Financial topics

[Higgenbotham]

Question: Should the Fed have raised interest rates sooner to defuse the late 1990s stock bubble? What has the Fed learned about bubbles since then?

Who could have looked at the Nasdaq in 1999 and not had some concern that these prices had reached bubble levels? Shouldn't we have tightened monetary policy to address it? I think what most people would have thought inside the Fed then, and I wasn't but I agreed with it, was we have an economy that in terms of the goals Congress assigned us (jobs, price stability), it is doing just fine. It does not need a tighter monetary policy and if we tighten monetary policy to bring stock prices down, we are probably gonna have to tighten a lot. We are gonna harm our performance on all the things Congress put on our scorecard.

This has been a devastating financial crisis. It is hard to pick up the pieces. We have intervened very aggressively and stopped what could have been an utter financial meltdown. Most members of the Fed anticipate that we will have high unemployment for a number of years despite our best efforts. We have pushed close to the limits to what we can do to address that.

http://www.safehaven.com/article/33167/ ... ew-part-ii

"We have an economy that in terms of the goals Congress assigned us (jobs, price stability), it is doing just fine."

How were the producers doing?

"This has been a devastating financial crisis. It is hard to pick up the pieces. We have intervened very aggressively and stopped what could have been an utter financial meltdown."

I think this aggressive intervention to stop a financial meltdown is causing a production meltdown.

[Higgenbotham]

The Bank of England released a report this summer stating that 40 percent of the stock-market gains from the BOE's quantitative easing program had gone to the wealthiest 5 percent of households.

Economist Anthony Randazzo of the Reason Foundation wrote that QE "is fundamentally a regressive redistribution program that has been boosting wealth for those already engaged in the financial sector or those who already own homes, but passing little along to the rest of the economy. It is a primary driver of income inequality."

http://www.cnbc.com/id/100589198

[Higgenbotham]

A new study sponsored by Nasa's Goddard Space Flight Center has
highlighted the prospect that global industrial civilisation could
collapse in coming decades due to unsustainable resource exploitation
and increasingly unequal wealth distribution.

These factors can lead to collapse when they converge to generate two
crucial social features: "the stretching of resources due to the
strain placed on the ecological carrying capacity"; and "the economic
stratification of society into Elites [rich] and Masses (or
"Commoners") [poor]" These social phenomena have played "a central
role in the character or in the process of the collapse," in all such
cases over "the last five thousand years."

Circling back around, the promotion of the two conditions that lead to a collapse and a new dark age is official Federal Reserve policy. The Federal Reserve is making it very difficult to produce resources like oil at a profit while at the same time creating a small group of elites who don't need to produce anything to attain the highest level of income and wealth.

[Higgenbotham]

The other night I was studying late for a midterm exam — I am a grad student in computer science at Columbia University — with several friends who will be working at Dropbox and Facebook this summer. Around 9 o’clock, we ordered Chinese food on Seamless. I paid one of the guys back with the digital wallet Venmo. This summer in San Francisco, I’m living with three roommates, also students doing tech internships in the valley, two at Google and one at the news aggregator Flipboard. For better or worse, these are the kinds of companies that seem to be winning the recruiting race, and if the traditional lament at Ivy League schools has been that the best talent goes to Wall Street, a newer one is taking shape: Why do these smart, quantitatively trained engineers, who could help cure cancer or fix healthcare.gov, want to work for a sexting app?
Part of the answer, I think, lies in the excitement I’ve been hinting at. Another part is prestige. Smart kids want to work for a sexting app because other smart kids want to work for the same sexting app. “Highly concentrated pools of top talent are one of the rarest things you can find,” Biswas told me, “and I think people are really attracted to those environments.”

The valley has always been a hard-charging, ever-optimistic place, full of people who are passionate about ideas that require some suspension of disbelief. But in the last 10 years in particular, there has been an exacerbation of the qualities for which it’s been both feted and mocked: Valuations are absurdly high for companies with no revenue.

As tech valuations rise to truly crazy levels, the ramifications, financial and otherwise, of a job at a pre-I.P.O. company like Dropbox or even post-I.P.O. companies like Twitter are frequently life-changing.

Perhaps the greatest barriers to closing the divide lie closer to home. This past Christmas, my family went to dinner with another family, the Yangs, whose son, Andrew, was a sophomore at the University of Chicago and trying to decide on a major. He was interested in computer science, having taken the online version of CS50, Harvard’s introductory computer-science course, in his spare time. But his parents, both software engineers, wanted him to choose finance. They thought that being a software engineer meant drowning in a technical quagmire, being someone else’s code monkey.

http://www.nytimes.com/2014/03/16/magaz ... oblem.html

[Marc]

A new study sponsored by Nasa's Goddard Space Flight Center has
highlighted the prospect that global industrial civilisation could
collapse in coming decades due to unsustainable resource exploitation
and increasingly unequal wealth distribution.

These factors can lead to collapse when they converge to generate two
crucial social features: "the stretching of resources due to the
strain placed on the ecological carrying capacity"; and "the economic
stratification of society into Elites [rich] and Masses (or
"Commoners") [poor]" These social phenomena have played "a central
role in the character or in the process of the collapse," in all such
cases over "the last five thousand years."

Circling back around, the promotion of the two conditions that lead to a collapse and a new dark age is official Federal Reserve policy. The Federal Reserve is making it very difficult to produce resources like oil at a profit while at the same time creating a small group of elites who don't need to produce anything to attain the highest level of income and wealth.

Something that would likely allow the aforementioned financial game to be played considerably longer is to allow increasingly generous “production tax credits” to oil producers as well as to food producers, apparel producers, housing producers, etc., so that such producers can continue to produce products that are affordable to the masses. However, of course, this will put increasing pressure on the US Treasury and the Federal Reserve, thus creating an increasingly unstable financial situation. —Regards, Marc

[Higgenbotham]

“We now have overtly and pugnaciously a leader in the Kremlin who does not believe that the fundamentals of the U.S.- Russian relationship and the relationship between Russia and the West is one of partnership. He sees it as adversarial and competitive,” he said. “So it’s a new ballgame.”

http://www.bloomberg.com/news/2014-03-2 ... onomy.html

"They are living beyond their means and shifting a part of the weight of their problems to the world economy," Putin told a Kremlin youth group while touring its summer camp north of Moscow. "They are living like parasites off the global economy and their monopoly of the dollar."

http://www.zerohedge.com/news/word-war- ... lobal-econ

"Fundamentals" evidently means, "We print $55 billion per month out of thin air and you supply us with oil, nickel, or whatever other hard goods we need."

[Higgenbotham]

Something that would likely allow the aforementioned financial game to be played considerably longer is to allow increasingly generous “production tax credits” to oil producers as well as to food producers, apparel producers, housing producers, etc., so that such producers can continue to produce products that are affordable to the masses. However, of course, this will put increasing pressure on the US Treasury and the Federal Reserve, thus creating an increasingly unstable financial situation. —Regards, Marc

I'm guessing that instead of doing that, due to the long standing negative bias toward the oil industry, the game will be to ensure that every US citizen receives a guaranteed minimum income. It might be, for example, $12,000 per person or something like that, and when a person fills out their tax return, however much adjusted gross income falls short of $12,000 would result in a payment up to that level of income. There's already been talk of this from a number of different sources.

Once the crisis is over, if there is a recovery, and more normal income opportunities resume, it's very likely in my view also that the government will subsidize manufacturing as they do agriculture to keep it onshore, as the crisis will probably demonstrate the danger of not doing so, and it will be a different and smarter generation making those decisions.

[Reality Check]

(Reuters) - Chevron Corp, the second-largest U.S. oil company, cut its 2017 production forecast on Tuesday by 6 percent, citing project delays and asset sales, while saying high prices have pushed its new baseline for oil to north of $100 a barrel.

Despite the more cautious production forecast, Chevron raised the oil price used in its planning models to $110 a barrel from $79. Exxon Mobil, the largest U.S. oil company, is using a similar level of $109 a barrel in its budgets, based on 2013 average prices.

"There comes a point when some projects just won't be able to compete for capital" below $110 per barrel, Watson told reporters after the analyst meeting.

Chevron plans to sell about $10 billion of assets in the next three years, an increase from the $7 billion in asset sales in the previous three years, which will also cut production.

http://www.reuters.com/article/2014/03/ ... SU20140311

Will selling assets cut worldwide production, or just transfer that production to the control of other corporations and/or other countries ?

[Marc]

Something that would likely allow the aforementioned financial game to be played considerably longer is to allow increasingly generous “production tax credits” to oil producers as well as to food producers, apparel producers, housing producers, etc., so that such producers can continue to produce products that are affordable to the masses. However, of course, this will put increasing pressure on the US Treasury and the Federal Reserve, thus creating an increasingly unstable financial situation. —Regards, Marc

I'm guessing that instead of doing that, due to the long standing negative bias toward the oil industry, the game will be to ensure that every US citizen receives a guaranteed minimum income. It might be, for example, $12,000 per person or something like that, and when a person fills out their tax return, however much adjusted gross income falls short of $12,000 would result in a payment up to that level of income. There's already been talk of this from a number of different sources.

Interesting you mention this idea, Higgenbotham. President Nixon actually suggested the concept back in the early 1970s, and as most know here, he was a Republican president. If Obama or most anyone else in his place today suggested a Guaranteed Minimum Income, we would likely have many howls of “Marxism!” and “Communism!” — in other words, something really for the commie heap in the minds of many. However, given the increasing wealth inequality today, there may be some palatable (or Generation-X “stealth” way) that it can be made into reality. We’ll definitely see. Thanks for the on-target insights. —Regards, Marc

[Higgenbotham]

Will selling assets cut worldwide production, or just transfer that production to the control of other corporations and/or other countries ?

I think that anything that is sold now in the initial rounds of selling will be assets that have not yet been put into production, and probably never will be. It will be like a game of "pass the trash" where someone will bid low enough that they are gambling they are getting a good deal, hoping that they hit the bottom and that the fundamentals change for long enough to make a profit on it. Meanwhile, the company selling the asset, who probably knows the fundamentals best, is most likely to be right.

It would remind me of a game I saw a guy play with real estate foreclosures in the Rust Belt in the 1980s. He bought dozens of crap properties from banks and marked them up to assessed price on his balance sheet, then went around to lender after lender until someone lent him money on the fake equity. That aspect may come into play also.

Once the sales start digging into properties that are actually producing, I think what would happen is, since the oil companies have deep pockets, they will have been pumping at a loss for awhile out of that property. The new owner will likely shut it down and wait for a time in the future where it can be produced at a profit, if possible, also selling whatever they can strip out of it. The new owners will likely be vulture investors like Goldman or Eddie Lampert.