Daily Investment Interpretations

April 1, 2009

2009-4-1:  Today, this first day of the second quarter of 2009, the markets gained again. The NASDAQ added 23.01 points (1.51%) to close at 1,552, the Dow climbed 152.68 (2.01%) to 7,762, and the S&P 500 increased 13.21 (1.66%) to close at 798. Oil was unchanged at $48.39, and gold gained $2.70 to $927.70: The VIX fell 1.86 to 42.28.
     In today's news, the private sector cut 742,000 jobs in March--a new record and worse than the Marketwatch consensus of 663,000: Private sector cuts 742,000 jobs in March, ADP says. 
    The ISM manufacturing index for March rose slightly from 35.8% to 36.3%, a gain of 0.5%: Slight improvement in manufacturing. The new orders index jumped to 41.2% from 33.1% after hitting an all-time low of 23.1% in December. The percentage of firms reporting higher new orders - 28% - was the highest since June. The employment index rose two percentage points from 26.1% to 28.1%. Inventories continue to fall, which lowers the ISM manufacturing index, but bodes well for future manufacturing. The export index rose from 37.5% to 39%.
   The markets took this mixed data as further signs that the economy is beginning to turn up. However, in Permanent Link to Partying like it’s 1931, Paul Krugman writes, "I'm detecting a trend in commentary that I find slightly ominous. Some of the economic news lately has been slightly better than expected, which was bound to happen at some point (on average, after all, half of all news should be better than expected). Mostly, this is in the form of things getting worse more slowly, but it wouldn't be surprising if we see, say, an uptick in industrial production in a few months, as the inventory cycle runs its course. If so, that doesn't mean the worst is over. There was a pause in the plunge in early 1931, and many people started breathe easier. They were wrong. So far, there's nothing pointing to a fundamental turnaround this year, or next, or for that matter, as far as the eye can see."
    
    In Read: Geithner-san, Dr. Krugman links to an article by Adam Posen: Does Obama Have a Plan B?  Who's Adam Posen? He's an economist who, "with Timothy Geithner, Larry Summers, and a host of other economists--spent the late 1990's yelling at Japanese and other Asian Officials to clean up their banking crises". Dr. Krugman refers to Dr. Posen as someone "who really knows what went down during Japan's lost decade,"  and also as "the go-to guy for understanding Japan's lost decade." Dr. Posen is the Deputy Director of the Peterson Institute for International Economics (the organization that U. S. Comptroller-General David Walker joined last April when he resigned from his post to warn the U. S. public about the financial disaster that was bearing down upon it). He's a co-author, with Fed Chairman Ben Bernanke, et al of Inflation Targeting: Lessons from the Internationa Experience. He shares the same interpretation as 2007-2008 International Monetary Fund Chief Economist, Simon Johnson that the U. S. is hostage to its financial lobby, The former IMF Chief Economist Tells It Like It Is... and It Ain't Too Purty, just as was Japan before it became desperate enough (after twelve years) to enact the necessary reforms to get its banking system straightened out.
    Dr. Krugman also quotes White House Chief of Staff Rahm Emanuel's response to Dr. Krugman's criticism of the Administration's stimulus plan: "Now, my view is that Krugman as an economist is not wrong. But in the art of the possible, of the deal, he is wrong. He couldn’t get his legislation.”  Dr. Krugman concludes,
    "To be fair: the Obama team really does face huge political obstacles in doing the right thing. Maybe it really can’t be done. But we shouldn't kid ourselves. Japan is us."
    Bottom line: Mr. Emanuel understands that the current stimulus package won't be enough, but he had to work miracles to get the stimulus bill we got.
    Three articles by Peter Brimelow reinforce this picture.
(1) Brimelow on magazines' crisis views
    In this article, he reviews the same Atlantic Monthly article, "The Quiet Coup", by 2007-2008 IMF Chief Economist Simon Johnson, that Todd Harrison referenced yesterday, The former IMF Chief Economist tells it like it is... and it ain't too purty, and observes that it reaches remarkably similar conclusions to those in an April 2nd Rolling Stones article written by Matt Taibbi, "The Big Takeover,". Taibbi writes, "The reality is that the worldwide economic meltdown and the bailout that followed were together a kind of revolution, a coup d'état. They cemented and formalized a political trend that has been snowballing for decades: the gradual takeover of the government by a small class of connected insiders, who used money to control elections, buy influence and systematically weaken financial regulations. The crisis was the coup de grâce: Given virtually free rein over the economy, these same insiders first wrecked the financial world, then cunningly granted themselves nearly unlimited emergency powers to clean up their own mess." Mr. Brimelow continues,
     "Paranoia? Taibbi supplies devastating detail about the way the subprime mortgage crisis metastasized through American International Group Inc.'s promiscuous use of 'credit default swaps, the central role of Goldman Sachs Group Inc., and the opaque nature of the subsequent bailouts."
    Mr. Brimelow quotes MIT Professor Simon Johson's advice, "The advice from the IMF on this front would again be simple: Break the oligarchy."
    Mr. Brimelow concludes, "And how long has the manipulation of markets, which is now explicit policy (viz.: the Treasury Department buying U. S. Treasuries), been going on? It was blatant in the peculiar decision to rescue Long Term Capital Management in 1998. (See Another case of collusion?)"
    He continues, "I repeat my call, which seems to have fallen on deaf ears, for a new Pujo Commission, which investigated the Panic of 1907. (And gave us the Federal Reserve, but that's another story.)" 
(2) His article Another case of collusion? (September, 2008) describes two earlier articles he wrote in the 90s: one in 1993 in which he and his "brilliant" co-author Leslie Spencer discovered blatant errors in a widely publicized study by the Boston Fed. The errors were acknowledged by the  Boston Fed, which then proceeded to evangelize its erroneous story, steamrolling over Peter Brimelow and Leslie Spencer, who had penetrated the deception. The second potential article, which no editor was interested in publishing, concerned the reason that the Long-Term Capital Management hedge fund was rescued by the federal government in 1998 - it was well-connected to Goldman Sachs, "which in turn was extremely well connected to federal government. Its former CEO, Robert Rubin, was Treasury Secretary at the time. By an amazing coincidence, another former Goldman CEO, Henry Paulsen, is orchestrating the current bailout."
    He concludes, 
    "Dunbar wrote of Long Term Capital Management that by the end of 1997: 'Governments treated it as a valued partner, to be used whenever markets weren't efficient enough to achieve macroeconomic goals.'
    "My questions: What governments? What goals? Are sub-prime mortgages just a later example?
    " How long has this sort of collusion been going on?"
(3) Peter Brimelow's third article, June, 2008, Debt is not the only problem begins:
    "Recently, we discussed Kevin Phillips' thesis, in his new book "Bad Money: Reckless Finance, Failed Politics, and the Global Finance of American Capital" that the U.S. economy has been run by a Washington-Wall Street alliance for the benefit of the burgeoning finance sector."
    He mentions Phillips' "daring" acceptance of a hypothetical U. S. Federal "Plunge Protection Team (PPT) that intervenes in U. S. equity markets to temper its swings and reduce panic, Though Mr. Phillips doesn't mention anything about alleged manipulations of the gold market to prevent panic-buying of gold, signaling big trouble in the world's paper currencies, or the under-the-rose collusion with China to keep the yuan low with respect to the dollar.
    
What This May Mean to Us As Investors
    Several independent sources are now reporting that the U. S. is being looted by a financial elite, and that the U. S. government is intervening (for better or for worse) in our "free" markets. There is also agreement that the economy isn't going to miraculously rise again like a phoenix this fall. When a recovery finally comes, it will bring with it, at best, a GDP reduced by the difference between what consumers spent in 2007, with a slightly negative savings rate, and what they will be able to spend in the future, given a savings rate of... 8%?... a year. And if other countries aren't willing to finance ever-deeper Treasury indebtedness, then the U. S. public will have to step up to the plate and make up the difference through savings. So our savings should help wean us off foreign capital (?) (It's worth noting that the greater part of our Treasury bond purchases has always been financed with U. S. money.) 
    This reinforces at least to me the need to be very cautious in investing in U. S. stocks. Dividend-yielding companies are being touted as a safe haven for hard times. The problems is that dividends are being cut left and right, and if the economy slows substantially from here, one might end up with reduced capital and reduced dividends.
    The chances of a market recovery this spring look ever more remote, and the worst thing that could happen to us is to lose what precious remaining capital we still have.
    I'll try to discuss this further tomorrow.
    The articles below deal with bull market prospects.
Is this a sustainable bull market?
Bamboozling the bulls?