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Saturday, November 5, 2011

The Big Picture

The Big Picture

Link to The Big Picture

Fun Facts: October Returns

Posted: 05 Nov 2011 12:00 PM PDT

Click to enlarge:

Source: Bianco Research, Charts Of The Week of November 2, 2011

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Despite the end of month 2 day slide in stocks, October 2011 ranks as one of the best Octobers ever in stock market history.

Here are some interesting facts regarding October's returns:

• The S&P 500 returned 10.92% on a total return basis during this past month, marking the best October since 1982.
• According to Doug Kass, the ten largest monthly gains have all occurred during secular bear markets.
• Merrill Lynch noted it was the third best October and the 23rd highest monthly return for the S&P since 1928.
• According to MarketBeat, October did not see back-to-back daily declines at all. The last time a month went without 2 consecutive days of declines was 5 years ago.
• On a seasonal basis, September and October are historically two of the three worst months to own stocks.
• November and December, on the other hand, rank as the fourth and second best months to own stocks, respectively.

Looking at the historical statistics, markets are likely to continue with an upward bias throughout November and December. Hedge funds are somewhat under-invested and playing performance catch up (but not Mutual funds — who are fairly loaded and dealing with equity outflows).


Is Starting A Business Safer Than Your Job?

Posted: 05 Nov 2011 11:30 AM PDT

Perfect for a soft NFP day!
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Click for ginormous graphic:

Source:
Is Starting A Business Safer Than Your Job?
Lendio, October 25, 2011


Where Will the Jobs Come From?

Posted: 05 Nov 2011 08:00 AM PDT

Where Will the Jobs Come From?
John Mauldin
November 4, 2011

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Where Will the Jobs Come From?
Stupid Government Tricks
Let's Tax the Millionaires
Kilkenny, Atlanta, DC, and Home

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I find myself in Liam’s taxi on the beautiful drive to Kilkenny through the Irish countryside for a few hours this very early Friday morning, so what better time to begin writing about employment than in a country that is struggling, just as most of the developed world is, to find good jobs for its people. I’m on my way to a conference that will talk about the economics that is driving the world’s leading governments to distraction in Cannes. Is Greece going to vote? Take the money? Will it be an orderly default? Should Ireland default? Whatever I write, the situation will change as soon as I hit the send button tonight. (For the record, I think Greece should have a referendum. You don’t go into what they are getting ready to suffer without national buy-in. No elitist deals. Put it to the people to decide, one way or the other.)

Where Will the Jobs Come From?

With seven kids, jobs have been on my mind of late. It has not been easy for some of them. It helps me to remember what it was like to be in my 20s in the ’70s and to really struggle to pay the rent and put food on the table for a family. Savings? Hah! And while I have been able to help the kids here and there, back then there was no one to help me. More than a few nights, I woke up with a knot in my stomach, wondering whether to pay rent or make payroll. College did not prepare me for the “joys” of being an entrepreneur.

Interest rates were 18% if you could even find a bank in Texas to lend on hard receivables. Unemployment was north of 8% and sometimes 10%. The Japanese were beating our brains out. It was the Carter malaise years. All my friends were struggling as well, so it seemed normal. Kind of like now.

And I know I have written this before, but it bears repeating. The correct answer then, as it is today, to the question, “Where will the jobs come from?” was “I don’t know, but they will.” That is what free markets and entrepreneurs do: they create jobs where none existed, given the chance.

And that’s how it looks today. This week’s ISM and jobs reports augur poorly for employment in the coming months.

Jonathan Tepper (co-author of Endgame) of Variant Perception writes this week:

“Economists miss the start of recessions for two reasons: 1) they focus on coincident to lagging data, and 2) they use data series that are heavily revised, rendering them useless in real time.

“For example, most mainstream economists did not recognize the beginning of the last recession that began in December 2007 until mid-2008. Leading indicators had plunged, yet coincident and lagging data continued to be positive. However, once the data for non-farm payrolls and GDP were revised, the loss of employment and the loss of economic output were much greater than had originally been estimated. In all likelihood, we are seeing a similar dynamic play out today.

“All of our leading indicators have been pointing down since early spring. Now many unrevised short leading indicators are pointing towards weakness in employment, output and asset prices. The GDP weighted employment reading for ISM services and manufacturing is now clearly below 50. The last times this happened was before the 2001 recession and before the 2008 recession.”

You can’t read any serious economic analysis of late that does not talk about jobs, whether in Europe or the US or Asia. And not a lot of it is pretty. Politicians offer “plans” for jobs, most of which go to great lengths to illustrate the sympathy they have for people out of work, but without offering any real ideas on how to create meaningful, lasting jobs. Some are actually destructive of jobs, far from creating any (these are of the “I’m from the government and I’m here to help” variety).

I have been having a rather lively email conversation with several serious thought-leaders about what we should do to get us out of the current job malaise. The ideas we are discussing are worth a wider audience, so Bill Dunkelberg, who is the Chief Economist for the National Federation of Independent Businesses and I have decided to write what we hope will be a short book on employment (I know, I have never done a short book yet). How are jobs created? What policies should governments adopt to help create jobs? How do we get back to full employment in the US in a Muddle Through economy that needs at least 125,000 jobs a month just to keep up with population growth? (Today we learned that in October new employment was just 80,000.)

Stupid Government Tricks

The book will be US-centric in its focus, but the policies we will be talking about can be adapted to almost any country. And as long-time readers know, when I start on a book project, some of it tends to leak into the weekly letter; so in between writing about the crisis du jour in Europe, I will give you a small preview of where we are going. I should note that Dunk and I will be getting a little help from our friends, and we want your help in some very specific ways.

First, I know my readers are among the smartest on the net. If you have an idea about how to increase employment, send it to us. Put “jobs” in the subject line.

Also, most of America is familiar with David Letterman’s occasional skit called “Stupid Animal Tricks.” We want to do a section on government policies that hurt job creation. At all levels, from local to national. Send us your anecdotes and notes on odd rules and laws that destroy jobs and opportunity, rather than create them. Almost everyone has a story about how government is hurting their business. Tell us yours.

And at the same time, what do you see that is working? Why do some states seem to attract businesses and others lose them? Again, send your comments with the subject line “jobs.” And, you’ll get a footnote if we use your suggestion. (Hey, I love being footnoted!)

In that regard, I call your attention to a column in Thursday’s Wall Street Journal by Daniel Henninger about whether Texas Governor Rick Perry (now candidate for president) can take credit for the jobs creation that has been happening in Texas. And the writer’s point, and I concur, is that he can only in the sense that he didn’t get in the way and did help pass a few bills to make it easier. And you do have to give him credit for being aggressive about luring businesses.

But that has been the case as long as I can remember. Democrat or Republican, Texas governors and politicians in general recognize that businesses drive employment, which drives the economy. In that regard, Perry does “get” what helps create a favorable business climate (not that that would be the reason to elect him). The columnist interviewed a lot of businesses that had come to Texas. It was not just lower taxes that brought them; it was an overall favorable business climate and an able workforce that made the difference.

Henninger has some very nice things to say about Texas and its work ethic:

“In 1990, one of the world’s biggest companies, Exxon Mobil, left New York City for Dallas. Exxon’s former CEO, Lee Raymond, says the move in part was indeed about costs and New York State’s notoriously overbearing tax authority. But it was also about working amid a culture of competence. 'It’s just the attitude in Texas of getting things done and doing them well,’ he says.

“Mr. Raymond remarks that the economic policies that in time trapped the Northeast and Rust Belt in spirals of decline never touched Texas. But this is about something beyond low taxes and no unions: 'In Texas the people tend to be farmers or individual businessmen, and they have this attitude: We have to make do with what we have and work together to get things done and survive. It’s can-do. That attitude permeates everything there.’”

And while the part of me that is deep-roots Texan likes to believe that somehow we are special, the part of me that has been to 49 states and 60 countries smiles a little at my pride. I find that same attitude in Maine, where I go fishing in the summer. And in Atlanta, where I will be next week. And in New York City, and Colorado. Everywhere I go I find people wanting and willing to work hard.

It is not just the US, either. As I noted a few weeks ago, the Irish may be at each other’s throats with their politics, but they are united in their desire to “sell” Ireland as a center for business (and the jobs businesses bring). And while the Dutch work many fewer hours than we do in the US, their productivity is manifest and their export power per person is amazing. South Africa? Thailand? Japan? China? I could go on and on. Everywhere I go I see the drive to excel and get things done. Yes, with different local emphases, but with that same basic human drive.

“A more recent corporate immigrant [to Texas], Alan Boeckmann, until recently CEO of Fluor Corp., the engineering and construction firm, says regulatory and legal hassles pushed Fluor out of California. Congress passed Sarbanes-Oxley, but 'California had its own version.’ There were constant class-action suits over Fluor’s benefits. 'It could have been settled, but not in California. That’s how the game is played there.’

“When word of the 2006 move got out, 'California made no attempt to keep us.’ In Texas, 'things started to happen quickly, without us initiating them.’ The Irving Chamber of Commerce did orientation sessions for employees and spouses, even helping with new-house searches. Or 'little things’: Irving on its own renamed a street Fluor Drive, which in California or the Northeast would be laughable. Those Texas rubes!”

But the workers of California are no slouches. Witness Silicon Valley. And the amazing biotech companies of Southern California. And California farm productivity is legendary.

Yet certain states seem to be the beneficiaries of businesses moving to them from certain other states. The data on that is compelling. Lower taxes? Less regulation? Lower costs? (Certainly no one chooses Texas for the weather. I left San Francisco yesterday and could only wish for days like that in Texas.)

Let’s hold that thought on business-friendly states for a few paragraphs and turn to two other op-eds in a weekend edition of the Wall Street Journal from a few weeks ago. The first was by Peggy Noonan, who may be the most gifted writer and commentator of our times. The Weekend Journal is where you can find her, on Saturday mornings. This particular column was poignant, as she was focusing on the angst she sees in the world outside Washington:

“Look, we are in a remarkable moment and I’m not sure we’re noticing it in the day-to-day of politics and media. Last week I wrote of the new patriotism that I see taking hold of the American establishment, if that’s the right word—business leaders, doctors, scientists, entrepreneurs, journalists and lawyers who find themselves feeling a great, deep yearning to help save their country. That public-spiritedness is waiting to be harnessed and led by good men and women who, in words I’ll explain in a moment, have passion not for themselves but for America.

“What’s behind it is fear. The economy is tanking and can take a whole world with it. But what’s interesting—and new—is that the fear is not finding its expression (again, among those loosely described as the establishment) in rage, or in deeper partisan antagonism. Democrats could be feeling bitter and snarky: President Obama didn’t work, and they’re not in love with him anyway, so why not bash Republicans just for fun? Republicans could be feeling mindlessly triumphant: We’re on the verge of a major victory, make way for your new rulers. But that’s not what I’m seeing. What I’m seeing is a new convergence of thought among Democrats and Republicans who are not in Washington and not part of the political matrix. They are in new agreement about our essential problems and priorities: that the economy comes first, all other crises (in foreign affairs, in our culture) come second, because they cannot be helped without an economy that is healthy and growing. They all agree—no one really argues about this anymore—the government is going bankrupt. They all agree the entitlement system has to be reformed. Heck, they all respect Paul Ryan, for his seriousness. They all want grown-ups to come forward with ideas that maybe each party wouldn’t love but that might do the country some good.

“That is what I see in every business and professional meeting, in conversations with Democrats and Republicans: a new convergence of thought among the thoughtful.”

She then goes on to describe two focus groups she watched that week of “Wal-Mart moms,” one in Iowa and the other in Orlando, Florida. A few strategic quotes:

“In Orlando they were asked to describe in a word or two how things are going in the country. The responses: 'Depressing,’ 'different,’ 'discouraged,’ 'sour’ and 'bad.’ Any positive words to describe our country right now? Silence. How, asked the moderator, do you see our economic troubles in your life? 'I see it every day in my job,’ one woman said. Two weeks ago her company put up a posting for a position. Two hundred fifty applicants responded, 'all overqualified.’

“Another: 'Most houses in my neighborhood are under foreclosure or for sale.’ Another: 'If I had the financial stability I think I’d just get out of here.’

“…What do they want in a political leader? Someone who cares about 'Jane Doe on Main Street that can’t pay her electric bill.’ Someone 'with passion not for himself but for America.’

“Do elected officials in Washington know how you live? In Orlando there was a chorus of noes: 'They have a bunch of chefs cook for them.’ 'They’re more privileged.’ 'They’re compensated above and beyond their salaries. They have health care.’

“Do they care about you? 'No, not so much.’ 'They won’t care till they’re affected.’ What do you want Washington to do? From Iowa: 'Fix it.’ 'Start looking at the big picture.’

What do you want from leaders. From Iowa: 'Someone who isn’t hollow.’ ”

“They all said they care about 2012. They all said they’d vote.

“We are in a remarkable moment. Everyone understands the stakes. Everyone wants action. From comfortable professionals to people barely scraping by, everyone wants both parties to work together, to think of our country and not themselves.

“And of course everyone really gets this except Washington, which says it gets it and doesn’t. But those who think 2012 is just a clash of big parties had better wake up. They think they’re pulling and pushing in a tug of war, but they are dancing on the precipice.”

Precipice indeed. It is the Endgame. We are watching it play out in Europe, but we all know it will come to our own shores all too soon if we do not act. I hear this everywhere I go. The meeting I had with those ten Senators a month ago resonated with readers. I get asked over and over, “Do you think they understand? Will they do something?” Most of the times their voices are tinged with hope. Sometimes, though, it’s resignation, and the follow-up questions are in the “How do I protect my family and survive this?” vein.

Reading Peggy’s article invoked deep empathy, as those women could be my kids and their friends (and yes, we shop at Wal-Mart, among other places). Watching Occupy Wall Street just underscores the frustration out there. And then I read the column below Noonan’s, by Mary Kay Henry, president of the Service Employees International Union. She argues that:

“The hard truth is that things are pretty lousy for most Americans right now. And while students, seniors and workers didn’t cause our economic collapse, we’re the ones paying the price. It’s been three years since Wall Street CEOs crashed our economy. When Wall Street was on its knees, the American taxpayers came to their rescue with trillions of dollars in bailouts and promise from the big banks that they’d invest in our recovery.

“Instead, the banks used our hard-earned tax dollars to enrich themselves. They robbed millions of Americans of their jobs and their livelihoods. They refuse to invest in the small businesses that drive America’s job creation and growth. And they continue to kick us while we’re down by foreclosing on millions of families.

Mary Kay sounded the refrain about millionaires and billionaires and then said:

“…We can’t begin to fix what is wrong with our economy without creating good jobs. We have work that needs doing in this country and millions of Americans looking for full-time work. It’s time to put the two together to make America a stronger nation. And it’s time to use the money being made on Wall Street and in corporate boardrooms across the country to put Americans back to work.

“Congress can begin by passing the American Jobs Act and immediately put Americans to work rebuilding our outdated and dangerous roads and bridges and ensuring our kids have first-class schools. We can invest in our communities to keep teachers in our classrooms, police on the beat, health-care workers at our hospitals and clinics, and ensure that we have enough firefighters to protect our communities.”

The disconnect between the two columns simply leaped at me. Both note the angst that is palpable in the country (and around the world in developed countries). But one called for adults coming together and the other struck a severely partisan note, which I guess you might expect from the head of a government workers’ union.

Which brings us to the question, “What is the role of government in creating jobs?” To answer that, let’s look at the data that shows us where jobs come from. And we find (I go in-depth on this in previous columns and in Endgame) that net new jobs for the last 15 years came from new business start-ups. Big business is a net drag on job creation, and small businesses are a wash. Governments have seen job growth, but where does the money come to pay government employees?

Net new jobs come from new businesses (defined as those started within the last ten years). Yes, some of those businesses become Google and others are the local dry cleaner or donut shop. But those start-ups (if they survive) are the source of new jobs.

Let’s Tax the Millionaires

Ms. Henry wants to tax the millionaires, as if they are somehow sucking the system dry and should “pay their fair share.” Her answer is to tax them and hire more government workers. But that simply transfers income from one party to another and does nothing to create real wealth. And this has been brought home to me recently in a very personal way.

My youngest son, Trey, has been spending a lot of time with a new friend, and I decided I needed to meet his father. I went to their home to check them out. The father, Larry, was from South Africa and had just moved to my neighborhood from Utah. He said he was in software design. We became friends, and one day I probed a little deeper into what he did.

It turns out that he had designed a system (and patented it) that automatically triggers a “911″ call (the US emergency number) if you are in an auto accident, as long as your (smart) cell phone is on. Yes, the phone can recognize when you are in a vehicle and there is an impact, and that is different from dropping the phone or even throwing it into a wall. It can notify family members (or friends) if there is an accident and tell them where you are. It will work in almost any country. If a button is hit, it can silently call emergency services. It can also track your kids or employees and let you know all sorts of things you ask it, but that’s another story.

But he was in the middle of a funding crisis. I watched for several months as he struggled for money to finish his project. It was 98% of the way there, with thousands of paying users in “beta.” It was cheap. It worked. There was demand. But he was losing his funding. Why?

His original source had been a wealthy entrepreneur who had a “liquidity event,” selling his business for a large sum. As part of his reinvestment, he funded, with a small part of his money, a venture capital firm that had the goal of investing in 40 start-ups, mostly in high tech, which was where he had made his original money. I talked with the manager of the fund. The story was typical of others I have heard.

In just a few years, 10 of the original 40 had already been shut down or sold off. But the manager was not discouraged. Their plan was in the end to get ten businesses that survived and were successful. Think about that for a minute. A lousy 25% success rate?!? Would you start a business if you thought there was a 75% chance of failure? Really? Would you fire a manager who had 75% of his projects fail?

Understand, they had looked at multiple hundreds of business ideas to get to that 40. Those were the best ideas they saw. They initially thought every single one had a chance of success or they would not have funded them.

But Michael Gerber would say they were being optimistic. Gerber was a very real influence on me as a young entrepreneur. He wrote a book, originally called The E-Myth, on what really makes a business work. He cited studies that suggested that 80% of all new businesses fail within five years and that 80% of the remainder fail, are sold, or shut down within another five years. Now that is creative destruction, if not outright Darwinism. He has since gone on to write a lot of books and to help many entrepreneurs, but I have never forgotten those first lessons. (http://www.e-myth.com/ – I would suggest that any entrepreneur read his books.)

Do you think that because you like to make pies and are good at it you can open a pie shop? (his illustration). You’ll soon find out you are not just in the pie-making business. You have inventory, employees, payroll, marketing, budgeting, customers, taxes, government forms, regulations, etc. They take your time away from doing what you thought you were good at.

I grew up in a print shop. And when I was in my 20s I found out I could sell. And because I knew printing and could sell, I opened a print shop. Several times. You would think I would have learned. Starting a business is more than just having technical knowledge or skills. It is a host of things, and it is very hard to make one work. But the good news is that optimism triumphs over reality, and as a society we all benefit from those who take the risks and figure it out. And jobs get created.

The rich entrepreneur who funded Larry’s start-up? His basic business and investments hit a bump in the recession. He had to reduce his funding commitments, and one of those casualties was Larry, who went into scramble mode when his next source also went upside down.

I did my homework, brought in some people who understood what Larry was doing, and decided to make an offer. Larry took it. I got in for much less than the original investor in terms of dollar-for-equity, but that’s what I wanted for the risk. We’ll see how it works out. (Note to self: go see that private fund manager and find out what the heck the businesses are that he thought were worth continuing to fund, if you funded his leftovers. You might learn something.)

The point? The entrepreneur with his venture capital firm is one of those millionaires that some want to raise taxes on. If you take another 5% from him, that is 5% less that he can invest.

I am somewhat like him, on a much, much smaller scale. I am a serial entrepreneur. I can’t help myself. (Is there a 12-step program?) I won’t pretend that if my taxes go up 5% from where they are today, I won’t start or invest in a business if the right opportunity comes along. But that is 5% less that I have to use for risk capital. At some point along the tax curve the risk is not worth it. And that 5% may actually represent 30-50% of the annual growth in my risk capital, as venture capital is the very last part of my residual capital and income that gets allocated.

Multiply that by one million potential entrepreneurs, just in the US. There is a certain portion of the human breed that is by nature and instinct entrepreneurial. They see opportunity and look for ways and means to make it happen. Family, friends, and so-called “angel” investors fund these start-ups. More and more we see quasiformal networks of angel investors forming. They often go in together and mentor and help start-up companies and businesspeople.

These are the millionaires who are somehow not paying their fair share. Yes, there are Wall Street bankers and some professionals that make large salaries, but most of the high-income earners in the US are owners/founders/investors in small business, or got that way as a result of a small business that became larger and successful. Some become Bill Gates or Steve Jobs – the billionaires. But those successes are rare, very rare.

(Sidebar: I am so tired of hearing about Warren Buffet’s low tax rates. Berkshire Hathaway pays billions in taxes. Which, since Warren owns a chunk of BH, are essentially paid by him. Since he doesn’t require that much to live on, his effective tax is in the 1,000%-plus range. Therefore he pays a lot more than his secretary. )

Without growth in private GDP, or the portion of GDP that is not government-related, there will be no job growth for the rest of this decade. Private GDP has been flat for 15 years (in real terms). The chart below shows how important government spending has been to official GDP figures.

The “growth” of the economy has been in government spending and debt. But that source of growth is going away as governments are increasingly constrained by revenue losses and debt. We can talk all we want about how we need to make a commitment to government jobs, but the reality is that we are at the Endgame of government spending, both in the US and in Europe.

How do we grow our way out of the current crisis? We have to have more private-sector jobs. Period. End of story. And that means we have to figure out how to make it easier for entrepreneurs to find and access capital. Taking capital away from investors who fund these start-ups will not do the trick.

Let me hasten to say I am not against government spending or taxes. A certain level of government spending is necessary. And as I outlined at length in Endgame, I am all for increasing energy taxes (slowly over time), to be used 100% to rebuild our crumbling infrastructure (funding goes directly to local and state governments), which, yes, produces government-financed jobs. But we simply do not have the funds to take national taxes to fund local needs, no matter how worthy. If something is needed on a local or state level, that must become a local funding issue. If California wants to pay its prison guards $100,000 a year, that is their choice. Or pick a state, any state – they all have needs. We have plenty in Texas that needs funding, for sure.

It is time to hit the send button, so let me close by saying that we really do want your input on this new jobs book. Dunk and I and the other writers want to contribute to the national conversation that we must have next year. It is a very timely and worthy topic, and there is much more to say. It is not simply “support your new small businesses.” It is far more complex and will take a book to go into the detail that is needed.

We want your input and ideas. Put “jobs” in the subject line. Let’s start an adult conversation by exploring the nuances of how jobs are created and how we can help the process.

Kilkenny, Atlanta, DC, and Home

As noted at the top, I am in Kilkenny, Ireland. I got off the plane, drove to Kilkenny, and saw posters with quotes from me on the walls around town. That was different. I was almost immediately grabbed by host and event organizer David McWilliams, for what I was told was the #1 radio talk show in the country. Very thoughtful host and large, sold-out crowd for the show. The first panel session was tonight. I found myself in an unusual role. Normally I am the radical in the group. Here it was a very mixed crowd, liberals and conservatives and everyone ready to mix it up, along with some very funny stand-up comedians! And tomorrow I am on three panels or speaking events. Lots of readers were in the audience, and it is all quite fun; although, when I talk about reducing deficits I am not used to getting boos and cheers at the same time. Like I said, interesting and fun.

I am in Atlanta on Wednesday for the Hedge Fund Cares fundraiser (along with Tiffani). The team that is hosting the event wants me to point out that there are a few spots for lunch still available. Contact them for cost and details. It is at the Piedmont Driving Club, which is the most exclusive “old-money” club in Atlanta – Driving Miss Daisy was filmed there. It sounds like a really cool venue. And it is for charity. http://hedgefundscare.org/event.asp?eventID=74

I then go the following week to Washington, where I will be at the National UBS conference for a few days; and then I am home until mid-January, or at least I don’t have to get on a plane unless I want to. As much as I enjoy meeting people and seeing new places, I am looking forward to being home for an extended time.

Tomorrow I will wander around Kilkenny and visit the local castle and learn some of the history. This was the first capital of Ireland, and there are some VERY old buildings here (as in 900 years plus). And walking back tonight I got the sense of a very lovely place. I will probably want to come back.

Have a great week. And go out and tell an entrepreneur thanks.

Your hoping that I can be in that 20% a few times in a row analyst,

John Mauldin

John@FrontlineThoughts.com


Hey Mayor Bloomberg! No, the GSEs Did Not Cause the Financial Meltdown (but thats just according to the data)

Posted: 05 Nov 2011 06:30 AM PDT

Mike Konczal is a fellow with the Roosevelt Institute, and is a blogger at the Rortybomb Blog and New Deal 2.0.

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Sigh.

Mayor Bloomberg:

“It was not the banks that created the mortgage crisis. It was, plain and simple, Congress, who forced everybody to go and give mortgages to people who were on the cusp… But they were the ones who pushed Fannie and Freddie to make a bunch of loans that were imprudent, if you will. They were the ones that pushed the banks to loan to everybody.”

It seems there are people who can't accept that some markets, particularly financial ones, are disastrous when completely unregulated — and thus find any far-fetched excuse to blame the government instead. Since this line of argument continues to pop up, how should one respond to the idea that Congress and Fannie Mae/Freddie Mac caused the housing crisis? Here are six facts to back you up:

1. Private markets caused the shady mortgage boom: The first thing to point out is that the both the subprime mortgage boom and the subsequent crash are very much concentrated in the private market, especially the private label securitization channel (PLS) market. The Government-Sponsored Entities (GSEs, or Fannie and Freddie) were not behind them. The fly-by-night lending boom, slicing and dicing mortgage bonds, derivatives and CDOs, and all the other shadiness of the mortgage market in the 2000s were Wall Street creations, and they drove all those risky mortgages.

Here's some data to back that up: "More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions… Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year."

As Center For American Progress's David Min pointed out to me, the timing doesn't work at all: "But from 2002-2005, [GSEs] saw a fairly precipitous drop in market share, going from about 50% to just under 30% of all mortgage originations. Conversely, private label securitization [PLS] shot up from about 10% to about 40% over the same period. This is, to state the obvious, a very radical shift in mortgage originations that overlapped neatly with the origination of the most toxic home loans."

2. The government's affordability mission didn't cause the crisis: The next thing to mention is that the "affordability goals" of the GSEs, as well as the Community Reinvestment Act (CRA), didn't cause the problems. Randy Krozner summarized one of the better studies on this so far, finding that "the very small share of all higher-priced loan originations that can reasonably be attributed to the CRA makes it hard to imagine how this law could have contributed in any meaningful way to the current subprime crisis." The CRA wasn't nearly big enough to cause these problems.

I'd recommend checking out "A Closer Look at Fannie Mae and Freddie Mac: What We Know, What We Think We Know and What We Don't Know" by Jason Thomas and Robert Van Order for more on the GSEs' goals, which, in addition to explaining how their affordability mission is a distraction, argues that subprime loans were only 5 percent of the GSEs' losses. The GSEs also bought the highly rated tranches of mortgage bonds, for which there was already a ton of demand.

3. There is a lot of research to back this up and little against it: This is not exactly an obscure corner of the wonk world — it is one of the most studied capital markets in the world. What has other research found on this matter? From Min:

Did Fannie and Freddie buy high-risk mortgage-backed securities? Yes. But they did not buy enough of them to be blamed for the mortgage crisis. Highly respected analysts who have looked at these data in much greater detail than Wallison, Pinto, or myself, including the nonpartisan Government Accountability Office, the Harvard Joint Center for Housing Studies, the Financial Crisis Inquiry Commission majority, the Federal Housing Finance Agency, and virtually all academics, including the University of North Carolina, Glaeser et al at Harvard, and the St. Louis Federal Reserve, have all rejected the Wallison/Pinto argument that federal affordable housing policies were responsible for the proliferation of actual high-risk mortgages over the past decade.

The other side has virtually no research conducted that explains their argument, with one exception that I'll cover below.

4. Conservatives sang a different tune before the crash: Conservative think tanks spent the 2000s saying the exact opposite of what they are saying now and the opposite of what Bloomberg said above. They argued that the CRA and the GSEs were getting in the way of getting risky subprime mortgages to risky subprime borrowers.

My personal favorite is Cato's "Should CRA Stand for 'Community Redundancy Act?'" from 2000 (here's a write-up by James Kwak), which argues a position amplified in its 2003 Handbook for Congress financial deregulation chapter: "by increasing the costs to banks of doing business in distressed communities, the CRA makes banks likely to deny credit to marginal borrowers that would qualify for credit if costs were not so high." Replace "marginal" with Bloomberg's "on the cusp" and you get the same idea.

Bill Black went through what AEI said about the GSEs during the 2000s and it is the same thing — that they were blocking subprime loans from being made. In the words of Peter Wallison in 2004: "In recent years, study after study has shown that Fannie Mae and Freddie Mac are failing to do even as much as banks and S&Ls in providing financing for affordable housing, including minority and low income housing."

5. Expanding the subprime loan category to say GSEs had more exposure makes no sense: Some argue that the GSEs had huge subprime exposure if you create a new category that supposedly represents the risks of subprime more accurately. This new "high-risk" category is associated with a consultant to AEI named Ed Pinto, and his analysis deliberately blurs the wording on "high-risk" and subprime in much of his writings. David Min broke down the numbers, and I wrote about it here. Here's a graphic from Min's follow-up work, addressing criticism:

min_updated

Even this "high risk" category isn't risky compared to subprime and it looks like the national average. When you divide it by private label, the numbers are even worse. Private label loans "have defaulted at over 6x the rate of GSE loans, as well as the fact that private label securitization is responsible for 42% of all delinquencies despite accounting for only 13% of all outstanding loans (as compared to the GSEs being responsible for 22% of all delinquencies despite accounting for 57% of all outstanding loans)." The issue isn't this fake "high risk" category, it is subprime and private label origination.

The Financial Crisis Inquiry Commission (FCIC) panel looked carefully at this argument and also ended up shredding it. So even those who blame the GSEs can't get the numbers to work when they make up categories.

6. Even some Republicans don't agree with this argument: The three Republicans on the FCIC panel rejected the "blame the GSEs/Congress" approach to explaining the crisis in their minority report. Indeed, they, and most conservatives who know this is a dead end, tend to take a "it's a whole lot of things, hoocoodanode?" approach.

Peter Wallison blamed the GSEs when he served as the fourth Republican on the FCIC panel. What did the other three Republicans make of his argument? Check out these released FCIC emails from the GOP members. They are really fun, because you can see the other Republicans doing damage control and debating whether Wallison and Pinto were on the take for making this argument — because the argument makes no sense when looking at the data.

There are lots of great quotes: "Re: peter, it seems that if you get pinto on your side, peter can't complain. But is peter thinking idependently [sic] or is he just a parrot for pinto?", "I can't tell re: who is the leader and who is the follower," "Maybe this email is reaching you too late but I think wmt [William M. Thomas] is going to push to find out if pinto is being paid by anyone." And then there's the infamous event where Wallison emailed his fellow GOP member: "It's very important, I think, that what we say in our separate statements not undermine the ability of the new House GOP to modify or repeal Dodd-Frank."

The GSEs had a serious corruption problem and were flawed in design — Jeff Madrick and Frank Partnoy had a good column about the GSEs in the NYRB recently that you should check out about all this — but they were not the culprits of the bubble.

~~~

mike-konczal-new

Mike Konczal is a Fellow at the Roosevelt Institute.


The Consistency of Insanity

Posted: 05 Nov 2011 04:30 AM PDT

A 1997 PBS show worth watching…

The Consistency of Insanity Circa 1997

Hat tip Michael Covel


Weekend Reads

Posted: 05 Nov 2011 04:00 AM PDT

Pour yourself a tall mug of Joe, and settle in with some reading material to start off your weekend :

• Earnings Season:
…..-Warning Ratio Highest In a Decade (WSJ)
…..-Looks and smells like bear-market rally (Market Watch)
• Applying The Numbers To Gold Supply And Demand (Forbes)
• NFP:
…..-Economists React to 'Mixed' Economic Jobs Report (WSJ)
…..-Bill Gross Says U.S. in Anemic, Jobless Recovery: (Bloomberg)
• How Appraisals Are Derailing Home Sales (Smart Money)
• Eurozone
…..-Crisis will not go away until banks face reality (Fortune)
…..-Exit Would Be Mess for Athens (WSJ)
Taibbi: Mike Bloomberg’s Marie Antoinette Moment (Rolling Stone)
• Groupon:
…..-Doing the Math on a Groupon Deal (NYT)
…..-What's Wrong with Groupon? (Baseline Scenario)
• Rising Poverty is bad, but less bleak than originally depicted (NYT)
• Siri:
…..-Apple's Siri is eating Google’s lunch (Market Watch)
…..-Artificial stupidity: Siri suffers a 5-hour outage (Fortune)
• Too Big to Jail (The Nation)

What are you reading?

>

click for hilarious video


How Music Travels Around the Globe

Posted: 05 Nov 2011 04:00 AM PDT

Click for interactive graphic

Source: Thomson: How Music Travels – The Evolution of Western Music


Fukushima: “Far From Any Stable Shutdown”

Posted: 04 Nov 2011 10:30 PM PDT

Fukushima: Further Away From a Stable Shutdown Than Japanese Claimed

Radioactive xenon has been detected at the Fukushima nuclear plant, indicating that nuclear reactions are still occurring.

BusinessWeek notes that the Japanese government has confirmed the existence of radioactive xenon:

The detection of xenon, which is associated with nuclear fission, was confirmed today by the Japan Atomic Energy Agency, the country's atomic regulator said.

NHK reports:

The operator of the crippled Fukushima Daiichi nuclear power plant says it found in the facility's No.2 reactor radioactive substances that could have resulted from continuous nuclear fission.

The Tokyo Electric Power Company, or TEPCO, said on Wednesday that it detected xenon-133 and xenon-135 in gas taken from the reactor's containment vessel on the previous day. The substances were reportedly in concentrations of 6 to more than 10 parts per million becquerels per cubic centimeter.

Xenon-135 was also detected in gas samples collected on Wednesday.

Radioactive xenon is produced during nuclear fission.

The half-life of xenon-133 is 5 days, and that of xenon-135 is 9 hours.

***

The utility also says it wants to take a close look at the situation of the plant's No.1 and 3 reactors.

Bloomberg writes:

"Given the signs, it's certain that fission is occurring," Junichi Matsumoto, a general manager at Tepco who regularly talks to the media, told reporters in Tokyo today. There's been no large-scale or sustained criticality and no increase in radiation, he said.

***

It's possible there are similar reactions occurring in the No. 1 and No. 3 reactors, the other cores damaged at the station, Matsumoto said.

"Melted fuel in the No. 2 reactor may have undergone a sustained process of nuclear fission or re-criticality," Tetsuo Ito, the head of Kinki University's Atomic Energy Research Institute, said by phone. "The nuclear fission should be containable by injecting boron into the reactor to absorb neutrons."

Bellona points out:

According to Bellona physicist and executive director, Nils Bøhmer, and Dr Komei Hosokawa, head of the Department of Environmental and Social Research at Japan's Kyoto Seika University … The presence of these gasses indicated fresh nuclear fission taking place in the hot debris of the melted fuel rods at the bottom of the container….

"This clear indication that a nuclear chain reaction is going on in one the reactors is a very bad sign. TEPCO had said that the situation would be stable within nine months after the accident," said Bøhmer.

"Any on-going uncontrolled chain-reaction is not an indication of a stable rector, and we could face a much longer period of instability until the reactors are safe," he said.

A TEPCO official has confirmed a so-called "partial re-criticality" incident in reactor No 2, said Hosokawa in the information he forwarded to Bellona. Hosokawa said the term "partial re-criticality was "a new vague word for [TEPCO's] spin practice."

Other radioactive gasses detected at the reactor, said Hosokawa, included Xenon-131m and Krypton-85, which are likely remnants of the chain reactions that occurred immediately after the earthquake and tsunami.

However, Ex-SKF reports – based on a handout from Tepco – that there was a "100-Fold Increase in Krypton-85 from November 1" to November 2nd.

EneNews notes the significance of Krytpon-85:

According to a study published in the Journal of Environmental Radioactivity, "Krypton-85 is the best indicator for clandestine plutonium separations" when conducting wide-area atmospheric monitoring.

Also, EX-SKF writes, "According to wiki, 'About three atoms of krypton-85 are produced for every 1000 fissions (i.e. it has a fission yield of 0.3%)'.

Bellona also writes:

Japanese nuclear authorities … say the chain reactions will not affect the projected shut-own schedule. Currently the temperature at the hot zones of the reactors is been sustained at below 100 degrees Celsius by seawater constantly being pumped in.

Hosokawa, however, strongly disagreed, citing the apparent present condition of the nuclear fuel in reactor No 2, if not others.

"TEPCO so far claimed that the melted-down uranium had formed an oval shape with a cooled-down crust. Their roadmap for the "cold shutdown, if ever, is based on this condition," said Hosokawa. "Now that they propose a quite different view regarding the condition of nuclear fuel, the roadmap vision [for shutdown] cannot be intact."

Indeed, we've been reporting for months that nuclear reactions are probably still continuing at Fukushima (as have Fairewinds, Ene and Ex-SKF.)

The New York Times points out:

The unexpected bursts — something akin to flare-ups after a major fire … threaten to increase the amount of dangerous radioactive elements leaking from the complex and complicate cleanup efforts, raising startling questions about how much remains uncertain at the plant….

The plant's owner admitted for the first time that fuel deep inside three stricken plants was probably continuing to experience bursts of fission.

***

It is impossible to determine exactly what state the fuel is in, given that even an intact reactor can offer only limited gauges in the form of temperature, pressure readings and neutron flow, but not visual observation. That lack of clarity is one of the most resonant lessons of the Fukushima disaster, where those trying to guide the response and assess the danger operated by what amounted to educated guesswork.

In reactors of the design used at Fukushima, that chain reaction is normally stopped when the operator gives a command to insert control rods, which rise up from the bottom of the core and separate the fuel assemblies. But when the cores of three reactors at Fukushima melted, a large part of the fuel presumably formed a jumbled mass in the bottom of the vessel, and without a strict gridlike geometry, the control rods cannot be inserted. Some of the fuel has escaped the vessel, experts believe, and is in spaces underneath, where there is no way to use control rods to interrupt the flow of neutrons.

***

The three reactors — together with spent fuel rods stored at a fourth damaged reactor — have been leaking radioactive material since the initial disaster, and new episodes of fission would only increase their dangers.

"Re-criticality would produce more harmful radioactive material, and because the reactors are damaged, there would be a danger of a leak," said Hiroaki Koide, assistant professor at Kyoto University's Research Reactor Institute, whose prescient warnings about nuclear safety have won him respect in Japan.

Mr. Koide holds that the nuclear fuel at the three reactors probably melted through containments and into the ground, raising the possibility of contaminated groundwater. If much of the fuel was indeed in the ground early in the crisis, the "feed and bleed" strategy initially taken by Tokyo Electric — where workers pumped cooling water into the reactors, producing hundreds of tons of radioactive runoff — would have prevented fuel still in the reactor from boiling itself dry and melting, but would not have done anything to reduce danger from fuel already in the soil — if it got that far.

***

Tokyo Electric does not deny the possibility that the fuel may have burrowed into the ground, but its officials say that "most" of the fuel likely remains within the reactor, albeit slumped at the bottom in a molten mass.

But even in their most dire assessments, some experts had not expected even bursts of re-criticality to occur, because it was unlikely that the fuel would melt in just the right way — and that another ingredient, water, would be present in just the right amounts — to allow for any nuclear reaction. If episodes of fission at Fukushima were confirmed, Mr. Koide said, "our entire understanding of nuclear safety would be turned on its head."

Some nuclear experts have debated for months whether nuclear reactions might be continuing, either in the fuel inside the reactors, or in the spent fuel pools at the plant. They have pointed, for example, to the continued reports of short-lived iodine in the spent fuel pool at Reactor No. 3.

A former nuclear engineer with three decades of experience at a major engineering firm … who has worked at all three nuclear power complexes operated by Tokyo Electric … said that tiny fuel pellets could have been carried to different parts of the plant, like the spaces under the reactor during attempts to vent them in the early days. That would explain several cases of lethally high radiation readings found outside the reactor cores.

"If the fuel is still inside the reactor core, that's one thing," he said. But if the fuel has been dispersed more widely, then we are far from any stable shutdown."

Hopefully, nuclear expert Paul Gunter's fear that we face a "China Syndrome" – where the fuel from the reactor cores at Fukushima have melted through the container vessels, into the ground, and are hitting groundwater and creating highly-radioactive steam – will turn out to be overblown (even though NHK and Tepco have allegedly confirmed that steam was escaping from underground back in June, something Fukushima workers have alleged for some time):


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