The Hourly G

Real Hourly Earnings Dropped

2011-02-17T12:00:00.011-05:00

Not so touted as the inflation number, today the Bureau of Labor Statistics (BLS) also released its report on real earnings and wages.

The results were not definitive of anything—but they weren’t encouraging: Real wages (adjusted) dropped 0.1% in January, but for the year, real wages rose 0.2% year-to-year (January 2010 to January 2011). Which means, of course, that this past January represented a significant downturn in real wages.

Was it a blip? Or was it the start of a trend?

Forgotten among the discussions about inflation are wages and salaries: If wages and salaries are downturning, even as price levels are upturning, then inflation is taking a double-bite from the average worker.

So keep an eye on real wages in February and especially March: If this past January’s trend continues, then people are going to be hurting even more than the inflation number would lead one to believe.

CPI Up 0.4%

2011-02-17T10:00:00.001-05:00

The Bureau of Labor Statistics (BLS) is reporting this morning that the Consumer Price Index (CPI) rose 0.4% during the month of January. For the year-to-year January 2010 through January 2011, CPI was up 1.6%.

So-called “core inflation” (CPI minus food and fuel) was up 0.2%

Not reported in much of the mainstream media were the following paragraph from the BLS report:

Over the last 12 months, the food index has risen 1.8 percent with the food at home index up 2.1 percent; both 12-month changes are the highest since 2009. The energy index has increased 7.3 percent over the last 12 months, with the gasoline index up 13.4 percent. The index for all items less food and energy has risen 1.0 percent.

This was the key news—and what will be driving the overall CPI number up over the coming months. Because really, is there any product in the wider economy that is not affected by the price of oil, gasoline, or food?

NOON CARTOON: A Paul Krugman Template

2011-02-16T12:00:00.001-05:00

Ripped off wholesale from the Economics of Contempt blog:
A Paul Krugman Post [Template]

I'm troubled by this statement from Obama:

"[Insert extremely broad, generic presidential statement about the economy.]"In effect, what Obama is saying is: [insert Ridiculous Proposition, completely unrelated to above statement by Obama].

Let me explain why this is so ridiculous: [insert brutal, utterly devastating takedown of Ridiculous Proposition].

Of course, this completely vindicates me, because I said a long time ago that [insert warning about Ridiculous Proposition from the 2008 primaries or early 2009].

Go check out the Economics of Contempt blog—highly recommended.

[Sorry, E. of C.: There was simply no way to partically quote your wonderful post.]

IBG, YBG

2011-02-16T10:00:00.000-05:00

The New York Times is carrying the first on-the-record interview of Bernie Madoff since being jailed.

Madoff—he of the famed multi-billion dollar Ponzi scheme—said something ved interestink about the banks he had to deal with:

“They had to know,” Mr. Madoff said. “But the attitude was sort of, ‘If you’re doing something wrong, we don’t want to know.’ ”

While he acknowledged his guilt in the interview and said nothing could excuse his crimes, he focused his comments laserlike on the big investors and giant institutions he dealt with, not on the financial pain he caused thousands of his more modest investors. In an e-mail written on Jan. 13, he observed that many long-term clients made more in legitimate profits from him in the years before the fraud than they could have elsewhere. “I would have loved for them to not lose anything, but that was a risk they were well aware of by investing in the market,” he wrote.

Mr. Madoff said he was startled to learn about some of the e-mails and messages raising doubts about his results — now emerging in lawsuits — that bankers were passing around before his scheme collapsed.

“I’m reading more now about how suspicious they were than I ever realized at the time,” he said with a faint smile.

Just a few days ago, the Wall Street Journal carried the following:

J.P. Morgan Chase potentially faces reputational damage, and maybe even more legal woes, from allegations leveled in a lawsuit by the trustee seeking to recoup losses forBernard Madoff's victims.

One issue raised by the suit that might be particularly troublesome is the allegation the bank sought to make money by offering financial products tied to Mr. Madoff even though the bank had concerns about the legitimacy of his returns.

There is an expression in the financial services industry, whenever a banker or executives comes across something that is sure to blow up at some time in the future:

IBG, YBG

I’ll Be Gone, You’ll Be Gone.

The tacit inference is, This thing will blow up—but we’ll both be long-gone by the time that happens.

This attitude was pervasive throughout the mortgage loan industry, especially as regards to sub-primes and alt-A’s, and the mortgage backed securities derived thereof. And it was clearly pervasive throughout Wall Street as regards to Bernie Madoff’s Ponzi scheme.

Madoff himself says in the interview (which is worth reading in full) that it was “willful blindness” on the part of the other Wall Street firms.

Another way of characterizing this attitude is with the word collusion.

If someone is involved in a transaction that they know for a fact will result in damages to a third party, but the damages will happen years after they are no longer involved in the business, is that person responsible?

Obviously yes—of course!

The question is, will the justice system in the financial sector punish the guilty? Not just Madoff—who is being punished as we speak—but the JPMorgans, and all the other counterparties to Madoff’s scheme, who likely realized what was going on, yet did and said nothing, so as to continue mining fat fees from the Madoff scheme.

The longer these people who colluded with Madoff continue not being punished, the more it disheartens the rest of the financial sector from doing “the right thing”. And in fact, the longer those who colluded with Madoff remain not just unpunished but free—that is, not in jail—the more it encourages the rest of the financial industry to aggressively pursue illegality. Because they know that they won’t be punished. At worst, they’ll get a fine—a traffic ticket. But they won’t lose their reputation, or their prerogatives, or their freedom.

Allowing IBG-YBG is no different than putting dynamite under the foundations of the Empire State Building. Yet that is what those people charged with policing the financial industry are doing, by charging no-one but Madoff, and letting all the IBG-YBG people get off scott-free.

UK Inflation Up, UK Unemployment UP—UK Interest Rates Flat

2011-02-16T09:00:00.000-05:00

We have worries of the UK: Inflation is up, unemployment is up, and Mervyn King just announced that interest rates will remain steady.

About UK unemployment, Bloomberg is reporting this morning:

U.K. unemployment claims unexpectedly rose in January, underlining the fragility of the labor market a year after the economy emerged from recession and as public-spending cuts start in earnest.

The number of people receiving jobless benefits rose 2,400 to 1.46 million, the Office for National Statistics in London said today. The median of 25 forecasts in a Bloomberg News survey was for a drop of 3,000. Unemployment based on International Labour Organization methods rose by 44,000 in the fourth quarter to 2.49 million.

Meanwhile, about UK inflation and interest rates, the Telegraph is reporting:

[Governor of the Bank of England] Mervyn King repeated his warning that the government's measure of how fast prices are rising, the consumer prices index (CPI), could hit 5pc "over the next few months", after figures showed it climbed 4pc in the year to January.

Nontheless, the UK's foremost central banker said the Bank's Monetary Policy Committee (MPC) thinks that trying to bring inflation back to the 2pc target quickly risks "undesirable volatility in output". A hit to growth could even see the target undershot in the future, he said.

Mr King continued to blame the over-target inflation on "temporary effects", citing the increase in VAT to 20pc at the start of the month, the fall in the pound and soaring commodity prices.

However, he warned: "There is a great deal of uncertainty about the medium-term outlook for inflation. And I do not wish to conceal that there are real differences of view within the Committee, reflecting different judgements about the risks to that outlook."

If January’s CPI was 4%, then the notion that it’ll hit an annualized rate of 5% “in the next few months” is absurd—inflation will hit 5% over the next couple of months at the latest. All commodity prices are surging, and there is nothing stopping it right now.

Coupled with surging unemployment, this all spells doom for the pound sterling unless Mervy the Swervy doesn’t get out ahead of inflation and reign it in—hard.

Problem is, the BOE can’t: The UK’s government is over-indebted, product of the spend-and-borrow Labour governments. If Mervy raises rates, to stop inflation, he might shove Britain into a sovereing debt crisis.

Mervy is trying to spin this as “no one is sure if this inflation is the real thing or a passing thing”—but all signs point to it being the real thing. Yet Mervy the Swervy ain’t doin’ a damn’d thing about it: Steady-as-she-goes interest rates is his answer, which will only feed the inflation beast.

So bottom line, it looks like the UK is heading into stagflation, with the Bank of England at best chasing after inflation reactively, like it did in the 1970’s, instead of getting out ahead of it and stopping it cold.

So advice? Get out of gilts, get out of the pound, or best of all, get into pound debt at a fixed rate. Goes that ship’s going down.

NOON CARTOON: Jeffrey Sachs Interview

2011-02-15T12:00:00.000-05:00

A really fascinating interview with Jeffrey Sachs, who basically says what everyone knows, but which the mainstream media does not report: That both the Democrats and the Republicans are in the back pockets of the wealthy, who are essentially forcing both parties to cut government until there is nothing left, rather than raise taxes.

The video can’t be embedded, so go here to see it. The picture below is just a picture of Sachs.

Why Are Capital Requirements Hated By Banks?

2011-02-15T09:00:00.035-05:00

Because they lower profitability—and therefore bonuses. Substantially.

Even the weak-kneed Basel requirements are having an effect, according to Bloomberg:

By cutting Credit Suisse Group AG’s profitability target last week, Brady Dougan acknowledged what some Wall Street bankers and investors are loathe to concede: Tougher capital rules will mean lower returns.

Dougan, the Zurich-based bank’s chief executive officer, lowered the goal for return on equity, a measure of profitability, to more than 15 percent from more than 18 percent. Barclays Plc said today it will aim for a 13 percent ROE, down from an average of 18 percent over the past 30 years. By contrast,Goldman Sachs Group Inc., the bank that makes the most revenue from trading, insists its target of a 20 percent return on tangible equity doesn’t need to be moved.

Profitability soared in the middle of the last decade as banks increased leverage, using borrowed money to bulk up on assets. The credit crisis exposed the risks of that strategy and resulted in $1.48 trillion of writedowns and losses worldwide. To generate the same returns while holding more capital, Wall Street firms can either discover fresh profit opportunities or reduce costs, including pay, analysts said.

A lot of fellow conservatives think that banking regulation and higher capital requirements are some sort of Commie plot.

But the fact is, banks will always play roulette with the money that they are entrusted—especially corporate banks.

Private banks—where the partners are personally exposed to their bank’s losses—will never take foolish risks. Their lending standards will always be prudent, their leverage positions always cautious, because their partners know that they could wind up in the poor-house if they make the wrong bets. But the flip side to this sensible caution is, private banks will always be very hesitant to lend out money, and so will not help developing industries with financing.

But corporate banks—apart from having access to greater capital through their publicly traded equity—will be more forthcoming insofar as loans to developing industries are concerned. Which is great—it spurs the economy.

However, the flip side to that is, the people running corporate banks do not have a personal stake in the fortunes of the bank. So they won’t be so afraid of driving the bank into the ground—as happened in the period leading up to the 2008 Global Financial Crisis.

That’s why capital requirements are necessary—and high ones at that.

The lax capital requirements of the last 20 years have created an incentive to both take huge gambles with OPM (other people’s money), and give incentive to the banks to pay huge salaries to bank employees.

Dougan is taking the first step in the new reality—let’s see if other bankers follow suit, or if there is enough push-back from the banksters that they get their way: A return to the wild-wild west days of yore.

Big Silvio in Real Trouble?

2011-02-15T08:00:00.004-05:00

The AP story was short and stark, serious like a heart attack:

An Italian judge has ordered Premier Silvio Berlusconi to stand trial on charges he paid for sex with a 17-year-old girl and then tried to cover it up. Judge Cristina Di Censo handed down the indictment Tuesday. The trial is set to begin April 6.

Once again, The Hourly G isn’t interested in tawdry sex stories—but if Berlusconi falls, it could have unanticipated consequences for the euro.

Why? Because Italy is in the same hole as Spain, Ireland, Portugal and Greece—there is a reason they are collectively known as the PIIGS.

All of the weak economies in the euro-zone—the PIIGS—are over-indebted: They need further funding from the bond markets, in order to stay operational. If there is a seizure in the euro-bond market—for whatever reason—then all of these countries, no just Italy, could suffer a crash.

And even if it’s just Italy, that’s still a huge elephant: Italy’s GDP is $2 trillion, compared to $3.3 trillion for Germany. Italy simply cannot be bailed out like Ireland ($204 billion) or Greece ($305 billion).

Ordinarily, sexual politics wouldn’t influence macro-economic policy—but this is Italy. If the Berlusconi government falls, there will be political chaos in Italy—and therefore no clear direction for the bond markets, which at this point in time rule the European continent.

So this isn’t a Bill Clinton-style freak-show, put on for our collective amusement, but ultimately inconsequential—this Berlusconi thing matters.

Inflation Rises in the UK and China—Oh My!

2011-02-15T07:00:00.000-05:00

The BBC is reporting this morning the rise in UK inflation:

The UK Consumer Prices Index (CPI) annual inflation rate rose to 4% in January, up from 3.7% in December, as the effects of the VAT rise were felt.

Higher oil prices also meant inflation remained well above the 2% target.

Retail Prices Index (RPI) inflation - which includes mortgage interest payments - rose to 5.1% from 4.8%.

The CPI figure is the highest since November 2008, and will put pressure on the Bank of England to lift interest rates to curb accelerating inflation.

Meanwhile, inflation in China is rising as well. According to Bloomberg:

China’s inflation accelerated in January as prices excluding food rose the most in at least six years, bolstering the case for more interest-rate increases to tame overheating risks in the fastest-growing major economy.

Consumer prices rose 4.9 percent from a year earlier after a 4.6 percent December gain, the statistics bureau said on its websitetoday. A separate central bank report showed banks signed 1.04 trillion yuan ($158 billion) in new loans, less than forecast while still the third-highest January total.

The article further points out that:

Asian economies, with rising food costs and inflows of capital driving inflation, may need to raiseinterest rates further to limit the risk of overheating and prevent a “hard landing,” International Monetary Fund Managing Director Dominique Strauss-Kahn said Feb. 1. India’s benchmark wholesale- price index rose 8.23 percent in January, Indonesia’s inflation is 7 percent and South Korea’s is 4.1 percent, the latest government data show.

Now, what does this all mean?

It means that food prices are rising—courtesy of the inflation exported by the Federal Reserve, via the various iterations of Quantitative Easing—and now we are all seeing the effects on the world's economies, both developed (like the UK’s) and emerging (like China’s and the rest of Asia’s). And this will likely trigger a rise in interest rates, at a time when the global economy is not exactly feeling at its most confident and carefree.

Inflation, in and of itself, would be bad, especially in stagnating economies—the dreaded “stagflation”. But what is happening around the world is, rising food prices are setting the stage for social unrest. We have seen that in Egypt, we are seeing it in the rest of the Middle East. We are also seeing it in Asia and to a lesser extent (so far) in Latin America.

Rising social unrest will have a severe impact on the global economy, by raising the specter of uncertainty—which will only further help drive up prices, especially of commodities, which will basically mean adding fuel to the fire.

So this isn’t over—far from it. This is merely the first signs of the beginning

Apple Unveiling Cheaper iPhone

2011-02-14T09:00:00.000-05:00

Confirmation is coming from various sources that Apple will be unveiling a new, smaller, cheaper iPhone.

iPhone 3G, and mock-up of smaller iPhone.

The rumor had been in the works for months, but lately both Bloomberg and the Wall Street Journal got confirmation from anonymous sources who had seen the new device.

The new, smaller, cheaper iPhone will likely be fully subsidized by the cell carriers, making it more affordable for the average consumer. The current iPhone 4G is sold by Apple to the carriers for $650, who in turn sell it to customers at $200 plus a minimum 2-year phone plan.

Currently, iPhones comprise 3.6% of the cell phone market—but they hold a 26% share of the smart-phone market, which is the fastest growing segment of the cell-phone industry.

Google’s Android platform, though released after the iPhone, has leap-frogged it, in terms of market share, to 33% of the smart-phone market.

The iPhone is a key product line for Apple, representing roughly 40% of its $26 billion 2010 revenue.

The release of a smaller, cheaper iPhone mimics the tactic Apple used with its famed iPod: The original model, selling at $300, was joined by the iPod Nano, which sold for half the price. And though the Nano had less than half the memory capacity of the original iPod, it became the dominant seller of the product line, both in units and overall revenue.

The iPod Nano also overwhelmed competing MP3 players at the time of its release, including Microsoft’s ill-fated Zune. Today, iPods represent 80% of the portable digital music player market.

Let’s see if the new cheaper iPhone does the same thing for Apple in the smart-phone market.

FY 2011 Budget Deficit: $1.6 Trillion

2011-02-14T08:00:00.014-05:00

So the Obama administration is submitting its fiscal year 2012 budget today—and along the way, the administration revises its FY 2011 budget deficit.

The current projected deficit for FY 2011? $1.6 trillion.

This comes after last month’s announcement by the Congressional Budget Office, which put the FY 2011 deficit at $1.48 trillion—which in turn was a revision over last year’s deficit projection of “only” $1.3 trillion.

So in other words, in less than six months, the FY 2011 budget—which has still yet to pass, scheduled for a vote this coming March 4—has had a deficit which has risen 23%.

The Wall Street Journal has a long, frankly tedious discussion about the ins and outs of the FY 2011 budget, and how we got here—but the money-paragraph is this:

For now, Mr. Obama and the Republicans are choosing to clash over a narrow slice of federal spending—the 15% devoted to discretionary programs unrelated to security and defense—while the entitlement programs that are driving projected federal deficits remain unaddressed by either party.

That pretty much covers it.

What ought to be noted is, today the Obama administration will release its FY 2012 budget proposal (FY 2012 runs October 2011 through September 2012)—yet as mentioned above, the FY 2011 budget has yet to pass. March 4 is the date when the continuing resolution ends, but who’s to say if the Congress and the administration kick the can further down the road.

This is the government the people elected. Jeez . . .

No German Wants the ECB Chairman’s Job

2011-02-14T07:00:00.000-05:00

Last week, Bundesbank Chairman Axel Weber, 53, publicly declined the job of European Central Bank president—which set off quite the round of tongue wagging.

Axel Weber

The ECB presidency is rotated—at the end of Jean-Claude Trichet’s tenure, it’s Germany’s turn. Weber was the leading candidate—and a famously strict disciplinarian insofar as monetary policy was concerned, in favor of a strong euro and letting the eurozone nations fend for themselves, when it came to sovereign debt.

But he wasn’t the only German to withdraw his name from contention: Peer Steinbrueck, a Social Democrat parliamentarian and former finance minister in Angela Merkel’s cabinet, has also withdrawn his name.

Axel Weber’s explanation for withdrawing was neatly summed up in an interview published today in Der Spiegel:

SPIEGEL: Why don't you want to be president of the ECB?

Weber: My name has been mentioned in the discussion about this position over the last year and a half. I have taken clear positions on a few important decisions in the last 12 months…

SPIEGEL: …especially the ECB's purchase of government bonds issued by troubled euro-zone members, a policy you are skeptical about …

Weber: …and I continue to support these positions. My positions might not always have served to increase my acceptability as an individual with certain governments. For this reason, it's been clear to me since last May that this would adversely affect a potential candidacy. Since then, I have become increasingly convinced that I should not seek this important position.

As to Steinbrueck, his explanation was shorter still: “I am not available for this job.”

A German has to take this job—after all, it’s their turn. The tapped candidate will have to somehow cut the Gordian Knot: Be disciplined with the euro, yet bail out the weaker euro-zone nations.

Trichet has played that role, more or less managing to please everybody. But as inflation is rising worldwide, saving the euro or saving the sovereign debt will become mutually exclusive.

So it’s really no surprise that no German wants to get involved in this unfolding mess.

NOON CARTOON: Foreclosure Auction Explained

2011-02-13T12:00:00.001-05:00

Here’s something neat that came over the transom: A clear and true explanation of how foreclosure auctions happen, courtesy of ForclosureRadar.com:

As the professor always sez: “Vedi interestink!”

Tonight’s Debate: Stoneleigh vs. Lira

2011-02-10T09:00:00.004-05:00

Due to tonight’s debate on deflation versus hyperinflation, posting will be thin today, picking up tomorrow after noon.

For those unaware of the debate (possible), here’s the link to the sign-up site.

Hope you enjoy it!

NOON CARTOON: What $100 Is Worth

2011-02-09T12:00:00.001-05:00

Courtesy of reader Bud Wood, a chart of the declining purchasing power of $100—quite the depressing little cartoon:

(click to enlarge)

Any questions?

And Now The States Will Get Bailed Out Too

2011-02-09T07:00:00.014-05:00

So in 2008, the U.S. Federal government and the Federal Reserve essentially nationalized the losses of the major banks, bringing onto their respective balance sheets all the toxic assets and all the bad bets made over the last decade or so.

To that, the Federal government is going to now add the insolvent state governments. According to the NY Times:

Looks like a corpse, doesn’t it?

President Obama is proposing to ride to the rescue of states that have borrowed billions of dollars from the federal government to continue paying unemployment benefits during the economic downturn. His plan would give the states a two-year breather before automatic tax increases would hit employers, and before states would have to start paying interest on the loans.

The proposal, which administration officials said would be included in the 2012 budget that the president is scheduled to unveil next week, was greeted coolly by Republicans on Capitol Hill, who warned that the plan would ultimately force many states to raise their unemployment taxes in the years to come.

Screw the “unemployment taxes in the years to come”—the Federal government will be adding massive liabilities to its balance sheet now, which will force even more issuance of debt in order to keep the Federal government afloat.

And since the Federal government is insolvent, this added debt will force the Federal Reserve to continue buying up Treasuries.

Obvious question: Is there anyone in a position of power in the United States who gives a shit about the fact that the government is being driven bankrupt?

NOON CARTOON: If Only This Were True About Economists

2011-02-08T12:00:00.011-05:00

“I see soft third quarter earnings . . .
for you, and for your little dog too!”

If only this were true about economists: AP is reporting that Romania will fine witches who make wrong predictions.

Not kidding:

Legislation being debated in Romania would require witches to get a permit and make it possible to fine or even imprison one whose prediction turns out to be false.

Imagine if this were the case with economists. Imagine if every time, say, Jan Hatzius predicted an unemployment number that turned out wrong, or Jim Cramer pitched some stock or other that then immediately tanked, they not only got fined—they even ran the risk of going to jail.

Would we all be happier?

Um . . . yeah.

Labour Angry About Tory Levy On Bankers

2011-02-08T11:00:00.007-05:00

The world is officially nuts—or the UK’s Labour Party is fucked up beyond all recognition:

George Osborne, the Conservative Chancellor of the Exchequer, in a surprise announcement today, accelerated the implementation of a levy on British bankers, essentially a windfall profits tax aimed especially at banks that got government largesse during the 2008 Financial Crisis, and at exorbitant banker bonuses.

The levy was supposed to be phased in over time—but Osborne decided to speed it up ahead of next month’s budget announcement.

The Labour Party had a fit: Calling Osborne’s decision “hurried and panicky”, as well as accusing him of “moving the tax goalpost” and throwing a “damp squib” on the financial sector, Labour’s Shadow Chancellor, Ed Balls, was practically frothing at the mouth, as Osborne and the Conservatives effortlessly robbed Labour of its populist mantle. Labour’s reaction so far has been so bad that it seems to this observer to be sliding into the perverse position of siding with the UK banksters, who are just as cutthroat and vampire-squid-like as their U.S. counterparts.

A video interview of Osborne after the jump:

”Hello, He Lied”: How Can Anyone Believe Anything Goldman Sachs Says?

2011-02-08T10:00:00.024-05:00

Goldman Sachs
positioning a client for a deal.

How can any customer of Goldman Sachs feel confident that they are not getting anally reamed, when something like this comes out on Bloomberg:

Goldman Sachs Group Inc. is telling investors to buy European bank stocks for the first time in more than 16 months. Bond buyers are taking the opposite view on concern that policy makers will fail to staunch the debt crisis.

As anyone and everyone knows, the time to buy bank stocks was when Warren Buffett pumped $5 billion into Goldman Sachs, at the very height of the 2008 Crisis. Anyone buying Citigroup stock when it fell below $1 a share would have quintupled their money. The same goes for European banks.

But buying American or much less European banking stock now? Especially when Euro-banks are seriously exposed to the sovereign debt of the PIIGS? Foolishly insane.

Nevertheless, Goldman is telling their clients, “Buy! Buy! Buy!”

Which just begs the question: How can any client trust anything that Goldman Sachs recommends?

Shrewd money managers always go against the flow—often to their and their clients’ benefit. But even just a casual look-see through Goldman’s “recommendations” over the years shows that Goldman doesn’t merely go against the flow: They seem to deliberately steer their clients straight to the most unprofitable trade, the most sure-fire money loser.

There’s an old poker saying: If you can’t tell who’s the fool at the table, then he’s you. When dealing with Goldman Sachs, the saying should be: If you cannot immediately recognize how they are trying to rape you, then they have already succeeded.

Today’s Headline: China Raises Rates for the Third Time Since October

2011-02-08T09:00:00.033-05:00

Today’s headline: China raises its key interest rates for the third time since October, and the second time in six weeks.

As per Reuters:

Benchmark one-year deposit rates will be lifted by 25 basis points to 3 percent, while one-year lending rates will also be raised by 25 basis points to 6.06 percent, the People's Bank of China said. The changes go into effect on Wednesday.

Although annual inflation slowed in December, analysts polled by Reuters expect it to have picked up to 5.3 percent last month, the fastest pace in more than two years, on the back of soaring food prices.

The rate hike was a surprise, coming as it did just before the Lunar New Year holiday. Commodity prices—especially oil—took a hit on the news, and there is concern that the hike will affect Chinese growth.

However, as highlighted, inflation is the concern.

Indonesia, South Korea, Thailand and India have all raised rates so far this year—all of them doing so on concerns about inflation, which has been hitting those economies rather severely.

The Chinese rate hike, coupled with their renewed (and ham-fisted) efforts at price controls, underlines how concerned the Chinese leadership is. They are also probably keeping a wary eye on developments in Egypt: After all, the Egyptian Crisis was triggered by rising food prices.

The Chinese Communist Party (CCP) has essentially a tacit understanding with the Chinese people: Let us rule you without debate, and we will give you food and prosperity.

The CCP cannot allow food price inflation to break that promise. So expect them to do everything necessary to keep food prices low.

If that means more rate hikes in the near term, then by Mao, there’ll be more rate hikes—as many as necessary, to keep the population happy. Or at least keep them from revolting.

Department of “So-Not-Surprised”—Ethanol Losing Money

2011-02-08T08:00:00.001-05:00

With the dramatic rise in corn prices—some of which is blamed on its use in ethanol and other “blended” fuels—ethanol producers are getting squeezed to the breaking point.

From the CME Group Ethanol Outlook Report:

Over [the past] 7-month period, corn prices have rallied by 90% whereas ethanol prices have rallied by only 55%. The relative weakness in ethanol prices has slashed the ethanol-corn crush margin to its current level of -1 cent per gallon from the 20 cent profit seen last July. Including the income earned from selling distiller dried grains (DDGs), the margin is still positive at 35 cents. However, from that 35-cent profit, U.S. corn-ethanol producers need to pay all their other expenses, meaning most [corn-ethanol producers] are barely profitable at present and some are already losing money. The profit risks remain high for ethanol producers if corn continues to rally.

The Law of Unintended Consequences: All the corn grown in the United States with generous Federal subsidies was glutting the markets—so the Bush administration had the bright idea to give even more incentives to turn that grain into fuel.

Turns out, aside from being an incredibly inefficient way to produce fuel, corn-ethanol drove up the price of corn, making ethanol uncompetitive with regular gasoline, as we are now seeing.

To top it off, there is such a high demand for fuel that, if every car were turned into an ethanol user, there isn’t enough corn on the planet to satisfy demand, let alone enough left over to feed people and livestock.

So the whole ethanol thing was another government boondoggle: Your tax dollars, hard at work.

Can You Spell “Schadenfreude”?

2011-02-07T09:00:00.001-05:00

F-O-R-E-C-L-O-S-U-R-E—M-I-L-L—A-T-T-O-R-N-E-Y—I-N—B-I-G—T-R-O-U-B-L-E—

—that’s how you spell “schadenfreude”: The Associated Press has a fascinating story about the rise and fall of David Stern, a top Florida foreclosure attorney and operator of a “foreclosure mill”, is in serious trouble.

The key paragraph:

The Florida attorney general's economic crimes division is investigating three law firms, including Stern's, over allegations that they created fraudulent legal documents, gouged homeowners with inflated fees, steered business to companies they owned and filed foreclosures without proving the bank actually had a legal interest in the loan. Florida authorities characterize the foreclosure process at these law firms as a "virtual morass" of "fake documents" and depicted Stern's operations as something akin to the TV show "Lost" - only instead of people that went missing, it was paperwork. Stern's employees churned out bogus mortgage assignments, faked signatures, falsified notarizations and foreclosed on people without verifying their identities, the amounts they owed or who owned their loans, according to employee testimony. The attorney general is also looking at whether Stern paid kickbacks to big banks.

The “big banks” the piece refers to are Goldman Sachs, JPMorganChase, GMAC, and CitiGroup—Stern worked with all of them.

This is all good and fine—but one glaring truth simply must be pointed out: Since the start of the Global Financial Crisis—aside from the Madoff Scam—not one person has even been charged with a crime, let alone gone to jail.

And even people who, it is clear, were involved with and knew of the Madoff Scam—such as JPMorgan—aren’t being prosecuted.

The rich really are different from you and me: When they scam, they don’t go to jail.

AOL Buys Out Huffington Post

2011-02-07T07:00:00.003-05:00

AOL bought out The Huffington Post, as announced on their site. As per the BBC:

The $315m (£222m) deal will create an internet media group with 270 million users, including 117 million in the US.

The purchase price - $300m of which will be in cash - will be paid to co-founders Arianna Huffington and Kenneth Lerer and a few minority shareholders.

Arriana Huffington
Ms Huffington - currently editor of her namesake news service - will head the combined firm's content division.

This means she will take on responsibility for AOL sites such as Engadget and Techcrunch, as well as retaining her current role at the intellectual centre-left website she helped set up in 2005.

This is the future of online news.

The Huffington Post does two things very well: It has a clear editorial line, and it makes its readers feel a part of the news by both the social networking stuff on the site, as well as the direct connection with the specific bloggers on the site.

In other words, it gathers like-minded readers who have a vested interest in the news. These readers follow the news like social twitters, or Facebook updates—and just like Twitter or Facebook, it becomes addictive to the user.

The Huffington Post is skewed towards politics and lifestyle & entertainment—but it’s easy to see how it can be a template for other news sites. In fact, of the financial sites, Zero Hedge is probably the one closest to mimicking THP’s concept.

An important issue about the site—and essential for the business model—is that The Huffington Post derives all its revenue from advertising. Anything sold on the website is gravy—it’s the ads that make it a going concern.

This is why AOL felt so confident about buying it: Unlike Murdoch’s purchase of MySpace—which became a money-pit—AOL knows The Huffington Post will stand on its own.

This deal signals the end of both network news and traditional newspapers: The Huffington Post and other similar sites can provide both written and video news, and deliver it when the user wants it, not at set times in the evening, or every morning at the newsstand.

Expect other sites to ride The Huffington Post’s coattails to big-money deals. Of the financial sites, Zero Hedge is the one most likely to go in that direction.

Smooth Sailing—For Now

2011-02-05T10:00:00.004-05:00

The Egyptian situation is stabilizing; Mubarek will likely step aside one way or another, and Egypt will go back to business.

Meanwhile, in the U.S., earning are doing somewhat better than expected, the VIX index of investor anxiety dropped this past week, Friday’s U.S. jobs report—cosmetically better—is lowering anxiety, U.S. Treasury bond yields are up (signaling risk-on for the markets), and all-in-all, things seem to be going okay.

So barring something out of left field, the next week is going to be Onward and Upward Ho!

The only thing that will be signalling bad juju on the horizon will be commodities: Precious metals, industrial metals, oil and agros.

Expect them all to creep up all of next week. Nothing to get into a twist over—just a steady march up, across the board.

Friday’s closing prices:

Light sweet Texas crude: $89.03

Gold: $1348.48

Silver: $29.11

Copper: $4.5795

Wheat: $853.75

Corn: $678.50

Call It The Bureau of Lying With Statistics: Unemployment Supposedly at 9.0%

2011-02-05T08:00:00.015-05:00

Yesterday, the Bureau of Labor Statistics (BLS) released January unemployment numbers. The headline paragraph was:

The unemployment rate fell by 0.4 percentage point to 9.0 percent in January, while nonfarm payroll employment changed little (+36,000), the U.S. Bureau of Labor Statistics reported today. Employment rose in manufacturing and in retail trade but was down in construction and in transportation and warehousing. Employment in most other major industries changed little over the month.

(We like the Courier font the original report uses, BTW.)

Sounds good, right? Unemployment at 9.0%—down 0.4% from the month before. The economy recovering, right?

Ding-dong!—wrong! It’s called “Lying With Statistics”.

Basically, the BLS made three moves with the employment statistics: They reduced the number of people who could be counted as unemployed; they back-revised 2010 data, so as to count even fewer people among the unemployed; and they inflated the model they use to guesstimate new job creation.

Hence, even though there was a minuscule job growth of only +36,000 new jobs in the month of January, the headline blare is that unemployment went down 0.4%, to 9.0%.

So everybody happy!-happy!-happy! Right?

Hmm . . . everybody except the unemployed.

The Ten PM Tutorial vi: Exporting Inflation

2011-02-04T22:00:00.005-05:00

With food prices rising in the rest of the world, sparking riots in Egypt and general social unrest in other countries, commentators have been talking about how the United States is “exporting inflation”.

It sounds confusing, but this is actually a simple concept.

The Federal Reserve has been printing money via Quantitative Easing (2008–09), QE-lite (August 2010–August 2011), and QE-2 (November 2010–June 2011). These policies have meant that the Fed has created money, then used it to buy toxic assets (QE-1), then Treasury bonds (lite and 2).

The reason the Fed did QE-1 was so that the toxic assets the American banks had on their balance sheets wouldn’t drive them broke—as they were threatening to do. When the Fed carried out QE-1, the banks got rid of their toxic assets, and got fresh money. They used this money to buy Treasury bonds.

When the Fed unleashed QE-lite and then QE-2, the Fed was worried about a deflationary spiral: Lower aggregate demand pushing prices of goods and services lower, forcing companies to lay off workers, which naturally curtails demand, pushing prices for goods and services lower still, and so on.

By flooding the economy with money via QE-lite and QE-2, prices of all asset classes would rise, thereby avoiding a deflationary death spiral.

This was a successful policy: There was no price deflation. Instead, markets have rallied: Stocks, bonds, commodities—

—and here’s the problem: Since late 2009, commodities of all classes—precious metals, industrial metals, oil, agro—have all been rising, and rising rather precipitously at that.

The rise in commodity prices in dollar terms has meant that foreign countries have to spend more dollars in order to import the same amount of a commodity, let’s say wheat. This rise in the price of wheat is passed on to the local population, in the form of higher prices for bread.

Since spending on food comprises a greater proportion of income in poor and developing countries than in richer countries, real-world inflation affects a population faster in poor and developing countries than in the U.S. or Europe.

Lately, we have been seeing this: The riots in Egypt were triggered by rises in food prices. Problems in Indonesia, Asia, Brazil. All food related.

Federal Reserve chairman Ben Bernanke claims that the rise in commodity prices has nothing to do with the various versions of QE—he claims instead that rising commodity prices is because of natural events curtailing commodity production (floods in Australia, drought in Argentina, fires in Russia) which of course makes prices rise, and is also a sign of a recovering economy, as stronger demand puts pressure on prices. Bernanke also claims that rising inflation in the developing world is a sign that those economies (China, India, Brazil, etc.) are leading the way out of this recession.

Bernanke’s explanation is pretty complicated, if you get right down to it. Apply Occam’s razor: The simpler explanation is that dollar creation by the Fed by way of the various QE’s has driven up commodities, whose price increase is being reflected in the rise of consumer goods in the poorer nations first.

Thus in order to “save” the U.S. economy, the Fed has “exported inflation” to the rest of the world.

The obvious problem, of course, is that this inflation won’t stay outside the U.S. for long. Like a boomerang, it’ll soon be coming back.

Live by the Ratings, Die by the Ratings: Beck Is Going Down

2011-02-04T15:00:00.014-05:00

(Full disclosure: GL was invited to appear on The Glenn Beck Show back in September 2010, as a “hyperinflation expert”, amusingly enough. However, his appearance was cancelled at the last minute—rather embarrassing and inconvenient. He was promised an opportunity to get on the show again—but he’s not holding his breath.)

Glenn Beck Wants YOU . . .
to watch his show.

So Deadline Hollywood is reporting that Glenn Beck’s ratings for his show are tanking something awful. According to them:

Beck's eponymous talk show posted the steepest ratings declines for any cable news program. Glenn Beck averaged 1.8 million viewers, down 39% vs. January 2010. In 25-54, the drop was even bigger, 48%, to 397,000. Some of the losses could be explained by tough comparisons to last January, which was one of the highest-rated in Fox News' history, fueled largely by coverage of the Massachusetts governor race. Still, this is a very steep decline for Beck, who peaked at 2.8 million viewers in 2009, drawing more viewers than all of his cable news competitors combined.

The piece softens this assessment by pointing out that all news talk shows are taking a beating at the ratings. (Which makes sense, if you think about it: Our current reality sucks, so people are turning to escapist fare, rather than confrontational shows, or news shows.)

But what’s really killing Beck’s show are the advertisers—specifically, the number of advertisers who refuse to run ads during his show. Again, quoth DH:

As of Sept. 2010, 296 advertisers had asked not to be on Glenn Beck, up from 26 in August 2009.

No matter how high your ratings, if you’re not bringing in the big-time advertisers, you’re in serious trouble.

After all, the whole point of ratings is to determine the rate your advertisers will pay you. If you don’t have any advertisers—or if they are inconsequential, low-dollar advertisers—then having the highest ratings ever doesn’t mean a thing.

This is why Beck’s media fate is worth paying attention to: He’s popular, but he’s not bringing in big-time advertising revenue. So he just might get the boot.

A lot of people—Left, Right and Center—despise Glenn Beck. But irrespective of what one thinks of him and his political “philosophy”, he certainly does bring diversity to the mainstream media pap—a rather stark contrast to the high-energy, quick-talking, carefully polished, but altogether bland offerings elsewhere in media-land.

However, Fox News just might drop him, if he doesn’t deliver the income that he should from the advertisers. His ratings are merely a derivative of the really important number—his show’s ad revenue.

Roger Ailes, the boss of Fox News, might share Beck’s politics—but bottom-line, it’s about the bottom-line. Ailes wants Fox to make money—but Beck is hamstrung in this regard. The big advertisers have black-balled his show—and at this point in time, and there is nothing that Beck or Fox can do to bring them back.

This is an example of how corporations can so easily squeeze out dissenting voices. Whatever one might think of Beck, Keith Olbermann, Rachel Maddow, John Stewart, Rush Limbaugh, and so on, the example of Glenn Beck shows how easily a few corporations can torpedo that dissent from the mainstream.

Is that what a healthy society should have? A mass media that only allows a few carefully bland parrots in the cage?

Stay tuned.

Why Foreigner Hate The Fed

2011-02-04T08:00:00.029-05:00

The BBC is reporting this morning that the inflation situation in India is dire.

India's prime minister has warned that the country's rapid economic growth is under "serious threat" from inflation.

Manmohan Singh said getting inflation under control was a matter of urgency, raising the prospect of an eighth interest rate rise in under 12 months.

Emerging markets like India, where GDP growth is running at 8.5%, are helping to drive global economic recovery.

But Mr Singh said India's inflation rate of 8.4% - and food price inflation of 17% - was unsustainable.

"Inflation poses a serious threat to the growth momentum. Whatever be the cause, the fact remains that inflation is something which needs to be tackled with great urgency," he said.

The highlighted line is worth noting.

As discussed in the previous hour’s post, the rest of the world is coming to the conclusion that the U.S. Federal Reserve’s policies of loose money, ZIRP, and the various iterations of Quantitative Easing are responsible for the run-up in commodity prices—and therefore, the run-up in the price of foodstuffs.

Politically, for a lot of countries—including India—it is awkward to point out the obvious, except through elliptical phrases like “Whatever be the cause [of the shithole we find ourselves in]”. They can’t say, “You stupid Americans! You’re flooding the world with dollars! Driving up the price of basic foods! Causing riots! Causing political upheaval! Stop printing dollars!”

They can’t say that—but other countries can. Countries and groups with marginal or antagonistic relationships with the U.S.—such as Iran, Venezuela, maybe Russia—can say out loud what most of the world is thinking.

And they can take advantage of the situation, at the U.S.’s expense.

Furthermore, if what is happening in Egypt—severe political destabilization brought about by food price inflation—starts happening in the rest of the world, then more and more countries will start taking steps on a path that hurts everyone: Food price controls, aggressive capital controls, government crackdowns on dissenters, trade barriers.

It’s obvious: If a lightly-to-mildly repressive regime sees food prices rise which brings about social discontent, what are they going to do? Stand by idly? Let what happened to Mubarek happen to them?

Of course not! They’ll subsidize food, and put trade barriers to make it stick. They’ll install more aggressive capital controls, to prevent capital flight. And if the food situation gets bad, they’ll round up the dissidents before they’ve had a chance to organize—so it’ll be in the interest of these lightly-to-mildly repressive regime to become aggressively repressive regimes.

These are the unintended consequences of the Federal Reserve’s policies.

Hurray.

Two Views on The Bernank

2011-02-04T07:00:00.038-05:00

This morning, there are two radically different views on a speech Federal Reserve chairman Ben Bernanke gave on Thursday—the view from the mainstream media in the United States, and the view of the mainstream media in the rest of the world.

Ride ‘em, Cowboy.
Chairman Ben Bernanke.

Both are referring to the same speech The Bernank gave at a luncheon at the National Press Club in Washington—but the American media is focussing on an obvious political nonstarter: The idea that the budget ceiling will not be raised.

The foreign media, on the other hand, is focussing on something that really matters: How the U.S. is exporting inflation, especially food price inflation, which is leading to social unrest.

Bernanke’s vehement denial of the obvious is what the media in the rest of the world is talking about.

Compare:

The New York Times reports in the lead of its story,

The Federal Reserve chairman, Ben S. Bernanke, warned Congressional Republicans on Thursday not to “play around with” a coming vote to raise the government’s legal borrowing limit or use it as a bargaining chip for spending cuts.

In remarks after a luncheon speech here, Mr. Bernanke sided with the Obama administration in the fight over the debt ceiling, which the government is on course to hit in April or May, saying it should be raised without conditions. Some Republicans have insisted on immediate spending cuts in exchange for raising the limit.

It was the first time that Mr. Bernanke, who in contrast to his predecessors has avoided taking sides in partisan debates on fiscal matters, had spoken out on the debt ceiling issue. His willingness to do so suggested a desire by the central bank to prevent Washington lawmakers from toying with bond markets that have been volatile since the European debt crisis last year.

Contrast those lead paragraphs with these from the UK’s Telegraph (not exactly a bastion of Lefty thinking):

Ben Bernanke, the chairman of the US Federal Reserve, has dismissed the idea that the central bank’s policies are to blame for the rise in global food prices to a record high that helped trigger political unrest in Egypt.

Mr Bernanke said that the rapid growth of developing economies was behind the increase in food prices, rather than the Fed’s decision to embark on a second, $600bn (£371bn) round of printing money. “Clearly what’s happening is not a dollar effect, it’s a growth effect,” Mr Bernanke said in a rare question and answer session with journalists at the National Press Club in Washington on Thursday.

The United Nations Food and Agriculture Organization (UN FAO) has warned that high prices, already above levels in 2008 which sparked riots, were likely to rise further.

The Times and the rest of the American mainstream media is focussed on a non-issue—while the rest of the world is focussing on something that matters: Food price rises, and the perception that America is exporting inflation.

The American financial media’s thing about the Federal government debt ceiling is sort of silly—everyone knows that the debt ceiling will be raised.

The last time either party brought issues of government finances to a head—back in 1995, with the two Federal government shutdowns—the political cost was catastrophic for the party that pulled the trigger, in that case Newt Gingrich’s Republicans.

So for all their posturing, everyone knows the history. When it gets to crunch time, the Republicans won’t make the same mistake twice: They’ll fold, and sign off on raising the Federal government debt ceiling.

The debt ceiling is a non-issue: It’s political theater. Perhaps the U.S. mainstream media is focussing on it precisely because it is theater, and not substantive.

But food price inflation is real. The riots in Egypt are real—and they have nothing to do with “muslim extremists”, or even Mubarek’s dictatorship: They’re about food prices, plain and simple, which have been steadily rising ever since the Federal Reserve’s loose money policies and various versions of QE have driven commodity prices to the moon.

American media is concentrating on political theater—fiddling while Rome burns, as it were—while foreign media is focussed—rightly—on what matters: The cause of mass unrest.

The Hourly G fully expects severe, high inflation to kick the American economy in the short term. Because the mainstream media is playing down fears of inflation, and (as in the case above) ignoring altogether the likely culprit for food price inflation, which is causing civil disturbances around the globe, expect the American people to be vastly surprised when inflation boils over.

This inflation shock that’s coming might well prove to be worse than the inflation shock of ‘79.

MIDNIGHT MOVIE: The Utter Foolishness of Bill O’Reilly

2011-02-04T00:00:00.019-05:00

God help us all—Bill O’Reilly asks “How’d the moon get there? How’d it get there?”, as if it were an actual question:

(BTW, Mars actually has two moons. The earth’s moon is unusual in the solar system for being the largest relative to its orbiting planet—but it’s not the largest of them all. The largest moon in the solar system, by both mass and volume, is Ganymede, orbiting Jupiter.)

The question isn’t how the moon got to where it is—the real question is, how did someone as foolish as Bill O’Reilly get to the position that he is in.

This is a man whose views and opinions on a wide variety of serious subjects are accepted by a wide swath of the American electorate. Yet this same man is so ignorant—or so blinded by what he believes, and which he insists others must believe as well (sort of like a Massachusetts Muslim Radical)—that he does not accept a perfectly rational, ordinary explanation for the origin of the moon.

Should anyone be listening to such a fool, when there are so many serious problems going on?

(Another BTW: For anyone who might be wondering, here is a video explaining how the moon was “created”:

NOON CARTOON: Young & Jobless in London

2011-02-03T12:00:00.000-05:00

Once again via Bloomberg, the sorry state of London’s youth job market.

One thing they all have in common: Prospective employers cannot afford to hire workers who need to be trained—a perennial issue in a stagnant economy.

Not Just Our Imaginations: UN Confirms World Food Prices Rising

2011-02-03T11:00:00.023-05:00

The United Nations’ Food and Agricultural Organization announced that their Food Price Index is at its highest level ever: It was 230.7 points in January, rising 3.4% over December’s 223.1 level. (The Food Price Index is a diversified basket of food products and staples consumed throughout the world, weighted by population and preference.)

The New Gold?

The culprits mentioned in the report are the usual suspects: Fire in Russia, drought in Argentina, flooding in Australia.

What isn’t mentioned in the report is the race to the bottom being carried out by the Federal Reserve and the other central banks. In the previous hour’s posting, essentially the same point was made: Ben Bernanke’s policy of flooding the markets with dollars has exacerbated the problem of rising food prices (as the dollar is the reserve currency), and has forced the other central banks to essentially follow suit, which has put pressure on locally produced foodstuffs, and not just foodstuffs consumed by net food importing countries.

Rising food prices—rising political tensions, especially in restive countries.

It was blind luck that more confirmation of rising global food prices came out so helpfully: So all we have to say is, Thanks UN!!

I Fucked Up

2011-02-03T10:30:00.006-05:00

Yesterday, I posted a nasty bit about Mish Shedlock.

It was a mistake—I fucked up.

Personally, I feel contempt at Shedlock’s condescencion to other writers, and lack of even simple courtesy towards their views. I also think he does a disservice to his readers by being so willfully blind to the facts, thereby steering them in the wrong direction.

But it was wrong of my to stick him publicly. I should have simply ignored him, as I have before, no matter how irritating and disagreeable he has been towards me.

His snide little comment on The Hourly G, and his line about how “some people don’t know how to read”, ticked me. Shedlock has also accused me of not knowing how to write, and holding positions “too stupid to debate”.

I have ignored him before—I should have ignored him again. But my bad luck, he caught me tired and in an off mood.

So please excuse me: I fucked up.

I’m sure—nay, positive—that I will fuck up again. But hopefully, it won’t be for a good long while.

GL

Why Inflation Matters In Indonesia—and Everywhere Else. Like China.

2011-02-03T10:00:00.010-05:00

There’s a smart op-ed piece by William Pesek on Bloomberg, referring to the rise in the price of chillis in Indonesia, a basic (and very popular) staple in the country of 240 million (over three-quarters the size of the United States):

America’s Che Guevara?
Indonesians will put up with all kinds of indignities. Rising rents? Dismal infrastructure? Endemic corruption? Public inefficiency? Such is life. But a four- or five-fold surge in chili prices? An outrage!

The message is clear: Policy makers must intensify their inflation battle immediately and interest rates aren’t enough.

This is more than an exercise in avoiding ugly consumer- price-index readings. It’s about social stability in emerging economies that suffer from an underappreciated vulnerability. East Asia is home to a critical mass of those surviving on less than $2 a day. For families, surging costs for chili peppers, rice and cooking oils are a desperate issue.

Pesek is exactly right—inflation kills the poor. It brings simmering political issues to a boil—like what is happening in Egypt: The Egyptian protestors didn’t simply up and decide one morning, “Hey, wouldn’t it be great to start a riot?” They had a reason.

Pesek himself writes, “While 30 years of autocratic rule are what’s forcing President Hosni Mubarak from office, 10 percent-plus inflation isn’t helping.”

However, he’s wrong about the causation: Mubarek didn’t cause the unrest. What caused it was the 10% inflation—the lit match tossed in a pool of gasoline. The 30-year rule of Mubarek was 30 years of drip-drip-dripping gasoline—but were it not for the inflation, Mubarek would still be sitting pretty, grooming his son to take over.

Now, if inflation starts hitting a passive population—such as America’s or Europe’s—the Central Banks will raise interest rates without any worries about civil unrest.

But what about a restive population? Like Egypt? Like China?

The Chinese have a dictatorship, but the political stresses and strains there have been masked by the generalized economic progress. If and when severe inflation hits the poor and the restive—which in China is roughly half the population—what will the Chinese reaction be—higher interest rates to halt inflation and protect the renminbi?

No! It’ll be food and price controls. Because for governments with restive populations, that’s the only choice they have: Pay off the people with subsidized food and fuel, or prepare to put them down with soldiers and tanks.

That’s the decision inflation forces these governments to make.

It would be well to remember that the inflation these countries are experiencing was exported by the United States, via Federal Reserve policy. So when the riots and revolutions start happening in Asia, we should think of Ben Bernanke not as the chairman of the Federal Reserve, but rather, as the Che Guevara of the new millennium.

“The Odor of Mammon”? No Kidding, Bill

2011-02-03T09:00:00.024-05:00

From PIMCO’s Bill Gross:

PIMCO’s Bill Gross

Fifty years ago, the highest paid and most prestigious professions were that of a doctor or a 707 airline pilot who flew the “golden” route from Los Angeles to Honolulu. Today the yellow brick road begins on Wall Street or the City. Aside from supernova innovators such as Steve Jobs or Mark Zuckerberg, the money is made from securitizing things instead of booting and rebuilding America. The tallest buildings in almost every major city are banks, with tens of thousands of people shuffling and trading paper for a living. One of this country’s premier investment banks paid each of its 26,000 employees an average of $370,000 in 2010, nearly ten times the take-home pay of other American workers. Almost a quarter of the 400 wealthiest people on Forbes annual richest list make their moneyfrom money, whereas only 8% could make that claim in its first issue in 1982, and probably close to 0% when I first read my economic primer in 1966.

Having been part of this process and even a member of the rogue’s gallery itself, I know one thing for sure: This is not God’s work – it has the unmistakable odor of Mammon.

No kidding, Bill . . . but aside from the nice words, what are you planning to do about it?

Oil Up, Inflation in Europe Up, Trichet Acts Semi-Decisively . . . Which Means He Does Nothing

2011-02-03T08:00:00.065-05:00

On the heels of the Egyptian protests, oil prices are up—$91.59 per barrel—and European inflation is also up: January figures for the euro-zone were 2.4% annualized.

ECB and Fed policy?

The European Central Bank (ECB) just announced that it will keep euro interest rates at the record low of 1%. A statement by ECB president Jean-Claude Trichet later in the day is expected to say more or less nothing: Fears about inflation on the one hand, worries about stifling growth with an interest rate hike on the other, the ECB doing the high-wire act between the two. Boo-hoo.

Interestingly enough, Ben Bernanke will give the exact same speech—written by the exact same speech-writer!—at 2:30 pm EST. He too will bitch about how the life of a central banker is oh-so hard, trying to balance inflation fears with attempts to “bolster the economy”.

Trichet and the euro-weenies at the ECB are much tougher with their monetary policy: They’ve been buying up some sovereign debt, sure, just like The Bernank, but they haven’t gone to the QE lengths that the Minions at the Eccles Building have.

The European Financial Stability Facility—which very much looks like it’s being groomed to become the issuer of European-wide debt—might potentially be the vehicle to buy even more European sovereign debt: This will be discussed in an ECB meeting tomorrow, but that seems part and parcel of centralizing Europe’s finances, and not primarily a quatitative easing mechanism.

Bottom line, Trichet and the ECB are expected to raise rates in 3Q/2011, ahead of The Bernank, who has signalled that the Federal Reserve will not raise rates any time in 2011.

Now, this is all good and fine: But what happens when inflation starts hitting the dollar and the euro—bad? Copper is at a historic high of $4.54, wheat and cotton (because of the Australian cyclone) rising as well, not to mention oil—these commodity price surges are creating inflation in the rest of the world: Why can’t there be severe inflation in Europe and the U.S.?

The answer is, of course, that there can be inflation in Europe and the U.S.—in fact, like that giant wave in The Poseidon Adventure, it’s coming our way.

If The Bernank and Trichet stick to their easy money guns, then when the wave hits, they’ll be overwhelmed—and washed away.

Really Good Graphic of Egyptian Protests

2011-02-03T08:00:00.001-05:00

The advantages of having Sulzberg money—The New York Times has a really good graphic of Tahrir Square in Cairo, and the flow of demonstrators, both anti- and pro-Mubarek.

The graphic explains quite succinctly how the Egyptian army allowed pro-Mubarek gangs to confront anti-Mubarek protestors, but remain aloof from the violence, and maintain “plausible deniability”.

The graphic is here.

Day 2 of Egyptian Violence

2011-02-03T07:00:00.001-05:00

This morning, the news from Egypt is that there were more street demonstrations and clashes at Tahrir Square between pro- and anti-Mubarek government groups. Five dead, over 800 wounded, depending on sources. However, though it’s the second day of violence, the general tenor of the street clashes (subjective though it may be) seems to be that the bloodshed is not increasing.

The violence started yesterday, when after several days of relatively peaceful protest in Cairo’s center, pro-Mubarek supporters in civilian garb (some military in disguise?—possible, though not confirmed) were brought in on Wednesday, and began to clash with the anti-Mubarek demonstrators.

International responses have been “outraged” at the violence perpetrated by the pro-Mubarek forces. (Notice how political leadership is always so outraged when street violence in a country not their own is violently countered by pro-government forces? Whenever it’s home grown violence, the protestors/instigators—no matter how just their cause—are violently repressed by these selfsame leaders in the name of “restoring order”.)

Meanwhile, the Egyptian military is edging ever closer to supporting the regime. At this point, it really does seem that they are using the street protestors to undermine the Mubarek regime, and enhance their own position.

Will there be a military crack-down on the violence? Possibly yes, if the violence continues unabated. At this time—Thursday morning in the U.S., 2pm in Cairo—the military has no legitimate excuse to take the streets violently. If the protests turn really violent tonight in Cairo, then they well might.

Bottom line, President Hosni Mubarek is looking more and more illegitimate. He has said that he will not seek reelection in September, and that his son—who was being groomed to take over—will also not seek office. But he is still in power.

The protests and clashes are a distraction at this point: One way or another, they will end shortly, either petering out, or violently repressed by the military. Food and fuel shortages—which are beginning to affect the vast majority of the population—will make it necessary before the weekend is out for order to be restored.

The issue now is whether the Egyptian military will stay and support a diminished Mubarek regime through September, and then support a replacement regime (led by the current vice-president), or whether they will assume power—and thereby put themselves in the firing line of international “outrage”.

The next few days will tell us.

MIDNIGHT MOVIE: Michael Lewis Interview

2011-02-03T00:00:00.000-05:00

The author of Moneyball and The Big Short, interviewed on Bloomberg—definitely worth viewing:

Bottom Line? Mish Shedlock is an Idiot

2011-02-02T19:00:00.003-05:00

Addendum below.

So recently, The Hourly G ran a post about the State finances of Texas, which are in far worse shape than one would think. How bad? California bad.

Dungeon Master Mish Shedlock,
with his fetish object.

The key passage was:

Texas is famously pro-business, low-taxes, no-union. It doesn’t have a state income tax, and it lowered its school property taxes by a third in 2005.

Still, it has this 15% deficit, and a total debt which will cross the 100% mark this year—which pretty much gives lie to the notion that you can get all that you want by lowering taxes, squeezing out unions, and letting business get down to business.

People like Mish Shedlock who constantly harp about the union and the taxes fail explain that the only way a low-tax, pro-business, no-union situation can exist is to cut services—drastically. Or not have them at all.

This was an en passant reference to the Windy City Windbag. But lo and behold, he wrote in the comment section some lines that show . . . well, they give the prosecution’s case for declaring him a certifiable idiot:

The Windbag wrote:

Preposterous.

States do not need to cut services at all.

Instead they need to scrap union wages, scrap absurd union benefits, get rid of collective bargaining for unions, and get rid of prevailing wage laws.

Not a single teacher, firefighter, or police officer need be fired.

The problem is public union wages and benefits are bankrupting states. I have explained this 100 times. Some people simply cannot read.

Dungeon Master Mish doesn’t seem to realize that Texas does not have any of the conditions he is constantly harping about—yet Texas is still nearing insolvency. That was the whole point of the post, which he didn’t bother to read (or maybe he reads nothing except that which is written by The Great Dungeon Master In The Sky—Gary Gygax).

See, children learn early: TANSTAAFL—There Ain’t No Such Thing As A Free Lunch. You gotta pay for stuff, one way or another.

The people of Texas want police? Fine. Firefighters, garbage collectors, all the other city services? That’s cool too—but they gotta pay for this stuff. They don’t pay but still demand these services? They go broke—it’s that simple.

Texas has no income tax, lower property tax, no unions for public workers, etc., etc.—all the wet dreams of Mish Shedlock and other 40 year-old virgins like him. (Don’t think he’s a virgin? Please take a good long look at the above picture of the man.)

Your government goes broke when you vote for services but against taxes—it’s that simple. The Other 40-Year Old Virgin does not seem to understand this fairly basic concept. Like a lot of morons on both the Right and the Left, he seems to think that some external bugaboo is to blame for not getting what the whiny brats want for free.

Dungeon Master Mish cannot conceive that it’s a problem of simple arithmetic: Spending more than you earn drives you to bankruptcy. Like other minions of the tin-foil hat brigade, The Windbag is convinced that UFO’s are responsible for crop circles, and that Texas’ looming bankruptcy is all the fault of the unions, all the fault of the minimum wages, or COLA’s, or something else.

To Mish Shedlock, bankruptcy is never the fault of craven politicians who vote for more services and less taxes, in order to suck up to the electorate, who are foolish enough to believe this balderdash. In a very real sense, Shedlock is as ~~stupid~~ clueless as those economists peddling the mind-bendingly stupid conceit about the perfectly rational markets.

Considering all the evidence, we here at The Hourly G have decided: Mish Shedlock is so blinded by ideology, so foolish in his idée fixe, so entrenched in his blinkered world view, that he leaves us no choice:

Congratualtions, Dungeon Master Mish! You are officially a Grade-A Idiot!!

Now go back to your wood-panelled basement to finish painting your lead figurines, and let the grown-ups discuss the news.

Addendum: A while back, Mish Shedlock was publicly challenged to debate deflation vs. hyperinflation. He dodged the challenge—then wrote a poison-pen blogpost, severely distorting positions he disagreed with, in order to score points without any opposition, thereby “proving” that he was right, and that the “flat-earthers” (as he referred to inflationists) were wrong.

In contrast to Shedlock’s pettiness, in this post, there hasn’t been any distortion of his position: The comment quoted above was the entire comment he wrote. And anyone even vaguely familiar with his rants about unions being the root of all evil will know that the characterization of him is accurate—to a T.

THE MIDDLE EASTERN FLU: First It Hit Tunisia—Then Egypt—Then Jordan—Then Yemen—Then . . . ?

2011-02-02T07:00:00.002-05:00

Tunisia started this round of Middle Eastern Flu: Food inflation, lack of jobs, reaction to institutionalized corruption, curtailed freedom of speech, and generalized discontent led protestors to march on the streets—and a violent reaction from President Zine El Abidine Ben Ali’s regime which ultimately backfired, and resulted in Ben Ali’s fleeing to Saudi Arabia.

First Tunisia, then Egypt, then Jordan,
then Yemen, then . . . ?

Then the contagion spread to Egypt: President Hosni Mubarek’s regime came under intense public pressure for similiar grievances as Tunisia—food inflation, lack of jobs, institutionalized corruption, etc.

This morning, Mubarek is teetering—even after agreeing to major concessions, including stepping down in September. There are open calls from Barack Obama and the European Union to “change now”, while the Egyptian military pleads with the protestors to calm down.

Then Jordan caught the bug: Following Tunisia, weeks of protests culminated in King Abdullah kicking his cabinet to the curb, and replacing his prime minister with Marouf al-Bakhit, a former Army general, as well as diplomat, who served as Jordan’s ambassador to Israel.

This change was a surprise. As the New York Times reports,

Changing cabinets is not new for King Abdullah. In his 12 years on the throne, he has done so eight times. But this was the first time that he had done so in reaction to public pressure, seeking to undermine a growing protest movement across a broad spectrum of society and to pre-empt further unrest. It came after four weeks of unusual public demonstrations.

Yemen too caught the Flu: Yemeni President Ali Abdullah Saleh—in power since 1978—has announced today he will not seek “reelection” in 2013 (a sham election, as he has always won since taking power). This concession hasn’t been enough for protestors, who are planning a major protest for today.

Tunisia, Egypt, Jordan, Yemen: All of these protests have the same basic shape—autocratic regimes ensconced in power through a combination of crony corruption, American financial and military aid, and intimidation and mild-to-medium repression, leads to public dissatisfaction which starts with the poor, but quickly rises through the professional middle classes.

The autocratic leader finds himself without support, even among the beneficiaries of his cronyism: The bureaucrats, cronies and the military that supported the autocrat are quick to distance themselves so as not to be identified with him.

Thus without visible support—and crucially an unwillingness of the military to decisively quell the street protests—the regime quickly begins to teeter. And as in the case of Tunisia, fall.

So far, of the ones hit—Tunisia, Egypt, Jordan, Yemen—none have any oil except for Yemen (though Yemeni reserves are expected to be depleted by 2017).

The issue is of course, What happens when a major oil producing nation gets hit with the Middle Eastern Flu?

Notice it’s when—not if.

Washington’s and Jerusalem’s wishes to the contrary, Iran might not necessarily be the next country to face severe internal problems: The next one might well be Saudi Arabia.

Consider: Officially, Saudi Arabia has a population of about 26 million—of which 5.6 million are foreign nationals, mostly South Asians (Indians, Pakistanis, Bangladeshi); over 20% of the population. Some observers think the proportion is much higher, closer to 30%—be that as it may, this large foreign population is an underclass that could easily revolt, especially if Saudi authorities preemptively try placing more controls on them.

Like the other aforementioned regimes, the vast majority of Saudis do not enjoy the lavish lifestyles of the ruling class, for the simple reason that there are too many people to benefit from the oil largesse. In Kuwait, the native population of Kuwaitis is small enough that they all do benefit from the oil largesse. But in Saudi Arabia, that is not the case—there is a large underclass in the country that has been paid off by the ruling royal family, including by way of education, subsidies and the like. But in terms of rights, they are no better off than the non-national population.

So potentially, the non-national population (many of whom, such as the 300,000 displaced Palestinians, were born there and have lived there all their lives) could begin protesting, sparking the alientated Saudi underclasses and middle classes to join in, creating a similar situation as the ones besetting Egypt, Jordan and Yemen.

The Saudi government does not need its people to rule—it needs American muscle, bought and paid for with Saudi oil. It could potentially repress—violently—any popular protest, if one were to arise.

But even if quelled, any protest in Saudi Arabia—or Iran—could severely disrupt the flow of oil to the rest of the world. And this could have drastic consequences for the world markets—a potentially catastrophic effect on the rest of the world, much like the ‘79 Oil Crisis did: Oil price spike, inflation, stagflation.

Something to consider, as we watch the Middle Eastern Flu unfold.

Then Again, Democracies Don’t Believe In Democracy

2011-02-01T12:00:00.001-05:00

Today’s must-read: A fascinating op-ed piece in al-Jazeera, written by Robert Grenier, a 27-year veteran of the CIA, called “The Triviality of US Mideast Policy”.

The key paragraph:

The failure of the US to uphold its stated commitment to democratic values therefore goes beyond a simple surface hypocrisy, beyond the exigencies of great-power interests, to suggest a fundamental lack of belief in democracy as a means of promoting enlightened, long-term US interests in peace and stability.

Global Capitalism Doesn’t Believe in Capitalism

2011-02-01T11:00:00.000-05:00

One of the hallmarks of the age we are living in is a lack of belief in capitalism.

Sure, people today believe in pursuing their own best interests—but they are unwilling to allow capitalism’s creative destruction to run its course.

Case in point: Iceland.

During the Global Financial Crisis, the Icelanders allowed their banking system to fail. Shareholders were wiped out, creditors took a beating—and blamed the Icelandic government. The international financial sector punished Iceland severely—reasonable commentators said Iceland would go back to the stone-age, in terms of its economy and financial credibility.

But now, two years after the crisis, Iceland is doing just fine: It took the short-term hit—a 7% drop in GDP, a 58% devaluation in the krona, lots of nasty words from the banksters who got hit—but now, Iceland is back on track: 2011 GDP growth is expected to be 3%, and the country has not needed any bailout. Its excessive—nay, ridiculous—banking sector is gone the way of the dodo, replaced by a more sensible financial sector for the country that Iceland actually is.

Now look at Ireland.

During the height of the Global Financial Crisis, the Irish government guaranteed the Irish banks—and the Irish people have never recovered. The Irish state has consistently run monstrous budget deficits, to the point where they finally had to essentially surrender their sovereignty in order to receive an IMF/ECB/UK bailout. Worst of all, Ireland still has the teetering zombie banks, which share their balance sheets with the Irish government, and ultimately the Irish people.

At the time of the crisis, Prime Minister Brian Cowen’s boneheaded move to back the Irish financial sector was spoken of in the financial press in glowing terms: “Restoring stability to the markets”, and all that bullshit.

But now—finally!—two years after the Global Financial Crisis, Bloomberg is out with a piece: “Iceland Proves Ireland Did ‘Wrong Things’ Sacrificing Taxpayers”. They get the title from Joseph Stiglitz, who is quoted as saying, “Iceland did the right thing by making sure its payment systems continued to function while creditors, not the taxpayers, shouldered the losses of banks.”

It’s odd that Stiglitz—a renown Neo-Keynesian—should be cheerleading Iceland; but that’s for another day.

Capitalism depends on creative destruction. There is no business so essential that it cannot be allowed to fail.

How different would the U.S. economy be, if the so-called “Too Big To Fail” banks had actually be allowed to fail?

The fact that all sides in the political and financial leadership did not allow them to fail shows that that leadership does not believe in capitalism—it believes in cronyism

BP Posts Loss of $4.9 Billion

2011-02-01T08:00:00.001-05:00

BP posted losses of $4.9 billion in 2010, compared to a profit of $13.9 billion in 2009.

Mostly, this loss comes from the $40.9 billion BP has spent and set aside for the BP Oil Spill in the Gulf of Mexico.

Ever since the spill, BP has been scrambling for cash, selling interests around the world, including refineries in Texas, and interests in Latin America and Asia.

The kerfuffle with its Russian partners in TNK-BP is not helping matters much. As expected, BP’s partners blocked the dividend payout of $1.8 billion—$900 million of which was headed BP’s way. The reason the Russian oligarchs got pissed at BP was its joint venture with Russian government controlled Rosneft to explore the Arctic. But now that has been halted in its tracks: A lawsuit filed by BP’s TNK-BP partners is keeping BP from moving forward with Rosneft.

So no dividends from TNK-BP, and no joint venture for BP with Rosneft.

All in all, looks like BP is getting The Treatment—like this:

NY Governor Cuomo: “I’m Shocked—SHOCKED—That There’s Gambling Going On Here!”

2011-02-01T07:00:00.000-05:00

New York Governor Andrew Cuomo is playing the Captain Renault card in the ongoing NY State budget negotiations. Under the laughable title “Cuomo Exposes Dirty Budget Trick”, the New York Post writes today:

Gov. Cuomo yesterday condemned the entire state budget process as a scam ginned up by special interests that added as much as $9 billion to the deficit before anyone - the governor included - laid a hand on the upcoming spending plan.

The proposal is expected to call for the most severe cuts in state history. On the eve of his first budget address today, Cuomo released a bombshell op-ed column for the state's newspapers comparing the "sham" process by which state leaders craft each year's spending plan to the best schemes of insurance companies and Wall Street bankers he battled as attorney general.

The Democratic executive expressed "shock" to find a projected 13 percent spending increase driven largely by a series of automatic spending increases buried into law by generations of lobbyists and complicit legislators.

This front-page “story” was published to support an editorial written by Cuomo that was published in every Empire State newspaper.

In the editorial, Cuomo himself writes,

In the past 30 days, as I have prepared the state's budget, I was shocked to learn that the state's budget process is a sham that mirrors the deceptive practices I fought to change in the private sector.

The budget process is a metaphor of Albany dysfunction: special interests dominate the process with little transparency; programs continue with no accountability and the taxpayers get the exorbitant bills. The greatest challenge -- and opportunity -- in this year's difficult budget is to expose this chronic problem and reform it once and for all.

The next question is: who is responsible for setting the growth in the state's budget? The answer is shockingly, no one. It is dictated by hundreds of rates and formulas that are marbleized throughout New York State laws that govern different programs -- formulas that have been built into the law over decades, without regard to fiscal realities, performance or accountability.

The formulas operate year after year, generating liabilities that when totaled define the state's budget growth. The one thing the rates do well is increase year after year. These formulas (predominantly in education and Medicaid funding) are often inserted into the law by pressure from well-connected special interests and lobbyists.

When a governor takes office, in many ways the die has already been cast. Unbelievably, this year these rates and formulas in total call for a 13 percent increase in Medicaid and a 13 percent increase in education funding next year.

The “shocking” wording is silly: It’s not as if Cuomo—or the NY Post, for that matter—is some babe in the woods. His father Mario was governor of the Empire State for just shy of twelve years, from ‘83 to ‘94.

So exactly one month after assuming office, Cuomo is signaling that any failure in the budget process will not be his—because as he writes, “the die has already been cast”.

Cuomo rightly points out that these automatic formulas for budget increases are rampant throughout State budget processes throughout the United States.

The question is, Is it too late to change them? Or are they too entrenched at this point, and only State bankruptcy will turn things around?

The way Cuomo seems to be shading it, it’s too late.

DEPARTMENT OF I-DID-NOT-KNOW-THAT: McDonald’s Trounced in China . . . by KFC

2011-01-31T15:00:00.000-05:00

From Bloomberg a couple of days ago:

In its home market, the U.S., KFC is struggling, an also- ran to McDonald’s Corp., the world’s biggest restaurant company, and feuding with some of its own franchisees over how to halt declining profits.

In China, KFC has achieved such dominance over McDonald’s and local rivals that Colonel Harland Sanders’s image is a far more common sight in many Chinese cities than that of Mao. That accomplishment is striking in a country where foreign companies often stumbled and ran into roadblocks in the past.

The secret to the success of KFC’s parent company, Louisville, Kentucky-based Yum! Brands Inc., can be traced to its use of local ingredients -- both in its management team and on its menus. In the 24 years it has been operating in China, Yum has hired Chinese managers to build partnerships with local companies in its expansion drive and used their expertise to offer an array of regional dishes that appeal to domestic tastes.

Hmm! We did not know that.

NOON CARTOON: “How to Analyze a State Department Briefing”

2011-01-31T12:00:00.002-05:00

Here’s Secretary of State Hillary Clinton talking about the protests in Egypt.

Listen to what she says—but read what she’s thinking:

Egyptian Crisis Driving It Broke? Not Yet . . . But Soon It Might

2011-01-31T10:00:00.009-05:00

On the seventh day of protests, the economic and financial costs of the crisis in Egypt are becoming known, though not yet apparent.

Tourists in Egypt.

The Egyptian balance of payments is covered, at least for the next few weeks. The Mubarek government had $36 billion in reserves at the end of 2010, according to Egyptian Central Bank figures, plus (according to a Jan. 27 Citigroup note) an additional $21 billion in “unofficial reserves” with foreign banks as of October.

Capital flight from Egypt has been estimated at $500 million per day, during all of last week—but although markets are betting against the Egyptian pound and the Egyptian government’s debt, the full effects of these market actions haven’t had a serious repercussion in the country’s balance sheet.

Though local markets have been closed because of the crisis, currency dealers have reported little change in the price of the dollar, which rose a mere 0.7% last week. The Egyptian Central Bank has said it has not interfered with the exchange rate, which seems to be the consensus on the street.

The biggest danger of the crisis is to the tourism sector: It’s a $12 billion a year business for Egypt, so any disruption because of the protest will not only be immediate, but potentially long term, as Western vacationers avoid the, for fears of political unrest.

Right now, the danger for Egypt is that the crisis drags out, exacerbating both capital flight, and currency troubles.

BP Learning Why It’s Bad to Get Into Bed With Russians

2011-01-31T09:00:00.001-05:00

So BP is supposed to resume dividend payments, after they were suspended following the BP Oil Disaster in the Gulf. Dividends are a key issue for British retirees—so it’s a political issue as well as a financial one.

Didn’t Vonnegut make pictures like this in
“Breakfast of Champions”?

However, these resumed dividend payments are threatened even before they’ve begun, by the fucking Russians: TNK-BP, the 50-50 joint venture between BP and some Russian oligarchs, might not be issuing the $1.8 billion fourth quarter dividend—$900 million of which were supposed to go to BP.

BP needs those $900 million: The February BP dividend payment is supposed to total $1.3 billion, and BP simply doesn’t have the cash on hand for the February payment.

The Russians—organized in the investment vehicle Alfa-Access-Renova (AAR)—are pissed that BP is forming a joint venture with the State-controlled Rosneft to do Arctic exploration. TNK-BP was supposed to be BP’s primary vehicle for all Russian endeavors.

AAR’s board is voting today. If they vote in favor of suspending the TNK-BP dividend payment—which BO needs—then BP is going to take a serious hit. BP

The Military Joins the Mubarak Cabinet

2011-01-31T08:00:00.002-05:00

Egyptian President Hosni Mubarek has formed a new cabinet, including a retired general as his Minister of Interior. The military is also out on the streets, maintaining security and “stiffening” the police forces.

Protestors are still filling the streets of Cairo, but the protestors are non-violent, and there have been no serious clashes with the military or the police. They are calling for a million-person march for Tuesday.

This move by the Mubarek government means that they do not have a political solution to the protests—which is an ominous development. The retired general they have brought into the cabinet, Mahmoud Wahji, has strong ties to the Egyptian security and intelligence apparatus.

So at this point in time, it looks both sides are lining themselves up for a confrontation: Whether it will be violent or remains to be seen.

But the fact that the Mubarek government’s first move was to bring the military into the cabinet means that violent repression is the most likely outcome for these protests.

Al Jazeera has consistently delivered the best coverage and analysis of the Egyptian crisis—check them out here.

The New York Times and the rest of the U.S. mainstream media is focussed on Israel’s reaction (which is deliberately keeping quiet), and trying to create a narrative around Mohamed ElBaradei as a possible opposition leader, despite the fact that he has wafer-thin support among the people.

Don’t Mess With Texas—They’re Messed Up Enough As It Is

2011-01-31T07:00:00.000-05:00

The big story this morning out of Texas: The Texas Tribune is reporting how the 2012–13 budget (Texas has biennial budgets and legislative sessions) could have a deficit as high as $27 billion, over total expenditures of $182 billion—in other words, a 14.8% deficit. It’s accrued debt so far is $81 billion—which is 89% of its yearly budget.

Coming to the Texas
legislative session.

According to the story,

Leadership in the Texas Legislature, which is dominated by fiscal conservatives, is not expected to support attempts to raise taxes to fill the multibillion-dollar hole. But social service advocates say the state's safety net system can't afford any further budget cuts.

The story goes on to enumerate how this state of affairs came to pass.

Texas is famously pro-business, low-taxes, no-union. It doesn’t have a state income tax, and it lowered its school property taxes by a third in 2005.

Still, it has this 15% deficit, and a total debt which will cross the 100% mark this year—which pretty much gives lie to the notion that you can get all that you want by lowering taxes, squeezing out unions, and letting business get down to business.

People like Mish Shedlock who constantly harp about the union and the taxes fail explain that the only way a low-tax, pro-business, no-union situation can exist is to cut services—drastically. Or not have them at all.

In Texas, they’ve already “deregulated” state university tuition costs, and now, they’re not only considering reducing Medicaid, they’re even talking about cutting it altogether.

Which is fine—if Texas wants to be a state were the poor and indigent get no medical treatment. If Texas wants to be a state where only the well-off get an education.

If not, well . . . the solution is obvious.

The 82nd Texas legislature convened on January 11, and runs through May 30.

NOON CARTOON: “Bank Bailouts Explained”

2011-01-30T12:00:00.002-05:00

From the same guys who did the “Quantitative Easing Explained”, here are the same two bears, giving us the “Bank Bailouts Explained”:

On Egypt Crisis: Ignore U.S. Mainstream Media—Go to Al-Jazeera for Real News

2011-01-30T10:00:00.006-05:00

The Hourly G is not affiliated with al-Jazeera in any way—which is why we can endorse it with a clear conscience:

Al-Jazeera is the only news source worth following during the unfolding Egyptian crisis. The internet live-stream for al-Jazeera English is here.

As others have pointed out, U.S. mainstream media is painting the Egyptian Crisis as something it is not: It is not a foreign instigated crisis, it is not an “Islamist revolution”, it is not a “violent uprising”. Of course, non-Egyptians are taking advantage of the situation to advance their various agendas, religious Muslim groups are also taking advantage of the social unrest, and there has been sporadic looting, compete with cars set on fire—but none of these have been the dominant tenor of the unfolding crisis, which is more a reaction to the corruption in the Mubarak regime than anything else. And a fairly non-violent reaction at that, considering how deep the resentment of the general populace clearly is.

However, it seems increasingly clear that the U.S. media is intent on painting the Egyptian crisis as a “threat”, creating the impression that the corrupt Mubarek regime is worth supporting as the lesser of two evils: The other evil being, of course, “Muslim fundamentalists”.

Only al-Jazeera is reporting from the ground, with some semblance of objectivity, and giving context to what is actually going on. U.S. mainstream media is more propaganda for U.S. intervention than anything else.

Do note that the vast majority of U.S. cable customers cannot receive al-Jazeera, as it was essentially boycotted for being a “voice of the terrorists”, rather than what it actually is—an objective (and uniquely knowledgeable) source of news about the Middle East.

The Hourly G invites you to boycott U.S. mainstream reporting of the Egyptian crisis, and get your news from al-Jazeera, as well as the UK Telegraph, Der Spiegel, and other non-U.S. news agencies.

We are confident that, when the Internet Kill Switch legislation is finally passed, The Hourly G will be shut down for having endorsed al-Jazeera, and having dared suggest non-U.S. mainstream media is not reporting the truth.

Quote Without Comment

2011-01-30T09:00:00.000-05:00

From Wired magazine:

Legislation granting the president internet-killing powers is to be re-introduced soon to a Senate committee, the proposal’s chief sponsor told Wired.com on Friday.

The resurgence of the so-called “kill switch” legislation came the same day Egyptians faced an internet blackout designed to counter massive demonstrations in that country.

The bill, which has bipartisan support, is being floated by Sen. Susan Collins, the Republican ranking member on the Homeland Security and Governmental Affairs Committee. The proposed legislation, which Collins said would not give the president the same power Egypt’s Hosni Mubarak is exercising to quell dissent, sailed through the Homeland Security Committee in December but expired with the new Congress weeks later.

The bill is designed to protect against “significant” cyber threats before they cause damage, Collins said.

“My legislation would provide a mechanism for the government to work with the private sector in the event of a true cyber emergency,” Collins said in an e-mail Friday. “It would give our nation the best tools available to swiftly respond to a significant threat.”

And what, pray tell, is a “significant threat”?

Egyptian Crisis & The Markets This Week

2011-01-30T08:00:00.000-05:00

Saturday—the first day of the work-week in the Middle East—stock markets in plunged across the board, on news of the Egyptian crisis: The Saudi stock market dropped over 6%, Dubai dropped over 4%, as did all other indices across the region.

They recovered somewhat on Sunday—but what hasn’t recovered is oil prices: Light crude is up to just shy of $90 a barrel. Gold too surged on the news from Cairo, to $1,330, as did silver, to $27.95, while copper went up to $4.37 a pound—with the expectation that oil, precious metals and industrial metals will all continue to rise.

Meanwhile, on the ground in Egypt, civilian police have lost control of the situation, while the military is on the fence: President Hosni Mubarek needs them to shore up his position, but they haven’t yet gone out and quelled the protestors, fearful that if Mubarek is swept away, they’ll be swept away along with him.

So the Egyptian military is guarding key government installations, as they wait out the situation. At this time, it is looking like Mubarek will eventually lose control, and be forced out.

So what does this all mean?

If Egypt is in melt-down mode, the future will depend on who takes over after Mubarek: The military, or someone else.

And if the Egyptian crisis crosses borders and sets off protests in other repressive regimes—especially the oil-rich regimes, which are all repressive—then this could become a serious problem short- to mid-term.

Is such a contagion likely? Well, the protests started in Tunisia, then spread of Egypt—so maybe yes.

Will this situation end soon, one way or another? Well, if the military continue on the fence, then likely no. The uncertainty will continue over the next week or so—at least.

So look for continued rises in oil and commodity prices, until the Egyptian situation is sorted out.

If—if, a very big if—there is continued instability in the region, up to and including regime change in Egypt or any one of the big oil producing nations in the Middle East, then it could be analogous to the Iranian Revolution in January of ‘79: Disruption of oil production following the Revolution.

And we all remember how that affected oil prices—and inflation—within the year.

GDP Was a Lot Worse Than Reported

2011-01-29T08:00:00.001-05:00

Credit Writedown pretty much covers it:

[T]he advance reading of real GDP came in at 3.2% for the 4Q of 2010 (actually, it was 3.17%, but who’s counting?) versus expectations of 3.5%. There was a lot of internal noise, with large positive contributions from personal consumption and net exports, offset by negative contributions from inventories and government spending. However, the line item that jumped off the page was the GDP deflator, the measure of inflation that turns nominal GDP into real GDP.

The GDP deflator was very light at only 0.3%. If it had come in as estimated (1.6% according to Bloomberg), and all other inputs remained constant, real GDP growth would have been cut in half. A smaller deflator pads real growth by subtracting a smaller number from nominal growth. We read one possible explanation for the light deflator: oil is an import, and imports subtract from GDP, therefore higher oil prices subtracted from the GDP price index. What we do know is that the core PCE price index (a preferred Fed measure of inflation) also declined, and the GDP deflator tends to track Core PCE over time despite the quirkiness of GDP accounting. The current level of Core PCE, 0.4%, is the lowest on record since 1959.

So bottom-line, inflation under-reporting is inflating 2010 GDP estimates.

Who Owns Treasury Bonds?

2011-01-29T08:00:00.000-05:00

Zero Hedge has a great little chart this morning, comparing the holdings in Treasury bonds—simple, basic, to-the-point, and ugly as sin:

Need anyone say more?

What You Get For $2 Billion a Year in “Aid”

2011-01-29T07:00:00.001-05:00

Years Hosni Mubarek has been in power?

30.

Average yearly U.S. aid to Egypt during his “presidency”?

$2 billion.

Percentage of Egyptian GDP that aid amounts to?

1%.

Average amount of that aid going to the Egyptian military?

$1.75 billion.

Number of M-1A1 Abrams tanks the U.S. has sold Egypt?

1,200

Number of F-16 fighter jets the U.S. has sold Egypt?

260.

Average per capita income of Egyptians?

$2,758 per year.

How many Egyptians tortured and repressed by the Mubarek regime?

Unknown.

Turning a nation of 79 million into raging anti-Americans?

Priceless.

NOON CARTOON: U.S. National Debt Clock

2011-01-28T12:00:00.005-05:00

Friend R.U. sent this along—spooky as all get-out:

www.usdebtclock.org

Read it and weep.

By Unanimous Vote, FOMC Intent On Driving The Dollar Off The Cliff

2011-01-27T09:00:00.025-05:00

So yesterday, the Federal Reserve Open Market Committee met—with its new makeup, including the two alleged critics of the Quantitative Easing 2 policy, Charles Plosser and Richard Fisher—

—and promptly endorsed by unaminous vote the continuation of QE-2, under the rationale of “promoting a stronger pace of economic recovery.”

More QE-2 steaming our way.

That Lira fellow (nothing to do with us elves at The Hourly G) wrote a long detailed piece, discussing each of the FOMC members, highlighting the two “opponents” of QE-2, Plosser and Fisher.

Are Plosser & Fisher bidding their time? Are they siding with The Bernank in this first meeting of the FOMC, so that later their dissent when QE-3 comes to a vote is louder and has more resonance?

Or are they mealy-mouthed Obama Obfuscators, saying the grand and daring in public, then doing the timid and bathetic when it becomes time to decide?

Hmm!

One does have to consider that, were it not for QE-2, the Treasury would be unable to fund the Federal government. if the Treasury didn’t have access to those $600 billion the Fed is printing out of thin air, the price of Treasury bonds would collapse—the dollar itself might collapse. The monetization that the Fed is carrying out is now a necessary fix—a lot like a heroin addiction. And as everyone knows, you don’t go cutting off a junkie in the middle of getting his fix—he might die if you cut him off.

So maybe Plosser & Fisher recognize this?

Or maybe . . .

Hmm . . .

Fuckit: The Hourly G has $500 bucks says Plosser and Fisher—regardless of their public statements—will vote with The Bernank in favor of QE-3 (or an indefinite extension of QE-2), when the time comes this coming summer.

Any takers?

It’s Official—USA is Greece

2011-01-27T08:00:00.004-05:00

The Congressional Budget Office (CBO), the non-partisan agency charged with evaluating U.S. fiscal policy, has come out with a report discussing the current fiscal year 2011 budget, and the U.S. fiscal situation through 2021.

It’s ugly like a vomit splatter.

The headline was—as expected—that for FY 2011, the Federal government deficit will reach $1.5 trillion, an increase from $1.267 due mostly to the extension of the Bush ear tax cuts that just happened.

Insofar as the economic outlook, the report says,

“Although recent actions by U.S. policymakers should help support further gains in real (inflation-adjusted) GDP in 2011, production and employment are likely to stay well below the economy's potential for a number of years. CBO expects that economic growth will remain moderate this year and next. As measured by the change from the fourth quarter of the previous year, real GDP is projected to increase by 3.1 percent this year [2011] and by 2.8 percent next year [2012].”

Grinding through the data supporting this analysis, essentially the CBO is inferring (but without saying) that the short term high of fiscal stimulus, tax cuts and Federal Reserve shenanigans will wear off by 2012—assuming of course that it’s not goosed along by the new Congress.

An issue the CBO addressed, of course, was employment:

“The recovery in employment has been slowed not only by the moderate growth in output in the past year and a half but also by structural changes in the labor market, such as a mismatch between the requirements of available jobs and the skills of job seekers, that have hindered the reemployment of workers who have lost their job.”

The report of course doesn’t mention this, but obviously, underwater housing is a serious constraint on the middle-class labor force: Estimates vary, but almost 25% of the U.S. housing is underwater. Therefore, these homeowners cannot move, in order to find work—dragging out the issue of labor misallocation.

Based on CBO data and common sense, The Hourly G concludes: If one of the strengths of the American economy was the willingness of the work-force to move for the sake of a job, then so long as the Mortgage Mess remains in place, with all these underwater homes like rocks around the necks of the middle-class, then one of the principal virtues of the American economy will not be a factor for years to come.

The eye-popping stuff is regards the deficit—and the interest payments thereof:

The deficits that will accumulate under current law will push federal debt held by the public to significantly higher levels. Just two years ago, debt held by the public was less than $6 trillion, or about 40 percent of GDP; at the end of fiscal year 2010, such debt was roughly $9 trillion, or 62 percent of GDP, and by the end of 2021, it is projected to climb to $18 trillion, or 77 percent of GDP. With such a large increase in debt, plus an expected increase in interest rates as the economic recovery strengthens, interest payments on the debt are poised to skyrocket over the next decade. CBO projects that the government's annual spending on net interest will more than double between 2011 and 2021 as a share of GDP, increasing from 1.5 percent to 3.3 percent.

(This is referring, of course, to outstanding Treasury and Agency debt, not Social Security liabilities, funding for which has been treated like the perennial piggy bank with the hole in its belly.)

As bureaucratically circumspect as the CBO report has to be, there’s no avoiding the obvious fact: The current level of fiscal indebtedness is unsustainable, and will rapidly reach a crisis point.

Folks, it’s official: The U.S.A. is Greece

DEPARTMENT OF THE TOTALLY COSMETIC: Japanese Bonds Downgraded

2011-01-27T07:00:00.013-05:00

The rating agency ~~Moody’s~~ Standard & Poor’s downgraded Japan’s sovereign debt to AA2, saying that the Japanese do not have a “coherent strategy” for dealing with its chronic indebtedness.

Rate this Bond.

Note that ~~Moody’s~~ Standard & Poor’s acknowledges the ease with which Japan can fund its deficit—unlike other countries that currently have Triple-A sovereign debt ratings, such as France, Germany and the United States, but which have had to carry out some, shall we say, unorthodox strategies, in order to keep funded.

Indeed, as we’ve been harping here, the only reason the U.S. has been able to fund its FY 2011 deficit with relative ease is because the Federal Reserve is purchasing 60% of it, half of the FY 2011 deficit through direct monetization via QE-2—in other words, money-printing.

Will ~~Moody’s~~ Standard & Poor’s downgrade U.S., EU or UK sovereign debt? Sure—and BTW, I’ve got a bridge I’m looking to sell. It’s out in Brooklyn—it’s older, but a tremendous opportunity for the right buyer.

~~Moody’s~~ Standard & Poor’s is simply trying to re-establish some semblance of respectability. Consider all the investment-grade ratings they gave to all those toxic assets that blew up: ~~Moody’s~~ Standard & Poor’s and the other ratings agencies are still like the village whore that’s trying to turn her life around . . . though she’s still whoring, so everyone knows it’s a totally cosmetic exercise.

Compare the U.S. Treasury bond’s Triple-A rating, and compare it to the Japan downgrade: The fact that Japan really doesn’t have any sort of idea how to cut its deficit (which is the rationale for ~~Moody’s~~ Standard & Poor’s downgrade) really doesn’t mean anything, because the Japanese have no trouble funding the deficit with home-grown buyers for its debt.

But the U.S.? Chulo, please . . . Treasury depends on Fed monetization to cover the deficit—need anything else be said?

If ~~Moody’s~~ Standard & Poor’s had downgraded American Treasury bonds to BAA1—which most serious people would agree is a reasonable rating for U.S. bonds, considering the likelihood that the only way the United States will ever get out from under its mountain of fiscal debt is by inflating away the problem—then one could take these guys seriously. But leaving America’s Triple-A rating makes the whole exercise academic.

Bottom line: Ignore the ratings agencies, they are irrelevant.

Update: A mental glitch was responsible for the reference to Moody’s, rather than Standard & Poor’s. Apologies and self-flagellations, as required.

The ‘flation Debate—Stoneleigh vs. Lira

2011-01-26T11:00:00.010-05:00

The world is going to hell—the only question is, will it be a deflationary hell? Or a hyperinflationary hell?

That’s what the debate’s going to be about:

Stoneleigh vs. Lira

It’ll be a live online event at 9pm EST on February 10.

The official announcement is next Monday, but for fans of The Hourly G, here’s the link to sign up.

Davos Delusions I: An Ongoing Series

2011-01-26T10:00:00.000-05:00

We here at The Hourly G will be keeping tabs on the annual meeting at the World Economic Forum, taking place at Davos, Switzerland, between January 26 and 30.

(And by the way: Davos? Really? For skiing, everyone knows it’s Zermatt-Cervinia, and for true degeneracy, everyone knows it’s St. Moritz, (or better yet, Gstaad—if you know the right people). But Davos-Klosters? Second-tier Eastern European hookers always with one eye on the clock, and overpriced Bolivian blow that’s way gritty—what’s the fun in that?)

On the first day of Davos, the delusion that’s being sold is that Everything Is Wonderful, And It Will All Get Better Soon. According to the BBC, there will be a “three-speed” recovery, with “fast” growth in Brazil, India and China, “strong” Germany and the US recoveries, while most other advanced economies will make only “weak progress”.

This sounds suspiciously like the World Economic Forum is playing to the audience in the room—but nevermind.

The BBC piece continues:

The session on the state of the economy, a traditional fixture kicking off the annual meeting of the world's top business and political leaders, was the most optimistic since the start of the global financial crisis in 2007.

Even Nouriel Roubini, one of the few economists to have predicted the credit crunch and a notorious pessimist, spoke of a situation where "we have a glass that is half-empty and half-full".

Hmm . . . Like this?

If you’ve got a case of the Davos Delusions, you will see that the glass really is half-full.

Goldman Selling 30-year Bonds, Claims Inflation Is Not A Concern

2011-01-26T09:00:00.002-05:00

Reader CH pointed to this piece in Bloomberg, recounting how Goldman Sachs auctioned off $2.5 billion in 30-year bonds this past Monday; the bid-to-cover was 3.6.

The Death Star
at 85 Broad Street

Bloomberg reports that this is the first time in three years that GS has sold 30-years, and is claiming that this auction “signals waning investor concern that inflation is accelerating”.

We at The Hourly G beg to differ: If Goldman Sachs is selling 30-years, then they definitely think inflation is in the offing. Raising cash now through long-term debt—and then investing that cash in inflation-protected assets, such as commodities—is the way to take advantage of an inflationary environment.

That Goldman managed to scrounge up enough fools to buy these bonds does not “signal waning investor concern that inflation is accelerating”—it merely signals that Goldman is exceptionally adept at finding suckers in the market.

O Says No to Austerity

2011-01-26T08:00:00.003-05:00

In last night’s State of the Union speech, President Barack Obama called for Americans to “rekindle their competitive spirit”—

—but the real take-away was the following metaphor:

Cutting the deficit by gutting our investments in innovation and education is like lightening an overloaded airplane by removing its engine. It may feel like you’re flying high at first, but it won’t take long before you’ll feel the impact.

Like all great political metaphors, it captured exactly what one side of the debate believes and at the same time provides them with a club with which to bash the other side: You want to cut government spending NOW? That’s like ripping off the engines on an airplane in mid-flight!

Nobody ever said O didn’t know how to deliver a pithy line.

The line is great, and the British situation is even better: The coalition government of David Cameron is passing through a series of painful austerity measures—and at the same time, the UK economy shrank 0.5% in Q4 of 2010.

Is there a correlation—or a causality—between the Cameron austerity measures and the shrinking of the UK GDP? Certainly not—

—but that won’t matter in the United States: Democrats will use the British example to point to how unwise it would be to cut government spending at this time.

Yet the Republicans control the House—so . . .

So bottom-line, there will be a continuation of what we have so far seen: More tax cuts by Republicans, more stimulus spending by the Democrats.

And since the Federal Reserve is monetizing 50% of FY 2011 deficit spending . . . expect that to rise as well.

German Import Price Inflation Rose to 12%—So Here’s a Fearless Prediction

2011-01-26T07:00:00.002-05:00

The pace of import-price inflation rose to an annual rate of 12% in Germany this past December, according to the German Federal Statistics Office. November’s pace was 10%. This is the fastest pace since October 1981.

Germany in the euro union.
Germany out of the euro union.

“Import-price inflation” is the metric by which the Germans measure all of the imported goods and commodities that they use, be it raw industrial metals or finished consumer goods. It is skewed towards raw commodities, and is a precursor to German inflation.

Indeed, commentators of all stripes say this import-price inflation will be passed on to the German consumers and result in euro inflation likely towards the end of the first quarter 2011.

How does euro inflation in Germany affect the Euro-Crisis in the preipheral economies?

Well, it’s not good: The Germans—famously—have a phobia to inflation, so any indication that it is rising in the eurozone will have the Germans pushing the European Central Bank to raise interest rates.

This could be disastrous to the PIIGS. Higher interest rates in the eurozone would mean higher costs of borrowing, exacerbating the debt crisis they have, while at the same time creating deflationary pressures in the peripheral countries. These deflationary pressures would result in further contractions, further unemployment, rising deficits, further crisis.

This is another example of why the euro as a common currency is such a dreadful scheme: German efforts to curb inflation will result in deflationary pressures in the periphery, likely breaking them.

The sensible solution, of course, would be allow inflation in the euro to creep along to 8% or so—but that is politically impossible in Germany.

So here’s a Fearless Predition:

The Hourly G is predicting that, because of German inflation fears, euro interest rates will rise come the spring, strengthening the euro—but triggering the next sovereign crisis come March-April of this year.

Update, 8:23am, 1/26/11:

Reader Alex From France doesn’t dispute the Fearless Prediction—only the timing of it. The Hourly G sees his point—so we’re updating the next euro-sovereign crisis to between March and June.

NOON CARTOON: “Gold”

2011-01-25T12:00:00.000-05:00

Gold. Ah . . . gold . . .

And the soundtrack is . . .

Russia Imposes Food Price Controls

2011-01-25T09:00:00.003-05:00

Zero Hedge this morning is pointing to a story in the Gazeta.ru, about the Russian government imposing price controls of basic foodstuffs.

According to the Gazeta (via Google translate, with light copy editing):

The [Russian] government may introduce price caps on buckwheat, potatoes and other socially important goods. But this is little help to curb inflation, which in only in January has reached about one-third of the annual norm. During the year inflation will reach up to double-digit values, experts say.

Ministry of Economic Development does not rule out that in 2011, tools could be used to establish maximum prices for certain types of food products, said Deputy Minister Andrei Klepach on Monday. "This is a tool [price controls] which can be used, and I do not rule out that such restrictions will have to use this year," said Klepac. Price controls would be related primarily to buckwheat, potatoes, fruit and vegetables, added the official. [ . . . ]

A marked increase in prices of foodstuffs began in the second half of last year, and efforts to stop these price increases have not yet succeeded. "The risk is significant for increases in wheat and grain prices this spring and the grain—and, hence, subsequent increases in bread and meat," admitted Klepac.

Do keep in mind, Russia experienced a terrible wildfire last summer, which affected croplands for several weeks.

Still these price controls are troubling. As commodity prices rise, and those rises are passed on to consumers, expect more inflation, like in the UK, and EU and in the US, and price controls in more statist countries like Russia and China.

UK Economy Shrank 0.5% in Q4

2011-01-25T08:00:00.002-05:00

The data point of the morning: The UK economy shrank 0.5% in Q4 of 2010, compared to a 0.7% growth in Q3 of last year.

This is seriously bad news—especially as 2011 is supposed to be the bad year in the UK, what with the coalition government’s austerity measures, which include cutting government spending, the government workforce, and raising the value added tax from 17.5% to a round 20%.

The bad Q4 number is being blamed on the bad weather by government officials. Yeah, right.

On top of it all, government borrowing rose to a record high level in this past November, though it has pulled back some.

And if that weren’t bad enough, there is the looming issue of UK inflation, which we’ve written about here, here and especially here, where we discussed the final 2010 UK inflation figure of 3.7%.

The question remains: Is the UK the canary in the coalmine for the U.S. economy?

Stay tuned.

Getting Gouged at Davos

2011-01-25T07:00:00.000-05:00

Andrew Ross Sorkin has an eyebrow-raising piece about the costs of attending the World Economic Forum’s annual meeting at Davos, Switzerland, which is going on this week (and to which we were not invited—because we at The Hourly G never get invited anywhere :( . . . (the ellipsis points are supposed to be bitter, bitter tears, BTW)).

The eyebrows go north as Sorkin looks into the cost of attending. As he explains:

There are several levels of membership: the basic level, which will get you one invitation to Davos, costs 50,000 Swiss francs, or about $52,000. The ticket itself is another 18,000 Swiss francs ($19,000), plus tax, bringing the total cost of membership and entrance fee to $71,000.

A couple of retirees,
bitching about the world at Davos.

The costs just go up from there: “Industry Partner” level will cost you $301,000 for two people, “Strategic Partner” will run $622,000 for a group of five people, one of whom has to be a woman (for the sake of “diversity”—let’s ask Silvio B. what kind of “diversity” he’ll be bringing to Davos!).

This all of course does not include the price of transportation, hotels, and throwing parties for clients or associates. All told, a group fo five from any large-ish sized company will be in the hole for easily $1 to $3 million.

Which is ironic, considering the following, extraordinarily telling quote from David Rothkopf in the Sorkin piece:

“As Steve Case, founder of AOL, once told me while standing at the bar in the middle of the hubbub of the main conference center: ‘You always feel like you are in the wrong place in Davos, like there is some better meeting going on somewhere in one of the hotels that you really ought to be at. Like the real Davos is happening in secret somewhere.’”

Well, at least we here at The Hourly G Command Central always make sure to end the night with at least one too-thin, too-slutty, too-young girlfriend or other. So I guess we’re doing better than the schmucks getting gouged at Davos!

So After Two Weeks . . . What Do You Think?

2011-01-24T12:00:00.000-05:00

It’s been a couple-three weeks since the launch of The Hourly G—so what do you think?

You who are reading this are the core audience of this blog—I haven’t made any effort to publicize it, aside from the static ad on my regular site. You’re my guys—so your opinion is the opinion I value the most.

The goal of this blog is to talk about finance and macroeconomics, but in a short, pithy, simple way. Not simplistic—simple, yet respecting the intelligence of the readers.

So! Taking a cue from the ratings after each post, how would you characterize The Hourly G so far:

Smart?

Stupid?

Fun?

Useful?

Boring?

All of the above?

None of the above?

Tell me—I very much want to know. Because in the coming weeks, I’ll be expanding the readership of The Hourly G. But I’m very, very interested in getting your thoughts, ideas, criticisms and suggestions. After all, you’re my early adopters—you’re my base. You’re my guys.

So in the comments section below, let ‘er rip!! I’m very much looking forward to learning what you think—in as much detail as necessary.

Thank you.

GL

P.S.: The pictures are of the logo through the design iterations these past couple of weeks. Yes, I will continue to change the background and color scheme of the blog, without modifying the basic design . . . or at least not modifying it much. After all, everything changes, so rather than fight it, embrace it.

The cult of stability is a culture of death.

Weekend Box Office Wrap-Up

2011-01-24T10:00:00.001-05:00

So the weekend box office numbers of the only American industry—aside from weapons—that still consistently turns a profit:

No Strings Attached, the perfectly awful romantic comedy starring this year’s Oscar favorite Natalie (Black Swan) Portman and Ashton Kutcher rustled up a surprising $20.3 million dollar weekend. This for a film with a budget of $25 million means that Portman has a bona fide hit on top of Black Swann itself, which raised its B.O. to $83 million so far—very impressive, considering it was made for $13 million. So Portman’s definitely going to get her Oscar—it’s her year, after being in movie jail for a while.

The Green Hornet, Seth Rogen’s dreadful stab at action-comedy, made $18.1 million over the weekend—a fall of 46% over last weekend, which is not as bad as was feared, for a cum of $63 million. Then again, this was a $120 million lemon, and foreign prospects are weak; this weekend’s numbers were as high as they were probably because there was no other big mindless smash-it-up movie in the cineplexes. Bottom line, this was an expensive flop—so Seth, say good-bye to any career doing anything other than being a pot-head in a raunchy comedy.

The Dilemma, the Kevin James/Vince Vaughn laffer, is dying badly. Clearly, director Ron Howard was trying to recapture some of the comedy/drama gold of Parenthood (1989)—but missed.

The King’s Speech rumbled along for a $9 million weekend, a $58 million domestic cum, $91 million worldwide (U.S. plus rest of the world).

And rounding out the top five, True Grit held steady at $8 million for the weekend, $139 million cumulative—and that’s before the foreign release, which will tie in with the Oscar race. An additional $150 million from overseas markets—assuming TG scores big in the Oscar nominations, which is very likely—is very reasonable.

Talk of “Super-Cycles” to Pretend It’s Not Inflation

2011-01-24T08:00:00.000-05:00

The antechamber to Hell:
Davos, Switzerland

As predicted on the other blog, GL, officials and establishment journalists are starting to claim that falling bond prices and rising inflation is actually a sign of returning normalcy.

This morning’s example: A weird little bit of Davos cheerleading from Bloomberg. A headlined piece leads off with the following two paragraphs, if you can believe it:

For only the third time since the Industrial Revolution, the world may be entering a long-term growth cycle that will lift all economies simultaneously, driving bond yields and commodity prices higher.

The depth and scope of the expansion will be a focus for discussion at this week’s annual meeting of the World Economic Forum in Davos, Switzerland. Evidence of a broadening global recovery will enable U.S. Treasury Secretary Timothy F. Geithner, investor George Soros and 2,500 political, business and academic leaders to shift their emphasis away from crisis- fighting.

WTF?

The rise in bond yields—especially sovereign bonds—does not mean that it’s a “risk on” environment, and that happy days are here again: It simply means investors are re-allocating their capital, and hedging against the possibility of a collapsing sovereign credit market.

It’s not quite a secret that the world’s governments are overindebted, and that the central banks of the world’s premier currencies have been printing their way into reigniting their local economies, creating a race to the bottom effect insofar as currency is concerned.

That inflation is picking up—product of rising commodity prices, which is itself a product of this race-to-the-bottom approach to currency management—is not something particularly surprising. But it is certainly not because everything is hunky dory in the world’s economies. And talk of it actually being a sign of the beginning of a “Super-Cyle”?

Again, WTF?

The idea of the “Super-Cycle” is from the Elliott Wave Theory, created by Ralph Nelson Elliott. I have always been of two minds, with regards to technical analysis: On the one hand, it is obvious that if you study the herd, apply statistics to slightly anticipate its general direction, then follow it, you will profit—

—until of course you don’t. Until of course you follow the herd right off the cliff. That’s why I’m of two minds about it as a trading strategy. Technical analysis is really nothing more then behavioral psychology applied to the markets—which is fine. But one has to remember that if the herd happens to zag instead of zig, well, you’re zucked.

But on a more macro level? Technical analysis and talk of “Super-Cycles” means absolutely squat. At a macro-economic level, it’s more like reading tea leaves, or appealing to an oracle, or just flat-out making shit up, than any kind of sensible analysis of the situation.

The Bloomberg piece is near laughable in how it mixes and matches data in order to arrive at a conclusion that everything is wonderful, and that things are about to turn super-rosy. For instance, it points to Treasury bonds yields having fallen to 3.41% as of Jan. 21, compares that to the 15.8% yield of 1981 (WTF?), then says that the 2.9% yield in Treasuries at the start of December, compared to current levels, signals “momentum”.

This is just flat out deception practiced against anyone who doesn’t know the economic history and/or the current bond market situation: First of all, in 1981, the Federal Reserve was in a death match with inflation, product of the Iranian Revolution and subsequent Oil Crisis. The Fed had deliberately forced yields up in order to reign in inflation. A year and a half before this 15.8% data point, yields had been less than half that. So no relevant, pertinent inference can be made from the fact that, in 1981, bond yields were 15.8%, compared to 3.41% today.

And the fact that yields were at 2.9% in December and are at 3.41% today does not signal “momentum”—actually, it signals that the markets consider Treasury bonds a risky investment: After all, the Fed is outright purchasing 50% of the Federal government debt for FY 2011—yet bond yields are still rising as their prices fall.

There’s going to be a lot more cheerleading, as the winter progresses: A lot of talk that the fall in bond prices and rising inflation is a sign of returning normalcy.

They’re right, actually: Falling bond prices and rising inflation are definitely signs of returning normalcy—assuming of course that “normal” means that we’re all going straight to hell.

Ireland’s in Trouble . . . Again. For Real This Time?

2011-01-24T07:00:00.037-05:00

To start the week this morning, it seems clear that the next flash point of the ongoing European Crisis will not be Portugal or Spain or Italy, as had been anticipated—it’ll be Ireland. Again.

The Green Party, who only had six seats out of 166 in the Dáil Éireann (Irish lower house), have pulled out of Prime Minister Brian Cowen’s governing coalition over the weekend. This has triggered the election that everyone feared, and which Cowen’s Fianna Fáil’s party will lose—and a scramble to pass an Irish budget before that happens.

The reason to pass the budget is, the €85 billion rescue package set up by the IMF and the UCB will not flow Ireland’s way, until they’ve implemented the austerity budget—which is hugely unpopular. Compare the €6 ($8) billion in higher taxes and spending cuts of the austerity budget, to the €35 billion in total Irish tax receipts and fiscal income.

The Irish austerity budget is gonna hurt—bad.

Now, people inside the government and what remains of the coalition are saying that the budget will be passed before the election—and so do a lot of outside observers; per Bloomberg:

“It looks like the finance bill will pass,” said Kevin Rafter, a professor at Dublin City University who has published books about Irish politics, including a history of Fine Gael, the biggest opposition party. “All the parties want it off the table before the election.”

The opposition Labour party says it will support the Fianna Fáil on the budget, so long as elections are called for no later than February 25—and of course the budget is passed before that.

Everyone might want that bitter pill to be swallowed before the election—but that doesn’t mean it will necessarily happen. Recall that, immediately after the announcement of the bailout package—and severe austerity measures—there was a protest in Dublin, with between 50,000 and 100,000 marchers.

Realize, too, however that Cowen’s governing coalition is a lame duck without the Greens: If the budget is passed before the election, popular sentiment will turn against Fianna Fáil, killing their election chances. So it might be to the back-benchers’ advantage to not pass a budget, and claim they were not doing it in order to protect Ireland from the money grubbers of the IMF and ECB, and the UK banks that hold so much of Ireland’s debt (and were key players in pushing through a bailout in December).

Cowen’s government last week lost four ministers—four. The whole governing edifice is crumbling. And Cowen does not have the personal well of loyalty to prevent backbenchers from maintaining party discipline. So it could well be to the inidividual Fianna Fáil MP’s advantage to not pass the budget.

As of this morning, the spread on the Irish bond over the German 10-year is 5.810%, up a mere 5 basis points from Friday’s close of 5.768%. So there is the generalized sense that the markets had already factored in the collapse of the Cowen govenment.

Stay tuned . . .

Roger’s Version: How to Rob a Bank

2011-01-24T06:00:00.000-05:00

In the movie GoodFellas, there’s a wonderful sequence explaining how the Mob will “bust out” a restaurant: They use the restaurant’s good credit to load it with debt, use the debt to buy merchandise (liqour, cigarettes, etc.), and then simply walk out the door with the merchandise. Lather, rinse, repeat, until the restaurant is broke.

Roger Ehrenberg

Roger Ehrenberg, who runs an angel investor firm after making his money on Wall Street, and blogs sporadically but very insightfully, has a very clever explanation/recipe for ways someone can “bust out” a bank or investment firm: A step-by-step career path which The Hourly G can confirm from experience is exactly how the best & the brightest from Ivy League schools went about plundering Wall Street exactly like over-educated mobsters—Joe Pesci with better table manners.

According to Roger’s version:

[I]t didn’t take long before the best and easiest method of robbery popped into my mind (assuming staying out of jail is a priority): derivatives trading. Now I’m not saying that this is de-facto how derivatives traders operate; I’m simply saying that what is described below is a tried-and-true approach for extracting value for oneself without truly creating value for the firm and its shareholders. It has happened countless times throughout Wall Street and hedge fund history, and I’m sure it will happen again (it’s probably happening now).

Here is a straight-forward seven-step process for getting in the position to use derivatives trading to “rob the bank:”

1. Go to a fancy college, do well in math, CS and stats, and study those brain teasers that trading desks love to give applicants. If you didn’t go to a fancy college, work yours and your parents connections to try and secure a position. Absent connections, leverage your alumni network. Do whatever you need to do to get an interview.

2. Trade a little on your own, so you can say “I trade my own book” when asked, and have a trade idea in mind when you go for the interview. You will be asked this question.

3. Once you get the interview impress, show passion, intensity and how you are laser focused on making tons of money for your firm (and yourself). Take chances, be brash, stand out from the crowd.

4. Congratulations, you did it! Join the trading desk as a go-fer, indentured servant, whatever. Ask lots of questions without being annoying, and make sure you are studying the mechanics of how trades get done and how they get reflected in the firm’s risk systems.

5. Gain the confidence of others, build reputation, and position yourself for securing your own book. This can take a little time but be patient: It’s worth it.

6. When you get your book, really understand how P&L recognition works. If P&L is calculated on concepts like “inception gain” or “theoretical profit,” you’re in good shape. Also figure out the implied cost of capital. If your firm is charging you LIBOR flat, yippie! Another good fact. If it’s LIBOR plus a credit spread for the duration of the trade, less good but you can live with it if your P&L has the right revenue recognition characteristics.

7. What you’d now really like to do is enter into a large notional amount of longer-dated, short volatility trades. Book profit as theta decays, assuming you don’t blow up. if you do, well, your downside is zero and you can get a job at another firm for even having been in the position to take such massive risk. If you don’t, well hey now, all that time decay flows right to your bottom line. And with a large enough notional amount, your 8-12% of P&L can add up to some serious coin.

Did you create value? No. Did you trade well? If being lucky counts, then yes. And if you get paid and shortly thereafter the chickens come home to roost and your book blows up? Well, you’ve just robbed the bank!

Just like gangsters in the Bad Old Seventies, only with much nicer suits and no pasta bellies, the guys who followed this career path are the guys who brought the Shadow Banking sector to its knees in 2008.

And because there hasn’t been real reform since the crisis, they’re still around . . .

NOON CARTOON: “Winterreise”—Two Versions

2011-01-23T12:00:00.003-05:00

A little culture for a Sunday afternoon never hurt anyone—here’s Shubert’s “Winterreise”:

And if your taste runs to something more contemporary, here’s Coldworld’s version of “Winterreise”:

Which do you prefer? Say so in the comments section.

Example of Investment Bias: The Apple Hater

2011-01-23T10:00:00.031-05:00

Here’s something macro, to think about this lazy Sunday:

So there’s this blog post this past Wednesday in the Wall Street Journal, where Bruce Greenwald, professor at the Columbia University business school, has a few choice words to say about Apple:

“Apple is unlikely to be as sustainably profitable as it is today. All these things are consumer electronics. In the software race they’re losing to Google, and Google is giving it away for free. Android is likely to be the Windows of the mobile world, and Apple is likely to be a minority system. The open system has always won. Always.”

Okay, fair enough. But then Greenwald also goes on to say that Apple—

“[is] going to struggle along with their own system for a while [ie. the iPhone OS], and then they’ll bow to the Android reality. And then they’ll just be making consumer devices, and we know what that business looks like. They’ll be a marginally-profitable company.”

And finally, when referring to the $59 billion in cash Apple is sitting on, Greenwald dismisses it with a wave of a magic wand and says the following:

“If they’ve still got it [in a few years], they’re likely going to waste it desperately, trying to find alternate ways to make money. [ . . . ] The economics of this business are hopeless in the long run.]”

Now, Greenwald isn’t just some random schmuck: As the WSJ proclaims, Greenwald—

is well-equipped to handle these questions. He heads Columbia’s Heilbrunn Center for Graham & Dodd Investing, a place revered by people on Wall Street for its rigor and back-to-basics approach to investing. Greenwald is also research director for First Eagle Funds, which manages $51.9 billion.

So this is a guy who is “revered” on Wall Street, and who has a major hand in managing some major money—so he would seem to be someone worth listening to.

The market share data would seem to bear Greenwald out: Between August and November of 2010, Google’s Android platform grew its market share from 19.6% to 26%, compared to Apple’s iPhone market share, which grew only 0.8%, from 24.2% to 25.0%.

Case closed, right? Greenwald is right, Apple is doomed—right?

Right?

Well . . . let’s look at some facts:

• In the above comparison, Microsoft’s share fell a calamitous 20%, from 10.8% to 9.0% of the smartphone market.

• Research In Motion, creator of the Blackberry, saw its share fall from 37.6% to 33.5%—and they have been the leading edge of the smartphone market.

• Furthermore, Android is currently available on all phone carriers—Apple’s iPhone was only carried by AT&T, until the recently announced Verizon deal. So as Verizon customers—who either had been locked into Verizon contracts, or did not want to sign up to an AT&T contract—begin using the iPhone in droves, Apple’s share of the smartphone market will likely increase in the short and medium term—drastically.

• Aside from the smartphone market, Apple’s stores (all 323 of them) are the most profitable stores per square foot in the world.

• Apple’s share of the personal computer market is a (growing) 9.4% in 2010, and sales of Macintosh computers grew 23% year over year. And insofar as the tablet market is concerned, Apple’s iPad—using the iPhone OS—has a 95% market share.

• Aside from that, Apple has no serious long-term debt, has the aforementioned mountain of cash, has a steady product line, and aside from Steve Jobs’ recent health issue, a steady management team.

That Apple is exceedingly profitable today is unquestioned. That Apple might well become less profitable in the future is also unquestioned: Nothing lasts forever.

But in the short to medium term? Say over the next five years? If Apple suddenly developed Corporate Alzheimer’s, shipped literal turds to all its customers with accompanying dog-piss spray cans, and then set its corporate offices on fire, then maybe Apple might be in trouble over the next three to five years.

Barring such a complete corporate breakdown, Apple is probably going to do fine over the next five years.

So what are we dealing with, when we deal with Bruce Greenwald? We’re dealing with investment bias: An inability to see the reality of the marketplace, and instead see what we want to see.

Check out the above-quoted phrase about how Apple “[is] going to struggle along with their own system for a while, and then they’ll bow to the Android reality.”

Talk about failure to grasp reality! If this is Apple “struggling along”, God help us all when they get on a roll!

Clearly, Greenwald is unable to see what is looking right at him: Right now and for the foreseeable future, Apple is going to be a major player. It has the cash, the technology, the management, and most important of all, the hot product that everyone loves.

Greenwald has fallen—majorly—for investment bias.

Now, if someone like Greenwald—a big brain running major money—can so easily slide into investment bias, then it makes one wonder:

How easily do we fall for investment bias? How easily do we fall in love—or hate—with something or other, with no rational basis in reality? Or (worse yet) a very tenuous relation to reality?

How often do we take the slimmest sign that our investment biases are right, while ignoring mountains of evidence that we might be wrong?

So for this Sunday, The Hourly G commands you (like the third-rate oracle that it is) to re-examine every investment decision you have lately made—but to analyze it from the opposite end: If you are sure that gold will go up, honestly and carefully go analyze the case for gold going down. If you are absolutely positive that the economy is about to crash, analyze the data to see if maybe the economy really is improving.

Always remember: The truth is never afraid of a little scrutiny. It’s the half-truths and biases that freak out when you start to examine them.

Gold Bullion: Bottleneck? Or Not Enough to Go Around?

2011-01-23T08:00:00.000-05:00

Credit Writedowns is carrying a piece by Jeff Clark of BIG GOLD, discussing the ins and out of the current shortage of gold bullion: Is it a bottleneck? Or—more ominously—is there a supply shortage?

Clark does a fine job of outlining the relevant data, before coming squarely on the side of “bottleneck” with a nifty little metaphor:

It’s no different than the store that sells old-fashioned wooden rocking chairs suddenly getting swamped with customers when an antique dealer declares they’ll be valuable collectibles in the future. Collectors rush to buy, and the store doesn’t have enough rocking chairs in its warehouse. But they’re not running out of wood.

Quite right. So it’s a bottleneck.

But then Clark goes on, and makes a series of observations about the bullion market—particularly silver—which are all quite smart, all worth mulling over:

According to International Strategy and Investment Group, gold ownership currently represents 0.6% of total financial assets. If it rose to just 1.2% – still less than half its 1980 level – it would require an additional 917.1 million ounces, or 16% of aggregate gold worldwide. This amount is equal to about 10 years of current global production.
Investment demand represented 53% of all gold demand in 1979; today, it represents just 32%. Coin demand represented 37% of all demand in 1979; today it’s less than 14%.
Gold and gold mining stocks represented 26% of all global assets in 1981 (high inflation), and 20% in 1932 (high deflation). Today, gold and gold mining shares represent about 1% of global assets.
The market cap of the entire gold industry is about the size of Microsoft, is less than Exxon Mobil, and is 10 times smaller than the banking industry. The whole of the silver industry is smaller than Starbucks.
Silver mine production is insufficient to meet current demand. The only way silver needs are fulfilled is from scrap coming to market. Miners don’t produce enough on their own.
There are approximately 40% more earthlings right now than there are ounces of gold that have ever been mined. That includes every ounce used in jewelry, electronics, and dental. Further, if every ounce of supply last year were made into coins and bars for investment purchase, it would amount to less than two one-hundredths of an ounce, or about half a gram, for every man, woman, and child on earth. This means 0.018% of the global population – about one in every 55 people – could buy a one-ounce gold coin this year.

Clark goes on a bit more, but the kicker is the following:

Andy Schectman of bullion dealer Miles Franklin told me last summer that, “Based on what I know, it’s my opinion that if 5% of this country put 5% of their money into gold, there would be nothing left tomorrow morning.” In other words, even if supply is sufficient at present, what happens if demand, say, doubles, as the above data show is possible?

Again: Quite right.

Junior Gets His Wrists Slapped

2011-01-22T08:00:00.004-05:00

My! How we love to kick Edgar Bronfman, jr., around! We did it a couple of weeks ago, but it’s not like we’re looking to mess him up: The guy seems to go looking to catch a beating.

Edgard Bronfman, jr.

On Friday, according to the Associated Press:

A French court, in a surprise ruling, on Friday convicted and fined Warner Music Group chairman and CEO Edgar Bronfman Jr. for insider trading and former high-flying Vivendi CEO Jean-Marie Messier for misusing company funds and misleading investors.

Bronfman, a former executive vice president of Vivendi Universal, was fined €5 million ($6.7 million) and given a 15-month suspended sentence for insider trading around the Vivendi media conglomerate when he was a top executive there. Messier was handed a three-year suspended prison sentence and a €150,000 fine.

The unexpected convictions came despite the prosecutor's recommendations that the two men and other ex-Vivendi executives be cleared of all charges for lack of evidence that they duped investors.

Both said they would appeal the verdict, which deals a blow to the two men once considered masterminds of massive mergers in the media and telecommunications sectors.

But though the piece explicitly says it was a “surprise ruling”, that doesn’t seem to be the case—especially if one knows how to read the tea leaves.

Just the day before the ruling, the New York Times Dealbook Blog, edited by Andrew Ross Sorkin—the most plugged-in and establishment-oriented business journalist in Manhattan—ran a piece called “Warner Music Plan: Buy or Be Bought”:

Warner Music Group, one of the four major record companies, has hired the investment bank Goldman Sachs to seek out potential buyers for the company, a process that will play out while Warner continues to explore buying the beleaguered British music giant EMI.

The decision to hire Goldman Sachs came after several suitors, including the buyout firm Kohlberg Kravis Roberts, approached Warner Music’s management in recent months about buying the company, according to an executive briefed on the matter who spoke only anonymously.

Instead of negotiating solely with K.K.R., the company’s management decided to begin a formal sale process by hiring Goldman, which has recently begun making pitches to financial investors and media companies about buying Warner.

This came out the day before the ruling.

Obviously, Sorkin was played by Bronfman, who likely leaked him this non-news item (“KKR approached Warner Music’s management in recent months”? Please.) That Bronfman/Warner Music hired Goldman to explore a sale or a buy? The timing so close to the decision could not be happenstance: Bronfman likely hired GS just to stir up the media waters, and deflect from the conviction.

So it couldn’t have been such a surprise.

Digging through the trash heap that is Edgar Bronfman’s business saga (sold out 25% share in DuPont for $9 billion, went into the media biz, wound up with a record company, whittling those $9 billion to likely around $1.5 billion—if not less), The Hourly G came across this very interesting piece by David Plotz in Slate, from way back in 1998.

Plotz’s piece details the misplaced reputations of both Bronfman Junior and Bronfman Senior. Worth reading in its entirety, here’s the relevant graphs:

A certain aura of creeping decay does surround the Bronfmans, and it is tempting to view them as a study in dynastic decline. [ . . . ]

But the saga of dynastic decline is not quite so simple. The father [Edgar Sr.] is not quite the icon he seems, and the son is not quite the flake. Edgar Jr. is mocked for his playboy instincts, but it's Edgar Sr. who has been married five times to four different women. Edgar Jr. is the Hollywood mogul, but it's Edgar Sr. who is bullying and grandiose. Edgar Jr. is soft-spoken and self-effacing. Edgar Sr. deplores the assimilation of Jews as a "silent Holocaust," but he barely observes the Jewish religion, married three non-Jews, and named his son after himself, a major Jewish no-no. Edgar Jr. is pilloried for dragging a liquor company into the film industry, but Edgar Sr. did it first. He tried to take over a movie studio in the late '60s and even ran MGM briefly.

What’s the line from the Bible? “The sins of the father unto the son”? Guess the sin that runs in this family is hypocrisy and incompetence.

Hypocrisy is forgiveable—incompetence is not.

The Fed Going Bankrupt? Not Anymore!

2011-01-22T07:00:00.005-05:00

There was concern that the Federal Reserve—the U.S.’s central bank, the emitor of the currency—might go bankrupt, impossible as that may sound, because of losses on the toxic assets it has on its balance sheet.

Do recall, starting in the fall of 2008 through the summer of 2009, the Fed expanded its balance sheet (id est, printed money) by about $1.7 trillion, and used that to buy roughly $900 billion worth of toxic assets off the teetering banks.

Because of this Fed buy in toxic assets, the teetering banks became the Too Big To Fail banks—

—but those toxic assets didn’t simply disappear: The wound up on the Fed’s balance sheet. And though the excedent of some of those bonds were used for QE-lite, other toxic assets blew up. Hence, the concern that the Fed might itself go bankrupt.

Ah! Ye of little faith in the Fed’s machinations! Reuters came out with a story on Friday afternoon that will get a lot more play over the coming week: Seems the Fed vewy vewy quietwy solved the pwobwem:

In its January 6 weekly report, tucked away in the body of the report and written in very technical language, the Federal Reserve revised its own accounting standards insofar as it handles losses. As per the Reuters story:

The change essentially allows the Fed to denote losses by the various regional reserve banks that make up the Fed system as a liability to the Treasury rather than a hit to its capital. It would then simply direct future profits from Fed operations toward that liability.

[ . . . ]

"Any future losses the Fed may incur will now show up as a negative liability as opposed to a reduction in Fed capital, thereby making a negative capital situation technically impossible," said Brian Smedley, a rates strategist at Bank of America-Merrill Lynch and a former New York Fed staffer.

Hence the Federal Reserve will never ever have negative capital—it will never be insolvent.

The Reuters story goes on to say that this all is a good thing, as it allows for more transparency in the Fed’s dealings.

Perhaps.

But it also erodes the financial separation between the Federal Reserve and the Treasury Department. The balance sheet of the two are going to become more and more intertwined.

In and of itself, this isn’t much of an issue—but it does create the conditions whereby further monetization of Federal government debt could be carried out without much fanfare.

Federal Reserve monetization of the Federal government debt has been going on ever since the fall of 2008: First with the original Quantitative Easing, whereby troubled banks sold toxic assets to the Fed, then turned around and used that cash to buy Treasury bonds; then with QE-lite; now with QE-2, whereby the Fed is monetizing 50% to 60% of the Federal government fiscal year 2011 deficit, depending on how you count it.

Closer ties with the Treasury would make such monetization all the more easy.

Which only further proves our point: The United States is a banana republic—with nukes.

The Ten PM Tutorial v

2011-01-21T22:00:00.072-05:00

Did poor people, living in homes they couldn’t afford, cause the 2008 crisis? Let’s look at the 2008 Global Financial Crisis, and discuss a few key terms for the unintiated.

In this issue of The Ten PM Tutorial, we are going to discuss: Mortgage Backed Securities, Collateralized Debt Obligations, Credit Default Swaps, and the explain the origins of the Global Financial Crisis.

Let’s start:

Mortgage Backed Securities (MBS): They are bonds made up of mortgages that have the same or very similar characteristics in terms of interest rates, risk, and period. The (theoretical) beauty of this sort of bond is that, as the name implies, it is backed by the property itself. Therefore, if the borrower goes into default, the idea was, the property can be foreclosed, sold at auction, and the money recovered. Hence—again, in theory—it was supposed to be a totally safe investment vehicle.

The kink in the system was, Mortgage Backed Securities depended on housing prices not falling. So long as they did not fall in price, the

Collateralized Debt Obligation (CDO): It is a bond made up of some item which is the collateral to the loan. Mortgage Backed Securities are a type of CDO.

Credit Default Swap (CDS): It is essentially an insurance contract, taken out on a bond. Suppose you, me, and Mary are trading bonds. Mary issues $1 million in bonds of her company, Mary Inc. You buy the bonds—but you’re not sure Mary will pay. So I sell you a CDS: If Mary fails to pay off her bond, I will pay it to you in her place.

Notice the name: “Credit Default Swap”. It is a swap (or insurance) for the case where a credit (or a bond) goes into default (or non-payment).

As you can see, this is really an insurance policy—but it is not regulated like insurance. In the case of fire, auto, and life insurance policies, government regulators all over the world make sure that the insurance companies that sell such policies have the money to pay off the claims.

But in the case of Credit Default Swaps, they were deliberately designed to fall in the cracks of regulation.

The Federal Reserve—under Chairman Alan Greenspan—should have regulated Credit Default Swaps. But he chose not to.

In 2008, a lot of mortgage loans had been given out to people who could not afford them. The reason was, mortgage providers wanted the fees: They would give a $600,000 mortgage to a Mexican gardener earning minimum wage, then turn around and sell the mortgage to investment banks. So the mortgage provider was no longer on the hook, if the Mexican gardener could no longer pay for the $600,000 mortgage.

The mortgage provider had collected his fee from the Mexican gardener, and collected his fee from the investment bank—so he didn’t care if the loan went into default, because when that happened, it wouldn’t be his problem.

So that’s why mortgage providers had such a huge incentive to give mortgages to people who should never have gotten mortgages: It wasn’t the Mexican gardener’s fault—it was the loan providers’ fault.

The investment bank took the Mexican gardener’s mortgage, and bundled it up into Mortgage Backed Securities—then sold them to customer, telling them that the bond was safe, because it was backed by the $600,000 house.

When the Mexican gardener (and everyone else) could no longer pay the mortgage, the house was foreclosed. Since several houses in a given market were all for sale for the same reason, housing prices in the neighborhood went down. Instead of $600,000, the house could only be sold for, say, $400,000—which was less than what was owed on the mortgage.

Hence, the houses were underwater: The loan was more than what they were worth on the market.

This effect started with the lowest class of mortgage loans—sub-prime mortgages—but it worked its way through all the mortgage loans in the U.S. housing market.

This started in 2006, but eventually reached the investment banks in 2008—they had bonds that were not worth what people thought they were. The losses were so big, that there was a panic.

That was—in essence—what happened in the fall of 2008: A classic bank panic, when everyone realized that the financial system was insolvent because of all these deals.

The banks were all bankrupt—and in 2008, people realized it.

After the panic, the regulators—that is, the Federal Reserve and the Treasury Department—did not do what they should have: They instead tried to prop up all the banks, and sweep the problems under a flood of money.

That is where we are today: The problems have been flooded with money—but the problems of insolvency have not gone away.

Soc Gen Thinks China Has Lost Control

2011-01-21T14:00:00.002-05:00

The French bank Société Générale released a report, advising clients that it thinks China will suffer a “hard landing” that will likely be inflationary, due to excessive liquidity.

In a report titled “The Dragon Which Played With Fire” (catchy), SocGen points out that China has injected its own brand of Quantitative Easing into its economy, roughly 50% of Chinese GDP over the last two years—dwarfing The Bernank’s similar efforts in the United States.

The SocGen team thinks the Chinese have not drained this excess liquidity, and that it will be the regime’s undoing.

“Policymakers are already behind the curve. According to our Taylor Rule analysis, the tightening needed is about 250 basis points,” says the report. It was written by Alain Bokobza, Glenn Maguire, and Wei Yao.

The report goes on to say that “The skew of risks is very much for an extended period of overheating, and therefore uncontained inflation”—not happy news.

Under its “risk scenario”, which represents a 30% probability, SocGen sees a Chinese market spike towards the mid-year, then a collapse in the second half of 2011.

The report goes on: “We think growth could slow to 5 per cent by early 2012, which would be a drama for China. It would be the first hard landing since 1994 and would destabilise the global economy. It is not our central scenario, but if it happens: commodities won't like it; Asian equities won't like it; and emerging markets won't like it.”

Frankly, nobody’s gonna like it.

The Hourly G hasn’t been able to get its grubby little hands on the PDF of the entire report, just the highlights and bullets. But readers can find further analysis and commentary here, here and here.

NOON CARTOON: “Lost Pictures of the New York Blizzard”

2011-01-21T12:00:00.001-05:00

Making the rounds of YouTube, this slightly pretentious video: The narrator is a weenie, but the pictures are quite beautiful.

Ya Think?!?: OECD Publishes Report, Says Housing Sparked the Financial Crisis

2011-01-21T10:00:00.000-05:00

From the Department of Better-Late-Than-Never? Or is it the Department of So-Unbelievably-Late-It-Borders-On-Idiocy? You decide!

The OECD (Organization for Economic Co-operation and Development) has a report out today, saying that the housing markets in the developed economies caused the crisis. According to these geniuses:

Poorly managed housing markets played a key role in triggering the recent global financial crisis and may be slowing the recovery. A new OECD study offers governments a roadmap for sounder housing policies.

Ya think?

The study goes on to point out further obvious tid-bits: How governments’ efforts at home ownership created perverse incentives; lax supervision and mortgage market deregulation heightened instability; housing prices in real terms rose 90% in ten years; and how underwater houses serve to curtail labor movement, as underwater homeowners cannot sell and move to where there is work.

But the biggest “insight” of these geniuses deserves to be highlighted: In their own words, “Poorly managed housing markets played a key role in triggering the recent global financial crisis and may be slowing the recovery.”

Ya think?!?!?

This is yet another example of mainstream economic “thinking”: It took the geniuses at the OECD over two fucking years to figure out what people were saying before the crisis happened! And now they’re saying it like it’s the biggest, most breathtaking insight—not only that, but now, quote, the “new OECD study offers governments a roadmap for sounder housing policies.”!!

In other words, the same fools who didn’t see the crisis coming are now offering themselves up as saviors who know how to make sure this never ever happens again!!!

Someone should take these guys out behind the barn and shoot them.

Now, it’s easy to say that the crisis was triggered and exacerbated by housing—but at the time? Mainstream economists—including all the drones at the OECD—said housing prices were fine! There was no bubble! You don’t know what you’re talking about!

Look how that ended.

Inflation—and hyperinflation—is coming, and will hit in 2011–2012. Drones at the OECD and just about every other mainstream economist is saying that food and commodity price rises are nothing to be concerned about—they are not inflationary! And QE, QE-lite and QE-2? Not inflationary!

Mm-hmm: I bet a bushel of wheat that in 2015, there will be another OECD study, proclaiming, “Stimulus Monetary Policies in 2010 Caused Hyperinflationary Crisis”.

BAD OMEN: German Bond Yields Rising on Inflation Fears

2011-01-21T09:00:00.050-05:00

Here at The Hourly G Command Central (which looks very much like the bridge of the Startship Enterprise), we’re so obsessed with the peripheral European bond markets—especially spreads on Spain’, Italy’s and Belgium’s debt—that this morning, we failed to notice that the German 10-year yield started rising.

[O’-boy—gulp for air—try to stay calm.]

At first, we noticed that the spreads on Spanish, Italian, Greek and Irish debt were stable against the German bund, or even slightly narrower in overnight trading—

—then we took a look at the benchmark: The German 10-year is at a yield of 3.17%, up 7 basis points this morning, while the bond yields of Spain, Italy and Greece are all lower—

—looks like the bond markets are pricing in the fact that Germany is going to shoulder the brunt of the resuce efforts, regardless of what the Germans themselves might want.

German producer price inflation rose in December 0.7%, for a 5.3% year-over-year jump,. And what’s more, consensus and expectations are that—due to rising oil, agro and metals prices—this will continue in Germany.

So rather than stay below that nice, safe 3% yield level, the German 10-year looks like it has crossed a milestone, and is poised to fall further in price over the coming days/weeks. How far will it fall? And will any Spanish or Italian crisis erode the German bond even more?

At least if we were living in a Star Trek episode, we would know how it would end: Wiser and happier. This ending? Not so much.

Pass the antacid tablets—it’s going to be a bumpy warp-speed jump.

The World Is Sinking!!!

2011-01-21T08:00:00.010-05:00

. . . the Dubai World, that is. A suit against the developers of the island archipelago, the Dubai state-owned Nakheel, revealed that The World is, well, sinking.

According to the Telegraph:

The World, the ambitiously-constructed archipelago of islands shaped like the countries of the globe, is sinking back into the sea, according to evidence cited before a property tribunal.

The islands were intended to be developed with tailor-made hotel complexes and luxury villas, and sold to millionaires. They are off the coast of Dubai and accessible by yacht or motor boat.

Now their sands are eroding and the navigational channels between them are silting up, the British lawyer for a company bringing a case against the state-run developer, Nakheel, has told judges.

BTW, only the island supposed to represent Greenland has any construction—all the other buildings and projects have been halted. Which makes only too much sense: Property values in Dubai have more than halved, since the top of the market in 2008.

People actually paid north of $20 million to buy what were, essentially, patches of sand in the middle of the ocean.

It amuses the staff at The Hourly G Command Central to no end, to see the profligacy of our passing Gilded Age pass into dust—or in this case, slide back into the sea from which it came.

So take a good long last look, before it’s all gone (some choice images after the jump):

Dubai’s The World: Looks great from afar.

Greenland, the only building on the islands.

The “islands”: Or in other words,
patches of sand sinking into the ocean.
Believe it or not, people paid good money for this.

What will soon remain of “The World”.

UK Plays Hardball With Big Pharma—So Why Can’t America?

2011-01-21T07:00:00.003-05:00

In the States, the Republican-controlled Congress is getting ready to repeal the Obama Heathcare Legislation.

In the UK—with their National Health Service—ie., socialized medicine—they are having a different problem. From Bloomberg this morning:

U.K. Health Secretary Andrew Lansley told drug industry representatives that the prices of new medicines would be lower than companies wanted at a meeting weeks after the coalition government took power.

Lansley, a Conservative, “thought it inevitable that there would be some prices the industry therefore wouldn’t like,” according to the minutes of a June 7 meeting with the Association of the British Pharmaceutical Industry.

In other words, in order to close it’s £156 ($250) billion budget gap, the Conservative government is playing hardball with Big Pharma—

—and why not? No one is remotely surprised when, say, Wal-Mart squeezes its suppliers, in order to deliver to its customers the cheapest products possible. Why shouldn’t the British NHS—the biggest UK customer of drugs and pharmaceuticals—squeeze its suppliers?

So the Conservative UK government is doing the sensible thing: Negotiating with a supplier.

In the United States, however, it seems as if it were illegal for the government to bargain with a major supplier—most especially Big Pharma. As has been pointed out, the U.S. patient pays twice (or more) for the same drug as a patient in Canada.

Why? Because Big Pharma spends truckloads of money on lobbying—in 2009, they spent north of $100 million on lobbying efforts through their main lobbying group, PhRMA (the Pharmaceuticals Research and Manufacturers’ Association).

One of the main goals of PhRMA during the health care legislation negotiations was to remove the public option, so that the Federal government would not be able to negotiate directly with Big Pharma. Had the public option gone through, the political pressure would have been overwhelming for Big Pharma to lower drug prices.

But that, as we know, didn’t happen. What $100 million in lobbying can buy.

$100 million is a lot of lobbying money—but chump change compared to the stakes in the U.S.: Total health care costs for 2009 were upwards of $2.5 trillion. That’s $8,200 for every man woman and child in the United States. Even a total 2% annual savings would translate into $50 billion—enough to fund the Food Stamps program that helps 14% of the U.S. population.

But why do the sensible thing, huh? Especially when lobbyists are being paid good money to screw the American people.

This Weekend’s Big Read: Obama’s Incompetent Economics Team

2011-01-20T09:00:00.003-05:00

This weekend, the thing to read is the long article in the New York Times Magazine, “The White House Looks For Work”, which reports on the backstage shenanigans of the Obama administration’s economics team.

Sara Carlson, salesclerk.

Written by Peter Baker, the Times’ White House correspondent (so how hard-ball do you actually think the piece is going to be?), his article is extremely pro-Obama—which paradoxically highlights how incompetent the Obama economics team really is. For instance, the appraisal of Treasury Secretary Timothy Geithner:

At 49, Geithner is relaxed and confident, prone to using words like “cool” to describe esoteric economic ideas, and is so well liked within the administration that he is universally known simply as Tim. He is a surprising survivor, given the lacerating criticism of his early days in office, but he bonded with Obama, who was born just two weeks earlier, and emerged as the strongest figure on the economic team, even if not its most effective public spokesman.

Like the Obama administration itself, the piece seems enamored of the idea that poor communication of policy initiatives is why Obama’s numbers are down—not actually, y’know, poor policies.

The bottom line on what the piece reveals: The Obama administration has no idea how to get the country out of the rut that it’s in. There’s lots of talk about “policy initiatives” and such—but no genuine direction. No world-view. No cogent sense of what caused the crisis, and therefore what needs to be done.

In other words, in the absolutely best case scenario, the next two years will be a collosal waste of time—assuming America muddles along, and there is no major crisis.

Spain Getting Ready to Bail Out Cajas . . . with More Debt

2011-01-20T08:00:00.002-05:00

The Wall Street Journal is reporting a scoop this morning: Spain is getting ready to issue €3 billion in bonds during the coming days, and a total of €30 billion altogether, in order to save the cajas (local savings banks). The Journal sums it up best:

The fate of the cajas is inextricably tied to the fate of Spain and potentially to the euro itself. Fear that the savings banks can't raise funds on their own and will need a government bailout was one reason ratings agency Moody's put Spain's rating on review for a downgrade last month.

This morning, Spanish sovereign 10-years had a 2.307 spread over German debt—but the news has yet to sink in, so let’s see how the evening’s spread goes.

Clearly, the Spanish government is bouyed by last week’s successful auction—and by discovering it has a new friend in China.

If—and that’s a ginormous If—the Spanish can somehow thread the needle, and postpone the insolvency of the cajas and raise the money and all the rest of it, then the question remains: How is Spain going to get back on track? It has 20% unemployment, it has a huge sovereign debt load which—though not at Greek or American levels (and bet you never ever thought that comparison would be valid)—is still exceedingly troubling.

If the Journal story is accurate, and Spain is going to be auctioning off €30 billion to save the cajas, then we have the Irish problem all over again: Private sector losses in the banking sector being put on the public balance sheet, to the point where it might eventually sink the nation.

So all told, this is not a solution to anything concrete just yet: Just postponement—or really just rearranging who’s got the bad debt and who is scot-free.

Asinine Elitist Blindness

2011-01-19T14:00:00.005-05:00

Caroline Baum at Bloomberg has a remarkably asinine view of increasing US GDP while unemployment remains high:

In her columns, she writes:

Bloomberg columnist
Caroline Baum

The pieces just don’t add up. Credit card debt outstanding has fallen 27 straight months for a total decline of $177.2 billion. The unemployment rate has been stuck above 9 percent for 20 months. Average hourly earnings rose 1.9 percent in 2010. Personal income rose less than 4 percent in the 12 months ended November. About 23 percent of homes with mortgages are worth less than the amount of the loan. Faced with these not insignificant hurdles, what did the U.S. consumer do? Why, he spent like there was no tomorrow.

[ . . . ]

There’s another possibility that would better explain the inconsistency between weak job and income growth on the one hand and robust spending on the other.

“I think a credible case can be made that income and employment are being understated,” says Joe Carson, director of economic research at AllianceBernstein.

Then Ms. Baum goes on to “prove” this by using Treasury data on withheld income tax receipts, which rose 17%. Then, in order to strengthen her case, she questions whether the Bureau of Labor Statistics—which a lot of commentators, including The Hourly G, credibly argue severely under-reports unemployment—might in fact be over-reporting unemployment.

In other words, according to Ms. Baum, with rising spending and rising Treasury tax receipts, the unemployment might really be getting better, as the recovery takes hold!

Hurray! . . . is Ms. Baum’s thesis.

There is, of course, another possibility—and a rather obvious one at that:

The wealthy are earning more and spending more, even as the poor, the working poor and the middle classes are less well off, and the pool of unemployed workers is expanding.

All we need do is look at this Dec. 23 article—from Bloomberg, Ms. Baum’s home—to see that her thesis might be . . . well, let’s just say a bit off the mark:

Sales at U.S. Wal-Mart stores open at least a year fell 1.3 percent in the quarter ended Oct. 31, the sixth straight quarter of decline, as traffic shrank from last year.

So much for spending more.

As to earning more? Well, why is it that there are more people on food stamps than ever before? About 14% of the U.S. population, to be precise: 43.2 million people.

Maybe the well-to-do, the rich and the very rich are earning more and spending more. But the hoi polloi? The uncleaned rabble? Not so much—and just about every metric proves it.

Maybe Ms. Baum doesn’t realize it, but she does sound like a cheerleader for the ancien régime.

And we know how those poor unfortunates ended up.

NOON CARTOON: Great Interview with Steve Keen

2011-01-19T12:00:00.008-05:00

The Hourly G is a bit late with this wonderful interview conducted by Max Keiser—but it’s still worth watching and passing along.

Steve Keen’s interview starts at 13:07.

Silvio Watch: Berlusconi is Scalding

2011-01-19T10:00:00.001-05:00

Talk about hot water! Poor Silvio Berlusconi is in serious trouble over his pecker: Prosecutors in Milan handed over to the Italian Parliament a 389 page dossier, seeking to gain permission to prosecute Berlusconi on prostitution charges.

Does this man look worried?
Italian Prime Minister Silvio Berlusconi

To insist: No matter how fun it might be, Berlusconi’s scandal wouldn’t ordinarily be something The Hourly G would be interested in.

However . . . as everyone knows, the Italian fiscal situation is as terrible as Spain’s.

And after surviving a no-confidence vote in December, it is clear that there isn’t an Italian politician or coalition that could replace Big Silvio. If his government were to fall, Italy might find itself rapidly going through coalitions, without any of them having the political muscle to straighten out Italy’s fiscal situation. Or (just as bad) Italy could slide into a Belgian Limbo, where there is no government in power for an extended period of time, the country floating along on nothing but air while all the political parties squabble.

The Telegraph’s reporting covers the sordid details of Big Silvio’s pecker problems—but as we here at The Hourly G Command Central have already said: The next big sovereign debt crisis in the eurozone could be the last crisis in the eurozone.

We’d been betting it was going to be Spain that triggered the fall—but it could wind up being Big Silvio’s Bimbo Eruption instead.

Comcast-NBC Deal: No Regulation Is Good Regulation?

2011-01-19T08:00:00.073-05:00

Part of the point of Teddy Roosevelt and the Trust Busters was, of course, to prevent the kind of vertical integration which has become rampant in the last couple of decades.

Take the Comcast acquisition of NBC Universal: The cable giant will own NBC, and be able to distribute its content through its distribution network.

The FCC recently approved the deal with some unbelievably light caveats (NBC can no longer manage hulu.com, but can retain its stake in the online distributor; Comcast cannot exclude Bloomberg from its “channel neighborhoods” that it provides its customers)—these caveats were so light that they were more along the lines of cheerleading the deal, rather than true regulation.

If this deal had been cut in 1950, it would have been challenged by anti-trust crusaders. Hell, if it had been cut in 1960, 1970, 1980, even 1990—it would not have been approved.

Why? Simple:

The Comcast-NBC Universal deal goes directly against the spirit of the United States v. Paramount case, the 1948 Supreme Court decision that prohibited film studios from owning an exhibition network. Before, each studio owned its theaters—and only exhibited the parent studio’s products, squeezing out any independent producers. After the decision, independent producers were able to get their films on the screen.

The Paramount case gave the Federal Communications Commission the standing to demand that the nascent television networks limit their ownership of affiliates to a set percentage of the total market. That’s why NBC, CBS and ABC can only own and operate the local channels in New York and Los Angeles, while their affiliatated local stations in every other market are independently owned.

The whole rationale was so as to prevent a concentration of power, and thereby foster competition.

The Comcast-NBC Universal deal goes directly against this American precedent, as Comcast (the distributor) will now be one with the producer, in this case NBC Universal.

In other words, it will be a trust—a monopoly.

This is part and parcel of a wider problem in the United States: The oligopolization of America.

Consider the repeal of the Glass-Steagall Act, which separated investment banking from commercial banking: There was a reason for this division—it was not arbitrary. And the world found out about it in 2008, during the Global Financial Crisis: The repeal of Glass-Steagall created the Too Big To Fail banks, which are now an albatross around the American economy’s neck.

Regardless of the mealy-mouthed FCC caveats in its approval, Comcast will now be able to squeeze out any competing programming—or else be able to demand of the other networks exorbitant fees to carry their channels.

Since cable service providers cannot be changed—if you have Comcast in your neighborhood, that’s it—viewers will be forced to watch what Comcast decides.

In other words, by acquiring NBC Universal, Comcast will be vertically integrated, and be able to squeeze out any competition directly for its benefit, at the cost of consumer choice as well as industry growth.

Or to say it in yet another way: With this deal, the FCC is allowing Comcast to purchase NBC Universal, and thereby stifle the marketplace, stunt the growth of the industry, and provide viewers with fewer choices.

What a great deal . . .

(Slow) Shipping News

2011-01-19T07:00:00.018-05:00

In shipping news, Bloomberg is reporting something interesting:

Container vessels are sailing at the slowest speeds in at least two years to save on fuel costs, driving up freight rates and the shares of shipbuilders.

The global fleet of about 4,660 carriers moved at an average of 11.44 knots last month, 7.4 percent less than a year earlier and the lowest since Bloomberg began compiling the data from AISLive in May 2008. Sailing more slowly saves fuel, the price of which has more than doubled in two years, and curbs the availability of ships, shoring up income for owners.

Not too long ago, over-capacity was the watch-word in the shipping industry, as global trade fell off a cliff. But now, the shipping lanes are slower even with more freight being hauled.

Bloomberg has one additional tid-bit:

“Slow steaming is going to bring the biggest change to the shipping industry since World War II,” said Lee Sokje, an analyst at Mirae Asset Securities Co. in Seoul, whose recommendations on Hyundai Heavy Industries Co. and Samsung Heavy Industries Co., the world’s biggest yards, earned investors at least 63 percent in a year, data compiled by Bloomberg show. “It was only last year there was concern of oversupply but now we may have to worry about undersupply.”

Mr. Sokje might be exaggerating abit about “the biggest change to the shipping industry since WWII”—however, it’s definitely worth keeping an eye on shipping into the near future.

If shipping and freight rates begin rising—product of a combination of higher fuel prices and undersupply brought about by slow sailing—these price rises will reach the consumer sooner rather than later.

And rising consumer prices means . . .

DEPT. OF COMPLETELY POINTLESS: Financial Stability Oversight Council Announces Rules and Recommendations

2011-01-19T05:00:00.001-05:00

Is a rule a rule if no one is willing to enforce it?

The New York Times and everyone else is reporting that the Financial Stability Oversight Committee:

took its first big steps on Tuesday to set out tentative guidelines to limit trading by banks for their own accounts and to restrict the growth of the biggest financial companies.

[“First big steps to set out tentative guidelines”—the decisiveness of a Gen. Patton, but whatever.]

The Financial Stability Oversight Council, the grand council of financial regulators created by the Dodd-Frank Act, also proposed rules as to which large financial companies that were not banks would be regulated by the Federal Reserve because they constituted a potential threat to the nation’s financial system’s stability based on their size.

The “large financial companies that were not banks” are basically hedge funds and private equity firms, which made up the so-called “shadow banking” world—but the shadow banks essentially died with the Global Financial Crisis of 2008. So there’s not much left to regulate.

What is left—the Too Big To Fail banks—are supposed to be regulated by the Federal Reserve: It’s part of their mandate. They don’t need additional rules and regs to do their job.

Then, the kicker of the piece:

The recommendations made public on Tuesday are subject to revision based on public comments and the recommendations of various other state and federal regulatory agencies. But the proposals are among the most concrete steps yet aimed at preventing financial institutions from becoming “too big to fail” and at keeping tabs on insurance companies and other companies whose activities could endanger the American economy.

Two obvious points: One, banks became “too big to fail” when regulators began trying to prop them up—as happened in 2008. And two, Too Big To Fail banks exist now—which proves that this whole exercise of the Financial Stability Oversight Committee is totally cosmetic.

If they were serious, they would have delivered recommendations as to how to break up the Too Big To Fail Banks.

Now, the reason the banks got into trouble in 2008, and the whole concept of the TBTF came into existence, was because of the repeal of Glass-Steagal during the Clinton administration, egged on by the Republican Congress and then-Treasury Secretary Robert Rudin, late of Goldman Sachs and Citigroup.

The removal of the rules barring commercial banking from acting as investment banks set the stage for the Global Financial Crisis—but a big part of it was the failure of the Federal Reserve to apply the rules on the books and actually oversee the banks that it was supposed to oversee.

This Financial Stability Oversight Committee’s recommendations? Way too little, way too late—totally pointless.

Investing In The Stock Market—Any AMERICAN Stock Market—Is A Sucker’s Bet

2011-01-18T09:00:00.009-05:00

Here at The Hourly G, we find the stock market tedious and depressing because of a single, simple truism: American equities are unhinged from reality, due to the Federal Reserve’s machinations.

“These are the voyages
of the starship . . . Manipulate.”

The Fed is supposed to have the twin goals of stable prices and maximum employment—but ever since the Global Financial Crisis of 2008, Benny & The Fed Fools have apparently ditched the second mantra, and replaced “maximum employment” with “maximum equities prices”, in the perverse belief that high equities prices are a sign of “economic health”.

So since equities are being gamed, why bother commenting on them?

Yves Smith at naked capitalism came out today with a nice sum-up of exactly this feeling we here at THG have:

We seem to be in a toxic replay of what I called the Tinkerbell market in 2007 and 2008: if the officialdom can get enough people to applaud, the economy will live. They weren’t too successful back then, but the crisis has appeared to have upped the game of the Powers That Be in talking up the price of financial instruments. And having the Fed at ready to provide boatloads of liquidity should anything go awry appears to have put much of the world in “don’t fight the Fed” mode.

Market action is looking a tad manic, yet the dot-com mania proved that unwarranted optimism can persist far longer than cooler heads deem possible. Hedge fund leverage, for instance, is allegedly back to pre-crisis highs. And various market commentators are pointing to worrisome echoes of dot-com type preferences, where stocks amenable to fantasy, or what Bill Fleckenstein calls “imagination” are preferable to ones with clearly better prospects.

This is the upshot of what she wrote; interested parties can find the rest here.

The Tinkerbell Market sums it up nicely: Clap as hard as you can, and it’ll live.

Still, that means that the equities markets are really already dead.

Gird Your Loins!! Final UK Inflation Number for 2010 is . . . 3.7% . . . and Rising.

2011-01-18T08:00:00.014-05:00

The inflation shock today comes from the UK—quoth the Telegraph:

The official measure of inflation [in the UK] showed that prices rose 3.7pc in the year to December, up from the previous month's 3.3pc rate as the soaring cost of oil drove the biggest monthly increase on record.

The figures from the Office for National Statistics mean that inflation, as tracked on the consumer price index (CPI), stayed at least one percentage point away from the Bank’s 2pc target for the whole of last year.

This all is happening even as housing prices in the UK are slumping—December house prices in the United Kingdom fell 1.3% over the previous December.

Meanwhile, in the U.S., the ridiculously named “core inflation rate”—that is, inflation without food or energy prices—was all of 0.8% in 2010, while the CPI (Consumer Price Index) rose 1.5% in 2010, down from 2.7% in 2009.

Is the UK an aberration? Or a sign of things to come in the U.S.?

You decide! (We here at The Hourly G Command Central already know . . . and are planning accordingly.)

Germany Determined to Get Its Euro of Flesh from Club Med

2011-01-18T07:00:00.039-05:00

In yesterday’s European Union finance minister meeting in Brussels, to discuss the bailout mechanism, Germany got a lot in exchange for very little.

German euro.
Most definitely, German euro.

Eurointelligence sums it up best:

The EFSF’s ceiling will be brought back to €440bn, the level that was agreed originally. It came down to €250bn due to commitments the EFSF had to give to obtain a triple-A rating. That will allow Merkel to claim at home that the €440bn ceiling was not raised. Wolfgang Schäuble said yesterday there is no rush to take action now, and that Germany will condition further expansion of the EFSF on rules for greater fiscal discipline in Europe—above and beyond what it necessary under the stability pact—El País reports. In other words, Germany will force a deflationary adjustment in the rest of the eurozone in exchange for a commitment to allow the EFSF to act beyond Portugal.

As for the operating rules, discussions are continuing, with no agreement in sight. Germany is not willing to accept that the EFSF purchases bonds in the secondary markets – the ceiling would simply not allow that. There may be some leeway for agreement on a lower interest rate.

Back home in Germany, the anti-euro crowd (there are definitely euro-skeptics there too) are essentially drawing a line in the sand: €440 billion ceiling for the European Financial Stability Facility, and no euro-bond. And if Wolfgang Schaeuble’s words are any guide, Chancellor Angela Merkel will not cross that line, if she knows what’s good for her, politically. And she does—oh does she ever!

So the battle lines are becoming clear: Germany demands austerity, and full payment of any sovereign bond—no defaults, no extraordinary rescues.

On the other hand, if there is another panic—like in Greece last spring, like in Ireland last fall—then the country in crisis (Here’s looking at you, Spain) will have to suck it up, regardless of their domestic political cost.

All this means is, Germany is consigning the weaker economies to a deflationary collapse: If you have another sovereign bond panic, suck it up and deal with it.

This is suicidal for any nation facing such an off-the-cliff moment.

So the next crisis in the eurozone could likely be the last: If Germany continues with this foolish intransigence, mindlessly demanding fiscal austerity and no bond haircuts—much less a euro devaluation—then the next country to suffer a bond market panic and subsequent funding crisis—likely Spain—will have no choice but to exit the euro. Which could mean the start of the end of the euro.

Germany does have a habit of slicing off its nose to spite its face.

Apple Doesn’t Need Steve Jobs Anymore

2011-01-18T06:00:00.001-05:00

As the world knows, Steve Jobs is taking a second medical leave in two years from running Apple. The news caught everyone by surprise—Apple is now the biggest tech company in the world by valuation, and though Apple has a very strong management and product design team, there is question that Jobs is the driving force behind the company.

Apple CEO Steve Jobs

Amid all the breathless—and occasionally panicked—reporting about Job’s exit from Apple, only Farhad Manjoo at Slate has anything interesting to say: He thinks that—regardless of his health issues—Jobs might well never return to Apple:

Since returning to Apple in 1996, Jobs has pushed the company to achieve one of his long-held goals—to turn computers into mainstream appliances as ubiquitous and easy-to-use as televisions, toasters, and food processors. He has been stunningly successful in achieving that vision. And now he's probably done. The tech world, today, looks more or less exactly like what Steve Jobs has always said the tech world should look like, and Apple is one of the most valuable companies in that universe. What more is there left for Jobs to do?

Manjoo gets it exactly right. From Jobs’ point of view, he’s summited all the tech mountains worth climbing. Without question, the shape of today’s tech world is the shape Jobs imagined it back in 1976. So in a very real sense, Jobs doesn’t need Apple anymore.

As for Apple, it doesn’t really need Jobs.

Remember the 2007 launch of the iPhone: Though the unveiling of the product was done by Jobs, the actual development of the product was during a time when retrospectively, Job was having obvious and severe health concerns—culminating in April 2009 with his liver transplant.

In the short run, clearly Apple’s stock might take a hit—but in the medium to long run? Considering how successful Apple currently is—what with devices, the App Store, the brick-and-mortar store, all of them fabulously successful by any metric—and considering that each of these areas of Apple’s still have room for galloping growth—with nary a single serious competitor on the horizon, not even Google—Apple is going to continue doing very well for many years to come.

The only ominous note is that, unlike Jobs’ last health break, he has not announced how long he will be out of Apple.