Category: Finance

Is it me…

…. or have we all gone stark, staring mad!

Sorry, in a bit of a rant mood just now.

I read widely many Blogs out there because it seems that this channel is one which is more likely to offer real, valid commentaries on what is going on at present with regard to the economic crisis, that is the crisis in the broader sense.

Here’s a recent piece from Baseline Scenario about the US Federal Reserve.  Here’s how that piece ends:

Regulation remains largely ineffective (in fact, the industry has managed to demonize the word), the big banks are too important to fail, and interest rates are low across the yield curve. The Fed provides downside protection and there is no effective limit on the amount or nature of risks that the private financial sector can take. This is a recipe not for stagnation but rather for a metaboom in which we will receive warnings, including painful recessions – but consistently ignore them.

The 1920s opened with an 18-month recession, an eerie parallel to the 2007-9 experience. It ended with the Great Crash of 1929.

Then across the way we have a piece on The Daily Beast about Summers. I quote from the first two paragraphs with their permission (thanks guys.)

Washington is swirling with the usual rumors—the White House’s man was pushed! He jumped! But Summers is leaving because he made sure real reform was discussed—but not accomplished.

Thomas

The rumor that come November, when the mid-term elections are history, Lawrence Summers, administration’s quarterback on economic matters, will leave the White House, has been confirmed. The usual presumptions have been put in play: Summers is weary of the job; the president and his men and women feel the need for a new pair of hands under center; the man has done well; the man has done badly. There is no indication that, like Bush II’s ill-served first Treasury Secretary, Paul O’Neill, Summers is being canned for speaking truth to power. That is not the man’s style, not—let it be said—that there’s much evidence that the administration has better than a shaky grasp of the practical truths of American financial and economic life in the Age of Goldman Sachs.The bottom line is that we can expect the usual judgemental blahblahblah to grow in volume and marginality on the talk-show and Op-Ed circuit as the day calendared by the media for Summers’ leave-taking approaches.

Now go across to the article and read it in full. Read why Michael Thomas, the author and no stranger to Wall St., describes Summers as someone who “saw to it that the talk was talked, but the walk was never walked.”

And I’ll close by repeating a comment I made to the Baseline Scenario article:

I don’t have the knowledge to respond to Simon’s excellent Post in detail but his comments reinforce what feels like a constant throbbing in my mind – how can the citizens of so many countries have abdicated so much interest and concern in how they/we are governed. Wish I had even a clue as to the answer to that question.

Significant social unrest would be very scary – the ‘law’ of unintended consequences and all that – but there are times when I wonder if this, in the end, might be the only form of real progress for the hard-working, tax-paying majority.

End of rant! 😉

By Paul Handover

Not quite so ‘Irish’

“You’ve got to do your own growing, no matter how tall your grandfather was.” Irish quotation.

In England, inexplicable happenings are commonly ascribed to being ‘Irish’! It’s meant in a loving way; there is a great deal of warmth towards the different ways that Irish people appear to see the world.  But what is facing Ireland (and other countries) as a result of some distinctly unfunny goings-on in the USA is potentially hugely damaging.

To many the way that the world has descended into a dark, economic abyss, which is likely to affect us all in so many ways, and in which we are going to remain for a long time (a la Japan?), is also inexplicable.

Thus a chance comment from Norm Cimon to a recent post on Baseline Scenario set off a chain of discovery that for me has been very interesting.  Here’s how it ran.

I have subscribed to Baseline Scenario for some time.  It describes itself thus:

The Baseline Scenario is dedicated to explaining some of the key issues in the global economy and developing concrete policy proposals. Since it was launched in September 2008, this blog has been cited by virtually every major newspaper, Internet site, and blog covering economic and financial issues.

It’s a great resource.

A recent Post on Baseline Scenario, Irish Worries For The Global Economy, had already attracted 135 comments at the time of writing this post.  A recent one was from a Norm Cimon, who is described in Linked In as the owner of Info Synchronicity LLC.  This is what he said:

That is the other side of the coin. William Black has been lucid on this topic, and clear on the morality of the current age and how to fix it. Put people in jail and let everyone know why they were sent there. If you want to change perceptions then change the reality. The anger of the general public and the disdain of Wall Street are tied to that one issue. No one has paid for the crime of the millenium and everybody knows it.

And included was this recording of Bill Moyers interviewing Bill Black, the author of The Best Way to Own a Bank is to Rob One.

Here’s the interview:

However, there’s more to this discovery than the YouTube video.  If one clicks on the link behind Norm Cimon’s name on that Baseline post, then one is taken here.  It’s a pdf of a paper written by Norm Cimon entitled, “Computing Power and Human Greed.” It seems to me to explain the tools, for want of a better word, that enabled the American banking system to behave in the way that Bill Black so roundly condemns in the Bill Moyer interview.  Here’s how Cimon ends his paper:

With networked computers now cast by all organizations, including the financial sector, into the role of wizard-behind-the-curtain, we all live in Oz.  It’s long past time we pull back the veil and call a halt to the mindless application of this supreme and supremely dangerous creation before the damage gets any greater.

Unfortunately, there isn’t a date to the paper but my guess was that it was written late in 2009. Whatever the date, it is a very apt observation.

Where do we go from here, I ask?

By Paul Handover

I salute this guy!

Karl Denninger of Market Ticker is brilliant

Karl D

I say that not because I have sufficient financial knowledge to evaluate his writings from a technical point of view but because he puts in huge effort, I mean hundreds of hours a month, to support his perspective.

Anyway, do bookmark his website/blog – it’s here.

An article published on the 10th demonstrates both Denninger’s commitment to his audience and some very specific dangers potentially coming out of Europe.  Called “A Round-Up Of Current Idiocy” it includes this conclusion:

Since we keep drinking more as an economy (debt and deficits) the violence and incidence of these “undesirable outcomes” is going to continue to increase.  We had one nasty in 2000, and then again in 2007.  From the so-called “recovery” (2003) to the onset of the last mess was about four years.  We’re now about two years in from the so-called “bottom” of this latest train wreck (Lehman), and if we keep on-path, and we are as the below chart shows, our fuse should go inside the box for this next mess somewhere between now and the end of 2011.

I hope you’re ready, because this next one, coming with no real recovery having taken place in employment or private economic activity, may be the one that takes us well beyond the misery we suffered in the 1930s.

And if it does, it will be our – that’s right – our – fault, since we simply will not accept that there is no such thing as a free lunch.

Note the copyright please.

Despite it being quite a technical piece with some aspects that weren’t clear to me, no surprise!, it’s still got many important messages for all those concerned about our savings and assets.  Do read it.

Well done, Karl.

By Paul Handover

Colbert Good, Keynes Not So Smart

Another hugely interesting article from Patrice Ayme

Patrice is a good friend of this Blog so it pleases me very much to point you towards a recent article on Patrice’s own Blog.  Here’s the abstract:

Obama is well on his way to become one of the most unaccomplished presidents of the USA, ever. This is made worse, because we are at a crucial juncture of history, and the USA is in leadership position. When the car is travelling fast, and the leader is asleep at the wheel, it will not just end in the ditch.

The little smoke and mirrors Obama threw up, will be easily reversed by the republicans, as planned. So, in the end, Obama will turn up as just an extension of Bush, without the smirk… nor the originality. By choosing the same ideological, Goldman Sachs team, that implemented plutocracy under Clinton, Obama asked those who put the car in the ditch, to get it out, not understanding that they were still drunk in their quest to selfish profit.

This story presently unfolding has been seen before; it was Great Depression II, the great depression of the 1930s. It was the stall after the deliberately engineered bubble of the 1920s.

The West got out of it by massive state enforced job programs, started under president Hoover (Hoover dam, Empire State building, etc,) and pursued by FD Roosevelt (Grand Coulee dam, etc.) and Hitler (Autobahn system, copied by Eisenhower in the 1950s, and everybody else since).

Millions got employed directly by the government and the massive mobilization of WWII did the rest, followed by the GI Bill in 1945. Europe had massive state organized and financed economic activity, led by the US Marshall plan (Marshall was the US chief of staff during WWII, and Secretary of State of Truman). Europe, traumatized by what had happened also made important institutional changes, oriented towards welfare, such as free health care. Sully’s plan of circa 1600 for a “Very Christian Council of Europe” was also implemented.

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(Labeling used on aid packages.)

The Marshall Plan (officially the European Recovery Program,ERP) was the primary program of the USA for rebuilding and creating a stronger economic foundation for the countries of Europe (1947–51). Efforts focused on modernizing European industrial and business practices using high-efficiency American models (themselves learned from French industrialists to implement American production of the 75mm gun, the mainstay of French artillery in WWI).

All this help and investment, in the USA and Europe, was paid bymarginal tax rates on income as high as 90% in the USA (under US president Ike).

Right, now, instead, the richest Americans pay the lowest tax rate (15%), and wealth has not been so concentrated in a century (a century ago, great spaces and freedom were another form of wealth, at least in the USA, which have now disappeared).

Starting in 1996, a succession of ever larger bubbles, following part of Keynes’s ideas, has injected more and more money in the economy, money which came neither from savings nor production, but mostly borrowed from aliens, and, increasingly, the Chinese.

Robert Reich (UC Berkeley), who lost to Robert Rubin (Goldman Sachs) the debate on the economic strategy to pursue in the Clinton administration, wrote an essay in the New York Times, “How to End The Great Recession”, reflecting the approach that wealth needs to be redistributed. Reich mentioned what I have long observed: the real (inflation adjusted) median income has been going down for thirty years now. This is worse than what happened during Great Depression II. So this is Great Depression III, not just another recession.

I approve of Reich’s anti plutocratic approach, of course. As he says: “The Great Depression and its aftermath demonstrate that there is only one way back to full recovery: through more widely shared prosperity.”… However, this is not the whole story.Redistribution is good, however production is necessary.Keynes, as we will see, is about throwing money to the people, as the Roman emperors invented. That is not about meaningful employment.

Obama’s ineptitude is not all his fault. The economic advice he got, even from his opponents, has been terrible. For example, Krugman, whom I approve a lot of, wanted, like Romer (the ex-chair of economic advisers) a bigger stimulus. And so did I.

But stimulating what? How? To which aim? Most of Obama’s stimulus was wasted on short term alleviation of long term structural defects, exactly the sort of trap one does not want to fall into (French socialists fell into that very trap in the recent past, with the result that the income tax started to fully go to paying the interest on the French national debt).

The USA stimulus ought to have targeted to jump start a big energy infrastructure first, followed by a massively innovative scientific industry, modeled after the military industrial complex (the only thing the USA does really well nowadays, besides plenty of hot air). Instead, the debate in economic theory has been pretty much Keynes (somewhat of a neo-stupid, see below) versus Hayek (a pro-plutocratic neo-fascist who influenced the Chicago school’s meta principle that GREED, AND ONLY GREED, MAKES GOOD).

However, the military-industrial complex of the USA, by now, by far, the most competitive part of its economy, is not run according to Hayek, or Keynes. It is run along the lines defined by Jean Baptiste Colbert. That ought to be a hint, but no main stream American economist has picked it up.

American economists in good standing do not know who Colbert was, perhaps because he thrived when Indians were outnumbering European colonists in North America, and studying history is not as important than learning sports, and to learn to agree with one’s peers, in American schools.

Colbert started his career, and this is overlooked, overlooking the military, at the grand old age of 21. Colbert branched off into economy and finance much later, after helping to send the hyper rich “superintendent of finances”, Fouquet, to jail, for life.

The American economist Paul Kennedy, in a book about The Rise And Fall Of The Great Powers, basically expounded, as his theory, what was pretty much Colbert’s theory and practice(unsurprisingly, Kennedy does not talk about Colbert too much, and got rewarded with a prize for his depth and originality).

Colbert had perfectly understood that Great Power status necessitated a Great Economy. Thus Colbertism could be viewed as the highest form of militarism. Just like the USA is itself the highest form of militarism which ever was. Notice the rapprochement. Not to make fun of it: the position of Europe and the USA is unstable, just as the entire world economy, society and military situations are all simultaneously unstable, and military superiority is what keeps thing together, right now (unfortunately it is courting defeat in Afghanistan).

Colbert was actually following the model implemented, with spectacular success, by Henri IV and his economy and finance minister, Sully, a protestant military engineer, around 1600 CE, with state financed canals, silk factories and free markets.

Why are great powers great powers? Because they have achieved a technological superiority gradient, and have enough numbers to sit on top of it. Numbers are not everything: the Mongols carved the world’s largest empire in a few years, and with 200,000 warriors. “Technology” here is meant in the full etymological sense: any specialized discourse.

If we want to keep a superior lifestyle in the empire of the West, and a stable planet, it is high time to recover such a gradient, which is, basically, an intelligence gradient. Thus it is high time to redistribute the sort of economy which makes the military industrial complex of the USA so superior, namely COLBERTISM MODERNIZED.

***

The full article is here

Well worth reading.

By Paul Handover

Deregulation – an expert’s view.

Once again, not everything is as it seems!

Focus warning!  This is a longer piece that usual but also a more important piece than usual.  Please find the time to read it and explore the links.  Thank you.

Many, many years ago I lived in Tamarama Bay, just East of Sydney,

Bronte Beach, Australia

Australia.  It was a very short walk to Bronte Beach which was much better experience than the famous Bondi Beach about half a mile North of where we lived.

Thus when I saw the name Bronte Capital it caught my eye because of old resonances from the word “Bronte”.

OK, to the point!

John Hempton is a principle at Bronte Capital, an Australian fund manager.  John is no slouch having been in his past a Chief Analyst for the New Zealand Treasury and Executive Assistant to the CEO of ANZ Bank in New Zealand.  John’s CV is here.

Bronte Capital have a Blog – well who doesn’t – and it was a link to that Blog from Naked Capitalism that caused me to read a recent article from John about deregulation.

Despite me not understanding many of the technical aspects, it struck me with some force, so much so that I wanted to reproduce chunks of it on Learning from Dogs.  John was gracious enough to give me written permission to so do!  Thanks John.

The article is called A Deregulation Conundrum.

John opens by writing:

I have just read Daniel Amman’s excellent biography of Marc Rich – the oil trader notoriously pardoned by Bill Clinton.  I don’t want to get into the politics and ethics of the pardon other than to note that few things in it are black-and-white when you finished reading the book.

and a couple of paragraphs later explains that Marc Rich has a rather appropriate surname – well this is how John writes:

Marc Rich exploited price fixing/import/export controls to make simply unbelievable profits trading oil.  Marc Rich & Co (the Swiss vehicle) was started with just over $1 million in capital and a couple of years later was making in excess of $200 million in profit.  This level of profitability exceeds – by far – any other trading operation I have ever seen – and was probably the most profitable trading operation in history.  Marc Rich & Co (since renamed Glencore) is possibly the most valuable business in Switzerland within the lifetime of its founder.

Just stop here for a moment.

This man, Rich, goes from one million dollars in capital to two hundred million dollars in profits in 2 years, give or take!  Read on:

A typical Marc Rich & Co trade involved Iran (under the Shah), Israel, Communist Albania and Fascist Spain.  The Shah needed a path to export oil probably produced in excess of OPEC quotas and one which was unaudited and hence could be skimmed to support the Shah’s personal fortune.  Israel – a pariah state in the Middle East – wanted oil.  Spain had rising oil demand and limited foreign currency but was happy to buy oil (slightly) on the cheap.  Spain however did not recognise Israel and hence would not buy oil from Israel – so it needed to be washed through a third country.  Albania openly traded with both Israel and Spain.  Oh, and there is an old oil pipeline which goes from Iran through Israel to the sea.

So what is the deal?  The Shah sells his non-quota oil down the pipeline through Israel and skims his take of the proceeds.  Israel skim their take of the oil.  Someone doing lading and unlading in Albania gets their take and hence make it – from the Spanish perspective – Albanian, not Israeli oil.  The Spanish ask few questions.  The margins are mouth-watering – and they all come from giving people what they really want rather than what they say they want.  We know what the Shah wanted (folding stuff).  We know what Israel wanted (oil).  We know what Spain wanted (cheap oil).  Who cares that Spain was publicly spouting anti-Israel rhetoric.  [Similar trades allowed South Africa to break the anti-Apartheid trade embargoes.]

John explains:

It also helped that Marc Rich & Co was a (highly) multilingual firm.  Rich is fluent in Spanish (it is the language he talks to his children in).  He speaks English, German, Yiddish and presumably Hebrew.  His business partner (Pincus Green – pardoned the same day as Rich) speaks Farsi amongst many other languages.  They could do this deal because they could negotiate it and – deep in their heart they hold the Ayn Rand view that trade is a moral virtue and hence they do not need to be concerned with other morality. [The only line that matters is the law – and then it might not be the law of his adopted country – Switzerland – rather than the United States where he was resident.]

My italics, by the way.  Just stay with me for a short while longer to ‘get’ John’s important message.  Here’s John again:

The regulatory regime for domestic American oil was also perverse.  Old oil (meaning wells drilled before the first oil crisis) received one price.  New oil (wells drilled after the crisis) received a higher price.  Squeeze oil (oil that was extracted from wells that ran less than 10 barrels per day) received a higher price still.  The oil could be chemically identical and the price difference over $20 per barrel.  Obviously a trader with a method (any method) of changing the oil source could make a fortune.  Again I am not commenting on legality or morality.  That was just plain fact.  Ayn Rand applies – you give a value and you receive a value.

What all this regulation did was that it allowed people to make simply grotesque profits by thwarting regulation.  The regulation thus worked less well and it was socially unfair.  Pincus Green was good at negotiating in Farsi.  He was astoundingly brave going to Iran immediately after the Shah fell.  He was good at organising shipping.  He worked really hard – but he did not invent something that changed the world and he wound up a billionaire.   Traders make money by intermediating real business solutions – but these were real business solutions to problems made by legislation.  Bad regulation, moral indignation about “trading with the enemy” or “trading with Israel” or with racists in South Africa made people with Ayn Rand morals exceedingly wealthy because you could arbitrage your way around any of these regulations.

OK, you are probably getting the drift of this important article from John.  If any of this ruffles your hair, then read it all – it’s a very important message.  This is what John is saying:

As a plea then I want a debate about the right form of regulation – a regulation that controls agency problems but does not allow arbitrage opportunities to people with “Ayn Rand morals”.

We are not going to get that from the current Tea Party Republicans.  They simply argue that regulation (they say but do not mean all regulation) impinges on “freedom” (something that is clearly a good but hard to define).  However many of the same people want planning regulations to ban a mosque in downtown New York because it is an insult to the victims of 9/11 (and banning mosques is not a restriction on “freedom”).

If that is the level of debate we are not going to get good re-regulation – we are just going to get pandering to whichever lobby group manages to garner most support.  And that is a real risk because we will leave agency problems in place (they benefit the rich and powerful) and we will introduce the same sort of (dumb) regulation that made Marc Rich and Pincus Green astoundingly wealthy.  That sort of regulation also benefits the rich and powerful – especially those with “Ayn Rand morals”.  [The rich and powerful – if you have not noticed – are good lobbyists.  Unless we are careful many amongst them will get their way.]

You didn’t rush those last three paragraphs, did you?

John concludes thus:

I don’t know how to do this well – but I thought I would state the obvious.  The most obvious things that need regulation are things with a government guarantee (implicit or explicit).  If you have an implicit guarantee (as we now know almost all large financial institutions have) then regulation really matters.  If there are large agency problems (small shareholders, large management) then regulation should be deliberately biased to put power in the hands of shareholders not managers (eg banning staggered board elections).

Likewise other agency problems should be strongly policed and the regulation should be of the form that allows that policing.  When Elliot Spitzer found that Marsh – a large insurance broker – was participating in bid rigging against schools buying insurance that was shocking – and is precisely the sort of thing in financial markets that should be policed strongly.  But it took Elliot considerable effort to find and prove his case.  The rules should be established so that sort of behaviour is really difficult to hide.

And I do not think that I need to explain to anyone how much mortgage brokers contributed to the crisis by (a) deliberately misleading borrowers about conditions on their mortgage and (b) participating in the faking of borrowers income/assets/education level when they on-sold the loans to Wall Street.  Agency problems were at the core of the crisis.

On the other side if there is no agency problem then deregulation should remain the order of the day.  Trade restrictions create arbitrageurs – and the arbitrageurs ensure the trade restrictions don’t work anyway.

There are obviously going to be extensions to this rough rule – and this post is really to garner discussion.  But for a start I expect agents who benefit from their agency (and the abuse of their agency) to join the Tea Party.

It is difficult to get policy right.  And when and if the policy is got right we are in for a very long fight to implement it.

I take my hat off to Mr John Hempton. He’s in the ‘finance’ industry, probably doing well, and yet he has the courage to hold a mirror up to the desperately immoral happenings going on around him.

It’s a real pleasure and honour to publish this Post.

Let me close with a short piece from the Sydney Morning Herald of the 2nd January, 2010.

John Hempton ... blog locally, act globally. Photo: Domino Postiglione

WHEN John Hempton started a blog as he recovered from pneumonia, he did not expect to send shockwaves through the finance industry.

But that is exactly what the 42-year-old fund manager did through his Bronte Capital blog. His exposé of an unrelated US hedge fund would eventually lead to $426 million in investments being frozen and authorities seizing control of the Albury fund manager Trio Capital shortly before Christmas.

Fabulous! I salute you, Sir.

By Paul Handover

Statistical impressions!

Or as I would prefer to call it: Lies, Damn Lies and Statistics!

From time to time, I have mentioned David Kauders of Kauders Portfolio Services

I was a client for many years but had to terminate that client relationship when residence in the USA became highly likely!  Very happy with the service and advice provided – extremely so!  (I have no relationship at any level with that firm now!).

Anyway, David publishes what he calls Contrary View from time to time.  His latest is reproduced with his permission.

No. 074 9th August 2010 A statistical impression

Over the last few weeks a number of graphs have appeared showing how the economy has apparently picked up to where it was before the credit crunch started. Such graphs invariably show a ‘U’ shaped curve demonstrating perfect recovery. This is the impression easily formed by a glance at such a graph, but it is the wrong assumption to make.

National Statistics reports Gross Domestic Product (GDP) as two different measures, both estimates showing a decline in GDP.  Here are the latest figures (estimated), taken from their website last week:

3rd Qtr 2008 Index 102.6

2nd Qtr 2010 Index  99.0

This GDP index shows a permanent loss of output.

Detailed figures are also available (Table 1.02 of the UK economic accounts) and on the same estimating basis, seasonally adjusted, report:

3rd Qtr 2008 GDP £340,780 million

2nd Qtr 2010 GDP £328,766 million

No matter how you look at these figures, there has been a permanent loss of output of just over 3.5% in this period.

This loss of output means less work, so debts are more difficult to service.  Why do the press produce graphs showing an apparently perfect recovery? The answer is that the graphs are taken from the National Statistics press release, for example on 23rd July 2010. The graph that is offered is a rate of change, not the level of output, and may simply have been copied without consideration of the impression formed.

The graph mentioned in the text. Ed.

http://www.contraryview.co.uk, published by Kauders Portfolio Management

WARNING: The firm can only be responsible for action taken on our advice given personally and specifically to be suitable for each individual. Statements on this site do not, on their own, constitute advice. Please note that UK regulatory requirements prevent us commenting on your existing investments or giving specific advice, unless you first sign one of our portfolio service agreements.

As I mentioned in a comment to a regular reader of Learning from Dogs:

To me, sufficiently old to have watched Governments for some decades now, the most striking thing about the present circumstances is the terrible decline in political integrity.

By Paul Handover

More bending!

More on those revised US GDP figures

On the 2nd August there was a Post that highlighted the way that officialdom was changing figures that painted a very different picture to that promoted at the time the figures were released.

I linked to a recent article from Karl Denninger showing how previous US GDP figures had been significantly revised downwards.

Well Karl has now published a smart chart showing what happened in a way that makes it very easy to understand.

The chart is below, but please support Karl by going to the article which is here.

Revised US GDP figures

Do read the original article at Karl’s Blog site simply because he sets out in his usual clear (and forthright) manner just what this all means.  And it isn’t just affecting the US – this ripples across the pond!

Finally, another perspective on this issue is here – with the same implications being presented.  It’s gloomy ahead!

By Paul Handover

The Verdict!

A nearly 30-year old film has real relevance for today!

Those of you that read yesterday’s Post right through to the end will have picked up on the fact that after completing that article last Friday, Jean and I watched the movie The Verdict.

Amazingly, this powerful film was released on the 8th December 1982.

So why the connection between the film and the Post written yesterday?

Well yesterday I wrote about two recent examples of, at best, a terrible lack of integrity, or, at worst, blatant examples of powerful institutions lying to us.  It troubled me greatly and I found no adequate way of closing the Post expressing my troubles in a succinct and fitting way.  Stay with me for a few moments.

In the film The Verdict, Paul Newman plays Frank Galvin – here’s the synopsis from the IMDb website:

Frank Galvin is a down-on-his luck lawyer, reduced to drinking and ambulance chasing. Former associate Mickey Morrissey reminds him of his obligations in a medical malpractice suit that he himself served to Galvin on a silver platter: all parties willing to settle out of court. Blundering his way through the preliminaries, he suddenly realizes that perhaps after all the case should go to court: to punish the guilty, to get a decent settlement for his clients, and to restore his standing as a lawyer.

As one might have guessed, Galvin wins the case against all the odds, which doesn’t in any way reduce the power of the film.  Newman was brilliant.

Tackling a medical malpractice case that could revive his once glorious career, attorney Frank Galvin (Paul Newman) questions a key witness, Dr. Thompson (Joe Seneca), in the compelling courtroom drama The Verdict.

At the end of the hearing Galvin rises to give his summation.  Technically the case appears utterly lost to his side.  Galvin slowly stands, hesitantly looks as his notes, cast the sheet aside and reluctantly addresses the jury.

You know, so much of the time we’re just lost.

We say, “Please, God, tell us what is right; tell us what is true.” And there is no justice: the rich win, the poor are powerless. We become tired of hearing people lie.

And after a time, we become dead… a little dead. We think of ourselves as victims… and we become victims. We become… we become weak. We doubt ourselves, we doubt our beliefs. We doubt our institutions. And we doubt the law.

But today you are the law. You ARE the law. Not some book… not the lawyers… not the, a marble statue… or the trappings of the court. See those are just symbols of our desire to be just. They are… they are, in fact, a prayer: a fervent and a frightened prayer. In my religion, they say, “Act as if ye had faith… and faith will be given to you.” IF… if we are to have faith in justice, we need only to believe in ourselves. And ACT with justice. See, I believe there is justice in our hearts.

Now go back and read my Post of yesterday.  Read of the Citi executives paying token fines for lying to investors.  Read of the allegation that the 2009 data set in the US GDP report was a “bald-faced lie”.

Now read again, aloud to yourself if you can, the first few sentences of Galvin’s summation.  Here they are again (my emphasis).

You know, so much of the time we’re just lost.

We say, “Please, God, tell us what is right; tell us what is true.” And there is no justice: the rich win, the poor are powerless. We become tired of hearing people lie.

And after a time, we become dead… a little dead. We think of ourselves as victims… and we become victims. We become… we become weak. We doubt ourselves, we doubt our beliefs. We doubt our institutions. And we doubt the law.

I firmly believe that this is where millions of ordinary, hard-working, caring citizens of many countries have arrived today because of the lack of integrity, the lack of honesty and the lack of grace shown by so many in positions of power and privilege.

But do not despair because if we do that, then all is lost.  No, believe in the power of good men.  Back to the summation from the film:

In my religion, they say, “Act as if ye had faith… and faith will be given to you.” IF… if we are to have faith in justice, we need only to believe in ourselves. And ACT with justice. See, I believe there is justice in our hearts.

Exactly!

By Paul Handover

Our economic outlook – where to?

The fundamentals always win, in the end!

Those that know me or have followed Learning from Dogs for the last year (and thank you!) know that I am pretty pessimistic about the economic future for North America and Europe (at least!).  I speak not as an economist, far from it, but as someone sufficiently old to think that many millions of individuals and their countries have been living on borrowed time for decades.

David Kauders

Twenty years ago I didn’t really do anything than feel uncomfortable when friends announced another new house with mortgages far in excess of the old ‘rule’ of 1.5 to 2.0 times one’s annual income.

Then I came across David Kauders of Kauders Portfolio Management who explained in fundamental ways why this was all going to end in tears, so to speak.  Wasn’t he right!

Thanks to David, I am moderately more well-off than I would have been – without a doubt.  Not only did David manage my private pension, he greatly influenced my modest personal investments outside his portfolio.

Where’s this heading?  This Blog is an attempt to show that integrity in all that we all do is not only the best personal strategy, it is the only viable course for mankind in bringing us back from the brink of global disaster.  So a couple of recent items about economic matters from people of great integrity underlined the value of mentioning them in this Blog.

The first is a talk given by Elizabeth Warren two years ago, in January 2008, entitled The Coming Collapse of the Middle Class.  It’s nearly an hour long but very well worth watching especially in the way that Ms. Warren shows how counter-intuitive is our understanding of how family costs have risen over the last 30 years.  Although it applies to the US, it certainly has relevance for British viewers.  Do watch it.

Here’s how the video is described:

Distinguished law scholar Elizabeth Warren teaches contract law, bankruptcy, and commercial law at Harvard Law School. She is an outspoken critic of America’s credit economy, which she has linked to the continuing rise in bankruptcy among the middle-class.

Next is that stalwart Karl Denninger.  How he finds the energy and enthusiasm for publishing his Market Ticker is beyond me.  He’s not subtle but his personal integrity is beyond reproach in my opinion.

Karl was recently interviewed by Bill Still (Bill produced the highly acclaimed film The Money Masters) and despite the videos being heavily edited Karl says “and for the most part accurately captures my views on the topics covered.”

Again these interviews are not short but, again, if you want to understand how dangerous the fundamentals still are – then watch them.

Karl Denninger, author of Market Ticker and winner of the 2008 Reed Irvine Accuracy in Media Award explains the roots of the current crisis and why real economic growth is impossible. He explains why the stock market rebounded in 2009 and why that can’t continue. He explains what needs to be done with the banks and predicts that all the big banks will fail.

Part One:

Part Two:

Finally back to David Kauders.  He also publishes an opinion website Contrary View. Here’s what David wrote in February 2010.

No. 73 22nd February 2010 Predicting lost decades

There is plenty of evidence from Japan about lost decades for investments. Japan has now lost two decades in equity and property investment, during which time only Government Bonds provided any sanctuary. All policy options failed, because none tackled the real problem, which is that there is already too much debt. What lessons can be drawn for Britain?

Shares here have certainly had a lost decade. On the Japanese evidence, they may well suffer another lost decade. Property has only hit minor bumps, so the Japanese experience suggests that property may suffer a long decline for two decades. In the UK, the Bank of England’s support for mortgages will be withdrawn over the next two years, which itself threatens prices. Why, though, the hysteria about Government debt?

It is questionable whether pundits appreciate the extent of the private sector debt problem, which explains why two groups of economists can offer totally contradictory remedies. In a world with no Gold standard and therefore no anchor to the monetary system, Government debt is relatively safe. The global economy is perched on a knife edge, with a permanent loss of output that must cause income loss and therefore restrict the capacity of households to service their debts. Seeing the commercial risks, banks are still restricting lending, which means there can be no sustained recovery.

There is a misconceived demographic argument being touted at present, which completely ignores the real driver of the post-1945 expansion, namely increased credit. That credit growth has simply gone too far and now brings its own problems. For those people who neither saw the credit crunch nor the long fall in interest rates and inflation coming, to now be credible in predicting a lost decade for bonds, is itself unbelievable.

You see how it all makes sense – the fundamentals are in charge, and always will be!

You be safe out there!

By Paul Handover

Pass the parcel

Congratulations to Martin Wolf of the Financial Times

An article was published in the FT on the 29th June that beautifully describes the ways in which we are all being so beautifully ‘screwed’ by the world of finance.  (Note, you may need to register to see this article, but please do.  Registration is free and the FT is full of great content.)

It starts like this:

This global game of ‘pass the parcel’ cannot end well

By Martin Wolf

Published: June 29 2010 23:31 | Last updated: June 29 2010 23:31

Paul here. Pass the parcel is a game for kids’ parties that involves passing a multi-wrapped ‘present’ around where the kid holding the parcel when the music stops gets to unwrap one sheet, then passes it on, etc., etc., until the kid holding the parcel with just one wrapper on it when the music stops gets the present.

Martin continues:

Our adult game of pass the parcel is far more sophisticated: there are several games going on at once; and there are many parcels, some containing prizes; others containing penalties.

So here are four such games. The first is played within the financial sector: the aim of each player is to ensure that bad loans end up somewhere else, while collecting a fee for each sheet unwrapped along the way. The second game is played between finance and the rest of the private sector, the aim being to sell the latter as much service as possible, while ensuring that the losses end up with the customers. The third game is played between the financial sector and the state: its aim is to ensure that, if all else fails, the state ends up with these losses. Then, when the state has bailed it out, finance can win by shorting the states it has bankrupted. The fourth game is played among states. The aim is to ensure that other countries end up with any excess supply. Surplus countries win by serially bankrupting the private and then public sectors of trading partners. It might be called: “beggaring your neighbours, while feeling moral about it”. It is the game Germany is playing so well in the eurozone.

It’s an article that really does need to be read in full. Martin concludes thus:

Yet it is quite clear that an isolated discussion of the need to reduce fiscal deficits will not work. These cannot be shrunk without resolving the overindebtedness of damaged private sectors, reducing external imbalances, or both.

The games we have been playing have been economically damaging. We will be on the road to recovery, when we start playing better ones.

Now I really don’t want Learning from Dogs to focus on ‘doom and gloom’. There’s more than enough of that to go round twice and thrice.

But when someone writes in such a great clarifying way – then it deserves the widest promulgation. The more we all know about the games being played, the better we can change the rules to benefit society.  Well done, Martin.

By Paul Handover