Shocked and Saddened

Oh so very shocked and so deeply deeply saddened. Barack Obama was clearly not on his A game. But can you blame him? After spending what must have felt like an eternity with the interminable Global Warming windbag drone, Al Gore, being hounded by the jackal media over "Governor Blagojevich" might have felt a welcomed relief. But he forgot his "No soap radio " punchline as he and David Axelrod failed to coordinate answers beforehand. He blew his first shot at denial.

Stupidly, Obama let himself be first out of the box with a mumble stumble "shocked and saddened" response YouTube - Obama Responds To Blagojevich Arrest. Too many "ahs" and "ah I, we, ah" for my taste. But he was probably running through in his mind all the times he had conversations with this dip of a Governor and was trying to figure out how he could get screwed. Even if he is innocent. But in politics, who is truly "innocent?" You know with absolute certainty a politician is lying when they tell you how "saddened" they are when one of their moron colleagues gets caught and threatens the good deal they all have. Immensely angry, very on guard, perhaps even fearful, but saddened? If Blagojevitch were a "captain" in the mob he would have been sleeping with the fishes by now. How much bigger of a jackass can you be than to offer the Obama Senate seat directly in exchange for cash in a bag?

Even though the Senate seat is of course for sale. What the hell in politics is not for sale? When the media and the politicians start with this shocked and saddened high dungeon crap, you know we are in DEFCON1 cover up mode. But this scandal has spectacular potential. The prosecutor Fitzgerald is the guy who decided he was going to get Cheney's chief of staff and did. This is considerably bigger than that. Its not that he was selling the damn seat that is the scandal, its the stupidity with which he was doing it and the gigantic Pandora's Box it can open. The Illinois Dems are truly wondering how they put themselves in the situation of potentially being taken down by this guy. This is as bad as Sammy "The Bull" Gravano getting "turned".

You know this one is going to be good because it has secret codes. I was listening to my car radio earlier and heard some guy say how "shocked and saddened" he was. It wasn't Obama's voice so I instantly knew whoever it was had just been implicated in the "Blagojevitch" case. Boy, am I clever. It turns out it was secret code "Senator #5", Congressman Jesse Jackson Jr. Apparently, as the press puts it, his "emissaries" offered $1 million for the seat. Jackson strongly and assertively said something like "I never authorized" something or other. Politicians really must hate Bill Clinton for giving their secret "pol-speak decoder" away as he described the complex etymology of the word "is". When I read Jackson Jr's almost comprehensible statement, I envisioned silver tongued Illuminati constructing infinite meaning word loops perfect for all occasions. "Oh, children of the night, what sweet music they make!"

So much shock and so much sadness and yet so little time to express it. But I too am shocked and saddened. I am shocked and saddened that Caroline Kennedy can make a call and try to worm her way into the Hillary Clinton Senate seat. I am sure she is far better trained in the rules of "this thing of ours" than that blithering idiot "Blago", but do you really think there is no "trading going on"? I am also truly shocked and saddened that the insufferable Bloomberg can decide, Putin style, he is going to be mayor for a third term, even though there are term limits. I am beyond shock and sadness that political apparatchiks like Jim Johnson and Franklin Raines can get 5 year $100 million rides at Fannie Mae. I feel truly saddened and shocked when I recall that the roommate of Chairman of the House Financial Services Committee, Barney Frank, got caught running a "bisexual sex ring" out of their apartment. When I think of the recent 3 Governors of Connecticut, New York and New Jersey all getting blown out of office for one thing or another, I am very much shocked and very much saddened.

Shock and sadness does not begin to describe my feelings when William J Clinton had to give up his Middle East Dharma Bum money raising operation in exchange for Hillary's Secretary of State seat. He has raised $500 million for his "Library" and another $100 million in speaking fees in the last 10 years, much from the Middle East. But if it is so above board, why can't he do it anymore with Hillary as Secretary of State? This shocks and saddens me for both of them. When I contemplate Clinton's pardon of Marc Rich in exchange for $1 million, it also shocks and saddens me.

Many things shock and sadden me. Like the $4 trillion dollars we collectively give to this group of freakish incompetent hyenas in the form of taxes. Does it really shock you that occasionally one of them slips up and lets the cat out of the bag? These are the people who will be dolling out the American people's money to "shovel ready" projects, "green technologies", a hodge podge of unions, and most importantly to themselves in the form of ludicrously high pensions, lifetime health care, lifetime speaking gigs, every conceivable back door deal, and all that jazz.

Shocked and saddened doesn't begin to describe my feelings. How about you?

The End of Financial Armageddon?

There is little or no "science" in what is about to be discussed, but it will be said anyway. It is beginning to seem that despite the best efforts of all, we may really have hit a market bottom. This is all impressionistic but here goes.

UNEMPLOYMENT AND THE STOCK MARKET

The 4 largest spikes in unemployment since 1960 happened in 1975, 1982, 1992, and 2002. In each instance, the stock market "bottomed out" before unemployment "peaked". By the end of October 1974, the S&P 500 completed an almost 50% decline during the prior 18 months (what is with October and market bottoms?). Over the next 2 years the market was up 70%. Unemployment had increased from 4.6% to 6% in the 12 months ending in October. Although the stock market "bottomed" in October, unemployment continued to rise to 9% by July of 1975.

In August, 1982 the market reached its low point after a 24% decline during a 2 year bear market. The market was up 65% over the next 14 months. Unemployment increased more than in 1974 before the market turned around. Unemployment rose from 5.6% in May of 1979 to 9.8% in August 1982 before peaking at 10.8% in December. In this case the market reached its low 5 months before unemployment peaked while in 1974 there was a 9 month lag.

The market had declined 15% between June and October of 1990 while unemployment had risen from 5.2% to 5.9% during the same period. The market rose 35% over the next 14 months while unemployment kept rising until it peaked at 7.8% in July of 1992. Finally, in October of 2002 the stock market reached a low after declining about 48% during the prior 26 months. The market rose about 35% during the next 14 months. Unemployment during that same 26 month period increased from 3.9% to 5.7% before reaching its high of 6.3% in July of 2003.

The point here is the stock market almost always reaches its bottom before unemployment reaches its top. The reason is likely that the increase in the stock market, and the resulting economic benefits, helps cause employment to rise, but with a lagged effect. That is, unemployment peaks soon after the stock market starts rising from its bottom. But what causes the stock market to rise? Who knows? But I will quote Keynes on this one to reflect what I think. "Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits---a spontaneous urge to action rather than inaction---and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities".

Even if my "analysis" above reflects history accurately, and even if it suggests correctly some causation between a rising stock market and employment, it does not mean we have reached a bottom in the stock market. The bottom could be 50% below where we are now or more and still bottom out before unemployment peaks. My point, however, is that economists and other analysts can be right about unemployment rising from here, but that does not mean the stock market has to fall further if they are correct.

WELCOME TO THE HOTEL CALIFORNIA

"........And she said we are all just prisoners here, of our own device....... Last thing I remember, I was running for the door. I had to find the passage back to the place I was before. Relax, said the night man, you are programmed to receive. You can check out any time you like, but you can never leave!"--Hotel California

Little did mortgage investors know that the "night man" was going to be in charge of their investments. The "Hotel California" of today's crisis is the California real estate market. The state represents about 25-35% of all foreclosures. Add Florida, Phoenix and Vegas and the entire incremental increase relative to the normal foreclosure rate is almost entirely attributable to this quartet. I have written often about how the global mortgage backed securities market is just an absurdly complex ownership structure of California, Florida, Arizona and Nevada homes. The "night man" was the Wall Street packager selling this product which apparently no one can now sell. It is not clear whether California "caused" the crisis or whether it was the first victim of the crisis. I believe the former is true. There were lending practices that encouraged multiple home purchases by unqualified persons in a true Ponzi home flipping scheme spontaneously generated by buyers. There is no need to go over this again. One can review my blog, Where is Cool Hand Luke When You Need Him? for more detail plus the many articles written about this less complex than it appears phenomenon.

My point is the peak California market, and subsequent crash, "predicted" (I believe caused) the global crisis. The current high sales activity in these markets may now be "predicting" (and therefore causing) the end of the crisis as well. Of course, all credit seems to be shunned now by the market. One of the largest hedge funds, Citadel, is down 40-50% this year due largely to leveraging corporate credit, not mortgages. But corporate credit is arguably the "innocent bystander" in this debacle. Most defaults have happened in the "mortgage backed securities" market, not in the corporate market. Then, beyond that, fear of further price declines forced prices down for good mortgages. This naturally had a spill over effect regarding risk taking in the corporate market. But this was not really justified by concurrent fundamentals in the corporate market. In the 3rd Quarter, for example, corporate profits were up $47 billion when we exclude the Banks and Investment firms. That is remarkable. The "night man" of Wall Street also put corporate bonds in "corporate bond/loan backed securities" structures. The experience investors had with "California mortgages" soured them on all asset backed structures so corporate credit has declined as well. Now the liquidity crisis is full blown and seemingly the world just wants to park their capital in US Treasuries.

But that is yesterday's news. Today's news is that housing sales are high in California, Vegas and Phoenix. They are still sluggish but improved in Florida. The market is not frozen in place as it is in the securities markets. The power and efficiency of the foreclosure process is helping create liquidity. Banks who have foreclosed are selling properties. Buyers are getting great deals. Volumes are up 100-250 percent in some cities and at all time highs in Bakersfield, Sacramento, Stockton, and Las Vegas. Obviously, this is occurring at low prices. Prices are down literally 60-70 percent. So any asset backed security with these houses in them will experience large losses and in many cases complete wipe outs. But again, this has already happened. The market is not frozen in housing. It is frozen in securities that is backed by housing. But this obviously has to give or so it seems. Letting markets resolve prices, even if it means that sellers lose (in this case) and buyers win, is the best way to go in housing.It is ridiculous for the Government to engage in activities to prop up the price of houses and to prevent foreclosures. The foreclosure process is the cure not the disease. This should be apparent to any sentient person. Would we want the Government to prop up the price of gasoline? They already prop up the price of ethanol, which they make us buy. Would we want the Government to prop up the price of cars, food, clothes etc? Why should the Government be supporting sellers over buyers? This is ridiculous. Fortunately, our Government so far just proposes an idea a day to create confusion, but has done much less by way of implementation. Lets hope it stays that way. By the way, a foreclosed individual is not being tossed out on the street. They can rent for a while at pretty good rental rates. Ownership is not a "right". To treat it like one makes little sense.

ACCELERATING FEAR AND $8.5 TRILLION

It can always get worse than it is. This is a truism. Historically, however, when extremely negative scenarios are built into everyone's forecast it can be a sign the worst is about to be behind us. This is true because all actions have already been taken to reflect that view. All selling has occurred to the maximum, all economic interpretations are exaggerated for the worst effect, and as bad as things have been all forecasts are for a continuation of the bad and even an acceleration of such. It can never be so bad, that we will not see predictions that it can only get worse. This seems to be built into how we process information.

The first sign we may be "in extremis" in economic interpretation was last week's headline on Bloomberg News that the Government bailout had reached $7.7 trillion. This came out of nowhere. This number, according to the The Big Picture economics blog, is actually $8.5 trillion. Lets face it, these numbers no longer are capable of providing any information. The normal person, which includes just about everyone, can not possibly see such a number and have any understanding. I know I don't. It took me a few hours to get a handle on what it could mean. How much is "$8.5 trillion"? 8.5 trillion what?

First of all, the number is a kitchen sink. That is, they have included everything in there including the kitchen sink. They are also adding up numbers which do not represent the same dollar value or risk. It would be as if someone found a thousand copper pennies and 50 silver dollars but the headlines read, "1050 coins found". It is not necessary to get into too great a detail here. But there is no $8.5 trillion anything, at least in any common sense meaning of the term. The number is derived by summing things like; 1) Congressional stimulus spending; 2) already existing FDIC insurance; and 3) potential but currently non-existent commercial paper purchases by the Fed, among other things. This is like adding apples, screwdrivers and giraffes together. The Big Picture blog spells it out pretty clearly for those interested. My point is that when stories, like the one Bloomberg news printed, gets accepted as having meaning, we are probably "in extremis" regarding economic forecasting and interpretation.

OIL AND DIVERGENCE

Oil spiked to $147 a barrel last July. No matter how much and how fast it rose, all forecasts were that it was going to rise faster. Investors had been buying into the absurd notion that commodities are an "asset class" that should be owned long term as an investment. A word of caution. When someone tells you about a new "asset class", run.
When prices move a great amount, every one is an expert as to why it occurred, after the fact of course. In the case of oil, it was "China", "we are running out", "global reserves are overstated", "commodity speculators", etc. Goldman Sachs was forecasting $200 a barrel. Now, only 4 months later, oil is $42 and we have the same forecasts going on in reverse. The economy is so bad, that demand is collapsing. Yes, oil has dropped 70% but it will drop another 50% and fast. Merrill Lynch is forecasting $25 a barrel and Gulf Oil is forecasting $20 a barrel. As low as it has gone and as fast as it has happened, it will continue to decline at even a faster rate. Oil forecasts are just a reflection of the current panic.

One interesting phenomenon we are now seeing is a divergence between oil prices and stock prices. Both have had significant declines and have represented the fear of a significant recession. But equity investors, as implied in the opening section, may very well be having second thoughts about how bad it can get. In my Law of the Bad Premise---Second Hand News blog I have pointed to a few equity strategists and investors who are calling the bottom. One has to hunt the news to find them, but a few are there. Hopefully, we will look back at the Tim Geithner appointment as new Treasury Secretary as the turning point in the equity market. One of the things I really like about Giethner so far is he has said absolutely nothing. What a welcome relief from the barking dogs at Treasury and the Fed. The S&P 500 was at about 750 2 Fridays ago when his appointment was announced during the day. The market is up 17% since then. Oil, on the other hand is down 17% over the same time frame. Sometimes in markets divergences such as this indicate a change in opinion is occurring.

It is hard not to see in the oil forecasts the same herd instinct we saw when it was spiking. Nor should we ignore the considerable boost to the consumer such a price decline will have. Each dollar decline in oil represents a $7 billion dollar annual savings to the American consumer. Relative to $147 a barrel (going to $200!), this is over $700 billion in real dollar savings per year (not the screwdriver and giraffe number like the $8.5 trillion). Just as the high prices of oil (and California real estate) "predicted" the recession, so might the lower price of oil and liquid California real estate "predict" the near end of the recession.

ECONOMY IS BAD, BUT HOW BAD?

24/7 we hear all bad news all the time. Much of it is repetition and ignorance. But we are in an economic downturn. We are experiencing a meaningful absence of liquidity in the markets. I am far from suggesting otherwise. Unemployment is likely to go up. But even here we are prone to panic. We forecast things which are simply not knowable. Even the level headed Greg Mankiw appeared in panic mode on a television interview last week. He basically is predicting unemployment in the 10-12% range. He may be right. But like the oil forecasters predicting $200 oil before it reached $150, Mankiw seems to be jumping the gun a bit.

As the Fed pours money into the system, nothing happens. "Velocity" of money has dropped. Investors either want to hold cash or Treasuries. If this really does continue, it will get worse. But there may be good reasons why investors are now not willing to be less risk adverse. The most obvious reason of all to wait is the new administration will be in office in 6 weeks. Why take any risk? If Obama were a known entity, perhaps this would not be the case. Obama really is the ultimate wild card and every investor knows that. He has shown no consistency in his views at all, so no one knows what to really believe. Of course, all investors prefer what they have seen rather than left wing consistency. Still, we do not know. The current administration is irrelevant, with the exception of Bernanke. Why they even say anything is beyond me, as they will happily be gone soon.
The markets really do need to get a better understanding of what the new policies will be. When that happens, assuming he does not insist on something ridiculous (higher taxes, CO2 emissions cap and trade, trade barriers, etc.) I am guessing the Keynesian animal spirits thing kicks in. We will see.