4/18/11…homespun Greenspan

This week’s economic calendar is extremely light but has some important information about the housing market. The highlight of the week will be March Housing Starts (Tuesday). We will also get March Existing Home Sales (Wednesday) and March Leading Indicators and the April Philadelphia Fed Survey (Thursday). There are no indicators scheduled for release on either Monday or Friday. Courtesy of Steve Wood, Insight Economics, Walnut Creek, CA

Bloomberg Top Stories:

*Euro Weakends, Greek Yields Climb on Debt Concern; Stocks, Commodities Drop

*Greece Says No Restructuring Plan in Place as Traders Raise Default Rate

*Bernanke Speaking Freely in Briefings Poised to Offset Talk From Fed Hawks

*Bonello Urges ECB Caution in Raising Rates as Most-Indebted Nations Suffer

*G-20 Targets ‘Too Big to Ignore’ Economies as Growth Will Outweigh Shocks

*Swaps Show Toxic Mortgage Debt Woes Easing…somewhat!

*BOJ Said to Forecast Inlfation Accelerating to 0.5% for Yer to March 2012

*Aussie Rides Commodity Boom as Credit Suisse Joins RBS in Seeing 4% Gains

*Citigroup, Deutsche Bank, Morgan Stanley Are Cleared in Parmalat Lawsuit – that was years ago!!!

*Eli Lilly Profit Drops 15% on costs From Diabetes Accord With Boehringer

*Hybrid Funds Deluged by Record Cash as S&P 500 Swings Most Since Roosevelt !!!

*RIM’s BlackBerry Losing Grip in Washington as U.S. Workers Demand IPhones

*Social Security’s Disability Payments Double Since 2001 – uh oh!

*Snickers-to-Noodles Surge Drives Cooking Oil Supplies to Three-Decade Low

*Gold-Shortage Threat Drives Texas Schools Hoarding 664,000 Ounces at HSBC

*Rebels in Ajdabiya Repel Attack by Qaddafi Forces as Libyan Fighting Rages

*Ryan Budget Accord Defended as U.S. Republicans Return Home to Hear Voters

On Friday, the Dow was +0.5%, Transports +0.7%, S&P 500 +0.4%; the two Nasdaq indices mixed and the Russell 2000 small cap was the big winner +0.9%. The banks were the big losers led by BofA who despite the first profit in two years (all from Merrill), disappointed. NYSE Volume was 1.05 billion shares, and while still about 100m below average was the highest since March 18 – more importantly the volume was on an up day – more or less. This was the 20th straight below average session. These are twelve year low volumes! Meanwhile, despite all the problems facing us, volatility (VIX) plundeged to 14.92, lowest in more than a year.

Overnight, global equities are weak, making it so four of the last five sessions: FTSE -1%; CAC40 -1.5%; DAX -1.1%; Nikkei -0.4%; Hang Seng -0.7%; Korean Kospi -0.1% but still net positive about 2% for last five sessions; Indian SENSEX -1.5% but also with a net gain of about 1.5%. US Futures hammered: DOW -65; SPX -8.30; NDQ -11.25 Dollar fighting upward and back above resistance at 75, 75.36 +.52. Gold is $1481.70 -$4.30. Crude weaker but like Friday from strength for two session is, $108.06 +$1.57. Bonds rallying for a second session….look at long end: 10 year note is 3.39% +3/16 and the long bond 4.44% +13/32…rally in store if QE2 ends!  

…Sir Alan of Greenspan certainly has the gift of gab…just when you hate him and predict he will be remembered as the worst Fed Chairman in history, he astounds you.

That is the secret of his longevity and what happened Sunday on Meet the Press where he was a rare guest on a panel discussing the teabaggers and the deficit. The teabagger rhetoric was predictable gloom and doom yet they hold themselves out as optimists. How can that be when everything is dire. Meanwhile Sir Alan sat silently taking it all in. When David Gregory finally turned to him here were some of his surprising comments:

*Budget cuts can work as long as they are accompanied by a measured amount of tax increases…he pointed to a Danish study that showed a balanced approach works the best (silence from the teabagger). The teabaggers and GOP however won’t even correct for fairness issues such as 15% tax rates for hedge fund operators and private equity firms. (By the way, TB believes that we should tax the top 5% more and cut the corporate tax rate to zero – restoring the 15% dividend tax to ordinary income rates. This was proposed for years by Nobel laureate Franco Modigliani who believed it should be done since they don’t pay taxes anyway (witness GE). Interestingly, Sweden has NO corporate tax but one of the highest personal income tax rates in the world (national tax rate of 20-25% and municipal rate of 30-35%) – works for them.

*If it were up to him he would repeal all of the Bush tax cuts – immediately! They only helped the wealthy and there is no proof that they did anything to boost the economy. They just made the wealth gap wider.

Later, CNBC reprised a 2009 David Faber documentary “House of Cards.” While TB saw it when originally released, the Greenspan comments were even more puzzling seeing it again two years later:

*I had at my disposal about 250 mathematicians and I am well schooled in mathematics. I could not figure out CDO’s and neither could any of them explain them to me completely. *this begs the question: why didn’t YOU Mr. Chairman, put poplularity aside and at least step up examinations? – don’t forget that appraisers were writing Congress complaining about being coerced into writing inflated appraisals. TB)

*There was nothing that I could have done to stop it. Had the Fed attempted to it would not have been well received by Congress (or the Bush administration who was on board)

*All of the growth of the economy could be attributed to home equity loans and higher home prices….this had nothing to do with the Bush tax cuts.

*The closing quote went to Greenspan who when asked by Faber if more regulation wouldn’t have prevented the crisis. “You can’t regulate greed.” A sad commentary from a Fed Chairman, and one who still believes in Ayn Rand.  Greenspan said he believed that since these were smart people running the firms they would pull the plug on their own…that they must have an exit strategy…they all did: the same one! (There is a new must see film out about her theories, based on her book. Both are called: Atlas Shrugged)

But what was interesting about the film was the sad interviews with good people who were sold a bill of goods…pushed into subprime loans by mortgage companies when they could have qualified for conventional mortgages…just to generate higher fees.

There were two former Wall Street people. A quant who designed these instruments for Bear Stearns…department head…and a trader for Lehman. Both tried to warn management but were overruled.

When pressed by Faber as to whether either had done anything wrong…or even exacerbated it, the Lehman trader said, “no I don’t think so, if I hadn’t done it someone else would have”…sounds an awful lot like “I was just following orders.” The Bear Stearns guy, could only look away and mumble “I don’t think I did anything wrong” but his face told a completely different story. That is the same response TB gets when he asks friends in the business who worked for firms who caused the crisis why they won’t admit what was done for short term profits.

Some interesting stories out on income, budget etc.:

*In 1965, the index on household ‘mean’ income (the one that gets the headlines) was 45, while the ‘median’ was 40…a nice spread, but look how it has widened since:

1980   1990     1995   2000     2005   2010

Mean               54        62        61        72        69        68

Median           45        48        45        51        51        49

9        14        16        21        18        19

(Thompson Reuters. Note the sharp increase since the Bush tax cuts!)

*According to the IMF, 50% of the budget deficit came from the Bush tax cuts!

Question: What classes have suffered the most?

Followup: What group will suffer most from the spending bill?

“Endearingly typical of Washington is that the way it chooses to get around an impasse on spending in the next five months is to come up with solutions 10 to 12 years out.” – Alan Abelson, Barrons. Is that the ‘path to prosperity’ that is being hawked to us?

. . .  – – –  . . .   . . . – – –  . . . S O S   S O S

A reader sent the following on Friday after reading the commentary:

*The lesson of the 1920s is that a tech boom should see deflation at the rate of productivity growth – [his emphasis] (this is the “good deflation” economists talk about).  Instead, Easy Al ignored that and set monetary policy far too loose — hence the stock market boom (and the fiscal surplus as a corollary).

I cannot emphasize enough how important this is.  Stock market boom/bust led to housing market boom/bust and here we are now.  And btw, these asset price bubbles are an important factor in driving the wealth and income inequality you (correctly) care so much about.”

There were some appalling stories on 60 Minutes last night: Greg Mortensen a hero who created his aura through lies; the horrible issue of rape at our universities, and Paul Allan making a fool of himself by bashing Bill Gates…while Gates is eccentric, which one has more credibility? Very sad. 

Mea culpa: TB had two glaring errors Friday which either no one caught or were to kind to tell him about: first, there IS NO FOMC meeting this week, and second, BofA bought Countrywide, NOT WaMU (that was a negotiated sale to JPMorganChase by the Fed).

Have a great week…TB will be on the road until Friday so there will be no commentaries.

TB

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