Bear Market

Cohen & Steers Funds Merge

June 30, 2009 by · Leave a Comment 

Two odd press releases after the close today, both pertaining to our favorite REIT focused fund. According to the first, Cohen & Steers Advantage Income Realty Fund, Inc. (“RLF“), Cohen & Steers Worldwide Realty Income Fund, Inc. (“RWF”), Cohen and Steers Premium Income Realty Fund, Inc. (“RPF”) and Cohen & Steers Quality Income Realty Fund, Inc. (“RQI”) have all merged with and into RQI. It apeears that even despite the magical ramp of all REITs this quarter, those pesky “size matters” issues have reared their ugly heads for the 4 various closed-end funds (all four combined represent less than half a billion in net assets):

In approving the mergers, the directors considered, among other things, each fund’s investment objectives, net asset value and stock price performance, income-generating strategy and expenses, and potential cost savings based on operational efficiencies. The mergers will permit fund shareholders to pursue substantially similar investment objectives in a larger fund that has similar investment policies and anticipated lower expenses.

Zero Hedge is anxiously waiting to see the proxy information that will accompany this transaction in order to get justification for the move.

And in another almost idential press release C&S announce the merging of its REIT and Utility Income Fund with the Cohen & Steers Select Utility Fund. An interesting tidbit from the PR:

The board also has approved removal of UTF’s 20% limit on investing in foreign securities, so that the fund can invest without limit in foreign securities, including securities of companies in emerging market countries, to the extent consistent with the fund’s investment objective and other investment policies. The changes will broaden UTF’s geographic investment universe and open up potentially higher-growth sub-sectors while maintaining similar investment characteristics.

Nothing like having no size limits in a $1.4 billion fund. Visions of Bill Ackman’s PSIV (Target) adventure, and its dramatic returns, start floating. Of course, one needs dry powder for when Merrill strats upgrading and issuing secondaries for the Honduras mall REIT that is ‘almost’ guaranteed to generate 1000% return once the Honduras SEC pulls all borrow.

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De Facto Socialism, 20 Million Vacant Houses and Squattertown, USA

June 30, 2009 by · Leave a Comment 

June 30, 2009

Combine rising foreclosures and unemployment with de facto Federal ownership of millions of homes and you eventually get de facto socialized housing.

Correspondent Richard Metzger and I have been discussing the consequences of rising foreclosures/unemployment and the de facto government ownership of millions of U.S. houses via Fannie Mae/Freddie Mac and direct ownership/control of banks.

There are a lot of threads to pull together on this topic, so please bear with me as we set up the contexts.

The party line on the housing bust is that “the market” will solve everything.Millions of foreclosed homes and apartment buildings will be sold to millions of buyers, who will fix them up and rent them out for tidy profits.

One little problem with that rosy scenario: how can unemployed households pay rent? Like all the other “green shoots” scenarios, this one depends on semi-full employment to pan out. But rather than semi-full employment, we’re facing a tidal wave of job losses which is far from being spent.

Back in January, I posted this analysis which concluded job losses won’t stop at today’s 6.7 million but proceed on to 21 million or even 30 million: The End of (Paying) Work .

Meanwhile, house prices continue their relentless decline. Home Prices Continued Their Decline in March (New York Times)

The S&P/Case-Shiller U.S. National Home Price Index – which covers all nine U.S. census divisions – recorded a 19.1% decline in the 1st quarter of 2009 versus the 1st quarter of 2008, the largest decline in the series’ 21-year history. The 10-City and 20-City Composites recorded annual declines of 18.6% and 18.7%, respectively. These are slight improvements from their returns reported for February. (from the report link in the NY Times story)

Overwhelmed, the banks are now taking a different approach: dumping the properties to clear their books, making them “extremely motivated sellers,” as Mr. Havig calls them.

Dumping properties has worked so far because the quantity dribbled onto the market by lenders has been modest and a pool of anxious-to-catch-the-bottom buyers had gathered. But once this shallow pool has been soaked up, then there is no long-term source of buyers.

Indeed, buyers bidding up prices now will regret their impatience in a year as prices continue their inexorable slide downward.

Richard also sent me this story on shrinking Rust Belt cities bulldozing suburbs:

US cities may have to be bulldozed in order to survive: Dozens of US cities may have entire neighbourhoods bulldozed as part of drastic “shrink to survive” proposals being considered by the Obama administration to tackle economic decline.

While this is a somewhat sensationalist headline, it does raise a number of complex issues.

1. If an old house has been stripped or left vacant for long periods of time in locales with extreme summers and winters, then it may well be not worth fixing up. Its only value will be for scrap lumber, etc.

2. If a house is still habitable, but outside the shrinking radius of city services, does that matter to someone unable to pay rent on a nicer, more central house? Perhaps not.

3. If such free housing (abandoned, foreclosed and unsold, etc.) outside the shrinking city jurisdiction is occupied by informal residents, i.e. squatters, then what authority (if any) is in place?

I have covered many troubling aspects of the housing bubble’s inevitable deflation for years. Just for context, let’s glance as the key points in the following stories:

Can 4% of Homeowners Sink the Entire Market? (February 21, 2007)

If 4% of all American homeowners fall into foreclosure, could that “small number” cause a collapse in the entire housing market? The Pareto principle says: yes.

How 4% of Mortgages Have Brought Down the Entire Market (August 21, 2007)

Back on February 21, 2007, I invoked The Pareto principle to suggest that a mere 4% of U.S. mortgages going bad could bring down the entire U.S. housing and mortgage markets. Seven months later, that call appears to be playing out in spades.

It now seems likely that the 64/4 (80/20) rule is playing out globally–the “limited” subprime meltdown is set to take down the global mortgage market and the trillions in derivatives which have been written on trillions in real estate-based debt.

Will Delinquencies Trigger a New American Revolution? (April 7, 2008)

Two years ago I predicted we’d soon see 5 million foreclosed/distressed homes, 5 million REO/investment/2nd homes languishing on the market and lender/thrift losses of $500 billion. I seem to have undershot the losses…

Interestingly, there are 20 million vacant dwellings in the U.S., of which only 7 million are vacation homes. So much for any perceived “shortage” of housing, of any type.

Feedback Loop of Recession: Housing Bust, Debt and Layoffs (March 10, 2008)

Could 50% of All Homes End Up in Foreclosure? (June 3, 2008)

Just how bad could the housing bust get? How about half of all urban homes being in foreclosure? As stunning or unbelievable as that may sound, it already happened once in the U.S., in the Great Depression, as documented in this report: Lessons from the Great Depression (St. Louis Federal Reserve).

The Great Fall: How Suburbs De-gentrify to Ghettos (November 20, 2007)

A disturbing number of mainstream media stories are documenting the appearance of inner-city plagues such as gangs, drugs and graffiti in what were recently middle-class suburbs.

The Company Store, Debt and Serfdom (October 24, 2008)

Most astonishingly, the Ministry of Propaganda has succeeded in diverting the nation’s attention from the Company store/debt-serf realities to a bogus “debate” over “socialism” and “capitalism.” As Michael Hudson has pointed out, the rentier class which owns the mortgages, loans and credit card debt is not capitalist at all; it is essentially medieval in structure. It takes no risks, creates no innovations, invests no capital in new enterprises or indeed, performs any classical capitalist functions at all.

It simply indebts the serfs, convinces them via doublespeak, propaganda and phony statistics that they are still gloriously “middle class” (that is, obscuring or reifying their true nature as mere miserable debt serfs) and then sits back and collects the interest and profits which the debt serfs will be struggling to pay until their last breath.

This is the real context: a growing army of millions of unemployed, declining housing values and equity, a banking sector bloated with foreclosed/distressed houses which cannot be sold en masse and a Ministry of Propaganda in full-court press on reality.

Unfortunately for Team Propaganda, Reality keeps sneaking through the full-court press and scoring easy dunks. (Shameless basketball analogy.)

Let’s return to the key issue of no jobs=no income=no ability to pay rent or mortgage. The entire U.S. system of unemployment insurance is based on the premise that no recession can last longer than six months–thus unemployment runs out after 26 weeks. Now, as dark storm clouds gather, this is being extended to 39 weeks–nine months. But few observers are pondering what happens next year when that nine months’ of income expires and millions more lose their jobs.

This raises a fundamental question which Richard poses thusly:

With the news of California’s impending financial implosion, and the buzz about cutting off welfare, etc., in the state, I wonder where are they going to expect the tsunami of future homeless families to go? Under a bridge? Their front yards? The curb?

I believe that more than 60% in Los Angeles county are renters. Let’s say for sake of argument that the non-bubble related, non-FIRE related industries can only really sustain 75% of CA workers and that there is 25% who are unable to find work. It’s not that far off from that now. No one believes the official statistics. When the state resources really get run down, will they still evict unemployed people unable to pay their rent or will there be something like “rent vouchers” like they had in the U.K. pre-Thatcher?

We have no history of widespread government housing here unlike many European countries. How will concepts of private property –and laws– have to change to deal with something like “rent vouchers” being injected into the picture? It’s difficult for me to imagine any other practical method of keeping unemployed renters in their homes, but what of the landlord’s obligations to the banks with their mortgages? Does the voucher convert into money at some stage of the game?

This seems to be a pretty toxic string to pull on the already threadbare sweater of the banking system. But for the life of me I cannot think of another way they can handle this situation without riots in the streets.

And suppose if nothing is done and they are allowing evictions and the sheriff’s deputies still carry them out… picture up to 10% of renters and their landlords clogging up the courts system. Imagine the news stories about landlords hiring goons to crack the heads of tenants they want out, etc.

When the landlords start walking away, too, that’s going to get interesting. It may be that “widespread government housing” in the US of A takes the form of abandoned properties being taken over by the nationalized banking system…

It seems inevitable to me that as jobs vanish and incomes drop, rents will decline and vacancies will rise. This will trigger a wave of foreclosures of landlords who bought rental properties based on full occupancy and high (full employment) rents.

As noted here before, that raise all sorts of other “interesting” issues; readers have recalled living in foreclosed apartment buildings during the late 1980s savings & loan bust and not knowing who even owned the building. There was thus no one to ray rent to.

One key feature of the present is completely unprecedented in American history: the Federal government essentially owns millions of dwellings via its takeover of the GSEs Fannie Mae and Freddie Mac. These two lenders were once quasi-governmentally owned; now the quasi has been dropped. Fannie and Freddie own $5 trillion in mortgages; so when the owner walks away or defaults, guess who ends up owning the house?

You and me: the taxpayers.

Add in trillions of dollars of FHA and VA loans which arein default/distressed–also government guaranteed and thus in a sense government-owned–and direct Federal ownership of shares in major banks (which absorbed mortgage lenders like Countrywide, WAMU and Wachovia in Federally overseen shotgun marriages) and you end up with Federal ownership of a significant portion of the entire U.S. mortgage/housing stock. (Fannie and Freddie alone account for half of all outstanding mortgages.)

Back to Richard’s question: so exactly what will the U.S. do with 10 or even 20 million unemployed/low-income households? As noted above, there are already 20 million vacant dwellings. Even bulldozing 2 million of them won’t change the big picture, and it certainly won’t address the core issue of housing and feeding 10 million households with essentially zero prospects for formal employment in an economy burdened by staggering debt, losses and interest payments and a FIRE (finance, real estate and insurance) economy which has imploded and wil never come back.

The Ministry of Propaganda has an ironic task before it: it must continue its relentless cheerleading and its relentless attacks on “socialism” (whatever that means) even as the Federal government must somehow prepare to deal with 10 or 20 million homeless, broke households on a long-term basis.

Even more ironically, that same Federal government now owns, via Federally backed mortgages, some 20 million dwellings. Now put all this together. Either we face up to 20 million households living in Squattertown, U.S.A. or the Federal government faces up to the obligations it now carries as reluctant owner of 20 million foreclosed/distressed/defaulted dwellings.

Is providing low-cost housing for 20 million homeless people “socialist”? If so, bring it on, Ministry of Propaganda be damned.

Our previous lists of hot reading and viewing can be found at Books and Films.

Of Two Minds is now available via Kindle: Of Two Minds blog-Kindle

Of Two Minds reader forum (hosted offsite, reader moderated)

Thank you, David Z. ($25), for your most-welcome generous contribution to this site. I am greatly honored by your support and readership.

Go to my main site at
for the full posts and archives.

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Globalization and China: Neoliberal Capitalism’s Last "Fix"

June 30, 2009 by · Leave a Comment 

June 29, 2009

Rather than being the new leader of the global economy, China is the bag-holder in global Capitalism’s last ‘fix”: exploitation passed off as globalization.

What’s going to pull the global economy out of deep recession? The current story requires only one word: China. China’s massive domestic stimulus is going to spark a sustained domestic demand for Chinese-made goods, lessening China’s dependency on exports. Further good news: China’s domestic growth will spur demand for commodities and grains, driving prices much higher.

Before we accept this account, perhaps we should step back and look at the larger context of globalization, in which China is only one part. From at least one perspective, the opening of China was simply part of neoliberal Capitalism’s last “fix” of a structurally failing system.

From this point of view, China’s productive output (largely foreign-owned and controlled, mind you) enabled vast profits to be reaped by global capital even as it opened new markets for advanced economies like Japan and Germany which had literally run out of new markets to exploit for machinery, toolmaking equipment, etc.

More cynically, China offered a low-cost was to evade the West’s stringent environmental regulations.

From this point of view, China is not the world-beating leader of the global economy: it is the bag-holder: the last big market ruthlessly exploited and the one which will now be left behind as global capital exists, leaving China to deal with the social rubble and dire ecological consequences of rapid, unconstrained industrialization.

This is a contrarian view–did you expect anything else?–but read on for a longer-term perspective on “the China Miracle.” (I know this is heavy lifting, but stick with me for at least a few more paragraphs–CHS.)

One more point to consider before we begin: the history of global trade stretches back thousands of years because it was mutually profitable to both ends of the trade. Globalization proports to be a continuation of such mutually beneficial exchange, but this is only a simulacrum: the reality is that much of globalization is not mutually beneficial exchange of goods but exploitation on the industrial grab-and-run or Plantation models.

In essence, globalization was neoliberal Capitalism’s attempt to save itself from the endgame of advanced capitalism foreseen by Marx: overcapacity which leads to a collapse in profits and thus a decline in capital and the overall economy.

Marx’s insight was straightforward: the dynamic of capitalism is for production to rise to meet demand–and then keep rising. As demand is sated, capacity continues to grow because Capital is like a shark–it must move forward or it dies, and it moves toward what was immensely profitable in the recent past.

This is how we get overbuilding of office and retail space: as demand (and profits) soar, then everyone with capital rushes in to enjoy the profit spree. But ironically, this massive rush to the most profitable return guarantees overbuilding and overcapacity.

As Marx noted, supply soon overshoots demand and sales plummet, wiping out profits. The end result is a move to monopoly capital, in which a handful of the strongest players squeeze out or buy out all the weaker players who fold as the retrun on capital goes negative (losses). The last players standing then consolidate and shutter most of the capacity, setting up a monopoply which then lowers supply below demand to maintain outsized profits.

All the workers laid off as capacity is shuttered no longer have income so they stop spending, which lowers demand even further. This cycle of boom and bust was inherent to Capitalism and Marx expected them to steadily become ever more extreme.

But capitalism “solved” this cycle of overcapacity and crashing demand/income/profits by turning to new overseas markets. Those with a military-backed Empire (for instance, Great Britain) could simply force new markets for domestic goods into existence overseas: by requiring consumers in India to buy cloth manufactured in England, for instance.

In other cases, advanced capitalist states opened new markets by forcing less developed economies to “offer” their low-cost manufactured goods, which quickly took market share from the more informally produced local goods.

The heyday of colonialism was driven by a simple “virtuous cycle” (virtuous for the advanced economy, not for the subjegated colony) in which the colony was forced to ship its raw materials to the colonial power at low cost while at the same time it was forced to pay a premium for the advanced economy’s output/surplus goods.

Since the colonial power’s domestic workforce benefitted immensely from this “global trade” (low commodity prices thanks to the exploited colonies and plentiful jobs to make the goods forced onto the colonies) then the Colonial Power’s Elites received great political suport for the their one-sided “globalization” policies.

Apologists are quick to point out the supposedly stupendous benefits of this globalization for the “natives”: high-quality advanced goods and paying work in an economy with little formal employment. Yet the reality is not so happy-happy: only economies with locally owned productive capacity such as Japan and Korea become wealthy economies. Those former colonies where foreign capital dominates the productive capacity and commodity extraction are in essence still exploited colonies.

Government ownership is also no panacea. When less-developed economies’ primary assets (including commodities like oil) are owned and operated by the government, then the nation actually becomes poorer, not wealthier, due to the perverse dynamic of the State (government) and capital.

As profits roll in, the State, unlike private capital, defers investment in favor of political patronage and the spoils of “leadership.” The incentives to politicians and the State’s technocrat managers is thus to eat their seed corn whenever possible, where private capital understands that surplus capital must be invested or deployed in search of high returns lest it dwindle to zero as all profits are extracted and spent.

This mechanism is called the paradox of plenty in which resource-rich nations such as Venzuela and Argentina grow progressively more impoverished under State control of the nation’s assets.

A corollary of this mechanism is the impoverishment of oil-exporting nations who find redistributing the wealth created by fossil fuels much easier than creating a productive labor force and infrastructure. Thus as the income from oil gyrates (and as oil inevitably enters the depletion phase) then the nation has no cultural or economic Plan B to generate national income and wealth.

With these mechanisms in mind, we can see that the advanced economies have attempted to save Capitalism by colonizing China for production and their own domestic populations for forced consumption.

Of the many misconceptions about China’s spectacular economic growth, perhaps none is more misleading than the assumption that the capital and surplus profits being made in China will stay in China. Despite the much-touted public ownership of joint-venture companies, much of the profitable production in China is owned by non-PRC (People’s Republic of China) companies based in Taiwan, Japan, Korea and the West.

From a more clear-eyed perspective, China has been colonized by advanced economies to lower the cost of production and to establish a dumping ground for environmentally unsound production which their domestic citizenry will no longer tolerate. As with all colonies, the profits are extracted and sent elsewhere while apologists are hired to tout the glories of employment for China’s teeming millions.

Until, of course, Marx’s overcapacity cycle kicks in. Now that China’s stupendous production capacity exceeds the potential demand of the entire world, including its own mostly impoverished domestic populace, then capital is fleeing China in its usual pursuit of higher returns, leaving behind tens of millions of unemployed workers and a toxic landscape.

The Chinese State is now attempting to counter this cycle by spending its own capital on stimulus, but State spending is not a replacement for capital or organic demand. Even worse, the Chinese State saddled its own banks with hundreds of billions of dollars in uncollectible debt in a vain attempt to prop up thousands of State-owned enterprises which racked up gigantic losses even during the boom.

The Chinese State attempted to staunch this open wound by closing thousands of its factories but the uncollectible debts remain, buried by accounting tricks within the books of its four major banks and government finance ministries.

The bloom is off the rose now that the overcapacity in China is no longer profitable to global capital and in essence the Chinese State is left holding the bag: stupendous losses in its own financial system, horrendously costly environmental damage and an industrial infrastructure which is losing value as capital shifts elsewhere.

Meanwhile, advanced Capitalism expanded due to two key innovations: the colonization of its own domestic consumers and the exponential increase in speculative debt instruments.

The essence of colonization is the forcing opening of new markets for surplus production. Frustrated by the poverty of 80% of the Chinese and Indian populaces–people with almost no surplus income cannot consume much in the way of surplus production–global capitalism turned to its own domestic populaces.

By lowering the cost of money to near-zero and generating a gigantic asset bubble in the one asset every middle class consumer already owned–a house–then global capital in essence colonized its own domestic populaces by opening a heretofore limited market for surplus production: a consumerist blow-off of unprecedented scope fueled by limitless credit and a rising asset base (real estate) inflated by the same limitless credit, all extended by a State propelled by the need for the sort of domestic economic growth which maintains political support for the State’s leadership elites.

Now that game has expired as the advanced-economy consumers finally reached the limits of their ability to service their rapidly expanding debts. Even the U.S. government’s massive meddling and the printing/borrowing of trillions of dollars is not re-inflating the real estate bubble, and thus there is no collateral left to support the limitless credit global capital now requires for growth.

Advanced Capitalism is thus facing a crisis of unprecedented scale and scope: the globalization/colonization “escape” from overcapacity has come to a dead end. While some eternally hopeful capitalists look to the former colonies of Africa as the growth engine for global capitalism, a quick look at the capacity of China and Asia to produce goods quickly reveals that hope as baseless: if we add up the remaining production in the West and developed East Asia with China’s monumental new capacity, we find that the global capacity outstrips all potential demand.

The world could easily ship 20 million new autos a year to Africa, but unfortunately for the advanced capitalist nations, there isn’t enough income in Africa to support 100 million autos and the vast infrastructre they require. The same can be said of the billion impoverished residents of China and India. Global capital would be delighted to sell them all its surplus production but for the sad fact they have no money or collateral on which to base consumer borrowing.

Now that the global real estate bubble has burst, global capital is facing a real dilemma: it has colonized and exploited virtually every populace available, and there is no one left to exploit. Their lackeys in the governments have eliminated moral hazard (that is, go ahead and speculate wildly, we’ll save you all regardless of risk or the size of your losses) and expanded credit exponentially, but never-ending exponential growth is simply not possible.

And so now with the destruction of the bogus real estate bubble and speculative “wealth,” global capital has screeched to a halt at the edge of an abyss it has avoided for a hundred years: finally, there is no place left to sell overproduction, and the domestic populaces it depends on for political support are restive as they sense the ground beneath their “prosperity” has fallen away.

Thus global capital is desperately demanding the State print/borrow trillions of dollars in a futile effort to either inflate new bubbles and thus create new markets. The reinflation will fail, even as they push governments into insolvency and fail to save neoliberal capitalism.

Globalization also has a host of other pernicious features.

1. Concentration of resources and political power. Global capital, armed with virtually unlimited access to capital via the capital markets and various exotic instruments such as derivatives, can always outbid local owners/capitalists for resources. Once the forest, oil field, etc. is owned (or joint-ventured with local crony capitalists or Oligarch families) then it is promptly stripped/exploited/depleted.

2. No accountability for enviromental damage. Any environmental damage that results is of no consequence because the local political Elite can be bought for relatively modest sums. There is no profit in cleaning up the site and so to do so would be “irrational” in a rational-market metric.

Perhaps this distance from the environmental consequences of resource/wealth extraction is globalization’s most pernicious feature. Mine owners never live near the tailings, and the coal plant’s owners never live downwind of the sooty plume, either.

The more distant the owner, the less accountable they are for local consequences.

In today’s Internet-savvy world, global capital places some modest value on corporate image, and thus some sort of simulacrum of environmental concern is made and then hyped via company propaganda. In a handful of cases, wise stewardships is not just a propaganda talking point; but the circumstances behind these exceptions are not easily codified.

3. Redistribution of income to capital from labor or local ownership is “necessary” to encourage “investment.” Even in Empire States like the U.S., foreign capital is given numerous tax loopholes and other redirections of income to capital. This is always explained as necessary to encourage “investment.”

But this greater income did not appear out of thin air; it was redistributed from labor and local owners via tax loopholes and credits. But since global capital is driven to seek the highest returns possible, the income exracted from Locale A is rarely reinvested in Locale A. This justification for the income redistribution–to encourage “investment”–is thus a cover for resource/profit extraction.

In the U.S., global companies like General Motors have received taxpayer bailouts in the tens of billions, supposedly to keep their production and workforce in the U.S., when the demand of global capital for higher returns forces the company to expand in Brazil at the expense of domestic U.S. jobs.

In one sense, the company has no choice. It must deploy its remaining capital at the highest return or simply close down. In the Chinese model the State owns the factories and continues to operate them at a loss. But as China’s own state-owned enterprises show, permanent losses are simply not sustainable, even for the government.

4. As middle class jobs are cut, demand falls, exacerbating overcapacity.Global capital shifts away from high cost production (except where that opportunity is limited by the State), replacing middle class employment in advanced economies with lower-cost labor in less-developed economies.

Ironically, this lowers demand for the global companies’ goods even as their overseas capacity expands. The net result is that financial speculation becomes an increasingly attractive use for capital. Thus selling consumers credit with which to buy cars becomes more profitable than selling them cars. Additional profit is reaped by bundling these consumer loans into packages–securitization–and selling the newly minted securities to credulous imvestors around the world.

Thus speculative leveraged credit and securitization can vastly increase profits even as production falls.

5. As its own income falls, the middle class follows the lead of global capital by increasingly relying on credit-based speculation rather than production for income. No one is more anxious to pursue speculative gains than someone whose income from labor is declining. Thus homeowners or prospective homeowners were delighted to follow global capital’s forays into credit-based real estate speculation.

Unfortunately, speculation is no substitute in the long run for producing actual goods and services, and once the exponential blow-off was reached and the bubble popped, global capital simply sold off (or got bailed out) and moved on, while the middle class speculators were left with staggering losses in real wealth or capital traps (assets declining in value which could not be sold).

6. Due to its global nature, capital is no longer accountable for the consequences of its choices. Here’s how it works: global capital gets huge tax credits (incentives that are basically nothing more than redistribtion of income from labor and local entreprenuers to global capital) for “investing” in the local economy. It them mines the local labor and/or resources of profits until overcapacity or depletion strikes. Then it shutters the factory or mine and move its machinery elsewhere, leaving the local economy a shambles. Next it hypes the need for “investment” elsewhere, moving production to wherever offers the highest tax benefits, the least environmental restrictions and the lowest labor costs. Final step: repeat.

From the point of view of global capital, this is “obviously” the only model which “works.” Local residents, workers and small-scale enterprise owners will disagree once their locale has been stripmined of profits and wealth.

In sum: globalization is a key driver in the end of paying work and the impoverishment of local labor, resources and enterprise via the redistribution of profits and income to global capital.

Our previous lists of hot reading and viewing can be found at Books and Films.

Of Two Minds is now available via Kindle: Of Two Minds blog-Kindle

Thank you, Don E. ($15), for your ongoing film recommendations, wry humor and other generous contributions to this site. I am greatly honored by your support and readership.

Go to my main site at
for the full posts and archives.

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Small Banks Continue to Seek TARP Funding

June 30, 2009 by · Leave a Comment 

While larger banks rush to return bailout money received months ago, smaller banks show continued interest in the Troubled Asset Relief Program, with at least 11 taking a total of $96 million in government assistance in the past few weeks.

Suburban Illinois Bancorp, Inc. received the largest chunk of the recently disbursed funds, getting $15 million from the Treasury Department. The bank has more than $674 million in assets.     

Minnesota-based Duke Financial Group, with assets of $743 million, received $12 million, as did California-based Farmers Enterprises Inc. Farmers has $734 million in total assets.

Other banks receiving money included University Financial Corp. ($11.9 million), M&F Bancorp ($11.7 million), Century Financial Services Corp. ($10 million), RCB Financial Corp. ($8.9 million), Biscayne Bancshares Inc.  ($6.4 million), Merchants and Manufacturers Bank Corp. ($3.5 million), Manhattan Bancshares Inc. ($2.6 million) and NEMO Bancshares Inc. ($2.3 million).

The ongoing interest in TARP funding by small banks stands in sharp contrast to the behavior of most of the large banks that have received the largest amount of bailout assistance. The bigger financial institutions, such as Morgan Stanley and Citigroup Inc., have moved to get out of the program as soon as possible, citing regulatory restrictions on executive pay and dividend payments.

But smaller banks, most of which have lower compensation levels and fewer shareholders, are not as concerned about these regulatory fetters. Instead, they see  TARP as an inexpensive way to raise capital in an uncertain economic environment.

“One of the only other options is to borrow from large banks and, frankly, they’re not in the market to do that,” Steve Anderson, chief executive of River Valley Bancorporation, told the Wall Street Journal last week. River Valley received $15 million in TARP funding.

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Dan Solin: Smart Investor Makeover: Picking Hot Mutual Funds and Other Fables (Video)

June 30, 2009 by · Leave a Comment 

Every day brokerage firms across the country recommend mutual funds to their clients.

Sometimes they make these recommendations based on Morningstar’s much hyped “star” ratings. They may also rely on the past performance of the fund or the fund manager.

It’s all an elaborate con.

One study showed that 5-star Morningstar rated funds actually underperformed the mutual fund averages in ensuing years.

The media reinforces the ability of “experts” to pick superior funds. Forbes has an annual “Honor Roll’ of mutual funds which it touts as being helpful to investors. Vanguard founder, John Bogle, examined the “Honor Roll” picks from 1974 to 1990. He found that “Honor Roll” funds significantly underperformed the markets during the period after their selection. The cumulative returns of the “Honor Roll” funds was 439.7% vs, 633.4% for index fund investors.

In this week’s video, which is entitled “No Stars,” I discuss the data you need to know to make informed decisions about mutual funds.

If I had thought more about the title, I would have called it “No Conscience.”

The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein.

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Financial Commission Unmanned: Both Dems, GOP Have Yet To Nominate A Single Person

June 30, 2009 by · Leave a Comment 

Democratic and Republican leaders have yet to nominate a single person to the high-profile commission aimed at investigating the financial crisis, even though it was signed into law by President Obama more than a month ago.

House and Senate leaders, responsible for naming all 10 members of the panel, say an announcement could come as early as this week so that the panel, with broad subpoena power, can begin looking into the causes of the crisis.

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Gold Breakout Above $1,000 Only a Question of Time

June 30, 2009 by · Leave a Comment 

To borrow a phrase from a recent piece by Martin Armstrong, “it’s just time” for Gold to shine and revert to its role as money. Of course, the powers that be and their minions laugh in contempt at such a concept. Wall Street laughs at the investment that has no growth potential and pays no dividends.

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To Dennis Kneale: You’re An Idiot

June 30, 2009 by · Leave a Comment 

Since Dennis saw fit this evening on CNBC to “go after” bloggers who in turn had gone after him, yet he omitted The Market Ticker, I’ll go ahead and put a full-on dredge out behind my stern and slow to 3kts.

And Dennis, if you would like me on your show, I’ll be happy to appear.  Phone is fine.  And I’m not anonymous, nor do I want to be – CNBC already has has my full bio, my full name, and my CNBC-standard disclosure document back with a digital signature affixed.  You can also “whois” this domain and get my full name and address.  Good enough?  Several employees of NBC Universal are on my forum and a CNBC producer has my direct email address – just ask around and I’m sure you can obtain it, and if you do email me I’ll be happy to call you at your convenience.

OK, now on to the facts – your idiotic and utterly unsupportable “the recession is over” call.

There are two types of recessions, if you happen to know more about economics than you knew about options a year ago, when you were caught asking on the air “what’s the VIX?”

The types of recessions are inventory driven recessions, the most common, and credit driven recessions.

The last material credit driven recession was in the 1930s.  We called the “The Great Depression.”

Inventory-driven recessions are primarily about excessive industrial capacity for demand.  That is, manufacturers and suppliers of services get too bullish about prospects, build too much capacity and inventory, and wind up engaging in a destructive price war in an attempt to “win”.  This drives down profits and ultimately forces the weaker firms out of business, ergo, recession – GDP and employment decline.  Having cleansed itself of the excess, the economy recovers.   The trigger for these recessions is often (but not always) an external shock such as the oil embargo in the 1970s or the collapse of the Internet fraud-and-circuses games in 2000.

The second sort of recession is a credit-driven recession.  Excessive credit creation – that is, loans going too far toward “fog a mirror” qualifications (and in some cases, such as the most recent, actually reaching “fog a mirror”) drives one or more asset bubbles.  These pop when effective interest rates in the economy reach an effective level of zero, usually because the amount of leverage available becomes for all intents and purposes infinite (Bear and Lehman at 30:1, Fannie/Freddie at 80:1, AIG at god-knows-what, and duped “home buyers” buying with zero down for a true infinite leverage ratio.)  This excessive credit creation drives a speculative asset bidding war which in turn causes prices to go sky-high for one or more types of asset.

The latter sort of recession is triggered because the cost of borrowing money is never actually zero, even if people pretend that it might be.  As a consequence the lenders begin to earn a negative spread and lose actual purchasing power.  This is an unsustainable situation because cash flow cannot be fudged nor can anyone sustain a negative cash flow for very long; no matter how much you start with if you spend more than you make eventually you go broke.

Recessions cannot end until the conditions that caused the recession are removed from the economy.  This is elementary logic and obvious to anyone with an IQ larger than their shoe size.

For an inventory recession growth returns when enough capacity is destroyed through layoffs and inventory selloffs to bring capacity and demand back into balance.  Employers then hire new workers and the economy recovers.

For a credit recession, however, there is a much larger problem: The reason real interest rates went negative is that debt has a carrying cost and consumes free cash flow; so long as the debt taken on in the credit binge remains the cash flow impact also remains.

Default and bankruptcy clears excessive credit (debt) from the system – if it is allowed to occur.  But if it is not, then the bad debt remains on the balance sheets somewhere and the cash flow impact remains in the economy.  Employment remains weak, capital spending restart attempts falter as demand fails to return and credit quality continues to remain insufficient to support new credit demand.

The consumer is 70% of our economy, give or take a few points.  The consumer’s “savings rate” (which government blithely declares as income minus spending), which was in fact negative (that is, consumers were spending more than they made through taking on more and more debt), is now solidly positive at 6.9%. 

The impact of this (6.9% X 70%) is an immediately 4.83 decrease in real GDP. Fudge the numbers all you want (and government will), but this is the math, and the math is never, ever wrong.

The truly bad news however is that most of the time savings in fact turns into capital formation – that is, it becomes investment.  But government doesn’t differentiate between actual savings and debt repayment – their formula is simply “income less spending = savings rate.” 

You had one guest on this evening who “got it”, but you wouldn’t let him explain it, so I will.

Consumers are not saving, they are paying down debt in a furious attempt to avoid defaulting on nearly $1 trillion in outstanding credit card balances that have gone from 11% interest to 29.6%, on OptionARMs that are seeing a tripling of payments while the home’s value is underwater and precludes refinance, all while they are being laid off by the hundreds of thousands monthly.

We as a society and government are doing everything in our power to avoid the banks and others having to take their medicine – that is, to allow the excessive debt to be defaulted.  We have in fact shifted more than $2 trillion dollars of actual bad debt onto the Treasury and Federal Reserve rather than allow the market to declare it defaulted and force those who hold too much of it into bankruptcy, and we continue this asinine and exactly backwards program to this very day.

This is an utterly idiotic policy because the conditions that led us into this recession – excessive debt – must be removed, not shifted around and hidden, before the recession can truly end.

Japan tried what we’re doing in the 1990s and failed.  The Nikkei never recovered its former highs, in fact, it never even got close.  Japan’s economy never managed to get materially out of deflation and is now back in it as a direct consequence of their refusal to force the bad debt into the open and default it.

We are going to suffer the precise same fate for the precise same reason unless our government and economic leaders stop hiding the bad paper and force it out into the open were it will default and be removed from the economy.

Your network has fawned all over Bernanke when in fact he is acting exactly backward compared to what must be done – he is hiding bad assets on his balance sheet, allowing banks to hide bad assets on theirs, and refusing to expose the liars, cheats and frauds (along with their phony “assets”) so they will default and clear the system of the bad debt.  He is doing this because he is protecting those who wrote all that bad paper, mathematics be damned, and if it doesn’t stop we will at best play Japan and at worst have a Depression far worse than the 1930s, as our systemic leverage ratios still, to this day, are higher than they ever were in the Great Depression!

This is not about what I believe Dennis, this is about mathematical facts.  Real GDP has taken a 4.83% contraction already from consumers alone – now add into this the pass-through effects on manufacturing and services output from the unemployment and the numbers are even worse.  It matters not what the government cooks up – what matters is what people actually do.

Finally, on your so-called “Golden Cross”; for it to be valid the 200MA and 50MA must be rising.  The 200MA is falling; ergo, it is a false signal.  Go look at some charts; this indicator is no better than a coin toss if the second condition, which you conveniently omitted, is absent.  Better yet, talk to a market technician that knows his butt from a hole in the ground.  I do a nightly technical video available on my forum and pointed this out several days ago.

I will be happy to debate this at your leisure at any time live on the air Dennis, and will tattoo your “Recession Is Over” call on your forehead.  You can also bet that this Ticker will be prominently featured when, not if, you’re proved to be just as ignorant of economics as you were on options hedging strategies and the VIX.

The teleprompter will not save you Dennis.

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Who Are You and What Have You Done With Paul Krugman II

June 30, 2009 by · Leave a Comment 

Robert Waldmann

Paul Krugman thinks that a US politician is excessively opposed to tariffs.

End of days near.

I think the president has this wrong:

President Obama on Sunday praised the energy bill passed by the House late last week as an “extraordinary first step,” but he spoke out against a provision that would impose trade penalties on countries that do not accept limits on global warming pollution.


The truth is that there’s perfectly sound economics behind border adjustments related to cap-and-trade.

Krugman goes on to make a perfectly convincing case (click the link) but would the Krugman of 1992 have discussed this in public with protectionist politicians listening ?

Already Krugman has shocked DeLong by agreeing with Reich.

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Examining The Damage to the NYC-area Economy

June 30, 2009 by · Leave a Comment 

Being a seven-hour drive away, I don’t have as much direct knowledge of the NYC economy as I did a year or so ago. So I have to rely on Different Metrics.

Here is one DrektheUninteresting (see #6) (of Scatterplot and Total Drek fame) will love, when he resurfaces.

For those who want a contemporary view of how bad things have gotten in the U.S. economy in general and NYC, just check out the result of this eBay auction.

The winning bid was $10,250. The last time this item was auctioned, a mere six months ago (though in Los Angeles), it went for $12,000.

And a mere three years ago, the item was sold, in NYC, to two separate bidders (it being relatively non-rival), for $20,000 each.

Forget housing prices. If you want a metric to judge the decline of the NYC-area economy, just consider the decline in bidding even as the value of the underlying has gone up.

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