The Mess That Greenspan Made: 2008

Happy New Year!

Wednesday, December 31, 2008

A Jim Carrey Happy New Year - nine years old and still very funny. Happy New Year to one and all and thanks for reading. Hopefully, next year at this time, things will be a bit cheerier.

And ... we have another winner!

Today's closing prices for a barrel of oil and an ounce of gold were ~~$42.62~~ $44.60 and $880.80, respectively, making Dorcus' Daddy the winner of the fifth "Guess the Price of Oil and Gold" contest by a ~~wide~~ small margin over News and Mathlete.
[Note: The scale in the chart above paints a misleading picture of the final results tabulated below. The maximum value of the vertical scale is about five times the minimum value, whereas, in the horizontal direction it is just over twice the minimum value - vertical separation, in percentage terms, is much greater than it appears.]

While, in the end it was a fairly close contest (thanks to the surge in the price of oil today), this was, by far, the largest error on the part of the winner. In previous contests, the combined percentage differences between the guessed and actual values for oil and gold were just a few percentage points - this time around it was over 30.
Dorcus' Daddy wins a one-year subscription to Iacono Research, where the model portfolio ended the year with a loss of just 27 percent (just?) after a rousing last few weeks of the year.

This follows consecutive annual gains of 22 percent, 25 percent, and 24 percent putting the model portfolio value back to about early-2006 after a very challenging 2008.

Thanks to all who participated - there will be a mid-year contest next year which should kick off sometime in early-April.

Congratulations DD - please send me mail so I can get an account set up for you.

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UPDATE: December 31st, 2008, 3:50 PM PST

As pointed out by News in the comments, the Nymex close for crude oil was indeed $44.60 a barrel per the Nymex website and both the chart and the table have been updated to reflect this, but it does not affect first place result (I don't know why Bloomberg, INO, Kitco, and others are reporting a close of $42.62 - well, now Bloomberg appears to have updated theirs to $44.60 as well).

A review of 2008 predictions

Well, unfortunately, it's that time of the year again - time to look back at the first of the year to see how yours truly did with his Predictions for 2008 and be humbled as never before.

During the two prior years, things had gone largely as expected:

In fact, for the year 2006, the predictions were pretty uncanny in their accuracy, the headline at Seeking Alpha reading Predictions for 2006: Scarily Precise.

The self-grading system that has been in place here for the last few years (not to be confused with our self-regulating financial markets) has produced the following results:

2006: 6-As, 2-Bs, 1-C, 1-N/A
2007: 7-As, 2-Bs, 1-F

How about if we just skip 2008 and reminisce some more about 2006 and 2007 instead?

Nah...

The year that completes later today was quite a different story than the last two as we all know, unprecedented in many ways, including the unprecedented number of times the word "unprecedented" has been used when describing the goings-on in the global economy and world financial markets.

Let's see how things turned out...

1. Lots More Pain for Housing

There is a near consensus that housing is in for more trouble in 2008, but this is not one of those cases where it would be better to go against the crowd - that will happen in another couple years or so when your friends and neighbors tell you that real estate is a horrible investment. Just like back in 1995-1996, when no one wanted to go near an open house five years after that last peak - that's when you'll know we've hit bottom.

Housing prices will fall another 10 percent nationally, based on the year-over-year change to the 20-city S&P Case Shiller Home Price Index for October 2008 (this report gets released at the end of December and showed a 6.7 percent decline as of last week.)

In some areas home prices will reach 2003 levels, which, in California, would still be more than double the price at the 1995-1996 bottom but will be a painful 40 percent below the 2006 peak. Don't let talk of stabilizing sales for new or existing homes confuse the issue of home prices - home prices will continue to fall as long as inventory remains at historically high levels.

Grade: B+

Yesterday's report from Case-Shiller had the 20-city index down a whopping 18 percent. I'm not sure if anyone predicted that big of a drop, but, if they did, congratulations are in order.

Home prices in California have indeed fallen back to the levels of 2003 and, in some cases, they've reached 2002 levels as seen in the latest report from DataQuick. It's pretty amazing that home equity is vanishing more quickly than it appeared in the Golden State where your typical Southern California homeowner lost about $150K of their "housing wealth" in 2008.

Ouch!

2. The Dollar Will Continue to Go Down

The eight percent decline in 2007 on the trade weighted U.S. dollar index (against the Euro, Yen, Pound, etc.) was such a success that there will be another, slightly smaller, decline in 2008. By year-end the index will be at 71 or 72 and economists will marvel at how the trade deficit is narrowing and how gross domestic product is receiving welcomed support due to more exports.

The Japanese yen will gain the most against the greenback and both the euro and the Canadian loonie will strengthen, but not as much as in 2007. The British pound will lose ground to the buck as credit and housing market problems accelerate in the U.K.

Grade: C

It looks like the U.S. Dollar Index will end the year at about 81 after starting at about 76, falling as low as about 71, then rising to 88, and falling again. This is probably the first of many instances that my prediction would have been great at mid-year but not-so-good by year-end because of those little problems during September and October.

The yen gaining against the dollar was a good call by year-end as was the one for the British pound, hence the reason for the grade of C versus F.

Come to think of it, maybe the grading should be done on a curve this year since so few prognosticators are likely to have done well...

3. It Will Be a Bad Year for U.S. Equities

The Dow and the S&P 500 Index will decline by 5 percent and the Nasdaq will gain 1 percent. Foreign stocks will continue to do better than U.S. stocks, but there will be fewer high-flyers than in 2007.

The Chinese stock market will gain more than 50 percent by summer and then lose most of the gains by year-end. The Japanese stock market will be one of the top performers in the world.

Grade: D

Well, the headline was right (the only reason for not getting an "F"), but the magnitude of the decline was a bit wide of the mark - off by about 35 percentage points or so (why the Nasdaq was expected to do better than the other U.S. indexes is a mystery).

Foreign stocks did much worse than U.S. stocks in 2008 and there were nothing but losses in China where equity markets ended the year down 65 percent with Japan not far behind at about minus 45 percent.

For my 2009 predictions, I promise not to let Peter Schiff's views affect my own.

4. Short-Term Interest Rates Will Go Much Lower

The Fed will cut interest rates by a quarter-point at every meeting and at one meeting they will cut by a half-point putting the Fed Funds rates at an even two percent by year-end.

They'll continue to talk tough about inflation occasionally but no one will really care - inflation will be the least of the country's problems by summer.

Grade: A-

Since the good grades are few and far between this year, I'm going to go ahead and give myself an "A-" on this one since no one could have possibly predicted ZIRP by year-end. Did anyone? Interest rates started out at 4.25 percent in 2008 and fell faster than ever before.

The prediction for 2009 is pretty easy - zero.

As for the inflation part of this prediction, it was spot on for late-summer as the price of oil was careening through the $100 a barrel mark, many of us thinking that it might be ready to stop careening when the careening was just getting warmed up.

5. Energy Prices Will Continue to Rise

The price of crude oil will rise to over $130 per barrel before ending the year at $115 per barrel. Just like $3 gasoline wasn't a big deal, $4 gasoline won't be a big deal either - unless of course you use your car a lot and/or you don't make a lot of money. Then it will be a big deal.

Natural gas, a laggard over the last two years after a spectacular rise in 2005, will surprise to the upside in 2008.

Grade C:

Again, this would have been a good prediction for mid-year. The idea of $100 oil was still a twinkle in everyone's eyes a year ago but not so by summer time. Gasoline at $4 came and went as did the boom in natural gas prices which almost doubled before losing two-thirds.

If the year-end part of this had been omitted, the grade would have been an "A", as it is, it's a somewhat generous "C" due to the good calls for the peaks.

Predictions for energy prices in 2009 should be all over the map.

6. Gold and Silver Will Continue to Rise

Gold will spike to over $1,000 per ounce and finish the year just below that mark. Silver will hit $22 per ounce and end the year at $19. There will be at least two gut-wrenching corrections that will cause many new investors to make an early exit from precious metals markets, but they'll be back.

People will start talking about junior mining stocks at cocktail parties - just like internet stocks in 1997. (I'm going to keep saying this until it's true).

Grade: B-

Thousand dollar gold came and went as did $21 silver, however, the year-end view of things was off by about 10 percent and 40 percent, respectively, which, in comparison to the predictions for energy is a stellar result.

Once again, omitting the year-end price would have boosted the grade a bit here, but a "B" seems to be warranted.

As for the "junior mining stocks like internet stocks" comment, I think that was a typo - it should have said, like internet stocks in "2001".

7. Economic Growth will Turn Negative, Consumption will Decline

This is the year that the American consumer finally pulls back in a big way and real economic growth will be negative in two quarters. Home equity, the source for much of consumer spending in recent years, will vanish more quickly due to falling home prices than it did when people were spending their home equity like drunken sailors.

Grade: A+

Wow!

Maybe I should have spent more time thinking about the impact that would result in the second half of the year if this eerily accurate prediction actually came true.

As it was, the year 2008 turned out to be the year that people stopped saying, "Never count out the American consumer".

8. Reported Inflation will Remain Contained

More people will realize that the government's inflation numbers are bogus. They won't be happy about it.

Grade: A

Again, good grades are hard to come by this year...

However, when reflecting back upon last summer (which now seems years away), it would have been very hard to disagree with this sentiment when gasoline was over $4 a gallon and the government's inflation rate peaked at an annual rate of about five percent.

9. Job Growth Will Turn Negative by Year-End

State and local governments will cut back on hiring due to shrinking tax revenue and fewer people will eat out - two important props for the job market will be partially removed. Employment in health care will continue to boom and even fewer people will talk about the looming Medicare crisis.

By the end of 2008, year-over-year job growth will turn negative but it will be impossible to really know for sure until sometime in 2010 when the Bureau of Labor Statistics completes all its revisions for 2008.

Help wanted signs at coffee shops and restaurants will slowly disappear which will be unfortunate for those teenagers who finally have to start looking for low-paying jobs to buy their next iPod or cell phone because their parents have spent all their home equity.

Grade: A

Year-over-year job growth turned negative in July and hasn't looked back - almost two million jobs were lost in 2008 and, if the last labor report is any indication, it might be closer to three million after the December data is reported next week.

Given that there had not yet been a single month of declines in nonfarm payrolls when this prediction was made, a grade of "A" seems warranted (plus the fact that it's hard to get good grades this year).

10. Hillary or Barack will Win the Election

It's too bad Ron Paul isn't ten or fifteen years younger - in another eight years the country will be ready for him.

Grade: B

I'm giving myself a grade of "B" on this one simply because I knew in my gut Obama was the right prediction, but I didn't want to look silly if he stumbled and made an early exit.

Remember that, at the time this call was made, no primary had yet been held and the tide had just begun to turn from the "Hillary is inevitable" thinking.

Summary

Overall, this wasn't as bad as first thought - a somewhat generous 4-As, 3-Bs, 2-Cs, and 1-D, though others might grade it differently - but the fact that the bad ones cost a lot more money than the good ones earned makes this something of a disappointment, money-wise.

Tomorrow's Predictions for 2009 are going to be quite a challenge.

Some people got what they wanted in 2008

There are quite a few retrospectives out today for what has been a remarkable year in many ways (see the second section of the previous post of daily links). The image below is from the Globe & Mail's The Year in Pictures which is quite good.

Wednesday morning links

Harry Dent's dire predictions

Tuesday, December 30, 2008

This was spotted over at Patrick.net. I've heard the name before but don't know anything more about him than what appears at Wikipedia which is none too flattering.

The patron saint of pool skatin'

You may have seen this elsewhere by now as it appeared at Barry's Big Picture blog yesterday, but it's worth mentioning again here in case you missed it or were looking for some added context.

In a New York Times story from Sunday, it was learned that, since most of the stagnant water has been removed from the swimming pools of foreclosed homes in California's Central Valley in what had proved to be a very effective breeding ground for mosquitoes over the last two summers, the empty pools now offer a veritable smorgasbord of options for skateboarders, some of whom credit the former chairman of the Federal Reserve for their good fortune.

Some skateboarders use realty tracking sites like realquest.com and realtor.com to find foreclosed houses with pools, while others trawl through satellite images from Google Earth.

On the Web site skateandannoy.com, where skaters trade tips about how to find and drain abandoned pools, one poster wrote about the current economic malaise. “God bless Greenspan,” the post read, “patron saint of pool skatin’.”

What this indicates about the understanding of monetary policy by the skating community and the public at large is unclear, however, what is clear is that The Maestro now has one more ignominious label to add to his growing collection after a tumultuous period that has seen his reputation plunge faster than either stocks or home prices.

More record home price declines

The October report(.pdf) for the S&P Case-Shiller Home Price Indices shows the 10-City and 20-City Composite Home Price Indices at new record annual declines of 19.1 percent and 18.0 percent, respectively. Price indices for all 20 cities are shown below.
Recall that to aid in viewing this graphic, the order of the legend (upper left) reflects the top-to-bottom position of all 20 cities for the current month (far right).

New York maintains its lead over Washington for having best held its price gains over the past nine years, but that may change in 2009 as financial sector job losses continue to mount in New York, creating something of bailout boom in Washington.

Phoenix and Las Vegas continue to lead the way down, but now San Francisco has joined the select group of areas with year-over-year price declines of more than 30 percent as indicated below in red.

Annual declines of 20 percent or greater are indicated in blue. As if it didn't have enough other things to worry about, Detroit joined that list in October with Tampa looking ready to make the same move next month.
Not a single area showed a month-to-month improvement, in contrast to last month when both Boston and Cleveland posted small gain and Dallas was unchanged.

David M. Blitzer, Chairman of the Index Committee at Standard & Poor's, noted:

The bear market continues; home prices are back to their March, 2004 levels. Both composite indices and 14 of the 20 metro areas are reporting new record rates of decline. As of October 2008, the 10-City Composite is down 25.0% from its mid-2006 peak, and the 20-City Composite is down 23.4%.

In October, we also saw three new markets enter the ‘double-digit’ club. Atlanta, Seattle and Portland are reporting annual rates of decline of 10.5%, 10.2% and 10.1%, respectively. While not yet experiencing as severe a contraction as in the Sunbelt, it seems the Pacific Northwest and Mid-Atlantic South is not immune to the overall demise in the housing market.

With the level of price declines that have already been seen, you'd think that things can't get any worse, but they do. You'd at least think that the year-over-year price declines would start to ease up a little bit, but they don't - new records are being set every month.

Tuesday morning links

Marc Faber on CNBC

Monday, December 29, 2008

Despite the stumbling introduction by Joe Kernen and some bizarre in-studio camera work on what appears to be a very old picture of Dr. Doom, this is a pretty good interview.

Summary: Buy gold, buy commodities, and buy natural resource stocks while getting ready to short U.S. debt "massively".

The Minsky journey continues

Paul McCulley at Pimco talks to his rabbit about monetary and fiscal policy in the context of our long Minsky journey. The "Minsky Policy Solution" shown at the bottom-right in the graphic below is the government's "all-in reflationary response" to the crisis.

A boomtown interrupted

After visiting Alberta a few times in recent years, "Canada's Texas" as some refer to it, and having heard local news stories about the goings-on at Fort McMurray, a story in today's Globe & Mail comes as no surprise given the recent plunge in oil prices.

It seems that the Canadian oil sands (also known as "tar sands" for obvious reasons) make a lot more sense (and money) when crude oil prices are closer to $100 a barrel than $40 a barrel. Why? As shown below, while this source of non-conventional oil does indeed yield very usable petroleum products, it's not like sticking a straw into the ground.
These added production costs, at a time when no one is quite sure whether crude oil is headed to $25 a barrel or $125 a barrel, have cut dramatically short the job listings at Fort MacMurray, perhaps ending the days (at least temporarily) when a new high school graduate could earn $90,000 a year simply by going north to drive a dump truck.

The Globe & Mail has all the particulars in this report:

Hungry young tradesmen like Evan Brewer used to be as plentiful on the ground in Fort McMurray as chips at the Boomtown Casino. They'd get off the plane from Atlantic Canada and score big money in the oil sands.

Now Mr. Brewer feels like one of the last of an endangered species. “I just got in under the wire,” says the 23-year-old journeyman welder from Fredericton, as he lines up for the 5 a.m. breakfast of cereal, doughnuts and croissants at the Ace Inn, a favoured downtown hostelry for young men in work boots and hard hats.

With a base pay of $40 an hour and living allowances, Mr. Brewer is pulling down better than $3,000 a week, much more than he ever dreamed of back in New Brunswick, where he was living in his parents' basement.

But since he signed up at Suncor Energy Inc. in June, the floor has collapsed under the great oil sands bonanza.

Project after future project has been shelved or slowed down until, according to the companies, plunging oil prices stabilize and financing starts to loosen up.

Fort McMurray will not become a ghost town. You can still see the signs everywhere of an overheated economy. Highway 63 is a parking lot during rush hour as the workers stream out of the city toward the big oil sands projects. The slots at the Boomtown are busy even on a Monday night, and you can hardly find a hotel room with less than a week's notice.

But the mood is decidedly less bullish in the work camps and motels around Fort Mac, where the shadow population, the temporary workers flown in from everywhere, are insecure about the future.

There's lots more to this story which is well worth reading in its entirety.

So far, only temporary workers have been affected, however, that could change depending upon how long energy prices remain low. Home prices are still at astronomical levels (an average sale price of CAD$690,000), but this could change even faster.

Also of interest is the impact that the northern Alberta economy has had, and continues to have, on surrounding areas.This has been one heckuva boomtown over the last few years and it will likely be so again at some point, the big question is when.

A bailout boomtown

The Washington Post reports on one of the bright spots to the year-long financial crisis.

As the Financial Bailouts Grow, So Does the Fed
Real estate analysts have predicted that federal bailouts could be a boon for Washington commercial space, as federal agencies and the contractors that serve them expand in the face of the economy's problems.

A new deal supports that theory: The Federal Reserve is broadening its office footprint at International Square 1, 1850 K St. NW, Washington.

The agency leased an additional 80,000 square feet -- two more floors in the building. It already has about 35,000 square feet on one floor in the building.

Art Greenberg and Vernon Knarr, both brokers at Studley, represented the agency in the latest deal.

Paraphrasing the inimitable Carl Spackler from the 1980 movie classic Caddyshack:

So we got that goin' for us, which is nice.

ooo

Monday morning links

Keeping the drunk in Scotch a while longer

Sunday, December 28, 2008

In this New York Times commentary by Peter Goodman, you get a couple more metaphors for the ongoing economic crisis and the stimulative responses by government - one good, one bad - along with about as good a rationalization as you are likely to hear for why contemporary economics is unique in the world in that, to borrow a phrase from the world of medicine, the cause and the cure for an illness are one-and-the-same.

So it may seem perverse that in this new era of reckoning — with consumers finally tapped out, government coffers lean and banks paralyzed by fear — many economists have concluded that the appropriate medicine is a fresh dose of the very course that delivered the disarray: Spend without limit. Print money today, fret about the consequences tomorrow. Otherwise, invite a loss of jobs and business failures that could cripple the nation for years.

To the uninitiated, say, someone observing the Earth from afar and knowing nothing about our monetary history, it must surely seem like madness.

How can more easy money be the solution to the problems caused by too much easy money?

That question must have been asked a hundred times here over the last year.

On to the metaphors - first the good one:

“We got into this mess to a considerable extent by overborrowing,” said Martin N. Baily, a chairman of the Council of Economic Advisers under President Clinton and now a fellow at the Brookings Institution. “Now, we’re saying, ‘Well, O.K., let’s just borrow a bunch more, and that will help us get out of this mess.’ It’s like a drunk who says, ‘Give me a bottle of Scotch, and then I’ll be O.K. and I won’t have to drink anymore.’ Eventually, we have to get off this binge of borrowing.”

Some argue that the moment for sobriety is long overdue, and postponing it further only increases the ultimate costs. “Our government doesn’t have enough spare cash to bail out a lemonade stand,” declared Peter Schiff president of Euro Pacific Capital, a Connecticut-based trading house. “Our standard of living must decline to reflect years of reckless consumption and the disintegration of our industrial base. Only by swallowing this tough medicine now will our sick economy ever recover.”

Oh, there's Peter again - he's everywhere these days...

A lower standard of living is a pretty tough to sell for politicians - at least for those who are seeking another term in office, which, as I understand it, is job one for most elected officials.

That would be quite remarkable though, wouldn't it?

If, at his inauguration, Barack Obama calls for a collective acceptance of our declining standard of living as part of our new role in the global economy.

Nah. Change like that would be a bit much. 'Tis better to stick with what has always worked in the past - the bad metaphor - the economy as a sick patient rather than someone with a serious drinking problem.

But most economists cast such thinking as recklessly extreme, akin to putting an obese person on a painful diet in the name of long-term health just as they are fighting off a potentially lethal infection. In the dominant view, now is no time for austerity — not with paychecks disappearing from the economy and gyrating markets wiping out retirement savings. Not with the financial system in virtual lockdown, and much of the world in a similar state of retrenchment, shrinking demand for American goods and services.

Since the Great Depression, the conventional prescription for such times is to have the government step in and create demand by cycling its dollars through the economy, generating jobs and business opportunities. That such dollars must be borrowed is hardly ideal, adding to the long-term strains on the nation. But the immediate risks of not spending them could be grave.

Ultimately, the drunk metaphor is much more convincing, but even Mr. Baily comes around to the view that maybe more alcohol really is the best course of action:

“This is a dangerous situation,” says Mr. Baily, essentially arguing that the drunk must be kept in Scotch a while longer, lest he burn down the neighborhood in the midst of a crisis. “The risks of things actually getting worse and us going into a really severe recession are high. We need to get more money out there now.”

Yes, we really do need more money out there now.

We'll set about fixing things the next time around - after the current crisis has passed, when the drunk is back on his feet again.

Nouriel Roubini - playboy economist

This story is rather old, but it's the first I've heard it, something that wouldn't have happened if not for this mostly flattering piece in the Financial Times in which Nouriel Roubini is referred to as a "playboy economist", the picture below from Gawker confirming such.
The big smile on Dr. Doom's face notwithstanding, it seems that a dust up began two months ago when Nick Denton at Gawker penned The Secret Pleasures of Dr. Doom, in which, the social life of the renowned New York economist was chronicled.

As short excerpt:

The image of Dr. Doom may satisfy the needs of the media and partygoers this Halloween—but Roubini is anything but dour. The 50-year-old Iranian-Jewish economist is a promiscuous Facebook friend who draws a cosmopolitan crowd to the frequent parties at his Tribeca loft—an apartment with walls indented with plaster vulvas, incidentally.

Yikes!

Things degraded rapidly from there as this search at Gawker reveals. A few of the highlights are shown below:

10/15 - Credit Crunch's Dr. Doom Is A Facebook Stalker
10/16 - 'Nick Denton Is An Anti-Semite With A Nazi Mind'
10/16 - Let's Go Over the Rules of Internet Microfeuds Again
10/17 - Journalists Are 'Bunch of Wimps' Blackmailed By Gawker, Says Dr. Meltdown

Lots of interesting reading there with many more photos...

As for the Financial Times piece, it now all seems rather odd. What is apparently the first in a series of articles dubbed "Faces of the Crisis", the retelling of Nouriel Roubini's involvement in the 2008 financial crisis begins with his personal life:

In the buzzy, scruffy warren of offices in New York from which Nouriel Roubini runs his economics aggregration and commentary website, one of the young cyber-serfs has taped a New York Post story about the boss to the chalky wall. “NYU Playboy Warns: Econ Party’s Over”, the sub-heading declares, next to a photograph of a smiling, open-shirted Mr Roubini, sandwiched between two attractive young women.

Not so long ago, the phrase “playboy economist” would have been a joky oxymoron, likely to feature in satirical lists alongside “selfless hedge fund manager” and (at least before the US surge in Iraq) “military intelligence”. But, in a sign that practitioners of the dismal science are among the few beneficiaries of the global economic meltdown, this crisis has transformed the 50-year-old New York University professor from a respected academic economist into a minor celebrity.

Mr Roubini, who offered one of the first and most nuanced predictions of the financial and economic crash, is ambivalent about the personal scrutiny his fame has attracted. After Nick Denton, founder of the Gawker website, first pointed to the contrast between the economist’s “Dr Doom” public persona and his party-going private life, Mr Roubini sent Mr Denton a Facebook message in which he declared: “I work very, very hard and I also enjoy life . . . To paraphrase Seinfeld: anything wrong with that?”

The rest of the commentary is about what you might expect including comments by billionaire philanthropist George Soros and Mohamed El-Erian, chief executive at Pimco, who, for all I know may be two of Nouriel's "wingmen" along with Barney Stinson.

Sunday morning links

Peter Schiff's WSJ op-ed piece

Saturday, December 27, 2008

That second to last page in the first section of the Wall Street Journal continues to offer up commentary that you just don't see elsewhere in the mainstream media.

Over the last month or so, as it has become increasingly clear that our monetary system may be at the root of many of our current problems, there were at least three calls for a new monetary order, all of which involved gold in some way.

See the following references from back in November:

Nov. 14 - We need more editorials like this
Nov. 18 - Another good "sound money" editorial
Nov. 24 - Another call for a gold standard in the WSJ

(Hmm... maybe I should be more demanding when crafting the titles to these posts - it seems to have had the desired effect.)

Today, Peter Schiff weighs in with some quite sensible arguments regarding the recent mania in economic stimulus programs around the world, figuring that maybe the free market would be better off deciding who wins and loses rather than governments.

There's No Pain-Free Cure for Recession
Belt-tightening is required by all, including government.
By PETER SCHIFF

As recession fears cause the nation to embrace greater state control of the economy and unimaginable federal deficits, one searches in vain for debate worthy of the moment. Where there should be an historic clash of ideas, there is only blind resignation and an amorphous queasiness that we are simply sweeping the slouching beast under the rug.

With faith in the free markets now taking a back seat to fear and expediency, nearly the entire political spectrum agrees that the federal government must spend whatever amount is necessary to stabilize the housing market, bail out financial firms, liquefy the credit markets, create jobs and make the recession as shallow and brief as possible. The few who maintain free-market views have been largely marginalized.

It is rather remarkable that the only discussion you really hear these days is how big and how far-reaching the economic stimulus should be with few elected officials (Ron Paul, Fred Thompson, and a couple others) questioning how more easy money is going to solve the problems caused by too much easy money.

After discussing Keynesian versus Austrian economics, an increasingly popular topic these days but one that still gets far too little attention, Peter concludes:

By borrowing more than it can ever pay back, the government will guarantee higher inflation for years to come, thereby diminishing the value of all that Americans have saved and acquired. For now the inflationary tide is being held back by the countervailing pressures of bursting asset bubbles in real estate and stocks, forced liquidations in commodities, and troubled retailers slashing prices to unload excess inventory. But when the dust settles, trillions of new dollars will remain, chasing a diminished supply of goods. We will be left with 1970s-style stagflation, only with a much sharper contraction and significantly higher inflation.

The good news is that economics is not all that complicated. The bad news is that our economy is broken and there is nothing the government can do to fix it. However, the free market does have a cure: it's called a recession, and it's not fun, easy or quick. But if we put our faith in the power of government to make the pain go away, we will live with the consequences for generations.

At this point, the free market solution would likely be a depression rather than a recession, hence the reason that no elected official or right-thinking economist would contemplate anything other than the current course.

Oil and gold contest update #6

Friday, December 26, 2008

Last week, the plunging price of crude oil nearly caused a scale adjustment in the graphic below, however, this week, the opening up of the $30 to $40 range was unavoidable in this last update of the fifth semi-annual "Guess the Price of Oil and Gold" contest.
Over the last seven days, crude oil tumbled from about $43 a barrel to just $37.70 after having dipped to about $35 on Wednesday. At some point in the future, it will be funny to look back on this price and think of what a bargain oil was - of course it may become even more of a bargain in the weeks and months ahead.

Gold had a late-week surge to close at $869 an ounce, now sporting a gain of 4 percent for the year (about 6 percent if you own it in physical form) and it may add to these totals next week. The price of gold has risen over the last three trading days during six of the last seven years.

Mathlete has moved from fourth place to second, but Dorcas' Daddy continues to build on his lead. The only way this gap can be closed is with a big move up in both oil and gold, the former being the more important of the two and seeming very unlikely at this time. The top ten contains the same names as last week with the exception of EB squeezing into 8th place, Tom C. having been tossed out.

I didn't check to see where my guesses stood this week...

The lucky winner, to be announced next Wednesday or Thursday will receive a free one year subscription to Iacono Research where the model portfolio had another good week and looks ready to end the year about 10 to 15 percentage points clear of broad equity markets.

Of course, this year, such a result is still quite awful.

Here's the chart from when the contest was kicked off back in early-October.
Yes, a scale change will be required on this too when the summer contest begins next year.

ooo

An 8.5 percent actuarial assumption?

If I didn't have so many relatives who are retired school teachers, now counting on the Pennsylvania Public School Employees' Retirement System for their monthly checks, this story($) in today's Wall Street Journal would probably have escaped further scrutiny. But, since I do, it didn't.

In discussing how pension fund managers are largely undeterred after the events of the last year, as eager as ever to direct school teachers' retirement money toward hedge funds as part of a never-ending quest for higher returns, this little gem about actuarial assumptions in the Keystone State was stumbled upon.

"We have an 8.5% actuarial assumption, and ... we have to look for programs that can reach that level," said Alan Van Noord, chief investment officer at the $54.7 billion Pennsylvania Public School Employees' Retirement System. "There are very few asset classes that you can get [returns] above 8%."

I'd get on the phone to let some people back East know about what kind of assumptions Mr. Noord has been working with and how they might affect their retirement income stream over the long-term if there was something they might be able to do about it.

Maybe, I'll call anyway.

Is this typical? To assume a return of 8.5 percent?

Everyone knows what happens when you assume...

If this is a fairly standard approach, it surely speaks volumes about this first decade in the new century - a period when short-term interest rates have averaged just a couple percent and giant pension funds are operating under the belief that they can make annual returns four times as high.

Given what's happened since the summer, when asked, they ought to at least say something like, "We're taking a close look at our investment options at the moment". Or, better yet, "We're taking a close look at our investment assumptions right now", but apparently not.

That pension funds remain committed to hedge funds may be a surprise given the industry's recent problems, where total assets have shrunk to about $1.5 trillion from nearly $2 trillion in June.
...
Even some pension funds that cashed out of hedge funds recently are now returning. A few months ago, the $8.5 billion School Employees Retirement System of Ohio, or SERS, shelved its investments in hedge funds. Last week, the pension fund's board approved moving right back in.

"Fundings will probably be restarted during the first quarter of 2009, but no definite dates were determined," said Tim Barbour, a spokesman for SERS.

Then again, if you're a retired teacher in Ohio, you may have more important things to worry about than the choices being made by your pension fund managers.

With a population of 12 million, the Pennsylvania's teachers' retirement system holds a total of $55 billion in assets, but with just one million fewer people living in Ohio, their pension fund holds only $8.5 billion.

More Treasury bubble talk

In today's commentary at Bloomberg, Michael Sesit consults with the "Bond King" on what many call the biggest and baddest bubble of them all - U.S. debt.

To Bill Gross, co-chief investment officer of Newport Beach, California-based Pacific Investment Management Co., the answer is yes. “Treasuries have some bubble characteristics, certainly the Treasury bill does,” Gross said earlier this month. “A Treasury bill at zero percent is overvalued. Who could argue with that in terms of the return relative to the risk? There is no return.”
...
The bursting of a bubble in the U.S. government bond market would be a perilous event.

First, it would cause large losses for millions of investors, especially U.S. retirees who regard Treasury securities as the ultimate safe investment.

Second, it might threaten Treasuries’ status as the global “risk-free asset” and would damage the international stature of the U.S. Foreigners, who own about half of all Treasuries, might stop funding the country’s growing trade and budget deficits without an increase in U.S. interest rates.

Finally, a busted Treasury-market bubble could undermine the dollar’s global reserve-currency status, which in turn would spell higher U.S. interest rates, undercutting economic growth.

Big and bad and likely to burst someday...

Friday morning links

Christmas Trees 'Round the World

Thursday, December 25, 2008

Enjoy these wonderful Christmas trees - Merry Christmas to all!

[Note: This came in the mail and, as such, the source is not known. If anyone does know the source, please advise and they will be properly credited.]

Before the ball drops in Times Square, the Big Apple turns on its holiday charm with the Christmas tree in Rockefeller Center.
The Capitol Christmas tree in Washington, D.C., is decorated with 3,000 ornaments that are the handiwork of U.S. schoolchildren.

Encircling evergreens in the 'Pathway of Peace' represent the 50 U.S. states.The world's largest Christmas tree display rises up the slopes of Monte Ingino outside of Gubbio, in Italy's Umbria region. Composed of about 500 lights connected by 40,000 feet of wire, the 'tree' is a modern marvel for an ancient city.
A Christmas tree befitting Tokyo's nighttime neon display is projected onto the exterior of the Grand Prince Hotel Akasaka.
Illuminating the Gothic facades of Prague's Old Town Square, and casting its glow over the manger display of the famous Christmas market, is a grand tree cut in the Sumava mountains in the southern Czech Republic.
Venice 's Murano Island renowned throughout the world for its quality glasswork is home to the tallest glass tree in the world. Sculpted by master glass blower Simone Cenedese, the artistic Christmas tree is a modern reflection of the holiday season.
Moscow celebrates Christmas according to the Russian Orthodox calendar on Jan. 7. For weeks beforehand, the city is alive with festivities in anticipation of Father Frost's arrival on his magical troika with the Snow Maiden. He and his helper deliver gifts under the New Year tree, or yolka, which is traditionally a fir.
The largest Christmas tree in Europe (more than 230 feet tall) can be found in the Prado Comio in Lisbon, Portugal. Thousands of lights adorn the tree, adding to the special enchantment of the city during the holiday season.
'Oh Christmas tree, oh Christmas tree': Even in its humblest attire, aglow beside a tiny chapel in Germany's Karwendel mountains, a Christmas tree is a wondrous sight.
Ooh la la Galeries Lafayette! In Paris, even the Christmas trees are chic. With its monumental, baroque dome, plus 10 stories of lights and high fashion, it's no surprise this show-stopping department store draws more visitors than the Louvre and the Eiffel Tower
In addition to the Vatican's heavenly evergreen, St. Peter's Square in Rome hosts a larger-than-life nativity scene in front of the obelisk.
The Christmas tree that greets revelers at the Puerta del Sol is dressed for a party. Madrid's two-week celebration makes millionaires along with merrymakers. On Dec. 22, a lucky citizen will win El Gordo (the fat one), the world's biggest lottery.
A token of gratitude for Britain's aid during World War II, the Christmas tree in London's Trafalgar Square has been the annual gift of the people of Norway since 1947.
Drink a glass of gluhwein from the holiday market at the Romer Frankfurt's city hall since 1405 and enjoy a taste of Christmas past.
Against a backdrop of tall, shadowy firs, a rainbow trio of Christmas trees lights up the night (location unknown).

You better watch out, you better not cry

'Twas the night before Christmas

Wednesday, December 24, 2008

Image courtesy of Crazy-Jokes.com.

Preparing for the shortest honeymoon ever

From the current issue of Time Magazine:

Paul O'Neill on the Obama jobs intitiative

In today's commentary at Bloomberg, Caroline Baum consults former Treasury Secretary Paul O'Neill on President-elect Obama's $750 billion stimulus program aimed at bettering the lives of the 10 million unemployed Americans - one solution is surprisingly simple.

“If we write a check for $75,000 to each of the unemployed, we won’t have anyone ‘unemployed,’” said former Treasury Secretary Paul O’Neill.

The recipients may not be working in the traditional sense of going to the office each day, but the government can provide for their needs without anyone having to lift a finger.

The Obama administration’s goal of creating 3 million new jobs by January 2011 will run smack into “the natural demographic flow, which will add 3.2 million people to the workforce” in the same time period, O’Neill said. In effect, “we are going to spend $750 billion, the number of unemployed will rise and the (unemployment) rate will go down slightly.”

O’Neill did the math so you don’t have to. Each job “will cost $250,000, which doesn’t suggest much labor intensity for the dollars spent,” he said. “It makes me wonder if any of the planners or commentators are good at arithmetic.”

They’re not good at arithmetic. And one wonders about their facility with economics.

If putting people to work is the goal, we could get rid of all the heavy earth-moving equipment and go back to digging ditches with shovels.

Why stop there? If it takes one man two days to dig a trench three feet deep and 30 feet long with a shovel, how long would it take 100 men using spoons?

Just think how many jobs could be created if they used tiny spoons?

New highs for jobless claims

It's not clear whether anyone really pays attention to the new jobless claims numbers these days, what with all the other bad economic news that continues to pour in, but, if they do, they are likely to notice when weekly claims for unemployment insurance top the 600,000 mark, which now seems inevitable.
A new high of 586,000 for the current economic cycle was set earlier this morning for the week ending December 20th. This follows readings of 575,000 and 556,000 over the prior two reporting periods and things are likely to get worse, perhaps much worse, before they get better for the labor market which is typically a lagging economic indicator.

Jobless claims are now at the highest level since November of 1982, the last time that the 600,000 level was breached at 612,000. Just one month before, in October, the all-time high of 695,000 was reached.

Adjusting for the roughly 30 percent increase in the U.S. population since that time, the all-time high in jobless claims translates to almost one million today, meaning that crossing the 600,000 mark could just be the beginning.

Wednesday morning links

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