Wednesday, August 26, 2009

Half Way Through the Week Links

The last bear standing: Hat tip to Zero Hedge for finding this great link to a presentation by Australian economist Steve Keen. According to the video, Keen is just one of a handful of economists who saw the crisis coming. Because of that, he modestly suggests that we should not listen to those who say that the US and Australia are in the clear. His thoughts on Australia are actually incredibly eye opening. His claim is that due to unsustainably high private debt to GDP levels, Australia has not missed the storm. It just is a couple of years behind everyone else in experiencing the crash. Anyone who has read my discussions of the Australian housing industry knows that I was concerned that it looked a whole lot like the US housing market did in late 2006, just before the bubble popped. Prices have run up tremendously since 2002 and households have taken on a ton of debt. The argument in Australia right now is “we are different.” While that may be true to some extent Keen worries that the amount of debt in the system will lead to instability, similar to the process Minsky articulated in the 1960s.

"I probably win the Dr. Doom award around the planet these days now that Nouriel Roubini is expecting the recession will end in about 6 months time. I think it's got a lot longer to go than that."

"What we are going through is a deleveraging crisis and we haven't experienced one of those since 1930. Last time it took 10 years and a world war to get rid of it, and this time we are staring up with 1.7 times the level of debt in America, not even mentioning the derivatives catastrophe that is also there."

"And deleveraging which is the attempt by the private sector to reduce its debt level can overwhelm the government's stimulus. The whole problem was caused by irresponsible lending and the only way out of this ultimately is to eliminate that debt. The debt has to be written off"

Keen suggests that the reason we can’t compare the current situation to recent past recessions is due to the deleveraging and deflation components. So, in his mind this time it really is different, Australia will not be spared and the US still is far from out of the woods. But please don’t despair: the S&P is up more than 50% from its lows. And since the stock market is not a voting machine dominated by a few traders who trade 5 stocks amongst themselves, we should look at its movements as arbiters of eternal truth. (By the way, if anyone can explain to me why trading in Fannie, Freddie, Citi, and AIG currently makes up a large percentage of total volume, I would really appreciate it. I’m serious. Not being a trader I have no idea what the rationale is or how they expect to profit.)

Chanos takes a contrarian view on Big Pharma: Hat tip to Vitaliy Katsenelson for finding this link. Unlike some of his value investing peers who have big stakes in pharmaceutical companies, Jim Chanos thinks there are headwinds in the near future:

The billionaire founder and president of Kynikos, an American hedge fund, said: "The US healthcare system is probably the most interesting large group of companies that are heading for major problems that we've seen in a long, long time."

Speaking on a radio program, Mr Chanos said: "Healthcare is growing now at about 10 per cent per annum in the US top line, versus 3 per cent for the economy. As someone with a sharp pencil and an eye for this kind of thing, this can't last."

The question is, what does Chanos think about the under the table deal that Obama made with the pharma companies? If, in return for their support of health care reform, Obama promised these companies that the government would not use its purchasing power to negotiate cheaper prices for drugs, then reform might be the best thing that ever happened to the industry. Not only would the companies get to maintain their pricing and margins, but if the government subsidized the cost of insurance for the currently uninsured, the pharmaceuticals would benefit from millions of newly insured customers who would have never been able to afford their drugs previously. While this could be great for the stocks, I can’t see how this would be good for consumers, those who want to reduce the spiraling costs of health care or bears like Chanos.,28124,25977947-5018014,00.html

Here comes the commodity inflation: From Ambrose Evans-Pritchard of the Telegraph:

A draft report by China’s Ministry of Industry and Information Technology has called for a total ban on foreign shipments of terbium, dysprosium, yttrium, thulium, and lutetium. Other metals such as neodymium, europium, cerium, and lanthanum will be restricted to a combined export quota of 35,000 tonnes a year, far below global needs.

China mines over 95pc of the world’s rare earth minerals, mostly in Inner Mongolia. The move to hoard reserves is the clearest sign to date that the global struggle for diminishing resources is shifting into a new phase. Countries may find it hard to obtain key materials at any price.

The truth is that many of the products that use these minerals are made in China. But, for manufacturers throughout the rest of the world, this move by China could lead to significantly higher prices because of China’s monopoly:

New technologies have since increased the value and strategic importance of these metals, but it will take years for fresh supply to come on stream from deposits in Australia, North America, and South Africa. The rare earth family are hard to find, and harder to extract.

What might become more expensive if the price outside of China for these minerals rises?

Blackberries, iPods, mobile phones, plasma TVs, navigation systems, and air defence missiles all use a sprinkling of rare earth metals. They are used to filter viruses and bacteria from water, and cleaning up Sarin gas and VX nerve agents.

There goes my idea to start a business that cleans up after Sarin gas attacks. In any case, China’s recent actions clearly show a bias towards a stockpiling of natural resources. Can you blame them? With all of the resources they may need in the coming decades it makes a lot more sense than holding US dollars. The questions going forward are can they sustain this buying and if they can, what will it do to prices in the long run?

Evans-Pritchard on the Bernanke reappointment: I was listening to the most recent interview with Marc Faber on King World News and I thought he had a perfect analogy for what Bernanke has accomplished during the crisis. I think it is way better than Taleb’s “crashing the bus” comparison. Faber said that Bernanke was like the captain of a ship with 1000 passengers who sunk the ship because of his poor leadership and killed all the passengers. But, since he was able to save the small crew of people around him in a lifeboat, he deserves a medal of honor. In other words, despite the fact that his policies and ideology as a Fed Governor and as Chairman were a cause of the crisis, the fact that he did some unorthodox things to save the economy from an absolute calamity means he gets to keep his job. Even if we give him the benefit of the doubt that he admittedly made some mistakes and is now up to the task, how do we know what Bernanke we are going to get post crisis? If he couldn’t see a bubble then and thought we were in a Great Moderation period even as a dangerous amount of leverage and risk was building up, how can we trust him going forward?

It is this twin-sided nature of Bernanke that raises nagging questions about his reappointment as chairman of the Fed. He has admitted errors: it was wrong to think the sub-prime crisis could be contained. But he has yet to acknowledge that his economic ideology is deeply flawed.

Bill White, former chief economist at the Bank for International Settlements, said the error of the central banking fraternity over past 20 years has been to cut real interest rates ever lower to keep the game going. This has lured the world into a debt trap. The effect is to keep drawing prosperity from the future – until the future arrives.

If it is true that his economic philosophy has not changed in the slightest by the events over the past few years then we will be no better off if he is still the Chairman when all of the unintended consequences of the current policy eventually begin to come home to roost.

Is Bernanke the world’s most dangerous man? Hat tip to Zero Hedge for finding this article on MarketWatch from Paul Farrell. In this piece, Farrell sounds the all too common alarm that the Fed is owned and run by the banks and until that tie is broken we are doomed to get biased policy decisions under the guise of independence. It has always troubled me that major bank leaders are on the boards of directors of the Fed and that the commercial banks are the shareholders of the 12 Federal Reserve Banks. If these were the bad guys of the current crisis, how could it be a good thing for them to have influence over one of the most powerful “independent” bodies in the world? Also, if you believe that the banksters have gained so much power that they basically have captured the executive branch, the Congress and the regulators, then it appears that the only hope to reign them in lies with the judicial system. For a long time I have wanted to believe that The Quiet Coup as discussed by Simon Johnson was just an exaggeration. But the more evidence I see, the more I think Johnson is unfortunately right on. Along those lines, Farrell sites Secrets of the Temple: How the Federal Reserve Runs the Country author William Greider’s 6 reasons not to give the Fed more power:

1. More power rewards failure, creating 'moral hazard'

2. Fed policies will continue destabilizing U.S. and global economies

3. The Fed's not objective, cannot investigate its own systemic flaws

4. The Fed cannot be trusted to protect taxpayers against Wall Street

5. More Fed power means more companies want 'too big to fail' status

6. The Fed will be a rich-man's club dominating everything from the top

What are our chances of stopping Obama’s attempt to grant the Fed even more power or of dismantling the currently broken temple? Not so good according to Greider:

But unfortunately, "many in Congress will be afraid to take on the temple and reluctant to violate the taboo surrounding the Fed. It will probably require popular rebellion." Why? Because Congress (like the Fed) dances to the bidding of Wall Street and its lobbyists who donate megabucks to their campaigns. So don't expect reform until the next crisis, a mega-meltdown around 2013, the centennial anniversary of the Fed.

Just what we need. Another major crisis. It’s not like the coming health care, social security, climate and budget crises are not scary enough.

(Picture courtesy of