The Limerick of Finance for 03/28/10

The Maestro warns debt costs will rise
A mea culpa, we can almost surmise
Though junk bonds wtill rally
Traders' gains, they do tally
A bond bubble burst will surprise

Greenspan Singing Like a Canary, But Off-Key

The Maestro sounds off about treasury yields:

Former Federal Reserve Chairman Alan Greenspan said the recent rise in Treasury yields represents a “canary in the mine” that may signal further gains in interest rates.

Higher yields reflect investor concerns over “this huge overhang of federal debt which we have never seen before,” Greenspan said in an interview today on Bloomberg Television’s “Political Capital With Al Hunt.”

The problem is that he still hasn't owned up to his contribution to the federal government's insolvency.  His endorsement of Bush II's tax cuts and his own low interest rate policy made debt issuance into a mad scramble to see who among governments, banks, hedge funds, and homeowners could lever up the fastest.  Anyone who played that game turned out to be a big loser. 

Come on, Alan.  Think of how history will view you.  The least you can do now is admit that the U.S. government won't be able to pay its future bills because you allowed it to run up its credit card. 

A Conversation on Automakers and Business Cycles

A friend of mine who is a thoughtful private investor (like myself) emailed me a question about our favorite troubled automakers. It grew into a larger email exchange that I've reprinted here with his permission. Comments from Mr. Private Investor are in italics. My own comments are in bold type.

(begin transcript)

Tony, I'm thinking Ford is going to be stronger financially in the future and be in a stronger position when negotiating with UAW once the Union and the Feds destroy GM forcing tens of thousands of auto workers into unemployment.

Am I off my rocker?

What are your thoughts about Ford specifically?

What are your thoughts about the GM thing?

Is now a good time to purchase stock in Ford?

I don't know Ford's business model all that well (aside from owning a dented 2003 Mustang). It looks they'll survive this year but any U.S. automaker is going to have a hard time in the future because union wages and benefits put them at a huge cost disadvantage. Ford could easily go into a nosedive again if this Depression (yes, it is one) gets even worse in 2010. I've often wondered why Ford doesn't introduce its cheap, fuel efficient European models (like the Ka and SportKa) in the U.S. The fact that they haven't speaks to me of a weak strategic vision that can't translate success in one market to another.

GM is very likely to end up in bankruptcy within a month, for all of the reasons we've all read about.

Your thinking is probably correct, but I personally would not buy stock in either company. The long-term prospects for growth in the U.S. car market are poor simply because there are too many cars on the road right now. People with constrained incomes and poor job prospects are going to postpone auto purchases and keep driving their clunkers for years. I'm not even fixing the dents on my Mustang.

Okay, what is the definition of a depression?

That is a good question regarding those two models. Is there some regulatory reason, do they actually believe there is no market, or like you state just poor vision.

My boss is a Mustang fan in case you ever get in a conversation with him.

The NBER (http://www.nber.org/) doesn't have a formal definition of a depression. I use a definition shared by a minority of economists: a decline in GDP of 10% or more. We're almost there.

I'm not sure about regulatory reasons. I think it mostly comes down to poor vision at Ford.

Okay, I checked out NEBR and the Business Cycle and Expansion link.

My guess is that the second column "Previous trough to this peak" is when the "times were good". If that is true the longest (120), third longest (92) and fifth longest (73) included and followed the Reagan era. The two "peak to trough" periods (i.e. not so good) during and following the Reagan era were eight months each, two months less than the ten month avg for 1945-2001.

What say you?

Am I just a Reagan fan looking for everything presumably beneficial regarding his era or am I on to something?

Or do I need to leave the economic prognosticating to the learned?

Pretty good analysis! Let's delve further . . .

The 92-month expansion was very likely a result of Paul Volcker's inflation-killing monetary discipline at the Fed combined with Reagan-era deficit spending. The 120-month expansion is harder to explain; leaps in information technology made American industry phenomenally more productive in the '90s, stimulating GDP growth as federal deficits were gradually declining. The 73-month expansion was almost entirely a result of the Bush era's war spending and the Greenspan Fed's easy-credit bubble that drove massive overbuilding of homes and Ponzi schemes in securitized debt products.

I'd give the Reagan administration partial credit for the 120-month run and little to no credit for the others, as supply-side economists were largely out of power after 1989. Much of the economy's growth since the late 90's has been the result of too much debt issuance. I think Americans will be unpleasantly surprised when they find GDP falling to sustainable levels we haven't seen since . . . Reagan.

So what occurred in the 61-69 period to cause the second longest (106) and in 38-45 to cause the fourth longest (80)? Or are those eras not really comparable due to so the world (i.e. economic systems) was simply a different place?

You will need to open the e-mail for the following to look correct:

MAR91-MAR01 (120) Pre-GWOT, relative peace (other than Kosovo and occasional missile launch) and deficit reduction and more efficient production due to capitalism (supply meeting demand)
FEB61-DEC69 (106) Vietnam and space race
NOV82-JUL90 (92) Reagan defense spending (and "monetary discipline");Panama/just prior to Desert Shield
JUN38-FEB45 (80) WWII
DEC01-DEC07 (73) GWOT

The longest did occur during deficit reduction, should I interpret that as less spending in government?

The two longest occurred under Democrat administrations, not easy for a Republican to admit. Of course they did follow Republican administrations :-) so I will claim they were reaping the benefits ;-)

You understand that if my boss wonders why I am not being as productive as I should be that I will pass the blame to (other name redacted by Tony Alfidi)?

Vietnam and WWII both had massive economic stimulus effects. Regardless of who's in power, government spending does juice the economy up to a point. Today's spending stimulus is occurring when the U.S. economy has likely reached its carrying capacity of debt, where every additional dollar of debt incurred contributes progressively less to GDP growth.

This discussion would be great for one of my blog posts. Mind if I use it? I'll disguise your name as "Private Investor."

So we are in a unique economic situation where the ability to incur debt is actually having the reverse effect that it normally has. I.E. historically speaking, a person goes in debt so he/she has to be a productive member of society in order to get paid so that he/she can pay their debts as well as have some spending money thus leading to good times. But, this time the debt is so overwhelming (across the economic system) that the working class is unable to do two things, 1-make the payments and 2-acquire more debt/spend what they have left, because there is nothing left of their paycheck if they can do number one.

So although the government is spending oodles to get $ into the economy it is not being used for purchasing but going simply to pay off debt for past purchases hence no growth. So, yeah a few more guys are being hired to build a road or bridge or whatever but they are not using the income in a way that "stimulates" the economy and the $ that was sent to the financial sector was simply absorbed for expenses.

My last "post" was basically asking what is "monetary discipline". My understanding was/is that deficit reduction (my interpretation is less government) helps stimulate the economy.

The Republican in me wants to interpret this as reduce the government, let the people have more of their money, and regulate the fed in such a way that there is $ for responsible debt but not irresponsible.

How am I doing prof?

Pretty good! I think I'll let that be the last word in the blog post tonight, Mr. Private Investor. :-)

(end transcript)

Folks, this is the kind of intellectual stimulation you can expect from Alfidi Capital. Keep tuning in for more.

Closer and Closer to a Full Mea Culpa

Alan Greenspan may be growing increasingly concerned with his place in history. He is beginning to admit that his low-interest rate bias wasn't a good idea, although not in so many words:

Greenspan told the House Oversight Committee that his belief that banks would be more prudent in their lending practices because of the need to protect their stockholders had been proven wrong by the current crisis. He called this a "mistake" in his views and said he had been shocked by that.

The trouble with economists is that their models take all of the emotion out of economic behavior, which is still ultimately a competition for resources driven by an evolutionary bias for reproduction. Behavioral finance is beginning to account for this gap, but Mr. Greenspan is still bewildered by it in his testimony (end of article):

"It was the failure to properly price such risky assets that precipitated the crisis," Greenspan said.

No, it wasn't a failure of pricing! Easy money drove risky pricing when the Greenspan Fed kept short term rates artificially low after the dot-com blowout. He must be aware of this criticism of him by now, but he wouldn't even address this line of questioning during his testimony.

Give him a few more months. He'll come around when people start calling this "Greenspan's Depression."

The Haiku of Finance for 10/23/08

Greenspan admits "flaw"
Surprised bank lending went wild
Won't admit his guilt

Greenspan Bloviates in Paperback

Former Fed chief Alan Greenspan may very well enjoy second-guessing the country's current financial leadership. The thing is, he's not guessing with his comments today. He's merely restating reality.

A high-level panel of financial officials should be given broad authority to quickly determine whether a failing company poses a sufficient threat to the entire U.S. economy, he recommends. If so, the company would be shut down.

He's actually describing the current ad-hoc relationship that the Fed has begun building with the Treasury Department, although he doesn't name it as such. The quote above neatly summarizes the government's response to Bear Stearns' collapse. And I thought I was alone in my penchant for stating the obvious.

"We need laws that specify and limit the conditions for bailouts -- laws that authorize the Treasury to use taxpayer money to counter systemic financial breakdowns transparently and directly rather than circuitously through the central bank as was done during the blowup of Bear Stearns," Greenspan wrote in a new epilogue to the paperback edition of his memoir, "The Age of Turbulence: Adventures in a New World."

I'm not convinced that a new set of laws will mean much to policymakers with so much (already de facto) new power. The Fed's charter gives it a legal mandate to fight inflation, but Helicopter Ben chooses to ignore it.

"Much as we might wish otherwise, policymakers cannot reliably anticipate financial or economic shocks or the consequences of economic imbalances," Greenspan says.

It almost sounds like the Maestro has learned something from his own injections of liquidity into the economy after 9-11. This may be as close to a mea culpa as we will ever hear from Mr. Greenspan for his contribution to inflating this decade's housing bubble. Perhaps I'm reading too much into this.