The Credit Crisis Financial Stocks Short Journal

"First, the pax economica that preceded the current slump was artificial. Large swaths of the economy had stopped doing anything productive, while the rest of the economy was buoyed by rising home values that allowed for spending on a level that was disconnected from what people were actually bringing in via income. Of course, you know this part of the story, but the key is that this is meaningfully different than the situation heading into previous economic slumps."

Thats the difference between the 30's downturn and this one, a very good chunk of the 30's GDP decline was unneeded and it was induced by the debt deflation that the Fed and the government allowed to occur(which they brought to a halt in the 1933 dollar devaluation), there was an excess shreading of capacity, labor, output due fear and forced liquidations, bankruptcies. Too much capacity was shutdown relative to the population size

In this cycle this is a smaller factor, most mortgage lenders that went out of business went for good, there was no panic there, it was uneconomical for them to continue to operate, same thing with other housing, finance, retail, auto related jobs, output, factories, capacity, etc. Total GDP decline so far has been 4%, most of it was probably deserved, I can hardly accept that there was a excessive correction given the magnitude of the bubbles
 
Hussman cutting back on calls,
http://www.hussmanfunds.com/wmc/wmc090921.htm


Market is overbought, overvalued and overbullish. I will let the trendfollowers keep chasing this market incorrectly thinking their odds are so good despite the historical evidence saying these situations on average dont bring good returns. They might very well get lucky again and catch a run to 1120 yet I wont laydown my discipline and jump on the largest low volume squeeze on record

http://www.hussmanfunds.com/rsi/PhoenixVolume.htm
 
If Grant is so bullish on GDP what on earth will be the GDP component that will boom so much?
Both consumer spending and capital spending are likely to remain weak
http://www.calculatedriskblog.com/2009/09/capital-spending-and-consumer-spending.html

That leaves trade and government spending. Government spending will remain the strong sector but that is hardly the kind of enviroment that Fed will raise rates. When GDP growth is depending on stuff like cash for clunkers and giving away $8k for home buyers you know the underlying economy is quite weak
 
"By rallying, equities and corporate bonds not only anticipate recovery, but they also help to bring it to fruition. By opening their arms wide to such previously unfinanceable businesses as AMR Corp., parent of American Airlines, and Delta Air Lines Inc., the newly confident credit markets are implementing their own stimulus program. "Reflexivity" is the three-dollar word coined by the speculator George Soros to describe the dual effect of market oscillations. Not only does the rise and fall of the averages reflect economic reality, but it also changes it. One year ago, the Wall Street liquidation stopped world commerce in its tracks. Today's bull markets are helping to revive it." - Grant

I addressed this a while back. There is no doubt this is true, indeed it was my major mistake in 2009. I couldn't possibly see how the crisis of confidence would end without excellent government policy which was not happening(zombie banks and all). I couldn't antecipate an immaculate recovery of confidence so I overstayed in the US depression trade.

This was a good lesson, it seems that you cant depress human optimism for too long, its like a rubberband that will eventually snap back and risk taking over even if everybody is on the verge of precipice. The irony is that when everybody does it the precipice dissapears. The stupidity of CNBC being optimists and putting a positive spin on everything is the core of what makes capitalism work and crisis end, so they dont deserve much criticism

But this only goes so far, the Rogoff sample probably included a number of immaculate recoveries of confidence, that didnt prevent the average time for the equity, housing, labor market to recover to be quite long and the corrections quite deep

Furthermore Soros is on the record calling for a inverse square root shaped recovery, saying growth will be weak
We wont be lying our way into a 90's boom
 
Roubini says what ended the crisis of confidence was the policymakers. The problem is most programs had been announced for months before risk assets bottomed. TALF, no big bank will fail, zero rates, CP liquidity facility, etc were 2008 stories, that didnt prevent markets from keep freefalling, thats why I call this an immaculate recovery even though the government programs certaintly contributed. Even the 'we wont nationalize banks' prevented markets from more declines

Back in early Mar the confidence rubberband decided to snapback for whatever(random) reason then it just kept going using whatever excuse(good or bad) avaliable, and the government provided a ton(good or bad), then the rise in risk assets feed through the data(like consumer confidence, leading indicators etc) and it just fueled on itself
 
Looks like the blogs zero hedge and across the curve are waking up to the Geithner QE move that is occuring.
It took these guys almost a week to report on this, the guy from across the curve is a very good bond market observer and it took a tip from a conspiracy theorist blog for him to find out(and guess what, I shot tyler an email handing out that the treasury move was more QE in disguise in the day of the announcement)

Thats why I feel like I got an edge reading the fed and can afford to make a big bet, the market didnt think that announcement was a big deal, nor did most people but it probably shows that Bernanke is still quite dovish as he probably spoke with Geithner about the consequences of the move. This kind of public information is not usually priced by the markets regardless of what the Economics department at Yale might say

Is Jim Grant aware of what that announcement meant?Does he has any idea of what the conversation likely was like between Geithner and Bernanke about shutting down the SFP?Bernanke gave an ok to pump $200b more in QE and yet Grant is probably crying about moral hazzard and inflation, as if that has ever made anyone any money
 
The idea that the SFP was shutdown because of JUST the debt ceilling issues seems ridiculous. Congress votes to increase the ceilling A LOT, there is simply no reason to expect they would vote no, so asking for a raise would work just as it did every single time ever since the United States has had marketable debt issues(going back centuries)

Furthermore the program was created because of the Fed, the Fed asked Paulson to create this in order to prevent the Fed Funds from going to 0% back when it was 2% and above. For the Treasury(now run by an ex FOMC voter) to shut the program down without consulting with the fed(in the middle of all this exit strategy craze), flooding banks with 25% more monetary base than that starting monatery base(pre-crisis) was it just seems a absurd proposition.
Bernanke said in the WSJ that this program will be a part of the exit strategy, clearly the guy is not thinking much about exits as he agreed to extend the UST purchase by $200b indirectly by giving his Tres pal an ok and close down the SFP

If the Fed were to announce more UST purchases tomorrow, bonds would soar, yet thats effectively what Bernanke did by agreeing to shutdown the program
 
"Per capita real income in 1933 was almost the same as in the depression year of 1908, a quarter of a century earlier. Four years of contractions had temporarily erased the gains of two decades, not, of course, by erasing the gains of technology but by idling men and machines" - A Monetary History of the US

This time this seems to be a much smaller factor, that V shaped GDP recovery from 1933 was almost certaintly helped by the fact that lots of 'idling of men and machines' should never have occured, so tons of that growth was low hanging fruit. This time around two big bubbles burst and it lead to a 4% decline in GDP, then guys like Grant want to suggest there was overshreading of capacity, please
 
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