Leftovers -- Radio Show 3/6/2010

 We emphasized the euro is here to stay and Greece is not going to default, but the EU austerity program includes tax increases, public job cuts, wage cuts, and lower pension payments to current retirees.  The problems in Greece cannot be solved until the mirror problems in Germany are solved: more internal demand and more productive labor wages.  The trade account competitiveness gaps between the southern Eurozone countries and the northern Eurozone countries are a direct result of the structure of the euro and even the primary author of the Stability and Growth Pact has publicly said it was not designed to be applied and create economic harm.

China's hidden debt may push government debt to 96% of GDP in 2011 or about $5.8 trillion, because surging local government borrowing is not counted in official estimates of China's debt to GDP.  China's banking regulator has begun an investigation and review of loans to local government's financing vehicles which were created as investment companies to circumvent regulations against local government direct borrowing.  This crackdown could create a wave of bad loans as projects are left without funding.  This debt could hamper China's ability to maintain growth and control inflation.


Kenneth Rogoff said China may be different, but that does not mean it will not have a financial crisis particularly since it is mired in debt and needs to spend to maintain growth.  The global financial crisis is still filtering its way through China, which is the world's largest economy, and China sees itself as standing alone in a hostile global environment.

A Deputy Governor of the Bank of China said his biggest fear for 2010 is the risks of the dollar carry trade, which China estimates at $1.5 trillion.  If the size of the Fed balance sheet is maintaining equilibrium in currency markets, which the 20 week correlation of .7 to .9 between the Fed balance sheet and value of the dollar appears to support, then any steps by the Fed to normalize rates or reduce its balance sheet (below $1.9-2.o trillion) too fast will tip the dollar into a deflationary rally.

US consumer credit in January went up $5 billion or 2.4% annualized.  It was expected to go down $4.5 billion but December was revised up $4.6 billion.  Credit card debt is down for 16th month in January, while auto and non-revolving debt is up $6.6 billion.

GM February sales up 11.5% vs year ago; Ford up 43.1% (and now has a 17% marketplace share); Toyota down 8.7%.

Pending home sales were down 7.6% in January.

US factory orders were up 1.7% in January (below 1.8 expected) propelled by aircraft sales which were up 118.6%; excluding transportation, orders were only up one-tenth percent.

10 Vanguard sector index funds, which were previously too concentrated for IRS favorable treatment, changed their MSCI benchmarks as did Fidelity previously.

On last Friday, Barney Frank agreed with the Administration that Fannie and Freddie debt should be backed by the US.  He said he supports the earlier Treasury statement that it stands fully behind their debt.  Earlier in the week Treasury testified before the financial investigatory commission that the US never guaranteed TBTF.

GM will reinstate 661 dealers of 1100 who sought arbitration over their terminations.

Stiglitz said the Fed structure is rife with conflicts of interest, because banks sit on the board of directors of each Fed district bank, which means the bankers are governing themselves.  He said that when he ran the World Bank he would have denied assistance to any country which created a central bank with the Fed's governance system.

FDIC will auction $38 billion of securities backed by residential mortgage assets of failed banks in 3 tranches managed by Barclays.

On 2/28, 1.2 million people lost unemployment benefits.  A temporary one month extension to April 5th was signed into law last week, but it does not effect those who have exhausted benefits or exhausted the final tier of extended benefits.  It only extends the deadline for one month allowing the opportunity to qualify for emergency unemployment compensation or extended benefits to continue.  The one month extension will cost $10 billion.

US consumer spending was up .5% in January; income was up .1% but disposable income was down .4%.

Construction (residential) spending was up 1.1% in January, but non-residential was down 1.4% for a total decline of .6%.  Residential is down 6.4% vs year ago and non-residential is down 19.9%.

ISM manufacturing index was down to 56.5 in February from 58.4; new orders were down 6.4 points' employment was up 2.8 points; inventory was up .8.

Outstanding bank credit fell $3.3 billion during the week of 2/17.  This is a 7 week cumulative decline of $150 billion.  Lending to households fell at 12% annualized over the lst 13 weeks.

Pension funds hold 68% of commercial real estate equity.

ISM service sector index was up to 53.0 (highest since 12/07) in February from 50.6; employment up to 48.6 from 44.6; prices paid down to 60.4 from 61.2.

US productivity Q4 up 6.5%; labor costs down 5.9%.  People are working harder for less.  Some economists are speculating that temporary and part-time employment may be coming permanent.

Fed President Rosengren (Boston) like Lockhart (Atlanta) favors keeping rates low and Rosengren said low interest rates were not "solely" to blame for the housing bubble.

Italy 2009 GDP contracted 5% and is estimating a positive .7% for 2010.  Unemployment was 8.6% in January.  The deficit is up to 5.3% of GDP from 2.7% a year ago.

Average wages in Germany for 2009 were down .4%.

French unemployment was up .5% to 10.0% in Q4.

German factory orders were up 4.3% in January (most since 6/07) with input prices up 6.9% (7.7% in January), but economists expect weak economy will not sustain inflation.

The Chinese Premier at their National Party Conference said they need to address the inequality of wages (urban-coastal vs rural) by boosting public welfare in rural areas, by maintaining easy monetary policies, and by holding the yuan steady to support economic recovery.

Bank of England held its interest rate at .5%; ECB held its rate to 1%.

16 country Eurozone Q4 GDP was .1% and contracted 2.7% vs year ago.

Australian central bank raised its interest rate 25 basis points to 4% (4th raise in 5 meeting - did not raise in last meeting).  Unemployment is 5.3% in January (5.8% in October).  Q3 GDP was up .3% and Q4 was up .9% for 2.4% 2009 and 2.7% vs year ago.  GDP is expected to grow 3.0% in 2010.  Public spending was up 3.8% in Q4.

Sweden fell back into recession with Q4 GDP down .6% and Q3 revised to <.1%> from up .2%.

Copper prices are up as the result of the earthquake in Chile.


HSBS profits were down unexpectedly to $7.1 billion in 2009 from $9.3 billion in 2008.  There was a $6.5 billion accounting loss on value of its debt (expected $5 billion loss).  It is paying 3 investment bankers over 9 million pounds each in mostly shares over 3 years.

China manufacturing (PMI) fell to 52.0 in February from 55.8.

AIG will sell its Asian life insurance subsidiary to UK's Pru for $35.5 billion.

Fed vice-chair Kohn (67 years old) is quitting at the end of his term in June.

Fed President Hoenig (Kansas City) said Fed should not be guaranteeing markets zero interest rate for extended period and should raise rates sooner than later but very gradually.  Plosser (Philadelphia) said the Fed must not lose regulatory powers and other bureaucracies are not needed.  He also want TBTF concept to end and be replaced with orderly bankruptcy process.  Fisher (Dallas) said let risky banks fail.  Bullard (St. Louis) wants Fed to treat QE in the same manner as adjusting interest rate policy.

US Treasury auctioned $272.17 million of Bank of America warrants and got in excess of $1.5 billion with A warrants fetching $8.35/warrant ($7 minimum) and B warrants selling for $2.55/warrant ($1.50 minimum).

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