Stocks Rally With Wall Street Banks as King of the Hill

Meredith Whitney made a bull call on Goldman, and the stock market rallied as a result.

There are some important qualifiers in this that the markets seem to be ignoring.

Goldman is positioned as more of a 'one-off' in her forecast, which remains decidedly gloomy for the overall economy, with unemployment as it is under reported by the BLS rising to 13%.

She believes that Goldman will benefit from being in the position to take fees and profits from the heavy government debt issuance to come in the US, especially since it was able to eliminate some long term rivals in Bear Stearns and Lehman Brothers.

Ironically, a richer Goldman does little or nothing for the overall economy since the company pays out about half its profits in bonuses to employees. There is some trickle down to the real economy as they buy their luxury cars, place their children in the finest private schools, and make huge contributions to key politicians, but not much else.

Goldman is not a commercial bank. It has taken on that name to tap into the Government funds, and despite their noises about paying back their TARP, they are huge beneficiaries of the ongoing bailout of AIG with their 100% payouts on Credit Default Swaps.

So, the people give their tax money to Goldman, and in turn a little of it trickles back to those working in the luxury industries, perhaps as servants to great households, and certainly as politicians managing the outlays of public monies to Wall Street.

The debasement of the currency is going to hit the middle class particularly hard, since the monetary inflation is being so heavily targeted to the wealthy few, while little or no quality jobs creation is stimulated. And it is the middle class that is paying for this, in more ways than one.

And economists call gold a barbarous relic.

WSJ
Meredith Whitney Bullish On Goldman,Sees 2Q Above Views
By Ed Welsch

NEW YORK (Dow Jones)--Goldman Sachs Group Inc. (GS) will benefit from being a key player in a "tsunami of debt issuance" by governments as they try to fill gaps in underfunded budgets, financial analyst Meredith Whitney said Monday in an upgrade of Goldman to "buy."

Whitney predicted Goldman Sachs would post second-quarter results Tuesday above Street estimates - she expects earnings of $4.65 a share, compared with the average analyst estimate of $3.48, according to a survey of analysts by Thomson Reuters. She set her 12-month price target on Goldman shares at $186.

Shares of Goldman Sachs rose 2.7% in recent trading to $145.75.

A bullish call from Whitney is rare; she gained renown during the financial crisis for initially unpopular bearish calls on the stocks of large banks that ultimately proved to be correct.

However, Whitney said her bullish view of Goldman is rooted in her overall bearish outlook for the U.S. economy and other U.S. financial companies. While Goldman has made most of its money in the past through a focus on equity markets, Whitney said during the next two years the firm will shift focus to the government debt markets, facilitating new issuance from local, state, federal and sovereign governments as they try to raise money to fill budget gaps.

Whitney raised her earnings estimates for Goldman in 2010 to $19.65, compared to the average analyst expectation of $14.44, and for 2011 to $22.10, compared to the average expectation of $16.75.

She predicted that sovereign and municipal debt markets will grow more than 20% over the next 18 months, and that the state and local municipal debt market could eventually grow more than 50%.

While Whitney predicted U.S. corporate debt will reach about 60% of the levels of the last three years, she said Goldman will get a larger share of that market as well, due to the absence of formerly key players, including Lehman Brothers Holding Inc. (LEH) and Bear Stearns Cos.

Whitney also expects Goldman to take advantage of relatively high capital levels to buy back stock, and by late 2010 could reach the share count level it had before raising capital this year and last.

There Will Be No Recovery...

"The banks must be restrained, and the financial system reformed, and balance
restored to the economy, before there can be any sustained recovery."

Often a closing comment from our blog, essentially this is what Robert Reich is saying in his recent essay on the economy.

The median wage must increase for consumption to resume, and for this to happen the heavy taxes of the financial sector and the oligarchs on the real economy must be lowered significantly.

There is reason for pessimism that this can happen voluntarily. I have come to the conclusion that there is a pathological drive in some small portion of the population to acquire and control and devour rather than consume, even to their own destruction.

The law sets limits on the speed on highways to protect the many from the reckless and willful behaviour of the few. That we ought not to set limits on the banking system is a remarkable bit of speciousness.

There are obvious questions of how best and how far to limit, and how to detect and prevent and prosecute violations, but the comparison is more valid than obtuse. But it is a poor argument to say that we ought not to do it at all because it is difficult, and perpetrators are always trying to find ways to circumvent the system, especially when it is the aspiring criminal element and their demimonde that is making the argument.

The comparison of this latest epidemic of bad economic behaviour is strikingly reminiscent of the Gilded Age at the end of the 19th century and the Roaring 20's. As you may recall both periods were followed by economic dislocation and a world in flames.

Why we allow this sort of bestial behaviour to ravage the many, in the mistaken support of 'free markets,' where nothing these people touch can remain free and effective and efficient for long, is truly an accomplishment of propaganda and those blinded by ideology.

Robert Reich
When Will The Recovery Begin? Never.
Thursday, July 09, 2009

The so-called "green shoots" of recovery are turning brown in the scorching summer sun. In fact, the whole debate about when and how a recovery will begin is wrongly framed. On one side are the V-shapers who look back at prior recessions and conclude that the faster an economy drops, the faster it gets back on track. And because this economy fell off a cliff late last fall, they expect it to roar to life early next year. Hence the V shape.

Unfortunately, V-shapers are looking back at the wrong recessions. Focus on those that started with the bursting of a giant speculative bubble and you see slow recoveries. The reason is asset values at bottom are so low that investor confidence returns only gradually.

That's where the more sober U-shapers come in. They predict a more gradual recovery, as investors slowly tiptoe back into the market.

Personally, I don't buy into either camp. In a recession this deep, recovery doesn't depend on investors. It depends on consumers who, after all, are 70 percent of the U.S. economy. And this time consumers got really whacked. Until consumers start spending again, you can forget any recovery, V or U shaped.

Problem is, consumers won't start spending until they have money in their pockets and feel reasonably secure. But they don't have the money, and it's hard to see where it will come from. They can't borrow. Their homes are worth a fraction of what they were before, so say goodbye to home equity loans and refinancings. One out of ten home owners is under water -- owing more on their homes than their homes are worth. Unemployment continues to rise, and number of hours at work continues to drop. Those who can are saving. Those who can't are hunkering down, as they must.

Eventually consumers will replace cars and appliances and other stuff that wears out, but a recovery can't be built on replacements. Don't expect businesses to invest much more without lots of consumers hankering after lots of new stuff. And don't rely on exports. The global economy is contracting.

My prediction, then? Not a V, not a U. But an X. This economy can't get back on track because the track we were on for years -- featuring flat or declining median wages, mounting consumer debt, and widening insecurity, not to mention increasing carbon in the atmosphere -- simply cannot be sustained.

The X marks a brand new track -- a new economy. What will it look like? Nobody knows. All we know is the current economy can't "recover" because it can't go back to where it was before the crash. So instead of asking when the recovery will start, we should be asking when and how the new economy will begin. More on this to come.

The Net Asset Values of Certain Precious Metals Funds and ETFs

The China Bubble and the Convergence of Oligarchies

This is an interesting story from a source that we will be consulting regularly for their news items and insightful analysis.

Regular readers of this blog will notice that we strike the same recurrent themes.

Some years ago Mr. Bill Gates traveled to China, and liked what he saw. This was the model of capitalism which he favored: a small but powerful elite centrally planning an economy peopled by semi-feudal serfs, and living large on the backs of the many.

With all deference to Jimmy Rogers, China is a bubble. The central government will grow increasingly repressive and manipulative as the people improve in education, health and material means. Propaganda will grow more sophisticated and remain as pervasive as it is today.

When the bubble bursts, the iron fist will be unveiled and there will be popular uprisings, and those who believe they are in elite positions now may then find themselves on the docks piled on their baggage waiting for the next ship to take them to safer destinations.

This is certainly nothing new. After the collapse of the first Federal Reserve credit bubble in the late 1920's, the West turned to Soviet Russia and the fascist countries of Italy and Germany for the answer to the 'failure' of Western free market capitalism. Hitler and Mussolini were heavily favored by Wall Street, having a firm hand to rein in the mob.

On the optimistic side, freedom wanes, but still and in remarkable ways, never seems to die.

The Daily Bell
Chinese bank announces bombshell
Issue 343 • Friday, July 10, 2009

Yesterday on their website, the People's Bank of China announced a shocker. New Chinese bank lending for June was 1.53 trillion yuan ($224 billion), double the lending in May. The total already for the year is an astounding 7.4 trillion yuan when the target for the entire year was 5 trillion.

Putting this in context, total lending this year so far has amounted to 25% of 2008 GDP. As I wrote earlier this week, Chinese regulators are getting concerned that this lending is going towards poor credit and bleeding into commodity market speculation.

As most know, bank lending is high powered monetary stimulus due to its high velocity. This is the key difference between fiscal stimulus vs. monetary stimulus. Actually, monetary stimulus will only work well if the banks receiving the funds lend them out. In the US, this is clearly not happening due to banks loan losses and caution over new lending (expanding balance sheet.) In China, this is not the case and new loans are flowing. - CNBC

Dominant Social Theme: China is heating up.

Free-Market Analysis: We've written about this before. China backed into "capitalism" about 30 years ago and the impetus for where it is now was increased by the problems with Tiananmen Square. The Chinese leaders are not interested in political theory at this point (if they ever were). Their currency is power and the way to maintain power is to create an apolitical system where citizens "can grow rich." Western systems work a good deal better than communist systems in this regard. And thus China has built a facade of a Western system.

Yes, it is really only an imitation of a Western system (from a political and big business perspective anyway) in our opinion, just as its banks are only imitations of Western banks and its stock markets are only imitations as well. In fact, to grow rich by investing in the Chinese stock market one apparently simply has to listen intently to the noises coming from the government as to what companies will grow and what companies will not. (And this is different from the US now in what way? - Jesse)

As far as the banks go, the system is probably even more basic than in the West. The central bank prints as much money as it can, and the commercial banks disseminate it. These banks may act as independent entities, but they still have a foot in state government as do many large companies in China.

It is all fairly well jury rigged. China has incorporated a façade of Westernism but to cast China as the world's financial engine is to understand how desperate the West has become. China's economy grows by 10 and 15 percent a year, and now appears be heating up even more. This is not normal growth but central banking generated growth. The same clique still runs China, but the economy has been supercharged by additional printing.

China is said to be turning inward now, as Western countries cannot afford to buy its products. But whether China will be able to maintain its growth by using its own huge population as a purchasing pool remains to be seen. What will certainly happen sooner or later is that the supercharged money being used by the Chinese will create the same boom-bust cycle as has happened elsewhere. Only when it ends in China after so many years, it will be the mother-of-all blow-offs.

Conclusion: It is difficult to see what Chinese leaders expect to happen once the bubble busts. Maybe they are gambling that they can control the unrest that will come in its wake. Maybe they assume the bubble will not bust for many years. (And this is different from the US now in what way? - Jesse)

But articles like the one excerpted above show us that sooner or later China's overheated and pseudo-Western economy will implode, and likely even more violently than Western economies ever have. And here's a thought: The Chinese in the meantime are said to be big buyers of gold on a government level and also personally. Perhaps what is going to eventually happen is better known in China than the West.