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Monday, March 31, 2008

Chicago PMI Upswing

FUT & freight indicators were substantially up YoY, indicating some relative stimulus in production. Chicago PMI for March showed it. There is a long lead time for capital equipment, employment declines are lessening, and the production and overall index improved sharply from February.

Industrial production in Japan is slowing. Industrial production in the EU sector is mixed, with Spain and Italy weak, but Germany still running relatively strong and France perhaps showing some relative strength. EU inflation is accelerating. The shift everywhere is away from consumer into primary production.

Saturday, March 29, 2008

Smoot-Hawley Under The Heading Of Carbon Tariffs

I got here honestly, folks. I wanted to answer that inflation question, and to do so I had to lay the groundwork for the case that most of the current inflationary pressures are global rather than intra-currency. Thus the postings regarding food, etc.

As I write the situation seems to be getting sharply worse. The rice crisis appears to be real. Sitting here trying to recalculate my forecasts for EM growth taking that into account is giving me fits.

I am genuinely concerned that environmental concerns are being used as a proxy for protectionist economic legislation and may have severe consequences. I would like to discuss this article from a Canadian source about carbon taxation:
Imposing carbon tariffs on emerging economies with low manufacturing costs and high greenhouse gas emissions could drive some manufacturers back to Western countries, according to two economists.

Jeff Rubin, chief strategist and economist at CIBC World Markets, thinks such tariffs could emerge quickly. Countries in Europe are already becoming publicly intolerant of emissions elsewhere and the next president of the United States is expected to institute a cap on greenhouse gas emissions alongside the trading of carbon credits.
I am going to break my rule and cite a great deal of this because of the extreme economic threat I perceive:
Because of China's focus on cheap but dirty coal to power its fast-growing economy, the country's estimated greenhouse gas emissions in 2007 were higher than those of the United States. Further, China and other less developed countries now emit more greenhouse gases than the U.S. and developed countries.

Given this increasing imbalance, Mr. Rubin said in his report the "only leverage is through trade access," specifically a "carbon tariff."

Mr. Rubin predicted such a tariff, based on $45 a tonne of carbon dioxide and equivalent - about the current price on the carbon trading market in Europe - would collect $55-billion annually. It equates to a 17-per cent levy on all Chinese imports to the U.S. - almost six times greater than current import tariffs.

At a price of $45 a tonne for carbon, Mr. Rubin projected the U.S. inflation rate would be increased by about 0.6 percentage points from the current core U.S. inflation rate of 2.5 per cent.
The argument that is being shopped around is basically a protectionist one. Now, in the current economic crisis, which btw is a global crisis of loose lending and over-extension of credit, which led to a nearly global rise in real estate prices, and probably global over-capacity in some industries, to institute a system of carbon taxation will act like Smoot-Hawley did (see Wikipedia article for a start):
The Hawley-Smoot Tariff (or Smoot-Hawley Tariff Act)[1] was signed into law on June 17, 1930, and raised U.S. tariffs on over 20,000 imported goods to record levels, and, in the opinion of most economists, worsened the Great Depression. Economists have now generally regarded this Tariff Act (i.e., tax increase on imported goods) as the greatest policy blunder in American economic history, coming as it did after the 1929-30 recession and preventing the economy from a full, natural recovery which had already started by the Spring of 1930. Many countries retaliated with their own increased tariffs on U.S. goods, and American exports and imports plunged by more than half.
Using panel data estimates of export and import equations for 17 countries, Jakob B. Madsen (2002) estimated the effects of increasing tariff and nontariff trade barriers on worldwide trade during the period 1929–1932. He included not only Hawley-Smoot but also the tariff increases in other countries. He concluded that real international trade contracted by about 14% because of declining GNP in each country; by 8% because of increases in tariff rates; by 5% because of deflation-induced tariff increases; and 6% because of the imposition of nontariff barriers.

The Smoot-Hawley Tariff Act "imposed an effective tax rate of 60% on more than 3,200 products and materials imported into the U.S.", quadrupling previous tariff rates.
Back then, Canada imposed retaliatory tariffs before Smoot-Hawley even passed.

Europe is in an extremely protectionist mood, and I believe one of the reasons for the non-scientifically based focus on carbon is that it serves as a justification for tariffs. If the next president does institute carbon tariffs, the result will have a real impact on world trade.

I believe that many politicians are being deeply dishonest about their "environmental" concerns. I also believe that instituting a carbon tariff will cause Asian growth to slow remarkably and further destabilize the world economy. The rise in food prices is very dangerous because it has an impact on the ability of emerging market countries to support consumption increases necessary to rebalance trade. If you add to the situation by doing something like this, you could recreate the conditions which caused the Great Depression.


We have no proof at all that CO2 is dramatically affecting global temperatures or will. We have a bunch of models that don't predict previous temperature changes, so how can we believe that they are accurate in future predictions? We have a lot of hysteria on the subject, but it is mostly occurring in the political realm. Follow the money.

Proposed Financial Regulator Changes

It sounds pretty sweeping, although the reporting varies a bit. (See also the CR post which links to the very detailed NY Times article.)

Combining thrift (OTS) and national bank (OCC) supervision makes sense, given their agencies' recent assertions of similar powers and the lack of state regulation. Also, OTS seems to have several disasters on its hands.
The proposal would designate the Fed as the primary regulator of market stability, greatly expanding the central bank's ability to examine not just commercial banks but all segments of the financial services industry.
Few people outside the industry realize this, but most of the enforcement muscle the regulators assert derives from the "safety and soundness" rubric. This seems as if the regulators are acknowledging that a new industry-wide (rather than institution-specific) standard of safety and soundness needs to be addressed in the wake of the repeal of Glass-Steagall. That does make sense.

Two major changes:
In other areas, the Fed gathers more power. The study proposes that the Fed become a ``market stability'' regulator, with powers over insurance companies and securities firms with federal charters.

The study also suggests a distinction be made between the Fed's ``normal'' lender-of-last resort discount window to help banks meet short-term funding needs and ``market stability'' lending to help stave off severe funding shortages and panics. In that function, the loans could be extended to federally- chartered insurance companies and financial institutions, the study says.
But again, all of this addresses problems that arose as the result of repealing Glass-Steagall's walls between various functions. When the distinction between commercial banks and investment banks is eliminated, the incentives for tying become intense, and when financials can own insurance companies, etc, a vast new group of risks emerge.

Barring a second Great Depression, it's hard to see how we can unscramble the financial eggs that Glass-Steagall's repeal scrambled. But no one really knows how all this will work, and so far I have not read of anything that would address the role of the ratings firms. Failure to address that risk essentially makes most of these other changes meaningless.

The ratings firms (such as S&P, Moody's and Fitch) have been granted authority by the financial regulators to grade the soundness of investment vehicles of various types. The financial regulators take collateral, figure risk costs, etc, using those ratings. Since the failure to correctly assess risk was widespread, this needs to be addressed.

The complexities of the current environment continue to mount. Here's an example. The FRB just released an interpretation ruling that a credit card bank can now underwrite (versus selling for an unaffiliated third party) debt insurance for its credit card customers without a change in status.

Consider the risks. Insurance companies are generally regulated by their state insurance regulator, and for an insurance company to sell insurance in a particular state it has to comply with that state's regulations, fees, etc. Regulator scrutiny includes investigation of the company to ensure that it has adequate investments to pay off claims under foreseeable circumstances.

If you allow a credit card bank to effectively get into the insurance business, it aggregates risk. Rather than having a separate counterparty to turn to when the economic environment goes bad, the credit card bank would have to turn to its own reserves. Needless to say a downturn in economic environment jacks up CC defaults. It always has and it always will. So now the credit card bank will be paying off claims to itself.

Think about that. There really is no insurance here unless the CC bank itself calculates everything correctly and builds up sufficient reserves to handle it. Who will be responsible for ensuring that it is doing so appropriately, and that it is not using the insurance reserves as required risk-based capital reserves?

From the details discussed in the letter, there's also an issue of business practices. If, during a period of involuntary unemployment, the only real benefit to the customer is that the bank won't dun them for payments, but they won't be able to use their cards and interest will still accrue, one wonders about the appropriateness of the service. Debt under the program only gets cancelled when the borrower dies.

The current situation is genuinely bad, but I wonder if we are on the path to better financial management? I am not convinced. Oh, banks will draw back their mortgage lending standards to something approaching rationality, which will help. But there are other problems out there, and the consumer's debt burden is a huge economic issue.

Friday, March 28, 2008

Funniest Darned Video

This is really making fun of over-enthusiastic would-be female homebuyers, I think. It's also not very kind to realtors. Worksafe and very funny video of a British realtor having trouble with one half of the couple to whom she's showing a house. Watch the interplay between the realtor and the woman.

The Rice Crisis

Now things get serious. The grain shortage and rise in food prices has led poorer countries to impose some food export bans recently. China was one of the first. Now a bunch of rice-exporting countries have followed suit:
Rice prices jumped 30 per cent to an all-time high on Thursday, raising fears of fresh outbreaks of social unrest across Asia where the grain is a staple food for more than 2.5bn people.
These foreign sales restrictions have removed about a third of the rice traded in the international market.

“I have no idea how importing countries will get rice,” said Chookiat Ophaswongse, president of the Thai Rice Exporters Association. He forecast that prices would rise further.

The Philippines, the world’s largest buyer of the grain, said on Thursday it wanted to purchase 500,000 tonnes after it failed to buy a similar amount earlier this month.
This is a genuine disaster. Hungry people are always a disaster. India, Vietnam, Egypt and Cambodia are some of the countries participating. Rice prices have almost doubled this year. The Shrink gets it, although I'm darned if I can follow his psychological explanation. But regardless, messing with food production is not a road to world peace and prosperity. Europe, btw, set an official goal for use of biofuels at 10%. Here is an article about that last year (May 2007):
A year ago, this lush coastal field near Rome was filled with orderly rows of delicate durum wheat, used to make high quality Italian pasta. Today it overflows with rapeseed, a tall, gnarled weedlike plant bursting with coarse yellow flowers that has become a new manna for European farmers: rapeseed can be turned into biofuel.
In March, the European Commission, disappointed by the slow growth of the biofuels industry in Europe, approved a directive that included a "binding target" requiring member states to use 10 percent biofuel for transport by 2020 - the most ambitious and specific goal in the world.

Most EU states are currently far from achieving the target, and are introducing new incentives and subsidies to boost production.

As a result, bioenergy crops have now replaced food as the most profitable crop in a number European countries.
Because rice and other grains can be used interchangeably in some feeds, removing corn and wheat from the food market does place pressure on rice stocks. Organizations such as FAO started to warn about the results of bad biofuel policies last year, and now the Cassandras have proven to be accurate prophets. Much of US biofuel production is uneconomic, and the producers are dumping in Europe, so we have committed another round of malinvestment.

There is nothing worse for global political stability than this sort of a food crisis. It's also playing hell with the world economy. The negative trend is accelerating in Europe, where retail sales fell to contracting levels, but this type of inflation also cuts into the emerging consumer demand markets of the big Asian countries which were supposed to take up the slack in demand from the US and Europe.

Many have attributed US inflation to the Fed's monetary policy, but I believe that is largely wrong so far. The impact of food and fuel price increases causes relatively far more severe inflation (video) in countries that have been exporting to us. This shows up in their need to increase prices due to higher transport, production and labor costs. Cutting interest rates does not always lead to inflation (it didn't in the early 2000s), and raising interest rates doesn't always generate a decline in inflation. It especially doesn't when conditions are heavily and regressively inflationary in markets which export goods to you. See Japan's predicament.

Japan might be in a recession. Unemployment there rose and consumer demand remains weak. India is now projecting 2008 growth of around 8%, and the rupee is showing less strength.

Thursday, March 27, 2008

And Now The Real Crunch Hits

The next few months are going to be difficult indeed. More "unprecedented" steps will be taken in the US and elsewhere.

The bottom line is that the collapse of the muni insurance racket is pushing up costs and yields on that market, especially the short-term variable rate segment. That is going to keep sucking up the available cash from investors. Current mortgage bonds out there are devalued as a result.

Nor is this all credit-related. It's important to understand that even high-quality mortgage paper - government-guaranteed stuff - can't compete with the yields I can get on good quality individual munis now, and therefore it has been devalued. The difference is taxation. Tax-free munis have a huge tax advantage which overwhelms the proceeds on mortgage bonds even if you account for risk in munis by assuming that absolutely no bond insurance is worth anything.

Individual investors are the most probable source of liquidity on the good stuff, and they now have absolutely no reason to buy mortgage bonds.
The cure for liquidity crunches is the income investor (buy/hold) and the income investor will do a lot better buying munis in most cases.

So this is structural, and the losses are structural. The collapse in the mortgage bond market is more related to returns than risk, and therefore nothing the government can do will restore this segment of value to the instruments.

The real reason why these bonds were marketable at those returns in the first place was because they were used to obtain the additional long-short leverage through ABCP pools of various sorts. They were also used as instruments to obtain leverage. Well, with the unwind of all of the bad risk assumptions, that value premium is mostly gone.

So what options does the government have? The idea that banks and other financial firms should be able to stop marking to market is insane. That would mean that banks and financials would in effect be forced to trade with no knowledge. It would make the liquidity crunch worse rather than better.

The only way to restore yiold value to the prime mortgage bond market would be for the federal government to institute a super financial holdings tax - a property tax, in other words. That would get at the high net-value individuals who make so much non-taxable income off munis, but it is unlikely to happen. The other way is to institute a flat tax, which would help some because it would cut the premium for these instruments to individuals paying high taxation rates.

There is just no way that agency paper paying 5.5% can compete with investment-grade munis paying 4.5% when you consider the net tax premium to someone paying a state and federal marginal rate of over 30%.
Not only that, but proposals to raise tax rates are going to devalue mortgage bonds yet again. Current federal tax rates are approximately 28% above 77,000, 33% above 160,000, and 35% above 350,000. Then add state tax. We'll use an average of 6%, okay? That takes me to 34%, 39%, and 41%.

Look at the returns for
No AMT Munis= 4.5%, $4,500 net.
Agency = 5.5%, $5,500 before tax
Agency Net @34% $1,870 tax = net of $3,630.
Agency Net @39% $2,145 tax = net of $3,355
Agency Net @41% $2,255 tax = net of $3,245

Liquidity concerns for high tax rate individuals are less of an issue. The backstop of value for all bonds is the expected yield to first call or maturity. Prime mortgage bonds now have to pay the investor around 7% to get an equivalent return. Therefore the housing market can't recover in a meaningful fashion for years to come.

The auto/CC/small commercial crunch is about to start showing up on smaller banks' balance sheets and will continue for some time. This adds fuel to the equity destruction fires in a major way later this year.

The only way the Fed can restore value to the agency mortgage bond market is by making them Fed collateral (a liquidity premium), which is exactly what they are doing. It still doesn't compensate much.

Update: See this Bloomberg article regarding mortgage rates:
Lenders aren't helping the central bank even after they've been given seven interest rate cuts and a new program designed to jumpstart borrowing.

The difference between the 10-year government bond yield and the average U.S. fixed mortgage rate was 2.7 percentage points last month, the widest spread since 1986, data compiled by Bloomberg show. Banks are defying Bernanke and hoarding cash after writing down the value of more than $200 billion of mortgage-related securities since July.
This is total nonsense. Banks aren't defying Bernanke. Investors are defying Bernanke. If investors can get better returns elsewhere, they are not going to buy mortgages. Why should they?

Banks don't sit on tons of 30 year mortgages because banks can't afford the duration risk. The mortgage market is an investor-driven market, and mortgages are now competing with munis. That's what is primarily driving rates.

Wednesday, March 26, 2008

Fry Your Own Grits, Janet!

Janet Daley's bio says that she was raised in New York, used to be a liberal, and is now conservative. She now writes for the UK Telegraph.

I think her academic roots show in this column she wrote about Obama and American insecurity. She starts by noting correctly that in his early wins he said little about race, and then moves on to note that his own origins have little to do with the history of most black Americans:
Mr Obama has accepted the mantle of black resentment: the bitterness of slavery and segregation, the triumphs of the civil rights movement, the continuing struggle for equal opportunity and achievement. They are all his now, an intrinsic part of the package in which he offers himself to the electorate, even though, ironically, they have little to do with his own life experience.
...why did he choose to cleave to a spiritual mentor whose church was dedicated to the perpetuation of black anger? Why did he identify himself, in what must have been a quite conscious act of personal reinvention, with a pastor and congregation whose collective memory was so utterly different from his own?
It was part of a phenomenon that almost no one who was not born and raised in the United States seems to grasp: the desperate need that Americans feel to be part of a shared ethnic or cultural identity that will give them a sense of rootedness and belonging in the vast, endlessly shifting flux of a country that is a nation but not a people.
Ack, pfooey. This is college professor stuff. The average American is not worrying desperately about finding an identity. The average American is not possessed by anomie, glumly brooding about his or her comparative insignificance in the "vast, endlessly shifting flux of a country". A sense of belonging comes from family, friends, often faiths, profession and the like.

The average American kind of likes the shifting flux thing. As proof of American ethnicity-deprived ennui, Daley retails her visit to Ellis Island:
...I was struck by the school parties. The children - who were almost certainly at least second- and probably third- or fourth-generation Americans - were chatting to each other about their own families' histories. They all seemed to know not only their country and region of origin, but often the name of the village from which their ancestors had come.
This would have come from school assignments most often, and it is not proof of some anguished search for roots, but rather a sharing of the common experience of being immigrants. Given the area, certainly a decent proportion of the school children were first generation. We are all Americans by choice except for blacks and some (mostly) native Americans. Of course the native Americans were immigrants too, but that was a very long while ago.

The column becomes funnier:
The British find the sentimentality of Americans toward their national roots largely absurd and occasionally sinister - like when, for example, legions of fourth-generation Irish-Americans feel morally bound to supply the IRA with money for guns.
Well, see, outside of major urban areas, Americans find the British belief that you get peace by giving up your guns extremely sinister. Frankly, if the average Brit weren't so propagandized, charitable Georgians alone would raise enough donated firearms to rearm the British yeomanry. Texas alone could rearm half of Europe without too much personal deprivation. The problem is that you probably wouldn't know how to clean them, and abuse of good weapons is a sin for which we would not want to be responsible.

Also, about that sentimentality thing - I hate to break it to you, Janet, but for many of us, the US was a haven. In my case, my mother is of mostly long-term American stock, but my father's father got out of Germany, into France, and to the US just in time for the Great Depression. That was bad, but still incredibly better than spending the same time in Europe. We do not feel sentimental about the old country. At all. Some of the people, yes. The nation, no. The Chief is a naturalized citizen. He got here in his twenties. He is profoundly grateful. The only thing he ever wanted was for the kids to be Americans, and they are. A lot of us were running from something, and most of us were running toward a hope for a better life.

However, over one-sixth of Americans are recent immigrants (immigrants or children born to immigrants), so the American story and the American constitutional system has to be told and retold and taught and retaught. A country that keeps absorbing so many new arrivals each generation has to keep explaining what it's about. It has to keep explaining to its children that being American is a choice, and that all that's needed to be American is the choice, and explain the purposes and workings of our government.. Many of us try to remember the sorrows of our pasts in order to ensure that they are not repeated in our future. For most immigrants, being American is about the right to self-definition under a government that dignifies individual lives and aspirations.

The burden of a life in a free country is more than enough to constitute a sense of shared identity. Take the current election. It is quite painful enough to have to vote for one of Ms. Fantasy Marine of Bosnia, Mr. Church of Black Jesus, or Mr. I'm A Party of ONE. It is, indeed, so painful that we have no need to seek for some sense of identity elsewhere. The shared agony of this election is seared, seared, I tell you, into our collective psyches. Our politicians are a cross we bear with no pride at all. Every American generation has to renew the battle for a good and reasonably effective government. It's a constant. There is no House of Lords or long history of tradition to ensure that we follow on the nice traditional and known path. We haven't got one. We have to figure it out ourselves each generation.

Janet closes with:
Americans suffer from the collective insecurity that arises from rootlessness and the wilful abandonment of historical continuity. That longing for roots, and the emotional security that goes with them, divides Americans as surely and inevitably as their constitutional arrangements unite them. That is the perennial contradiction at the heart of national life.

Of course, it doesn't have to be ethnicity any more. You can find your communal identity through gender, or sexual orientation: you just have to be able to plant your feet on solid ground somewhere and find people to holds hands with, so as not to be swept away in the endless, terrifyingly anonymous void.
Sorry, no. Not even close. This, I believe, is a projection of her own fears across the Atlantic. Americans do tend to look admiringly at other cultures, but that is a trait of security rather than insecurity.

We don't need the ethnic roots, loyalties and passions. They haven't led to much that's good overseas. Americans actually really like reinventing themselves every generation. We keep what we like of the old and slap on a new coat of cultural paint, just the way we paint our houses. An American can be proud of being Korean, Irish, Chinese, Italian, Polish, Confederate or whatever without having to suffer through the actual condition of being one. Sure, it's a cheap thrill, but we like our thrills cheap and our drinks ice cold. Is there something wrong with that? Baby, we are the Land of Fast Cars, Wine Coolers and Very Cold Beer!

It's not Americans that are insecure over ethnic identities. It's Europeans and Brits in the new Europe, with its open borders and fast-moving immigration, who are insecure over these things. We do have the Constitution, our flag, and our principles. Also our guns. And our churches. We are used to this way of life and like it. It works for the most recent arrivals just as well as for those of a few centuries ago. The Chief buys many books about US history and political history. He studies this country to find out why it works so well. He knows very well that we are not natively better people. It is the system under which we live that has enabled us to get a better and more rational result.

It's you of Europe who are so traumatized by the loss of ethnic national identities that you are passing all these laws about not insulting religions, etc. We insult each other all day long and don't riot over it. And what's with the anti-Semitism? If that's not an example of insecurity, I don't know what would be.

Now, for black Americans, the case can be different. Not, in my experience, for most blacks in the south. The discrimination is too real and recent for them to need to seek some artificial roots in it. Those of my generation and the next are generally very diligently seeking to live out the victory of MLK's dream.

But for a black in the urban north who is successful I suppose there can be a feeling of separation. The great drama of the civil rights movement is an American demarcation point. If you are a black American born too late to participate, and born to a fortunate life, you probably will feel some guilt for the plight of blacks in inner-city poverty. You'll want somehow to pass the baton. There is nothing wrong with that - it is, in some fashion, exactly the same thing as joining the Peace Corp or the Marshall plan was in a previous generation. It's a search for a way to help other people get what you've got.

The American search for a better life has always been to some degree rooted in the realization that it is impossible to secure that better life alone. Many of us came here to escape harrowing circumstances in our countries of origin, and the memories are still real. We still seek justice for all.

Compared to most European countries, American politics are far more populistic. Post WWII Europeans of the upper class often seem to be afraid of their lower classes, whereas in the US, the politicians who capture the national imagination - the Jacksons, Kennedys, and Reagans - look at politics as being about ensuring that everyone has opportunity. We do not like classes, and American life is so fluid that in fact first-generation American immigrants often achieve great success, and if they don't, their children usually move into the middle to upper middle class.

At its best, Obama's embrace of Wright and his church had to have been an expression of solidarity with all the black Americans who didn't have what he had. Obama was attractive to those white voters precisely because in some way he seemed to be the more populistic of the leading candidates. If his campaign really is about hope for a better life and an active pursuit of ways to open the doors for more Americans, he's captured the American imagination. If it's about black anger, it fizzles. I don't think Obama is all about black anger. He is probably somewhat confused about the whole thing, but he doesn't seem to have a defeatist bone in his body. He's very American in his super-successful black yuppie way. And if his true bent is to seek justice and opportunity for everyone, he's very American in that as well.

However the other dominant trait in American cultural life is pragmatism. In some areas, over 30% of the residents and over 50% of the schoolchildren are immigrants or born to immigrants. We cannot afford to spend too much time angsting around and navel-gazing. We can't afford to set up a welfare system like that of some European countries because of our huge immigrant population. It takes a lot of hard work to integrate yourself economically and educationally into the culture, and it won't happen if you have three generations supported by welfare. Our remaining ghettos are way less a product of discrimination than the product of some very bad choices in public housing and social programs. Guess what? Your economic ghettos are the product of generations of welfare as well, and all too often, it is immigrants who are on the welfare. It's breeding the same crime and culture of anger that it bred here. Do the same thing, get the same result.

Lisbon does mean changes for the EU countries, and one of those will be the abandonment of the ethnic state given the economic provisons of the union. You'll find out on your own that it is far easier to teach loyalty to principles (which are abstract and universal) than to inculcate a reverence for the House of Lords, or swear fealty to some unachievable idea of multicultural economic equality. Cultures determine a great deal about economic achievement. The best a host country can do is provide opportunity and let everyone seek their own goals.

Ethnicity, like skin color, height, eye color and such traits, is nothing but an accident of birth. The aspirations and the goals by which a man or woman lives his or her life are the chosen things which create the bones around which the soul and spirit of a human being are formed. It is ultimately demeaning and irrational to categorize people by their births rather than their lives, and the security of Americans is rooted in the cultural precept that we must choose our own lives and will be responsible for the result.

So fry your own grits, Janet. Work out your own feelings over loss of ethnic nationalism. The only truly American advice I have for you is that worrying about the other guy's sins never fixes your own. As for Obama, he is in control of his own destiny, and that's a good thing.

PS: Have an ice cold beer on me.

Headlines Bad, But....

When I compare Treasury receipts, trucking, rail, durables, etc, the picture I get is of a fundamental upturn in production. The YTD inventory/shipment ratio on the durables report looks quite healthy, with the exception of motor vehicles.

In particular, both primary and fabricated metals look strong.

The consumer side of the economy is quite weak, and will continue to weaken. Financials are a Shakespearean tale of stupidity, terror and woe. But so far the productive side of the economy is in a much stronger on a YoY basis, and this would account for the fact that Federal Unemployment Taxes (FUT) is looking healthy. (The positive YoY on FUT should change as we enter the period in which construction is most active.)

Take a gander at these figures from the durables advance (YTD 2008/2007 comparison):
Total durables:
Shipments: 4.0%
Inventories: 4.2%
Shipments: 5.0%
Inventories: 1.9%!!!!!
Shipments: 3.5%
Inventories: 3.6%

Now indicator categories:
Primary Metals:
Shipments: 8.6%
Inventories: -0.4%!!!
Fabricated Metals:
Shipments: 2.4%
Inventories: 1.8%
Shipments: 12.9%
Inventories: 5.7%!!!
Computers and Electronics:
Shipments: 6.3%
Inventories: 0.2%!!!
These figures agree well with Japanese figures. Capital goods are so-so. Shipments are up 7.6% and inventories are up 9.1%, but even these ratios are much better than the 07/06 comparable period.

Last year's release for February is here. For example, total durables shipments were up 0.5 YTD, but inventories were up 8.9%. Capital goods shipments were up 1.8%, whereas inventories were up 7.9%. The ratios between inventories and shipments tell you more about the current conditions than anything else, and by that standard, this year's situation is strikingly improved over 2007.

I'm not saying that we are not in a recession. I'm saying that the imbalances in our economy which produced this recession are adjusting, which is a very promising sign. This will limit the damage and eventually produce a lot of growth in services.

The task before the Fed is to prevent the financial sorrow and woe from starving out this production upswing. It will take quite a while for the health in this sector to overcome the impact of all the bad debt out there, and if the bad debt causes the supply of money to dry up to this sector, we'll really be in dire straits.

A note about New Orders:
To anyone who has actually worked in industry, new orders booked for shipment at a considerably later time are suspect. When you see new orders rising and rising but somehow shipments stay trickling along at a low level, you ought to be highly skeptical of those new orders.

Monday, March 24, 2008

Food Prices

MSNBC article:
Among the driving forces are petroleum prices, which increase the cost of everything from fertilizers to transport to food processing. Rising demand for meat and dairy in rapidly developing countries such as China and India is sending up the cost of grain, used for cattle feed, as is the demand for raw materials to make biofuels.

What’s rare is that the spikes are hitting all major foods in most countries at once. Food prices rose 4 percent in the U.S. last year, the highest rise since 1990, and are expected to climb as much again this year, according to the U.S. Department of Agriculture.
There are some harrowing details in the article. The poorer the country, the worse the situation. The price of grains is the worst problem. It's one thing to not be able to afford animal protein. It is quite another to not be able to afford pasta, corn or rice.
Chinese Premier Wen Jiabao says fighting inflation from shortages of key foods is a top economic priority. Inflation reached 7.1 percent in January, the highest in 11 years, led by an 18.2 percent jump in food prices.
Most fertilizers have petroleum components. There is something quite sick about making ethanol from corn while people are so hungry. The article cites FAO's estimate that grains rose 42%, oils rose 50%, and dairy rose 80%.

Update: It will turn out to be a very ugly thing indeed if the "save the world" CO2 people end up having campaigned for "starve the world". The problem is that something is wrong with the data being generated in the search for CO2-induced AGW, although there is reluctance to admit that. This doesn't mean that CO2 doesn't cause warming at all, but it strongly suggests that all those who have been claiming that solar variance is a much weaker driver of climate than CO2 levels might have a screw loose. Sunspot cycle 24 was supposed to start in 2006. Then it was supposed to start in 2007, and by now it is beginning to remind ,me of that awful "Waiting For Godot" play. Every time you think you see it, you get disappointed (Jan 08). (Feb 08) Is this it?
NASA now is talking about May. Some of the predictions for 24 (whenever it deigns to arrive) are for very low activity.

The sunspot cycle is usually said to be about 11 years, over time the length and amplitude of the cycles has varied, and the variances seem to correspond with historical weather patterns. 23 just has been hanging around. If this pattern continues, we could be in for a spate of colder Earth weather. Also Mars and all those other planets which have been warming with the Earth will be colder.

I wonder how long it will take the climate fanatics to suggest that the satellites and robots reporting temps are guilty of treason and should be executed? For what it's worth, recent studies of glaciers seem to show that sudden changes in earth climate are not that rare.

However I would not get all hysterical about the next ice age yet. When I was in fourth grade the NY Times had gotten all excited about the Next Ice Age, and we were duly informed of our coming tragic demise (crop failures, global warfare sparked by starving people, you know the drill) by school authorities. It did not happen, and I am thankful that the suggestion to cover the poles with soot was not followed, because my air conditioning bill would have been higher if it had. It might be that leaping to conclusions is capable of causing more harm than solar weather.

I will let you know if my blueberries suddenly seem panicky and start to grow fur. They seem to be more reliable than climate scientists, and so far they have only mentioned cooling.

PS: If you are really interested, what has solar scientists concerned is the length of cycle 23. The cycles vary in both peak and in length, and in periods in which the cycles become shorter, temperature tends to rise. Here's a pdf (30 pages) of a recent paper looking at trends. Lots of graphs.

Life Lesson Learned Today

NEVER try to explain agency pass-throughs on the phone. NEVER. Over the course of a month I've worked my way up to the top guy in this investment group, and now he's all enthused. I think I made a friend for life.

I'm in the middle of trying to set up some new investment instructures, and right now the opps are in strange new fields!

Back later!

PS: Look at the Existing Home Sales report. This is the one-page pdf. Scroll down to where it shows the median and average price declines for Feb sales YoY. -8.2% and -7.0% respectively. It's rapidly catching up with Case-Shiller. I must remember to go and see how they tried to spin this. It is supposed to be a 50% sample, so I believe the point about the unreliability of OFHEO numbers is made.

The southern season is a bit contrary to the rest of the country, and the average southern decline was 9.2%. The median price decline for the west was 13.4%. The NE prices are holding the best, but as the financial layoffs really take hold the impact will show.

CFNAI is well into recession territory. It really got there in October, and the 3 month rolling average continues to decline. A series of 3 month rolling average readings below -.5 is usually the marker for recession. Here's the recent sequence:
2007:07 0.15 -0.10
2007:08 -0.79 -0.26
2007:09 -0.38 -0.34
2007:10 -0.83 -0.66
2007:11 -0.63 -0.61
2007:12 -0.89 -0.78
2008:01 -0.68 -0.73
2008:02 -1.04 -0.87
The second number is the 3 month rolling average.

Sunday, March 23, 2008

Happy Easter!

Wishing you all the best. Gerard Manly Hopkins
THE WORLD is charged with the grandeur of God.
It will flame out, like shining from shook foil;
It gathers to a greatness, like the ooze of oil
Crushed. Why do men then now not reck his rod?
Generations have trod, have trod, have trod;
And all is seared with trade; bleared, smeared with toil;
And wears man’s smudge and shares man’s smell: the soil
Is bare now, nor can foot feel, being shod.

And for all this, nature is never spent;
There lives the dearest freshness deep down things;
And though the last lights off the black West went
Oh, morning, at the brown brink eastward, springs—
Because the Holy Ghost over the bent
World broods with warm breast and with ah! bright wings.
For some (like me) it's a religious holiday, but spring offers a natural sense of resilient hope to everyone. In the end, that is generally quite realistic.

So for interesting reading about Europe's Euro problems:
European companies are frantically investing in U.S. production capacity, which creates jobs and helps to reduce the $740 billion current- account deficit at the root of the dollar's woes. BMW, for example, is ramping up output at its existing plant in Spartanburg, S.C., by 50%. By 2012, BMW expects to create 500 additional jobs at the factory, where it makes its X series crossover sport- utility vehicles. Volkswagen, which manufactures in Mexico, is scouting for a U.S. site. Since EADS was awarded a contract to manufacture refueling tanker planes for the U.S. Air Force, Airbus plans to build civilian and military aircraft in Alabama. Smaller companies are bolstering their U.S. operations, too. Trumpf, a German maker of lasers used to cut sheet metal, in April is christening a new factory in Connecticut, where it already has a plant.

Meanwhile, European companies are trying to buy more parts from the U.S.
We have lost a very large part of our manufacturing base, though, and we still have the energy problem. I don't quite think that coal gasification is going to do it, although China is trying liquefaction and may move to gasification. Gasification is not new. It has been used for a long time, but it has never been economically competitive, and therefore has only been used in times of shortage such as WWII.

Saturday, March 22, 2008

A Picture Worth A Thousand Words

From TWIP, gas stocks. The blue range is the average; the red is the current. Crude was in the mid range.

Thursday, March 20, 2008

I Was Going To Write About Economics, But First

First things first. There is a strain developing in the comments which worries me. Reasonably precise economic analysis and forecasting is completely dependent on careful sifting of data, identification of areas of uncertainty, and the willingness to say that sometimes one just doesn't know. Interposing any political, social or personal screen on economic data is fatal, because there is always a lot of uncertainty in the data itself, and thus even any minor but consistent filtering of it to match a worldview magnifies the inherent errors and sends you shooting off to infinity, a la Lawrence Yun's hysterically funny projections of home sales and prices.

Of course one could say the same for a number of other disciplines. However we live in a time in which the rise of cultic thinking is worrisome to say the least. In the 70s and 80s the average person was much less prone to this type of thinking then they are now.

I am probably acutely sensitive to the change because I was effectively removed from the broader culture for so long by acute neurological problems. I have not experienced this cultural change slowly. I cannot express to you all how incredibly odd it is to struggle out of an impaired brain which organically would not consistently store, retrieve and obtain data to discover that somehow, in my absence, this mode of existence has become the desired and preferable option for many who DON'T have brain damage.

I really don't understand how any group of people would willingly choose this. This entire blog is a testimonial to my belief that people have not in fact willingly and consciously chosen to distort their thinking.

has written a very important post about the reaction to Obama's Wright speech which addresses one small group in our society involved in cultic thinking, and the failure of another group to reject it:
Until Kristof or anyone else can provide some evidence to show that government scientists invented the AIDS virus and then introduced it into the black community or unearth the policy papers describing how introducing Crack into black neighborhoods would somehow achieve whatever goal fevered imaginations can come up with, these ideas, along with many others that Jeremiah Wright promulgated with minimal demurral from Barack Obama, must be considered nothing more than the worst kinds of paranoid conspiracy theories. These are not just different perspectives or different opinions but bizarre and damaging fantasy structures that infect the thinking of those who hold such ideas.

Human beings are prone to believe in nonsense. We typically find ways to use our rational thinking to support our nonsense theories, and usually the nonsense we believe in is harmless so long as it doesn't interfere with our ability to work, love, and play (to use Freud's old descriptor's of mental health.)
Other conspiracy theories are extraordinarily damaging to the holder. Those conspiracy theories are the ones that support the holder's view that he or she is the victim of circumstances, forces, and people that are much more powerful than they, are inimical to them, and are beyond their control. Those beliefs lead to passivity and anger, and away from self reflection and responsibility.
Please read the post. It is important for far more than race relations. I left a comment over there explaining why I think this is so important:
It accurately sums up my distress over Obama's speech. He appeared to be saying he would not reject this type of thinking, whereas from my POV the failure to reject this type of thinking inevitably places one in the position of always reacting and never controlling. It's letting yourself be whipsawed by nuttiness.

I also suspect that Obama's failure to reject this type of thinking is involved in his stated determination to negotiate with leaders like Ahmadinejad. It's not possible to negotiate with insanity. He probably does have a blind spot to craziness produced from ignoring the insane streak in a segment of black US culture.

The reason liberals do not see the problem is that they too are deeply involved in conspiracy theories. There is a large segment of our university culture which is just as bizarre and disconnected from reality as the ravings of Wright. This stuff is shocking, but it is CW among a large proportion of academics in the US.

European culture also has the same problem. Don't forget, a German government minister wrote a book claiming that the US government was behind 9/11, and a very large proportion of the German population found the position credible. It's an unpleasant reality that there are segments of old European culture which are far less sane than US black culture in aggregate.

I have a theory that living in a society or segment of society that is disconnected from economic realities, scientific realities fosters this sort of cultural demise. Over time, it's possible that any group which doesn't experience a real-world penalty for this type of thinking might tend to fall into it. Perhaps, as you note, the human ability to make the world "comfortable" would generate the same pattern in any culture group not consistently forced to deal with exigent outer circumstances.

University professors of non-reality tested disciplines, for example, do not pay a penalty for being wrong. Small businessmen do. Welfare recipients generally can be as dysfunctional as they like without it impairing their income. Climate scientists have been badly hurt because the money flow is dependent upon one set of conclusions.

The highly socialized populations of Europe may be similarly insulated from reality.

I wish there were a word other than "liberal" in common use to describe this type of non reality-tested worldview. I think "liberal" is a misnomer. You can have strongly liberal tendencies and not be subject to this habit of thinking. And people who hold views described as "conservative" can be as illogical and un-tested in their thinking as "liberals".
There are many people who consider themselves liberal who are extremely opposed to this type of thinking, and there are people who claim to be conservative who seem to have the ingrained habit of cultic thinking.

Probably Tanta over at Calculated Risk is a person of liberal views. She is notable for her habit of carefully identifying all salient features of a situation and then trying to evaluate suggested changes based on the facts rather than what she would like the solution to be. That is the opposite of cultic thinking.

David Mamet's recent Village Voice article entitled Why I Am No Longer a "Brain-Dead" Liberal is another example. I doubt that his political goals have changed, but some of his axioms have:
The Constitution, written by men with some experience of actual government, assumes that the chief executive will work to be king, the Parliament will scheme to sell off the silverware, and the judiciary will consider itself Olympian and do everything it can to much improve (destroy) the work of the other two branches. So the Constitution pits them against each other, in the attempt not to achieve stasis, but rather to allow for the constant corrections necessary to prevent one branch from getting too much power for too long.

Rather brilliant. For, in the abstract, we may envision an Olympian perfection of perfect beings in Washington doing the business of their employers, the people, but any of us who has ever been at a zoning meeting with our property at stake is aware of the urge to cut through all the pernicious bullshit and go straight to firearms.
It is so unfortunate that a few of the Supreme Court justices who signed on to the Kelo decision had not spent more time in local government. If they had, they would have understood that entrusting a local body to determine what "public use" means is equivalent to handing the keys to everyone's house to some of the most easily corrupted individuals on the face of the earth. Those individuals will take the keys to the ones they can make the most profit on, and hand the keys of the rest back.

Mamet's point about experience in government is essentially the only salient one in most political debate. "How has this worked out in the past?" and "What are the likely consequences of trying this?" are the questions which underly the political and social framework of our society.

Cultic thinking is marked by the following:

  1. Demonization of opposing leaders or sanctifying leaders (these two are chained together),
  2. Ignoring plausibility when it contradicts a personally satisfying narrative,
  3. Breaking cause/effect relationships in narratives and substituting categorization by identity.
It is extremely difficult to create workable, effective political solutions unless one is firmly involved with the facts. Our society is an experimental and constantly adapting one. This is a big advantage, but it does imply that optimal solutions will change with time. Some things are constant, and some will vary.

SW wrote an earlier post describing why cultic thinking might be comforting (the specific example he used was the fact that about 30% of the British population believed that Princess Diana had been murdered):
In such a complex world, we are as out of control as the most primitive and superstitious Caveman, whose life was at the mercy of events both large (storms, lightning bolts, earthquakes and tsunamis) and small (smilodons, infections, broken bones). In such a terrifying world, our anxiety leads us to imagine that some all-powerful individual (at one time thought to be God, but he has been devalued by modern, secular sophisticates who keep themselves unaware of the primitive nature of our minds) or individuals, are actually in control.

A random world is not only terrifying but poorly comprehensible; a world controlled by secret cabals of Jews, Americans, the CIA, multinationals, or some other nefarious grouping, may be frightening, but at least it is understandable.
Yeah, well, it's also far more uncontrollable than the real world. Pushing on imaginary levers is not the way to move the world, even if you imagine the levers to be very big indeed and you are convinced that you are standing on the firmest rock imaginable. Therefore it is inimical to democracy. If you want to live in a dictatorship, cultic thinking is the best route.

You can be a traditional liberal or a traditional conservative and be a good citizen. If you are addicted to cultic thinking or victimology (a subset thereof), you cannot be a good citizen of a government "by, for and of the people."

Don't call yourself a Democrat here if you display cultic thinking. It's not Democratic. Don't prate about being a conservative who believes in free markets if you live in an imaginary world of "Regulation bad! Banks Good! Welfare bad!" A bank, you dummy, is the product of regulation. It is an entity created by regulation. For example, almost all banks have the ability to take deposits guaranteed by the state. FDIC insurance is bank welfare. Like all welfare, it is funded by the state under the theory that it does serve the public good.

I have no problem with anyone who is willing to follow their thinking consistently and to incorporate applicable facts into their worldview. There are usually multiple ways to solve most problems, and one of the benefits of having various schools of thinking is that those schools tend to generate multiple solutions, which helps the experimental process along.

Toddling Ever Forward

EU indicators showed slowing growth at a pace that was greater than expected. Oil and gold fell again overnight.

US initial claims rose on an SA basis to 378,000. The SA insured unemployment rate rose to a .3 differential from 2007.

The next few weeks pose some difficulties with seasonal adjustments involving the timing of Easter and various spring break calenders, so a degree of caution should be exerted when interpreting initial claims data for this period.

On an NSA basis, continuing claims have dropped slightly for three weeks. However the yearly comparison change is now intimidating - the unadjusted change is 416,010, which is a YoY rise of 16%. Because these data are one week behind, this is probably the most statistically significant stat in the report. Insured unemployment rates are growing:
The highest insured unemployment rates in the week ending March 1 were in Alaska (5.0 percent), Michigan (4.3), Pennsylvania (4.0), Rhode Island (4.0), Wisconsin (3.9), Idaho (3.8), New Jersey (3.5), Oregon (3.5), Vermont (3.5), California (3.4), and Massachusetts (3.4).
Continued weakness in auto and truck sales are hurting a number of states.

There was a sudden break in intermodal rail shipments. It may have more to do with the blizzard and the Chinese New Year than anything else, because it is a sharp diversion from trend. Intermodal rail shipments were down 3.4% for February and for the first two months of 2008. The first week of March showed a puzzling drop in carloadings (which have been up YoY on commodities) and a collapse in intermodal by 15.1%. I'll be watching rail freight closely over the next few weeks!

Regarding the dollar and commodities: you can take your pick of explanations. Either the dollar is tending to gain because people are selling commodities and this implicitly devalues commodity-dependent currencies, or commodities are being sold because the dollar is looking better. Both explanations are being advanced.

My belief is that someone noticed that people weren't going to be buying much of this stuff at the prices it was carrying. Take gold, for example. At the current price, quite a few individuals will be motivated to dump gold chains and the like.

The big exchange to watch is Brazil's Bovespa. How it breaks today will tell a lot.

Update: Two excellent articles on commodities and the continuing problems with auction rate securities.
Gold for immediate delivery dropped as much as 4.1 percent to $905.41 an ounce, the lowest since Feb. 19, and traded at $920.65 as of 12:53 p.m. in London. The metal's 8.3 percent drop this week would be the biggest since March 1983. The U.K. and U.S. are on holiday tomorrow.
No one's going to say "bubble", but.... What's scary about the pace of the drop is that it can pose problems for various hedges and become a force of its own. Commodities are usually the last bubble.

Philly Fed improved from last month. -17.4 is better than -24, although it indicates a decisive contraction.

An ECB luminary is now claiming that the Fed rate cuts will help the Euro economy:
European Central Bank Vice President Lucas Papademos said the U.S. Federal Reserve's interest-rate cuts will help to support economic growth in Europe.

The reduction in U.S. borrowing costs ``will support global economic demand, with a favorable impact on the euro area,'' Papademos said at a press conference in Moscow today. ``We have full trust in the decisions and actions taken by the Federal Reserve.''
Gurgle. The decoupling hypothesis just got stabbed to death. Papademos appears to be trying to narrow the gap between the USD and Euro.

Here is a linked list of his speeches and interviews. They reward the reader. This Feb, 2005 interview with Handelblatt discusses asset bubbles, etc, and contrasts Papademos' views with Greenspan's. Greenspan loved bubbles; Papademos was more concerned about the damage. It is true that asset bubbles can't be addressed with monetary policy, but they are susceptible to regulation which focuses on risk.

Wednesday, March 19, 2008

And We Wait

Looking at CP short vs longer rates makes me think we've got a much larger problem waiting in the wings. If this doesn't even out a bit in the next few days, it's going to get ugly fast:
Term AA
1-day 2.50 3.38 2.66 3.40
7-day 2.32 3.20 2.31 3.22
15-day 2.12 3.13 2.44 2.92
30-day 2.08 3.13 2.40 2.81
60-day 1.94 2.89 2.47 2.79
90-day n.a. 2.78 2.41 2.58

There's a high risk premium now, which is pretty rational. Short money is too tight, though. Look at the difference between AA nonfinancial and AA financial. The market expects another 50 bps cut by summer, but it doesn't expect financial risk to diminish much or at all.

There are signs of trouble in commodities and in the Asian markets. Endeavour's losses stem from volatility in Japanese government bonds:
The fund suffered as the spread, or difference, between yields on Japanese 7- and 20-year bonds widened to 1.44 percentage points on March 17, the most in almost nine years.

``You've had a confluence of events that has led to extreme volatility and vast moves'' in Japanese government debt, said Matthews, 47, a former head of global fixed-income arbitrage at Salomon Smith Barney. ``The relative moves we've seen in Japan are not in the realm of anything we've ever seen for Japanese government bonds.''
The odd rate moves are blowing up various widely used hedging strategies which are inflicting some awful losses in various funds. I spoke to a financial advisor on Monday and he was completely spooked. There are two different types of investing in bonds. One is to buy for income. The other is to trade for price volatility. Both strategies really make money by using spread differences to finance the bonds. People hedge on both, but the most common hedges are now inflicting losses of their own as the relationships between yields on various types of investments move opposite to what the hedging model predicted.

Fed Funds rate is 2.25. Discount is 2.50. Look at treasury yield movements over the last week:
Date 1 mo 3 mo 6 mo 1 yr 2 yr 3 yr 5 yr 7 yr 10 yr 20 yr 30 yr
03/11/08 1.82 1.48 1.64 1.67 1.74 1.93 2.61 3.04 3.60 4.48 4.53
03/12/08 1.68 1.48 1.56 1.58 1.63 1.81 2.49 2.93 3.49 4.35 4.40
03/13/08 1.56 1.35 1.50 1.54 1.63 1.84 2.53 2.99 3.56 4.42 4.47
03/14/08 1.20 1.18 1.32 1.37 1.47 1.65 2.37 2.84 3.44 4.30 4.35
03/17/08 1.16 1.11 1.31 1.32 1.35 1.52 2.23 2.71 3.34 4.24 4.29
03/18/08 0.71 0.92 1.32 1.40 1.58 1.74 2.42 2.88 3.48 4.30 4.35

Look at how short yields collapsed yesterday.

As of yesterday's close it did not appear that mortgage rates were going to be much affected by the Fed action. They may go higher on risk.

Commodities are falling fast.

I am not sure that most of the substitute strategies for hedging are going to work out any better in the long run. Volcker's comments last night seem dead on to me. Volcker was not in favor of dismantling the traditional restrictions on financials and banks in the first place. When he comments that the current situation is an inappropriate regulatory framework, he is obliquely referring to the fact that by dissembling Glass-Steagall (Congress) we introduced much larger potential risks into the financial sector. In order to compensate, we needed enhanced regulation on financials:
Rose: So the Federal Reserve should not be doing that, in your judgment. It’s not because it shouldn’t be done, it’s the role of the federal government.

Volcker: Absolutely. In this situation, they stepped in and nobody else was there to do it…They stepped into a vacuum, and I think quite appropriately, it’s a judgment they had to make. But is this what you want for the longstanding regulatory support system? My answer is no.

Rose: Somebody said to me that we entered a period in which they were worshiping mathematical models … And mathematical models had no business sense.

Volcker: The market was being run by mathematicians that didn’t know financial markets. And you keep hearing, you know, god, that event should only happen once every hundred years, according to my model. But those every hundred years events are coming along every two or three years, which should raise some questions.
Congress is still sitting around doing nothing. The regulatory structure is a creation of Congress, not the Presidency. Greenspan is still pushing the "no regulation" crap. I don't know how this will end. I think as long as the Fed chops the head off firms that become dangerous it will return a measure of sanity in the short term, but in the long term we need an enhanced regulatory framework or we will return to the boom-bust cycles of the 1800s, which were very painful and included one depression. Enhanced regulation requires money, which Congress must supply. As far as I can see, Congress intends to do nothing.

Tuesday, March 18, 2008

Obama's Chances

The Anchoress pegged it early on:
These are not “racist” or “sexist” gambits being played by Wright or Steinem, but appeals to emotion, and appeals to emotion are too often used to gloss over a lack of substance, or so I have been told by my correspondents on the left, lo these many years, as they accuse the GOP of governing on “fear,” (because terrorism is not a real threat).

And while the victim card appeals to emotions, it tends to noisily set off rage in those who listen and perceive themselves as being identified as the “enemy.” So everyone gets emotional, everyone starts yelling, and no one is listening or making any sense.

The victim card is an odd card to play in a presidential race; victimhood in and of itself seems like a strange theme for either presidential candidate to embrace. “Vote for me; I’m the bigger victim and this qualifies me to…”what, exactly, lead the wailing?
Yup. So aside from the anger that "God Damn America" generates in most Americans, most people are going to react with a subliminal worry about victimology in a presidential candidate. The reason why Obama has been getting more votes from men is that Hillary's supporters have been slapping down the victim card with such regularity. It's noxious, and it certainly inspires no confidence whatsoever.

In today's speech, Obama addressed Wright's "God Damn America" sermon head on:
...the remarks that have caused this recent firestorm weren't simply controversial. They weren't simply a religious leader's effort to speak out against perceived injustice. Instead, they expressed a profoundly distorted view of this country - a view that sees white racism as endemic, and that elevates what is wrong with America above all that we know is right with America; a view that sees the conflicts in the Middle East as rooted primarily in the actions of stalwart allies like Israel, instead of emanating from the perverse and hateful ideologies of radical Islam.

As such, Reverend Wright's comments were not only wrong but divisive, divisive at a time when we need unity; racially charged at a time when we need to come together to solve a set of monumental problems - two wars, a terrorist threat, a falling economy, a chronic health care crisis and potentially devastating climate change; problems that are neither black or white or Latino or Asian, but rather problems that confront us all.
He also tried to address victimology in the black community:
For the African-American community, that path means embracing the burdens of our past without becoming victims of our past. It means continuing to insist on a full measure of justice in every aspect of American life. But it also means binding our particular grievances - for better health care, and better schools, and better jobs - to the larger aspirations of all Americans -- the white woman struggling to break the glass ceiling, the white man whose been laid off, the immigrant trying to feed his family. And it means taking full responsibility for own lives - by demanding more from our fathers, and spending more time with our children, and reading to them, and teaching them that while they may face challenges and discrimination in their own lives, they must never succumb to despair or cynicism; they must always believe that they can write their own destiny.
We'll see if this goes far enough. I disagree that we are in a racial stalemate. Obama did point out that Wright's picture of America was flawed, and that we have made great progress. Through most of the rest of the speech he moves uneasily in and out of stereotypes and reality. There are plenty of people who are too lazy to work and who try to get on some government welfare program in order to avoid that unpleasantness, and the truth is that allowing unrestricted immigration is driving down wages for the working class. Attributing reasonable worries to isms is a bad error.

As far as I can see, Obama didn't fully put away the victimology problem in his speech today. He may even have strengthened the case with some of his later comments. So everyone's going to have to take a look at this man and decide for themselves whether he is infected by it. I don't think he does exude it. But if he isn't infected, why would he let his kids sit in a church and listen to it? (Maybe he wants them to have contact with it, and compensates by home teaching? This is plausible.)

And Michelle Obama's comments do run along the lines of Reverend Wright's victimology theology, which is going to worry a lot of people. Here's the passage of the speech that most concerns me (here Obama is quoting from his book about his reaction to his early experiences in this church, and the Rev. Wright's preaching):
I imagined the stories of ordinary black people merging with the stories of David and Goliath, Moses and Pharaoh, the Christians in the lion's den, Ezekiel's field of dry bones. Those stories - of survival, and freedom, and hope - became our story, my story; the blood that had spilled was our blood, the tears our tears; until this black church, on this bright day, seemed once more a vessel carrying the story of a people into future generations and into a larger world. Our trials and triumphs became at once unique and universal, black and more than black; in chronicling our journey, the stories and songs gave us a means to reclaim memories that we didn't need to feel shame about…memories that all people might study and cherish - and with which we could start to rebuild.
How well does this square with "Jesus was a black man"? It's quite possible that this is what Obama might have heard, but it is apparently not quite what the Reverend Wright was preaching. It is very true that both the Old and New Testaments are extremely relevant to the human condition today. In the encounters with the stories of the lives, trials, decisions and fears of human beings thousands of years ago we really do encounter truths about human beings. Israel's failed experience with a government of judges, for example, is very relevant to the judicial activism of today.

Same thing with Epictetus. But I don't have to claim Epictetus was a woman in order to experience his relevance to my life. That's what is perverse in Wright's teachings. You can't shove the other person out in order to bring yourself into the picture. If you have to do that, there is something wrong with your psychological makeup. You haven't grown up. Obama's Ashley anecdote does seem an effort to address the issue by implication, but why not say it explicitly?

The questions about Obama's psychological maturity are what he really has to face. He's relatively young, very inexperienced, and it is reasonable for the voters to care a great deal about his fundamental character. It's fine to be hopeful and optimistic. We could use a heaping load of that in our leaders. We also need that optimism to be deeply infused and engaged with reality - otherwise it's just wishful thinking. And yes, some of Obama's comments about sitting down to talk to certain world leaders do strike me as wishful thinking.

A president infected with victimology would be a disaster, and I think that is precisely what is causing Hillary problems.

The average American, immigrant or non-immigrant, is not into the victim thing. By "average", I mean not part of the university/elite/idiocracy crowd. The average American has faced at least one of these circumstances
Most of those who have won through the difficulties have explicitly faced and rejected the victim thang. See, most of us can make out a case that we are victims in one way or another. You are a minority, you're a woman, you weren't born into a rich family, you are a recent immigrant, your mama didn't love you, Dad walked off and left the family, your wife/husband screwed around on you, you were stricken by some illness, your husband died, the factory closed and you lost everything, the bank closed and you lost everything, your kid is sick, etc, etc. The list of victim cards just rolls on forever!!! Sooner or later, life gives each of us a victim card. Play it and you're sunk.

The thing is, once you succumb to the victim mentality you are forever handicapped. You can never get out. I personally have a tremendous allergy to victimology, and that's because I want so desperately to survive as the most functional person I can. Believe me, I have to fight off the pity, I have to fight off the "poor-you" crap. I have to fight off the insistence on pain medication, because I really can't sustain my mental activity if I take pain-killing drugs. Too much brain damage. I choose to be conscious, in pain, happy and functional, and it is a choice. I have a very nice life in many ways, and it is grounded on all of my good fortune (the Chief, great family, good friends, the mercy of God, great doctor) AND refusing to be a victim. You've got to step out and meet life halfway.

So I know how crippling accepting the victim ID is. I don't trust anyone to lead this country who's involved in it at all. What I got out of Obama's speech is that he hasn't fully made that choice. I don't think he's into it, but the problem is that he hasn't made the choice, and apparently he is sitting in a church, and allowing his kids to sit in a church, that preaches it. He hasn't had to reject victimology. He was born into an upper middle class family and hasn't faced significant adversity (the Obamas' taxable income in 2006 was over $990,000). Both he and his wife got very good educations and are very fortunate people. It's only people like the Obamas who can afford the flirtation with victimology. The rest of us, who are down on our hunkers, can't. Is he here with us, or is he off hobnobbing with the professors who couldn't pour piss out of a boot if the instructions were written on the heel?

Whichever luckless person is elected to the presidency is going to find himself or herself exposed to extreme adversity. That's certain. Reading Obama's speech made me wonder what his choice about victimology will be when he has to make it. I can't tell. All that stuff about rejecting black America is misleading. No one expects him to reject black America. What the people of the US want to know is whether he rejects the ideology behind the dysfunctional portion of black America. He knows that it is dysfunctional:

What's remarkable is not how many failed in the face of discrimination, but rather how many men and women overcame the odds; how many were able to make a way out of no way for those like me who would come after them.
But for all those who scratched and clawed their way to get a piece of the American Dream, there were many who didn't make it - those who were ultimately defeated, in one way or another, by discrimination. That legacy of defeat was passed on to future generations - those young men and increasingly young women who we see standing on street corners or languishing in our prisons, without hope or prospects for the future. Even for those blacks who did make it, questions of race, and racism, continue to define their worldview in fundamental ways. For the men and women of Reverend Wright's generation, the memories of humiliation and doubt and fear have not gone away; nor has the anger and the bitterness of those years. That anger may not get expressed in public, in front of white co-workers or white friends. But it does find voice in the barbershop or around the kitchen table. At times, that anger is exploited by politicians, to gin up votes along racial lines, or to make up for a politician's own failings.
And occasionally it finds voice in the church on Sunday morning, in the pulpit and in the pews. The fact that so many people are surprised to hear that anger in some of Reverend Wright's sermons simply reminds us of the old truism that the most segregated hour in American life occurs on Sunday morning. That anger is not always productive; indeed, all too often it distracts attention from solving real problems; it keeps us from squarely facing our own complicity in our condition, and prevents the African-American community from forging the alliances it needs to bring about real change. But the anger is real; it is powerful; and to simply wish it away, to condemn it without understanding its roots, only serves to widen the chasm of misunderstanding that exists between the races.
But does he understand that the necessity for each person to explicitly reject it in their own lives? It's an either/or. Nor can you help a young kid who believes the world is against him or her by going on about how the world is stacked against him or her! It's not just black kids! It's half of everyone!

There really is no middle road - and this is more than just a black issue. It's a Maureen Dowd issue, it's a feminist issue, it's a Democratic issue. The Democratic party has spent quite a bit of time fostering victimology in the past few decades. It is the worst thing it has done to this country, and it is one of the major reasons why so many individuals are hesitant to vote Democrat. Obama needs the Independents, and to get them he has to explicitly eschew defeatism (victimology) and wishful thinking. He dances around it here, but does not quite close the sale.

Victimology has seeped right through our country. The conservatives aren't immune, no matter what they say. Read, for example, this rather whining article by Lawrence Kudlow on the topic of Bear Stearns being the sacrificial lamb:
Did Bear Stearns really need to go down in flames? It's a question that needs to be asked, and my answer is no.

Of course, I don't know the value of Bear Stearns's assets, and whether they could have served as collateral for private or government loans. So I cannot be entirely certain that my answer is correct.
Well, geeze man, if you don't know whether the company was flat broke or not, then why are you answering no? This starts out bonzo stupid and does not improve. Read it, if you are a conservative. This is the idiocracy in action, and it is an ugly spectacle. Here's a hint: if you want the privileges of a bank, you better be prepared to be shut down when you can't meet your obligations, which Bear couldn't.

The left has very fair criticisms of our current financial leadership. Many of these chiefs of finance are idiots. They expect the truck drivers to carry their losses. They really do want privatized profits and socialized losses. They are more than willing to stagger out in public waving their "poor me, whoda thunk" cards pleading for bailouts. They're probably wondering why the American rock stars aren't holding "Bank Aid" concerts already.

Our chickens are truly coming home to roost, on both the right and left. But those chickens are feathered not by racism, but by a pervasive failure to accept responsibility for the highly foreseeable results of one's own actions. Sorry, bank presidents have to accept responsibility too.

The majority of the American public sees the BS and is tired of it. It is time for politicians, bankers, rich people and the like to show accountability right along with criminals and dopers. That's what people thought they saw in Obama. They thought they saw a new consensus. They thought they saw a man with one foot in the reality pond. Eliot Spitzer just got dumped for this reason. People want the same rules to apply to everyone.

Read the speech. Obama makes many good points, but I think he has to confront the issue very directly. His major problem here is that the speech addresses victimology in too confined a fashion. Too narrowly. The American public is trying to figure out whether this is a nice guy who has not quite grown up or whether he's really got both oars in the waters of reality. A lot of his social program is not even remotely possible, so he really needs to engage social reality head on in meaningful ways.

It's rather obvious that large sections of our society DON'T engage with reality. It's also obvious that they are costing us a pretty penny. Any society can only carry so many whiners on its back.

One thing for sure. This speech convinced me that he's head and shoulders above Hillary. He really is more flexible, more realistic, less self-righteous, and less reflexively defensive toward criticism than she. But does he have a strong enough character to sit in the hotseat and take the flak? The next president is going to need tremendous psychological maturity to achieve much.

Regardless, the man is good for the Democratic party, which is more than you can say about a lot of Democratic politicians.

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