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The Leithner Letter
Issues 120-123 26 December 2009 - 26 March 2010
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   The Mainstream
    Declares "Mission
    Accomplished;" I
    Remain as Bearish
    as Ever

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spacer  The Intelligent Australian Investor–Chris Leithner




 

After nearly four months of frank, honest, and open dialogue about the failing economy, a weary U.S. populace announced this week that it is once again ready to be lied to about the current state of the financial system. Tired of hearing the grim truth about their economic future, Americans demanded that the bald-faced lies resume immediately, particularly whenever politicians feel the need to divulge another terrifying problem with Wall Street, the housing market, or any one of a hundred other ticking time bombs everyone was better off not knowing about. In addition, citizens are requesting that the phrase, “It will only get worse before it gets better,” be permanently replaced with, “Things are going great. Enjoy yourselves.”

“I thought I wanted a new era of transparency and accountability, but honestly, I just can’t handle it,” Ohio resident Nathan Pletcher said. “All I ever hear about now is how my retirement has been pushed back 15 years and how I won’t be able to afford my daughter’s tuition when she grows up.” “From now on, just tell me the bullshit I want to hear,” Pletcher added. “Tell me my savings are okay, everybody has a job, and we’re No. 1 again. Please, just lie to my face.”

The national call for decreased candor began last month, after the Department of Labor released another soul-crushing report that most Americans agreed “wasn’t helping anything” and “didn’t need to be so specific, at least.” The report estimated that 663,000 private and public sector jobs were lost in the month of March – a revealing statistic many people found shockingly blunt. Responding to the new information, an overwhelming majority of citizens said they believe that, during these extremely uncertain times, our leaders have a responsibility to come together, sit the American people down, and lie through their teeth about everything from misappropriations of taxpayer dollars to the severity of the credit crisis.

“Please, treat me like a child. Treat me like a five-year-old,” Sacramento resident David Cooke, 64, wrote in a letter to Congress. “I lost everything when the Dow tanked, and I’m too old to start working again, so why punish me further by explaining in detail the clever ways these investment firms ripped me off and how they’re all going to get away with it?”

Thus far, many policymakers in Washington have responded favorably to their constituents’ requests, saying they respect and understand the public’s need for dishonesty. “I think we can accommodate the American people on this,” Senate majority leader Harry Reid (D-NV) told reporters. “Why, just today we made excellent progress with GM, whose CEO Fritz Henderson told us that every penny of federal and taxpayer funds would go directly to the construction of three new auto plants in Detroit that will create over 90,000 new jobs and spark the economic rebound we’ve been waiting for.”

Nation Ready To Be Lied To About Economy Again
The Onion (4 May 2009)

The Mainstream Declares “Mission Accomplished;”
I Remain as Bearish as Ever

On 28 September, during his testimony to the Senate Economics References Committee, a senator asked Glenn Stevens, the Governor of the Reserve Bank of Australia, “Given the devastation and given the challenges that are being put to the Reserve Bank, could you explain exactly why we did not see this [the “Global Financial Crisis”] coming?” Stevens replied:

There were not that many people who accurately forecast that sequence of events. After these sorts of events, it is normal to see a few people pop out and say, ‘I predicted all this.’ But I think that most of those claims could be taken with a certain degree of salt. What I would say is that if you go back several years there were people who were saying things like: ‘There’s leverage building up. There is very skinny compensation for risk being paid to investors. There’s a lot of complexity here. We’re worried.’ The official community of supervisors and central bankers and those who think about stability said things like that for a few years. The thing that they could not do, though, was say: ‘Not only do I have this concern but I can tell you how it’s going to unfold. What will happen is that these American subprime loans will start to go sour. Then there will be a sequence of failures. Then there will be a retreat from risk taking. These concerns will spread to Europe. Then there will be a rescue of the No. 5 American investment bank, but then when No. 4 comes under pressure it will not be rescued. And then after that Armageddon will follow.’ I am not aware of anyone who predicted a sequence of events like that.

That’s astonishing. Because nobody could foretell precisely what (i.e., sub-prime mortgages versus commercial mortgages versus credit default swaps versus the U.S. Government’s bankruptcy, etc.) would trigger the GFC, and because nobody could specify exactly where and when the second and third, etc., domino would fall or the specific path the destruction would take, the warnings of yesterday’s reprobates, sceptics and naysayers should be “taken with a certain degree of salt.” So too, by implication, should today’s. Unless foresight is 20-20, in other words, it’s useless. Central bankers, of course, exempt themselves from this standard. The Governor thereby – and quite conveniently – bears no responsibility for his intellectual blindness. “Nobody saw the GFC coming,” Stevens seems to say, “so don’t blame me for not seeing it coming.” So never mind a speech he delivered in June 2007 – just weeks before things economic and financial began cracking at the seams – in which he confidently reassured Australians:

Looking ahead, there does not seem to be a high likelihood of the world economy slowing abruptly in the near term. Hence, the external forces at work will in all likelihood continue to be pretty positive. Australian households overall appear to have plenty of disposable income and the confidence to spend it. Business profits are in good shape, and firms will be well placed to continue their high levels of investment as needed. They are also displaying a strong propensity to borrow, with business credit growth at its highest for nearly two decades.

The RBA’s most senior central planners didn’t just overlook the storm before it struck: they continued to misapprehend it after it arrived. On 12 December 2007, six months after the first wave of turbulence commenced, Stevens’ deputy, Ric Battelino, did a probably unintentional but certainly credible impersonation of Mister Magoo (quoted in The Australian Financial Review):

My own view is that Australian households are in very good shape. They are not in any way exposed or vulnerable – the structure of assets and liabilities is quite sound. There would obviously be examples of people getting themselves into financial difficulty. But fundamentally, the household sector as a whole is in very good financial shape. We had an adjustment in the housing market over 2005 and 2006, but house prices are now rising again … and there’s no hint the share market is grossly overvalued.

You may recollect that during calendar 2008 the All Ordinaries Index suffered the biggest fall (-45%) in its history.

To read the entire Newsletter (pdf), click here.

Chris Leithner    

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