Bear Market

Robert Reich: GM Bailout A Wasteful Way to Ameliorate Pain

May 31, 2009 by · Leave a Comment 

The last person one might expect to criticize the Obama Administration bailout of GM is a unapologetic liberal like Robert Reich, labor secretary under Clinton. Yet he does precisely that in today’s Financial Times.

And his logic is similar to the arguments made here and elsewhere against the bank rescue operations. Unlike some other commentators, who would be happy to Big Auto fail and devil take the hindmost, Reich believes the social cost would be so great (if nothing else, the whackage to GDP), that means to address the fallout are warranted, But he strongly disagrees with the bailout program, seeing it as wasteful and intellectually dishonest.

Bizarrely, the rescue, by throwing dollars at the problem, somehow looks more surgical and hands-off. Indeed, in the various announcements of the imminent GM bankruptcy filing, the powers that be have gone to some lengths to say they will be a hands off 60% owner. Yet the sort of active measures that Reich calls for, such as retraining programs, extended unemployment (and I would add relocation aid) weirdly raises the specter of “big government” in the public mind more than just writing very large checks. So we’ll go for costly and indirect rather than focused, cheaper, but more moving parts.

From the Financial Times:

As president of General Motors when Eisenhower tapped him to become secretary of defence in 1953, “Engine Charlie” Wilson….asked whether he could make a decision in the interest of the US that was adverse to the interest of GM, he said he could.

Then he reassured them that such a conflict would never arise. “I cannot conceive of one because for years I thought what was good for our country was good for General Motors, and vice versa. Our company is too big. It goes with the welfare of the country.”….

In 1953, GM was the world’s biggest manufacturer…It generated 3 per cent of US gross national product….It was also America’s largest employer, paying its workers solidly middle-class wages with generous benefits.

Today, Wal-Mart is America’s largest employer, Toyota is the world’s largest carmaker and General Motors is expected to file for bankruptcy. And Wilson’s reassuring words in 1953 now have an ironic twist. There will be little difference between what is good for America and for GM because it is soon to be owned by US taxpayers who have forked out more than $60bn (€42bn, £37bn) to buy it.

But why would US taxpayers want to own today’s GM? Surely not because the shares promise a high return when the economy turns up. GM has been on a downward slide for years. In the 1960s, consumer advocate Ralph Nader revealed its cars were unsafe. In the 1970s, Middle East oil producers showed its cars were uneconomic. In the 1980s, Japanese carmakers exposed them as unreliable and costly. Many younger Americans have never bought a GM car and would not think of doing so. Given this record, it seems doubtful that taxpayers will even be repaid our $60bn. But getting repaid cannot be the main goal of the bail-out. Presumably, the reason is to serve some larger public purpose. But the goal is not obvious.

It cannot be to preserve GM jobs, because the US Treasury has signalled GM must slim to get the cash. It plans to shut half-a-dozen factories and sack at least 20,000 more workers. It has already culled its dealership network.

The purpose cannot be to create a new, lean, debt-free company that might one day turn a profit. That is what the private sector is supposed to achieve on its own and what a reorganisation under bankruptcy would do.

Nor is the purpose of the bail-out to create a new generation of fuel-efficient cars. Congress has already given carmakers money to do this. Besides, the Treasury has said it has no interest in being an active investor or telling the industry what cars to make.

The only practical purpose I can imagine for the bail-out is to slow the decline of GM to create enough time for its workers, suppliers, dealers and communities to adjust to its eventual demise. Yet if this is the goal, surely there are better ways to allocate $60bn than to buy GM? The funds would be better spent helping the Midwest diversify away from cars. Cash could be used to retrain car workers, giving them extended unemployment insurance as they retrain.

But US politicians dare not talk openly about industrial adjustment because the public does not want to hear about it. A strong constituency wants to preserve jobs and communities as they are, regardless of the public cost. Another equally powerful group wants to let markets work their will, regardless of the short-term social costs. Polls show most Americans are against bailing out GM, but if their own jobs were at stake I am sure they would have a different view.

So the Obama administration is, in effect, paying $60bn to buy off both constituencies….But it is not telling anyone the complete truth: GM will disappear, eventually. The bail-out is designed to give the economy time to reduce the social costs of the blow.

Behind all of this is a growing public fear, of which GM’s demise is a small but telling part. Half a century ago, the prosperity of America’s middle class was one of democratic capitalism’s greatest triumphs. By the time Wilson left GM, almost half of all US families fell within the middle range of income. Most were headed not by professionals or executives but by skilled and semi-skilled factory workers. Jobs were steady and health benefits secure. Americans were becoming more equal economically.

But starting three decades ago, these trends have been turned upside down. Middle-class jobs that do not need a college degree are disappearing. Job security is all but gone. And the nation is more unequal. GM in its heyday was the model of economic security and widening prosperity. Its decline has mirrored the disappearance of both.

Middle-class taxpayers worry they cannot afford to bail out companies like GM. Yet they worry they cannot afford to lose their jobs. Wilson’s edict, too, has been turned upside down: in many ways, what has been bad for GM has been bad for much of America.

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Stocks Bear Market Rally Consolidating Before the Rally Resumes

May 31, 2009 by · Leave a Comment 

Current Position of the Market

SPX: Long-term trend – Down! The very-long-term cycles have taken over and if they make their lows when expected, the bear market which started in October 2007 should continue until 2012-2014. This would imply that much lower prices lie ahead.
SPX: Intermediate trend – Sideways! The counter-trend rally which started on March 6 is undergoing a consolidation which could last two or three more weeks, after which the bear market rally will continue.


The rally which started on March 6 is turning out to be much stronger than most had expected. Not only did the SPX go up uninterrupted for over two months and 263 points, but we can’t even get a decent correction after all this! Last Friday, the index closed only 11 points from its high and, by closing on its high of the day, looks ready to go higher. Well, don’t get fooled by looks. It’s more than likely that the correction is not over, and the next couple of weeks will be down. After that, the bear market rally will continue and find a more decent top which will bring about a real correction or, to be more exact, will bring about the return of the bear market and a new SPX low.

On Friday, the NDX made a new recovery high, which would also seem to intimate that we are ready to extend the rally. The problem is that the internals were not supportive of the move, and that neither the Russell nor the Value line appear ready to follow. Now, if we should explode upward on Monday morning, I will be ready to change my mind, but until I see some more evidence that we are ready to go forward, I think it’s more probable that we will retrace.

Other signs of market readiness that we look for, such as the sentiment indicator, is still more bearish than bullish, and the daily momentum indicators are not making a convincing “buy” pattern. Conclusion: more consolidation is ahead.

More often than not, lows tend to coincide with an important cycle making its low. There are none directly ahead. Those that could have brought the market down and that were mentioned repeatedly in the past few weeks are now behind us after disappointing the bears, and with the possibility that at least one or two may have inverted. There are only a couple of short-term cycles bottoming in mid-June. They could be the ones that will end this consolidation. Let’s keep June 16 and 17 in mind.

What’s ahead?

Chart Pattern and Momentum

The two brown lines represent a secondary trend channel. The index is consolidating under the top trend line and will probably go through it after the consolidation is over. This will not signal that we are in a new bull market. The primary trend channel is much higher around 1200 and I sincerely doubt that the rally from 667 will continue long enough to come even close to it.

Since I expect Friday’s move to have reached its peak at the close, or early on Monday, I have made certain assumptions about the end of the consolidation which I have noted on the chart. These assumptions would be invalidated if Friday’s move continued and closed higher than 925 on an hourly basis. There are several other factors which could nullify or modify that scenario, even if we found a top at 919.

Both oscillators are close enough to give a buy signal so I think that we won’t have long to wait and should know by Monday’s close whether or not we have a buy signal or if additional consolidation is needed.

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Gold, Silver and Crude Oil On Fire! Breaking Out to New Highs!

May 31, 2009 by · Leave a Comment 

The charts below quickly give you a visual as to where each commodity is trading in relation to intermediate and short term support and resistance levels, chart patterns and trend lines.

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Black Swan Fund Makes a Big Bet on Inflation

May 31, 2009 by · Leave a Comment 

“A hedge fund firm that reaped huge rewards betting against the market last year is about to open a fund premised on another wager: that the massive stimulus efforts of global governments will lead to hyperinflation. The firm, Universa Investments L.P., is known for its ties to gloomy investor Nassim Nicholas Taleb, author of the 2007 bestseller “The Black Swan,” which describes the impact of extreme events on the world and financial markets. ”

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Fortunately Private Debt is Not Inheritable

May 31, 2009 by · Leave a Comment 

Last weekend, we journeyed to Boston to attend a college graduation. Thousands of callow scholars were on display. Each was handed his papers…and then marched out of the hockey stadium. To the tune of ‘Pomp & Circumstance,’ wearing a long, red robe, he entered the outside world solemnly…like a patsy joining a poker game.

So far, not a single major university has asked us to make the commencement address. Nor a minor college. Not even a school of cosmetology or taxidermy. But here at the Daily Reckoning headquarters in London, protected by a broad ocean and a narrow reading of the First Amendment, we will give them – and UK graduates too – advice no one asked for.

“Plastics,” was the advice given to college graduates in Mike Nichols’ ’67 film. But that was when there was still hope for America’s manufacturing sector. Even then, it was too late. The percentage of GDP from the manufacturing sector fell for the next four decades, from over 20% in the last ’60s to barely 12% last year. Better advice would have been ‘derivatives.’ They stank just as bad, but they were much more profitable. While only 8% of GDP, finance accounted for 40% of corporate profits in 2007. And derivatives grew from nothing to a face value of 16 times the GDP of the entire planet.

But your elders are always giving you bum advice.

“You cannot decline the burdens of empire and still expect to share its honors,” said Pericles to the class of 430BC. He lived during a time not unlike your parents’ era in the USA – when Athens was on top of the world. But vanity got the better of him. He launched an attack on Sparta that backfired badly. He soon died of plague and Athens was not only ruined, but enslaved. Athens’ ‘golden age’ turned to lead. Young Athenians should have shrugged off the burden rather than accept it. You should do the same.

When you were born 20-some years ago, the nation’s total debt per person was less than $90,000 – adjusted to ’09 dollars, of course. While that was a lot of money, it was nothing compared to what was coming. Now it’s $186,717 per person – more than twice as much, in real terms. Fortunately, private debt is not inheritable. But it comes to you as a lien against property. Instead of paying off their mortgages and leaving you a house, free and clear, the baby boomer generation spent the ‘equity’ in their houses even faster than they got it. House prices rose. But mortgage debt rose faster. While your grandparents owned 80% of their houses, by 2007, the typical homeowner only really owned 4 rooms of an 8-room house. And then, when house prices fell, so did his remaining equity…to the point where one out of six homeowners in America is now underwater. You could still eventually inherit a house, but you may have to scrape the barnacles off the front porch.

But that’s not even the half of it. While your parents had control of the US government they allowed themselves a little larceny. Add the unfunded retirement and healthcare benefits they voted for themselves to the official national debt, and together they are scheduled to cost your generation 4 times the total annual output of the US. This is over and above the private debt they accumulated.

Some of this debt can be carried. Some will have to paid down. But as it stands, as much as $77 trillion of post-’09 earnings must be stolen from the future in order to pay for the liquor your parents drank…the bombs they dropped on god-forsaken foreigners…and the interest on their debts. So, forget about saving for a European vacation or a house of your own. Even if every penny of your savings – and every other American’s savings – are put to the task you will still be paying for your parents’ expenses all your life.

But wait, there’s more! The burden is getting heavier. Federal budget projections show an additional $7 trillion in deficits over the next 10 years. Described as the cost of fighting recession, the present generation buries its own mistakes under cash that the next generation hasn’t even earned yet. Today’s bankers, businessmen and speculators are being bankrolled by you – tomorrow’s bankers, businessmen and speculators. Today’s homeowners get a helping hand…from whom? Tomorrow’s homeowners – you. Today’s employees get a boost too. Same story. Where do you think the money came from to pay Wall Street bonuses this year? How do you think GM stays in business…and Fannie Mae…and AIG… Who pays those salaries? Who pays to keep troops all over the world and keep old people supplied with new drugs? Who pays for hundreds of billions’ worth of ‘shovel ready’ boondoggles? You will. At least, that’s the plan.

The luck of one generation is the curse of the next. Like Pericles, your parents inherited a dollar; they leave you a peso. They took over the strongest, richest, most competitive nation in the world. And like Pericles they minded everyone’s business but their own. Now, not only does the US owe money all over town, its government puts out trillions more in IOUs every year – each one with your name on it. You’re not even out in the real world yet, and you’re getting the bill for 50 cents of every dollar the feds spend – almost none of it earmarked for you. But that is the thing about the real world your teachers probably forgot to tell you about. It is more unreal and fantastical than anything you studied.

Here’s what’s real: You’ve been dealt a bad hand. From the bottom of the deck…your parents have slipped you some nasty cards. Our advice? Fold ’em. Get up from the table before they clean you out.

Bill Bonner
for The Daily Reckoning Australia

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Feds’ Plan is to Reflate the Economy

May 31, 2009 by · Leave a Comment 

Jobless claims eased for the second week in a row. Hallelujah. The economy is still unloading jobs, but at least its not dumping them like it was earlier in the year. Which leads a number of economists to the old refrain: ‘the worst is behind us.’

Meanwhile, from Japan comes encouraging news. The Nippon economy is increasing its industrial output at the fastest pace in 56 years. And oil is signaling a global rebound, isn’t it?

“I don’t think so,” says MoneyWeek’s editor in Paris. “There is no increase in oil consumption. Instead, consumption is still going down. What we’re seeing is speculation. The central banks are adding to the funds available for speculation. So far, that money isn’t reaching the consumer economy…it’s mostly in the natural resources market betting on inflation.”

Everywhere you look, dear reader, is a war zone. Nothing is safe. The feds’ war against deflation does collateral damage to almost everyone and everything.

But you have to give the feds credit. Raw materials…gold…oil…emerging markets – all have seen big increases. Major stock markets too are showing big gains.

But the feds’ plan is not to reflate the asset bubble, but to reflate the economy. For that, they need rising consumer prices. Consumers need to borrow…and spend. They’ll do so, say economists, when prices rise and their dollars lose value. So far, milk and potatoes aren’t cooperating. The price of milk fell so low that farmers slaughtered their herds. As for potatoes…we don’t know.

In Europe, inflation has disappeared. This is the first time the euro zone has ever had flat and falling prices. In America, too, consumer price inflation is ebbing away.

In other words, the feds may be winning a battle but losing the war!

As usual, there’s a lot of smoke and fog on this battlefield. Consumer confidence is rising…but so is unemployment. The New York Times says US joblessness may soon pass Europe’s habitually-high rates. The Chinese are still buying America’s debt – but only the short-term stuff. America’s biggest industrial company goes broke…the government takes a key role in key industries…but investors buy more stocks!

If you look through your binoculars you will have a hard time figuring out who’s really winning. In the confusion of the battlefield, even a hardened veteran often fails to tell which way the fight is going. In fact, you might see rising stock prices and get the wrong idea…like watching the Yankees get chased back to Washington after the first battle of Bull Run; you might have thought that that was all there was to it. The war was over and the South had won.

Not quite.

Until next time,

Bill Bonner
for The Daily Reckoning Australia

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Jim the Realtor: Check out this Backyard!

May 31, 2009 by · Leave a Comment 

Another video from Jim … words can’t describe this backyard and other, uh, “features” … although I think the “long jump” pit is for horseshoes.

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GM to file Bankruptcy Monday Morning

May 31, 2009 by · Leave a Comment 

From the Detroit News: GM bankruptcy filing expected 6 a.m. Monday (ht jb)

The Obama administration will name a veteran turnaround expert as chief restructuring officer for General Motors Corp., which plans to file for bankruptcy protection about 6 a.m. Monday in New York … Al Koch, a managing director at AlixPartners LLP, will be named chief restructuring officer Monday, a government official familiar with the matter said, and will help to wind down GM’s “bad” assets that it plans to leave behind in bankruptcy.

The WSJ says 8 AM.

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“Is Larry Summers Taking Kickbacks From the Banks He’s Bailing Out?”

May 31, 2009 by · Leave a Comment 

Larry Summers appears to have a less than operational moral compass.

The former Treasury Secretary, now head of the National Economic Council (and presumed Fed chairman if Obama decides against recommending Bernanke for another term) was in the employ of hedge fund DE Shaw to the tune of $5 million for sixteen months while working with actively on Democratic economic policy, with the clear expectation that he would have a policy role. In other words, Summers is already way too cozy with the financial services industry.

And now we have the latest, from Mark Amos (hat tip reader Marshall). I’ve put up some excerpts, and strongly recommend you read the entire piece.

Ames points out that a number of very big Wall Street firms made an unusual investment in a start-up, one Revolution Money, a “PayPal meets Mastercard” in the Steve Case “Revolution” sphere. Weirdly, the company says Summers was on the board, and Summers certainly was talking up to the media, but filings suggest otherwise. But while the exact nature of Summers’ relationship is unclear, he was certainly promoting the venture.

While Summers did terminate his relationship with the Revolution Money before the big players invested, fundraising and getting to closing documents is generally a lengthy process, so it is reasonable to surmise that Summers’ salesmanship and relationship with the company played a meaningful role in these banks’ decision to invest in a company with lousy performance, dubious prospects, and no obvious synergies. Amos notes the investees got off better in the stress tests than their brethren did. That may be happenstance, but it was reported that the stress tests were tougher on loans than on trading portfolios, and the investors in Revolution Money all had big capital markets operations.

The Ames piece is provocative, but it’s certain no explicit payoff was made. But the flip side is it is highly likely the banks invested to curry favor with Summers. Even if the only payoff was privileged access to him, that alone would be troubling,

From Ames:

Is Larry Summers taking kickbacks from the banks he’s bailing out?

Last month, a little-known company where Summers served on the board of directors received a $42 million investment from a group of investors, including three banks that Summers, Obama’s effective “economy czar,” has been doling out billions in bailout money to: Goldman Sachs, Citigroup, and Morgan Stanley. The banks invested into the small startup company, Revolution Money, right at the time when Summers was administering the “stress test” to these same banks.

A month after they invested in Summers’ former company, all three banks came out of the stress test much better than anyone expected — thanks to the fact that the banks themselves were allowed to help decide how bad their problems were (Citigroup “negotiated” down its financial hole from $35 billion to $5.5 billion.)

The fact that the banks invested in the company just a few months after Summers resigned suggests the appearance of corruption, because it suggests to other firms that if you hire Larry Summers onto your board, large banks will want to invest as a favor to a politically-connected director…

According to filings obtained for this story, Summers first joined the board of directors of Revolution Money back in 2006 (when it was called “GratisCard…Revolution Money/GratisCard was a startup headed by former AOL chief Steve Case. Revolution Money billed itself as the Next Big Thing in online payment,…

In September 2007, Revolution Money announced that it had raised $50 million from a group of investors including Citigroup, Morgan Stanley and Deutsche Bank. Some found the investment strange even then, because normally big banks don’t get involved in seeding small startups — that’s the domain of venture capitalists, not mega-banks. Especially not in September, 2007, when these same megabanks were Chernobyling their way into full-fledged balance-sheet meltdown.

What seems clear is that at least part of Revolution Money’s success in raising funds is due to their star-studded board of directors — which included not only Larry Summers, but also the notorious Frank Raines, the former Fannie Mae chief whom Time Magazine named to its “25 People To Blame For The Financial Crisis” list. Raines is still a board member.

Over the next year and a half, Revolution Money didn’t quite live up to its promise of competing with PayPal or Visa/Mastercard. At least some of this could be attributed to the difficulty of starting up an online credit card company in the middle of a triple-cluster credit crunch, banking crisis and recession. But there is also evidence that the company wasn’t run well. Another one of Steve Case’s “Revolution” brand startups, “Revolution Health,” (which also features a star-studded board of directors including Carly Fiorina, Colin Powell, and several future-Obama Administration officials) essentially folded last autumn when it was sold to Everyday Health last September and merged into that company’s operations.

In spite of all of this, on April 6, 2009, Revolution Money announced the happy news: it had just successfully raised $42 million dollars in the most difficult market since the 1930s. The investors? Goldman Sachs, Citigroup and Morgan Stanley — bankrupt institutions that Larry Summers was transferring billions in bailout funds to.

At the very same time that these three megabanks were pouring millions into Summers’ former company, Obama’s economic team, starring Larry Summers, was subjecting these same banks to a “stress test” to decide how deep in shit these same banks really were. The banks wanted the government to fudge the results for obvious reasons — who wants the world to know how deep of a hole you’ve dug for yourself?

When the stress test results were finally released, the banks all came out with glowing reports that beat expectations and caused plenty of skepticism.

In an interview for this article, William Black, a former bank regulator who exposed the $160 billion Savings & Loan scandal and its ties to powerful U.S. Senators, remarked,“Summers wasn’t hired [by Revolution Money] for his expertise because he doesn’t have relevant expertise in this kind of credit card operation.”

“He’s not a techie. He doesn’t have business expertise,” Black said. “So this is solely someone hired for the name and contacts because he’s politically active and politically connected. And that’s made all the more clear by the fact that Frank Raines was put on the board at a time when he was pushed out in disgrace from Fannie Mae. Why? Because of his political connections.”

And it worked, as the recent investment shows.

“That’s the pattern of this entity,” said Black, “Which hasn’t been doing well financially and desperately needs to get money from others, and has been able to get money from banks at a time when [these same banks] largely stopped lending to productive enterprises. But with this politically-connected entity [Revolution Money], they’re happy to dump money.”

According to a company spokesperson, Summers resigned from the board of directors at Revolution Money this January, just three months before the banks invested. On one of Revolution Money’s main websites, Revolution Money Exchange, you could still see Summers’ name still listed as a director when this story was filed…

Whatever the case, Summers was pushing Revolution Money as recently as last September, in an interview with Portfolio magazine:

“I’ve enjoyed being involved with a number of smaller companies such as the Revolution Money venture….”..

His involvement wasn’t just incidental—if you look at the press releases, Larry Summers’ name is always touted as part of its selling point — one press release in 2007 refers to Summers as “Legendary.”

Moreover, Summers’ longtime chief of staff, Marne Levine, who also served as Summers’ chief of staff when he was in Treasury under Clinton and again at Harvard, joined Summers at Revolution Money, serving as “Director of Product Management.”

Black pointed out another sleazy aspect of Revolution Money’s pitch: it proudly boasted in late 2007 that it would make it easier than ever for people with low credit ratings to find access to lines of credit. In other words, Revolution Money billed itself as the ultimate ghetto loan shark.

According to a 2007 press release, the same one boasting of “Legendary” Larry Summers, “Unlike most bank credit card issuers who are limited to a narrow scope of credit approval guidelines specific to their bank, RevolutionCard seamlessly utilizes multiple partners to achieve unparalleled consumer approval rates.”

Nineteen months later, Larry Summers, now in control of the economy, told Meet The Press, “We need to do things to stop the marketing of credit in ways that addicts people to it and so that our households are again savings, and families are again preparing to send their kids to college, for their retirement and so forth.”

So once again, Larry Summers creates a problem that the rich profit from, then is put in charge of “fixing” it after vulnerable Americans have been picked clean.

Whether or not the three bailed-out banks’ investment in Revolution Money last month represents some kind of bribe or kickback or even the appearance of corruption is almost secondary, because the shameless cronyism is the problem, and this is the reason why America is in the horrible mess today.

“Polite society was supposed to impose social pressures to make sure this wasn’t tolerated,” Black said. “Like the old phrase about hogs being slaughtered. But now the hogs get even wealthier, even fatter.”

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Guest Post: Why is Small Beautiful?

May 31, 2009 by · Leave a Comment 

Please read my latest comment:

Why is Small Beautiful?

And please post comments here on NC.

Kind regards,

Leo Kolivakis

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