Career News 24/7: The Big Picture

Monday, September 5, 2011

The Big Picture

10 Labor Day Afternoon Reads
Precipitous Reduction in Bank Reserve Requirements
Equity Scenarios: Returns Required to Regain Peak
Labor Day, Leen’s Lodge, Employment Report
WP: Special Report on “Breakaway Wealth”
Kurt Vonnegut: Stories Have Shapes
Germans who play with fire . . .
FDIC Bank Failures
A House with a Slalom Course View
Roubini Warns of Global Recession Risk

Posted: 05 Sep 2011 02:00 PM PDT

Its been a hazy, lazy Labor Day, capping off a full week of outdoor activities. I am now back in my climate controlled lair, ready for a nap. I know exactly what I will read before dropping off for an afternoon siesta:

• Nassim Nicholas Taleb and Mark Spitznagel The great bank robbery (CNN) Bankers to extract $5 trillion from the US economy this in the coming decade
• Supercommittee Pits Lobbying Firms' Clients Against One Another (Bloomberg)
• Forsyth: Buy Stocks, Not Economic Data (Barron’s)
• How the wealthy keep rolling in it (Business Live) see also Revolt of the Elites (Balkinization)
• Energy grid: safe from cyber attack? (Discovery News)
• Life in Hooverville (…….)
• Social Media’s Slow Slog Into the Ivory Towers of Academia (The Atlantic)
• Some Neurons Just Love Animals (Noah Gray)
• Ten Enduring Myths About the U.S. Space Program (Smithsonian)
• All an act: Notes on John Cusack and the art of being yourself (Press Play)

What did you read this weekend?

Via Jeff Parker, Florida Today

Precipitous Reduction in Bank Reserve Requirements

Posted: 05 Sep 2011 11:30 AM PDT

In Barron’s this week, Alan Abelson discusses the gradual changes in Bank reserve requirements over the years, and the impact that has had on banking, via Crosscurrents Alan Newman.

Note that this is not the 2005 SEC change in leverage rules fro investment shops, but parallels the same radical deregulation and regulatory capture.

Excerpt:

“Alan Newman, whose CrossCurrents market commentary is unfailingly informative [is as] bearish as ever. Alan leans heavily on technical stuff to analyze the increasingly flighty investment scene, but don’t let that scare you. He admirably avoids most of the mumbo-jumbo that makes so much of the genre incomprehensible and gives voice to his opinion in clear and lucid declarative sentences.

Not least of the various and sundry concerns that trouble Alan is that a generation of economic growth leading up to the Great Recession was largely fueled by an enormous expansion of debt and we’ve yet to pay the full price of that extreme and lengthy fecklessness. That’s not exactly a secret, to be sure, but the key to assessing the future of the economy and the markets is to find out what got us into this awful jam to begin with.

And one of the prime causal agents of this massive growth in borrowing, Alan relates, was the precipitous reduction in bank reserve requirements, from 12.3% in 1968 to 10.1% in 1978 and 8.5% in 1988. What that meant, he explains, was that the banks could lend 12 times their reserves, which, we might add, most of them lost no time in doing, and ultimately lived to regret it, except for those institutions that are no longer standing.

A legacy of that barely credible rush to lend that bedevils us still, Alan laments, is that reserve requirements have become something of a meaningless statistic as banks push into more-lucrative businesses like the creation and sales of sophisticated derivative instruments “that no one truly understands” or, for that matter, has even a tenuous grasp of the attendant risks.

And he points out, too, that banks now have gone whole-hog in high-frequency trading, which accounts for over 70% of turnover on the exchanges. And, we might add, is finally drawing more intense scrutiny by the often somnolent SEC. In short, increasingly, and one might say eagerly, banks have abandoned their traditional roles in favor of speculating. Crucial in enabling the banks to indulge their wayward activities was the 1999 repeal of the Glass-Steagal Act enacted in 1933 to prevent the banks from using the savings of widows, orphans and other innocent depositors as the coin to speculate with.

One mind-boggling result cited by Alan of the banks becoming prey to the casino mentality is that dollar trading volume now weighs in at four times gross domestic product — that’s right, quadruple GDP — and up a full tenfold what it was from 1926 to 1999. We’ve become a nation of paper swappers.

According to Alan, it could be a long time before the bear market bottoms, and he’s wise enough not to give a date or a number. Among his immediate worries is that the cash holdings of mutual funds, the tinder, as it were, to ignite a real rally, at last count was a meager 3.3% of assets, an all-time low. So, he asks, “What will fuel the next bull market? Hope?”

Interesting stuff . . .

Source:
A Doleful Report
ALAN ABELSON
Barron’s SEPTEMBER 3, 2011
http://online.barrons.com/article/SB50001424052702303807404576540463846785874.html

Equity Scenarios: Returns Required to Regain Peak

Posted: 05 Sep 2011 09:00 AM PDT

Many investors ignore this sort of data, but its too important not to occasionally remind people about.

The table below looks at the nature of asymmetrical gains and losses, especially, the returns necessary to recover from losses. A 25% loss requires 33% gains to get back to break even, a 50% loss requires a 100% gain, etc.

Consider the following Bull, Bear and In-between scenarios for return to break even:

Source: BLS, FactSet, J.P. Morgan Asset Management.
Data reflect most recently available as of 6/30/11.

Source: JP Morgan funds

Labor Day, Leen’s Lodge, Employment Report

Posted: 05 Sep 2011 07:30 AM PDT

Labor Day, Leen's Lodge, Employment Report
David R. Kotok
September 4, 2011

My long-time friend and fishing guide Ray Sockabasin put the onion rings in a special beer batter concoction that he characterizes as an "old Passamaquoddy Indian recipe." With the frying pan on the fire, in went the onion rings… sizzle, sizzle, sizzle, and out they came – fabulous. They were so light you could think of them as almost floating – why, you might use one as a 'bobber' if you were bait fishing in Big Lake in Grand Lake Stream, Maine.

Labor Day weekend is a quieter time in Maine. This is a place where you can read, study research reports, take some time to go fishing, have conversations, and at the same time consider some very serious issues. On Friday morning via Leen's Lodge satellite connection, the eyes were fixed on the employment report.

We channel-flipped between CNBC and Bloomberg. We happened to catch the release on CNBC when another good friend and skilled economist, Bob Brusca, was guest hosting for the hour. We listened to the dialogue among Brusca, Diane Swonk, Mark Zandi, Steve Liesman, and others. Setting aside some commentary, which I would consider rather innocuous, let me focus specifically on the skilled comments that came from Liesman and the three guest economists.

No matter what one does with this employment report, one has to come away with an ominous feeling. It simply was not good. Interpretation of details could suggest that it was break-even, or "not any worse than I thought," or subject to reinterpretation because of the revisions. There was nothing in it that was robust or optimistic.

There is much speculation about why this is so. Some of us, myself included, expected the second and third quarters of 2011 to be particularly weak. We attributed the loss of at least a half point in GDP to the supply-chain interruptions in the manufacturing sector due to the tragedy in Japan. We cannot blame the earthquake and the hurricane for August employment data. The effects of those natural events will be seen when we get the report in early October for September. We can attribute some major employment composition changes to the changes in government policy, the debate over layoffs in Minnesota, or to the labor interruption that took place with Verizon. In addition, August is notoriously a difficult month for employment data. It is impacted by all sorts of cross currents, from vacations to auto cycles to other causes.

With certainty, the employment report guarantees that interest rates will remain low and stay low for a protracted period. On the heels of the employment report, the Treasury market rallied enormously. Ten-year Treasury yields dropped by a quarter of a point, and thirty-year Treasury yields did the same. The Federal Reserve did not act in the hour preceding or following the employment report. So, when you look at this extraordinary volatility in which Treasury securities moved by more than two full points, you cannot attribute that to the Fed. You can attribute such violent moves to the high volatility applicable to Treasury securities in a climate of enormous uncertainty.

Our view remains the same. We expect the fourth quarter of 2011 to be better than the second and third quarters of 2011. We expect the supply-chain interruptions to have run their course. We expect the rebuilding and recovery in states from South Carolina to Maine and Vermont to be underway in the fourth quarter. We also expect the commitments that will be made to continue that rebuilding and recovery to take place in the early part of 2012.

It is a shame that the failed policies in Washington from our political leaders, both Democrat and Republican, House, Senate, and White House – that is right – failed, failed, failed – miserable policies coming from Congressmen, Senators, Democrats, Republicans, and the President – all of them carry the unemployment burden of the United States on their shoulders and in their hands. On the left, they would spend without reservation and without constraint. On the right, they would continue to subsidize very wealthy, specialized investment managers with carried interest tax at fifteen percent and subsidize ethanol production at the cost of billions of dollars a year, while failing to pay those who need help or threatening payments to those who serve in the Armed Forces of the United States. Our political system in Washington is broken. Democrats, Republicans, Congressmen, Senators, and the President have failed to lead. They all put their re-election possibilities and their personal political careers ahead of the nation's interests.

The employment report should be the time that the President speaks to a joint session of Congress. That should be convened at 9:00 am on the first Friday of the month, when the unemployment statistics from the previous month are released to the public.

Labor Day, Leen's Lodge, employment report. Satellite television brings the unemployment report onto the lake, into the blue sky, and into the sunshine. It interferes with the ambience of a wonderful location in Maine. We will take a little time off, but must confess, the ruminations and discussions here are on national policy issues, markets, and economics. The good news is, the fishing is terrific, and the geography of pristine waters and wonderful green surroundings survives in spite of the monsters that lurk in our government in Washington.

~~~~

David R. Kotok, Chairman and Chief Investment Officer

WP: Special Report on “Breakaway Wealth”

Posted: 05 Sep 2011 06:00 AM PDT

There is a huge Washington Post special report on Breakaway Wealth in the US. More than most other industrialized nations, the US has seen the top 0.1% compensated in vastly disproportionate numbers versus the rest of the populace.

There are at least several reasons to be concerned about this, beyond basic fairness: 1) Nations that have extremes wealth disparities tend towards social unrest. Usually, its banana republics and dictatorships, but it could happen in a corporate-owned quasi democracy as well. 2) CEOs and other company insiders have been engaging in a massive grab of shareholders wealth for decades. Its gotten appreciably worse in the 2000s. 3) Management is now trying to hide their compensation from the business owners — the firm’s shareholders

Making matters even more outrageous, these CEOs are trying to pass legislation that would legally allow them to not to disclose executive compensation at public companies:

“Here's one financial figure some big U.S. companies would rather keep secret: how much more their chief executive makes than the typical worker. Now a group backed by 81 major companies — including McDonald's, Lowe's, General Dynamics, American Airlines, IBM and General Mills — is lobbying against new rules that would force disclosure of that comparison.

The lobbying effort began more than a year ago. It involved some of the biggest names in corporate America and meetings with members of both parties on the House Financial Services Committee and Senate banking committee. The companies and their Republican allies in Congress call comparisons between the chief and everyone else in the company "useless."

But some Democrats and investors say the information should be issued to highlight the growing income disparity in the United States. They add that opponents of disclosure merely want to hide the outrageous scale of executive pay packages.”

Legalized theft of shareholder assets, approved by a corrupt Congress. What little respect I had left for the GOP is now completely gone. This is not “business friendly” — its utterly corrupt theft of shareholders.

The charts below (click for larger graphics) show exactly how absurd this has become. The rumors you may have heard about class warfare have been greatly exaggerated . . .

US Compared with other countries

Who makes up the top 0.1%?

Rising executive pay

Growing share of income for the rich

Charts via Washington Post

Sources:
Special Report: Breakaway Wealth
An ongoing Washington Post series about how the rich are pulling away from the rest of America
http://www.washingtonpost.com/breakawaywealth

Business group: Public companies shouldn't have to compare CEO and worker pay
Peter Whoriskey
Washington Post, June 24 2011
http://www.washingtonpost.com/business/economy/business-group-public-companies-shouldnt-have-to-compare-ceo-and-worker-pay/2011/06/23/AGGMcFjH_story.html

Kurt Vonnegut: Stories Have Shapes

Posted: 05 Sep 2011 05:00 AM PDT

Hat tip kottke

Transcript here

Germans who play with fire . . .

Posted: 05 Sep 2011 04:30 AM PDT

People who play with fire
Kiron Sarkar
September 4, 2011

Exit polls in respect of the vote in Mrs Merkel’s home State of Mecklenburg-Vorpommern (hope I got the spelling right), suggest that she has been trounced, as have her coalition partners (Free Democrats), who have been so badly beaten that they could have lost all their representatives in the regional assembly. This is the 6th regional election loss this year for Mrs Merkel and her coalition – a bit careless I would have thought.

Now it gets serious. The key election issue was Mrs Merkel’s handling of the Euro Zone crisis – she had tried to get tough on the Euro Zone – too little, too late. However, I suspect she will be far less tolerant from now on. As I keep banging on, Mrs Merkel is not a natural leader – she is a back room operator, cautious of taking a position unless she has achieved prior consensus. Furthermore, she does not understand markets – a common problem with most European politicians, bureaucrats and officials.

The next German regional elections are in Berlin later this month.

The Greeks have been ignoring all calls to get serious. They have run out of time. On Wednesday, the German Constitutional Court rules. Most believe that they will not block the bail out of the peripheral Euro Zone countries. Quite possibly, but giving a blank cheque to the executive, is also unlikely, in my humble opinion. They may, for example, insist on additional oversight by the German Parliament, which will make the EFSF and the future ESM unworkable, as decisions (which need Parliamentary approval) will take far too long to deal with market issues – basically means that it is over to you ECB/Monsieur Trichet to sort things out – and they are totally reluctant, though what choice do they have.

Recently the German President accused the ECB of violating its mandate and Article 123 of the Lisbon Treaty. The head of the German Central Bank (the Bundesbank), Mr Jens Weidmann has, equally, been highly critical of the ECB – he stated that EU law was being “gutted” by the ECB bond purchases of Italian and Spanish and other PIIGS debt. No
diplomatic terminology there, you will note.

Essentially, the EU/ECB have overreached themselves and imposed their wishes (through unelected Commissioners in the case of the EU and appointed Board members in the case of the ECB) upon Europe. I seem to remember “no taxation without representation” and we all know what happened next. The French have generally exercised more political control (until the French revolt) over their people, than other
countries in Europe and Mr Trichet – well he’s French.

Recent polls suggest that the German’s don’t necessarily want to ditch the Euro. Yes, a number want the DM back, but the majority (quite sensibly) will live with the Euro, but don’t want to bail out the entire Euro Zone, especially if they don’t meet their commitments (Greece….). I totally understand that sentiment. Indeed, I believe the Germans have been uber generous to date, but that generosity has a limit.

This, off course, leads me back to the Greeks. They have totally ignored all their commitments/promises etc. Their fiscal position is unsustainable and worsening. The proposed austerity measures are unworkable and the Government has given up trying. This cannot continue. However, the Greeks will have to be allowed to default – and
I mean 70%+ haircuts – forget the 21% “deal” with the banks. Then you have the next issue, recapitalisation of the European banks and avoiding contagion spreading to, not just the other PIIGS, but Belgium and France and…

The Italians better reconsider their recent attempts to backslide from their commitments – they have a large debt maturity this week – some E14.6bn and E62bn by the end of September (the highest ever in a single month). In total, Italy must roll over E170bn by end December – Whoops. Italian 10 year bond spreads crept up to near 5.30% on Friday,
up 30bps+ recently.

We are coming to an end game – waffle, bluff and bluster wont work mes amis. Neither will the recent Merkel comments (and the views of the senior German politician I met last week) who told me that the markets were just getting hysterical and that they (the
politicians/bureaucrats/officials) have it all under control and ample time to sort things out.

I still have the email address of the particular German politician. I don’t believe I’m generous enough to avoid sending him a short note in due course, though I suspect that my invitation to visit the Bundestag will be forgotten about. Oh well, still worth it – indeed, it’s irresistible.

Will await the market reaction and the German Constitutional Court ruling on Wednesday, just to be sure though.

~~~

A qualified UK accountant, Kiron joined the M&A dept of N M Rothschild in London. He was then appointed head of M&A of Rothschild (Hong Kong). On his return to the UK, he was a founding member of the Rothschild international privatisation team. Subsequently headed up the Central and Eastern European ("CEE") team – rated No 1 in 4 out of 5 years (Privatisation International).

On leaving Rothschild, he worked as privatisation adviser to the UK Governments Know How Fund, which was established to advise Governments in CEE on policy, privatisation, economic, financial, regulatory and other issues. Subsequently European Head of Media, Tech and Telecoms at CIBC World markets. Following CIBC, Kiron advised on telecoms and energy deals in CEE.

Kiron has acted as a lead adviser in respect of over US$150bn of deals and has worked globally in both developed and emerging markets.

FDIC Bank Failures

Posted: 05 Sep 2011 03:45 AM PDT

Just cause its a holiday weekend does not mean that the FDIC isn’t busy closing insolvent banks!

Via Ron Griess of the Chart Store:

˜˜˜

A House with a Slalom Course View

Posted: 05 Sep 2011 03:45 AM PDT

Perfect for labor day weekend!

Competitive waterskier Steve Krigbaum and architect Scott Hughes designed this contemporary lake-front home in Hobe Sound, Fla., with the water in mind.

9/1/2011 6:39:13 PM

Roubini Warns of Global Recession Risk

Posted: 05 Sep 2011 03:00 AM PDT

Economist Nouriel Roubini says the risk of a global recession is greater than 50 percent, and the next two to three months will reveal the economy’s direction. In an interview with WSJ’s Simon Constable, Roubini also says he’s putting his money in cash. “This is not the time to be in risky assets,” he says.

8/11/2011 6:42:02 PM