What are America's Chief Financial Officers Thinking?

CFO Survey: No Economic Recovery Expected Until Late 2009

Duke University CFO Survey

Top Concerns of American CFOs

• Consumer Demand
  
  
• Credit Markets/Interest Rates
  
  
• Housing Market Fallout
  
  
• Cost of Fuel

Responses to the CFO Economic Survey

• 54% say US economy in recession
  
  
• 76% say Fed interest rates cuts have not helped their firms
  
  
• 60% will scale back expansion/cap spending/hiring
  
  
• 87% say no recovery until 2009
  
  
• 85% with foreign sales say depreciated dollar has helped exports

Confidence in the US economy appears to be hitting new lows. (and a hat tip to The ContraryInvestor.com for the charts)




















But the stock market just had a fabulous rally?
Doesn't that mean that stocks are discounting an improving economy looking out six months?

No. It shows that credit bubbles deflate in fits and starts. Also, that its still relatively easy for the Street to pump the markets to smooth the way for a big IPO like VISA when the Fed is picking up the tab and decent but naive people are willing to do what the Street wants 'for the good of the country.'

Its takes a little effort to see it in this chart, but NYSE margin debt is a leading indicator of the SP 500.





















If you would like to be able to watch a more convenient indicator of the direction of the SP, keep an eye on the Yen/$ cross currency.
We show the Yen chart with an SP 500 overlay every day on our charts section.

Dr. Blinder, the Fed Cannot, and Should Not, Do it Alone

Alan Blinder draws some interesting and important distinctions that deserve a hearing about the Fed's ability to tap the public purse in order to bail out insolvent private financial institutions.

The power to issue money, the power to maintain the national currency, without audit or signifcant outside interference, is a weighty responsibility and a privilege. The amount of discretion permitted the Fed is an important policy question that is likely to be lost on the American professional economists, who have become so focused on the photons of detail that they can barely see what is shown by the light.

This Republican Administration is hardly laissez-faire as Dr. Blinder asserts. Rather, they prefer to outsource their venality and constitutional indiscretions to private companies, who later can plead that they were merely 'following orders.' What we have is a crisis of accountability, from the government regulatory agencies to the corporate boardrooms.

The root of the problem is reckless disregard for the public welfare and financial legerdemain in the style and manner of the 1920's. The Fed is no bystander, but was the sine qua non of this type of bubble and bust.

It was a deadly mixture of excessive credit expansion, lax regulation, and technological innovation that brought us to where we are, starting with a vengance in the Clinton administration but brought to full flower under the Republicans.

We need to restore some regulatory decency to our financial markets. All that the professor seems to be recommending is a new coat of paint on what has become a disreputable casino. How many crises triggered by regulatory dodging, if not fraud, is it going to take before the people and the Congress get the message? The world is watching.

Dr. Blinder recommends we turn to Barney Frank and Chris Dodd to fix this for us. Fine men, but it might be more effective to serve the banks a generous portion of the aggressive activism of Andrew Jackson backed with the principled judgement of Thomas Jefferson as the prescription for fixing this crisis of those who cannot seem to abide the law and keep their hands out of other people's pockets.


The Fed Can't Do It Alone
By Alan S. Blinder
Tuesday, March 18, 2008; A19

Psychology has now overwhelmed economics. What started last summer as a serious problem in a little-known -- but not so little -- corner of the U.S. mortgage market has blossomed into a worldwide financial panic, the sort we read about in history books. Except within the Republican Party, laissez-fairy tales have been discarded, and government support is being both sought and given.

The financial markets live or die on confidence. If you sell a security, you must believe the other guy will pay. You must also believe that something worth $30 at Friday's close, such as shares of Bear Stearns, will not be worth $2 at Monday's open. Such confidence looks to be draining from the system.

Who can restore it? Once upon a time, it was J.P. Morgan -- the man, not the company. Today, it must be the world's leading central banks and treasuries, starting with our own.

Unfortunately, this past weekend was a bad one for Team USA. On Friday, President Bush gave a speech at the Economic Club of New York that left people wondering whether he was in touch. On Sunday, Treasury Secretary Henry Paulson, who has been eerily silent as this crisis unfolded, made the rounds of the morning talk shows. It was not reassuring to see this former titan of Wall Street recite his talking points. Wolf Blitzer asked him five times, "Why did you bail out Bear Stearns?" He never got an answer.

Actually, the Treasury didn't bail out Bear Stearns; the Federal Reserve did. Chairman Ben Bernanke and the Fed have been working overtime; they have slashed interest rates and lent or offered money to almost everyone potentially involved in this mess. On Sunday, the Fed even put its own balance sheet at risk to smooth the way for J.P. Morgan (the company, not the man) to "buy" Bear Stearns. But the stunningly low purchase price, far below even the value of Bear Stearns's Manhattan building, did not exactly inspire confidence.

Earth to the White House and Congress: The Fed cannot do this job alone. (The Fed is integral to the problem, and cannot be the solution - Jesse)

But isn't the central bank the fabled "lender of last resort"? Yes, and the Fed is performing that role extensively. But central banks are designed to lend money to banks that are illiquid but not insolvent. It is not supposed to spend taxpayer money or even put much of it at risk. Those political decisions are properly made by elected leaders.

So what can be done now?

First, everyone should take a deep breath. To those living far from the canyons of Manhattan, the sky is not falling. If you don't want to sell your home, forget about falling house prices. Even on paper, it's unlikely that you've "lost" anything near what you "gained" in the run-up. Yes, the economy is limping, but it's not collapsing. And the effects of the Fed's interest rate cuts and the stimulus package that Congress enacted last month are still to come.

Second, it would be nice to see some patient capital step up to the plate. With so many assets on fire sale, buying opportunities abound. Highly leveraged public companies with mark-to-market accounting and daily liquidity drains are too petrified to buy. But patient investors who don't need liquidity and don't have to worry about mark-to-market accounting have a chance to be the J.P. Morgans of our day. (Should we view this in the same light as Alan Greenspan's admonition to the public to participate more aggressively in ARMs to finance their homes, at an historic low in interest rates - Jesse)

Third, our nation's great financial houses need to use the breathing space the Fed is providing to put themselves in order -- post haste. They need to come clean, book the losses and, in many cases, raise new capital. If the capital must come from abroad, Americans must set aside their pride and/or xenophobia. (By the way, why are some of these companies still paying large dividends and enormous bonuses to their top executives?) (That's Professor Blinder's question not mine, but its the best one he asks. - Jesse)

Fourth, we need leadership from political Washington. Forget the president. We need the Treasury secretary to take charge, not just to "support the Fed." While Paulson repeats his "strong dollar" mantra, confidence in the dollar ebbs. How about doing something about it -- such as a dramatic currency market intervention in concert with other nations? (What good would a dramatic currency intervention do? Except perhaps to further line the pockets of Wall Street banks? The problem is that our markets are riddled with fraud, insider trading, and croney capitalism. - Jesse)

Fifth, I'd like to hear the Fed, which has the credibility the administration lacks, talk more -- and in plain English. For example, I'd like to hear it answer Wolf Blitzer's question -- and others. I'm sure Bernanke can do it better than Paulson. (Leadership starts from above. The Fed's Bernanke cannot and should not be the patsy for the failings of this administration - Jesse)

But our best hope for leadership from Washington may now be in Congress. Rep. Barney Frank (D-Mass.) and Sen. Chris Dodd (D-Conn.) are working on a fine bill that, by easing some of the stresses in the mortgage market, could do some real good. I urge Frank, Dodd and the Democratic leadership to expedite the process, and congressional Republicans should stop standing in the way.

In 1933, Franklin Roosevelt famously told Americans that "the only thing we have to fear is fear itself." Unbridled fear is gripping today's financial markets. We need some soothing words right now -- followed by actions, as FDR's words were. Who will step forward?

Alan S. Blinder, a vice chairman of the Federal Reserve from 1994 to 1996, is an economics professor at Princeton and vice chairman of the Promontory Interfinancial Network

"The Fed Can't Do It Alone - Alan Blinder - The Washington Post

Oh, and by the way Dr. Blinder, the Fed is continuing to run a bluff in trying to 'shape expectations.' The heart of the problem is a pervasive fraud that tumbled prematurely while too many 'too big to fail' institutions were still holding the bag. As Mehernosh Engineer, credit strategist at BNP Paribas, observed...

"The core problem is that the Fed is still not acknowledging that triple A rated CDOs are not triple A. Until it does, the market is just seeing through all of its interventions. The Fed is trying to portray this as a liquidity problem but it’s an insolvency problem based on deteriorating assets."

The Fed is not acknowledging the problem because they do not wish to acknowledge the problem, because its a big one, with deep roots, and lots of nasty non-sexual scandals. And besides, where are the cops? Where is the Justice Department, the FBI, the SEC, the CFTC? Out chasing Elliott Spitzer.

And what is the point of a coordinated central bank effort to pump billions of liquidity into the system and even stronger government action as the IMF's Lipsky suggest? In order to start the music playing again so those too big to fail and too connected to jail can pass their junk paper along to the public according to plan? Is this liquidity flowing into useful productive enterprise, or just to sustain the continuing transference of wealth from the many to the few?

By all means, let us ameliorate the collateral damage to the public by government intervention. But that intervention should NOT be limited to handing over money into the existing corrupted system. The only way to resolve this is that any government intervention to resolve this must include:

1. A formal reinstatement of the Glass-Steagall restrictions on ALL banks doing business in the US including multinationals. A revocation of 23A exemptions and removal of the Fed's latitude to overrule any written law on their own volition. An end to self-regulation and revolving door government regulation by non-civil service political appointees.

2. A return to the concept of regional and local banks through a reinstatement of laws limiting bank ownership across state lines

3. A national usury ceiling for all interest rates and fees on all debt, both revolving and non-revolving, to prevent banks from perpetuating predatory interest rate schemes based on extending individual state laws.

4. A significant set of Congressional hearings and the appointment of a special prosecutor assigned to investigate, with FBI support, the pervasive frauds in the US financial industry from Enron to Tech to Subprime, with special attention to RICO statutes and individuals as well as corporations. The insiders will seek to offer up some designated patsies. We have to try and go beyond that and strike the root and not just the branches.

The last point deals not with retribution, but restoring accountability and as a deterrence. This will happen again in a few years with some new Ponzi scheme. If we take no action it will happen again.

The world is watching what we do next.

"If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered."

Thomas Jefferson, Letter to the Treasury Secretary Albert Gallatin (1802)

Bank Frauds and Glass-Steagall -- Déjà Vu

From the FDIC web site. (hat tip to Obseedian of MarketTickerForum. Nice catch thanks. The whole section is worth reading.)

"National City Company repackages bad Latin American loans from its affiliated bank and sells them to unknowing investors as new securities.

This is one of the deals that initiate the Glass-Steagall Act of 1933."

FDIC: Banks in the Roaring 20's



By way of reminder, the banks will be trotting the VISA IPO out the door tonight and tomorrow.

VISA IPO Gets Priced Tomorrow

Bernanke's Odyssey

We are evenly split on whether the Fed will cut 50 or 75 basis points this afternoon. 100 or more basis points would reflate equity markets but put the dollar in freefall unless the Fed also wraps restrictive language around it signalling a firm pause.

We return to our analogy of Scylla and Charybdis. The Fed's task is to navigate between a falling dollar and broken bond on one hand, and the real economy and the equity markets on the other. Its a difficult task, made even more difficult as we approach what the Fed likes to call 'the zero bound.' We call to mind Chairman Bernanke's game plan as discussed in his academic writings:
"Bernanke and Reinhart (2004) discuss three alternative, though potentially complementary, strategies when monetary policymakers are confronted with a short-term nominal interest rate that is close to zero. As discussed in the introduction, these alternatives involve:

(1) shaping the expectations of the public about future settings of the policy rate,
(2) increasing the size of the central bank’s balance sheet beyond the level needed to set the short-term policy rate at zero (“quantitative easing”); and
(3) shifting the composition of the central bank’s balance sheet in order to affect the relative supplies of securities held by the public."

It is deceptive to think that the Fed will wait until US short term rates are at zero to implement these strategic options. Indeed, they have been trying to shape expectations for some time through both talk and selective price manipulation of certain financial assets, as Mr. Bernanke discloses in his paper using supply and demand dynamics of select financial instruments. Shifting the composition of the Fed's balance sheet is well underway with the non-recourse additions of junk mortgage debt to the Fed assets once pristine with Treasuries and the better agencies.

The next shoe to drop will be the methods by which the Fed "increases the size of their balance sheet" quickly enough to achieve a quantitative easing. Several commentators are calculating the Fed held assets as they approach zero as the Fed extends its assets to the banks and exchanges them in a variety of swaps.

We suggest it is probably incorrect to assume that when the Fed expend the remaining three or four hundred billions of existing Treasury holdings that they will say 'game over' and call it a day. That when we leave the trodden path of monetary history and the US attempts to break the final bonds of a purely fiat currency.

IMF External Relations Department
Morning Press
Tuesday, March 18, 2008

Pressure on Fed to slash interest rates

The Federal Reserve faces pressure to cut interest rates by as much as a full percentage point or more at its scheduled policy meeting today, the FT reports. In early trading yesterday, options prices indicated roughly even odds of a 75basis-point cut or a 100-basis-point cut - with some traders betting on an even bigger 125-basis-point reduction from the current rate of 3%. This puts the U.S. central bank in a difficult position. Before the latest deterioration in financial markets and the crisis at Bear Stearns, policymakers were signaling their reluctance to cut rates by more than 50 basis points at this meeting.

They wanted to indicate that they were still committed to managing inflation at a time when the dollar has been plummeting, commodity prices soaring and market expectations of inflation and inflation risk mounting. Fed policymakers are increasingly doubtful that the risks facing the financial system and the economy can be dealt with through orthodox monetary policy alone. So far interest rate cuts have been largely offset by the expansion in credit spreads. While some on the committee believe this calls for still more aggressive rate reductions, others are concerned that if the central bank cuts rates too aggressively in the face of inflation risk, the bond market could rebel, pushing long-term interest rates up.

But developments in the economy and above all the financial markets in recent days are likely to push policymakers to consider more than a 50-basis-point cut. Above all, financial markets are in a state of extreme dysfunction, which extends to the core of the housing finance system: mortgages guaranteed by Fannie Mae and Freddie Mac.

For years, policymakers have fretted about the global imbalances embodied in the U.S. trade deficit and associated surpluses in China, Japan and oil-exporting countries, the FT also reported. The fear was that if these were to unwind rapidly, with confidence evaporating in the U.S. economy and the dollar, the outcome would be grim. In 2006, the IMF said a disorderly reduction in the U.S. trade deficit would involve "a more rapid fall of the U.S. dollar, volatile conditions in financial markets, rising protectionist pressures, and a significant hit to global output". Dominique Strauss-Kahn, the IMF managing director, yesterday made it clear that some of those fears are materializing.

"For a long time the dollar was in a situation where its downward movement was predictable. We are now in a situation that is more stretched," he said. "It's a problem for economic growth. We clearly face a situation in which the risks to economic growth are more and more serious."

The prospect of full-blown official foreign exchange intervention was played down yesterday by the head of the IMF as the euro's surge to another record high created a fresh headache for the ECB, the FT reported. "It doesn't appear that in this situation central banks need to intervene," said Dominique Strauss-Kahn, IMF managing director.

As jittery investors digested Washington's dramatic steps Sunday to broker a bailout of Bear Stearns Cos. and offer emergency credit to Wall Street firms, the possible outlines of a broader response to the U.S. financial crisis began taking shape, The Wall Street Journal reported today. The result is likely to be a heavier hand of government in the form of corporate bailouts, fiscal incentives and regulation. In the wake of the Bear Stearns deal, fears persisted that the credit-market woes might damage the broader U.S. economy. Overseas markets sold off sharply prior to the start of the U.S. trading session. The dollar also faltered badly, at one point hitting its lowest level against the yen since August 1995. In the financial sector, National City plummeted 43% on reports it was having a hard time finding a buyer. Lehman Brothers dropped 19%.

Far more than at any time before, the Federal Reserve is putting its vast resources and its reputation on the line to rescue Wall Street's biggest institutions from their far-reaching mistakes, The New York Times reported today. Over the next few months, the central bank will lend hundreds of billions of dollars to banks and investment firms that financed a mountain of mortgages now headed toward default. No one knows how many financial institutions will be looking for money, or how much they will seek. No one knows how much in hard-to-value securities the central bank, in return, will have to hold as collateral."

The Fed's decision this afternoon will not give us a clear answer to which way we are heading if the Fed does its job well in striking another balance in the moving equilibrium between economic implosion and currency devaluation. But it will help us to chart the progress as Bernanke navigates the current danger, ironically of the Fed's own creation. Is there a real end in sight? Or is the Fed merely prolonging the problem through financial turmoil and manipulation as the US Dollar empire declines?

"Beauty is but a flower,
That wrinkles will devour.
Brightness falls from the air.
Queens have died, young and fair;
Dust hath closed Helen's eye.
We are sick, and must die.
Lord have mercy on us."

Greece fell. Persia fell. Egypt fell. Rome fell. And life went on. We can only conduct ourselves with honor and grace, as best we can, as this page of history slowly and raggedly turns.

"The world will know that free men stood against tyranny, that few stood against many, and that before this battle is over, even a god-king can bleed."