Risk Is Good

In 1970 Governor Nelson Rockefeller signed into law a statute in New York requiring commercial liability insurance policies to contain a pollution exclusion.  Why, might one ask, would a state require there to be less insurance for pollution cleanup?  Wouldn't it make more sense to prohibit pollution exclusions, like a couple of other states did, to make sure plenty of money was available to clean up pollution?

Well, the reasoning was sound.  Hold polluters accountable monetarily for the risk they were taking in polluting and they will take less risk.  After all, if their insurers were going to have to pay for it, why stop polluting when it is a lot cheaper to keep polluting.

The philosophy employed by the State of New York is the exact opposite of what the Fed and U.S. Government have been doing for quite some time.  The Fed fosters more risk taking in financial markets by flooding them with money at low rates and then when the boys of Wall Street do the predictable and take exorbitant risks with cheap money only to get caught with their overly leveraged pants down, good old Uncle Sam steps in and saves the day.  Be it TARP, the bailout of AIG, GM, Chrysler, GE or others, the wonderful powers that be simply will not let big over-leveraged risk takers fail.  The Fed claims it is fostering a stronger economy and economic growth by playing with interest rates and the government claims to help the economy by saving the Too Big To Fails (TBTF) from their just deserts.  Problem being that the low rates only really seem to help the top 1% to play financial games and make more money and the government bailouts take the risk out of them doing so.  This cycle guarantees one financial bubble after the next, with each getting worse and government deficits ballooning all the while as the taxpayers pay the bill for the bailouts.

Truth be told, there are no TBTFs out there.  Rather, these are in my view TBTS - Too Big To Save.  And for the vast majority there really is not that much at stake to let them pay the price for their stupidity.  Admittedly, for corporations that employ a host of workers, like GM, consideration has to be given to not punishing the workers who are not responsible for the mess and simply take the cost out on those responsible, but even the likes of GM disappearing could have been worth the lesson and would not have brought the economy crashing.  Plenty of other car makers would have filled the void and been better off because of the void.

And consider AIG.  Its mess was simply at the holding company overloaded with credit default swaps (CDS) it had issued.  And it had issued a lot of them.  When bond or other debt obligation payments could not be made the buyers of these CDSs started knocking at AIG's door and AIG promptly knocked at the taxpayer's door.  "Please save this fine company from an untimely demise.  If AIG folds millions of policyholders will be without insurance and the financial repercussions will be the end to life as Hank - err - -we know it.  We are simply too big to fail."  Or something like that.

http://www.reuters.com/article/2008/09/18/us-how-aig-fell-apart-idUSMAR85972720080918

But the reality is that the insurance was not issued by the holding company but by an assortment of subsidiaries, all of which are tightly regulated by their respective states and all of which were financially sound.  They all had reserves, as regulators require, and regulators also required said reserves to be conservatively invested.  Thus, while the holding company had major problems, the insurance company subs did not need saving.   AIG was not TBTF, it was TBTS. 

But noooo!  We must save it.  We must put in like $182B taxpayer dollars to prop it up.  And the only folks we really helped were the risk takers.  Some of whom thanked us by sending us roses - nope - taking out a full page "Thank Y"ou in the WSJ - nah - changing their ways - of course not.  Nope, they thanked us by suing us:

http://www.washingtonpost.com/opinions/the-federal-government-gets-sued-for-saving-aig/2014/10/13/3e0db462-50c1-11e4-8c24-487e92bc997b_story.html

Maurice "Hank" Greenberg, former CEO of AIG, sued saying the bailout violated his constitutional rights.  Since when is saving his sorry arse violating his rights?  Well, if he wants a just result, we will give him a just result.  At least NY is prosecuting him for a just result.  The grand Hankmeister is being prosecuted for some illegal financial shenanigans he is alleged to have orchestrated while he ran AIG.  Said "alleged" transactions put millions more into this billionaire's pocket.  And it is this prosecution of the Hankinator that leaves us with the best quote of the year to date.  Greenberg spokesman Steve Aiello is quoted as saying Thursday that "We think [the prosecution is] an abuse of taxpayer resources, which certainly could be used for other things in New York state.”  Isn't that just precious, the Hankenstein's counsel complaining about taxpayer resources being abused!

Well, we obviously cannot rely on the Fed or the federal government to reduce risk, but hopefully the states putting a few of them behind bars my be a tad of a deterrent. 

No Longer Greek to Me

I have written a fair amount on Greece over the years (who hasn't) and recently saw this nice piece by Felix Salmon that summarizes the situation in terms of where Greece is economically, how it got there and options forward.  If the whole situation is Greek to you, worth the read as the options forward could lead to some very interesting consequences:

http://seekingalpha.com/article/3027366-greeces-debt-crisis-how-did-we-get-here

Too simplistic, you say.  Well if you want a somewhat more complex though still enlightening explanation of what is happening in the EU, albeit one focusing on Germany, then I recommend this: 

http://www.nakedcapitalism.com/2015/04/herr-schaubles-foibles-eurozone-rebalancing-conundrum.html

It makes a nice plausible explanation of why Germany is to blame for many of Europe's woes and is now focusing its trade surplus sights outside of Europe as its European trading partners can no longer afford to buy stuff with all the austerity measures sucking away available resources.  The author suggests that it may be Germany, not Greece, that decides to leave the EU first out of self interest.  Das ist sher interesting (no freakin clue if this is even close to an accurate German translation but I think it sounds good).

Have you noticed, a lot of folks are saying the EU does not seem long for this world.  Wish I had thought of that.  Kind of makes you wonder what is going to happen to all those Euro denominated bonds floating around these days, including some 100 year ones Mexico -sí México y sí 100 años - just sold.  Seriously folks, Mexico has been selling 100 year bonds at just over 4% denominated in euros.  That is a currency exchange rate play that is going to leave a bruise.

http://globaleconomicanalysis.blogspot.com/2015/04/milestones-in-bond-insanity-negative-10.html

 Oh, this is going to be very interesting indeed.

She's A Yellen and He's Insana To Listen To Her

There is sooooo much debate lately on whether the Fed will move off ZIRP (a Mork term if I ever heard one).  Is the economy where it needs to be?  Is unemployment close enough to the target?  Are dogs now sleeping with cats?  The Fed removed that magical "patient" word recently and there is a whole market on guessing when the rate increase will come.  All eyes are on the Fed.  Or perhaps I should say all ears, as they are not exactly Yellen what they intend to do.

http://www.mineweb.com/news/gold/will-she-wont-she-yellen-interest-rates-and-gold/

Some think that the Fed should stand pat as the economy is in a tough patch at the moment and exchange rates are doing the same work as a rate hike.  While I do think the Fed will stand pat and not hike rates at all this year or next because the economy will worsen before they get to that point, I nonetheless am not saying that is what they should be doing.  Others, like Mr. Insana at CNBC,  think the Fed is just fine staying where it is with ZIRP and should do so as that is the right thing to do:

http://www.cnbc.com/id/102511918

In what language does Insana mean insane? 

While I think they will stay with ZIRP and perhaps have another QE or two next year, the Fed should not be maintaining their current stance or any stance and stop with the QEs already.  They should abandon all stances (and hope) and stop their meddling.  They of course won't do so, so I am not going to waste my time arguing why they should.  Unfortunately, they will prove why on their own in due course.

I recently linked a post by David Stockman - Reagan's Director of the OMB - who makes a very elegant case against the Fed actions for like the past few decades.  I agree with him on it but know he is wasting his breath, and rumor has it more people listen to him than me.  Note I said rumor - it has yet to be confirmed.   Nothing short of an epic bubble bursting that people finally attribute to Fed policies will get us there, and that will have to be sooo extreme it is a scary thing to ponder.  Perhaps some smart politician will be able to tie the next bubble bursting to the Fed and include in his or her platform the promise to appoint to the Fed appointees that see the role more conservatively.  Now there is little one President can do as only one Fed President gets appointed every other year and they serve 14 year terms, but if we have to wait that long to clean house it is best to get started.  And even if the Fed were magically replaced or decided to change and stop its monetary games, there is presently at least a real question on whether it would have any impact.

Let's assume Janet were to wake up tomorrow morning and lean over to her multi-millionaire husband and say, "Honey do you know where in the world I put the Depends?"  Oops, scratch that, I meant she would say "Honey, you know the world depends on us to do the right thing.  I think I will stop the Fed from meddling in things and let the economy achieve a natural balance."  If she did that, would we be alright?  No, not at all because other central banks have to stop too.  We are at ZIPR but the EU is at NIRP (which unfortunately is Negative IRP and not No IRP).  Indeed, the financial shenanigans banks and corporations use to generate financial bubbles are now increasingly taking place in Europe where credit is even cheaper.  So even if Janet and all the other Feds wake up with a dose of common sense, the bubble still cometh. 

So time to prepare yourself - if you have not already - for the storm that looms folks.  It is coming.  I do not know what Lehman Brothers pin is out there this time to pop it, but it is there.  The market knows it and has been trading sideways for four months.  Perhaps its time to move to Iceland.  Or maybe its time to move to Russia - I kid you not:

http://globaleconomicanalysis.blogspot.com/2015/04/russia-forced-to-do-right-thing-buy.html

It would appear that Russia is actually allowing free market forces to dictate for a change and it may be working.  Wouldn't that be precious - Russia mastering capitalism better than the U.S.  Put that in your трубка and smoke it Bernanke.

If You Think The Last One Was Ugly . . .

I will post more on this later, but for a nice macroeconomic overview of where we are today and how we got here, I highly recommend the following article to your reading pleasure:

http://seekingalpha.com/article/3053346-meet-the-new-recession-cycle-its-triggered-by-bursting-bubbles-not-surging-inflation

ECB Putten Der QE Into Der EU - das ist gut?

Bloomberg notes that the ECB plans for $1.1T QE in the EU are certainly fueling an already booming German economy:

http://www.bloomberg.com/news/articles/2015-03-29/german-economy-finds-new-fuel-as-it-reaps-benefits-of-draghi-qe

The German economy is hitting on all fours and the future looks bright.  Unemployment is at record lows, the DAX is skyrocketing (Index up 23% this year), consumer spending is on the rise, exchange rates are good and every thing is just dandy.  Add in a little QE and ya, das ist gut.  There is that little Greece thingy, but relatively speaking Greece is economically a small country.  Of course it is part of the broader based PIIGS problem, which is part of the broader EU structural problem, which is part of the global economy problem, but Germany is immune to all that.  Und ya, deflation is behind it too.  After two months of deflation it showed .1% inflation.  Yeah!

One instigator for all this glowing success is likely the exchange rate with the U.S., it's number two trading partner after France.  Yet that might not continue be the benefit one would think.  I have not seen anything yet on the U.S. trade deficit shrinking in terms of what that means to Germany and the rest of the EU, but it has to mean something.  Imports in the U.S. were down over $10B in February, which is over 4%.  That is not a small drop, though one month does not a trend make.  The point being, however, that it will be exceedingly difficult for Germany to continue doing well when its trading partners generally are on the brink of a recession - if not already in one.  And last I checked, Germany's number one trading partner France, was not exactly booming - unless you like Zombies:

http://www.businessinsider.com/frances-zombie-economy-is-missing-out-on-europes-recovery-2015-3


I have little doubt Germany will have a wonderful 2015, especially benefiting more than most from the QE in the EU and that comparatively speaking it will continue to do better than the rest of the EU and most other countries as it has its fiscal house in pretty good order, but the DAX at levels 50% above the records set 2007 is unrealistic and likely due to there being no place else for a lot of people to put their money.  Und das ain't gut.

Fedspeak

The head of the Atlanta Fed, Dennis Lockhart, is  quoted in the NY Times as saying:

"The slowness in the first quarter obviously raises concerns that we’re going to see a continuing or persistent slowdown, but that’s not my base case view. My base case view is that we’ll see a rebound in the second and third quarter and beyond and that we’ll stay on the basic track that has been our story, our narrative here, for the last year or more. And that is a 2.5 percent to 3 percent growth rate with continuing improvement on the employment front, and gradual rise in inflation toward the 2 percent target. So to some extent I’m taking on a Wilbur Mills position: That’s my story and I’m sticking to it."

So the "story" is that we were in a short term tough patch this past quarter but will bounce back this quarter and next to a 2.5-3% growth rate. Yep, that's his story and he's sticking to it.  I like this guy.  At least when he is telling you what he knows to be a "story" he flat out tells you he is telling you a "story" and does not feign that it is reality like most the Fedspeaks do.  His "story" is proven just that by the Atlanta Fed GDP Now site that is putting GDP forecast for the year at .1%.  As I have noted recently, that is a drop of nearly 2% in the forecast in two months, which is huge.

Now compare this to the Fedspeak from John Williams, head of the Fed in San Francisco, as quoted in the Wall Street Journal:

"'Things are looking better–in fact, they’re looking downright good,' the official said in a speech to be delivered to an audience in Sydney and Melbourne via video.
Given how much the economy has improved and is likely to continue to gain ground, “I think that by mid-year it will be the time to have a discussion about starting to raise rates,” Mr. Williams said.
The strength of the U.S. dollar against a “broad index” of currencies is not an impediment to the U.S. economy reaching real GDP growth of 2.5% this year, he said.
“The U.S. economy has good momentum…even with what is a rather large appreciation of the U.S. dollar,” Mr. Williams said."

So this guy really seems to be buying his own "story" or, as they say, drinking his own Kool-Aid.  The problem with this Kool-Aid, however, is they drink it and we are the ones that suffer.

For more on some of the other Fedspeak, here is link to a nice article that discusses the less than spectacular employment data out today, which includes a worthy collection of recent Fed quotes on the economy, including those I noted above.

http://economistsview.typepad.com/economistsview/2015/04/fed-watch-air-pocket.html

Add to this some former Fed Fedspeak from Bernanke's new blog on how the Fed does not create bubbles or distort markets, and you will have a nice laugh for the weekend.

http://globaleconomicanalysis.blogspot.com/2015/04/thrown-under-bus-another-look-at-self.html

These guys (and gals) really crack me up. 

Would You Like That GDP on Flat Bread

Well, we are officially at ground zero.  The Atlanta Fed at its GDP Now site has today lowered its GDP forecast for Q1 for the U.S.  On February 2, the 2015 forecast stood at a respectable 1.9%.  The economic reports in the two months since have led to a steady decline and today they lowered the forecast to zero, zip, nada, nix, nothing, zilch, zippo, goose egg, naught, nil, nuttin' honey.  Apparently they did not like the ISM Manufacturing Index numbers out today, which still showed some growth at 51.5%, but a good bit lower than February at 52.9%:


http://www.ism.ws/ismreport/mfgrob.cfm


Any number over 50% shows more companies growing than shrinking, so we are just barely there.  Now this month was less than February and February was less than January and January was less than December and . . . well, you get the picture.  Lowest number for this index in almost two years and . . . I must be reading this wrong . . . apparently it was "well short of Wall Street's forecast."


http://www.marketwatch.com/story/ism-manufacturing-index-falls-in-march-to-lowest-rate-since-may-2013-2015-04-01


Oh dear.  Oh dear, oh dear, oh dear.  Wall Street forecasts were overly optimistic - really?  I'm shocked, shocked to find that forecasts have gone wrong here. If you cannot trust Wall Street, who can you trust.  At least the ISM index number has got to be reliable as it is based on a survey of manufacturing executives and they would never fib about how well business is doing.  Yes, you can take those numbers to the bank - though I would avoid taking them to Greek banks at the moment.

P.S.

The above was originally posted by me yesterday. Today, 4/2/15, the Atlanta Fed reversed course a bit and raised the Q1 GDP forecast back to .1%.  Not huge, but an increase nonetheless.  The reason for it is a tad curious in my book.  It is tied to a foreign trade report that came out this morning.  The report showed a nice decrease in our trade deficit, which is viewed as a good thing, but both exports and imports were down from January.  It is just that the decrease in imports, which went down $10.2 billion, exceeded the decrease in exports, which only went down $3.0 billion.  Thus, the deficit was less.  So the question I have to ask is whether decreases in both export and import activity are a good sign for the economy?  Doesn't this reflect that we are both buying less from others and selling less to others?  Am I missing something?  Obviously I am missing a lot, but that is another discussion.


http://globaleconomicanalysis.blogspot.com/2015/04/trade-deficit-shrinks-first-quarter-gdp_2.html