Irrational Exuberance Reader

Here is a collection of articles intelligently explaining why the market rally is ill-founded and why we are in for a bigger bust some time in the future. All that the Americans have done is put a giant humongous band-aid on their economic wounds without doing anything substantive to solve the underlying problems.

Lessons of Financial Crisis Forgotten in Heady Speculation

In order to rescue the financial markets, the US government has put its credit on the line by bailing out shaky institutions and offering guarantees on deposits and loans. Obama has also revealed that America is likely to increase its debts by $9 trillion in the next ten years. Add this figure to the existing $12 trillion of federal debts, that is more than $20 trillion.

Assuming an interest rate of 5%, that is about $1 trillion which has to be allocated in the budget to pay creditors yearly. Where is Uncle Sam going to get the bulk of this money except to turn to its printing press? And we are not even thinking about other liabilities in its social security and health care.

Is there a point where the party stops and nothing works anymore? Very likely yes. The Federal Reserve cannot cause the market to rise indefinitely by printing money at will. Its status as the global reserve currency is at stake after abusing it for so long.

It is a matter of time before we experience another major recession because the key lessons from this financial crisis were forgotten easily and people are back to their greedy speculative ways. But the next time round, the Federal Reserve may find its hands tied, with very few options available.

The Next Financial Crisis

During this crisis, Bernanke--while saving the financial system in the short term--has done nothing to break this long-term pattern; worse, he exacerbated it. As a result, unless real reform happens soon, we face the prospect of another bubble-bust-bailout cycle that will be even more dangerous than the one we’ve just been through.

Irwin Kellner: Irrational exuberance takes an encore

Based on the fundamentals, neither stocks nor oil should be trading at today's lofty prices, nor should gold, for that matter. Yet people are chasing their prices up, so anxious are they to buy.

In the case of the dollar, it has fallen so much that it is now undervalued, in terms of purchasing power parity, yet investors continue to sell.

Underlying this behavior is what I would call twisted logic.

When it comes to the world of investments, rising prices cause people to buy while falling prices beget selling. This is exactly the opposite of what they do out there in the real world of goods and services.

Here, most of us look for bargains -- we tend to buy more when prices are low. When prices go up, we step back and buy less or none at all.

For their own sakes, it is too bad that investors do not carry their real-world attitudes to the world of stocks, bonds and commodities. If they did, we would experience fewer, if any, bubbles no matter how much liquidity fills the financial system.

MarketWatch Pundit Calls a Meltdown

I hope you get it by now. I am not a market bull. And neither is Paul Farrell. Bernanke won't turn off the liquidity tap. Meanwhile Geithner, Paulson & friends continue to prop up the crap financial institutions like Citigroup, Bank of America, AIG, Fannie Mae and Freddie. America is super obese because of its addiction to leverage and debt, and speculators are punting up the stock market when the economy is hardly showing a recovery.

Good luck to all of you currently in the stock market. I hope, for your sake, that I am wrong.

Wall Street's 2012 meltdown sweepstakes

It's coming in 2012: Another, bigger meltdown of Wall Street's "too-greedy-to-fail" banks. No, this is not another fanatical warning about that Dec. 21, 2012 end-of-days prediction based on the Mayan calendar, though you may well ask "Who will survive?"

Here is what's happening: History is repeating itself. Wall Street's soul-sickness is setting up a new meltdown. Dead ahead. Be prepared.

...

Unfortunately America's collective brain was addicted to the adrenaline rush of gambling in a risky bull. The euphoria is intoxicating. We were caught up in a game of musical chairs, squeezing out every last dollar of return, blind to the catastrophe ahead until caught by surprise. Unfortunately, Wall Street lacked a moral compass and stole trillions from American taxpayers. Today, the only lesson Wall Street has learned is "greed is good." Now the beginning of the end has become a moral tragedy that is setting the stage for an implosion of Wall Street, capitalism and our economy circa 2012.

Everyone's still listening, still in a trance

Yes, another meltdown is coming; it's inevitable. This time, I've decided to do more periodic updates -- a watch list of alerts, warnings and predictions. Just like the updates done for over a decade, except this time we're more aware that few in power will listen, not Wall Street, not Washington, not Corporate America. But you must.

Yet Another Top Analyst Calls a Bubble

Nouriel Roubini and SocGen are bearish on the stock markets. Now, another top analyst, Meredith Whitney, famous for her right call on the collapse of Citigroup and other banks, now says that the market rally is not backed by fundamentals.

Bank analyst Whitney bearish on U.S. market
Mon Nov 16, 2009 3:47pm EST

NEW YORK, Nov 16 (Reuters) - Bank analyst Meredith Whitney said on Monday she does not believe the U.S. equities rally is based on fundamentals, and she is as bearish as she has been this year in the stock market.

In an interview with CNBC television, Whitney said there is "no way" the banking sector is well capitalized and it is time to reduce weighting in large-cap banks.

Whitney also said she sees a double-dip U.S. recession.

The main U.S. stock indexes pared some of their gains during the interview.

Whitney wrote a particularly pessimistic, but accurate, report on Citigroup, on Oct. 31, 2007, which got her attention from many Wall Street analysts and the news media. She has since followed this report with similar reports and predictions, which have tended to leave the companies involved with lower stock prices as the market has taken her opinion seriously. One of her claims is that goodwill is built-in to a lot of companies' share prices, and that as the market moves into dark times, this goodwill will dissipate.

In 2007, Whitney was listed as the second best stock picker in the capital markets industry on Forbes.com's list of "The Best Analysts: Stock Pickers", as well as being named "one of NY Post's 50 Most Powerful Women in NYC.

Whitney's extremely bearish view on banks landed her on the cover of the August 18, 2008 issue of Fortune Magazine. Even before the problems in September that befell Merrill Lynch and Lehman Brothers, she is quoted as saying, "It feels like I'm at the epicenter of the biggest financial crisis in history, however even a broken clock is right twice a day" In October 2008 Whitney, was ranked as one of Fortune 500’s “50 Most Powerful Women in Business.” In 2008 she won CNBC's "Power Player of the Year" over Jamie Dimon, Ben Bernanke, and Hank Paulson.

SocGen & Nouriel Roubini: Markets to Tank Very Soon

SocGen's Albert Edwards and economist Nouriel Roubini are sounding a warning that the recent rallies in asset markets are being driven by a liquidity bubble that is going to burst spectacularly, perhaps as soon as next year.

Reuters reports as follows:

SocGen's top analyst sees market lows next year
Mon Nov 9, 2009 11:54pm EST

HONG KONG (Reuters) - Albert Edwards, a top analyst with French bank Societe Generale, expects global markets to hit a new low in 2010, adding that he would not be surprised if the global economy enters another recession next year.

Edwards, one of the leading equities bears and a long-term critic of the policies of Western central banks, is skeptical of popular opinion that extreme policy response will safeguard the West against a repeat of Japan's lost decade of the 1990's.

Edwards said he expected that at some point China would go into recession, calling people's excessive faith in growth stories a "sick joke."

Japan would run into difficulty funding itself next year as demand for Japanese government bonds waned and bond yields rose further, he said.

The significance of higher Japanese government bond yields was that it would cause some Japanese investors, who have been investing overseas in search of higher returns, to bring that money back home, he said.

Meanwhile, Nouriel Roubini, in this essay, warns of the effects of the 'mother of all carry trades'

"the combined effect of the Fed policy of a zero Fed funds rate, quantitative easing and massive purchase of long-term debt instruments is seemingly making the world safe – for now – for the mother of all carry trades and mother of all highly leveraged global asset bubbles.

...

But one day this bubble will burst, leading to the biggest co-ordinated asset bust ever: if factors lead the dollar to reverse and suddenly appreciate – as was seen in previous reversals, such as the yen-funded carry trade – the leveraged carry trade will have to be suddenly closed as investors cover their dollar shorts. A stampede will occur as closing long leveraged risky asset positions across all asset classes funded by dollar shorts triggers a co-ordinated collapse of all those risky assets – equities, commodities, emerging market asset classes and credit instruments."

Personally, i don't know exactly what is going to happen, but I certainly agree with these two analysts that the recent market rallies certainly seem to be fueled by exceptionally loose credit rather that proper market fundamentals. The US and European economies are still in the dumps, propped up only by record levels of government spending and record levels of liquidity as supplied by the central banks. Instead of taking the hard medicine of properly restructuring the economy, all we see is continued support of 'too-big-to-fail' sick giants and more and more borrowing.

Sooner or later a liquidity bubble is going to form (it probably already has) and sooner or later this bubble is going to burst... how big and how hard the burst and subsequent crash is going to be, I don't really know. But if SocGen and Roubini are right, then it looks like it's going to be a loooong way down from here.

Foreign Residents Should Just Shut Up

(see below for context)

I refer to the letter, "Be prouder of this great little red dot (ST, Nov 7)" by Mr Sam Ahmed, and find it amusing that the author criticises Singaporeans for complaining about their own country or wanting to "save up and leave."

Indeed, it is ironic for a person who has left his own country, lived his life in several cities around the world, and finally decided that a country not his own should be where he wants to settle down - should then have the gall to deprive others the right to choose where they want to live, or to decide that their country of birth has room for improvement.

Mr Ahmed, of course, has never been a Singaporean taxi driver, nor has he ever been a Singaporean undergraduate. Incredibly, however, he claims to have the insight and wisdom to understand how 'foolish' Singaporean taxi drivers and undergraduates are when they criticise their own country. Perhaps Mr Ahmed should take a few years off his own busy schedule to attempt to live life as a taxi driver in Singapore and to study as a Singaporean undergraduate before blowing his trumpet in the national newspaper.

Mr Ahmed has also clearly never paused to consider the fact that amongst the many other foreigners who have passed through Singapore's shores, he is but amongst a minority who have decided to settle here. This leaves me wondering, does Mr Ahmed have superior judgment to all those other foreign fools?

The hypocrisy of foreign residents like Mr Sam Ahmed is astounding. While attempting to belittle the opinions of Singaporeans, they conveniently ignore the fact that they themselves have abandoned their own homelands for another one which they perceive to be a superior place to live. Where, Mr Ahmed, is your own pride in your own home country?

Mr Ahmed is patently unqualified to make any of the comments he made in his forum letter. Indeed, It is time for foreigners like him to keep their mouth shut and mind their own business.

Singaporeans are fully capable of making their own informed decisions and forming their own opinions about their country. The last thing we need is a foreigner with little understanding of how things work, pontificating about how Singaporeans should think about their homeland.

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ST Nov 7, 2009

Be prouder of this great little red dot

I REFER to Thursday's report, 'Singapore a top choice for migrants'. I am a new permanent resident, and this report not only makes me proud, but also affirms my fundamental belief that Singapore is destined to be a global centre from a financial standpoint and a cultural and social perspective.

After living most of my life in Sydney, Paris and Tokyo, I have embraced Singapore as my home - I never felt so intimate with the other cities.

My only beef with Singapore is that its citizens do not necessarily share my passion for this country. From personal observations, I have noticed that Singaporeans are both competitive and in a constant pursuit to improve their daily lives, whether economically or in some other sphere.

In this challenging environment, it is natural that one loses perspective of the overall big picture, which is that Singapore, a country of about 700 sq km, has come a long way from a backwater trading post to establishing itself as arguably the financial and technological hub of Asia.

Perhaps Singaporeans should be prouder of their country. Cab drivers complain about everything and university graduates I come across talk of saving up and moving to Spain or Italy.

Perhaps it is time citizens took a step back from the frantic demands of everyday life to reflect a little on what their country has to offer - a safe, ecologically aware and technologically advanced metropolis with excellent public transport and infrastructure, a thriving arts scene and a welcoming multicultural local population.

If foreigners from all over the world can see this and are coming to Singapore, why can't Singaporeans?

Sam Ahmed

France to Count Happiness in GDP - Why Singapore is Still Nowhere Near World Class

Very interesting article in the Financial Times Today. I quote it here, editing it for my purposes.

France to count happiness in GDP
By Ben Hall in Paris

Published: September 14 2009 15:48 Last updated: September 14 2009 19:35

Happiness, long holidays and a sense of well-being may not be (Singapore’s) yardstick for economic performance, but Nicolas Sarkozy believes they should be embraced by (Singapore) in a national accounting overhaul.

France’s president on Monday urged other countries (like Singapore) to adopt proposed new measures of economic output unveiled by a panel of international economists led by Joseph Stiglitz, the US Nobel Prize winner.

Mr Sarkozy, who set up the Stiglitz-led commission last year, said that (Singapore) had become trapped in a “cult of figures”.

Insee, the French statistics agency, would set about incorporating the new indicators in its accounting, Mr Sarkozy said.

One consequence of the commission’s proposed enhancements to gross domestic product data would be to improve instantly France’s economic performance by taking into account its high-quality health service, expensive welfare system and long holidays. At the same time, the commission’s changes would downgrade (Singapore's) economic output.

The commission suggested a series of improvements to the way GDP was measured. It proposed accounting for people’s well-being and the sustainability of a country’s economy and natural resources. “(In Singapore), citizens think we are lying to them, that the figures are wrong, that they are manipulated,” said the president. “And they have reasons to think like that.

Certainly, I do not think we will expect to see the Singapore Government incorporate citizen happiness, well-being or the state of the welfare system into its GDP accounting system.

Because that would make us look like a third-world country. Let's face The Ugly Truth - Singaporeans are stressed out chickens & unhappy rat-racers. They work hard their entire lives just to be able to buy that condo or that landed property & that BMW/Mercedes Benz. Many of them can't wait to get out of the country to some place where they will not be treated as second class citizens in their own back yard.

Indeed, as I explained before, GDP is a lousy indicator of a people's wellbeing. And it's what the Singapore governnment has been using all along to measure its performance and to justify the astronomically inflated salaries of its ministers.

God bless the day we finally depose of the Leegime and have someone who thinks like Mr Nicholas Sarkozy.

The Temasek Problem is Not a Temasek Problem (Why Tharman Shanmugaratnam is Ho Ching's Best Friend)

The major news headline to hit the press in July was the failure of the announced leadership transition by Temasek Holdings to materialise. Back in February, Ho Ching announced her resignation and that she would hand over power of Singapore's Sovereign Wealth Fund to Charles Goodyear. At that time, the Merrill-BoA merger was being finalised and the BoA share price was hitting record lows. Here's a snapshot, if you don't remember.

At the time, the announcement was very surprising indeed, to observers who had been used to criticising the fact that Mdm Ho Ching was the Prime Minister's wife, as well as Lee Kuan Yew's daughter-in-law. That the top corporate job in Singapore was held by yet another member of the Lee family was, in the eyes of many observers, evidence of cronyism and nepotism in the Lee regime.

Many speculated over the reason for the sudden announcement of the stepping down of Ho Ching to give way to Charles Goodyear. Perhaps it was because of the massive losses that Temasek had sustained due to its over-allocation of resources to the financial sector. Perhaps it was because Ho Ching couldn't take the criticisms of having ascended to the CEO position because of her connections. Whatever the case, it seemed that Temasek was taking a significant step towards its image as a genuinely independent entity - by putting a foreigner in charge.

Fast forward five months, and Chip goodyear is leaving Temasek before even spending a single day as CEO. He is leaving amicably, due to 'strategic differences' - so goes the official line.

Of course, every Singaporean is left scratching his/her head trying to figure what is going wrong with the Temasek leadership transition. According to sources,

"A person familiar with the situation said last week that Mr. Goodyear's proposals for the company's new strategic direction were considered too risky by some, without elaborating. He also said Mr. Goodyear planned changes in senior management that weren't well received by Temasek's board."

But what are the real reasons? Singaporeans will never know... because Tharman Shanmugaratnam is Ho Ching's best friend.

Aug 18, 2009
S'pore Parliament
No goodwill for Goodyear
By Robin Chan

FORMER chief executive-to-be Mr Charles Goodyear received no goodwill payment for his four months' work at Temasek Holdings the Finance Minister revealed in Parliament.

But after 25 minutes of grilling, the House emerged none the wiser over what exactly the strategic differences were that led to his sudden departure.

Members of Parliament threw question after question at Mr Tharman Shanmugaratnam asking him to get Temasek to share with the public what went on behind the scenes but he would not budge.

He said that disclosing the information would serve no strategic purpose and that was not unlike the actions of other publicly-listed companies in the private sector.

'People do want to know, there is curiosity, it is a matter of public interest. That is not sufficient reason to disclose information. It is not sufficient that there be curiosity and interest that you want to disclose information,' he said in response to questioning from Mr Low Thia Khiang, opposition MP for Hougang.

He reiterated that the words in Temasek's statement to the public were carefully chosen and the Government would not add to that.

But of course. Did any of us really expect Mr Shanmugaratnam to reveal anything that we do not already know? Did any of us really expect to find out anything truly and genuinely useful about Temasek through the parliamentary proceedings?

Of course not - and that's because the Government bears ultimate responsibility for Temasek's stuff ups. Ultimately, the Government must bear the consequences of any mismanagement of reserves. Likewise, it will take credit for any 'good' news where Temasek is concerned. The Government has a vested interested in keeping information about Temasek cock-ups hidden away from public consumption.

Thus, can Temasek ever be expected to suddenly become transparent and candid about its management stuff ups and its investment errors? No, it will only be transparent to the extent that its shareholder demands it, and to the extent that regulations require. Since Temasek is not a publicly listed company, Singaporeans cannot expect Temasek to be transparent on the basis that its publicly listed subsidiaries are. And since Government ministers repeatedly say that it is not their role to comment on individual investments - Temasek will never come clean on individual investment decisions, nor will the truth ever be told about why Chip Goodyear quit.

No - what Singaporeans expect from Temasek - they first have to demand of the Government. If Singaporeans want transparency and accountability about Temasek's investments and policy decisions, they have to first demand transparency and accountability from the Singapore Government. If Singaporeans want information about Temasek's decision making process, they have to demand the same sort of information from the Singapore Government. They have to demand that Tharman Shanmugaratnam keep a close watch on the major individual decisions that Temasek makes - and in turn - either report this information to the Singapore people, or require that Temasek makes the appropriate disclosures. It is only after we establish a culture of tranparency and accountability at the highest echelons of Singapore's society, that the lieutenants & the troops will then follow in line.

Indeed, the Temasek Problem is Not a Temasek Problem; The Temasek Problem is a Government of Singapore problem. Ultimately, the quality of corporate governance of Temasek Holdings will mirror the quality of political governance of the Government of Singapore.

And until Singaporeans realise this, they will have to continue living with the opacity and secrecy that shrouds Temasek Holdings - protected as it is by its political masters.