This week we visit some very thoughtful analysis by an old friend of Outside the Box, Dr. John Hussman of the Hussman Funds (http://www.hussmanfunds.com/index.html). Is the new PPIP program and related activities likely to help or hurt the situation? Will this help keep banks for bankruptcy or will it push the FDIC into insolvency requiring massive tax payer cash. This week's Outside the Box is brief, but poignant.
This week I bring you two different articles as an offering for Outside the Box. As a way to introduce the first, let me give you the quote from Merrill Lynch economist David Rosenberg about the rising threat of global trade protectionism:
"The Financial Times weighs in on the rising threat of global trade protectionism in today's Lex Column on page 14 ("Economic Patriotism"). The FT points out that the stimulus packages of many countries include "buy local" provisions. At home, there is a proposed inclusion of a 'Buy American' provision in the economic recovery package and this could set off trade retaliation from importers of US goods. Here is what the FT had to say, 'It was trade protectionism that made the 1930s Depression "Great". Congress would do well to understand that it is in everyone's interest to keep trade open today.'"
I have long written that the one thing that could derail my Muddle Through (at least eventually) view point is a return to trade protectionism. Nothing could be more devastating to the hopes of a recovery. Nothing could more surely turn a recession into a depression, and a global one at that.
David Kotok of Cumberland Advisors notes the very real problem with Tim Geithner's written testimony, threatening China and calling the manipulators, clearly making the point that this is Obama's policy. I did not have time to touch last Friday on the dangerous policy if it is that and not just rhetoric, but David says everything I would want to say and does it shortly and eloquently.
Second, several people requested a chance to look at the actual paper I cited in last week's Thoughts from the Frontline by Nouriel Roubini and Elisa Parisi-Capone of RGE Monitor (www.rgemonitor.com) on how they come up with an estimated potential loss of $3.6 trillion dollars in the US financial system. It makes for rather grim reading, but they go sector by sector to show where the losses are coming from.
Tomorrow I will hold my first "conversation" with Ed Easterling and Dr. Lacy Hunt. To find out more about how to listen in and still get the half price discount for the rest of this week at http://www.johnmauldin.com/conversations. Just enter the code JM44 when asked. Have a great week.
Yesterday I sent you an Outside the Box from Paul McCulley who supports the government and Fed activity (in general) in the current economic crisis. Today we look at an opposing view from Bennet Sedacca of Atlantic Advisors. He asks some very interesting questions like:
- Shouldn't the consumer, after decades of over-consumption, be allowed to digest the over-indebtedness and save, rather than be encouraged to take risk?
- Shouldn't companies, no matter what of view, if run poorly, be allowed to fail or forced to restructure?
- Should taxpayer money be used to make up for the mishaps at financial institutions or should we allow them to wallow in their own mistakes?
I think you will find this a very thought-provoking Outside the Box.
This week we will look at what will be a fairly controversial essay by good friend Michael Lewitt of HCM. In light of today's speech by Treasury Secretary Henry Paulson of the re-organization of the regulatory system in the US, Michael suggest we look at what the real problems are before we begin the process of re-arranging the deck chairs on the Titanic. For many, some of what he says will be considered economic heresy. I do not agree with all of it (though I am in solid agreement on most of it), and look forward to talking with him in a few weeks in La Jolla when we are together. But the point of Outside the Box is not to find material that I or you agree with or that makes us comfortable, but something which causes us to think through our own opinions and biases.
But this is a debate that absolutely must happen if we are to move forward and away from the current crisis and to somehow see if we can avoid yet another crisis in five years. Simply adding new regulations without changing the incentive nature of the markets will not fix the things that really matter. None of us should cry when some fund that is leveraged 30 to 1 goes down and investors get wiped out. What were they thinking anyway? But when a fund or investment bank is so big that its demise threatens the system that we participate in, something is wrong in the way our society manages risk. Simply bailing out big banks is not an adequate regulatory response. While it may work for the immediate moment, it does not solve the longer term issues.
Please feel free to forward this letter to anyone you think should be part of that debate process.