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Merrill's Contra-Bear Argument

Tyler Durden's picture


Merrill Lynch (excuse me, BofA/ML as they like to put on the lead left side of REIT prospectuses), presents its case for why optimism dominates and all theories voices by perma-bears "have little founding in economic theory or history." What is notable from the below multi-pronged perspective on the definition of the term "recession" is that BofA/ML's entire argument rests on the premise of a fiat currency as taken for granted. Eliminate that, and the construct of imminent recovery from any and every economic cataclysm becomes immediately flawed. Ironically, the only reason there is no mass violence and civil uprisings right now (which would have been the case had RBS and HBOS gone under, an event which according to Bloomberg was mere hours away), is because printing presses the world over went into overdrive with wanton monopoly money (or nightcrawlers as they have been penned elsewhere in the blogosphere) creation (or destruction, depending on your perspective). From BofA/ML, on why permabears are fools:

All you gotta do is act naturally

It is important to realize that in the absence of negative shocks, the economy has a natural tendency to (eventually) return to full employment. After all, the modern, activist anti-recession policies generally didn’t exist before the 1950s. The economy recovered from many recessions in the past without the help of the Fed or fiscal authorities. Economists do not fully agree on the mechanisms (or the speed) of a natural recovery. However, we think the following theories all have some validity:

  • Keynesian: Recessions occur due to a “coordination problem”: a shock hits and causes everyone to pull back on activity for fear that others will be cutting back as well. Recoveries are a reversal of these pullbacks. This is akin to the “feedback loops” view of the cycle.
  • Classical: Recessions cause wages and prices to weaken to the point where demand for workers and products rebounds.
  • Austrian school: A recession is a period of cleansing or “creative destruction,” where less productive industries die but it takes time for more productive industries to be born. Once resources start moving to the more productive sectors, a boom sets in.
  • Financial accelerator model: This is another feedback loop theory. When the economy weakens, lenders tighten lending standards causing further economic weakness, and that in turn causes even tighter lending standards. The opposite happens during recoveries: a better economy makes more people creditworthy, causing more credit and more spending. This is a favorite of Ben Bernanke.
  • Accelerator models: Recessions occur when firms react to weak sales by cutting production even more dramatically, driving inventories lower. The opposite occurs in the recovery: as sales pick up, firms try to boost production to match sales and stop the collapse in inventories.
  • Pent-up demand: A related view is that by the end of recessions, companies and households have delayed many essential purchases—the car is getting rusty, the house needs a new roof, the computer needs updating, the machine tool becomes outdated. This pent-up demand drives spending once a semblance of confidence returns.

The one notable exception to this view is Marxism. In Marxist theory the capitalist world is doomed to ever worsening cycles of boom and bust, culminating in its collapse and the assent of communism. Needless to say, we do not ascribe to this view.

The bottom line: the economy can grow without ever-increasing government stimulus. While policy actions play an important role in many theories of economic recovery, and most economists believe active policy helps the economy recover faster, there are many reasons to expect a natural normalization in economic activity. Extreme perma-bear stories have little founding in economic theory or history.

It needs no pointing out that the current recovery has no analog in history, as it is so much more than a manufacturing recession. To get educated on that, we recommend the BofA/ML gentlemen read the work of their former colleague David Rosenberg. 1950s was not known for a time where several hundred billion in securitizations were rolled out each and every year to profit from the stupidity of the subprime investors (and of Iceland). Our credit recession strikes at the core of the fiat currency system. Ironically, the Marxist view, the one slighted by BofA/ML, is precisely the one that would have been most appropriate if the Fed had not decided to interfere with the biggest wealth transfer in recorded history (from middle to upper class). And the most ironic outcome, is that we may have well skipped the recession part altogether: numerous pundits will attest that America exists in a state of Corporate Communism at this point. So just why again is a Marxist view irrelevant? Oh yes, it is so far below tenured economists (of the BofA/ML cadre) to even consider the alternative that their entire worldview has been flawed from the beginning.

The truth is much simpler: after Lehman fell, the financial system, which relies exclusively on two taken for granted concepts: confidence and trust (which at their core are one), saw itself in an unprecedented $26 trillion hole, as the two core precepts for a functioning fiat economy were pulled, very much like the proverbial rug under the house of cards. The tally of the damage was done by both SIGTARP and former Goldman banker Nomi Prins (attached).



What is the conclusion: the collapse of the liquidity pyramid, the disappearance of securitization, and the near-death experience of a fiat system has had an opportunity cost of $26 trillion, which had to be funded, backstopped and guaranteed by the heart (but not soul cynics would add, as that has already been sold to Satan or Wall Street, whichever comes first) of the currency devaluation system itself: the US Federal Reserve. An opportunity for what? Simply to perpetuate a current broken system which rewards only entities such as the aforementioned BofA/ML (the firm would have been bankrupted 100 times over if it had not been for the relevant parties stepping in at the right time), affording Messrs Harris and Matus (whom we have lots of respect for otherwise) the luxury of spewing such unsubstantiated optimistic drivel even though their paychecks are still guaranteed by the US taxpayer (perhaps they could take their optimistic cheerleader role with a little more humility in this light). And what is the flipside? A global reset: where the debts of every man, woman and child in the US could have been wiped clean (several times over). Of course, that would mean the end of the current banking system as we know it, as all those bank balance sheets have loans as assets, either securitized or in whole, that are intricately tied with the current broken iteration of capitalism (that and waging wars, but that is a topic for another day). This would also include mortgages, which at last count were about $12 trillion in notional. If Obama is so focused on making the home ownership dream a reality, he could have easily accomplished that, and at less than half the cost to the US middle class. After all the latter will be the only one left picking up the pieces when this latest ponzi scheme blows up. Which, like any bubble, it will, sooner or later. However this time the fate of the Fed (in other words America itself) is tied in with that of the bubble. Its burst, when it comes, will be the end of the current paradigm, call it what you will. And what is most unfortunate, is that the BofA/ML Messrs. Harris, Matus, Hanson, Helwing, Bigg and Dutta, are all too well aware of this.


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Sat, 10/10/2009 - 13:14 | Link to Comment Anonymous
Sat, 10/10/2009 - 13:38 | Link to Comment Sqworl
Sqworl's picture

Welcome register and you will be taken seriously...sodomizing Paulson was your password...but having Lloyd hanging upside down in the same cell with next written on his bald head would be nice too!

Sat, 10/10/2009 - 15:09 | Link to Comment Anonymous
Sat, 10/10/2009 - 13:15 | Link to Comment Anonymous
Sat, 10/10/2009 - 17:04 | Link to Comment Anonymous
Sun, 10/11/2009 - 07:58 | Link to Comment Marge N Call
Marge N Call's picture

Pay no attention to the loss of purchasing power, all is OK. Gold is a silly yellow rock, no value there. Please move along.

Sat, 10/10/2009 - 13:17 | Link to Comment Marley
Marley's picture

It's the neologistic economy baby! 

Sat, 10/10/2009 - 13:17 | Link to Comment Anonymous
Sat, 10/10/2009 - 13:25 | Link to Comment Anonymous
Sat, 10/10/2009 - 13:27 | Link to Comment Anonymous
Sat, 10/10/2009 - 13:35 | Link to Comment Anonymous
Sat, 10/10/2009 - 13:57 | Link to Comment Anonymous
Sat, 10/10/2009 - 13:38 | Link to Comment phaesed
phaesed's picture

Start taking your money out of the bank... now.


More of this to come.

Sat, 10/10/2009 - 13:41 | Link to Comment Sqworl
Sqworl's picture

@phaesed: got no money to take anywhere! They took all of it...every last cent...

Sat, 10/10/2009 - 13:56 | Link to Comment Anonymous
Sat, 10/10/2009 - 14:39 | Link to Comment Anonymous
Sat, 10/10/2009 - 16:30 | Link to Comment deadhead
deadhead's picture


truthfully, i was shocked.  we got at least 500 banks that are candidates, maybe more, excluding the TBTFs and we didn't even get one mom and pop out of georgia or illinois or cali.  wow.

while we know the DIF is basically busted, they will get some devalued buckies soon enough....i'm wondering if the fdic is simply overwhelmed....i also imagine that they are getting many "no thank you" responses to some of the crap that they are trying to unload...

Sun, 10/11/2009 - 04:01 | Link to Comment Bear
Bear's picture

They have to hold out until 12/31, so Lewis can take 100% of blame.

Oh this works ... it's also bonus time for BAC, GS, MS, C, et all!

Sun, 10/11/2009 - 08:00 | Link to Comment Marge N Call
Marge N Call's picture

They are on furlough every Friday to save money. If they all take Fridays without pay for the next 700 years they will be solvent.

Sat, 10/10/2009 - 14:07 | Link to Comment buzzsaw99
buzzsaw99's picture

Fine, nice of Merril to share. If that's true then they should knock themselves out buying shares hand over fist.

Sat, 10/10/2009 - 16:31 | Link to Comment deadhead
deadhead's picture

i think they might be a little happier if we bought new bonds, proceeds of which will pay of reit debt to bac. then again, I could be wrong.

Sat, 10/10/2009 - 14:11 | Link to Comment glenlloyd
glenlloyd's picture

I don't know what alternate universe that BoA/ML drivel came from but it wasn't this one.

The real question is what were they attempting to accomplish by publishing that? Do they at all expect people to believe it? The only thing it demonstrates is their complete lack of understanding about the present situation and the consequences. And that they don't live in reality...which I guess we already sort of knew.

Sat, 10/10/2009 - 14:19 | Link to Comment Fritz
Fritz's picture

What a surprise.

Merrill finally goes positive on the market just in time to bait grandma and grandpa to go all-in so the Merrill brokers can generate a few commissions before the end of the year.

Has Merrill not done enough damage to their client base already?

Sat, 10/10/2009 - 14:20 | Link to Comment msorense
msorense's picture

Just a little insight from the real economy:  My small business (engineered components to high tech companies) has exploded over the past few weeks.  I mean orders have shot up about 2-3X easily.  I have had to scramble to secure materials and bring inventory in.  I buy precision bearings from China and you should know that their prices have remained exactly the same since 2003 even though our currency has lost about 40% since then and the Fed has almost tripled the money supply since 2008.  Although I am a uber-bear,  I can see that a "recovery" for our Ponzi economy is very possible under such a scenario where the government/Fed can print to no end without stoking a massive rise in prices (I'm using Schiffs definition here - the expansion of the monetary supply is inflation - rising prices are normally a symptom). 

I hate the Chinese and the Asians for the way they patronize the dollar, but that's reality.  Therefore, it is entirely possible for the economy to come back again and go on for years.  Only when they break away will you see an EXPLOSION in prices.  But if they are not willing to now I don't know if they every will.

See this good article on Chris Martensons blog:

Sat, 10/10/2009 - 17:08 | Link to Comment Anonymous
Sat, 10/10/2009 - 23:44 | Link to Comment aswipe
aswipe's picture

I too have my own business as a grain broker and business is terrible. The dairy, hog and beef industries have been on the brink of bankruptcy for a year and may fall if the dollar rallies. We have massive builds on inventories of most all agricultural products this year and believe me we are in a deflationary cycle that may last another year. It will be early next year when the bankuptcies hit. Business sectors that cannot manage inventories quickly are in deep shit.

Sun, 10/11/2009 - 12:45 | Link to Comment JR
JR's picture

I hear you and see some of the same. But I don’t agree that “it is entirely possible for the economy to come back again and go on for years” without the consent of the economy.  It always seems to reach out and grab you by the nape of the neck if you stray too far into economic La La Land—even if you’re economy enemy number one, Ben Bernanke.

Just a thought to pursue: Could it be that in areas of high-technology concentration that venture capital is returning to American shores, breaking out of the bankers’ global financial loop by seeking less risk and more hands on safety, looking for honesty and partnerships with entrepreneurs and investors and researchers and developers who can be trusted?  Perhaps, just perhaps, it is the glimmer of a return to America’s former contract society--the basis of a free, market-based economy--and repudiation of top-down, world sanctioned socialism induced by the Fed cartel’s New Finance securitization revolution whereby risk is “detached from banks and spread across the globe to the point no one could identify where real risk lay.”

However, and here is where the economy intervenes against its enemy, i.e., the heightened risk brought to bear by the investment banks. The consumer will have his say and he is saying, my reserves are low and I am concerned about the future.

And so, the downsizing continues. Sam Newhouse’s media dynasty is shedding Gourmet (the nation’s oldest food magazine), Modern Bride, Elegant Bride and Cookie.  Earlier it shed Portfolio and Domino. Gourmet’s ad pages were down 50 percent in the second quarter.

Chris Rodriguez at Seeking Alpha in an article,  Retail Firms at Risk for Bankruptcy, published the following list Sept. 29 from Audit Integrity, a Los Angeles research services company. The results are from an independent corporate bankruptcy study which identified 20 major U.S. corporations that are at risk for filing bankruptcy in the next 12 months. Says Rodriquez: “A different assessment done by commercial real estate investment firm Madison Marquette identified a separate list of U.S. retail chains at risk for bankruptcy in the not too distant future. The retailers at biggest risk on that list include Chico’s, Cost Plus World Market, Dillards, and Talbots.”

Here is Audit Integrity’s list as published by Reuters:

* Advanced Micro Devices, Inc.
* Amkor Technology, Inc.
* AMR Corporation
* Apartment Investment and Management Co.
* CBS Corporation
* Continental Airlines, Inc.
* Federal-Mogul Corporation
* Hertz Global Holdings, Inc.
* Interpublic Group of Companies, Inc.
* Las Vegas Sands Corp.
* Liberty Media Corporation (Capital)
* Macy's, Inc.
* Mylan Inc.
* Oshkosh Corporation
* Redwood Trust, Inc.
* Rite Aid Corporation
* Sirius XM Radio Inc.
* Sprint Nextel Corporation
* Textron Inc.
* The Goodyear Tire & Rubber Company.

Sun, 10/11/2009 - 13:30 | Link to Comment deadhead
deadhead's picture

thanks for the post JR.  i'll be watching the Oct 14 Commerce dept figures but moreso, it will be very interesting to watch retail around, say, December 26 and thereafter.

Sat, 10/10/2009 - 14:24 | Link to Comment Prophet of Wise
Prophet of Wise's picture

Anon #95314: Not sure if anyone has mentioned this in the comments, but the WSJ had a chart yesterday tracking the dollar this year. Not surprisingly, if one puts the DOW over the same chart, it shows stock market going in the opposite direction of the dollar.

You are onto just go back and do the same as above with the S&P/DOW/Wiltshire 6000 against the USD fiatcos but take it one-step further and take them back to 1971 instead of just one year and you will see the results produce exactly the same conditions/correlations. The value of the USD is and has been inversely related to the value of the S&P since 1971. The purchasing power [inflation adjusted] value of the US dollar since the creation of the Federal Reserve [The Finance Wing of the Church of Satan] has fallen 96%.

 However, let’s trace what an ounce of gold or silver – true money – has been able to purchase at various periods in history, and how it compares to today.

1979: Gold’s average price that year was $306.68. This bought an average-priced full size bed.

30 years later, $950 would still buy you a full size bed.

 1963: A gallon of gasoline in America sold for 31 cents. This meant that 3 silver dimes could buy a gallon of gasoline. The total weight of silver in 3 silver dimes is .217 of an ounce.

Today, 3 silver dimes would buy a gallon of gasoline anywhere in the U.S.

 600 AD: In the Middle East, a chicken at the time of Mohammad would cost a family one silver Dirham (3 grams).

  Today, 1,400 years later, a chicken in the Middle East would still cost a family one silver Dirham.

 Time of Christ: Under the Roman Empire, an ounce of gold purchased a Roman citizen his toga (suit), a leather belt, and a pair of sandals.

  Today, one ounce of gold will still buy a man a suit, a leather belt, and a pair of shoes. 

 400 BC: Some scholars report that during the reign of King Nebuchadnezzar, an ounce of gold bought 350 loaves of bread.

 Today, an ounce of gold still buys about 350 loaves ($950 divided by 350 = $2.73/loaf).

 1000 BC: King Solomon was known to have purchased many horses for his army. Historical records show he bought them in Egypt for 150 shekels of silver each. 150 shekels was about 55 troy ounces of silver.

  Today, you can still buy a riding horse for 55 troy ounces of silver ($800).

I've maintained for years the Matus/Harris duo are the present Pied Pipers of Hamelin bought-and-paid to send the lemings over the edge.

Sun, 10/11/2009 - 07:31 | Link to Comment aus_punter
aus_punter's picture

doesn't this ignore the concept of compound interest ?

Sat, 10/10/2009 - 14:23 | Link to Comment Anonymous
Sat, 10/10/2009 - 14:24 | Link to Comment Anonymous
Sat, 10/10/2009 - 14:28 | Link to Comment TraderMark
TraderMark's picture

Kirby Daley (who!?) on CNBC Australia saying all the things we say in the dark corners of the blogosphere (somewhere Gasparino and Kneale are preparing attacks on Kirby if he is dare shown on US version) - and not being laughed at unlike CNBC USA.

I call it Kirby Daley has detached from the Matrix.


Sat, 10/10/2009 - 15:05 | Link to Comment NRGTDR
NRGTDR's picture

The more they try to defend the system, the closer we are to its end.

Sat, 10/10/2009 - 16:30 | Link to Comment JR
JR's picture
Speaking instead of the contra-bull argument, this from Barron's October 12 issue:


DESPITE THE INCREASING CAPITULATION (or perhaps because of it) among bears to the idea that this market is unstoppable, there are some real danger signals. That's the view, at least, of Robert Prechter, president of Elliott Wave International, a market-timing permabear who said a market low was being formed in February.

Consider the dividend yield -- the annual dividend divided by stock price. The yield for the Dow Jones Industrial Average has fallen from 4.7% on March 9 to 2.95%, about the same as in September 1929 -- and lower than at all other stock-market peaks of the 20th century, writes Prechter in his most recent report. With the dividend yield so low, "people are too optimistic about making capital gains," Prechter says. "When dividend yields are low, it has always indicated a market top," he adds.

But that isn't all that gives Prechter pause. At the end of July, mutual-fund cash holdings stood at 4.2% of assets, not much higher than the all-time low of 3.5% at the July 2007 stock-market high.

Moreover, sentiment readings have gone bullishly haywire -- a notably contrarian signal. Prechter, who predicted both last year's major decline and the 1987 crash, and who is issuing an updated version of his 2002 Conquer the Crash later this month, notes that the Daily Sentiment Index reported by MBH Commodities recently hit 92% bullish, compared with just 2% at the March low.

Prechter doesn't know what might trigger a market swoon, although he thinks it will be "at least as large" as the 60% drop from October 2007 to March 2009. His prescription? Short-term Treasury bills and gold.

Sat, 10/10/2009 - 17:02 | Link to Comment Marley
Marley's picture

Check out P/E ratios.

Sat, 10/10/2009 - 17:30 | Link to Comment JR
JR's picture

Absolutely (thought I had, sorry).  As Abelson pointed out in Up and Down Wall Street, same issue of Barron's: "In a recent report on valuation, David Rosenberg of Gluskin Sheff, notes that on an operating ("scrubbed") basis the price/earnings ratio of the Standard & Poor's 500 has expanded a whopping 10 points since its March low, and stands at 27.6.  Historically, Dave observes, when the economy is making the switch from contraction to expansion, as it did in the third quarter, the P/E is 15." 

Ugly things, facts.

Sat, 10/10/2009 - 17:33 | Link to Comment tjfxh
tjfxh's picture

Translation of the oligarchs' contra-bear argument: buy assets, especially equities and houses, in order to reflate our toxic debt, or else we'll take you down with us, and you'll go lower than we will.

The Mafia calls it "an offer you can't refuse."

Sat, 10/10/2009 - 19:02 | Link to Comment Zippyin Annapolis
Zippyin Annapolis's picture

Who can Ever believe the prime bankers? They created this mess and now it is a replay of "Wizard of Oz" scene "don't pay any attention to tha man behind the curtain".


BTW Where is Tyler and Zero on the latest OTC Derivative Regulation "cave-in" by the House Democrats? The House Financial Services bill carves out virtually every swap dealer and end user, a move that was added and abetted by NY off -Committee Dems, so called "New Dems".


The House Ag version is tougher, but the tide is clearly on the side of the Prime Brokers.


Talk about cycles, this one evidently has not hit the 8.6 year peak--

Sat, 10/10/2009 - 19:03 | Link to Comment trader1
trader1's picture

nice work by nomi prins

Sat, 10/10/2009 - 19:14 | Link to Comment Anonymous
Sun, 10/11/2009 - 06:20 | Link to Comment Hephasteus
Hephasteus's picture

Which begs an analysis of just how undeniable the truth is that no currency can exist without violent protection? Is it an inevitablity that honest people must rise up and say put down the printing press or I'll fucking kill you? Is this going to turn into a 90's AT&T commercial?

Have you ever beat a banker to death his own briefcase? You will.

Have you ever burned an entire corporate building to the ground for sending you a false bill and then imposing it on your credit rating when you try to fight it? You will.

How rediculous does this have to be to get fixed?


Sat, 10/10/2009 - 20:36 | Link to Comment Anonymous
Sun, 10/11/2009 - 07:40 | Link to Comment aus_punter
aus_punter's picture

"Austrian school: A recession is a period of cleansing or “creative destruction,” where less productive industries die but it takes time for more productive industries to be born. Once resources start moving to the more productive sectors, a boom sets in"

Taking credit from small business and giving it to numbskulls from Charlotte who never "got" derivatives.

I think the boom will be the sound of the US economy imploding

Sun, 10/11/2009 - 13:14 | Link to Comment Anonymous
Sun, 10/11/2009 - 18:18 | Link to Comment BabaJ
BabaJ's picture

I sometimes question my gut feeling that capitalism as we know it is destined to  fail due to its intrinsic contradictions due to the propaganda bombardment designed to lull me into a false sense of security regarding the state of the global economy.


I then pop down to to witness what in my eyes is evidence that endgame is what we are now experiencing. The unsustainable nature of the current system is apparent for all who are not blind.

Sun, 10/11/2009 - 18:25 | Link to Comment Cheeky Bastard
Cheeky Bastard's picture

BabaJ; weren't you a regular over at MarketWatch ? I'm asking because your avatar and your name sound awfully familiar, and i could swear i had a couple of awesome discussions with you long time ago. But if not, sorry for the weird post.

Sun, 10/11/2009 - 19:14 | Link to Comment BabaJ
BabaJ's picture

It is indeed me. I do still enjoy certain elements in MW community, but here I can actually comment on articles worth reading - and the avatar fits a lot better on the white background anyway ;-)

Now - if certain other people had chosen to assume only one identity on several sites I may be able to experience the kind of familiarity you apparently currently are experiencing, or otherwise excuse my poor memory.

Tue, 10/13/2009 - 11:38 | Link to Comment AR
AR's picture

PHAESED:  Thanks for he above article.  Well written with some historical perspective as you promised late last week.  Be well...

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