Wall Street -- ? -- Socialism

By John Ballard

Sez here...

...how can the Dow be so far up when every business and Wall Street executive I come across tells me government is crushing the economy with its huge deficits, and its supposed �takeover� of health care, autos, housing, energy, and finance? Their anguished cries of �socialism� are almost drowning out all their cheering over the surging Dow.
The explanation is simple. The great consumer retreat from the market is being offset by government�s advance into the market.

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Why are health care stocks booming? Because the government is about to expand coverage to tens of millions more Americans, and the White House has assured Big Pharma and health insurers that their profits will soar. Why are auto sales up? Because the cash-for-clunkers program has been subsidizing new car sales. Why is the financial sector surging? Because the Fed is keeping interest rates near zero, and the rest of the government is still guaranteeing any bank too big to fail will be bailed out. Why are federal contractors doing so well? Because the stimulus has kicked in.

In other words, the Dow is up despite the biggest consumer retreat from the market since the Great Depression because of the very thing so many executives are complaining about, which is government�s expansion. And regardless of what you call it � Keynesianism, socialism, or just pragmatism � it�s doing wonders for business, especially big business and Wall Street. Consumer spending is falling back to 60 to 65 percent of the economy, as government spending expands to fill the gap.

~Robert Reich

More at the link but you probably don't want to know. I didn't.

In other news, a year has gone by as we listened to much prating about the need for better regulation of the financial  smoke and mirrors game  markets. This fun post by Satyajit Das at Naked Capitalism splains why.

One year ago, AIG was brought to the brink of bankruptcy as a result its exposure under credit default swaps (�CDS�) (a form of credit insurance). Asset backed securities and Collateralised Debt Obligations (�CDOs�), which lived up to its cheery nickname Chernobyl Death Obligation, brought the financial system to the edge of collapse.
Volatile equity and currency markets caused problems with exotic option �accumulators� (known to traders as �I-will-kill-you-later�). Numerous investors and corporations are bunkered down with their lawyers hoping to litigate their way out of significant losses on �hedges� pleading familiar defenses � �I did not understand the risks� or �I was misled about the risks by the bank�.

If you assumed that these events meant that wild beast of derivatives would be tamed, then you would be wrong. History tells us that there will be cosmetic changes to the functioning of the market but business as usual will resume in the not too distant future. Problems with derivative problems of portfolio insurance in 1987 and Long Term Capital Management (�LTCM�) in 1998 did not lead to fundamental changes in the operation of derivatives markets.

�Holy water�, �hosanna�s� or other utterances (based on particular religious convictions) will be sprinkled or said in the form of initiatives to improve disclosure, increase capital and a new centralised counterparty (�CCP�) to reduce the risk of a major dealer failing. Fundamental issues � the use for derivative for speculation, mis-selling of instruments to less sophisticated market participants, complexity, valuation problems � will not be substantively addressed.

Very droll. Go enjoy.
Ends with this punchline.

Warren Buffet once described bankers in the following terms: �Wall Street never voluntarily abandons a highly profitable field. Years ago� a fellow down on Wall Street�was talking about the evils of drugs�he ranted on for 15 or 20 minutes to a small crowd�then�he said: �Do you have any questions?� One bright investment banking type said to him: �yeah, who makes the needles?

[***RIM SHOT***]

Derivatives and debt are the needles of finance and bankers will continue to supply them to all the Dr. Jekyll�s and Mr. Hyde�s alike for the foreseeable future as long as there is money to be made in the trade.

Best comment replied to this sentence: The ability to use derivatives to speculate, create off-balance sheet positions, increase leverage, arbitrage regulatory and tax rules and manufacture exotic risk cocktails will continue to be a major factor in derivative activity.

Let me fix this sentence for you:

The ability to use derivatives to speculate, create off-balance sheet positions, increase leverage, TAKE DOWN THE COMPETITION WITHOUT THEM SEEING IT COMING, arbitrage regulatory and tax rules and manufacture exotic risk cocktails will continue to be a major factor in derivative activity.

Chernobyl Death Obligations reminds me of a term mortgage brokers used to describe the now famous sub-prime mortgages: neutron loans. Humans might die but the property would be left intact.

  Principles? Did you say principles? You gotta be kidding! Bwaahahahaha....!!!!

<<<==================================>>>

My breezy, sarcastic mood this morning reflects the frustration of an aging child of the Sixties whose excitement about the election of Bill Clinton was tarnished by his exposure of very pliable moral values, such as they were, of the same era. My own roots, somewhat neo-Puritan, led me to a Ghandian extreme during that time, with Fabian Socialism as close to Marxism as I dared stand. The election of Barack Obama is the culmination of trends that were as unimaginable two years ago as the collapse of the former Soviet Union, which caught even so-called experts by surprise.

(Many disciples of St. Reagan would have us believe that he saw it all coming and waved it into reality with a few choice words, a thin beatific smile and a wave of his wrinkled hand. But nothing could be further from the truth. He and his handlers were as surprised as the rest of us when it happened, even when the Berlin Wall came down. That event echoed the Old Testament account of Joshua and the fall of Jericho so clearly that people of faith, especially credulous Evangelicals, launched a wave of political activism not seen since John Brown took matters into his own hand at Harper's Ferry, Virginia.)

In retrospect last year's collapse of global financial markets was (and continues to be) as natural as the melting of glaciers and polar ice caps. Man-made, you say? I dunno. Likely not, but almost certainly made worse by human behavior.

So I came across a more serious analysis of macro-economics that makes me wish I had a pot of capital that could be put away for my heirs. Just so no one imagines I'm just an eccentric old Buffett-wannabe multimillionaire, here is my surfing trail: Roubini  => Edward Harrison  =>  Bill Gross.

PIMCO* was founded in Newport Beach, California, in 1971. PIMCO is one of the world's largest fixed income managers, with a presence in every major global bond market. PIMCO started as a subsidiary of Pacific Life Insurance Company to manage separate accounts for institutional clients. Today, PIMCO's global client base is served from offices in New York, Singapore, Tokyo, London, Sydney, Munich, Toronto, Hong Kong and Newport Beach.

In 2000, PIMCO was acquired by Allianz SE, a large global financial services company based in Germany. PIMCO operates as a separate and autonomous subsidiary of Allia

nz. 
PIMCO has enjoyed a stable organization throughout its 38-year history, and has retained key professionals in part due to strong financial incentives. Many of the professionals who were instrumental in PIMCO's founding and subsequent growth are still active in its management.

...if you are a child of the bull market, it�s time to grow up and become a chastened adult; it�s time to recognize that things have changed and that they will continue to change for the next � yes, the next 10 years and maybe even the next 20 years. We are heading into what we call the New Normal, which is a period of time in which economies grow very slowly as opposed to growing like weeds, the way children do; in which profits are relatively static; in which the government plays a significant role in terms of deficits and reregulation and control of the economy; in which the consumer stops shopping until he drops and begins, as they do in Japan (to be a little ghoulish), starts saving to the grave. [My emphasis JB]

This focus on the DDRs � delevering, deglobalization, and reregulation � may be conceptually understandable, but nevertheless still a little hard to get one�s arms around. Why would they necessarily lead to a new, slower growth normal? A little easier to grasp might be the following approach, which feeds off the same concept, but which extends it a little further by suggesting that DD and R lead to a number of broken business or economic models that may forever change the world we once knew and make even Barton Biggs a chastened adult. They are as follows:

• 1. American-style capitalism and the making of paper instead of things. Inherent in the �great moderation� of the past 25 years was the acceptance of a sort of reverse mercantilism. America would consume, then print paper assets and debt in order to pay for it. Developing (and many developed) countries would make things, and accept America�s securities in return. This game is over, and unless developing countries (China, Brazil) step up and generate a consumer ethic of their own, the world will grow at a slower pace.


• 2. Private vs. public-driven growth. The invisible hand of free enterprise is being replaced by the visible fist of government, a temporarily necessary, but (if permanent) damnable condition itself in terms of future growth and profits. The once successful �shadow banking system� is being regulated and delevered. Perhaps a fabled �110-pound weakling� may be an exaggeration of where our financial system is headed, but rest assured it will not be looking like Charles Atlas anytime soon. Prepare to have sand kicked in your face, if you believe you are a �child of the bull market!�


•  3. Global economic leadership. It�s premature to award the 21st century to the Chinese as opposed to the United States, but if the last six months have been any example, China is sort of lookin� like Muhammad Ali standing over Sonny Liston in 1964 yelling, �Get up, you big ugly bear!� Not only has China spent three times the amount of money (relative to GDP) to revive its economy, but it has managed to grow at a �near normal� 8% pace vs. our �big R� recessionary numbers. Its equity market, while volatile and lightly regulated, has almost doubled in twelve months, making ours look like that ugly bear instead of a raging bull. 


• 4. United States housing and employment. Old normal housing models in the U.S. encouraged home ownership, eventually peaking at 69% of households as shown in Chart 1. Subsidized and tax-deductible mortgage interest rates as well as a �see no evil � speak no evil� regulatory response to government Agencies FNMA and FHLMC promoted a long-term housing boom and now a significant housing bust. Housing cannot lead us out of this big R recession no matter what the recent Case-Shiller home price numbers may suggest. The model has been broken if only because homeownership is declining, not rising, sinking to perhaps a New Normal level of 65% as opposed to 69% of American households.
  

This reading is not for the average layman. It's aimed at savvy big-shot investors. But if he is even close to accurate in his macro-economic view of the next decade or two, political types would be wise to take heed.  Attention everybody, left, right and center: Barack Obama is ahead of all of you on this one. Yes, hand-wringing Progressives, I'm talking to you as well. It's not just teabaggers who are our there in space somewhere. There are more things in heaven and earth, Horatio,
Than are dreamt of in your philosophy.

Since leaving the academic environment about forty years ago I have watched history unfold backward, with business and money running ahead of politics instead of the other way around. Multi-national corporations, starting with petroleum and followed by all the rest, from tourism to retail to banking, have done to the world what colonialism never dreamed possible, leaving politicians in the dust as they play catch-up with market forces light years ahead of law, politics and sometimes science itself.

More significant than the fall of the Berlin Wall was Deng Xiao Ping's aphorism It doesn't matter what color the cat is as long as it catches mice.