EconoMonitor

Nouriel Roubini's Global EconoMonitor

Roadmap for the G20

President Bush has invited the heads of state of the Group of 20 (G20) nations for a summit on November 15 in an effort tocontinue responding in a coordinated way to the unfolding financial and economic crisis, and also to discuss weighty issues such as regulatory reforms, improving banking and capital market supervision and reforming the international organizational structure to avoid the next crisis. The G20group, which accounts for 90% of global GDP, includes 10 major emerging economies – including Brazil, China, India, Saudi Arabia and South Africa among others, along with members of the G8, Australia and the European Union.This meeting, which some have called a second Bretton Woods, follows a meeting of the G20 finance ministers and central bank governors on November 9and meetings in DC at the beginning of Octoberthat somewhat opened the door to broaden the club of global economic leadership. Given the issues on their agenda, markets will be watching to see what reforms might be on the cards. However, while most governments have been advocating the need for more concerted global efforts, most policies must still be taken at the national level.

Reaching a consensus on international regulatory reform will likely be one of the key issues at the meeting. While the 27 EU leaders earlier failed to agree on a joint economic strategy to tackle the coming recession in Europe, the member countries worked out a joint five-point action plan for the G-20 with the following very specific proposals: 1) Submit rating agencies to registration and surveillance, especially with a view to credit ratings’ prominent role within the Basel II capital requirement framework. 2) Adopt principles to ensure the ‘convergence of accounting standards’. 3) Decide that no market segment, no territory and no financial institution should escape regulation or at least oversight. 4) Establish codes of conduct to avoid excessive risk-taking in the financial sector, including on the ‘remuneration’ of executives. 5) Give the IMF the ‘initial responsibility’ and ‘necessary resources’ for ‘recommending the measures to restore confidence and stability’ in the international financial system.

The Financial Stability Forum (FSF) released its implementation progress report in October. Its guiding principle is to recreate a financial system that operates with less leverage, that is immune to the set of misaligned incentives at the root of this crisis, where prudential and regulatory oversight is strengthened, and where transparency allows better identification and management of risks. According to observers, the strengthening of the Basel II framework calls for a reduction in the pro-cyclicality of risk-based capital requirements – Spain points to its stabilizing dynamic loan-loss provisions in this regard. The current framework also lacks a minimum liquidity requirement ratio. Equally important is the regulation of the off-balance sheet universe in order to put a dent on regulatory arbitrage. The FSF also urges to put in place a central counterparty clearing house for over-the-counter (OTC) credit derivatives and to achieve more robust operational processes.

There have also been calls by some countries for a global fiscal stimulus to offset the decline in private aggregate demand and cushion consumers and firms from the prolonged global slowdown. Coordinated action, especially one including the U.S. and the EU might be more effective than stimuli by individual countries, while also preventing leakages via trade and capital flows. However, global action is constrained by prevailing fiscal deficits in several countries, different economic structures and coordination issues. Notwithstanding these limitations, countries across Asia, the EU and as well as the U.S. are individually implementing fiscal stimuli via infrastructure spending, subsidized public services, housing, tax cuts, benefits for lower income groups and the unemployed. While surplus countries like China, Germany and the Gulf States have enough fiscal room for this, deficit-laden nations might face the risk of higher future sovereign debt and nominal yields.

Additionally, countries will face challenges to sustain the recent boom in trade. High oil prices have raised shipping costs, the credit crunch has crippled trade finance, and the global slowdown are severely affecting international trade. Ministers have also voiced concerns against any possible rise in protectionism in developed countries amidst the recession. Moreover, the financial crisis and the ongoing massive capital outflows from EMs would invite debate on the benefits of financial globalization, with implications on greater regulation in developed markets and a potential aversion to financial liberalization in developing countries.

Also, the financial crisis has reemphasized the role of the IMF, as it becomes the chosen vehicle for financial support to emerging market economies caught short by the reversal of capital flows and financial market disruptions. It is already set to approve loans to Iceland, Ukraineand Hungary and several other EM countries may be on the list. The IMF is providing funds via two channels: A less conditional borrowing facility (short-term liquidity facility or SLF) in which countries can borrow up to five times their quota with a three-month duration, and borrowing by countries in need of longer term programs which is likely subject to more specific conditions. The IMF has been heavily challenged by its potential ability to contribute to solve the current financial meltdown, after years of low demand for its assistance, as buoyant capital markets and rising commodity prices allowed many developing nations to raise funds on their own while the IMF’s own budget worsened. Some economists recently argued that the IMF’s role in the current crisis should be sharpened as an interlocutor between lenders and developing country borrowers, rather than simply as a replacement for all other loan sources.

However, an expanded IMF agenda may mean the institution too will need a capital injection since its current available funds are just over $200bn. Japan has suggested it might channel funds from its forex reserves through the IMF if needed to support vulnerable EMs. U.S. and UK leaders have also been calling on surplus regions (China and the GCC) to contribute funds. With strong growth and forex reserve accumulation, Asia led by China may have a role to play in bailing out the global financial system, and cushioning from a global economic slump by lending reserves directly or via institution like IMF or even via swaps arrangements. This might be in their interest too in order to support their export markets. However, China argues that the best way it can support the global economy is by maintaining Chinese growth through a series of monetary and fiscal stimuli through 2010. Moreover, these plans come at a time when some surplus countries are witnessing slowing exports with massive capital outflows and oil prices approaching the break-even point. They are also beginning to need more capital at home given the realization that sovereign wealth funds may have suffered significant losses in the last few months.

This will, however, give new impetus to the ongoing debate on the reallocation of voting chairs and quota shares and give emerging economies greater weight in the IMF which so far remains dominated by the EU (32% of votes), U.S. (17%) and Japan. Leading emerging economies at the meeting will strengthen their calls for implementing changes in the international architecture to mark their growing clout in the international economic and financial system. This is especially true given that emerging markets are already participating in coordinated global interest rate cuts and swap agreements with the Fed, and will contribute to almost all of the global growth in 2009, as G10 growth stagnates. Thus, unless international institutions and groups include large economies like China, Brazil, India and perhaps Saudi Arabia, it will be very difficult to think of solving some of the most intractable global challenges ranging from international financial regulation and exchange rate alignments to energy supply and climate change responses. There are also additional ideas for floating new institutions – to create more robust regional institutions to pool capital and improve financial monitoring and regulatory enforcement; to create regional level FSFs supported by regional development banks; to expand the FSF to include the concerns of emerging markets.

Furthermore, the reallocation of country quotas in any significant manner could presumably address the large surpluses built up in countries like China and the Middle-East. At the end of the day, many say the solution to the global financial crisis must address the big elephant in the room, namely the current global imbalances which have stored-away vast sums of dollars on some sovereign balance sheets but not on others. Unless some of the surplus regions begin consuming more, the underlying dynamics would continue. But evidence shows that consumption in China might slow despite government capital injections and infrastructure financing, thus leaving some room for adjustment in the future. At least so far, the financial crisis seems to be contributing to an unwinding of some of these imbalances with the correction in oil and commodity prices and easing capital flows in surplus countries.

Meanwhile even if policy measures are able to stabilize the financial markets, the economic outlook is worsening.

227 Responses to “Roadmap for the G20”

StuartNovember 12th, 2008 at 9:00 am

They also better be planning a backup for the dollar as reserve currency given the inevitability of debt default. The US has had a free lunch for long enough.

Sam DimondNovember 13th, 2008 at 8:16 am

My guess is they will attempt to assign world currency status to an existing currency with a tie to gold or at least a basket of currencies. They may have the guts to try to create an entirely new currency. At this point, nothing is sacred.

GuestNovember 13th, 2008 at 12:09 pm

I agree this could be an answer to some of our problems. A currency split (mentioned on this blog before) would also seem to work to me. But the fact that it’s not talked about much leads me to think others see holes in these ideas that I don’t.hlowe

GuestNovember 12th, 2008 at 9:30 pm

None of this is ever going to happen. Why would an emerging economy like China agree to reduce the trade surplus that is its best bargaining chip ? The Quid Pro Quo that China might want to extract would not be politically palatable to the US. This implies that all the countries would strike private deals witheach other. Diversification of trade using local currency (Yuan) and domestic infrastructure development would likely be China’s priority right now. China would never agree to a revaluation of the Yuan until they are ready to let the Yuan take over as a reserve currency of the world (they don’t seem to be in any particular hurry and are just letting the US steam in its crisis)

MandarinNovember 13th, 2008 at 8:13 am

Truly, given a well established pattern of export-oriented development they have little incentive. But you must consider, as they do,that the internal market must be developed for China’s growth to be sustainable over the coming decades. That will require a revaluation of the Yuan.OK, no news there. What about the immediate future? The US can offer a number of incentives for an immediate and substantial increase in Chinese imports from the US. I am thinking of allowing the PRC to import some banned “strategic” items like advanced computers and avionics. I see nothing wrong with it, not at all in the camp that sees the PRC as the reincarnation of the CCCP – the “enemy.”And while we’re at it, maybe the greatest prize incentive of all, Taiwan. All it would require to obtain an economy saving concession from Beijing is simply, hands off the island on our side. No Taiwanese rearmament, no trying to tie it into a Japanese sphere of influence.

GuestNovember 13th, 2008 at 1:06 pm

Taiwan is a prize no doubt but it is not a “prize” in the back-pocket of the US to dole out. First of all think of all the political fallout in the US. Secondly from China’s point of view, why should they seek a “prize” that is sooner or later going to fall in their lap anyways ? Taiwan as a deeply silicon-exports driven economy and has no strategic depth. China can outlast Taiwan in the battle of nerves hands-down. Taiwanese people share the same Confucian-culture roots as the Mainland and no doubt when faced with the choice between survival and freedom will choose the practical confucian choice of survival. Crystal ball prediction – Taiwan will revert to China in a couple of years without any concessions from the US.

GuestNovember 13th, 2008 at 8:01 am

Obama makes foreign leaders waitCHICAGO: The world is waiting for President-elect Barack Obama, and some of its most prominent leaders are flying to the United States this weekend clamoring to meet with him. But they will have to keep on waiting.The leaders of 19 foreign powers, including Britain, France, Germany, Russia and China, are scheduled to converge Friday on Washington for an emergency economic summit meeting organized by President George W. Bush.Although invited, Obama has opted to stay in Chicago and will not meet any of the leaders separately.His transition team said Wednesday that, instead of attending the summit, he had designated the former Secretary of State Madeleine Albright, who served under President Bill Clinton, and former Representative Jim Leach, a Republican from Iowa who endorsed Obama during the campaign, to meet with visiting foreign dignitaries on his behalf this weekend.http://www.iht.com/articles/2008/11/12/america/obama.php

GuestNovember 13th, 2008 at 10:19 am

Change you Can Believe In – I heard when they were selecting campaign slogans “Back to the Future” was on the short list along with “From each according to their abilities, to each according to their needs”

GuestNovember 13th, 2008 at 10:45 am

If he was still campaigning he would have been managed to do both because, you know, as president you would have to be able to do more than one thing at a time.

HubbsNovember 13th, 2008 at 8:03 am

To guest who posted last thread re: (Jim Chanos) guest hosting on CNBC this AM…BINGO! Said that health care apparatus manufacturers and service providers enjoy margins that other companies would die (no pun intended) for. Therefore short medical equipment and service providers. Same way that autoworkers can not enjoy $87 per hour wages thanks to the union. Of course we all ready know about CEO pay.

GuestNovember 13th, 2008 at 8:27 am

Yea but those jobs aren’t dirty, see white collar workers have a loathing for blue collar workers they want them all making less than $10 per hour in case you haven’t noticed the trend and their quite successful push for the past 30 years. You see most white collar workers are merely fools despite their degrees and titles, they blame workers for the fact that they’ve been squeezed instead of going after the oligarchs/politicians who are selling us all out.

Guest2November 13th, 2008 at 9:19 am

Personally, I’d prefer you refrain from the sweeping generalizations. I am currently a “white collar” worker, but I’ve been a blue collar in the past. I work in an IT department, but I don’t have a degree. I taught myself and worked my way up from the factory floor to a desk.I don’t have a problem at all with blue collar making more than $10/hour (although I do have issues with executives making 20-50 times the wage of the workers or more), and the only people I blame for any problems are either upper level management who make poor decisions from their ivory towers, or the government and their failed policies.

GuestNovember 13th, 2008 at 9:55 am

Exactly, it’s more like blue collar, grey collar, and suits on top of the pyramid.Besides, at least the blue collar has unions something the grey/white collar can’t have.

GuestNovember 13th, 2008 at 12:20 pm

That’s pretty much what I meant in a much more diplomatic tone. I can’t help myself I tend to get a little emotionally charged after witnessing a very successful emotionally based deceptive and manipulative political campaign the past 20 years to pillage our society and wipe out the middle class. Every time I hear more of it I get a little emotional. Unfortunately it seems scholars don’t move public opinion it takes more of the same to undo what’s been done. It took a complete collapse to get some change when I believe we should have fought fire with fire to counter the damaging and prevailing views set forth by the likes of Rush Limbaugh and Sean Hannity. While the scholars refused to stoop that low the other side was winning the war and now the damage may be so far gone it’s too late. There’s a time to be emotional and even a time for generalizations there’s a purpose for everything.

GuestNovember 13th, 2008 at 8:10 am

Some key levels to watch today:S&P Oct 10 intra-day low 839S&P Oct 27 closing low 848Nasdaq Oct 24 intra-day low 1493We can’t have these levels broken whilst the G20 are in town.

Sam DimondNovember 13th, 2008 at 8:10 am

You have ignored the fact that since august, the foreign central banks have stopped growing their balance sheets.(they’ve stop buying our debt!)We are now in full printing mode; it’s the only place left to get the money. Tin foil hatters like myself always got laughed at when we talked about the amero.It’s not so funny now, is it?I’m skeptical anything good will come of this meeting.Every time a new decision is made, Joe6pack gets screwed a little harder.

MANovember 13th, 2008 at 11:27 am

The media has you focused on where the bailouts are going. Likewise, they are more focused on downside risk. (quoting “the experts” like Fuld and Thain and their jumping on the bandwagon of doom. Excellent! We are still reading about what these men say, when they helped create the problem and couldn’t see the cliff coming!)I apologize for not posting what you deem up to snuff… but I think contrary.I think that is EXTREMELY important to know that investors should not get caught up in the smoke and mirrors of the media’s doom and gloom. You need to think independently! Ask the opposite questions like “where ISN’T the money going?” and “Cash is always flowing… where will it flow next?”I DON’T SEE THE MEDIA ASKING THESE QUESTIONS! The answers to those questions are where savvy investors will separate themselves from the media driven herds!I decided to use riddles to emphasize my points. That’s just my attempt at style and flair. It’s what hopefully separates me from other writers on this blog. I hope it gets a couple of people to think in new ways. To expand your imagination and so forth…Miss Americap.s. Thanks for the backup Cahill.

CahillNovember 13th, 2008 at 5:29 pm

Anytime!And while I’m no scholar my personal answer to number 2 is to ask each man, will you never lie to me? Those that claim they will never like (Paulson, Bernanke, Greenspan, Goldman, Bear Stearns etc.) are the ones you should never follow. The one who says, I may lie to you sometime down this road is the honest one, since by our very nature all men lie at some point. My point is much like yours, don’t trust what you are told, use your mind. My mind says all men lie, therefore the honest man admits he’s a liar.Just my opinion

Jason BNovember 13th, 2008 at 8:23 am

Leading indicators seem to be predicting the Greater Depression. Please refute this so I can sleep tonight.Baltic Dry (shipping cost) drops a staggering 98%http://www.independent.co.uk/news/business/analysis-and-features/shipping-holed-beneath-the-waterline-995066.htmlBond market either disfunctional of predicting a massive depressionhttp://www.forbes.com/business/2008/11/11/bonds-credit-economy-biz-wall-cz_mc_1111bonds.htmlConsumer Sentiment drops record amount in Octoberhttp://www.marketwatch.com/news/story/consumer-sentiment-drops-october/story.aspx?guid=%7BE8DA56DA-33C8-4E13-8E46-5635A59B7A0A%7D&dist=google

MandarinNovember 13th, 2008 at 9:44 am

I’ll throw in my two cents and an Ambien. Others here have said, and correctly, that it would be at least a very deep recession because when the housing bubble burst the consumer lost the ability to live beyond his means.On top of that the banks went bust and rightly so since they were the originators of the bubble. What has followed has been the exposure of the same weakness in Europe, followed by panic, followed by a general unwillingness to extend the kind of credit on which shipping a la the Baltic Index depends. Add all these factors up and you’ve got a deep, deep recession.The threat of an actual depression comes in because of the actions of the Fed (and to a lesser extent the ECB) and Treasury in trying to coin vast amounts of new money trying to bail out the unbailable banks. This has raised the specter of the dollar becoming worthless, interest rates shooting to the moon, and the economy — dead.However, there are players who are solvent and who can make us whole — if we stop destroying our currency, rein in the banks, and begin making investment in tradeable, exportable saleable goods. The question is whether the world’s viable capital will come near us with a ten foot pole given the stupendous errors we’ve made in the past and the larceny our leaders are perpetuating now.I happen to think that we’re a country of talented and honest people and that the government will make the necessary moves to restructure/reorient. So when this thing hits bottom around the end of next year we’ll be hurting badly and we’ll be looking for many lean years. But the Republic will survive and so will the greenback.

JimmTheBankerNovember 13th, 2008 at 8:25 am

Did you just see the GOOSE JOB in the S&P futures!!! PPT says no breaking 850 today!!!! RIGGED RIGGED RIGGED! Both jobless claims and continuing claims set new highs today-FUGLY numbers and so the PPT will be in all day IMHO.

GuestNovember 13th, 2008 at 9:00 am

There is another way to discuss reform at the g-20:1) eliminate the federal reserve and central banking2) accept that there is no one institution which is too-big-to-fail regardless of the consequences.

GuestNovember 13th, 2008 at 9:02 am

Laurence Fink, BlackRock chairman/CEO just said on cnbc that housing is the foundation of our economy. What ever happened to jobs? How does a house create productivity? Hedge fund logic

PeteCANovember 13th, 2008 at 9:02 am

WHAT DOES IT ALL MEAN ???OK where are we up to?First, go to this link at Husssman Funds and look at the percentage market drops in various recessions since 1970. See the bottom chart at the link, comparing the current market (in black) to previous recessions.http://www.hussmanfunds.com/rsi/recessrecog.htmNext, realize that the chart was only updated to October 20’th. So look at $SPX on http://www.stockcharts.com to see the most recent shape of the S&P 500. Then imagine current further losses updated on the chart at Hussman Funds.What this exercise is clearly showing is that the current market does NOT look like any of the previous recessions, including the bad recession in 1970. Losses are too steep over the same time period.I’ll go back to what I said in an earlier post. The stock market is looking forwards and discounting future outcomes. So what is this current market trying to tell us? Clearly, something very unpalatable lies ahead. I’m not speculating on the outcome, just reflecting on actual data to this point.PeteCA

PeteCANovember 13th, 2008 at 9:12 am

You know … it’s years of subliminal conditioning from reading Brian Pretti’s analyses. But the folks at Contrary Investor have a good point in the way they apporach things. At any time, all we’ve got is data up to today, right? Any extrapolation going forwards is indeed a guess. And the financial and political future is nonlinear and highly unpredictable. But I do think it’s reasonable to conclude that simple theories about the US economic situation making an immediate rosy recovery are not consistent with the market message right now.PeteCA

PeteCANovember 13th, 2008 at 9:23 am

Chris Puplava has another set of really excellent charts today. Here they are:http://www.financialsense.com/Market/wrapup.htmBut let’s take a top-level view. What’s the real message of Chris’ charts??? Simply this. The USA evolved from a manufacturing economy to a service-based economy, and then ultimately to a financial economy. Think about who was making the real money in America. It was the hedge funds and the investment bankers. And Chris’ charts show that very clearly – with the explosion of bank credit over the last two decades.This financial bubble must now resolve. Regardless of what the Fed does, they cannot change the outcome. That means that the financial economy is collapsing, with credit destruction and deleveraging being powerful process (along with fear and lack of confidence in the markets). It also means that the financial services sector will leave the USA and “export itself” overseas. The investment bankers will move elsewhere.However, what are we left with … once the financial economy collapses? The problem is that our service-based economy cannot be sustained, due to the relatively high wages paid to Americans. The fact is that both manufacturing jobs and service jobs can be outsourced to other countries in the world, undercutting US jobs. This is why real wage growth in America has been lousy over the last decade, and why American families feel like they are struggling to keep their heads above water.So the real issue boils down to bad investment. The “Financial Economy” did not invest America’s money wisely. It did not build new infrastructure and new means of productivity that would allow US workers to maintain a high standard of living. Now that the Financial Economy is collpasing, we reap the deficit of malinvestment. We are using up our future tax base right now trying to re-build banks that made incredibly bad investment choices. That is not just moral hazard, it is very BAD economics.PeteCA

GuestNovember 13th, 2008 at 11:19 am

The USA evolved from a manufacturing economy to a service-based economy, and then ultimately to a financial economy.

The only normal, sustainable, proper, economy is a manufacturing economy (unless a country has unlimited energy/mineral resources).

OuterBeltwayNovember 13th, 2008 at 12:15 pm

PeteCA:Great analysis. Now, it’s time to answer the “what’s next for the U.S. economy” question.The bankers couldn’t answer the question. That’s part of why the “mis-allocation” happened. The other reason is that debt can grow much faster than savings, and if you can find a way to monetize debt flow (which they did), hey that’s good for them, but horrible for us.They had full eyes-open awareness of what they were doing. Sometime soon, the public is going to connect those dots.Meantime, for those of us that actually want to live in a country that has a functioning economy, we need to answer the “what’s next?” question pretty quick now.Conference call is calling. See below. You in particular are invited, PeteCA.

PeteCANovember 13th, 2008 at 1:53 pm

Thanks very much. Unfortunately, I can’t do it during normal daytime hours. But I do appreciate the invitation. Hope you will post a short summary.PeteCA

GuestNovember 13th, 2008 at 10:03 am

Federal Reserve will open lines of credit to individuals by issuing credit cards, The FEDERAL EXPRESS, don’t leave work with out it.

GuestNovember 13th, 2008 at 10:37 am

They do not earn it. They substantially rely on public-sector risk to make their bets. When they go belly up, the system cracks, and we all pay. They steal public resources to backstop their bets.

PeteCANovember 13th, 2008 at 10:11 am

WHAT IF ????OK, let me complete the thought here. And take it one step further.First, why did we wind up with a “bail out” mentality in the USA? And why did the banks get all the money? Well, it’s pretty clear that the big Wall Street banks bought tremendous political influence in Washington DC. They have a lot of politicians sitting in their back pockets. And it’s also clear that the Fed’s primary mandate is to defend the US banking system. That’s what they are empowered to do. So, is it be really surprising if we get the outcome that we are seeing? The banking system is trying to regenerate itself, and get back to the “old glory days” of rampant speculation. But they can’t. The game is OVER.Now let’s imagine a totally different approach for America. Let’s suppose that Paulson’s rescue package was never aimed at the banks at all. Hypothetically, let’s suppose we gave that stimulus money to strong companies within America. For the sake of argument I’ll pick two. Just as an example, Suppose the $700 billion rescue was given to Microsoft and Boeing.Of course, your gut reaction might be to say “But Pete, there companies are not in trouble. They don’t need help.”But my response is this. Why are Microsoft and Boeing strong? Because they have good management. Because they can make a good product and SELL it into the global marketplace. Because they can work with US labor costs (although both companies do outsource some activities!), and keep Americans employed. The point is – these companies have proven they can survive and thrive. So if workers are laid off from the auto industry, they could work building airplanes instead. And if workers are laid off from the banking industry, they could get jobs doing IT for Microsoft instead. The point is this … by rewarding the strong companies in America we would be putting the stimulus in the RIGHT places.Now let’s imagine a different future. Let’s suppose that the Chinese succeed in building their own competitive airplane industry. So now Boeing loses future market share to both Europe and China. And let’s suppose that India makes a massive investment to build a completely independent software base that makes operating systems for personal computers. A direct competitor to Microsoft products. Don’t laugh. The outcome is entirely plausible. In this scenario the USA would lose key competitiveness in commercial airliners and PC operating systems. It would be an enormous future blow to US exports.We are missing this kind of thinking. We’ve got a bunch of politicians in the USA who are absolutely clueless about the economy, how money works, and what needs to be done to keep America competitive. We keep seeing ridiculous plans for saving failed banks (who wasted coutless billions in the futures markets), and saving home prices (which are adjusting due to free amrket principles). There is absolutely no vision of how to restore the industries in America that could really be building a future for our people and our kids. Monetary policies are not a substitute for really good economic policies. Will Obama be able to fix this? Frankly, I don’t know. We have a crisis in leadership, and our whole establishment is infected with bad thinking.PeteCA

MandarinNovember 13th, 2008 at 10:33 am

I think we may get some improvement in the budget, the Democrats managed to balance it last time. This huge new debt is going to impose its own discipline. Expect an end to the open handed giveaways to the banks, but a continued (and defensible) dribble of money to rust belt industries. Result: the dollar remains viable.The Clinton-Obama team is less venal but more Machiavellian than some have supposed. Any reorientation of the domestic economy is going to come from a geo-political and world system play designed to get us out of Middle East hostilities and open further the East Asian markets. Unfortunately I think Bank of America and Citibank are going to continue to play a leading role in attempts to spread American style finance to China.In short, handouts and reorganization for the dying industries including more transfer of equity to foreigners. New agreements overseas and a better trading balance which will help aerospace, biotech, agritech and farm exports. No deliberate plan to boost leading edge industries, though – we haven’t had one for the past 20 years, we won’t have one now.I think we’re looking at stag – whatever, first stagdeflation, then stagdisinflation or what have you. Survival, just.

MandarinNovember 13th, 2008 at 10:34 am

I think we may get some improvement in the budget, the Democrats managed to balance it last time. This huge new debt is going to impose its own discipline. Expect an end to the open handed giveaways to the banks, but a continued (and defensible) dribble of money to rust belt industries. Result: the dollar remains viable.The Clinton-Obama team is less venal but more Machiavellian than some have supposed. Any reorientation of the domestic economy is going to come from a geo-political and world system play designed to get us out of Middle East hostilities and open further the East Asian markets. Unfortunately I think Bank of America and Citibank are going to continue to play a leading role in attempts to spread American style finance to China.In short, handouts and reorganization for the dying industries including more transfer of equity to foreigners. New agreements overseas and a better trading balance which will help aerospace, biotech, agritech and farm exports. No deliberate plan to boost leading edge industries, though – we haven’t had one for the past 20 years, we won’t have one now.I think we’re looking at stag – whatever, first stagdeflation, then stagdisinflation or what have you. Survival, just.

MandarinNovember 13th, 2008 at 10:38 am

I think we may get some improvement in the budget, the Democrats managed to balance it last time. This huge new debt is going to impose its own discipline. Expect an end to the open handed giveaways to the banks, but a continued (and defensible) dribble of money to rust belt industries. Result: the dollar remains viable.The Clinton-Obama team is less venal but more Machiavellian than some have supposed. Any reorientation of the domestic economy is going to come from a geo-political and world system play designed to get us out of Middle East hostilities and open further the East Asian markets. Unfortunately I think Bank of America and Citibank are going to continue to play a leading role in attempts to spread American style finance to China.In short, handouts and reorganization for the dying industries including more transfer of equity to foreigners. New agreements overseas and a better trading balance which will help aerospace, biotech, agritech and farm exports. No deliberate plan to boost leading edge industries, though – we haven’t had one for the past 20 years, we won’t have one now.I think we’re looking at stag – whatever, first stagdeflation, then stagdisinflation or what have you. Survival, just.

GuestNovember 13th, 2008 at 10:45 am

Soros says deep recession inevitable, depression possibleWASHINGTON (Reuters) – George Soros, chairman of Soros Fund Management, testified at a House Oversight and Government Reform Committee hearing on Thursday. Highlights:* Said “a deep recession is now inevitable and the possibility of a depression cannot be ruled out.”http://www.reuters.com/article/ousiv/idUSTRE4AC5IN20081113

David in SeattleNovember 13th, 2008 at 10:55 am

“Sometimes I think it’s the job of each Fed chairman to try to prove Richebächer wrong.”Paul Volcker, former Fed ChiefMany of you may not have heard of Dr. Kurt Richebächer, but he was probably the brightest beacon in the world of economics, and predicted today’s events much earlier than either Nouriel or others. Unfortunately, the good doctor passed away before he could see how accurate his predictions about the world economy would turn out to be. Here is an article that he wrote before his death.US Consumer SpendingOne has to realize that all the increase in US consumer spending is borrowed. And it is borrowed against rising house prices. In 2001, Greenspan replaced the bursting stock market bubble with the housing bubble. But soon he’ll be faced with a bursting housing bubble. The only question is when.Asset prices are the key to the US economy. As long as asset prices are high, there seems to be ample liquidity in the economy. But as asset prices fall, the liquidity disappears. Americans think they are liquid. They aren’t liquid. Liquid is a person who has savings. We must realize that the appearance of great liquidity is merely the result of highly leveraged asset prices. And those can collapse.Excess credit is the only thing supporting asset prices…Greenspan recently observed that American consumers have weathered the energy price hikes very well. But that’s only because they borrowed crazier and crazier. That’s not the kind of resilience you should applaud. It’s as if he said, “We succeeded in helping the consumer to borrow more and more.”US Consumer Spending: The Noose TightensIt would be desirable, of course, if the consumer would retrench a bit. Not that he would continue to increase his borrowing.The thing to realize, of course, is that the housing bubble is many times more dangerous than the stock market bubble, because it involves the whole banking system. Greenspan has replaced one bubble with an even bigger and more dangerous bubble.American monetary policy is out of control. Greenspan has created a debt Colossus. This debt Colossus needs permanent new credit. In an economy that needs four dollars in credit to produce one dollar of GDP, simply reducing credit could be disastrous. Even a slight reduction of credit could create enormous negative repercussions in the asset markets and financial markets.The level of credit excess in America has reached such a level of absurdity that no return to normalcy is possible without a disastrous effect on the economy.US Consumer Spending: America the “Ponzi unit”America has become what Hyman Minsky calls a “Ponzi unit.” In other words, there sometimes comes a point where an economic unit has to rely upon asset sales to satisfy its interest payments and debt repayment. That’s America!The writings of Hyman P. Minksy, particularly his 1986 book, ‘Stabilizing and Unstable Economy,’ …identify three distinct income-debt relations for economic units: hedge, speculative and Ponzi finance:1) Hedge-financing units can fulfill all of their contractual payment obligations by their cash flow.2) Speculative units can meet the interest bill on their liabilities from their income, but are unable to repay the principal out of cash flow from operations. They need to roll over their liabilities.3) Ponzi units are unable to fulfill repayment of principal and to pay the interest due on outstanding debts by their cash flow from operations. They depend on borrowing or selling assets even to meet their interest bill.It is a reasonable conclusion that the U.S. economy and its financial system on the whole have become one huge Ponzi financing unit.”]US Consumer Spending: The Abolition of SavingWhat the Americans have done is that they have simply abolished savings. And that means that more and more of GDP goes into consumption at the expense of investment and at the expense of the trade balance…What I often hear is that there’s so much liquidity in the US economy and US financial markets. But this liquidity is not from cash. It is credit. There is huge liquidity in the asset markets that could turn into a savage deflation tomorrow. This is an illusion, this liquidity argument. It works as long as the system of inflating asset prices functions. But when it stops, liquidity is gone. If there is a lot of leverage in the market, it can collapse.It has not yet happened…But it will, as soon as credit becomes more expensive or difficult to obtain…The crucial support for the American financial infrastructure is the massive purchases of U.S. Treasury bonds by foreign central banks. The Americans think that this is to their advantage. But this only means that they have a longer rope with which to hang themselves. To have too much credit is never good, not for a country and not for an individual and not for a company.America as the Empire of DebtThis is the problem: America has too much international credit. Not from private investors, but from central banks. Central banks are the marginal key influence. And therefore, when you consider the American fundamentals, America is certainly the most backward country in the world, among industrialized nations.From a fundamental point of view, the American economy is in incomparably worst condition today than in 2000. Income growth for the individual is stagnating. It is negative. And there is no savings. America has no reserves to protect itself against the next recession.The fact is, Americans are trapped. And worse, there comes a point where they are unable to sell any assets to raise capital, a point where the markets become completely illiquid…because there’s no buyer left. The buyers of today are all leveraged buyers. They need new credit. But when you get declining prices, there is no buyer left. America’s super-liquidity all comes from borrowing. Credit has played a major role in all U.S. financial markets…There are many who say that deficit spending by the government is bad. But they don’t say that deficit spending by the consumer is equally bad, or worse. The American idea that everything good comes from consumer spending is preposterous. And that is the key fallacy in America today.But the key question is whether America has finally reached the inflection point where its disastrous economic policies will begin to undermine its prosperity. I think she has.There is no way out. The excesses are much too big to be treated with conventional methods.US Consumer Spending: The Great Ideological DivideAnglo-Saxons know no limits at all! And no one complains about it. Europeans impose fiscal limits on ourselves and have difficulty keeping them under control, which is understandable. But when Americans double and treble their deficits, that is okay, because there are not limits. The Anglo-Saxons have two different sets of rules: One for the Europeans and one for the Anglo-Saxons. The Anglo-Saxons can do whatever they like.The normal economic condition for a developed industrial country is to have an export surplus, and this surplus becomes the basis of its capital formation…That was basic macroeconomics.All of a sudden, the virtue of an industrial country is not to export, but to over-consume…to save the world through over-consumption.The European economies, for example, always had investment and export as a key driver of growth. And that is what you would expect from an industrialized economy, that is invests and that it exports…But Americans just borrow and consume.Because consumption has grown so far out of proportion to production, capitalist America relies on the generosity of communist China. Americans don’t even realize how ridiculous and absurd this is. It’s so absurd I can’t believe it. I think this is the worst sign that I could imagine. It means that net investment is collapsing.Consumption produces the least desirable kind of growth. And the simple thing to know is that it is unsustainable. It is unsustainable because real incomes are not growing. In America you’re having a fiasco in employment and income growth. The average income of the American middle-class is declining in real terms. And they have debts and debts and debts and zero savings. They have no reserves.US Consumer Spending: Manufacturing DisasterIn America, it is no secret, the manufacturing sector is shrinking. That’s THE big problem. In every economy, the manufacturing sector has the biggest multiplier effect.Manufacturing is a sector that uses all the intermediate goods. That’s part of its multiplying effect. The growth of financial services is fine, but not when the manufacturing sector is disappearing at the same time…When you look at capital goods production in the United States, you can see what has collapsed is investment. And with the collapse of investment you have a collapse of employment in the manufacturing sector…here are two kinds of assets; those that you produce, and those that you simply trade. In America today, you have an inflated service sector trading inflated assets. The assets that you trade do not produce any widespread wealth. They simply produce wealth for the individuals who trade them. The great failure in America is in investment, employment and income growth…and that is tied to manufacturing.we’re living in a world where Greenspan and his associates have told the world that all of America’s massive imbalances do not matter. But for any economist who has a little something in his head, the structure of the American economy is one of the most alarming of all time. For a developed economy it is scandalous.The American economists think this is perfectly acceptable. But I find it unbelievable. Like Ben Bernanke blaming the rest of the world for what he calls a “savings glut.” This is crazy. Why isn’t he, instead, urging Americans to save and to invest? Are the Fed governors really as stupid as they appear? Or are they deliberately stupid?There are, of course, people in America, including many of my readers, who are old-fashioned, economically speaking. Paul Volcker, for example, who is an old friend of mine. But he held these basic economic concepts that I write about in his gut. All these things that I write about used to be in the gut of every economist.The Americans I knew thirty years ago saved money. They didn’t save as much as the Europeans, but they held the same attitude, at least. The fundamentals were never questioned. No economist questioned the idea that a nation needs savings. They never questioned that investment is crucial for prosperity. It was never questioned that a developed country should have a surplus in its current account. This was never questioned! It was never a topic of discussion!But all of a sudden, the Americans have rewritten economics…because it suits them…Saving money used to be instinctive in people, even without any economic theories. Classic economic theory is absent in America. It does not exist.US Consumer Spending: More popular the QuaintAnachronism of Saving.We are at an inflection point in thinking…The big change begun in the 1980s. In the ’80s, Americans continued to save, but it was the government that began to dis-save. And at the time, there was a lively debate among economists about the wisdom and benefits of deficit-spending by the government. There was a very lively debate about this topic. Today there is no debate. There is no longer any economic discussion. American economists are silent, deeply silent.Do you know why they are quiet? Because academic America, like all of America, believes that consumer spending is the key to prosperity. The high esteem of consumer spending is implanted in every American, including its academics.There are many who say that deficit spending by the government is bad. But they don’t say that deficit spending by the consumer is equally bad, or worse. The American idea that everything good comes from consumer spending is preposterous. And that is the key fallacy in America today.And so I wonder, is it possible that next year we will see the great denouement of the American economy?

The Facts of LifeNovember 13th, 2008 at 11:31 am

Thank you for that comment. Refreshing. I renew my question of the term fiduciary, and question who we have let lead us down this treasonous path.

OuterBeltwayNovember 13th, 2008 at 12:34 pm

They are silent for several reasons, and each is powerful:* they haven’t done their thinking. TV works – it’s addictive, and it numbs the brain.* they’re sated. The U.S. is a rich country, and most of Maslow’s hierarchy of needs are currently satisfied. Bertram Russell says “therefore, consume!”The Thinkers of the western world have been asking humanity to think before the hammer hits them on the head. This is in contravention of the fundamentals of human nature. As a race, we don’t plan ahead very well. Too bad.I agree that lack of savings, and lack of intellectual discipline is the root cause of this trouble, in addition to the usual cast of thieves and jackals. But you preach to the choir.To me, the most interesting question of all is how to communicate the situation and the solutions to the people whose individual decisions actually count.We are reaping the whirlwind of 30 years of progressive, systematic dumbing-down of the American public, converting our body politic into a blob of protoplasm supported by a couch.The conversion of that entity into a thinking, planning, action-oriented being is quite the undertaking.That is what we’re up against. If we are to succeed in this work, we must accurately identify the scale of the beast we face.

ForkNovember 13th, 2008 at 10:56 am

GM is not being resourceful. They need to bundle some toxic derivatives with each new car purchase, as well as put some of Goldman Sachs management on their board of directors, then the Treasury and FED would fall all over themselves to give them money.

OuterBeltwayNovember 13th, 2008 at 10:58 am

RGE Braintrust Conference Call is going to happen, and soon.Let’s start planning for it.Who’s coming?You are. Got ideas? Want to start doing something about those ideas? You need to be on this call. The first 96 people that call in…are in.What are we going to talk about?You decide. Post your suggested topic below, and we’ll put it on the agenda.Some of the stuff we might accomplish on the first call is to:a. Introduce ourselves, if we want tob. Get a feel for what people want to accomplish. See if there’s common groundc. Find areas of immediate interestd. Figure out how to have a coherent discussion with somewhere between 0 and 96 people.Will Big Brother be attending?Count on it, but we will be providing speech scramblers for all participants. <grin> Just kiddin’, guys.Can I preserve my anonymity?Yes. Up to 96 people can attend this call, so you can lurk w/o bumping someone that’ll contribute. You can just listen, make your own judgments about the quality of the group, etc, and chime in when/if you feel it’s worthwhile.So, how’s it work?The service we’ll be using is a 3rd party internet tool (FreeConferenceCall.com). You’ll use your own phone (your LD phone rates apply) to connect to the service.I thought about Skype (per LB’s recommendation), and I like it, but not everyone has broadband access, and that makes a difference. So, at the outset, we’ll use phone network based conferencing, and maybe later we’ll move up to internet-based conferencing.Prep work* put your suggested agenda item or theme below. Up to 2 bullet points per person. Keep it brief, so everyone has a chance to participate* put your best day(s) of week, and best time(s) of day for the conf call on your post so I can pick a time that works for the most peopleWhat’s OuterBeltway’s Agenda?I’m winding up a long period of stewing and crankiness, and I’m emotionally transitioning into action-mode. I’ve got some action-oriented ideas I want to kick around. I need some smart people to vet these ideas with. You guys are smart, and you are hammering away at the same walls I want to bash. Bashing is much more fun if you’re on a team.In prep for action-mode, I want to expand my network of movers and shakers. One of the problems that thinking people have is that we tend to be isolated, simply because most people aren’t doing that much thinking. Well, I want to overcome that obstacle, and this is a good way to do it.Remember though, this call isn’t about me or my agenda. My agenda is only one of possibly 96 agendas on this call. I want to stimulate conversation about stuff I think is useful, and find out if anyone else thinks its worthwhile. Who knows where it leads from there. I want you to do the same thing: posit your ideas, and see if you can hook up with some like-minded people.Does that resonate with you? OK then. Put your ideas into the hat by posting your agenda items, and your availability directly below here. I’ll put together the logistics for the first conf call, and if it works out well, maybe we’ll do another one.

MandarinNovember 13th, 2008 at 11:31 am

I like the idea of a shadow government to formulate and spread a critique and alternative of what will be coming out of DC.I’m 13 time zones ahead of the place but I can manage to check in.

MedicNovember 13th, 2008 at 12:21 pm

OB -I’m in. I’ll bet you can’t possibly guess what I want on the agenda……- Universal health as beneficial to most businesses- Universal health as beneficial to citizens (reduced cost of insurance, less likelihood of financial disaster due to illnessI am on EST and evenings are best for me, but I can likely make it whenever.Somehow I just knew it would be you who organized this 😉

OuterBeltwayNovember 13th, 2008 at 12:40 pm

First-rate, Medic. Glad to have you aboard. You and I have much to discuss. Healthcare costs are both a major threat and a major oppty in NextEconomy. You are the perfect advocate for bottom-up reform. Go to town.

MANovember 13th, 2008 at 12:55 pm

@ OB,If you can put it together… I’d be glad to join.My point number 1 is simple!The information superhighway is more like an idea parking lot. There’s so much information, that we get caught in traffic jams and gridlock for pushing the good ideas forward.My idea/point is to form a “Constitution” of the best ideas. To define certain fixes/ideas/rules/etc… as platform, and stick to them through “grass rooting” of that “Constitution”.In other words, Article 1 “fix xxxxxxxx”Then when something new is constructed or thought through… Add it, but do not remove the first from view.i.e. Article 1 “fix xxxxxxxx” (amendment a “rule ggggggggg”)Article 2 “create regulatory ZZZZZZZ”And so forth.Then, keep letting it grow as a fixed whole document and spread it around the internet on every website available.Essentially creating, an information super side street.That’s it for now,Miss America

OuterBeltwayNovember 13th, 2008 at 1:20 pm

Yup, we’ve got a lot on that sidestreet w/your name on it. Keep them ideers a-comin. Park your grammar at the door.

ORNovember 13th, 2008 at 5:11 pm

My comment to MA in his blog. I think his post was a very good one!MA hope this is the kind of post you are looking for…Question #3 If a mirror reverses your right from your left and your left from your right, why doesn’t it also reverse up and down?A lens reverses the image on the other side of the lens left and right AND up and down because the light changes direction as it passes through the lens. A mirror actually does not reverse anything just reflects the light. Whereas our definitions of up and down are absolute, the definition of left and right depends on the direction we are facing. Your right side seems to be in the left side “inside” the mirror because you mentally are positioning yourself inside the mirror taking a mental 180o turn which is impossible because you will never be inside a mirror:-) But wait! what happens if you place the mirror in the ceiling and then look up?:-)Where is the money going?Certainly the flow towards banks holding mortgages will be lower than anticipated and banks in the business of selling cc debt such as amex will get more money than anticipated due to Hanks sudden change in strategy.BTW, Hanks 700 billion ripoff of the Amerikan public (700 truckloads of gold carrying 40.5 metric tons of gold each) belongs to the guinness records as the greatest heist in the history of mankind! Hanky is a clever guy! He made an excellent “chess” move:He knew the US economy would go down the drain with or without the 700 billion so congress only had one way out: approve the plan BEFORE the election.Since the economy would go down the drain with or without the 700 billion, if congress didn’t approve the 700 billion, in the future and with the benefit of knowing what happened, people could say it was their fault the economy went down the tubes as the 700 billion might have saved it or at the very least soften the recession (error of omission). However, by aproving the plan they can always say they tried their best and that it would have been worse with the plan.So hanky got what he wanted: a big wad of cash BEFORE the election, which as you all can see, he is “wasting” freely among his friends. he only has until January to waste it all so he is devising the fastest ways to give it away to his friends. The mortgage buy back stuff would have taken too long as the toxic stuff is impossible to price.A very reasonable 1% commission easily makes Hank a billionaire if he is not one already:-)Don’t get fooled by the Stuttering, Hank is smarter than all of us put together!

ForkNovember 13th, 2008 at 1:02 pm

Design a make-work program heavily weighted to manufacturing which in turn is biased to production of classic agriculture instruments used to lift or pitch biomass.

Detlef GuertlerNovember 13th, 2008 at 3:03 pm

Good idea, OB!I’d like to join, no matter which hour of day or night. My main point of interest: The next Apollo program. Or the next Tennessee Valley Project, if you like more the comparison to GD I – the program that helps the world to get out of GD II. What could it be? What should it be? What will it be? Who will participate, who benefits, who pays for it?

Average JaneNovember 13th, 2008 at 6:52 pm

Count me in, OB. I’m on Central Standard Time, generally available evenings, nights, weekends. I’d like to see an agenda item discussing what our Native American neighbors are doing vis-a-vis renewable energy, etc. The Shakopee Mdewaketan (probably misspelled that) folks in southern Minnesota are way ahead of the curve. I can get some pertinent information from their website to contribute.

GuestNovember 13th, 2008 at 11:11 am

From NC”The High Priests of the Bubble Economy””Along with former Federal Reserve Board chairman Alan Greenspan, Rubin and Summers compose the high priesthood of the bubble economy. Their policy of one-sided financial deregulation is responsible for the current economic catastrophe…”http://www.nakedcapitalism.com/2008/11/high-priests-of-bubble-economy.html

GuestNovember 13th, 2008 at 11:25 am

Rubin and Summers may be criminally responsible, but unlike Paulson they won’t directly loot the public to throw money at their banker pals. They are smart enough to know that their little experiment blew up and that some new tricks are called for. Since most of the global banking establishment is no different than they, the G20 IMF gang will pull together to make sure that the world emerges from this only slightly different and the US remains a weakened but still essential leader. Those looking for a Weimar style breakdown are going to be disappointed.

GuestNovember 13th, 2008 at 11:21 am

S&P currently @ 843 12:20PM EST compared to the Oct 10 intra-day low of 839. This feels like a test – yet VIX is a bit anemic today — maybe cause the hedgies are all in Washington –

Octavio RichettaNovember 13th, 2008 at 11:59 am

Will this be the last Bush administration screw-up? From the NC link:Since the time Bush picked (November 15) was after the elections, it was a bizarre gesture. Was this to pressure a new Administration into formulating views before they were ready (Bush had made it clear that the President elect would participate).So the US’s face saving expedient is to downgrade the summit. Obama is sending representatives who are clearly peripheral players; Paulson is now effectively saying that this session will not accomplish much:This weekend provides an opportunity for nations to take an important step, but only one step, on the necessary path to reform.That sounds like the MOST they get to do is agree on the agenda for future meetings. Only one step, children!This verges on an insult to the other participants, and were it not for the fact that Bush called the meeting and Paulson will be in attendance, if I were in their shoes, I’d lower the seniority of my delegate pronto.The outgoing US administration of George W. Bush and the incoming administration of Barack Obama both signalled in different ways on Wednesday that they did not intend to be bounced into firm commitments on sweeping reform of the international financial system at this weekend’s G20 summit.Hank Paulson, Treasury secretary, said: “This weekend provides an opportunity for nations to take an important step, but only one step, on the necessary path to reform.”He made it clear that the US wants the agenda to deal not just with regulation, but also with the global economic imbalances that he said were “at the heart of our problems”.Meanwhile, the Obama transition team said the president-elect would send Madeleine Albright, a former Democratic secretary of state, and Jim Leach, a former Republican congressman, to represent him in discussions with world leaders attending the summit.The two figures chosen are senior dignitaries, but neither is part of the Obama economic team, or likely to take a leadership role on economic issues in the future…..Does not sound to me like we are willing to mend our ways…. As LB mentioned in one of his posts, what does the Iraqi refugee think about Obama: ” don’t kid yourself they are all the same”

P1AQL.November 13th, 2008 at 11:29 am

RGE Analysts wrote:

1) Submit rating agencies to registration and surveillance, especially with a view to credit ratings’ prominent role within the Basel II capital requirement framework.

Of all the issues, this is the most crucial. We have to stop the greed for AAA assets because they command a lower weight factor under Basel II. Who’s to say a AAA bond won’t suffer from a bad default rate in some year (black swan)? See Altman’s paper on this:http://pages.stern.nyu.edu/~ealtman/Are-Historical-Models-Still-Relevant1.pdfWe need to scrap the weights system (i.e. roll back Basel II) so that ratings agencies stop blackmailing unrated bonds with a penalty weight of 150%Remember, that the ratings agencies wilted under pressure on slap AAA lipstick on the CDO wurst so that European banks could gorge on them.Best,P1AQL.

GuestNovember 13th, 2008 at 11:50 am

and we’ve broken throughDow 8,127.66 -155.00 (-1.87%)S&P 500 836.53 -15.77 (-1.85%)Nasdaq 1,456.34 -42.87 (-2.86%)

JimmyTheBankerNovember 13th, 2008 at 11:51 am

Huge selling on the takeout of S&P 839. Lets see if we close red today or if this is THE double bottom the whole world is calling for (hint: be scared of that)

vsssarmaNovember 13th, 2008 at 11:55 am

The root cause of the trouble is US Dollar and its uncontrolled printing by USA coupled to the enormity of loans taken by US Federal, State Governments as well as the Corporations. The excess liquidity was dissipated into the US market by giving loans at an interest rate less than inflation rate which means that the banks are doling out money and for taking money, they are paying interest. This has resulted in enormous demand for Cement, Steel and Oil whose prices shot up making life miserable for the common man. Hedge funds and Sovereign Wealth Funds are used to prop up prices in an unnatural manner, prompted by enormous greed. When common man was suffering, there was no G-20 meeting but when banks are collapsing the same is rushed in. Run away consumption has seriously affected the natural resources of the earth.In this situation, the Governments should chip in to bring relief to the main street but not the wall street. This is what exactly China is doing and USA is not doing.The currency of transaction in International trade should be changed from US Dollar to the currency of the country selling the goods. This will restrict the demand for US Dollar and hopefully the printing will stop.

GuestNovember 13th, 2008 at 11:58 am

“… In detailing the next phase of Treasury’s $700 billion Troubled Asset Relief Program, Mr. Paulson indicated the government would continue flooding financial institutions with cash, but would also try to increase the availability of student loans, auto loans and credit cards.”Because that’s just what the people need….more debt.

GuestNovember 13th, 2008 at 12:02 pm

This is just a sucker smack. The whole world was watching that 850 level and so Paulson, er, um, uhhhh, I mean the market sucked in all the sellers and now Paulson, er, I mean the market will reverse and close up for the day.

AnonymousNovember 13th, 2008 at 12:03 pm

Commodity Bull-WhipI posted this on H’s blog as well. It fits with the relevance of Historical Models. I research supply chains so I tend to think in terms of stages of production, inventories, and lags. I also do some work on complex adaptive systems and supply chain risk management. I would like to hear some debate on the following thought. (I’ve increased my dose of Ambien and would like to sit back and read some insightful comments.)Commodity Bull-WhipI have a conern that I have not seen posted anywhere. The deflation / inflation debate is rampant.Can we have both?Deflation of productive assets decreases production dramatically. This drives producers out of business. This creates intense scarcity driving up prices.My first concern is with oil – OPEC nations become politically unstable and production ceases.My second concern is with agriculture. Farmers can’t get credit to plant.There are some vicious feedback systems and lags at work here. They are happening much faster than at any point in previous history.There is a probability that the bull-whips in separate industries could align creating currently inconceivable prices (swings).Oil is at $40. This appears indicative of a fat-tail event that should raise alarms just as much as $150.Just looking for some restful sleep…As a footnote, I recently completed some research for a large computer manufacturer regarding effects of precipitous drops in demand on cashflow and supply chain viability – the results were not very comforting.

JLarkinNovember 13th, 2008 at 3:12 pm

Scary Octavio? The Asian gamblers just think they’ve seen the bottom, like Buffet, and started buying around 8000.

GuestNovember 13th, 2008 at 12:04 pm

and we haveDow 7,976.25 -306.41 (-3.70%)S&P 500 820.95 -31.35 (-3.68%)Nasdaq 1,432.05 -67.16 (-4.48%)1:04PM EST

JohnRyskampNovember 13th, 2008 at 12:10 pm

And by the way, kudos to that fat corrupt idiot Soros for saying today what I have been saying for two years: we will have a depression. He hasn’t yet fully said what I have said, but he will: this depression will be two to three times as bad as 1931.Again, BAN HOUSING EVICTIONS.Also, I said look out for facts on the ground. This confirms what I have said:BLOOMBERG:“In October business just stopped, and everyone is extrapolating that to the quarter and all of next year,” said Richard Campagna, chief investment officer of Provident Investment Counsel in Pasadena, California, which manages $1 billion.That’s right: business has STOPPED. OK, NOW do we put in place a “stand in place” order for facts on the ground, or do we become Somalia. There is NO THIRD WAY.Watch for this economic decline to cause a collapse of the political system. First the confidence crisis, then the economic crisis, then the political crisis.

Octavio RichettaNovember 13th, 2008 at 12:14 pm

BRKA watch: http://finance.google.com/finance?q=NYSE:BRK.AAs Predicted trading under 100K and falling almost twice as hard as the overall market. And still dam expensive!.Don’t forget the old man owns a good chunk of Amex, Wells Fargo and other companies that are suffering and will suffer even more with the recession. A don’t forget his multibillion USD dealings with GS and GE at much higher stock priceshttp://en.wikipedia.org/wiki/Berkshire_HathawayCompanies with a “beneficial owner” relationshipThis includes some of the companies where a Berkshire Hathaway stake is 5% or more of the outstanding stock, as reported in the last proxy statement SEC filing, and the latest annual report.In order of percentage stake:Moody’s Corporation (19.1%)The Washington Post Company (18.2%)Burlington Northern Santa Fe Corp. (17.5%)American Express (13.1%)Wells Fargo (9.2%)The Coca-Cola Company (8.6%)It almost feels as if SI’s Pancho Villa is back:-)

GuestNovember 13th, 2008 at 12:22 pm

Could be, but be careful not to get sucked in – when you see it reverse 30 points on the S&P in 5 minutes then maybe –

MM CANovember 13th, 2008 at 12:25 pm

Ten companies now have more Level 3 assets than capital. In order they are (as a % of total shareholder equity: 1) Bear Stearns (BSC): 313.97% 2) Morgan Stanley (MS): 234.88% 3) Merrill Lynch (MER): 225.4% 4) Goldman Sachs (GS): 191.56% 5) Lehman (LEH): 171.18% 6) Fannie Mae (FNM): 161.48% 7) Northwest Air (NWA): 142.02% 8) Citigroup (C): 125.06% 9) Prudential (PRU): 119.36% 10) Hartford (HIG): 108.52%

MM CANovember 13th, 2008 at 12:32 pm

Level 3 From wikepediaFinancial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability (examples include certain private equity investments, certain residential and commercial mortgage related assets (including loans, securities and derivatives), and long-dated or complex derivatives including certain foreign stock exchanges, foreign options and long dated options on gas and power). Level 3 assets trade infrequently, as a result there are not many reliable market prices for them. Valuations of these assets are typically based on management assumptions or expectations.

MM CANovember 13th, 2008 at 12:26 pm

Level 2 Assets Ranked by Dollar Amount 1) Citigroup (C) $1.15 trillion 2) J.P. Morgan (JPM) $1.09 trillion 3) Merrill Lynch (MER) $1.02 trillion 4) Back of America (BAC) $781 billion 5) Goldman Sachs (GS) $620 billion 6) Bear Stearns (BSC) $332 billion 7) Fannie Mae (FNM) $321 billion 8) Morgan Stanley (MS) $304 billion 9) Prudential (PRU) $276 billion 10) Lehman Brothers (LEH) $200 billion Level 2 Assets Ranked by Ratio to Total Shareholder Equity: 1) Merrill Lynch 28x 2) Bear Stearns 28x 3) Goldman Sachs 12x 4) Prudential 12x 5) Amerprise Financial (AMP) 9x 6) Citigroup 9x 7) American Electric Power (AEP) 9x 8) Genworth Financial (GNW) 9x 9) Hartford Insurance (HIG) 9x 10) Lehman Brothers 9x 11) Suntrust (STI) 8.7x 12) J.P.Morgan 8.7x 13) Anadarko Petroleum (APC) 8.7x 14) Travelers (TRV) 8.5x 15) Loews (LTR) 8.5x

MM CANovember 13th, 2008 at 12:34 pm

From wikinvestLevel 2Financial assets and liabilities whose values are based on quoted prices in inactive markets, or whose values are based on models – but the inputs to those models are observable either directly or indirectly for substantially the full term of the asset or liability. Level 2 inputs include the following: a) Quoted prices for similar assets or liabilities in active markets (for example, restricted stock); b) Quoted prices for identical or similar assets or liabilities in non-active markets (examples include corporate and municipal bonds, which trade infrequently); c) Pricing models whose inputs are observable for substantially the full term of the asset or liability (examples include most over-the-counter derivatives, including interest rate and currency swaps); and d) Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the asset or liability (examples include certain residential and commercial mortgage related assets, including loans, securities and derivatives).Level 1Financial assets and liabilities whose values are based on unadjusted, quoted prices for identical assets or liabilities in an active market (examples include active exchange-traded equity securities, listed derivatives, most U.S. Government and agency securities, and certain other sovereign government obligations). If you can look up an up-to-date price on a major exchange it’s a level 1 asset.

JohnRyskampNovember 13th, 2008 at 1:03 pm

Look at this ridiculous number!! Silver should be at 21 cents.Dec. silver drops 7.2% to close at $8.80/oz on Nymex

SunNovember 13th, 2008 at 1:41 pm

There isn’t going to be a complete collapse of the economy. Things are bad now and will stay bad, but it will be worked out, it will take some time and some good management, but it will be OK in the end

subgeniusNovember 13th, 2008 at 1:46 pm

….Of course there will be a complete collapse of the economy.The economic model is unsustainable (just look at global resource use vs. global resource availability), which by definition means it will fail at some point.The only question is when.

SunNovember 13th, 2008 at 1:57 pm

Come on, tons of these were minted in colorado and shipped to china since 2007 and no one else has any evidence. This is bs, the guy has some fuzzy token coin you can’t see in the video.

guestNovember 13th, 2008 at 2:09 pm

Heard they are going to confiscate tin foil to make the coins. Now how can we protect ourselves from UFO and CIA beaming messages into our head.

GuestNovember 13th, 2008 at 2:13 pm

there is no way this will happen simply because it would require a change of the US Constitution and that is a very difficult thing to do; not kidding…

GuestNovember 13th, 2008 at 1:49 pm

This is THE bottom. This was the 5th save at the 850 level since October 10th. The market is now 8% off the lows JUST TODAY! This is the perverbial bell folks…

DRBNovember 13th, 2008 at 1:55 pm

I love it. You will be beaten to a pulp in this market before all is said and done. This? The bottom? That is laughable. There is literally nothing to point to to support this optimism.I will say, however, that if there were ever a day for StocksGoinGreenGuy, this would be it. Where did he run off to? I miss the guy.

GuestNovember 13th, 2008 at 2:03 pm

C’mon, think about it. Five saves at this level in a month and, even with the news and the economy in far worse shape than in 2000-2003, the market has STILL NOT BROKEN THOSE LOWS! That is the bell RING…RING…RING

AfANovember 13th, 2008 at 1:57 pm

Then be prepared for another round of crash.Just when I think reality is starting to sink in, I’m proved wrong. Contrarians will still need to wait.

WiseGuyNovember 13th, 2008 at 3:08 pm

Contrary to who or what?It’s hard to know which way is reverse on this market when it’s still in the process of spinning out.

CaponeNovember 13th, 2008 at 3:29 pm

he who has no name, i sort of see this as a wave 4 up within a series of wave 5s. what is your time frame.

GuestNovember 13th, 2008 at 1:54 pm

What do you people think of the liklihood of this scenario for the G20 put forth by Larry Edelson (Weiss) today:It won’t be just the U.S. that devalues its currency. The world is too interconnected. Instead, the world’s leading countries will propose a simultaneous and universal currency devaluation. They cease all gold sales and instead, raise the current official central bank price of gold from its booked value of $42.22 an ounce — to a price that monetizes a large enough portion of the world’s outstanding debts. That way, just like in 1933, the debts become a fraction of re-inflated asset prices (led higher by the gold price). And this time, instead of staying with the dollar as a reserve currency, the G-20 issues three new monetary units of exchange, each with equal reserve status.The three currencies will essentially be a new dollar, new euro, and a new pan-Asian currency. (The Chinese yuan may survive as a fourth currency, but it will be linked to a basket of the three new currencies.)The new fiat monetary units would be worth less than the old ones. For instance, it could take 10 new units of money to buy 1 old dollar or euro.

SunNovember 13th, 2008 at 2:07 pm

Don’t tell me, it’s going to be the AMERO, a mystery coin that represents the consolidated Canada, USA, and Mexico, but is minted in the US and written in English. Not buying it.

JimmyTheBankerNovember 13th, 2008 at 2:26 pm

We are about to bust out above a key two week moving average on the SSO. This thing will explode up when that happens!

GuestNovember 13th, 2008 at 2:26 pm

There’s no such thing as too-big-to-fail. Please goverment throw this rubbish out, the precedents you are laying here are evil in the long-run.

JimmyTheBankerNovember 13th, 2008 at 2:36 pm

We broke that SSO moving average and BOOM! Looks like our bottom caller may be right-volume is huge in here and market internals have improved markedly since the lows this morning.

GuestNovember 13th, 2008 at 2:52 pm

3:10 pm today and in 40 minutes straight up 400 points — Now when have we seen this pattern before in the past four weeks???G20 news?Short Covering?Some other announcement?PPT on steroids?

Facts fo LIfeNovember 13th, 2008 at 3:27 pm

Bond auction debacle. Long T rates higher to attract buyers. Weaker dollar, commodity and health care equity buying. Dollar Death Dance, DDD.

PeterJBNovember 13th, 2008 at 3:00 pm

Speaking of road maps and the same old tricks:From Wayne Madsen”Chinese and Japanese intelligence agencies that look closely at financial malfeasance are alarmed that the Salomon division of Citigroup has managed to take over all of Lehman Brothers’ viable assets, leaving the U.S. bankruptcy court holding the debt of the failed securities firm. Lehman Brothers filed for Chapter 11 bankruptcy on September 15, 2008. Lehman had borrowed billions from two Japanese banks — Nomura and Sumitomo Mitsui — to stay afloat. Our Asian intelligence sources report that the Salomon division of Citigroup engaged in a massive fraud scheme with the connivance of the Treasury Department of Henry Paulson and the Federal Reserve Bank of Ben Shalom Bernanke. “”WMR has also learned that a number of CIA officers are in Beijing to try to prevent a united Asian front against Washington’s and Wall Street’s attempts to call the shots on the global financial crisis. The CIA’s top priority is to ensure that nothing interferes with China’s continued backing of the U.S. dollar.”Moral Hazard – fraud – deception – deceit…The G20 meeting will do nothing except waste public money and take pictures of smiling morons before they steal the silverware (and anything else not bolted to the floor) as souvenirs… as usualHo hum

GuestNovember 13th, 2008 at 3:05 pm

No wonder we rallied!!!4:01 p.m.[KSS] Kohl’s Q3 revenue $3.8 bln vs $3.83 bln4:00 p.m.[KSS] Kohl’s Q3 net income 52c vs 61c

AfANovember 13th, 2008 at 3:18 pm

I think I figured it out all, I mean market psychology.From the opening up until around 2pm, the markets are in a waiting room, if Paulson shows up by then, then the sell off follows, if he doesn’t (like today) a buying panic wave hits the market.

WiseGuyNovember 13th, 2008 at 3:23 pm

Phew! And here you all almost had me convinced that our economy was in trouble!I’m glad that I listened to the markets today. They told me that everything is better, the storm has passed, and brighter days are ahead!Hooray!

GuestNovember 13th, 2008 at 3:33 pm

the acquistors + fee factories up in in canada seem to be singing the same tunes as the u.s.a. and the acronyism whoops i mean acronisms are starting to sound familiar too.

GuestNovember 13th, 2008 at 3:39 pm

Warning, the surgeon general has determined the stock market may cause dizzyness. Do not operate heavy machinery or drive if you are in the market.

GuestNovember 13th, 2008 at 3:48 pm

gaming tax was suppose to pay for better school infrastructure. are they going to take that from the kids and redistribute it to the unemployed momies and daddies?

CahillNovember 13th, 2008 at 3:51 pm

I do seriously suspect that the drive up in the market are the masses with a false hope/belief that the G20 will solve all the problems and they are trying to get in on the floor. I myself will liquidate all that can tomorrow. I suspect next week will be incredibly bad.

MNmomNovember 13th, 2008 at 4:07 pm

Wow. I can’t believe it.Dow – 552.59 (+6.67%)Nasdaq – 97.49 (+6.50%)S and P – 58.99 (+6.92%)What the hell happened? What news (if any) sparked a rally?I left the house at lunch and the market was down.There is absolutely no reason for this.BTW, did anyone listen on Bloomberg TV to the live interview with Hank Paulson?What a moron.

Alessandro - http://castellidicarte.blogspot.com/November 13th, 2008 at 4:40 pm

Looked like a successful retest of the lows. Lots of technical oriented people got in at once. This may run for a while or break down pretty fast. Toss your coin.

Alessandro - http://castellidicarte.blogspot.com/November 13th, 2008 at 4:45 pm

BTW: 97 ES points intra-day reversal, that’s a 11,8% swing in exactly three trading hours. So far.Pretty impressive.

Octavio RichettaNovember 13th, 2008 at 5:10 pm

My comment to MA in his blog. I think his post was a very good one!MA hope this is the kind of post you are looking for…Question #3 If a mirror reverses your right from your left and your left from your right, why doesn’t it also reverse up and down?A lens reverses the image on the other side of the lens left and right AND up and down because the light changes direction as it passes through the lens. A mirror actually does not reverse anything just reflects the light. Whereas our definitions of up and down are absolute, the definition of left and right depends on the direction we are facing. Your right side seems to be in the left side “inside” the mirror because you mentally are positioning yourself inside the mirror taking a mental 180o turn which is impossible because you will never be inside a mirror:-) But wait! what happens if you place the mirror in the ceiling and then look up?:-)Where is the money going?Certainly the flow towards banks holding mortgages will be lower than anticipated and banks in the business of selling cc debt such as amex will get more money than anticipated due to Hanks sudden change in strategy.BTW, Hanks 700 billion ripoff of the Amerikan public (700 truckloads of gold carrying 40.5 metric tons of gold each) belongs to the guinness records as the greatest heist in the history of mankind! Hanky is a clever guy! He made an excellent “chess” move:He knew the US economy would go down the drain with or without the 700 billion so congress only had one way out: approve the plan BEFORE the election.Since the economy would go down the drain with or without the 700 billion, if congress didn’t approve the 700 billion, in the future and with the benefit of knowing what happened, people could say it was their fault the economy went down the tubes as the 700 billion might have saved it or at the very least soften the recession (error of omission). However, by aproving the plan they can always say they tried their best and that it would have been worse with the plan.So hanky got what he wanted: a big wad of cash BEFORE the election, which as you all can see, he is “wasting” freely among his friends. he only has until January to waste it all so he is devising the fastest ways to give it away to his friends. The mortgage buy back stuff would have taken too long as the toxic stuff is impossible to price.A very reasonable 1% commission easily makes Hank a billionaire if he is not one already:-)Don’t get fooled by the Stuttering, Hank is smarter than all of us put together!

ORNovember 13th, 2008 at 5:17 pm

Hank may not literally get 1% of the money but it buys him influence which is worth $$$$. Corruption in the US is more subtle. In the underdeveloped world, they take the money directly from the treasury. In the US, the politicians are businessmen (think Bush Cheney). They use their political power to move the $$$ towards their businesses (think Halliburton) It is a kind of money laundering that is difficult prosecute in a court of law.

GuestNovember 13th, 2008 at 7:06 pm

Dr RoubiniOn 13 October 2008, the US Fed announced the establishment of unlimited currency swaps with numerous foreign central banks to provide liquidity for US $ in foreign jurisdictions.Ive been following the progress and amounts that have been “swapped” under this program.Ive contacted the US Fed and they informed me that they are accounting for this amount in the Feds weekly H.4.1 reports in the Line Item Titled “Other Federal Reserve Assets”. And confirmed my assertion that this amount has now grown to over $600B, approaching 1/3 of the entire balance sheet of the Fed. in what can be described as an unsecured “loan” to foreign central banks.Are you aware of this?I feel that these Fed actions have not received adequate attention in the media and in political discourse.Resp,

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