NY Times Opinion|Einhorn: Easy Money, Hard Truths

From David Einhorn in the NY Times Opinion Today:

"Before this recession it appeared that absent action, the government’s long-term commitments would become a problem in a few decades. I believe the government response to the recession has created budgetary stress sufficient to bring about the crisis much sooner. Our generation — not our grandchildren’s — will have to deal with the consequences.

EASY money has negative consequences in addition to the risk of inflation and devaluing the dollar. It can also feed asset bubbles. In recent years, we have gone from one bubble and bailout to the next. Each bailout has rewarded those who acted imprudently. This has encouraged additional risky behavior, feeding the creation of new, larger bubbles.

The Fed bailed out the equity markets after the crash of 1987, which fed a boom ending with the Mexican crisis and bailout. That Treasury-financed bailout started a bubble in emerging market debt, which ended with the Asian currency crisis and Russian default. The resulting organized rescue of Long-Term Capital Management’s counterparties spurred the Internet bubble. After that popped, the rescue led to the housing and credit bubble. The deflationary aspects of that bubble popping created a bubble in sovereign debt, despite the fiscal strains created by the bailouts. The Greek crisis may be the first sign of the sovereign debt bubble bursting."

Scott Dauenhauer CFP, MSFP, AIF

US money supply plunges at 1930s pace as Obama eyes fresh stimulus

The M3 figures - which include broad range of bank accounts and are tracked by British and European monetarists for warning signals about the direction of the US economy a year or so in advance - began shrinking last summer. The pace has since quickened.

The stock of money fell from $14.2 trillion to $13.9 trillion in the three months to April, amounting to an annual rate of contraction of 9.6pc. The assets of insitutional money market funds fell at a 37pc rate, the sharpest drop ever.

The US authorities have an entirely different explanation for the failure of stimulus measures to gain full traction. They are opting instead for yet further doses of Keynesian spending, despite warnings from the IMF that the gross public debt of the US will reach 97pc of GDP next year and 110pc by 2015.

Larry Summers, President Barack Obama’s top economic adviser, has asked Congress to "grit its teeth" and approve a fresh fiscal boost of $200bn to keep growth on track. "We are nearly 8m jobs short of normal employment. For millions of Americans the economic emergency grinds on," he said.

David Rosenberg from Gluskin Sheff said the White House appears to have reversed course just weeks after Mr Obama vowed to rein in a budget deficit of $1.5 trillion (9.4pc of GDP) this year and set up a commission to target cuts. "You truly cannot make this stuff up. The US governnment is freaked out about the prospect of a double-dip," he said.

As I've stated before, Deflation is a real possibility at this point and this is a major indicator. Get ready for more money printing and more "stimulus" packages (there is already a new state bailout bill pending, of course it is called something else).

Scott Dauenhauer CFP, MSFP, AIF

Simon Johnson: The Financial Reform Sham

Former economist for the IMF and author of 13 Bankers (or should we say Banksters) Simon Johnson writes:

By now you have probably realized – correctly – that “financial reform” has turned into a victory lap for Wall Street.

When they saved the big banks, with massive unconditional support (both explicit and implicit) over a year ago, top administration officials promised they would be back later to fix the underlying problems. This they – and Congress – manifestly have failed to do.

Our banking structure remains unchanged, the rules will be tweaked at the margins, and the incentive and belief system that lies behind reckless risk-taking has only become more dangerous. (The back story, if you can still stomach it, is in 13 Bankers).

If you think this is scary, read on:

No doubt the administration feels good about what it has “achieved” on financial reform. The public aura of mutual congratulation will last for about three weeks.

At one point in early 1998, Larry Summers called Brooksley Born – the last person who really tried to rein in the dangers posed by derivatives (and it was a much lower level of danger then compared with now). Summers reportedly said, “I have thirteen bankers in my office, and they say if you go forward with this you will cause the worst financial crisis since World War II.”

We now seem to have come full circle to exactly the same people saying exactly the same things – no doubt top people in the administration are now calling Senator Lincoln and impressing upon her a version of the same point made by Summers to Born.

The 13 bankers have won, completely. Here we go again.

We are setting ourselves up for something that is entirely without precedent.....unless you consider history.

Scott Dauenhauer CFP, MSFP, AIF

Zweig: Legendary Investor Is More Worried Than Ever

Sorry to do this to you, this is another Wall Street Journal article by Jason Zweig.

Zweig got the chance to interview the legend you've probably never heard about, Seth Klarman, it was one of the most important interviews you will ever read. You can click the link above to read the article (hopefully its not behind the subscription log-in) or you can read the entire interview below:

Notes from Seth Klarman's discussion at the CFA Institute's Annual Conference

You will not read more important words of financial wisdom.

Scott Dauenhauer CFP, MSFP, AIF

It's The Valuations, Stupid

Not sure you'll be able to view this article because its on the Wall Street Journal website, but its a good read - basically says that the markets are volatile because they are overvalued using historical measures.

Scott Dauenhauer