Thursday, January 6, 2011


Five Big Risks to the Recovery

These five factors could make the smooth recovery a lot more rocky.

They are:

* Fiscal policy and imbalances.
* The rapid rate of ascent in interest rates.
* Structural unemployment.
* "Screwflation."
* Sentiment and speculation.

Exploding Packages in Maryland

CNN reports that two packages exploded in a Maryland government building.

Heavy Call Action in Yahoo!

The January 17.50 YHOO calls have traded nearly 36,000 contracts today.

Run, don't walk, to read Zach Karabell's piece on strucutral unemployment in Time Magazine.

Hello, Screwflation, My Old Friend

Screwflation is a theme that I have emphasized lately; it has broad economic, social, political and market implications.

Similar to its first cousin stagflation, screwflation is a period of slow and uneven economic growth, but, in addition, it holds the existence of inflationary consequences that have an outsized impact on a specific group. The emergence of screwflation hurts just the group that authorities want to protect -- namely, the middle class, a segment of the population that has already spent a decade experiencing an erosion in disposable income and a painful period (at least over the past several years) of lower stock and home prices

Public companies, even some of the largest are not immune.

Just look at TGT -- today's victim of screwflation.

Given the domestic economy's reliance on the consumer, there will be many more victims.

I continue to question the foundation of growth and the assumption of a smooth and self-sustaining recovery that is so dependent upon the pressured average American consumer.

So, what went wrong with our economic and financial system in the past several years?

Wall Street was at the epicenter of all that went wrong in our economy over the past three years. A small cabal of bankers who created unwieldy, unregulated and unnecessary derivative products, or financial weapons of mass destruction, ended up producing an economic, financial and credit disequilibrium that affected nearly everyone in the audience today. This was done under the not-so-watchful eyes of regulatory agencies and of our government.

Recklessness abounded. How else to explain investment banks that were leveraged to the tune of 35-1, which seems to be the equivalent of playing Russian roulette with five of the six chambers of the gun loaded. If one added up the off-balance sheet liabilities to this leverage, you might as well have filled the sixth chamber with a bullet and pulled the trigger.

America rushed headlong into the twenty-first century without a proper understanding of what economic policies and financial tools were going to be required to prosper in a changing world. For more than two decades, the U.S. economy favored financial speculation over production.

The financial crisis impacted nearly everyone in our country, and, with those derivative products imported by the investment banks, AIG and several large money center banks to other financial institutions around the world, a massive credit crisis ensued, which nearly resulted in an unfathomable collapse in the world's banking system and securities markets.

Household net worths were decimated by the unprecedented stock and home price drops, and, to varying degrees, your parents' ability to help you pay for a college education was hurt.

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