Splash! Safe landing for the economy, but too much was lost

We survived the economic crash, but the aircraft was lost

Sullenberger pulled off the ultimate soft landing

As 2009 comes to a close I had this funny thought: Pain and suffering are market neutral. The market goes up, the market goes down and the pain and suffering continue.

I think of this as I stare down the data of 2009: The “V-shaped” recovery is here (see graphics below) — at least for now — and the stock market is up 20%, surging 60% from the March lows. The investment banks that nearly brought down the global economy are racking up both record profits and record bonus pools.

With so much good news, why are so many so glum?

Oh, we’re not glum the way we were in November 2008 or even last March. The nation feels glum the way a lost child feels knocking around the house, unclear which way to go or what to do. Or glum, the way one feels after a death. Change is in the air, and it doesn’t feel the least bit comfortable. In theory, The Great Recession should usher in The Great Recovery. Instead, 2010 looks, at best, like The Great Blah.The wind in our collective sail has faltered because in retrospect the bailouts have shattered our notion of fairness. And this is a country that accepts differences in wealth — so long as things feel fair. You work hard and are smart and lucky? Congrats on your millions, even your billions.

The bailouts have smashed our sense of ourselves as a nation in charge. The vision was an illusion lead by Alan Greenspan and a host of enablers; Bill Clinton, Robert Rubin, Phil Gramm, Barney Frank and all the other lawmakers and economists who thought they could engineer society (100% home ownership!) and the economy (low rates forever; no failures) without any negative consequences. Greenspan and his denizens appeared to have believed that they were Captain Chesley Sullenberger at the helm of an Airbus A320, capable of a soft landing no matter where. But what the ideologues in Washington and New York failed to realize is that even a soft landing is far from painless. Sullenberger saved the passengers but the aircraft was lost; now the bureaucrats saved the aircraft but crippled the passengers.

We look back, and still wonder: How could it have happened — not just the greatest bubble in economic history but the response? And the survivors! Key players who were responsible for many of the threads leading to the great market crack-up are flourishing. You won’t find them on the unemployment line. White House economic advisor Larry Summers, Treasury Secretary Tim Geithner, OCC chief John Dugan (recently profiled in an amazing piece in The Nation), Congressman Barney Frank, and NY attorney general Andrew Cuomo (former HUD give-’em-all-loans secretary). You have to wonder how the geniuses behind the Fannie Mae and Freddie Mac implosion performed so scandalously while one private firm (Enterprise Community Investment) devoted to low-income housing has fared so brilliantly, even during the darkest day of the economic breakdown.

And then there were the bailouts, an astonishingly slap-dash, even naive affair by Wall Street standards that left taxpayers with just the bill and not much more. We saved GM while castigating the world for contributing to climate warming. How about putting all those billions into building public transportation? Why subsidize something that symbolizes our dependence on oil? No vision whatsoever.

What is left behind is gnawing resentment between the haves and have-nots. And a series of tiresome articles about bonuses and benefits — a distraction in what some have tallied to be a $17 trillion bailout. Isn’t the whole point of capitalism that people can get rich? Isn’t that supposed to be an incentive? I don’t care if the bankers make more money than Midas himself. This is America. Anyone can do anything. A poor kid can become a billionaire — but his investors get rich with him. A man raised by his grandmother can become President, and we are all the richer.

But it’s New Year’s eve, so I’ll hit the pause button on this rant to consider the  V-shaped recovery, which everyone had been longing for. In this economic scenario, the economy comes roaring back from its lows. In an L-shaped recovery, which everyone feared, we just hobble along the bottom. In 2010, I expect the V-shape could continue, but we, as a nation, will feel like we are in an L-shaped scenario because the recovery will help relatively few people and because of the state of our national debt.

So here’s a roundup of a few data points that support the V-shaped recovery outlook:

First, the “activity index” from the Chicago Fed:

chicagofed_V-shapeYou see the “V” shape on the far right in the graphic? Business fell off a cliff and while still not in an expansionary mode is clawing it’s way back to Square One. In fact, according to the Chicago Federal explainer, this graph shows a classic pattern of recovery after a recession.

Next, existing home sales (via Calculated Risk):

home sales_nov 2009_calculatedrisk

The extension of the first-time buyer tax credit has given an extra boost to November home sales, but the ‘V’-shape is unavoidably visible.

Next, the Philadelphia Fed’s Coincident indicator (again, via Calculated Risk):

A majority of states show increasing activity for the first time since the Great Recession began.

A majority of states show increasing activity for the first time since the Great Recession began.

Here’s the coup de grace, gross domestic product, a measure of how we’re doing coast-to-coast — even including California!

You can see the V-shape emerging.

You can see the V-shape emerging.

And just for those of you who would like to see an upside down V that signals good things — the declining number of jobless claims:


via Calculated Risk

This brings me back to the start of my post: pain and suffering are market neutral. This, of course, has always been true. It just feels so much more poignant now. What strikes me as particularly humorous this go-round is that in the ’00s, hedge fund managers sold “market neutral” strategies as a sure-fire method to avoid losing money in down or up markets. AIG Financial Products was so hedged that its fearless leader promised winnings no matter what. (Estimated minimum loss to taxpayers: $30 billion — remember the biggest bailout until 2008 cost taxpayers $1 billion with the demise of Continental Illinois in 1984.) The emails in the recent Washington Post story on the demise of AIG are amazing to read. One trader, puzzled by the implosion, complains that he isn’t getting his allotted high-fives.) Market neutral was one of the biggest flops on Wall Street, along with credit default swaps and securitized mortgages, and the triple-A seal of approval from the credit rating agencies.

And now as we look into 2010, investors ask whether the market rally is a true harbinger of The Great Recovery. Who better to ask than the famous hedge fund manager of the month? According to the Wall Street Journal, David Tepper foresaw it all — the “V” in recovery and the brightness of our future. This fearless manager had the backbone to invest in America, the tree that grows no matter what. David Tepper, hedge fund manager and brilliant strategist stood tall and bet that we wouldn’t lapse into a recession, as a result, raking in a cool $7 billion profit for his Appaloosa Fund.

But is that really what Tepper’s trading bets signal? A real belief in the hardiness of our oil-dependent, smoke-belching, Zombie-lovin’ economy? Or maybe he was just placing a bet on the spinelessness of the feds and their willingness to print and print and print more dinares for supplicant financial Amazons. I’ll grant Tepper has the cajones to follow his instincts. He’s one hell of a trader. But his instincts didn’t exactly point to a noble vision of American know-how leading to great economic success. No, his vision wouldn’t result in a wild rendition of “Ode to Joy.”  In his own words, Tepper says he was betting that the feds wouldn’t let the banks go under:

On Feb. 10 of this year, Mr. Tepper read that the Treasury Department was introducing the so-called Financial Stability Plan. It included a commitment by the government to inject capital into banks by buying their preferred stock, or shares that carry less chance of reward but also less risk than common stock.

At the time, investors worried that the government ultimately would have to nationalize big banks. U.S. officials said they had no intention of such a move, which could wipe out common shareholders, but investors were dubious.

The news from the Treasury Department struck Mr. Tepper as proof that the government would stand behind the banks. He directed his traders to begin buying bank stock and debt.

For the past decade, the feds have basically pursued a policy that enabled moral hazard. Why would Tepper believe that anything different would happen this time round?

So even as 2009 was shaping up to cap the worst decade for stock investors in nearly 200 years, Tepper’s Appaloosa Management is up 120%, after fees. On Twitter the traders soundly chastised all the lumpen-proletariat who missed out on one of the greatest market rallies. One commented that they held on to their bearish views “the way toddlers clutch  blanky.”

But one trader said to me that playing the rally doesn’t signal a long-term bullish Indeed, the Treasury curve, typically interpreted as the Grand Seer of the macroeconomy is sending mixed signals. The difference in yield between the two-year and 10-year note has now widened to 2.81 percentage points. The last time the yield curve looked this steep was 1992 or 2003, according to the Journal. And what do you know — that was just when we were emerging from recessions. It could be yet another harbinger of recovery. But this time round some are wondering whether the yield curve is signaling something else. It may be a measure of how much investors fear the mounting costs of the bailouts and the ambitious Obama agenda. This year alone, Treasury issued a record $2.1 trillion in new debt. The yield curve may be saying: Next year, the Fed won’t be buying debt to help repair the economy; it may actually be selling securities, depressing bond prices and raising interest rates. Yikes.

At the moment, our leaders are relying on a sea of liquidity, which is not unreasonable so long as it flows to where it’s truly needed; so long as it doesn’t offend our sense of fairness.  At the moment, bank lending is abysmal and non-financial companies are sitting on a hoard of cash. With some luck and skill, we can hand back the economy to entrepreneurs who create something more than financial instruments. That is where the future lies.

I wish you all a prosperous and healthy 2010.


12 thoughts on “Splash! Safe landing for the economy, but too much was lost

  1. Pingback: Tweets that mention Splash! Safe landing for the economy, but too much was lost - Nancy Miller - The New Wall St. - True/Slant -- Topsy.com

  2. Ms. Miller,

    I think that there are three points to consider.

    1) The DJIA, S&P500 and other similar measures of stock market activity are largely meaningless as a measure of economic activity in the United States as it impacts the average American. They were officially dropped as “leading economic indicators” quite some time ago. The reason is that with the nearly complete disappearance of manufacturing in this country, employment and stock market activity are largely independent of industrial activity. GDP is now largely driven by “services” rather than “goods”.

    2) During the Great Depression, the great irony of the time was that there was a huge industrial capacity sitting idle and huge mass of people who had made their living working in factories who were equally idle. There was this fantastic latent industrial capacity that was not realized until WW II. After that war, there was something there to bounce back. In contrast, in the Great Recession, there is hardly any unrealized industrial capacity. There is nothing here to bounce back.

    3) Broadly, there is a crisis of investment, there is very little outlet in the United States for investment, aside from Finance, Insurance, and Real Estate (FIRE). The regulators in Washington and the investors in Wall Street know this, this is why they have been encouraging all of the dangerous activities on Wall Street, the bubbles, scams, and Ponzi schemes, without them, the even the FIRE based economy, the only part of the economy that has been vibrant, would have collapsed. The Fed intentionally created a real estate bubble back after the “Dot.Com” bubble burst to provide investment opportunities. The federal government intentionally rolled back the safe-guards put in place in the 1930’s to stimulate (short-term) FIRE related growth. These people were not stupid, they knew that it was a very narrow type of economic activity they were stimulating, but what were the alternatives?

    • David,
      Yes, the basic problem now is that we don’t make enough real things in the U.S. The economy has become dependent on financial ephemera. But I think there is hope because we still have create capacity to manufacture real things and to some extent still do. I believe the economy in that regard the economy in the UK is much worse off. But the question is whether our politicians will have the will and foresight to point the country in the direction it needs to go.

      I have two points of disagreement with you. I don’t believe the central bankers created a bubble intentionally. I think they were full of hubris and felt they could abolish the business cycle and that prosperity was, well, a perpetual machine. Also, the stock market is still an important component in the leading indicator index.

      • Ms. Miller,

        Let me re-phrase, the economic regulators did not intentionally set out to create a bubble but they did want to create an economic environment where investors could put their money and find a sizable return. In our FIRE based economy, especially after the dot.com bust, a real estate bubble was the natural result, intentional or otherwise. They were probably thinking that a mini-bubble in real estate would be a transitional situation until something else developed, some other investment outlet. Unfortunately, none ever did. Plus bubbles develop a live of their own, while the economic regulators might have imagined that they were creating some sort of transient mini-bubble, the bubble might have had ideas of its own, as it were.

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  4. First problem: Capitalists — who threw off the shackles of national allegiance years ago — deftly play countries against each other in what’s supposed to be a race to the top, but is really a race to the bottom. Result? The “jobless recovery” wherein fortunes are made “in the market” while the underclass teems and seethes.

    I’m reminded of this poem attributed to German anti-Nazi activist, Pastor Martin Niemöller:

    First they came for the Communists,
    and I didn’t speak up,
    because I wasn’t a Communist.
    Then they came for the Jews,
    and I didn’t speak up,
    because I wasn’t a Jew.
    Then they came for the Catholics,
    and I didn’t speak up,
    because I was a Protestant.
    Then they came for me,
    and by that time there was no one
    left to speak up for me.

    An American could say:
    First they came for textile jobs,
    but because I wasn’t in textiles
    I didn’t speak up.
    Then they downsized my department,
    but because I kept my job
    and my 401-k got a nice bump,
    I didn’t speak up.
    Then my neighbor lost his job and defaulted
    on his mortgage,
    but I could still pay mine
    so I didn’t speak up.
    Now I lost my job and can’t pay my
    underwater mortgage and the only one left
    to speak up for me is the soup kitchen.
    The director of the soup kitchen says
    donations are down and demand is up.
    Evidently, charity is for suckers.

    Second problem: our eyes are on the wrong prize. In our focus to remove all obstacles that would stand between ourselves and the top of the food chain, we practice “blood money capitalism”(gain at the expense of others). No set of laws or regulations can fix what is essentially a disease of our collective soul. Our government, laws, regulations, treaties, indeed everything that binds members of the human race in a social contract, begins with a common morality. As it stands now, our morality says that whoever gets thrown under the bus deserves it.

    We’re better than that.

    • Churchill summed it up: “The inherent vice of capitalism is the unequal sharing of blessings. The inherent virtue of Socialism is the equal sharing of miseries.”
      And in the past year or two, a number of people have re-written Churchill’s famous bon mot on democracy and applied it to capitalism — the worst system, except for all the rest.

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