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.

The Hollow Man

(originally written July 27th, 2008 but not "published")

Not Hollow Men but Hollow Man. The former of course is T.S. Eliot's famous poem which "can be understood as a poem commenting upon the emptiness and futility of war and how war destroys those who have to fight in it. It can also be read as a poem that discusses lives without meaning, an interplay between nihilism and existentialism". Hollow Man is the 2000 science fiction movie adaptation of H.G Well's Invisible Man written in 1897. The Hollow Man or the ""Invisible Man" of the title is Griffen, a scientist who theorizes that if a person's refractive index is changed to exactly that of air and his body does not absorb or reflect light, then he will be invisible." A great believer in science as a vehicle for "change", Griffen successfully carries out this procedure on himself. But he cannot become visible again, and becomes mentally unstable as a result. In other words, he has lost himself in the most literal of all possible ways while becoming invisible to others. Griffen became an anti-social pariah in response. The hopes generated by the millennial potential advances of science turn dark in the hands of "Griffen".
Obama, a candidate for the president of the United States (not the World, Europe, or the UN), is losing himself in the most political and philosophical of ways. His Berlin speech raised more questions than it answered about his substantive values. He continues to generate confusing "tacking to the center" images, while also doubling down on his messianic rhetoric. He seems trapped by an ever increasing requirement and desire to appear as a "great" world leader of "change". He positions himself as the human embodiment of a unique but undefined "invisible" and crucial turning point in history. One senses a disappointment he cannot run for world president. In Europe (with 72% popularity), his self proclaimed case for greatness in the Berlin speech in part was that "he does not look like other previous candidates" and that he is a "citizen" of the world. These are bizarre statements.

This cannot end well. The Berlin spectacle and speech were prima facie evidence he has too large an appetite for glory; in particular global glory, than can be good for the US body politic. Griffen was seduced by science; our Hollow Man is being seduced by a hollow "historical greatness" with no substance other than the idea of greatness itself.
Obama has specialized in the most airy of messianic, vague and weired generalities ("we are the ones we have been waiting for"). He has done this to hide some of his more traditional left wing radical positions in order to appear as some "new" "post-something" transcendent politician. But since he has earned the nomination, his views on many issues have been careening wildly back and forth, particularly in foreign policy. This is called tacking to the center by the incompetent Obama supporting post-modern media, which sees only the contest itself as having meaning. At times his campaign has looked like the political equivalent of I Speak English, I learn it from a book, in it's ridiculous cookbook obviousness. The best way for McCain to win, in my opinion, is to attack his opponent non-stop on every substantive issue. Every contradiction between what is said by Obama and what he may have previously said and done has to be constantly repeated. He has not done enough of this at all. Johnny Mac's conceit has primarily been his "reach across the isle" personna. Obama's main thesis, supported by a compliant media, is his own "specialness". If McCain were to follow the prescriptions above, he would be ahead in this race.

There is a core tendency for America's 2 main political parties to rhetorically and substantively differ from each other in critical ways. Not surprisingly, however, historically they have rhetorically differed more than they have substantively. This is clearly true by any objective analysis of the policies of the 2 parties for the last 60 years. This is probably a good thing. The more similar the parties are, even as they think they are different, the more stable the politics and the system are likely to be. But Obama is a wild card. Some of his unscripted and even scripted statements are off the wall. He acts like he is committed to really be different regardless of what it takes.

This is all by way of introduction and putting in context the message of this essay. I am going to "liveblog" (well, really "youtube blog") Obama's Berlin speech and comment on the substance and spectacle as I watch it. What is disturbing to me about Obama, very disturbing actually, is that a strong case can easily be made that he is the most "radical and populist" of any politician who has been a candidate for President since William Jennings Bryan.
This includes domestic tax and economic policies, an "eat your peas now" imposing social agenda on "good works" and "sacrifice", a cult of personality, and worst of all the desire to pander to populist opinion even internationally at the expense of America's self interest. All candidates get inflated by the act of being watched by millions daily. This provides the adrenalin rush which enables them to work 18/7 (even they sleep). All presidential politicians at some point begin deluding themselves or at least try to delude others into believing, that their's is the most important campaign ever. It just comes with the territory. But there should be limits.

Bold and Fresh

POLITICAL THEATER

Barack Obama has apparently set a record for the number of press conferences held by a president in waiting---Obama beats record for press conferences.... This is the kind of information that passes for news today. This is a story by the conservative newspaper the Washington Times no less. The media is just beginning to wrap its arms around the idea that Obama may be the empty vessel which he said he was in one of his autobiographies. We have no idea what he really thinks or believes. The Left still is hanging onto his promises made during the primary season so many moons ago. And who would have thought the Right would start to breathe a sigh of relief for the return of the Clinton Administration?

I realize it is political theater, but the cliche driven oratory of Obama is really grating. So much about Obama's delivery and tone is designed to emphasize the specialness of his place in history. At his latest news conference he announced the formation of a new something or other called the Economic Recovery Advisory Board. He says he needed this board to seek advice from outside the Government. Normally we would call those people lobbyists. But at this "defining moment in history" the "old way" of thinking just won't do. We need "fresh" ways of thinking and "bold" new ideas. It sounds like what this country needs is a great new laundry detergent.

THE DECADE OF GREED

So to put forth these bold new ideas he announces that 81 year old Paul Volcker will head this committee. I guess we are starting to run out of Clinton appointees. Obama is now reaching back to name a Carter appointee to drive forward these bold and fresh new ways of thinking. Volcker is properly credited with helping stem the massive inflationary tide of the 70s. He did this by radically raising interest rates which did push the nation into a recession. But these anti-inflationary tactics did stop inflation and helped stage the economic recovery and record economic growth of the 80s. Of course, since a Republican was president during the 80s, it was not known for being the decade of growth but the "Decade of Greed" and the "Big Lie" (Decade of Greed). But we already know that.

So Obama seeks fresh and bold new ideas and reprises one of the architects of the Decade of Greed. But I think bold and fresh ideas are the last thing we need right now. How about some basic economics 101 and some old tried and true, dreary and boring ideas? Of course in politics, just breathing normally can be heralded as bold and fresh, so perhaps I shouldn't take the oratory so literally. Not to get all nostalgic and so yesterday, but that is one of the things I like about Sarah Palin (or "Sarah the Turkey Impaler"). At least she actually tries to say what she means.

What passes for political genius, at least when a favored Democrat is in charge, is when it is really difficult to figure out what policies a candidate or president elect is actually in favor of. The Obama supporting media seem awestruck over his every move. First, he is like the baby in the manger (Time Magazine), then Lincoln (Newsweek), then FDR (Time again). How more absurd can media blindness get than when Obama chooses to keep Bush's Secretary of Defense, promote a Bush appointee for Secretary of Treasury and there is not any recognition of the political ridiculousness of it all? Then to top it off we get Hillary. It is as if he is pulling every one's chain. But the media supporters just see a Lincolnesque Team of Rivals. So much for the "failed policies of the Bush administration". Well, maybe this is "bold and fresh" after all.

THE PAULSON CONFUSION

My belief is that Bush/Paulson/Bernanke are trying to do too much to "fix" the current economic problems. Obama is also giving every sign that he wants to significantly increase Governmnet's involvement. The first problem is trying to understand what the current policy of the Government actually is. I cannot determine it. In an unbelievable admission of historic proportions, Henry Paulson told Congress that by the time it had passed the original $700 billion "bailout" bill (now ridiculously known as TARP) he already had changed his mind on what to do. Oddly, the Government has not yet done all that much, at least relative to what they are threatening. The most significant thing that Bush and Obama have done is tell us what they are going to do.

Meanwhile, as they speak, the equity markets provides feedback by going down. The credit markets provide feedback by not lending. Investors are obviously confused about Government's intentions. When the Government has acted it has been very intrusive. Paulson forced banks to sell the Government equity even if they did not want to. When Wells Fargo and Citigroup were competing over the purchase of Wachovia the Government was almost forcing Wells Fargo to take its guarantees, which they rejected. This has to be an unprecedented intrusion.

Currently, we have a credit crisis, although if short term interest rates are any indication, it is not as severe as it was 1 month ago. A credit crisis is just a confusing term which means that banks either cannot or will not engage in lending at a rate that can sustain economic growth. It does not mean, as some headlines would have you believe, that there is no lending happening. There is just not enough of it to achieve growth. It also means that other lenders, such as State and Corporate Pension Funds, Mutual Funds, and Insurance companies will also not lend or invest money long term at levels required to fund growth. Individuals (all these institutions of course just invest the savings of individuals) who manage their own money are also conservative.

The reason this is happening at one level is pretty straight forward. Significant losses were taken in the real estate market and then the stock market. It is human nature that caution will follow a period where such losses are taken. This always happens toward the end of business cycles. This time, however, the pull back in risk taking is more severe than usual. From what I can tell, no one seems to understand why this is the case. Nor does there seem to be any inherent reason why this should be the case.

OBJECTIVE VERSUS SUBJECTIVE

But if everyone "subjectively" believes that economic activity will be more risky than usual, thus leading to less lending and investing, that belief alone can become "self fulfilling". This does not mean there cannot be "objective" reasons for concerns that justify such fear of lending and investing. What if we discovered that everything that was manufactured in the last 5 years was made of some mysterious disappearing material and just disintegrated over night? That would be an extreme example of an "objective" reason for fearing future investment. Or more realistically perhaps, what if we discovered that we just built 30 million cars but the world only wants to buy 25 million at the current price of producing those cars? Or even more realistically, what if we discovered that we built too many houses at the peak of the housing market?

My first example would be the worst case scenario, because everything built in the last 5 years would now be worth zero. There is no solution to that problem except discovering what caused the material to disappear in the first place to prevent future occurrences. Losses would be so extensive that we truly would have a financial disaster. The equivalent of this example is something like WWII in Europe.

But the next 2 examples should get solved by price adjustments in the free market and, while creating financial losses, need not create total fear and uncertainty. We are seeing this happen now, below the headlines for some reason, in the worst real estate market of all, California. The number of homes being sold is much higher than a year ago and in some large areas are actually at record levels.

Houses in California (and Phoenix, Las Vegas, and much of Florida) are being sold at significantly lower prices than the peak (down as much as 60-70%), but still 50% higher than in 2000. But number of sales have meaningfully increased. This appears to be a great example of a market adjusting to a "bursting of a bubble". Just as I have been mystified by the lack of interest in how (and even just the fact itself) the California and other "boom" housing markets became large and disproportional contributors to this crisis, I am equally mystified by the lack of interest in these markets' apparent market based adjustments to this same crisis. This is occurring without Government intervention and without noisy headlines. These stories just do not make the headlines because it counters the current narrative of the day, which is all about financial Armageddon.

My point point is that while there can be "objective" reasons for the current perceived severity of the problem, I do not believe there are, or at least I have not seen anything I find persuasive. The total housing losses are simply not big enough. I think our political and media leaders for a variety of reasons, some self serving and some not, have encouraged the Armageddon narrative. By doing so I believe they are increasing the probability of its actual occurrence. The reason I don't believe in what I call "objective reasons" for the severity of the crisis is that no one is able to say definitively what these could be.

To compound the confusion, we really do not know the actual severity of the problem. We know how much the equity markets and real estate markets have declined. But we do not yet know, of course, what the real economic impact will be in the next 12-24 months. 3rd Quarter GDP was flat, far from a disaster. The 4th Quarter is projected to be down 1.25% (or 5% on an annual basis). If the 5% rate of decline continued, that would be significant. But this brings us back to the whole issue of what is causing the decline to begin with. We do know there is great fear and concern, but that is a different thing than reality itself. I maintain, at least at this time, that it is, for lack of a better term, the "public narrative" itself which is the number one cause of the perceived problem.

THE "FIX"

In part because this has been a presidential election year, politicians and bureaucrats have been more inclined to get "involved" than even in normal times of economic weakness. When you subsidize something you get more of it. We taxpayers subsidize state, local and federal Government at about 30% of our total economic output. When we have a true economic problem (like building too many houses) the Government tries to give the people something for its money, which in this case is "fixing" the problem of having built too many houses. This becomes dramatically exaggerated in an election cycle as politicians and bureaucrats struggle to get or keep their jobs.

But inherently Government cannot "fix" a problem such as having built too many houses at too high a price. Only price adjustment and time can fix that problem. But the Government cannot tell the people that. Since they are quick to take credit for good things that happen, they need to find "reasons" and "solutions" for when bad things happen. Why? I think if they did not, we would realize that we do not need them to the magnitude that we pay for their services. It is amazing to me how we simply take it for granted that Government can be so large yet not have a negative impact. The average mindset really is to look for Government to solve our problems. I think this is the equivalent of believing in phantoms. Nobel economist Milton Friedman used to sardonically say he would prefer the Government just take his money and randomly give it to other citizens rather than use it to "fix" any problem. While the former is bad the latter is worse.

Obama is promising the biggest "fix" in the history of the United States. The political economists of the moment seem to agree on a few basic things. First, they do not know what is happening and why. Second, we need to try anything we can think of (which really just boils down to huge deficit spending on Government chosen projects and providing massive unprecedented financial "guarantees" to favored parties). Third, we need to do this in as big a way as possible (or as Harvard economist and Obama appointee Larry Summers says, we need to "over react"). And fourth, we do not know if it will work.

It is difficult to conceive of more unusual admissions. They cannot see the "ghost"; don't even know if it exists; have decided to burn down the house it could be in if it does exist; do not know if fires even kill ghosts; but the fire needs to be as big as possible. If Barack Obama really is a follower of Saul Alinsky, then we are about to move toward being an even more Government centric nation (Saul Alinsky - Wikipedia, the free encyclopedia). The spending programs and Government involvement potentially being put forth by the Democrats is unprecedented. All in the name of Economic Recovery.

The apparent Obama plans are unfortunately being conflated with the merely confused and misguided policies of the Bush administration, thus creating an illusion of continuity. Bernanke and Paulson seem to be unwittingly preventing price discovery from occurring in the "credit markets". Just as in California, where the real estate market needed to adjust its prices down before increased economic risk taking could begin again, the Government also needs to let the financial markets adjust the price of lending down (i.e., interest rates up) so increased economic risk taking can begin again.

This can be consistent with something like the TARP program. But we need to Keep It Simple Stupid ("KISS"). Instead, the Fed and Treasury insist on ad hoc intermediation in the financial markets. Daily, it seems, some new program is being announced by the duel headed ObamaBush even if not yet implemented. This is preventing real buyers from taking real risks. In doing this, the Bush administration is simply delaying the ultimate solution from naturally happening. Granted, my suggestion would likely cause a recession, but as Volcker proved in his tenure as head of the Fed, that is what is sometimes required and can end up much better in the medium and long run.

The irony of the Volcker appointment is that in his time and place he understood that the Government had caused the inflation problem and therefore he had to reverse course. Today, the Government is contributing to the current marketplace's "risk taking" phobia and we need to now reverse course. But this does not seem to be the solution of the day. The economic legacy of the Bush Administration may be that it set the stage for the "bold and fresh new idea" of the largest Government intervention and deficit spending spree in the history of the American economy.

(TO BE CONTINUED)

If I Go Crazy Will You Still Call Me Superman?

....I watched the world float to the dark side of the moon, I feel there is nothing I can do....If I go crazy then will you still call me Superman, if I'm alive and well will you be there holding my hand...? (3 Doors Down - Kryptonite)

....I was actually born on Krypton, sent here by my father Jor-El to save the planet earth...(Obama: Born On Krypton)

The expectation that awaits Obama's presidency is sky high. Perhaps he was trying to defuse these expectations when he joked about being from Krypton at the Alfred E. Smith dinner in October. It is amazing how the media can look at what amounts to random statistical "noise" and without irony declare the dawning of a new era. Approximately 60% of citizens voted for president in both 2004 and 2008. Obama received 67 million votes or about 31% of all potential votes. In 2004 Bush received 62 million votes or about 30% of all potential votes. How much of that 1% difference was a function of the timing of the financial crisis? The reality is that when things go bad enough voters are willing to give the other party a shot. It does not necessarily represent a sea change of opinion regarding ideology.

Howard Kurtz of the Washington Post summarizes the media's insatiable appetite for hyperbole (Media Notes: A Giddy Sense of Boosterism ). My favorite is Newsweek's "commemorative" issue on Obama entitled "Obama's American Dream". This is particularly fascinating since it is the 2 most senior Newsweek editors (Jon Meacham and Evan Thomas) who told Charlie Rose the day after the election that the Obama cult of personality was creepy and deeply manipulative (The Sparkling Stranger). I do not understand the need the media have to engage in hero creation and worship. At best this is a historical curiosity but more likely it is dangerous and disturbing.

These are presumably intelligent adults engaging in the most infantile form of groupie behavior. What is the psychological need which drives this? Meanwhile, the world is floating "to the dark side of the moon" in what is universally feared to be the coming of the next great depression. But even the possibility of a severe recession or depression is not able to stop the Beatle screamer press. Time Magazine seems almost to relish the thought of the next great depression as it inadvertently reprises Eddie Murphy's "White Like Me" (Saturday Night Live - White Like Me - Truveo Video Search) with a ludicrous photo shopped cover of FDR in Obama "blackface" (TIME Magazine -- U.S. Edition -- November 24, 2008 Vol. 172 No. 21).

The well respected presidential historian Michael Beschloss actually states that "being cool" can "really help a new president". Just how is "being cool" going to help a new president? Was George Washington cool? Does this statement have any meaning other than to demonstrate just how far gone the media have become? And just when did Obama actually become "cool"? While Time Magazine compares Obama to FDR, Newsweek compares him to Lincoln. Isn't this mad?

Newsweek and Time do not see the horrific irony in the comparison of Obama with Lincoln and FDR. These presidents were unfortunate enough to have presided over the 2 most violent, frightening and unstable times in this country's history. Lincoln was assassinated at the end of the Civil War and FDR unsuccessfully struggled to get this country out of a depression before the world was consumed by WWII. The media's attraction to this comparison cannot be coincidence. I do not know what mental processes are driving this media madness, but I don't like it.

Doris Kearns Goodwin's book about Lincoln, Team of Rivals, is also being referenced as some kind of past is prologue interpretation of Obama's administration. She makes the point that Lincoln's success was in part due to the fact that he appointed people to his cabinet who disagreed with him. I find this particularly amusing as Team of Rivals was Sarah Palin's favorite presidential biography. We won't see that in print anytime soon.

The recent Zogby poll and the John Ziegler movie How Obama Got Elected highlight exactly the problem this type of reporting and adulation brings to the American body politic. Voters generally do not understand the issues, but it is not for lack of attention. They certainly were aware of Sarah Palin's pregnancy and wardrobe, but not which political party controlled congress.

Do normal Americans actually feel the same way the media do? Are people out there in our towns and cities relishing in the after glow of this enormous meta-historical moment? Or are they concerned that their remaining stocks, their houses, their pensions, and their insurance policies are all going to zero? I lean toward the latter interpretation. Meanwhile we have a president elect whose background and experience is all local left wing Chicago politics. He threatens us in his Time Magazine interview with FDR experimentation. He may end up making Paulson look like a stable guy.

I believe it is easier for any president to do more harm than good. Presidents do not have control over reality. No amount of good intentions or perceived coolness will get one through the difficulties. Obama will have a filibuster free Congress whose only conflicts will be between liberals and the even more left wing of the Democratic party. This means that Government will obsessively try to "fix" things. The Bush administration's recent activities will seem Laissez Faire by comparison.

How will the media cover and report these issues? I guess it depends on how the economy and our foreign relations go. Objective analysis and reporting is what we need from our media, not hyperventilating myth perpetuation. I have stated in the past that if things go poorly, the mainstream media can turn on Obama to the same degree it has elevated him. But I am beginning to wonder if that is really true. They are pretty severely invested in Obama, so it will take a lot of Kryptonite before they turn on him. I am pretty sure this is something we do not want, as it probably means some major disaster will have come our way.

Meanwhile, the market keeps dropping like a boulder as we await the inauguration of Superman/Lincoln/FDR.

The Sparkling Stranger

Admittedly, the general harping by Conservatives about media favoritism toward President elect Obama can appear tedious. But just when you thought the peak of Obama favoritism had been reached, new high water marks get discovered. The Weekly Standard has some amusing observations in an article on just this topic. One is that Keith Olberman does not vote in order to preserve his objectivity Olbermann Declines to Vote to Preserve Perception of Objectivity. Another is Time Magazine's editor-at-large, Nancy Gibbs, telling her readers in this week's feature story on the election that:

"Some princes are born in palaces. Some are born in mangers. But a few are born in the imagination, out of scraps of history and hope.....people were waiting for him, waiting for someone to finish what a King began"

Which King is that? One assumes she is using a play on words, although she leaves that unsaid so who knows? The King presumably is Martin Luther, not the one born in the manger. Yet the hyperbole is still absurd. She sees no irony in her "born in the imagination" imagery. And this is in a news story, not an opinion piece.

But even in the world of opinion, where all is allowed, Time still manages to set new fantastical standards. Novelist Pico Iyer writes this week's guest essay in Time My Close Encounter With Obama in Hawaii. From his comments it is clear he has become so used to projecting fantasies onto paper, he cannot distinguish reality from his novels. In a great bit of "look back" projection, Iyer recounts accidentally meeting Obama in Hawaii outside at an "avocado burger" place (you just cannot make this stuff up). He looked like a "skinny teenager" but the most remarkable thing about Obama was:

"this sparkling stranger was so much like the kind of people we meet in Paris, in Hong Kong, in the Middle East: difficult to place but connected to everywhere....like the air of his home island...he spoke for the global melting pot of today"

Seriously, doesn't this make you laugh out loud? Having been to the aforementioned three places (he can't trick me with his globetrotting conceit!) on many occasions, I never had trouble "connecting" these people to where they actually live, rather than "everywhere". Nor do I recall some ubiquitous fascination with global melting pots, but I am sure we traveled in different circles. But Iyer is not satisfied just making the point about the futuristic Obama's transcendent humanism; he needs to also contrast this with Alaska's backward looking yesterday's "go-it-alone" spirit. He happened to be in Alaska the "week Sarah Palin was introduced to the world" (who is this guy, Zelig ?). Despite Alaska's "great possibility" it is tied to the "last frontier" vision of yesterday, not to the hopeful tomorrow of the "kids" outside the avocado burger "North Shore shack" in Hawaii.

If Time has a "Meet The Beatles" frame of reference about Obama, its crosstown rival, Newsweek, leans more toward "Sympathy for the Devil". Somehow they never did get around to sharing that perspective with us prior to the election. I wonder why? In an interview with NPR's version of Larry King, Charlie Rose, Newsweek's Jon Meacham and Evan Thomas reveal their insights into Obama's personality A conversation with Jon Meacham & Evan Thomas. Meacham is the editor-in-chief of Newsweek and Thomas is its most senior writer. What is remarkable about the interview is it shows that the media has had its doubts about Obama all along. Yet somehow this has never lead to any serious investigative reporting that may have shown Obama as a human being with a history, rather than some magical phantom.

Evan Thomas almost causes Meacham to have a heart seizure when he refers to Obama's "creepy cult of personality". Rose also nearly fell out of his shoes when Thomas said this and he repeated it back to Thomas in disbelief. Thomas reiterated his comment and then upped the ante by also saying he was "deeply manipulative". Thomas also casually asserts Obama's attachment to the teachings of leftist Saul Alinsky (Obama's Alinsky Jujitsu) as if it were common knowledge. Now you may agree with the objectives and tactics of Alinsky but my guess is the majority of Americans do not.

So here we have Evan Thomas, on the day after the election, telling Charlie Rose that Obama is a follower of socialist/Marxist Alinsky, is a creator of a creepy cult of personality and is a deeply manipulative individual. Before Thomas could go any further, perhaps even persuading us we just elected Satan as president, Meacham had to disagree with the "creepy cult" concept and somehow turned Thomas's observations into "Obama is really more like Reagan". I had thought Ronald Reagan Was An Amiable Dunce but I suppose that was another day and another time.

Either we get the comically absurd hero worship of Time magazine, or the equally absurd cynical avoidance of inconvenient truths by Newsweek. Obama faces a difficult enough task as president. Wait till he actually has to start making some decisions. I think he will discover the media's exaggerations can go both ways.

Blaming Sarah Palin

A million boring years ago, back in February or March, I used to jokingly refer to Mitt Romney as the "White Obama". It was meant to be funny (ha, ha) and parody the foibles of each candidate and their supporters. On the one hand, each was young, tall, handsome, well spoken, a controversial Church member, and accused of being vapid. On the other hand, each was almost a stereotypical perfect candidate for a certain type of voter; Obama to the young as well as the black and Romney to the white male businessman.

A Yellow Dog Democrat is a term which goes back to the late 19th century. Although no longer in popular use, it referred to southern Democrats who would prefer voting for a "yellow dog" before they would vote for a Republican. I have some times called myself a Yellow Dog Republican (although I voted 3 times happily for Mayor Ed Koch). Even though both parties, in practice, are often very similar, the Republicans at least only want to take half your money, not three quarters of it.

Despite being a Yellow Dog Republican, this was the first Republican primary season in a few decades that I could not get interested in a particular candidate. I try to "optimize" when looking at candidates. I generally try to pick the person who has the best chance of winning the general election who I also like as a candidate. This year no candidate scored high on both fronts. Guliani was an Italian New York City liberal Republican, so he was going nowhere, although I liked him. Huckabee, who bizarrely now hosts the television show of choice for left wing Hollywood types, was the worst of all candidates. He was the most incoherent candidate economically who also was a demagogue on cultural issues.

I never was an enthusiastic McCain supporter. As I have stated before, I voted more against Obama than for McCain. McCain's Vietnam war record and foreign policy capabilities are his most impressive credentials. But he used to drive me crazy with his domestic policies. He voted against the "Bush tax cuts"; he supported the anti-free speech, pro-incumbent monstrosity of a bill, the "McCain-Feingold Campaign Finance Reform Act". And he was against drilling before he was for it. I can go on, but I would never finish.

This left the White Obama. I kind of liked him, although I was already imagining the headlines in the NY Times ("Morman Cultist Candidate Fired Ohio Workers while CEO of Bain & Co."). I particularly liked his economic philosophy. But it was very clear early on he was not going to win. While he got the "free market" vote, Huckabee was able to get the cultural conservative vote. McCain got the "foreign policy" vote and Guliani lost his itinerary. McCain won because Huckabee cannibalized the cultural conservatives from Romney. McCain was every one's second choice.

The "Blaming Sarah Palin" contingent would like to conveniently forget the facts on the ground. While Clinton and Obama were capturing 120% of the media attention, the Republicans were in a complete funk. They looked at John McCain glumly and only one thought came to their mind, "Bob Dole". Except Dole had a coherent economic policy.

And then came Sarah Palin. Never, that means never, has a vice presidential candidate generated the kind of enthusiasm she did for her party. No point here in explaining this phenomenon, because it is beside the point. The Reagan style Conservative Republicans actually had an affirmative reason to vote. The party had not felt this excited literally since 1988. From Day 1 to Day 75 the vice presidential candidate drew unprecedented crowds even for a presidential candidate. The most widely watched debate was the vice presidential debate. Her convention speech drew the same audience size as did Obama's. The overwhelming percentage of media and political personalities who actually met her, came away impressed whether they agreed with her policies or not. Within 2 weeks of her nomination McCain went from 5-7 down to 2 up.

Then came the bail out bill and the market crisis. When I first heard McCain was rushing back to DC to focus on the bill, I thought it was to oppose it, as 95% of the voters expressing an opinion did. Maybe if the McCain jackals could have pointed this out to their candidate, they wouldn't have to now be pretending Palin didn't know Africa is a continent. Instead, his worst "reach across the isle" instincts came out. He actually tried to work with Frank, Reid and Pelosi to "craft a compromise". Was he kidding? They literally mocked him while Obama stayed coolly above the fray.

We do not know what would have happened had he chosen someone else. But the odds are low another would have turned this "Bob Dole" candidacy into one Conservatives would seriously care about. She may have cost McCain the "Christopher Buckley" vote, though I seriously doubt it. Those guys would have jumped ship for some other reason. I am still waiting for McCain to condemn his own staff, although his time to do that has already passed.

Here is a woman who starts the campaign with the New York Times actually pedaling the story that she faked her own pregnancy, and ends it with the McCain generated freakish fantasy of a shopaholic gone berserk because the Alaskan Governor couldn't figure out that Canada was part of the North American Free Trade Agreement. In between, she out drew the head of her ticket, and spoke before more voters than McCain did in his lifetime.

The good news is she will be back, while he and his campaign staff will not.