Prieur’s readings (April 22, 2010)

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This post provides links to a number of interesting articles I have read over the past few days that you may also enjoy.

• Jennifer Schonberger (The Motley Fool): Shiller: The housing recovery could be on shaky ground, April 20, 2010.
“Home prices have been going up for nearly a year now, according to our data, the S&P/Case-Shiller indices … Normally we could extrapolate that kind of upward trend because historically home prices have shown a lot of momentum. But I think we’re in a very unusual circumstance because of the massive bailouts, the homebuyer tax credits, the Fed’s purchase of mortgage-backed securities – and these things are coming to an end. So it’s an unusual period. So I don’t trust the trend that we have. I’m worried that it might get reversed,” said Shiller.

• Jon Hilsenrath (The Wall Street Journal): The U.S.’s least capitalized big bank: The Fed, April 21, 2010.
Last year the Federal Reserve pushed the nation’s biggest banks to beef up their capital levels to ensure that they could escape a worsening crisis with common equity of at least 4% of their total assets. Today, the Fed put out financial statements on itself and revealed that its own capital level is below that stress-test level. At the end of 2009 the Fed had $51.3 billion in total capital on $2.3 trillion of assets, for a capital ratio of 2.3%. Is this something to be alarmed about? The answer is yes and no.

• Martin Hutchinson (Asia Times): V-shaped explosion, April 21, 2010.
Commentators, including the egregious Federal Reserve chairman Ben Bernanke, are increasingly claiming that the United States is in the process of a V-shaped recovery from the Great Recession. Certainly first-quarter gross domestic product (GDP), to be announced next week, is likely to show a substantial bounce, albeit not quite the inventory-driven 5.6% annualized growth of the fourth quarter. Yet commentators should be careful what they wish for: a V-shaped recovery is likely to lead not to a prolonged period of healthy growth, but to an economic explosion and collapse.

• The Pragmatic Capitalist: A self-sustaining recovery? Not yet. April 22, 2010.
The markets are pricing in a self sustaining organic recovery and I still believe we have anything but that.  While we are still very constructive on the economy in H1 (and likely into Q3), I believe we are still mired in a balance sheet recession that is simply being papered over by extraordinary amounts of government spending.  In essence, the government has implemented a massive private sector crediting of accounts while their balance sheets remain highly indebted and continue to be worked down.

• David Bogoslaw (BusinessWeek): Poor pricing power poses problems for the U.S., April 20, 2010.
The attention of policymakers and economists is trained mostly on a looming inflation threat, the drawback you typically associate with enormous amounts of liquidity pumped into the financial system and an economy rebounding from a severe recession. A negligible 0.1% rise in the March consumer price index and comments from the Federal Reserve that interest rates will remain very low for an extended time don’t appear to confirm that risk, however. Some economists and analysts see reasons to worry about the opposite scenario – a period of deflation if companies feel compelled to lower prices to jump-start demand in a sluggish economic recovery burdened by high unemployment.

• Bess Levin (The New York Observer): Inside the Goldman trade, April 20, 2010.
The news on Friday that Goldman Sachs had been sued by the Securities and Exchange Commission on allegations of fraud floored most of Wall Street. But it came as no surprise to Wall Street Journal reporter Greg Zuckerman, whose book The Greatest Trade Ever detailed the transaction at the center of the Goldman case. Mr. Zuckerman talks about the security, which was created for a Goldman investor, John Paulson, who had a distinct interest in seeing it fail.

• Randall Forsyth (Barron’s): Steroid era ends for finance, April 20, 2010.
As in baseball, names of those involved in tainted deals, such as Goldman, will be tainted. Moreover, output will suffer, in homers and economy.

• Marcus Walker and David Enrich (The Wall Street Journal): A backlash in Europe has politicians calling for a Goldman ban, April 21, 2010.
Goldman Sachs Group Inc. is in danger of losing business with a key group of clients as a result of the fraud allegations it faces: governments in Europe and the U.S. Politicians in the U.K. and Germany are starting to call on their governments to cut ties with Goldman, which has long been one of the top financial advisers to European policy makers.

• Martin Wolf (Financial Times): The challenge of halting the financial doomsday machine, April 21, 2010.
There is much more to effective reform of the financial system than tackling “too big to fail”. The big issues are the credit cycle and panics.

• The Economist: Synthetic, derivative, April 20, 2010.
Democrats and Republicans in America’s Senate are playing chicken over reforming finance.

• IBD Editorials (Investor’s Business Daily): Why does Soros bite hand that feeds him? April 20, 2010.

• Soros is free to invest as he pleases, of course. But there seems to be a disconnect with what he says and what he knows will make money.

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