Leftovers - Radio Show 1/23/2010

In yet another example of the facade over substance of the proposed "Volcker" Rule announced by President Obama, Austan Goolsbee, an economist on the Council of Economic Advisors, said the bank reform will not do a "full" Glass-Steagall.  It is aimed at limiting banks from investing their own capital in hedge funds, private equity funds, and engaging in proprietary trading.  Already there is rampant speculation as to how to define "proprietary trading" when everyone knew what it was two days ago.  We have previously disclosed other "limiting details" from the background briefing to the media, but here is more from the actual briefing which further confirms the Administration is not moving against the banks as is but against some nebulous, undefined future.  This not reform.

It is apparent that all the market indexes are at a low resistance line, which means Monday will be very interesting, and that investors looking for safety are going to be very challenged.  Yields on money markets, Cds, and short term Treasuries are too low and long term Treasuries and bonds may have interest rate risk going forward.  John Hussman has written in his weekly commentary that he expects inflation to be a problem in the latter part of the next decade.  I think it will be a problem when the Fed tries to exit quantitative easing and then again when it attempts to sell the MBS it has bought.  The Fed has already shown an ineptitude in recognizing the strangulation of the recovery by its failure to address unemployment, preferring instead to encourage banks to not lend while unemployment keeps inflation down during this continuing deleveraging process.  Hussman also questions China's ability to sustain economic growth.  He thinks there will be a second wave of credit losses.  His commentary then proceeds to provide an explanation of inflation, the misconceptons of inflation, and how it arises.

The European Union said it is going to investigate high frequency trading, which already constitutes 42% of the U.S. market, as well as dark pools.

The FDIC's Bair urged banks to recognize losses related commercial real estate loans on their books.  Fitch has indicated that loan delinquencies on commercial real estate securities will not peak until 2012, although they have already risen 5 times what they were one year ago.  At the end of 2009 the rate was 4.71% and is expected to peak at 12%.  In 2009, commercial real estate surpassed residential real estate as the worst performing property class.  There is $3.5 trillion in CRE debt outstanding with little equity buffer.

Australia may carefully withdraw stimulus measures as private demands recovers, but signaled there would be no overnight withdrawal which would hurt confidance, small business, and job creation.  Here is a Central Bank which is concerned about unemployment.  It is also a central bank who core target inflation rate is 3% and which did not lower its interest rate as fast or as far as the Fed and has raised it at least twice since to protect its currency from the weak U. S. dollar.  Because its interest rate policies were not unduly low prior to the financial crisis, it had a more shallow housing bubble.

ECB Giverning Council member, Nowotny, does not see EU falling back into recession, no double dip.  He said they may have to copy the Fed's plans to squeeze excess cash out of the banking system.  This is contrary to the current ECB policy of charging banks for depositing excess reserves with the ECB rather than lending it.  Nowotny heads the Austrian Cental bank and he warned that the EU will not bailout Greece or any other country.

The head of the International Monetary Fund warned countries may suffer a double dip if they begin exit strategies too soon without adequate recovery in private demand and employment.

New York Fed President Dudley said persistently tight credit and high unemployment are putting a damper on the economic recovery and circumstances are far from where the Fed wants them to be.  He also defended the Fed's extraordinary response to the financial crisis, including the controversial bailouts of financial institutions.

The World Bank said there is a modest recovery under way but it could quickly lose steam as central banks and governments begin to pull extra liquidity.  It indicated this may place an economic burden on developing countries in managing debt and sustaining economic growth.

Paul Krugman has written that the Obama Administration has not been able to move health care, a more targeted stimulus, and any meaningful financial regulatory reform because the Obama Administration has been guided by poor policy and political misjudgments. He compares the Obama Administration with that of Reagan.  While Krugman thinks there is little Obama can do about job creation right now, I think he must fiscally target job creation which creates jobs now not two years down the road in green energy jobs which will soon be outsourced to cheaper foreign work places.

What keeps the AIG bailout controversial is that it is at the center of what was wrong with the bank bailouts.  The New York Fed told AIG to stand down on any discussions about unwinding its CDO portfolio at less than full value.  Emails have been released which detail the New York Fed helping AIG build a case to keep the CDO payments secret.  It is obvious Geithner will testify next week that he had no knowledge.  Yves Smith of naked capitalist has detailed that the efforts to keep the Maiden Lane III details secret are an attempt to keep public information confidential.  She indicates it appears that the Fed does not want to disclose it has the AIG assets on its books at full value rather than whatever their real illiquid value may be.  In a later post she provided a more detailed analysis of the CDOs.  Then she followed up with another post on how the details are actually publicly available.  This is the best succinct and practical analysis I have read of the AIG CDO bailout controversy.

Meanwhile AIG is asking its employees who receive retention bonuses to take a 15% cut and get their bonuses earlier than the March payment in order for the savings to be used to pay the federal government the $165 million dollars that the employees did not repay as promised in 2009.  To make it even worse, 40% of the absolutely essential people who are receiving these retention bonuses are no longer AIG employees,

This week saw more monetary policy tightening from China as China asked some banks to curb lending and turned their attention to controlling inflation while its Q4 GDP grew at 10.7% and 8.7% for 2009.  This will continue to be a direct pressure on the recovery, the stock market, and international mutual funds.

The EU remained strident in its calls for Greece to get tough on budget cuts.  This concentration on a country's debt level to GDP rather than on the country's use of properly targeted spending to stimulate the country's economy is baffling as it is reminiscent of economic policy under a gold standard rather than the current fiat currency and modern monetary theory.  It is directly harming not only Greece, which badly needs to redraw its budget and become more efficient in its spending and appears to be making a very serious attempt to do so, but it is also preventing Spain from doing what it needs to stimulate its economy.  At some point in time the EU is going to have to come to grips with the destructive nature of this monetary policy trumping individual country's need for fiscal stimulus as tension also continues to build in Portugal, Italy, and Ireland.  If Greece or these other countries are forced to fiscally tighten, a deep recession will result in these countries.  Despite EU repeated statements it will not bailout any country, many economic commentators do not believe the EU could accept the consequences of a member country's default.

The continued UK and Dutch insistence Iceland to repay UK and Dutch payments to investors within their countries who deposited money at high rates in Iceland banks which were then taken over by the Iceland government is nothing short of international extortion.  It threatens the continued IMF loan to Iceland which the country badly needs.  Although the IMF says it is not dependent on Iceland's actions in submitting the UK and Dutch payment plan to national referendum, the Nordic "common view" of the Nordic countries which are actually making the IMF loan payments to Iceland is that Iceland adhere to a depositor guarantee requirement which is actually not required under EU law.  If the UK, Dutch, and the Nordic countries want Iceland to default, do they want to be named as the culprits who accelerated this global recession?

UK retail sales in December were up 3/10ths of a percent (expected 1.1%) and up 2.1% vs year ago.
German manufacturers orders were up 2.8% in November; capital goods orders were up 6.2% (prior report has a 6.7% drop).  This will likely boost Q4 GDP.
Eurozone industrial new orders were up 1.6% in November, which was 3 times expectations.




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