Road to Nowhere


We’re on a road to nowhere, come on inside
Taking that ride to nowhere, we’ll take that ride
Feeling okay this morning, and you know
We’re on a road to paradise, here we go, here we go

– Talking Heads Financial Services & Brokerage

Where do you think 5 years of All Ords got you? Dan Denning reports: Nowhere

Where do you think 5 years of All Ords got you?

Where is it going to get you in the next five years? Who knows? But with government influence and debt on the rise, there are probably some severe misallocations in the economy. On a global and local scale. At some point they are going to have to reallocate. Until then, it’s the road to nowhere. Again. Still. Indefinitely.

Don’t Worry, I’m a PHD

The analytical ability of central bankers is said to be immense. The combined wisdom of their knowledge and advanced computer modelling systems is what keeps us on track. Like the CFO of a company, the Governors, Chairmen and Presidents of central banks around the world manage the financial health of their economies.

None are more revered than Maestro Alan Greenspan, who recently put his remarkable skills to the test:

“If home prices stay stable, then I think we will skirt the worst of the housing problem,” Greenspan said.

Wow. What a genius. Although Greenspan would know, as he financed the credit bubble which created the housing bubble in the first place.

Unlike with Bernanke, things aren’t “unusually uncertain” to Greenspan: “We’re in a pause in a recovery, a modest recovery, but a pause in the modest recovery feels like a quasi-recession.”

Get it? But how does Greenspan know all this? Surely he sees the same numbers as every other economist.

Well, it turns out the numbers aren’t terribly enlightening in the first place. The Financial Times reports on how “Bernanke faces US growth mysteries” after the second quarter growth data came out. Among the analysis of the released data was this:

“The most interesting numbers in the release were not about the second quarter at all – they were revisions for 2007, 2008 and 2009. These showed that the recession was even deeper than previously thought. Output in 2009 was 1 per cent below the previous estimate.”

So we know the numbers are rubbish, but we still analyse them and our policy makers use them to make decisions. Sounds like a great idea.

One of the decisions being debated is the extension of the Bush Tax Cuts. Economists are all over the place on this one:

Geithner: Defends Letting Tax Cuts Expire

Bernanke: “We ought to maintain a reasonable degree of fiscal support, stimulus for the economy. [Extending the tax cuts is] one way.”

Greenspan: Extending Bush Tax Cuts Without Paying For Them Could Be ‘Disastrous’ (Dan discussed this on Monday)

Deutsche Bank: If Bush Tax Cuts Go, Recovery Dies

Obama: to allow Bush tax cuts to expire on schedule

So what can we take from this? A little less than nothing, most likely.

The Greatest Stimulus Stories

The stimulus stories will continue long after the stimulus is gone. But the chronic stuff ups extend to infrastructure spending as well. Kenneth Davidson, Senior Columnist at The Age reports that the National Broadband Network “was approved without any cost-benefit analysis or even a rudimentary business case to support it.”

All 50 billion dollars of it. If a company’s management team did this, it wouldn’t last. But when it comes to government, there are only 2 alternative “management teams” to choose from, and neither are likely to get it right.

Once again, we Australians have to bow out to superior US performance. When it comes to stimulus spending, few can beat the $294,958 allocated “for reducing menopausal hot flashes through yoga.” There was also something about spending on monkeys taking cocaine.

Two US senators, one of which is John McCain, have come up with a list of stimulus spending they “think [is] stupid and inappropriate.” There are 100. You can check out the list here. While you’re at it, here is last year’s version by the same people. Each state is running news stories on its share of the 100.

But on one thing we Aussies remain ahead. Our stimulus programs managed to kill people.

The Greatest Bailout Stories

It turns out that bailouts and toxic assets can be a profitable business proposition. Back in May we learned that the Federal Reserve was going to do handsomely on its mortgage backed securities investments (MBS).

“According to CBO estimates, the central bank’s MBS investments and other crisis-mode assets will turn a record $70 billion profit for the Federal Reserve this year.”

That’s five times Goldman Sachs’ 2009 profit. Ooops.

On the other side of the Atlantic, a similar farce is playing out:

“[Northern Rock plc], spun from the carcass of the old Northern Rock, which went bust in September 2007 and is still state-owned, seemed to have all the advantages of a fresh start…

Yet Northern Rock, in the six months to June 30th, was unable to make a profit… The simple business of arranging new mortgages and scooping up the difference between the interest it charged on loans and the interest it paid for funds should have put the bank into positive territory. It did not. Northern Rock plc recorded a loss of €140m over the period.

Meanwhile, the rump of the old bank, dubbed Northern Rock (Asset Management) plc, or NRAM, supposedly saddled with all the toxic stuff, came out with a profit of €349.7m.

So it turns out that bankers only make profits when they are high on toxic assets. Perhaps this is why they invested in subprime in the first place. Speaking of which, Fannie Mae is back for more cash from the Treasury, while bailed out GM donates money to the Congressional Black Caucus foundation.

Election Update

Election news has descended into a complete farce. Sorry, that isn’t terribly new. But can you remember if any election battle was so void of policy debates in the media?

If image and snipe comments are what make politicians, then the successful politicians to come are going to be a rather horrific bunch. It seems leaders don’t need brains anymore, if they ever did.

Give a moment’s thought to where this leads Australia.

Meanwhile, we will hear more about not having debates than debates. About reversal of policy instead of policy (not that we are complaining about this). And that “Tony Abbott is not unelectable”, which is a surprise. (The cartoon on that last article is a cracker.)

But seriously, if you read the following in a newspaper about a foreign politician leading a party, what would you think?

“The most pervasive and perhaps fatal perception in this election is that Tony Abbott is unelectable. This entrenched idea is killing the Labor campaign; yet Labor has cultivated the notion and it has been an article of faith among progressive political and media elites in Australia for years.”

Including that Labor is in itself a misspelt name, it makes Australian politics look ridiculous. Ok, so maybe Paul Kelly at The Australian has a point with Tony Abbott specifically. But still. An unelectable politician leading polls..? (Even if it’s his party leading polls, not the man himself. Oh sorry, person himself.)

More interestingly, what makes a left leaning, government enthusiastic Labor voter? Well, firstly, you have to be unrealistically optimistic about your party’s ability to tell people how to live their lives. Secondly, you have to be unrealistically optimistic about people wanting their lives to be controlled by government. And thirdly, you have to be unrealistically optimistic about people voting to have their lives controlled. All this is evident from last week’s news poll:

“Among ALP voters 77 per cent think Julia Gillard will win and only 5 per cent think Abbott will win. In short, Labor voters think the election is a no contest. Somehow, some way, they are convinced Abbott has no hope when the exact same poll shows him winning!”

But what about coalition voters?

“By contrast Coalition voters are more realistic, being split 42-38 per cent in predicting an Abbott victory.”

Realistic hey?

“And the nation overall is confident that Gillard will win 56-23 per cent.”

56% is confident?

All this is rather odd. So they expect a surprise stuff up from Abbott, or a surge from the new and improved real Gillard. Or they believe Abbott when he says he is the underdog.

And now we hear that Howard and Rudd are back meddling again. But are their comments discussion of policy? Nope.

Overseas is close to home

HSBC’s global chairman of personal and commercial banking and insurance, Sandy Flockhart, has commented on something that has been bothering Dan Denning for a while now. “HSBC has one of the more conservative funding profiles of the global banks, with deposits funding 79 per cent of its lending. The deposits of Australia’s big four fund a little more than 50 per cent of lending. The difference is largely made up in borrowings, leaving them more vulnerable to supply and pricing on wholesale markets.”

In other words, Aussie banks are leveraged to foreign debt markets instead of their depositor base. That means it matters a great deal what is going on overseas. Hopefully Glenn Stevens won’t feel too unimportant.

He will be pleased to hear that “Greece has made ”remarkable” progress implementing an austerity program to tackle its debt crisis… the IMF and EU said Thursday. They warned, however, that the country still faces significant challenges.”

Ok, so they would have said that regardless. But the key part of the message was tucked away:

“…and is expected to receive the second installment of rescue loans next month”

Oh, so they are doing well, but we will increase their debt burden. Great.

As it is

How is this for an opening statement on CNBC:

“Investors should’ve listened to me already six months ago, when I wrote that the Fed will continue to monetize, and this is my view: They will never let up. They will print and print and print, until the final crisis wipes out the entire system… They are very bad forecasters of economic events. In particular that was the case for Mr Greenspan, but Mr Bernanke is in the same boat. He has no clue what the economy is doing.”

Marc Faber continues his legendary TV interviews.

In the bad news box, we find the following:

Bloomberg reports unemployment probably rose in July, while Reuters ponders whether jobs have become a leading indicator. The Financial Times reports that the “faltering US recovery trips dollar… as investors bet that evidence of a faltering US recovery will lead to further monetary easing by the Federal Reserve.”

So Marc Faber doesn’t look so crazy anymore, does he?

Until next week,

Nickolai Hubble.
The Daily Reckoning Week in Review

Nick Hubble
Nick Hubble is a feature editor of The Daily Reckoning and editor of The Money for Life Letter. Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like. He then brought his youthful enthusiasm and energy to Port Phillip Publishing, where, instead of telling everyone about The Daily Reckoning, he started writing for it. To follow Nick's financial world view more closely you can you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails.

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