Mystery Economic Theater 2010

[ewmayer]

I am pleased to open the 2010 installment of the 2009 and the 2008 "All Things Economic" threads -- thanks to Mr. Batalov for suggesting a spiffy title.

By way of an opening salvo, please supplement your Nosferatian Nostradamian prognostications (actually that's a bad descriptor, as I hope ours will be far less vague than those of the late "Dr. No") with a pithy phrase you think will apply well to the global economic and financial scene in 2010.

Before sharing my own 2010 predictions, a few nice historical quotations for your enjoyment:

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"What we learn from history is that we do not learn from history"
-- Benjamin Disraeli, British Prime Minister ()


"The ultimate result of shielding men from the effects of folly is to fill the world with fools"
-- Herbert Spencer (Victorian philosopher)


"Success breeds a disregard of the possibility of failure." -- Hyman Minsky

"We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness."
-- Second and Third sentences of the preamble to the U.S. Declaration of Independence.


"The fact that an opinion has been widely held is no evidence whatever that it is not utterly absurd; indeed in view of the silliness of the majority of mankind, a widespread belief is more likely to be foolish than sensible." -- Bertrand Russell


"A large Bank is exactly the place where a vain and shallow person in authority, if he be a man of gravity and method, as such men often are, may do infinite evil in no long time, and before he is detected. If he is lucky enough to begin at a time of expansion in trade, he is nearly sure not to be found out till the time of contraction has arrived, and then very large figures will be required to reckon the evil he has done."
-- Walter Bagehot, Lombard Street, VIII.20


"Yeah, yeah, we know, employment is a lagging indicator. Not this time, buddy."
-- Alan Abelson, Barron's Magazine


"I'm shocked, shocked to find that gambling is going on in here! [As a croupier hands Renault a pile of money]" -- Captain Renault, Casablanca.

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Edit: The diligent folks at The Pragmatic Capitalist blog have put together a great tabulation of 2010 predictions by various investment firms and pundits, which should be good for no number of laughs as the year proceeds. Here it is is, by way of Barry Ritholtz's blog:

THE PRAGMATIC CAPITALIST'S ULTIMATE GUIDE TO 2010 INVESTMENT PREDICTIONS AND OUTLOOKS

[Fusion_power]

Predictions for 2010:
1. There will be a gradual lessening of economic stress through the 1st half of the year.
2. Unemployment will gradually stabilize but won't significantly decline.
3. By the latter half of the year, storm clouds will be on the horizon again, the economy will be prepared for a serious downturn.... again.
4. GM will be back at the trough again.. and again... and again.....
5. Inflation will be the next major economic hurdle. It will begin to show in 2010.
6. More companies will go bankrupt including several heavy industry players.
7. You will see a LOT of trucks and trailers on the road hauling scrap metals to sell for whatever it brings.
8. Fewer people will buy new cars relative to 2009.
9. I will move to a new house.... because I dislike paying rent, even if it is only $400 per month.
10. More people will have gardens in 2010 because that is a major way to put food on the table.

DarJones

[ewmayer]

Ernstradamus sayeth:

My predictive catchphrase for 2010 is "Reality Bites". (I copied Zeta-Flux Fusion Power's post riffing on this previously-announced theme from the Econ 2009 thread over to here - that's why it appears above this thread-starting one.)

MAJOR PREDICTIONS:

- In the U.S., the bailed-out GSEs (along with FHA, "the new Countrywide Financial") and automakers will continue to bleed (GM and Chrysler seem to be trying to outdo each other in terms of the "sell fewer cars, each at a hefty loss!" business model), commercial real estate will finally run out of Ponzi-debt-rollover options and blow sky high, multiple states will similarly blow budget gaskets and go crying to DC for bailouts, and official unemployment will stubbornly remain at or around 10% while real unemployment continues to creep steadily toward 20%. Once the market bulls who have deluded themselves into believing that one ca have a robust V-shaped recovery in the presence of massive unemployment, unprecedented household and federal debt levels and a generational retrenchment of consumers from credit-overdose to reality-is-frugality mode, the markets will once again threaten to retest the March 2009 lows and yet another desperation "Stimulus 2: Now Even Bigger and More Wasteful" government-giveaway will get announced. Republicans will jump all over this with cries of "Obamanomics has failed", while Democrats will cry that "We didn't cause the bad economy, we're simply trying our best to make it worse".

- Even though the U.S.'s economic woes are a thoroughly bipartisan issue, during the Fall 2010 elections frustrated voters will punish the party in power. Just-voted-out democrats will engage in a woeful chorus of "but we inherited all these problems from Bad Bush!"

- In the European (dis)Union, multiple governments will suffer debt crises. Rumors of sovereign default will spread, as the countries with the most-dire balance sheets (e.g. Greece, Dubai, Spain, Ireland, one or more of the Baltics, Mexico, maybe even Japan) and limited ability to cram below-market-interest-rate debt down the throats of codependent borrowers - a privilege the U.S. currently is abusing to the fullest - run out of "extend and pretend" options. Whether any of these turn into outright defaults or whether the rest of the world cobbles together huge bailout packages (funded by - ta da! - more debt issuance by the bailer-outers) remains to be seen. "We simply cannot allow [X] to fail" will again become a vogue phrase.

- The U.S. Fed will continue to shock and awe with its never-ending bag of tricks for backdoor bailouts of the banks and monetization of the skyrocketing balance-sheet debt. However, increasingly-skeptical pundits and lawmakers will call bullshit on the flagrant monetization. Despite the best efforts of numerous Bank-owned lawmakers and Fed-owned economists, "Audit the Fed" will become a very imminent threat, at which point the banksters, knowing that their free-money punch bowl is about to get taken away, will panic and financial shares will sell off big-time.

WILDCARDS:

- The banks, which still have trillions in off-balance-sheet garbage they have not been able to offload at par onto Uncle Stupid, and which will find it hard to continue issuing new play-money shares at government-market-pump-inflated prices. Gradual withdrawal of free-play-money liquidity by various central banks (the U.S. will be among the last of these) will expose much remaining weakness in the banking sector.

- The bond markets: The U.S. needs to issue a record amount of debt next year to keep its Ponzified economy lubricated. If the Fed starts losing control of long-bond (and the closely correlated mortgage) rates, the "housing recovery" and all the associated feel-goodiness will come to a screeching halt.

- Emerging markets: The biggest of these, China, only kept its export-dependent economy from outright implosion this year by way of a free-money bonanza well in excess of 10% of GDP. As a result, China equity and property markets are once again in bubble mode, as exports remain very weak, albeit better than the catastrophic levels of early this year. But inflating a second credit bubble to help allay the effects of the bursting of the first one is just silly.

- China has helped keep prices of oil and other commodities artificially high via massive stockpiling - you can't really blame them, because they really need to offload as much of their US$ holdings as they can, and buying commodities is one of the few ways for them to do so which provides guaranteed value. (They seem intent not to repeat the late-1980s Japanese mistake of using their surplus dollars to buy massively-overpriced U.S. commercial real estate). But there is simply no economic justification for $80 oil at present. On the other hand...

- If Israel decides that it has had enough of nice-sounding but completely useless Obama-and -Eurodiplomat-talk regarding Iran's nuclear program, oil prices could skyrocket. This would of course put the kibosh on any remaining "nascent U.S. economic recovery" talk.

I hope my raging optimism is not overly infectious. ;)

[Spherical Cow]

First, I'll qualify the rest of my post by saying that the Econ 2009 thread is the best source for economic news and comment I've found. And I do agree with the vast majority of the commentary.

Predictions are dangerous, though, no matter how well we all think we understand what's going on. Below is a prediction from the Econ 2009 thread, Post # 565 dated July 6.

There is no way to accurately guess when the market will bottom. At this point, a decline of 20 to 25% is highly likely within the next 3 months. Can you say 6000 on the dow? Ignore the advice of the ballyhoo pundits, they will continue to talk about green shoots and recovery as the economy slides further down the drain.

And attached, of course, is a graph of what actually happened to the Dow. Now, regardless of whether or not the Dow is secretly manipulated by a powerful few (as described in some posts the other day), its important to pay attention to it since so many of us have 401K or other retirement plans invested in mutual funds, which are obviously affected by the stock market.

For example, in July, I was considering whether my 401K account should be in a stock index fund or a simple, much safer money market fund. Post #565
pretty specifically predicted that putting money in the stock market would be a waste. Oddly, I went with the stock index, and my account is 25% bigger as a result, rather than the 25% smaller that was predicted.

So, now what should I do? Move to the safety of something like the money market? Stick with a stock index? Cash out and buy gold coins to hide under the bed? Predictions, anyone?


Norm

[R. Gerbicz]

Nobel Prize in Literature for Barack Obama.

[__HRB__]

p(Gold<$1000.00) ~ 0.10
p(Gold>$1250.00) ~ 0.95
p(Gold>$1750.00) ~ 0.50
p(Gold>$2500.00) ~ 0.25

[Fusion_power]

Anatomy of a company bankruptcy.

Nortel declared bankruptcy one year ago and stated the intent to sell off all operating divisions. The process of packaging up business segments and placing them in convenient and marketable groups has taken a year. The final group to be sold is the CVAS busines unit which provides digital switching systems primarily sold to telephone companies to provide local phone service. This division is now in a stalking horse bid to be sold within 30 days.

Some significant concerns that have played out over the past year include:

1. Who owns intellectual property such as patents. Nortel owned several thousand patents related to various businesses. Some were sold with operating divisions. Some were retained to be held by a shell corporation for future revenue.
2. The company retirement plan was terminated and turned over to the Pension Benefit Guarantee Corporation. This hurts a lot because it means our pension is set to a fixed benefit based on the money that was available at the time of takeover. There is a small possibility that further contributions to the pension may be made by Nortel as part of the bankruptcy settlement. I'm not holding my breath for this to happen.
3. Thousands of employees were terminated under egregious terms. There is no soft landing, no assistance finding new jobs, no termination pay, nothing but a call to clean out your desk, you're gone.
4. The employees who are left have mostly been absorbed by new companies. This is a positive overall because most of us need jobs, especially true in todays economy.
5. The uncertainty has taken a huge toll on morale. It is not easy for employees to keep turning out high quality work when they have no idea if they will have a job tomorrow.
6. The customers we deal with have been phenomal. With few exceptions they have been supportive and have continued to buy equipment. The result has been a solid year of sales in a down market. This is a tremendous help with being able to market the business.

DarJones

[wblipp]

Originally Posted by Fusion_power

4. The employees who are left have mostly been absorbed by new companies.

Once upon a time I worked in that industry. Does "new companies" mean "newly formed companies" or something else? I'd enjoy hearing about who these new companies are.

[Fusion_power]

posted in reverse order of sale:

Carrier VOIP Application Solutions division in bidding to be sold with an initial stalking horse bid from Genband, probable sale price in the range of $500 Million

Nortel Enterprise Solutions - sold to Avaya for $900 Million

Wireless CDMA and LTE division - sold to Ericsson for $1.13 Billion

Alteon networking gear - Sold to Radware for $18 Million

Overall, the breakup of the company looks to bring in about $2.4 Billion which is a pittance of the market prices 10 years ago.

DarJones

[ewmayer]

Note that I inserted a new thread-opening post above with some quotes you may enjoy, and which are completely unrelated to the thread topic (cough).

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Dubai "Tower of Bubble" Opens With Great Hoopla:

Dubai opens half-mile-high tower, world's tallest

Dubai opened the world's tallest skyscraper Monday in a blaze of fireworks, then added a final flourish: It renamed the half-mile-high tower for the head of neighboring Abu Dhabi, whose billions bailed out Dubai amid last year's financial crisis.

Long known as Burj Dubai — Arabic for "Dubai Tower" — the building rises 2,717 feet (828 meters) from the desert. The $1.5 billion "vertical city" of luxury apartments and offices and a hotel designed by Giorgio Armani also plans to have the world's highest mosque (158th floor) and swimming pool (76th floor).

Its backers wanted the skyscraper to be a monument to the boundless, can-do spirit of Dubai — one of a federation of seven small sheikdoms that make up the United Arab Emirates — but the timing could not be worse. Property prices in parts of Dubai collapsed by nearly half in the past year, the result of easy credit and overbuilding during a real estate bubble that has since burst.

My Comment: A fitting monument to the Great Credit/Housing Bubble. Still Sought: An actual paying tenant. (I know ... details, details). I found it interesting that the nightclub floor is a few floors below the mosque ... "and after praying, come on downstairs and show the strippers some love." The real question, though, is: It may be built to withstand a 9/11-style plane strike, but is it proof against foreclosure?


Eurozone Update:

Unlike the U.S., Iceland`s president proves he is not bank-owned, and the ECB begins to worry about some of the "collateral" it accepted last year from bailed-out banks:

Iceland to Hold Referendum on Icesave After Veto: Iceland will hold a referendum on a depositor accord with the U.K. and Netherlands after President Olafur R. Grimsson blocked the bill in a move that threatens to undermine the island’s efforts to repair international relations.

Grimsson vetoed the so-called Icesave accord after more than 60,000 of Iceland’s 320,000 inhabitants signed a petition urging him to reject the legislation.

The bill, which polls show about 70 percent of the population opposes, had obliged Iceland to use $5.5 billion in borrowed funds from the U.K. and Netherlands to cover depositor claims from the two countries after the failure of Landsbanki Islands hf in October 2008. The absence of clear cross-border regulatory rules on depositor insurance has allowed settlement of the claims to drag on and left Icelandic taxpayers disgruntled over having to pay for the failure of a private bank.

“The cornerstone of Iceland’s constitution is that the nation is the highest judge for the validity of law,” Grimsson told reporters at his residence outside the capital today. “Now the nation has the power and the responsibility in its hands.”

My Comment: Wow, respecting the whole "rule of law" thing and the "government of, by and for the people" -- that`s just so *backward* compared to the shining beacon of Governmental/Corporate-Kleptocracy (or was it "Fascist-Financial-Oligopoly" ... I really should've taken a PoliSci class in college) which is the latter-day USA. I do love the bit about the UK government admonishing Iceland to "meet its obligations", though - this the same UK government which is printing money like mad (a form of taxation without representation, and in fact fraud if the resultin g debt notes are sold with knowing intention to devalue the currency backing them) in a desperate attempt to paper over its own insolvency.


ECB Said to Start Consulting Banks, Investors on Collateral Transparency: European Central Bank officials are moving closer to forcing banks to provide more information about the collateral they give the ECB in return for loans.

ECB policy makers may today approve the start of a consultation process with banks, investors and market participants asking them to suggest how residential mortgage- backed securities can be made more transparent, according to two people involved in the process. The Governing Council meets today in Frankfurt.

The ECB is trying to better monitor the quality of the assets it’s holding in return for the funds it’s pumped into the European banking system during the crisis. European banks have created about 1.1 trillion euros ($1.6 trillion) of asset-backed securities since June 2007, which they can use as collateral for ECB loans.
...
Under the terms of the collateral consultation, officials want banks to provide information about individual loans such as the value of the property backing a mortgage, details on cash flow and whether the borrower is in arrears, the people said.

Banks in Europe have pledged about 217 billion euros of asset-backed securities as collateral at the ECB, Barclays Capital estimates.

My Comment: You accepted a couple hundred billion (fsce-valued) of crap MBS as collateral and you didn`t bother to do even the most-basic due diligence regarding the underlying loans? (Emphasis on the "lying" part). Who do you think you are ... the Federal Reserve?


New Wave of Bankruptcy Filings Finds Way Out of 2005 "Debt Slavery" Act

Personal Bankruptcy Filings Rising Fast

The number of Americans filing for personal bankruptcy rose by nearly a third in 2009, a surge largely driven by foreclosures and job losses.

And more people are filing for Chapter 7 bankruptcy, which liquidates assets to pay off some debts and absolves the filers of others. That is significant because a 2005 overhaul of federal bankruptcy laws aimed to encourage Chapter 13 filings, which force consumers to sign onto debt-repayment plans in exchange for keeping certain assets.

My Comment: Mish adds some very good advice for folks contemplating such an action in his commentary on the original WSJ article here.


ZeroHedge + Taibbi = Interesting

Last week, ZeroHedge ran an interesting article titled Origins of an American Kleptocracy, laying out the case that the true origins of the subprime-mortgage/housing-bubble/ponzi-securtization debacle lay not with the big banks, Wall Street or AIG, but instead with those government-sponsored pillars of affordable-housing-lenditude, Fannie and Freddie, who (as it increasingly appears) were routinely misrepresenting subprime loans as prime long before Angelo M and his Boyz over at Countrywide started working that scam. Seems that none other than Rolling Stone gadfly par excellence Matt Taibbi read that piece with no small interest:

...what we’ve learned in the last few years as one scandal after another spilled onto the front pages is that the bubble economies of the last two decades were not merely monstrous Ponzi schemes that destroyed trillions in wealth while making a small handful of people rich. They were also a profound expression of the fundamentally criminal nature of our political system, in which state power/largess and the private pursuit of (mostly short-term) profit were brilliantly fused in a kind of ongoing theft scheme that sought to instant-cannibalize all the wealth America had stored up during its postwar glory, in the process keeping politicians in office and bankers in beach homes while continually moving the increasingly inevitable disaster to the future.

That is a terrible story and it is also sort of a taboo story, since we don’t really have a system of media now that is willing or even able to digest that dark and complicated truth. Instead, our media — which has always been at best an inadvertent accomplice to these messes — is basically set up to take every revelation about the underlying truth and split it down the middle, feeding half to one side of the political spectrum and one half to the other, where the actual point is then burned up in the useless smoke of a blame game.

The essentially complicit nature of the two ruling political parties was in this way covered up for decades, as the crimes of the Democrats were greedily consumed as entertainment by the Limbaugh crowd while the crimes of the Bushies became hot-selling t-shirts and bumper stickers for the Air America listenership. The abiding mutual hatred the red/blue groups shared consistently prevented any kind of collective realization about the structure of the overall scheme.

What worries me is that we’re now reverting to the same old pattern with the financial crisis story. We’re starting to see fault lines develop, where one side blames the government while another side blames Wall Street for the messes of the last two decades.

[schickel]

Originally Posted by ewmayer

Seems that none other than Rolling Stone gadfly par excellence Matt Taibbi read that piece with no small interest:

Ooops....looks like you forgot the link there, Ernst.