Economic Risk: The Gasoline Wild Card

Updated | 4:49 p.m. Using footage recorded by a French photographer who was in Homs this month, Britain’s Channel 4 News has produced a remarkable portrait of urban warfare in the Syrian city, between government forces and the lightly armed fighters of the Free Syrian Army.

The 11-minute video report broadcast on Wednesday night features scenes of everyday life in the city divided along sectarian lines, and shows a battle between the rebels and government snipers for control of a local headquarters of the mukhabarat, or secret police.

Source

Felix Salmon

As Mitt Romney cruises to his inevitable coronation as the Republican presidential candidate, increasing amounts of attention are being focused on his history at Bain Capital, where he made his fortune. Did he create 100,000 jobs, as he claims? Or is he a vulture and asset stripper?

Glenn Kessler has the definitive take on the job-creation claim, which he says is “untenable”; as he says, Romney’s method of counting jobs created when he wasn’t at Bain or when Bain wasn’t managing the companies in question doesn’t even pass the laugh test. Meanwhile, as Mark Maremont documents, Bain-run companies — even the successful ones — have an alarming tendency to end up in bankruptcy. And I think it’s fair to say that bankruptcy never creates jobs, except perhaps among bankruptcy lawyers.

The reality is that Romney would have been in violation of his fiduciary duty to his investors had he concentrated on creating jobs, rather than extracting as much money as he possibly could from the companies he bought. For instance, Worldwide Grinding Systems was a win for Bain, where it made $12 million on its initial $8 million investment, plus another $4.5 million in consulting fees. But the firm ended up in bankruptcy, 750 people lost their jobs, and the US government had to bail out the company’s pension plan to the tune of $44 million. There’s no sense in which that is just.

Romney’s company, Bain Capital, was a “private equity” firm — the friendly, focus-grouped phrase which replaced “leveraged buy-outs” after Mike Milken blew up. But at heart it’s the same thing: you buy companies with an enormous amount of borrowed money, and then dividend as much money out of them as you can. If they still manage to grow, you can make a fortune; if they don’t grow, they’ll likely fail, but even then you might well have made a profit anyway.

Private equity companies need growth, because they’re built on the idea of buying, restructuring, and then selling. They’re never in any business for the long haul: instead, they want to make as much money as they can as quickly as possible, sell out, and keep all the profits for themselves and their investors. When you sell, you want to maximize the price you can ask — and the way to do that is to show healthy growth. No one will pay top dollar for a company which isn’t growing.

Read the rest here.

Via Global Macro Monitor

Great chart from the recently released Economic Report of the President.  We suspect the Great Depression housing bust didn’t have the government props to soften the blow as we do today,  which,  therefore, on a relative basis,  makes the current bust much worse.   The prior conditions to the current bust must have been much worse than those before the Great Depression.

The Council of Economic Advisers (CEA) do note,

…during the Great Depression, the only other instance of nationwide price declines since WWI, much of the comparably-sized decline in nominal home prices was offset by a concurrent drop in general price levels, so the decline in real housing values was only about one-quarter as large as the one we recently experienced.

Thus the current collapse in housing prices is a relative price shift whereas the housing bust of the Great Depression was more a symptom of general price deflation in the economy.

Read the rest here.

Profits in the Standard & Poor’s 500 Index are rising faster than its price, leaving the gauge 9 percent cheaper than it was in April even after American equities climbed within 0.1 percent of last year’s high.

The S&P 500 rose 0.4 percent to 1,363.46 today following a rally since October that added as much as $3.2 trillion to share values, according to data compiled by Bloomberg. While the index is just shy of its 2011 peak of 1,363.61, expanding income has pushed the price-earnings ratio to 14.1 from 15.4 in April.

Economic growth that has been slower than any post- recession period since at least the 1940s is keeping investors from paying more for earnings even after stocks doubled in three years. The best January for the S&P 500 in 15 years has coincided with a decline in New York Stock Exchange trading volume to the lowest level since 1999 and record deposits with investment-grade bond funds.

“The world is profoundly underinvested in U.S. equities,” Jeffrey Saut, chief investment strategist at Raymond James & Associates in St. Petersburg, Florida, said in a phone interview on Feb. 21. His firm manages $300 billion. “The public is bombarded with all these negatives. Greece this, Portugal that, dysfunctional governments. The retail investor is frozen.”

Read the rest here.

Joe Weisenthal

Well this is going to be the hot read of the day.

SocGen’s Albert Edwards blasts the recent stock-market rally, and says there’s still way too much “hope.” Only when the hope is totally gone will we know the great ice age is over.

One key lesson from Japan is that an essential ingredient to the end of a long valuation bear market is revulsion. It is when buyers-on-dips become sellers-on-rallies. It is when volume dries up to almost nothing. It is the loss of hope.

In Japan we saw huge rallies in the Nikkei on the back of short-lived cyclical recoveries. Each cyclical failure and further new lows in the equity market saw hope being progressively crushed. Previous US valuation bear markets typically take 4 or 5 recessions to fully play out. We have only had two.

The market is once again in a hope phase hoping that the US is now in a self-sustaining recovery; hoping that China might be soft-landing; hoping that the Greece bailout and the ECB liquidity polices have settled things down in the eurozone. These bursts of hope are essential in long bear markets. Essential in the sense that hope must be crushed. It will be crushed. Hope still beats in the breasts of equity investors. The market will rip out that hope and consume it in front of investors’ eyes. Only then can the bull market begin.

As evidence that the current hope will be quashed again like last year, he posts this chart…

TEHRAN (FNA)- The wife of Martyr Mostafa Ahmadi Roshan Behdast, who was assassinated by Mossad agents in Tehran in January, reiterated on Tuesday that her husband sought the annihilation of the Zionist regime wholeheartedly.

“Mostafa’s ultimate goal was the annihilation of Israel,” Fatemeh Bolouri Kashani told FNA on Tuesday.

Bolouri Kashani also underlined that her spouse loved any resistance figure in his life who was willing to fight the Zionist regime and supported the rights of the oppressed Palestinian nation.

Iran’s 32-year-old Mostafa Ahmadi Roshan Behdast, a chemistry professor and a deputy director of commerce at Natanz uranium enrichment facility, was assassinated during the morning rush-hour in the capital early January. His driver was also killed in the terrorist attack.

Roshan was killed on the second anniversary of the martyrdom of Iranian university professor and nuclear scientist, Massoud Ali Mohammadi, who was also assassinated in a terrorist bomb attack in Tehran in January 2010.

The method used for Roshan’s assassination was similar to the 2010 terrorist bomb attacks against the then university professor, Fereidoun Abbassi Davani – who is now the head of Iran’s Atomic Energy Organization – and his colleague Majid Shahriari. Abbasi Davani survived the attack, while Shahriari was martyred.

Another Iranian scientist, Dariush Rezaeinejad, was also assassinated through the same method on 23 July 2011.

Iran has condemned the CIA, MI6 and Mossad for the five assassinations.

A series of CIA reports revealed that Israeli Mossad agents, posing as American spies, have recruited members of the terrorist organization Jundollah to stage terrorist operations against Iran.

Foreign Policy magazine cites CIA memos from 2007-2008 that Mossad recruited members of Jundollah terror group to fight a covert war against Tehran.

Buried deep in the archives of America’s intelligence services are a series of memos, written during the last years of President George W. Bush’s administration, that describe how Israeli Mossad officers recruited operatives belonging to the terrorist group Jundollah by passing themselves off as American agents. According to two US intelligence officials, the Israelis, flush with American dollars and toting US passports, posed as CIA officers in recruiting Jundollah operatives – what is commonly referred to as a “false flag” operation.

The sources – one of whom has read the memos and another who is intimately familiar with the case – said the memos investigated and debunked reports from 2007 and 2008 accusing the CIA, at the direction of the White House, of covertly supporting Jundollah – a Pakistan-based extremist organization responsible for numerous terrorist attacks against Iranian civilians and military officials. Even according to the US government and published reports, Jundollah is responsible for assassinating Iranian government officials and killing Iranian women and children.

Source

Tesla Motors’ lineup of all-electric vehicles — its existing Roadster, almost certainly its impending Model S, and possibly its future Model X — apparently suffer from a severe limitation that can largely destroy the value of the vehicle. If the battery is ever totally discharged, the owner is left with what Tesla describes as a “brick”: a completely immobile vehicle that cannot be started or even pushed down the street. The only known remedy is for the owner to pay Tesla approximately $40,000 to replace the entire battery. Unlike practically every other modern car problem, neither Tesla’s warranty nor typical car insurance policies provide any protection from this major financial loss.

Here’s how it happens.

Despite this “brick” scenario having occurred several times already, Tesla has publicly downplayed the severity of battery depletion risk to both existing owners and future buyers. Privately though, Tesla has gone to great lengths to prevent this potentially brand-destroying incident from happening more often, including possibly engaging in GPS tracking of a vehicle without the owner’s knowledge.

Read the rest here.

The world is in the midst of a natural gas revolution. Even the sober International Energy Agency refers to a scenario it calls a “golden age of gas”. If such optimism proves right, the implications would not only be far greater than those of the eurozone’s painful dissolution, but would also be economically positive. Never forget that ours is a civilisation built on cheap supplies of commercial energy. The economic rise of emerging countries is bound to make the demand for commercial energy increase dramatically in the decades ahead. Gas matters.

This revolution has a name: “hydraulic fracturing”, colloquially known as “hydrofracking” or just “fracking”. As is true of nearly all of the technological revolutions of the past century, this one also originated in the US. The US Energy Information Administration explains that “[t]he use of horizontal drilling in conjunction with hydraulic fracturing has greatly expanded the ability of producers to produce natural gas from low permeability geologic formations, particularly shale formations.”*

While some innovations date to the 1970s, the EIA notes that “the advent of large-scale shale gas production did not occur until Mitchell Energy and Development Corporation experimented during the 1980s and 1990s to make deep shale gas production a commercial reality in the Barnett Shale in North-Central Texas.” But, by now, it adds, “[t]he development of shale gas has become a ‘game changer’ for the US natural gas market.”

The new activity has increased dry shale gas production in the US from 0.39tn cubic feet in 2000 to 4.8tn cubic feet in 2010, or 23 per cent of US dry gas production. Vastly more is to come. The EIA estimates 860tn cubic feet of “technically recoverable” US shale gas against just 273tn cubic feet in today’s “proved reserves”. If this estimate is correct, shale gas on its own would give the US 40 years of gas consumption, at current rates.

How large are the world’s shale gas reserves? The EIA asked consultants to examine 48 shale gas basins in 32 countries. Their report estimates “technically recoverable” global shale gas resources at 6,600tn cubic feet, roughly equal to today’s proved reserves. The largest identified resources, apart from those of the US, are in China (1,275tn cubic feet), Argentina (774tn), Mexico (681tn) South Africa (485tn), Australia (396tn), Canada (388tn), Libya (290tn), Algeria (231tn), Brazil (226tn), Poland (187tn) and France (180tn). Regions excluded from this analysis include Russia, central Asia, the Middle East, south-east Asia and central Africa. Global potential should be far larger still.

Read the rest here.

The following animated GIF chronicles the rise of the HFT Algo Machines from January 2007 through January 2012.

August 5th, 2011, was U.S. debt downgrade day.

Source

Hedge Fund Intelligence

Feb 22 (Reuters) – Some U.S. pawnbrokers are taking liquid assets – literally.

Fine wines are among the items they will accept as collateral for loans, along with family jewels and fine art, as a practice common in Britain and France catches on across the Atlantic.

Liquidity issues, or a cash shortage, can be found on most rungs of the economic ladder, the pawnbrokers said.

“You’d be amazed by how many wealthy individuals have terrible credit ratings. And besides, if you go to a bank, it can take weeks or months to get a loan. When we make a loan, it’s usually the same day,” said Jordan Tabach-Bank, head of Beverly Loan Co.

In an office above a Bank of America Corp branch in Beverly Hills, California, home to some of Hollywood’s biggest stars, the pawnshop for the prosperous regularly lends to hedge-fund managers, bankers, lawyers, doctors – and occasionally to Oscar winners.

“Most people have a vision of pawn shops as sad sites. But that’s not the case here,” Tabach-Bank said. “I have a lot of people who come in who have a business opportunity and they need an infusion of cash for business purposes,” he said.

USGoldBuyers.com, an online pawnbroker with an office in New York City’s diamond district, will also accept fine wines as collateral, spokesman Jose Caba said. While the wealthy like their “expensive toys, unfortunately, sometimes they don’t have the liquid assets so to speak, to keep up their toys. That’s where we come in.”

“We don’t really want to sell the wine, or any asset that we take in whether it be gold or fine art,” Caba said. About 90 percent of the loans made have been repaid, he estimated.

Interest rates and length of the loans vary widely.

Read the rest here.

Duke Buchan III’s $1 billion hedge fund beat U.S. stocks by 46 percent in the decade through March, a period that included the steepest equity-market losses since the 1930s.

Then came the selloff in August when global stocks suffered their worst nine-day drop since the 2008 financial crisis. For four days, The Dow Jones Industrial Average (INDU) alternated between gains and losses of more than 400 points, the longest streak ever, and its intraday swings have averaged twice the level seen during the first seven months of the year. Last week, Buchan told clients he is shutting his firm Hunter Global Investors LP.

“Markets seem to be driven more by the latest news out of Europe than by a company’s earnings prospects,” Buchan, 48, said in a Dec. 8 investor letter. “We have not weathered the ensuing volatility well.”

Traders who used to profit from price swings are struggling as record stock market volatility shows no signs of abating. Hedge funds are on track to post their second-worst year on record, with managers such as John Paulson seeing bets undermined by Europe’s two-year sovereign-debt crisis and concerns over the U.S. economic recovery. U.S. mutual funds are headed for their second-weakest year of deposits in two decades, and the top Wall Street banks posted their worst quarter in trading and investment banking since the depths of the 2008 financial crisis.

Jeffrey Kronthal, a former Merrill Lynch & Co. senior fixed-income executive, said he’s never seen so much volatility over such a long period as this in his 33-year trading career.

Read the rest here.

The drop in inventory as a phenomenon may or may not pass quickly but one thing is clear – weird changes in market behavior happen for a reason – I don’t see declining inventory as a particular sign of strength in the housing market.

The collapse in housing and the 33 percent plunge in house prices since 2006 are favoring renting over homeownership. This trend will dominate the housing market for the next four or five years, and put additional pressure on a weak economy.

Policy makers in Washington continue to have a soft spot for homeownership. Many recent government actions can be viewed as attempts to keep people in their homes, even owners who clearly can’t afford them. In addition to specific plans such as the Home Affordable Modification Program, or HAMP, and the Home Affordable Refinance Program, or HARP, the Obama administration is trying to revive the moribund housing sector by encouraging mortgage lenders and servicers to refinance loans at lower rates.

This reduces interest income for banks, which are now compelled by the Dodd-Frank law to retain 5 percent of the credit risk on lower-quality residential mortgages that are securitized and sold to others. Furthermore, banks are reluctant to refinance loans that Fannie Mae and Freddie Mac (NMCMFUS) then guarantee and put back to the lenders if they find any defects. The White House plan is a tough sell.

Read the rest here.

Michael Lind

Manufacturing is back in the news.  The combination of Obama administration initiatives to help American manufacturing with criticism of China’s unfair trade and industrial policies by candidates for the Republican presidential nomination has produced a bipartisan backlash by prominent academic economists including Christine Romer, a Democrat and a former Obama economic adviser, in the New York Times., and Michael Boskin, a Republican and adviser to the first President Bush.

Romer and Boskin agree that government should do nothing to save or promote the manufacturing sector in the United States.  Their critiques of industrial policy, in turn, have produced responses by prominent advocates of federal aid for technological innovation and manufacturing, including Clyde Prestowitz, a former Reagan administration official and founder of the Economic Strategy Institute.

This debate is not a contest between “free trade” and “protectionism.”  It is between dogmatists who argue that free trade and government indifference to industry are the best policies for all countries, at all levels of economic development, at all times, and pragmatists who argue that free trade, strategic trade or protectionism may make sense for one country rather than another—or for the same country, in different historical periods.

Nor is the debate between left and right.  As we see today, it often pits liberal and conservative policymakers and voters against academic economists, who on this issue, whether they are Democrats or Republicans, tend to take what in politics is the view of trade held only by the libertarian lunatic fringe.

Versions of this “industrial policy debate,” featuring many of the same players, have taken place every decade since the 1970s.   It is never resolved, because the two sides are talking past each other.  They do not agree on basic theory, basic facts, or even the basic rationales for the trade and manufacturing policies in dispute.

Basic theory.  Mainstream academic economists like Romer and Boskin base their views of trade, not on the study of economic history or the actual policies of contemporary industrial countries, but on the theories of Adam Smith (absolute advantage) and David Ricardo (comparative advantage), dressed up in recent generations in seemingly-impressive but superficial mathematics.  Despite their differences, the theories of absolute and comparative advantage assume that, in a technologically-static world, global economic efficiency, defined as the lowest prices for consumers, can be maximized if all countries, as well as firms and individuals, specialize in particular lines of production.

In contrast, proponents of industrial policy and other government aid to manufacturing base their views on the actual history of the world since the late 1800s and early 1900s, after Smith and Ricardo wrote.  The four greatest economic powers in today’s world—the U.S., China, Japan and Germany—all became leading countries by ignoring the unrealistic theories of Smith and Ricardo and fostering selected national industries by some combination of tariffs, nontariff barriers, subsidies, public or publicly-funded R&D and credit policies favorable to manufacturing.  If market fundamentalists were correct, these countries should be economic basket cases, instead of the world’s leading manufacturing powers.  Even Japan, despite the aftermath of its real estate and stock bubble, remains a leader in many high-value-added industries.

Most growth in the last two centuries has resulted, not from the specialization of countries in one or a few sectors, but from the substitution of machinery powered by mineral energy for human and animal muscle power and the energy generated by wind, water and biomass.  The unwise nations that followed the advice of Smith and Ricardo and specialized according to their preindustrial absolute or comparative advantages have been backward, non-industrialized, one-crop “banana republics” like those of Central America.

Read the rest here.

Noam Scheiber

For the past three years, Washington journalists and politicos have obsessed over a 57-page memo that Barack Obama’s incoming economic team prepared for him in late 2008. The document has achieved such totemic status for good reason: It decisively shaped the Obama administration’s initial response to the economic crisis. The memo outlined the president-elect’s options for dealing with the teetering banks, the cash-strapped automakers, and the country’s tidal wave of foreclosures. Above all, the memo laid out options for a massive stimulus package—the mix of tax cuts and government spending designed to end the recession and boost employment. The economic team presented the contents of the memo to Obama at his transition headquarters on December 16, 2008, at which point they collectively settled on a proposed stimulus of nearly $800 billion.

Last month, my friend and former colleague, Ryan Lizza, wrote a much-discussed piece in The New Yorker based on a copy of this and several other previously-unpublished memos. The piece and the corresponding memo described the stimulus options that Obama’s team—including Larry Summers, his top economic adviser, and Christy Romer, soon to be his chief White House economist—ultimately sent him. The options ranged from about $550 billion to just under $900 billion.

Intriguingly, Lizza also noted that Romer “was frustrated that she wasn’t allowed to present an even larger option,” suggesting that while the memo he obtained may have been the end of the story, it was far from the whole story.

Read the rest here.

Jason Zweig

When Your DNA Dings Your ROI

Why are some people more prone to stupid financial behavior than others?

Several of the most common and costly mistakes that investors make appear to be encoded in our genes.

So argues a new research paper from two finance professors, Henrik Cronqvist of Claremont McKenna College and Stephan Siegel of the W.P. Carey School of Business at Arizona State University.

Cronqvist and Siegel based their study on two sets of remarkable data.

In Sweden, until recently, the government collected details about each holding in taxpayers’ investment portfolios. Cronqvist and Siegel could thus track the investment portfolios of individual Swedes, as well as any of their sales of securities, between 1999 and 2007. (None of the investors’ names were disclosed to the researchers.)

What’s more, the Swedish government enters all twins in a national register at birth. Cronqvist and Siegel identified more than 30,000 twins with investment portfolios – including more than 9,200 identical twins – and then studied how much their investing behavior varied. Bear in mind that identical twins are genetically a perfect match, while fraternal twins share similar but not identical genetic profiles; the researchers also compared twins against a random sample of nontwins as an experimental control.

The intuition is obvious: If thousands of people who are genetically identical exhibit the same behavior more strongly than thousands of nonidentical people do, then it’s plausible to attribute the variation in behavior to their genetic makeup.

Cronqvist and Siegel studied five prevalent investing mistakes or “biases”:

• Inadequate diversification (measured as a preference for investments based in Sweden)
• Excessive trading
• The reluctance to sell at a loss
• Chasing hot past performance
• Trying to get rich quick.

Cronqvist and Siegel found, across the twins in their sample, that genetic variation explained between one-quarter and nearly one-half of the extent to which investors suffered from these biases. Inadequate diversification scored the highest, with genetic effects explaining 45.3% of the variation across investors. At the low end, 25.7% of the degree to which investors traded too much was explained by their genetic variation.

Of course,we aren’t just abject slaves to our double helix when we invest. As intriguing as these new data are, they still explain less than half of what makes investors tick.

Read the rest here.

Peter H. Gleick, Pacific Institute

The Origin of the Heartland Documents

Man Trapped In Car for Two Months in Sub-Zero Temperatures Survives By ‘Hibernating Like a Bear’

Updated: Monday, 20 Feb 2012, 10:31 AM EST
Published : Monday, 20 Feb 2012, 8:14 AM EST

By NewsCore

Read more: http://trade.cc/anop