Generational Dynamics Forum - New Site

Hah. I have been trying not to incur debt myself and to have all mine paid off, only to have my senior cat's illness overturn that resolution. So if I get a stimulus check and pay off my credit card, this will indirectly pay the vet ... though actually, the bill was not that great. Now - suppose the check goes into savings. Good for the economy? Bad for the economy? I have no idea and hence will do what seems best for me and my family.

And multiply my questions by however many million people there are in this country now lacking direction and floundering.

The Grey Badger wrote:Hah. I have been trying not to incur debt myself and to have all mine paid off, only to have my senior cat's illness overturn that resolution. So if I get a stimulus check and pay off my credit card, this will indirectly pay the vet ... though actually, the bill was not that great. Now - suppose the check goes into savings. Good for the economy? Bad for the economy? I have no idea and hence will do what seems best for me and my family.

And multiply my questions by however many million people there are in this country now lacking direction and floundering.

Grey Badger,

In actuality, you have already "stimulated" the economy by choosing to get treatment for your cat. That money has already been spent and is sloshing around the economy as we speak. So the choice between putting money into savings or reducing the debt on your credit card is a pretty easy one to make: if the interest on your credit card debt is higher than the interest you earn by putting your money into savings (which I'm 99.9999% positive it is, unless you have a 0% teaser rate on your CC), then it makes sense to pay off your credit card. IMO, debt is evil and the less of it one has, the better. Especially when entering into times such as these...

But you bring to mind the concept of the Paradox of Thrift. The Paradox of Thrift says what is good for the individual is bad for the economy as a whole and vice versa. The decision to put money into savings (or to pay down debt), vice spend it by purchasing a big screen TV or the like, is good for you but bad for the economy. It boosts your personal bottom line but reduces the bottom line of our national economy.

I'm selfish so I choose to boost my bottom line.

-Rube

John wrote: I certainly agree with you that we're waiting for a crisis catalyst,
and it might be any of several things. But whether there's one
catalyst or 10 catalysts, one of the catalysts has to be a stock
market crash of epic proportions. These huge bubbles have to implode
some time.

I think we've had a fourth turning catalyst, but not a Crisis catalyst. From my perspective, the generations really haven't been acting in a 3T manner since 9/11, but there's been no shot to the gut to push things along.

John wrote:I certainly agree with you that we're waiting for a crisis catalyst,
and it might be any of several things. But whether there's one
catalyst or 10 catalysts, one of the catalysts has to be a stock
market crash of epic proportions. These huge bubbles have to implode
some time.

I wonder if you'd consider taking your research on money markets and
putting the pieces together into a formal article for the web site.
Something like, "Is your money market account safe? by C....
C........." Subtitle: "How long can the Fed keep money market
accounts from collapsing?"

Sincerely,

John

Really, after all this posting on details recently, I'd like to switch channels soon to the big picture.

But getting back to details for now, money markets are a question in and of themselves, but a further question may be how what happened in September with the money markets points to vulnerabilities in the stock market.

This recent discussion was leading up to speculation on my part as to what could trigger a severe drop in the Dow (as the NY Post article had mentioned would have happened--to the tune of 2000 points on September 18(?) had Paulson not stepped in). As I had implied on Tuesday night, the key to some of this at the moment may be employment as money market funds and other money instruments are derived from a lot of consumer loans, as well as subprime, which triggered the September event in money markets (Lehman default). With the ADP jobs report on deck for Wednesday morning, that was a key figure to watch in my view, as the market to the best of my recollection has typically waited for confirmation from the BLS report 2 days later before doing very much. Well, the ADP report was worse than expected and the market didn't wait, with the futures dropping heavily on Wednesday morning right after the report was released and staying down. My thought was that if BLS confirmed the ADP report, that the market had a decent chance of suffering heavy losses. That didn't happen, as the ADP report estimated 693,000 newly unemployed whereas BLS came in somewhere around 524,000, right around expectations.

As an addendum to this discussion, a forum reader might ask why job losses would not always be bad for the stock market. The reason they are not is that job losses are a lagging indicator. The stock market typically bottoms long before unemployment peaks. And it could still be the case that the market did bottom in November and will rally for a few more months, similar to the 1929/1930 pattern, or even longer, but somehow I doubt it. My guess is that a second crash is likely coming because consumers are stuffed to the gills with debt and unemployment can't get out of control if they are to be able to pay off that debt in an orderly manner. Which reminds me, I need to look at Japan's unemployment figures to see where they were at this stage of their post 1990 stock market peak.
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edit--Here's an article that gives an overview of Japan's economic situation in the 1990s. After the Japanese stock market bubble burst in 1990 (and see John's blog for some articles comparing the generational aspects of the Japanese bubbles of 1919, I think it was, and 1990 to our later bubbles), we can see from this article that Japan's GDP stayed positive for many years thereafter and Japan's unemployment did not increase much until about 3 years after their stock market peaked.

http://www.treasury.gov.au/documents/81 ... icle_4.asp

If we were somehow able to keep our population employed exporting products like Japan did in the 1990s then there would be reason to be much more optimistic about the prospects for an orderly debt unwinding similar to Japan's. The Obama jobs plan is looking more and more like a panic response to handwriting that is already on the wall. I've noticed that the numbers keep going up as the unemployment situation worsens. The latest number is 4 million new jobs to be "created".

Here's a typical analysis explaining (for dummies, of course) why the job losses experienced recently don't matter to the stock market. I knew it wouldn't take but a few minutes to find an article saying that last week's jobs report doesn't matter. My guess is that using post crisis era comparisons like these will put too many people wrongly into the bullish camp, setting up a panic situation as buyers find that they must exit. Time will tell.

http://www.financialsense.com/fsu/edito ... /0109.html

And as far as the stock market looking 6-9 months ahead as Harding states in this article, if that were true, unemployment would have bottomed 6-9 months after the October 2007 all time high in the stock market. But as he states in the article, the economy was already in recession by December 2007. Harding has been around for years, but his experience doesn't seem to be helping him in this kind of environment. Unemployment made its low early in 2007, long before the stock market peaked. Usually, it is the reverse, but the country was in the mood to gamble and the stock market speculation went on much longer than it normally would have. The link to the BLS unemployment chart is below.

http://data.bls.gov/PDQ/servlet/SurveyO ... N_cpsbref3

Higgenbotham wrote:Here's a typical analysis explaining (for dummies, of course) why the job losses experienced recently don't matter to the stock market. I knew it wouldn't take but a few minutes to find an article saying that last week's jobs report doesn't matter. My guess is that using post crisis era comparisons like these will put too many people wrongly into the bullish camp, setting up a panic situation as buyers find that they must exit. Time will tell.

http://www.financialsense.com/fsu/edito ... /0109.html

And as far as the stock market looking 6-9 months ahead as Harding states in this article, if that were true, unemployment would have bottomed 6-9 months after the October 2007 all time high in the stock market. But as he states in the article, the economy was already in recession by December 2007. Harding has been around for years, but his experience doesn't seem to be helping him in this kind of environment. Unemployment made its low early in 2007, long before the stock market peaked. Usually, it is the reverse, but the country was in the mood to gamble and the stock market speculation went on much longer than it normally would have. The link to the BLS unemployment chart is below.

http://data.bls.gov/PDQ/servlet/SurveyO ... N_cpsbref3

Ultimately the question is whether we are in "The Great Unwind" as to whether or not you think rising unemployment is a good or bad sign.

It is obvious to me that we are in a unique period and that rising unemployment is not yet a signal that we are towards the end of the recession. I base this on the severity of the problems we continue to face along with the continued high valuations of the stock market. One tells me we are in a very serious economic downturn and the other tells me we have yet to face that fact fully.

--Fred

Here's a one paragraph story that came out on Wednesday. This received very little press and I only picked it up on a hunch by searching yahoo news for "money market funds" this morning. The timing is interesting as are the comments attached to the story. It doesn't seem that the commenters grasp in the vaguest sense what is happening here and why.

WASHINGTON (MarketWatch) -- More institutions will be eligible to participate in the Federal Reserve's Money Market Investor Funding Facility, the Fed said Wednesday. In addition to money market mutual funds, the Fed will buy assets from other funds that operate in a similar manner to money market mutual funds. The newly eligible participants include U.S.-based securities-lending cash-collateral reinvestment funds, portfolios, and accounts (securities lenders); and U.S.-based investment funds, such as certain local government investment pools, common trust funds, and collective investment funds. The program was authorized on Oct. 28 after a several large funds were pressured by failed investments in Lehman Bros.

http://www.marketwatch.com/news/story/f ... d#comments

Here's another piece of the puzzle with regard to the banks and their affiliates. As subprime collapsed, the Federal Reserve issued a number of exemption letters to the banks as listed here:

http://www.federalreserve.gov/boarddocs ... eact/2007/

One example is as follows:

August 20, 2007 (3.4 MB PDF)
Letter to Patrick S. Antrim, Esq., Bank of America Corporation, Charlotte, North Carolina, granting an exemption from section 23A of the Federal Reserve Act (12 U.S.C. 371c) and Regulation W (12 CFR Part 223) for certain securities financing transactions between Bank of America, N.A., and its affiliate, Banc of America Securities LLC.

I know very little about banking law, but after Glass-Steagall was repealed, it's my guess that Regulation W was needed to place restrictions on transactions between banks and their affiliates in cases where these types of relationships would not have been possible at all under Glass-Steagall.

edit--Here's some information on the gutting of Glass-Steagall and its replacement with the new Regulation W for consumer loans:

THE CLINTON administration’s free-market program culminated in two momentous deregulatory acts. Near the end of his eight years in office, Clinton signed into law the Gramm-Leach-Bliley Financial Services Modernization Act of 1999, one of the most far-reaching banking reforms since the Great Depression. It swept aside parts of the Glass-Steagall Act of 1933 that had provided significant regulatory firewalls between commercial banks, insurance companies, securities firms, and investment banks.

IT MAY be helpful to consider what has become of the old Federal Reserve Regulations W and X, the old margin requirements on consumer and housing loans. Since the gutting of Glass-Steagall, the new Regulation W deals with transactions between commercial banks and their securities affiliates. Federal regulatory resources, which in the past were directed to the safety and soundness of mortgage and consumer loans, are now redirected to the opaque transactions between affiliates within financial conglomerates. The former regulatory effort was prudential and preventive in nature, the latter more akin to monitoring the problem only after the horse had left the barn.

http://www.dissentmagazine.org/article/?article=1229

The gutting of Glass-Steagall in 1999 apparently paved the way for banks to transact consumer loans between affiliate brokerage and money market mutual fund companies, and we apparently have the Fed stepping further into this mess last Wednesday to attempt to get the horse back into the barn.

The full story may not be told for another generation.

I have been scratching my head to the point of making it bleed with respect to the bond market and the Fed's recent involvement in same. I am a deflationist but this guy's analysis is interesting:

The Fed's Bubble Trouble

Peter Schiff
Jan 10, 2009

A few weeks ago when the Fed announced a strategy designed to bring down long-term interest and home mortgage rates through unlimited Treasury bond purchases, government debt staged a spectacular rally. To the unschooled market observer, the spike may be difficult to understand. After all, why would the value of Treasury bonds rise while their underlying credit quality is deteriorating faster than Bernie Madoff's social schedule? The move is actually a perfect illustration of the tried and true Wall Street strategy of "buy the rumor and sell the fact".

If it is well known that the Fed will be a big purchaser of Treasuries, those buying now will be positioned to unload their holdings when the buying spree begins. If the Fed pays higher prices in the future, traders can earn riskless speculative profits. If the traders lever up their positions, as many are likely doing, even small profits can turn unto huge windfalls.

The downside of course, is that all of the demand for Treasuries is artificial. Treasuries are now in the hands of speculators looking to sell, not investors looking to hold. These players are analogous to the mid-decade condo-flippers who flocked to new developments for quick profits. They did not intend to occupy their properties, but rather flip them to future buyers. Once these properties came back on the market, condo prices collapsed, as developers were forced to compete for new sales with their former customers.

This is precisely what will happen with Treasuries. Just as the U.S. government issues mountains of new debt to finance the multi-trillion annual deficits planned by the Obama Administration, speculative holders of existing debt will be offering their bonds for sale as well. In order to prevent a complete collapse in the bond prices the Fed will be forced to significantly increase its buying.

However, since the only way the Fed can buy bonds is by printing money, the more bonds they buy the more inflation they will create. As inflation diminishes the investment value of low-yielding Treasuries, such a scenario will kick off a downward spiral. But the more active the Fed becomes in their quest to prop up bond prices, the bigger the incentive to hit the Fed's bid. The result will be that all Treasuries sold will be purchased by the Fed. But with the resulting frenzy in the Treasury market, and with inflation kicking into high gear, we can expect that demand for other debt classes that the Fed is not backstopping, such as corporate, municipal and agency debt, to fall through the floor, pushing up interest rates across the board.

In order to "save" the economy from these high rates the Fed will then have to expand its purchases to include all forms of debt. If that happens, run-away inflation will quickly turn into hyper-inflation, and our currency will be worthless and our economy left in ruins.

To avoid this nightmare scenario, the Fed should pull out of the bond market before it's too late and let prices fall to where real buyers, those willing to hold to maturity, re-enter the market. Given how high inflation will likely be by the time this happens, my guess is that long-term Treasury yields will have to rise well into the double digits to clear the market.

The grim reality of course is that when the real estate bubble burst the Government was able to "bail-out" private parties. However, when the bond market bubble bursts, it will be the U.S. Government itself that will be in need of the mother of all bailouts. If U.S. taxpayers or foreign creditors are unwilling or unable to pony up, and if the nightmare hyper-inflation scenario is to be avoided, default will be the only option. If misery really does love company, Bernie Madoff's clients might finally find some comfort.

###

John wrote:Dear Matt,

StilesBC wrote: > And I'd also like to point out to all the GD readers that I have
> finally completed the final part of my 6 Part preview for 2009 on
> the financial markets and economy. Do take a look:

This is sensational stuff. I hope you don't mind that I quoted your
conclusions in my recent article.

** The outlook for 2009
** http://www.generationaldynamics.com/cgi ... look090105

Sincerely,

John

No problem, thanks for the hat-tip. I agree. If anything, I'm probably too optimistic.