The Pool Room, Week Ending May 22nd 2009
Fans of the Australian movie classic “The Castle” will remember the archetypal line “This one’s going straight to the Pool Room”, uttered by the ever-optimistic Darryl Kerrigan whenever he was given a gift. If you haven’t yet seen the movie, consider setting aside a couple of hours to watch it.
Debtwatch’s “Poolroom gifts” come from the media coverage of the Global Financial Crisis. Some are gems–incisive bits of analysis that are an informative read. Others are … well, best characterised as spin, though they range from outright spin, to delusion derived from thinking like a neoclassical economist.
I used to gather these on a daily basis and put them under the “Gems”and “Brickats” pages of the blog. But the workload got the best of me, given my other activities (the most important of which now are writing an analytic book on the crisis, based of course in Minsky’s Financial Instability Hypothesis). Blog member Evan Harris kindly offered to take over the role, and from now on a weekly collection of items on the GFC will be published on Fridays Sydney time under the title of “The Pool Room” (or Saturdays, if I have too social a time of it on the Friday, as happened this week).
Entries there will be linked on the same page from then on, and I’ll roll the Gems and Brickbats together for that purpose under the page title of “Pool Room”.
If you’d like to nominate an article or blog report that deserves an entry in The Pool Room, please send them to the gmail.com email address “gfcwrap” (I’m writing it this way to avoid automated email gathering programs). Evan will then check them over, collate them with his own nominations, and pass the copy on to me.
Just one quick observation here on the role of the media in the GFC. I know that a lot of the blog members have a negative view of the media, encapsulated in the acronym MSM for “Mainstream Media”, which sees it as part of the overall “spin cycle” that has led to this catastrophe in the first place. Often this will result in antagonistic attitudes towards particular journalists too, who are seen as regular sources of positive spin on financial and economic affairs.
I have a less cynical attitude towards the “Mainstream Media”, and the journalists who work in it as well. Part of this reflects my own work history: I spent some time as a contributing editor to a computer magazine, an economic commentator for an ABC radio program (Indian Pacific), a conference organiser on coverage of “third world” issues for Australian NGOs and the Australia-China Council, and before becoming an academic I had numerous features published on a sporadic basis in newspapers like the SMH, The Age and The Australian. I also did some semi-academic work on the media: my first published piece in an academic journal reported on a workshop I ran comparing the Australian media’s coverage of the collapse of India’s Janata Party back in the 1980s to how it was covered in Asian journals.
I also have the “Mainstream Media” to thank for the fact that my iconoclastic views on the GFC have achieved such widespread coverage.
So we have a system that on one level gets vilified, and on another does a sterling job–how then to assess its role? My take is to regard the media as another, special industry in the overall market economy, and journalists as its production line workers.
A lot of what they do is dictated by what’s coming down the assembly line–and this will involve reporting opinions on finance and economics uttered by representatives of other companies, and also individuals who have become “newsmakers” in their own right.
This sort of stuff can be treated by journalists just like factory workers might treat a particularly esoteric concept dreamed up by the design staff as they assemble it–”it looks like a load of crap to me, but what can I do about it?” I’m sure there were many workers uttering such sentiments as they assembled the Edsel for Ford all those decades ago, and I know there are many journalists out there today who have to cover a news release in a fairly straight manner, but who privately think “what a crock” as they do so.
Also, journalists are by definition generalists. They will find themselves doing the market wrap at some stage in their career, and covering Canberra politics in another–or the morning cop wrap. They simply have to do it–it’s part of the job. Sometimes, they will feel completely out of their depth because they are generalists, and they’re right to restrain themselves from any cynical commentary that someone who isn’t doing this for a living might add, were they also covering the same topic.
The best that a journalist can do in a situation like that is to try to get a contrary opinion uttered by another “expert” into the story as well. But often there isn’t time to locate someone, or space to run it. So something that a GFC critic can regard as spin gets published. But it’s not necessarily because the journalist who wrote the story, or the media outlet that published it, actually believes the spin.
Then the editor might suggest a balancing story be run at a later date–and of course this cuts both ways: there may be a top critical story on the GFC, quoting someone like myself, Nouriel Roubini, or Michael Hudson, followed by another citing, for example, Craig James or Alan Greenspan.
So generally I’m inclined to regard the media’s role in all this with a less jaundiced eye than many critics of the global financial system, and I certainly won’t take a snipe at an individual journalist for simply reporting a story.
The people I will take a swipe at are those who are themselves economists, or who act as economic journalists for media outlets–hence mentioning Craig James above, who has to be the loudest cheerleader for the “Happy times are here again, please buy stocks (through ComSec) now” perspective in Australia. These people put themselves forward as experts on the economy, and hence they’re fair game for me to point out when I think they’re less than expert.
That’s enough of a prelude. Below is the first set of gifts for the Debtwatch Poolroom. If you’d like to nominate candidates for future weeks, please send them to that gfcwrap[at]gmail.com. Any feedback would also be appreciated. And thanks again to Evan Harris for taking on this role.
Push On To Sell Aussie Bonds, Lucy Battersby, SMH, 18 May
Unsustainable debt? No problem. Ramp up the “effective marketing of debt products” budget, retrain those stiff bureaucrats and don’t mention the debt.
Bond Boost For Big Four Banks, Chris Zappone, SMH, 18 May
Our robust and conservative banking cartel receives another taxpayer-funded profit boost. And “because of the state of the markets there’s less competition than there used to be”! More handouts, less competition, “bank fees soar despite slowdown”, “$1 billion in penalty fees”… never waste a good crisis. And what’s $2m between friends?
Shoppers Trade Down, Even Within Stores, Jamie Freed, SMH, 18 May
Deflation watch 1. Bye, bye David Jones, hello Target.
Rents for luxury property in Australia tumble, Bridget Carter, news.com.au, 18 May [via Bubblepedia]
Deflation watch 2. Will sub-luxury rents also be falling “at least 25%” in the near future? Beach shacks also lose their chic as empty properties depreciate (along with their owners’ egos).
Recovery This Year: RBA [original title later changed], SMH, 19 May
Glenn Stevens forecasted the worst financial crisis since the Great Depression with unerring accuracy (“no one saw this coming”) and followed it up with an embattled (“recovery by the end of 2008”). He didn’t predict inflation to drop to a decade low as he jacked up interest rates less than a year ago. Here’s his latest foray: “… too soon to say if a recovery had begun, though developments over recent months are certainly consistent with the view that a recovery will get under way towards the end of the year.” A sage-like Ken Henry stands shoulder-to-shoulder with Stevens evoking happy memories of Bush, Howard and WMD.
Job Well Done Government Tells ASIC, Jacob Saulwick & Ruth Williams, SMH, 19 May
Obviously Kevin and his multi-millionaire Mrs didn’t take out margin loans with our robust and conservative banking cartel (Which Bank?) to invest in Storm Financial.
Home Affordability “Dramatically Better” Than Five Years Ago, Jessica Irvine, SMH, 20 May
“Dramatically better” doesn’t square too well with the verdict of the 2009 Demographia International Housing Affordability Survey, a respected independent survey widely cited throughout the OECD. Guess the great Australian dream isn’t that affordable after all. It would be useful to know the exact methodology behind the Reserve Banks “affordability” calculation.
No Distress in Pub Sales, Says ALE, Natalie Craig, SMH, 20 May
Of course not. The Managing Director of ALE says so.
Bailing On Britain, Jesse’s Cafe Amercain, 20 May
Australia is the number one choice for disenchanted Poms who want out. Maybe they can buy those empty beach shacks.
Diving Shares Teach University a Lesson, Heath Gilmore, SMH, 21 May
What do General Motors and University of Sydney have in common? Both seem to have morphed into wannabe investment funds first, car manufacturers / educators second. Task for University of Sydney Economics graduates: how many full-fee-paying foreign students does it take to plug a 23% capital loss on a $1.15 billion portfolio? (Extra marks for subtracting fund management fees)
Altruism at the Fee Factory?, Ian Verrender, SMH, 21 May
Great article by the ever-critical Ian Verrender. Key quote: “Imagine what would have happened to the profit if the Canadians had not ridden in on a white charger in the nick of time.” Yes, ma and pa pensioners in the land of the maple leaf are propping up Macquarie bonuses this year. The lobbyists help out too. More drivel.
NZ Couple Laughing All the Way from the Bank, SMH (Dominion Post), 22 May
Contributed by Steve Keen. Perfect illustration of how credit money is “manufactured” outside of official Central Bank policy. Whoops! I only meant to make $100,000 boss! Wall St and Hedge funds manufacture US$1,400,000,000,000,000 of derivatives and that’s okay. A couple runs off with US$6,000,000 and it’s time to call the CIB and Interpol. Though maybe the party is coming to an end.
$A Fall the Work of Speculators, Clancy Yeats, SMH, 22 May
Oh my God: the RBA discovers that investors make decisions without reference to “new information about either the global or domestic economy”. We didn’t deserve a currency crash in 2008 on par with Iceland. Their debt-based Ponzi-scheme is also denominated in foreign currency but they don’t have kangaroos.
NAB is $1b breakthrough Offshore Funding Deal, Richard Gluyas, The Australian, 22 May
NAB withdraws from the public teat (for now): “It’s another step towards the return of normal funding arrangements [pre credit crunch].” Yes, it’s normal for total Australian debt to be over 160% of GDP and now it’s normal to jack it up some more. As Chuck Prince said “As long as the music is playing you’ve got to get up and dance”… just before he was fired.
Stock Pickers See Upturn within a Year, The Australian (Times Online except headline), 21 May
The same stock pickers who pushed the stock market to new highs following the credit lockdown in August 2007? The same stock pickers who predicted a sluggish economy in early 2008 that would rebound later in the year? The same stock pickers who’ve shifted the results of their catastrophic bets onto the taxpayer after looting hundreds of billions in bonuses? Perhaps the same stock pickers who manage your pension fund. The sub-editors at the Australian have helpfully sexed-up the original Times’ headline, Alistair Campbell style. Charlie Aitken pours the whisky in the kids’ milk… just don’t scare them with memories of his famous call “the whole sub-prime issue is over-stated and losses/defaults will be nowhere near where the armageddonists believe. “ And be sure not to notice that his argument ignores the role of debt (unlike 23% of consumers). Yes, Charlie, “you appear smarter if you are bearish”. MACCA cites the highly regarded David Rosenburg as a dissenting voice (also on video).
Great Southern Crash Fells Expert Opinions, Michael Pascoe, SMH, 22 May
The assumption seems to be that expert opinions (this time KPMG) can be relied upon for anything other than bloated fees. A tip for young players: now that’s just silly.
Australia’s Debt Mountain Pales Into Insignificance, SMH, 22 May
That ol’ chestnut: when downplaying debt, be sure to only focus on government debt. Yes, Australia’s government debt is tiny compared to other countries. But so was Iceland’s before it imploded (all the debt was held by the over-sized banks). Even the US, the undisputed debt behemoth, doesn’t look too awful when you only focus on official government debt (ignoring unfunded liabilities). So record credit card debt, record auto financing, Harvey Norman 48-month interest free loans, massive mortgages (requiring two income earners to cover the monthly payments), highly geared commercial real estate, record corporate debt and now record government stimulus spending matched with shrinking government revenues are all nothing to worry about? Has anyone noticed Aussie government bonds have leapt above 5% in the last week? A great way to end the week.
“US Homebuilder Confidence Rises To Eight Month High”, SMH/Bloomberg, May 19
Well, that’s how Bloomberg spun the story. Quite a headline considering the confidence index rose from 12 (out of 100) to a mighty 14. In 2005 the index was 72. Now for some context that you won’t find in this article: surging prime delinquencies, OptionARM loans are re-setting, limited jumbo financing, few move up buyers and even more shadow supply.
“The Worst Is Yet to Come”: If You’re Not Petrified, You’re Not Paying Attention, Yahoo Finance, May 15
Over-the-top? Perhaps. “The stress tests were a ‘con game to get private money to finance these institutions because [Treasury] can’t get more money from Congress. It’s the ‘greater fool’ theory.’” And lo and behold here comes the private money… “You have to do it while things have improved and you’re really running the gauntlet if you don’t.”
The Night They Re-read Minsky, Paul Krugman, NYT, May 17
Contributed by blog member hbl. It aint often that Minsky makes an appearance in the NYT, the US’s trusty “Newspaper of Record”.
S&P500 Earnings Decline: 90%, The Big Picture, May 17
Note second comment: “Reminds me of the line from Crocodile Dundee…”Now that’s a knife!” Check out this simple graph while you’re at it. Those green shoots require vats of industrial weed killer.
S&P500 Swings [since the peak in Oct 07], Chart Store, May 19 (via The Big Picture)
As one of the comments says: “it’s a traders market”. The buy-and-hold strategy is dead, along with your pension. Lucky that the insiders know where the S&P is headed, though these days who the hell knows?
Japanese Economy Shrinks At 15.2% Annual Pace in 1Q, Naked Capitalism, May 19
Excellent citing of ridiculous spin in the FT article referenced at the bottom of the post. More intelligent views from FT Alphaville. A post in Japan Economy Watch notes that Japanese government debt is not held by foreigners – in stark contrast to our sun burnt country.
Fed Sees Hopeful Signs But Downgrades 09 Forecast, Yahoo Finance, 20 May
The sub-title says it all: “Fed expects improvements in months ahead, even as it downgrades the economic outlook for 2009.” The Fed steps into the green shoots fertiliser as it re-forecasts unemployment significantly higher than it did only 3 months ago. Blog member MACCA cites a Mish article which begs to differ with the party line.
Egan-Jones Takes a Dim View of Morgan Stanley’s Health, NYT, 8 May (via Naked Capitalism)
This lesser-known but vastly more reputable ratings agency says MS needs $40bn of new capital to remain solvent… just a teeny weeny bit higher than the $1.8bn claimed by the government (following the Stress Tests). Yet MS wants to repay TARP funds.
Meredith Whitney Interview, CNBC, 12 May
Brilliant interview discussing the state of US banks and the impact of government intervention on investing. Here’s another video outlining the mortgage fraud underpinning the major banks balance sheets. There was little mention of systemic fraud in the Stress Test scam.
Treasury Plans Help For Muni Bond Market, Financial Times (US), 15 May
“Rating agencies would also come under pressure to improve state and local governments’ credit ratings, with the SEC tasked with checking that they are not assigning too high a risk of default compared with corporate bonds.” Hold on a minute? Aren’t these the same ratings agencies that Kevin described as “”? Surely they can’t be pressured to improve government credit ratings? Let’s not even mention the unfortunate fact that Aussie councils are losing millions as they watch their synthetic CDOs – triple AAA rated by these “tough customers” – go down the toilet. $12m for a single council adds up to a lot of parking tickets.
Same Ol Same Ol JP Morgan, Bank Impode-O-Meter, 17 May
It’s the little details that never seem to reach newspaper reports. “Armed with their new “Mark-to-Mickey Mouse” accounting sub-standards, JP Morgan felt free to report their fiscal first quarter 2009 earnings in the traditional manner of the credit bubble. They frontloaded profits with one time gains, papered over losses, and beat phony prearranged expectations.”
Chasing the Shadow of Money, Zero Hedge, 18 May
Brilliant if somewhat lengthy article. Also contributed by blog member hbl. Sample quote:
“It is immediately obvious that the expansion of public shadow money is no match for the massive contraction seen in the private side… the question of the efficacy of the QE rollout and other public shadow money expansion has a tinge of futility to it…”
The Wreck of Modern Finance, Martin Hutchinson, Prudent Bear, 18 May
Contributed by blog member Lyonwiss. A scholarly explanation of the problems of assessing risk in high finance and its contribution to the GFC. Similar to Taleb’s Black Swan thesis.
No Option On Financial Pain, Option ARMaggedon, 18 May
Excellent analysis of BankUnited’s troubles first published last October. It collapsed on 21 May. The article discusses the Option ARM debacle, soon to be screening in a theatre near you. Only 9% of BankUnited’s customers signed to Option ARMs were making full payments on their mortgage. 9%! These mortgages are the reality underlying the toxic securitised assets that the US Fed now has on its balance sheet. Oh, and leading Private Equity players like Blackstone and Carlyle got to pick up the pieces dirt cheap including billions in retail deposits… never waste a crisis.
The Flagrantly Visible Hand, Zero Hedge, 19 May
Every now and again there’s a glitch in the matrix. Using $10 to $20 billion to move a market isn’t that much money when the US government has bankrolled its too-big-to-succeed banks by $12.8 trillion. Relax, your superannuation relies on this game continuing. Some more manipulation. And more. And more.
Pensions Benefit Guarantee Corporation Deficit Increases, Calculated Risk, 20 May
Bailout alert. The US pension fund implosion should be on everyone’s radar. Denninger chips in and Pension Pulse provides more in-depth analysis and notes “… rising stock markets will not save pensions. As interest rates fall to historic lows, future pension liabilities have soared. You need higher asset values and higher interest rates to reign in those ballooning pension deficits.” I wonder how much improper influence goes on in Sydney’s CBD.
With Media Absent, A Senator Reports the News, Deep Capture, 5 May
Deep Capture is the ultimate market manipulation blog. Its primary focus is naked short selling (stock counterfeiting). Spare some time and a lot of motivation to read The Story including the incredible Wikipedia fine print (towards the end of Part 1). Also read one of the all time great blog posts from a related commentator and watch this video on naked short selling and its link to the Bear Stearns and Lehman collapses.
The Collapse of the Neoliberal Model: Where Russia Went Wrong, Michael Hudson, Counterpunch, May 14
Contributed by blog member Marvenger. Stellar article critiquing the monetarist model promoted by the West and its impact on commodity countries (whoops – Australia is a commodity country).
Different Conceptions of China’s Future Role in the Global Financial System, Brad Setser, 15 May
Solid article by the “CFR-approved” Setser. Key quote: “Is a stable international financial order one defined by large-scale Chinese financing of the US, in dollars, to sustain a large US current account deficit?”
Global Systematic Crisis: June 2009, Leap2020, 16 May [subscription required for full article]
Well, well, well, one for the bear’s bear. Ballsy forecasting indeed. Note that Leap2020 is strongly affiliated with the EU. Blog member Lyonwiss contributes an interview from January with David Korton who calls for a “new economy dedicated to serving life”.
Asia Will Author Its Own Destruction If It Triggers a Crisis Over US Bonds, Telegraph (UK), 17 May
Didn’t the neoclassicists preach that countries should build up their export sector above all else to reduce reliance on Western aid? PD Bower’s comment (see same page) is a classic: “So let’s get this straight. Asia has all the productive capacity and savings pool, the west has a Ponzi scheme economy based on speculation and vendor financing using worthless fiat money and they [Asia] are the ones in trouble!” See also a better article from Michael Pettis writing in the FT (he’s usually at mpettis.com) and an NYT piece entitled China Becomes More Picky About Debt. Blog member ak links the present geopolitical environment to the Opium Wars of the 19th century.
China To Pump Billions Into Brazil To Ensure Energy Security, Wall St Journal, 18 May
Another example of the potential for China to replace the US as the dominant super-power. This has huge implications for the future of the USD. Now China and Brazil “plan to axe the dollar” according to the FT – major news and very candid headline for a mainstream newspaper. But the UAE gives Uncle Sam a reprieve.
Will the Dollar Standard Collapse?, Clusterstock, 18 May (via Naked Capitalism)
Useful analysis of the impact of a trade surplus on a country’s domestic economy. Blog member Bullturnedbear contributes David Walker’s concerns about the US retaining its AAA rating (awarded by those “tough customers” at Standard & Poor - – so you can have a $60 trillion debt mountain and still keep the AAA bumper sticker when you’re the world’s biggest but sickest.
Dollar Stops Being Russia’s Basic Reserve Currency, Pravda, 19 May
“The euro-based share of reserve assets of Russia’s Central Bank increased to the level of 47.5 percent as of January 1, 2009 and exceeded the investments in dollar assets, which made up 41.5 percent.” More revealing insights from Pravda.
S&P: UK Outlook Revised To Negative, Zero Hedge, 21 May
More from those “tough customers” – maybe Kevin and Nafen Rees were right after all! “The sovereign downgrade monster is back on the rampage… S&P fired a blank shell straight at the heart of the usurper formerly known as the developed world, when it put UK’s credit outlook on negative.” Let’s take a look at that US Debt Clock one more time.