Monday, January 31, 2011

A Busy Tuesday for Geithner

On Tuesday morning, Treasury Secretary Geithner will attend the President’s Cabinet meeting at the White House.

Later, the Secretary will attend the President’s meeting with members of the Technology CEO Council at the White House to discuss "competitiveness, education, innovation, and the need for strategic investments to create jobs, grow the economy and win the future." (Note this one sounds like serious plotting-RW)

In the afternoon, the Secretary will meet with members of the Financial Services Roundtable for a discussion on "the global economy, implementation of the Dodd-Frank Act, and strategies for strengthening U.S. competitiveness at home and abroad." Roundtable officers are:

Chairman
Richard K. Davis
U.S. Bancorp

Chairman-Elect
James E. Rohr
PNC Financial Services Group, Inc.

Treasurer
Robert P. Kelly
Bank of New York Mellon Corporation


Finally, the biggie: In the evening, Secretary Geithner will join Treasury officials meeting with the Treasury Borrowing Advisory Committee as part of the Quarterly Refunding process, or in layman's terms a discussion of how to finagle another three months for a basically broke government.

The Government Tracking of Money Expands

Conversation I just overheard at a CVS store, between two employees:
Employee 1: Since when do we have to get ID when someone purchases a money order?

Employee 2: Couple of days.

Employee 1: This can't be a new CVS policy. It must be the government. Right?

Employee 2: Right. 

My on the Street Interview with Egyptian Citizens

Sometimes, you don't have to go to Cairo to interview Egyptian citizens about what is going on in Egypt.

On my way to a lunch meeting earlier today, a couple stopped me on Park Avenue in midtown Manhattan and asked me for directions to Times Square. After giving them the directions, as is my habit, I asked them where they were from. "Egypt," they replied.

Thus, my opportunity for a "man on the street" interview with Egyptians.

I asked them what they thought was going to happen. The man did all the talking. He replied forcefully, "They are not going to stop until Mubarak is gone."

I asked him what the riots were about, he said no one had anything except for a rich few. "Only Mubarak and some mayors are rich," he said. His English was very good but not New York Times perfect. I took his comment about mayors to mean other government leaders, perhaps some type of regional governors.

He went on, "The streets are dirty." I took this to mean a hint of the poverty.

He said he did not think the police or soldiers would fire on the people.

I asked him, who he thought would replace Mubarak, and herein lies the problem and the potential for simply another totalitarian, he said, "We don't know."

The Power Elite Warn on Debt Crisis

The current issue of Council on Foreign Relations newsletter, This Month in Geonomics, is all about the debt crisis. It features five separate articles warning on the debt problem (Five!):
Roger C. Altman and Richard N. Haass argue that if U.S. leaders do not rein in government debt, global financial markets will ultimately force a solution. The result would be an age of American austerity that shrinks America's global role and leads to a less safe and less free world.


CFR Co-Chairman Robert E. Rubin writes that if we don't make tough decisions on deficit reduction now, we will be forced to act more harshly and with less time to thoughtfully set priorities in the future.

Sebastian Mallaby says that in the State of the Union President Obama was too optimistic that he can achieve new public investments and deficit reduction at the same time. He will have to choose between the two.

Peter R. Orszag warns that it may take a crisis to get U.S. policymakers to address the unsustainability of the federal government's fiscal trajectory.
A topic which was once the exclusive terrain of goldbugs and small government types is now being discussed openly by the power elite. What gives?

These are very smart guys. My guess is they know the crisis is coming and they know they can't stop the crisis, so they want to get out in front of it. If they are out with warnings now, they will be in a better position to shape what follows the crisis.

It's not exactly clear what these insiders view as a solution to the crisis, just know that is should not include more bailouts of banks or deadbeat state and local governments. The only real solution is a severe shrinking of government. Rand Paul's proposal is a start. The solution should also include restructuring (read:bankruptcy) at the federal, state and local levels. The crisis will come. The elites aren't trying to get in front of this for any other reason. The only question is: Who will pay for the crisis, "the people", which is probably on the mind of the elites, or those that have supported the reckless regime spending by buying this government debt in the first place?

From the CFR Daily News Brief

EGYPT

Tens of thousands of Egyptian demonstrators remained in central Cairo for the seventh day of anti-government demonstrations demanding the ouster of President Hosni Mubarak. The activists have vowed to stay until Mubarak leaves office (FT). Opposition leaders said they were organizing the largest demonstrations yet for Tuesday--a "march of millions" (NYT). The BBC reported that the military has cordoned off Cairo's central square with tanks, but is letting people come and go despite the violation of a government-imposed curfew. Egyptian police failed to put down pro-democracy demonstrations last week, and the army was mobilized Friday night. The U.S. Embassy is preparing to evacuate American citizens (WashPost), diplomatic families, and non-essential embassy personnel. The opposition has tentatively settled on pro-democracy activist and Nobel laureate Mohamed ElBaradei as the interim leader in any negotiations with the government (WSJ). ElBaradei told reporters that he has the "popular and political support'' necessary to begin the process of forming a unity government and that he would be seeking contact with the army to discuss a political transition.

JAPAN

Ichiro Ozawa, the Japanese powerbroker who is widely considered the architect of the Democratic party's historic 2009 victory, has been charged with political funding violations (FT). The indictment will fuel disagreement within the DPJ between Ozawa supporters and those of Prime Minister Naoto Kan.

INDIA

Protesters rallied in several Indian cities to march against government corruption and demand an effective anti-graft law (OneIndia).

TUNISIA

Rached Ghannouchi, the leader of a formerly banned opposition party, returned to Tunisia after twenty-one years in exile in the UK. Tunisia's interim government (TunisiaOnline) vowed to allow parties prohibited under now-ousted president Zine al-Abidine Ben Ali.

A Report from the Secret Koch Meetings

The Rancho Las Palmas Resort
On Sunday, Tim Carney delivered a speech at the secretive Koch conference being held at the Rancho Las Palmas Resort in Rancho Mirage, California. While I'm sure he would be banned from any future Koch event if he as much as disclosed what was served for breakfast, at the two day event, or who used the jacuzzi, he has written a column that does provide some clues as to what is going on at the event.

First, it is clear that the Koch brothers are now on the radar screen of the left. The left was protesting outside the conference. Carney writes:

At the front gates of the Rancho Las Palmas resort, a few hundred liberals rallied Sunday against "corporate greed" and polluters.
What really appears to be developing is a WWF-style battle of the oligarchs. Carney informs us:

The protest's organizer, the nonprofit Common Cause, is funded by billionaire George Soros.
But what is most curious about this event is that Carney writes, it is about:

...free markets and electoral strategies.
Got that, electoral strategies? Now, it is common knowledge that the Koch brothers promote some kind of free market philosophy that supports some Federal Reserve apologists and attempts to stuff free market economists Ludwig von Mises and Murray Rothbard down the memory hole, but what's this electoral strategy all about? Are the Kochs about to launch a support campaign for the two most hardcore free market advocates in Congress, Ron Paul and Rand Paul? Don't hold your breath.

The Koch position on free markets is always a diluted position, support the Fed, discourage discussion of Mises and Rothbard. Their "electoral strategy" appears the similar, discourage discussion of the Pauls. But just who are they supporting? Who really knows? Though Carney does give us a another clue in his column that the "electoral strategy" does appear to be about political influence. He writes that the protesters are:

....against rich people's influence on politics.
His focus is, of course, on the protesters, who support the other oligarch in the ring, Soros, and the contradiction that exists, given the influence that Soros attempts to buy. But, I think Carney has this nailed correctly. The conference is about Koch political influence, rather than the educational type roles and free market advocacy of Ron and Rand Paul. You don't need to influence Ron and Rand Paul, they are as free market as you are going to get.

So the question remains, who do the Kochs want to influence and why?

On this, Carney remains silent.

Treasury to Sell Boston Private Financial Warrants

The Treasury has announced that today it has commenced a secondary public offering of 2,887,500 warrants to purchase the common stock of Boston Private Financial Holdings, Inc.

The warrants were acquired during Treasury's TARP financing.

Carlyle Group holds a stake in the bank.

The Economics of Egypt

Zachary Karabell reports:

The mass movement engulfing Egypt exposes a fact that has been hiding in plain sight: In a decade during which China has brought more people out of poverty at a faster rate than ever in human history, in a period of time where economic reform has been sweeping the world from Brazil to Indonesia, Egypt has missed out.

A decade ago, IBM ran a series of commercials featuring its global reach. One included a fisherman sailing on the Nile, tapping into a wireless network. It was an enticing image—and almost completely fictional. Few countries have been less integrated into the global economy.

The country ranks 137 in the world in per-capita income (just behind Tonga and ahead of Kirbati), with a population in the top 20. And while GDP growth for the past few years has been respectable, averaging 4%-5% save for 2009 (when all countries suffered), even that is at best middle of the pack in a period where the more competitive dynamic nations have been surging ahead.
Egypt has long been famous for crony inefficiency. Yet Hosni Mubarak was graced with nearly $2 billion in annual U.S. aid, another $5 billion from dues from the Suez Canal, and $10 billion in tourism...

[The assassinated Anwar] Sadat's most lasting legacy for Egypt may have been his brief attempt to liberalize the economy (the Infitah) and open the country to the world. While President Mubarak gave lip service to that economic opening, for much of the subsequent three decades Egypt's economy has been locked in a system that stifles economic activity and innovation as surely as it does political expression...

 Mr. Mubarak seemed to realize that the complete absence of economic reform wasn't tenable. He watched as China surged ahead without loosening the control of the state over political life...

Meanwhile, China ignored the dialectic in the West—which placed political opening at the top of societal imperatives—and plunged into an experiment of hypercharged economic development without political change. Its phenomenal success to date is impossible to refute, just as its future course is impossible to predict....

What allows China to thrive for now (and Brazil and India and Indonesia, among many others) is that its citizens believe they have some control over their material lives and a chance to turn their dreams and ambitions into reality. They have an outlet for their passions that is not determined for them, and an increasing degree of economic freedom.

The young in Egypt—two-thirds of the population is under the age of 30—believe that they have no future, and in many ways they are correct. Under Mr. Mubarak, their food and housing is subsidized and they are placed in jobs or left in unemployed limbo, not starving but without any hope of anything but years of numbing sameness.

Geithner Talks New York Knicks Basketball?

On Monday afternoon, Treasury Secretary Geithner will meet with, former New York Knick, Senator Bill Bradley, at Treasury.

Eurozone Inflation Hits 2.4%

Eurozone inflation in January hit an annualized rate of 2.4%, well above the European Central Bank target of 2.0%.

The ECB has an interest rate policy setting meeting this Thursday.  It is unlikely that the ECB will raise rates at the meeting, but the rhetoric for future rate hikes will be thick. Of course, with anyone of the PIIGS needing bailout money at any moment, the success of a long-term responsible ECB monetary policy is on a par with the likely success of Charlie Sheen's latest visit to rehab.

America's Mideast Raj is On Fire

By Eric Margolis

When I wrote my latest book on the way America dominates the Mideast, I chose the title, American Raj, because this modern US imperium so closely resembled the famed Indian Raj – way the British Empire ruled India.


As I predicted in this book, and in a column last April, Egypt was headed for a major explosion. America’s Mideast Raj is now on fire. Whether it survives or not remains to be seen.

One cannot escape a sense that we may be looking at a Mideast version of the 1989 uprisings across Eastern Europe that brought down its Communist regimes and then the Soviet Union. Americans should be uneasy seeing crowds of Egyptians pleading for freedom and justice watched over by US-supplied tanks.

There are indeed certainly strong similarities between the old Soviet East Bloc and the spreading intifada across the police states of America’s Mideast Raj. Corrupt, repressive governments; rapacious oligarchies; high youth unemployment and economic stagnation; widespread feelings of fear, frustration, hopelessness and fury.

But there is also a big difference. The principled Soviet leader, Mikhail Gorbachev, and the Communist rulers of Eastern Europe, refused to turn their army’s guns against the rebelling people.

In Tunisia, where the current Arab uprising began, the army has so far stayed admirably neutral.

But in other Arab states now seething with rebellion – Egypt, Algeria, Yemen, Morocco, Libya, Jordan – there may be no such reservations. Their ruthless security forces and military could quickly crush the uprisings unless the soldiers refuse to shoot down their own people – as happened in Moscow in 1991.

As of this writing, Egypt’s 450,000-man US-equipped and financed armed forces are poised for action against that nation’s popular uprising, but its generals are undecided whether to shoot down their own people and earn universal hatred, overthrow President Mubarak’s regime, or openly seize power. Mubarak’s newly named vice president, Gen. Suleiman, controls the hated and feared secret police, or mukhabarat, but is unloved by the army.

Somewhere in the ranks of Egypt’s armed forces must be a group of officers like Col. Gamal Abdel Nasser and his Young Officers who seized power in 1952 to end foreign control of Egypt. Nasser, adored by most Egyptians was the first authentic native-born leader in 2,000 years. Look for a resurgence of Nasserism.

Washington is watching this growing intifada in its Mideast Raj with alarm and confusion. Ignore the Obama administration’s hypocritical platitudes urging "democracy." All of the authoritarian Arab rulers now under siege by their people have been armed, financed and supported for decades by the US. The US has given Egypt $2 billion annually, $1.4 billion of which goes to the military. Almost all the tanks and armored vehicles deployed in Cairo’s streets came from the US.

Washington has previously lauded Mubarak for "moderation" and "stability." These are code words for faithfully following US policies and crushing all opposition. Moderate opposition groups across the Mideast have been jailed and tortured, leaving only outlawed underground movements. The same thing happened in Iran.

Egypt’s armed forces were configured to keep Mubarak’s military regime in power, not to defend the nation’s borders. The US keeps Egypt’s armed forces short on munitions and spare parts so it cannot fight a war against Israel for more than a few days.

The brutal, sadistic secret police and other security forces of Morocco, Algeria, Egypt, Jordan and Yemen were all trained and equipped by the US or France. The CIA taught them "interrogation techniques," just as it did to the Shah of Iran’s secret police, Savak. We have reaped the whirlwind in bitter US-Iranian relations.

Read the rest here.

Sunday, January 30, 2011

Geithner Parties with the Prez (At the home of an Atlantic V.P.)

Keith Koffler spills the beans as to what went on in D.C. Saturday night:
The Washington A-List was out in force Saturday night at the farewell party for senior adviser David Axelrod, with a roster of guests featuring Cabinet secretaries, big shot journos and – President Obama...

The skepticism beyond the Beltway about whether Washington is just one big Love-In certainly gets fed by the sight – as conveyed by the press pool report – of reporters like ABC’s Jake Tapper, NBC’s Chuck Todd, National Journal’s Major Garrett, and John Harwood of CNBC and the New York Times emerging from a bash with the president that was held to toast his chief political fixer and leading spinmeister.

I understand why reporters would do this – other than the admittedly pathetic notion that, gosh, it’s fun to party with the president of the United States! It is pretty good for building sources and getting inside dope. But man, it ain’t easy smacking the White House with tough stories all the time if you’re getting invited to their exclusive parties, now is it?

Also on hand were Treasury Secretary Timothy Geithner, Education Secretary Arne Duncan, and Energy Secretary Steven Chu. The party was at the Washington residence of Linda Douglass, the former hard-hitting ABC reporter who dropped out of journalism to spin the health care bill out of the White House. She’s now a VP at Atlantic Media.

So we have an official with a journalism outfit – Atlantic Media – HOSTING a party for the president and his consigliere.
Yes, that Atlantic Media, home of Megan McArdle and Daniel Indiviglio. And you wonder why they give Ron Paul a hard time?

Reich: Egypt and Tunisia Are Nothing Compared to What's Coming

Former Labor Secretary under Bill Clinton, Robert Reich, thumbs:
If you think revolts in Tunis, Egypt, and Yemen are big, wait for coming food and energy shortages around world. US shld take lead now.

Reich is dead on as far as more trouble down the road, but I have no idea what he expects the U.S. to do. Double the size of  Michelle Obama's White House garden?

The problem is two fold and there are no quick solutions. The first is tyrannical governments which take and take, leaving little incentive for people to produce. The second problem is central bank stop and go money printing, in first world countries, which makes if difficult for farmers to plan the size of their operations.

The best thing the U.S. can do is stop Fed money printing and then get out of the way, so those in other countriess can see that the success of the United States is the result of free markets, private property and rule of law. Then, quite possibly, some of these revolutions may lead to free market reforms as opposed torevolutions that lead to newtyrants with a different disguise.

The Krugman-Murphy Debate

Bob Murphy is out with his latest video explaining the debate that he has challenged Paul Krugman to take part in.

Once the money pot (which all goes to an NYC charity for homeless) crosses $100,000, I think Krugman will bring along his commodity charts and agree to the debate.

The latest Murphy video is here.

The Difference Between Ron Paul as Monetary Policy Chairman and Barney Frank

Congressman Paul was hard at work in Washington D.C., this week, while the former chairman of the House subcommittee on Monetary Policy, Barney Frank, was hobnobbing it in Davos with the power elite.

And while Ron Paul seems very concerned about future inflation, Barney Frank became irritated when reporters at the plotters' pow wow wanted to discuss the topic.

Reports WSJ:
Mr. Frank was dressed something like a rock star himself, wearing a paisley tie that was wrapped almost completely around the outside of his collar. He had just emerged from a meeting of the world’s leading economic officials, including European Central Bank President Jean-Claude Trichet. Reporters asked him whether Mr. Trichet had expressed worries about inflation. No, he said.

They asked again; that began to annoy Mr. Frank.

“I am terribly sorry. Look, I understand not giving bad news to journalists is like not giving candy to children. But I apologize I have no bad news to give you.”

One reporter would not be dissuaded: There was no discussion of inflation?
“That’s the third time you’ve asked me, and you would obviously like me to say there was inflation, and I can’t make it up!”

Krugman on Price Inflation

Paul Krugman continues to attempt to protect his former Princeton University boss, Ben Bernanke, and continues to promote the idea that current price inflation is comimg from many directions, but not from his former boss.

Krugman's focus continues to be on commodities, and his ongoing claim that price increases are the result of hoarding, other increased demand, or weather related supply reductions. As I have pointed out several times, there is no question that foreign demand factors and supply reductions play a role in the increases in commodity prices. But this does not mean that they are the only factors acting on commodity prices. I could just as easily pull out money supply charts and say, "There, Bernanke is causing most of the price gains , just look at the money growth."

The truth is both Bernanke and supply-demand factors are impacting commodity prices.

The curious thing, though, is that Krugman wants to keep the focus on commodities because he can blame the supply-demand causes for the increases and confuse the situation. Yet, price increases are certainly not limited to the commodities.

Over the last 12 months, the the stock market, as measured by the S&P 500, has climbed by 18.85%. I'd like to see Krugman blame this on Chinese farmers hoarding. Further, the last CPI release not only showed increases in the energy sector but increases in the shelter index, the indexes for airline fares, medical care and apparel.

Now some of the increases in some of these indexes can be attributed to commodity gains, but others have limited to no connection (e.g. medical care).

Then, of course, we have anecdotal evidence of non-commodity related price increases, e.g. the hike in the price of movie theater tickets.

Krugman's focus on commodity prices distorts the real picture. Many other prices are climbing, but further, Krugman is illegitimately claiming that none of the spike in commodity prices is a result of Bernanke money printing. By mid-2011, when prices really start to spike, it will be very clear that overall rising prices are not the result of simply changes in non-monetary supply and demand factors.

Then what voodoo analysis will Krugman attempt to explain all those price hikes?

Israel: The Third Rail and the Math

Rand Paul may be the first Senator in decades to take a serious look at government spending and propose serious spending reductions. He has already come out with a detailed proposal to cut government spending by 30%.

He wisely calls for the ending of all foreign aid, as part of his reductions. Thomas Eddlem calls this touching the third rail. How so? Rand is being attacked for including Israel as a foreign country.

Eddlem reports:
Various Israeli-lobby outlets have condemned his proposal. New York City's The Jewish Week called it a "toxic mix." The Republican Jewish Coalition rejected the proposal as "misguided." The Washington Post's Jennifer Rubin labeled Dr. Rand Paul's remarks "neo-isolationism" and said they would be "widely condemned."
Here's CNN's Wolf Blitzer giving Senator Paul the once over:
BLITZER: What about the $2 billion or $3 billion that goes every year to Israel? Do you want to eliminate that as well?

PAUL: Well, I think what you have to do is you have to look. When you send foreign aid, you actually send quite a bit to Israel's enemies. Islamic nations around Israel get quite a bit of foreign aid, too.

BLITZER: Egypt gets almost the same amount?

PAUL: Almost the same amount, so really you have to ask yourself, are we funding an arms race on both sides? I have a lot of sympathy and respect for Israel as a democratic nation, as a, you know, a fountain of peace and a fountain of democracy within the Middle East.
But at the same time, I don't [believe in] funding both sides of the arms race, particularly when we have to borrow the money from China to send it to someone else. We just can't do it anymore. The debt is all consuming and it threatens our well being as a country.

BLITZER: All right, so just to be precise, end all foreign aid including the foreign aid to Israel as well. Is that right?

PAUL: Yes.
Senator Paul has, of course, an important point here. Further, the current financial situation in the U.S.  means that cuts must be made even on the money we pay out to our favorite girlfriends.

The United States has grown into the great country that it is because of an adherence, though a slipping adherence, to free markets, respect for property rights and the rule of law. This model is the true gift we can give the people of any country: Watch how we grow and you to can do the same.

As for Israel, I have no problems with supporters of Israel sending their own private money over to the country, but if we are going to cut off foreign aid, I find it hard to understand how we are going to explain to American citizens of, say, non-Jewish African or non-Jewish Eastern European descent, that we are cutting off aid to their countries, but they must support aid to others.

Further, with supporters of Israel sending over their own money, the money is likely to be much more efficiently used. I find no comfort in thinking that U.S. government money sent to the Israeli government some how does not result in the corruption and inefficiencies that result when governments get in the middle of anything.

Lastly, I'm sure that Senator Paul's eventual goal with these spending cuts is to reduce taxes substantially. If the top tax rate can be cut from the 35% range to 25%, and a corresponding rate cut can be made at other tax brackets, then private sector funding of aid to Israel would seem to be very doable.

My very rough estimate of income in the United States by those who consider themselves Jewish, presumably the group most interested in supporting Israel, is $145 billion  (2.9 million Jewish households in U.S., average household income of $50k) . If the tax rates drop by a full 10%, this means that there is roughly an annual windfall of $14.5 billion to American Jews. This is roughly three times the amount of money sent to Israel each year as foreign aid. Thus, in the long run, American Jews would have no problem or hardship funding aid to Israel on a private basis, which I emphasize, again, would be more efficient funding. Further, even now, before tax cuts, to keep Israel funding at the same level, would only require 3% of income from private sector funding by Jewish households. One would think Jews could then decide, individually, whether to accept this burden, while America tightens its belt, and all other foreign countries see their foreign aid eliminated also.

Thus, especially given the long term positives, I would think any Jew doing the math would be in favor of Senator Paul's proposal, except, of course, those that are simply into coercion and want others to pay the bills for their favorite projects.

Top Ten

Below are the Top Ten most viewed EPJ posts for the week ending Saturday January 29, 2011.

#1 American Arrested in Mexico for Carrying 150 Gold Coins; Coins Seized  (An April 2010 EPJ classic comes roaring back on to the Top Ten.)

#2 HOT: Fed Hides Major Accounting Change (2nd week on list)

#3 Global Insiders Warned: U.S. Debt Crisis Could Explode at Anytime

#4 Is This the Best the Fed Can Do in Its Defense?

#5 How To Prepare For A State Default by Jonathan Bergman

#6 Food Stamps as a JPMorgan Growth Industry

#7 An Inside Look at Global Money Center Bank Activities (2nd week on list)

#8 What a Difference Free Markets Make

#9 The Coming Internet National ID Card (2nd week on list)

#10 Are Skyscrapers Evil?

The Clanging Noise in GDP

I tend to, in general, be very suspicious of large aggregated macro-numbers such as GDP. The "estimates" and "projections" made in the data make it impossible to take these numbers for anything but a very rough guide to activity in the economy. Anyone who takes seriously a small blip in the number from one quarter to another, in my book, is respecting BEA data collection abilities far beyond what they deserve.

Rick Davis of Consumer Metrics Institute emails in his latest take on the GDP numbers and points out the problems with these estimates. He then takes a look at the more broader trends in the numbers, coupled with the analysis that he is doing at CMI. His conclusion indicates that the trend in the United States toward Banana Republic status is doing just fine. The gap between the connected-rich and the poor continues to grow.  Here's Rick:

The Bureau of Economic Analysis' ("BEA") "Advance Estimate" of the fourth quarter 2010 Gross Domestic Product ("GDP") had a headline annualized growth rate of 3.17% for the U.S. economy, some 0.62% higher than their estimate of the third quarter's annualized growth rate of 2.55%. It is important to note that historically the BEA eventually adjusts "Advance Estimate" percentages by an average of 1.3% (up or down, with the standard deviation of the adjustments about 1.0%), making all the the below analysis a necessary but possibly meaningless exercise.

As a quick reminder, the classic definition of the GDP can be summarized with the following equation:


GDP = private consumption + gross private investment + government spending + (exports − imports)

or, as it is commonly expressed in algebraic shorthand:


GDP = C + I + G + (X-M)
The quarter-to-quarter variances in the contributions that the components made were startling.
While consumer services and exports remained relatively stable, the growth contributions of the other components changed dramatically. In fact, some of the swings in the component values dwarfed the overall quarter-to-quarter improvement of 0.62%: the changes in trade "added" nearly 5.2% to the total, while the swing in inventories "subtracted" over 5.3%. Statistically it can be challenging to pull legitimate composite signals from this amount of quarter-to-quarter noise.

Furthermore, some of the key components (e.g., the trade numbers and inventories) represent, at best, two months of real data plus one month of "guesstimate" -- a perilous task given the rates of change being experienced from quarter to quarter (particularly in the "deflater" being used, as covered below). The "Advance Estimate" will be revised at the end of each of the next two months, and then again in July. One year ago the prior fourth quarter's "Advance Estimate" ultimately ended up being erroneously high by about .7% by the time that the revisions were complete (six months later, at the end of July).

Additionally, the reported real (i.e., inflation adjusted) annualized growth rate of 3.17% benefited from a relatively low annualized inflation assumption of 0.3% for the quarter -- which contradicts a number of other current inflation estimates, including the December year-over-year CPI numbers (running 5 times higher at about 1.5%), the PPI finished goods numbers for December (reported to be over 10 times higher at a 4.0% annualized rate) and the BEA's own "deflater" for the prior quarter (which was set 7 times higher at 2.1%). Arguably, a major portion of the 3.17% growth would evaporate if the 0.3% "deflater" proves to be unduly optimistic.

Ironically, the flip-side of the low "deflater" being used for the entire economy is the extremely high 21.8% annualized "deflater" that was used to inflation-adjust the amounts of goods that were imported during the quarter. This huge spike in the imported goods "deflater" (up 31% from a -9.2% dis-inflationary number used in the third quarter) partially explains the dramatic drop in reported imports in the GDP equation (and that consequently boosted the overall GDP growth rate by over 4.9%). Given the recent movement in commodity prices (especially oil) it is hard to quarrel with the 21.8% number per se (even if it brings the 0.3% overall "deflater" into question), but the impact of that "deflater" has certainly added to the noise present in this GDP release, if not to the headline number itself.

Setting aside for the moment our concerns about the reliability of the data, a face-value read of the report reveals several surprises in the data:

-- The inventory building that had been adding significantly to the headline GDP growth rate since the third quarter of 2009 has sharply reversed. This component is generally subject to the largest revisions from release to release, since the data seems to lag more than most of the series. But with that caveat, it is clear on face-value that the five consecutive quarters of inventory building has ended -- perhaps with a vengeance.

-- The net growth of governmental spending has also reversed. Given the political environment in Washington and the fiscal realities facing state and municipal governments, that trend is likely real and it will probably stay with us for some time.

-- As mentioned above, the BEA reports a contraction in the quantity of imported goods and services by nearly 4%. While a contraction of this magnitude has occurred quarter-to-quarter many times before, it has generally been accompanied by (and ultimately caused by) a sharp contraction in consumer spending. No such change in consumer behavior is even hinted at elsewhere in the report. The only plausible explanation for this contraction is a huge shift in market share from foreign producers to domestic sources. However, no such shift was observed in any of the larger segments of the consumer economy -- including automobiles, apparel, electronics and oil.

-- Again at face-value, about a quarter of the annualized growth (or about 0.83%) came from a recovery in residential housing investment, which is reportedly now growing at a tepid 0.08% annualized rate. This was the second positive quarter for residential housing investment during the year (but only the third over the past four years), and portends well for the economy if the reported trend continues. Our concern, however, is that the data used in this series has been subject in the past to short term distortions (e.g., permit rushes to beat code deadlines).

-- Consumer spending was reported to have strengthened by about 1.3%, with consumer goods now being shown to be have an annualized growth rate of 2.26%.

We would like to believe at face-value the BEA's latest GDP report. However, even if it is absolutely correct, it portrays turbulent undercurrents in this economy that warrant attention:

-- The recent round of inventory building is over. Inventory cycles generally run for a number of quarters, with the last building cycle running for 5 consecutive quarters and the last inventory draw-down lasting for 8 consecutive quarters. Inventories are likely to be a drag on the GDP over at least the next year.

-- Governmental support of the economy has begun to sharply decrease. Mr. Bernanke notwithstanding, real commerce created by governmental entities has begun to decline, and it is likely to continue to do so for the foreseeable future.

-- The recent rapid increase in commodity prices has caused a correspondingly rapid decrease in reported imports. Not reported is what the same rise in commodity prices has done to the purchasing power of consumer take-home pay. If the 31% swing in the quarter-to-quarter price of imported goods is correct, real discretionary consumer spending is about to take a serious hit.

These observations can be drawn from the report if it is taken a face-value. Not obvious from the report itself is a turbulence created by the variance between the past few quarters of GDP reports and the experiences of the un- or under-employed in America. It also portrays a continued and reasonable economic growth that may seem unbelievable to homeowners trapped by their mortgages. It paints a picture of modest prosperity that is probably contrary to the real-world experiences of "Main Street" Americans that on a daily basis drive past strip malls that are at least as "Available" as occupied.

Our data continues to indicate that this recession and the much reported recovery (as supported by this GDP report) have not been a shared experience of all Americans. Mr. Bernanke, Mr. Geithner and their colleagues at Goldman Sachs have probably not personally felt the impact of this economic event to the same extent as those of us without privileged access to taxpayer supported defined benefit plans, pay checks backed by self-printed money, zero cost loans or microsecond access to equity market transaction data before those transactions are even executed.

The turbulent undercurrents read from the BEA's report don't address the social consequences of a likely widening gap between the rich and poor of this country -- or the young and old. Cultural, racial, gender and educational gaps have probably widened as well -- and we may well be seeing signs of that in our data.

Saturday, January 29, 2011

Is Something Serious Up at Treasury?

On Sunday, Treasury Secretary Geithner will have dinner at Treasury with former secretaries of the Treasury.

What's up with this? There was no indication on the weekly Treasury schedule, put out just a day ago, that this dinner was planned. Very unusual.

On top of that, the Treasury put this notice out at 9:00PM on a Saturday night. Sure looks like a rushed meeting to me.

Madness at MIT: Economists Gone Stupid

National Public Radio is reporting on a conference of "top" economists that is now going on at M.I.T.

If you want to learn why the economy is so screwed up, you need to listen to these economists. 

The report contains a clip by Harvard economist and top economic textbook salesman, Greg Mankiw. His take on the recent financial crisis is that the reason mainstream economist didn't forecast it was because it was an outlier event. Says Mankiw, economists weren't thinking about such an event because it would be like thinking about an Asteroid landing in M.I.T's Central Square.

The levels of the absurdity of this comment are mind boggling. First, and foremost, Mankiw completely throws down the memory hole those economists who subscribe to the Austrian theory of the business cycle and who do not see the recent crisis as a unique black swan event, but the result of central bank monetary policies that cause recurring crises in economies both here, and around the world. These economists far from being surprised by the event correctly forecasted the crisis.

Secondly, even if say, for argument's sake, that the crisis was an outlier "asteroid"event, this does not mean you can't see the asteroid when it has entered the atmosphere and about to crash on your head. Plenty of non-economists also saw the crisis coming becasue of the size of the asteroid heading at them.

The truth of the matter is that mainstream Keynesian economists use incorrect tools to understand the economy and will regularly fail in their forecasts.

From there, in the report, NPR takes us to another mainstream fiction, that the Fed has driven rates to zero. I have discussed this, recently, in a post, Note to Economists: The Fed Funds Rate is NOT 'Essentially at Zero'

Rates are not at zero and it is again mind boggling to think about the poor quality of thinking by economists who think the interest rate is at zero. Yet, in the NPR report this is exactly what Northwestern professor Bob Gordon states. He goes even further and sates that because of this, "The Fed has run out of bullets." This I remind you, he is saying while the Fed is in the process of implementing QE2, which is dumping hundreds of billions of new dollars into the economy, which is creating a new manipulated boom in the stock market and economy.
 
Most bizarre, NPR reports that M.I.T grad students are leaving other thesis topics to study zero bound interest rates, when the phenomena doesn't exist!
 
The NPR report closes with a clip from  the former chairman of President Obama's Council of Economic Advisers, Christina Romer, who has admitted she didn't have a clue as to how bad the economy would get.  In this NPR clip, she now  tells us that she "can't sound too optimistic." Yet, if nothing else, the Bernanke money printing will increasingly make the economy look bright in terms of the data that Romer, and other mainstream economists will look at. So not only did she miss the crisis, she's missing the Bernanke manipulated rebound.
 
NPR says there were a thousand economists at this mad show. When Girls Go Wild on South Beach during spring break, there's a pretty good bet a lot of that is alcohol fueled. I have no idea what fuels these economists to go stupid, other than that they have a total inability to think for themselves and speak out against the ruling regime. Their statements are so out of touch with reality that, in comparison, it makes the girls during spring break on South Beach appear like modest and cerebral women who are contemplating choosing life in a convent.

The Video Bernanke is Watching Right Now

Credit Bubble Stocks writes:

Somewhere in the lavish Eccles Building in Washington D.C., Bernanke is watching this video.



(ViaTaylorConant)

Battle at the Egyptian Interior Ministry

From Twitter reports:

Sounds like there's a real battle going on at the interior ministry. No pictures available, though.

Gunfire getting louder - Tanks moved to block street to Min. of Int. Claiming it is to stop the police from reaching the main square

The army is separating the police an the protesters in front of the interior ministry

 People asking how I'm tweeting from Egypt, we are using a work-around. Internet is still down and I can't send pics

One protester last night: 'The soldiers are all right. The police are sons of bitches'

fallen protester soaked in blood carried on shoulders of protesters as crowd roars on behalf of him

White House Releases Pic of Obama Talking to Mubarak

Police Open Fire in Egypt

Al Jazeera TV reports about 1,000 Egyptians try to storm interior ministry in Cairo, police open fire.

The Big Question: if protesters actually succeed in chasing Mubarak from power, who will they put into the power vacuum? And a power vacuum it will be, since there is no evidence that in Egypt there is a mass understanding of  a private property society and how it does not require a power center.

Replacing the man carrying the machine gun is not the same thing as taking away the machine gun.

Roubini: Break Up of European Monetary Union Possible

Nouriel Roubini is out with his take on the EU financial crisis. As per usual, he is great on the facts but mostly terrible on policy. Here he is on the facts:
The contagion from the Greek and Irish crises has spread to Portugal, Spain and possibly Italy. Unless the eurozone undertakes radical reform there is a risk of disorderly defaults by fiscally stressed member states and even – eventually – of a break-up of the monetary union.

The current muddle-through approach to the crisis is to “lend and pray”: ie, provide financing to member states in distress (conditional on such states implementing fiscal adjustment and structural reforms) in the hope that their problems are of liquidity rather than solvency. But this could lead to disorderly defaults and a break-up of the European Monetary Union (EMU), unless institutional reforms and other policies leading to closer integration and restoration of growth in the eurozone’s periphery are implemented soon.

The periphery members all suffer from a loss of competitiveness, low economic growth (Italy, Portugal) or contraction (Spain, Ireland, Greece), and large private and/or public debts. Spain’s and Ireland’s problems started with too much debt in the private sector (due to a debt-financed housing bubble) and morphed into a public debt problem once the losses from the housing bust were socialised. Greece had a reckless fiscal policy for more than a decade, which led to a public debt crisis. Portugal and Italy have lower levels of private debt but large stocks of public debt. Distressed sovereigns that have already lost market access (Greece and Ireland) were bailed out by the IMF and the EU, but no one will come from Mars to bail out these super-sovereigns if the sovereigns end up insolvent.
 
On policy, though, he is way off. He calls for ECB money printing, a German fiscal stimulus, and German backed EuroBonds as a way to increase official EU resources for emergency bailouts. All these policy moves would turn the EuroZone into a stagflation pit. Remarkably, Roubini does admit the inflation part of the stagflation:
The European Central Bank (ECB) should pursue a much looser monetary policy; this would weaken the euro... 
However, because of a Keynesian/Mercantilist view, he doesn't get that this money printing only distorts the economy, that German backed EuroBonds would only crowd out private sector borrowers and that bailouts simply create moral hazards.

Surprisingly, while he does mix this mad policy cocktail that is not too far from what EU officials would like to see happen, Roubini also calls on some correct medicine:
...super-sovereigns such as the IMF and EU cannot and should not continue to bail out distressed sovereigns that are insolvent rather than illiquid. Thus, a third necessary reform pillar is for Europe to implement early, orderly restructurings of distressed sovereigns’ public debt....

..all unsecured creditors of banks and other financial institutions, even senior ones, must accept losses on their claims when a financial institution is severely financially distressed. This is needed to prevent even more private debt being put on government balance sheets. If orderly treatment of unsecured senior creditors requires a new, Europe-wide regime to close down insolvent European banks, such a regime should be implemented soon.
It is hard to understand Roubini's sound medicine recommendations here of restructuring government debt, i.e., sovereign bankruptcy and the call for banks to face losses, with his unsound Keynesian/mercantilist advice. The medicine in itself would solve the EU crisis, while the other policy advice would simply suffocate the region.

In his book, Crisis Economics, Roubini writes that economists should learn more about what the Austrian school economists have to say. One hopes that Roubini takes his own advice soon and starts reading up on Austrian business cycle theory, so that he can understand the disastrous flaws in Keynesian/mercantilist policy theory.

Soldiers Shoot at University Students in Nigeria

From AP via WaPo:
Witnesses say soldiers in a central Nigerian city opened fire on students protesting continuing violence between Christians and Muslims.

Saturday's shooting comes after rioters set fire to gas stations and a farmer's market Friday night in the city of Jos, a city at the epicenter of tensions between Nigeria's two dominant faiths. That fighting began when students attacked Muslims attempting to bury a corpse.

Friday, January 28, 2011

Google Party at Davos


Pic via Nouriel Roubini

Mubarak Speaking

Developing...

President Mubarak clearly remains in power, he asks that the rest of his government step down.

"Much too dangerous to leave economy in the hands of economist," he says.

he is beginning to sound like Obama: Talking about lowering unemployment and improving healthcare. "I am on the side of the poor people."

Report: Mubarak on Way to Switzerland

and also this via John Carney:
Whoa! "3 private jets leave Cairo airport under heavy security; #Egypt parliament speaker to make major announcement - NBC"
From Reuters:
13 killed in Egypt's Suez, 1,030 wounded in Cairo
UPDATE: Mubarak speaks, still in control, more here.

How To Get Online in Egypt, Even withGovernment Blocking of the Internet

Steve Kovach at Business Insider says go old school. In Egypt, while internet access has been blocked, old school access via dial up through telephone lines is working.

Lifehacker suggests trying the global dialup ISP Budget Dialup or the French ISP FDN, which is providing free access to users in Egypt.

More from Kovach:

One site worth checking out is the forum OPENMESH that was just launched as a resource for finding ways to help Egyptians get back online. TechCrunch says, they're looking for people with a tech background who may be able to skirt around the block. If you have any ideas, share them on Twitter using the #OPENMESH hashtag.

Let's See Paul Krugman Explain This as the Result of Chinese Demand for Commodities

The average ticket price at movie theaters in the U.S. and Canada last year rose to an all-time high of $7.89, up 5% from $7.50 in 2009, according to the National Assn. of Theatre Owners.

What kind if impact does inflation have on prices? NATO spokesman Patrick Corcoran says that the average ticket price in 1970 was $1.55.

EPJ Passes Harvard Magazine in Traffic Ranking

According to Quantcast, the web traffic monitoring site, EconomicPolicyJournal.com has just passed Harvard Magazine in terms of visitors.

EPJ as of earlier today is ranked at 19,932, while Harvard Magazine is ranked at 19,978. EPJ is also now ahead of Russia's news agency Interfax, which ranks 19,948.

A Translation of Obama's SOTU

By Harvard's Jeffrey Miron:
1. More investment in techonology = bigger handouts to the green lobby.
2. More investment in education = bigger handouts to teachers.

3. More investment in infrastructure = bigger handouts to construction unions.

A Short Film: Robert Redford Hypocrite

Robert Redford is one of the main opponents of a plan by the Pacific Union College to build an eco-village in Angwin, California. The college says it needs the funds because of a dire financial situation.

The village is close to Redford’s vineyard in the Napa Valley. However while publicly opposing this development “to preserve the rural heritage” Redford has been quietly selling development lots in the Sundance Preserve for $2 million. These lots are intended for vacation homes close to Redford’s Sundance Ski Resort.

A short film Robert Redford Hypocrite which has just been released probes the contradictory positions of Redford.

Film director Ann McElhinney said the film is not criticising Redford for selling his property.

"It is great that in a recession Mr Redford can find so many buyers. I am delighted that those houses will be built, creating jobs and vitality in a remote area but it is shocking that Mr Redford would deny others similar opportunities to make a profit and create jobs."

The film’s co-director Phelim McAleer said the film was highlighting the double standards of so many celebrities and environmentalists.

"This is just another example of environmental elites telling the rest of us how and where we must live and what we are not allowed to do, but thinking that those rules don’t apply to themselves. Robert Redford has shown himself to be a hypocrite - plain and simple," said McAleer.




Redford Hypocrite was produced and directed by Ann McElhinney and Phelim McAleer. They previously produced Not Evil Just Wrong, a documentary which took a sceptical look at Global Warming hysteria.

The same group also produced James Cameron Hypocrite which looks at the double standards of Avatar director James Cameron.

Geithner: I See Nothing

Sergeant Schultz Treasury Secretary Geithner on climbing food and gasoline prices:
 I would not put inflation at the global level on the high list of concerns.

Paulson Buying into Real Estate

John Paulson, who just picked up a 2010 paycheck in excess of $5 billion and who netted $4 billion in 2007 by being short the subprime market, is now a real estate buyer.

One of Paulson's newest projects is in the Sonoran Desert in the American Southwest, where he is buying residential-development lots.

Marketwatch reports that one of Paulson's  main strategies is to buy undeveloped tracts of land that already have environmental and building permits. Roads, sewers and electricity may also be in place, but not homes, according to one of the people familiar with the fund.

If the real-estate market recovers enough for developers to start building more new houses, this may be the type of land they buy first. That’s because a lot of the costly, time-consuming preparation work already has been done, the person explained.

Video Footage from Today's Protests in Egypt

The Internet and twitter are being blocked in Egypt. Here's video footage of the protests.

Reports Reuters:
Tens of thousands of Egyptians flooded into the streets after Friday prayers in mounting demonstrations calling for an end to President Hosni Mubarak's 30-year rule.

Violence was reported in Suez and Alexandria along with several areas in Cairo.
 

Spain Q4 Unemployment at 20.3%

Ouch.

This is  up from 19.8% in Q3 and worse than Keynsian forecasts of 19.9%.

Oh yeah, Spain will be able to pay its bills.

From the CFR Daily News Brief

EGYPT

Following Friday prayers, a new wave of anti-government protests (Haaretz) erupted across Egypt. The demonstrations have continued for four consecutive days, as activists pressed for the resignation of President Hosni Mubarak, who has ruled for nearly thirty years. Employing tear gas, rubber bullets, and water cannons, police tried to disperse throngs of demonstrators. Many arrests and detentions have been made, and the BBC reported clashes with security forces in multiple cities. Analysts expected Friday's rallies to be the biggest so far, with websites urging people to join after attending prayers. As a result, the government has disrupted or restricted communications including cellphones and social media (NYT), which has also hampered the ability of journalists to report on the unrest.

JAPAN

Japanese Prime Minister Naoto Kan vowed fiscal reforms in the wake of a downgrade in the country's long-term debt rating by Standard & Poor's (Reuters). In order to institute his reforms, Kan needs the support of opposition parties that, according to observers, have shown little tendency to compromise.

SUDAN

The Satellite Sentinel Project, an initiative of several U.S.-based NGOs, says it has captured images of Sudanese military deployments in strategic areas along the North-South border (allAfrica), but the troops do not look like they are preparing forward movement.

CHILE

Chile is launching its first investigation into the death of President Salvador Allende (Latin America News), thirty-seven years after the socialist leader was found shot in the head during a U.S.-backed coup. Until now, his death had been ruled a suicide.

GERMANY

The German Bundestag approved a one-year extension to its military mandate in Afghanistan (DeutscheWelle). The proposal also contained the first explicit plans for withdrawal, to begin by the end of 2011 and be completed by 2014.

ITALY

Italian prosecutors alleged that a second female minor was present at Prime Minister Silvio Berlusconi's private residences on multiple occasions. Prosecutors are investigating claims that Berlusconi paid for sex with a minor (CNN), though he denies the allegations.

U.S. GDP Growth Accelerates .

Gross domestic product rose at an inflation-adjusted annual rate of 3.2% in the fourth quarter, according to the Commerce Department. GDP rose by 2.6% in the third quarter and by 1.7% in the second quarter.

No surprise here, as long as Bennie has the money printing machine going the manipulated boom will continue. But what is Bennie going to do when the money printing kicks up inflation by mid-2011?

Will he stop printing and crash the manipulated boom he has created?

or

Will he keep the printing going, which will accelerate the inflation?

China to Implement Property Taxes

China's State Council has announced that some cities will be allowed to implement  property taxes. Shanghai and Chongqing are expected to be among the first that will introduce such a tax.

Needless to say, this is another march in the wrong direction. The last thing an economy needs when it is going into an economic downturn is higher taxes. Higher taxes are never a good idea, but it truly bleeds a stagnating economy.

$900 Billion Child Support Suit Against Rapper Diddy

Radar Online reports that rapper Sean "Diddy" Combs was sued for $1 trillion by a woman named Valerie Joyce Wilson Turks, who alleges that he date raped her 24 years ago... and then conspired with Rodney King to bring down the World Trade Center on September 11th, 2001.

Turks wants $900 billion for child suppor and $100 billion in damages.

Soros: Authorities Terrified

In an interview out of Davos, Switzerland, George Soros told FT that authorities are terrified over the financial situation in countries like Ireland. The oligarch spoke up for "the people" in his remarks and said that it is "blatantly unfair for the people [of Ireland] to absorb all the losses" in Ireland, while bond holders go free. He said this is causing fear among authorities and it is why an EU emergency fund must be said.

Not mentioned by Soros is the fact that an emergency fund would result in further EU control over "independent" EU nations.He also failed to mention the fact that an emergency fund would simply spread the cost over entire EU population, rather than only the populations in the countries with the debt problems. As for objections from the German people about bailouts, the master manipulator said the German people "were coming along".

Soros correctly noted that the Chinese had made a mistake in monetary policy and that inflation in China is "on the verge of getting out of control."

Bizarrely, he sees the United States in a "sweet spot" because of its current situation of "some inflation" and simultaneous quantitative easing. He also believes that the U.S. will end up "importing" some inflation from China, and also views this in the same odd fashion as a good thing.

The full interview is here.

Internal Tensions at Goldman Sachs?

Word out of GS is always that internally the firm is like one big happy pajama party. No riffs there.

This makes this note from FT all the more curious:
Goldman Sachs appointed Michael Evans, its Asia chairman, to a broader role as head of emerging markets, a move that could soothe internal tensions within the bank’s senior ranks and underlines its desire to expand in developing economies...

Goldman declined to comment. Mr Evans, who is attending the World Economic Forum annual meeting in Davos this week, could not be reached.

Mr Evans’s promotion comes as banks seek new ways to benefit from the fast-growing economies of Asia and Latin America. Mr Blankfein has described these markets as a cornerstone of Goldman’s plans following the financial crisis.

But the new post is also an attempt to quell a potential source of disagreement within Goldman.
Tell us more FT.

Illinois Supremes Rule in Favor of Emanuel

The Illinois Supreme Court ruled 7-0 late Thursday that Rahm Emanuel can run for mayor of

Chicago.

Emanuel's legitimacy to run for mayor was questioned by some who took him to court on the matter. They claimed that because he lived in Washington D.C. for most of last year as White House chief-of-staff, he did meet the one-year residency requirement to appear on the ballot in Chicago.

Polls indicate that Emanuel is well ahead in the polls, for the February election.

Paulson's 2010 Personal Net: $5 Billion Plus

Hedge-fund manager John Paulson personally netted more than $5 billion in profits in 2010—likely the largest one-year haul in investing history, trumping the nearly $4 billion he made with his "short" bets against subprime mortgages in 2007, reports WSJ.

WSJ goes on:
Mr. Paulson's take, described by investors and people close to investment firm Paulson & Co., shows how profits continue to pile up for elite hedge-fund managers. Appaloosa Management founder David Tepper and Bridgewater Associates chief Ray Dalio each personally made between $2 billion and $3 billion last year, according to investors and people familiar with the situation. James Simons, founder of Renaissance Technologies LLC, also produced profits in that range, say investors in his firm...Mr. Paulson and the other top managers made winning bets on commodities, emerging-market companies, bank shares and U.S. Treasury bonds, among other investments.
Paulson recently endowed two chairs at New York University. One will be in his name and the other in that of Alan Greenspan.

Thursday, January 27, 2011

Jamie Dimon is Right

Dealbook reports:
J.P. Morgan CEO Jamie Dimon is an emotional, entertaining bloke. And never more so when he is the most ardent defender of the U.S. financial industry.

At the World Economic Forum today, Dimon gave perhaps his most impassioned defense to date.

Asked what he thought about Americans’ popular anger directed at banks, Dimon didn’t mince words. “It’s not fair to lump all banks together,” Dimon said, according to our Barron’s colleague Vito Racanelli:

I don’t lump all media together….There’s good and there’s bad. There’s irresponsible and ignorant and there’s really smart media. Well, not all bankers are the same. I just think this constant refrain [of] ‘bankers, bankers, bankers,’ — it’s just a really unproductive and unfair way of treating people….People should just stop doing that.
Dimon is right, all banks shouldn't be lumped together. There are a lot of decent hardworking bankers at local banks that couldn't get President Obama to buy them a hot dog. They shouldn't be lumped in with the elitist plotters like Goldman Sachs and Jamie's JPMorgan Chase, which was gifted Washington Mutual and Bear Stearns during the height of the crisis.

Paying People Not To Work

by Larry M. Elkin, CPA, CFP®

To economists and the business-savvy elements of the public, the recent recession is history. But some who lost their jobs more than a year ago are still sitting at home ­ and getting paid to do so.

In 25 states workers are able to collect unemployment benefits for 99 weeks, thanks to emergency measures enacted by Washington after the widespread layoffs and job losses in 2008 and 2009. Ordinarily, unemployed workers receive only 26 weeks of state-paid support.

The extended unemployment benefits will continue through the end of this year, as part of the deal that President Obama negotiated with congressional Republicans last month to extend the Bush-era income tax rates.

Unemployment insurance is based on the theory that joblessness is a situation over which individuals have no control, like other things we insure against such as health problems, car accidents, and theft. This attitude makes sense when it is applied to short-term unemployment. There is nothing an individual employee can do to stop the plant she works for from being closed down, or to save her employer from having to cut payroll.

But studies have shown that, after the initial shock of job loss, motivation plays a big role in how quickly an individual secures new employment. When workers who have been receiving unemployment benefits approach the end of those benefits ­ and are therefore presumably most motivated to find new sources of cash ­ their chances of returning to work increase significantly, according to 1990 study cited by the Heritage Foundation.

This change in motivation can be explained as a change in what economists call the “reserve wage.” The reserve wage is the lowest pay rate that a worker is willing to accept in exchange for the inconvenience and costs associated with a particular proffered job. The costs of employment generally include things like buying work clothes, commuting, and eating more lunches out. Those who have been collecting unemployment benefits, however, also have to consider another cost: giving up their government checks. Once benefits run out, the cost of getting a job goes down compared to remaining unemployed, so the “reserve wage” drops.

In addition to potentially accepting lower wages, those who cannot count on unemployment benefits may also be willing to accept more inconvenience. They might, for example, consider jobs in other geographic areas or in other fields. Those without unemployment checks may also be willing to accept more risk in order to earn income. Many recent college graduates, who are generally new to the workforce and therefore ineligible for unemployment benefits, turned to entrepreneurship as a way to make their own jobs when employers were not hiring.

Meanwhile, people who get paid to not work frequently continue to not work. If you pay people to do something, they’ll generally keep doing it. That’s why, at Palisades Hudson, we don’t pay people to stay home and be sick. Instead of paid sick days, we provide a reasonable allotment of personal days and vacation time, which can be used for any purpose ­ whether that’s resting when sick or taking advantage of good health and good weather to go hiking. If people run out of paid time off and then fall ill, we work with them to arrange for unpaid time off while they recuperate.

Social acceptance of unemployment also makes people less motivated to find new jobs. A study released by the World Bank last summer found that people whose peers are also unemployed focus less on their pursuit of work, leading to a situation in which, as the number of people who are unemployed increases, each unemployed person’s effort to get back to work declines. The study explains, “If others are unemployed, I will search less and extend my unemployment duration, in turn affecting others’ return to work.” By allowing for longer periods of unemployment, extended unemployment benefits can make entire groups of people less likely to return to work.

Some people argue that, consequences aside, unemployment insurance benefits are a human right. The United Nations’ Universal Declaration of Human Rights states in Article 25, “Everyone has the right to a standard of living adequate for the health and well-being of himself and of his family…and the right to security in the event of unemployment…or other lack of livelihood in circumstances beyond his control.” Yet this same document, in Article 23, defends “the right to work.” It does not say anything about the right not to work.

Long-term unemployment insurance, by promoting long-term unemployment, makes it harder for people to return to work when their benefits eventually do run out. While they’re not working, they miss out on opportunities to build new skills, foster networking connections and keep up with developments in their fields.

A report by the Pew Center found that, of people who had been unemployed and had then found work, those who spent the longest time between jobs were most likely to say the new job was worse than the previous one. This could simply be because people who have been unemployed the longest are more likely to have run out of benefits and are therefore more willing to compromise. But it could also be that people who have sat on the bench too long lose the ability to compete for the kinds of jobs that would be most satisfying for them.

Our society drew the line at 26 weeks. Amid spectacularly bad circumstances a few years ago, we nearly quadrupled that period. The crisis of 2008-2009 is well past. Even though unemployment will almost certainly still be high at the end of this year, it will be time to start getting the labor market back to normal. One of the first steps is to resume paying people to work, rather than not to work.


For more articles by Larry Elkin on financial, business, and other topics, view the Palisades Hudson newsletter, Sentinel, or subscribe to my daily opinion column, Current Commentary.

HOT: Moody's Warns on U.S. Debt

Moody's Investors Service has just released a warning on on U.S. government debt. The slow moving ratings agency said that there is a the growing likelihood that it could issue a negative outlook on the credit rating of the United States in the next two years.

The rating agency said the risk to the U.S.'s coveted AAA rating, while small, is rising and is seen likely to continue to rise in the next several years.

Rates are headed higher without this rating threat. There is no reason to own government debt at any level right now, federal, state or local. When you have a slow moving agency like Moody's warning, you know the problem is very serious.

How Paul Samuelson Really Got Rich

It's not common knowledge in the economics profession, but the anti-gold, Keynesian economist, Paul Samuelson, made a bundle by being long gold in the late 1970's, through a commodities trading firm, Commodity Corp., that he was affiliated with. (Keynes also a gold hater, made a fortune on gold stocks after he urged FDR to prop up the price of gold).

David Warsh writes about Samuelson's involvement with Commodity Corp (though he doesn't mention their gold positions, which he would unlikely to be aware of) My emphasis:
It turns out that the great MIT economist was influential in the creation of one of the earliest and most influential hedge funds. Launched in 1970, Commodities Corp. blazed a trail of extremely high returns throughout the 1970s and early ’80s, before disappearing in various pieces into Bermuda mailboxes and Goldman Sachs. Many of its star traders – Bruce Kovner of Caxton and Paul Tudor Jones, chief among them—formed successful hedge funds of their own. Samuelson thus had a ringside seat at the birth of an influential industry that is still only poorly understood.

About the same time, he invested a substantial amount in shares of Warren Buffet’s Berkshire Hathaway Inc. It was in 1970, too, that he won the Nobel prize in economics, the second to be awarded. Long famous for the fortune that his pioneering textbook earned him after 1948, it turns out that Samuelson may have made more money as an investor than as an author. He was both smarter and richer than is generally understood...

In 1965, Samuelson published a version of the efficient-markets hypothesis — a world in which all reliably predictable events are priced right, and only surprises would remain; there would be no easy pickings on Wall Street. About the same time, Eugene Fama published his own formulation, and the idea that stock prices were properly described as a “random walk” – that it was all but impossible to outperform the market — was on its way to becoming firmly established.


Not that Samuelson himself took the finding literally. He later explained, “Experience makes me think that a few folk do have an intuitive flair for making money by sensing patterns of momentum.” Others, he said, are good at “figuring out which fundamentals are fundamental and which new data are worth paying high costs to get.”...

Someone proposed an experiment to Samuelson – Mallaby doesn’t say who – and the idea of Commodities Corp. was born. As one of two original venture investors, Samuelson put up $125,000 – real money back then.

The key figure was F. Helmut Weymar, whose prize-winning thesis on predicting cocoa prices Samuelson had supervised a couple of years before, along with MIT finance professor Paul Cootner. “I thought random walk was bullshit,” Weymar told Mallaby for More Money Than God. “The whole idea that an individual can’t make serious money with a competitive edge over the rest of the market is wacko.”...

By the end of the 1970s, Mallaby writes, Commodities Corp had become a prodigious success, its capital grown to $30 million, its profits in 1980 $42 million after $13 million in bonuses.
And there you have it. That's the story with a lot of these guys. Their academic nonsense says one thing, but their real world activities are quite different. In academia, Samuelson wrote about the efficiencies of the market and was anti-gold. In the real world, he sought out traders that could find the inefficiencies in the markets, and he owned gold.

A well-known econometrician, who knows my decidedly anti-econometric views, trades gold and calls me regularly for my views on gold. I wonder where Krugman has his money?

Comparing Global Inflation.

A cool graphic from WSJ. There's an interactive version, here.

Click for larger view.

Yama Sakura!!

Several thousand American and Japanese troops simulated missile attacks, guerrilla warfare and a full-scale invasion of Japan as part of a major war games that began Thursday, reports the Army Times.

The exercises, called "Yama Sakura," involve about 1,500 U.S. troops and 4,500 Japanese military personnel. Yama Sakura, being held on the southwestern island of Kyushu, is the biggest annual joint maneuver held with Japan's army.

File Under: Nothing is Confirmed Until Officially Denied

European Central Bank President Jean-Claude Trichet said on Thursday during a panel discussion at the World Economic Forum in Davos. "There is no crisis of the euro currency. That's absolutely obvious."

Oh! The Problems for Davos Wives and Scheming Mistressess

Anya Schiffrin, the wife of Joseph Stiglitz, spills the beans:

Of Snubs and Men

The point about Davos is that it makes everyone feel wildly insecure. Billionaires and heads of state alike are all convinced that they have been given the worst hotel rooms, put on the least interesting panels and excluded from the most important events/most interesting private dinners. The genius of World Economic Founder Klaus Schwab is that he has been able to persuade hundreds of accomplished businessmen to pay thousands of dollars to attend an event which is largely based on mass humiliation and paranoia.

Wives feel sympathetic to their husbands and share their pain. But we have our own problems to cope with. After all, we are the on the bottom rung of the Davos ladder.

The most revealing sign of our lowly status is that we are forced to wear the ultimate badge of shame — the white name tag.

Here is how it works: everyone at Davos has to wear a name tag and these are color coded by status/occupation (speaker, organizer, journalist etc). Usually these name tags include some kind of affiliation, such as the company or organization you work for.

But wives’ name tags state only their name. This means there is nothing on it that could help a stranger strike up a conversation. If you don’t use your husband’s name then you are guaranteed virtual anonymity. Upon being introduced to someone new, the normal Davos gesture is not to look at the face of the person they are meeting but to look down at his/her name tag.

The wives’ name tag guarantees that the Davos man in question will instantly decide you are of no value and so he immediately looks over your shoulder for the next best opportunity, i.e. someone without a white name tag who is, by definition, more important than you. Many wives refuse to be Davos wives and the white name tag is the reason they most often cite for their decision to stay home.

I have often thought that the WEF should put something, anything, on the wives’ name tags just so as to give us a talking point. I wouldn’t mind wearing a tag that read “loves cooking” or “adores cats” (Not really. I hate ‘em.) Anything so that someone who actually wanted to talk me would know how to strike up a conversation.


People lose their heads in this hothouse atmosphere and behave in ways that they probably would never even consider in another setting. My own introduction to Davos’ competitiveness was years ago. The husband and I had just arrived from a night flight and a limo ride to our spartan but centrally-located hotel room. We dropped off our bags and staggered over to the Congress Centre to pick up our name tags. Winding through the little corridor on the way to the registration we ran into an old colleague of my husband. We stopped to say hello and were greeted with a gloating reply: “I see my book got a better review than yours did in the New York Review of Books this year.” (!).

Read the rest here.

Anya Schiffrin is the author of “Bad News,” and the wife of Nobel Prize Winner Joseph Stiglitz.

Dallas Cabbies Plan Super Bowl Boycott (Are the Evil Twins Pickens and Sunstein Causing the Problem?)

Dallas cab drivers, outraged by a city initiative that sends natural-gas-powered cabs to the front of the queue at Love Field airport, are organizing a boycott that would make it harder for visitors to get around North Texas for the game, reports WSJ.

Drivers say they sit for hours at the back of the line, according to WSJ. They say the promotion of cabs powered by compressed natural gas isn't just about clean air, but an effort to boost Texas's natural-gas industry. Otherwise, they ask, why didn't it include hybrid vehicles?

WSJ reports, cabbie Gebeyhu Tesma, waiting in line last week at Love Field's taxi depot in the late afternoon, said the boycott was necessary because he can't afford a natural-gas taxi; converting a gasoline-powered car can cost up to $14,000.

This sounds like a Cass Sunstein-type developed nudge of oligarch Boone Pickens' desire to manipulate government to get more of his natural gas sold.

They can't force cabbies to covert to naturak gas but they can create a Sunstein-type nudge to conversion by making it more difficult to fuel up with regular gas.

 Pickens's Clean Energy Fuels Corp. operates three natural-gas fueling stations.

Airport spokesman David MagaƱa told WSJ that the program reflects "the airport's longstanding commitment to environmental stewardship."

ISM Index Revised Upward

Bernanke's money printing that distorts the economy in favor of the capital goods sector seems to be doing the trick.

The Institute for Supply Management said its index of national factory activity was 58.5 last month, compared with the 57.0 reading it originally reported.

The index's employment component was also revised higher to 58.9 from 55.7.

Readings above 50 indicate expansion.

Of course, the next stop will be accelerating price inflation. What's Bennie going to do then?

Mag Editor Crashes $250,000 Bentley

While test driving a $250,000 Bentley, Katie Winick, a magazine editor at Worth , crashed the car after swerving to avoid a UPS truck.

Defending her actions, Winick claims those at the car company were "lovely," and that they "deal with this stuff all the time."

(ViaBusinessInsider)

Rand Paul Calls for 30% Cut in Federal Spending

Paul's proposal calls for a 23% cut in the legislative branch, elimination of the Government Printing Office, a 32% cut in the judicial branch, a 30% cut in agriculture programs, elimination of the National Institute for Food and Agriculture, a 20% reduction in forest service, a 54% cut at the Commerce Department, a 6.5% cut in military spending, an 83% cut in education funding, elimination of the Department of Energy, a 26% cut in health and human services, a 62% reduction at the Food and Drug Administration, a 46% in indian health services, a 28% reduction at the Center for Disease Control, a 37% cut at the National Institute of Health, a 43% cut at the Department of Homeland Security, a 40% cut at the TSA, the elimination of Housing and Urban Development, a 78% reduction for the Interior Department, a 42% reduction in the National Park Service, elimination of the Bureau of Indian Affairs, a 28% cut at the Department of Justice, a 2% cut at the Labor Department, a 71% cut at the State Department, a 49% cut at the Transportation Department, elimination of Amtrak subsidies, a 27% cut at the Corps of Engineers, a 29% cut at the Environmental Protection Agency, an 85% cut at the General Services Administration, a 25% cut at NASA, a 62% cut at the National Science Foundation, a 12.3% cut in the Office of Personnel Management ans a 22% cut in the Federal Communications Commission.

Paul has a great 37-page blow-by-blow of his proposal here (Pdf).

Upstart Crony Capitalist Sighting at Davos

NYT reporter Peter Lattman thumbs:
Davos moment: Upon exiting men's room, nearly bump right into Bill Clinton

Larry Summers on the Difference Between Harvard "A" Students and Harvard "C" Students

WSJ reports that on a panel at Davos, Summers, a former President of Harvard, told the audience that at Harvard, the A students tend to become professors and the C students become wealthy donors.

Is This Some Introspection at Davos?

A Forum-related lunch is scheduled today, called "Criminals Without Borders".