Brian Schuettler

I have been in financial management for about 20 years now and have decided to initiate a blog that addresses the complex financial, accounting and general business issues that confront our society. These issues vary in content and complexity but there is no time in the past half century that has demanded more the identity and clarification of them. This is a start. Thank you. Brian John Schuettler

Bonds Backed by Mortgages Regain Allure

Bond Market No Responses »

Feb 192012

Bonds Backed by Mortgages Regain Allure New York Times. The Times is quoting Greg Lippmann, the patient zero of subprime? If the SEC investigation of Deutsche Bank were remotely serious, Lippmann would be in serious trouble. What Greg Zuckerman and Michael Lewis have written about them in their books on subprime shorts alone is grist for a good civil suit. And even worse, the headline implies that there is a market for newly issued non-governemnt guaranteed bonds (wrong, that’s dead) when this is about speculation in vintage subprime.

The funniest bit is that the Times is acting as if the fact that Lippmann is talking up the market is a tip of sorts. As one of my buddies pointed out long ago, what you worry about when an investor talks up his book is not that he is trying to get more people in to raise the price, but he is trying to get more people in so he can complete his exit.

Wall Street insider blasts his industry

A Time To Repent No Responses »

Feb 192012

“I’m the furthest thing from a liberal,” Doyle said. “But let’s not forget what happened here. Capitalism got abused.

“The country needs Wall Street. It needs a flow of capital and credit, but when politicians get paid off, you end up with a regulatory system that protects the industry rather than investors.”

“I’m just trying to help people understand what’s going on here,” he said. “If that’s critical of the industry, well, let’s put it this way, there’s been a lot to write about.”

Wall Street insider blasts his industry MarketWatch

What If Obama & Krugman Tried to Run a Business?

A Picture Is Worth A Thousand Words, Back to the basics No Responses »

Feb 052012

We must keep in mind that the purpose of business is to serve the interests of the work force, not the consumers to whom we will eventually try to sell our products. After all, in the recent Atlantic cover story, “Making It in America,” we were confronted with the tragic story of an auto-parts factory in North Carolina that was so efficient that the factory floor seemed to run itself, with workers an afterthought. The implications of this are so alarming that we must be bold about trying to reverse it.

The writer of The Atlantic piece, Adam Davidson, declared, “It’s tempting to look to the owners of Standard Motor Products and ask them to help [low-skill worker] Maddie out: to cut costs a little less relentlessly, take slightly lower profits, and maybe even help solve America’s jobs crisis in some small way.” So Davidson yielded to the temptation: “I tracked down the people who run Standard to put this possibility to them,” he says.

Davidson is the host of an economics program called “Planet Money” on NPR, “has won every major award in broadcast journalism” and “has traveled to many countries to study the global economy,” according to his bio. So he obviously knew a lot about business before he ever set foot in this horrible worker-unfriendly factory.

It seems reasonable to assume he knows more about business than the average Democratic politician, such as DNC Chair Debbie Wasserman Schultz, who recently said, “We applaud success, but [Romney’s] record, which he’s hung his candidacy on, of being a corporate raider, and of essentially coming into communities, devastating the local economy, shutting down plants, deliberately bankrupting companies and shipping jobs overseas is not one that voters are embracing.”

Sounding a similar note, a Nobel Prize winning economist said that Romney and Bain were, by being so ruthless about wringing out inefficiency, “helping to destroy the American middle class.”

Our factory is the antidote to all of this heartless, rapacious, greedy capitalism. Alas, it will never sell any products, because our lovingly-made, middle-class nourishing solar panels with a conscience cost many times more than Chinese-made competition. At the end of his article, Davidson discovers to his surprise that Standard Motor Products is run by perfectly nice people (its CEO is graced with an unimpeachable mark of virtue–his dream was to be a reporter for The New York Times) who are simply unable to pay their workers more lest their prices rise above what their customers will pay, causing their business to fail. And yet: with nothing on their conscience but profit, they continue to employ Americans.

Meanwhile our imaginary solar-panel factory joins the moonscape of abandoned property in Detroit. Putting workers before profit, it turns out, leaves you with neither.

What If Obama & Krugman Tried to Run a Business? – Kyle Smith, Forbes

As Obama Crows, Real Story Is 10.5 Million Jobs Deficit

Unemployment Catastrophe, Unindicted Co-Conspiritors No Responses »

Feb 052012

According to data from the Federal Reserve Bank of Minneapolis, the economy is just 0.7% above its previous high. Usually at this point in an expansion, it’s 13.5% above the last peak. In other words, thanks to Obama’s policies, we’re missing about $1.8 trillion in GDP — or roughly $5,760 for every man, woman and child.

Far worse for most Americans is the jobs depression that has accompanied Obamanomics. As the chart shows, we’ve suffered a jobs implosion greater than any since World War II.

Obama likes to blame his predecessor for this. And true enough, 4.4 million jobs disappeared during the 2007-08 panic. But after Obama took office, an additional 4.3 million jobs disappeared. So when Obama says “we’ve added 3.7 million new jobs,” he’s not giving you the full story.

We are still 5.6 million jobs below where we were at the peak in 2007. Add to that the 4.9 million new jobs that would have had to be created just to soak up new entrants into the workforce, and all told we have a jobs deficit of 10.5 million.

As Obama Crows, Real Story Is 10.5 Million Jobs Deficit – Editorial, IBD

Most U.S. Manufacturing Jobs Gone for Good

Back to the basics, Bilderbergers 1 USA 0, The Sorry State Of American Manufacturing, Unemployment Catastrophe, Unintended Consequences No Responses »

Feb 052012

Yet “a small business trying to grow its market share is not going to have a decision driven by a tax break,” he continued. “It’s not the cost of labor. The issue is components. Our Buttkicker requires steel, aluminum, copper, a circuit board, chips and resisters, plugs and power adapters. . . These components still come from China. We’ve lost the infrastructure for a lot of these parts,” he said.

Meanwhile, manufacturing firms that are trying to compete with Chinese firms say they are being undermined by unfair trade practices. U.S.-based solar manufacturers last October filed a trade complaint against China-based firms for dumping solar cells on the U.S. market at below their cost of production, which they can do because of substantial government subsidies. The International Trade Commission issued a preliminary ruling in their favor earlier this week.

“Twelve U.S. companies have gone out of business or experienced significant layoffs in the past year,” said Tim Brightbill, an attorney at Wiley Rein, which filed the complaint on behalf of SolarWorld in Portland, Ore., and six other domestic manufacturers.
“Over 2,000 manufacturing jobs are gone.”

But America’s love affair with cheap goods made overseas extends even to this high-tech industry, which is having its domestic subsidies pulled away after repeated assaults on Capitol Hill. A coalition of solar installers and manufacturers, some of whom have their own operations in China, oppose the imposition of trade sanctions on China.

And it’s not hard to understand why. Solar installer sales are surging based on cheap Chinese solar cells. “Oversupply is good for you and me,” Danny Kennedy, founder of California-based installer Sungevity, said shortly after the complaint was filed. “We are doing what we are meant to be doing, which is to make solar cheap and affordable.”

Most U.S. Manufacturing Jobs Gone for Good – M. Goozner, Fiscal Times

Fannie Ignored 2006 Warnings About Widespread Mortgage Abuses

A Moral Question - Not A Political One, Back to the basics No Responses »

Feb 052012

…and possibly so did Newt Gingrich

From Naked Capitalism:

Gretchen Morgenson of the New York Times reports on an ugly bit of mortgage market history: that Fannie Mae was told in 2006 to address the derelict behavior of its servicers and foreclosure mills yet chose to do pretty much nothing about it.
Read the Rest…

Secular Hegemony

European Union? No Responses »

Feb 052012

The end of five thousand years of Greek struggle. The EU will do what Persia couldn’t.

The German government proposed last week that a European commissioner be appointed to supplant the Greek government. While phrasing the German proposal this way might seem extreme, it is not unreasonable. Under the German proposal, this commissioner would hold power over the Greek national budget and taxation. Since the European Central Bank already controls the Greek currency, the euro, this would effectively transfer control of the Greek government to the European Union, since whoever controls a country’s government expenditures, tax rates and monetary policy effectively controls that country. The German proposal therefore would suspend Greek sovereignty and the democratic process as the price of financial aid to Greece.

Though the European Commission rejected the proposal, the concept is far from dead, as it flows directly from the logic of the situation. The Greeks are in the midst of a financial crisis that has made Greece unable to repay money Athens borrowed. Their options are to default on the debt or to negotiate a settlement with their creditors. The International Monetary Fund and European Union are managing these negotiations.

Make Crony Capitalism the Issue in 2012

A Moral Question - Not A Political One, A State of Distress, HEY AMERICA-STICK 'EM UP!, It Is Supposed to be a Republic!, It starts with a foundation, IT'S ALL ABOUT POWER AND MONEY, Jacksonian Democracy No Responses »

Jan 222012

The issue of crony capitalism should be front and center in this campaign. President Obama defends his cronies instead of the so called 99 percent. That’s his contradiction. Big Labor, Big Business and Big Green Energy are collections of cronies with big jobs, big salaries and big privileges. Nothing to do with the 99 percent.

But Romney can go even further to slam crony capitalism. This is where tax reform and deep spending cuts come in. A flattening of tax rates should be accompanied by the elimination of cronied tax deductions, exemptions and carve-outs. Even more, we should get rid of crony corporate welfare wherever it exists, including crony government subsidies to energy, exports and agriculture. Wherever it exists.

Let’s say you went to two tax brackets at 10 and 25 percent, as per Paul Ryan’s plan, or even the next step of a single-rate flat tax. Here, all the crony tax advantages should be wiped out. They won’t be necessary at lower rates, and their removal would end crony favoritism.

Finally, Romney can punctuate his crony-capitalism attack by telling folks he will overturn and upend the prevailing Washington, D.C., establishment.

Sadly, with the exception Rick Santorum making the case for lower tax rates, Thursday night’s debate had virtually no discussion of tax reform. Newt Gingrich never even once mentioned his 15 percent flat-tax plan. Unfortunately, Newt still leaves most deductions and carve-outs in place, and that needs to be fixed.

That aside, Romney capped his strong performance with a Reaganesque summation. As he has in the past, he criticized Obama for trying to “transform” America from a merit society — an opportunity society where people are free to choose — to a European-style entitlement society. Romney said, “We need to restore the values that made America the hope of the Earth. … (President Obama) has made it almost impossible for our private sector to reboot. … I will defeat Barack Obama and keep America as it’s always been, the shining (city) on a hill.”

Make Crony Capitalism the Issue in 2012 – Larry Kudlow, National Review

COUNTDOWN TO MARCH 2012

A Changing Europe, A Moral Question - Not A Political One, A Shareholder-Not Just a "Stakeholder", A State of Distress, A Time To Repent, Collateral Damage, Consumption Ran the Old Economy, Deflation-Inflation-Stagflation, Dismal Science-Ignorant Scientists?, Economic Analysis Isn't Science, European Union?, Former Economist, Global Trade, Goldman: Underwriter or Undertaker?, Greenspan is kind of stupid, History of Finance, IMF Issues - Discussion, Insolvency, It Is Nice To Be Part of the Elite!, It starts with a foundation, IT'S ALL ABOUT POWER AND MONEY, Let's Call What It Is - DEPRESSION, Monetary Policy - Discussion, Moral Hazard, PANDEMIC, Patience is a virtue...Delusion is a vice, Pig-Headed Economic Policy May Still Lead to Disaster, PIIGS Default?, Political Chaos, Political Implications No Responses »

Jan 162012

GROWING WORRIES IN ATHENS

A Greek Default Would Hit the ECB Hard

Hopes that Greece can be saved are dwindling. Athens had hoped to reach a deal with its creditors on a 50 percent debt haircut, but banks have now made it clear that efforts to reach an agreement could fail. Should the country go bankrupt, the European Central Bank stands to lose the most.

I FINALLY FOUND A TREE!

A Picture Is Worth A Thousand Words No Responses »

Jan 162012

Polar bears and Asian lions are particularly enticed by the Christmas tree smell, according to zookeepers. They say it stimulates their behavior. Here, a polar bear at the Berlin Zoo is shown in an archive photo.

2012 could be the year Germany lets the euro die

A Changing Europe, Bilderbergers 1 Germany 0, Collateral Damage, Coming Social Unrest, European Union? No Responses »

Jan 032012

Germany will not be able to fudge EMU any longer. It must either immolate itself, accepting a debt union and internal inflation to save a currency it never wanted and doesn’t love; or opt instead to uphold fiscal sovereignty and the essence of its own democracy, and let the Project die.

The shrewd, equivocating, ice-cold Chancellor will quietly oust arch-europhile Wolfgang Schauble and let the Project die, always pretending otherwise.

Just an idle hunch. Guten Rutsch.

Germany May Let Euro Die In 2012 – Ambrose Evans-Pritchard, Telegraph

Oxymorons

A Saturday Break 1 Response »

Dec 312011

1. Is it good if a vacuum really sucks? 2. Why is the third hand On the watch Called the second hand? 3. If a word is misspelled In the dictionary, How would we ever know? 4 If Webster wrote the first dictionary, Where did he find the words? 5. Why do we say something is out of whack? What is a whack? 6. Why does “slow down” and ”slow up” mean the same thing? 7. Why does “fat chance” and “slim chance”> Mean the same thing? 8. Why do “tug” boats push their barges? 9. Why do we sing ”Take me out to the ball game” W hen we are already there? 10. Why are they called ” stands” When they are made for sitting? 11. Why is it called “after dark” When it really is “after light”? 12.. Doesn’t “expecting the unexpected” Make the unexpected expected? 13.. Why are a “wise man” and A “wise guy” opposites? 14. Why do “overlook” and “oversee” Mean opposite things? 15. Why is “phonics” Not spelled The way it sounds? 16. If work is so terrific, Why do they have to pay you to do it? 17.. If all the world is a stage, Where is the audience sitting? 18. If love is blind, Why is lingerie so popular? 19. If you are cross-eyed And have dyslexia, Can you read all right? 20. Why is bra singular And panties plural? 21.. Why do you press harder On the buttons of a remote control When you know the batteries are dead? 22. Why do we put suits in garment bags And garments in a suitcase? 23. How come abbreviated Is such a long word? 24. Why do we wash bath towels? Aren’t we clean when we use them? 25.. Why doesn’t glue Stick to the inside of the bottle? 26. Why do they call it a TV set When you only have one? 27. Christmas——- What other time of the year Do you sit in front of a DEAD TREE And EAT CANDY OUT OF YOUR SOCKS? 28. Why do we drive on a parkway And park on a driveway?

The Most Important Economic Chart Of The Year

A Picture Is Worth A Thousand Words, Analysis & Commentary, Back to the basics, Bond Market, Creditors Caveat, Deflation-Inflation-Stagflation, Devaluation, Economic Analysis Isn't Science, European Union? No Responses »

Dec 262011

courtesy of Spiegel Online:

This chart illustrates the end of euro complacency. Investors once acted as though the euro eliminated not just currency risk but sovereign credit risk. All nations–from Greece to Germany–could borrow at the same low rates. No longer. As the financial crisis enters its fifth year, markets are again distinguishing between strong nations and weak.

I subsequently discovered that I am not alone in choosing this chart. The BBC has a version of this as the first entry in its survey of top graphs of the year (with commentary by Vicky Pryce of FTI Consulting), and Desmond Lachman of the American Enterprise Institute included it in Derek Thompson’s survey of top graphs over at the Atlantic.

P.S. For the United States, I think Brad DeLong is right: behold the shortfall in nominal U.S. GDP.

The Most Important Economic Chart Of The Year by Donald Marron

Signs Point to Economy’s Rise, but Experts See a False Dawn

Analysis & Commentary 1 Response »

Dec 232011

“Unfortunately, I think we’re going to see a slowdown over the course of next year,” Ethan Harris, co-head of global economics research at Bank of America Merrill Lynch, told reporters last week. “Not only do we have the European crisis spilling over and hurting U.S. trade and confidence,” he said, but the United States economy also faces “homegrown shocks.”

There are two reasons for the renewed pessimism. First, economists say that temporary trends increased growth in the fourth quarter and may not continue into next year. Second, the economy faces significant headwinds in 2012: some from Europe’s long-lingering sovereign debt crisis, and some from domestic cutbacks beyond the control of President Obama, whose campaign would like to point to a brightening economic picture, not a darkening one. Even the Federal Reserve is predicting that the unemployment rate will remain around 8.6 percent by the time voters go to the polls in November.

The fourth quarter benefited, for instance, from wholesalers restocking inventories of goods like petroleum, paper and cars, giving a jolt to growth.

“We had lean inventories, so those required additional production to satisfy demand,” said Gregory Daco of IHS Global Insight. “But once inventories are restocked, there is no need to restock them anymore. That means there’s going to be less production,” he said.

Consumers also pulled back on their savings, helping to finance a recent spurt in spending. a trend that forecasters doubt will continue. Other short-lived factors include falling gasoline and commodity prices, and an increase in orders from Japanese companies returning to business after the devastating spring tsunami.

But next year, Washington is increasing some taxes and reducing spending as temporary measures enacted during the worst of the recession expire. That will damp growth by a percentage point or more next year, forecasters say. Provisions like a tax write-off to help businesses pay for equipment are winding down or ending.

Signs Point to Economy’s Rise, but Experts See a False Dawn

Political Realities Threaten To Split The Eurozone

Decapitalization, European Union? 1 Response »

Dec 182011

Nicolas Sarkozy will be the only French president since World War II with two recessions under his watch, if the forecast by the National Institute of Statistics and Economics (Insee) turns out to be correct. Recessions are rare in France: between the end of the war and the beginning of the financial crisis, there were two. Then came the four negative quarters of 2008/2009. Now, Insee forecasts another contraction: -0.2% in the fourth quarter of 2011 and -0.1% in the first quarter of 2012.

After an uptick over the summer, economic indicators have gone south.
Read the Rest…at Naked Capitalism

Fragile and Unbalanced in 2012

Nouriel Roubini, Our phony middle class, Patience is a virtue...Delusion is a vice, Pig-Headed Economic Policy May Still Lead to Disaster, Political Implications, Read and Weep Entries, Sound Familiar?, TARP fruit loops, The American Financial Oligarchy, The Arrogance of Power, The Consequences of Greed, The End of American Capitalism As We Know It? - Discuss, The excellent adventures of Ben Bernanke, The Financial Elite, The Global Economy, The Great American Heist, The Importance of Strategic Planning, The Inherent Disorder of Empires, The Intrusion of UNLAWFUL Authority, The Obama OMG magic factory, The Sorry State Of American Manufacturing, The Suffering Poor, The Ticking Euro Bomb, This self-serving arbitrariness, Unemployment Catastrophe, Unindicted Co-Conspiritors, Unintended Consequences, Wage Deflation, We Are All Cooked, We Have Become Beggars To The World, Who Guarantees the Guarantor?-You Do!, Who owns Congress-Still! No Responses »

Dec 172011

Policymakers are running out of options. Currency devaluation is a zero-sum game, because not all countries can depreciate and improve net exports at the same time. Monetary policy will be eased as inflation becomes a non-issue in advanced economies (and a lesser issue in emerging markets). But monetary policy is increasingly ineffective in advanced economies, where the problems stem from insolvency – and thus creditworthiness – rather than liquidity.

Meanwhile, fiscal policy is constrained by the rise of deficits and debts, bond vigilantes, and new fiscal rules in Europe. Backstopping and bailing out financial institutions is politically unpopular, while near-insolvent governments don’t have the money to do so. And, politically, the promise of the G-20 has given way to the reality of the G-0: weak governments find it increasingly difficult to implement international policy coordination, as the worldviews, goals, and interests of advanced economies and emerging markets come into conflict.

As a result, dealing with stock imbalances – the large debts of households, financial institutions, and governments – by papering over solvency problems with financing and liquidity may eventually give way to painful and possibly disorderly restructurings. Likewise, addressing weak competitiveness and current-account imbalances requires currency adjustments that may eventually lead some members to exit the eurozone.

Restoring robust growth is difficult enough without the ever-present specter of deleveraging and a severe shortage of policy ammunition. But that is the challenge that a fragile and unbalanced global economy faces in 2012. To paraphrase Bette Davis in All About Eve, “Fasten your seatbelts, it’s going to be a bumpy year!”

Fasten Your Seatbelts For Rough 2012 – Nouriel Roubini, Project Syndicate

Nouriel Roubini is Chairman of Roubini Global Economics and professor at the Stern School of Business, New York University. His detailed 2012 global growth outlook is available at www.roubini.com

Greeenspanism

Bilderbergers 1 USA 0, Greenspan is kind of stupid 1 Response »

Dec 102011

Now the system desperately clings to some magical hope of saving itself, and thus this kind of artificial economy. An economy where activity is not marginally predicated on productive endeavors of work and earned income, but of the shifting and constant transference of paper currency and claims, created by the whims of flawed mathematical calculations. Banks must be bailed out because their failure means the monetarist system fails with them. The economy does not fail if the banks fail, THEIR economy fails if the banks fail.

Had the Federal Reserve, and its fellow global central banking cartel participants, stayed out of the economic management business global growth would necessarily have been slower, but would that have been such a bad thing? The tortoise and the hare are a lasting parable for good reason. Consumer spending would not have reached 70%+ of the economy, but that would necessarily have meant a larger proportion of marginal economic activity based on productive production. Production usually leads to jobs, and it is no coincidence that our current dearth of jobs is coincident to the neglect of productive capacity in favor of financial innovation.

The indebted and impoverished households of the developed world have finally seen through the façade of monetarism, now demanding actual jobs, boring earned income and a solid foundation of traditional financial stability to lead us into a future of prosperity. It is no coincidence that retail stock investors are fleeing price markets while real estate remains mired in depression. The system is devolving (or re-learning if you want to see it as the positive transformation that it is) on its own, finally and mercifully impervious to the central control of credit production.

The central economic authorities have tried their best, but the real free market is trying to assert the real price of risk. The economy is now caught between diametrically opposed forces – the return to true productive potential vs. another fit of money inflation and its obligatory crash.

Euro Summit Still Trying to Sort Out Greenspanism – Jeffrey Snider, RCM

More “collateral damage”

Collateral Damage 1 Response »

Dec 102011

A new proposal by the New York Stock Exchange to trade retail orders in increments of a 10th of a penny—down from today’s one-cent ticks—is meant partly to restore the confidence of retail investors by keeping the exchange competitive with alternative trading platforms.

“We’re trying to further improve the quality of order flow for retail orders in the public markets,” says Joseph Mecane, executive vice president at the exchange.

But those tiny trading increments could present new opportunities for mischief by high-speed traders and lead to more “collateral damage,” says Kevin Cronin, global head of equity trading at Invesco.

So what can you do to trade more safely?

How Small Investors Can Get Stomped – Jason Zweig, Wall Street Journal

Mall Rats Can’t Bring About the Wealth of Nations

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Dec 042011

there is something fundamentally wrong with a culture that promotes spending as the key to health and wealth. A multidecade borrowing-and-spending binge whittled the U.S. savings rate from an average of 9.6 percent in the 1970s, to 8.6 percent in the 1980s, to 5.5 percent in the 1990s, to 3.3 percent in the 2000s. At one point during the housing bubble, the savings rate approached zero.

My generation learned about the virtues of thrift from our parents, who were children of the Great Depression. Subsequent generations haven’t had the benefit of real-world teachers. For them, the 1930s are a story told through sepia-toned photographs of ravaged dust-bowl farms and bread lines.

Younger generations of Americans have grown up on conspicuous consumption. The focus has been on what something costs today — the monthly interest payment on the credit card or mortgage — not whether the car or home is affordable. Easy and cheap credit made it all possible.

Incentive to Spend

The Federal Reserve is complicit, too, in discouraging saving by holding its benchmark rate close to zero and pledging to keep it there at least through mid-2013. Consumers aren’t getting paid to save. The rate they can earn on bank deposits is negative when adjusted for current or expected inflation. Therefore, they spend. High real rates induce consumers to forgo current spending and save.

Households have been deleveraging for three years in an attempt to repair their balance sheets. Yet many economists and policy makers advocate more borrowing and spending as a cure for what ails the economy, and cheer as mall rats infest stores in the middle of the night. How can that be?

I suspect it’s the old short-run/long-run dichotomy. By now, though, it should be obvious that the U.S. suffers from an extreme case of short-term thinking, and it underpins decisions on everything from tax-and-spend policy to monetary policy.

Even the stock market applauds more “consumption,” a synonym for spending I try to avoid. A former editor said the word made him think of people wasting away from tuberculosis, which happens to be Merriam-Webster’s first definition. It was enough to convince me.

In the context of this column, however, the alternate definition seems appropriate: “the utilization of economic goods in the satisfaction of wants … resulting chiefly in their destruction, deterioration, or transformation.”

“Destruction” should be a tip-off that whatever it is, it isn’t wealth.

Mall Rats Don’t Produce Wealth of Nations – Caroline Baum, Bloomberg

I think the most notable development this week was Thursday’s big release of global factory activity surveys. It wasn’t pretty. Overall, the JP Morgan Global Manufacturing PMI dropped for the third straight month and fell below the 50 level — the line of demarcation between growth or contraction in monthly factory activity — for the first time since recession was descending upon us back in early 2008. Scary stuff.

Although U.S. activity was buoyant (no doubt a remnant of the sentiment tailwinds enjoyed from the market rally in October), we cannot remain an island of tranquility as Asia and Europe fall into the abyss.

Here are the highlights (any reading under 50 indicates a drop in activity):

*Brazil PMI: 48.7 vs. 46.5 prior
*Ireland PMI: 48.5 vs. 50.1 prior
*Sweden PMI: 47.6 v. 49 estimated
*Norway PMI: 48.6 vs. 50.2 estimated
*Denmark PMI: 47.7 vs. 43.6 prior
*Poland PMI: 49.5 vs. 51.7 prior
*Spain PMI: 42.8 vs. 43.9 prior
*Swiss PMI: 44.8 vs. 46.6 estimated
*Czech PMI: 48.6 vs. 51.7 prior
*Italy PMI: 44 vs. 42.8 estimated
*France PMI: 47.3 vs. 47.6 estimated
*Germany PMI: 47.9
*Greece PMI: 40.9 vs. 40.5 prior
*South Korea PMI: 47.1 vs. 48 prior
*Taiwan PMI: 43.9 vs. 43.7 prior

And, now for the big boys:

*Eurozone PMI: 46.4 — lowest reading since recession ended in July 2009
*U.K. PMI: 47.6 vs. 47 estimated — lowest since June 2009
*China PMI: 49 vs. 49.8 estimated — lowest reading since February 2009
*China HSBC PMI: 47.7 vs. 51 prior — 32-month low

In addition to signs of economic weakness — which was enough for a Chinese vice finance minster to say the global economy faces a “worse situation” than in 2008 — there was evidence that the financial system remains under severe stress despite the freak out over Wednesday’s move by the Federal Reserve to lower dollar funding costs for foreign banks (which, as I discussed at the time, wasn’t really a game changer). The European Central Bank reported that eurozone banks borrowed nearly €9 billion in overnight emergency cash — up from €2.7 billion earlier this week. Not good.

Other signs of strain could be seen in the way German 12-month bill yields dropped below zero on Wednesday as European investors were willing to pay Berlin for the luxury of lending it money. The motivation is that, if you’re holding a big wad of euros, German short-term debt is one of the few “sure bets” left out there. It’s a sign of extreme risk aversion and fear.

Of course, the epicenter for all this is Europe.

Adding to concerns were comments this week from new ECB chief Mario Draghi that while downside risks to the economic outlook have increased, he cannot ride to Europe’s rescue by engaging in unmitigated money printing and bond buying; instead, it must adhere to its founding principles, including an inability to engage in monetary financing of government debts (exactly what the likes of Italy would love right now).

Draghi’s comments were akin to yelling “fire” in a crowded theater before announcing all the fire extinguishers are empty. Whoops.

According to the team at Capital Economics, based in London, the eurozone economy is on track to contract by 1% next year and by 2.5% in 2013, with risks to the downside for both forecasts. Recession will only deepen the budget deficits at the center of the eurozone debt crisis. The only way out is growth. And the only way the likes of Greece, Portugal, and Italy can restore growth is via massive currency depreciation and domestic inflation — something that’s not going to happen as long as they’re in the eurozone.

Sure, there will be distractions like Wednesday’s move by the Fed or additional stimulus measures out of places like China and Brazil. That’s just how the market gods like it. All the better to keep the masses confused and complacent as the fundamentals just get worse and worse.

To put it differently: When you look around the theater, everyone’s still focused on center stage blissfully unaware what’s happening around them. Turn around. The balcony level is in flames.

The Economy Is About To Get A Lot Worse – Anthony Mirhaydari, MSNBC

A Future Prediction

Analysis & Commentary No Responses »

Nov 272011

The governments, regulators and bullion banks have let the silver market get more and more leveraged. We’ve seen a lot of wealth destruction as a result of this leverage and we’re going to see a lot more until, finally, the governments decide to change the system
I don’t buy the argument on margin hikes at all.

It’s not up to them to decide what is parabolic. They’re not investors themselves. They don’t have money in the market. They decide a bubble is going to happen if they don’t raise margins but no one knows when a bubble is forming. It is only apparent after it’s already happened. By hiking the margins, they create the appearance of a bubble bursting. They create the bubble. They create the proof that it was a bubble. If they let it alone, the market would stabilize by itself

The job of the regulators is to protect the retail investor. That’s their only job. It’s not to protect the banks or the brokerage firms. The little guy is the primary taxpayer. Why were the Securities and Exchange Commission (SEC) and the CFTC put in place? They were put in place to protect retail investors. Prior to regulation, the banks controlled the market. Today, the banks control the market again. Who should control the market? Retail investors. Who’s protecting them? No one.
Are you saying that the CFTC does nothing while the COMEX caters to banks and brokerage firms?
Yes.

And the COMEX doesn’t serve retail investors?

No. Absolutely not.

Do you foresee a return to a free market in the future?

I’m an optimist. I believe one day that governments will rewrite the rules and force the regulators to protect investors. That’s where we were back in the ‘70s and that’s where I think we have to be again to correct the problems that have arisen over the past 40 years. Silver is being revalued. It’s going to affect a lot of people along the way and it will change the financial system. Ultimately, we’re going to have a new financial system and, hopefully, we’ll go back to natural markets, completely driven by supply and demand. It may take another 20 years but I think it will happen.

A new financial system?

If I’m wrong, the banks will run the world, even more so than they do today, 10 or 20 years from now. God forbid that we ever get there because that’s a one currency, one government world that would absolutely be a disaster for the human race. There would be no freedoms at all to move or to invest. It would be like having shackles on our ankles. There is a movement to go in that direction, unfortunately. There are a number of very wealthy people that want to see that. I hope that we can find the politicians to prevent that type of world from coming to pass.

Keith Neumeyer

Chief Executive Officer, President and Director of First Majestic Silver Corp. (AG). Mr. Neumeyer began his career at the Vancouver Stock Exchange and worked in the investment community for 26 years beginning his career in a series of Canadian national brokerage firms including McLeod Young Weir (now Scotia McLeod), then Richardson Greenshields and then Walwyn Stogell McCuthchen (which became Midland Walwyn).

Mr. Neumeyer moved on to work with several publically traded companies in the natural resource and high technology sectors. His roles have included senior management positions and directorships in the areas of finance, business development, strategic planning and corporate restructuring. Mr. Neumeyer, who has listed a number of companies on the Toronto Stock Exchange, has extensive experience dealing with financial, regulatory, legal and accounting issues.

Time To Move To Cash?

Analysis & Commentary, Back to the basics, Cash Is King! No Responses »

Nov 272011

Is it time to exit the stock market and move to cash?

What looks like the most logical move for stock investors may not end up being the best move. We have a situation in Europe that is teetering on the brink of full-blown crisis that would likely result in a global financial contagion. Such an outcome would be decisively negative for stocks. Thus, moving fully from stocks to cash might almost appear like a no brainer.

But making such a decisive move amplifies a particular element of risk in your portfolio. It is policy risk. And it is measured by the actions or lack thereof by global fiscal and monetary policy makers in addressing the various crises that arise along the way. Just as the lack of any policy action is a downside risk, the execution of aggressive policy action is a profound upside risk for stocks. Therefore, while waiting for policy action that never comes can be perilous, it can be equally crushing to exit the stock market just as unexpectedly aggressive policy action sends the stock market soaring.

The primary challenge in managing policy risk is that it is difficult to measure. This is due to the fact that it is highly dependent on the whims of human behavior and decision-making. On what day, if ever, does German Chancellor Angela Merkel suddenly decide that Eurobonds may actually be a good idea? At what hour, if at all, does the European Central Bank opt to announce that they will engage in quantitative easing through the large scale asset purchases of the bonds of at risk sovereigns across the eurozone? And at what moment, and to what scale, does U.S. Fed Chairman Ben Bernanke decide to begin pulling the trigger on QE3? While investors can spend their days reading various tea leaves, there’s no telling exactly when during times of crisis that policy makers may finally be compelled to act if at all. This leaves stock investors on a constant tight rope since the two outcomes associated with policy action and policy inaction are so widely divergent. Stay in the stock market that receives no policy support and suffer further declines, or exit the stock market that suddenly receives policy support and miss a dramatic rally. Frustrated stock investors have to look no further than the afternoon of October 4to see how swiftly the market can shift, seemingly without any reason whatsoever other than the policy response – Operation Twist in this case – that often only becomes apparent in retrospect.

So what is an investor to do? All signs out of Europe indicate that it’s time to get out of stocks and get to the sidelines. But we could wake up on any given day and the stock market is suddenly soaring behind some extraordinary (or perceived to be extraordinary) policy response from the ECB, eurozone leaders and/or the Fed. So what is the answer? It’s not necessarily about choosing between stocks or cash. Instead, it’s about hedging your stock positions with allocations that include cash.

It should not be a question of stocks OR cash in the current environment. Instead, the answer is stocks AND cash along with a variety of other complementary positions that are designed to withstand crisis and have the potential to perform when stocks are under extreme pressure. This way, stock investors can more effectively manage against policy risk so that they can participate if stocks suddenly rise due to aggressive policy action but are also protected if stocks continue to fall.

Time To Move To Cash? by Eric Parnell

How a “Bad Bank” appears to be a “Good Bank”

The Inherent Disorder of Empires, The Intrusion of UNLAWFUL Authority, The Joy of Being A Bank, This self-serving arbitrariness No Responses »

Nov 202011

it is in the bank’s best interest to ensure that the “thickness” of the equity tranche is maximized (for both a bank and a securitization structure). However, since it is perceptions of thickness that matter, believable means to achieving equity buffers are far more effective. Contrast that need with a bank on a physical fractional standard where the amount of cash in a vault is the governing limitation. Under the cash standard the bank would be out of business once the cash dwindled, regardless of whether there were any actual losses incurred. Again perceptions matter here, but it is more about cash on hand and less about actual losses. So it seems like there has been a positive evolution as actual losses are now the impetus for “runs”, not just fear of a lack of available physical cash. The capital-based framework systemically sorts “bad” banks from “good”.

But as we see all too plainly today, there is no real answer when a large proportion of the banking cohort cannot be counted as “good” banks. In fact, the capital ratio scheme has already completed part of its job by pointing out which banks are in fact “bad” banks. Where the system seems to be failing is in how to deal with those problem institutions since there is no shortage of less-than-believable “solutions” to the equity capital buffer problem.

If regulators endorse, as they appear to be doing, the fantasy of risk-weighted asset optimization accounting, then the capital ratio-standard of banking is entirely insufficient to do the full job it was designed for. This is nothing more than moral hazard in different clothing.

At some point, the banking system is supposed to advance the idea of intermediation in the real economy. Since long-term economic health is utterly dependent on money being efficiently allocated to “good” ideas and projects (those that have the best prospects for long-term stability and sustainability), it follows that banks that accumulate large losses are economically inefficient. “Bad” banks are doing nothing more than assigning and allocating credit to “bad” ideas, so the economy is actually far worse off if they continue to exist. It makes no sense to allow inefficiently allocating banks to stay in business since they produce a negative productivity of credit money.

Under less stressed systemic circumstances, the capital ratio failure of “bad” institutions would likely lead to the orderly bankruptcy of the credit producer in question – with the full approval and assistance of regulators. The system is simply ill-equipped, however, for a mass of failures (defined by the size of institutions) at the same time. In other words, the equity capital system is not all that much better than the physical system since both inadequately deal with systemic pressures (though in opposite directions). That means that the capital limitations from the preceding stage of the systemic event, the credit buildup, is not at all effective at limiting the ability of the system to build and maintain negative productivity of money and credit. The equity standard allows a large accumulation of “bad” banks, in direct contrast to its stated purpose.

The supposed superiority of the equity capital system led the banking system to fully believe it had discovered a better understanding of risk, and therefore could accumulate far more risk than a physical system. This unwarranted expectation meant extending fractional lending out to extremes. At the same time, these accumulations of risk were advanced into the real economic system through perverted prices and incentives.

Reality No Longer Has a Seat at the Banking Table – Jeffrey Snider, RCM

What They Don’t Teach Law Students: Lawyering

Humor and Humility, Important Skills - No Apprentice Programs, It starts with a foundation No Responses »

Nov 202011

For decades, clients have essentially underwritten the training of new lawyers, paying as much as $300 an hour for the time of associates learning on the job. But the downturn in the economy, and long-running efforts to rethink legal fees, have prompted more and more of those clients to send a simple message to law firms: Teach new hires on your own dime.

“The fundamental issue is that law schools are producing people who are not capable of being counselors,” says Jeffrey W. Carr, the general counsel of FMC Technologies, a Houston company that makes oil drilling equipment. “They are lawyers in the sense that they have law degrees, but they aren’t ready to be a provider of services.”

Last year, a survey by American Lawyer found that 47 percent of law firms had a client say, in effect, “We don’t want to see the names of first- or second-year associates on our bills.” Other clients are demanding that law firms charge flat fees.

What They Don’t Teach in Law School: Lawyering – David Segal, NY Times

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