Paulson Adviser Warns of Shifting Bubble

Former UCLA Anderson Forecast economist Chris Thornberg, founder of Beacon Economics and who sits on the advisory board of the John Paulson hedge funds, has come out with a forecast that is significantly in line with our own forecasts here at EPJ.

WSJ provides details of a new Beacon Economics report:

The firm’s stance is that the $787 billion federal stimulus package and the Federal Reserve’s near-zero interest rates have propped up the economy but will prove unsustainable and are actually exacerbating some of the imbalances that led to the recession. “The nation seems to be trading in its private bubble for a public one, swapping one set of unsustainable economic drivers for another,” the report said...

The gist is this: The stimulus and other such measures have prevented a shedding of debts that needs to happen before the economy can return to sustainable growth. The saving rate has grown from its record lows, but has been propped up by tax cuts that have exacerbated the mountain of debt at all levels of government. Property values have fallen, but accounting changes have prevented banks from acknowledging a lot of underwater loans. Even the roaring stock market is artificial, in the firm’s view.

“The rally in the equity markets seems to be occurring despite the fact that overall asset prices still seem too high given our long-run potential for growth. And the bounce in the asset markets overlooks the fact that overall the national deleveraging that needs to occur to shed off record levels of debt has yet to really get underway,” the report said.

This is pretty much in lockstep with our analysis that the "recovery" has been a manipulated recovery, and given the Fed's near zero money growth (M2), the capital structure as it currently exists can not be supporetd by the current level of savings.

As for the equity market strength, we concur that it appears to be an anomaly, and do not believe it can be sustained.

Beacon sees to possibilities from here:

“The best-case scenario is that the Federal Reserve and the Obama administration manage to draw down the public bubble slowly, a possibility that private bubbles typically don’t share,” the report says.

The downside? “The worst-case scenario is that the bubble pops rapidly, putting the economy squarely back into another recession — the double dip."

In our view, it's down to the latter. Soft landings are always tough, and as far as EPJ is concerned we are much too far down the road for anything other than a second dip--led on the downside by the stock market.

Paulson Hedge Fund Buys Into Mortgage Securities

John Paulson, the hedge fund manager (not to be confused with Treasury Secretary Henry Paulson), who was called before Congress last week to discuss the huge profits ($3.7 billion) he made by foreseeing the collapse of the subprime mortgage market and shortng mortgage backed securities, has started to buy securities backed by residential mortgages.

US residential mortgage securities fell in value last week after Hank Paulson, Treasury secretary, said that the federal government had decided against buying toxic assets as part of its $700bn troubled asset relief program.

Paulson has told his investors that he started buying troubled mortgage-backed securities at the end of last week, hoping to capitalise on price falls that followed the Treasury announcement,according to FT.

ALERT: Plunge Protection Team Press Briefing Tuesday Morning

The following is a Treasury Press Release on tomorrow's press biefing:

Secretary Henry M. Paulson, Jr., Federal Reserve Chairman Ben Bernanke, and FDIC Chairman Sheila Bair will be joined by the other members of the President's Working Group on Financial Markets to make statements in the Treasury Department Cash Room at 8:30 a.m. (EDT) on October 14, 2008 on a series of comprehensive actions to strengthen public confidence in our financial institutions and restore functioning of our credit markets. Following the on-camera statement Treasury officials will conduct an off-camera, background briefing in the same room.

Who
Treasury Secretary Henry M. Paulson, Jr.
Federal Reserve Chairman Ben Bernanke
FDIC Chairman Sheila C. Bair
SEC Chairman Christopher Cox
CFTC Chairman Walter Lukken
OCC Comptroller John Dugan
OTS Director John M. Reich

McCain Would Fire SEC Chair Cox

Republican presidential candidate John McCain, campaigning in Iowa Thursday, is expected to call for the firing of Securities and Exchange Commission (SEC) Chairman Chris Cox.

In his prepared remarks, Sen. McCain (Ariz.), without naming Cox, said the chairman has “betrayed the public’s trust.”

“If I were president today, I would fire him,” McCain will say, according to his prepared remarks.

This is swatting a gnat while a tiger and lion are headed towards you. McCain doesn't have a clue.

This crisis is a Paulson and his lapdog, Bernanke, operation.

Except for his nonsense about short-sellers, Cox has been incompetently benign during this entire crisis. Incompetently benign in a bureaucrat is not a bad thing.

-Robert Wenzel

Housing Short-Seller Will Start To Buy Bank Stocks

Randal Quarles has competition.

John Paulson, the money manager whose short-sales against the U.S. housing market helped him earn an estimated $3.7 billion last year, is now seeking to profit from Wall Street's search for capital to offset mortgage writedowns, according to Bloomberg.

Paulson plans to open a hedge fund by December that will provide capital to the world's biggest banks and brokers, according to two people with knowledge of the matter. His firm has hired employees this year to research securities firms such as Citigroup Inc. for long-term investment positions.

The New York-based firm's credit funds rose as much as sixfold last year, in large part as a result of shorting subprime home loan securities.