Who should investors listen to; the markets or the Fed? One says we are in for a double dip recession, the other just raised GDP forecasts.

The head of our central bank Benjamin S. Bernanke has a perfect track record for predicting economic outcomes. Unfortunately, his track record is only perfect due to its 100% inaccuracy. The Fed Chairman once assured investors that the subprime housing crisis was contained and would not bring down real estate prices or affect the overall economy.

Then, after being proven completely wrong by the near collapse of the entire global economy, Mr. Bernanke moved to an emergency Federal Funds target rate of 0-25 bps and has held it there for 17 months. And even though the economy has posted three straight quarters of growth, has shown no inkling to provide American savers with a decent return on their money deposited in banks.

Now we find the Federal Reserve once again proving it has an unlimited aptitude for ineptness by actuallyraising their G.D.P. forecast from a growth range of 2.8%-3.5% to 3.2-3.7%. That’s correct; Federal Reserve officials raised their U.S. growth estimates for 2010 and lowered forecasts for unemployment and inflation, according to minutes of the Federal Open Market Committee meeting on April 27-28. They left their 2011 forecast unchanged at 3.4 percent to 4.5 percent. Fed officials’ forecast for the average unemployment rate in the last quarter of 2010 fell to 9.1 percent to 9.5 percent versus 9.5 percent to 9.7 percent estimate made in January.

However, contrary to the Fed’s predicted trend of improvement in employment numbers and economic data, on Thursday we saw first time claims for unemployment jump by 21,000 to 471,000 in the week ended May 15^th. The four-week moving average also climbed to 453,500 last week from 450,500. Additionally, the Index of Leading Economic Indicators during the month of April saw a .1 percent decrease. That dip in the Conference Board’s outlook for the next three to six months followed a revised 1.3 percent gain in March and was the first decline for the index in a year.

Meanwhile, sovereign debt contagion threatens to dismantle the Euro currency as Eurozone borrowing costs may become intractable if interest rates continue to rise. China is busy trying to pop their property bubble at the same time the Shanghai Composite Index is down 21% in 2010. Not to be outdone, Australia has collapsed their resource sector by imposing a 40% tax on the earnings of mining companies.

The threat of a metastasizing government debt default crisis similar to the credit crisis of 2008 has sent crude oil prices tumbling from over $85 a barrel to $68 in a matter of weeks. Dr. Copper has plummeted from $3.60 a pound in April to $2.93 as of this writing. But none of that matters to the Fed or gives them pause to reflect on their ebullient outlook.

It doesn’t take superhuman predictive powers to have the ability to look at markets. What is it that Mr. Bernanke and company look at other than the rear view mirror when making prognostications about growth, unemployment and inflation?  We have given the most incredibly powers to the Federal Reserve; namely, to dictate a target rate for the cost of money. But we have allowed to be appointed at the Fed a group of individuals who not only cannot accurately assess a given series of data but also have chosen to completely ignore markets.

The CRB Index is trading at its lowest level since October of 2009 and is telling investors that the global economy is in the process of slowing. But the Fed is stacked with academics that have never had to earn a living by predicting economic and market directions. Their failure to listen to the message of markets is the key reason they have such a miserable record of making accurate projections. For the betterment of the nation, the next appointment to serve at the Fed should be someone from the trading pit and not from Princeton.

(via)

(via WSJ)

The left has figured out who to blame for the financial crisis: Greedy Wall Street bankers, especially at Goldman Sachs. The right has figured it out, too: It was government’s fault, especially Fannie Mae and Freddie Mac.

Raghuram Rajan of the University of Chicago’s Booth School of Business says it’s more complicated: Fault lines along the tectonic plates of the global economy pushed big government and big finance to a financial earthquake.

One lesson from the crisis: When nine of 10 experts say everything is fine, the press should devote more than 10% of its coverage to those who say it isn’t fine. I should have paid more attention to Mr. Rajan, who famously ruined a 2005 Federal Reserve celebration of Alan Greenspan’s career by suggesting that big banks might be steering the world economy off the cliff. (“I felt like an early Christian who had wandered into a convention of half-starved lions,” he says.)

Mr. Rajan, a Massachusetts Institute of Technology Ph.D., sees the crisis through an unusual lens. He spent his childhood in India, studied electrical engineering there and still advises its government. He later did a few years as chief economist of the International Monetary Fund. More than most economists, he sees ways in which rich countries behave similarly to poorer ones and sees the roots of the crisis as global.

In a conversation a few days after the government pointed the finger of blame at Goldman Sachs, Mr. Rajan previewed arguments he’ll make in a book (“Fault Lines: How Hidden Fractures Still Threaten the World Economy”) to be published in July.

“We miss the point if we find a scapegoat in the financial sector. It was doing what so many people wanted. And not many people were asking questions,” he says.

To him, this was a Greek tragedy in which traders and bankers, congressmen and subprime borrowers all played their parts until the drama reached the inevitably painful end. (Mr. Rajan plays Cassandra, of course.) But just when you’re about to cast him as a University of Chicago free-market stereotype, he surprises by identifying the widening gap between rich and poor as a big cause of the calamity.

The first Rajan fault line lies in the U.S. As incomes at the top soared, politicians responded to middle-class angst about stagnant wages and insecurity over jobs and health insurance. Since they couldn’t easily raise incomes—Mr. Rajan is in the camp that sees better education as the only cure and that takes time—politicians of both parties gave constituents more to spend by fostering an explosion of credit, especially for housing.

[Note: ‘Making housing more affordable’ was an initiative driven by Clinton and Bush administration]

The second fault line lies in the relentless exporting of many countries. Germany and Japan grew rich by exporting. They built agile export sectors that compete with the world’s best, but shielded or strangled domestic industries such as banking and retailing. These industries are uncompetitive and inefficient, and charge high prices that discourage consumer spending.

China and others got to a similar place by a different route. Financial crises in the 1990s showed them the dangers of relying on money flowing from rich countries through local banks to finance factories, office towers and other investment. So they switched strategies, borrowed less and turned to exporting more to fuel growth. This led them to hold down exchange rates (that makes exports more attractive to others). So doing meant building huge rainy day funds of U.S. dollars.

The result: A lot of money abroad looking for a place to go met a lot of demand for borrowing in U.S. A lot of foolish loans were made.

A third Rajan fault line spread the crisis. The U.S. approach to recession-fighting—unemployment insurance and the like—and its social safety net are geared for fast, quick recoveries of the past, not for jobless recoveries now the norm. That puts pressure on Washington to do something: tax cuts, spending increases and very low interest rates. This leads big finance to assume, consciously or unconsciously, that the government will keep the money flowing and will step in if catastrophe occurs.

Compounded by hubris, envy, greed, short-sighted compensation schemes and follow-the-herd habits, these expectations that the government will save us all leads big finance to borrow cheaply and take ever bigger risks. No democratic government can let ordinary folk suffer when the harshness of the market brings the party to an end, as it inevitable does. Big finance exploits what Mr. Rajan calls this “government decency” and bets accordingly.

If he’s right, changing the rules, incentives and innards of major economies to reduce the risks of repeating the recent crisis is not going to be easy.

[Note about the 3rd fault line; Rogoff devoted a whole book about this “This time is different”. It is in line with Pimco’s assessment that the era of ‘sameness’ in growth is over, due to the volatility in markets and debt burden of (nearly all) developed countries.]

Mr. Ronisky is one of about 40,000 law-school students who will graduate this spring and enter one of the worst job markets for attorneys in decades. This year’s classes have it particularly bad, according to lawyers and industry experts. Though hiring was down last year as well, they said 2009 graduates applied for jobs before law firms had felt the full brunt of the downturn.

The situation is so bleak that some students and industry experts are rethinking the value of a law degree, long considered a ticket to financial security. If students performed well, particularly at top-tier law schools, they could count on jobs at corporate firms where annual pay starts as high as $160,000 and can top out well north of $1 million. While plenty of graduates are still set to embark on that career path, many others have had their dreams upended.

Part of the problem is supply and demand. Law-school enrollment has held steady in recent years while law firms, judges, the government and other employers have drastically cut hiring in the economic downturn.

Large corporate law firms have been hit particularly hard. The nation’s 100 highest-grossing corporate firms last year reported an average revenue decline of 3.4%, the first overall drop in more than 20 years, according to the May issue of The American Lawyer magazine.

Morrison & Foerster LLP, a 1,000-lawyer San Francisco-based firm, hired about 30% fewer graduates this year than in the prior year. “It would not surprise me if all firms cut back on hiring law graduates for a couple of years,” said Keith Wetmore, its chairman. Saul Ewing LLP, a 250-lawyer Philadelphia firm, cut hiring of law graduates this year by about two-thirds.

[…]

Employers last year offered 69% of summer interns a full-time job, down from about 90% in the previous five years.

(via WSJ)

Status of Economic Recovery

It is apparent that the economy is starting to rebound. There are several reasons for it. One is that, despite the fact that the long-term impact is negative, there is a lot of fiscal stimulus working its way through the economy. I believe this will have a short-term effect only and will wear off when the money is spent.

I believe there are too many headwinds in the way of a recovery that will impact the economy some time in H2. I have written about this many times and referred to some of these factors in the original version of this article.

There is another factor which I have also written about. That is that some of this recovery is real. The U.S. economy has a remarkable ability to correct its mistakes after a bust, reallocate capital to profitable ventures, and grow again. I cannot discount this fact even though I believe the data doesn’t quite support that conclusion.

I don’t think that any Austrian theory economist could honestly come to any conclusion on that because it is too difficult to know if “real” capital is sufficient to support new growth. And the reason is that the government is doing so many things to thwart and delay a recovery by supporting companies and industries that need to fail.

Primary among those government policies that delay a recovery is allowing banks to stay alive when they should fail. This is the cause of the credit freeze and credit as money supply continues to decline. In the real estate crash of the late 1980s, more than 2,000 banks, and 1,589 S&Ls, were closed,  the Resolution Trust Corporation sold assets wholesale. Bad assets were disposed of, balance sheets were cleared, banks were closed, and credit flowed again. The economy went into recession in 1990 and started recovering after 8 months. This is not happening this time. (via)

Germany, a social welfare state in Europe, has implemented many forms of buffers and narcotics to lessen the effects of a recession. But were some 12 months enough time for the slow political pyramids in the world, to correct the real underlying misgivings, misalignments, legalized crimes, earmarkings, waste, misjudgment and biased decisions, to learn and act from the lessons real world economics slapped in our face?

2010 will be the year, which will break or make us.

Either we will get some traction of growth, stop layoffs, create new jobs, hire again, … or the defaults on revolving debt (public, private, real estate, credit cards, housing etc) will be the overkill for credit markets.

And when countries/states/councils/cities can’t fund their deficit spending (aside from companies who can’t expand bc capital is too expensive) - then they have to cut spending and raise taxes. In effect killing growth.

What I, in a snap reasoning and judgment, can think of, is that we wasted our opportunity in the last plus 12 months, making the time worth suffering by doing the hard things. Coming clean with so many things which are so wrong. And everybody is complaining about it, but nobody stands up.

Where are we supposed to look for help when governments begin to fail functioning? Fail working efficiently and effective (what is hardly the case right now and in the past decades). What if they fail? What if we lose trust in them? In the marketplace, in banks, in the currency. I don’t want to paint the devil on the wall, but it is really a probability of the worst.

It is already clear that the short-time working program has simultaneously been a lifesaver, a buffer and a narcotic. Frank-Jürgen Weise, head of the Federal Employment Agency, is already warning that the worst is yet to come for some industrial sectors, especially the machine-tool and auto industries. “Hundreds of thousands are currently still on short time, but that won’t be sustainable in the long run,” he says. (Source)

Continued:

Short-time working can save jobs in the short term, but it cannot invalidate the laws of economics.

The crisis is entering a new phase. If layoffs are imminent because a company no longer has enough work for its employees and must modify its business to cope with new conditions, one option is to shift employees to so-called “transfer” companies with the help of government support. These transfer companies provide professional training or job placement services. “Before the crisis, we had five to eight of these companies, but now we have about 60,” says Herbert Rössle from the Stuttgart employment agency. And, once again, the metal industry is the first to take advantage of the programs.

In the end, the short-time working program is, more than anything, a bet that there will be an economic upturn in 2010. But no one knows how the wager will turn out.

“If the economy does not pick up steam, it will catch up with us,” says Burkhard Schwenker, CEO of the management consulting firm Roland Berger Strategy Consultants. “But if the economy does recover, Germany, as an export-oriented country with strong companies, will benefit in particular.”

I posted yesterday a brief statement about the case of Dubai;

DUBAI. The Question is — ‘Is it contained?’

Guaranteeing the debt ‘on a case by case basis’ may help, but it (will) overshadow the so claimed recovery of the US. Sentiment can turn quickly, many real estate properties in the world and in the US (are connected) have to revolve their debt in the coming months ahead. As big and small companies have to.

And with the prospect of a subdued recovery (eventually double-dip), and weak financial markets - containment is again the buzzword #1. Goldman Sachs and others may make money in proprietary business, but banks don’t do business with Main Street as they did before.

We all sunk into it because we are connected, we all sink when one loses control. Look out for further potholes, Dubai is one.

Now one day late, The Economist comes with a quiet subtle hint what it means for the world.

Dubai’s failure re-awakened a number of dormant fears in investors. Some worried about banks that had lent heavily to the region. Others wondered if Dubai was carrying far more than the $80 billion or so in debt that it has owned up to. The announcement reminded investors that tacit sovereign guarantees may be worthless. Earlier in November, for example, Ukraine’s state railway firm, Ukrzaliznytsya, failed to repay part of a syndicated loan, and its energy firm, Naftogaz, restructured its debt.

More fundamentally, Dubai’s wobble raised the spectre of a sovereign default. Dubai’s government is not technically on the hook for Nakheel’s debts. But the government’s hesitation in saving its national champions nonetheless demonstrates its fiscal limits.

[…] But many investors in Abu Dhabi bought into the Dubai boom. They will lose money if the bust turns into a protracted slump.

Ice Cold Water.

We are far from recovery. We just jumped ship, the Titanic. The ship is long gone. So many people are now in the ice cold water, freezing to death. Fighting to get onto some buoyant wreckage. And with every hour, more people, um, institutions die in the cold sea. That is how I visualize this.

The Double-Dip Is Here (Q1-2010) or even Q4-09/December

Government of Dubai said today that it will not stand behind its wholly-owned subsidiary Dubai World, prompting fears that the company’s creditors could lose billions of dollars.

Dubai World’s borrowings include a $3.5 billion Islamic bond that was due to be repaid by Nakheel, the property developer behind the Palm Jumeriah islands, in two weeks.

Many creditors had assumed that the structure of Islamic bonds implied there was state backing for this type of financing and Dubai’s failure to support the Nakheel debt could have damaging implications for the wider Islamic market.

UK banks are among 70 institutions to have loaned Dubai World money in recent years as the company grew rapidly and bought foreign assets such as the Turnberry golf course in Scotland and P&O ports. Dubai’s Department of Finance said creditors will be affected in “the short term” by the Dubai World’s restructuring.

It has also emerged today that Nakheel has requested that all three of its sukuks (Islamic bonds) traded on the Dubai stock exchange be suspended. This includes the $4 billion sukuk due to mature on December 14, which triggered the current crisis.

The group’s statement said the three sukuks would remain suspended “until it is in a position to fully inform the market”. ({c} Source)