Fed Granted Stay; Has to 9/30 to Appeal Disclosure Order

Hear ye, heat ye, all rise!

The case of Bloomberg LP v. Board of Governors of the Federal Reserve System, U.S. District Court, Southern District of New York (Manhattan), No. 08-9595.


The Federal Judge that granted Bloomberg’s FOIA request for information about borrowers from the Federal Reserve has granted a temporary stay of execution to the Fed:

Federal Reserve has until Sept. 30 to appeal a federal judge’s order requiring the central bank to identify financial institutions that benefited from its emergency loans.

The Fed’s Board of Governors asked Manhattan Chief U.S. District Judge Loretta Preska to delay enforcement of her Aug. 24 decision that the identities of borrowers in 11 lending programs be made public by Aug. 31. The central bank wanted Preska to stay her order until the U.S. Court of Appeals in New York can hear the case.

The Fed’s “ability to effectively manage the current, and any future, financial crisis” would be impaired, according to the Fed’s motion for a stay. It said “significant harms” could befall the U.S. economy as well.

I suspect this is merely a delaying tactic, with the Fed eventually losing 3 to nothing on appeal.

It is one thing to grant immunity to sensitive defense secrets during wartime, it is something else entirely to avoid wanting to embarrass poorly run banks who needed cash, and keep crucial info from shareholders and taxpayers.

If the Appeals Court were to grant this request, then kiss the idea of an open soceity good bye. The slipperly slope downwards from this to anything else declared by any government agency to be “Important” or “Sensitive” or “Embarrassing” is the eventual result of the Fed winning their appeal.

My prediction: The Appeals court tells the Fed to go jump . .  .


Judge Sets Sept. 30 Deadline for Fed to Appeal Disclosure Order
Mark Pittman
Bloomberg, Aug. 28 2009

Judge puts Fed’s bailout revelations on hold
Jonathan Stempel
Reuters, Aug 28, 2009 6:48pm

Words from the (investment) wise August 30, 2009

Words from the (investment) wise for the week that was (August 24 – 30, 2009)

Stock markets, in general, again logged gains last week as pundits perceived economic data to be better than expected. But the recovery path is not home and dry yet, as shown by declines in crude oil, a number of emerging stock market indices, small cap indices and high-yield corporate bonds. All said, risky assets displayed some fatigue despite positive economic reports.

Caution remained over the robustness of any economic upswing, as reflected by the solid performance of government bonds, with safe-haven currencies such as the US greenback and the Japanese yen also edging up.

As expected, Federal Reserve Chairman Ben Bernanke was appointed by President Barack Obama on Tuesday to serve a second term. “Mr Obama is said to credit Mr Bernanke with a leading role in helping to avert economic catastrophe. By reappointing Mr Bernanke – who worked in the Bush White House – Mr Obama can also emphasize his bipartisan credentials at a time when he is embroiled in a fiercely partisan battle over healthcare reform,” commented the Financial Times.


Source: LOLFed.com

However, critics of Obama’s decision were plentiful and Morgan Stanley’s Stephen Roach, blaming Bernanke for his pre-crisis actions, said (via the Financial Times): “It is as if a doctor guilty of malpractice is being given credit for inventing a miracle cure. Maybe the patient needs a new doctor.” Bill King (The King Report) ascribed the stock market rising subsequent to Obama’s announcement to a “thank God it’s not Larry Summers” rally.

The past week’s performance of the major asset classes is summarized by the chart below – a set of numbers showing both the S&P 500 Index and government bonds rising, indicating an expectation of a subdued economic recovery and that the Fed’s monetary policy will stay easy for an extended period of time.


Source: StockCharts.com

A summary of the movements of major global stock markets for the past week, as well as various other measurement periods, is given in the table below.

The MSCI World Index (+1.3%) and MSCI Emerging Markets Index (-0.2%) again followed separate paths last week as China, Hong Kong and Brazil underperformed. Mature stock markets have recorded gains for a straight seven weeks, whereas emerging markets have seen two back-to-back weeks of declines. The end result is that emerging markets have now underperformed developed markets for four weeks running. Could this be a sign of a retrenchment in risk appetite?

The major US indices extended their gains to two consecutive weeks, including eight straight up-days in the case of the Dow Jones Industrial Index, before getting snapped by a decline on Friday. The year-to-date gains are as follows: the Dow Jones Industrial Index +8.7%, the S&P 500 Index +13.9% and the Nasdaq Composite Index +28.6%. With declines on three days, the Russell 2000 Index was the odd index out last week, but still boasts a respectable +16.1% gain since the beginning of 2009.

Click here or on the table below for a larger image.


Top performers in the stock markets this week were Lithuania (+28.2%), Estonia (+17.3%), Latvia (+12.6%), Egypt (+9.6%) and Iceland (+9.1%). The top three positions were all occupied by eastern European countries where worries over the risk of some economies collapsing have receded. At the bottom end of the performance rankings, countries included Nepal (-4.0%), China (-3.4%), Kenya (-2.7%), Uganda (-2.6%) and Bangladesh (-1.8%).

The Chinese Shanghai Composite Index recorded its fourth consecutive down-week as investors remained concerned about how long China’s exceptionally loose monetary policy will continue. The banking regulator has already instructed lenders to raise reserves to 150% of their non-performing loans by the end of this year – up from 134.8% at the end of June, and the central bank has increased money-market rates to drain liquidity.

However, US Global Investors opines that historically sustainable market rallies out of a cyclical trough usually start with an expansion in valuation multiples followed by a recovery in earnings. “China may be poised to enter this second stage against a favorable macro backdrop. With surging money supply and significantly lower commodity prices from a year earlier, corporate earnings in China could produce upside surprises going forward,” said the report.


Source: US Global Investors – Weekly Investor Alert, August 28, 2009.

Of the 96 stock markets I keep on my radar screen, 77% (last week 47%) recorded gains, 18% (47%) showed losses and 5% (4%) remained unchanged. (Click here to access a complete list of global stock market movements, as supplied by Emerginvest.)

John Nyaradi (Wall Street Sector Selector) reports that as far as exchange-traded funds (ETFs) are concerned, the winners for the week included CurrencyShares Russian Ruble (XRU) (+5.0%), First Trust Amex Biotechnology (FBT) (+4.8%), iShares MSCI Australia (EWA) (+4.5%) and iShares Silver Trust (SLV) (+4.2%).

On the losing side of the slate, ETFs included Claymore/AlphaShares China Real Estate (TAO) (-4.2%), Market Vectors Coal (KOL) (-3.1%), SPDR KBW Regional Banking (KRE) (-3.1%) and iShares MSCI Brazil (EWZ) (-3.0%).

As far as credit markets are concerned, Bloomberg reported that banks were increasing lending to buyers of high-yield company loans and mortgage bonds at what might be the fastest pace since the credit-market debacle began in 2007. “Federal Reserve data show the 18 primary dealers required to bid at Treasury auctions held $27.6 billion of securities as collateral for financings lasting more than one day as of August 12, up 75% from May 6. The increase over that 14-week stretch is the biggest since the period that ended April 2007, three months before two Bear Stearns Cos. hedge funds failed because of leveraged investments.” This is a sign of credit markets moving towards normalization.

Referring to the mind-boggling US budget deficit, the quote du jour this week comes from 85-year old Richard Russell, author of the Dow Theory Letters. He said: “Comes the dawn – and the penalty. There’s a price to be paid for Bernanke’s all-out battle to thwart the bear market. And now it’s being told. Yesterday the White House itself admitted that the budget deficit over the next 10 years would be $2 trillion above their original outrageous estimate of $7 trillion dollars.

“As I said all along, it would have been better to have allowed the bear market to run its course to conclusion. That would have been extremely painful, but the US would have recovered. However, deficits in the trillions could ultimately ‘break’ this nation. I can’t imagine how Bernanke-Obama plan to handle the coming mind-blowing deficits, plus the interest on those deficits.

“The pressure will be on the reserve status of the dollar, the level of the dollar compared to other international currencies, interest rates, and the standard of living of all of us living in the new ‘banana republic’, the United States of ‘bankrupt’ America.

“When you take all this in, you can begin to see how this bear market could end with stocks selling below known values and people despising the stock market and capitalism.”

Other news is that the Fed must for the first time identify the companies in its emergency lending programs – created to address the financial crisis – after losing a Freedom of Information Act lawsuit against Bloomberg. The Fed is likely to appeal against the order on the grounds that such disclosure would threaten the companies and the economy.

Also, the Federal Deposit Insurance Corporation (FDIC) on Thursday said (via the Financial Times) the number of “problem banks” had grown from 305 to 416 during the second quarter, representing total assets of $299.8 billion. In the meantime, the FDIC’s deposit insurance fund, which insures up to $250,000 per depositor in each bank, had fallen to just $10.4 billion – the lowest level since March 1993 – as a result of all the bank failures, tallying 84 so far in 2009.

Next, a tag cloud of all the articles I read during the past week. This is a way of visualizing word frequencies at a glance. Key words such as “market”, “Fed”, “bank”, “prices”, “rates” and “economy” featured prominently. Interestingly, “recovery” is still moving up the ranks as the global economy seems to have turned the corner.


The key moving-average levels for the major US indices, the BRIC countries and South Africa (from where I am writing this post) are given in the table below. With the exception of the Chinese Shanghai Composite Index, which fell below its 50-day moving average about two weeks ago, all the indices are trading above their respective 50- and 200-day moving averages. The 50-day lines are also in all instances above the 200-day lines and therefore not threatening the bullish “golden crosses” established when the 50-day averages broke upwards through the 200-day averages.

The August 17 lows that represent short-term support levels for the major US markets and are as follows: Dow Jones Industrial Index (9,135), S&P 500 Index (980) and Nasdaq Composite Index (1,931).

Click here or on the table below for a larger image.


For more on key levels and some ideas regarding the short-term direction of the S&P 500 Index, Adam Hewison’s (INO.com) short technical analysis provides valuable insight. Click here to access the presentation.

The chart below, courtesy of Bespoke, shows that the average short interest as a percentage of float for stocks in the S&P 1500 is currently at 6.9% – the lowest level since February 2007 when the average was 6.6%. “In 2008, it was the bulls who argued that high levels of short interest were a reason the market should rally. With the recent data, however, it is now the bears who will argue that low levels of short interest suggest that investors are now too bullish,” remarked Bespoke.


Source: Bespoke, August 26, 2009.

Doug Kass (The Street.com) said: “The authorities have created a sugar high for speculation, with a Federal Reserve that has maintained interest rates so low that there is no return on savings and with an Administration that promises to provide stimulus until it manufactures economic growth. My view is that investors will shortly see through the current sugar high and the better-than-expected earnings cycle and will begin to look over the valley at the chronic and secular issues that have emerged from the past cycle and from policy decisions aimed at returning the domestic economy toward self-sustaining growth.”

The last words on equities go to Jeff Saut, investment strategist of Raymond James, who said “‘Breakout or fake out?’ is the question du jour. Yet as market maven Arthur Zeikel wrote decades ago, ‘Despite what theoreticians tell us, investing – particularly at the margin – is not the product of rational and objective analysis, but an emotional relative analysis – anxiety about the future.” My colleague Bob Ferrell put it this way: ‘Emotions are simply stronger than reason; people do not change and people make markets!’ Indeed, fear, hope and greed are only loosely connected to the business cycle. And, at session 30 in the ‘buying stampede’, we are clearly in the ‘greed phase’. We continue to invest, and trade accordingly.”

For more discussion on the direction of financial markets, see my recent posts “Stages of a secular bear market“, “The lie of the investment land, according to Hugh Hendry“, “Picture du Jour: Stock market rally long in the tooth” and “RGE: Impact of China on financial markets“.

“Global business confidence remained positive last week for the third straight week. The last time confidence was consistently positive was nearly a year ago,” said the latest Survey of Business Confidence of the World by Moody’s Economy.com. “Businesses are responding most positively to broad assessments of the current economic environment and the outlook into early 2010; they are as strong as they have been since the financial crisis first hit in the summer of 2007.” The Survey results suggest that the global recession is coming to an end, but isn’t quite over yet.


Source: Moody’s Economy.com

The German economy expanded in the second quarter of 2009 with real GDP rising by 0.3% on a seasonally adjusted basis from the previous quarter. Also, the Ifo Business Survey reported that German business confidence improved to an 11-month high in August, indicating a further improvement in GDP in the second half of 2009.


Source: Ifo, August 27, 2009.

Heading home from Jackson Hole a week ago, the world’s central bankers seemed in no hurry to start increasing interest rates – intent on not repeating the monetary policy tightening mistakes of the Great Depression. As reported by the Financial Times, Martin Feldstein, a Harvard professor, thought it would be possible to have “two years or more of very low interest rates” without risk of excess inflation, given the labor and factory capacity in the economy.

Meanwhile, after keeping the interest rate at a record low of 0.5% from April to July 2009, the Bank of Israel (BoI) became the first central bank to raise interest rates in this cycle, increasing the benchmark rate to 0.75%. Analysts believe Australia and Norway will tighten first among the G-10 central banks in 2010, as reported by RGE Monitor.

A snapshot of the week’s US economic reports is provided below. (Click on the dates to see Northern Trust’s assessment of the various data releases.)

Friday, August 28
• “Cash for clunkers” lifts consumer spending in July

Thursday, August 27
• Jobless claims decline, but continuing claims including special programs advance
• Q2 real GDP unchanged at -1.0%

Wednesday, August 26
• Sales of new homes advanced, inventories are shrinking
• Defense and aircraft orders lift durable goods in July

Tuesday, August 25
• Case-Shiller Home Price Index and FHFA House Price Index – noteworthy recovery
• Gain in consumer confidence during August nearly erases losses of prior two months

Monday, August 24
• Chicago Fed National Activity Index – confirms positive signals of other reports

The S&P/Case-Shiller Home Price Index for June showed its second straight monthly increase. According to Bespoke, the last time home prices increased two months in a row was back in the summer of 2006 at the end of the last housing boom. “June’s 1.4% monthly gain was also the largest monthly increase since June 2005. There’s no denying that these numbers are showing considerable improvement.”


Source: Bespoke, August 25, 2009.

The White House confirmed on Tuesday that the US deficit would be wider than they had previously estimated. The graph below, courtesy of Clusterstock – Business Insider, shows that although the budget deficit as a percentage of GDP has been revised down for 2009 – due to less bailout spending – it has been increased for every year through 2019.


Source: Clusterstock – Business Insider, August 25, 2009.

“The longest and deepest recession of the postwar era has ended,” said IHS Global Insight chief economist Nariman Behravesh (via MarketWatch). However, he expressed concern that the recovery could lose steam in a few quarters, warning: “A sustained, robust global recovery depends on renewed growth in consumer spending and capital investment. The coming expansion will be restrained by cautious consumers in the United States and Europe, who are saving to rebuild depleted assets and reduce debt burdens.”

Week’s economic reports
Click here for the week’s economy in pictures, courtesy of Jake of EconomPic Data.


Time (ET)

Statistic For


Briefing Forecast

Market Expects


Aug 25

08:30 AM

Durable Orders Jul





Aug 25

09:00 AM

Consumer Confidence Aug





Aug 25

09:00 AM

S&P/Case-Shiller Home Price Index Jun





Aug 26

08:30 AM

Durable Orders Jul





Aug 26

08:30 AM

Durables, Ex Transportation Jul





Aug 26

10:00 AM

New Home Sales Jul





Aug 26

10:30 AM

Crude Inventories 08/21





Aug 27

08:30 AM

Initial Claims 08/22





Aug 27

08:30 AM

Q2 GDP – Preliminary Q2





Aug 27

08:30 AM

GDP Deflator Q2





Aug 28

08:30 AM

Personal Income Jul





Aug 28

08:30 AM

Personal Spending Jul





Aug 28

08:30 AM

PCE Core Jul





Aug 28

09:55 AM

Michigan Sentiment Aug





Source: Yahoo Finance, August 28, 2009.

Click here for a summary of Wells Fargo Securities’ weekly economic and financial commentary.

The European Central Bank (ECB) will make an interest rate announcement on Thursday (September 3). US economic data reports for the week include the following:

Monday, August 31
• Chicago PMI

Tuesday, September 1
• Construction spending
• ISM Index
• Auto sales

Wednesday, September 2
• ADP employment
• Productivity
• Factory orders
• FOMC minutes

Thursday, September 3
• Initial jobless claims
• ISM services

Friday, September 4
• Nonfarm payrolls
• Unemployment rate

The performance chart obtained from the Wall Street Journal Online shows how different global financial markets performed during the past week.


Source: Wall Street Journal Online, August 28, 2009.

“Great minds talk about ideas. Average minds talk about events. Small minds talk about people,” said Eleanor Roosevelt. Let’s hope the news items and quotes from market commentators included in the “Words from the Wise” review will assist Investment Postcards readers to generate money-making ideas that look past the noise investors so often wave to wade through.

For short comments – maximum 140 characters – on topical economic and market issues, web links and graphs, you can also follow me on Twitter by clicking here.

That’s the way it looks from Cape Town (from where I am leaving on a business trip to Slovenia in five days’ time – let me know if you are in Ljubljana at the time and would like to meet).


Source: Nate Beeler, August 28, 2009.

Continue reading "Words from the (investment) wise August 30, 2009"

An Uncomfortable Choice

An Uncomfortable Choice

August 28, 2009
By John Mauldin

An Uncomfortable Choice

What Were We Thinking?

Frugality is the New Normal

And Then We Face the Real Problem

Argentina, Brazil, Uruguay, New Orleans, Detroit, and More

We have arrived at this particular economic moment in time by the choices we have  made, which now leave us with choices in our future that will be neither easy, convenient, nor comfortable. Sometimes there are just no good choices, only less-bad ones. In this week’s letter we look at what some of those choices might be, and ponder their possible consequences. Are we headed for a double-dip  recession? Read on.

An Uncomfortable Choice

As our family grew, we limited the choices our seven kids could make; but as they  grew into teenagers, they were given more leeway. Not all of their choices were good. How many times did Dad say, “What were you thinking?” and get a mute reply or a mumbled “I don’t know.”

Yet how else do you teach them that bad choices have bad consequences? You can  lecture, you can be a role model; but in the end you have to let them make their own choices. And a lot of them make a lot of bad choices. After having raised six, with one more teenage son at home, I have come to the conclusion that you just breathe a sigh of relief if they grow up and have avoided fatal, life-altering choices. I am lucky. So far. Knock on a lot of wood.

I have watched good kids from good families make bad choices, and kids with no seeming chance make good choices. But one thing I have observed. Very few teenagers make the hard choice without some outside encouragement or help in understanding the known consequences, from some source. They nearly always opt for the choice that involves the most fun and/or the least immediate pain, and then learn later that they now have to make yet another choice as a consequence of the original one. And thus they grow up. So quickly.

But it’s not just teenagers. I am completely capable of making very bad choices as I approach the end of my sixth decade of human experiences and observations. In fact, I have made some rather distressing choices over time. Even in areas where I think I have some expertise I can make appallingly bad choices. Or maybe particularly in those areas, because I have delusions of actually knowing something. In my experience, it takes an expert with a powerful computer to truly foul things up.

Of course, sometimes I get it right. Even I learn, with enough pain. And sometimes I just get lucky. (Although, as my less-than-sainted Dad repeatedly intoned, “The harder I work the luckier I get.”)

Each morning is a new day, but it is a new day impacted by all the choices of the  previous days and years. Tiffani and I have literally interviewed in depth well over a hundred millionaires, and talked anecdotally with hundreds over the years. I am struck by how their lives, and those of their families, come down to a few choices. Sometimes good choices and sometimes lucky choices. Often, difficult ones. But very few were the easy choice.

What Were We Thinking?

As a culture, the current mix of generations, especially in the US, has made some  choices. Choices which, in hindsight, leave the adult in us asking, “What were we thinking?”

In a way, we were like teenagers. We made the easy choice, not thinking of the consequences. We never absorbed the lessons of the Depression from our grandparents. We quickly forgot the sobering malaise of the ’70s as the bull market of the ’80s and ’90s gave us the illusion of wealth and an easy future. Even the crash of Black Friday seemed a mere bump on the path to success, passing so quickly. And as interest rates came down and money became easier,
our propensity to acquire things took over.

And then something really bad happened. Our homes started to rise in value and we
learned through new methods of financial engineering that we could borrow against what seemed like their ever-rising value, to finance consumption today.

We became Blimpie from the Popeye cartoons of our youth: “I will gladly repay you
Tuesday for a hamburger today.”

Not for us the lay-away programs of our parents, patiently paying something each week or month until the desired object could be taken home. Come to think of it, I am not sure if my kids (15 through 32) have ever even heard of a lay-away program, not with credit cards so easy to obtain. Next family brunch, I will explain this quaint concept. (Interestingly, I heard about a revival of the concept on CNBC radio, coming back from dropping Trey off at school this morning. Everything old is new again.)

As a banking system, we made choices. We created all sorts of readily available  credit, and packaged it in convenient, irresistible AAA-rated securities and sold them to a gullible world. We created liar loans, no-money-down loans, and no-documentation loans and expected them to act the same way that mortgages had in the past. What were the rating agencies thinking? Where were the adults supervising the sand box?

(Oh, wait a minute. That’s the same group of regulators who now want more power and

It is not as if all this was done in some back alley by seedy-looking characters.  This was done on TV and in books and advertisements. I remember the first time I saw an ad telling me to call this number to borrow up to 125% of the value of my home, and wondering how this could be a good idea.

Turns out it can be a great idea for the salesmen, if they can package those loans into securities and sell them to foreigners, with everyone making large commissions on the way. The choice was to make a lot of money with no downside consequences to yourself. What
teenager could say no?

Greenspan keeping rates low aided and abetted that process. Starting two wars and pushing through a massive health-care package, along with no spending control from the Republican Party, ran up the fiscal deficits.

Allowing credit default swaps to  trade without an exchange or regulations. A culture that viscerally believed that the McMansions they were buying were an investment and not really debt. Yes, we were adolescents at the party to end all parties.

Not to mention an investment industry that tells their clients that stocks earn 8% a year real returns (the report I mentioned at the beginning goes into detail about this). Even as  stocks have gone nowhere for ten years, we largely believe (or at least hope) that the latest trend is just the beginning of the next bull market.

It was not that there were no warnings. There were many, including from your humble analyst, who wrote about the coming train wreck that we are now trying to clean up. But those warnings were ignored.

Actually, ignored is a nice way to put it. Derision. Scorn. Laughter. And worse, dismissal as a non-serious perpetual perma-bear. My corner of the investment-writing world takes a very
thick skin.

The good times had lasted so long, how could the trend not be correct? It is human nature to believe the current trend, especially a favorable one that helps us, will continue forever.

And just like a teenager who doesn’t think about the consequences of the current fun, we paid no attention. We hadn’t experienced the hard lessons of our elders, who learned them in the depths of the Depression. This time it was different. We were smarter and wouldn’t make
those mistakes. Didn’t we have the research of Bernanke and others, telling us
what to avoid?

In millions of different ways, we all partied on. It wasn’t exclusively a liberal or a conservative, a rich or apoor,  a male or a female addiction. We all borrowed and spent. We did it as  individuals, and we did it as cities and states and countries.

We ran up unfunded pension deficits at many local and state funds, to the tune of several trillion dollars and rising. We have a massive, tens of trillions of dollars, bill coming due for Social Security and Medicare, starting in the next 5-7 years, that makes the current
crisis pale in comparison. We now seemingly want to add to this by passing even
more spending programs that will only make the hole deeper.

Frugality is the New Normal

I could go on and on, but I think
you get the point. The time for good choices was a decade ago. It would have
been more difficult at the time, so that is not what we did. And now we wake up
and are faced with a set of choices, none of them good.

Reality is staring back in the mirror at the American consumer, and especially the Boomer generation. The psyche of the American consumer has been permanently seared. We are watching savings beginning to rise and consumer spending patterns change for the first
time in generations. Even as the authorities try to prod consumers back into  old habits, they are not responding. Borrowing and credit are actually falling. Banks, for whatever reason, now want borrowers to actually be able to pay them back. Go figure.

Frugality is the new normal. We are resetting the underpinnings of a consumer-driven society to a new level. It will require a major overhaul of our economy. The normal drivers of growth – consumer spending, business investment, and  exports – are all weak, and it is only because of massive government spending that the second quarter was not as bad as the two previous quarters and that the coming quarter will be positive.

But what then? How long can we continue with 10%-plus GDP deficits? We have an economy that is in a Statistical Recovery, fueled by government largesse. In the real world, we are
watching unemployment rise, and it is likely to do so through the middle of  next year. Deflation is in the air. Capacity utilization is near all-time lows.  Housing numbers are only bouncing because of the government program of large tax credits for first-time home buyers and lower home prices. It will be years before construction is significant.

We will be faced with a choice this fall and early next year. If you take away the government spending, the potential for falling back into a recession is quite high, given the underlying
weakness in the economy. A few hundred billion for increased and extended unemployment benefits will not be enough to stem the tide. There will be a groundswell for yet another stimulus package. Another 10% of GDP deficit is quite likely for next year.

As I (and Woody Brock) have made very clear in these e-letters, deficits that are higher than nominal GDP cannot continue without dire consequences. Good friend Richard Russell writes today:

“The US national debt is now over $11 trillion dollars. The interest on our national debt is now $340 billion. This is about at 3.04% rate of interest. In ten years the Obama administration admits that they will add $9 trillion to the national debt. That would take it to $20 trillion. Let’s say that by some miracle the interest on the national debt in 10 years will still be 3.09%. That would mean that the interest on the national debt would be $618 billion a year or over one billion a day. No nation can hold up in the face of those kinds of expenses.
Either the dollar would collapse or interest rates would go through the roof.”

That would be at least 30% of the national budget. How would your household do, paying that much as interest? How can you operate when interest payments are 30% or more of the budget? Do you borrow to pay the interest? And the Obama administration openly admits to
deficits of over a trillion a year for the next ten years, under very rosy growth assumptions. Anyone outside of Washington and rosy-eyed economists think we will grow 4% next year? I am not seeing many hands go up.

And Then We Face the Real Problem

If we do not maintain high deficits, it is likely we fall back into recession. Yet if we do not control spending, we risk running up a debt that becomes very difficult to finance by conventional means. Monetizing the debt can only work for a few trillion here or there. At
some point, the bond market will simply fall apart. And it could happen  quickly. Think back to how fast things fell apart in the summer of 2007. When perception of the potential for inflation changes, it changes things fast.

The problem is that we are now in a very deflationary world. Deleveraging, too much capacity, high and rising unemployment, falling real incomes, and more are all the classic pieces of the formula for deflation.

Let’s look at what my friend Nouriel Roubini recently wrote. I think he hit the nail on the head:

“A combination of higher official indebtedness and monetization has the potential to yield the worst of all worlds, pushing up long-term rates and generating increased inflation
expectations before a convincing return to growth takes hold. An early return to higher long-term rates will crowd out private demand, as lending rates on mortgages and personal and corporate loans rise too. It is unlikely that actual inflation will emerge this year or even next, but inflation expectations as reflected in long-term interest rates could well be rising later in 2010. This would represent a serious threat to economic recovery, which is predicated on the idea that the actual borrowing rates that individuals and businesses pay will remain low for an extended period.

“Yet the alternative – the early withdrawal of the stimulus drug that governments have been dispensing so freely – is even more serious. The present administration believes that
deflation is a worse threat than inflation. They are right to think that. Trying to rebuild public finances at a deflationary moment – a time when unemployment is rising, and private demand is still contracting – could be catastrophic, turning recovery into renewed recession.”

There are no good choices. Nouriel, optimist that he is (note sarcasm), suggests that there is a possibility that the government can manage expectations by showing a clear path to fiscal
responsibility that can be believed. And thus the bond markets do not force  rates higher, thereby thwarting recovery.

And technically he is right. If  there were adults supervising the party, it might be possible. But there are not. . Instead of fiscal discipline, we are hearing  increased demands for more spending. Please note that the very rosy future-deficit assumptions assume the end of the Bush tax cuts at the close of 2010. But raising taxes back to the level of 2000 does not make the projected future budget deficits go away.

I mean, seriously, does anyone think Pelosi or Reid are going to lead us to fiscal constraint? Obama talks a good game, but he has not offered a serious deficit-reduction proposal, other
than further tax increases. And by serious, I mean we need cuts on the order of several hundred billion dollars. The Republicans lost their way and their power (deservedly, in my opinion). Just as at the high school prom, the very few adults are being ignored.

It is the proverbial rock and the hard place. Cut the stimulus too soon and we slide back into a deeper recession. Let the budget spin out of control for a few years and we will see inflation return, with higher rates and a recession. Raise taxes by 1.5-2% of GDP in 2010 and we are shoved back into recession.

There are no good choices. If we do the right thing and cut the deficit, it means very hard choices. Can we keep our commitments to two wars and our massive defense budget? Medicare and Social Security reform are not painless. Education? Research? The “stimulus”? But cutting the deficit by hundreds of billions while raising taxes by even more than is already
in the works, is not the formula for sustainable recovery.

Have we grown up? Are there adults in the room? Sadly, I don’t think there are enough. We are still a nation of teenagers. We will do whatever we can to avoid the pain today. We will kick the can down the road, hoping for a miracle. Will we grow up? Yes, but the lessons
learned will be hard.

There are no statistical signs of an impending recession. We are not going to get an inverted yield curve this time, which made it relatively easy for me to predict recessions in 2000 and
2006. We are in a deflationary, deleveraging world. A far different world than in the past.

I see little room for us to avoid a double-dip recession. It would take the skill and speed of former Cowboys running back Tony Dorsett hitting a very small hole in the line to break us
into the open. I see no running back in our national leadership with such ability. As I have outlined above, recession could be triggered again in any number of very different economic environments. It all depends on the choices we make. But the choices lead to the same consequences, at least in my opinion.

As I wrote in August 2000 and August 2006, I write again in August 2009: there is a recession in our future. I was early both of those times and I am early now, maybe two years early, though I doubt it. And as I pointed out both of those last times, the stock market
drops an average of over 40% during a recession. When I was on Kudlow in October of 2006, I was given a hard time about my recession call and prediction of a bear market. I think it was John Rutherford who dismissed my bearish vision. And he was right for the next three quarters, as the market proceeded to rise another 20%. I looked foolish to many, but I maintained my views.

You have choices. You can buy and hold (buy and hope?) or you can develop a strategic alternative. The next bear market, as I wrote in 2003 and in will likely be the bottom. (It takes at least three of them to really take us to the bottom.) But the next one will change perceptions for a long time. Valuations will drop. Savings will rise even more. And a generation will grow up. The adults will return. Chastened. Scarred. Shaken. But we will Muddle Through. That is what we do. Even my teenagers.

Choose Wisely

Argentina, Brazil, Uruguay, New Orleans, Detroit, and More

Only a month ago my fall schedule looked sur prisingly light. And then reality hit. I will be at the Schwab conference in San Diego on September 15. If you are going to be there, drop me a note. That is my only trip in September. But then it gets interesting. I celebrate my 60th birthday the first weekend of October, then fly to New Orleans to be at the annual New Orleans Conference, October 8-11. The speaker line-up is better than ever. I find this to be one of the best conferences I go to very year. I have been attending on and off for over 25
years. You should think about this one.

Then I will spend the next weekend in Detroit, then probably go to New York, then  Philadelphia for a CMG conference October 20, then down to Houston, over to  Orlando, stop to change clothes and pack at home, and then fly off on a whirlwind trip to Argentina, Brazil, and Uruguay, speaking at a series of CFA conferences. Orlando in mid-November … and nothing else so far. Switzerland and London in January.

I recently did an interview with King World News that was quite frankly one of the best interviews I have ever done. Eric King really got me going. It is in two parts. I give you the link to the first part, and the second is in their archives. There are also interviews with a very serious group of names. I am flattered to be included. Click here.

It is time to hit the send button. I am resisting the temptation to launch into politics, so I need to quit before I do. Suffice it to say, we could see some big changes as we work through our teenage years, back to adulthood.

Speaking of good choices, the wedding last weekend was fabulous. I am delighted with my new son-in-law. Life goes on, even as my kids struggle to get enough hours of work and money. Henry is at UPS, and work hours are way down and they have a new son. Chad finally
got a new job, which may give him enough hours to survive, but not a lot of money. For those of you who think I live in an ivory tower, I do have a view into the lives of seven kids who are very real people, as well as those of lots of friends. I am very well aware of how tough it is out there, and realize how blessed I am.

You have a great week. Tomorrow I get to go the Dallas Cowboys game in the new stadium in a suite, courtesy of a friend who got the seats from Jerry Jones himself. Not sure where, but it
sounds cool. Sometimes life gives you lucky breaks.

Your amazed to still be writing after all these years


John Mauldin


Copyright 2009 John Mauldin. All Rights Reserved

John Mauldin is the President of Millennium Wave Advisors, LLC (MWA) which is an investment advisory firm registered with multiple states. John Mauldin is a registered representative of Millennium Wave Securities, LLC, (MWS) an NASD registered broker-dealer. MWS is also a Commodity Pool Operator (CPO) and a Commodity Trading Advisor (CTA) registered with the CFTC, as well as an Introducing Broker (IB). Millennium Wave Investments is a dba of MWA LLC and MWS LLC. All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors before making any investment decisions.


An Important Announcement

But first, I want to make a very important announcement. There are not many
times in a career when you can say that something new has been created in the
financial services industry and that you have been a part of it. But now I can
say that and, I must admit, with a little pride in helping to bring a new
creation into the world.

For years, Steve Blumenthal and I have shared a passion for bringing Absolute Return Strategies to all investors, not just the wealthy and institutional investors.

I want to introduce you to a new mutual fund, one that is different than the typical long-only equity mutual fund. My friends and partners at CMG have created a mutual fund that is comprised of 9 different trading strategies, a “fund of trading strategies,” so to speak; and it’s one that I believe will be strategically suitable for the economic environment that I think we face. And, as a mutual fund, it is open to
all investors.

You can learn more about it by reading a report I have prepared, entitled “How to
Deal with Volatility in Extraordinary Markets – Introducing the CMG
Absolute Return Strategies Fund.” Simply click here.

If you are an investment advisor or broker, you especially should read about this new fund and contact CMG directly for more information and reports. Full disclosure: as a consultant to the Advisor to the fund, my investment advisory firm does participate in the fees.
And be sure and read all the disclosures and risk factors in the document.

Weak Consumers, Creditless Firms Impacts Recovery

Two interesting front page articles this morning expand on several of our favorite themes.

The first, the NYT’s A Reluctance to Spend May Be a Legacy of the Recession, treads over some well worn ground with anecdotes and data.  The anecdotal stuff is the usual mix of sad tales, and psychology, some signs of improvement and recovery.

Two data points worth noting are:

“Between 2003 and 2007 — prime years of the housing boom — the net worth of an American household expanded to about $540,000, from about $400,000, according to an analysis of federal data by Moody’s Economy.com.

Now, the wealth effect is working in reverse: by the first three months of this year, household net worth had dropped to $421,000 . . .

As recently as the middle of 2007, Americans saved less than 2 percent of their income, according to the Bureau of Economic Analysis. In recent months, the rate has exceeded 4 percent.”

What is omitted from the article is the why:  3 asset class collapses (Stocks, Housing, then Stocks again) will wreak havoc with yor psychology. Add to it shrinking Real Income, and voila! Consumers find frugality to be their new mantra.

The WSJ takes a different tack, looking at the advantages of larger versus smaller firms — but using the same anecdotal hooks to tell the story (I omit anecdotes for the obvious reasons):

The U.S. recovery is a tale of two economies. At one extreme of Corporate America is a cadre of companies and banks, mostly big, united by an enviable access to credit. At the other end are firms, chiefly small, with slumping sales that can’t borrow or are facing stiff terms to do so.

On Main Street, there are consumers with rock-solid jobs — but also legions of debt-strapped individuals struggling to keep their noses above water.

This split helps explain the patchiness of the recovery that appears to be taking hold after the worst recession in a half-century . . .”

Both of these are well worth your Saturday morning reading time . . .



A Reluctance to Spend May Be a Legacy of the Recession
NYT, August 28, 2009

Halting Recovery Divides America in Two
WSJ, August 29, 2009

Sayings of the Jewish Buddha



The Jewish Buddha says:

If there is no self, whose arthritis is this?

Be here now. Be someplace else later. Is that so complicated?

Drink tea and nourish life; with the first sip, joy; with the second sip, satisfaction; with the third sip, peace; with the fourth, a Danish.

Wherever you go, there you are. Your luggage is another story.

Accept misfortune as a blessing. Do not wish for perfect health, or a life without problems. What would you talk about?

The journey of a thousand miles begins with a single Oy.

There is no escaping karma. In a previous life, you never called, you never wrote, you never visited. And whose fault was that?

Zen is not easy. It takes effort to attain nothingness. And then what do you have? Bupkis.

The Tao does not speak. The Tao does not blame. The Tao does not take sides. The Tao has no expectations. The Tao demands nothing of others. The Tao is not Jewish.

Breathe in. Breathe out. Breathe in. Breathe out. Forget this and attaining Enlightenment will be the least of your problems.

Let your mind be as a floating cloud. Let your stillness be as a wooded glen. And sit up straight. You’ll never meet the Buddha with such rounded shoulders.

Deep inside you are ten thousand flowers.  Each flower blossoms ten thousand times. Each blossom has ten thousand petals.  You might want to see a specialist.

Be aware of your body. Be aware of your perceptions.  Keep in mind that not every physical sensation is a symptom of a terminal illness.

The Torah says, Love your neighbor as yourself.  The Buddha says, There is no self.  So … maybe we’re off the hook?

SEC Chair Mary Schapiro on Fox Business

Highlights and transcript from FOX Business Network’s interview with SEC Chair Mary Schapiro.


SEC Chair Mary Schapiro spoke with FOX Business Network’s Liz Claman in an interview to air at 3pm ET and said that the SEC “is not as big as it needs to be” and is lacking tools she’d like it to have to get the job done.

SEC Chair Schapiro, Part I


Part II


Part III


Below are highlights from the interview:

On how the SEC decides what problems to attack first:

“It’s a hard question and it’s one we wrestle with every day—how to allocate our resources—because the SEC is not as big as it needs to be. We don’t have all the tools that we’d like to have.”

“We’re trying to do it all—we can’t do every single thing, so we need to prioritize. Cases coming out of the financial crisis are particularly important.”

On regulating hedge funds:

“I think it’s necessary to regulate hedge funds. They are too big a part of the marketplace for the SEC and the federal government not to have a handle on the impact they’re having on the markets, the strategies they’re employing—it’s time for that to happen.”

On shutting down ponzi schemes:

“We’ve shut down three times as many ponzi schemes in the first half of this year as we did last year.”

On how much larger of a budget the SEC needs:

“There are 3,600 people at the SEC and we regulate about 35,000 entities—that’s a pretty bad ratio…Over the next few years I would like to see the agency expand significantly. We need significantly more money.”

Revisiting “The Ongoing Impact of the Housing Sector”

Blast from the past: This is now 2 years old:  The Ongoing Impact of the Housing Sector

“The economic weakness has shown up first in retail spending figures. Especially hard hit have been the number one and two retailers in the U.S., Wal-Mart and Home Depot. But its not just those two retailers. As the chart below shows, the U.S. consumer appears to be getting tired. Housing is already in a recession, and Automobile Sales are on the verge of one, if not already there. Not just GM and Ford, but Toyota and Honda have seen year over year sales drops in the U.S.

Slowing economic activity here has been offset by strength abroad. Robust growth in Asia, Europe and Latin America, along with a weak U.S. dollar, has been a huge boon to American exporters. U.S. corporate profits are actually quite strong, albeit at a cyclical high. The corporate sector has not been hit by Housing – yet.

More recently, banking and finance companies have felt the sting of the housing slowdown. Indeed, it is not just the retailers and auto dealers who have been affected by Real Estate – the entire financial system is being impacted. Let’s look at how that came to be.”

Whenever people tell me no one saw it coming, this is one of the many links I send to them . .  .


The Ongoing Impact of the Housing Sector
Barry Ritholtz
August 24, 2007

Ten for Friday

Some reading for your end of week pleasure

Experiment:  (I am going to try to create this in real time, so refresh this page frequently) Finished !


Leverage Rising on Wall Street at Fastest Pace Since ‘07 Freeze (Bloomberg) Banks are increasing lending to buyers of high-yield company loans and mortgage bonds at what may be the fastest pace since the credit-market debacle began in 2007

What’s C Worth? (Krasting)

•  Big is Back: The Return of the Corporate Giant (The Economist) Today the balance of advantage may be shifting again. To a degree, the financial crisis is responsible. It has devastated the venture-capital market, the lifeblood of many young firms. Governments have been rescuing companies they consider too big to fail, such as Citigroup and General Motors. Recession is squeezing out smaller and less well-connected firms. But there are other reasons too, which are giving big companies a self-confidence they have not displayed for decades.

Is The Fed Enabling Foreign Central Banks To Swap Out Their Agency Debt Into Treasuries? (Zerohedge)

Consumers’ debt-tactic changes may hurt banks (Daily Herald) Wall Street may be repeating the mistakes that felled American International Group Inc., which sold the equivalent of cheap lottery tickets in the belief that no one ever would hit the winning number. These tickets are credit default swaps, derivatives that insure against a company default on its debt. The problem is banks and brokers look as if they are selling these swaps too cheaply, at least for a raft of industrial companies.

Has the tide turned for corporate profits? (Economist)

AIG’s Swaps Blunder Now Replaying on Wall Street (Bloomberg) Wall Street may be repeating the mistakes that felled American International Group Inc., which sold the equivalent of cheap lottery tickets in the belief that no one ever would hit the winning number. These tickets are credit default swaps, derivatives that insure against a company default on its debt. The problem is banks and brokers look as if they are selling these swaps too cheaply, at least for a raft of industrial companies. The willingness to gamble like this may be symptomatic of the exuberance that has gripped markets this summer.

Fannie, Freddie soar on opportunistic day traders (Reuters)

Best of Wikipedia

Nation’s Unemployment Outlook Improves Drastically After Fifth Beer (The Onion)

Anything else linkworthy?

Have a good weekend~!

Income/spending/savings rate

July Income was flat vs expectations of a gain of .1% but June was revised higher by .2% to a decline of 1.1%. Spending rose .2%, in line with forecasts and June was revised up by .2%. Because the headline PCE was flat, REAL spending rose by .2% (vs .1% gain in June) and with flat income, the Savings Rate fell to 4.2% from 4.5%. Over the past 30 years, the Savings Rate has averaged 5.6% and before 1995 it averaged 7.7%. Headline PCE fell .8% y/o/y and is negative for a 3rd straight month. The core PCE though rose .1% m/o/m and is up 1.4% y/o/y, the lowest since Sept ‘03 but it clearly didn’t get to the deflationary levels that headline PCE has achieved. This highlights the impact that commodity prices have had on inflation just within the past year. Bottom line, Q3 GDP will see positive growth but the contribution from the consumer side will be muted as income growth remains lacking.

UoM Final Consumer Confidence

The Final August U of Michigan confidence figure was 65.7, above the preliminary reading of 63.2, higher than the consensus estimate of 64 but is a touch below the 66 seen in July. Both Current Conditions and the Future Outlook rose from the Aug preliminary number. However, from July, Current Conditions fell almost 4 points but was partially offset by a 1.8 jump in the Outlook. YTD, Current Conditions are only 3.3 points above the low in March while the Outlook is 14.5 points above the Feb low. This discrepancy over how people feel today vs the improvement they foresee has been evident in other confidence figures, and was seen in Tuesday’s Conference Board confidence number. Inflation expectations were unchanged with the initial reading at 2.8% and down .1% from July.

Bonds and Beyond

Airtime: Fri. Aug. 28 2009 | 7:05 AM ET

A look at the US bond market and beyond, with Jim Bianco, of Bianco Research; Tony Crescenzi, of Pimco; and Jim Iuorio, of TJM Institutional Services.


July Income was flat vs expectations of a gain of .1% but June was revised higher by .2% to a decline of 1.1%. Spending rose .2%, in line with forecasts and June was revised up by .2%. Because the headline PCE was flat, REAL spending rose by .2% (vs .1% gain in June) and with flat income, the Savings Rate fell to 4.2% from 4.5%. Over the past 30 years, the Savings Rate has averaged 5.6% and before 1995 it averaged 7.7%. Headline PCE fell .8% y/o/y and is negative for a 3rd straight month. The core PCE though rose .1% m/o/m and is up 1.4% y/o/y, the lowest since Sept ‘03 but it clearly didn’t get to the deflationary levels that headline PCE has achieved. This highlights the impact that commodity prices have had on inflation just within the past year. Bottom line, Q3 GDP will see positive growth but the contribution from the consumer side will be muted as income growth remains lacking.

Who would have thunk that in ‘06, SNL would reveal that something was amiss at the height of the credit bubble, http://www.hulu.com/watch/1389/saturday-night-live-dont-buy-stuff . Saving is the new cool and having credit card debt is so passe. This transition is not a multi Q process but multi year and it has implications for US economic growth for years to come. Our economy will be for the better though in time as exports and investment eventually pick up the slack as we can better finance our growth with savings and less on debt. Even if consumers wanted to pick up their spending in the face of weak income growth, they can’t as access to credit remains crimped. Credit drove our economy on high speed for 10 years. We’ll get a rebound but it won’t be sustainable until we save more and export more.