reality-based educator

This should be good in an election year:

Dec. 17 (Bloomberg) -- The world economy is facing the risk of both recession and faster inflation.

Global growth this quarter and next may be the slowest in four years, while inflation might be the fastest in a decade, say economists at JPMorgan Chase & Co.

...

``What lies ahead is a period of stagflation -- slow or no growth combined with rising inflation -- in the advanced economies,'' says Joachim Fels, co-chief global economist at Morgan Stanley in London.

So far, economists say this will just be a "mild case" of stagflation compared to what we endured in the 70's and early 80's.

Funny thing though: many people don't remember the stagflation of the 70's and 80's because they aren't old enough (or even born yet.)

I wonder how people who weren't around for gas station lines, 19% interest rates and WIN buttons will react to even "a mild case" of stagflation?

Four articles this morning would lead one to believe the country is either in a recession or headed for one - and it's going to be a doozy.

First, Bloomberg News reports that corporate profits for the third quarter are already in recession:

Dec. 3 (Bloomberg) -- U.S. corporate profits are in a recession, and the entire economy may not be far behind.

Slower sales and higher energy and labor costs are forcing companies from Bear Stearns Cos. to Pitney Bowes Inc. to reduce spending and hiring. Their efforts to keep earnings from eroding even further raise the risk that the economy, already weakened by the steepest housing slide since 1991, may shrink sometime next year.

``The earnings recession has already arrived,'' says David Rosenberg, North America economist for Merrill Lynch & Co. in New York. ``We are going to see an economic recession in '08.''

Next, Bloomberg News reports that Secretary of the Treasury Hank Paulson is desperately working behind the scenes to bash out a sub-prime mortgage accord with lenders and investors in order to stave off a second Bush recession:

The Treasury is negotiating with lenders to fix interest rates on some mortgages to prevent a surge in defaults as borrowing costs on 2006 loans rise from initially low rates. Paulson speaks at a conference in Washington at 10:30 a.m.

Paulson and Federal Reserve Chairman Ben S. Bernanke are concerned that falling home values will throttle consumer spending, which has driven much of the six-year expansion. By heading off further deterioration in the $11.5 trillion mortgage market, officials are also aiming to stem losses on securities backed by subprime loans.

Paulson and Bernanke kept playing down concerns about sub-prime mortgage problems until very recently, so there's no reason to think they actually have a handle on just how big the problem really is or how bad it's going to get now. Many analysts also believe it will be difficult to set up a large-scale program to realistically address the burgeoning foreclosure problem across the nation because so many of these mortgages are no longer held by the original lenders. And if the foreclosure problem can not be solved, the credit problem cannot be solved - at least not until all the bad debt gets cleared out of the system.

Paul Krugman notes in the NY Times that many in the financial world now realize that they don't really understand what they themselves have created:

The financial crisis that began late last summer, then took a brief vacation in September and October, is back with a vengeance.

How bad is it? Well, I’ve never seen financial insiders this spooked — not even during the Asian crisis of 1997-98, when economic dominoes seemed to be falling all around the world.

This time, market players seem truly horrified — because they’ve suddenly realized that they don’t understand the complex financial system they created.

...

“What we are witnessing,” says Bill Gross of the bond manager Pimco, “is essentially the breakdown of our modern-day banking system, a complex of leveraged lending so hard to understand that Federal Reserve Chairman Ben Bernanke required a face-to-face refresher course from hedge fund managers in mid-August.”

The freezing up of the financial markets will, if it goes on much longer, lead to a severe reduction in overall lending, causing business investment to go the way of home construction — and that will mean a recession, possibly a nasty one.

Behind the disappearance of liquidity lies a collapse of trust: market players don’t want to lend to each other, because they’re not sure they’ll be repaid.

In a direct sense, this collapse of trust has been caused by the bursting of the housing bubble. The run-up of home prices made even less sense than the dot-com bubble — I mean, there wasn’t even a glamorous new technology to justify claims that old rules no longer applied — but somehow financial markets accepted crazy home prices as the new normal. And when the bubble burst, a lot of investments that were labeled AAA turned out to be junk.

Thus, “super-senior” claims against subprime mortgages — that is, investments that have first dibs on whatever mortgage payments borrowers make, and were therefore supposed to pay off in full even if a sizable fraction of these borrowers defaulted on their debts — have lost a third of their market value since July.

But what has really undermined trust is the fact that nobody knows where the financial toxic waste is buried. Citigroup wasn’t supposed to have tens of billions of dollars in subprime exposure; it did. Florida’s Local Government Investment Pool, which acts as a bank for the state’s school districts, was supposed to be risk-free; it wasn’t (and now schools don’t have the money to pay teachers).

How did things get so opaque? The answer is “financial innovation” — two words that should, from now on, strike fear into investors’ hearts.

O.K., to be fair, some kinds of financial innovation are good. I don’t want to go back to the days when checking accounts didn’t pay interest and you couldn’t withdraw cash on weekends.

But the innovations of recent years — the alphabet soup of C.D.O.’s and S.I.V.’s, R.M.B.S. and A.B.C.P. — were sold on false pretenses. They were promoted as ways to spread risk, making investment safer. What they did instead — aside from making their creators a lot of money, which they didn’t have to repay when it all went bust — was to spread confusion, luring investors into taking on more risk than they realized.

Why was this allowed to happen? At a deep level, I believe that the problem was ideological: policy makers, committed to the view that the market is always right, simply ignored the warning signs. We know, in particular, that Alan Greenspan brushed aside warnings from Edward Gramlich, who was a member of the Federal Reserve Board, about a potential subprime crisis.

And free-market orthodoxy dies hard. Just a few weeks ago Henry Paulson, the Treasury secretary, admitted to Fortune magazine that financial innovation got ahead of regulation — but added, “I don’t think we’d want it the other way around.” Is that your final answer, Mr. Secretary?

Now, Mr. Paulson’s new proposal to help borrowers renegotiate their mortgage payments and avoid foreclosure sounds in principle like a good idea (although we have yet to hear any details). Realistically, however, it won’t make more than a small dent in the subprime problem.

The bottom line is that policy makers left the financial industry free to innovate — and what it did was to innovate itself, and the rest of us, into a big, nasty mess.

Finally, the AP reports that the U.S. adds $1 million dollars of debt a minute - or $1.4 billion dollars a day. If interest rates start to rise - as is expected to happen by the middle of next year, no matter how many interest rate cuts Uncle Ben gives this year - the interest on the national debt will really hammer an already overstrapped U.S. which has been fighting two foreign wars on borrowed money.

An overstrapped government, overstrapped consumers and a country that no longer manufactures anything and has made all its money recently by borrowing money from overseas and buying and selling assets and equities.

Scary stuff - and probably an even scarier recession coming down the road.

I have been busy with life, work, and other things and haven't been able to update the blog lately. I will be returning to regularly scheduled blogging in a short while.

Wow - the dirt surrounding the Rudy Giuliani campaign just gets worse and worse:

Judith Regan, the book publisher who was fired by the News Corporation last year, asserts in a lawsuit filed today that a senior executive at the media conglomerate encouraged her to mislead federal investigators about her relationship with Bernard B. Kerik during his bid to become homeland security secretary in late 2004.

The lawsuit asserts that the News Corporation executive wanted to protect the presidential aspirations of former Mayor Rudolph W. Giuliani, Mr. Kerik’s mentor, who had appointed him New York City police commissioner and had recommended him for the federal post.

Ms. Regan makes the charge at the start of a 70-page filing that seeks $100 million in damages for what she says was a campaign to smear and discredit her by her bosses at HarperCollins and its parent company, the News Corporation, after her project to publish a book with O.J. Simpson was abandoned amid a storm of protest.

In the civil complaint filed in state court in Manhattan, Ms. Regan says the company has long sought to promote Mr. Giuliani’s ambitions. But the lawsuit does not elaborate on that charge, or identify the executive who she alleged pressured her to mislead investigators, nor does it offer details or evidence to back up her claim.

...

One of Ms. Regan’s lawyers, Brian C. Kerr of the firm Dreier L.L.P., said she possesses evidence to support her claim that she was advised to lie to federal investigators who were vetting Mr. Kerik. But Mr. Kerr declined to discuss the nature of the evidence.

“We’re fully confident that the evidence will show that Judith Regan was the victim of a vicious smear campaign engineered by News Corp. and HarperCollins,” Mr. Kerr said.

FOX News and the NY Post - the TASS and Pravda of the Republican Party and specifically the Giuliani campaign.

How much of this dirt can get tossed on Rudy before the press finally turns away from stories about how low cut Hillary's tops are and actually takes a look at what a dirty crooked scumbag Rudy is?

You know, I looked at E*Trade's online bank awhile ago. They were offering the highest interest of any online banks at that time and I was thinking about opening an account. But then I read how they were having some subprime mortgages issues and decided to look elsewhere.

I'm glad I did:

Shares of E*Trade lost more than half of their value after the company said it expected additional asset write-downs and an analyst suggested that it might be forced into bankruptcy protection. While the bank assured customers that it remained “well capitalized by regulatory standards,” the analyst, Prashant Bhatia of Citigroup, theorized that a rush of withdrawals might leave the bank without enough funding to operate.

E*Trade has already warned that this year’s profits would be hurt by the subprime crisis. But the picture grew even more grim late Friday, when E*Trade said it expected to take additional write-downs on its $3 billion portfolio of asset-backed securities, which includes second-lien loans and C.D.O.’s.

What was potentially most unnerving to Wall Street was that E*Trade did not put a number on the size of the latest write-downs. E*Trade also withdrew its previous earnings forecasts, which had already been lowered several times this year.

“Management believes it is no longer beneficial to provide earnings expectations for the remainder of the year,” E*Trade said in a statement.

Mr. Bhatia, the Citi analyst, responded by cutting his rating on E*Trade to “sell” from “hold,” citing a “higher probability of a run on the bank.” About half of E*Trade’s deposits, or $15 billion, are in accounts that contain more than $100,000, he said in a report dated Sunday. These account holders are the most likely to bolt, because bank deposits above that amount aren’t insured by the Federal Deposit Insurance Corporation.

If customers rush to withdraw their money, E*Trade could be forced to hold a fire-sale of other assets to generate capital. The resulting losses could wipe out its tangible equity, Mr. Bhatia wrote.

E*Trade's stock fell 60% today. It's now worth less than $4 a share.

Here's how the stock has done in the past year:



POSTSCRIPT: The advertiser on the website where I got the chart of E*Trade's stock performance over the last year was E*Trade.

Wonder how much longer they'll be in business?

Here we go:

HONG KONG (MarketWatch) -- Crude oil topped $98 a barrel and gold futures rose as high as $848 an ounce Wednesday after comments from a senior Chinese official suggesting China should consider diversifying some of its foreign reserve holdings sent the dollar to fresh lows.

Gold prices spiked to multi-decade highs on safe-haven buying amid concerns that higher oil prices and dollar weakness could lead to inflation. The front-month contract for bullion leapt $20.03 to $843.70 an ounce in recent London trading, adding to the $12.60 rise Tuesday that took bullion to its highest close since 1980.
Oil for December delivery touched $98.46 a barrel in electronic trading, before easing to $98.19, up $1.49 from the New York close.

Cheng Siwei, vice chairman of the Standing Committee of the National People's Congress, said Wednesday in Beijing that authorities should consider the appreciation of currencies such as the euro when the country purchases foreign bonds with its $1.43 trillion stockpile of foreign-exchange reserves, according to media reports. Later in the day Cheng reportedly said his remarks had been misinterpreted.

The Fed looks like it's going to be coming in with another rate cut next month as oil looks like it will top $100 today or tomorrow, as food and energy costs sky-rocket and as the dollar hits all-time lows.

Australia actually raised interest rates yesterday because of inflation worries.

Here in the U.S., we don't count increased food and energy costs as inflation so we don't have to worry about inflation.

That's why the Fed can continue to cut rates and stoke increases in commodity and equity prices.

Inflation, what inflation?

Enjoy the rate cuts. I know I am. My bank cut my savings rate by 50 basis points today.

Since I get paid in dollars, my savings isn't worth all that much anyway.

I guess the message is clear.

Borrow and spend, borrow and spend, borrow and spend.

What the hell, the dollar's not worth anything anyway.

From the Washington Post:

Republican presidential candidate Fred Thompson has been crisscrossing the country since early this summer on a private jet lent to him by a businessman and close adviser who has a criminal record for drug dealing.

Thompson selected the businessman, Philip Martin, to raise seed money for his White House bid. Martin is one of four campaign co-chairmen and the head of a group called the "first day founders." Campaign aides jokingly began to refer to Martin, who has been friends with Thompson since the early 1990s, as the head of "Thompson's Airforce."

Thompson's frequent flights aboard Martin's twin-engine Cessna 560 Citation have saved him more than $100,000, because until the law changed in September, campaign-finance rules allowed presidential candidates to reimburse private jet owners for just a fraction of the true cost.

Martin entered a plea of guilty to the sale of 11 pounds of marijuana in 1979; the court withheld judgment pending completion of his probation. He was charged in 1983 with violating his probation and with multiple counts of felony bookmaking, cocaine trafficking and conspiracy. He pleaded no contest to the cocaine-trafficking and conspiracy charges, which stemmed from a plan to sell $30,000 worth of the drug, and was continued on probation.

Thompson's campaign said the candidate was not aware of the multiple criminal cases, for which Martin served no jail time. All are described in public court records.

The Thompson campaign whines in response to the story that "There's not a campaign in the world that has the ability to research every one of its supporters going back more than 20 years."

Can you image if HRC used that excuse about Norman Hsu instead of giving back the $800,000 that Hsu raised for the Clinton campaign?

Can you imagine if HRC was flying around in a plane paid for by a coke dealer?

Oh, the hand-wringing and teeth-gnashing that story would engender in the usual Beltway CW crowd.

I wonder if this story will even get mentioned by Tweety Bird, Pumpkinhead and the rest?

So far they've managed to ignore the "Rudy knew Kerik was a made guy in the mob" story while doing all they can to expose the "corruption" of the Clintons.

I guess we're going back to the future - the Clinton Rules are back in session.

If the Clintons do it, it's a crime; If Saint Rudy or Good Ole Boy Fred Thomspon do it, it's just a mistake.