The Winds of Change Are Blowing

Posted on May 5, 2013

John Mason – Originally Published at Seeking Alpha – Reprinted with Author’s Permission

The world is changing. The world is changing because it must change. When the unemployment rate hits 27 percent, as it now stands in Spain, something more is going on than just a business cycle.

Unemployment is also above 27 percent in Greece. In Italy, the unemployment rate is close to 12 percent. In France, the unemployment rate is above 10 percent. The employment problems in these countries are not just cyclical, they are structural.

The same for the United States. Although the unemployment rate in the United States is under 8 percent, the startling figure concerning the U.S. labor market is that the labor participation rate has dropped below 64 percent, a figure not reached since the latter part of the 1970s when women were not as big a part of the workforce as they are now.

These structural forces are causing divisions between countries as the world tries to recover from the Great Recession and more. Angela Merkel, German Chancellor, “highlights eurozone divisions.” The unemployment rate in Germany is 5.4 percent.

But, as we know, the utilization of capital in the western world tends to be lower now, for this stage in the business cycle, that at any other time in the past fifty years. Western countries are not only not using the human capital that is available; it is not using the physical capital it possesses. The competitiveness of the eurozone is an issue that comes up over and over again.

Phillip Stephens writes in the Financial Times about The New Deal for Europe: More Reform, Less Austerity. “High unemployment in Europe is not just a reflection of recession. It often mirrors ossified labor markets that lock out young people and discourage investment and innovation.”

But … read the rest

Why is 20 % of the American Workforce Unemployed?

Posted on September 25, 2012

Originally Published at Global Economic Intersection under the title Buddy Can You Spare a Dime?

Written by , Capital Matters

Republicans are heartless monsters who have no compassion for the victims of a financial crash they caused by manipulating Wall Street.”

Democrats are committed to destroy the American system by redistributing the hard-earned products and services of America’s businesses to shiftless moochers.”

duel-chipmunks-360x361

Wow, are we making progress in the current political debate!

 

 

 

 

 

 

 

 

 

 

 

Follow up:

Cyclical or Structural?

For economists the discussion revolves around a more civil discourse on whether the current high level of unemployment results from a severe cyclical downturn or from a structural change in the American economy. The Federal Reserve has forcefully adopted the cyclical downturn mantra, committing $500 billion per year to the assumption that, with more financial stimulus, the jobs will come back.

Buffalo Springfield’s insight from the 1960s is still valid:

I think it’s time we stop, hey, what’s that sound?
Everybody look what’s going down
What a field day for the heat
A thousand people in the street
Singing songs and carrying signs
Mostly say, hooray for our side

A Big Bet With Millions of Human Poker Chips

We are in the process of making an enormous bet with the American economy. The risks are not trivial: inflation, deflation, financial and social collapse are just a few. Yet what if this bet is being made based upon a misunderstanding of the problem with which we are faced.

Steven Hansen recently produced a rather depressing chart showing that, despite a period of steady economic recovery, civilian employment in relation to population flatlined beginning in late 2009, after a very sharp drop from 63% to 58% during the financial crisis.

employment-population-ratio-2007-2012

The Robot read the rest

Are We Measuring the Wrong Money Supply … Again?

Posted on June 12, 2012

Back in 2008 we wrote that the U. S. was facing a serious credit squeeze in part because we had failed to take into account some important structural changes in the credit markets: i.e. the rapid growth and subsequent collapse of the Shadow Banking system. Since then the Fed and the Treasury have spent enormous resources addressing the impact of that collapse through the purchase of assets from financial institutions, the nationalization of Fannie and Freddie and numerous other actions to prop up the housing market in hopes of repairing shrunken balance sheets throughout the economy.

We may be suffering from a different, but equally portentous, issue today arising from another misreading of what the term money really means. In response to our recent article on Fed tightening since the fall of 2011, John Lounsbury, Managing Editor of econintersect.com, made a very astute observation:

You do not mention it in your article but is it possible that the Fed has not been taking a sufficiently global view and has insufficiently reacted to a recessing Europe and a rapidly slowing Asia? India just dropped to a GDP growth rate below anything seen during the Great Financial Crisis. The manufacturing numbers in China have been flirting with contraction for several months. If the Fed reacts to these factors after they have gained a solid foothold, doesn’t that likely increase the magnitude of the yo-yo swings?

The U.S. dollar is without question the world’s reserve currency and the current problems of the Euro have only served to cement that position. Given the global demand for $100 bills, in many parts of the globe the dollar is not only the reserve currency, but the defacto physical currency as well. Yet we continue to look at money as a national, or in the case of the Euro, regional … read the rest

January Video Newsletter

Posted on January 26, 2012

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Is QE3 Already Underway?

Posted on January 17, 2012

Much ink is being spilled on when/if the Fed will move to the next iteration of its quantitative easing program. That’s the wrong question. The Fed and the world’s other major monetary authorities have effectively been captured by national treasuries running historically high budgetary deficits and their chief function has become the funding of governmental expenditures that cannot or will not be funded through taxes. Continued pressure to monetize the debt is a foregone conclusion so long as the deficits continue at their current levels.

A year ago we explored Chairman Bernanke’s position that “QE II (the purchase of long term Treasury Bonds by the Federal Reserve) is not inflationary and has not created an explosion of the money supply.”

How could it be the case that rapid monetary expansion could be accomplished without an inflationary impact? Keynes, though much maligned and misused, provided a clear explanation for this one with his description of a “liquidity trap”. In normal credit environments new reserves added to the banking system are magically multiple through the working of fractional banking, creating a significant multiplier effect on business activity throughout the economy.

In a liquidity trap this no longer works; reserves just sit at the banks and the money multiplier sinks. That’s where we are today as recently outlined by Paul McCulley, Chairman of the Society of Fellows of the Global Interdependence Center and former PIMCO trader, in a recent CNBC interview. As a result the Fed has been able to create in excess of $1.5 Trillion of excess bank reserves since the 2008 crash


(Click to enlarge)

Looked at globally, the trend is even more dramatic.


(Click to enlarge)

Source: Zero Hedge

The size of the combined Federal Reserve, European Central Bank and Bank of Japan balance sheets has grown from a historical norm of … read the rest

Time for Transparency on Bailing Out the Banks’ Bondholders

Posted on April 20, 2009

This morning the New York Times reported that the Treasury is planning to convert TARP holdings of preferred stock into common equity at a number of banks. As we previously raised, the real issue is whether and why the Treasury is committed to protect the bondholders of the big banks. There is a great deal of capital in the banking system in the form of unsecured debt.  In a normal world, when a company goes broke, some or all of the debtholders’ interests will ultimately be converted to equity capital either in bankruptcy or in an out of court restructure.  The current issue of The Institutional Risk Analyst makes a very interesting proposal for conversion of Citibank debt into equity, which would address the capitalization issue once and for all.  It’s time the Treasury explains in clear English why they are electing to further commit taxpayer funds to bailing out the big banks’ bondholders.

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Categories: Bailouts, Bankruptcy, Banks, Business Survival, Distress, Economics, Junior Capital

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We’re Seven Months into the Great Mess. What’s Going to Happen Next?

Posted on April 14, 2009

Seven months ago (Monday September 15, 2008) we learned of the failure of Lehman Brothers and soon thereafter the sale of Merrill Lynch and the bailout of AIG.  These events were the culmination of a series of market shocks that had started with the demise of the sub-prime loan market, had accelerated with the collapse of the leveraged loan market starting in August 2007 and had included the takeover of Bear Stearns in March 2008.  But September 15, 2008 is the current era’s equivalent of 1929’s Black Monday.

Since September we have witnessed dramatic governmental actions designed to prevent the current crisis from descending into a downward spiral reminiscent of the 1930s.  For the moment, the stock market seems to be giving these actions (as well as our charismatic new President) a vote of confidence.  We’re also hearing from some of our clients that their operations improved in March and that they are more optimistic about their businesses looking toward the summer.  Another “green shoot” is the middle market M&A market, where I spend much of my time.  The M&A market has definitely improved since the first of the year and indications are that it will remain reasonably strong for a while, at least for profitable companies in favored industries such as government contracting, IT services and health care.

So what is the economic scorecard to date and what can we expect to see going forward?

1)    The World economy is in the midst of the first major global recession of the postwar era.  Global trade has been collapsed for many of the major exporters, particularly China, Japan and Germany.

china-exports1

While there have been some recent hints that the rate of decline is slowing (the second derivative of negative growth) or even bouncing a little, world trade is still an area of significant concern.  … read the rest

How Much Risk is the Treasury Really Assuming from the Financial Institutions?

Posted on April 7, 2009

What does it really mean to talk about saving “the banks”?  The Treasury would like us to have a mental picture of Jimmy Stewart in It’s a Wonderful Life, protecting the savings and mortgages of the good citizens of Bedford Falls.  In truth, for all material purposes, the current Public Private Investment Plan (PPIP) is about saving four mammoth financial institutions considered too big to fail, BankAmerica, Citicorp, J. P. Morgan Chase, and Wells Fargo.

These financial behemoths, each as large as a significant number of the world’s national economies, bear as much relationship to the Bedford Falls Building and Loan as a rowboat does to the Titanic.  For public consumption, however, it is convenient for the Treasury to continue to describe its efforts as a rescue of “the banks”;   rescuing hydra-headed financial giants just doesn’t have quite the same ring.  Additionally by lumping these institutions under the category of “banks” the Treasury can continue the fiction that the bailout is about “getting the banks lending again.”

Notwithstanding this fiction, as we showed last week, even Secretary Geithner has abandoned the pretense that the PPIP program is about encouraging direct bank lending in the traditional sense of taking deposits and making loans, admitting that the primary purpose of PPIP is to restore the strength of these wholesale institutions so that they can restart the private securitization markets that fueled the credit bubble earlier in the decade.  So here’s the plan.  Just remove the toxic assets from the books of the financial giants and the system will be restored to its former picture of robust health.  Hopefully the PPIP will be sufficient to fund the fix.  If not the Treasury can use its proposed new liquidation authority, invest few hundred billion dollars more to fill the gaps and sell the freshly minted “clean” … read the rest

Categories: Bailouts, Banks, Business Survival, Business Turnarounds, Distress, Economics

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We’re The Marks

Posted on March 17, 2009

From Dictionary.com

Def. Mark – noun

15. b.   Slang.  the intended victim of a swindler, hustler, or the like: e.g. “The cardsharps picked their marks from among the tourists on the cruise ship.”

It’s midnight in Vegas.  A somewhat paunchy fiftyish guy from the Midwest has just sauntered over to the poker table.  With a bourbon in his right hand and a party girl on his left arm, he stumbles slightly before announcing “mind if I join you guys?”  The player with the dark glasses looks up briefly, mumbles something unintelligible and looks back at his cards.  The one in the cowboy hat says “howdy partner, glad to have you”.  Our hero throws his chips on the table and takes his seat.  “Boy I’m feeling lucky tonight.”

Guess who’s flying back to river city tomorrow with a lot fewer chips than he came with?

Uncle Sam stumbled into the world’s highest stakes casino last fall.  He didn’t know how to play the game, but he certainly knew how to raise the table stakes.  Nothing that has happened since then increases my confidence that the U. S. of A. will be leaving this game as a winner.

This morning Andrew Ross Sorkin of the New York Times was on Morning Joe making the case for payment of the AIG bonuses.  His core argument in an article in Tuesday’s Times is that we can’t ignore contractual rights just because they’re not politically popular.  To do so would cause untold damage to the American economy.  On Morning Joe Andrew was brave enough to take the even more unpopular position that the partially nationalized financial institutions must pay up to hire good people or the smart guys at Goldman, et. al. will clean their (and our) clocks.

That this has suddenly become a major political issue should … read the rest

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What Does a Bonus Cost?

Posted on February 15, 2009

Consider this fable.

You’ve decided to invest $5 million in backing a champion at the new World Champion Poker Standoff. The rules are simple. Two players will play a winner takes all game of Texas Holdem. Each player will come to the table with a $5 million stake. You might ask why you would consider such an “investment”, but this is not all that different from the game the big banks have played in recent years.

Once in the game, you win a flip of a coin and are given first choice on hiring one of the two champions who will play in the tournament. The only information you are given is the following:

  • Player A wants an upfront cash salary of $400,000 plus a bonus equal to 50% of salary.
  • Player B requires no salary, but demands a bonus equal to 20% of his winnings.

Admittedly you’re missing some fairly important information such as who has the better track record and whether one of the players is a drunk or cocaine addict. But this is a fable after all so you’ve got to play by fable rules.

Given no more information than this, which player should you choose and how much will each player cost you if chosen. I would posit the following:

Player B is the only rational choice. Player A doesn’t have the courage of is convictions. Player B does. While this could be based on a totally unrealistic optimism on Player B’s part, it is more likely based on Player B’s realistic confidence that he will win. Assuming this is the case then the odds favor Player B and the likely cost of each player is as follows:

  • Player A costs $5,400,000 (Salary plus 100% loss of capital)
  • Player B generates a net profit of $4,000,000 ($5,000,000 winnings less $1,000,000
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Categories: Bailouts, Banks, Business Turnarounds, Economics, Uncategorized

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