Where did all the money go?

People are babbling about all of the "money" that the Federal Reserve is supposedly "printing", but I knew that the Fed was not "printing" lots of currency and that a lot of the "money" was being kept as banking reserves at the Fed. I went ahead and looked for the Fed's "balance sheet" which has a lot of the relevant data.

As far as all of the so-called "printing" of money is concerned, it's mostly a lot of hot air and malarkey. The net change over the past year has been an increase of about $81.5 billion in U.S. currency. That's all. The bulk of the so-called "printed" money is actually just sitting in the Federal Reserve computers as banking "reserves" - about $770 billion of the $1.2 trillion increase in "money" on the Federal Reserve balance sheet. Check out the "balance sheet" for the Federal Reserve - the last column gives you the delta (in millions of dollars) from a year ago:

8. Consolidated Statement of Condition of All Federal Reserve Banks
Millions of dollars
                                                 Eliminations                          Change since
                                                     from       Wednesday        Wednesday        Wednesday
Assets, liabilities, and capital                consolidation Mar 18, 2009     Mar 11, 2009     Mar 19, 2008

 

Assets
Gold certificate account                                           11,037                0                0
Special drawing rights certificate account                          2,200                0                0
Coin                                                                1,827       -        8       +      511
Securities, repurchase agreements, term auction
      credit, and other loans                                   1,363,396       +  147,531       +  531,986
  Securities held outright                                        759,465       +  171,414       +   98,981
    U.S. Treasury securities (1)                                  474,704       +       43       -  185,780      
      Bills (2)                                                    18,423                0       -  133,937
      Notes and bonds, nominal (2)                                412,914                0       -   52,096
      Notes and bonds, inflation-indexed (2)                       39,378                0       +      941
      Inflation compensation (3)                                    3,990       +       43       -      688
    Federal agency debt securities (2)                             48,272       +    3,840       +   48,272
    Mortgage-backed securities (4)                                236,489       +  167,531       +  236,489
  Repurchase agreements (5)                                             0                0       -   62,000   
  Term auction credit                                             468,589       -   24,556       +  388,589
  Other loans                                                     135,342       +      673       +  106,417
Net portfolio holdings of Commercial Paper
  Funding Facility LLC (6)                                        240,713       -      145       +  240,713
Net portfolio holdings of LLCs funded through
  the Money Market Investor Funding Facility (7)                        0                0                0
Net portfolio holdings of Maiden Lane LLC (8)                      26,212       +       34       +   26,212
Net portfolio holdings of Maiden Lane II LLC (9)                   18,439       +       12       +   18,439
Net portfolio holdings of
  Maiden Lane III LLC (10)                                         27,628       +       31       +   27,628
Items in process of collection                         (330)          388       -      216       -    1,098
Bank premises                                                       2,187       +        1       +       46
Central bank liquidity swaps (11)                                 329,012       +   16,551       +  329,012
Other assets (12)                                                  45,582       +    3,844       +    4,424
    
      Total assets                                     (330)    2,068,620       +  167,634       +1,177,873

 

Note: Components may not sum to totals because of rounding.  Footnotes appear at the end of the table.

 

8. Consolidated Statement of Condition of All Federal Reserve Banks (continued)
Millions of dollars
                                                 Eliminations                          Change since
                                                     from       Wednesday        Wednesday        Wednesday
Assets, liabilities, and capital                consolidation Mar 18, 2009     Mar 11, 2009     Mar 19, 2008
                        
Liabilities
Federal Reserve notes, net of F.R. Bank holdings                  862,732       +      467       +   81,531
Reverse repurchase agreements (13)                                 65,027       -    1,358       +   18,884
Deposits                                                 (0)    1,083,408       +  167,824       +1,067,483      
  Depository institutions                                         780,306       +  147,816       +  770,131
  U.S. Treasury, general account                                  100,379       +   65,948       +   95,015
  U.S. Treasury, supplementary financing account                  199,937       -        8       +  199,937
  Foreign official                                                  2,490       +      697       +    2,391
  Other                                                  (0)          295       -   46,631       +        7
Deferred availability cash items                       (330)        2,933       -      787       -      332
Other liabilities and accrued dividends (14)                        9,405       +      281       +    5,328

 

      Total liabilities                                (330)    2,023,505       +  166,427       +1,172,894
                         
Capital accounts
Capital paid in                                                    22,533       +      173       +    3,005
Surplus                                                            21,140       +      193       +    2,682
Other capital accounts                                              1,443       +      842       -      707

 

      Total capital                                                45,115       +    1,207       +    4,979

See: http://www.federalreserve.gov/releases/h41/Current/

Basically, the Fed is "buying" assets from the banks in exchange for this so-called "printed" cash, and the banks turn around and "deposit" the "cash" at the Federal Reserve, increasing the banks' capital base. The theory is that somewhere down the road the Fed will be able to sell these assets and retire much of that "printed" money.

There is neither a big mystery here nor a great scandal or conspiracy, but there is plenty of room for all manner of pundits to "print" lots of scandal and conspiracy with impunity since few people besides me actually bother to take even a peek at the actual data.

-- Jack Krupansky

Opened a SmartyPig savings account - 3.25% APY!

SmartyPig.com is a new form of online bank. You can open savings accounts for specific goals and specify a monthly savings amount that will be automatically deducted from a traditional bank checking account. You can have more than one savings account and more than one savings goal and create them as you need them.

SmartyPig is currently paying 3.25% APY interest, better than all traditional bank savings accounts, including most CDs, and that is FDIC insured.

I just opened my first SmartyPig savings account today with a "retirement" savings goal 15 years from now, that translates into a $10 per month contribution.

I need to look into how suitable SmartyPig is for "parking" modeerate piles of cash for arbitrary periods of time, such as two to eighteen months, as an alternative to a traditional bank money market or CD account. After all, 3.25% APY is better than I can get anywhere else.

Incidentally, I found out about SmartyPig from a recent AARP publication, but they have actually been around for a little more than a year.

-- Jack Krupansky

Should I buy a new printer?

My old printer died somehow when I shipped it to my apartment in NYC last May. That was no great loss since I do very, little printing these days. In fact, in a typical year my only printing is travel itineraries and paper copies of e-tickets. I have managed to do without a printer since the middle of last May. But today I wanted to buy a bus ticket to the airport online and they require that the ticket be printed. My airline e-ticket and Priceline hotel reservation did not require a printed confirmation, but the bus ticket does. Oh Well. So, I decided to buy a new printer for $100 or so. But then I thought about it and did the math and decided that if I paid cash for my bus tickets over the next three years I would still not lose the amount I would have saved by buying the tickets in advance online once the price of the printer was factored in. Part of the calculation is that I do not bother claiming cash business expenses when I do my taxes. So, I changed my mind and decided that a printer would not be a good investment. I had already found a nice HP monochrome laser printer for $99 (originally $189), but money is money.

I checked the bus line's web site and found that there was a ticket office at Port Authority Bus Terminal (PABT) here in NYC. The bus line is CoachUSA, but the tickets are sold by Gray Line. I walked over to the office just inside the 42nd Street entrance and charged a round-trip ticket (NYC to Newark Airport) on my credit card for the same price as online ($25 roundtrip.) So, now I am all set for travel and without the need to purchase a new printer.

Maybe next year I will come up with a valid reason to buy a new printer.

-- Jack Krupansky

Should banks and hedge funds be permitted to contribute to volatility of markets?

Forget the phony outrage about Wall Street bonuses. The real villain, to my mind, is the extent to which the big banks and hedge funds are permitted to contribute to the volatility of markets rather than requiring banks to actively seek to moderate volatility. Specifically, all of the big banks, especially those that were formerly Wall Street investment banks, operate in-house proprietary trading desks that seek to take a cut of market volatility, including the stock market, bond market, foreign exchange market, and commodities markets. Many (most?) hedge funds do the same. That by itself is no harm to markets if done on a small or modest enough scale, but with so many large players so active in the markets it is inevitable that many of those seeking a cut of volatility are in fact dramatically increasing volatility. More than simply taking a small cut of the markets, they are becoming the markets and even small "adjustments" by them can cause major market moves.

Increased volatility of markets has four harmful effects: 1) markets move up faster than they would otherwise, 2) markets move down faster than they would otherwise, 3) markets reach much higher peaks than they would otherwise, and 4) markets reach much deeper bottoms than they would otherwise.

Higher peaks, especially in commodities, mean higher inflation.

Lower bottoms, especially in stocks and bonds, reduce household wealth and restrict business investment. In extreme cases it can cause deflation as well.

To be clear, I would not propose that we seek to restrict markets from functioning normally and properly, but simply that we prevent "hot money" from major banks and hedge funds from artificially manipulating markets in a way that increases volatility and distorts the true value of assets.

Exactly how to regulate the major banks and hedge funds from "becoming the market" would be a matter of great debate, but the basic concept would be to funnel records of all trades through a central clearinghouse and subtract out all of the bank and hedge fund trading to determine the size of the normal, "organic" market for any security or basket of security, and limit total bank and hedge fund trading to be at most a small fraction of the normal, organic market. Maybe that fraction is 5% or 10% or maybe only 2% total across all banks and hedge funds, but it simply cannot be allowed to be 1,000% or any large multiple of the underlying organic market.

As a specific example, the futures market works best when actual producers and actual consumers are the primary sellers and buyers of futures contracts. Banks and hedge funds can reasonably take the other side of a legitimate transaction by an actual producer or supplier, but non-producer and non-consumers should not be permitted to "make" a secondary market priced separately from what actual producers and actual consumers are willing to offer and bid. Wall Street should not be permitted to "drive" commodities prices. Unlike stocks and bonds, commodities are the "real" economy and should not be subject to speculation beyond that offered by actual producers and actual consumers. Regulations should be clear that commodities themselves (as opposed to production and distribution of them) are not a legitimate form of "investment." Excessive hording or dumping of commodities is not a valid function of any bank. Hedge funds should indeed be permitted to "hedge", but only to the extent that they are not distorting the underlying organic markets.

One additional form of regulation would be to ban banks from making "trading calls" where they indirectly manipulate markets by advising their "clients" to buy or sell selected securities on a short-term basis for short-term gain. Obviously we can't legislate free speech, but we can put a ban on the financial equivalent of screaming "Fire!" in a crowded theater, as well as the flip side of yelling "Gold!" to kick off a rush into a market.

The ultimate goal is simply that we prevent the banks and hedge funds from "becoming the market" or otherwise manipulating markets.

There is no need for an outright ban of short-term trading, simply that normal markets be permitted to function normally ex the banks and hedge funds.

Of course, we also need to keep a watchful eye on mutual funds to be sure that they do not suddenly become a new hotbed for hedge fund-like hot money trading.

The bottom line is that the bulk of Wall Street needs to shift away from its current short-term trading mentality and back to a focus on long-term investment.

The real economy needs Wall Street to support real, long-term investment. The real economy does not need Wall Street to profit from disasters of its own making.

-- Jack Krupansky

I continue to have great confidence in President Obama's economic team

Nothing new here, but I just wanted to reaffirm that I continue to have absolute confidence in President Obama and his economic team, including Tim Geithner and Ben Bernanke, despite all of the gratuitous scorn being heaped upon them. I have absolutely no reservations about any member of the team and their policy decisions to date. They have a big task in front of them and are doing an absolutely amazing job.

What about the big Wall Street bonuses? Yeah, what about them?!?! Talk about a red herring. Yes, the bonuses are absolutely outrageous, but so what?! President Obama and his economic team have plenty of much bigger fish to fry, so please, please, please stop trying to distract them from focusing on the core of the problem. The bonuses are a mere sideshow. Let Congress hold some hearings and then let's move on. If any laws are being broken, then of course the relevant law enforcement authorities will pursue the matter at that level, but the kind of mindless "outrage" being puffed up in the media and by disgruntled Republicans and non-centrist Progressives is a real waste of national energy.

Message to President Obama and his economic team: Back to REAL work.

-- Jack Krupansky

Future of Wall Street and public companies

With so many rules and regulations and with many more coming, one has to wonder about the future of public companies, the stock market, and Wall Street. Besides, with the advent of the Internet and direct access to consumers and businesses and financial institutions, what benefit does Wall Street really provide? I do not have any immediate answers, but this is something to think about.

One possibility is that a much smaller collection of companies will remain public while smaller companies and some larger companies seek shelter in status of non-public ownership or consolidation with other firms.

It is quite possible that Google (GOOG) was the last major tech IPO of our lifetimes, or at least until Wall Street morphs into a far more rational structure.

It would not surprise me if some of the big banks decided to go private, especially with their puny stock prices.

I remain comfortable with my modest stake in Microsoft (MSFT). It is certainly not be as glamorous as it once was, but it is relatively rock solid (despite what Apple fans and the anti-Microsoft crowd will tell you) and one of the very, very few companies with an AAA credit rating. And it pays a nice dividend which appears to be relatively safe and secure. I am not buying any more outright, but I am reinvesting dividends, at least for now.

I am wondering whether Verizon (VZ) might be a good investment, but I have not done any deep research yet. Landlines may be fading, but the phone companies are stealing cable customers as well. I am contemplating Qwest (Q) as well. One big question is what the new broadband infrastructure stimulus spending will mean for these companies.

-- Jack Krupansky

Friday evening at the FDIC - three bank failures

There were no bank failures a week ago, but Friday evening the FDIC announced that three banks were closed this past week:

1. FirstCity Bank, Stockbridge, Georgia. No assuming institution could be located, so the FDIC will simply mail checks to insured depositors for their insured amounts.
2. Colorado National Bank, Colorado Springs, Colorado. Herring Bank, Amarillo, Texas assumed all of the deposits.
3. Teambank, National Association, Paola, Kansas. Great Southern Bank, Springfield, Missouri assumed all of the deposits.

That brings to 20 the number of failed banks in 2009.

The FDIC does not give any advance notice of bank closures. In fact, it is usually a state banking regulator who does the closure and then FDIC is "named receiver" and then takes over and promptly arranges to sell as much deposits and assets as it can to a healthier bank.

The basic idea is to totally avoid old-fashioned "runs" on banks and pre-arrange the assumption of deposits by a healthy bank before the closure is even announced. In other words, there should be no disruption of service and no need for customers to lose any sleep.

-- Jack Krupansky

ECRI Weekly Leading Index rises moderately but remains deep in recession territory

The Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) rose moderately by +0.51% vs. -0.26% last week, still only barely above its 14-year low, but its annualized growth rate was unchanged at -23.9, remaining near its record low for its 60-year history of data of -29.9 for the week ended December 5, 2008, which is well below the flat line, suggesting that the economy will be struggling in the months ahead, but we may see some stabilization as well.

According to ECRI, "WLI growth held steady in the latest week and is clearly holding above its December low, suggesting that U.S. economic growth will stabilize in coming months."

The bottom line is that the ECRI WLI remains "flashing red." Alas, even the ECRI WLI is not a guaranteed, fool-proof economic indicator, especially when the data is mixed and there some amount of stimulus as well as potential problems in the pipeline.

My personal outlook is that: The recession of the U.S. economy that started in December 2007 and sharply accelerated in August 2008 currently shows no sign of an imminent end. No imminent end, but there are some "hints" that some stabilization may be coming soon.

Although the current economic reports show significant weakness, there is also a vast amount of potential stimulus in the pipeline that could kick-start the economy within the next couple of months.

-- Jack Krupansky

Macroeconomic Advisers say Q1 GDP tracking for a -5.0% annualized loss

Any day now, Macroeconomic Advisers (MA) will report their preliminary estimate for GDP in the month of January. Meanwhile, as of Friday they were forecasting that for all of Q1 2009 we would see an annualized decline of -5.0%. Note that an annualized rate is simply four times the actual rate for the quarter, so an annualized decline of -5.0% would indicate an actual quarterly decline of -1.25%.

The government does not publish GDP data at a monthly level, but the NBER Business Cycle Dating Committee (NBER BCDC) says that they refer to sources such as Macroeconomic Advisers (MA) and their MGDP data series.

If the NBER BCDC is the definitive expert on marking of recessions, MA is the definitive expert on measuring real GDP at the monthly level with their MGDP data series.

My own hunch is that the economy needs to "burn off" about 5% to 10% of the excess growth over the fast five years that was due to the offering of large amounts of unrealistic credit and exotic Wall Street financial instruments. Even "solid" firms may suffer to some extent, to the extent that they may have misguidedly become dependent on these unsustainable forms of credit. The government speaks of "getting banks lending again", but that most certainly does not mean that any (or at least most) of the unsustainable sources of credit will be back in operation again. Many of the firms that were based too-heavily on unsustainable credit will simply vanish and others will shrink dramatically to size themselves based on access to sustainable credit and much more realistic pricing of risk. In any case, this "credit adjustment" will require GDP to shrink substantially in the near term, regardless of any longer-term growth that results from stimulus that seeds sustainable development.

-- Jack Krupansky

Finally a key answer about Madoff: it started with the 1991 recession

For almost three months now I have been patiently waiting for the answer to one important, key question about Bernie Madoff's Ponzi scheme, as I wrote on December 16, 2008 in a post entitled "When did Bernie Madoff initiate his fraud?":

The main question I have about the Madoff scandal is when did Bernie Madoff initiate his fraud? Has he been doing it all along, or was he on the up-and-up originally and only decide to "go Ponzi" when he started having trouble achieving decent returns in recent years? In other words, what was the real turning point? Was he always a crook, or did he just get into a bind and pride and ego led him to "cheat"?

Today, as Bernie pleaded "guilty" (eleven times), he disclosed that it all started with the recession of the early 1990's. According to a Bloomberg article by Jeremy Gerard entitled "Madoff Exits in Cuffs, 'Law and Order' Cameras Roll: Commentary":

He started bilking his clients during the recession of the early 1990s, he said. Once he had a taste of it -- by neglecting to buy securities his clients paid him for, for example -- he just couldn't stop himself.

Associated Press has the "Text of Bernard Madoff's court statement", in which Bernie tells us:

... for many years up until my arrest on December 11, 2008, I operated a Ponzi scheme through the investment advisory side of my business, Bernard L. Madoff Securities LLC ...

... When I began the Ponzi scheme I believed it would end shortly and I would be able to extricate myself and my clients from the scheme. However, this proved difficult, and ultimately impossible, and as the years went by I realized that my arrest and this day would inevitably come. ...

... I never invested those funds in the securities, as I had promised. Instead, those funds were deposited in a bank account at Chase Manhattan Bank. When clients wished to receive the profits they believed they had earned with me or to redeem their principal, I used the money in the Chase Manhattan bank account that belonged to them or other clients to pay the requested funds. ...

... I want to emphasize today that while my investment advisory business -- the vehicle of my wrongdoing -- was part of my firm Bernard L. Madoff Securities, the other businesses my firm engaged in, proprietary trading and market making, were legitimate, profitable and successful in all respects. ...

Then Bernie comes to the key fact:

... To the best of my recollection, my fraud began in the early 1990s. ...

He goes on to tell us what motivated his decision to commit fraud:

... At that time, the country was in a recession and this posed a problem for investments in the securities markets. Nevertheless, I had received investment commitments from certain institutional clients and understood that those clients, like all professional investors, expected to see their investments out-perform the market. While I never promised a specific rate of return to any client, I felt compelled to satisfy my clients' expectations, at any cost. I therefore claimed that I employed an investment strategy I had developed, called a "split strike conversion strategy," to falsely give the appearance to clients that I had achieved the results I believed they expected. ...

This does not us an exact date, but close enough. According to NBER, the recession started in July 1990 and ended in March 1991. So, it seems to seem safe to conclude that his Ponzi scheme started in 1990 or 1991. His overall firm was founded in 1960, but I am not sure when he started taking client money and acting as an investment advisor.

In short, he did not plan a Ponzi scheme from the beginning. Originally his investments were all on the up-and-up, but then he found himself in a bind and decided to try to take an "easy shortcut" and we now know how that movie ended.

Reuters also has the PDF file for the actual Madoff Allocution Statement that was submitted to the court. It appears to have the same text as the AP article, as far as I can tell.

-- Jack Krupansky

Great short-covering rally for deeply oversold stock market

The massive stock market rally today was quite a relief after weeks of vicious declines, but ultimately it was merely a short-covering rally, a heavy short squeeze, for a market that was deeply oversold, so it does not tell us anything about where the market might be headed in the coming weeks and months. The key question now is followthrough and whether the market can build on today's gains or at least refrain from giving them all up and giving us yet another bear market low ("lower lows and lower highs") within the next week or two.

The term oversold means that far too many market participants have open bets (e.g., short positions) that the markets will continue to decline and we reach the point of selling exhaustion where there is simply nobody left to do any selling in the near-term. When traders sense that the market is oversold, they begin shifting their bets to the upside and that kicks off a short-covering rally. If the rally moves quick enough, the remaining shorts quickly become under great pressure to cover their short positions, known as a short squeeze.

None of this has anything to do with the fundamentals of businesses and the economy. Sure, news reports can trigger any initial wave of buying or selling, but traders and short-term speculators have their own worldview (e.g., so-called technical analysis and chart reading) that drives any large market moves.

-- Jack Krupansky

Quants: "They sold their souls to the devil"

I was always a bit suspicious of "quants" and their seeming "mastery" of finance and treatment of markets as a form of math and science, but now an article in The New York Times by Dennis Overbye entitled "They Tried to Outsmart Wall Street" lays bare the naked folly of such a proposition. This is hard-core emperor-without-any-clothes stuff and helps to explain a lot of the bizarre risk-taking that has brought our banking system and economy to its knees. Some choice quotes:

... "All I can say is, beware of geeks bearing formulas," Warren Buffett said ...

... As Dr. Derman put it in his book "My Life as a Quant: Reflections on Physics and Finance," "In physics there may one day be a Theory of Everything; in finance and the social sciences, you're lucky if there is a useable theory of anything." ...

... termed the market "a wild beast" that cannot be controlled ...

... "It's not like building a bridge. If you're right more than half the time you're winning the game."...

... "They sold their souls to the devil,"...

... "I haven't met many quants who said they were in finance because they were in love with finance."...

... his boss was fascinated anyway by the graphical user interface, a novelty on Wall Street at the time. ...

... when you need financial models the most ... they might break down. ...

... a Merrill Lynch memorandum noted that the financial models "may provide a greater sense of security than warranted; therefore reliance on these models should be limited." ...

... Given the state of the world, you might ask whether quants have any idea at all what they are doing. ...

... "What is amazing to me as I learn about this is how flimsy was the theoretical basis of the claims that derivatives and other complex financial instruments reduced risk, when their use in fact brought on instabilities." ...

... "Every trader will tell you that every risk manager is a fraud," ...

... the odds of game-changing outliers like Bill Gates's fortune or a Black Monday are actually much greater than the quant models predict, rendering quants useless or even dangerous ...

... "... physicists should go back to the physics department and leave Wall Street alone," ...

... models ... can be a useful guide to thinking as long as you do not confuse them with real science ...

... "Nobody ever took these models as playing chess with God." ...

... Do some people take the models too seriously? "Not the smart people," ...

... Quants say that they should not be blamed for the actions of traders. ...

... "We did try to warn people," ... "This is a crisis caused by business decisions. ...

... By their activities, quants admit that despite their misgivings they have at least given cover to some of the wilder schemes of their bosses, allowing traders to conduct business in a quasi-scientific language and take risks they did not understand. ...

... Wall Street was not looking for Ph.D.'s, but ... "P.S.D.s -- poor, smart and a deep desire to get rich." ...

And finally, from the caption under a picture of one of these "geniuses":

"Because the math is really complicated people assume it must be right."

That's great, Step One for all of the magic formulas is to assume that human nature does not exist.

Truly appalling.

-- Jack Krupansky

My suggestion for the White House economic recovery web site

It is all well and good that the White House has a web site for the stimulus package, www.recovery.gov, but I did not find it immediately helpful in terms of how much money is actually flowing into the U.S. economy. I sent them the following suggestion:

What is missing and really needed is a classic thermometer that shows the amount of stimulus funding that has actually been disbursed or spent by each agency and is actually out there in the economy.

There should be a daily log listing the agency, specific program, and amounts for daily disbursements and expenditures into the economy above the agency/program baseline budget that is directly attributable to the ARRA stimulus spending.

Thanks.

-- Jack Krupansky

It will be interesting to see if they actually can tell when each dollar of ARRA money is disbursed or spent.

In any case, I at least gave them some useful feedback.

-- Jack Krupansky

Is the nation at the brink of a depression?

What a great name for someone alleging that we are on the "brink of a depression": Specter. According to an Associated Press article entitled "Specter says nation on 'brink of a depression'":

The nation is on the "brink of a depression," but there's a "reasonable chance" that the $787 billion economic stimulus package will help ease the situation, Sen. Arlen Specter said Monday.

Specter, R-Pa., said the nation's economic situation is more dire than the public has been told, but did not elaborate.

"Our economic problems are enormously serious - more serious than is publicly disclosed. And I think we're on the brink of a depression," he told reporters at the state Capitol.

...

"Had there been no stimulus, I think we'd have gone right off the edge," he said. "I think we're pretty close to the edge anyway, to be very brutally blunt about it."

This is the same Arlen Specter who concocted the infamous Single-Bullet Theory of the JFK assassination and here he is concocting a conspiracy theory about the U.S. government allegedly withholding information about the economy. Yeah, right.

In truth, there is no "edge" or single trigger event for a depression. A true depression is a very long, very slow downward slide. Sure, people worry about whether our current slide might have that lasting potential, but there is no evidence of that yet -- even if the dear senator might have fearmongered himself into believing so.

It may not feel like the government actions are having much of an effect, but that is because the Federal Reserve, Treasury, et al are still busy putting all of the elements into place and it will take more than just a few months to see fruit borne of those efforts.

My theory is simply that we need to finish burning off the excess "growth" of the past several years which was fueled by super-cheap credit and exotic financial instruments. That might mean a net hit of 5% to 10% to GDP, employment, income, and spending, but this is not a long-term depressionary process. Sure, such a "structural contraction" is much worse than a garden-variety inventory-based recession, but we already have enough structural supports in place to effectively preclude a true depression.

If we are at a brink, it is a brink of starting to see the positive impact of the stimulus and the Federal Reserve efforts to restart non-bank lending (what was called the "shadow banking system.")

The simple reality is that politicians love to peddle one of two things: sunny-day fantasies or deep, dark gloom. The latter gets a lot of traction these days regardless of what reality might be.

-- Jack Krupansky

Has the economy really fallen off a cliff?

Colorful metaphors are great fun, but never terribly enlightening. Warren Buffet is an endless source of colorful metaphors, the latest of which is his allusion that the U.S. economy has "fallen off a cliff." He uttered this odd characterization in an interview on CNBC [but... but... but... I thought their credibility had "fallen off a cliff" after Jon Stewart's "takendown"!!! Have they rehabilitated themselves already?!?!] that is summarized in a Reuters article by Jonathan Stempel entitled "Buffett says economy fell off cliff, fears inflation."

Now, to be fair, maybe Mr. Buffett considers any recession to be a "cliff." Sure, any contraction of economic activity is not to be desired, but the simple fact is that the "fall" to date of the U.S. economy has been only a "few" percent, which is hardly a cliff.

Now, the stock market can be legitimating characterized as having "fallen off a cliff", but there has been no comparable decline in the overall real economy, whether you look at GDP, employment, income, or spending.

To be clear, yes, the U.S. is experienced a severe "structural contraction", that may leave the U.S. economy 5% to 10% smaller over the next year or two, but that hardly constitutes a "cliff."

A fall from a cliff is not something that you survive. The U.S. economy is surely going to survive.

Mr. Buffett enjoys being colorful, something that CNBC is well-positioned to promote, but not for any socially useful purpose.

-- Jack Krupansky

Friday evening at the FDIC - one bank failure

It was a slow week at the FDIC. Friday evening the FDIC announced that only one bank was closed this past week:

1. Freedom Bank of Georgia, Commerce, Georgia. Northeast Georgia Bank, Lavonia, Georgia assumed all of the deposits.

That brings to 17 the number of failed banks in 2009.

The FDIC does not give any advance notice of bank closures. In fact, it is usually a state banking regulator who does the closure and then FDIC is "named receiver" and then takes over and promptly arranges to sell as much deposits and assets as it can to a healthier bank.

The basic idea is to totally avoid old-fashioned "runs" on banks and pre-arrange the assumption of deposits by a healthy bank before the closure is even announced. In other words, there should be no disruption of service and no need for customers to lose any sleep.

-- Jack Krupansky

ECRI Weekly Leading Index indicator falls moderately and remains deep in recession territory

The Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) fell moderately by -0.36% vs. -1.56% last week to a new 14-year low, but its annualized growth rate was unchanged at -24.1, remaining near its record low for its 60-year history of data of -30.2 for the week ended December 5, 2008, which is well below the flat line, suggesting that the economy will be struggling in the months ahead.

According to ECRI, "The WLI has now slipped to another new cycle low, suggesting that the end of this recession has yet to start taking shape."

The bottom line is that the ECRI WLI remains "flashing red." Alas, even the ECRI WLI is not a guaranteed, fool-proof economic indicator, especially when the data is mixed and there some amount of stimulus as well as potential problems in the pipeline.

My personal outlook is that: The recession of the U.S. economy that started in December 2007 and sharply accelerated in August 2008 currently shows no sign of an imminent end.

Although the current economic reports show significant weakness, there is also a vast amount of potential stimulus in the pipeline that could kick-start the economy within the next couple of months.

-- Jack Krupansky

My Gary, Indiana solution

Back in January of 2000 when I still had a small mountain of financial assets, I actually considered whether I should go to cash and permanently retire. One option, the one I chose, unfortunately, was that "I only need one more year of decent stock market returns (15-20%) and then I will be set for life", but we know how that movie ended. That was all I needed, one more year, and then I could live "forever" on income from Treasuries. In fact, three-quarters of my net worth was in Treasuries at that point anyway due to my call option strategy that was working so well in the bull market. But, that is water over the dam now. The other option that I briefly considered, but rejected as unattractive, was what I called "my Gary, Indiana solution". Briefly, although I did not have enough money to retire in New York City, I could have retired forever if I could have stomached relocating to some godforsaken place that was really, really cheap, such as I imagined Gary, Indiana to be.

I actually had no idea what Gary, Indiana was really like, but being part of the so-called "Rust Belt", I imagined that everything was much cheaper there. I could easily and quickly get to Chicago, Illinois if I ever had a desperate urge to be somewhere other than "nowhere" and fly from Chicago to "anywhere." Meanwhile, I would not have to burn through piles of cash for living expenses, or so I imagined. In truth, even if Gary was only moderately cheaper I actually would have been able to life, even if not thrive, on Treasury income.

The big obstacle to implementing "my Gary, Indiana solution" was simply the fact that for me personally it had the feeling that I would be imprisoned or at least exiled away from anything that might interest me. Joliet would not have sounded much worse to me. The Internet and Web were still relatively primitive even in 2000 compared to all the online social networking we have today. Maybe with Web 2.0 I could have envisioned living in a bubble, like living on the moon or Mars.

Alas, today I do not even have the financial resources for that "ambitious" Gary, Indiana "solution" that I had back in 2000. I would need to have some kind of job, but I might be able to pull it off with a more menial type of job, if something were in fact available.

In any case, my immediate goal here is simply to record for my own reference and for posterity this idea that I had back in 2000. Whether I can reuse it in some way remains to be seen.

When thinking anew about the concept, two immediate questions come to mind. First, where in the U.S. can you live very, very cheaply? Second, and which of those places have significant acceptable and palatable employment opportunities. The goal here is not to find a place to spend the rest of my life, but finding an "economic refuge" until technology employment opportunities once again become plentiful.

-- Jack Krupansky

Contemplation of life off the grid

Although I personally have no desire to "drop off the gird", the current economic crisis implicitly raises it as a very real possibility. Obtaining satisfying and well-paying work (or even entrepreneurial opportunities) is no longer anything even remotely resembling a "slam dunk." Maybe life off the grid would not be such an unconscionable alternative.

But what would it mean to live off the grid, as a general proposition? Somehow, the primary constraint would be to dramatically limit expenses:

1. Rent. Maybe free lodging. Or camping.
2. Meals. Consider growing some own food.
3. Health care. Only real option is that you need to be in great health.
4. Entertainment. Need to entertain yourself. Use the library, including free Internet access. Free cultural events.
5. Socializing. No longer quite so easy to socialize with those on the grid. Network with others off the grid.
6. Keeping up. Including current events, work opportunities, and training opportunities. Once again, the library may be a best solution.

Thoreau tried to live off the grid, for awhile, but he had some land, a cabin, and a life he could go back to.

At this stage I am certainly not seriously contemplating going "off grid", but if May rolls around and I have no serious employment opportunities (contracting, full-time, part-time, or whatever), suddenly going at least partially off-grid will become a possibility to consider. I will still have significant cash (and stock??) resources at the end of May (when my current apartment lease is up), so I actually will not be "forced" to go completely off the grid, but maybe a partial off-grid lifestyle might be a possibility.

Some kind of semi-nomadic lifestyle may in fact be more appropriate for me.

Or, finding some locale where I can live really, really, really cheaply until the economy stabilizes at least a little.

In any case, I have my living expenses for the next three months covered and can "merrily" sit back and watch the economic storms swirl around me, as if I had not a care in the world. Or something like that.

-- Jack Krupansky

NASDAQ throws in the towel and sets a new bear market closing low below the November low

That's it. NASDAQ "officially" set a new bear market closing low of 1,299.59 below its closing low of 1,316.12 on November 20, 2008. As a minor technicality though, the NASDAQ intraday low of 1,298.33 did not fall below the intraday low of 1,295.48 on November 21, 2008. Minor detail.

So, NASDAQ is now officially out of its trading range in resuming its bear market by setting a "lower low."

When will the market finally bottom and turn up again in a new bull market? Simple. It will do so as soon as insiders and others begin to detect the money flow in the real economy starting to improve. That will happen months in advance of any official reports. The government stimulus money could start to do that soon, but initially any new government spending will be offset by further deterioration in the economy. It will take some time before the stimulus money flow grows large enough to exceed the recessionary contraction of money flow that we are currently experiencing.

-- Jack Krupansky

Nice dead-cat bounce for NASDAQ today, but still hovering near its November low

It was in fact quite a relief to see NASDAQ bounce so smartly today, but unfortunately this "one-day wonder" only counts as a dead-cat bounce unless it "has legs" over the coming weeks. NASDAQ remains less than 40 points above its November low, which is not a very comfortable place to be. Still, it is encouraging that NASDAQ has gone this long without setting a new bear market low.

The bottom line is that NASDAQ is still in a trading range, within a larger bear market, and now has a one-day run up from the lower end of that range (the November low.)

Read my previous NASDAQ commentary which is mostly still valid.

-- Jack Krupansky

Zombies and nationalization, what's it all about?

With all of the non-stop, mega-volume talk about "zombie banks" and how nationalization of banks is the only way to go, one has to wonder whether President Obama and his team are really as bone-headed stupid as their critics suggest. So, what is really going on?

Put simply, it is all about sour grapes and lobbying.

First, let's acknowledge that there is always more than one way to skin a cat, and that includes dealling with so-called zombie banks. So, maybe critics half a half a point in that their proposals could work. The problem is that these critics refuse to accept what I just said, namely that there are in fact multiple possible paths that lead out of the current financial swamp. Alas, pride, ego, and ideology prevent the critics from admitting any such thing.

Second, the whole concept of a bank being a so-called "zombie" is predicated on all of their "risky" credit assets effectively being worth zero or at least something very far from 100 cents on the dollar. The real problem is that we will not know the true value of many of these assets until the economy is back to normal growth mode. Until then, hard-core freemarketeers will insist that all "risky" assets are effectively worth zero. Their ideology and possibly even personal trading positions prevent them from allowing that a significant fraction of these risky assets will be worth something much closer to 100 cents on the dollar a few years from now. In short, one man's "zombie" is simply another doctor's hospital patient. Never confuse the present with the future. The future has to be worth something to any sane person, but those who drone on and on about zombies can admit no such thing.

Third, many of these critics are probably just shilling for pals who have bearish trading positions that are bets on the decline or failure of the various financial institutions. Even if they do not have a direct position, they may pal around with traders and speculators who do and essentially be their mouthpieces.

And then there is the media. They love a juicy story. Negativity sells. They are out to make money, not enlighten you.

The real bottom line is that many of the critics are much more interested in lobbying for their pet plans than allowing that the administration economic team might succeed.

Treasury and the Federal Reserve may not yet have all of their ducks lined up yet, but they are actually doing an outstanding job and much more likely to succeed than their critics will ever be willing to admit, even after the fact.

Yeah, our major banks sure have made a lot of mistakes over the past five years, but it would be far better to allow the administration economic team to continue their efforts, which includes course adjustements as reality evolves, than to try to bend to every self-serving criticsim and proposition that critics lob at them.

Personally, I do not see any of the big banks as likely to fail or in need of true nationalization. All of them are in fact lending, but not to the excess we saw during the housing boom. I see no merit in referring to them as zombies. Yes, more bailout money will clearly be needed (a trillion, maybe two?), but their trajectory is getting better as each day, week, and month goes by.

The good news is that the evil old Wall Street which was the primary driver of the excesses of recent years is rapidly vanishing.

In short, no sane American need lose even a moment of sleep at night worrying about "zombies" and "nationalization".

-- Jack Krupansky

Another moment of truth: NASDAQ hanging by a thread near its November low

Repeating much of what I said yesterday... Although the Dow Industrials and S&P 500 continue to set new bear market lows, NASDAQ is still within a trading range, albeit barely. But, we are now at another moment of truth. NASDAQ closed at 1,321.01 yesterday, a mere 4.89 points above its November closing low of 1,316.12 on November 20, 2008 and with an intraday low of 1,312.98 which is only 17.50 points above the November intraday low of 1,295.48 on November 21, 2008. All we need to see is an 18-point intraday drop and a 5-point closing drop and NASDAQ will be officially out of its trading range with a new bear-market low. But, if the market were to turn around in the rough vicinity of these levels it could be a so-called "double bottom" which is actually a bullish sign. To be a true bear market, we would need to see a sequence of new lows (below the November lows) over the coming days and weeks. In any case, technically, NASDAQ is still merely on a downswing in a trading range.

I suspect that although the more doomish and gloomish of traders and short-term speculators would like to use the new Dow and S&P 500 lows as an excuse to take the market down further, there is a moderate chance that the "down" crowd will soon run out of cash for more bearish bets and soon begin to reverse and push upwards for a new trading range. They may decide to wait until the NASDAQ doom and gloom crowd hits "selling exhaustion", but that might actually have occurred at noon yesterday.

If too many people set up for a new NASDAQ low in the coming days, shrewd traders will "smell" the fact that too many people are "leaning in the same direction" and will set up for the reversal and kick off a massive short-covering rally. It should be really interesting.

Note that traders sometimes like to engineer "head fakes" like yesterday where they pretend to set up for a bullish move before the market opens to scare some of the shorts into covering, but then they sell into the early rally in the hope that it will fizzle, reverse, and head back down, which is exactly what we saw. Sometimes it works and sometimes it doesn't. They might try the same thing again today, although short-term speculators could sense their timidity and bet against them as they start the reversal and then kick off a somewhat larger short-covering rally.

Ultimately, we could be setting up for a triple-bottom for NASDAQ as some sense of euphoria for an eventual economic recovery builds a short-term bullish mood that runs for awhile but eventually fizzles within a couple of months as the near-term outlook continues with a track record of weakness and sends NASDAQ back to "revisit" the double-bottom area, but then maybe we actually do start to see a hint of a little light at the end of the tunnel to finally mark the bottom and kick off a true bull market. Note that the stock market is a leading indicator, so you would expect to see the stock market turn up before the economy actually does in a publicly noticeable manner.

In any case, best to give the market another week or so to sort it out and get past the euphoria of new Dow and S&P 500 bear market lows before concluding anything about the NASDAQ medium-term trend.

-- Jack Krupansky

Brad Feld on investment vs. speculation

One of my pet peeves is when people refer to all manner of stock and commodity trading and speculation as "investment" when it is no such thing, so I really appreciated venture capitalist Brad Feld's blog post entitled "Investment vs. Speculation." I mostly agree with him and absolutely agree the we need more attention to investment and less attention on speculation.

My main departure from Brad is that I see investment as not only long-term, but open-ended, whereas speculation can be multi-year but has a target event which will end or "exit" the speculation. Granted, no investment is necessarily "forever and ever", but would normally end only when the "investment thesis" changes or our investment goals change. But with speculation, we may have a price or P/E target in mind upfront that predetermines the decision to end or "exit" the speculation.

In short, in speculation we focus intently on the end or "exit" event, while in true investment we focus on building enterprise value over time, either to achieve dividends on an ongoing basis or to increase market value over time, but with no date or price for "exit" in mind.

In the case of venture capital investment, it is not typically open-ended and usually has a fairly clear end goal or "exit" in mind, such as an IPO or sale of the investment to another business, coupled with a distribution of stock and cash to the investors.

Venture capitalists, as the general partners of venture capital limited partnerships, have a fiduciary duty to satisfy the goals of delivering an "exit" so that the limited partners can cash out both their original investment and profit within some fairly well-defined range of years, typically 5-7 years. Granted, that timeframe is well beyond the tolerance or patience of most stock and commodity speculators, but "real" investors might use that as a minimum rather than a maximum timeframe.

Nonetheless, a venture capital investment is clearly relatively long term compared to speculative activity that we see with stocks and commodities.

Another thing about venture capital investments is that they are inherently "speculative" in nature in the sense of having a high degree of risk that the principle invested in an individual company could be completely lost. Most stock investors would never consider investing in a company that is rated in advance as being at such as high risk of a major decline or even "going to zero." I would still consider venture capital as an investment since there is a fairly high tolerance to short-term adverse events of the sort that would cause a garden-variety stock or commodity speculator to immediately hit a "stop loss" and dump their "investment." Unlike stock and commodity speculators, venture investors typically have a role on the board of directors or some other advisory role such that they can help out to significantly mitigate adverse events. The "package" of high potential return and significant technical and managerial expertise of the venture capital general partners give venture capital an acceptable level of risk for the limited partners and result in it being more of an investment than a speculation.

On the other hand, venture investors do have one quality advantage over stock investors: they have very low tolerance for allowing a company to stagnate for long periods of time and are super-motivated to aggressively push company management to "maximize shareholder value."

All of that said, I am glad to hear that someone else is beating the "investment vs. speculation" drum.

-- Jack Krupansky

Another moment of truth: NASDAQ closes in on its November low

Although the Dow Industrials and S&P 500 continue to set new bear market lows, NASDAQ is still within a trading range, albeit barely. But, we are now at another moment of truth. NASDAQ closed at 1,322.85 today, slightly above its intraday low of 1,322.13. That is a mere 6.73 points above its November closing low of 1,316.12 on November 20, 2008 and 22.65 points above the November intraday low of 1,295.48 on November 21, 2008. All we need to see is a 23-point intraday drop and a 7-point closing drop and NASDAQ will be officially out of its trading range with a new bear-market low. But, if the market were to turn around in the rough vicinity of these levels it could be a so-called "double bottom" which is actually a bullish sign. To be a true bear market, we would need to see a sequence of new lows over the coming days and weeks. In any case, technically, NASDAQ is still merely on a downswing in a trading range.

I suspect that although the more doomish and gloomish of traders and short-term speculators would like to use the new Dow and S&P 500 lows as an excuse to take the market down further, there is a moderate chance that the "down" crowd will soon run out of cash for more bearish bets and soon begin to reverse and push upwards for a new trading range. They may decide to wait until the NASDAQ doom and gloom crowd hits "selling exhaustion", but that might actually have occurred at the end of today as NASDAQ closed near its low right at the end of the day.

If too many people set up for a new NASDAQ low in the coming days, shrewd traders will "smell" the fact that too many people are leaning in the same direction and will set up for the reversal and kick off a massive short-covering rally. It should be really interesting.

In any case, best to give the market another week or so to sort it out and get past the euphoria of new Dow and S&P 500 bear market lows before concluding anything about the NASDAQ medium-term trend.

-- Jack Krupansky