Friday, March 19, 2010

Leftovers -- Radio Show -- 3/13/2010

With calls during the radio show, we have a lot of leftover information.  We have already posted on the Valukas report on Lehman and we discussed it in a cursory fashion on the show.  There are several key points in that report, but the knowledge which the New York Fed had and its failure to act under Geithner deserves a spotlight and is much dismissed or ignored in the main stream media. We also discussed that the continuing low volume in the market combined with overvaluation of the market and pressure on bond yields often precede a negative turn in the market, as John Hussman pointed out in his weekly commentary.  We also noted the large monthly mystery buyer of S&P futures which has been putting a lot of liquidity into the market as well as high frequency computer trades by one or more large banks in which they are purchasing the SPY ETF multiple times a minute, minute after minute, and, rather than seeking the best price,they are always purchasing at a higher price with each purchase.

The SEC has asked Congress to provide transparent regulation of credit default swaps, because they are often used in place of securities and directly impact the market.

Sheila Bair of the FDIC supported the Fed's low interest rate policy to get credit flowing but said regulators should not force banks to lend.  She also said Fannie and Freddie should either be privatized or nationalized.  She also said a resolution mechanism to unwind financial companies and shadow banks would also require aligning economic incentives with regulation.

Christina Romer, who heads the Council of Economic Advisers, said the deficit is a cause for concern but it would be foolish to derail the recovery.  Controlling the deficit is directly related to lowering unemployment.

Prudential of America is facing a nation-wide class action lawsuit on behalf of long-term care disability claimants who are appealing denied disability income benefits for the second time since November 2005.

While credit card debt has been falling for 16 months, consumers are not paying debt down as much as walking away from the debt.  Some credit card issuers are writing off as much as 90% of the reported drop.

Paul Krugman looked at the similarities in the Irish financial crisis and the United States and found irrational exuberance, a huge inflow of cheap money, the financial players had huge incentives to take big risks, and the people charges with regulating the banks just did not do their jobs.  For Krugman this means we need to focus on the regulators and we need an independent consumer financial protection agency.

Spain has the economic means to weather this financial crisis if it starts taking action to combat the property bubble that burst and exposed the illusion of some public finances and the need to restructure their financial system with banks far more exposed to real estate mortgages  than is publicly reported, which may be double.  The banks have been allowed to apparently under report non-performing loans and continuing to carry toxic assets at inflated values, because the central bank and the central government has been unable to force the regional cajas which control the banks in their regions to act.  This has some people concerned that the Spanish banks may be systemically dangerous and more financially weak than publicly perceived.

We have published articles and discussed the growing wage inequality in China between the urban-coastal workers and the rural workers, but the problem is actually more serious, because China does not allow rural citizens working in urban settings to legally register as urban residents, which forces them to be eligible for rural wages only.

The EU is discussing forming an internal IMF-like lender but the discussions are divided even within member countries.  The formation of such a European Monetary Fund is well advanced but still sticky in acceptance.  However, the EU appears firm in its determination to regulate derivatives and curb their use in making bets against sovereign debt. 

We have talked in the past of the the CDS investigations in Italy involving sales to municipalities which appears to be expanding very fast.  The overall notional figure may be 35.5 billion euro or one-third of local government debt.

Portugal intends  a fiscal consolidation by generating a decline in real wages of public workers by capping pay increases below inflation, postpone infrastructure investments, and step up its privatization efforts.  Portuguese 10 year bonds are almost half the premium they were a month ago.  Their 5 year CDS are third behind Greece, and Ireland.

As we have proposed may be necessary, the EU is discussing whether EU bonds should be issued to assist EU countries, like Greece.  All 27 EU countries would have to agree.

China, in order to control its housing bubble, is raising down payments required to 40% and requiring higher interest rates for purchasers of existing mortgage property to discourage speculators.

While China is under increasing pressure to appreciate the yuan, it remains adamant that the yuan must remain stable.  Concerns that inflationary pressures may build has the government reviewing monetary policies and curtailing debt issuance internally.  Its current account balance can be readjusted without readjustment by other exporting countries such as Germany and Japan.  Foreign exchange reserves are approximately $2.4 trillion.  China has reaffirmed its commitment to US Treasuries and said it is wary of gold.  Still many economists still expect China to move gradually away from pegging its currency to the US dollar.  China's shrinking trade surplus may allow China to argue the currency appreciation is not necessary.  The trade surplus fell $6 billion to $8 billion from January to February.  There is some speculation China may slowly appreciate its currency 4% in the next 12 months.  Nouriel Roubini thinks China will raise its currency 2% in the 2nd Quarter and let it strengthen another 1-2% in 12 months.

China plans to nullify all guarantees local governments have provided for loans taken by financing vehicles.  It will also ban all future guarantees by local governments.  These were used to circumvent regulations preventing them from borrowing directly.  This crackdown is estimated to involve $3.5 trillion and could trigger a wave of bad loans as projects are left without funding.

The Fed announced it will expand reverse repo counterparties when the Fed begins to reduce its balance sheet.  It has already drained $990 million in five trials in December.

Chicago Fed President Evans said policy makers may be accepting a higher level of unemployment in the future.  While he thinks the Fed has taken its asset purchases to the extent it has been helpful, he left the door open for further purchases if the economic conditions change.

William White, a former BIS economist, who in February 2008 slammed the Fed for blowing bubbles and then "using gimmicks and palliatives" to only make things worse, is again lecturing Bernanke in a December-January OECD Observer article in which he says the current financial crisis has focused on the underlying systemic questions which expose the vulnerability of financial stability.  Since financial stability is necessary, the US may be facing a similar challenge as did Japan in the 1990's in reducing the debt created by booms fueled by excess credit and it will take a significant amount of time.

Unemployment is up in 30 states in the US with Illinois at 11.3% in January or 8th highest.

US wholesale inventory was down .2% in January (Down 1% in December), inventory ratio was down to 1.10 months, and sales were up 1.3%.

US regulators sent a letter to banks in December telling them to avoid dividends or stock buybacks or face a stress test to get permission.

US trade gap shrank 6.6% to $37.3 billion despite lower exports, because oil imports fell to the lowest since February 1999.  There is a significant oversupply of oil and the refineries are not buying at current prices and cutting back refining oil for gasoline.  Consequently, you can expect gasoline to rise to $3.50 per gallon this summer.

The Congressional TARP Oversight Panel issued a critical report on the special treatment given GMAC and expressed the opinion that it is not convinced bankruptcy was not a viable option in 2008.  The US has spent $17.2 billion and owns 56.3% and the OMB estimates $6.3 billion may never be paid back.  Treasury has never required a clear business plan to viability from GMAC.  It has a large portfolio of real estate mortgages.

February retail sales were up .3% (expected .2%) but January was revised down from .5% to only .1%, excluding autos February was up .8%.

US manufacturing and trade inventories are at 1.25 months and may continue down, although inventory adjustments may be over.  However, that would remove the largest driver of GDP growth in Q4.

Greek strikes shut down hospitals, schools, airports, bus systems, and subways as drivers, doctors, journalists, and teachers protested wage cuts and tax increases as the Greek government expands its austerity program to reduce debt to please the EU.  The Greek austerity program will contract the Greek economy at least 2.0% in 2010 (same contraction as in 2009).

San Fransisco Fed President Janet Yellin is rumored as a potential replacement for Kohn as Fed Vice-Chairman.

US Treasury auctions:
3 year Treasury, $40 billion, yield 1.437%, bid-to-cover 3.13, foreign 51.8%, direct 10.3%.

10 year Treasury, $21 billion, yield 3.735%, bid-to-cover3..45 (new record), foreign 35.1% (low), direct 17.5% (record).

30 year Treasury, $13 billion, yield 4.679%, bid-to-cover 2.897, foreign 23.9% (low), direct 29.6% (new record).

Bank lending in Japan fell 1.5% in February vs year ago for 3rd straight month.  The Bank of Japan and the government disagree on deflation moves with the government exerting pressure for the Bank to take action to boost prices.

Paul Volcker called IMF study papers suggesting central banks raise their core inflation targets to 4% "nonsense".  Those papers argued that the Central banks would have had more room to lower interest rates without encountering the monetary policy problems of very low or zero interest rates and one paper used modeling of pre-Volcker and post-Volcker time periods to demonstrate it would have provided increased flexibility.

Chicago Fed President Evans indicated there would be zero interest rates and loose monetary policy for at least the next 6 months.

US January exports were down 6.9%, which is the biggest decline since July 2006.

France's trade deficit went down 13% in January.

Japan's Q4 GDP was 3.8% (estimate was 4.6%) with less capital spending.

The Swiss National Bank left interest rates at near zero.

AIG will sell Alico to MetLife for $15.5 billion and use the money to repay Fed loan.

The FDIC is trying to encourage large pension funds ($3 trillion or more) to directly invest in the securitized assets of failed banks the FDIC is offering.  63% of these assets involve other lender participation who might have to take writedowns after auction.

Barney Frank asked the largest banks to writedown 2nd liens.

Besides tariff disputes with China, the US now faces retaliation for US cotton subsidies from Brazil with the support of the WTO, which is allowing Brazil to raise tariffs on 102 US products in what is the second largest # of retaliatory tariffs allowed by the WTO.

Fannie 30 year fixed rate mortgage bonds and 10 year Treasury spread is at .63%, which is the smallest since 1984.

According to a Spectrum survey, in 2009 the number of millionaires increased 16% to 7.8 million from 6.7 million (shrank 27%) in 2008 from 9.2 million in 2007.  Those with a net worth of at least $5 million is up 17% to 980,000.

February Chinese exports jumped 45.7% vs year ago (21% in January) with imports up 44.7% (85.5% in January) and was perhaps skewed by the long lunar New Year.

Chinese inflation for the year to February was 2.7% (1.5% in January) from a low base in last year's slump and holiday spending from last months extended lunar New Year as well as bad weather pushing the price of food up.  This means the inflation rate is above the 2.25% interest rate for 12 month CD's in China.

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