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Mr. Market Had a Really Bad Day

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You know things are not normal when a 4%-5% movement in equity markets looks routine.

I’ve been a bit surprised that it has taken investors this long to get the memo that the prospects for the economy (both domestically and internationally) are lousy. The stunning US GDP revisions of last month should have been a wake-up call, but they seemed to be swamped by the deficit ceiling/S&P downgrade theatrics.

In case anyone managed to miss it, advanced economies have decided to put on the austerity hairshirt, which assures near or actual deflation. The concern re the uptick in consumer inflation figures excludes the biggest input into goods costs, namely wages. Commodities inflation seems to be driven by a combination of speculative inflows (which is believed to include hoarding of storable materials, such as metals in China) and emerging economies, particularly China, running at over potential and being too slow to increase interest rates to cool off demand.

The US program of using monetary stimulus as a fix for a failure to reform the banking system, write down bad debts, and apply generous stimulus as an offset isn’t working out very well. The notion was to have the wealth effect of higher stock prices and hopefully stabilizing and improving housing prices restart consumer spending. But consumers were in retrenchment mode as a result of being overlevered, and the lousy job market is keeping them correctly very cautious. So QE-induced optimism goosed asset prices, like stocks and subprime debt, without doing much for the real economy.

But even though investors got ahead of themselves in the US, the real trouble spot is Europe. The latest EU attempt at confidence building by Sarkozky and Merkel on Tuesday wasn’t even kick the can down the road, it was pure smoke and mirrors. With a lack of any political consensus on moving to a fiscal union, the job of holding the Euromess at bay falls to the ECB. And as we’ve indicated, its Bundesbank mentality guarantees it won’t do a Bernanke and balloon its balance sheet to the €2-3 trillion level needed to do the job. It has already done roughly €96 billion of bond purchases to support periphery debt. Italy has €68 billion of debt maturing by the end of September, and market participants estimate the ECB would need to buy €100 billion of Italian debt to keep its borrowing rate at 5%. That would push the ECB’s purchases above the level than many think the bank is comfortable with. This is not a trivial issue. The ECB is already divided on further interventions; we are told by colleagues who speak to staffers that board meetings have devolved into screaming fights.

The assumption has been that if we have a Eurocrisis, the authorities will do what the markets think is the right thing and bail out the banks and provide generous liquidity. But any TARP-type facilities will have to be on a national level, and with austerity the order of the day, that would seem to be a non-starter. It also seems unlikely that the ECB would change stripes and create a raft of Bernanke-style emergency lending and asset-purchase facilities, or at least not quickly enough to halt an unraveling.

The other wild card is that the policy paralysis in the Eurozone means an eventual breakup, with some countries exiting and the rest remaining as a rump Euro area, seems more and more likely. Europe otherwise needs a vastly lower euro (Wolfgang Munchau has estimated .60 or .80 to the dollar) to alleviate the internal imbalances and give periphery countries a boost via increased exports. That does not seem likely, plus that magnitude of a currency move would have its own knock-on effects. A dissolution could take the form of a German bloc exiting, but given the denial among politicians, it would probably happen as a result of banking-related stresses becoming more acute, rather than as part of a program to remedy them.

I’d rather be proven wrong on this one, but days like today are likely to look tame relative to what is in store.

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105 comments

    1. ambrit

      Dear MLTPB;
      I’m more worried about Miss and Master Market. When they throw a tantrum, things get broken.

    1. Archie

      TS

      The absolute deficit figure is irrelevant. Get rid of the Bush tax cuts and reduce the Pentagon/DOD budgets by 50% and the deficits go away. Or, you can eliminate all social welfare programs and the deficits go away.

      So, the real question is: Austerity for Whom?

      1. MyLessThanPrimeBeef

        Speaking of the DOD, shouldn’t we consider the Swiss model?

        However, we have to be careful here and go all Swiss on everything.

        For example, we like the economics of Swiss School Cheese, but definitely not the Swiss Cheese School of Economics, too many holes in their theories.

        Opinions vary, but I think MMT is one of those…well, to me anyway.

        1. Patrick

          “Speaking of the DOD, shouldn’t we consider the Swiss model?”

          Mandatory army service followed by every male keeping his assault rifle at home with ammo such that they have a very small standing army. Once a year the gov provides more ammo for target practice.

          On the plus side no one breaks into any homes! :~)

      2. don

        As much as I’d like to see military spending slashed in half i doubt it will happen. Doing so would result in massive job losses. We have a militarized economy and are held hostage to it.

      3. R Foreman

        It won’t be the middle + lower classes that get fleeced during this deflation, since those groups don’t have any wealth. The coming deflation will wipe out the faux-wealthy, as they get harvested by the super-rich.

        Then when the ability to eat a regular meal is determined by a tiny fraction of the global population, things will start to get interesting.

        Flash-mobs with masks showing up everywhere, and the gate-keepers of the super-wealthy turning on their masters, are just a couple things which come to mind.

        1. attempter


          It won’t be the middle + lower classes that get fleeced during this deflation, since those groups don’t have any wealth.

          But we can be driven further into negative wealth, debt indenture within a comprehensive space of totalitarian privatization, as the mechanism of enslavement.

          http://attempter.wordpress.com/2010/07/05/part-4-the-full-fury-of-the-new-feudal-war-the-intended-end-state/

          So the inevitable deflation, which they intend to carry out in a coordinated way, is something we need to plan for as well. Unless we assert ourselves in that same embattled space, humanity will be lost.

      4. gruntled

        Yes, that’s the right way to put it. Get rid of the Bush era tax cuts, and stop this insanity of 2-3 simultaneous wars, and the US will be saved.

    2. ambrit

      Dear Squid;
      It really depends on the distribution of the pain. Down here on “the Street” I watch fellow workers at my new place of employment nervously watching the stock market figures during the day. As one explained to me today, “We were encouraged to ‘invest’ (her quote marks) some of our weekly pay in the market through the 401k. This was supposed to be a ‘responsible’ (her quotes again) investment in our retirement. Now with our “k”s tanking and Social Security of all things on the table, who or what are we to believe anymore? It makes me want to shoot someone.” If the Government really cuts Social Security I fear there will be a big opportunity for Demagogues, from either end of the political spectrum.

    3. scraping_by

      Federal government deficits have nothing to do with austerity, other than a talking point.

      Austerity is squeezing the workers and the weak. Lack of past squeezing didn’t cause the Federal deficit.

      That was cuased by an economy hollowed out for the sake of the financial industry, who then let trillions slip away in bad deals, were then bailed out of the bad deals with federal money, and have not been taxed to a reasonable, sustainable level for close to thirty years.

      The only connection between the two is that they’re part of the worldview of the elite.

    4. Tertium Squid

      A & A & S,

      Ah, I agree with you all. But notice we are no longer talking about austerity, we are now talking about malinvestment.

      If I buy a nice big house for myself and then make my kids sleep unsheltered in the backyard, that is not austerity. And more importantly, the solution is not (as some deficit doves continually insist) buying a bigger house for them to camp outside of.

        1. Tertium Squid

          Is it? It seems to be the prevailing definition nowadays.

          “Oh, sorry about your Social Security. We decided to spend trillions recapitalizing zombie banks and now there’s nothing left for you!”

      1. Anonymous Jones

        I’m not saying that you are wrong, but it does not seem that using the term “austerity” to reflect a reduction in the rate of change (rather than a reduction in absolute levels) is completely unreasonable.

        I get your point, though.

    5. Jackrabbit

      Can we please stop labeling > $1T deficits/year as AUSTERITY?

      Yes. You’re right, it’s not austerity. ‘Social Cannibalism’ is a much more appropriate description.

    6. frobn

      Whether or not it’s austerity depends on your perception. If you are in the top 10% bracket it’s bonuses, if you are in the bottom 90 it’s austerity.

  1. Sauron

    Ah the Byzantine, desperate, imaginative measures to push that string.

    Whatever ultimately gets done, you can be sure that actually helping the vast majority of people in the economy will be the very last thing they try and then only when disaster has struck.

    Give a common man a $1000 buck stimulus and you’re creating inflation and creating moral hazard. Give banks trillions and that’s okay.

    1. Paul Richardson

      I think London was a taste, it’s not so much that the riots there were declared on a single event, but in general by the non-elite classes just not giving a darn, that in turn resulting from all of us bearing witness to the idiocy which is passing for policy these days.

      1. Sauron

        London was definitely a taste but it will have to get a lot worse, like Great Depression worse and even then I’m not optimistic unless another leader the caliber of an FDR comes along.

        The problem is achingly obvious–not enough demand because 90 of the pop is losing the class war, but the PTB scratch their heads and do more of the same.

        1. attempter

          The problem is the existence of a criminal system where we have such concepts as “consumers” and “demand” in the first place, and where we wait for a “better PTB” to come along which won’t just scratch its heads but will bring us better trickle-down.

          BTW, it doesn’t look to me like the elites are scratching their heads at all. It looks like they’re aggressively moving on every front doing exactly what they want to do, in accord with their kleptocratic aims.

    2. Linus Huber

      This is an important point you make that goes to the heart of the matter. The Western Society is based on the RULE OF LAW. The way the situation has been handled over the past few years is in clear violation of its spirit. It has been the greatest theft by transfering the losses of bad investments from the banks to the general population and it continues without end in sight.

      The bank have been given a great privilege to create money in the form of extending credit. They have plundered this privilege by making unsound decisions repeatedly and continue the abuse without the slightest remorse. Their lobbying activities supported with vast financial resources have been extremely successful in diverting the attention of the media and politics away from them and in influencing legislation in their favor. While the rest of the population gets hurt in this process, the managers of those financial institutions continue to enrich themselves despite of their repeated failure in deligence and care when evaluating credit risks. Nothing will stop them until we do take real action which does require to make them personally responsible and accountable. When their personal wellbeing is in question, and only then, will they grow up and implement the virtues of serious diligence and care.

  2. tz

    EVen with Europe in austerity mode, what they will do is tighten up more on the little people, cut benefits, and jobs, sell off crown jewels, and then give their bankers big bonuses.

    Isn’t that exactly what we did and are doing?

    Why are none of them in the bastille. They should worry that if they don’t end up in the bastille, they may end up in the guillotine.

    1. Linus Huber

      You are right. The problem is that the electorate is very slow in reacting and that the banking lobby has been extremely successful in diverting the attention away from them which is no wonder considering their great financial resources available. However, with each day passing and very slowly the populace will feel the impact and will start to understand the crime committed in form of the greatest theft by transfering enormous losses as a result of the banks’ incompetence and abuse of their money creating function from them to the public.

      The scheme will only stop, once those managers are made personally responsible for their lack of diligence and care of their very important function within the financial system.

  3. Tertium Squid

    “So QE-induced optimism goosed asset prices, like stocks and subprime debt, without doing much for the real economy.”

    How is this not in actuality part of the “inflation” that we keep hearing isn’t happening?

    And if so, I assume dramatic deflation (at least in this asset class) is a natural and desirable thing.

    1. scraping_by

      You’ve hit on an important point: there are two economies at work.

      The real economy, producing goods and services, got little or nothing of stimulus. Its members are mostly in debt and worried about tomorrow, when they’re not actually un- or under employed.

      The financial ecnomy, money shifting, crumb catching, asset speculating, fraud in all its shades and flavors, bonus inflating, and generally doing northing buy trade numbers and bits of paper. This has been hyperinflated. The stock market, gold, oil (for a time), rare minerals, etc.

      The stock market is currently going from hyperinflated to something close to realistic prices. Housing and other real estate is going from hyperinflated to affordable prices (it was hyperinflated by finance, not by real demand). It’s possible gold is going from hyperinflated to jewelry prices, though that’s not clear.

      Unlike the supply-caused hyperinflation in oil of the 1970′s, this hyperinflation is demand-caused, and his going away as the printing press closes down. Maybe for the best.

      1. Tertium Squid

        Dunno – I’d say we’re heading for a new sort of inflation, for materials that people can eat, wear, shoot, or grow food with. When the fake economy collapses, there will be trillions of dollars flushing into the real one. Should be real interesting.

        I am filling my basement with food and water.

        1. MyLessThanPrimeBeef

          They don’t teach how to hunt and gather food anymore.

          It’s too bad.

          A 12 yr old Neanderthal would know more about livng a free, independent life than us Homo Not-So-Sapiens Not-So-Sapiens.

    2. Nick

      Tertium squid, Id take inflation over deflation as of now. Deflation would cripple banks ability to loan, which in turn would hurt any business or entrepreneurs, or anybody who really needs a loan. Which would then hamstring our barely recovering economy, inflation isn’t a dirty word this time around.

  4. Sam

    The gains of the past 15 years went to the upper 1%. They don’t want regulation so they’re getting Regulation with a capital R. No one on Main St gives a crap. No one who aas lost a job to wage arbitrage gives a crap. I’d still like tho see the 20 slides title “if Glass-Steagall had been left in place.” When New York City banks are concreted over with a shroud, and when Wall Street shuts down, good riddance. Pension funds can be managed by newly minted MBAs with zero prior connection to Wall Street. As for banks, if there are no jobs in the US, there is no need for banks. I’d pick the head of the State Bank of North Dakota, as far away from NYC as possible.

  5. JB McMunn

    Spend, save, splurge, cut, inflate, deflate, it doesn’t matter. You’re swimming against an unstoppable tidal wave of de-leveraging deflation. You can try to buy time with monetary and fiscal gimmicks, but time has a funny way of costing you extra in the long run.

    All roads lead to pain. It’s unavoidable. Futzing with it just makes things worse.

    1. ScottS

      No. Government spending in a depression is not inflationary (more to the point, it balances out deflationary pressures). Sustained government spending in the real economy creates demand. After several years of steady demand, private business are confident enough to invest their capital instead of hoarding it to survive the dearth of demand.

      It’s not complicated. It’s the Great Depression all over again. So let’s build some bridges and dams.

      1. ambrit

        Dear ScottS;
        I,m with you on this. How about a levee style ‘flood control structure’ down by the Potomac Navy Yard? To keep the water in, not out.

      2. banger

        Sadly, we are in a period where rational solutions to practical problems is impossible in this country. This has nothing to do with economics or even politics–it is the cultural trend of running away from reality into all the houses of fantasy you can imagine. It will get ugly and then maybe a few people will wake up.

        The very best we can hope for is stagnation and gradual degradation of the economy–but any little shock will send it spiraling down–it’s really tragic. And there is nothing any of us can do about it other than find alternate ways to live and lay the foundation for alternate institutions.

        1. jjohannson

          This is especially true given the current campaign finance system. Political wisdom depends on either eliminating or devaluing private campaign largesse.

    2. Linus Huber

      You are correct!!!

      The only question is if we share the pain or if we let some con guys get away with theft. I am for it to share and get all con guys to live a life in poverty.

  6. Tertium Squid

    So, is:

    “Europe otherwise needs a vastly lower euro (Wolfgang Munchau has estimated .60 or .80 to the dollar) to alleviate the internal imbalances and give periphery countries a boost via increased exports.”

    code for:

    “Print Euros even faster than the US is printing their dollar.”

    ?

  7. Nectar

    Can someone please just nuke China already? Jesus that currency peg is killing the whole world.

    Why is it so hard to overcome? Since when when did some piss ant communist crap country get to dictate the ‘terms of prosperity’ for the rest of the world?

    The US and Europe crashing and burning over China?

    Jeepers!

    1. Tika

      Europe blows up its own energy supply Libya. (Spain and Italy huge cheap oil source)

      China has poured huge amount of liquidity and import massive amount of european goods. What has US done? blowing up energy source, more war cost, and speculative attack on banks?

      I think the worlds problem is very obvious …

      Europe is only few steps away from crash. (terrorist attack as retaliation to libya bombing, Russia cutting off energy supply, China cutting off liquidity and import, social unrest.)

    2. Linus Huber

      Well, that is an easy way out of one’s own responsibility. We do not have to look to China for finding our own faults.

  8. Schofield

    The new austerity looks likely to consist of the majority of the population hunting Republicans to eat.

    1. BetaSheep

      The Democrats are just as tasty and just as much part of the problem as the Republicans are.

  9. Jim Haygood

    What caught my eye today were reports that Finland, Austria and Slovenia are demanding collateral against their contributions to the already agreed-upon Greek rescue.

    Pressure for bilateral deals will turn the rescue plan into a squalid free-for-all food fight.

    Yet it’s perfectly understandable that these governments don’t want to walk the plank. Greece needs a haircut on the order of 60% or more. Signing on to this misbegotten plan means GUARANTEED LOSSES when Greece ultimately defaults or restructures, as it surely must do.

    On the other hand, I took profits on some short positions today, since the morning plunge didn’t deepen as expected. The towering run-up in gold is what makes me nervous these days — too many casual new riders casually clinging to the outside of the bus, believing that unrelenting daily gains of $20 and $30 are their birthright.

    A sub-2% yield on the 10-year T-note was also rejected, after a brief excursion to a record-low 1.97%.

    Both gold and Treasuries — the ultimate safe havens — are stupendously overextended. The sad truth is that there’s no true safe haven. At least not on this mundo bizarro!

  10. Paul Tioxon

    Yves, what about the Philly Fed Reserve report today and its affect on the market. How much of a connection is there. It is mentioned in some comments as shockingly lower, the worst in three years.

    http://blogs.reuters.com/macroscope/2011/08/18/philly-fed-the-nightmare-index/

    HERE IS AN EXCERPT FROM THE ABOVE REUTERS:

    That’s probably one of the worst misses the Reuters polling team can recall in recent memory.

    “For three out of the past four releases, the Philly Fed number has come in below even the lowest forecast from dozens of economists. But that August result is something else.

    While we’ve noted extensively how economists have been far too optimistic in their forecasts in general, perhaps now we’ll start seeing wholesale downgrades to U.S. growth forecasts.”

    1. Jim Haygood

      See the EOCI index — a weighted average of the Fed Regional Manufacturing Surveys, the Chicago Fed National Activity Index, the NFIB Small Business Survery, the Leading Economic Indicators and the STA Composite ISM index.

      http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2011/08/EOCI.png

      It shows a definitive plunge into recession, based on multiple indicators all pointing in the same direction — down.

      I’m hereby raising my recession probability estimate to 80% from 60%.

      As a corollary, the probability of the incumbent president being re-elected in 2012 is the inverse of the recession probability, or 20%.

  11. Alex R.

    You know things are bad when Naked Capitalism starts to read like Zero Hedge. (I should head over there for a read – the hysteria should be worked into a meringue-like froth by now. I hope they used the lemon flavoring – strawberry hysteria tastes like crap.)

    1. Yves Smith Post author

      We get agitated here only when it is warranted. Go look at our posts from 2007-8 v. 2009 and 2010.

      1. Anonymous Jones

        While this is true, there sure are a lot more stories at NC about the market on bad days than good days.

        Hey, not that I’m complaining, I think the market has reached fair value only a few times since 1996 (at the spike troughs).

        But we should probably acknowledge that our focus on down days is probably because of our pre-existing belief on fair value. This only seems reasonable. It’s not really that different from the glee of the cheerleaders on the shoot-the-moon up days. I guess it’d be different if we could ever be proven right. Sadly, there are no controls in this test. As I like to say, life ain’t a monte carlo experiment; it’s a one shot deal.

        1. Yves Smith Post author

          What do you mean? We were bullish on Treasuries at the time of the S&P downgrade :-)

          I have come to the same conclusion as my buddy Amar Bhide: stocks should not be traded publicly on an anonymous, arm’s length basis. Equities are a very ambiguous promise: you get dividends when the company makes money if management also feels like paying them, and you have a vote which doesn’t mean much and they also can dilute when they feel like it.

          Now I cannot get rid of publicly traded equities, just as I cannot get rid of malaria, but I certainly don’t want to encourage them by cheerleading.

          And there are so many market touts, you really don’t need me to add to the chorus.

  12. oracle

    Only increased consumer demand will prevent a decade or more of stagnation/stagflation. An HOLC to refinance mortgages (at CURRENT valuations); redistribution of wealth to those with a higher marginal propensity to consume. Anyone who got a B in a competent freshman economics course (an oxymoron at all but a few U.S. colleges of course)can comprehend this. Its all about hegemonic economic ideology and brute political power. Our financial elites have too much political power.

    1. Linus Huber

      You are correct!!

      The only way to correct this will be via ballot box (maybe some unrest will accompany this). Unfortunately it takes a very long time until the electorate understands the crime committed and until those who were given the privilege to create money in form of extending credit are made accountable for their failure while enriching themselves in the process.

  13. jake chase

    All you guys predicting the end of the world should remember that for every seller of those tumbling shares there has been a buyer. Volume is suspiciously low. This looks like a classic shake-out. I have no idea where the liquidity for zombie preservation will come from, but you can be sure it’s coming. We have zombies called banks, Europe has zombies called member states. If the Eurofascists can’t enforce austerity their next move will be extend and pretend. The alternative is simply chaos. Who says Bernanke can’t use the primary dealers to buy Italian debt? They buy every other kind of worthless drek with Fed electronic money. When it comes to saving the finance elite there aren’t any rules.

    1. compass rose

      So you’re saying that if you and I stand in a room and hand a time bomb back and forth, that’s a sustainable economy?

  14. DJ

    “They” will never allow true deflation to happen. They never have. Why should this time be any different?

    I get ill when I see candy bars selling for $1 now. They were 10 cents each (and bigger) when I was a kid.

  15. Jackrabbit

    Great Summary Yves. But what about the hopium headfakes that we keep getting from economists and others?

    What has been done to address fundamental problems in the last year? Why the complacency? Is there no strategy except to manage our transition to a lower standard of living?

    1. primefool

      Yep – there is no “strategy” coming from our “leaders”. None. Only tactics to get enough bernanke bucks to buy a comfortable house and pay for food . That is a major challenge and requires a lot of devious behavior.

    2. primefool

      They” have no ability to control economics. The only thing the People should demand is that a system of laws ibe established and enforced. That would be a big step forward from bananarepublichood.

      1. Linus Huber

        Very correct. The spirit of the RULE OF LAW is the basis of the capitalistic system and has been violated repeatedly over the past years without end in sight for the purpose to sustain the same crew at the helm excerting more undeserved benefits at the cost of the general populace.

  16. primefool

    Sooo- we have allowed academic economists free rein over our affairs for several decades. Even aborginal tribesmen get rid of the village witch-doctor if he has killed off all his patients for more than an entire generation. OK maybe the fathers get too set in their ways to do anything about what they view as the “normal” state of affairs. But the sons and daughters – well if they had any Darwinian aspirations – would question the state of affairs.

    1. Sauron

      The problem isn’t so much the control of academic economics per se, it’s the corruption of academic economics. Take a look at Inside Job. Economists on the whole are theorists to power–the conclusions are predetermined by non-economists, the economist’s role is to rationize those conclusions.

  17. Jim Haygood

    More harsh deflation:

    The Port Authority of New York and New Jersey plans to consider a revised and less dramatic slate of toll and fare increases on Friday that would raise E-ZPass tolls on the major Hudson River crossings this fall by $1.50, to $9.50 a ride, at peak hours, according to a person briefed on the final proposal.

    The toll, which applies to the George Washington Bridge, the Holland and Lincoln Tunnels, and three other spans to Staten Island, would then rise by another 75 cents a year through 2015. The cash toll would be raised by $4 in September, to $12 a ride, according to the person, who requested anonymity because the plan was not yet intended to be made public.

    http://cityroom.blogs.nytimes.com/2011/08/18/port-authority-proposes-less-drastic-toll-increase/?hp

    This really should be attacked as an unconstitutional interference with interstate commerce by the Enemies of the People.

    1. KnotRP

      That actually is deflationary (I don’t know if that comment was snark or not) because increased fees to get to work will cut marginal discretionary items from main street spending, so net employment will go down. Same amount of money, but fewer goods consumed (i.e. dropping ability to consume, which economists often mislabel as dropping demand).

      Economic asphyxiation by rent seekers == deflation

  18. primefool

    I dont know about you – but I am well into the middle game and down a rook and two pawns what I do is – let my big shaggy dog in so he can upset the chessboard, climb all over my opponent and generally “reset” things. Oh – well – want to start a fresh game?

    1. compass rose

      fool, did you ever play Monopoly as a kid? I didn’t like the game, but I knew a kid who did and always wanted to play, so I would occasionally. I liked geeky pursuits better (science and technology), and Risk and Battleship, sometimes Stratego, and usually word/language games. I found Monopoly boring. It was like religion: always the same outcome. Guess I’m not much on fixed eschatologies or being the only one to get to heaven.

      This kid only ever wanted to play Monopoly, and he ALWAYS won. The rest of us didn’t care that he won, and didn’t care enough about losing. We usually went off and played the other stuff. The thing was, toward the end of the game, where he’d own everything and have all the money, he wouldn’t want to stop playing. He’d do things like create a distraction and move game pieces or shove money at other players. He’d change the rules so the game would continue.

      We’d point out that all he had to do was win, and we could start over. But he didn’t want to give up his having the most money, houses, etc. He didn’t want to be back at square one with the rest of us. At least I think that was it. He knew he would win. He knew that although in a gross sense he lost more, in a net sense, he’d always come out on top. But he was more anxious about the short time between winning, starting a new game, and embarking on winning yet again, than any of us were about anything related to the game.

      I have thought of him a lot in the past three years. And through whole PlayMoney souffle called The Economy these past 30 years.

  19. Nick

    Let’s hope Ben bernanke has the minerals to do something about stimulus, deflation is spelled D-E-A-T-H when it comes to recoveries in fragile economies like the U.S.’s as of late.

  20. Ron

    over leveraged interconnected markets look good on the way up but sooner or later margin calls caused by events in another suddenly create liquidity issues throughout the system. Magical thinking has dominated American financial thinking a dose of reality now and then can’t be all bad.

  21. Dirk van Dijk

    Bring down the trade deficit and the unemployment rate will follow. Bring down the unemployment rate and the budget deficit will follow.

    Things don’t work in reverse, bringing down the deficit first, buy raising taxes OR by cutting spending will increas the unemployment rate. A very high uneployment rate however, might just hepl bring down the trade deficit, but it would have to be very high indeed, as 9% plus does not seem to be doing the trick.

    To bring down the TD, rapidly shifting to Natural Gas as a trasportation fuel would be a very good start. More than half of the TD is oil. A tariff on imported oil would also be somethign to consider on a number of levels, perhaps with exceptions for NAFTA countries. However bringing down the other half of the tD will need a weaker $. Unfortunately Europe, particularly Club Med also needs a weak Euro. Hard to get confident in the Euro whenit might not even exist in a few years. Can’t see the Europe wide economic government thing ever working. Here people tend to think of themselves as Americans first, and New Yorkers or Virginians second (ok Texans are an exception). Not true on the other side of the pond. They are French or German or Dutch before they are Europeans. Core countries are in no mood to become the equivelent of CT and NJ paying out massively more in Fed taxes than the states get. Club Med will see it as 1942 all over again, with wing tips rather than jackboots. Just not going to happen.

    1. Nick

      High unemployment doesn’t work to level out trade deficit when the imbalance is that you’re importing too much, and countries are still pouring capital Into your economy thinking you’ll get back on your feet eventually. High unemployment is the last thing our economy needs right now.

      1. Dirk van Dijk

        I was NOT suggesting that we increase UE to bring down the trade deficit, just that if UE got high enough people would get so poor that they would not be importing things. If you cant afford to fill the gas tank, you dont drive. If you have no money at all, you wear the clothers in your closet, or maybe go to Goodwill rather than buy new clothes made in China or Indonesia at WMT. Clearly 9% is not high enough to do it, 25% U-3 might. That is a cure that is worse than the disease by far.
        I was suggesting that the focus on the near term Budget deficit is totally misplaced and putting the cart in front of the horse.

  22. Psychoanalystus

    Oh, I’m so sorry to hear that Mr. Market had another really bad day… breaks my heart… not!

    Don’t mean to rub it in, but Mr. Gold made me enough today to cover a little trip Down Under to scope me out some nice ocean-front property.

    I just love this “recession” thing, or whatever they call it…lol

    1. Mikhail Kropotkin

      Mr. Market did not have a bad day. The recent lift is what is officially called:

      A DEAD CAT BOUNCE

  23. Francois T

    “The US program of using monetary stimulus as a fix…”

    Yves,
    The fix was for those with (plenty of) assets, not us, the unwashed masses.

    1. Linus Huber

      Of course not! Do you really think someone in the circles of Washington or Wall Street gives a whatever about your wellbeing? It is all about themselves except during campaigns they will pretend to care about you. Do not let them fool you next time at elections.

  24. jim

    there truly has not been a recovery…..a weak dollar has boosted corporate revenues …..47 million on food stamps…….80 million baby boomers ready to retire…….banks cannot take back the homes because they do not want to take the losses……its a tough game out there,,,,but there is great volatility for trading….

    http://www.floridadaytrading.com is an interesting sight

    1. Francois T

      “banks cannot take back the homes because they do not want to take the losses”

      Hmmm! How about “banks won’t take back the homes because they were not forced yet to make amends for their systemic control fraud machinations”.?

      1. Linus Huber

        The only way to stop this game is to make those bankers accountable with their personal wellbeing. Nothing else will do.

  25. Hugh

    This is bear market volatility. The big shocks are yet to come. It’s funny in this environment the excuses that are used to justify the changes in direction in the markets. One day it’s Europe but Europe has been with us for a year. Then the next day the market reverses. Did Europe suddenly disappear or fix itself? No.

    This is not to say that there aren’t big crises and bad fundamentals out there, but it is important to remember that the markets are rigged. What we are seeing is a show among kleptocrats. Yes, the 401Ks of ordinary Americans are getting hammered but they small potatoes in these markets. The kleptocrats are jittery. They smell a crash. The big and not so big players are ready to head for the exits at the slightest provocation. It’s a stupid situation because only the big players will make it out in time. The smaller players only dream they will get out. If they aren’t out by now, in the event of a crash, they are dead already and just don’t know it. For the big players, a crash is not a calamity but an opportunity. The overall market cap may be less but they will own a bigger chunk of it and their wealth relative to everyone else will increase.

    As always, it is all about the looting. The markets are not going to learn humility and wisdom. Obama is not going to see the light. Democrats and Republicans are not going to give up their kabuki fights. That’s true here. It’s equally true for the kleptocracies of Europe and China. Don’t mistake the atmospherics for reality.

  26. Francois T

    The actual market gyrations as well as the financial bullshit that is paralyzing our economies is only a harbinger of things to come if we don’t force a real redistribution of pain toward those who can most afford it.

    For your consideration:

    A Society on the Verge of a Meltdown
    http://www.spiegel.de/international/zeitgeist/0,1518,780991,00.html

    6 all time highs and NO lows observed this year; chances are we ain’t talking about the stock market now, do we? http://t.co/0rSCipx Think food prices, riots, and enhanced instability. US military thinkers are worried, and so should we.

    Nouriel on Al Jazeera Opinion section: “Is capitalism doomed?” http://t.co/Ns2s2b9 It’ll be interesting to watch if Chris Whalen starts to hyperventilate on that one, like he did on the Marx reference in the WSJ. (LOL!!!)

    Last but not least, and as an encore, Rosie a.k.a. The Master on the double-dip recession/depression coming soon.
    http://www.zerohedge.com/news/david-rosenbergs-12-bullet-points-confirming-double-dip-here

    1. MichaelC

      I’ll suggest, on a more sober note(vs ZH ) that Buffet’s signal to his pals that game’s over, is THE game changer.

      IMHO his appeal was meant to signal to the D+R loon’s, that they’ve gone too far and they need to call off their dogs if they want to safegaurd their legacies.

      (Perry and Bachman were fun, but only in a a less treacherouss time. That time has passed, more quickly than anticipated, but… they’re not useful any more..

      The oligarchs have overplayed their hand, events have overtaken them, yet O is still preferable to a R resurgance to most voters (and plutocrats) for the nezt 4 years at least, despite O’s current ratings. We’ve held our noses before.

      For the rest of us, we have Taibbi, and YS, to keep loudly shouting BS no matter who wins.

      1. Fraud Guy

        Buffet has been sending that signal for years, but the pitcher keeps waving him off. At some point, he’s going to tell the batter what is coming next and ask him to hit it out of the park, but gently.

  27. Mike c

    I case anyone hasn’t noticed…

    ….western economies cannot sustain their current debt levels and so austerity is a must.

    1. gs_runsthiscountry

      Me too! I am all for austarity – let the restructuring and write-downs of faux balance sheets begin!

    2. reslez

      It’s a dreamland where debt levels are ordained by God and can never be changed. Debt is not the law of gravity. Debt is a human creation. It can be written down or wiped clean whenever necessary. This has been the historical practice since the dawn of civilization.

      Your austerity is the tool of moneyed creditors intent on extracting every last molecule of hemoglobin from a lake of liquid magma. They’ll keep sucking and sucking until their faces melt away. And we wouldn’t want that to happen, would we?

    3. compass rose

      Hail austerity!

      From henceforth until combine ceases hitting serial mounds of manure, 90% gains taxes on all investment products held less than six months. 90% tax on all wealth over $50 million. Repatriation of offshore profits, snugged up into a First National Bank of the Infrastructure, lending domestically at 2% and to offshore companies (like the Chinese engineers building the new SF Bay Bridge) at 12%. Tax base shifts to waste, not work–to pollution, to shorting, to luxe, scamming, and gambling. Zero taxes on earned income below median + one standard deviation. Eminent Domain of broadcast spectrum, repatriated to American people and rented to corporations as pubic asset. Creation of national scrip to do the jobs that global fiat currency cannot. Debt jubilee every 7 years.

      Let the austerity begin among the plutocrats.

      Also: anybody who burns down their neighbors’ houses or places of business/worship or means of transit gets a one-way ticket to Somalia.

      Those who target plutocrats get a cookie.

  28. Crazy Horse

    So how about if we start over again? Other societies have done it and we can too. Declare all dollars worthless overnight– let’s have a real default! Close all 1200 overseas military outposts and bring the imperial army home. Print enough Freedom Chips to distribute 50,000 of them equally to every man, woman, child, — even Lloyd Blankfein. Shutter all banks and restart with state banks on the North Dakota model. Confiscate all titles to the entire housing stock and have everybody rent to own at a nominal rate— about the current level of property taxes. One 3,000 sq ft maximum home per family, partition all the remaining trophy houses into apartments. No more homeless ex-middle class moms living with their families in their SUV’s, no more banksters getting rich from mortgage Ponzi schemes, and even Bill Gates might have to downsize to live within the product of his 50,000FC capital. No more problems with effective demand, because everybody would be equally rich and in need of spending for necessities. Might even take a full generation for a new ruling class to emerge.

    It would be a bit disruptive for a while until things sort themselves out and the 40% who used to work in the financial sector find useful work as janitors, fruit pickers, other occupations suited to their actual skills, but it sure would be interesting to watch.

    1. compass rose

      Well, Angelo Mozilo effectively did your housing thing around here. “Fog a mirror, get a house!”

      These properties were solid white collar working class modest houses on small acreage.

      They are now inhabited by people whose idea of caring for a house is shoving the booze bottles and works further under the porch. The houses are crumbling, the gardens overgrown and untended, while Bumpus Hounds meander and lick their junk between spates of fulminating at neighbors. Meanwhile, these meth-and-crack-addled carbon units spend all their time trying to figure out their next score. A drug deal? A lawsuit? A robbery?

      The new urban underclass has arrived, in all its designer clothes wrapped glory, and they are running down property values even faster than the housing market. Going from one debt instrument to the next, and even defaulting, they are effectively a protected class–destroying everything the rest of us worked to create over ten to thirty years with our homes.

      Being given a house doesn’t magically turn people into something other than what they are. That’s the nuts and balls of the problem. Those who know how to create modest prosperity, strong communities and families, safe neighborhoods, good relationships, economic sustainability, and environmental healthfulness are not the ones the present incentive system rewards. Rewards are reserved for slackers, scammers, sociopaths, and anybody who has a profitable gripe.

  29. Matt

    Been finding new for sale signs on real estate, bi-weekly lowering of asking prices and then finding zillow.com and others are flagging late payment houses as well.

    I suspect this trend after the debt limit debacle is affecting both the stock market and real estate.

  30. zephyrum

    The wife and I have worked hard for decades, saved some money, stayed prudent, and been shafted. So to those people who rang me up last week to boast of buying the dip: Neener, Neener, Neener.

    (Childish? Yes. Also cathartic.)

  31. Jeff

    Here’s a great idea to truly stimulate the economy:

    “Politicos across the spectrum and cargo-cult Keynesians are constantly bleating about “creating jobs.” You really want to create jobs instead of just helplessly wringing your soft little hands? Here’s how:

    1. The only engine for jobs is small business, so quit pandering to global corporations and start pandering to the people who might actually hire someone in America. The back-of-the-envelope number bandied about is that small business creates about 60% of the new jobs in the U.S. I suspect that’s a number from a decade or two ago; in the real world of the present, it’s more like 90%.

    As noted here many times before, Global Corporate America is a profit machine with no loyalty to the nation or its workforce. It only has one prime directive: deploy capital and labor wherever it reaps the most profit and the quickest return. That’s it. Everything else is political propaganda and PR.

    This is not a judgment, it is a statement of fact. As capital is allowed to flow freely, then it seeks the highest return and the lowest labor costs. Once global supply chains are in place, then that place is rarely America.

    Why? Because the U.S. economy has a high cost structure for small business that’s getting higher while yielding diminishing returns. Rents are high, thanks to the real estate bubble, taxes for small business are high, healthcare costs are double that of our developed-world competitors–the list goes on. America is not an efficient place to do business; you pay high costs and taxes (if you’re a small business or self-employed), and don’t get much in return….”

    It’s long and has a sequel, view it here:

    http://www.oftwominds.com/blogaug11/how-to-create-jobs-8-11.html

  32. frank

    A very good analysis of the Greek vs. the Argentine default is laid out below.

    http://www.voxeu.org/index.php?q=node/6877

    It is inevitable that the Greeks leave the EU. This gives one a historic precedent on a dual currency.

    The European banking crisis will dictacte all markets until it is resolved. Austerity creates recessions and hence lower stock market valuations.

    We are all in for some tough sleding.

  33. UnreasonableResponse

    If you really wanted to support the asset prices and stuff, there was much easier way to do it than TARPS and the like.

    Instead of shoveling the money directly into banks (and various others) balance sheets, give it to families (rich and poor – there’s many more not-rich ones, so not excluding those doesn’t make much difference) as an interest-free loan. Put a condition that the whole loan has to be used to pay down debts first – anything left over (if at all) can be spent.

    So the money will flow to banks balance sheets (and more so to those that lent money to real economy than playing silly games), govt spent te same money, but people on the street are better off as well.

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