solarbird | Mar. 28th, 2009

Good afternoon. As is probably obvious, I've been really busy trying to figure out how to do recordings and really haven't been keeping up with the economic posts htis week. So this is a bit of a big amalgamation - a post on the latest bailout (ne "recovery") proposals, an assortment of social mood and political ramifications, some important statistics, and a few warning flags. So let's get to it, shall we?

Here, have a chart of 4Q2008 GDP, courtesy Iacono Research:

that's 6.3% annual decline, a revision for the worse, as, well, kind of expected. Also quietly not talked about is that last week's "lower" (really, noise amounts only) first-time unemployment claims also got revised up (so not lower anymore), and this week's non-revised was noise-level above that as well, at 652,000. Continuing claims are up to 5,560,000,000 (5.56 million), above forecasts.

Glenn Greenwald points to uncomfortable similarities between the US and both Russia and Argentina, relying on an article by the IMF's Desmond Lachman, who notes:

Much like the oligarchs did in Russia, a small group of traders and executives at onetime venerable institutions have brought the U.S. and global financial systems to their knees with their reckless risk-taking -- with other people's money -- for their personal gain....

The parallels between U.S. policymaking and what we see in emerging markets are clearest in how we've mishandled the banking crisis. We delude ourselves that our banks face liquidity problems, rather than deeper solvency problems, and we try to fix it all on the cheap just like any run-of-the-mill emerging market economy would try to do. And after years of lecturing Asian and Latin American leaders about the importance of consistency and transparency in sorting out financial crises, we fail on both counts...

Similar commentary is made by Simon Johnson at The Atlantic, in an article called "The Quiet Coup." Mr. Lachman is as concerned as I am about the ever-increasing US debt, asking, "Before running up further outsized budget deficits, should we not heed the markets that now see a 10 percent probability that the U.S. government will default on its sovereign debt in the next five years? And should we not be paying close attention to the Chinese central bank governor's musings that he does not feel comfortable with the $1 trillion of U.S. government debt that the Chinese central bank already owns, let alone adding to those holdings?"

By example of this sort of regulatory capture and the inevitable abuses which result, see Naked Capitalism's commentary on the "gaming" of TARP and similar programmes, where the banks being bailed out of their 'toxic' assets are using those bailout funds to buy more of these same sorts of toxic assets, knowing they'll be able to pull more strings for yet more taxpayer money to buy out these, as well. This is called "looting."

Barrons has some positive commentary on the latest bailout routine, the Public-Private Investment Programme (PPIP). It's around US$1T. Barrons thinks that it could work. Jeffrey Sachs is much less sanguine and more in-tune with the regulatory-capture reality, noting that 85.7% of the risk is still with taxpayers, and expecting yet more inflated values to be paid for securities covered. (He calls it a massive raid of the FDIC for bank shareholders, estimating the taxpayer-to-bank-shareholder value around $276B.) Clusterstock outlines five easy ways to game this programme to loot the taxpayer.

I learn to be bear side of this because all of these programmes are, fundamentally, about paying more for assets than the market is willing to pay on its own, and all of these programmes are based on the idea that banks are not insolvent, but are actually just short of liquid cash. We know this isn't true, so I tend to hang with the bears until I have a very good data-based reason to think otherwise. (Remember: taxpayers have been sold every bailout routine so far as something that'd probably make a profit. And that the war in Iraq was going to cost no more than $80B. Aheh.)

Dr. Roubini thinks that we're just playing games to avoid inevitable bank collapse and nationalisation. (Video interview here, as well.) Incidentally, he doesn't think much of the Russo-Chinese efforts towards a new reserve currency, but Brad Setzer is taking the proposal a good bit more seriously. Banks led the stock markets down on Friday, after JPMorgan Chase & Co CEO Jamie Dimon said that while January and February had been somewhat better, March... had not. (Also, retail trading has jumped the first couple of weeks of March, with the rally, indicating capitulation is not yet in play.)

Similarly, John Robb at Global Guerrillas points to this report, "Manning the Barricades," from the Economist Intelligence Unit, analysing risks of unrest in various countries around the world. Their central forecast (60% probability) is that global stimulus packages will stabilise financial systems and economic growth will return sometime in 2010, but they estimate a sustained depression at 30% likelihood and a 10% probability of a complete dollar collapse. Canada's instability rating is the third best in the world; the US instability rating is rated tied with those of France and Iceland; you may enjoy the details, here.

In that context, think of this letter to Wall Street on Something Awful. Note that certain former AIG executives are not helping themselves, ranting on Livejournal about deserving that money. (No lie. Well, the post got changed to friends-only, but Clusterstock has the text.) Business Insider has another letter which claims that "the entire US system is committing suicide," only in all caps.

See also this column about American anger and spikes in gun sales. Consider also this post by Mish pointing to this article about Flint, Michigan trying to remove remaining individuals from otherwise-abandoned neighbourhoods, so they can abandon city services in those areas. He also discusses similar efforts in other cities, such as Youngstown, Ohio. You're seeing more anecdotal reports of spontaneous frustration violence. And popular home-budget advise columnist Suze Orman says building cash savings is more important than paying off credit card debt:

So here is the problem. If you do not have a stash of cash in an emergency fund and you have been using all your extra money to pay down your credit card debt and they keep closing your cards down—what are you going to live on if you lose your job? Chances are you may not have any available credit, or too little credit, to use in the event you are laid off. Nor will you be able to get a new card if you are unemployed.

That’s why I am telling you to pay just the minimum required on your card each month and then use every extra penny you have to build up your emergency savings fund. You want to have a fund that can cover your living expenses for up to eight months.

She's telling people to bunker. It will be interesting to see what effect this has, if any. On the other hand, US consumer sentiment rose a bit in March; while still extremely low, it does break the decline rate. Still, popular opinion still expects a grim 2009.

GMInsideNews is reporting that there will be a bankruptcy deadline set on Monday for both GM and Chrysler. Chrysler Canada has been unable to reach agreement with its union, endangering any future aid from Ottawa.

IBM is shifting service units to India; that'll mean laying off about 5,000.

The Baltic Dry Index's rebound has ended, and it seems to be headed rather sharply back down again. It's worse in the Pacific, with Chinese shippers saying April volumes are simply through the floor, and they don't know whether shippers are just betting on lower rates or whether people simply aren't shipping much of anything at all.

Japan has severe export issues, with exports down 49%, and they have even larger public debt by percentage than the US. It's a problem. They're also seeing outright price deflation. Retail sales domestically fell 5.8%. China wants the US to "ensure security" of Chinese "assets and investments in the U.S.".

Eurozone industrial orders are down 34% year-to-year in January, a record. It's quite ugly. George Soros thinks Britain may have to get bailed out by the IMF, and that this coming G20 meeting is the "last chance" to stave off a global depression.

Questions are appearing wondering whether Goldman Sachs "goosed" the last leg of 2007's oil price run-up, interfering in the market for the leg up from $120/barrel to $148/barrel. The motive: to bankrupt a Texas pipeline company which had made bets on falling oil prices, force it into bankruptcy, and pick up the pieces for nickels, to the tune of about US$1.5B in profit. It's all circumstantial, but. Meanwhile, oil prices continue to rise as industrial production doesn't, with various people worrying more about a new oil spike. Meanwhile, solar-panel prices have collapsed, and various companies are announcing large-scale layoffs.

The US dollar index made a big move up on Friday. I have no idea why. Only one bank was siezed by the FDIC on Friday; Omni National of Atlanta.

Oh, and if you're considering starting your own business, be aware: here's an article about Google Checkout and their hair-trigger false-positive-for-fraud account shutdowns, and how you have no recourse and don't get any of your money. The complaining party here hasn't sued yet, but here's an account from someone who did, and won - tho' in the latter case, it involved Google AdSense, not Google Checkout. Be careful.

So, there you are. I hope everyone has a relaxing weekend and wakes up ready and refreshed on Monday morning; good luck.