Sunday, December 6, 2009

Leftovers from 12/5/2009 Radio Show

We indicated there was some speculation that Dubai World creditors may not agree to the debt payment standstill and that would cause immediate default, if it happens.  Something to keep an eye on, because the dollar futures market is already showing fears of a dollar rally as Dubai plays in the background,  There has also been speculation that Dubai Holding might be the next debt fear as it has borrowed $12 billion and $1.8 billion is due next year.  Together with Dubai World, their debt is 60-70% of total Dubai debt.  The sheik also has substantial loans outstanding, but he is legally immune from any legal action.

Some analysts have been predicting at least one sovereign debt default next year.  I have always thought any such default, if any, would most likely be in Eastern Europe, but Dubai makes you wonder.

At the end of the show I said that Australia's Central Bank had raised its interest rate 25 basis points to 3.75% for the third month in a row and the Australian Dollar immediately lost 38 cents to the weak US Dollar.  I have questioned for some time if Australia was not raising rates to protect itself against the weak US Dollar and its appreciating Australian Dollar.

Japan will set aside another $115 billion to make 3 month loans to banks at .1% (one-tenth).  They just keep compounding their 1990's stagnation rolling into the future.  The Japanese Central Bank held an emergency meeting on falling consumer prices and the yen which is at a 14 year high against the weak US Dollar, but it ended up taking no action with respect to prices or currency policy and continuing monthly purchases of government bonds.

The Federal Reserve is fine tuning its future repo program in which they would sell assets with a guarantee to repurchase as a probable part of an exit strategy.  It is designed as a means to begin pulling money out of the economy whenever the exit actually begins.  The New York Fed has already tested it once.

Five (5) bank broker-dealers were fined by FINRA for deficient supervision and procedures in the sale of VA, mutual funds, and UIT.  The bank B-D's included Wells Fargo, PNC Investments, and WM Financial Services which is now Chase Investment Services.  You should always investigate your broker-dealer for FINRA and SEC violations.

The UK, which continues to pursue a more regulatory reform than the US, will take control of the Royal Bank of Scotland's bonus pool.  The government has put 62 billion pounds into RBS and owns 70%.  The demand came as a condition to allowing RBS to join the government's troubled asset insurance program and to gain another infusion of 22.3 million pounds.

European Union finance ministers have come to a compromise on bank rules.  They had clashed on how much power the new supervisors of a European Systemic Risk Board should have.  France wanted a majority of member states to be necessary to overturn a council decision to bailout a banks and the UK wanted the council to seek a majority of member states to initiate action.  The compromise was a simple majority to reverse emergency decisions.  The Board is to make sure laws are the same in each of the 27 countries and is designed to issue warnings and recommendations.

Spencer Dale, who is the chief economist for the Bank of England, said the economy has turned, although Q3 contracted, and that inflation in the UK could rise 3% next year, but it would be temporary succumbing to the persistent downward pressure of spare capacity.

Philadelphia Fed President Plosser said the job recovery will take a couple of years and warned that the Fed must be prepared to raise interest rates before the jobless rate has fallen to an acceptable level in order to fight inflation, because he is projecting that real interest rates will be rising in the next two years as the economy grows slowly.

Richmond Fed President Lacker said, "While the outlook has brightened in recent months, we still face major economic challenges. In commercial real estate, construction is falling, vacancy rates are rising, and falling property prices are eroding owners' equity positions. Holders of commercial-mortgage-backed securities have already taken sizable losses, with more on the horizon as numerous projects are scheduled for refinancing. And some community banks have lent heavily to commercial real estate developers and are now facing rising delinquencies and losses. No one expects a quick reversal of these negative trends, and as a result, business investment in nonresidential structures is likely to be a substantial drag on U.S. growth in the near term.
"More worrisome is the extremely weak labor market. The number of people employed has fallen for 22 straight months. The unemployment rate has more than doubled, to a 10.2 percent rate. Wages are under pressure; so far this year average hourly earnings have only risen at a 2.1 percent annual rate, about half its rate in mid-2007. Going forward, as overall economic activity continues to improve, employment will bottom out and then begin to return to an upward trajectory. Even the more optimistic forecasters, though, do not expect a rapid improvement in national labor market conditions, and we will need to carefully monitor employment and earnings for an extended period."

He also said, "In fact, we have seen that even in the early stage of a recovery, inflation and inflation expectations can drift higher. The perception of inflation risk could be particularly pertinent to the current recovery, given the massive and unprecedented expansion in bank reserves that has occurred, and the widespread market commentary expressing uncertainty over whether the Federal Reserve is willing and able to promptly reverse that expansion...The harder problem is the same one that we face after every recession, which is choosing when and how rapidly to remove monetary stimulus. There is no doubt that we must be aware of the danger of aborting a weak, uneven recovery if we tighten too soon. But if we hope to keep inflation in check, we cannot be paralyzed by patches of lingering weakness, which could persist well into the recovery."

The two prior posts below go into far more detail and provide extensive links on issues we discussed during the Radio Show.

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