through. It should be interesting.

But first, two housekeeping items. I want to welcome the 150,000 members of the National Association of the Self-Employed to this letter. They have asked me to be a special consulting economist to their group, and they will send this letter each week to their members. Since its beginning in 1981, the National Association for the Self-Employed has pioneered support for micro-businesses and the self-employed, and been a forceful advocate for small business in this country. (www.nase.org) I am honored. I am pleased to add you to my 1 million closest friends. I hope you find it useful.

Second, I will be going to South America at the end of next week, to Buenos Aires, Montevideo, Sao Paulo and Rio. I will be speaking in those cities and traveling with my new Latin American partner, Enrique Fynn of Fynn Capital (based in Uruguay). If you would like to find out about this tour or what services he can help you with, you can go to www.accreditedinvestor.ws and sign up and Enrique will get in touch with you. And as always, if you are an accredited investor, you can go to that website and one of my partners in the world will get back to you. (In this regard, I am president of and a registered representative of Millennium Wave Securities, LLC, member FINRA.) And now to the letter.

Muddle Through, R.I.P.?

I defined a Muddle Through Economy in the past as one of slow growth (in the area of 1-2%) and a slack employment environment, such as we had in 2002 and the early part of 2003. In early 2007, I suggested we would return at some point to such an environment at the end of the recession I was predicting.

I am not surprised about the response of the Fed to the current recession and credit crisis, whether it’s the large monetization of debt or the low interest rates. Assuming they more or less remove the monetary easing in a reasonable manner, there is nothing that would make me think we do not eventually recover, albeit at a very slow Muddle Through pace, with a jobless recovery that lasts for several years. It will not be pleasant, but we’ll survive.

However, gentle reader, never in my wildest dreams did I think we could be looking at government deficits of $1.5 trillion dollars and actually budgeting future deficits of over $1 trillion as far as the eye can see. And there is real reason to think that under current plans, $1 trillion deficits are optimistic. Look at the graph above from the Heritage Foundation. They suggest that current policy would bring us closer to a $2 trillion deficit by 2019.

And that assumes nominal growth that is north of 3% and unemployment dropping back below 5% in reasonably short order. If you make less optimistic assumptions, the number can become much larger rather quickly. Where do we find that much money to finance that large a deficit? We will look at what might be the answer, but first we need to look at a basic concept in economics.

Savings Equal Investments

GDP (Gross Domestic Product) is defined as Consumption (C) plus Investment (I) plus Government Spending (G) plus [Exports (E) minus Imports (I)] or:

GDP = C + I + G + (E-I)

(For the wonks out there, GDP is usually termed “Y”.)

You can calculate national savings as GDP minus consumption and government spending. That means that investment equals savings plus net exports. If there are no net exports, then money must come back into the US from outside the country to finance investments, along with savings.

This equation is known as an identity. An identity is an equality that remains true regardless of the values of any variables that appear within it. That means it is not a guess or an approximation. It is simple reality.

Thus, if there is a government deficit, there must be savings by both consumers and businesses, plus capital flows from outside the country, to offset that deficit in order for there to be any money left over for investments.

In the short run, an increase in government spending can offset a decline in consumption (a recession), but absent savings a government deficit crowds out investment in the long run. There must be savings in order for there to be investment. And without investment, you do not get job growth or economic growth.

Japanese Disease

Some readers wrote this week telling me I am far too worried about a rising government deficit. Right now we are at roughly 42% of debt to GDP. In 1989, at the start of the lost decades, Japan had a debt-to-GDP ratio of 51%. Now it is at 178%, and the world has not come to an end for them. In fact, they are running massive government deficits today and plan to do so for a long time. Why, I am asked, can’t we be like Japan? And my answer is that it is possible, but the cost that Japan has paid has been high.

In 1989, private Japanese debt (businesses and consumers) was at a debt-to-GDP ratio of 212%. Now it is at 110%. And the total of both government and private debt is roughly the same (within 5%) of where it was 20 years ago. Along with running large trade surpluses, private debt has been exchanged for government debt. Savings have fallen from the mid-teens to about 2% today, as the country is rapidly aging and now using its savings to live on. And how much has all that government spending helped the country? Before I answer that, read these paragraphs from Hoisington Asset Management’s latest letter (last week’s Outside the Box):

“The federal government’s promise to extricate the U.S. economy from this recession involves more spending (increasing public debt) and more subsidies for consumers, such as car rebates and home buying incentives (more private debt). In other words, more debt is supposed to solve the problem of over-indebtedness. The truth is that this policy merely indentures its citizens further without providing any income for repayment of debt. In previous letters we have discussed the fact that the government spending multiplier is zero (read Professor Robert Barro’s book, Macroeconomics – a Modern Approach, p. 370).

“This means there is no long term income benefit from stimulus programs. According to the latest academic research, the most recent $800 billion stimulus plan will boost economic activity in the short run, but will surely depress economic activity over time. The government problem is complicated by the fact that the tax multiplier is 3, meaning that a 1% change in taxes will change GDP by about 3% over time. More recent research (Barro & Redlick, September 2009, “NBER Working Paper 15369″) suggests that a 1% cut in the marginal tax rate would raise GDP in the ensuing year by 0.6%. With the deficit rising due to a zero spending multiplier, the tendency will be to try to raise taxes to pay for this higher level of expenditures, which will further depress aggregate spending and output.”

For all intents and purposes, Japan has had no growth for almost two decades. Their nominal GDP is where it was 17 years ago, and the number of employed people is at 20-years-ago levels. An aging population has masked their unemployment problems, as older citizens retire. Their savings went to government debt. Taxes were raised numerous times. Since government deficit spending has no long-term multiplier effect, growth has been nonexistent. (By the way, that research about multiplier effects has also been done by Christina Romer, the chairman of the current President’s Council of Economic Advisors, and further explored by European economists. There is general agreement on these facts.)

In 1998, the US had a total debt- (government plus private) to-GDP ratio of 260%. Today it is 373%. We have added over $15 trillion in debt, yet total employment today is roughly where it was 9 years ago. But the current economic leadership wants to solve the problem of too much debt with even more debt. I am sympathetic with the idea that in the short run the government should step in and the Fed should print (within limits) money to keep us from deflation. But the equation we spent time on earlier suggests that if we continue to run massive deficits, we run the risk of catching Japanese disease – a decade-long (or longer) period of slow growth and high unemployment, especially since our population is growing and our Boomers are going back to work (and surveys suggest they intend to work longer).

Large government deficits choke off the very investment that we need to create jobs. In the name of doing good, the unintended consequence is to make it more difficult for small businesses to start up and create jobs. And we all know that small business is the engine for job creation.

The way out of the current morass is to create jobs and increase productivity. But if the government runs deficits of $1.5 trillion, that means whatever savings (corporate and consumer) we have will not go into the investments we need, but into government debt.

Who Will Buy the Debt?

Now, let’s go back to the problem of who will buy the debt. How can we find $1.5 trillion each and every year? Some of it will come from foreign central banks, as we continue to run a trade deficit. Once those dollars leave our shores, they do not disappear. They can only go back into a dollar-denominated investment. Up to now, that has typically been US government debt. If China decides to use its dollars to buy commodities or other assets, whoever sells them the assets now has the dollars and must decide what to do with them. So give or take a few billion, about $400 billion will come back to the US from our trade deficit next year. That still leaves $1.1 trillion.

Upon reflection, and cutting to the chase, I think that the buyers of the debt could be US banks for quite some time. The next graph shows commercial and industrial loans at US banks falling precipitously. Banks have (correctly) tightened lending standards, but that means that small and medium-sized businesses, which account for over 85% of all jobs, have been cut off from the life blood of growth. Is it any wonder they are cutting jobs at a prodigious rate?

The next graph shows bank credit (of all types), going back to 1974. Notice that even during recessions (gray shaded areas) bank lending either grows or at the most goes flat. But now we are experiencing something new: bank lending is falling. Notice the sharp increase in lending in 2008 as corporations decided to draw down their banks’ lines of credit, afraid that the banks might cut back. And with good reason, as banks did exactly that.

So where do banks put their cash and reserves they are not lending? At the Fed and in Treasury debt. If you can leverage capital at ten to one (as banks can) and if you get 2% (for longer-term debt) and if you only have costs of, say, 50 basis points (or 0.5%), you can make a return on equity of 15% with no risk.

And that is what we are seeing. Banks are taking the money the Fed is printing and the government is giving them and putting it back at the Fed. Bank reserves at the Fed are exploding. And they are likely to continue to do so, since bank balance sheets are still deteriorating, especially at smaller and regional banks exposed to commercial real estate loans. Banks own 45% of commercial real estate loans, compared to only 21% of single-family loans. Banks (in general) are going to have to raise capital and reduce their loan portfolios in order to keep within the guidelines for adequate reserve capital. Small wonder that my friend Chris Whalen (one of the real experts on banks) thinks we will see over 400 banks fail in this cycle.

One quick chart to further highlight the problem that banks are facing. I have been writing for several years that commercial real estate loans will be the next shoe to drop. Moody’s calculates that commercial real estate prices have dropped 30%. Over a trillion dollars in commercial real estate loans are coming due in the next few years. Banks are going to continue to reduce their loan portfolios in order to deal with the massive write-offs they are going to have to make. And my bet is they put those reserves they are not lending into government debt.

Given that the current Congress is hell bent on massively raising taxes in 2011, we are likely to dip back into recession by then, if not before. Remember, taxes have a multiplier effect of three. That means tax cuts increase GDP (over time) by three times their amount. But tax increases reduce GDP by three times the increase. That will make deficits worse, and unemployment will again start to rise from already high levels. Twenty states have already raised sales taxes, and more are raising other taxes. It is a vicious spiral.

The New Muddle Through Economy

This is not a prescription for a return to normal growth. We are headed for a New Normal that is less than what the market currently believes. Unless the deficit comes under control at some point, we face the real prospect of catching Japanese Disease and suffering yet another lost decade. Can we Muddle Through? We have no choice but to do so. But it will not be fun. It will not be long-term 2% growth and employment going back to 6% any time soon. Can we reverse the course? With a different attitude and leadership in Congress, maybe we can. But it won’t happen next year, and it’s unlikely in 2011.

I am afraid we will have to put my old friend Muddle Through, as I previously defined him, back in his box for a while. But wait, if my friend at PIMCO, Mohammed El-Erian, can tell us we are going to a “New Normal,” then I can decide that we are going to a “New Muddle Through Economy.” Just not one as benign as I used to think.

In the end, that is what we will do. We will figure out how to deal with the environment in which we find ourselves. That is what free markets and entrepreneurs do. Things will sort out, but not before we have what could be an even more difficult crisis, which will force us to make hard choices.

As an aside, I am not expecting that we will see the crisis I am thinking of any time soon. We can move along with positive GDP for some time. I am thinking of the longer term, 1-3 years out. We will become complacent. I will get letters telling me I am too pessimistic. Just as I did in late 2006 when I said we would be in a recession by late 2007. But I firmly believe we will see a double-dip recession within another 18 months (at the most). Stock markets drop on average about 40% in a recession. Adjust your portfolios accordingly.

On the Road Again

I am writing tonight from Detroit. Tomorrow I will be in New York watching the Yankees/LA game. I will be the guy in the second row behind home plate in the Dallas Cowboys jacket. I will be on Yahoo Tech Ticker on Monday morning, so you should be able to go to Yahoo and see me later that afternoon. Then Philadelphia on Tuesday, speaking at my partner Steve Blumenthal’s CMG conference for investment advisors. They have a very interesting platform of trading advisors. You can see them at http://cmgfunds.net/public/mauldin_questionnaire.asp

I had a great deal of fun at the New Orleans conference, being with old friends and meeting new ones. David Tice (of the Prudent Bear Fund) was an exceptional host for dinner at Emeril’s. I was surprised that Karl Rove actually remembered me after nine years. I thoroughly enjoyed spending some quality time with my friend Ron Paul. We share a lot of concerns about the future of the Republic. I was pleasantly surprised by how thoughtful Howard Dean was. And very personable.

I go to Houston on Wednesday, Orlando on Thursday, and then South America on Saturday. I will be doing a lot of writing from hotel rooms, but all in all it will be fun. You have a great week, and remember that in 10 years none of us will look back and want to return to 2009. 2019 will be better than we can possibly imagine. We just have to make sure we all get there!

Time to hit the send button and find an adult beverage. All the best,

Your going to miss the Old Muddle Through analyst,

John Mauldin
John@frontlinethoughts.com

Copyright 2009 John Mauldin. All Rights Reserved

If you would like to reproduce any of John Mauldin’s E-Letters you must include the source of your quote and an email address (John@FrontlineThoughts.com) Please write to info@FrontlineThoughts.com and inform us of any reproductions. Please include where and when the copy will be reproduced.

* Thanks to a savvy reader for this perspective on the impact of rising oil prices;

* What it takes to get to the next level of performance;

* Dollar has further to drop?

* If Fed waits, it's too late;

* Views that the recession is over and more good reading;

* More signs of rising unemployment;

* A look at economic forecasts of the U.S. dollar and the economy;

* More on bank subsidies and record profits.
.

* Thanks to a savvy reader for this perspective on the impact of rising oil prices;

* What it takes to get to the next level of performance;

* Dollar has further to drop?

* If Fed waits, it's too late;

* Views that the recession is over and more good reading;

* More signs of rising unemployment;

* A look at economic forecasts of the U.S. dollar and the economy;

* More on bank subsidies and record profits.
.

Let’s see if this turns out to be true: Obama Administration Pushes Back at Bank Lobbying on Regulation

Or if its more of this:

John Darkow
SEPTEMBER 26, 2009
http://www.columbiatribune.com/news/commentary/darkow/

Last week's change in tune is this week's same old song: "Equities are for renting not owning at this juncture. I am not calling for a market top, but prices should trade more in a range, and if you intend to play on the long side, it will be important to maintain your discipline (for risk reasons) and buy at the lows of that trading range and sell at the highs to extract any profits from this market. The upward bias still remains as long as investor sentiment is still extremely bullish, but there is probably greater risk of a market down draft now than in past weeks."

More on uncertainty and climate change.

From the WaPo: FHA Set to Hire Freddie Mac Official

On Friday, the Inspector General of the Department of Housing and Urban Development, which includes FHA, said the agency lacks the ability to ensure that lenders meet its requirements.

The report also said that FHA did not obtain or consider negative information on lenders from other HUD offices, follow up on whether the required fees or documentation were collected, or properly dispose of lender application files containing personally identifiable information.

The AP has more on the report. (I haven't seen the report yet).

No wonder so many FHA lenders have off-the-chart default rates (see: FHA Lenders with High Default Rates).

For those interested in the implications of our observations of the Barclays-Lehman transaction as they pertain to the Federal Reserve's discount window, we recommend skipping to Part 2.

Part 1: The Lehman "Blue Light Special"

It is becoming increasingly likely that Barclays will have to pay a cool $5 billion (at least) in additional consideration to the Lehman estate, after the Official Committee of Unsecured Creditors came out yesterday with a hefty joinder piece to the debtor's motion that Barclays materially misrepresented and, in essence, stole $5 billion or more from under the noses of both Lehman Brothers Holdings and its Creditors, all as the megalomaniacal Judge Peck was trying to ram the largest prearranged stalking horse bankruptcy through, in the shortest (im)possible amount of time, just so he could print "Judge Peck  - Greatest Restructuring Judge in the World" t-shirts at the Bowling Green sweat shop just off NY Southern Bankruptcy court. As it often happens, the exposure of this alleged fraud was just a matter of time, and it would appear that Bob Diamond who was counting on a meek opposing creditor committee, and complicit debtor (which he got for a good 12 months, courtesy of a toothless Official Creditor Committee ) is about to pay through the nose for what he thought at the time was the greatest rip off since Bear Stearns.

A filing by the OCC provides a very good summary of the five purported axes of scammery that the Barclays' pickpockets were hoping to effectuate under the "End is Nigh" guise of systemic collapse, and the need for a quick transaction closing, no matter what the cost to Lehman:

Implied $5 Billion Discount. Unbeknownst to the Court or the Committee, early in the negotiations, Barclays and the Lehman Sellers agreed to give Barclays a $5 billion discount from the transferred assets' book value. Indeed, evidence suggests the $70 billion figure contained in the Asset Purchase Agreement ("APA") was not the value on the Lehman Sellers' books at all. Instead, it was a "negotiated" number with an embedded $5 billion discount. This discount was not disclosed in any of the transaction documents given to the Court.

Significant Structural Changes To Sale Transaction. The APA contemplated Barclays would acquire the North American broker dealer operations by purchasing certain of its assets and the liabilities relating to those assets. However, on September 17, 2008, the Federal Reserve Bank of New York (the "Fed") insisted that Barclays assume the Fed's obligations to provide financing to LBI. The Fed had financed LBI through a repurchase agreement (the "Fed Repurchase Agreement"). Barclays agreed to step into the Fed's position and entered into its own repurchase agreement with LBI (the "Barclays-LBI Repurchase Agreement"), which replaced the Fed Repurchase Agreement. As is common in financings of this type, the Fed Repurchase Agreement contained an approximately $4.4 to $5 billion cushion or haircut in valuing the assets in relation to the liabilities. Barclays agreed to provide $45.0 billion in funding, which LBI would secure with assets worth at least $50 billion. After executing and filing the APA, the parties ultimately decided to transform the Barclays-LBI Repurchase Agreement into an asset sale, with Barclays keeping all of the collateral pledged under the Fed Repurchase Agreement (the "Fed Portfolio") — which contained not less than $5 billion additional collateral beyond the $45.0 billion that Barclays was required to advance, i.e., the haircut.

Mad Dash For Unencumbered Assets. Not satisfied with the $5 billion cushion, beginning on Friday September 19, 2008, Barclays demanded that the Lehman Sellers transfer billions of dollars more additional assets. The search for these assets continued after the Sale Hearing, and included (a) no less than $1.9 billion of unencumbered securities in the "non-actionable" box, (b) 15c3 Securities valued at between $750 million and $800 million and (c) an undisclosed amount of collateral supporting the OCC Accounts and other exchange-traded accounts (valued at approximately 2.3 billion).

Overstated Liabilities. The evidence also reveals that Lehman and Barclays intentionally overstated the Cure and Compensation Liabilities to foster the impression that Barclays was assuming greater liabilities. The APA Scheduled these amounts at $2.25 billion and $2.0 billion respectively. In reality, the estimates of the liabilities were only approximately $1.3-$1.7 billion.

Conflicts Of Interest In Negotiations. The Lehman Sellers' teams negotiating on behalf of the estates were steeped in personal conflicts of interest. Several of the negotiators for the Lehman Sellers either negotiated their employment agreements in the midst of the Sale Transaction negotiations or at least knew that they would be transferred to Barclays.

While we have discussed the first four issues previously on Zero Hedge, the last point deserves additional mention as it points to what could be potentially criminal superposition of personal over fiduciary interests by a select few "negotiators" on both the Lehman and Barclays side. From the filing:

Deposition testimony revealed the identity of a certain core group of individuals responsible for negotiating the Sale Transaction. On the Lehman Sellers' side, the negotiators included Bart McDade (President), Skip McGee (Managing Director - Head of Investment Banking), Mark Shafir (Co-Head of M&A), Alex Kirk (Advisor), Mark Shapiro (Head of Restructuring) and Dick Fuld (CEO). Steven Berkenfeld (Managing Director, Legal) executed the APA, the First Amendment and the Clarification Letter on the Lehman Sellers' behalf. Also involved from the Lehman Sellers were Paolo Tonucci (Treasurer), Ian  Lowitt (CFO), Mike Gelband (Head of Capital Markets), Eric Felder (Co-Head of Fixed Income) and Martin Kelly (Global Financial Controller). At the operations level, the Lehman Sellers' employees involved included James Hraska, Robert Azerad, and Alastair Blackwell. As explained below, many of these individuals became Barclays' employees following the Sale Transaction.

On the Barclays' side, the chief negotiators appear to have been Rich Ricci (Chief Operating Officer), Archie Cox (Chief Executive Officer - Americas), Michael Klein (Advisor), Gerard LaRocca (Chief Accounting Officer - Americas), Bob Diamond (Chief Executive Officer), and Jerry del Missier (President). Also involved were Patrick Clackson and Michael Keegan. David Petrie and John Rodefeld were involved at the operations level on the Barclays' side.

And this is the part that we recommend regulatory and legal enforcement officials focus on the most:

Many of the individuals negotiating the Sale Transaction on the Lehman Sellers' behalf became Barclays' employees following the closing. Indeed, McDade told Lowitt that Barclays deemed eight individuals, including Lowitt himself, as critical to the transaction. The other seven were Skip McGee, Ajay Nagpal, Tom Humphrey, Eric Felder, Gerald Donini, Mike Gelband and Hyung Lee.  The transfer of these eight individuals to Barclays apparently became a condition of the Sale Transaction closing  -- a fact disclosed during the Sale Hearing. McDade also worked for Barclays after the sale transaction. However, the significant bonuses paid to these employees after the Sale Transaction closed was not disclosed to the Court. As Alex Kirk explained, "[s]everal of my colleagues. . . who had signed employment agreements were resigning from [Barclays] and receiving large payouts upon their leaving the firm." Kirk, who McDade had re-hired to assist during the negotiations, also went to work with Barclays after the transaction. Because he had no written employment agreement with Barclays, he prevailed upon McDade to press Barclays for a bonus package because "[McDade] was on point for those sorts of issues with Barclays." [Blacked out text, presumably discussing bonus and compensation in detail]. Shapiro, Azerad, Blackwell, Hraska, and Kelly each joined Barclays as well.

The fact that both sides of the negotiating table were incentivized to produce the lowest possible transaction value for the Lehman Brokerage Sale to Barclays is certainly not representative of a fair arms-length negotiation: it demands a close scrutiny of each person's personal motivations and how these could have been misaligned with the interests of equity and bondholders of Lehman, whose interests Messrs McDade, McGee, Kirk, Shapiro, Azerad, Blackwell, Hraska, and Kelly have a much greater responsibility to, than to their own personal wallets. And if this means Lehman creditors pocket the difference of not only the $5 billion that may have been misappropriated by the Barclays-Lehman crack team, but also obtain a clawback of any improperly structured bonuses paid out to Lehman employees (if we need a Pay Czar, this is "non-earmuff" time) who were set on screwing over Lehman creditors at any and all cost, so be it.

 

---

Part 2: In which the Federal Reserve accepts 5,136 shares of bankrupt retailer Shaper Image as collateral (among others)

 

As part of the escalating fight between the Lehman estate and Barclays, one of the tangential benefits is a quick glimpse into what goes on at the Fed's discount window. As a result of the unsealing of tomes of data, information scourers will have a field day by going through the thousands of pages made public for the first time, that disclose not only Lehman's asset exposure, but also the amount of collateral proffered to Lehman by the NY Fed, by JPMorgan as primary custodian in a tri-party repo involving the Fed, and subsequently how this collateral was viewed by Barclays, as well as the measures it took to do all it can do minimize the amount of money it would have to pay to assume the collateral (which was declining in value every day).

In the week following the Lehman collapse, Barclays, as part of its Asset Purchase Agreement, was supposed to purchase (at first) $70 billion worth of assets (coupled with assuming the related $69 billion of debt): an amount which for liquidity-depleted Lehman was financing with overnight loans from both the NY Fed and from JPMorgan, which acting as a Fed agent, was involved in a tri-party repo transaction with Lehman Brothers. Yet Barclays did all it could to minimize the amount of cash it would have to pay JPM, as it suddenly realized the assets it had purchased were quickly dropping in value. A good summary is presented in the UCC filing:

On Friday night, for the first time as far as we know, the Bankruptcy Court was apprised of a different 'deal' between Barclays Capital and Lehman Brothers -- and that Barclays Capital was no longer purchasing $70 billion in assets and assuming $69 billion in related debt. But the Court was not apprised of the purchase that Barclays Capital now says it agreed to make. Instead, of the Court being told that Barclays Capital was purchasing approximately $49.7 billion in securities for $45 billion in cash, the Court was told that Barclays Capital was purchasing $47.4 billion in securities for $45.5 billion in cash. In addition, the Court was told that the reason for the change was a deterioration in market prices, an explanation that we now know to be incorrect .... [I]nasmuch as you ended up taking securities that had not been part of the 'Fed collateral' -- again, some were part of the 'Barclays Capital tri-party collateral' and still others were not financed by JPMorgan at all -- we believe that a full accounting should be done. It is altogether possible that the LBI estate and its creditors gave you more or less value than you were entitled to receive. Moreover, the Bankruptcy Court was told that Barclays Capital was to receive $47.4 billion (not $49.7 billion) in securities and to pay $45.5 billion (not $45 or $45.2 billion) in cash. We are both duty-bound to ensure that LBI received  the value it was supposed to receive in exchange for your $45 billion. We have  offered several times to do this accounting with you (and, as appropriate, the Fed), and it is ntirely possible that the SIPA Trustee and the Bankruptcy Court would  want such an accounting, but your personnel have declined, citing the amount of time and effort it would take. We should do this accounting and should do it now...

A different way to explain what was happening is provided by the transcript of Kirk's confidential deposition in court, also made public:

. . . [A]s I understood it from the way that Mike Keegan explained it to me was that the Fed had been providing a repo for Lehman Brothers earlier in the week of approximately $50 billion, that the Fed had made it known that they wanted to be repaid on that repo, and that Barclays had agreed to assume that repo obligation from the Fed. Without that financing the firm would have collapsed the next morning. So the way it was explained to me was, during the transfer of those -- that loan and the collateral associated with that loan, there were many pieces of collateral that Barclays could not value, so they did not accept them in transfer from the Fed. And mechanically, it was explained to me the way that worked was, in a tri-party repo, the Fed transferred all of the positions to JPMorgan and then JPMorgan began transferring those positions upon the receipt of money from Barclays transferred money, and then they would transfer the positions that secured that repo. And at some point during that process, Barclays became very uncertain as to some percentage of that collateral, I don't recall the exact amount, but it was a large number, maybe as much as, you know, 20 percent of the collateral, and when Barclays didn't accept those positions, they, by definition, just got left at JPMorgan. They -- so JPMorgan was left with collateral that they were not comfortable with but Barclays would not accept, so -- and JPMorgan, I guess they attempted to negotiate but couldn't get that negotiation done.").

Barclays' attempt to nickel and dime JPM (and the US taxpayers) so infuriated Jamie Dimon that he penned an angry letter to John Varley, Barclays Group CEO (which CC:ed Barclays' president Bob Diamond), threatening with litigation in case Barclays is intent on sticking JPM with Lehman collateral that it thought was without value and not worth assuming in a time when every single day stock prices were crashing further lower.

A very telling excerpt from the note is the following description of what was happening the Thursday evening after Lehman had filed:

Chaos reigned throughout Thursday evening. You sent another $40 billion in cash. Billions of dollars of securities were sent out and many were "DK'd" or otherwise sent back. By about 11 o'clock, when DTC shut down, you had apparently received a net total of approximately $42.7 billion of securities. All of the confusion was heightened by the absence of any definitive list of securities you were purchasing - an absence that we believe further supports the notion that you were taking all of the securities collateralizing our intraday advances.

Basically, Barclays tried to rip JPMorgan off by collecting not just on the Lehman collateral which was part of the Barclays APA, but pretty much all the collateral in the tri-party repo, backed and funded by the NY Fed and JPMorgan. But the bottom line is that chaos ruled: tens of billions of dollars were flying on the wires at any given minute, in order to give the impression that with Lehman's collateral now on Barclays' books everything was magically better.

In this firestorm of wire transfers, the Fed's direct Lehman exposure was made obvious. From the Jamie Dimon letter, one can see that in the days after Lehman's bankruptcy, over $50 billion in securities had been assumed by the Fed via FRB and DTCC programs, which also included anywhere between $3 billion and $4.5 billion in equities. It was Barclays' onus to shift this entire collateral exposure to its own balance sheet (while paying both the Fed and JPM off).

Another way of representing this activity immediate to the $40 billion transfer highlighted by Dimon above, comes from the following table, showing the insane activity on the wires between the Fed, the Tri-Party repo, and other parties. Indicative of just how precarious the system was, is the over $6.2 billion in DK'd transactions (a staggering amount), which meant that the fate of the successful closure of the Lehman deal (and the September 19th near collapse of the Reserve money market fund) constantly hung on by a thread.

An amusing tidbit highlighting the manner in which Barclays was attempting to game the system, is that even as it was unwilling to assume much of the collateral that the Fed had accepted earlier (as we pointed out, this includes equities, which as Karl Denninger reminds us, is allowed by Section 13.3 under "unusual and exigent circumstances"), and which is the main focal points of JPM's complaint to Barclays, what it did accept it promptly proceeded to mark up aggressively: none other than Jamie Dimon points out that very fact:

Indeed, much of the collateral financed by Barclays Capital on Wednesday night was the very collateral financed by the Fed on Monday and Tuesday nights. (For a very significant amount of that collateral, the movement of which between the Fed collateral pool and the Barclays Capital collateral pool was undoubtedly deliberate, Barclays Capital assigned a loan value greater than the amount that had been assigned by the Fed.)

The games banks play, highlighted by the very master of the game.

Another representation of what was happening to the collateral pool in the very critical Tri-Party agreement is the following table highlighting the variance between Lehman's haircuts on various assets (a nominal 4% weighted average) and that demanded by the Federal Reserve (9% weighted average). What is shocking is the eagerness by the Fed to lend against equities after a mere 20% haircut in principal value. This begs the question, just how much of the collateral pool in the Fed's discount window is even covered at all, assuming extensive loans from the time of Lehman's collapse are likely significantly underwater not only in terms of equity collateral, but for non-IG corporates, converts, and private labels, all of which had the same blanket haircut. The chart below shows that on the Friday before Lehman's collapse, the Fed was willing to accept virtually any toxic asset into its own balance sheet, after applying a generic 20% discount.

And if you have ever wondered just how a hundred billion dollar + organization has a valuation set (almost) literally on a napkin, here are the handwritten notes by Lehman's global financial controller Martin Kelly:

 

 

Yet what readers will likely have the most interest in is the following CUSIP by CUSIP representation of all the securities (equity and otherwise) that the Fed was responsible for as part of the Tri-party Repo Agreement, thereby pledging the goodwill of taxpayers' returns on such equities as bankrupt WHX, Tower Automotive, Federal Mogul, Intermet, Finlay Jewelers, and many other quality names. The full file can be found here. Below is a sample of the representative equities that the Fed was backstopping for Lehman in the days when it seemed like the entire financial system would collapse:

Coming full circle, the major question we have is what, if any, considerations did the Fed use when determining how much of Lehman's collateral pool it would be willing to onboard in the discount window. And if back then it was willing to accept securities of bankrupt companies as value pledges to US taxpayers, why would one assume that anything has changed? The next time there is a "risk-flaring" event (and with bankrupt companies presumably still on the Fed's balance sheet, it is merely a matter of time), how much more leeway will be given to toxic assets? Will the Fed now allow for a 10% haircut instead of 20%? Or how about 5%? Or maybe it will actually say the securities deserve a premium, since all that money Bernanke is printing has to go somewhere. We hope that the over 300 members of Congress who already support Ron Paul's "Audit the Fed" Initiative consider the implications of what the Lehman fiasco has taught us, and how this unique look into the Fed's balance sheet should be a very critical reminder of just how much risk the Fed is willing to take on with taxpayer capital when bailing out a financial system that, absent ongoing accounting gimmickry and endless Reserve Banking System subsidies, is still rotten to its core.

Krugman vs Levitt

Update: More Krugman and More Levitt

Bloomberg is reporting State Revenue Falls Most Since 1963 on Incomes, Sales.

U.S. state tax collections tumbled the most in almost half a century in the second quarter as the economic recession curbed levies on incomes and sales.

The 16.6 percent plunge was the biggest since at least 1963, the Nelson A. Rockefeller Institute of Government said today. For the 12 months to June 30, the fiscal year for most states, revenue declined 8.2 percent, or $63 billion, about twice what states got from the $787 billion U.S. economic stimulus package, the institute said.

State revenue has dwindled for two straight quarters and continued to decline in July and August, the Albany-based research organization said. Budgets for the year that began July 1 already face $26 billion of deficits, the Washington, D.C.- based Center on Budget and Policy Priorities said Aug. 12, forcing state lawmakers to confront additional spending cuts.

“We’re looking at a multiyear problem hitting essentially every state,” Robert Ward, the institute’s deputy director, told reporters. “It has happened during recessions before, but the depth of this decline is unprecedented in modern times.”

Collections dropped in 49 states in the second quarter as sales and personal-income taxes slid for the third consecutive period, the institute said. Income tax was down 27.5 percent and sales tax fell down 9.5 percent, its study said. Both categories fell by the most in 45 years.

States are anticipating more cuts to current-year budgets, already pared once to bring them into balance. Mississippi Governor Haley Barbour told managers on Oct. 13 to cut spending 5 percent because tax collections in the first three months of fiscal 2010 were 7.7 percent below estimates. Florida Governor Charlie Crist told department heads on Oct. 12 not to request more money for next year, when the state faces a $2.6 billion deficit.

“It’s clear that when governors propose their budgets in January, the vast preponderance will be looking for more spending cuts and tax increases,” Boyd said.

Alaska’s tax income declined the most of any state, the study said, with an 86.5 percent drop because of lower oil prices. Vermont fared the best, with a 2.2 percent gain because of a one-time estate-tax settlement.

Raising taxes will put the burden on small businesses who will respond by not hiring. Raise taxes enough and corporations will play Musical Chairs.

When governments compete with private enterprise for funds, the government always wins. Everyone else but the direct recipients of the handouts loses.

Unfortunately raising taxes rather than cutting government waste is the solution selected by this administration and it will likely be the solution selected by various state governments as well.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Recently, I’ve mentioned the 48.75 level of the BKX banking index. I believe this is one of the primary reasons why the market hit resistance at the end of last week. Here is a daily chart of closing prices for the BKX (click chart to enlarge):

The two red arrows at the left show that 48.75 was support until it cracked in November. The four arrows on the right show that it is now resistance. The BKX was able to close above on Wednesday and Thursday, but fell back below on Friday.

Additional resistance in the area comes from the 50% Fibonacci retracement of the plunge down from the September 2008 peak:

So, instead of Blitzkrieg, there is more likely to hand-to-hand combat in the trenches – if the market can continue to rally here.

On the weekly chart, the BKX has managed to recapture the first Fibonacci retracement level (red line) of the bear market:

If the last few weeks of the pattern turn out to be a bull flag, then the 38.20% level (purple line) would be a target.

Everybody was expecting the earnings season to break the market higher, but that assumption has been called into question by the action at the end of the last week. So, now we have drama with the BKX at center stage.

From the Miami Herald: Florida's jobless rate hits 11 percent as public toll worsens

Florida's overall jobless rate hit 11 percent in September, up two-tenths of a percentage point from the previous month, according to figures released by the state labor department on Friday. That's the highest since 1975, and represents more than a million Floridians out of work.
emphasis added

The BLS will report all the state data this week, and just like in California and Nevada, unemployment in Florida is at an all time high for the state series (started in 1975).

A couple other high unemployment states ...

In Illinois, from the Chicago Tribune: Ill. jobless rate hits 10.5 percent in September

The jobless rate in Illinois increased to 10.5 percent in September after falling to 10 percent in August.

That is almost 700 thousand people unemployed in Illinois.

And the "good news" from the Detroit Free Press: State's jobless rate is showing stability

Michigan's unemployment rate inched slightly higher during September, rising one-tenth of a percentage point to 15.3%.
...
"Michigan's unemployment rate was largely unchanged in September, as a modest recall of auto workers from temporary layoff was countered by job losses in the service sector," said Rick Waclawek, director of [Michigan Department of Energy, Labor & Economic Growth]'s Bureau of Labor Market Information and Strategic Initiatives. "The state jobless rate, which rose sharply by five percentage points from December 2008 to June 2009, has stabilized somewhat since June."

That is the good news. The recall of some auto workers kept the unemployment rate "largely unchanged".

My guess is the overall unemployment rate will hit 10% this month or in November.

Warning: Mildly rough language contained herein.  Don't gripe, you were warned in advance not to read this if you'll be offended!

You have to be kidding me.....

From Larry Summers:

"Financial institutions that have benefited from government support can, should and must use this moment to think about what they can do for their country -- by accepting the necessary regulation to protect the American people," Summers said in remarks prepared for delivery at the Economist's Buttonwood Gathering in New York. "There is no financial institution that exists today that is not the direct or indirect beneficiary of trillions of dollars of taxpayer support for the financial system."

How about this Larry?

"Financial institutions will be placed under strong regulation and capital controls.  We will mark every asset to the market, we will investigate all the fraud, we will force all off-balance sheet "assets" back on balance sheet and we will stop the looting."

Oh wait.  I live in America, where the banks run the Congress, not the other way around.  Never mind a President and Chairman of House Financial Services who can't manage to get up off their knees, and they're not praying when they genuflect either.

I've had it with the knob-polishing behavior of these jackasses in DC, especially when it comes to letters like this:

Banks should be given three years to raise capital for offsetting assets and liabilities that must be brought onto their balance sheets, Citigroup Chief Financial Officer John Gerspach said yesterday in a letter to regulators. Requiring banks to “assume the risk-based capital effects immediately, or even over one year, is an undeniably severe penalty,” he wrote.

What?

FASB has already postponed the implementation of this rule, which it voted on in July of 2008.  It was originally to take effect in November of last year; the banks at that time said:

``The risks of too much haste are high,'' the securitization forum and Sifma said in a July 16 letter to the FASB. The ``abrupt consolidation'' of off-balance-sheet structures ``is likely to swell the balance sheets of the affected entities.''

So they got a reprieve for one year.

Now the banks are griping that this isn't good enough, and they want even more time!

An "undeniably severe penalty"? 

Citibank, JP Morgan and the rest have all known about this for more than two years.  They have had all this time to prepare for this event, they have had all this time to raise capital, they have had buoyant stock prices occasioned by FASB being literally extorted by Congress into allowing banks to lie about asset values, thereby cranking their stock prices up by 300, 400, even 600%.  Specifically:

Citibank, $0.97 -> $4.59, 473%
Bank of America, $2.53 -> $17.26, 682%
JP Morgan, $14.96 -> $47.47, 317%
Wells Fargo, $7.80 -> $30.02, 384%

JP Morgan has a market cap of $181 billion dollars as of this afternoon.  If they were forced to issue even two hundred billion dollars of equity, it would only erase half of their market price gain in the last six months.

Bank of America has a market cap of $149 billion dollars as of this afternoon.  If it was forced to issue three hundred billion dollars in equity that issuance would drive its stock price down to about $6.00, leaving it with more than a clean double from where it was in March.

Citibank has a market cap of $52 billion dollars as of right now.  If it was forced to issue one hundred billion dollars in equity, its stock price would be diluted such that it would still have posted more than a fifty percent gain since March.

Wells Fargo has a market cap of $140 billion as of this afternoon.  If it was forced to issue two hundred billion dollars in new equity, its stock price would be diluted such that it would still have posted more than a sixty percent gain since March.

Of course the actual required equity issuance is nowhere near this high for any of these firms.  Assuming a 10% Tier Capital requirement and two trillion dollars (in total) of off-balance sheet exposures to be brought back on these firms would have to post $200 billion between them all, or about 1/4 of the above amount (in total) 

That is, most of the price gains they've seen since the March lows would be retained - and this assumes the market does not cheer such issuance, as it did last time.  Indeed, in the spring when these banks issued new equity in each case the market rewarded them by bidding up their stock, not selling it off to reflect the dilution!

The truth is that if these firms are truly sound and solvent, going concerns, and are not hiding two trillion dollars in trash off balance sheet they can issue whatever new equity and/or debt that is necessary to meet reserve requirements right now.  The market has shown that it will respond favorably to such issuance.

The truth is that the reason we are in this mess is because banks have abused FASB, The Administration and Congress for years, literally threatening them with financial Armageddon unless all of the above kneel down and perform an obscene act upon their CEOs and Boards.

The truth is that these institutions are still engaged in outrageous acts with regards to foreclosures, property (mis)management and other acts that by any reasonable standard can only be considered schemes, artifices or even frauds.

The truth is that I and the rest of America have had it with the obscenities that our elected and appointed officials perform daily while genuflecting in front of these latter-day Al Capones, and we will remember come next Fall should this crap not be stopped.

This far, no further Gentlemen.

Mike Panzner just got back from The Economist’s “Buttonwood Gathering” in New York and thought I’d share a few of the more interesting (and, in some cases, quite enlightening) quotes (in no particular order) from the movers-and-shakers at the (well attended) conference:

Secretary Tim Geithner, United States Department of the Treasury:

“Generally, we did not do enough.” (Referring to the failure to address growing concerns over excessive risk-taking in the period leading up to the financial crisis.) [Editor's note: understatement of the year?]

Stephen Roach, Chairman, Morgan Stanley Asia:

Those who are looking for a “V”-shaped recovery are in for “a rude awakening.”

“The imbalances going into the crisis were large to begin with. Now, they are bigger than ever.”

George Soros, Chairman, Soros Fund Management:

“Bankers have too much power.” (Referring to the hold that Wall Street has over Washington.)

The “globalization of financial markets is built on false premises: namely, that markets can be left to their own devices.”

Sheila C. Bair, Chairman, Federal Deposit Insurance Corporation:

“Insured deposits are being used in ways that I don’t like to see.”

Wilbur L. Ross Jr., Chairman and Chief Executive Officer, WL Ross & Co.:

People were focused on “risk-ignoring rates of return.” (Describing one of the things that went helped bring about the financial crisis.)

If regulators had taken the time to visit a Countrywide Lending office, they would have seen something akin to “a Wall Street boiler room,” rather than a bank branch. (Referring to regulator’s unwillingness to go out into the field and see what was really going on during the housing boom.)

“Government is its own systemic risk in the mortgage market.”

Lawrence H. Summers, Director of the National Economic Council, The White House:

The root of most financial errors is “when you try to do today what you wished you had done yesterday.”

“I can assure you that on Main Street, it is a very different conversation.” (Referring to the contrast between the optimism on Wall Street and the more pessimistic mood of those struggling to get by in other parts of the country.)

“It is not the administrations’s view to bribe those who have been part of the problems we have experienced to do what is in the national interest.” (Referring to the suggestion that banks and other financial institutions need financial incentives to support proposed regulatory changes.)

Jeffrey D. Sachs, Director of The Earth Institute, Quetelet Professor of Sustainable Development, and Professor of Health Policy and Management, Columbia University:

“It was grotesque.” (Referring to fact that, despite its extraordinary size, the $62 trillion credit default swap market was essentially unregulated.)

“This was a crisis made in the U.S.” (Referring to the suggestion that China’s export policies played a key role in creating the credit bubble.)

Niall Ferguson, Laurence A. Tisch Professor of History, Harvard University, William Ziegler Professor of Business Administration, Harvard Business School:

“We are living though a gradual shift away from a dollar-centric system.”

“Is China the Germany of our time?” (Referring to the combination of economic dynamism and growing nationalism that stoked the aggressive ambitions of Nazi Germany.)

“The problem of being a declining empire doesn’t have a solution.” (Referring to the suggestion that a great many, if not all, of America’s problems are fixable.)

Robert J. Shiller, Arthur M. Okun Professor of Economics, Yale University:

“Look up ‘bubble’ in an economic textbook and it’s not there.” (Referring to the shortcomings of the traditional economic curriculum.).

People “are living in a ‘pretend-and-extend’ environment, waiting for the economy to recover.” (Referring to the precarious state of the commercial real estate market and the wave of resets coming due between 2011 and 2013.)

Elizabeth Warren, Chair, TARP Congressional Oversight Panel:

“The reason banks lost confidence in each other is because they looked at their own books.” (Referring to the loss of confidence that roiled markets during the darkest days of the crisis.)

Thanks, Mike!

Tacky similes aside, the Growth Enterprises Market (GEM) supports private companies that have difficulty getting financing in the much like capitalism, but still very much Communist Chinese system of favoring state-run enterprises.

In it’s first day of operation on October 23, the new board will support an initial batch of just 28 companies, according to the Xinhua News Agency.

GEM will be run by the Shenzhen Stock Exchange, in Shenzhen, the southern financial center not too far from Hong Kong.  The GEM is largely viewed as a crucial step in supporting private, smaller companies, critical for the growth of the rapidly growing, expanding economic classes in China.

This is an interesting arena, I’m curious as to how this board will perform and what it will do for the critical lower masses of Chinese businesses and traders.

For more information, check-out www.hkgem.com.  Though the website looks a little casual- I think this is going to be a "gem" worth watching. 

They call it the "Buyers Beware Market for Informed Investors" on the site...  I don't know how caveat emptor translates, but I know what they're trying to put across.

This morning I read Elliott Wave International's Short-Term Update, published yesterday afternoon, and I thought I'd share a couple of charts of interest. (Note: I am respectful of the proprietary nature of this work, and I have permission from EWI to republish charts from time to time, but you'll need to click on the banner ad on the right column to check out all their wares.)

The first shows the perverse relationship sentiment has with stocks. In early March, when stocks were a ridiculous bargain and multi-thousand percentage gains were just waiting to be plucked, the sentiment reading was an unheard-of 2% bulls.

Now, however, with stocks at (in my opinion) insanely-overpriced levels, and with all those multi-thousand percent gains already part of financial history, people are ga-ga about stocks.

The other chart of interest to me was particularly poignant. Long-time readers may remember the nasty relationship I had with the spring of 2008. I've mentioned it as something I'd never want to repeat. Well, not only has it repeated itself, but it has done so in slow motion. As the chart below suggests, the fractal form of the move from the low of March to the present is virtually identical to the form of the move from spring of 2008. So it's the same kind of torture, but prolonged by about 300% in terms of time.

Word on the street is that Fujisan will be doing another post on Slope this weekend; let's keep our fingers crossed, because I know how much everyone loved her last contribution!

Robert Waldmann


Not the intertubes, 18 mile long tubes held up by helium baloons releasing S02 into the stratosphere.

Daniel Davies writes

if you find yourself writing, in all seriousness, as a practical proposal, the phrase "pumping large quantities of sulphur dioxide into the Earth’s stratosphere through an 18-mile-long hose, held up by helium balloons", it is probably time to take a step back and ask yourself if something has gone a little bit wrong with your life.

Ok so I asked myself and I still think that pumping large quantities of sulphur dioxide into the Earth’s stratosphere through an 18-mile-long hose, held up by helium balloons would be excellent.



Davies is one of many many people who criticize the chapter on global warming of "Superfreakonomics" by Steves Levitt and Dubner. The most quoted takedowns were written by Joe Romm and by Tim Lambert.

As far as I can tell, they really don't have very much to say against the acid rain tubes idea. Rather they mainly object to the Steves proposal that we use the tubes as an alternative to cap and trade. The argument against doing both seems fairly weak to me.

There is the Leninist argument that the worse it is the better it is so any way to ameliorate global warming other than reducing emissions is bad, because it wil reduce pressure for reduced emissions. No one feels obliged to paint their roof black to increase pressure for emissions reductions and I don't see the difference.

Now there are clearly problems with the acid in the stratosphere approach. The S02 won't stay there forever. It seems to me that the best way to defend the tubes proposal is to lye -- that is dump something alkaline in the oceans (this is both to deal with sulfuric acid from the tubes and carbonic acid from C02). Now if one aimed to do that in a way which wouldn't create extremely alkaline areas and kill marine life, it would cost a lot. I think that cost should be added to the tubes cost.

Also it might not work. A case for not relying on the tubes but not, as far as I can see, a case for not trying them.

Joe Romm stresses the importance of positive feedback in global warming -- he notes ways in which a hotter climate causes more emissions due to more forest fires and more bark beetles. Others have discussed the possibility that methane released from melting arctic tundra will cook us. To me, this describes ways in which the tubes approach will reduce emissions of greenhouse gasses (seems to follow no ?). It seems to me conceivable that the most cost effective way to reduce emissions of greenhouse gasses is the 19 mile long tubes approach.

Both Romm and Lambert argue that if we send up S02, then stop, then the temperature will soon be the same as it would have been with no S02. This seems to me to be inconsistent with the limits of bark beetle reproduction and mobility and the way forest fires really happen and all that. There argument seems to be high temperatures cause high emissions *and* keeping the temperature low means just the same emissions waiting in the atmosphere for us to drop our S02 guard. I don't see how they can believe both claims at the same time.

update: spelling of Dubner corrected.

I almost wonder whether Karen Ignani is a progressive mole.

Good news, kids! Hard economic times has created bargains every where, and that includes a small auto maker in Maranello, Italy.

Recession bargain hunting extends even to Ferrari. Their newest offering is the California. It is the least expensive new Ferrari you can buy, a bargain at its offering price under $200k. And, there is little wait time — forget a 3-5 year backlog, the wait list for this little beastie is only 18 months!

Some of the specifics:

• 0 – 60 in 3.5 seconds
• First ever front engine V8
• 453-horsepower
• Retractable hardtop
• 1st Ferrari ot built entirely by hand
• High production run: 3,000 a year
• No manual transmission option

That last one is a deal killer for me . . . too bad, its a gorgeous looking car.

>

>

Sources:
Official site
http://www.ferraricalifornia.com

Color It Red, Like a Sea of Ink
JERRY GARRETT
NYT, October 18, 2009
http://www.nytimes.com/2009/10/18/automobiles/autoreviews/18ferrari.html

The California: A chick Ferrari that captures a guy’s heart
Dan Neil
LATimes, September 4, 2009
http://www.latimes.com/business/la-fi-neil4-2009sep04,0,22802.column

Ferrari California
Jeremy Clarkson
The Sunday Times, September 13, 2009
http://www.timesonline.co.uk/tol/driving/jeremy_clarkson/article6830070.ece

Driven: 2010 Ferrari California
Jason Cammisa
Automobile, August 05, 2009
http://www.automobilemag.com/reviews/driven/0908_2010_ferrari_california/index.html

Our friends from Maranello show off their latest mouth-watering creation.
JORDAN BROWN AND ERIK JOHNSON
Car & Driver, May 2008
http://www.caranddriver.com/news/car/08q2/2009_ferrari_california-car_news

Will 2010 be 1994 redux? No.

The first five pages, by themselves, are enough to discredit the whole thing.

When trading ranges are restricted, the amount that intraday traders can take out of any given market move will be limited. This makes execution--the ability to obtain good prices that maximize reward relative to risk--particularly important in choppy market conditions.

I define reactive trading as trading that is impulsive, often initiated by a fear of missing a move that seems to be getting under way. Instead of being guided by a forward sense for where the market is likely to go, the trader jumps aboard moves that look like they're going. More often than not, those moves reverse, leaving the trade underwater and the trader frustrated.

This is one reason why I like to start trades with profit targets, not entry setups. You enter a business venture only if you see significant profit potential: if the big picture isn't right for an entrepreneur, the venture isn't worth pursuing. Each trade is a business venture in miniature: it begins with a recognition of meaningful potential for gain. Only then does the entrepreneur/trader figure out how to pursue the venture so as to limit overhead and maximize profit.

In a range market, and especially in slow market conditions, it is necessary to temper one's expectations. Early in the morning when in a range, I'm looking to see if we are more likely to take out the overnight high or low; yesterday's high or low; the R1 or S1 level; etc. Incoming relative volume helps us understand how much participation there is in the market, which will provide useful guidance for how far we're likely to move.

Measures of intraday sentiment, such as NYSE TICK and the Cumulative Market Delta, will give us important guidance as to the likely directionality of movement.

Together with profit targets, our estimates of volatility and directionality help us frame proactive trades in which we wait for pullbacks from the expected direction of movement to enter anticipated moves to our targets. By defining price and/or indicator levels where our trade idea is clearly wrong and sizing the initial entry with a fraction of one's total buying power, we both define and control risk, even as we pursue profit with an entrepreneurial spirit.

Discretionary trading need not be reactive trading. A good entrepreneur passes up many business ideas before setting forth with a specific venture. So it should be with trading. If you're a developing trader, the links in this article will help get you started.
.

Note: this is not seasonally adjusted. There is a very distinct seasonal pattern for imports, but not for exports.

Sometimes port traffic gives us an early hint of changes in the trade deficit. The following graph shows the loaded inbound and outbound traffic at the ports of Los Angeles and Long Beach in TEUs (TEUs: 20-foot equivalent units or 20-foot-long cargo container). Although containers tell us nothing about value, container traffic does give us an idea of the volume of goods being exported and imported.

Click on graph for larger image in new window.

Inbound traffic was 17.4% below September 2008.

Outbound traffic was 8.6% below September 2008.

Even with the decline in September, there has been a clear recovery in U.S. exports. And export traffic at the LA area ports is at the September 2006 level.

However, for imports, traffic is about at the September 2003 level, and 2009 will probably be the weakest year for import traffic since 2002.

Note: Imports usually peak in the August through October period (as retailers import goods for the holidays) and then decline in November.

And some color from the LA Times: Imports dive at ports of Los Angeles and Long Beach

As dismal as those figures are for the two ports, which rank first and second in the U.S. in container volume and together rank fifth in the world, a greater worry goes beyond the immediate and substantial loss of local trade-related jobs: Some of the ports' most important tenants were so poorly positioned for the downturn that they might sink completely in a sea of billions of dollars of red ink, experts say.

"Without a doubt, the Southern California ports should be worried," said Neil Dekker, an analyst at Drewry Shipping Consultants in London who produces container industry forecasts. "Companies will go bust; freight rates may take years to recover."

Floyd Norris highlights a survey that implies globally, the recession is over:

The worldwide recession appears to have ended, with surveys showing manufacturing activity is on the rise nearly everywhere. “It is the emerging markets that are leading, with the U.S. following and Europe lagging,” said Chris Williamson, the chief economist of Markit, a company that surveys manufacturers in many countries.

Regular readers know my aversion for asking Humans questions, and then drawing big conclusions. We tend to read too much into the answers, which history has shown to be unreliable. Still, the surveys “have a reputation for showing turns in the economy, often before other indicators do.” The chart (below) implies things are not only less bad, but actually starting to improve in places. I remain less than fully convinced, but willing to recognize that in some sectors and regions, the economy is improving. For example, luxury spending jumped 29% this quarter from last. (Most be that $23B in Goldman bonuses getting spent!) > Chart courtesy of NYT > Source: By Some Reliable Measures, Recession Is Over FLOYD NORRIS NYT, October 16, 2009 http://www.nytimes.com/2009/10/17/business/economy/17charts.html