August 3, 2010, iTulip

Good news, bad news, and another word of caution for the housing bubble hopeful

I started iTulip.com in 1998 to warn readers that the technology bubble was not just an investor “party� or a neat way to force technology onto the market but was an efficient way to savage the heart and soul of the American economy. In 2005, five years after the bubble collapsed, I was at a Stanford investment conference moderating a VC panel hopefully titled “The Money’s Back.� It wasn’t.

Five years later it still isn’t. Today Thomson Reuters published its PricewaterhouseCoopers/National Venture Capital Association MoneyTreeâ„¢ Report and Data: only three technology market segments show positive growth over 1999 investment levels with the remaining segments still off 13% to 98% more than a decade after the bubble peak.  More …

July 29, 2010, iTulip
Six years ago today the Brookings Institution released a report Sustained Budget Deficits: Longer-Run U.S. Economic Performance and the Risk of Financial and Fiscal Disarray that speculates the outcome that we outlined in our 1999 theory of a final asset price deflation and reflation cycle that pushes the U.S. economy over the edge into a debt and currency crisis. Where are we six years later?  More …

June 7, 2010, iTulip

Friday’s jobs data support our opinion that despite near zero interest rates and the largest fiscal stimulus since WWII, the U.S. economy is still not creating jobs fast enough to allow stimulus to be withdrawn without sending the economy back into recession. Median duration of unemployment in May approached twice the highest level reached during the severe 1980s recessions, far exceeding the previous 1983 peak.  More …

April 16, 2010, iTulip

SAN FRANCISCO (MarketWatch) — The Securities and Exchange Commission on Friday charged Goldman Sachs & Co. (GS 161.00, -23.27, -12.62%) and one of its vice presidents for defrauding investors by misstating and omitting key facts about a financial product related to subprime mortgages.

AntiSpin: Okay, so we made up the part about Goldman shorting its own stock today, but we wouldn’t put it past them. The SEC is suing Goldman in civil court for shorting its own clients by selling subprime mortgages while at the same time shorting the CDOs through another client.  More …

March 29, 2010, iTulip

September 2008 we wrote in US exchange rate and capital controls or bust?

Exchange rate and capital controls are viewed by our modern economics orthodoxy as the retrograde policy of desperate third world countries that can’t hack free markets. However, history teaches us to not discount the possibility that major economies even in our current times may use them as a last resort. Each day the front page of the newspaper is plastered with reports of one last resort measure after another. It’s time to give the possibility of exchange rate and currency controls serious consideration.

In March 2010, the Foreign Account Tax Compliance Act of 2009 was tagged on as an amendment to the Hiring Incentives to Restore Employment Act (HIRE), Obama administration’s latest bid to restore US labor markets to pre-crisis levels. Over the weekend, several hysterical reports began to circulate claiming that this bill amounts to enforcement of capital controls. Nonsense.  More …

February 3, 2010, iTulip

At least one good thing came out of the housing fiasco. We’ll never have to clean up after another mess made by mortgage brokers selling liar loans to borrowers who can’t afford to repay.

No more exploitation of the dreams of new entrants to the middle class, built on the fantasy that they can afford a home that sports a price that has been inflated by decades of government loan subsidies.

No more Fed buying blown up asset-backed securities that backed bogus sub-prime mortgages to rescue banks that should be allowed to fail.

That’s all behind us. We learned our lesson! The government will prohibit these kinds of loans, prosecute violators, and never allow this mistake to happen, again.

Wait. What?  More …

January 16, 2010, iTulip

by Joost de Jong - January 15, 2009

As we gently slide toward the second dip of our roller-coaster recession, it may be time to consider our oldest ally across the ocean. Britain, you might think, but alas, that is a relationship that took some time to develop after the nascent United States decided to take its own course some 234 years ago. No, I mean France, that stubbornly self-serving nation that enjoys a level of economic growth and stability that the US has yet to attain.

Much of the iTulip editorial for the past decade has been dedicated to identifying the poor monetary and regulatory policies that lead to a never-ending sequence of financial bubbles. In the spirit of offering constructive alternatives, we are compelled to look outside US borders for a better model, to another nation that appears to manage its responsibilities to its constituency better. For that, my choice is France.  More …

January 5, 2010, iTulip

I’m working on projects this afternoon, trying to focus, but I’m distracted. Helicopters hover nearby. For over an hour. Loud helicopters. Yes, black helicopters.

Don’t worry. They were not here to invade iTulip headquarters in our Boston suburb where MIT and Harvard graduates come to breed and avoid sending their offspring to second rate public schools. They rather spend their money on expensive homes and high real estate taxes than on that and private school tuition to boot.

It’s a place where you see a SWAT team as often as a giraffe. Yet as I tool the back roads to town on an errand, a SWAT team is exactly what I encounter. I take this picture through my windshield.  More …

November 15, 2009, iTulip

by Joost de Jong

As a European investor, the DJIA has lost 44% over the past ten years, and that’s not the worst of it.

It was hard to miss the DJIA returning to the glorious level of 10,000 first achieved more than ten years ago, in March 1999. Recently various stock market pundits came together to celebrate the regaining of that level with a flood of uninformed cheer the airwaves and cable channels exhorting, We’re back, baby! Time to pay bonuses! In Goldman we trust! From our European vantage point, things look a little different.  More …

August 19, 2010, iTulip

Inflation is a process, not an event - Part I: Three inflation fallacies

- What have we forgotten the nature of inflation since the 1970s?
- Where is the U.S. economy in the transition from low to higher inflation?
Monetary authorities and economists focus on inflation expectations because inflation expectations have a way of becoming reality over time. Inflation expectations, after falling hard in 2008, have been steadily rising since early 2009, and actual inflation has tracked expectations, with a time lag, as usual. Recently, however, inflation and inflation expectations have started to dip again. Is it time for the Fed to hit the deflation spiral panic button?  More …

July 30, 2010, iTulip

“Those who cannot remember the past are condemned to repeat it.” - George Santayana

Deflation is back in the headlines. Quantitative easing (QE) is the call.

• Can the government and the Fed keep the money supply growing and prevent deflation?
• Is the deflation a real threat?
• How much QE is required?
• Or is QE irrelevant?
• Double-dip recession or staggering recovery?
• Gee, can’t we just depreciate the dollar again?
• From the Complaints bin: Hey, where’s the inflation you forecast?
• Stealth inflation. Deal with it.

Will the Fed hit the QE launch button soon to head off impending deflation? The question makes two assumptions. One, that the Fed faces a clear and present deflation threat. Two, that QE is an important policy tool to fight deflation. We find clues the answers in the outcome of the previous two games of the now 12-year-old deflation versus disinflation tournament. If we’ve learned anything after hearing deflation forecasts for a dozen years it’s this: when the Fed starts talking about deflation, grab your wallet. The money supply is about to take off.  More …

July 13, 2010, iTulip

Follow the money, let the data lead you, stay independent, and accept the fact that the political economy is not quantifiable

In his impetuous missive “Economics is Hard. Don’t Let Bloggers Tell You Otherwise� Richmond Fed researcher Kartik Athreya goes after the economics blogging community like a blindfolded kid batting a piñata full of hornets and received a series of predictably stinging responses. Presenting his own views and not those of his employer, he argued that bloggers practicing economics without a license have sent millions of unsuspecting economics consumers to hell in a hand basket of “incoherent or misleading� advice.

Athreya wants us to believe that a PhD in economics is an effective prophylactic against consumer quality violations. But the argument is a tough sell after a decade of economic booms and busts that taught the American public the hard way that accreditation offers no measure of protection to consumers of the output of professional economic analysts. Quite the opposite.

In fact, the failures and foibles of the macroeconomics profession created the market for economics bloggers in the first place.  More …

June 28, 2010, iTulip

Double-dip recession talk is all the rage. “More spending, the depression is here!” yells Paul Krugman in today’s New York Times.

We told you as early as 2006 that monetary and fiscal stimulus can halt a deflation spiral, but central banks and governments can’t print purchasing power a year or so after the stimulus the negative impact of reflation, the crowding out of private lending by government lending, starts to be felt as the economy grows in nominal terms but shrinks in real terms. A recession can’t return if it never really went away in the first place.  More …

June 18, 2010, iTulip

And the World Cup may be won by a herd of wild Burundi elephants

Central bankers worldwide are in the awkward position of needing to profess 100% confidence in a hopelessly flawed and outdated international money standard while simultaneously hedging its potential demise with a reserve asset that they claim to have abandoned nearly 40 years ago.

On the one hand they are all-in on global monetary system based on a fiat currency issued by a single nation with a declining global output share, an unsustainable structural fiscal deficit, $60 trillion in total contingent liabilities, and dependence on asset price inflation for economic growth, with no path out of any of them under a political system dominated by special interests. On the other hand these same central bankers have to hedge the risk that some day systemic flaws in the monetary system are expressed as a currency crisis. The only way to do that is with the only international currency in existence that does not have a national origin or reflect a set of geopolitical interests: the fourth currency, gold.

Demand for gold by governments as the inevitable crisis approaches is pushing gold prices to all time highs. But that doesn’t keep Morgan Stanley analyst Ruchir Sharma from making yet another dire gold price collapse forecast, at least the 100th we’re read since buying gold in 2001.  More …

June 11, 2010, iTulip

As, pent in an aquarium, the troutlet
Swims round and round his tank to find an outlet,
Pressing his nose against the glass that holds him,
Nor ever sees the prison that enfolds him;
So the poor debtor, seeing naught around him,
Yet feels the narrow limits that impound him,
Grieves at his debt and studies to evade it,
And finds at last he might as well have paid it.
- Barlow S. Vode

We’ve spent years talking to academic or industry economists who’ve given us a good understanding of the myriad ways governments drag economies into a state of over-indebtedness and how, theoretically, they might get out of it. It’s far easier to pontificate and speculate about debt and money goings on in Greece, Iceland and ex-Soviet countries, and speculate about euro zone countries leaving the euro than it is to work through a debt crisis with the relevant parties, with representatives of government and of international financial institutions (IFI) such as the IMF, within the operational constraints of the real world.

After all of the newspaper editorials are written someone still has to sit down with private and public lenders and borrowers to work out a deal and execute on it, even as the accusations fly in the press and angry citizens take to the streets. Such a person has the experience to offer informed opinions on risks, options, and outcomes for the sovereign debt crisis that has followed, with gruesome predictability, the global financial crisis before it. That’s where our guest, Founder and Managing Partner of Recovery Partners, Alex Jurshevski comes in.

EJ: You started in this industry in the early 1980s. What’s your assessment of the risks that remain in the financial markets in the wake of the global financial crisis?

AJ: Looking across the entire OECD this year you’re looking at a funding gap on the order of $12 to $13 trillion that needs to be funded and this is going to create pressures in financial markets—pressures we’re already feeling now in the sense that the markets have gotten very balky. There’s limited liquidity in a lot of the funding markets. Many deals are being pulled. Even up here in Canada we’re seeing a number of IPOs for good issuers being pulled because the investor base has simply retreated and is, I think, waiting for things to shake out. This is, in my opinion, one of the worst crises I have ever seen and it’s something I don’t believe is going to go away as a consequence of the “reflate-and-waitâ€� strategy which is what I think the authorities were counting on when they implemented the QE to start with.  More …