More of the same at Washington:
Biotechnology companies gave tens of thousands of dollars in campaign contributions over the past several months to Democrats who bucked their party leaders in a House Energy and Commerce vote. [Read More]
Amazing German Machines May Lead Europe Out of Recession
Germany’s heavy reliance on exports caused serious problems for the country when the global economic crisis dried up orders. However, its obsession with manufacturing could soon help drive growth. By merging electronics and mechanics, German factories could drive the Continent’s revival.
Aug 172009
Drug Promises Fix for Radiation Poisoning
Dirty bombs are one of the biggest threats to the world’s urban populations. Now an American molecular biologist has developed a drug that may protect against the effects of radioactivity. Military officials are thrilled, and the discoverers could make billions.
Aug 172009
Godfrey Hodgson | 12 August 2009
Barack Obama‘s stalled healthcare-reform plan reveals how crucial features of the American political system operate. Read more…
A Palestinian boy flies a kite during a festival on the beach of Khan Younis, south of the Gaza Strip. The festival was organized by the United Nations Relief and Works Agency (UNRWA). In July this year, thousands of children in the same area set a new world record for number of kites flown simultaneously during a similar event also organized by the UN agency, which provides aid to Palestinian reufgees.
Economic Freefall Ends in Germany and France
Germany and France, Europe’s two largest economies, on Thursday revealed they are officially no longer in recession. Signs of economic green shoots bolstered the euro — and surprised both policymakers and economists. The euro zone economy, however, continues to contract.
Aug 142009
Wall Street “gurus” come and go, but in the case of Bob Farrell legendary status was achieved. He spent several decades as chief stock market analyst at Merrill Lynch & Co. and had a front-row seat at the go-go markets of the late 1960s, mid-1980s and late 1990s, the brutal bear market of 1973-74, and October 1987 crash.
Farrell retired in 1992, but his famous “10 Market Rules to Remember” have lived on and are summarized below, courtesy of The Big Picture and MarketWatch (June 2008). The words of wisdom are timeless and are especially appropriate as investors grapple with the difficult juncture at which stock markets find themselves at this stage.
Bob Farrell’s 10 rules for investing
Aug 142009
Also published on the Atlantic Monthly’s Business Channel.
The term “naked CDS (Credit Default Swap)” has been tossed around a lot lately, with little to no examination of the etymology of the term. You may have heard of “naked short selling” of stock, and a bit of Google action will tell you that naked short selling is generally illegal. So, you’d be inclined to think that naked CDS must be similar in nature to naked short selling, and inevitably conclude that naked CDS would be illegal but for Wall Street’s tentacles. But of course, you’d be wrong.
Naked Short Selling
Naked short selling has nothing to do with being a hedonistic financier. Ordinarily, to short sell a stock, you (i) borrow the stock and then (ii) sell it to someone else. This pair of transactions leaves you with an amount of cash equal to the price of the stock at the time of the sale and an obligation to deliver the stock to the lender at some time in the future. If the price of the stock drops after the sale, you can purchase the stock in the market for less than the price you sold it for, deliver the stock to the lender, and pocket the difference. Fantastic. Naked short selling is very similar, except you never actually borrow the stock. That’s right, you sell something you don’t actually own. There are circumstances where this wouldn’t be much of a problem (e.g., I don’t own the stock right now but I will in the next couple of minutes) and we might want to allow the practice to occur. But exactly when the practice is acceptable is beyond the scope of this discussion. The key point is that naked short selling involves the sale of an asset you do not currently own.
Naked CDS
A naked CDS position is a short position that is unhedged by the underlying credit risk. For example, I have a short position on a bond through a CDS but I don’t actually own the bond. This means that I profit if the price of CDS protection on the bond increases, which usually means that the underlying bond is more likely to default than when I opened up the CDS trade. Note that I have not sold anything that I don’t own. The equivocation between naked CDS and naked short selling stems from the observation that in each case, you don’t own the thing in question. Sure, but in the case of a naked CDS position, you’re not trying to sell the thing you don’t own. It is the sale without current ownership that makes naked short selling problematic in certain contexts. In contrast, in the case of a naked CDS position, you simply enter into a trade expressing a negative view on a credit, that is all.
Naked CDS positions are similar to unhedged puts: buying a put on a stock without actually owning the stock. A put gives you the right to exchange stock for a fixed amount of cash, called the strike price. If the market price goes below strike price, you can go and buy the stock from the market, exercise the put, and pocket the difference between the strike price and the market price. Fantastic. So the more the price of the stock falls, the more you profit. How evil. Of course, no one has a problem with unhedged puts, even though they express a negative view on an asset in almost the same way a naked CDS position does. But don’t forget, puts are not part of the “shadow banking system,” or whatever other garbage meme is being pumped this week.
Same Same But Different
Pundits also grumble because naked CDS positions are speculative, as are short positions on commodities, such as the price of fuel. But of course, the custom crafted pundit logic applies differently to different markets. For example, in the context of CDS, naked CDS speculators are bad because they magically cause the price of the underlying bond to decrease. But when it comes to commodities, pundits claim that speculators cause the price of the underlying commodity to increase. They hold this to be true despite the fact that both the CDS market and the futures markets are comprised of an equal number of long and short positions, by definition. Moreover, speculators can make money on both the long and the short end of a trade in either market, so why should we assume they consistently choose the “evil side” of the trade? Why markets with such similar characteristics yield such different criticisms is beyond me, but perhaps one day I too will wield the Möbius strip of pundit logic.
Published at Derivative Dribble and reproduced here with the author’s permission.
In Judge Takes SEC and Bank of America Lawyers to Woodshed over Merril Bonus Settlement, Yves Smith covers the SEC-Bank of America hearing and considers the notion of Wall Street entitlement; their lawyers have ostensibly bought into this concept.
Joseph Mason looks at the recession two and a half years in and points out that some of the U.S. policies, like government subsidies, support and foster a continuation of the dynamics that fueled the crisis, but there are green shoots in regulatory competition, which are addressing industry and political capture. Read The Green Shoots that are Healthy don’t Taste Good to many Administration Officials.
Arpitha Bykere and Christian Menegatti look at U.S. job market data and provide some perspective. After severe job losses in early 2009, the pace of job losses slowed starting in April and the July numbers have brought more respite. Non-farm payroll job losses were 247,000 in July. However, the private sector lost 254,000 jobs. This is considerably better than analysts expected (around 325,000) but not good enough to claim that we are in the middle of a strong and sustainable recovery. Looking at the recessions of the post-war period, average monthly job losses ranged between 150 thousand and 260 thousand. Average monthly losses in this recession are still at 350 thousand. For the first four months of the year, the average was at 648 thousand. The improvement with respect to the first part of the year is clear. The improvement with respect to what we are used to seeing in recessionary periods is much less clear cut. Today’s numbers are not exactly what you call good news, at least not in absolute terms. In relative terms, after skirting a near depression, markets seem to consider 247 thousand payroll losses a breath of fresh air. See Easing Job Losses Don’t Change Weak Prospects for U.S. Recovery.
If the length of the train of this wedding dress represents how long the love between the happy couple will last, then this bride and groom should certainly expect to be growing old together. The aerial shot taken in China’s Jilin province shows the longest wedding train in the world, measuring more then 2 kilometers.
Aug 132009
I AM SO SICK OF THE INEFFICIENCY AND CORRUPTION BUT HERE IS AN UPDATE TO A CAMPAIGN BETWEEN TWEEDLE DEE AND TWEEDLE DUM(B)…..ACTULLY CHRISTIE LOOKS MORE LIKE DUMPTY-DUMPTY.
The Newark Star Ledger reports that “Republican gubernatorial candidate Chris Christie has tried to escape the shadow of former President George W. Bush, whose support for Christie has become a major line of attack by Democratic Gov. Jon Corzine. But in an interview Tuesday and in congressional testimony last month, longtime Bush advisor Karl Rove said he had conversations with Christie about a possible run for governor while Christie was serving in the non-political position of U.S. attorney.”
Aug 132009
“Citing a general feeling that it has been a while since one last occurred, the FBI warned Monday that the nation should prepare for the possibility of some kind of crazy, cult-related mass suicide,” The Onion reports. “ ‘It is our opinion that members of a fringe organization somewhere in the United States will more than likely engage in a sizable group suicide very soon,’ FBI director Robert Mueller told reporters at an early morning press conference. ‘I mean, can you believe we’ve gone this long without one? It’s been what — 10, 12 years? Too long. You just know some charismatic nut job’s planning something totally insane that’s gonna be like, “Whoa. Those people are nuts.” Right?’ While the FBI offered few specifics on how the suicides are likely to take place, it did not rule out the possibility of cult members ingesting cyanide at the behest of their leaders, engaging in self-immolation, or ‘just chopping their balls off or whatever.’” Check out, as well, on Onion Radio News: “Wal-Mart To Employ 80,000 Iraq War Veterans As Greeters.”
Aug 132009
Commerce’s weather shop — which once dabbled at seeding hurricanes — is adamant in rebuffing repeated requests from DHS’s Advanced Research Projects Agency for collaboration on a hurricane modification program, a Washington Post blog recounts. An MIT robotics lab is at work devising an iPhone app for controlling aerial drones and the warbot like, Danger Room reports. “More and more, it’s robots that are looking for the terrorists,” The Strategy Page leads — an approach, it adds, that “has raised some interesting legal questions.” Coupling biological materials with an electrode-based device, an Israeli boffin “is able to quickly and precisely detect pathogens and pollution — and infinitesimally small amounts of disease biomarkers in our blood,” Science Blog relays. Check, finally, Wired for a link to “Twenty Experts Advise On How To Overcome The Most Frightening Issues You Will Face This Century” (SurvivorMall) — and Slate for 60,000 readers’ best guesses as to “how America is going to end.”
Senior administration officials met last week to explore expanding efforts to thwart global financing for violent extremism, Global Security Newswire quotes one of them. “Stores are worrying less about teens stealing CDs than about sophisticated criminals like Samih Fadl Jamal, the ring leader of a major organized theft operation that stole and resold millions of dollars of baby formula,” The Associated Press recently led. U.S. commanders in Afghanistan say the addition of drug traffickers to a “kill or capture” list is legal and an essential tactic to disrupt the flow of drug money to the Taliban, The New York Times tells. Police believe members of an alleged Melbourne terror cell have been providing funding to al-Shabaab militants in Somalia, The Australian relates. The bloody feuding following the apparent death of Pakistan’s Taliban chief was actually a battle among Taliban warlords to control $24 million in funds, Pakistan’s News International informs.
Sugar and Coffee: Hard Spots in the Softs Market
- Sugar and coffee have outperformed grains, meat and dairy. Supply deficits due to cane crop failures in India and weather damage to coffee in Colombia have kept sugar and coffee prices at multi-year highs. Sugar prices in August 2009 saw record highs, not seen since March 1981, due to shortages coming from major sugar producers in India, Brazil, and China.
Aug 132009
Fed Interest Rate Path: More of the Same at the August Meeting
- The Federal Open Market Committee (FOMC) decided at its August meeting to keep its rate targets and most of its credit easing programs unchanged “for an extended period”. The Fed will slow purchases of Treasuries and extend purchases until the end of October 2009 but did not expand the program.
- Some analysts speculate the FOMC may later expand quantitative easing, particularly TALF purchases of private sector assets. An expansion of Treasury purchases is unlikely given recent economic improvement. Contrary to market expectations, many believe the Fed is unlikely to begin rate normalization until 2010 or 2011 due to a persistent output gap and stubbornly tight credit.
The Debt Crisis Cannot Be Solved with More Debt by David Saied
The principal problem with the current economic crisis is that the authorities are trying to solve the debt crisis by adding more debt — which is akin to trying to cure a viral infection by injecting more viruses. read more…
What Is Free Trade? by William Graham Sumner
There would be no need to fight for free speech, free press, free worship, or free soil, if nobody had put restraints in those matters. We never should have heard of free trade, if no restrictions had ever been put on trade. read more…
Aug 122009
The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.
Aug 122009
Tax cuts on consumption and government consumption have a relatively immediate impact both on aggregate demand and on the rate at which balance sheets are repaired, and income tax cuts along with spending on infrastructure are better at enhancing long-run growth. Thus, my view is not that the tax cut component in the current stimulus package was a complete mistake, tax cuts can help to shorten recessions as described above, and this effect occurs both because tax cuts help to repair balance sheets when the tax cuts are saved, and because they stimulate consumption. But the effectiveness of the tax cuts in the short-run could have been improved by targeting consumption rather than income, and government consumption may have had an even larger effect. What I haven’t been able to determine, however, is which type of tax cut, income or consumption, has the bigger effect on balance sheet repair (saving) rather than aggregate demand (consumption), though I suspect that income tax cuts would have the larger balance sheet effect.
The biggest mistake is that the government consumption component was much too small. The package should have been much larger, and proportionately more of the package should have gone to government consumption measures (which do not have to wait until projects are “shovel-ready” before they can be implemented) rather than income tax cuts and infrastructure. The package contained more than enough measures devoted to long-run economic growth, but far too few devoted to simulating aggregate demand immediately.
Spending Versus Tax Cuts by Mark Thoma
Woods Tells the Story of the Meltdown
As Ron Paul notes in his foreword, this book has great potential to do good.
[VIEW THIS ARTICLE ONLINE]