Reading links

Thanks to Naked Capitalism, got this story. If true, it is big and a huge shot-in-the-arm for those battling climate change and calling for more human efforts in that regard.

Thanks to Zerohedge, came across this very interesting and disturbing paper on High Frequency Trading. Capital market in the US has come a long way (down).

One of the high-frequency trading CEOs stated that the longest duration of holding a given stock by his firm was eleven seconds, although he considered that to be unusually and unacceptably long.

On days of thin trading volume, large-cap financial institutions can buoy u flagging markets by well-timed surges of exchange-traded fund buys, such as SPY (the S&P 500 exchange traded fund). [Read the whole paper here. It  is short and worth your time]

Want to experience happiness? Downsize, spend on experiential items, practice delayed gratification and maintain strong relationships. It seems to be working for many Americans now. Bernanke has to take note.

While we are on the subject of Bernanke, it is just as well that he takes note of this piece by the Reinharts in FT where they question the politically correct and optimistic assumptions and predictions by federal and monetary authorities. They are cautioning against assuming that the worst is history. Tell that to the SELL-SIDE research and to stock market investors in the US.

A valuable piece of research from Morgan Stanley (available only to clients) laid out starkly that it is a question of how western nations would default on their debt rather than if. Financial oppression is likely  and that means negative real returns for debtholders. Basically, resorting to inflation is financial oppression for debtholders. US and UK endured deflation to keep creditors from losing between the wars or even before that since financing wars meant debtholders had to be kept happy. That changed after World War II as other stakeholders (e.g., labour) became more powerful.

The question is what is in store now? If you can download this paper (people in developing  countries can do so easily without paying for it), do so and it is well worth a read.

Economists to the cleaners

In a professorial way, Dr. Subba Rao took economists to the cleaners at his speech in Bangalore. Not that it was undeserved. Only one simple caveat: it is not just economists who were blindsided by the crisis. Policymakers too believed in ‘great moderation’ as their achievement. So did bankers. They bought their own gibberish. At least, they were consistent! Second, it was mostly business economists – who have an axe to grind – who were busy peddling the ‘great moderation’. Some academic economists might have been part of the cheer-leading team but quite a few of them sounded the warning bells.

Dr. Subba Rao is correct to remind us that economics is an empirical science for which context matters a lot. Cannot agree more. Theories are useful as points of departure. Seldom are they the goals of the intellectual journey. Economists forgot that or did not bother to think much about it.

Dr. Subba Rao is echoed here.

Elsewhere, Prof. Roubini notes that repeated financial crises are the results of a failed system of corporate governance. Bang on target. A lot remains to be fixed in the US but cheerleaders are obscuring truths. Very few voices come through this thick cloud of obfuscation.

Optimistic Bernanke

Mr. Bernanke delivered his speech on the Economic Outlook and Monetary policy at Jackson Hole. It was a confident speech but lacked in substance behind that confidence. He is positive about the economic outlook for 2011 because the US households have rebuilt their savings already and would be ready to splurge next year! Is there not some relation of the savings rate to the impending retirement and the extent of de-leveraging that needs to take place?

Second reason for being sceptical of his confidence is that he admits that the Federal Reserve did not anticipate the slowdown that is currently underway in the US.

Yet, according to commentators, financial markets have taken heart from his confidence on 2011 and thus finished the day higher on Friday!

yes, of course

The worst outcome for him personally would be to let something like deflation get under way on his watch,” says Alfred Broaddus, the former president of the Richmond Fed who served alongside Mr. Bernanke from 2002 until 2005. “He will respond forcefully to evidence that the risk of a deflationary process getting under way is rising materially. He won’t be ambivalent.” [More here]

Why, of course. We would not be surprised. That is what we are waiting for. That is the last or the penultimate act of the drama that has been unfolding since 1987. It has to end one day. We are waiting for that, so that a new beginning can be made.

It is a pity, of course, that neither he nor other policymakers would pay heed to this excellent Op-ed (ack: David Rosenberg) in New York Times by Professor Norihiro Kato of the University of Tokyo.

Coming to think of it, many other countries – small, big, city-states, emirates – all need the lesson:

They are too settled in an earlier stage of development, in a dream of limitless growth. But society matures around them….

In a world whose limits are increasingly apparent, Japan and its youths, old beyond their years, may well reveal what it is like to outgrow growth. [More here]

Savvy and small are smart

(a) “There is a credible allegation that there is seriously abusive practices going on,” said James J. Angel, a financial market analyst specialist at Georgetown University, “to the extent that somebody is firing in a very high frequency of orders for no good economic reason, basically because they are trying to slow everybody else down.”

At a Washington hearing on the flash crash last week, Kevin Cronin, director of global equity trading at Invesco, a big fund manager, warned about “improper or manipulative activity” in the stock market.

Traders at BMO Capital Markets in Toronto said they had also identified a “data deluge” a few minutes before the crash. They said people in the markets were poring over Nanex’s colorful charts. [More here]

(b) Ned Davis Research has looked at forward analyst expectations for earnings growth and calculated that annualised market returns dropped to negative 12 per cent when forward earnings expectations were 15 per cent or higher. Conversely, returns averaged 18 per cent when forecast growth was 5 per cent or less…..

These bottom-up forecasts call for the companies in the S&P 500 to grow earnings by 33 per cent this year and another 16 per cent in 2011. … QED. [More here]

(c) Given (a) and (b) above, is it any surprise that this is happening?

Investors withdrew a staggering $33.12 billion from domestic stock market mutual funds in the first seven months of this year, according to the Investment Company Institute, the mutual fund industry trade group. Now many are choosing investments they deem safer, like bonds.

If that pace continues, more money will be pulled out of these mutual funds in 2010 than in any year since the 1980s, with the exception of 2008, when the global financial crisis peaked. [More here]

Given the withdrawal of small investors and even savvy investors, is it too difficult to conclude that the US stock market is nothing but an incestuous den run by and for the benefit of investment banks?


The Philadelphia Region Manufacturing Index swung sharply negative – a completely unanticipated outcome by consensus opinion (surprise, surprise!). Look at this page at the Federal Reserve Bank of Philadelphia which conducts the survey and publishes it.

While some might take heart from the fact that businesses surveyed anticipate better conditions in six months, it might be instructive to look at what businesses anticipated in February 2010 for August 2010. The future general activity index was at 35.8 in February. The current index reading is -7.7. Enough said.

The Initial Jobless claims (seasonally adjusted) – claims filed for unemployment benefits by first-time unemployment claimants –recaptured the psychologically negative level of 500K.  The labour market is in a funk.

The ‘icing on the cake’ was the Congressional Budget Office pronouncing that the budget deficit for 2010-11 would be 70 billions more than projected earlier. From a ‘Bata shoe price’ type level estimate of 996 billion, the CBO has now revised its estimate to 1.066 trillion.

It is a matter of WHEN and not IF the Fed and consensus opinion would throw in the towel on ‘double-dip’.