Market Talk

We’re not tough enough to take the pain.

That’s why it’s come down to this, citizens — the Fed priming more QE, doing “whatever it takes” to alleviate the hardship. The ceaseless efforts to artificially prop up asset prices. The extraordinary amount of Americans’ monthly personal income now derived directly from Uncle Sam.

It should be much more expedient and ultimately less costly for the government to simply step back and let the economic chips fall where they may. But it’ll hurt, and the nation’s leadership doesn’t think we citizens can handle the sting.

Indeed, we often come across like a society of coddled whiners who can’t stand to even be the slightest bit inconvenienced, never mind subjected to any degree of physical or psychological travail. We can’t handle bad reception on our iPhones, why should the government expect us to deal with the hardship that would come with allowing home prices to reach their natural level, to finally unleash market-clearing prices and probably the failure of more big banks and other institutions? Continue reading…

GMO’s Jeremy Grantham continues to be among the most coherent, rational and entertaining voices commenting on US markets and the economy. His latest quarterly piece is the usual must-read, titled “Night of the Living Fed.” Here’s a little taste:

In almost every respect, adhering to a policy of low rates, employing quantitative easing, deliberately stimulating asset prices, ignoring the consequences of bubbles breaking, and displaying a complete refusal to learn from experience has left Fed policy as a large net negative to the production of a healthy, stable economy with strong employment.

Enjoy the rest here.

- “In this recovery there is less job creation, less household formation, and less demand for housing units than a normal recovery. This is sort of a circular trap for both GDP growth and employment,” Calculated Risk says. “This is one of the reasons I expect the unemployment rate to tick up over the next several months.

- FusionIQ CEO Barry Ritholtz makes the argument that US bonds are resembling tech stocks during the dot-com bubble. “What made the dot-com situation so pernicious was that anyone who was judged on relative performance (i.e., mutual fund managers), were all but forced into these names in order to keep up,” Ritholtz says at The Big Picture. “Very few people — Buffett and Grantham come to mind — managed to both avoid both chasing these names and losing their client base.”

- There’s no denying the strong quarterly profit reports coming from S&P 500 companies in 2Q. But the notion that strong profits actually represent good news is “murky at best,” Derek Thompson writes at the Atlantic. “High unemployment is, strangely, both dampening revenue and enhancing profits.”

- Mortgage Bankers Association reports refinance activity surged 17% amid historically low interest rates. But Miller Tabak’s Peter Boockvar notes purchasing fell 3.4% and remains just 3.5% off lowest level since 1997. “This economic response to low rates is indicative of our whole economy that has the Fed now pushing on a string,” Boockvar says. “In times of deleveraging, lower rates only encourage refi’s, not new economic activity whether the purchase of a home or the expansion of a business.”

- Boston Fed argues economists aren’t to blame for missing the housing bubble, which absolutely baffles naked capitalism blogger Yves Smith. “It is truly astonishing to watch how determined the economics orthodoxy is to defend its inexcusable, economy-wrecking performance in the runup to the financial crisis,” Smith says.

- UPS recently said in a 10-Q that the impact of the health-care reform legislation “was not material” to its financial results, which shocks Footnoted blogger Michelle Leder, especially since many companies have said they’ll take big charges related to legislation, including AT&T’s (T) $1B charge.

- Since Fed’s announcement last week to reinvest proceeds from expiring MBS, the dollar’s risen while crude oil and S&P 500 have tumbled. “A cynic, however, might look at the lackluster reaction and think that the US central bank is losing some of its market-firepower in terms of unconventional monetary policy,” FT’s Alphaville says. “And an even bigger cynic might think that the market is simply holding out — or pushing — for a bigger bout of unconventional policy. Either way though, something’s out of sync here — the market or the Fed.”

- Tech blog Download Squad says Google (GOOG) and hardware maker HTC (2498.TW) are teaming up to build a tablet device that runs GOOG’s Chrome operating system. The blog says the tablet will be offered in conjunction with Verizon (VZ) and launched on Nov. 26, or Black Friday, the busiest shopping day of the year in the US.

- Is the Web really dead? The blogosphere debates.

- Looking to succeed at the dating game? Maybe its time to get off match.com and other dating sites and hit the athletic fields. WSJ explains.

- Potential candidates for Fed Board vacancies should be known to have anticipated the financial crisis in advance, have a pro-consumer stance and be willing to release AIG-related emails, Yves Smith says.

- In the next year or so, if we are to have a sustained recovery, I think we would be much better off with stingy banks, than with thrifty consumers,” Stephen Gandel writes.

- The notion that newspaper publishers should torch their print editions and just embrace the Web is “just plain nutty,” Newsosaur blogger Alan Mutter says. “It doesn’t take a certifiable Silicon Valley genius to see that no business can walk away from some 90% of its revenue base without imploding.”

- Jobless claims have been stuck at current levels for nearly four months, Economist’s Free Exchange blog notes. “The wait for the dip back to normal levels continues.”

- Google and retailers are teaming up to help customers find products.

- Consumer credit has contracted about 6% since the recession began, and banks’ lending standards are getting even tougher. “It will be interesting to see to what extent the tightening of standards for revolving credit impact overall lending,” writes Atlanta Fed’s Ellyn Terry.

- Latest AAII weekly poll shows surging bullish reading of 45.3%. “This has served as a fairly reliable contrarian indicator in the past as small investors tend to pile into stocks near the end of rallies,” Pragmatic Capitalist says.

- Is a housing bubble developing in China? Calculated Risk weighs in.

- Peter Boone and Simon Johnson say beware of the coming Greek debt bubble. Paul Krugman isn’t so sure.

- Sen. Chris Dodd will introduce his sweeping plan to overhaul financial regulations on Monday without any Republican support.

I caught all of about five minutes of that show that was on after the Super Bowl, “Undercover Boss,” but it took only about two minutes for me to realize what a public service that show could have done, had it been on four or five years ago. Done correctly, it could have prevented the entire housing implosion and credit crisis.

The show’s premise is actual bosses of actual companies pose as new hires and meander around, sniffing out all the inefficiencies and waste going on under their noses. Great idea, right? On last night’s premiere, Waste Management’s president, Lawrence O’Donnell, went undercover to discover what was really going on at his company.

But, boy, just imagine the shenanigans that could’ve been uncovered had the show been on five years ago:

- The president of a big mortgage company, posing as a “new hire,” sits in as one of his loan officers approves a 26-year old waiter for a $700,000 home loan:

“We didn’t even check his W-2. We didn’t even check his pay stubs. We didn’t even ask him for pay stubs. There’s absolutely no way we can say if this kid can pay the loan, for even a month. I’m the president of the company, these are the kinds of things I should know about.”

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It's okay Ben, just don't tell us you had nothing to do with it.

Ben Bernanke’s speech yesterday is getting a lot of press not for what he said, but for what wasn’t said.

Piggybacking off of Paul’s earlier post, Bernanke was adamant that lax regulation, and not low interest rates, was the main cause of the housing bubble. The comments aren’t surprising, especially coming from a Fed chairman. Still, Princeton economist Paul Krugman says it was a “somewhat odd” speech, as Bernanke should’ve been more forthright about the Fed’s “undoubted failures.”

Bernanke would’ve been better focusing on the Fed’s inability to acknowledge subprime lending risks, Krugman says, as well as recognizing the housing bubble as it was happening in real time.

“And I would add that focusing on unconventional mortgages is awfully 2007,” Krugman notes. “We now know that many perfectly conventional mortgages went bust; we know that commercial real estate was at least as overblown as housing.”

It’s clear the housing bubble was about much more than subprime mortgages, he adds. “Where regulation really needs to focus is on making the financial system less fragile.”

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I remember when my wife and I were looking for a house in 2006 (yes, we bought near the top, but sales were already stagnating and we negotiated a great deal, so it worked out okay,) we were in the offices of one loan officer from a large, multinational bank whose name I won’t mention but which was one of the banks to take a TARP loan.

So, we’re sitting in his office, and this guy plugs our numbers into his computer, and a minute later tells us we can get a loan for x amount. Now, I know, for a fact, without even doing any math, that this man was prepared to lend me way more than I could afford. Somewhere around $100,000, I can’t remember the exact amount now. But it was well above the range we were looking to borrow.

“It’s not my job to determine what you can afford,” he said to us, “I”m just telling you what we’ll lend you.”

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