Rick Perry and All People Undereducated

September 29, 2011

I’m still not sure who listens to Rick Perry and believes he has half a clue. That said, I’ve only spent limited time in Texas and I suppose one could easily argue that Sarah Palin garnered more votes than I could.

I am reminded of a panel I watched a couple of years ago where two honorable representatives from the US Congress reflected on the state of economic affairs and their own understanding of them.

What hit home was that one of these representatives lamented at the amazing amount of information and data he had access to in his privileged position. He talked about how “cool” his morning briefings were which connected him to the audience. He then went on to say that when he first took office, he quickly realized his understanding of economics was rusty and his understanding of financial markets was about nil given the advent of modern financial products. Thus with all these amazing reports and classified data on his desk, none of it really told him very much.

He then went on to say that he took it upon himself to go back to school to better equip himself to understand and ultimately impact the information he was reading. After all, as member of the finance committee, that was his job.

I was stunned to hear one our representatives express his own lack of knowledge and astounded that he took it upon himself to educate himself to be a better leader.

What really blew me off my seat, however, was when he described the lack of understanding shared by his peers in the House and Senate and went on to say that among them all, he was the only one he was aware of to go back to school to learn about the things he was tasked to oversee.

Reading the growing circus that is Rick Perry’s campaign I was inspired to consider a new rule that ought to be imposed on all of our political representatives, particularly those with specific domain responsibility.

Simply, we ought to keep our 4 year election cycle but move to a 5 year service cycle in which upon election all public leaders spend one year in school learning everything from the basics of flawed public finance, to leadership, ethics and markets and to take electives related to any committees they may need to serve on.

We spend a lot of oxygen touting the importance of education in the US. We talk about educating our children, have requirements of higher education for most highly skilled professions, but yet any schmo from Texas with an affable personality and some financial backing can grab a soap box and lead our country. I think we’ve seen the dangers of that before and I don’t think the US just needs a rinse and repeat.

After all, the political vacuum is great at dishing out rules for everyone else to follow. Why not at least require they have half a clue of what the fuck they are talking about?

Ben Bernanke, ‘Money-Printing’ Would Be Out at Fed: Perry
CNBC.com | September 29, 2011 | 08:28 AM EDT
Ben Bernanke no longer would be the Federal Reserve chairman and the central bank would be out of the money-printing business under a Rick-Perry-run White House, the Texas governor told CNBC.

The Republican presidential candidate has not hid his disdain for Bernanke, and he reiterated during a live interview that someone else would be in charge of monetary policy should Perry unseat President Barack Obama in the 2012 election.

“The statement towards Chairman Bernanke needs to be very clear to him, that making monetary policy to cover up bad fiscal policy is just bad public policy,” Perry said. “What we’re seeing is a Fed that is getting involved in things that frankly it does not need to be involved with. Printing money doesn’t do anything at this particular juncture except make the dollars in our pocket worth less money, plus it puts us in jeopardy of greater inflation in the future.”

Perry’s star has faded somewhat over the past week or so after turning in less-than-stellar performances in Republican candidate debates.

The fiery Texas governor has found himself criticized on the right for his immigration stance, and the left for his hard-line stances on social issues.

He has been especially rough on Bernanke, drawing criticism at one point for suggesting that if the central bank chief ever came to Texas he would face retribution for this actions.

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An algorithm that can predict weather a year in advance

September 27, 2011
new_apple_orange_small_normal.jpgfreakonomics (@freakonomics)
9/27/11 4:10 PM
An algorithm that can predict weather a year in advance. http://ow.ly/6GAa6

Saudi King Grants Women Right to Vote

September 26, 2011

But does he intend to have those votes counted?

Nonetheless any change in this direction is good!

http://mobile.bloomberg.com/news/2011-09-25/king-abdullah-gives-women-in-saudi-arabia-the-right-to-vote-for-first-time.html


Geithner Quoted in Europe’s Failure to Act

September 25, 2011

“Failure to act carries the “threat of cascading default, bank runs and catastrophic risk,” Geithner said in a Sept. 24 statement to the IMF, his strongest public lobbying yet.”

http://mobile.bloomberg.com/news/2011-09-25/bankers-splinter-on-remedy-for-european-debt-as-tension-pervades-meetings.html


Reconciling Theories: Expansion vs Contraction

September 23, 2011

In the now symphonic debate about wether the economy is heading into a double dip recession, which the real bears argue is absurd because we never came out of the last one, many side-liners sit confused swinging their head side to side like at a tennis match.

The expansionists, who temper their view with a “muddle through” or “new normal” sound bite think the market is over reacting because the real economy is going to get through the next year or two O.K. The contractionists on the other hand, whose camp I lean to, believe the markets are telling us something bad (both stocks and bonds), and what they are telling us is that the economy is either on the cusp of or is currently in a recession. Recent economic data supports this thesis but some will accurately argue that the Japan earthquake, hurricane season, and the Euro banking crisis may be misleading us to believe that things are bad.

If this debate ends like many debates that occur in my home, when my wife and I disagree, both sides will probably be proven right to some degree.

The Bloomberg article below describes data from the manufacturing sector that supports the thesis that things are chugging along here in the US. The data below supports the idea that the American manufacturing complex is well and good. In general this all makes sense particularly in light of the erosion of the US Dollar which has made our exports more attractive. And we have seen this show up in trade data as well.

On the flip side, as a percent of GDP manufacturing and industrial production only comprise about 30% of GDP, whereas consumption in the US accounts for 70%. Thus it is possible for the industrial economy to be functioning, feeding American exports while joblessness in the services and construction sectors drag down consumption. Consumption has been further reduced by consumer credit contraction and tighter lending standards.

What does this mean for investors? If some version of this outline is true, and both sides are right then we will probably see a lot of volatility that takes us sideways for a while, in a wide range, until future economic data begins to confirm which side is right.

Of course few argue that the economy is in fact strong. The precariousness of the most optimistic scenario thus leaves us quite vulnerable to more idiosyncratic shocks and policy maneuvers.

From Bloomberg:

No Sign of Recession With Rail Shipments Showing Growth Trend

Sept. 23 (Bloomberg) — Railroads shipments are the highest in almost three years, helping to defy concerns about a double- dip recession.

Total rail volumes excluding grain and coal averaged 381,831 carloads in August, the most since October 2008, according to data from the Association of American Railroads in Washington. These shipments represent the bulk of materials for industrial production, so rising volumes show the economy is still growing, according to Art Hatfield, a transportation analyst in Memphis, Tennessee, at Morgan Keegan & Co.

“We’re not seeing declines in rail volumes that are synonymous with a recession,” Hatfield said. “We remain in a slow growth environment.”

The correlation between the 12-month average of total rail- car loadings excluding grain and coal and the three-month average of the Federal Reserve’s manufacturing industrial- production index is 0.82, according to Bloomberg News calculations. A correlation of 1 would show they move in lockstep, while a value of zero signals no relationship.

Manufacturing output — which makes up 75 percent of all U.S. factory production — climbed 0.5 percent in August, the fourth consecutive increase, according to Fed data released this month.

“Industrial-production growth is slow but positive,” according to Kurt Rankin, an economist at PNC Financial Services Group Inc. in Pittsburgh, who forecasts a 0.3 percent increase in September from August. This indicates the “gradual” U.S. expansion is still in place, he said.

Rising Output

Gross domestic product climbed at a 1.0 percent annual rate in the second quarter, after almost stalling with a 0.4 percent gain from January-March, Commerce Department data show. GDP will rise 1.6 percent this year, according to the median estimate of 63 economists surveyed by Bloomberg.

The order rate for Kennametal Inc., the No. 1 supplier of cutting tools used by manufacturers including Caterpillar Inc. and Boeing Co., increased at a 20 percent annual pace in August, excluding acquisitions, divestitures and workdays, the company said in a Sept. 15 statement. Kennametal’s end markets “continued to reflect strong demand,” and its industrial business showed “ongoing strength,” the company said.

The Latrobe, Pennsylvania-based company is a “good barometer” for industrial production, according to Sheila Kahyaoglu, a New York-based analyst at Credit Suisse Group AG. Kahyaoglu maintains an “outperform” rating on the stock because its order rate, while poised to slow, will continue to grow at a rate faster than consensus forecasts.

Bullish About Manufacturing

Hatfield is bullish about U.S. manufacturing output even amid concerns that the world economy is slowing. The International Monetary Fund cut its forecast for global growth this week, projecting expansion of 4 percent this year, compared with a June forecast of 4.3 percent.

Hatfield maintains “outperform” ratings on Union Pacific Corp., Norfolk Southern Corp. and CSX Corp., the three largest U.S. railroads, because “valuations are attractive given our earnings estimates, which include the impact of slow growth.”

Between March 13, 2009, and July 1, 2011, the Standard & Poor’s Supercomposite Railroads Index — which includes the three companies — rose 200 percent, while the S&P 500 Index grew 77 percent, Bloomberg data show. Since July, the railroads index has fallen 23 percent, compared with the S&P 500’s 14 percent decline.

‘Some Pickup’

The recent underperformance is driven by investor concern about a recession, Hatfield said. The Fed noted in its Sept. 7 Beige Book report that “most” manufacturers were less optimistic than in its July survey. On Sept. 21, Fed policy makers said they expect “some pickup in the pace of recovery over coming quarters,” adding there are “significant downside risks” to their outlook.

Hatfield still projects rail-car shipments will grow in the “low single digits” for the second half of this year, even though third-quarter volumes may be lighter than forecast because of weather-related disruptions, he said.

FedEx Corp., operator of the world’s biggest cargo airline, cut its full-year profit and industrial production forecasts yesterday, as volumes declined amid a slowing economic recovery. The Memphis-based company now projects U.S. output will rise 3.9 percent in 2012, Executive Vice President Michael Glenn said on a conference call. This is down from its previous forecast of 4.3 percent, said Jesse Bunn, a company spokesman.

Consumer sentiment remains the biggest drag on economic improvement, Glenn said. Still, FedEx expects “modest growth to continue.”

No Indication of Declines

Similarly, since reporting quarterly earnings in July, the three largest U.S. railroads haven’t given any indication of a sharp decline in demand similar to 2008 and 2009, when volumes fell as much as 24 percent on an annual basis.

Omaha, Nebraska-based Union Pacific had its strongest weekly volume so far this year — almost 187,000 carloads — prior to Labor Day, Chief Financial Officer Robert Knight said at a Sept. 21 conference hosted by Citigroup Inc. It continues to see “solid demand” across most business segments, including shipments of industrial products, up 8 percent annually as of Sept. 15 for the quarter ending Sept. 30, he said.

Norfolk Southern, based in Norfolk, Virginia, maintains an outlook “which is still upbeat despite some of the macro indicators,” Chief Financial Officer James Squires said at the Citigroup conference on the same date. Total railcar shipments are up about 3 percent on an annual basis so far for the three- month period ending Sept. 30, he said.

‘Doing Okay’

Industrial volumes for Jacksonville, Florida-based CSX have increased about 5 percent since last year through August for the quarter ending Sept. 30, Vice President Fredrik Eliasson said yesterday at the Citigroup conference. Even amid recent “moderating,” the economy continues to grow and the company is “doing okay from a volume perspective,” he said.

Earlier this month, CSX’s Chief Financial Officer Oscar Munoz said he isn’t concerned about “any kind of overarching sort of dire circumstances around the corner,” as there is still a “general level of optimism” among customers and suppliers.

“Sure, things have moderated, but there is no one in that near state of panic that we saw certainly in late ‘08 and ‘09,” Munoz said at a Sept. 8 conference hosted by UBS AG.

To contact the reporter on this story: Anna-Louise Jackson in New York at ajackson36

To contact the editor responsible for this story: Anthony Feld in New York at afeld2

Find out more about Bloomberg for iPhone: http://m.bloomberg.com/iphone/


Stabilize Global Banking – Eliminate (or highly regulate) CDS as a product on Financial Institutions

September 22, 2011

The post below from ZH is a good summary of an undertow in the markets today. In short there was some speculation that Morgan Stanley might be over exposed to French banks. I’m not going to discuss if the information is either true or relevant.

I am going to try to expand on a very succinct point made by ZH.

For those who need a primer, CDS are Credit Default Swaps which effectively are like insurance on debt. The buyer of CDS (protection buyer) pays someone else (protection seller) for the obligation to be “made whole” if a bond defaults. The protection seller is usually a financial institution (large bank, hedge fund or insurance company) and the protection buyer can either be a bondholder looking to hedge their position or more often these days they can be speculators who don’t own the underlying bond, but instead use the CDS like a option to hedge or bet in a broader portfolio.

In the note from ZH he accurately points out the fact that any institution who is relying on CDS (insurance) in the event of a default particularly one that leads to a system-wide collapse of the banking system has inadequately hedged their positions. As ZH notes when Lehman failed, it set off a shockwave of CDS trades where some protection sellers who were willing to make Lehman bondholders whole were put in the precarious position of having sold too much insurance on Lehman, more than they could make good on thus putting the one who sold CDS themselves at risk. This type of scenario set off a chain reaction within hedge funds, banks and insurance companies who thought they had protection only to find out that their protection seller (counter party) over exposed himself and might not he able to meet the obligation.

Now remember the financial system is fragile, and as we learned in 2008 is built on trust more than anything else. When counter parties (large institutions) begin to distrust each other, no one needs to actually default. A rising level of distrust among who is exposed to who can, in and of itself, create a panic that leads to a default via a liquidity trap. A liquidity trap can be simplified as a moment when a company who is deemed “credit worthy” does not have enough liquid assets/cash on hand to run the business. If to raise the cash they are forced to sell assets, bankruptcy can ensue quickly. The simplest example of a liquidity trap is a bank whose depositors remove all their cash.

Here’s where I get angry. The people buying CDS on a specific bond, unless there is an arbitrage to be had, really have no business owning the bond in the first place. All CDS provide for when matched to the underlying bond is to allow the bondholder to pass the default risk off to someone else less knowledgeable (willing), the patsy. In the absence of the bond insurance the owner might not have bought the bond. And if demand for the bond was lower, the interest rate required to attract enough investors would probably be higher.

Thus the system has used this outsourcing of risk to obfuscate prices in the bond market. Presumably this is great for society because it lowers borrowing costs. The flip side is that when risk is misplaced because the risk holder (owner of the asset) is not fully aware of all the risks they own they become more susceptible to sell an asset when something surprising happens. In 2008 as is today, a number of surprising things happened and are happening.

This dilution of risk in owning bonds was touted by Greenspan as the best thing for the financial system since ATMs. Greenspan loved the idea that any risk could be parceled and packaged and sold to someone willing to own it, making the system more stable, because as the theory went people only buy financial assets whose risks they understand and are willing to own (and not panic sell). Sadly all this did was increase the number of patsies in the financial system. In 2008 AIG was the biggest patsy of all.

Furthermore and Unfortunately in 2008 we learned that the bond rating agencies were flawed at best, and conflicted at worst, ultimately helping to mis-price risk.

Thus when a hint of instability occurs in the financial system, risks have been so sliced and diced that no one really knows who is sitting on a time bomb. And the mere speculation of whose holding the firecracker is just enough flame to light a fuse.

I cannot imagine why anyone would want to continue to see the obfuscation of risk via CDS on financial firms continue. If someone wants to speculate on Johnson and Johnson, go ahead. At the end of the day a non financial company has a very definable balance sheet with known assets and liabilities. A bank or insurance company however, which may be sitting on billions of dollars of CDS exposure (long and short), can easily become the patsy when the global poker game starts counting up the cards.

If we simply disallow CDS on systemically important financial companies we can at least remove part of the ongoing circus that is now officially reoccurring in the global financial system.

tyler_normal.jpgzerohedge (@zerohedge)
9/22/11 8:59 PM
Second Bank Scambles To Defend Morgan Stanley Against Vicious “Blogger Attack” http://t.co/bwT4C1bz

The American Jobs Act Review (Part I)

September 19, 2011

Living Within Our Means and Investing in the Future: The President’s Plan for Economic Growth and Deficit Reduction

Below I comment on on the first few pages (7-12) of the Presidents Plan for Economic Growth and Deficit Reduction .  This is a dense document and my review is neither complete nor my analysis based on sharp political knowledge.  As my blog indicates I focus on anecdotal evidence.  What struck me, having never read such a dense piece of policy, is the transparency of bad and self-serving ideas.  I do not mean for my own biases to negate otherwise good ideas that are also included.

There were a number of good ideas, bad ideas and self-serving ideas layered into the document with lazy political acumen. Below I offer some high-lights, low-lights and some “grow-lights” that seem engineered to increase votes into help Obama’s reelection campaign.  My review starts in the American Jobs Act but stops short of the unemployment insurance section and before the discussion on Mandatory Savings, Health Savings and Tax Reform.  Clearly this list will be expanded when I have more time. I hope to post a Part II in the next day or so.

High-lights – Potential solid policy ideas with opportunities to create longer-term sustainable growth/deficit reduction

Provide a payroll tax cut to businesses, with a focus on small employers: Engineered to adversely help America’s small businesses.  Sadly the GOP will fight all the bad stuff, and ignore all the good stuff in an effort to stonewall into the campaign trail.

Help entrepreneurs and small businesses access capital and grow: One of the more interesting ideas engineered to stimulate entrepreneurship.  Items include: accelerated government payments to small business contractors; establish a framework for “crowdfunding” programs in concert with the SEC to help small companies raise capital; increase in guarantees for bonds to help small firms compete for infrastructure projects (this one smells like special interest handouts like Solyndra, not so good).  Whitehouse could probably raise substantial revenue by Trademarking “crowdfunding”.

Offer tax credits and career readiness efforts to boost veterans’ hiring: Returning Heros Tax Credit of up to $4,800 for unemployed veterans, and a Wounded Warriors Tax Credit of up to $9,600 that will increase the existing tax credit for firms that hire unemployed veterans with service-connected disabilities.”  I’m not sure of the message sent by quantifying the additional $4,800 on for wounded warriors, but the effort by the administration to help our amazing veterans is an excellent idea.

Improving our airports: While in one sense this might fall into the Low-light category due to the State Aid back door issue, this is a real area of need that can create meaningful efficiency improvements for commercial and passenger air traffic.

Funding for innovative transportation: I know this one is controversial primarily due to the call for high-speed rail.  I have seen worse expensive ideas.  The real issue is where we we are going to buy the technology from.  I’d be happier picking a battle that could be levered at least in part to American manufacturing.  Last I checked the Germans and Japanese have this market tied up.  What about retrofitting our transportation sector for electric and natural gas vehicles?  (neither were mentioned under this header)  At least those dollars would go to Ford and GM.

Establish a National Infrastructure Bank: Another controversial idea.  The devil will be in the details.  However, leveraging tax payer money with private investment is generally a winning combination.

Expand nationwide wireless Internet services for the public and the first responders and reduce the deficit: This is progress you can build on.  This is an excellent idea, and NEEDS to be advanced smartly.  These types of investments enhance national productivity while paving the way for REDUCED government expenses.  “The plan includes reallocating the D Block for public safety (costing $3 billion) and an additional $7 billion to support the deployment of this network and technological development to tailor the network to meet public safety requirements. This is part of a broader deficit-reducing wireless initiative that would free up public and private spectrum to enable the private sector to deploy highspeed wireless services to at least 98 percent of Americans, even those living in remote rural and farming communities.”

Grow-lights – Potential spam policy designed to provide short term stimulae to directly affect the 2012 election outcome.

Establish a complete payroll tax holiday for new jobs or wage increases: “CBO has identified this type of job creation tax cut as one of the most effective ways to help accelerate job growth.” Has the additional benefit of feeding the hope that POTUS gets reelected.  Tax holiday’s do nothing for long term sustainable growth.  They attempt to help politicians get reelected.

Extend 100 percent business expensing through 2012: “Extend 100 percent business expensing through 2012. “The President is proposing an extension of the 100-percent expensing provision that he signed into law in 2010, which rewards firms for making investments by allowing them to deduct the full value of those investments from their tax obligations through 2012”  Anything applied to 2012 explicitly automatically must be red-flagged into the campaign finance bucket.

Investments in making our Nation’s highway systems safer and more efficient: This one reeks of the job creation crack pipe.  A quick jolt, followed by a pronounced feeling of emptiness and wasted effort.  Has anyone ever been on a highway that is not currently under construction?  They are always under construction.  Try I-95 any day of the week.

Repairing transit systems and improving our rail systems:  Ironically this did not get labeled the Buffet Bill.  Somehow I wonder.

Expediting high-impact infrastructure projects: Government should not expedite anything that costs lots of money.  Unless of course there is a pending election.  That would be like having a 12 year old rush out to buy a car.

Low-lights – Potential counterproductive ideas that either stifle growth/spending reduction or are so absurd as to assure better policy measures get stonewalled in partisan politics.

Prevent teacher layoffs and keep police officers and firefighters on the job: These are the hand outs that the GOP cannot afford to fight against.  This is the “feel good” wasteful spending policy.  I in no way want to imply that these aren’t areas of dire importance and need, but they way this is framed it reads as backdoor aid to States which the GOP would never approve. I firmly believe that we need to invest in teachers, police officers, fire fighters, American Flags and apple pie.  That goes without saying.  What I can’t stand is the lemonade stand run by kids living in a McMansion.  Don’t patronize me to believe that dollars earmarked here will actually end up appropriated to the constituency being exploited to raise the funds.  If this passage turns into a backdoor blank-checks to the states, we will NEVER see this idea fulfill its intent.  It is noble in its spirit, but probably will fail in practice.  When 50 states chime in, this one is poised to end up to be so messy its never gets done and certainly not in the spirit it intended.  I’d be willing to bet that if this gets through a beleaguered Illinois may wind up with the best public schools in the country :)

Modernize at least 35,000 schools: ibid above.

Opportunities for all in the transportation sector: Always be suspect of any small numbers in a $4 trillion dollar plan. “The President’s plan will invest an additional $50 million in 2012 to enhance employment and job training opportunities that will benefit minorities, women, and socially and economically disadvantaged individuals in transportation-related activities, including construction, contract administration, inspection, and security. His plan will also invest an additional $10 million in 2012 to help minority-owned and disadvantaged business enterprises gain better access to transportation contracts.”  Also be suspect of any language that says “for all”.  This implies “for all voters”, and is so transparently engineered to buy votes in swing states.  What we need to is have this $60 million included in the campaign finance budget, as this is really what this item will be used for.

Put people back to work rehabilitating homes, businesses, and communities:  Not a fan of this one.  “Many regions with concentrated home foreclosures also have concentrations of vacant commercial structures that weigh on property values and make it less likely that new businesses will come into the community and invest new capital.”  On the plus side its an attempt to help depressed communities revitalize and proposes a public private partnership to do so.  Conversely, many of these geographies were over leveraged and over developed.  Beautifying defunct towns and sweeping empty streets wont do much without a natural job-base.  If residential and commercial real estate are defunct, there is a good reason.  We need to allow some ghost towns to become tourist traps.  I don’t say this without real empathy for those who may still be living in these areas, and substantial regret for their situations.  This kind of investment only rewards speculators.  Spending precious tax dollars in unsustainable communities is not the best and highest use of our nearly depleted fiscal stimulus.  For a fraction we could probably help remaining residents relocate to areas of the country where there are jobs, and help those communities enhance local infrastructure.  We need to be wise, not smart in how we do this, and to leverage investments that can create innovation and productivity, not social assistance.   This falls into the 2012 jobs for re-election bucket.  It’s also a back door bailout of regional banks.