Fin/Inv

One of the most self-defeating attitudes I've found among some traders is that it is somehow competitive and even desirable to "go on tilt". My experience is that traders on tilt are frustrated; they fight market movement and overtrade out of emotions. In fact, I can't think of a time when I've seen a trader on tilt actually trade well and make significant money. It always ends badly.

That is very different from being motivated and psyched up. The motivated trader is responding to anticipation: the expectation that comes from seeing markets well and looking forward to taking advantage of that vision. The trader on tilt is simply frustrated by prior events. Tilt is the epitome of being reactive, not proactive in outlook.

If you doubt that tilt is an undesirable state, imagine yourself as a patient in an operating room. Your surgeon has begun the prep for your surgery. With each successful step, he pumps his fist and yells out. When a portion of the preparation doesn't go well, he loudly curses, throws his surgical instruments, and yells at the OR staff.

Is that the surgeon you want for your procedure?

You get the point: consummate professionals don't go on tilt. Ever. Not in the operating room. Not in the cockpit of a plane. Not on the battlefield leading troops. Not anywhere there is significant risk. Professionalism means staying task focused and dealing with powerful emotional responses later.

After all, would you turn your money over to a money manager who swung high and low, hot and cold, with each gain and loss in your portfolio? So why manage your own money that way?
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Here is my column in tomorrow's NY Times about the marginal tax rates implicit in the health reform bill making its ways through Congress. Let me add a few additional observations on the topic.

1. Here are the CBO numbers on which the article is based. Unfortunately, the Times did not run the table of implicit marginal tax rates that I gave them based on the CBO numbers. But the example I used in the piece (an implicit tax rate of 23 percent) is representative. For lower income levels, the implicit marginal tax rate is even higher. Between $42,000 and $54,000, the implicit marginal tax rate from health reform is 34 percent.

2. When CBO estimates the budgetary cost of such bills, it holds GDP constant. If you think (as I do) that large increases in marginal tax rates tend to depress labor effort and thus GDP, then you should be wary of claims based on CBO scores that the health reform bill is deficit neutral. Lower GDP will mean lower tax revenue and thus a larger budget deficit.

3. How much do people respond to tax rates? Economists differ in their answer to this question. The latest thinking on this topic, by my Harvard colleague Raj Chetty, indicates that the elasticity of taxable income with respect to (1-tax rate) is about one half. So, for example, if a person starts with a marginal tax rate t of 0.3 and health reform raises it to 0.5, the percentage change in 1-t, using the midpoint method, is .2/.6, or 33 percent. With an elasticity of one half, his taxable income will fall by 17 percent. Thus, the economic impacts from these implicit tax hikes are sizable.

4. In my Times piece, I wrote, "None of this necessarily means that health reform is not worth doing. President Obama’s push for reform is premised on the belief that access to good health care should be a right of all Americans — a proposition better judged by political philosophers than economists. But we should not forget the cost of translating that noble aspiration into practical policy."

This passage may seem a bit passive-aggressive, as I appear to be criticizing the bill without really taking a stand. My aim, however, is to emphasize that economics alone cannot settle the debate.

Behind the healthcare debate is the classic tradeoff between equality and efficiency. Consider the following question, which is not about healthcare per se: Would you favor a substantial increase in marginal tax rates for millions of middle and upper income Americans to provide more resources for those toward the bottom of the economic ladder?

Your answer to this question cannot be determined by positive economics without adding in some normative judgments. But your answer should strongly influence your view of the health reform bill. The bill moves us closer to much of Western Europe by favoring equality and paying the price of reduced efficiency from much higher marginal tax rates.

That may be a policy choice Americans want to make. But before buying the merchandise being offered by Congress, I hope we all take a close look at the price tag.

Von den meisten Regierungen wird bereits seit einiger Zeit das Ende der Krise ausgerufen. Doch keine dieser Regierungen, kann bisher beurteilen, ob und wie die Wirtschaft ohne die Kruecken staatlicher Hilfsprogramme laufen kann.

I have another suggestion for the Systemic Bill. Someone should demand language, or file an amendment, that states:

‘Directors, Officers, senior management and consultants of any institution that draws on the industry funds created under this title or receives any relief or is subject to any other actions provided for under this Title shall, for a period of 5 years after such relief or support, be prohibited from becoming employed as Director, officer, senior manager or consultant at any regulated institution or an affiliated holding company or operating subsidiary’.

The Board should attest that they have no directors, employees, consultants in violation of this and regulators should issue a PCA letter if one is in violation.

Regulators should use PCA

1- it would cause greater focus and concentration on risk management and best practices.

2- it would cause whistle blower directors and silent objectors management to step down. This is a good thing and will drive investors to differentiate well managed firms from those who lose people and would force regulators to be aware of problem institutions.

3- Well run institutions to have a larger pool of potential quality officers and management to hire and those management would be rewarded with reputational advantage and renumenration.

By George Washington of Washington’s Blog.

Preface: My apologies if this is offensive.  As always, Yves Smith is not responsible for this content, does not necessarily agree, sponsor or endorse it.

Many people have called politicians prostitutes.

True, Obama has received more donations from Goldman Sachs and the rest of the financial industry than almost anyone else.

And Summers and the rest of Obama’s economic team have made many millions – even recently – from the financial industry.

And Congress has largely been bought and paid for, and two powerful congressmen have said that banks run Congress.

So yes, they have certainly sold their goods to the highest bidders.

Indeed, at least some people trust prostitutes more than elected officials.

But the prostitution analogy is inaccurate.

Specifically, as the chairman of the Department of Economics at George Mason University (Donald J. Boudreaux) points out:

Real whores, after all, personally supply the services their customers seek. Prostitutes do not steal; their customers pay them voluntarily. And their customers pay only with money belonging to these customers.

In contrast, members of Congress routinely truck and barter with other people’s property…

Members of Congress are less like whores than they are like pimps for persons unwillingly conscripted to perform unpleasant services.

Consider, for example, agricultural subsidies. Each year a handful of farmers and agribusinesses receive billions of taxpayer dollars. These are dollars that government forcibly takes from the pockets of taxpayers and then transfers to farmers.

The customers, in this case, are the farmers and agribusinesses. The suppliers of the services performed for these customers are taxpayers, for it’s the taxpayers who possess the ultimate asset — money — that farmers and agribusinesses lust after. And the intermediaries who oblige the suppliers to satisfy the base lusts of the customers are politicians. Just as pimps facilitate their customers’ access to prostitutes’ assets, politicians facilitate their customers’ access to taxpayers’ assets.

We taxpayers have less say in the matter than we like to think. Sure, we can vote. But if even just 50.00001 percent of voters cast their ballots for the candidate proposing higher taxes, the assets of not only our pro-tax citizens, but also those of the remaining 49.00009 percent of us anti-tax citizens are put at the disposal of our pimps’ customers. (And note that many of those who vote for higher taxes are not among those persons actually subject to higher taxation)…

Politicians force taxpayers to pony it up — just as the services rendered for a pimp’s customers are rendered not by that pimp personally, but by the ladies under his charge. The pimp pockets the bulk of each payment; he’s pleased with the transaction. His customer gets serviced well in return; he’s pleased with the transaction. The only loser is the prostitute forced to share her precious assets with strangers whom she doesn’t particularly care for and who care nothing for her.Also like the ladies under pimps’ power, taxpayers who resist being exploited risk serious consequences to their persons and pocketbooks. Uncle Sam doesn’t treat kindly taxpayers who try to avoid the obligations that he assigns to them. Government is a great deal more powerful, and often nastier, than is the typical taxpayer. Practically speaking, the taxpayer has little choice but to perform as government demands.

So to call politicians “whores” is to unduly insult women who either choose or who are forced into the profession of prostitution. These women aggress against no one; like all other respectable human beings, they do their best to get by as well as they can without violating other people’s rights.

The real villains in the prostitution arena are those pimps who coerce women into satisfying the lusts of strangers. Such pimps pocket most of the gains earned by the toil and risks involuntarily imposed upon the prostitutes they control. No one thinks this arrangement is fair or justified. No one gives pimps the title of “Honorable.” Decent people don’t care what pimps think or suppose that pimps have any special insights into what is good or bad for the women under their command. Decent people don’t pretend that pimps act chiefly for the benefit of their prostitutes. Decent people believe that pimps should be in prison.

Yet Americans continue to imagine that the typical representative or senator is an upstanding citizen, a human being worthy of being feted and listened to as if he or she possesses some unusually high moral or intellectual stature.

It’s closer to the truth to see politicians as pimps who force ordinary men and women to pony up freedoms and assets for the benefit of clients we call “special-interest groups.”

Note: There are a handful of honest politicians, fighting for the American people. But the exception proves the rule.

By George Washington of Washington’s Blog.

Ron Paul tells Bloomberg that Congressman Watt has just more or less killed the bill to audit the fed:

Representative Ron Paul, the Texas Republican who has called for an end to the Federal Reserve, said legislation he introduced to audit monetary policy has been “gutted” while moving toward a possible vote in the Democratic-controlled House.

The bill, with 308 co-sponsors, has been stripped of provisions that would remove Fed exemptions from audits of transactions with foreign central banks, monetary policy deliberations, transactions made under the direction of the Federal Open Market Committee and communications between the Board, the reserve banks and staff, Paul said today.

“There’s nothing left, it’s been gutted,” he said in a telephone interview. “This is not a partisan issue. People all over the country want to know what the Fed is up to, and this legislation was supposed to help them do that.”..

Paul, a member of the House Financial Services Committee, said Mel Watt, a Democrat from North Carolina, has eliminated “just about everything” while preparing the legislation for formal consideration. Watt is chairman of the panel’s domestic monetary policy and technology subcommittee.

Congress is also suggesting that the Fed be given more powers, making it the chief risk regulator of the entire banking system.

Specifically, as summarized by Huffington Post, a new bill introduced by Democrats in Congress “gives the Federal Reserve the power to determine which firms are actually ‘too big to fail’ and pose systemic risk to the financial system.”

Given the Fed’s history (as discussed below), that is like appointing the head of the Medellin drug cartel as drug tzar.

Admittedly, the Congressional bill allows other agencies a seat at the risk regulator table. But those are likely token seats. If the drug tzar’s office was staffed by the head of the Medellin drug cartel – who had the majority vote – and some law enforcement officers who have a history of either (a) being on the take or (b) looking the other way, what do you think would the result would be?

High-Level Fed Officials Speak Out

High-level officials of the Fed itself have criticized the Fed’s actions. For example, the head of the Federal Reserve bank of San Francisco – during a talk on how runaway bubbles can lead to depressions – admitted:

Fed monetary policy may also have contributed to the U.S. credit boom and the associated house price bubble …

Fed Vice Chairman Donald Kohn conceded that the government’s actions “will reduce [companies'] incentive to be careful in the future.” In other words, he’s admitting that the government’s actions will encourage financial companies to make even riskier gambles in the future.

Kansas City Fed President and veteran Fed official Thomas Hoenig said:

Too big has failed….

The sequence of [the government's] actions, unfortunately, has added to market uncertainty. Investors are understandably watching to see which institutions will receive public money and survive as wards of the state…

Any financial crisis leaves a stream of losses among the various participants, and these losses must ultimately be borne by someone. To start the resolution process, management responsible for the problems must be replaced and the losses identified and taken. Until these actions are taken, there is little chance to restore market confidence and get credit markets flowing. It is not a question of avoiding these losses, but one of how soon we will take them and get on to the process of recovery….

Many of the [government's current policy revolves around the idea of] “too big to fail” …. History, however, may show us a different experience. When examining previous financial crises, both in other countries as well as the United States, large institutions have been allowed to fail. Banking authorities have been successful in placing new and more responsible managers and directions in charge and then reprivatizing them. There is also evidence suggesting that countries that have tried to avoid taking such steps have been much slower to recover, and the ultimate cost to taxpayers has been larger…

The current head of the Philadelphia fed bank, Charles Plosser, disagrees with Bernanke’s strategy of the endless printing-press and ever-increasing fed balance sheet:

Plosser urged the Fed to “proceed with caution” with the new policy. Others outside the Fed are much more strident and want plans in place immediately to reverse it. They believe an inflation storm is already in train.***

Bernanke argued that focusing on the size of the balance sheet misses the point, arguing the Fed’s various asset purchase programs are not easily summarized in a single number.

But Plosser said that the growth of the Fed’s balance sheet was a key metric.

“It is not appropriate to ignore quantitative metrics in this new policy environment,” Plosser said.***

Plosser is bringing the spotlight right back to the Fed’s balance sheet.

“The size of the balance sheet does offer a possible nominal anchor for monitoring the volume of our liquidity provisions,” Plosser said.

The former head of the Fed’s Open Market Operations says the bailout might make things worse. Specifically, the former head of the Fed’s open market operation – the key Fed agency which has been loaning hundreds of billions of dollars to Wall Street companies and banks – was quoted in Bloomberg as saying:

“Every time you tinker with this delicate system even small changes can create big ripples,” said Dino Kos, former head of the New York Fed’s open-market operations . . . “This is the impossible situation they are in. The risks are that the government’s $700 billion purchase of assets disturbs markets even more.”

And William Poole, who recently left his post as president of the St. Louis Fed, is essentially calling Bernanke a communist:

Poole said he was very concerned that the Fed could simply lend money to anyone, without constraint.

In the Soviet Union and Eastern Europe during the Cold War era, economies were inefficient because they had a soft-budget constraint. If a firm got into trouble, the banking system would give them more money, Poole said.

The current situation at the Fed seems eerily similar, he said.

“What is discipline – where are the hard choices – when does Fed say our resources are exhausted?” Poole asked.

But the strongest criticism may be from the former Vice President of Dallas Federal Reserve, who said that the failure of the government to provide more information about the bailout could signal corruption. As ABC writes:

Gerald O’Driscoll, a former vice president at the Federal Reserve Bank of Dallas and a senior fellow at the Cato Institute, a libertarian think tank, said he worried that the failure of the government to provide more information about its rescue spending could signal corruption.

“Nontransparency in government programs is always associated with corruption in other countries, so I don’t see why it wouldn’t be here,” he said.

Of course, former Fed chairman Paul Volcker has also strongly criticized current Fed policies.

Global Agencies Speak Out

BIS – the central banks’ central bank – slammed the Fed and other central banks for blowing bubbles and then “using gimmicks and palliatives” which “will only make things worse”.

The head of the World Bank also says:

Central banks [including the Fed] failed to address risks building in the new economy. They seemingly mastered product price inflation in the 1980s, but most decided that asset price bubbles were difficult to identify and to restrain with monetary policy. They argued that damage to the ‘real economy’ of jobs, production, savings, and consumption could be contained once bubbles burst, through aggressive easing of interest rates. They turned out to be wrong.

Economists Speak Out

Stephen Roach (former chief economist for Morgan Stanley, and now director of Morgan Stanley Asia) is one of the most influential and respected American economists.

Roach told Charlie Rose this week that we have had terrible Federal Reserve policy for the past 12 years under Greenspan and Bernanke, that they concocted hair-brained theories (for example, that we should let the boom and bust cycle occur, but then “clean up the mess” once things fall apart), and that we really need to reform the Fed.

Specifically, here’s the must-read portion of the interview:

STEPHEN ROACH: And what’s missing in the debate that drives me nuts is going back to the very function of central banking that’s at the core of our financial system. Do we have the right model for the Fed to go forward? And, you know, I think we’ve minimized the role that the custodians, the stewards of our financial
system, the Federal Reserve, played in leading to this crisis and in making sure that we will never have this again. I think we’ve had horrible central banking in the United States for the past dozen of years. I mean, we elevate our central bankers, we probably .

CHARLIE ROSE: From Greenspan to Bernanke.

STEPHEN ROACH: Yeah.

CHARLIE ROSE: Both.

STEPHEN ROACH: We call them maestro, and, you know, we make them
sound larger than life. And, you know, and the fact is, they condoned
policies that took us from one bubble to another. They failed to live up
to their regulatory responsibility granted them by law. They concocted new
theories to explain why these things could go on forever, and they harbored
the belief, mistakenly in my view, that monetary policy is too big and
blunt an instrument, and so you just bring it in to clean up the mess
afterwards rather than prevent a mess ahead of time. Well, look at the
mess we’re in right now. We need a different approach here. We really do.

Leading economist Anna Schwartz, co-author of the leading book on the Great Depression with Milton Friedman, told the Wall Street journal that the Fed’s entire strategy in dealing with the financial crisis is wrong. Specifically, the Fed is treating it as a liquidity problem, when it is really an insolvency crisis.

Moreover, prominent Wall Street economist Henry Kaufman says that the Federal Reserve is primarily to blame for the financial crisis:

“I am convinced that the misbehavior of some would have been much rarer — and far less damaging to our economy — if the Federal Reserve and, to a lesser extent, other supervisory authorities, had measured up to their responsibilities …

Kaufman directly criticized former Federal Reserve Chairman Alan Greenspan for not using his position to dissuade big banks and others from taking big risks.

“Alan Greenspan spoke about irrational exuberance only as a theoretical concept, not as a warning to the market to curb excessive behavior,” Kaufman said. “It is difficult to believe that recourse to moral suasion by a Fed chairman would be ineffective.”

Partly because the Fed did not strongly oppose the repeal in 1999 of the Depression-era Glass-Steagall Act, more large financial conglomerates that were “too big to fail” have formed, Kaufman said, citing a factor that has made the global credit crisis especially acute.

“Financial conglomerates have become more and more opaque, especially about their massive off-balance-sheet activities,” he said. “The Fed failed to rein in the problem.”…

“Much of the recent extreme financial behavior is rooted in faulty monetary policies,” he said. “Poor policies encourage excessive risk taking.”

Economist Marc Faber says that central bankers are money printers who create bubbles, and that the system would be much better now if the Fed hadn’t intervened. Specifically, Faber says that – if the Fed hadn’t intervened – the system would be cleaned out, the system would be healthier because debt load and burden on taxpayers would be reduced.

Economist Jane D’Arista has shown that the Fed has failed miserably at its main task: providing a “counter-cyclical” influence (that is, taking the punch bowl away before the party gets too wild).

The Fed has also failed miserably in its role as regulator of banks and their affiliates. As well-known economist James Galbraith says:

The Federal Reserve has never been an effective regulator for the straightforward reason that it is dominated by economists and bankers and not by dedicated skeptics who make bank regulation a full-time profession.

The Fed has performed terribly in many other tasks as well.

And the Fed is unlawfully refusing to disclose to Congress or the American people who it’s giving money to and what it is really doing.

Conclusion

Given the above, isn’t it obvious that Congress is attempting to give the Fed more powers at a time when it should be audited, and then ended?

This is Michael Davey from Centrifugal Deforest. Regrettably (for you dear reader), the rumors circulating are indeed true. An apparently desperate Molehost had invited me aboard his Evil Spectre, in order to fill-or-kill a little empty space and comment on the event horizon. My purpose is simple - I’ll be holding rat hands while bobbing flotsam tides and jetsam streams, trading together in this ever amazing, shall we say special, marketplace.

Ha!

In your face, frothing tough love perhaps (and you deserve it!), but my hand shakes something awful, while my palms are humid, flippant and mercurial. You’re on your own Einstein. Kudos to the human race.

If you’re (still!) reading this, you’re probably a trader (the rest of you nut-cases can leave now as this is where it gets boring). I know your kind. Heartless, wretched opportunists looking to profit from a gambling-house market economy - all for the sake personal gain, growth and a general swell being. Cynical is too nice a term for you.

You have my respect.

Assuming I’m not fired already, among other things here I’m going to run a quasi (moto) weekly series: A Trader’s Guide; which for the most part will entrail the psychological do’s and don’ts of (wait for it…) trading markets.

So while I can’t hold any hands, I can at least illustrate some of the myriad failure-traps a trader beds-down with, as well as the more opportunistic mindset aimed at maximizing gains (something you manage harmoniously to generally avoid).

Trading and investing mistakes will be made and losses are a certainty (for experienced and newer trader’s alike). None of us are above that. And while many of you tend to blame losses on manipulative market makers, Goldman shenanigans, POMO f-me pumps, etc. (I know because I read the pathetic transcripts), I’m a huge proponent of actually learning from trading mistakes and losses; adapting and getting stronger because of them. Spit sour grapes if you must, but complaining of outside forces instead of examining your own otherwise brilliant strategy is only limiting your net-performance - it’s as simple as that. If we want to actually (de)generate greater profit, we need to be honest, accountable and focused in the present. By limiting mistakes (eliminating repeat-mistakes and mitigating new ones which prop-up) you’ve conquered half the battle of trading success. In fact, by simply containing losses and pyramiding gains a trader does not even need to be right half the time to rake a decent year. You can be the worst coin-flip player on the board and come out ahead. Conspiracy theories of a rigged market should not interest you as much as your own little conspiracies, which are sabotaging gains. I do not expect to outlast Goldman’s super-computer, but as long as the market is volatile I can glean a good living (in a market with very little volatility the computer will kick my ass every time; I make money when I can, while I can, and I try to find some other pup seal to club when I have no edge. The victim-attitude serves no purpose but to lay down and declare I am owned (we’re only really yelling at ourselves, no?). There are plenty of other professionals who behave worse than these programs and they are still throwing a decent chunk of (other people’s) money around - let those guys be the chumps. My job is to eat that guy’s lunch, send him on his bike with head hanging low - for the sake of evolution if nothing else. This is a red-meat business. I don’t know what kind of dreamland world you might live in, but I don’t want to be part of the fool trough where a human mind (and computer program for that matter) can so eloquently self-destruct. Don’t sabotage the goal of something we (as a heartfelt community) seek to achieve - don’t sabotage the profit!

As I was drafting this, PCLN, as stock I went short as of the late minutes of trading Thursday, spiked higher in the after-market on news they will be added to the S&P 500.

So rigged.

Cliff Notes: Learn from the lumps and prosper because of them. Make them a positive. Appraise losses honestly, as well as gains (since you are constantly leaving the the meat of those on the table!). Seek to eliminate repeating mistakes and to maximize gains, from every point forward. You are always always working to get better (why not excel?).That is what this series will typically address.

You see now that I’m really an inspirational guide (Fire Walking - The Other 12 Steps!). The otherwise nasty, chewing-on about it all veneer is just a bit of tread-wear perhaps.

Re-tread wear, more like it.

Question: WTF is Centrifugal Deforest?

Yeah, that. No one ever asks, so I guess it’s working as a title. The name is coined from an unknown (to my memory) bogus-scientist’s theory that the Earth’s axis is actaully accelerating as the planet’s larger, old-growth trees are harvested - similar to how an ice skater speeds-up her spin upon crouching and bringing in the arms. Hopefully that makes as little sense to you as to me, but I really like the theory (if anyone can bring me the name of this guy I’d love to buy him  a beer and a trading account; just so I could view the trades). As far as my style of trading, the name plays well enough. I am ramping-up (accelerating exposure), as things are going well and I am shrinking in reverse fashion when going poorly. The idea is to have maximum exposure when winning and progressively lessen the blows otherwise). The ‘deforest’ part is also apt, I suppose. By participating and making a living in this industry I am contributing to the greater downfall of everyone and everything.

Copy that.

If I cannot answer your comments right now, it is because I’m boarding my flight in a few moments and I don’t know yet if there will be Internet on this plane [not!]. With this ES merger in hand, I’m off to spend some of Mole’s hard yearned money.

Homework: Yes, this course series will come with homework. For now the only assignment is merely to catch up with the previous two installments…

A Trader’s Guide to Chasing Ambulances
A Trader’s Guide to Exhaustion

[no internet on the flight - what kind of world do we live in?]

Good weekend!
CD

Enjoy your Halloween today:

>

>

Hat tip Dealbook

 

From three DataQuick reports on Las Vegas, Miami and Phoenix ...

Las Vegas:

In September, a popular form of financing used by first-time home buyers – government-insured FHA loans – accounted for 53.8 percent of all home purchases, up from 52 percent in August. Absentee buyers bought 40.4 percent of all Las Vegas–area homes last month – the highest figure for any month this decade. Absentee buyers are often investors, but could include second-home buyers and others who, for various reasons, indicate at the time of sale that the property tax bill will be sent to a different address.
emphasis added

Miami:

A popular form of financing used by first-time home buyers - government-insured FHA loans - accounted for 45.0 percent of all September purchases, while absentee buyers bought 29.7 percent of all homes last month, according to an analysis of public property records.

Phoenix:

First-time buyers and investors remained the market’s lifeblood. Last month 46.7 percent of all Phoenix-area buyers used government-insured FHA loans, a popular choice among first-time buyers, according to an analysis of public property records. Absentee buyers made up 38.5 percent of all purchases ...

We are far from a healthy market ...

The attached presentation, from John Taylor of Stanford and John Williams of the SF FRB, prepared in the weekend before the Lehman bankruptcy, and thus in the eye of last year's hurricane, provides some additional insights into money markets, the Fed's TAF program, OIS spreads, and how everything can go spectacularly wrong at mere whiff of that greatest black swan of all, and the one concept all in the financial business take for granted: counterparty risk. With the Fed now actively pursuing the extraction of capital out of money markets instead of primary dealers, the potential liquidity imbalance will be a major threat to the system and will be actively monitored by Zero Hedge. If the Fed's soothing admonition that it has things in control serves any purpose, it is that sooner rather than later risk flaring and six sigma events will once again be a daily occurrence.

 

Attachment	Size
Money Market Black Swan.pdf	219.04 KB

Thanks to Tyler Cowen for the pointer.

Many people have called politicians prostitutes.

True, Obama has received more donations from Goldman Sachs and the rest of the financial industry than almost anyone else.

And Summers and the rest of Obama's economic team have made many millions - even recently - from the financial industry.

And Congress has largely been bought and paid for, and two powerful congressmen have said that banks run Congress.

So yes, they have certainly sold their goods to the highest bidders.

Indeed, at least some people trust prostitutes more than elected officials.

But the prostitution analogy is inaccurate.

Specifically, as the chairman of the Department of Economics at George Mason University (Donald J. Boudreaux) points out:

Real whores, after all, personally supply the services their customers seek. Prostitutes do not steal; their customers pay them voluntarily. And their customers pay only with money belonging to these customers.

In contrast, members of Congress routinely truck and barter with other people's property...

Members of Congress are less like whores than they are like pimps for persons unwillingly conscripted to perform unpleasant services.

Consider, for example, agricultural subsidies. Each year a handful of farmers and agribusinesses receive billions of taxpayer dollars. These are dollars that government forcibly takes from the pockets of taxpayers and then transfers to farmers.

The customers, in this case, are the farmers and agribusinesses. The suppliers of the services performed for these customers are taxpayers, for it's the taxpayers who possess the ultimate asset -- money -- that farmers and agribusinesses lust after. And the intermediaries who oblige the suppliers to satisfy the base lusts of the customers are politicians. Just as pimps facilitate their customers' access to prostitutes' assets, politicians facilitate their customers' access to taxpayers' assets.

We taxpayers have less say in the matter than we like to think. Sure, we can vote. But if even just 50.00001 percent of voters cast their ballots for the candidate proposing higher taxes, the assets of not only our pro-tax citizens, but also those of the remaining 49.00009 percent of us anti-tax citizens are put at the disposal of our pimps' customers. (And note that many of those who vote for higher taxes are not among those persons actually subject to higher taxation)...

Politicians force taxpayers to pony it up -- just as the services rendered for a pimp's customers are rendered not by that pimp personally, but by the ladies under his charge. The pimp pockets the bulk of each payment; he's pleased with the transaction. His customer gets serviced well in return; he's pleased with the transaction. The only loser is the prostitute forced to share her precious assets with strangers whom she doesn't particularly care for and who care nothing for her.

Also like the ladies under pimps' power, taxpayers who resist being exploited risk serious consequences to their persons and pocketbooks. Uncle Sam doesn't treat kindly taxpayers who try to avoid the obligations that he assigns to them. Government is a great deal more powerful, and often nastier, than is the typical taxpayer. Practically speaking, the taxpayer has little choice but to perform as government demands.

So to call politicians "whores" is to unduly insult women who either choose or who are forced into the profession of prostitution. These women aggress against no one; like all other respectable human beings, they do their best to get by as well as they can without violating other people's rights.

The real villains in the prostitution arena are those pimps who coerce women into satisfying the lusts of strangers. Such pimps pocket most of the gains earned by the toil and risks involuntarily imposed upon the prostitutes they control. No one thinks this arrangement is fair or justified. No one gives pimps the title of "Honorable." Decent people don't care what pimps think or suppose that pimps have any special insights into what is good or bad for the women under their command. Decent people don't pretend that pimps act chiefly for the benefit of their prostitutes. Decent people believe that pimps should be in prison.

Yet Americans continue to imagine that the typical representative or senator is an upstanding citizen, a human being worthy of being feted and listened to as if he or she possesses some unusually high moral or intellectual stature.

It's closer to the truth to see politicians as pimps who force ordinary men and women to pony up freedoms and assets for the benefit of clients we call "special-interest groups."

Note 1: The best analogy might be a man who kidnaps girls and then sells them into sexual slavery. Such a man does not provide the "protection" that a pimp might provide to voluntary prostitutes.

Note 2: There are a handful of honest politicians, fighting for the American people. But the exception proves the rule.

http://www.youtube.com/watch?v=pIuwVJ-WqnY

We need to really push back against the TBTF industry’s lobbying pitch that forcing them to shrink or break them up will cause them to be “uncompetitive”. This is a false notion and the only link they have for arguing against a requirement they reduce their size and scope, by imposing uneconomically high capital requirements or trust-busting.

If we fail to achieve this reduction in size and risk, the rest of the world will become uncompetitive given the lower cost of capital that the “implied government guarantees” will provide the. Ergo, these banks will further destabilize their non TBTF peers with their uneconomic pricing.

The House Financial Services Committee is now going to try and avoid real change by requiring that the industry “prefund” a failed bank clean-up fund. This is another avoidance of the reality of the problem. The mere acceptance that there are TBTF institutions IS the issue. Forcing the rest of the TBTF instituions to pay in advance rather than after doesn’t solve the problem, is unworkable and will cause greater probems given that:

- At the time one TBTF institution is in trouble there is a great liklihood that the liquidity of the others will be impaired;

- To force an institution that may manage its risks well to stand ready to pony up large percentages of its equity to support poorly managed competitors will support a race to zero in risk management as the good actor is forced to race to zero in his activities knowing that he is currently will lose market share to the poor practices of his peer and will later pay for the clean-up of his peer.

- Instead of playing this game we should place severly high capital requirements and charge deposit insurance (not based on deposits). This would force them to rethink their business plans. Then THEY could decide if it is better for their investors for them to be TBTF. Once determined they would either pay to play or sell off units (to the benefit of shareholders) and become more manageable, less risky and no longer TBTF.

- Also, we should demand that legislation spell out, in plain English, that the entire capital structure of a TBTF institution be wiped out, and its holding company held responsible as a source of strength, before taxpayers are exposed to a single dollar of loss.

Expanding on the “unleveled playing field”, as I wrote this week on New Deal 2.0:

http://www.newdeal20.org/?p=5836

Those who argue against a more proactive reduction in risk and size of TBTF institutions will, as always, revert to an argument that strikes a natural chord in every American’s heart: ‘Doing so would create an unleveled international playing field for our institutions relative to their international competitors.’ Level playing fields are a worthy goal, but this is not a relevant argument. Instead, this tired bromide must be resoundingly dismissed on several counts:

* Those countries with the largest banks as a percentage of GDP (Iceland, Ireland, Switzerland) demonstrated that a concentration of banking power can cause significant sovereign risk and tilt global economic playing fields away from that country.

* The likely breakups of ING, Lloyds and KBC suggest that it is we who seek to support an unlevel playing field where we subsidize our TBTF banks while other nations recognize the policy failures of moral hazard. If we continue down this path we will likely be at risk of violating international fair trade regimes.

* When the “unlevel playing field” argument is cited, keep in mind this reasoning supports the disadvantaging of 8000+ community banks relative to our largest banks, all in the name of protecting big banks from government- subsidized international competition.

* There is no longer any evidence that, beyond a cost of capital advantage that comes with implied government support, there are sustainable and tangible economies of scale arising from being the largest. The financial supermarket concept has been proven a failure. The only ones who benefit are the high-level executives.

* We must demand that our legislators no longer allow unelected officials at the independent Federal Reserve to sign international accords created by the TBTF banks through supra-national bodies like the Basel Committee.

* Are we to believe that if we did not have such large and globally dominant firms, US borrowers might be paying more that the 29% interest that several of the TBTF firms are now charging on their card accounts? Perhaps we should think about what advantage our population has gained as a result of our financial institutions being such a large part of our economy or being globally dominant.

* Since when did we accept a national strategy of following rather than leading? When we do what is right, others follow. As example, consider the bank secrecy havens — they made money for a bit. Now, even the Swiss and the Cayman authorities are coming around to our view.

* We are already at a disadvantage given that the largest foreign banks operate in the US without any tier one capital requirement and yet most large, foreign banks have not built a bricks and mortar presence here. Nobody screams about their undercapitalization nor has that undercapitalization caused deposits to migrate to foreign banks.

Also published at:

http://www.huffingtonpost.com/joshua-rosner/congress-and-tbtf-bring-i_b_338325.html

http://www.ritholtz.com/blog/2009/10/congress-and-tbtf-–-bring-in-the-bomb-squad/ (amazingly angry and thoughtful comments at this one)

Government, lenders, and various lender-sponsored "help" agencies have acted in unison, using fear mongering tactics and shame to manage the housing crisis for the sole benefit of lenders.

Thanks to Brent T. White at the James E. Rogers College of Law and the Sacramento Bee and for a fascinating called Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis.

Note: The PDF is 54 pages long and worth reading in entirety but I have condensed the discussion down to a very readable 3-4 pages of so. There is little sense in putting such a lengthy snip into a huge blockquote that will take up a lot of space. Instead, I will make it clear below when the article ends.

Abstract

Despite reports that homeowners are increasingly “walking away” from their mortgages, most homeowners continue to make their payments even when they are significantly underwater. This article suggests that most homeowners choose not to strategically default as a result of two emotional forces: 1) the desire to avoid the shame and guilt of foreclosure; and 2) exaggerated anxiety over foreclosure’s perceived consequences. Moreover, these emotional constraints are actively cultivated by the government and other social control agents in order to encourage homeowners to follow social and moral norms related to the honoring of financial obligations - and to ignore market and legal norms under which strategic default might be both viable and the wisest financial decision. Norms governing homeowner behavior stand in sharp contrast to norms governing lenders, who seek to maximize profits or minimize losses irrespective of concerns of morality or social responsibility. This norm asymmetry leads to distributional inequalities in which individual homeowners shoulder a disproportionate burden from the housing collapse.

II. Underwater and Staying Put

As further evidence that relatively few homeowners strategically default solely because they are underwater, housing markets with a sharply higher percentage of underwater homeowners as compared to the national average do not have sharply higher default rates.

As the chart below illustrates, this pattern of relatively low default rates compared to the percentage of underwater mortgages holds true almost universally across the hardest hit markets, with the default rate much more closely resembling the unemployment rate than the percent underwater:



III. The Financial Logic of Walking Away

Before examining why more underwater homeowners are not strategically defaulting, it might be helpful to explore why they should. A textbook premise of economics is that the value of a home, even an owner occupied one, is “the current value of the rent payments that could be earned from renting the property at market prices.”

In other words, when the net cost of buying a home exceeds the net cost of renting, one is better off renting. The equation is not as simple, however, as comparing total mortgage payments to rent payments because home ownership carries certain benefits including tax breaks and the potential for appreciation. Additionally, assuming a non-depreciating market, the portion of the mortgage payment that goes to principle rather than interest will eventually inure to the homeowner at the time of sale. On the flip side, homeownership carries significant costs that renting does not, including maintenance, homeowner’s insurance and substantial transaction costs upon selling.

In calculating whether to buy or rent, a potential homebuyer should compare the net cost of owning to the net cost of renting a similar home over the expected period of occupancy. The costs of owning include the interest-only portion of the loan payment, property taxes, maintenance, homeowners insurance, and transaction costs upon selling, minus the expected appreciation and cumulative tax savings over the planned period of ownership. As a rule of thumb, a potential homebuyer is generally better off renting when the home price exceeds 15 or 16 times the annual rent for comparable homes.

For example, a homeowner who bought an average home in Miami at the peak would have paid around $355,400. That home would now be worth only $198,00038 and, assuming a 5% down payment, the homeowner would have approximately $132,000 in negative equity. He could save approximately $116,000 by walking away and renting a comparable home. Or, he could stay and take 20 years just to recover lost equity – all the while throwing away $1300 a month in net savings that he could invest elsewhere.

The advantage of walking is even starker for the large percentage of individuals who bought more-expensive-than-average homes in the Miami area – or in any bubble market for that matter - in the last five years. Millions of U.S. homeowners could save hundreds of thousands of dollars by strategically defaulting on their mortgages.
Homeowners should be walking away in droves. But they aren’t.

V. The Social Control of the Housing Crisis

Alarmed by the possibility that foreclosures may reach a tipping point, formal federal policy has aimed to stem the tide of foreclosures through programs designed to “reduce household cash flow problems,” such as the Making Home Affordable (MHA) loan modification program and Hope For Homeowners.

In other words, federal policy assumes that homeowners are – for the most part - not “ruthless” and won’t walk away from their mortgages simply because they have negative equity. Most homeowners walk only when they can no longer afford to stay. As evidence of this fact, only 45% of homeowners would walk even if they had $300,000 in negative equity. This percentage drops to 38% among the subset of individuals who believe it is immoral to strategically default on one’s mortgage (a subset to which 87% of homeowners belong).

These numbers suggest that the “moral constraint” is a powerful one indeed – and that, for most people, only the complete inability to afford their mortgage would push them to default. On the other hand, the fact that 63% of “amoral” individuals would default at $300,000 in negative equity, and 59% would do so at $200,000, suggests that federal policy can only proceed on the premise that affordability is the prime consideration as long as the moral and social constraints on foreclosure remain strong.

The government thus has an incentive, along with certain other economic and social institutions interested in limiting the number of foreclosures, in cultivating guilt and shame in those who would contemplate walking away. Similarly, knowing that guilt and shame alone are not enough to prevent many individuals from defaulting once negative equity is extreme, these same institutions have an interest in increasing the perceived cost of foreclosure by cultivating fear of financial disaster for those who contemplate it.

At the political level, government spokespersons, including President Obama, have repeatedly emphasized the virtue of homeowners who have acted “responsibly” in “making their payments each month”. The worst criticism has been reserved, however, for those who would walk away from mortgages that they can afford.

Such individuals are portrayed as obscene, offensive, and unethical, and likened to deadbeat dads who walk out on their children, or those who would have “given up” and just handed over Europe to the Nazis.

Indeed, a homeowner contemplating a strategic default would be hard pressed to avoid the message that doing so would place them among the most despicable members of society.

Moreover, a homeowner who turned to any number of credit counseling agencies would also find little sympathy - and much moralizing - should they announce their plan to walk on their “affordable” mortgage. Gail Cunningham of the National Foundation for Credit Counseling declared for example in an interview on NPR: “Walking away from one's home should be the absolute last resort. However desperate a situation might become for a homeowner, that does not relieve us of our responsibilities."

Indeed, the uniform message of both governmental and non-profit counseling agencies (which are typically funded at least in significant part by the financial industry) is that “walking away” is not a responsible choice and should be avoided at all costs.

Social control of would be defaulters is not limited to moral suasion, however. Predominate messages regarding foreclosure also frequently employ fear to persuade homeowners that strategic default is a bad choice. Indeed, almost every media story on those who “walk away from their mortgages” condemns the behavior as immoral and enlists some “expert” to explain that foreclosure is, despite any claims to the contrary, a devastating event.

Similar warnings of disaster pervade the information given to homeowners by HUD-approved housing counseling agencies, such as the following from the Anaheim Housing Counseling Agency:

Losing your home can be the worst and most devastating event to you personally, and your credit history. This is a scenario that you don’t want to occur if you can avoid it! Not only will you lose the comfort of your home and your investment, but a Foreclosure will stay pending on your credit history for as long as 10 years. This will jeopardize your ability to qualify for any future home loan purchases, it may affect your ability to access loans for car purchase and other needed purchases, and loan costs are likely to be higher both in fees and interest paid.

As discussed above, fear alone is a powerful motivator. But guilt and fear in combination are even more potent.

This may be because most individuals have a deep-seated, if ill-defined, sense that if they do “bad things,” bad things will happen to them. Whatever the psychological underpinnings, most people simply do not believe they will escape punishment for their moral transgressions. Guilt and fear of punishment go together.

As explored above, however, there is in fact a huge financial upside to strategic default for seriously underwater homeowners – an upside that is routinely ignored by the media, credit counseling agencies, and other political and economic institutions in “informing” homeowners about the consequences of default. Moreover, the costs of default are not nearly as extreme as these same institutions typically misrepresent them to be. In reality: homeowners face no risk of a deficiency judgment in many states or, regardless of the state, for FHA loans or loans held by Fannie Mae or Freddie Mac; even in recourse states, lenders are unlikely to pursue a deficiency judgment because it is economically inefficient to do so; there is no tax liability on “forgiven portions” of home mortgages under current federal tax law in effect until 2012; defaulting on one’s mortgage does not mean that one’s other credit lines will be revoked; and most people can expect to recover from the negative impact of foreclosure on their credit score within a two years (and, meanwhile, two years of poor credit need not seriously impact one’s life).

VI. The Asymmetry of Homeowner and Lender Norms

One obvious response to the above discussion is that society benefits when people honor their financial obligations and behave according to social and moral norms, rather than strictly legal or market norms. This may be true if lenders behaved according to the same social and moral norms. In the case of lender-borrower behavior, however, there is a clear imbalance in placing personal responsibility on the borrower to honor their “promise to pay” in order to relieve the lender of their agreement to take back the home in lieu of payment. Given lenders generally superior knowledge and understanding of both mortgage instruments and valuation of real estate, it seems only fair to hold them to the benefit of their bargain. At a basic level, sound underwriting of mortgage loans requires lenders to ensure that a loan is sufficiently collateralized in the event of default.

As such, historical home prices have hewed nationally to a price-to-annual-rent ratio of roughly 15-to-1. At the peak of the market, however, price-to-rent ratios reached 38-to-1 in the most inflated markets, and the national average reached 23-to-1.

If personal responsibility is the operative value, then lenders who ignored basic economic principles (of which they should have been aware) should bear at least equal responsibility to homeowners for issuing collateralized loans that were far in excess of the intrinsic value of the home.

Moreover, since lenders generally arrange the appraisal (which home buyers must pay for) and home buyers rely upon the lender to ensure the home is worth the purchase price, one might argue that lender should bear much more than 50% responsibility for the bad investment of the homeowner and lender.

Indeed, lenders’ mortgage default risk models have long shown that the loan-to-value ratio is a critical factor in default risk. Lenders relaxed this requirement, however, as credit default models showed that few borrowers were “ruthless,” meaning that few borrowers default as soon as the loan value exceeds the market value of the home.

This is not to say that lenders are solely responsible for the housing run-up and bust, but that they do in fact bear a substantial portion of the blame – and thus should thus bear a substantial portion of the cost. One might argue, in fact, that the value of personal responsibility would require lenders to own up to their share of the blame, and work with underwater homeowners by voluntarily writing off some of the negative equity.

But lenders, of course, do not operate according norms of personal responsibility, and seek instead to maximize profit (or minimize losses). Appealing to this duty, it has been suggested that, given the great cost to lenders of foreclosure, they have an economic incentive to modify loans for homeowners in danger of default.

Recent studies seeking to explain this apparently irrational behavior have shown that lenders are simply operating to maximize profit and minimize losses, just as they would be expected to do.

First, lenders know that borrowers with high credit scores are unlikely to default even at high levels of negative equity. To modify loans for these homeowners would be to throw money away – and to encourage more homeowners to ask for modifications. Second, a significant number of homeowners who temporarily default on their mortgages “self-cure” without any help from their lender – though self cure rates have dropped precipitously in the last two years. Again, to modify the loans of individuals who would otherwise self cure would be to throw away money. Third, homeowners with poor credit, or who end up in arrears because of “triggering events” such as unemployment, divorce, or other financially devastating circumstances are likely to default on the modified loan as well. To modify loans for these individuals is to waste time and risk housing prices falling further before the lender eventually has to foreclosure and sell the property anyway.

Given these economic incentives for the lender, a seriously underwater homeowner with good credit and solid mortgage payment history who responsibly calls his lender to work out a loan modification is likely to be told by his lender that it will not discuss a loan modification until the homeowner is 30 days or more delinquent on his mortgage payment.

The lender is making a bet (and a good one) that the homeowner values his credit score too much to miss a payment and will just give up the idea of a loan modification.

However, if the homeowner does what the lender suggests, misses a payment, and calls back to discuss a loan modification in 30 days, the homeowner is likely to be told to call back when he is 90 days delinquent. In the meantime, the lender will send the borrower a series of strongly-worded notices reminding him of his moral obligation to pay and threatening legal action, including foreclosure and a deficiency judgment, if the homeowner does not bring his mortgage payments current. The lender is again making a bet (and again a good one) that the homeowner will be shamed or frightened into paying their mortgage. If the homeowner calls the lender’s bluff and calls back when he is 90 days delinquent, there is a good possibility that he will be told that his credit score is now so low that he does not qualify for a loan modification.

Most lenders will, in other words, take full advantage of the asymmetry of norms between lender and homeowner and will use the threat of damaging the borrower’s credit score to bring the homeowner into compliance. Additionally, many lenders will only bargain when the threat of damaging the homeowner’s credit has lost its force and it becomes clear to the lender that foreclosure is imminent absent some accommodation. On a fundamental level, the asymmetry of moral norms for borrowers and market norms for lenders gives lenders an unfair advantage in negotiations related to the enforcement of contractual rights and obligations.

*** END OF ARTICLE SNIP ***

There is more in the article including a discussion as to what to do about it all. I do not agree with many of the proposed solutions and indeed the article points out flaws in most of the solutions that have been proposed.

However, I do agree with the basic idea that asymmetry is a huge problem, that the playing field needs to be leveled.

Moreover, I will add that the real moral hazard is attempting to keep people debt slaves by purposely overstating the costs of walking away while ignoring all of the benefits. These "help" agencies are designed to do one thing and one thing only: help the lender regardless of the cost to the homeowner.

If these "help agencies" actually gave a realistic assessment of the advantages of walking away, we would see more willingness for voluntary cooperation between lenders and homeowners to negotiate a mutually beneficial arrangement. Instead we have a one sided winner-take-all approach whereby the only way for the homeowner to win is to walk away.

The current system of offering lenders a few thousand dollars to refinance a loan making the loan "more affordable" does nothing to address the fundamental problem of too much debt that will act as a drag on the economy for a decade to come.

The article concludes ...

Regardless of the precise policy prescription, it is time to put to rest the assumption that a borrower who exercises the option to default is somehow immoral or irresponsible. To the contrary, walking away may be the most financially responsible choice if it allows one to meet one’s unsecured credit obligations or provide for the future economic stability of one’s family.

Individuals should not be artificially discouraged on the basis of “morality” from making financially prudent decisions, particularly when the party on the other side is amorally operating according to market norms and could have acted to protect itself by following prudent underwriting practices.

The current housing bust should be viewed for what it is: a market failure – not a moral failure on the part of American homeowners. That being the case, it is time to take morals out of the picture and search for an equitable solution to the negative equity problem.

Other than a single sentence about "market failure" that was a brilliantly written piece by Brent T. White. The market did not fail, government policies to promote housing in conjunction with loose monetary policies at the Fed is what failed. Fannie Mae, Freddie Mac, HUD, the FHA, and the Fed all failed. Every one of those agencies should be abolished.

In the meantime, morality and fear mongering is not the solution. Instead, a rational look at the costs and benefits of walking away will encourage market solutions involving renegotiating debt levels to affordable levels rather than concentrating on affordable payment levels. A focus on the latter will act as a drag on the economy for a decade.

Addendum:

Walking away may be a good thing but laws vary state by state.

This is very important: Please do yourself a favor and Consult An Attorney Before Walking Away. The link will explain why.

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

According to an AP source and an article in the Wall Street Journal the United Auto Workers gave local Ford unions the weekend to review and ratify contract changes, but as of today, it's a no go.

The UAW and Ford agreed to contract changes weeks ago, but the workers needed to approve the deal, some 41,000 UAW-represented Ford employees.

Ford was seeking to reduce labor costs, bringing them more in-line with rivals GM and Chrysler- both having won concessions from the UAW being bankrupt and all. 

Ah, the perils of not being bankrupt.

 

 

On Wednesday Goldman Sachs, after picking a peculiar time to do so, decided to lower their Q3 GDP estimates, thereby lowering the bar for broad GDP expectations, and the resultant "beat" by the official BEA data of a 3.5% reading sparked the biggest market rally since July (only to be followed by an even bigger drop on Friday). Whether or not Goldman's prop trading operation benefiting directly or indirectly from this increase in volatility is unknown as the firm does not provide that level of granularity and detail in its earnings reports. Yet based on the most recent disclosure from the NYSE, Goldman is now trading at a more than 10:1 ratio of principal to agency (read gambling with taxpayer funds about 10 times more than it transacts on behalf of clients).

Zero Hedge is still hoping that the NYSE will eventually disclose what percentage of Goldman's principal trades goes to the exchange's SLP program, as previously promised. Perhaps one of the reasons why the NYSE's profitability is collapsing is because of the ongoing posture of opacity, despite all claims by Mr. Niederauer to the contrary. That, and of course dark pools encroaching more and more into exchange territory until such time as only retail sheep investors are left to trade on open venues.

Regardless of whatever P&L may have been generated by GS over the last two days when volatility took a roughly 35% round trip, Messrs. McKelvey and Hatzius are now hedging their bets on their GDP call, providing an extended matrix as to why not only will they be proven right, but why Q4 GDP will be a dramatic disappointment, courtesy of a CfC-esque pull forward of future GDP production/consumption.

As Rosenberg and many other strategists have been repeatedly banging on the table on this issue, the Q3 GDP is simply a recreation of the Cash For Clunkers effect, taken to the national level. Just as CfC managed to pump the SAAR rate for August to 14.3 million, which subsequently plummeted to 9 million in the next month, expect a comparable pattern with Q4 GDP. And unless the administration plans on essentially running the economy on one-time stimuli until the next presidential election, the bigger the artificial sugar high, the greater the subsequent crash. As much as Summer, Bernanke et al wish they could change the laws of economics (and physics), at this point there is no place to hide.

Goldman agrees with this simplistic assessment:

"How much of the rebound in real GDP was due to the fiscal stimulus, and where do we stand in terms of the effects of stimulus thus far?  Although precise answers are impossible at this juncture, several aspects of the report are consistent with our estimates that the fiscal package enacted in mid-February as the American Recovery and Reinvestment Act (ARRA) would have accounted for virtually all of the growth reported for the third quarter."

As Zero Hedge claimed, President Obama is widely encouraged to take a remedial analyst class at none other than Goldman Sachs. Perhaps, finally, he will understand that it is not Edmund's fault, nor are eveil economists to blame, when they point out what the significiance of one-time, non-recurring events is. And in this particular case, the cost of the 3.5% GDP artificial high reading is roughly $800 billion in incremental debt that is not going away, and that will have to be serviced: initially at a blended rate of about 2.75%, and potentially rising to 10% (just ask Paul Volcker).

Full GDP observations from Goldman Sachs:

 

---

 

 

Fiscal Stimulus Helps Third-Quarter Growth…

Gauging the precise effect of fiscal stimulus on third-quarter growth is difficult for two reasons.  First, the ARRA law had many provisions—in our analysis we split it into more than 50 line items—whose effects are scattered throughout the national income accounts.  Second and more importantly, we cannot know what would have happened in the absence of the stimulus.
 
That said, we can see clear patterns in the third-quarter data that, in conjunction with prior developments, suggest a strong helping hand from Uncle Sam:

1. The “cash for clunkers” program, which was not actually part of ARRA, spurred a large increase in purchases of new motor vehicles.  Real outlays on new vehicles rose to $191 billion (bn) at an annual rate in the third quarter from $154bn in the second quarter, as shown in Exhibit 1.  This accounted for slightly more than two-fifths (1.1 percentage point) of 2.5% annualized increase in real final sales.  Although we cannot know for sure how much of the increase in vehicle sales was due to cash for clunkers, the monthly data strongly suggest that most of it was.  The program was in effect from July 24 to August 24; consistent with that timing, both unit sales and the motor vehicles and parts component of real spending spiked in August after a more modest increase in July, and the September data show pull-backs to levels consistent with pre-clunker behavior.

Fiscal Stimulus: Passing the Peak Effect on Growth

Yesterday the Bureau of Economic Analysis (BEA) marked the onset of recovery in the US economy as it published its provisional estimate that real GDP rose 3.5% at an annual rate in the third quarter.  This was in the upper half of the range of private forecasts and well above our 2.7% estimate.  The report featured rebounds both in consumer spending (+3.4% in real terms) and in residential investment (+23.4%).  Real business investment and state and local spending fell, but by less than we had expected (-2.5% and -1.1%, respectively).

How much of the rebound in real GDP was due to the fiscal stimulus, and where do we stand in terms of the effects of stimulus thus far?  Although precise answers are impossible at this juncture, several aspects of the report are consistent with our estimates that the fiscal package enacted in mid-February as the American Recovery and Reinvestment Act (ARRA) would have accounted for virtually all of the growth reported for the third quarter.  Unfortunately, those same estimates also suggest that the growth impact of fiscal stimulus has passed its peak, absent significant extensions or new initiatives.  Without these, the fiscal contributions to real GDP growth will subside between now and mid-2010, after which we expect them to become drags.  Growth at that point will then require at least a modest pace of job creation to replace the support that Uncle Sam is now providing.

 

The effect on real GDP is more problematic, as some of this demand was undoubtedly met by drawing down inventories or by imports.  Indeed, real imports of autos and trucks surged more than $27bn at an annual rate last quarter.  However, domestic vehicle output also rose sharply, accounting for just about half (1.7 percentage points) of the increase in real GDP.  Although some of this increase in output would have occurred in any event, it is hard to avoid the conclusion that the cash for clunkers program was an important contributor.

2. Consumer spending on other items probably got a lift last quarter from tax cuts and extensions of benefit programs implemented during the first half of 2009.   While investment and infrastructure projects got much of the attention when ARRA was passed last winter, a more immediate purpose of this act was to shore up income-strapped state and local governments and households—in the latter case via tax cuts and enhancements to unemployment insurance and income support programs.  The effects on personal disposable income are clear; as shown in Exhibit 2, since February increases in government transfer payments and reductions in taxes have largely offset the effects of large and persistent declines in labor compensation and in income on assets on disposable income.  While the government support did not rise further in the third quarter, the level of this support remained high and essentially provided the wherewithal for last quarter’s increase in spending, as other components of income continued to erode on balance.  Given these patterns and the impact of the cash for clunkers program, it is not too much of a stretch to attribute most of last quarter’s increase in real consumer spending to fiscal stimulus.

 

 

3. The homeowner tax credit helped spark an upturn in residential investment.  This provision of ARRA provides an $8,000 tax credit—an effective price cut of nearly 5% on the median-priced existing home—to first-time homeowners who buy homes by November 30.  It has been widely credited for helping lift home sales from the historical depths to which they fell last winter.  Although some rebound was apt to occur from these lows, the timing and magnitude of this year’s gains in home sales and housing starts—increases of more than 20% since January—probably owe at least something to this tax credit.

If so, then last quarter’s increase in real GDP would show the effect in two places.  First, brokerage commissions are part of residential investment.  The “other structures” component that includes them rose $7.3bn at an annual rate in the third quarter, or $6.6bn in nominal terms.  This latter figure compares closely to the $7.1bn increase that would be implied from the sales data themselves.  Neither one is purely due to the tax credit—“other structures” include manufactured homes and major home improvements as well, while some of the increase in existing home sales might not have been due to the tax credit—but it surely played a role.  And if it did, then it would also be responsible for at least part of the $14.8bn annualized increase in single-family homebuilding that more than accounts for the rest of the rise in real residential investment, as multifamily construction continued to sag.

4. State and local spending would likely have fallen more if not for ARRA.  As noted above, states and localities were also specifically targeted by ARRA in an effort to soften the tax increases and spending cuts that these jurisdictions had to make to balance their operating budgets.  As with the personal income accounts, a large part of this support shows up as a sharp increase in federal grants-in-aid beginning in the first quarter of 2009, as shown in Exhibit 3.   Without this help, it is unlikely that real state and local spending would have rebounded as it did in the second quarter or dipped as little as it did this past quarter, which marked the first quarter of fiscal 2010 for most jurisdictions.  Notably, this increase was concentrated in construction outlays, which rose almost $13bn in the second quarter and nearly $2bn further in the third.

 

 

5. Business fixed investment may have gotten a lift from the expiring depreciation bonus.   Given the depths to which capacity utilization has fallen and the difficulties many firms have experienced in obtaining funds, the 2.5% annualized decline reported for real business investment in the third quarter is surprisingly mild.  One possible reason is that some companies accelerated the purchase of equipment in anticipation of the expiration of the depreciation bonus, which was extended to the end of 2009 in ARRA.

Taken as a whole, these observations imply that the US economy would have continued to contract last quarter in the absence of fiscal stimulus.  Note, for example, that gains in consumer spending and housing activity added 4.2 percentage points to last quarter’s growth; in other words, without them real GDP would have contracted by another 0.7% (the same as in the second quarter).  With fiscal stimulus providing most of the impetus to these increases. plus other components of business and state and local spending, it is hard to see how real GDP could have increased without these programs.

…But the Effects Diminish From Here

Unfortunately, our estimates also suggest that the peak of the fiscal support to US growth is now behind us, at least as the law now stands.  As shown in Exhibit 4, we estimate that the effects of ARRA will remain positive but subside through the second quarter of 2010.  Thereafter, this program exerts a drag on growth as the provisions that are now helping expire and pull GDP down by more than others lift it.

 

This statement often elicits surprise, for what we think are two reasons.  First, when the latest round of fiscal stimulus was first discussed about a year ago, the administration’s focus on proposals for infrastructure and investment projects received disproportionate attention in the press and in financial markets relative to what was actually enacted; in turn, this created a presumption that the effects of fiscal stimulus would build slowly given the long lead times for such projects.  Second, the effect of fiscal stimulus on GDP growth depends on the changes in the level of GDP the stimulus induces, and not on the level itself; this confusion is exacerbated by a focus on how little of the stimulus has yet been “spent” by the government.

To illustrate the first point, Exhibit 4 subdivides our estimates of the growth contribution from ARRA into three items—(1) income support to individuals (e.g., extension of unemployment benefits) plus aid to states and localities, (2) tax cuts to individuals and businesses, and (3) investment projects.   The first two categories comprised about two-thirds of the total package according to the final scoring of ARRA, and they took effect more quickly, accounting for seven-eighths of the fiscal 2009 total.  As a result, they have been responsible for the lion’s share of the growth effect thus far.

The second point is illustrated in Exhibit 5, where we plot the estimated effect of the entire bill on both the level of GDP (the line) and its growth rate (the bars).  The two are linked by the fact that the growth effects depend on how quickly the effect on spending is rising (the slope of the line).  Thus, the growth effects will tend to occur more quickly than would be suggested by statements to the effect that only a small portion of the money has been spent.  For example, while only 25% of the money has been spent according to recovery.gov, we have already seen more than half of the positive effect on real GDP growth, which should ultimately boost the level of GDP by about $370bn, or roughly 2½%, by mid-2010.  Thereafter, the growth effect turns negative as some of the initial provisions run out and the level of GDP declines as a result.

 

 

Of course, this is subject to change as Congress and the administration consider whether to extend various provisions as their expiration dates approach.  For example, as the homebuyer tax credit is due to expire at the end of November and several other provisions (unemployment benefits, health insurance for those who are unemployed, and various business tax breaks) come due in December, a “mini stimulus bill” is quickly coming together for consideration next week in the Congress.  So far, the effects look small (additional stimulus of about 0.3% of GDP in fiscal 2010) and temporary (no meaningful effect after fiscal 2010).  However, we cannot rule out more such efforts in coming months, at least until the labor market shows more signs of improvement than it has to date.

Ed McKelvey

 

In the first half of October, NYSE short interest as reported staged a moderate comeback, rising by 2.8% sequentially to 13.4 billion shares on October 15th, from 13.1 billion at the end of August, and a 1.1% decline from the 13.6 billion shares short on October 15, 2008. The short interest represented 3.51% of total shares outstanding.

The five biggest short interest position increases were in the following companies (possible new long positions established on technicals):

• Citi: 178,057,74; 50.95% (increase in SI sequentially)
• Xerox: 47,136,876; 611.75%
• Pfizer Inc: 285,836,513; 6.81%
• Merck: 195,283,992; 8.9%
• CIT Group Inc 81,042,082; 21.43%

The five biggest short interest position decreases (the stocks the contrarians may be interested in considering shorting):

• General Electric Co: 111,894,884; -13.91%
• EMC Corporation: 44,867,490; -27.34%
• Cemex SAB de CV 28,861,512; -36.49
• Fidelity Nat Info 3,950,367; -79.02%
• Harley-Davidson Inc 33,323,909; -16.4%

The NASDAQ-100 looks poised to test its October 2nd intra-day low of 1656.57 on Monday. Here is a daily NDX chart (click to enlarge):

Notice that the red uptrend line is converging with the blue support line.

The NDX is closer to testing its October 2nd low than the SPX is, and the signal it gives will also likely apply to the SPX since the NDX usually leads the SPX.

This test may occur Sunday night in the futures, so the equivalent low for the NDX futures (NQ) is 1652.75; only 13 points away, which is a small daily move for the NDX. The equivelent level for the SPX futures (ES) is 1012.00.

Click on cartoon for larger image in new window. Cartoon from Eric G. Lewis www.EricGLewis.com (site coming soon)

Ron Paul tells Bloomberg that Congressman Watt has just more or less killed the bill to audit the fed:

Representative Ron Paul, the Texas Republican who has called for an end to the Federal Reserve, said legislation he introduced to audit monetary policy has been “gutted” while moving toward a possible vote in the Democratic-controlled House.

The bill, with 308 co-sponsors, has been stripped of provisions that would remove Fed exemptions from audits of transactions with foreign central banks, monetary policy deliberations, transactions made under the direction of the Federal Open Market Committee and communications between the Board, the reserve banks and staff, Paul said today.

“There’s nothing left, it’s been gutted,” he said in a telephone interview. “This is not a partisan issue. People all over the country want to know what the Fed is up to, and this legislation was supposed to help them do that.”..

Paul, a member of the House Financial Services Committee, said Mel Watt, a Democrat from North Carolina, has eliminated “just about everything” while preparing the legislation for formal consideration. Watt is chairman of the panel’s domestic monetary policy and technology subcommittee.

Update: Ron Paul give perspective on Watt's action, pointing out that - while we've lost a battle - we haven't yet lost the war:

Nice job calling out them weasels and the clowns.

Joshua Rosner, managing director at Graham Fisher & Co., talks with Bloomberg’s Matt Miller and Carol Massar about proposed U.S. financial stability legislation. Banks, hedge funds and other financial firms that hold more than $10 billion in assets would pay to rescue companies whose collapse would shake the financial system under draft legislation crafted by a House panel.

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click for video

Source: Bloomberg

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If the legislation goes through, the Obama administration may end up being just as ruinous, if not more so, than the Bush administration.

Rdan

Nice:

“The Federal Deposit Insurance Corporation (FDIC) entered into a purchase and assumption agreement with U.S. Bank, NA, of Minneapolis, Minnesota, a wholly-owned subsidiary of U.S. Bancorp, to assume all of the deposits and essentially all of the assets of nine failed banks. The nine banks were closed this evening by federal and state bank regulators, which appointed the FDIC as receiver.

The nine banks involved in today’s transaction are: Bank USA, National Association, Phoenix, Arizona; California National Bank, Los Angeles, California; San Diego National Bank, San Diego, California; Pacific National Bank, San Francisco, California; Park National Bank, Chicago, Illinois; Community Bank of Lemont, Lemont, Illinois; North Houston Bank, Houston, Texas; Madisonville State Bank, Madisonville, Texas; and Citizens National Bank, Teague, Texas. As of September 30, 2009, the banks had combined assets of $19.4 billion and deposits of $15.4 billion.  (emphasis added)

The nine banks had 153 offices, which will reopen as branches of U.S. Bank beginning tomorrow during their normal business hours…”

And:

“U.S. authorities seized nine failed banks on Friday, the most in a single day since the financial crisis began and the latest stark sign that substantial parts of the nation’s banking industry are being crippled by bad loans.

The move brought the total number of failed banks in 2009 to 115 — their highest annual level since 1992 — with analysts expecting more to come. Among the lenders seized Friday was Los Angeles-based California National Bank, in what was the fourth-largest U.S. bank failure this year.

The largest institution to fail in the current financial crisis was Washington Mutual, which boasted $307 billion in assets when it was shuttered in September 2008.”

Nothing to see here, move along . . .
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Source:
U.S. Bank, NA, of Minneapolis, Minnesota, Assumes All of the Deposits of Nine Failed Banks in Arizona, California, Illinois and Texas
FDIC, October 30, 2009
http://www.fdic.gov/news/news/press/2009/pr09195.html

Nine U.S. banks seized in largest one-day haul
Sam Mircovich and Edwin Chan
Reuters, October 30, 2009.
http://finance.yahoo.com/news/Nine-US-banks-seized-in-rb-2593260864.html

I am speaking of the notion that went up the flagpole on allowing banks to refinance commercial real estate loans at more than 100% LTV - and having this "overlooked" by regulators.

Oh, but they are!

Regulators, in a significant step, also said they won't penalize banks for performing loans where the value of the underlying property is now worth less than the loan balance.

Who did this?

The guidelines, released on Friday by agencies including the Federal Deposit Insurance Corp., the Federal Reserve and the Office of the Comptroller of the Currency, provide guidance for bank examiners and financial institutions working with commercial property owners who are "experiencing diminished operating cash flows, depreciated collateral values, or prolonged delays in selling or renting commercial properties."

Their comment?

"Financial institutions that implement prudent [commercial real estate] loan workout arrangements after performing a comprehensive review of a borrower's financial condition will not be subject to criticism for engaging in these efforts," the agencies said in a policy statement.

One of the definitions of "prudent lending" is not to lend beyond the current value of a given asset, with any such "excess amount" requiring a dollar-for-dollar reserve of the bank's own capital.

Of course the others are knowing that the borrower can pay, which they appear to be covering.

But just as in residential real estate when you lend in commercial real estate beyond asset value you're doomed, because it is not possible to have a reasonable expectation that the borrower will continue to perform!

Why?

Primarily because demanded rents cannot be maintained.

Take two strip malls across the street from one another.  Both started with a "value" of $10 million.  Both now have a "present value" of $5 million.  Both are identical - in the same location, on opposite sides of the same road, both have the same square footage and amenities.

One loan is foreclosed and the property sold - for $5 million.  That buyer finances the $5 million purchase.

The second is "worked out" instead of demanding that the borrower either be foreclosed or pony up the other $5m (which he doesn't have), and the bank rolls the note at a negative equity position of $5m.

What happens?

Tenants start to go out of business.  As space opens in the $5m note mall, those in the $10m note mall see the open space.  So do potential new tenants. 

Is the rent in the $5m note property going to be higher or lower than the rent in the $10m note property?

How many of the $10m note property spaces will be rented one, two, three or five years from now, compared to the $5m property?

What is going to happen to that $10m loan?

This is an out-and-out scam that is simply going to end up costing the FDIC even more money, because the banks will be even further underwater when the note on that "worked out" property inevitably blows up.

Every time I see the government come up with some hair-brained scheme that will (1) never work and (2) will explode in the taxpayer's face, I maintain that I've seen the dumbest thing yet.

Unfortunately the FDIC and other regulators keep outdoing themselves.

by Bruce Webb

In the near four months since it passed out of Committee there has been little discussion of the Senate HELP Bill and the reason is clear, Max Baucus made it clear that Senate Finance would write a bill from the ground up. What this has meant is that the basis for comparing and contrasting alternate bills has been HR3200, the House Tri-Committee Bill. There are three main bills that have been presented in opposition to HR3200 with the Senate Finance Committee coming at it from the center-right while Wyden's Free Choice Act and HR676, Single Payer, coming from the left.

The major critiques of HR3200 have focused around the Public Option, with SFC debating whether it should even be part of the bill, while the Free Choice Act and HR676 arguing that it is too weak. This latter set of arguments seems to me largely driven by a profound misreading of the bill that may in its turn be driven by ideology from the Single Payer Now folk that have combined into a toxic stew that has led both the original HR3200 and his successor to be labeled in the harshest possible ways.

In the eyes of many progressives the problem with the PO is that it is just too cramped and limited to a "small sliver" of the American people, that "200 million people" will find it unavailable, that only people who are currently uninsured can get it, and so on. Well none of that is right, but seeing why will take some lengthy quotation and parsing, which for those interested can be found under the fold.

During the campaign Obama promised people that if they liked their current insurance they could keep it, and the bill does that, but what too many people took away is the idea that if they had current insurance, particularly through their employer that they HAD to keep it, that only those people who didn't have coverage at all, mostly the young, the self-employed, and workers in small businesses, would be served by the Exchange and the PO. Well lets go to the text, in this case the new House Bill.

SEC. 302. EXCHANGE-ELIGIBLE INDIVIDUALS AND EMPLOYERS.
(a) ACCESS TO COVERAGE.—In accordance with this section, all individuals are eligible to obtain coverage through enrollment in an Exchange-participating health benefits plan offered through the Health Insurance Exchange unless such individuals are enrolled in another qualified health benefits plan or other acceptable coverage. (p.156)

The key word here is "enrolled". Under the bill if your employer offers you insurance it has to be in the form of a Qualified Health Benefits Plan or QHBP, meaning that it has to meet all the accessibility, affordability and coverage provisions applicable to an Exchange plan which should mean in practice there would be little advantage to getting a QHBP Plan inside or outside the Exchange. So the bill writers and subsequently the CBO built in the assumption that most people who accept employer coverage, to the degree that they added a provision for employers to auto-enroll employees in the lowest cost plan offered by the employer. This process led many people to believe they were then simply locked into the company plan. Well not so fast, NOTHING permently locks you in, instead you have a number of different opt-out options.

Now one not acceptble option is simply not to have insurance at all, there are some religious exceptions but under the Individual Responsibility section there is a requirement for individuals to prove they have 'Acceptable Coverage'. And what is that?

(2) ACCEPTABLE COVERAGE.—For purposes of
this division, the term ‘‘acceptable coverage’’ means
any of the following:
(A) QUALIFIED HEALTH BENEFITS PLAN COVERAGE.—Coverage under a qualified health benefits plan.
(B) GRANDFATHERED HEALTH INSURANCE COVERAGE; COVERAGE UNDER CURRENT GROUP HEALTH PLAN.—Coverage under a grand- fathered health insurance coverage (as defined in subsection (a) of section 202) or under a current group health plan (described in sub- section (b) of such section).
(C) MEDICARE.—Coverage under part A of title XVIII of the Social Security Act.
(D) MEDICAID.—Coverage for medical assistance under title XIX of the Social Security Act, excluding such coverage that is only available because of the application of subsection (u), (z), or (aa) of section 1902 of such Act.
(E) MEMBERS OF THE ARMED FORCES AND DEPENDENTS (INCLUDING TRICARE).—
Coverage under chapter 55 of title 10, United States Code, including similar coverage furnished under section 1781 of title 38 of such Code.
(F) VA.—Coverage under the veteran’s health care program under chapter 17 of title 10 United States Code.
(G) OTHER COVERAGE.—Such other health benefits coverage, such as a State health benefits risk pool, as the Commissioner, in coordination with the Secretary of the Treasury, recognizes for purposes of this paragraph.

Well that is clear enough, an individual meets his responsibility requirement by showing he is covered under his employer plan, his spouse's employer plan, perhaps a parent's family plan or by a range of other public insurance plans. And in any of those latter situations the employee can opt-out of new employer coverage offers. But one of these opt-out possibilities is somewhat hidden here, that is the one that allows any employee to opt-out of employer coverage altogether and get an individual or group plan through the Exchange, including the PO, because in doing so he would meet the requirement of (A), the Public Option is explicitly defined as a QHBP. So where did the idea that the PO was only for the uninsured and was so limited to a fraction of the population arise?

Well a couple of places. First as noted the expectation is that most new employees without health insurance would simply enroll in whatever employer supplied plan level that met their needs, and that those who failed to do so would simply be auto-enrolled by the employer as provided in Sec 412 (c)

(c) AUTOMATIC ENROLLMENT FOR EMPLOYER SPONSORED HEALTH BENEFITS.—
(1) IN GENERAL.—The requirement of this subsection with respect to an employer and an employee is that the employer automatically enroll such employee into the employment-based health benefits plan for individual coverage under the plan option with the lowest applicable employee premium.
(2) OPT-OUT.—In no case may an employer automatically enroll an employee in a plan under paragraph (1) if such employee makes an affirmative election to opt out of such plan or to elect coverage under an employment-based health benefits plan offered by such employer. An employer shall provide an employee with a 30-day period to make such an affirmative election before the employer may automatically enroll the employee in such a plan. (p. 273-4)

If the employee does opt-out during that 30 days he is not "enrolled" and so falls under the definition of "exchange eligible individual" as defined in Sec 302. At which point the provisions of Sec 411 (3) kick in:

(3) CONTRIBUTION IN LIEU OF COVERAGE.—
Beginning with Y2, if an employee declines such offer but otherwise obtains coverage in an Exchange- participating health benefits plan (other than by reason of being covered by family coverage as a spouse or dependent of the primary insured), the employer shall make a timely contribution to the Health Insurance Exchange with respect to each such employee in accordance with section 413.

In short you are 'exchange eligible' unless you ACCEPT enrollment or ALLOW yourself to be auto-enrolled. On my reading there is no such thing as a lockout for any given individual, if you want the PO you can get it, though not without taking some positive action.

But what about employers? Why are they locked out of the Exchange and the PO? Well the answer is that they aren't, at least not permanently, that is simply the result of misunderstanding the language governing 'transition'. Subject for another post.

I have not crunched the numbers of Barron’s Big Money Poll — but I am curious if it operates as a reliable contrary indicator.

I would need to look at 30 years or so of the data to draw any statistically valid conclusion.

However, I cannot help but look at the amusing graphic that accompanies the article and wonder a bit about the contrary interpretation; At least the title –  Treading Carefully — is more circumspect than the graphic!:

AMERICA’S MONEY MANAGERS are still bullish about stocks, even after a blistering eight-month rally. But they also know from recent experience that trees don’t grow to the sky, and bears don’t disappear; they merely hibernate. So call our latest crop of Big Money bulls hopeful but cautious, too, about how much life is left in this rally, and how many bargains remain.

Nearly 60% of the professional investment managers responding to Barron’s fall Big Money poll say they are bullish or very bullish about the stock market’s prospects through the middle of next year. That’s the same percentage of bulls as in our spring survey, and a sure sign the pros regarded the market as severely oversold when the Dow Jones Industrial Average fell to 6547 in early March — a 12-year low.

Today’s bullish investors see the major stock indexes making steady progress through next June, amid signs the U.S. economy is on the mend after a searing recession. The latest evidence came Thursday, when the government reported that U.S. gross domestic product grew 3.5% in this year’s third quarter, spurred by stimulus spending. That is the first uptick in a year.

Go back to the Q1 Survey and see how Bullish, as a group, the money managers were . . .

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click for larger graphic

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Source:
Treading Carefully
JACK WILLOUGHBY
Barron’s NOVEMBER 2, 2009
http://online.barrons.com/article/SB125694262091319627.html

Well, I'll date myself in the goth scene by telling you that I'm listening to one of London After Midnight's tracks from "Violent Acts of Beauty" while writing this. What else does one listen to on Halloween?

The song, though, is about disappointment: what happens when everything you felt was perfect and pure were but nothing more than fantasy.

Just about every trader I've known has gone through that wrenching period of doubt. The successful ones get to the other side, where the fantasies are replaced by hard--but useful--realities.

The fantasy is that you'll start trading and, within months, begin making a fine living. You'll be your own person, doing what you love, making plenty of money, and having time for all that is important in life.

It doesn't happen. Not within months. Not within trading, nor within any other performance discipline.

You don't pick up the golf clubs for the first time and, within months, join the PGA tour. You don't go on stage for the first time and, within months, land a contract on the Broadway stage.

So much of what frustrates us in trading is not the trading itself, not the markets. It's the expectations--the unrealistic expectations--that we bring to our trading. The demands that we place on ourselves. The fantasies that ensnare us.

You start as a novice and first grow to competence. Only after that do you hit that elite level of expertise where you can make a living from your performances.

But if you have to reach competence before you reach expertise, that means that when you start out you are *not competent*: you are incompetent. It's not easy to embrace that reality. For months when I first swing golf clubs or play a piano, I'm not going to impress many people. And that's OK.

Because in the beginning, you don't have to be good; you just have to get better.

And better.

And better.

Sean sings about "going to the open sea and...going to say goodbye to me". To kill off our fantasies and unrealistic expectations seems like a kind of suicide. Some people can never let them go. But once you've enter that sea, you can find a different "me": someone who finds opportunity in setbacks and pride in the real, challenging, and sometimes wrenching efforts that define the path toward genuine success.
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The media, and apparently FDIC employees, gather outside San Diego National Bank just minutes before the bank was seized last night. Photo credit: Lee. The mural is by Wyland.

This is one of the nine banks seized yesterday by the FDIC; a record for one week during this cycle. The second photo apparently shows the FDIC employees gathering beneath the whales ... Photo credit: Lee.

The FDIC closed nine more banks on Friday, and that brings the total FDIC bank failures to 115 in 2009. The following graph shows bank failures by week in 2009.

Click on graph for larger image in new window.

Note: Week 1 on graph ends Jan 9th.

After a busy summer, the FDIC slowed down in late September and early October with only five bank failures in four weeks. Now it appears the pace has picked up again. With 9 weeks to go, it seems 150 or so bank failures is likely this year.

The 2nd graph covers the entire FDIC period (annually since 1934).

This is the most failures per year since 1992 (181 failures).

As far as failures per week - there were 28 weeks during the S&L crisis when regulators closed 10 or more banks, and the peak was April 20, 1989 with 60 bank closures (there were 7 separate weeks with more than 30 closures in the late '80s and early '90s).

For a graph that includes the 1920s and early '30s (before the FDIC was enacted) see the 3rd graph here.

Of course the number of banks isn't the only measure. Many banks today have more branches, and far more assets and deposits. Also the cumulative estimated losses for the DIF, since early 2007, is now about $47.5 billion.

The FDIC era source data is here - including by assets (in most cases) - under Failures and Assistance Transactions

The pre-FDIC data is here.