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View Full Version : FIRE economy is dead and I'm a freaking investment genius.



Jim Nickerson
07-17-09, 01:45 AM
OP-ED by Paul Krugman, NYT 07/16/09 http://www.nytimes.com/2009/07/17/opinion/17krugman.html?_r=1

By PAUL KRUGMAN (http://topics.nytimes.com/top/opinion/editorialsandoped/oped/columnists/paulkrugman/index.html?inline=nyt-per)

Published: July 16, 2009
The American economy remains in dire straits, with one worker in six unemployed or underemployed. Yet Goldman Sachs just reported record quarterly profits ó and itís preparing to hand out huge bonuses, comparable to what it was paying before the crisis. What does this contrast tell us?

First, it tells us that Goldman is very good at what it does. Unfortunately, what it does is bad for America.

Second, it shows that Wall Streetís bad habits ó above all, the system of compensation that helped cause the financial crisis ó have not gone away.

Third, it shows that by rescuing the financial system without reforming it, Washington has done nothing to protect us from a new crisis, and, in fact, has made another crisis more likely.
More at link.

Jim Nickerson
08-20-09, 01:41 PM
Whatever is the definition of an unexciting thread, this one meets it.

Somewhere on iTulip is a Title or category heading that the FIRE economy is dead, or has been dead for a while.

The picture below is the best I can do to document iTulip's (EJ's) position that the FIRE economy is dead. Note upper right hand corner of picture.http://www.itulip.com/images/consumercredit1844-Aug2009.gif

However in that same piece just beneath the above picture it is written "This is one of the reasons why we believe that the FIRE Economy ended with the 2007 collapse,.." (http://www.itulip.com/forums/showthread.php?p=116417#post116417)So perhaps there is something Biblically devine with the FIRE economy, it "died" in 2001, arose from the dead, and then "died" [ended] again in 2007.

It was Clinton being questioned about Lewinsky who replied "It depends on what the definition of "is" is."

A similar format of questioning can be used to ask with regard to the meaning of "dead."

Is Ariel Sharon dead? Well, it depends on what is the definition of "dead."

Below from Wikipedia (http://en.wikipedia.org/wiki/Ariel_Sharon)



"On 28 May 2006, Sharon was transferred from the hospital in Jerusalem to a long-term care unit of the Sheba Medical Center (http://en.wikipedia.org/wiki/Sheba_Medical_Center) in Tel HaShomer (http://en.wikipedia.org/wiki/Tel_HaShomer), a large civilian and military hospital. Ha'aretz reported that this move was an indication that Sharon's doctors did not expect him to emerge from his coma in the foreseeable future. Dr. Yuli Krieger, a physician not involved in Sharon's case, told Israel Radio (http://en.wikipedia.org/wiki/Israel_Radio) that the chances of waking up after such a lengthy coma were small. "Every day that passes after this kind of event with the patient still unconscious the chances that he will gain consciousness get smaller," said Krieger, Deputy Head of Levinstein House, another long-term care facility.[38] (http://en.wikipedia.org/wiki/Ariel_Sharon#cite_note-37)

"On 23 July 2006, CNN reported that Sharon's condition was deteriorating and his kidney function was worsening.[39] (http://en.wikipedia.org/wiki/Ariel_Sharon#cite_note-38) On 26 July 2006 doctors moved him to intensive care (http://en.wikipedia.org/wiki/Intensive_care_medicine) and began hemofiltration (http://en.wikipedia.org/wiki/Hemofiltration).[40] (http://en.wikipedia.org/wiki/Ariel_Sharon#cite_note-39) On 14 August 2006 doctors reported that Sharon's condition worsened significantly and that he was suffering from pneumonia (http://en.wikipedia.org/wiki/Pneumonia) in both lungs.[41] (http://en.wikipedia.org/wiki/Ariel_Sharon#cite_note-40) On 29 August, doctors reported that he had been successfully treated for his pneumonia and moved out of intensive care back to the long-term care unit.[42] (http://en.wikipedia.org/wiki/Ariel_Sharon#cite_note-41)

"On 3 November 2006, it was reported that Sharon had been admitted to intensive care after contracting an infection, though doctors insisted that his condition was 'stable'.[43] (http://en.wikipedia.org/wiki/Ariel_Sharon#cite_note-42) He was moved out of the intensive care unit on 6 November 2006 after treatment for a heart infection. Doctors stated that "his heart function has improved after being treated for an infection and his overall condition has stabilised".[44] (http://en.wikipedia.org/wiki/Ariel_Sharon#cite_note-43)

Sharon has remained in a long-term care centre since 6 November 2006.[45] (http://en.wikipedia.org/wiki/Ariel_Sharon#cite_note-44) Medical experts have indicated that Sharon's cognitive abilities were destroyed by the massive stroke, and that he is in a persistent vegetative state (http://en.wikipedia.org/wiki/Persistent_vegetative_state) with slim chances of regaining consciousness.[46] (http://en.wikipedia.org/wiki/Ariel_Sharon#cite_note-45)

On 13 April 2007, it was reported that Sharon's condition had slightly improved and that according to his son, Omri (http://en.wikipedia.org/wiki/Omri_Sharon), he was marginally responsive.[47] (http://en.wikipedia.org/wiki/Ariel_Sharon#cite_note-46) On 26 February 2009 he turned 81, still comatose but in a stable condition.[48]

Perhaps were I an Israeli and had experienced what Sharon did, early on I would have been "unplugged," and I would be planted however deep they bury people in Israel. I would be using NO resources. I would be "dead" in the real sense of the word.

Maybe a few of the 180 views of this thread-opening post read Krugman's op-ed article. In it he also noted with regard to "the life support" [my words] to the financial sector:



"You can argue that such rescues are necessary if we’re to avoid a replay of the Great Depression. In fact, I agree. But the result is that the financial system’s liabilities are now backed by an implicit government guarantee.

"Now the last time there was a comparable expansion of the financial safety net, the creation of federal deposit insurance in the 1930s, it was accompanied by much tighter regulation, to ensure that banks didn’t abuse their privileges. This time, new regulations are still in the drawing-board stage — and the finance lobby is already fighting against even the most basic protections for consumers.

"If these lobbying efforts succeed, we’ll have set the stage for an even bigger financial disaster a few years down the road. The next crisis could look something like the savings-and-loan mess of the 1980s, in which deregulated banks gambled with, or in some cases stole, taxpayers’ money — except that it would involve the financial industry as a whole.



Today David A. Rosenberg wrote in gluskinsheff.net note:




"It could well be that all the effort the government is making to stave off the decline in the record debt load the U.S. is carrying will just delay the inevitable for another day. The fact that the Fed is extending TALF to buy up distressed commercial real estate debt, not to mention financing RVs and mobile homes. Moreover, the Administration’s move to take over two auto companies and then immediately offer rebates (now that the government is an owner, it can do all it can in its powers to rev up sales) is a signpost that every effort is going to be made to perpetuate discretionary spending even though the boomers are not financially prepared for retirement, and that every effort will be made to resist the need for the household sector to pare their record level of liabilities on their balance sheets. You cannot possibly make this stuff up, but now appliance manufacturers have successfully lobbied for a "cash for clunker" program of its own! See Program to Offer Appliance Rebates on page A3 of the WSJ — a $300 million federal program to incentivize homeowners to replace old refrigerators, air conditioners, washer-dryers and dishwashers with new "high-efficiency" units!


"However, the catch-22 is that not until the culture of credit and conspicuous consumption has been replaced by a renewed focus on retirement planning and financial prudence will it be safe to call for the fundamental lows in the market. A 49% flashy bear market rally notwithstanding, we are not at some natural equilibrium point in the economy as the Federal Reserve and the government have moved to cannibalize their own balance sheets as an offset to the necessary deleveraging in the private sector. The Administration is merely deploying delay tactics, and one of them, by the way, is the new rules governing the credit card industry in the name of ‘consumer protection’. The reality is that here we are, two years into this collapse in creditworthiness, and still the government believes that everyone has a right to a credit card. There are very few who remember in the 1950s, when the first Diners Club cards were mailed out, that most people owned just one piece of plastic and that was considered a privilege.



So depending upon what the definition of "dead" is, my impression is that the FIRE economy is a long way from being "dead" in the sense that "dead" means a cessation of utilization of resources, which in regard to the US government means ever more debt to keep FIRE alive and bonuses flowing in what appears to be ultimately an attempt to return the American consumer to providing 70% of GDP.


GRG55 perhaps cogently commented [I used "perhaps" for my desire not to give him a "big head."]:




How long did it take the FIRE economy to replace the post-WWII manufacturing economy in the USA? Did it actually ever completely replace it?


Why should the current transition be much different in terms of its pace?


I think the only thing we can say with reasonable confidence [and that only if one accepts iTulip's research and conclusions] is that the FIRE economy cannot be revived, and therefore the process of the change has already started.



If GRG55 is correct, it will be a long time before the FIRE economy is "dead" in the sense that it stops using resources that could/would/should be better deployed for the continuation of the US as an important part of the global economy. What is a "long time?" To me it is something on the order of one of Doug Short's depictions below, which might mean another decade at least.


http://www.itulip.com/forums/attachment.php?attachmentid=2020&stc=1&d=1250788823


Calls for market lows in the SPX reaching 600 or below in the next 4-5 months though possible, perhaps suggest a quite rapid resolution to such a long-term problem as we have in the US. Who knows where the equity markets will be at any time in the future, but my suspicion is that the "death" of the FIRE economy is way away at the moment from being reflected in the markets and if past were to be prologue, we are still way away from a secular bear market bottom if such depends upon a resolution of the problems in the FIRE economy with re-emergence of financial assets becoming something useful for the continuation of the economy.

jk
08-20-09, 01:50 PM
Calls for market lows in the SPX reaching 600 or below in the next 4-5 months though possible, perhaps suggest a quite rapid resolution to such a long-term problem as we have in the US.
look at the nikkei chart. it had another big sell-off and that did NOT mean a rapid resolution. i don't think we can call the fire economy dead; it's gotten a lot of life support - trillions, and it still has the white house on speed dial.

edit: and until it is dead, it will continue to drain money from the productive economy

metalman
08-20-09, 01:54 PM
great post, jim. extensive. don't forget this nikkei/dow forecast...

http://www.itulip.com/images/debtdeflationbearStart122707.gif

http://www.itulip.com/images/debtdeflationbear111908.gif

and this one...

http://www.itulip.com/images/debtdeflationbear2009.gif

Jim Nickerson
08-20-09, 03:17 PM
Jesse's American Cafe has a nice opinion piece by him that touches on a number of issues. Greed, hidden taxes, economic theories. Quite a good article as it struck me.

http://jessescrossroadscafe.blogspot.com/2009/08/why-austrians-keynesians-and.html


Closing sentiment: "It means that until the banks are restrained, and the financial system is reformed, and balance is restored, there can be no sustained recovery."

vinoveri
08-20-09, 04:22 PM
Closing sentiment: "It means that until the banks are restrained, and the financial system is reformed, and balance is restored, there can be no sustained recovery."

But there can still be a bubble formed in equties and commodities due to the liquidity bubble produced by the global CBs. Look at the fed funds, and ask yourself whether you would borrow at ~0% to buy other assets if you could?

Recall 2006 and early 2007 when stocks kept going up even as fundamentals looked not to support he heady advances, but it kept going and going until ....

This rally in equities is becoming self-fulfilling and sustaining in my view as everyone from money managers to retail investors are jumping in because they are afraid of being left behind (I think EJ even observed that the fear of losing out is stronger than greed).

the problem is, not having ridden the 50% rise in SPX up over the last 5 months, I'm reluctant to jump in now b/c I think there is limited upside and a crash is somewhat imminent, but then again I told myself that back in early July.

doom&gloom
08-20-09, 05:29 PM
interestingly i spoke with a broker today whose clients are the wealthy crowd. he ays not a one of them is jumping in now...

ThePythonicCow
08-20-09, 06:59 PM
Jesse's American Cafe has a nice opinion piece by him that touches on a number of issues. Greed, hidden taxes, economic theories. Quite a good article as it struck me.

http://jessescrossroadscafe.blogspot.com/2009/08/why-austrians-keynesians-and.html
Nice, thanks.

Jesse writes in this article:

Discussion rarely proceeds very far because of the dialectical nature of American thought. Both extremes are wrong, but they seem to content to merely bash each other, pointing out their errors, while repeating the same mistakes over and again.
This nicely describes the never ending Inflation vs Deflation quarrelling that occurs on and between some of the web forums I read.

Jim Nickerson
08-20-09, 07:03 PM
But there can still be a bubble formed in equties and commodities due to the liquidity bubble produced by the global CBs. Look at the fed funds, and ask yourself whether you would borrow at ~0% to buy other assets if you could?

Recall 2006 and early 2007 when stocks kept going up even as fundamentals looked not to support he heady advances, but it kept going and going until ....

This rally in equities is becoming self-fulfilling and sustaining in my view as everyone from money managers to retail investors are jumping in because they are afraid of being left behind (I think EJ even observed that the fear of losing out is stronger than greed).

the problem is, not having ridden the 50% rise in SPX up over the last 5 months, I'm reluctant to jump in now b/c I think there is limited upside and a crash is somewhat imminent, but then again I told myself that back in early July.

You point is correct, I believe. Despite there being numerous reasons, assuming they are correct, that there should be new lows at some point in the future, it seems reasonable that all the current reflationary efforts may succeed with driving equities higher--that has certainly been the case so far.

Whether the current run-ups in equities have been promoted by the "smart money" or the "dumb money," if one's goal is making money in the markets, then those invested long on equities since March have been very smart.

jk
08-20-09, 08:52 PM
Whether the current run-ups in equities have been promoted by the "smart money" or the "dumb money," if one's goal is making money in the markets, then those invested long on equities since March have been very smart.
they were very smart provided they were in cash or short in january. otherwise, not so smart.
most of those invested long in equities since march were similarly invested in feb, jan, dec, nov, oct, etc.

vinoveri
08-20-09, 09:11 PM
they were very smart provided they were in cash or short in january. otherwise, not so smart.
most of those invested long in equities since march were similarly invested in feb, jan, dec, nov, oct, etc.

those who stayed invested during the whole period are of course still down relative to others who exited before the crashes, and who have stayed out through the recent runup.

If a year from now the SPX is at new highs, those who slept through the whole event staying fully invested will look pretty smart compared to some of us who only knew when to get out, and stubbornly held to our beliefs waiting for the true low that never came.

You know how Mish et al are rightly made fun of for sticking to their deflation prognoses, even as the FEd and governments do things that they never thought possible (e.g., expand the balance sheet buying mortgages etc.).

I wonder if some of us are falling into the same trap of incredulous denial even in the face of market action.

jk
08-20-09, 09:15 PM
those who stayed invested during the whole period are of course still down relative to others who exited before the crashes, and who have stayed out through the recent runup.

If a year from now the SPX is at new highs, those who slept through the whole event staying fully invested will look pretty smart compared to some of us who only knew when to get out, and stubbornly held to our beliefs waiting for the true low that never came.

You know how Mish et al are rightly made fun of for sticking to their deflation prognoses, even as the FEd and governments do things that they never thought possible (e.g., expand the balance sheet buying mortgages etc.).

I wonder if some of us are falling into the same trap of incredulous denial even in the face of market action.
it's always worth questioning one's own assumptions and beliefs. but if the s&p is at new highs, what do you think gold will be doing? and even if you end up with less than if you were 100% in equities, think of what you saved in antacids and sleeping pills. there's such a thing as a risk adjusted return. that's the metric i pursue, myself.