Economic oddities and collapses?

[trysail]

After all the worries of doubling oil costs (based on factors that are still around), we now have OPEC worried about $100 oil again. Do we actually know anything about what drives the insane futures traders? That they can lower the price because Gustav wasn't as bad as feared when the Russia and Iran mess still goes on is baffling (never mind the talks of shortages, lack of refining, booming China, etc.)--now don't get me wrong, I like low prices like everyone else, but I hate that it makes no sense to me. It indicates I still know nothing, after all this reading. Are the newspaper people just full of shit? Trysail, Hand, have you heard anything that actually justifies this? Is someone playing with politics, or are we Americans actually lowering our demand by that much?

I'm annoyingly lost.

In many respects, "the newspaper people" ARE "full of shit." Never, ever forget that their primary job is to sell newspapers**. Beyond that, very few of them have any understanding of economics or basic knowledge of the energy industries. Face it, the only qualification necessary to become a journalist is an ability to regurgitate other people's statements and to type basic English.

Daily journalism, by its nature, is concerned with the ephemeral. As such it tends to focus on spot prices (as, of course, do traders). Do not confuse the abstract concept of trading/speculating with investment— many people (and newspapers) make that mistake.

One of the reasons that Warren Buffett became the best investor the world has ever known is his ability to recognize and discriminate between marginal prices (a/k/a "spot" prices) and intrinsic value. They are two very, very different things and Buffett's fortune was made by his extraordinary talent at evaluating and capitalizing on those differences.

The marginal price of anything is merely the price where the most recent buyer and seller agree to buy and sell. It does not necessarily reflect the cost of production or the replacement cost. It is merely one transaction.

Intrinsic value, on the other hand, is a far more substantive and enduring concept. It is an informed estimate of the present value of the long-run worth of an enterprise or asset.

The human participants in markets are subject to periodic bouts of fear and greed; under the influence of these emotions, people behave irrationally. As Buffett once put it, " 'Mr. Market' has manic tendencies." In response to fear and greed, many market participants will behave stupidly: they will buy high and sell low.

It is amazing how many otherwise bright people permit their emotions to dictate their behavior.

With respect to petroleum prices, marginal demand has been curtailed by (1) conservation arising from comparatively high prices, (2) substitution and (3) slower economic activity. At the same time, production has been stimulated by those same comparatively high prices.

ETA:

"Buy when stock prices are low and hold on to your securities...
People seem unable to grasp these simple principles.
They do not buy when prices are low.
They are fearful of bargains."

-J. Paul Getty

______________________________
**Newspapers and the media are in the business of selling newspapers and attracting eyeballs. To that end: "If it bleeds, it leads." The media is, most assuredly, not interested in "Dog bites man" stories; the precise opposite is the case— they are drawn like flies to the scene of accidents, spilt blood and "Man bites dog" stories.

 

[rgraham666]

If you want to understand trading, whether of stocks, commodities or money, you have to understand fear and greed.

 

[JAMESBJOHNSON]

TRYSAIL

Ditto for real estate.

People have a tough time assessing land's intrinsic value, to wit: The Florida Land Crash of recent times. Government has a tough time with the idea, too. Land prices dropped 20%-45% in this county, and the local government estimated its tax base on the inflated prices. Now it has to re-figure with the deflated prices.

In 1929 people had no idea what the intrinsic value of stock was, and when the market plunged they sold Blue Chips for nuthin.

As I always say: Something's real value is what it's worth to me.

 

[trysail]

U.S. gasoline demand fell 1.6 percent last week, the 19th consecutive decline, as the summer peak driving season ended, a MasterCard Inc. report today showed.

Motorists bought an average 9.579 million barrels of gasoline a day in the week ended Aug. 29, down from 9.736 million a year earlier, MasterCard, the second-biggest credit-card company, said in its weekly SpendingPulse report. The drop was the smallest since the week ended April 25 as motorists in the Gulf Coast states increased purchases.

``Hurricane Gustav spiked pumping along the Gulf Coast as people were preparing for the evacuations,'' Michael McNamara, vice president of research and analysis for MasterCard Advisors, who wrote the report, said in an interview. ``The Gulf Coast was up 5.5 percent, the only region in the country that was up.''

Fuel consumption was down 2.5 percent for the year, the report showed. U.S. demand for gasoline tends to rise toward an annual peak between Memorial Day at the end of May and Labor Day in early September.

Gasoline demand this year peaked at 9.65 million barrels a day, 5.9 percent below the 2007 maximum of 10.25 million barrels in the week ended Aug. 17.

The last time fuel use increased from a year earlier was the week ended April 18.

The national average pump price for regular gasoline fell for a sixth straight week, declining 4 cents to $3.66 a gallon, MasterCard said. That's the lowest since the week ended May 9.

The price, which touched a record $4.10 the week ended July 18, is up 68 cents from $2.98 at the end of December.

The report from Purchase, New York-based MasterCard was assembled by MasterCard Advisors, the company's consulting arm. The data is based on credit card swipes and cash and check payments at about 140,000 U.S. gasoline stations...

 

[R. Richard]

As I always say: Something's real value is what it's worth to me.

Something's real value is what it's worth to you and also what it's worth to others if you have to sell it.

 

[DarlingVivacia]

The article that led to this post: http://business.timesonline.co.uk/tol/business/industry_sectors/natural_resources/article4663676.ece

After all the worries of doubling oil costs (based on factors that are still around), we now have OPEC worried about $100 oil again. Do we actually know anything about what drives the insane futures traders? That they can lower the price because Gustav wasn't as bad as feared when the Russia and Iran mess still goes on is baffling (never mind the talks of shortages, lack of refining, booming China, etc.)--now don't get me wrong, I like low prices like everyone else, but I hate that it makes no sense to me. It indicates I still know nothing, after all this reading. Are the newspaper people just full of shit? Trysail, Hand, have you heard anything that actually justifies this? Is someone playing with politics, or are we Americans actually lowering our demand by that much?

I'm annoyingly lost.

As I understand it, it has a lot to do with the speculators; Hedge Funds and Investment Bankers who were purchasing futures in oil. This coincided with the drop in the price of mortgage backed securities and was how they were able to maintain solid return on investments for their clients.

The repercussions, Americans adjusted their automobile use (marginally) and energy independence got a little more positive press. The Saudi's were not happy about this and opened up the supply of oil to help drop the price.

A bubble like the other bubbles: dot.com, sub prime, alt-a, oil, gold... I Suspect the next bubble is around the corner.

 

[trysail]

Reporter: What will stocks do, Mr. Morgan?

J.P. Morgan: They will fluctuate.

 

[JAMESBJOHNSON]

RICHARD

What I'm referring to is the real-time value of a resource. Richard 3rd offered his kingdom for a horse.

On one occasion I paid $100 for a brief bit of information that saved me several hundred dollars. The information was virtually useless to others but saved me the expense of traveling 1400 miles for nuthin. Plus the wasted time.

 

[trysail]

The fundamental problem is this: the mortgage business is, at bottom, an unnatural creation of the politicians. Because there is no natural pool of capital with an appetite for long-term (which, because of prepayment options have no determinable maturity), fixed-rate loans large enough to supply the demand, the politicians mandated Fannie and Freddie to be the bagholders (ultimately meaning, of course, Mr. and Mrs. Taxpayer).

As is always the case when politicians attempt to force square pegs into round holes, the result is a mess. All they have ever succeeded in doing was creating an artificial game of "hot potato" or "musical chairs." The size of the natural pool of capital that has the ability and desire to hold 15 or 30 year fixed-rate mortgages (which, by law, can usually be prepaid with little or no penalty) isn't large enough to satisfy the politicos. Nobody knows what the maturity on those mortgages is. Would you invest in something without knowing when it matures? I know I damn well wouldn't.

The political solution: pass laws repealing natural forces. It works..., for a little while but is ultimately doomed to fail.

Here's the rest of the story. I am embarrassed to admit that I didn't know that Fannie Mae was a creation of Roosevelt and the New Deal. I should have known— it bears all the hallmarks: innumeracy, ignorance, demagogic politicians, gullible voters, world savers, wishful thinking, Santa Claus, the tooth fairy and a multitude of Pied Pipers. It figures.

It has turned into one of the most colossal government boondoggles of all time and a preview of what lies in the future for BOTH Social Security AND Medicare.

______________________________________
(Fair Use Excerpt)
Paulson Plans to Bring Fannie, Freddie Under Government Control
By Alison Vekshin and Dawn Kopecki

Sept. 6-- Treasury Secretary Henry Paulson is preparing to announce plans to bring Fannie Mae and Freddie Mac under government control, seeking to halt the crisis of confidence in the companies that make up almost half the U.S. mortgage market...

...The decision follows the Treasury chief's repeated comments to lawmakers in July that he wasn't likely to use taxpayer funds to prop up the federally chartered, shareholder-owned firms hit by $14.9 billion in losses the past year. The shares of both companies slid since Paulson won powers to inject unlimited funds in the companies, and their borrowing costs rose...

...The meetings come a month after Paulson hired Morgan Stanley to advise on any use of taxpayer funds to recapitalize Fannie and Freddie, which account for almost half of the $12 trillion mortgage market. A government takeover would be the latest attempt to blunt the impact of the yearlong credit crisis, after the Fed provided financing for Bear Stearns Cos.'s takeover by JPMorgan Chase & Co...

...The Washington Post reported that the government would make quarterly injections of funds as the companies' losses warranted, avoiding a large up-front taxpayer cost, citing sources it didn't name. Debt and preferred shares would be protected, and common stock would be diluted while not wiped out, the Post said.

The New York Times said most or all of both the common and preferred shares would be worth little or nothing...

...Analysts have speculated that the Treasury would wipe out common shareholders, while seeking to shield preferred stockowners from total loss. Fannie and Freddie preferred shares are typically owned by banks and insurance companies. Their $5.2 trillion of debt outstanding is held by investors including Asian central banks, and would probably be guaranteed, analysts said...

...Fannie Mae was created in 1938 as part of President Franklin D. Roosevelt's New Deal plan. With the Vietnam War pressuring the federal budget, Fannie Mae was split from the government in 1968, and shares in the company were sold to the public. Freddie Mac was created in 1970 to provide competition for Fannie Mae.

 

[trysail]

As one who gets a kick from an apt turn of a phrase or a clever metaphor, I confess that I enjoyed reading Vincent Reinhart's description ( highlighted in red below ) of the epic struggle currently unfolding in United States' capital markets.
________________________

(Fair Use Excerpt)
Paulson, Bernanke Brave `Raptors' in Resisting Aid for Lehman
By Craig Torres and Shannon D. Harrington

Sept. 13 (Bloomberg) -- Henry Paulson and Ben S. Bernanke may have to weather more speculative attacks on financial institutions as they resist using public funds to aid the sale of Lehman Brothers Holdings Inc.

``The raptors test the fence for weak spots,'' said Vincent Reinhart, a former director of the Federal Reserve Board's Division of Monetary Affairs who is now a resident scholar at the American Enterprise Institute in Washington. ``The speculators think the authorities will blink, and the authorities think the speculators will run out of funds.''

By shutting the door on assistance for Lehman, Treasury Secretary Paulson and Fed Chairman Bernanke accelerated a plunge in the shares of other institutions perceived to face similar capital constraints. Merrill Lynch & Co., American International Group Inc. and Washington Mutual Inc. fell yesterday after a person familiar with Paulson's thinking said he was ``adamant'' that no government money be used in resolving Lehman's capital constraints. Fed officials are taking a similar stand.

Paulson and Bernanke are struggling to define which firms aren't too big to fail after the March bailout and merger of Bear Stearns Cos. and last weekend's seizure of Fannie Mae and Freddie Mac protected creditors, creating the perception the government would insure other firms against disorderly collapse. Paulson, New York Fed President Timothy Geithner and Securities and Exchange Commissioner Christopher Cox late yesterday met with Wall Street chiefs to discuss this week's market slump. New York Fed spokesman Andrew Williams declined to comment on the details of the discussions at his bank.

No-Win Decision
After Bear Stearns, regulators face a no-win decision with Lehman, said former Representative Richard Baker, a Louisiana Republican who served on the House Financial Services Committee. ``You bail them out, you are putting taxpayers' money at risk,'' Baker said. ``You don't bail them out, you are facilitating the short sellers.''

Former Fed Chairman Alan Greenspan said in a Bloomberg Television interview yesterday that avoiding the use of government funds in the case of Lehman would be ``the ideal solution.'' He wouldn't make odds on whether that would be the case. ``Once you put the line under Bear Stearns, that whole structure of financial and non-financial institutions above that automatically became too big to fail,'' Greenspan said.

The showdown comes at a precarious moment for the Fed and Treasury. The presidential elections are two months away. The central bank's interest-rate cuts, 3.25 percentage points over the past year, haven't translated into a free flow of credit at low rates for consumers, the Fed's own surveys show. Fed's Meeting Fed policy makers meeting next week will likely leave the benchmark rate unchanged, according to futures trading that also indicates a one-in-three chance central bankers will need to resume easing credit by year-end.

Reports this month point to a heightened risk of a recession. Unemployment rose to a five-year high of 6.1 percent last month, and retail sales fell 0.7 percent, excluding autos, the biggest decline this year.

``Financial conditions are extremely fragile,'' said former Fed governor Lyle Gramley, now a senior economic adviser for the Stanford Group Company in Washington. ``With the Lehman situation deteriorating, this tends to have knock-on effects.''

In a sign that creditors don't expect Paulson to blink, the cost to protect against defaults by AIG, Merrill, WaMu and Wachovia Corp. reached records. Credit-default swaps on Seattle- based WaMu are trading at levels that imply a 75 percent chance the company will default in the next five years, a JPMorgan Chase & Co. valuation model shows.

`Coming to Grips'
``All of these firms are exposed to the real-estate market,'' said Len Blum, managing director at Westwood Capital LLC, a New York-based investment bank. Investors are ``coming to grips with the reality that real-estate markets have been and will be in a decline.'' An index created by New York-based Credit Derivatives Research LLC that tracks credit-default swaps on 15 banks and securities firms, known as the CDR Counterparty Risk Index, rose 51 basis points the past week to 215 basis points, the highest since the collapse of Bear Stearns in March. A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

The Fed, Treasury and financial system ``are in a horrible situation,'' said Thomas Garcia, head of equity trading at Thornburg Investment Management Inc. in Santa Fe, New Mexico, which oversees about $46 billion. ``You have investors at large firms like Lehman saying: Why can't you do it again?''

Resolution Mechanism
One problem hobbling regulators is that they don't have a transparent process for dealing with investment banks in the same way that the Federal Deposit Insurance Corp. does for handling troubled commercial banks. That leaves Fed and Treasury officials with emergency decisions that set new precedents and change market incentives with every bailout or failure.

``The big policy question is, do you need to preserve investment banks in the public interest?'' said Joseph Mason, a Louisiana State University finance professor who served in the bank-research division of the Office of the Comptroller of the Currency from 1995 to 1998. ``We are at the inflection point,'' he said. ``Failures keep getting bigger and bigger.''

 

[trysail]

UNBELIEVABLE! I admit it; it is totally beyond my comprehension how anyone with such a demonstrably profound ignorance of economics could possibly be elected to high office. This is precisely the sort of demagogic vote-buying that will inevitably lead to the bankruptcy of all of us.

If it was YOUR money, how would you behave? This kind of absolutely irresponsible behavior fits well within the definition of chutzpah.
______________


(Fair Use Excerpt)
http://www.nytimes.com/2008/09/12/business/12fannie.html?_r=1&ref=business&oref=slogin
After Bailout, Senators Ask for a Delay in Foreclosures

By EDMUND L. ANDREWS
Published: September 11, 2008
WASHINGTON — Four Democratic senators urged the Bush administration on Thursday to stop the nation’s two giant mortgage finance companies, Freddie Mac and Fannie Mae, from foreclosing on any homes for at least 90 days and to help troubled borrowers switch into more affordable mortgages.

On Sunday, the government seized control of both government-sponsored mortgage finance companies. The Treasury Department pledged to supply up to $100 billion in fresh capital for each company and prevent them from defaulting on the trillions of dollars in mortgage-backed securities that they either own or have guaranteed.

The four senators — Charles E. Schumer of New York, Bob Casey of Pennsylvania, Sherrod Brown of Ohio and Robert Menendez of New Jersey — said the administration should follow the example of the Federal Deposit Insurance Corporation, which took over IndyMac Bank in Pasadena, Calif., and imposed a temporary freeze on foreclosures while it tried to modify as many delinquent loans as possible.

The senators described their goal as a temporary “time-out” that would give federal regulators and the newly appointed chiefs of Fannie Mae and Freddie Mac a chance to help defaulting borrowers negotiate new loan terms or refinance into a different mortgage.

“In many instances, these homeowners could remain in their homes and their loans could once again become performing assets through a loan modification,” the senators wrote in a letter to James B. Lockhart, director of the Federal Housing Finance Agency and the regulator now in charge of both companies.

The letter highlighted how the federal government’s growing rescue mission is becoming more politicized. For Democrats, the takeover of Fannie Mae and Freddie Mac provides an opening to push for popular but potentially costly assistance to overstretched homeowners.

But such assistance could inflate the final bill to taxpayers. And a large share of the people who would stand to benefit are likely to be somewhat affluent borrowers who stretched their finances by taking out riskier “Alt-A” mortgages that did not require them to make a down payment or to document their incomes.

That is because the senators’ limited their request for a freeze on foreclosures to actual mortgages, not to bonds backed by mortgages that Fannie Mae or Freddie Mac bought and are holding in their own portfolios.

Though the companies have either purchased or guaranteed about $5.3 trillion worth of mortgages and mortgage-backed securities, Fannie Mae owned only $342 billion in “whole” loans as of July 31 and more than $300 billion of those were Alt-A. Freddie Mac held $93 billion worth of whole loans in its portfolio.

Treasury officials have refused to estimate how much the bailout of Fannie and Freddie would eventually cost taxpayers, and the cost would largely depend on if and when the housing market recovered and housing prices stabilized.

Stephanie Mullen, a spokeswoman for the Federal Housing Finance Agency, said Mr. Lockhart had received the senators’ request. “We have received the letter and have been reviewing the issues,” she said.

 

[JAMESBJOHNSON]

TRYSAIL

One of my sons-in-law bought 5 houses as income property, and all of them are being foreclosed. He cant rent them for what the mortgages cost, or the renters arent paying. Plus Florida's property tax law is sodomizing him.

Property values in Florida are deflating. The value of my home decreased 1/3rd, but its been paid off since 1994, so the loss is on paper. People who bought before the bubble burst will take the hit, as will state and local governments.

 

[Kev H]

So, I just read an article spotlighting the housing nightmares in one town where the foreclosures are up 71% (things like rampant boarded windows, brown lawns--oh, the drama!--you know, the important stuff). But I found myself asking the--obviously--not-so-important question: where the hell are all these people living? There's not enough under-the-bridge space for them all!

In all seriousness, are these numbers exaggerating the issue, because these people all have decent places to go to or surely we'd be hearing and seeing pics of that. Insights?

 

[rgraham666]

Apparently this crisis wasn't that much of a surprise.

"Let's hope we are all wealthy and retired by the time this house of cards falters,'' one e-mail from an S&P employee said.

Humans

 

[Kev H]

So, inflation is on the rise (as predicted), and at least one source is saying we'll reach Zimbabwe levels. I have questions for the knowledgeable and helpful economists here (especially Handprint and Trysail).

Is inflation predictable and set in how it operates, or is it like the stock prices (driven by fear and other irrational factors)? Can it be a self-fulfilling prophesy, or does it have set factors (like a specific threshold of newly printed money or how it's used, debt-to-GNP factors)? I realize it's a complex mechanism, but the simple truth is, no decent people want inflation (where their money becomes worth less and less), so what can be done about it, to at least soften the blow? And more importantly, what types of things can we do (besides out-earn the rise) to stop the problem?

Thanks in advance for your thoughtful time.

 

[rgraham666]

Inflation isn't a problem, per se. It's an indicator of a problem in the same way that a person's body temperature is. It's simply the side effect of a system at work, waste heat.

The problem in this case is that debt levels for all actors in the U.S. economy rose too high. The government cut taxes and increased spending. Financial companies started speculating on debt. Individuals and families started using debt to finance their lifestyles. Partly this was to buy new houses and partly because wages have been stagnant for quite a while.

Now much of that debt has gone bad. Other financial systems in other parts who had speculated on debt are now in trouble because that debt is worthless. Even places like China are feeling the pinch because their markets aren't buying as much.

Anyway, from what I understand, this is a common place in history. Debt gets too high, the economy and the people affected by it suffer, the debt gets written off eventually and the whole cycle starts again.

As far as inflation goes I believe the figures on it are pretty much false. Commonly the most stable parts of an economy are used to measure it. But, in my opinion, many of our economic activities are inflationary. The stock market, the lending of money, credit cards; all these 'print money' but aren't measured by the system. To keep with my body temperature analogy, it's like taking a person's temperature at the tips of the fingers rather than with a rectal thermometer.

Shrugs. I think our understanding of economics is at the same level as medicine was in the 18th Century. Until we have better understanding most of our remedies to a sick economy will work about as well as bleeding did.

 

[trysail]

So, inflation is on the rise (as predicted), and at least one source is saying we'll reach Zimbabwe levels. I have questions for the knowledgeable and helpful economists here (especially Handprint and Trysail).

Is inflation predictable and set in how it operates, or is it like the stock prices (driven by fear and other irrational factors)? Can it be a self-fulfilling prophesy, or does it have set factors (like a specific threshold of newly printed money or how it's used, debt-to-GNP factors)? I realize it's a complex mechanism, but the simple truth is, no decent people want inflation (where their money becomes worth less and less), so what can be done about it, to at least soften the blow? And more importantly, what types of things can we do (besides out-earn the rise) to stop the problem?

Thanks in advance for your thoughtful time.

First off, I'm not an economist. While I was and am a student of the field, I never attempted to make a living at it. My life's work required an understanding of economics. I am extremely skeptical of the ability of anybody to repeatedly and accurately predict the future of damn near anything- most especially the stock market, interest rates, earnings, economic activity or petroleum prices. As a general rule, I don't believe it's possible though there may be one or two exceptions. All of us are, of course, affected by economics.

The enormous explicit borrowing of the United States and the substantially larger but generally ignored entitlement liabilities combine to create future government obligations that cannot possibly be met without imposition of tax rates that would beggar all its citizenry.

The only other possible solution available to the government [ and, of course, the only one palatable to elected officials ] is to "run the printing press" ( i.e., print money ).

If you've never lived through an inflationary period, it's difficult to describe. People begin to believe that the prices for EVERYTHING will do nothing except go up forever. Their behavior reflects that belief; they have no savings because it is foolish to save— asset prices will rise faster than the return on savings so it becomes embedded in behavior that it's better to buy tangible items today rather than wait until tomorrow. It, obviously, becomes a positively reinforcing behavior that can only be broken by a drastic slowdown in economic activity that is usually introduced by huge interest rates.

In the 1978-81 period in the U.S., it took interest rates of 15% ( for U.S. Treasury securities ) and 22% ( for bank loans ) to get people to stop spending and start saving. At the peak, inflation- measured by the Consumer Price Index- hit ~15%.

You are correct about the current worries of intelligent persons with respect to future inflation. Those who have previously witnessed irresponsible levels of government spending and the outcome thereof are pulling their hair out trying to figure out how to protect themselves. The only major difference between the current period and the period that preceded the massive inflation of the '70s is that interest rates were not deregulated back then until the late '70s while interest rates today are deregulated. If we're lucky, that fact and the "bond vigilantes" may ( emphasize "may" ) help to ameliorate some of the inevitable pain.

For the past decade, government economic policies have done nothing except encourage illiquidity and spendthrift behavior. Government policies have been punishing the liquid, the prudent and the solvent. I will say one thing: once you let the inflation genie out of the bottle, it is very, very, very damn hard to get him back in.

As was once observed by a sagacious man, "Democracy IS inflation."


TANSTAAFL. The "something for nothing" crowd always learns it the hard way.

 

[trysail]

(Fair Use Excerpt)

Bond Vigilantes Confront Obama as Housing Falters

They’re back.

For the first time since another Democrat occupied the White House, investors from Beijing to Zurich are challenging a president’s attempts to revive the economy with record deficit spending. Fifteen years after forcing Bill Clinton to abandon his own stimulus plans, the so-called bond vigilantes are punishing Barack Obama for quadrupling the budget shortfall to $1.85 trillion. By driving up yields on U.S. debt, they are also threatening to derail Federal Reserve Chairman Ben S. Bernanke’s efforts to cut borrowing costs for businesses and consumers.

The 1.4-percentage-point rise in 10-year Treasury yields this year pushed interest rates on 30-year fixed mortgages to above 5 percent for the first time since before Bernanke announced on March 18 that the central bank would start printing money to buy financial assets. Treasuries have lost 5.1 percent in their worst annual start since Merrill Lynch & Co. began its Treasury Master Index in 1977.

“The bond-market vigilantes are up in arms over the outlook for the federal deficit,” said Edward Yardeni, who coined the term in 1984 to describe investors who protest monetary or fiscal policies they consider inflationary by selling bonds. He now heads Yardeni Research Inc. in Great Neck, New York. “Ten trillion dollars over the next 10 years is just an indication that Washington is really out of control and that there is no fiscal discipline whatsoever.”

Investor Dread

What bond investors dread is accelerating inflation after the government and Fed agreed to lend, spend or commit $12.8 trillion to thaw frozen credit markets and snap the longest U.S. economic slump since the 1930s. The central bank also pledged to buy as much as $300 billion of Treasuries and $1.25 trillion of bonds backed by home loans.

For the moment, at least, inflation isn’t a cause for concern. During the past 12 months, consumer prices fell 0.7 percent, the biggest decline since 1955. Excluding food and energy, prices climbed 1.9 percent from April 2008, according to the Labor Department.

Bill Gross, the co-chief investment officer of Newport Beach, California-based Pacific Investment Management Co. and manager of the world’s largest bond fund, said all the cash flooding into the economy means inflation may accelerate to 3 percent to 4 percent in three years. The Fed’s preferred range is 1.7 percent to 2 percent.

“There’s becoming an embedded inflationary premium in the bond market that wasn’t there six months ago,” Gross said yesterday in an interview at a conference in Chicago.

Shrinking Economy

Bonds usually rally when the economy is in recession and inflation is subdued. Gross domestic product dropped at a 5.7 percent annual pace in the first quarter, after contracting at a 6.3 percent rate in the last three months of 2008, according to the Commerce Department.

This time it’s different because the Congressional Budget Office projects Obama’s spending plan will expand the deficit this year to about four times the previous record, and cause a $1.38 trillion shortfall in fiscal 2010. The U.S. will need to raise $3.25 trillion this year to finance its objectives, up from less than $1 trillion in 2008, according to Goldman Sachs Group Inc., one of 16 primary dealers of U.S. government securities that are obligated to bid at Treasury auctions.

“The deficit and funding the deficit has become front and center,” said Jim Bianco, president of Bianco Research LLC in Chicago. “The Fed is going to have to walk a fine line here and has to continue with a policy of printing money to buy Treasuries while at the same time convince the market that this isn’t going to end in tears with fits of inflation.”

‘Potential Benefits’

Ten-year note yields, which help determine rates on everything from mortgages to corporate bonds, rose as much as 1.71 percentage points from a record low of 2.035 percent on Dec. 18. That was two days after the Fed said it was “evaluating the potential benefits of purchasing longer-term Treasury securities” as a way to keep consumer borrowing costs from rising.

The yield on the 10-year note rose one basis point, or 0.01 percentage point, to 3.47 percent this week, according to BGCantor Market Data. The price of the 3.125 percent security maturing in May 2019 fell 3/32, or 94 cents per $1,000 face amount, to 97 4/32. The yield touched 3.748 percent yesterday, the highest since November.

The dollar has also begun to weaken against the majority of the world’s most actively traded currencies on concern about the value of U.S. assets. The dollar touched $1.4169 per euro today, the weakest level this year.

Bond Intimidation

Ten-year yields climbed from 5.2 percent in October 1993, about a year after Clinton was elected, to just over 8 percent in November 1994. Clinton then adopted policies to reduce the deficit, resulting in sustained economic growth that generated surpluses from his last four budgets and helped push the 10-year yield down to about 4 percent by November 1998.

Clinton political adviser James Carville said at the time that “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.”

The surpluses of the Clinton administration turned into record deficits as George W. Bush ramped up spending, including financing of the wars in Iraq and Afghanistan.

The bond vigilantes are being led by international investors, who own about 51 percent of the $6.36 trillion in marketable Treasuries outstanding, up from 35 percent in 2000, according to data compiled by the Treasury.

New Group

“The vigilante group is different this time around,” said Mark MacQueen, a partner and money manager at Austin, Texas- based Sage Advisory Services Ltd., which oversees $7.5 billion. “It’s major foreign creditors. This whole idea that we need to spend our way out of our problems is being questioned.”

MacQueen, who started in the bond business in 1981 at Merrill Lynch, has been selling Treasuries and moving into corporate and inflation-protected debt for the last few months.

Chinese Premier Wen Jiabao said in March that China was “worried” about its $767.9 billion investment and was looking for government assurances that the value of its holdings would be protected.

The nation bought $5.6 billion in bills and sold $964 million in U.S. notes and bonds in February, according to Treasury data released April 15. It was the first time since November that China purchased more securities due in a year or less than longer-maturity debt.

Obama’s Confidence

Treasury Secretary Timothy Geithner, who will travel to Beijing next week, will encourage China to boost domestic demand and maintain flexible markets, a Treasury spokesman said yesterday.

Obama spokesman Robert Gibbs said the president is confident that his budget and economic plans will cut the deficit and bring down the nation’s debt.

“The president feels very comfortable with the steps that the administration is taking to get our fiscal house in order and understands how important it is for our long-term growth,” Gibbs said.

Investors are also selling Treasuries as the economy shows signs of bottoming and credit and stock markets rebound, lessening the need for the relative safety of government debt. And while yields are rising, they are still below the average of 6.49 percent over the past 25 years.

‘Renewed Appreciation’

The world’s largest economy will begin to expand next quarter, according to 74 percent of economists in a National Association for Business Economics survey released this week. The Standard & Poor’s 500 has risen 36 percent since bottoming on March 9, while the London interbank offered rate, or Libor, that banks say they charge each other for three-month loans, fell to 0.66 percent today from 4.819 percent in October, according to the British Bankers’ Association.

Three-month Treasury bill rates have climbed to 0.13 percent after falling to minus 0.04 percent Dec. 4. That flight to safety helped U.S. debt rally 14 percent in 2008, the best year since gaining 18.5 percent in 1995, Merrill indexes show.

“Yes there’s been a big move, and you can argue the big move is driven by the renewed appreciation of the risks associated with holding long-term Treasury bonds,” said Brad Setser, a fellow for geoeconomics at the Council on Foreign Relations in New York.

Fed officials see several possible explanations for the rise in yields beyond investor concern about inflation. Among them: The supply of Treasuries for sale exceeds the Fed’s $300 billion purchase program, the economic outlook is improving and investors are selling government debt used as a hedge against mortgage securities.

Liquidity

Central bankers want to avoid appearing to react solely to market swings. Bernanke hasn’t formally asked policy makers to consider whether to increase Treasury purchases and may not do so before the Federal Open Market Committee’s next scheduled meeting June 23-24. Officials are confident they can mop up liquidity without gaining additional tools from Congress, such as the ability for the Fed to issue its own debt.

The Fed declined to comment for the story. Bernanke has an opportunity to discuss his views when he testifies June 3 before the House Budget Committee in Washington.

“We have daily reminders from bond vigilantes like Bill Gross about the prospect of losing our AAA rating,” Federal Reserve Bank of Dallas President Richard Fisher said in Washington yesterday. “This cannot be allowed to happen.”

Repair the Damage

The government and Fed are trying to repair the damage from the collapse of the subprime mortgage market in 2007, which caused credit markets to freeze, led to the collapse of Lehman Brothers Holdings Inc. in September and was responsible for $1.47 trillion of writedowns and losses at the world’s largest financial institutions, according to data compiled by Bloomberg.

The initial progress Bernanke made toward reducing the relative cost of credit is in jeopardy of being unwound by the work of the bond vigilantes.

The average rate on a typical 30-year fixed mortgage rose to 5.08 percent this week from 4.85 percent in April, according to North Palm Beach, Florida-based Bankrate.com. Credit card rates average 10.5 percentage points more than 1-month Libor, up from 7.19 percentage points in October.

“Longer term the danger is that the rise in yields disrupts the recovery or the rise in inflation expectations dislodges the Fed’s current complacency on inflation,” Credit Suisse Group AG interest-rate strategists Dominic Konstam, Carl Lantz and Michael Chang wrote in a May 22 report.

‘It’s Over’

Inflation expectations may best be reflected in the yield curve, or the difference between short- and long-term Treasury rates. The gap widened this week to 2.76 percentage points, surpassing the previous record of 2.74 percentage points set on Aug. 13, 2003. Investors typically demand higher yields on longer-maturity debt when inflation, which erodes the value of fixed-income payments, accelerates.

“The yield spreads opening up imply that inflation premiums are rising,” said former Fed Chairman Alan Greenspan in a telephone interview from Washington on May 22. “If we try to do too much, too soon, we will end up with higher real long- term interest rates which will thwart the economic recovery.”

Other economists are more pointed. After falling from 16 percent in the early 1980s, 10-year yields have nowhere to go but up, according to Richard Hoey, the New York-based chief economist at Bank of New York Mellon Corp.

“The secular bull market in Treasury bonds is over,” Hoey said in a Bloomberg Television interview. “It ran a good 28 years. They’re never going lower. That’s it. It’s over.”

 

[JAMESBJOHNSON]

Gold was $35 an ounce in 1970, its about $970 an ounce today.

 

[trysail]

Emerson is one of the U.S.'s "Great Companies." The folks running this company are straight shooters. It is a shame to see what government regulation and policies have done to manufacturing in this country.

Virtually every entrepreneur I know has said essentially the same thing. Most of 'em are older now and their start-up days are in the past— but they all say the same thing:

"I'd never do it today. There are too many rules and regulations and too many ambulance chasers."


~~~~~~~~~~~~~~~~~~~~~~~~~~

( Fair Use Excerpt )

Full story: http://www.bloomberg.com/apps/news?pid=conewsstory&tkr=EMR:US&sid=a9Rn1Ct1ZwTI

Emerson’s Farr Says U.S. Is Destroying Manufacturing
By Will Daley

Nov. 11 (Bloomberg) -- Emerson Electric Co. Chief Executive Officer David Farr said the U.S. government is hurting manufacturers with regulation and taxes and his company will continue to focus on growth overseas.

“Washington is doing everything in their manpower, capability, to destroy U.S. manufacturing,” Farr said today in Chicago at a Baird Industrial Outlook conference. “Cap and trade, medical reform, labor rules.”

Emerson, the maker of electrical equipment and InSinkErator garbage disposals with $20.9 billion in sales for the year ended September, will keep expanding in emerging markets, which represented 32 percent of revenue in 2009. About 36 percent of manufacturing is now in “best-cost countries” up from 21 percent in 2003, according to a slides accompanying his speech.

Farr, in his presentation, also said manufacturers are being hurt by taxes and regulation. He said companies will create jobs in India and China, “places where people want the products and where the governments welcome you to actually do something.”

Emerson has shed more than 20,000 jobs since the end of 2008 to lower expenses.

“What do you think I am going to do?” Farr asked. “I’m not going to hire anybody in the United States. I’m moving. They are doing everything possible to destroy jobs.”

******​

Emerson’s growth strategy includes some acquisitions and continued investment in technology. The company has identified “megatrends” such as resource scarcity, the environment and the demand for more wireless connectivity that are shaping its growth initiative.

The company had $1.7 billion in sales last fiscal year connected to energy efficiency through demand for products such as variable-speed controls and digital compressors, and it plans to increase that amount to about $5 billion in five years, Farr said.

In renewable and alternative-energy markets, Emerson had 2009 sales of $50 million and plans to increase that to more than $800 million in five years.

“But you are not going to see Emerson going out there with fancy commercials or sitting at the right hand of some president, talking about this,” Farr said. “We do it.”

 

[Stella_Omega]

Well, national healthcare would ease one major burden off of employer's shoulders. You'd think corporations like Emerson would throw some money into that effort.

 

[trysail]

Well, national healthcare would ease one major burden off of employer's shoulders. You'd think corporations like Emerson would throw some money into that effort.

The company is telling you that your premise is incorrect. The company's costs are already too high. If the cost is simply recycled in the form of higher taxation, they'll be in worse shape than they were before they started. As things stand, a world-class manufacturer of extremely useful products is waving the white flag and crying "Uncle."

Is it possible they're telling you something you don't want to hear?

Emerson is one of the U.S.'s "Great Companies." The folks running this company are straight shooters. It is a shame to see what government regulation and policies have done to manufacturing in this country.

Virtually every entrepreneur I know has said essentially the same thing. Most of 'em are older now and their start-up days are in the past— but they all say the same thing:

"I'd never do it today. There are too many rules and regulations and too many ambulance chasers."


~~~~~~~~~~~~~~~~~~~~~~~~~~

( Fair Use Excerpt )

Full story: http://www.bloomberg.com/apps/news?pid=20601110&sid=a_EbBQyskKl0

Emerson’s Farr Says U.S. Is Destroying Manufacturing
By Will Daley

Nov. 11 (Bloomberg) -- Emerson Electric Co. Chief Executive Officer David Farr said the U.S. government is hurting manufacturers with regulation and taxes and his company will continue to focus on growth overseas.

“Washington is doing everything in their manpower, capability, to destroy U.S. manufacturing,” Farr said today in Chicago at a Baird Industrial Outlook conference. “Cap and trade, medical reform, labor rules.”

Emerson, the maker of electrical equipment and InSinkErator garbage disposals with $20.9 billion in sales for the year ended September, will keep expanding in emerging markets, which represented 32 percent of revenue in 2009. About 36 percent of manufacturing is now in “best-cost countries” up from 21 percent in 2003, according to a slides accompanying his speech.

Farr, in his presentation, also said manufacturers are being hurt by taxes and regulation. He said companies will create jobs in India and China, “places where people want the products and where the governments welcome you to actually do something.”

Emerson has shed more than 20,000 jobs since the end of 2008 to lower expenses.

“What do you think I am going to do?” Farr asked. “I’m not going to hire anybody in the United States. I’m moving. They are doing everything possible to destroy jobs.”

******​

 

[Stella_Omega]

Well, lets see-- they get taxed directly by the insurance companies for the contracts they must, by law, purchase on the behalf of their employees- who also get taxed by those same insurance companies. And those rates are not regulated in any way, and do not cover many basic needs (because the insurance companies can call them "pre existing") that would keep workers functional.

Ambulance chasers make a great living because insurance companies abuse their monopoly position. And the liability laws are in place because insurance compnaies dont want to cover the people who pay them.

Of course, these companies can certainly move to third world countries, where people work for less than a dollar a day and when those workers get sick, they just die, no problem. But those countries won't remain third-world all that long. China didn't. Production costs are going up there-- quality is going up too, what a coincidence! But quality doesn't matter when profits get threatened.[/QUOTE]

 

[Dragonlipz]

Emerson is one of the U.S.'s "Great Companies." The folks running this company are straight shooters. It is a shame to see what government regulation and policies have done to manufacturing in this country.

Virtually every entrepreneur I know has said essentially the same thing. Most of 'em are older now and their start-up days are in the past— but they all say the same thing:

"I'd never do it today. There are too many rules and regulations and too many ambulance chasers."


~~~~~~~~~~~~~~~~~~~~~~~~~~

( Fair Use Excerpt )

Full story: http://www.bloomberg.com/apps/news?pid=20601110&sid=a_EbBQyskKl0

Emerson’s Farr Says U.S. Is Destroying Manufacturing
By Will Daley

Nov. 11 (Bloomberg) -- Emerson Electric Co. Chief Executive Officer David Farr said the U.S. government is hurting manufacturers with regulation and taxes and his company will continue to focus on growth overseas.

“Washington is doing everything in their manpower, capability, to destroy U.S. manufacturing,” Farr said today in Chicago at a Baird Industrial Outlook conference. “Cap and trade, medical reform, labor rules.”

Emerson, the maker of electrical equipment and InSinkErator garbage disposals with $20.9 billion in sales for the year ended September, will keep expanding in emerging markets, which represented 32 percent of revenue in 2009. About 36 percent of manufacturing is now in “best-cost countries” up from 21 percent in 2003, according to a slides accompanying his speech.

Farr, in his presentation, also said manufacturers are being hurt by taxes and regulation. He said companies will create jobs in India and China, “places where people want the products and where the governments welcome you to actually do something.”

Emerson has shed more than 20,000 jobs since the end of 2008 to lower expenses.

“What do you think I am going to do?” Farr asked. “I’m not going to hire anybody in the United States. I’m moving. They are doing everything possible to destroy jobs.”

******​

3Sale:
If you truly believe that crap put out by Mr Farr (and also the nonsense about them being straight shooters) I would like to turn your attention to a construct over the East River that's sale, and it is your good fortune that I represent the owners....

 

[trysail]

3Sale:
If you truly believe that crap put out by Mr Farr (and also the nonsense about them being straight shooters) I would like to turn your attention to a construct over the East River that's sale, and it is your good fortune that I represent the owners....

I know these people ( and, presumably, so do you given their location ). I'm not in the habit of buying "construct over the East River."