Don't Get Excited

Wall Street is carrying on as if we have turned the corner in the Jobs Department. The U.S. Bureau of Labor Statistics this morning released its monthly assessment of the Employment Situation (as in, we have a "situation" here), and the numbers were not quite as bad has had been feared in the days leading up to the announcement. The private sector actually created 67,000 jobs in August, though that number was more than offset by the loss of temporary census jobs, resulting in a negative net number (-54,000). That was only half the whisper number, so--wooHOO!--let's party.

Even a cursory glance at the chart above shows that the current malaise bears no resemblance to a typical post-WW2 recession. The losses are steeper, and the recovery will be more protracted. The total number of jobs in the economy is little changed from a year ago and down from three months ago, when the fertilizer got taken away from all those green shoots. Looking at the Household Survey data, David Rosenberg of Gluskin Sheff counts over a quarter-million full-time jobs lost in August. Rosenberg, derided as a perma-bear, no longer talks about a double dip. He looks at a chart like the one above and calls it a "single scoop" instead.

Put away the vuvuzelas.

[update, 09-07-10:]

"At the end of the day, the real mystery is why presumably numerate Wall Street economists and strategists have taken any comfort at all from the modest blip in the headline job count since last December. An economy that shed more than 8 million jobs during the two-year recession has now recovered the grand sum of 425,000 positions outside of the HES Complex [health, education, and social services], Core Government Operations, and the soon-to-be-completed 2010 Census.

Among this miniscule total, there were 160,000 half jobs in the leisure and hospitality sector, and 200,000 jobs at temporary employment agencies. These are the lowest paying, least stable jobs in the entire economy, and can't conceivably serve as a foundation for the recovery of private incomes and spending."

--David Stockman, "Now the Bad News: Those August Jobs Were Rented" [full article]

How Does Maine Rate?

It is no secret that states are staggering under the prospects of revenue shortfalls and looming unfunded liabilities. Bondholders concerned about the possibility of default have begun to buy insurance in the form of Credit Default Swaps (CDS), which guarantee the proceeds expected at maturity. The chart above, released Monday by Bespoke Investment Group, displays the "premiums" for such coverage. The number next to each state represents the cost per year to insure $10,000 worth of state bonds for 5 years. The higher the price, the higher the default risk.

So how risky are Maine's bonds? Moody's and Fitch have recent upgraded their ratings of our bonds to AA2 and AA+ respectively, but Standard & Poor's reiterated its negative outlook three months ago, much to the consternation of State Treasurer David Lemoine, who bemoans the higher cost of borrowing occasioned by the lower rating. In a letter to S&P dated June 9, Lemoine pointed out that "the people of Maine have a one hundred and ninety year history of issuing state general obligation bonds without default, a constitutional mandate to pay bond holders in full before any other state expenditure can occur, and a state government with current revenue expectations at twenty-five times general obligation debt service"--all signs of creditworthiness. But "history" these days quickly becomes ancient. An unprecedented pension liability, exacerbated by an eroding investment portfolio, is not likely to persuade S&P to change its outlook anytime soon.

As for the price of protection, Lemoine professes in an e-mail earlier today to know nothing of "the nature or make-up of a muni CDS market." Having been burned in 2007 for investing nearly $20 million of Maine's Cash Pool (back when we had a cash pool) in risky derivatives, Lemoine no longer plays with those matches. But even if he himself neither buys nor sells swaps, the suspicion remains that somebody does. Again, at what price?

Like Dominoes

[click to enlarge]

Yesterday the Federal Deposit Insurance Corporation (FDIC) released its Quarterly Banking Profile, evaluating the health of the commercial banking industry. The FDIC oversees over 7,000 banks; as of the end of June, 829 of them were categorized as "problem banks" at risk of failure. That number is up by 127 since the end of 2009 and does not include the 86 banks that were closed from January to June. In July and August 32 more banks have failed, raising the total cost to the Deposit Insurance Fund to almost $19.5 billion in 2010.

Aggregate loans and leases fell by $95.7 billion, or more than one percent, as banks continued to shrink their balance sheets. It was the fifth quarter out of the last six in which banks' assets declined, further evidence that the economy is contracting.

Although the FDIC's press release hailed the improved profitability of the industry, Peter Atwater, President and CEO of Financial Insyghts, remains skeptical. He believes that the $21.6 billion in combined profits for Q2 are largely illusory. Even the FDIC admits that "the primary factor contributing to the year-over-year improvement in quarterly earnings was a reduction in provisions for loan losses." At the end of June, loan-loss reserves totaled 65% of non-current loans.

"Personally," says Atwater, "I think the industry needs something closer to 80% coverage of non-current loans given our high unemployment and underemployment rate and the deflationary environment impact on underlying loan collateral." That would call for another $50 billion in reserves, offsetting reported Q2 profits by a ratio of more than 2:1.

According to the St. Louis Federal Reserve, allowances for loan and lease losses (ALLL) industrywide stand at less than 20% of all nonperforming loans:


Mike Mish Shedlock suspects that the problem is worse than what the FDIC is reporting. In his article "Something's Not Right With Report's Loan Loss Data," he quotes a commercial banker in California as follows:

In my estimation, if every bank had the collateral of all loans accurately appraised and each loan’s loan grading was finely tuned for an expected loss based on financial performance and collateral values, the number of essentially bankrupt banks in this county would increase by a factor of four to five from the current level.

In other words, there is a potential pool of 2,000 to 3,000 banks that would be on the FDIC's radar for getting closed.

The health of the industry is not accurately reported by any means.

Reminder: the MainePERS portfolio is still over-exposed to the banking sector, which means the hits will keep on comin'.

Tuesday Twosome

Kiki Dee and Elton John

Don't Go Breaking My Heart

Monetary Policy Cannot Make Up for Other Blunders

"Many proponents of quantitative easing (QE) appear to be highly confident in its effectiveness despite the absence of supporting evidence. It is likely that many supporters of QE do so because to do otherwise would be to admit that we have reached, or are very near the limits of, monetary policy. Unfortunately, while QE may enable the Fed to finesse the zero "bound", the only existing evidence strongly suggests the effectiveness of unconventional monetary policy is waning. It should not be surprising, if we have reached the limit of monetary policy. It has been the go-to policy to stimulate growth. US tax policy is best explained as an effort to garner campaign contributions despite deleterious effects on growth, fairness and efficiency. It has also encouraged the buildup of debt and leverage, while discouraging saving and equity-financed investment. The expenditure side of fiscal policy has been reduced to partisan-seniority-determined allocations of pork. Regulatory policy has become a means of placating valued constituencies and expanding moral hazard incentives. Trade policy is non-existent. Energy policy is non-existent. Perhaps it is time to expect less from monetary policy and demand more from other policies and policy makers."

--Christopher Whalen, Institutional Risk Analytics

Getting Down(stream) and Dirty

[courtesy Lewiston Sun Journal]

Volunteers met Saturday and removed debris that was diverting the outlet stream from Worthley Pond. Whole docks that had washed down the stream were removed along with other debris. The Peru Selectmen had asked for help, and about 20 people showed up, some with equipment for moving the larger pieces.

photo: Mary Standard

Incredible Shrinking GDP

The Commerce Department reported this morning that the U.S. Gross Domestic Product grew at an annualized rate of 1.6% during the second quarter, lower than the 2.4% initially projected a month ago and lower than the 3.7% reported for the first quarter. Take out the build in inventories, and you have real final sales growing at a meager 1%. The economy is clearly stalling. Most of the Q2 growth came in April, and it is likely that by the start of Q3 growth was flat to negative. How can we tell? Look here:

Banks continue to reduce their lending to businesses (above)...


...and instead are parking their money in U.S. Treasuries.
Risk OFF!

Jobs are disappearing once more...


MBA Purchase Index

reducing the demand for new home loans...


...and therefore sales of new homes (lowest since records began).
Fallout:
David Rosenberg of Gluskin Sheff expects another 3 to 4 million jobs to be lost in the construction industry.

The wild card in the debt pyramid? Looming sovereign defaults:

Spread between Greek and German 10-Year Bonds

Back to flash-crash highs; investors are nervous.

U.S. Peso At Risk

John Hussman, "Why Quantitative Easing Is Likely To Trigger a Collapse of the U.S. Dollar"

[excerpt:]

[T]he policy of quantitative easing is likely to force a large adjustment on the U.S. dollar because the Federal Reserve is choosing to lay a heavier hand on the Treasury bond market than would result from economic conditions alone. The resulting shift in interest rates and long-term inflation prospects combine to dramatically reduce the attractiveness of the U.S. dollar. A significant and relatively abrupt devaluation is then required, in an amount sufficient to set up expectations of a U.S. dollar appreciation over time....

So the argument here is... that we are running a fiscal policy that is long run (though not short-run) inflationary, and that the monetary policy of quantitative easing prevents longer term interest rates from acting as an adjustment variable... By suppressing Treasury yields, the Fed forces the exchange rate to bear the full weight of the adjustment....

Good policy is not rocket science. It begins with the refusal to make people pay for mistakes that are not their own. This economy continues to struggle with a fundamental problem, which is that debt obligations exceed the ability to service them. While policy makers have done everything to preserve the patterns of spending and consumption that created the problem in the first place, we have done nothing to restructure those obligations.

Complete article viewable at HussmanFunds.com.

And You Thought GOLDMAN Was the Villain

David Stockman, "How PIMCO Is Holding American Homeowners Hostage"

[excerpt:]

It turns out that the real vampire squid wrapped around the face of the American taxpayer isn't Goldman Sachs after all. Instead, it's surely the Pacific Investment Management Co. As overlord of the fixed-income finance market, the latter generates billions annually in effort-free profits from its trove of essentially riskless US Treasury securities and federally guaranteed housing paper. Now Pimco wants to swell Uncle Sam’s supply of this no-brainer paper even further -- adding upward of $2 trillion per year of what would be “government-issue” mortgages on top of the existing $1.5 trillion in general fund deficits.

This final transformation of American taxpayers into indentured servants of HIDC (the Housing Investment & Debt Complex) has been underway for a long time, and is now unstoppable because all principled political opposition to Pimco-style crony capitalism has been extinguished... The HIDC subsidy system has been doubly perverse. Whereas the nation lived way beyond its means by saving too little at home and borrowing too much abroad, even the meager savings we did generate were artificially channeled into the least-productive investments. Thanks to the pervasive HIDC subsidy system we now have big, new houses and small, aging factories....

Pulling the plug on HIDC will rescue millions of households from mortgage-payment slavery and put them into a buyer's market for rented-housing services -- a social welfare gain under present circumstances. To be sure, they'll lose their credit and probably their credit cards in the process. But the days of living off the housing ATM and bank-issued plastic are over for the American people anyway. Creating an honest financial environment where households are required to rebuild their balance sheets and consume within their means isn't a disservice or injustice to anyone.

Complete article viewable at Minyanville.com.

Paul Simon and Linda Ronstadt

Under African Skies

Quote for the Week, Aug. 22-28, 2010

Are you going to vote to have a war or not? If you aren't please tell me how you are going to help to not have a war.

--Samantha Smith, age 10, to Soviet President Yuri Andropov, 1982

Tuesday Twosome

Sarah McLachlan and Bryan Adams

Don't Let Go

Heavy Hand of Government Applies Chokehold

Jeff Harding, "The Dodd-Frank Wall Street Reform
and Consumer Protection Act: The Triumph of Crony Capitalism"

[excerpt:]

The new financial overhaul bill is the greatest government takeover of the financial sector of the economy since the National Recovery Act of 1933 when Franklin Roosevelt attempted to introduce central planning in America.

More than just a new law, the Dodd-Frank “Wall Street Reform and Consumer Protection Act” (the "Act") gives government a relatively free hand to set prices and wages, to make business decisions, to promote or eliminate businesses, and to break up businesses. It establishes a large new bureaucracy to enable the government to dictate its wishes to the industry....

While the new law has been signed by the President, it hasn't yet been written. That task will be the job of federal mandarins, the career lawyers and economists inside and outside of government who live off of government regulation. As such the ultimate consequences of this Act are unknown and won't be fully known until years later after the regulations have been written, agencies are established, and power is distributed among the bureaucrats....

This revolving door between Washington and Wall Street allows people attracted to power and who are skeptical of the ideals of a free market, to dominate economic policy for their benefit. One way to say this is that it creates a partnership between the financial sector of the economy and the government (which is the controlling partner in this relationship). In the 1930s this type of political system was greatly admired in Washington. Today this system has evolved into “crony capitalism,” an oligarchic structure maintained by the Wall Street-Washington Financial Complex to perpetuate itself.

Complete article viewable at Minyanville.com.

Biggest Ponzi Scheme Ever?

Laurence Kotlikoff, "U.S. Is Bankrupt and We Don't Even Know"

[excerpt:]

The International Monetary Fund has effectively pronounced the U.S. bankrupt. Section 6 of the July 2010 Selected Issues Paper says: “The U.S. fiscal gap associated with today’s federal fiscal policy is huge for plausible discount rates.” It adds that “closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 percent of U.S. GDP.” ...To put 14 percent of gross domestic product in perspective, current federal revenue totals 14.9 percent of GDP. So the IMF is saying that closing the U.S. fiscal gap, from the revenue side, requires, roughly speaking, an immediate and permanent doubling of our personal-income, corporate and federal taxes as well as the payroll levy set down in the Federal Insurance Contribution Act....

[The IMF] has done its homework. So has the Congressional Budget Office, whose Long-Term Budget Outlook, released in June, shows an even larger problem. Based on the CBO’s data, I calculate a fiscal gap of $202 trillion, which is more than 15 times the official debt. This gargantuan discrepancy between our “official” debt and our actual net indebtedness isn’t surprising. It reflects what economists call the labeling problem. Congress has been very careful over the years to label most of its liabilities “unofficial” to keep them off the books and far in the future....

This is what happens when you run a massive Ponzi scheme for six decades straight, taking ever larger resources from the young and giving them to the old while promising the young their eventual turn at passing the generational buck.

Complete article viewable at Bloomberg.com.

America Goes Dark

Unemployment metastasizes from county to county,
January 2008 to May 2010.

Tuesday Twosome

Gordon Waller and Peter Asher

A World Without Love

Our Wad Is Shot

Is it or isn't it? The Great Recession of 2008, I mean. According to the chart above, it's been over for the past year. The chart shows four consecutive quarters of sequential growth in Gross Domestic Product. Happy days are here again, right?

Not exactly. Despite stimulus spending by the federal government and quantitative easing by the Federal Reserve, the rebound in GDP has amounted to little more than a dead-cat bounce, falling 1% short of the pre-recession peak recorded in the fourth quarter of 2007. In other words, we have yet to gain back all that we had lost. This explains why Maine's general-fund revenues for FY 2010 (which ended on June 30) were down 2% from the year before. The two biggest drivers of GF revenues, the sales tax and the individual income tax, were down 2.6% and 4.9% respectively. Some recovery.

A "normal" recovery in the post-WW2 era, as David Rosenberg of Gluskin Sheff points out, should be far more robust. Ten quarters after the onset of a recession, GDP usually breaks out to a new high that is on average 8% above the prior peak, not 1% below. This year's Q2 number of +2.4%, released last Friday, is particularly disappointing not only because the pace of growth is slowing (already), but also because almost half the growth was due to a build in unsold inventories. Real final sales (GDP ex inventories) have grown just 1.2% in the past year--in Rosenberg's words, "the weakest revival in recorded history."

Leading indicators suggest that GDP growth will be flat-to-negative by Q4, which means that Maine faces more belt-tightening in FY 2011.

Hidden Costs Lead to Bad Choices

Bruce Mohl, "Green Power Costs Shouldn't Be in the Dark"

[excerpt:]

GREEN POWER curbs greenhouse gas emissions, reduces our reliance on fossil fuels, and has the potential to create new industries and jobs. But it’s not cheap, and consumers footing the bill for green power have a right to know what it costs....

The distribution charge on customer utility bills is ostensibly the cost of delivering electricity to homes. But it has become a dumping ground for all sorts of green power charges, including the above-market cost of long-term renewable power contracts as well as the tab for utility solar installations, smart grid pilot projects, and other programs subsidizing renewable energy. Even the fees utilities collect for signing green power contracts are rolled into the distribution charge.

The cost of the state’s green initiatives should be separated out and clearly identified, either on customer utility bills or separate bill impact statements. That way consumers can decide if the environmental benefits of green power are worth the extra cost. If state officials want consumers to embrace a green future, they have to be truthful about what that future costs.

Complete article viewable at the Boston Globe.

Tuesday Twosome

Ian and Sylvia Tyson

Four Strong Winds

Paddling around the Pond

Worthley Pond, 08-02-2010

Rapid River, Slow Recovery

Maine waters soothe wounded warriors. Story.

[Courtesy Boston Globe]

Slip-Sliding Away

Zero return in the last five years--and heading south...

Last month I took a look at the investment portfolio of the Maine Public Employees Retirement System (MainePERS) and suggested that the fund was ill positioned for a deflationary economy. In particular, the pension fund is overweight stocks--and dangerously exposed to the financial sector. Two of its top ten equity holdings are Bank of America and JP Morgan Chase (see the table below).

Those chips should have been taken off the table six months ago. An update at the MainePERS website shows that the fund's shares in Bank of America and JP Morgan Chase decreased in value by 19.2% and 17.9% respectively in the three-month period ending on June 30. We can hope that this was because of a reduced share-count, i.e. that fund managers smartly sold shares before this spring's sell-off, during which stock prices for both companies declined by over 20%. Given that the fund dropped a cool half-billion during the quarter (-6.4%), however, it is more likely that we simply rode the shares down, Six Flags style.

The Maine Center for Public Interest Reporting has posted an alert at its website (www.pinetreewatchdog.org) regarding Maine's pension liability and the huge impact it will have on the state budget going forward. The state has underfunded MainePERS by $4.4 billion and must make up the difference out of the General Fund by 2028. The gap is based on the dubious assumption that the MainePERS portfolio can generate returns of almost 8% annually between now and then. The portfolio's recent performance is hardly reassuring in that regard.

Worse, just as the pension gap is growing, so is the shortfall in the state's operating budget, a shortfall now expected to exceed $1 billion in the next biennium. You cannot rob Peter to pay Paul when Peter is flat broke.

Largest Holdings at June 30, 2010:

Top 10 Equity Holdings Market Value Exxon Mobil $ 66,477,991 Apple 51,352,113 Microsoft 43,881,980 IBM 42,349,442 Procter & Gamble 39,276,284 General Electric 38,006,304 JP Morgan Chase 37,104,601 Johnson & Johnson 36,994,416 Bank of America 36,864,697 Berkshire Hathaway Cl B 34,714,558 Top 10 Equities $ 427,022,386

For a detailed analysis of states' pension woes,
check out this report by Courtney Collins and Andrew J. Rettenmaier.

From the executive summary:

Many state and local government pension plans' liabilities are calculated using discount rates that are not commensurate with the risk they may pose to taxpayers. Accounting standards allow pension funds to calculate their liabilities using a discount rate comparable to the expected rate of return on the funds' assets. This typically high discount rate tends to reduce the size of a pension plan's accrued liabilities. However, pensioners have a durable legal claim to receive their benefits and consequently, it is more appropriate to use a lower discount rate in calculating the plans' accrued liabilities.

Due to the use of high discount rates, the liabilities of state and local government pension plans are underestimated. For example, recent reports by the Pew Center on the States and others indicate that assets will cover about 85 percent of the pension benefits owed to participants. But other studies that adopted lower discount rates have found liabilities may actually be 75 percent to 86 percent higher than reported. As a result, taxpayers' role as insurer may be much greater than anticipated.

Tuesday Twosome

Dan Seals and John Ford Coley

Nights Are Forever Without You

Manipulating the Currency, Remaking the Culture

The dollar has fallen in value ever since the Federal Reserve was created.


James Quinn, "How Welfare and Warfare Are Destroying Our Country"

[excerpts:]

The way to get elected in the U.S. since the 1930s has been to promise voters benefits while ignoring the long-term costs. The defense industry and their lobbyists benefit by creating phantom enemies around the globe and stirring up the masses through fear and propaganda. The other beneficiary has been the banking syndicate and their owned printing press called the Federal Reserve. The welfare promises and constant warfare over the last century wouldn’t have been possible without the Federal Reserve and their ability to create constant inflation.

Politicians discovered that the populace will go along with their never ending military adventures if they were bought off with promises of generous pensions, free medical insurance, subsidized housing, unlimited drug benefits, farm subsidies, tax loopholes, and thousands of other voter boondoggle payoffs. The Federal Reserve printed the fiat currency, the military industrial complex created the enemies, young Americans fought and died in foreign countries in undeclared wars of choice, and corrupt politicians promised unlimited benefits to the masses in search of votes while rigging the tax system to benefit the rich and powerful. The creation of the Federal Reserve and the Federal Income Tax in 1913 unleashed politicians from the chains of fiscal responsibility....

The U.S. welfare-warfare state is not the result of any one political party’s agenda. The Republican Party and the Democratic Party have cooperated to achieve this result. Republicans passed the largest entitlement expansion since LBJ in 2003. Democrats have just proposed the largest military budget in the history of mankind. It isn’t easy to run the National Debt from $5.7 trillion in 2000 to $13.1 trillion today. It takes cooperation and mutual ineptitude on the part of both parties to achieve such a spectacular result.

The complete article, including the author's list of six "immediate actions required to avoid a catastrophic collapse," can be found at TheBurningPlatform.com.

Loon Count 2010

Loon with chick at Worthley Pond, 07-17-10

[photo: Thea Palanza-Parker]

On Saturday the Maine Audubon Society coordinated its annual Loon Count on Maine's lakes and ponds. There is local evidence that the loon population is holding its own. At Worthley Pond in Peru, nine volunteers took up posts either on shore or in watercraft during the designated observation period (7:00 to 7:30 a.m.). There were known to be six resident loons on the Pond--including a two-week-old chick--and they were all sighted during the official half-hour window. Count 'em!

This was the most ever recorded at Worthley Pond since the annual count began in the mid-1980s. It was also the first time that a chick was counted (last year's surviving chick did not hatch until after the count). Afterward Cathy Hazelton hosted a breakfast for the counters at her father's camp on Annie Lane.

The Worthley Pond Association keeps a website, complete with photo gallery, here.

Inventory Coming Out of the Shadows

Keith Jurow, "Why Are Banks Withholding Highend Repossessions Over $300,000 From the Market?"

[excerpt:]

This year, banks in the Chicago area have foreclosed on a huge number of expensive homes. RealtyTrac lists 2,650 repossessed homes for more than $300,000 and 169 for more than $1 million.

Here is where it gets really interesting. Out of 28,829 repossessed properties, there were only 1,292 listed by lenders as "for sale." The vast majority of these available homes were inexpensive. A mere 29 homes over $300,000 were for sale. In other words, the banks have withheld from the market 2,621 properties listed at $300,000 or higher....

With so many homes listed for more than $300,000 now languishing on the Cook County market, it is somewhat understandable that the banks would be reluctant to add their foreclosed homes in this price range to a weak market. When you add in the 7,550 defaulted properties in this price range which have not yet been repossessed by the banks, you can get a sense of the soaring number of homes that is ready to inundate an already glutted market. When these homes come onto the market, as they eventually must, prices will inevitably plunge.

Dade County (FL), Orange County (CA), and Bergen County (NJ): same story.

Complete article viewable at RealEstateChannel.com.

Tuesday Twosome

Mark Knopfler and Emmylou Harris

Why Worry

Deficit Drivers

federal deficit à la carte

[excerpt:]

Some commentators blame recent legislation--the stimulus bill and the financial rescues--for today’s record deficits. Yet those costs pale next to other policies enacted since 2001 that have swollen the deficit....

Just two policies dating from the Bush Administration--tax cuts and the wars in Iraq and Afghanistan--accounted for over $500 billion of the deficit in 2009 and will account for almost $7 trillion in deficits in 2009 through 2019, including the associated debt-service costs. These impacts easily dwarf the stimulus and financial rescues. Furthermore, unlike those temporary costs, these inherited policies (especially the tax cuts and the prescription drug benefit enacted in 2003) do not fade away as the economy recovers (see Figure 1).

Complete analysis at Center on Budget and Policy Priorities website.

Wise Up, Investors

John Hussman, Ph.D., "Misallocating Resources"

[excerpts:]

There is little question that we have, for more than a decade, squandered our productive resources in the pursuit of bubbles. Almost unbelievably, real private gross domestic investment is lower today than it was 12 years ago, and much of the gross domestic investment that we have made in the interim has been destroyed in mispriced speculative activity such as residential construction and commercial real estate development....

If we as a nation fail to allow market discipline, to create incentives for research and development, to discourage speculative bubbles, to accumulate productive capital, and to maintain adequate educational achievement and human capital, the real wages of U.S. workers will slide toward those of developing economies. The real income of a nation is identical its real output - one cannot grow independent of the other....

For a moment, at least, it is good to be a corporate insider, particularly at major financial companies. First, you get to report productivity gains and "operating profits" - not by making smart investments in productive assets, but instead by writing up debt thanks to Treasury intervention, by misstating your balance sheet thanks to FASB changes last year, and at industrial firms, by cutting the number of workers per unit of capital. Next, you quietly write off large losses on bad investments and unrecoverable loans as "extraordinary expenses," to which investors pay no notice. And to add insult to injury, you deliver a significant portion of the remaining profits to yourself as "incentive compensation," followed by buybacks of stock to offset the dilution, which investors actually cheer because they don't realize they've been taken for suckers.

Complete article viewable at HussmanFunds.com.

Tuesday Twosome

Indigo Girls

Closer to Fine

Source: Annaly Capital Management

Peter Atwater, "How Is the Credit Card Industry Making Money?"

[excerpt:]

Since the beginning of 2007, the correlation between the unemployment rate and residential mortgages has tightened significantly, while the correlation between the unemployment rate and credit cards has broken down...[suggesting] a fundamental change in consumer credit behavior as consumers are “reprioritizing” monthly cash flows away from lower cost debt (first mortgages) to credit cards, home equity lines, and other higher cost borrowings.

Complete article viewable at Minyanville.com.

Tuesday Twosome

Alison Krauss and Robert Plant

Killing the Blues

From the Bookshelf...

[excerpts:]

My family and friends expected that I would welcome being "normal," be appreciative of lithium, and take in stride having normal energy and sleep. But if you have had stars at your feet and the rings of planets through your hands, are used to sleeping four or five hours a night and now sleep eight, are used to staying up all night for days and weeks in a row and now cannot, it is a very real adjustment to blend into a three-piece-suit schedule, which, while comfortable to many, is new, restrictive, seemingly less productive, and maddeningly less intoxicating....

After my suicide attempt, I had to reconcile the images of myself as a young girl who had been filled with enthusiasm, high hopes, great expectations, enormous energy and dreams and love of life, with that of a dreary, crabbed, pained woman who desperately wished only for death and took a lethal dose of lithium in order to accomplish it....

There is, for me, a mixture of longings for an earlier age; this is inevitable, perhaps, in any life, but there is an extra twist of almost painful nostalgia brought about by having lived a life particularly intense in moods. This makes it even harder to leave the past behind, and life, on occasion, becomes a kind of elegy for lost moods.

Kay Redfield Jamison, An Unquiet Mind

Featuring: Grafton Loop Trail

This morning's Maine Sunday Telegram has a piece (with photos) on the Grafton Loop Trail off Rte. 26 (trailheads in Newry and Grafton Notch). Cathy and I maintain the 3.1 miles from the highway to the summit of Puzzle Mountain and have backpacked the entire loop. What a resource!

Though the GLT was designed with backpackers in mind, Puzzle Mountain is a popular destination for day-hikers. We'll show you the way if you are interested. For more info, shoot your message to billhine@gmail.com.

Flip Charts

State of the Union, in pictures.


Initial Unemployment Claims:

Yesterday's figure of 472,000 is heading the wrong way--up!


Figures released today show the average work week heading back down.


Unit Labor Costs:

Wage deflation is here--
which explains why big-ticket purchases are down (see below).

MBA Purchase Index:

Applications for loans for new homes are at a 13-year low.

New Home Sales:

The figures for May were dismal, just 300,000 units annualized.

Auto sales:

The 5.6 million units sold in the first half of 2010 are not enough to restore profitability to the industry.


TED spread [LIBOR vs. U.S. Ten-Year Bond Yield]:

Inter-bank lending has loosened up in the past few weeks, which is a positive, but...


Yield on Greek Ten-Year Bonds:

The risk of sovereign default rises as the euro fix announced in May loses credibility. The global financial crisis is not over.

Want more slides?
The Heritage Foundation has a sequence on government spending,
beginning with this one:

[click for more]