Maureen Tkacik:

"In this economy," the network’s promotional spots remind viewers at every commercial break, "the most valuable asset you have is information."

CNBC: Now more than ever.

How valuable is it now to be told America is screwed? (Now more than ever?)

They said they were ensuring the “efficient allocation of capital,” but they were allocating a suspicious amount of capital to themselves. Class warfare has been the subject of several CNBC segments already this year, not that the network seems to have a clearly defined view of what class warfare is, simply that the market doesn’t like it.

These days on CNBC strategists incessantly advise viewers to rotate their holdings from stocks to bonds. But other than through bond funds, that’s easier said than done, and so CNBC doesn’t spend much time detailing the specifics of bonds, except inasmuch as they pertain to the broader market. And why should they? Home viewers can’t trade bonds, and CNBC viewers who can know better than to rely on it for anything other than what the broader “market” is doing.

The notion that what’s good for the Dow is good for America is inextricable from the network’s corporate culture. But with investors suddenly jolted back to the late nineties, CNBC seems, slowly, to be reevaluating what it thinks is good for the Dow ergo America.

From March, in a thread about Cramer-Stewart:

You are more likely to become a better athlete by watching ESPN than you are likely to become a better investor by watching CNBC.

See also, from Nassim Taleb:

Large institutions are disproportionately more fragile to Black Swans.

This paper establishes the case for a fallacy of economies of scale in large aggregate institutions. The problem of rogue trading is taken as a case example of hidden risks where rogue traders and losses are considered independently and dependently of the institution’s size. Both independent and dependent loss and hidden positions are shown to lead to the paper’s conclusion, that size and economies of scale have commensurate risks that mitigate the advantages of size.

A final thought from Paul Krugman:

While bankers may find the results of the stress tests “reassuring,” the rest of us should be very, very afraid.

Waiting for CNBC

Barclays via Tyler, from last week:

It is fair to say that just about everyone is bewildered and trying to understand when this rally will end.

As a prior boss repeatedly reminded me, and I humbly note here, there is no difference between being early and being wrong.

See also, from a week earlier:

The Incredibly Shrinking Market Liquidity, Or The Upcoming Black Swan Of Black Swans

"Anyone who is doing anything sensible right now is either losing money or is out of the market entirely."

A very interesting data point, provided by the NYSE, implicates none other than administration darling Goldman Sachs in yet another potentially troubling development.

Key to note here is that Goldman's program trading principal to agency+customer facilitation ratio is a staggering 5x, which is multiples higher than both the second most active program trader and the average ratio of the NYSE, both at or below 1x. The implication is that Goldman Sachs ... trades much more often for its own (principal) benefit, likely in tandem with the other top dogs ... For conspiracy lovers, long searching for any circumstantial evidence to catch the mysterious "plunge protection team" in action, you should look no further than this.

The Impending Market Reversal

Michael Mandel on Nassim Taleb:

The invention of the Internet was a reverse Black Swan—unexpected, extreme impact, and inevitable in retrospect. More generally, the positive Black Swans are the technological innovations which could not have been anticipated ahead of time, and which work so well that we have experienced 200 years of rising living standards, despite the downward Malthusian pressure.

Because technological innovation really is fundamentally unpredictable, increasing the amount spent on R&D and innovation does not lead to diversification and a reduction of uncertainty.

Taleb wrote: "The American economy has leveraged itself heavily on the idea generation."

1) Unexpected technological breakthroughs are possible. That's good.

2) The timing and nature of the breakthroughs cannot be controlled. That's bad.

3) Unexpected large bad events are possible as well. That's bad. In fact, we can get bad events which have as big an impact, in the negative direction, as the technological innovations.

Says Ratbert:

"I'm more of an idea rat."

The Horror, The Horror:

Owner: Take this object, but beware it carries a terrible curse!

Homer: [worried] Ooooh, that's bad.

Owner: But it comes with a free Frogurt!

Homer: [relieved] That's good.

Owner: The Frogurt is also cursed.

Homer: [worried] That's bad.

Owner: But you get your choice of topping!

Homer: [relieved] That's good.

Owner: The toppings contain Potassium Benzoate.

Homer: [stares]

Owner: That's bad.

The Reverse Black Swan

Martin Wolf, the world's preeminent financial journalist, responds to Simon Johnson's The Quiet Coup.

Is the US Russia?

The question seems provocative, if not outrageous.

The answer is Yes, but only up to a point.

Wolf continues:

Unquestionably, we have witnessed a massive rise in the significance of the financial sector. Now, the golden age of Wall Street is over. And I agree with the critique of the policies adopted so far.

Yet do these weaknesses make the US into Russia? No. Like Japan, the US is caught between the elite's fear of bankruptcy and the public's loathing of bail-outs. This is a more complex phenomenon than the "quiet coup" Prof Johnson describes.

According to Wolf, Americans can sleep soundly because the corruption is still relatively covert.

From the archive:

The average Afghan spends one-fifth of his income on bribes.

Cutting back financial capitalism is America's big test

Elizabeth Wurtzel:

Whatever lessons the powers that be might learn from this adjustment -- that salary structure should change, or that the billable hour is an anachronism -- it seems no one has stated the obvious: The whole system is warped.

All those lost nights of sleep are now lost 401(k)s. So what was the point? Corporate lawyers could have been sunning in St. Bart's and ended up with the exact same result, plus a tan.

Bob Skrivanek:

"You have this expectation that when you get out of law school, things will be better. Sometimes it's not true."

ABA Journal:

Of the 2,377 respondents who answered all or part of the survey, 84.2 percent indicated they would be willing to earn less money in exchange for lower billable-hour requirements.

Decius:

Life is too short to spend 2300 hours a year working on someone else's idea of what the right problems are.

Richard Hamming:

If you do not work on an important problem, it's unlikely you'll do important work.

Twelve Years Down the Drain

With the Dow now at 6,547.05, it seemed like as good a day as any to revisit this article from the December issue of Fortune.

Dow 4,000. Food shortages. A bubble in Treasury notes.

Fortune spoke to eight of the market's sharpest thinkers and what they had to say about the future is frightening.

Here's what Bob Schiller had to say about P/E ratios:

In terms of the stock market, the price/earnings ratio is no longer high. I use a P/E ratio in which the price is divided by ten-year average earnings. It's a really conservative way of looking at it. That P/E ratio got up to 44 in the year 2000, which was a record high. Recently it was down to less than 13, which is below the average of around 15. But after the stock market crash of 1929, the price/earnings ratio got down to about six, which is less than half of where it is now. So that's the worry. Some people who are so inclined might go more into the market here because there's a real chance it will go up a lot. But that's very risky. It could easily fall by half again.

From a few days ago:

If the exceptional monetary stimulus since September produces inflation, or the unprecedentedly large budget deficits in fiscal years 2009 and 2010 “crowd out” private investment, then growth and earnings prospects for the next few years would be below average. In that event, the market as it stands today would be overvalued.

From last week:

This link is extremely useful. DJIA still looks expensive by this measure!

On 2 March, we had a (1-year) forward P/E of 10.81 for DJIA; one week later, the 12-month forward P/E is down to 9.91. The (1-year) forward P/E for the S&P 500 is down from 11.90 to 10.36.

Are we on track to fulfill Schiller's "fall by half again"?

From last month:

Rather than rely on Wall Street Analysts who are chock full of the conflicts, and seem structurally incapable of catching major economic turns, let’s revisit a long term look at P/E ratios, via historical cycles.

The key point of the chart is that earnings and P/Es are cyclical.

From last October:

In August 2007, the 10-year price-earnings (P/E) ratio was 27.

In October 2008, the 10-year P/E ratio is 14, below the 100-year P/E (15.5) but above the "long-run average" for the depressions of the 30's and 80's (6).

Fall By Half Again? If Only!

John Reed, in FT:

Detroit may be the archetypal down-and-out rust-belt city, but to call it “dying” masks a more complex reality.

Detroit is no longer the nation’s worst-case scenario, but on its leading edge, the proverbial canary in the coal mine.

Neil Howe:

If you think that things couldn't get any worse, wait till the 2020s.

From the archive, a bit of Gladwell:

The relation between the number of people who aren’t of working age and the number of people who are is captured in the dependency ratio.

Last year, in the Economist:

Victorville is typical. Other sprawling exurbs, such as Palmdale and Lancaster, are also seeing an influx of blacks looking for cheaper housing and safer streets. They reveal a dramatic shift in southern California's population, and provide clues to how America is changing.

From 1957, James Reston, via McLuhan, from 1964:

A health director ... reported this week that a small mouse, which presumably had been watching television, attacked a little girl and her full-grown cat ... Both mouse and cat survived, and the incident is recorded here as a reminder that things seem to be changing.

The travails of Detroit

Since the recession began, the economy has eliminated roughly 4.4 million jobs, and more than half of those positions — some 2.6 million — disappeared in the last four months.

The acceleration has convinced some economists that, far from an ordinary downturn after which jobs will return, the contraction under way reflects a fundamental restructuring of the American economy. In crucial industries — particularly manufacturing, financial services and retail — many companies have opted to abandon whole areas of business.

Peter Drucker:

Managers have to learn to ask every few years of every process, every product, every procedure, every policy: "If we did not do this already, would we go into it now knowing what we now know?" If the answer is no, the organization has to ask, "So what do we do now?" And it has to do something, and not say, "Let's make another study."

"Leonard Nimoy":

The following tale of alien encounters is true. And by true, I mean false. It's all lies. But they're entertaining lies. And in the end, isn't that the real truth?

The answer ... is No.

Peter Schiff:

I think things are going to get very bad.

From the archive:

People say to me, "Whatever it takes." I tell them, It's going to take everything.

Also:

We're all losers now. There's no pleasure to it.

Have you seen "Revolutionary Road"?

Hopeless emptiness. Now you've said it. Plenty of people are onto the emptiness, but it takes real guts to see the hopelessness.

Crushing Job Losses May Signal Broader Changes

How much uglier can it get?

Many market participants think capitulation -- when investors take their losses and get out of the market altogether -- must precede a major market recovery.

Why not Teach for America?

One bear will teach another bear, and then that bear will do it.

To quote Rory Stewart out of context:

They will soon be tempted to give up.

Peter Schiff:

Tens of millions of people unemployed, inflation spiraling out of control, the government instituting price controls that result in shortages and blackouts and long lines for things.

I think things are going to get very bad.

Nouriel Roubini:

Let's pull out the bazooka and be done with it.

Bear Market's Bite Could Go Deeper

Aaron Swartz:

Everyone wants to be effective; a manager’s job is to do everything they can to make that happen. The ideal manager is someone everyone would want to have. So herewith, a guide to effective non-hierarchical management.

Peter Drucker:

The critical question is not, "How can I achieve?" but "What can I contribute?"

Warren Buffett:

Do what you love, or your boss will decide for you.

Paul Graham:

It's not so much that there's something special about founders as that there's something missing in the lives of employees.

Pointy-Haired Boss:

"I need to be managing a sexier project to boost my career."

Michael Lopp:

You should pick a fight, because bright people often yell at each other.

A final thought:

Deflation is only a problem if you're the one trying to sell the cheap thing, or if the incredibly cheap thing is your salary, and your boss can't decide between paying you peanuts and finding someone else who will do your job for even less.

Non-Hierarchical Management