I wrote quite a lot about GM when it was going down because it was such a bell-wether of America as a whole. So I think it only fair to write something in the same vein, now it is coming back.
GM is preparing to offer investors new shares in its re-vamped company. To me, however, the company still looks very much as its cars always have, something only a Mississippi river-boat gambler would feel at home in. A wheeled version of a wollowing, fat arsed, steam-driven, paddle boat – dodgey decor, overstuffed arm chairs, with a woofy engine that’s more bark than bite – all lit up like the Fourth of July.
But snideness aside I think someone over there in GM’s Detroit tower, needs to make contact with reality and start worrying.
GM is trying to come back as an independent company as fast as it can. Hoping, no doubt to sell into the nascent and much hyped, on CNBC at least, US recovery. It has to be remembered CNBC is owned of course by fellow American industrial and financial behemoth GE. The only problem is, the ‘recovery’ is nine parts hype to one part ‘maybe not’.
Let’s look at the actual facts and figures situation GM is going into.
Today US unemployment figures showed first time claimants this week rose to 500, 000. This is NOT a recovery figure – not even on CNBC. But this figure only tells you about the flow of new bodies coming down the river. It tells you nothing about those who’ve been there for months. There are so many of them, the long term on extended benefits, that you can barely see them any more. They’ve been there so long, unable to get out, that they are now all but submerged. Unemployment has not moved from 9.5% since I can remember. And that’s the narrow U3 figure. U6 is up there around 17% or more.
This is the comsumer base GM will be hoping to sell many more spiffy new cars to.
Then there is the fact that for the 15th week in a row, which is itself a record, retail investors, the smaller investors who normally make up the largest pile of capital in the market, have been pulling their money OUT of U.S. domestic stock mutual funds. This week the flow was negaitve $4.1 billion. So far the outflow is $48 billion.
These are the people GM is hoping to sell its stock to.
Then there is today’s Philadelphia Fed’s manufacturing survey. Each regional Fed conducts surveys in its area. The Philly area shows that manufacturing ‘conditions’ are at a recovery-tastic, minus 7. A little itty bitty bit down from +5 last month.
In the corporate areaa what we are seeing are lots of Mergers and Aquisitions (M&A’s). Which are to my mind a bad sign. Bankers LOVE them because they get paid many, many tens of millions to shuffle the papers and numbers around. But in our present climate what it says to me, is that companies know there are not going to be any new customers, no growth in consumption or the market size, so they are trying to buy up other people’s share of the shrinking customer base. Its a sort of corporate canibalism. Imagine fat men in a room with not enough food to go round. Wait long enough and ….
The corporations can do it because globally they have stock-piled over $2 Trillion in cash. Which they have chosen NOT to invest in more production or invest in the stock market. Corporate America would very much like people to buy up their stock but do not want to buy any themselves. Wonder why not?
What this says to me is that there is a decent chance GM’s IPO could be a disaster. Don’t worry it would be bought jup by the underwriting banks who would then issue guidance to buy, buy buy and upgrade GM’s outlook and then dump the stuff on idiots who believed them. That’s the most likely outcome.
Less likely, because it would be disasterous pr for GM and the US recovery, would be for GM to pull its IPO citing adverse market conditions. Which, in my opinion, would be closer to the truth but when was the last time truth sold on Wall Street?
So am I the only person seeing a build up of negative signs? Well no, for a change, I’m not. Today the Dow Jones has fallen, at time of writing 7pm GMT), a whopping 159 points which is 1.5%. We’re headed back under 10k, I think. Which means alarm bells will be ringing in QE HQ formerly known as Ben Bernanke’s office.
In Europe the US figures conspired to kick 2% out of the French Market, 1.8% out of the German Market and 1.7% out of London. London headed under 5k.
I have to say when I think of the Fed these days, especially the FOMC, I can’t help see that wonderful night-time Do Long Bridge scene from Apocalypse Now. About 4 minutes in you have arrived at Ben’s office. “Who’s in charge here? Aren’t YOU!”
Article about the banks fighting with insurers about whose responsinility the bad loans will be in the final reckoning.
http://www.nytimes.com/2010/08/20/business/20norris.html?_r=1&ref=business
Hi Golem
Thanks for the cautionary statements about CNBC. I had been wondering why their reporting was so unbalanced. They also have too many zany market tipsters, jigging up and down whilst making recommendations, like kids trying to tell you the same old joke. I suppose they're the entertainment for the evening.
The GM Cruze is receiving some good reviews at the moment. Though it is a big improvement for GM I think they have missed the boat by many years; it's too little too late and it will be hard to sell it abroad.
Interesting and well-balanced article Mr Eirik. I will try to read more from the NY Times.
Sorry in advance to just post links and not contribute to the debate – but the following articles may appeal to readers…
A nice article which talks about securitized mortgages
http://hbr.org/2010/09/the-big-idea-the-judgment-deficit/ar/1
and a very nice commentary on this article too from the ever excellent naked captilism blog
http://www.nakedcapitalism.com/2010/08/amar-bhide-on-the-staliniztion-of-finance.html
Rob,
Thanks for the links to "The Big Idea:The Judgement Deficit". I was genuinesly interested to read insiders taking issue with securitization and the spread of derivative based finance.
But Rob, the rest of the article raised my blood pressure.
Am I right in thinking the Big Idea is that the market, specifically mortgage lending, needs to get away form computerized credit score lending back to personal judgement lending?
It's a good idea, certainly. But big? If the paper had been called "The Deficit Judegement it would be fine. But passing it off as THE BIG IDEA is a problem for me. Because it makes it seem as if just a little matter of judgement is what caused this crisis and so fix hat bit of judgement, leaving ALL else therefore untouched, and it's fixed.
Now maybe I am just being bad tempered here. If so just ignore me while I calm down.
"The modern economy creates and spreads unprecedented prosperity by drawing on the resourcefulness and enterprise of the many, not by blindly following the dictates of a few." This is apologioa 101. I can't let it go, sorry.
What made Nike a vast money making part of the modern economy. Was it resourcefulness and enterprise of inventing running shoes OR was it locating their sweat shhops in countires where they could make the shoes for pennies and sell them for 60 dollars? I am sorry but following the dictats of the few is EXACTLY the business model. The few were offered pennies to work very long hourse and did.
The I-pad. Nice idea. But what made the millions? Was it the idea? Well the idea is a good one. But do you think the slave labour conditions at Foxconn in China making the things might be the reason it made Apple its profits?
This sentece is worthy of Marie-Antoinette. "… many of us value this humanization of our work as highly as we do the material comforts that the work secures." Exactly how people in assembly plants in CHina and India and all the other 'out-sourced' countries feel I am sure.
The article present western capitalism as a bunch of good guys having lattes and good ideas in the land of the free thinker. And completely glosses over the vast underpinning of masses following the dictates of the few.
"Yes, the collapse of the Soviet Union and of top-down, Soviet-style management in monolithic corporations liberated millions from mindless, unproductive toil." Ah those old soviets again. So useful as straw men. Yes they were released and welcomed into mindless and unproductive toil in monolithic western corporations. Or am I missing something here.
The the best bit of the whole article. His central point. "Finance suffered from a judgemnet deficit." Breath taking stuff. NO actually finance suffered from an HONESTY deficit. The article Lars suggested in the NY Times makes this clear. I have seen the paperwork of dozens of fraudulent and dishonest morrtgages. Pages and pages of them. Smurfs buying mortgages for a speculator, without income, no checks done, securitized again without checks, Rated as AAA without any checks and sold on into the torrebnt of greed.
A JUDGEMENT DEFICIT!? Oh yeah. Let's blame it on computers and specky boys who programmed them. NOTHING to do with all the actual fincancial people.
No. It was greed and dishonesty.
This paper said one good thing but the rest of it was a study in self serving stupidity and arse covering.
For my money it should be awarded the Nancy Reagan prize for fatuous drivel. Here's the sentece which sums it up.
"…we need to just say no to judgement-free risk taking by banks…."
Just say no to drugs! In Nancy's world it was as simple as that. Same is apparently true for Nancy-world finance professors like Amar Bhide.
Rob,
I suddenly thought you might feel my reply was in some way meant as an attack on you. It isn't at all. I was sincere when I said thanks for posting it.
I am grateful when people come here to read and more so when they take the time to recommend things and offer ideas and comments.
If my reply was intemporate then I apologize.
Sorry, but it was worth posting that just to read your reaction!
I think that some of the ideas in this article fit in with your theory (i think it's correct) of a new currency that has been debased. The financial people would have encouraged the judgement deficit in order to create more of their debt backed currency (the securities). Obviously the 'judgement' deficit was not something that came about by chance.
The most interesting point in the article for me (that I had not previously heard) is that securitisation removes flexibility in dealing with individual mortgage holders in difficulty. Once the debt is sliced and diced, then actually re-negotiating it becomes near impossible. This is a powerful argument against securitisation of mortgage debt – perhaps it should be banned outright.
I don't think that there is one single cause of this crisis nor a single solution. Why did securitisation or mortgage debt take place? Was it a cunning plan of the financial class to create their own currency, or was it in response to Clinton's plan to increase home ownership?
Problem is that people tend to be greedy and dishonest, especially when the ones at the top of the pile are greedy and dishonest. We need a system that is at least robust against that. How do you feel about paying taxes when a fair amount of it is going to bailing out the financial class?
Don't worry, I didn't think it was an attack on me – I'm one of the nice guys and I rarely cause offence.
I was a bit concerned that the article didn't wind me up as much as it wound you up. I'll have to go and meditate on that…
Basicaaly I was had. OK I can live with it. But I'm going to be calmer and more circumspect next time!
I hadn't thought of securitization removing any flexibility. It's an interesting
notion.
When I read this article I couldn't help experiencing a tingle of indignation and disgust. Strangely though, I couldn't explain what it was about the article that had raised my hackles, because on the surface the article presented sound arguments.
I think my unconscious mind has intuitively found the bullshit but my cognitive processes are too dumb to bring it kicking and screaming in to the real world. Like many people who visit this blog I have a keen sense of 'wrongness', but am unable to present a sound case for the prosecution. Like 57Nomad is fond of saying, 'It's not enough to just say something is wrong. You have to explain why it is wrong. Dumb ass!'
You just have to admire the Hollywood magic that produces speeches such as that of Al Pacino's at the end of Scent of a Woman – 'I don't know if Charlie's silence here today is right or wrong; I'm not a judge or jury. But I can tell you this: he won't sell anybody out to buy his future.'
Who didn't feel a tingle then! Sound words for our shady bankers.
Discussion with Stevehill around at UT —
@frog2: I wasn't accusing you personally of playing the envy card. I really do think there's a plausible regulatory model involving realtime computer monitoring so patterns are caught today, not months after the year-end audit. I helped build such a system for the insolvency profession when I was a regulator, and trust me: banks have no fucking idea what "regulatory monitoring" really means. And it's high time they did.
22 August, 2010 20:26
Where do I begin !
frog2
Where indeed. Juggling with knives in a whirlwind.
If you could catch the pattern of the hammer falling, recognize the little tell tale flash just before the bullet begins to leave its casing and plot the hot gases expand, pushing up the muzzle, would it help?
Even if studying the patterns of tremors ever revealed a pattern that allowed you to predict when the next earthquake will happen. What then? Could you stop it? Could you put the forces that had formed the pattern back in their box? Stop them in their tracks?
It's the dream of those who confuse mastering numbers with mastering the thing the numbers represent.
And then there's the teeny matter of non-linearity. The financial world has lived so long with curve fitting that some seem to have forgotten that fitting the curve after its happened is not the same as predicting it.
Years ago a mathematician working on weather prediction once showed me a wonderful demonstration. It was a competition between a little hand held Texas Instruments programmable hand calculator and a Cray 2 Super computer. The competition was for the Cray to be able to predict what number the TI was going to produce next out of a little equation it was running.
The TI was running a very simple Non-linear equation. Nothing complicated. He set it running.
All the Cray had to do, was compare the sequence of numbers popping out of the little calculator, find a pattern, zero in on a match and calcualte the next number before the TI did. Given that the Cray 2 was the most powerful computer in the world at the time, and the TI was an antique even then you might have thought it a daft test.
To make it easier he was even going to give the Cray the actual equation the TI was running. So all it would not know was the starting numbers that had been initially put into the TI to start it off.
Turns out that unless you know he EXACT numbers then the Cray will never catch up, never solve the problem and nbever be alble to predict the next number. No matter how long you give it.
In the financial world not only do you not know all the starting numbers of the system you are 'regulating', you also don't know the equations that govern the system.
Predictions have never worked and never will for known mathematical reasons. The world is non-linear.
Non-linearities make a mockery of wonderful phrases like "real time computer monitoring".
What does he think he will catch? The SEC can already see and could catch 'bid stuffing' right now – but they don't do anything. It's illegal but no one cares. To much money involved.
WHat does he think he's going to regulate?
You don't need a computer to see a bubble forming. But once one is forming, what you cannot predict is where the equation unerlying its behavour, will flip, jump or tip from one behaviour to another completely different one.
Poicarre knew it, Lyaponov knew it and veryone since knows it.
Regulate away. More power to his elbow. Will it solve anything and make the system good, robust, safe, better. No not really.
It will remain unstable, unpredictable and beyond regulatory control.
It's not just about the input values for this chaotic system, assuming they have all the relevant input variables, which is unlikely; they don't even have a correct equation and will try variations until they get the best curve fit. The trouble is, when they run the model at a later time it will be a different equation!
However, in their defence, these 'predictors' would point out that they are not aiming for a perfect correlation, but merely a trend within acceptable bounds.
I wonder how much the financial world truly relies on these models. It seems to me that world's problems have been caused by individual greed rather than computer models. As you say Golem, you don't need a computer to see a bubble forming, but I bet plenty of models showed precisely this and were simply ignored.