Market Talk

I said it almost exactly one year ago: a better tag for Alan Greenspan would be the “Sorcerer’s Apprentice.” When your policies lead to as much havoc as his did, nobody but nobody should be calling you a maestro.

But the former Fed chairman soldiers on, putting out a paper that lays the blame on the “weak recovery” at the feet of an overreaching government, which sends Paul Krugman into orbit:

Greenspan writes in characteristic form: other people may have their models, but he’s the wise oracle who knows the deep mysteries of human behavior, who can discern patterns based on his ineffable knowledge of economic psychology and history.

Sorry, but he doesn’t get to do that any more. 2011 is not 2006. Greenspan is an ex-Maestro; his reputation is pushing up the daisies, it’s gone to meet its maker, it’s joined the choir invisible.

He’s no longer the Man Who Knows; he’s the man who presided over an economy careening to the worst economic crisis since the Great Depression.

You’ve got to appreciate Krugman consciously parroting (pun intended) an old Monty Python bit, the famous dead-parrot sketch.

“This is an ex-parrot.”

(h/t Big Picture)

Paul Krugman states it bluntly: the Irish people are suffering for the sins of the bankers. Meanwhile, Iceland told the bankers to go scratch (or, more specifically, the banks’ creditors,) and that country seems to be doing better.

For the record, the U.S. went more Ireland than Iceland. From the NY Times:

At this point Iceland seems, if anything, to be doing better than its near-namesake. Its economic slump was no deeper than Ireland’s, its job losses were less severe and it seems better positioned for recovery. In fact, investors now appear to consider Iceland’s debt safer than Ireland’s. How is that possible?

Part of the answer is that Iceland let foreign lenders to its runaway banks pay the price of their poor judgment, rather than putting its own taxpayers on the line to guarantee bad private debts. As the International Monetary Fund notes — approvingly! — “private sector bankruptcies have led to a marked decline in external debt.” Meanwhile, Iceland helped avoid a financial panic in part by imposing temporary capital controls — that is, by limiting the ability of residents to pull funds out of the country.

And Iceland has also benefited from the fact that, unlike Ireland, it still has its own currency; devaluation of the krona, which has made Iceland’s exports more competitive, has been an important factor in limiting the depth of Iceland’s slump.

None of these heterodox options are available to Ireland, say the wise heads. Ireland, they say, must continue to inflict pain on its citizens — because to do anything else would fatally undermine confidence.

But Ireland is now in its third year of austerity, and confidence just keeps draining away. And you have to wonder what it will take for serious people to realize that punishing the populace for the bankers’ sins is worse than a crime; it’s a mistake.

How do you like them apples?

I was having a conversation yesterday with a good buddy of mine who doesn’t understand the big fuss about deflation. In his mind, what’s not to like?

Rent on his apartment is significantly less now than during the pre-financial crisis days and he boasts about walking around the mall and finding everything on sale for 40%, 50% or even 60% at any given time. So when he pulled out the print edition of the Journal yesterday and saw the headline “Big Investors Fear Deflation,” he was puzzled.

Yes, for people who still have decent-paying jobs and some dough in the bank, and not a lot of fixed debt, a little deflation doesn’t hurt. But in a broader economic sense, the prospect of deflation is downright frightening.

The Journal’s deflation piece, which Paul referenced yesterday, explains how some big-name investors, including Bill Gross, Jeremy Grantham, David Tepper and Alan Fournier are changing their investment strategies in light of deflationary fears. Even St. Louis Fed President James Bullard last week publicly warned about deflation and the potential of a Japanese-like lost decade, or period of slow growth.

Why all the fuss about deflation? WSJ explains in a nut shell:

Deflation is seen as pernicious and hard to address once it sets in. Falling prices can make businesses and consumers reluctant to spend and invest, hurting profits and crippling the economy. It can be caused by a drop in the money supply and credit, declining spending and high unemployment, all of which can encourage companies to cut prices.

That’s tough to grasp, especially since a deflationary environment doesn’t seem so bad on the surface; who doesn’t love cheaper prices on, well, everything? But Paul Krugman further explains the dangers of deflation and why it’s such a bad thing.

“When people expect falling prices, they become less willing to spend, and in particular less willing to borrow,” he says. “When that happens, the economy may stay depressed because people expect deflation, and deflation may continue because the economy remains depressed. That’s the deflationary trap we keep worrying about.”

Continue reading…

What are they talking about in there?

Here’s a headline you won’t see often:

Rosengren Sees Deflation As Bigger Risk Than Inflation

That crossed the Tape this afternoon. The Rosengren quoted here is Eric Rosengren, president of the Federal Reserve Bank of Boston. The headline surprised me, because to my recollection, it’s the first time that sentiment has been expressed by a high level Fed official. Rosengren made the comments in an interview with the Wall Street Journal:

“If you were to look at the balance of risks and what we could do about those risks, the risk from a downside shock I would view as more of a problem than the risk of an upside shock of inflation or the economy overall,” Mr. Rosengren said in an interview late last week.

“The core inflation rate is right around 1%,” he said. “Given the amount of substantial excess capacity that we have in the economy, there is some risk of further disinflation. And I would say the risk of deflation has gone up and is more of a risk than I would like to see at this point.”

For a Fed official, who as a group are slightly more excitable than any dozen or so lobotomy patients, that’s like standing up and screaming “What Lassie? Trouble at the old mill?!” The last time a Fed official uttered the word “deflation” well may have been 2002. Maybe I’m overstating it there, but still, Rosengren’s comments exhibit a bit more honesty than I’m used to from sitting members of the FOMC.

Continue reading…

Think the unthinkable.

So I talk about a depression, and whatda I get? Crickets. But let Paul Krugman cry about one, and everybody’s talking about it. Jeez Louise, I guess it really is all about your name. And not your first name, either.

Anyhow, I understand Krugman’s point, to a point. He now says we’re on the verge of a third depression, with the two previous ones coming in the 1870s and 1930s. Got it. I’m not so sure I buy his general prescription, that more government spending is the way to go. FDR spent money for years, and where’d it get him? I’m just not totally convinced.

Now let’s assume something wild, like, oh, I don’t know, that Larry Kudlow’s wrong, and that this is the third major economic depression like Krugman says it is. Well, then, you’re looking at this: a depression, then roughly 60 years until the next one, then a depression, then roughly 60 years until the next one.

There’s a pattern there, you might say. If that’s so, it just goes further to prove that the current environment is beyond any specific policies issues. (Although I’d still argue, and have, that a number of very specific developments over the years led to our current travails.)

Meanwhile, back to the present, John Hussman is starting to sound more than just a bit worried. Now, yes, Hussman is one of the ones that wears the bear label like it’s some kind of scarlet letter. He also happens to be one of the ones that was right while entertainers like Jim Cramer were laughing off the housing collapse.

Continue reading…

- Distressed home sales accounted for 29% of all homes sold in January, the highest level since April 2009. “This is not a good sign,” Barbara Kiviat says. “There’s long been a worry that after last year’s various foreclosure moratoria lifted, we’d see a fresh surge of trouble in the housing market. The latest figures on distressed sales…lend some weight to that argument.”

- Looks like the music industry’s digital sales boom may be over, Peter Kafka notes. Last quarter marked first-time ever that the number of digital songs sold in US decline.

- CNBC commentator Larry Kudlow argues a 5%-10% pay cut for federal employees could have a major impact on the federal budget deficit. But the Times’ Paul Krugman says those pay cuts would be “trivial” at best, and Kudlow’s picture is a fiscal fantasy.

- Spiking Greek bond spreads aren’t affecting over debt-ridden European nations. “That would appear to indicate that markets are not too concerned with the prospects of the Greek end-game leading to some sort of European contagion, which is the most dangerous risk of the Greek crisis,” Economist’s Free Exchange blog writes.

- February wholesale inventories rise for second consecutive month. If next week’s report on business inventories also rises, “it will confirm that we may be seeing the beginning of some inventory stocking after the slowing rate of destocking over the past six months,” notes Miller Tabak’s Peter Boockvar.

- Goldman Sachs (GS) has hired ex-New York Timesman Stephen
Labaton, who until December covered business from Washington, Politico.com reports, suggesting the bank’s aiming to counter its dreadful PR and help navigate the DC regulatory sphere.

- The war between Apple (AAPL) and Adobe (ADBE) is heating up.

- The American economy appears to be in a cyclical recovery that is gaining strength. Firms have begun to hire and consumer spending seems to be accelerating,” Floyd Norris writes. “That is what usually happens after particularly sharp recessions, so it is surprising that many commentators, whether economists or politicians, seem to doubt that such a thing could possibly be happening.”

- But it’s tough to cheer the economy when 15 million people are unemployed, Free Exchange says. “The state of the labor market is a real worry, and the effect of the drag from high levels of long-term unemployment is difficult to predict. Now is no time to declare victory and take a vacation.”

- FusionIQ CEO Barry Ritholtz toes the line between optimistic and pessimistic. Employment and consumer spending still have a long way to go before each returns to pre-recession levels. But as data continues to “impress,” investors would be wise not to fight the tape, he argues.

The White House is attempting to contain the damage surrounding President Obama’s curious remarks about bank bonuses. Whether it’s working is up for debate.

In case you missed it, Obama said he doesn’t “begrudge” the multi-million dollar bonuses JPMorgan (JPM) CEO Jamie Dimon and Goldman Sachs (GS) CEO Lloyd Blankfein received, noting it’s all part of the free-market system. He also compared these “savvy businessmen’s” exorbitant salaries to sports, saying some baseball players make more dough than both of those folks.

Now the White House is trying to mop up Obama’s mess. Huffington Post has the details:

The White House is moving swiftly to stem the fallout from a potentially damaging interview President Obama gave on Tuesday, in which, it was reported, he did not “begrudge” the multibillion-dollar bonuses of Wall Street executives.

Administration aides insisted, in email exchanges with the Huffington Post, that the quote was largely overplayed. The story, they say, made it appear as if the president didn’t mind massive compensation packages when he was simply stating that he didn’t fault anyone for his or her personal or professional success. Moreover, they added, the president has made similar remarks many times before without getting the critical reception he received on Wednesday morning.

“The president has said countless times, as he did in the interview, that he doesn’t ‘begrudge’ the success of Americans, but he also expressed ‘shock’ at the size of bonuses and made clear that there are a number of steps that need to be taken to change the culture of Wall Street,” spokesperson Jen Psaki told the Huffington Post. “[That is] a sentiment he has consistently expressed since long before he took office.”

The White House is clearly on damage control, trying to clean up a messy situation. But Princeton economist Paul Krugman, who heavily criticized Obama yesterday, still can’t get over the presiden’t “clueless” comments.

Continue reading…

We have to get hired sooner rather than later, right?

Anybody else struggling to decipher this morning’s jobs report?

A mixed bag may be the best way to describe today’s employment data. Economy lost 20,000 jobs in January, according to companies and governments surveyed by Labor Dept., representing a cause for concern for optimistic folks hoping to kick off 2010 with some job growth. But the unemployment rate dipped to 9.7%, as households surveyed said 541,000 more jobs were created last month.

So, 20,000 jobs lost or 541,000 jobs created? Tough to say which indicator is more reliable. Ask ten economists and they’ll give you 11 different responses.

But Princeton economist Paul Krugman may have summed up today’s data best: job growth is essentially flat and the rest is noise. Two separate surveys compiled the data and both are subject to significant statistical sampling errors.

“When employment growth is near zero, on either side, it’s not that surprising that the surveys should point in opposite directions,” he says. “The bottom line is that economic numbers are no more than rough indicators. You have been warned.”

Continue reading…

To say the blogosphere is buzzing about the iPad is certainly an understatement. It seems like everyone has something to say about Apple’s (AAPL) new device.

From your typical tech blogs, to twitter, to even Paul Krugman, folks everywhere are weighing in on the new tablet. Some positive thoughts, fair amount of skepticism, but for the most part people seem excited to get their hands on the device and test it out.

And for Apple, this is all unfolding exactly according to plan. And if it seems like it’s a plan that’s been implemented before, well, it has. Seems like Apple’s got a blueprint for how they do this stuff, doesn’t it?

Phase one of a typical Apple product announcement is now complete as months of hype and speculation gave way to the iPad’s actual unveiling, David Pogue chronicles on his NYT blog.

Now phase two – blogger bashing and criticizing of the yet-to-be released product – is beginning and will continue over the next few months until the iPad actually goes on sale, he says.

“Then phase three will begin: positive reviews, people lining up to buy the thing, best-sellerdom, and the mysterious disappearance of the basher-bloggers,” Pogue notes.

So what’s the takeaway? IPad has vast potential, but “it’s too early to draw any conclusions,” he says. “And anyone who claims to know what will happen will wind up looking like a fool.”
Continue reading…

Two prominent liberals aren’t exactly fans of President Obama’s proposed three-year budget freeze.

Princeton economist Paul Krugman and Robert Reich, former labor secretary in the Clinton administration, ripped Obama’s plans for limiting government spending amid high unemployment and not doing enough for middle class America.

WSJ says Obama’s proposal is “a move meant to quell rising concern over the deficit but whose practical impact will be muted.” From the Journal:

To attack the $1.4 trillion deficit, the White House will propose limits on discretionary spending unrelated to the military, veterans, homeland security and international affairs, according to senior administration officials. Also untouched are big entitlement programs such as Social Security and Medicare.

The freeze would affect $447 billion in spending, or 17% of the total federal budget, and would likely be overtaken by growth in the untouched areas of discretionary spending. It’s designed to save $250 billion over the coming decade, compared with what would have been spent had this area been allowed to rise along with inflation.

The administration officials said the cap won’t be imposed across the board. Some areas would see cuts while others, including education and investments related to job creation, would realize increases.

Obama proposing a three-year spending freeze is “appalling on every level,” Krugman writes at Conscience of a Liberal. “It’s bad economics, depressing demand when the economy is still suffering from mass unemployment,” he says.

Continue reading…