naked capitalism

I’ve been watching and reading about events in Georgia and Ossetia with some interest.

I didn’t post over the weekend because there really didn’t seem much left to say. Earnings season is tapering off with no real shocks, just a bunch of financial write-downs and a sense of general foreboding in all but the export sectors. Macro seems to have found a level for the time being, with the pressure on oil and the USD coming off until the next big insolvency news or people work out that enough economic weakness to lower the oil price is not necessarily a good thing. Always lots of geeky tech news, but little to affect markets generally. Everybody seems to be happy just watching the Olympics.

Then, almost perfectly timed for the opening ceremony a simplistic attempt at a land-grab by a minor but geographically pivotal demagogue in the Caucasus. No big deal really; didn’t work, hard to see how it ever could have. By the way, it’s this sort of thing that has me wanting to be long the upper tail on the oil price probability distribution.

Here’s a map, if you want to follow along.

At heart this is about a US proxy overstepping, and Russia re-asserting its interests in its near abroad – sort of a Caucasian Monroe doctrine – but over the past few days this has morphed into a much wider lesson in the power of PR spin and the US campaign which does invite some comment as an example of how the US public is consistently fed bad information about the world outside. This morning I was stunned to read DeLong, an erstwhile member of the reality-based-community, grabbing the spin hook, line and sinker.

The first place I go for breaking geo-political news (that consistently turns out to be accurate) is Bernhard at MoonOfAlabama, who does his usual yeoman’s job of objectively (yes, there is such a thing) tracking in real time both the conflict itself and the meta-conflict about why it occurred and who will be blamed.

• Saakashvili Wants War – He Will Get It
• The South Ossetian War
• Endgame Plans for South Ossetia
• Wrap Up – For Now
• Sack Saak

Despite yesterday’s announced ceasefire, the government of Georgia today launched an all out military attack on the breakaway South Ossetia region in northern Georgia… There are multiple reasons for this conflict. South Ossetia declared itself independent in the early 1990s. Ossetians are a distinct ethnic group with some 60,000 living in South Ossetia and some 500,000 living in North Ossetia which is a part of Russia. Most people in South Ossetia have a Russian passport and there are UN mandated Russian peacekeepers there… In the bigger picture Georgia is supported by ‘the west’ as part of an energy transport corridor from the Caspian to the Black Sea.

I honestly don’t think I can improve on “B”s reporting, so if you are interested there it is. If the ‘only the facts’ style can’t hold your interest, Gary Brecher at The War Nerd will has a more irreverant take:

There are three basic facts to keep in mind about the smokin’ little war in Ossetia:

• 1. The Georgians started it.
• 2. They lost.
• 3. What a beautiful little war!

Most likely the Georgians just thought the Russians wouldn’t react. They were doing something they learned from Bush and Cheney: sticking to best-case scenarios, positive thinking. The Georgian plan was classic shock’n’awe with no hard, grown-up thinking about the long term. Their shiny new army would go in, zap the South Ossetians while they were on a peace hangover (the worst kind), and then… uh, they’d be welcomed as liberators? Sure, just like we were in Iraq. Man, you pay a price for believing in Bush. The Georgians did. They thought he’d help.

While I cannot sympathise with his voyeuristic delight in the conflict itself, his analysis, as usual, is very good and owes nothing to administration “access”. The links between the aggressor and McCain’s campaign are also revealing in retrospect.

McCain’s top foreign policy advisor, neocon Randy Scheunemann, has a long financial relationship with Saakashvili to lobby his interests in the United States…

Scheunemann… also worked for recently-disgraced Bush fundraiser Stephen Payne, lobbying for his Caspian Alliance oil business. The Caspian oil pipeline runs through Georgia, the main reason that country has tugged the heartstrings of neocons and oil plutocrats for at least a decade or more.

What has been really amusing to me is the spin. Initially, multiple reputable news sources on the scene report that Georgia launched an unprovoked attack on the civilians of Ossetia and Russia responded as they were in fact bound to do by their UN-mandated peacekeeping obligations. Russia also immediately called a UN Security Council session where they tabled a resolution – which was blocked by the US and UK because it called for both sides “to renounce the use of force”. It reminds me of Lebanon – “Lord, give me peace; but not yet.”

Next, there is a (pre-arranged) press conference with the Georgian Prime Minister Lado Gurgenidze and clients of J.P. Morgan laying out talking points for the US media, and we are all told that Russia engineered the (Georgian?) attack as a pretext for occupying Georgia and overthrowing the government. From Ames:

The reason Lado did this is because he knew the enormous PR value that Georgia would gain by going to the money people and analysts, particularly since Georgia is clearly the aggressor this time… Lado is a former banker himself, so he knew that by framing the conflict for the most influential bankers and analysts in New York, that these power bankers would then write up reports and go on CNBC and argue Lado Gurgenidze’s talking points. It was brilliant, and now you’re starting to see the American media shift its coverage from calling it Georgia invading Ossetian territory, to the new spin, that it’s Russian imperial aggression against tiny little Georgia.”

I’d like to believe that the US public would be proof against this kind of manipulation, but I know otherwise. I actually laughed out loud this morning as the NZ national radio broadcast headlines that contradicted the previous day’s, and then went on to interview reporters on the scene who proceeded to contradict the new headlines. Whoops.

So we have a trumped up conflict with Russia, which Russia is bound to win, at the probable cost of their gaining de-facto control of an important pipeline through Georgia which ultimately supplies Europe. Why would anyone do this? Is there anything special about this fall in the USA? Oh, yeah. The elections. 

This will be yet another litmus test for the candidates. Will they parrot the official spin or believe their lying eyes? Unless the US public calls bullshit, or the MSM decides their readers would rather be uncomfortably informed than patriotically mislead, both candidates will have to adopt an increasingly strident, completely non-sensical, foreign policy position in order to prove their ‘commie-fighting’ credentials.

We’re all neo-cons now.

(If you don’t like this post don’t blame Yves, blame Paul Davis at Technology Investment Dot Info.)

I’m talking platform leverage – the sort of leverage you can get in a proxy battle by putting a page like this in front of millions of people, many of whom may in fact own your stock, the week before the meeting, for free:

Or, the leverage in media you can get by interjecting a few weeks before a major global sporting event a “feature” that redirects searches related to that event to content within your own pages (from TechCrunch):

In preparation for the start of the summer Olympics on August 8, Yahoo has added Olympic-themed Shortcuts to its search results. Yahoo Shortcuts serve up contextually relevant content from various Yahoo properties inline within the search results. Now, whenever somebody searches for Olympic results, news, or athletes, different Shortcut widgets will pop up.

Something like this:

or this:

Not that Google won’t do the same.

MSNBC has already done a deal to display Olympic video online in a format that is only supported on the Windows Media Centre.

In this insidious arms race the browser (or browsing enabled OS) is the ultimate high ground. Search captures about 50% of internet users each day, but everyone uses a browser. Sneaking in the door as a general purpose tool or service, pretty soon they can begin dictating what you may or may not do or see. Why shouldn’t Firefox (or Microsoft, or Apple) release a plug-in or widget this week which will dynamically update the medal counts and serve athlete profiles (and why not video) from some OTHER source which pays them money to do so. Then you won’t even need to use a search engine…

I still remember the sense of outrage when Yahoo first began selling the top positions in search results to the highest bidder… it made it that much easier to jump ship when an alternative came along.

(Oh, yes. This post brought to you by Paul Davis at Technology Investment Dot Info.)

Krugman doesn’t think inflation expectations will lead to wage growth:

… inflation is well under control: wages aren’t taking off, the labor market is weak, and once oil and food price spikes end we’ll be, if anything, in a deflationary environment… I don’t think there’s any fundamental inflation problem, just a one-time hit on food and energy.

and posts the following chart on correlations to show that it really is different this time:

Menzie Chin on EconBrowser has a very interesting chart which may explain why it doesn’t feel as if inflation is contained, and asks “Is the GDP deflator plausible?”

Four quarter inflation rate for GDP deflator (blue) and gross domestic purchases (red), calculated as 4 quarter log difference. NBER-defined recession dates shaded gray. Source: BEA GDP release of 31 July 2008, and author’s calclulations. Figure 1 highlights how the inflation rate for what we buy has accelerated over rates for what we make.

The way I read this is that the purchase deflator is consistently running ahead of the production deflator, except for a brief period in the 2001/2 slump, and since mid-07 they have completely diverged. The other term for a price change which deflates what you export/sell and inflates what you import/buy is a terms of trade shock. I suspect that the US middle class is experiencing just that on a personal level.

UPDATE:

James Hamilton at EconBrowser further explains the difference between “inflation” – which only describes what is produced locally – and let’s call it “purchasing power” – which includes the imported things I also buy – in a way that even I can understand it, ie. with coconuts and oil.

In 2007, Islandia produced 500 coconuts, which residents sold to themselves for $1 each, and imported 1 barrel of oil, which cost $100… Nominal GDP in Islandia for 2007 was $500. If you wanted to describe that in real terms, you’d call it 500 coconuts. You don’t count the oil in either nominal or real GDP because Islandia didn’t produce any oil… 

Here are the numbers for 2008. We grew 510 coconuts, sold them for $1.01 each, and still imported 1 barrel of oil, paying $125 for it. So nominal GDP was $515.10 (a 3% increase) and real GDP was 510 coconuts (a 2% increase). The change in the implicit GDP deflator would be the change in the ratio of nominal GDP to real GDP, namely, +1%… 

But wait a minute, Islandia’s pundits decry. How can your crummy accounting claim that inflation was only 1%? Last year we bought 500 coconuts and 1 barrel of oil for $600, but this year if we tried to buy the same thing it would cost us $630. The inflation rate, they tell you, is obviously 5%, not 1%.

Now I understand. But since I buy at least some imports every year my purchasing power is not even meant to be described by the “inflation” number. So TIPS aren’t really going to do me any good are they. What I need is a “purchasing power” protected bond. Likewise, if I want to know if my wealth is growing in “real” terms it does me no good to compare it to inflation – a production basket which only includes part of what I need to buy.

Brad Setser thinks that China is again holding the RMB down to maintain export volume in the face of softening global demand. From the comments (my emphasis):

China prefers subsidizing US consumption of Chinese goods to subsidizing Chinese consumption of Chinese goods… if China’s foreign asset accumulation continues at $800b a year, it will add $3.2 trillion to its foreign portfolio over the next four years — more than it added in the preceding twenty…

Bloomberg also points out that by dodging the debt bubble bullet China’s banks have drifted to the top of the market cap tables as well as providing some of the only investment gains for their competitors:

Chinese banks hold three of top six spots among the world’s largest financial companies based on market value… The Chinese banks owe their rankings in part to having avoided almost all of the $480 billion in writedowns and credit- market losses that have sent bank stocks tumbling worldwide… Only two years ago, the world’s biggest banks were led by Citigroup Inc. and Bank of America Corp. of the U.S. and UBS AG in Europe… ICBC’s unaudited figures… show first-half profit rose more than 50 percent… Beijing-based China Citic Bank Co. said earnings jumped more than 150 percent in the same period. China Construction Bank followed, saying net income may have advanced more than 50 percent… Chinese funds and companies spent $19.3 billion buying stakes in Blackstone Group LP, Morgan Stanley, Barclays Plc, Fortis and Johannesburg-based Standard Bank Group Ltd. since May 2007 that are now worth $7 billion less on paper… China Investment Corp.’s $5 billion purchase of a 9 percent stake in New York-based Morgan Stanley, the second-biggest U.S. securities firm… has declined 18 percent… The $200 billion sovereign wealth fund also invested $3 billion in shares of New York-based Blackstone, manager of the world’s largest buyout fund, only to see their value decline 41 percent… By contrast, foreign banks’ investments in Chinese financial firms have fared much better, showing $50 billion of paper profits… HSBC is sitting on a $16 billion gain… Bank of America, which bought 9 percent of China Construction Bank for $3 billion in 2005, has a $14 billion paper profit…

And, for those many investors bullish on both oil and the RMB, has the FT got a deal for you:

Shareholders in Petrochina have approved a plan for China’s largest corporate bond sale by a listed company… up to Rmb60bn ($8.77bn) through one or more tranches of bonds with maturities of up to 15 years… In the first half of this year, 21 listed Chinese companies issued a combined Rmb74.5bn of domestic bonds. While tiny compared with more developed economies, this amount was 6.35 times larger than the corresponding period last year…

The moment of truth for the un-coupling thesis is at hand; as pretty much everyone agrees (which is a sign for extreme caution) that there will be a post-olympic slump in China. In order to beat the rush, the IHT has already come out with their announcement: “China’s post-Olympics economic slowdown has started before the Games have even begun.”

New orders at Chinese factories plunged last month. Exports are barely growing, after adjusting for inflation and currency fluctuations. The real estate market is weakening, with apartment prices sinking in southeastern China… Any slowing of growth, which has been spurred in part by China’s herculean investment program to showcase the Olympic Games that open this week, could prove a shock to Chinese workers who have been receiving double-digit pay increases each year… any significant slowing below its recent pace of 11 percent or more a year would also make it much harder to find jobs for the millions of people moving from rural areas to cities each year in search of work. Economists have been forecasting growth of 9 percent to 10 percent over the coming year, and these estimates are being ratcheted downward.

I’m pretty sure this is just MSM type spin and speculation – no sources, no hard data. Rodger Baker at Stratfor is also concerned at the difficulty business VIP’s are having getting visas for the Olympics, and reads into this a wider post-Olympic crisis lurking:

China’s rapid and contradictory economic and security policies, rising social tensions, and seemingly counterproductive visa regulations appear to be signs of a government in crisis. They are the reactionary policies of a central leadership trying to preserve its authority, stabilize social stability and postpone an economic crisis. At the same time, we see signs that the local governments, and even organs of the central government, are putting up steady resistance to the announcements coming from Beijing… It may be that the contradictory policies Beijing is tossing around these days will simply fade away after September and things will get back to “normal.” But already, Chinese officials are downplaying the previously hyped political and economic benefits of the Olympic games. They are now warning that economic conditions may not be so strong in the future, and at least internally discussing the distinct possibility that at least certain regions of China are facing the same economic crises faced by their mentors Japan, South Korea and the Asian tigers.

A few more specific items which may argue against the post-olympic slump thesis:

China’s tax revenues rose 30.5% in the first six months of the year. The country collected about $472 billion on a surge that reflected corporate profits in 2007. Almost half of the tax revenue came from value-added, consumption and turnover taxes, which rose 22.4 percent, 18.5 percent and 25.7 percent, respectively. Import tariffs showed the fastest growth, rising 34.9 percent to 395.6 billion yuan, followed by stamp tax on securities trading, which rose 34.2 percent to 83.7 billion yuan.

China’s booming Internet population has surpassed the United States to become the world’s biggest, with 253 million people online… a 56 percent increase from a year ago… The United States had an estimated 223.1 million Internet users… Total revenues for China’s Internet companies soared to 40.5 billion yuan ($5.9 billion) in 2007, up 48.6 percent from the previous year… revenues should keep growing at an annual rate of at least 30 percent in coming years, reaching 137.5 billion yuan by 2010… By contrast, U.S. online advertising revenues alone in 2007 were $21.2 billion (145.2 billion yuan)… China’s online population should keep growing by 18 percent annually, reaching 490 million by 2012…

A survey of 3,591 US companies with annual revenues of $25 million or above ranked China as the most favourable location for offshore investment… India was second with 45.1 percent, followed by Mexico with 30.1 percent, the United Kingdom with 25.4 percent and Canada with 22 percent.

(Posted by Paul from Technology Investment Dot Info)

Ok. Oil. Exxon Mobil reported a second-quarter profit of nearly $12 billion — a number that works out (as many did) to about $39 for every man, woman and child in America; $90,000 a minute etc.

Mark Thoma has a think about the future price of gasoline for us. The punch line:

If past global expansions are a guide, global demand will recede only gradually. This is a direct implication of the model underlying this analysis. This suggests that US gasoline prices will remain high for the time being. Barring a major economic collapse in emerging Asia, prices will stabilise only as the world economy learns to economise on the use of oil and gasoline and as the supply of crude oil expands. Both corrective forces will take time to gain momentum.

As an investor however I believe that there is a definite skew in the probability distribution. Who ever heard of an extra 5 million barrels per day unexpectedly hitting the market? Yet, there is a distinct possibility of that much being unexpectedly withdrawn. Better to own the upper tail than the lower.

Brad Setser revisits the Gulf-inflation story — single digit interest rates, double digit inflation.

I’d like to see more game theory applied to the oil price analysis. If they did peg their currencies to price, the Gulf could be the world’s ultimate monetary authority. They can open the spigots whenever world growth flags below a targeted rate, and pull back when things are running a little hot… I’d rather own a currency based on oil than one based on gold.

Alternatively, they could pull back whenever there is talk of carbon caps, open up when it looks like alternative energy is getting too much interest and investment…

If I were advising them, here’s my spin: Gulf states announce that they are voluntarily limiting the production and export of petroleum in order to contain global warming; and coincidentally conserving global oil resources for future generations… Home run.

When people ask what I do for a living I tell them I do wealth preservation. If they ask how I do that, I say I do three things:

1. read the direction of inevitable changes in the world,
2. discover and value investment possibilities in the context of those changes, and
3. allocate risk capital among those possibilities.

Part of what I therefore do from day to day is to cover the intersection of technology, economics and finance; and I publish most of the general interest content to my blog as a sort of public filing cabinet that I can search for myself as well as refer people to. While Yves’ blog is not concerned with technology per se, and much of what I post is industry specific, I thought I’d cross post a brief selection of recent technology news items which I think do have wider economic implications…

I’m becoming increasingly aware of the tightening feedback loop between companies, press and blogs. One recent example was the Lehmans R3 shenanigans, which was (for me) first mooted on Naked Capitalism but is now the background for reporting from the FT, Bloomberg and Reuters. With Merrills it was less than a week between the official window-dressing (w/placement), the debunking online, and the press taking it mainstream. Apparently, blogs are the new “exchange”, and the SEC is about to make that official.

For several years, Sun CEO, Jonathan Schwartz has lobbied the SEC to allow disclosure of financial information through corporate blogs. In a landmark announcement, it seems that Mr. Schwartz may indeed get his wish, and with it, a historical decision that could break the age-old shackles that bound businesses to traditional media and distribution channels in order to satisfy full disclosure…

SEC special counsel Kim McManus outlined new guidance the SEC is about to give companies on when they can use their Websites, including blogs, to disclose material information… UNDER certain circumstances, companies can rely on their websites and blogs to meet the public disclosure requirements under Regulation FD (Fair Disclosure), according to new guidance unanimously approved by the US Securities and Exchange Commission today.

An essay in the New York Times called “OPEC 2.0″ points out that communications is just as vital and expensive as gasoline; and just as monopolized although, as in the early days of oil, by domestic monopolies.

AMERICANS today spend almost as much on bandwidth — the capacity to move information — as we do on energy. A family of four likely spends several hundred dollars a month on cellphones, cable television and Internet connections, which is about what we spend on gas and heating oil… That’s why, as with energy, we need to develop alternative sources of bandwidth…

The U.S. Court of Appeals in New York has cleared the way for Cablevision to offer so called “network DVRs,” in which consumers would be able to record video programming for future viewing “in the cloud,” rather than relying on hard-drive in their set-top boxes… So, in effect, your cable provider can record and store video content on your behalf without violating any copyright. I believe that all video content except news and sports will move to a store and foreward model… and bit-torrent has already worked out the platform.

DVRs have been one of the largest single drivers of capital spending in recent years, accounting for as much as 10% of capital spending for the major [cable companies.] Further, cable gains a huge differentiator versus their satellite competitors. Under the ruling, cable operators will not only be able to offer DVR functionality to all digital subscribers – whether they have a DVR or not – but also to every TV outlet in the house that has a digital set top box… DVR penetration is now about 25% of TV households; he says in short order effective penetration of DVR penetraton could jump to north of 60% – and with an even larger increase in DVR outlets per home… Broadcast TV companies are especially exposed to enabling ad skipping on time-shifted programs, since they are 100% ad supported… Also losing here: the satellite companies, who have no way to offer network DVR capability, which requires point-to-point connectivity.

I was listening to a William Gibson (Neuromancer…) podcast from IT Conversations yesterday while I stacked firewood. He said something like: “In the future, anyone of any public profile whatsoever is going to be subject to forensic data mining tools to an extent that we can only glimpse today. Every piece of data generated by anyone is going to be available and related to all other data.” Anyway, in the spirit of that famous quip that the future is already here, it’s simply not evenly distributed, I post the following from Slashdot:

Sometime in 2005-2006, White House Liaison Jan Williams attended a seminar on LexisNexis searches, and wrote one herself:

[First name of a candidate]! and pre/2 [last name of a candidate] w/7 bush or gore or republican! or democrat! or charg! or accus! or criticiz! or blam! or defend! or iran contra or clinton or spotted owl or florida recount or sex! or controvers! or racis! or fraud! or investigat! or bankrupt! or layoff! or downsiz! or PNTR or NAFTA or outsourc! or indict! or enron or kerry or iraq or wmd! or arrest! or intox! or fired or sex! or racis! or intox! or slur! or arrest! or fired or controvers! or abortion! or gay! or homosexual! or gun! or firearm!

Needless to say, when asked about it, Williams first said she didn’t remember ever seeing it, then said she’d used an edited version just once. LexisNexis records show she used it, as shown, 25 times.

Just a few things that are changing the landscape (from Paul Davis at Technology Investment Dot Info).

The FT’s Gillian Tett writes up a blow-by-blow of the credit crisis; and the spread chart is a good reminder of how different things still are:

On August 9 2007, the European Central Bank sent shock waves around world financial capitals when it injected €95bn ($150bn, £75bn) worth of funds into the money markets to prevent borrowing costs from spiralling sharply. The US Federal Reserve soon followed suit. But while the central banks had billed these moves as “pre-emptive” actions to quell incipient market tensions, they did not bring the panic to an end… A year later, there is still no sign of an end to these problems. Instead, the sense of pressure on western banks has risen so high that by some measures this is now the worst financial crisis seen in the west for 70 years.

There were a few people on the record as anticipating problems, and no easy way out – Hiroshi Nakaso, a senior official at the Bank of Japan; Jean-Claude Trichet, governor of the ECB; Timothy Geithner, president of the New York Federal Reserve – but it’s easy to data mine in retrospect. These are the drivers of the train, or at least in the engine cabin, and they just watched it crash.

Yet most investors, bankers and even regulators did not change their behaviour to any significant degree, owing to a widespread adherence to three big assumptions – or articles of faith – that have steathily underpinned 21st century finance in recent years.

The first of these was a belief that modern capital markets had become so much more advanced than their predecessors that banks would always be able to trade debt securities. This encouraged banks to keep lowering lending standards, since they assumed they could sell the risk on…

Second, many investors assumed that the credit rating agencies offered an easy and cost-effective compass with which to navigate this ever more complex world. Thus many continued to purchase complex securities throughout the first half of 2007 – even though most investors barely understood these products.

But third, and perhaps most crucially, there was a widespread assumption that the process of “slicing and dicing” debt had made the financial system more stable. Policymakers thought that because the pain of any potential credit defaults was spread among millions of investors, rather than concentrated in particular banks, it would be much easier for the system to absorb shocks than in the past…

Because the risk was systemic, there was no risk? A big mistake.

As a result, when high rates of subprime default emerged in late 2006, there was initially a widespread assumption that the system would absorb the pain relatively smoothly. After all, the system had easily weathered shocks earlier in the decade, such as the attacks of September 11 2001 or the collapse of the Amaranth hedge fund in 2006. Moreover, the US government initially estimated that subprime losses would be just $50bn-$100bn – a tiny fraction of the total capital of western banks or assets held by global investment funds… And as the surprise spread, the three pillars of faith that had supported the credit boom started to crumble… First, it became clear to investors that it was dangerous to use the ratings agencies as a guide for complex debt securities… [The end of that franchise.] Then, as bewildered investors lost faith in ratings, many stopped buying complex instruments altogether… As a result, western banks found themselves running out of capital in a way that no regulator or banker had ever foreseen… [Whocouldaknown?] Banks started hoarding cash and stopped lending to each other as financiers lost faith in their ability to judge the health of other institutions – or even their own… Then a vicious deleveraging spiral got under way… The IIF calculates that in the year to June, banks made $476bn in credit writedowns, as debt prices plunged in the panic (although tangible credit losses are hitherto just $50bn). However, they have also raised $354bn in capital…

It all seems so familiar somehow… but I cannot remember how the story ends. (Paul at Technology Investment Dot Info)

I like this cartoon (h/t Kedrosky) for perspective on the past year, though I would perhaps swap a few of the roles around. To me, it’s the regulators that lacked the courage to prick this bubble, and the investors that lacked a brain. I never expected the lenders to have a heart.

The Wizard of Oz was originally written around the turn of the century (last one) as a populist allegory railing against the banks and railroads and Yip Harburg, the lyricist for the 1939 movie, specifically stuck to that intention. I believe the tin man was the factory worker, the straw man the farmer, the cowardly lion was William Jennings Bryan, the fake wizard was Wall Street (as today) and the witches the monopoly trusts. The munchkins were the “little people”. Dorothy was you and me.

Plus ca change…

GDP for Q407 was revised to a negative 0.25%, Q108 to 0.9%, but Q208 was reported at 1.9%. The big story in the data was net exports. Dean Baker (via DeLong):

Exports grew at a 9.2 percent annual rate. More importantly, imports fell at a 6.6 percent annual rate. Together, the change in net exports added 2.42 percentage points to GDP growth for the quarter…

Jobs are weak.

Nonfarm payrolls fell for the seventh straight month in July, while the nation’s unemployment jumped to 5.7%, a four-year high, according to the Labor Department. Underemployment, a more comprehensive measure of the extent of labor market weakness, rose to 10.3%, its highest level since 2003 and two points above its July 2007 level. Since December, 463,000 jobs have been lost, the strongest signal yet that the economy is in a recession.

Tourism is not responding as strongly as one would hope to the weak dollar.

The world’s long-haul international travelers have jumped by 35 million since 2000, yet America has been largely overlooked by those new travelers, despite favorable exchange rates resulting from a weak dollar and attractions like Disney World and the Grand Canyon. In fact, the annual number of foreign visitors to the US is about 2 million lower than in 2000, leading travel-industry experts to figure that from 2000 to 2007, the US economy took a hit of about $150 billion… Foreign visitors to Orlando, Fla., dropped by one-third from 2000 to 2006; by nearly 40 percent over the same period to Anaheim, Calif. (read Disneyland); and by 22 percent to Las Vegas, a frequent entry point for foreigners to the Southwest… in all 50 states, travel and tourism figure somewhere among the top four industries by economic impact.

New York may go broke (again).

Costs are rising and revenues are falling fast. In June 2007 the 16 banks that pay the most taxes on their profits remitted $173m to the state treasury. Last month this dropped to $5m, a 97% decrease. This is a frightening fall given how much the state’s coffers rely on Wall Street taxes: 20% of all state revenues come from financial companies… Wall Street lost 4,300 jobs during the month of June alone… In less than 90 days, the projected deficit over the next three years has jumped 22% to $26.2 billion.

Peter Bernstein has added his voice to the chorus, waxing apocalyptic.

In 2007, as if some kind of secret signal went out among them, housing prices accelerated their decline while the prices of oil and food rocketed higher… the most unusual feature of our current problems: the primary impact of all of them has been on consumers, not on businesses… Today, a halt in the decline of home prices seems the necessary condition to transform the system from despair to hope and to turn the financial sector, now embattled and disorganized, back into the functioning organism the economy needs so badly… To sit back and let nature take its course is to risk the end of a civil society.

Too many developed economies got addicted to asset inflation – the increasing valuations were the only source of yield to service the debt incurred in their purchase – a Ponzi scheme in the Minsky sense. Now that bubble has burst. Houses are a non-productive asset, a consumption good. Values have to fall to where they can be serviced from current incomes – whether via a mortgage payment or rent – or incomes have got to rise via wage inflation. I still don’t see any other way out. The first decimates (many) banks, the second decimates the dollar.

(Paul Davis at Technology Investment Dot Info.

Paul Davis here, with my first go at guest posting for Yves so you’ll have to excuse me if I’m rusty on the formatting. Another week gone by; a pile of charts for you to consider (a click will mostly give you a larger size).

Krugman made the point with this chart that the Fed is pushing on a string here. The “bond market vigilantes” (remember that term) aren’t nearly as sanguine about the credit or inflation risk as Ben seems to be.

This one is also quite interesting. You can clearly see Mae/Mac taking up the mortgage baton when the S&L’s took a fall, and then the ABS market stepping into the breach when the agencies ran out of ammo. I believe Mae/Mac has moved back up to 80% of the mortgage market. Is mortgage broking going to be declared a strategic industry?

I like to see this type of GDP readout when I read the headline number. The various components have such disparate character it reminds me of the wheels on a slot machine. Depending where they end up any given quarter you can have GDP from -1 to +3… Taking them in turn: consumption had a bit of a bounce from the tax checks but I would expect less next quarter; non-residential is looking very anemic and steadily so, a bad sign; residential is falling less rapidly over time, could probably plot the bottom; inventories are all over the place from quarter to quarter, but it looks like they were just flushed out which could be good as they refill, or an indicator that businesses are genuinely pulling back on production, or it could just be too expensive to finance them; both exports (more) and imports (less) were positive for growth, probably the most encouraging data on the chart. Government is exogenous… no insight from me.

This chart pair shows the marked difference between the current residential-led slump and the 2001 capex drought.

The bigger picture shows that this is still not desperate territory in GDP growth terms, although my “ruler on the screen” technique reveals we are tracking below the trend since 2001.

Good news? The US deficit relative to GDP is also not the worst its ever been. The absolute numbers sound much worse.

But this chart from Ned Davis really scares me.

Unemployment is going up, but still not historically dramatic though DeLong and others argue that a wider indicator (U6) is now more useful.

With all the legal crossfire, perhaps we can expect something of a litigation-led recovery:

I know, oil prices are so last week, but I’ve been tracking this chart and the rollover in US miles driven is impressive. What also amazes me is that in 25 years the distance driven by Americans doubled. Why? The country didn’t change size. Everybody just did more driving. It’s hard for me to believe that that lead to an increase in quality of life (is driving per se a consumption good?) but that is just me. I would love to see this figure for Japan, Europe, China…

More behaviour modification in action. The invisible hand upside the head. Ouch!

Looking at this chart, it’s hard to fault the hot money flooding China.

I think I’ll leave it there for today. Cheers from down-under. (cross-posted from TechnologyInvestmentDotInfo)