Leftovers --- RADIO SHOW 2/13/2010

We spent a considerable amount of time explaining the pan-European debt crisis and its potential effects on Europe and the world.  We also spent time on one of our favorite topics, which is the need for substantive financial regulatory reform and how financial sector lobbyists are not only being very successful at defeating reform but also very successful at rolling back current regulations to less stringent standards and further diluting the legal protections American citizens should expect and demand.

Lobbyists for the insurance and banking companies have been particularly strident in eliminating any proposal which would make them more accountable to their clients through stronger fiduciary standards.  The very use of "adviser" as a title by their employees who are salespeople is a purposefully misleading marketing ploy.  The current SEC laws and regulations make it very hard and almost utterly confusing for the consumer to distinguish between a real financial adviser with no conflicts of interest, an "unavoidably" conflicted financial adviser, and a broker.

The current regulations even allow financial advisers who are dependent on a direct relationship with a broker/dealer advisory service and consequently have a conflict of interest in serving their clients, to call themselves fee-only, when it should be clear that their broker/dealer advisory service is not providing multitudinous support out of the kindness of their heart.

The financial industry wants nothing changed and, if changes are going to be proposed, they want the SEC to be the agency which delineates and defines the rules, because the SEC is viewed by the financial industry as their ally against the unruly demands of consumers.  Without the SEC's determination to purposefully confuse the consumer as to who different advisers and brokers serve and their duties to their clients, the financial industry would have to conduct itself as a responsible member of a democratic society and clearly and simply provide the information necessary for a person to make an informed decision which is in the client's best interests.

LPL Financial, SIFMA, and Morgan Stanley along with other well known names are hard at work trying to water down existing fiduciary standards much less stop new and stronger fiduciary standards.

Elizabeth Warren, the chairman of the Congressional TARP Oversight Panel, wrote an op-ed in the Wall Street Journal illuminating the banks' lobbying effort to beat the proposed Consumer Financial Protection Agency into oblivion.  The banks are using ""bureaucracy" and "big government" to confuse citizens into accepting a continuation of the current business model, i.e., screw the consumer again and again.  If Corporate Socialism is okay, then consumers need no protection.  While the whole financial regulatory reform legislation is going no where, the CFPA is the only proposal which would directly help American families.  However, it may be too late to stop an oligopoly with implicit government guarantees from doing anything they want.

San Francisco Fed President Yellen has written a report on her visit to China and Hong Kong in which she acknowledges that the current US Federal Reserve monetary policy is likely to cause excessive stimulation for their economy and currency.  She sees the need for China to allow an appreciation of its currency to mitigate growing inflationary concerns.  Because the Chinese currency is pegged to the US dollar, she sees China and Hong Kong as both "stuck" with the Federal Reserve's policy course.  She also thinks this will cause China to "recognize" it must abate its export economy to a more "balanced" economy.  We have been discussing for months the growth of leverage in China, spending bubbles, and real estate asset bubbles.  China has been taking the steps towards tightening lending and other monetary policy and we have seen how those small, reasonable steps have shaken the global markets.  While China may have to allow a small, controlled appreciated of the yuan to control inflation, it is not likely that it will give up export share to live in a more balanced international economy beneficial to the United States.  At what point does the pressure on China to appreciate its currency and the continued zero interest rate policy of the Federal Reserve not constitute the active conduct of a trade war?

The stock market appeared to be somewhat concerned about Bernanke's comments on how the Fed will exit from its current stimulus by ceasing to purchase assets, to eventually begin to sell assets on its balance sheet, to control bank lending, maybe raise the discount rate, and eventually raise interest rates.  There is nothing unexpected in these comments and possibilities.  It will all come down to the timing and the coordination.  Given the length of zero interest rates, the extent of quantitative easing, unemployment, and the perception of inflationary pressures, the timing and coordination will be very difficult and undoubtedly need pullbacks and refinements without pushing this slow, long "jobless" recovery back into a more serious recession.

Dallas Fed President Fisher said the Fed must find non-disruptive ways to withdraw the unprecedented monetary accommodation and the Fed must remain independent to do it.  When not defending the Fed from its critics, he saw many impediments to recovery, because business will have to regain confidence to expand and consumers will have to start doing their "share" by spending (the rest of this sentence is my opinion) their hard earned money rather than save it or pay down debt.

St. Louis Fed President Bullard sees mortgage reform as the central regulatory reform need and it is a mistake to not focus on the housing market.  Yet, he makes no mention of derivatives and how those synthetic instruments provided the greedy tsunami that surged the coffers of the banks and threatened the world.  It is as if he wants the Fed to wash its hands of the housing/derivatives bubble and say it is up to the government to do something.  He wants the Fed to get its balance sheet down before the next recession hits.  At the same time he sees the current housing market as flat this year and just hanging around at low levels.

What would cause a sovereign credit default swap trigger?  One would be a failure to pay coupon or principal, another would be a debt restructuring which affects obligations, and a third would be a repudiation/moratorium of obligations.  This sounds more like Dubai than Greece.

In an article, "Obama must resist 'deficit fetish'", Joseph Stiglitz focuses on how, when banks get government money, the deficit  is acceptable to the banks, but when the government is providing money to the public then the banks are upset about deficits.  It is self-serving for the banks to be opportunistic deficit hawks when the money is not going to them.  "It was a mistake to give in to the banker's pleas for deregulation before the crisis; a mistake to give into their demand for a bailout without constraints and without appropriate compensation for the government during the crisis; and even more wrong now to give into demands for unfettered deficit reductions, including an end to stimulus."  He goes on to say how money is spent makes a difference.  Some government expenditures stimulate an economy more than others.  Yet, worrying about deficits can be good, because it should cause us to ask what kind of spending yields high returns, what kind of spending has targeted multipliers, are there tax increases which will not harm output and employment, and are there other ways to stimulate an economy, such as eliminating problems in access to credit, and inducing banks to lend for job creation rather than creating asset bubbles, even if it means getting tough with banks.

Dubai is proposing a 6 month standstill on $22 billion of debt and their CDS costs are up sharply.

Estonia's GDP is down 9.4% 2009, but that is a significant improvement.

Latvia's Q4GDP was down 17.7% vs a year ago and unemployment in December was 22.8%.

US 30 year Treasury auction this past week was considered by some analysts to be a weak failed auction, because it had a very high yield, reduced number of foreign buyers, and an unusually high number of direct buyers.  Primary dealers (large banks and investment firms) are also upset at the increasing percentage of direct buyers as it increases prices and lowers the primary dealers' profits.

US trade deficit was up $40.2 billion (highest since October 2008), which was a 10.4% increase, with exports up 3.3% ($142.7 billion) and imports up 4.8% ($182.9 billion).

US wholesale inventory was down 8 tenths in December; sales were up 8 tenths but below expectations; inventory ratio is now 1.12 months.

 Oil supplies increased 2.4 million barrels; gas supplies increased 2.3 million barrels; distillate supplies declined 300,000 barrels.

Fed asset (the purchase of which will stop in March) sales, according to St. Louis Fed President Bullard, may start later in 2010.

Japanese bank lending  fell 15% in January vs year ago -- biggest decline in 4 years -- on over capacity and slow economic outlook.  Exports are expected to pick up.  Machinery orders were up 20.1% in December; wholesale prices were down for 13th straight monthly drop on weak demand.

Bank of France estimates French GDP to be 5 tenths in Q1.

US Treasury, which is doing $81 billion in auctions this week, has made the decision to stop increasing the size of debt auctions.

UK retail sales were down 7 tenths in January vs year ago.

German exports were up 3% in December vs November but imports were down 4.5%.

UK industrial output was up 5 tenths in December but down 3.6% vs a year ago.  Bank of England Governor King said further cash injections (quantitative easing) may be needed to bolster the economy.

Chinese exports were down 16.3% January vs December but up 21% vs a year ago.

French production was 1 tenth in December and Italy's was down 7 tenths.  German machinery orders were up 8% in December.

US business inventories were down 2 tenths in December; excluding auto they were up 2 tenths.  The inventory ratio is 1.26 months (lowest since June 2008); sales were up 9 tenths.

1 in 5 US mortgages are underwater according to the Zillow Real Estate Market Report.

Prime jumb RMBS which are 60 days delinquent are at 9.6% in January.

Fitch says US high yield corporate bond defaults are at 13.7% in 2009.

Illinois' fiscal budget gap is approximately 47.3% of revenue as of 1/8/2010.

US corporate borrowing costs are rising at the fastest pace in 2 months.

PIMCO prefers German bonds to US Treasuries.

S&P revised the outlookof  Bank of America and Citigroup to Negative from Stable.

The Federal trial judge has questioned the new SEC/Bank of America $150 million settlement asking if it still unfairly punishes shareholders.  The settlement also includes improvements in corporate governance and disclosures as well as executive pay.  The judge had rejected a prior settlement of $33 million as too low and unfair to shareholders who pay the fine.  This $150 million settlement will be paid into a fund and distributed to shareholders, but the judge has asked why shareholders should pay shareholders.

John Thain has been named the new CEO of bankrupt CIT and will have a compensation package of $500,000, $2.5 million in one year restricted stock, $5 million 5 year restricted stock, and a possible incentive award from the Board of Directors capped at $1.5 million.

Canadian housing prices increased for the 7th month in a rapid housing recovery -- some say too rapid.  Canadian banks reset the adjustable rate mortgages every few years and the Bank of Canada warned in December that, if interest rates increase by mid 2012, 9% of Canadian households could be financially vulnerable.

India's GDP is estimated to grow 7.2% in 2010.

Australia will end bank deposit and bank funding guarantees.

US Treasury auctions:

3 month Treasury, $13.3 billion with 17.3% direct buyers (normally 7.3%).
6 month Treasury, $11.9 billion with 18.2% direct buyers.

3 year Treasury, $40 billion, yield 1.377%, bid-to-cover 2.84, foreign 51.8%, direct 10.07%.

10 year Treasury, $25 billion, yield 3.692%, bid-to-cover 2.67, foreign 33.2% (average 43.27%), direct 13%.

30 year Treasury, $16 billion, yield 4.72%, bid-to-cover 2.36 (average 2.50), foreign 29% (weak), direct 24% (high).


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