The Bank of International Settlements, the world's Central Banks Bank, has again issued a warning to Central Bankers that low interest rates foster risk taking. In my post below, "The FED, Asset Bubbles, AIG, and Fraud", I referenced BIS reports going back several years that low interest rates encourage risk taking and how the Fed ignored the BIS reports prior to the current Financial Crisis and continues down the road of another new crisis which is the same as the old crisis. The Overview of the BIS report said, "The low interest rates in the advanced economies, combined with the earlier and stronger recovery in a number of emerging economies, continued to drive significant capital inflows into emerging markets, particularly in Asia and
the Pacific. Although difficult to quantify, a related development was increasing FX carry trade activity funded in US dollars and other low interest rate currencies. The result was rapid asset price increases in several emerging economies as well as substantial exchange rate appreciation with respect to the US dollar". The actual chapter on monetary policy and risk taking said, "Easy monetary conditions are a classic ingredient of financial crises: low interest rates may contribute to an excessive expansion of credit, and hence to
boom-bust type business fluctuations."
In the my post which I referenced at the beginning, I also referenced a Raw Finance article on "Meet the New Crisis, Same as the Old Crisis". The New BIS report which repeats yet again the same warning they have issued for several years. Baseline Scenario recently had an article on "Measuring the Fiscal Cost of Not Fixing the Financial System" in which Simon Johnson said, "At the heart of every crisis is a political problem – powerful people, and the firms they control, have gotten out of hand. Unless this is dealt with as part of the stabilization program, all the government has done is provide an unconditional bailout. That may be consistent with a short-term recovery, but it creates major problems for the sustainability of the recovery and for the medium-term. Again, this is the problem in the U.S. looking forward." He also said the the US crisis has worsened as a direct result of how the FED and Treasury dealt with the financial crisis and " Even more problematic is the underlying incentive to take excessive risk in the financial sector. With downside limited by generous government guarantees of various kinds, the head of financial stability at the Bank of England bluntly characterizes our repeated boom-bailout-bust cycle as a “doom loop.” The implication is repeated bailout and fiscal stimulus-led recovery programs."
Joseph Stiglitz has written yet again in "Too Big to Live" that the global controversy on whether banks are too big to fail and what regulations are needed, but it boils down to the bankers either swindled their shareholders and investors or they did not understand the nature of risk and reward. The condition then becomes, if they are permitted to survive, the smaller the entity the easier it will be to regulate them for the protection of society. Size itself is not the real issue it is whether the bank/shadow bank in its conduct presents itself as a systemically dangerous firm by its business activity: "Too-big-to-fail banks have perverse incentives; if they gamble and win, they walk off with the proceeds; if they fail, taxpayers pick up the tab.
· Financial institutions are too intertwined to fail; the part of AIG that cost America’s taxpayers $180 billion was relatively small.
· Even if individual banks are small, if they engage in correlated behavior – using the same models – their behavior can fuel systemic risk;
· Incentive structures within banks are designed to encourage short-sighted behavior and excessive risk taking.
· In assessing their own risk, banks do not look at the externalities that they (or their failure) would impose on others, which is one reason why we need regulation in the first place.
· Banks have done a bad job in risk assessment – the models they were using were deeply flawed."
Stiglitz's recommendation is very rational: "These are not matters of black and white: the more we limit the size, the more relaxed we can be about these and other details of regulation. That is why King, Paul Volcker, the United Nations Commission of Experts on Reforms of the International Monetary and Financial System, and a host of others are right about the need to curb the big banks. What is required is a multi-prong approach, including special taxes, increased capital requirements, tighter supervision, and limits on size and risk-taking activities."
But we are already seeing how the howling and circling packs of lobbyists are diluting and milking attempts at financial reform to benefit the large banks and the shadow banks as they have become larger, resumed their risk taking, and remain without sufficient regulation of their business and trading activities. The stage is set for an encore performance.
Print Page
Tuesday, December 8, 2009
Sunday, December 6, 2009
Questioning the November Employment Report
Many economists and analysts are finding the November BLS Employment Report released this last week hard to swallow. I went over it in some detail on the Radio Show, but the questions on the data merit posting for reader's review.
The Report showed a job loss of 11,000 jobs when the month before was 195,000 and it showed the unemployment rate going down to 10% from 10.2 despite the loss. However, the BLS figures are usually close to the ADP private survey and the ADP showed a loss of 169,000 jobs. Calculated Risk asked "If the Economy lost Jobs, why did the Unemployment Rate decline?" The article used scatter graphs of one month and two month rolling averages and a 3rd order polynomial and concluded it was at best statistical noise: "The bottom line is the decline in the unemployment rate this month was noise, and the unemployment rate will probably increase further. If the economy adds about 2 million payroll jobs next year, we'd expect the unemployment rate to still be at about 10% at the end of the year." For every point of unemployment which lasts two years, the cost is $400 billion.
GDP growth below 2.5% will not substantially change the unemployment rate. Slower growth could mean 10% unemployment through 2012 into 2013. Krugman has commented on this as has Calculated Risk in "Employment and Real GDP".
If you look at page five (5) of the Report, you will see that there was a 98,000 decline in the civilian labor force with a 325,000 decline in unemployment but there was an increase of 291,000 in people no longer in the labor force. You can also see this analysis on Shedlock's blog. U6, discouraged workers no longer in labor force is shown at 17.2% in the BLS Report, an alternative model using the same statistical definition in use in the middle 1990's indicates 22%, unchanged from last month.
Some people have tried to reconcile the BLS Report with the ADP and have found they cannot get the BLS Report to add up, but that may be because different statistical methodologie3s are used for different components of the BLS Report. It is well acknowledged that the BLS Birth/Death Model is flawed and will be corrected in its annual review in February for an overestimate of at least 824,000 jobs filled error, although some say the error may be an overestimate of about 80,000 per month, which would be 960,000. One attempt at the ADP to BLS figures summed up with "We are looking at a three-month ADP-BLS net jobs divergence of roughly 230%, with ISM non-manufacturing employment still deep in contraction. Again, whom are we supposed to believe?"
Trim Tabs, which is a professional fee analytical service, calculated a November job loss of 255,000 and The Money Game provided a month by month Trim Tabs to BLS comparison estimates and revisions. It is not pretty.
Print Page
The Report showed a job loss of 11,000 jobs when the month before was 195,000 and it showed the unemployment rate going down to 10% from 10.2 despite the loss. However, the BLS figures are usually close to the ADP private survey and the ADP showed a loss of 169,000 jobs. Calculated Risk asked "If the Economy lost Jobs, why did the Unemployment Rate decline?" The article used scatter graphs of one month and two month rolling averages and a 3rd order polynomial and concluded it was at best statistical noise: "The bottom line is the decline in the unemployment rate this month was noise, and the unemployment rate will probably increase further. If the economy adds about 2 million payroll jobs next year, we'd expect the unemployment rate to still be at about 10% at the end of the year." For every point of unemployment which lasts two years, the cost is $400 billion.
GDP growth below 2.5% will not substantially change the unemployment rate. Slower growth could mean 10% unemployment through 2012 into 2013. Krugman has commented on this as has Calculated Risk in "Employment and Real GDP".
If you look at page five (5) of the Report, you will see that there was a 98,000 decline in the civilian labor force with a 325,000 decline in unemployment but there was an increase of 291,000 in people no longer in the labor force. You can also see this analysis on Shedlock's blog. U6, discouraged workers no longer in labor force is shown at 17.2% in the BLS Report, an alternative model using the same statistical definition in use in the middle 1990's indicates 22%, unchanged from last month.
Some people have tried to reconcile the BLS Report with the ADP and have found they cannot get the BLS Report to add up, but that may be because different statistical methodologie3s are used for different components of the BLS Report. It is well acknowledged that the BLS Birth/Death Model is flawed and will be corrected in its annual review in February for an overestimate of at least 824,000 jobs filled error, although some say the error may be an overestimate of about 80,000 per month, which would be 960,000. One attempt at the ADP to BLS figures summed up with "We are looking at a three-month ADP-BLS net jobs divergence of roughly 230%, with ISM non-manufacturing employment still deep in contraction. Again, whom are we supposed to believe?"
Trim Tabs, which is a professional fee analytical service, calculated a November job loss of 255,000 and The Money Game provided a month by month Trim Tabs to BLS comparison estimates and revisions. It is not pretty.
Print Page
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.
Print Page
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.
Print Page
Friday, December 4, 2009
Stock Market Double Dip Probability - Leverage, the US, & China
I have been cautioning investors about this overvalued stock market and the low volume continuation of the March rally with its recent meaningless sideways correction and current feeble attempted rally. I have been particularly concerned that the weak US dollar and current US low interest rates have created an asset bubble in the US stock market which has been purposefully used to assist banks in issuing new debt and stock in order to recapitalize. Additionally, there have been close correlations between the weak dollar and the upward movement of the stock market as a risk investment and carry trade.
If you read the post below in detail with all its links you can see the multiple foundations for a recurrence of the financial crisis. Other commentators and economists are positing similar concerns for a variety of reasons. Even Paul Krugman has finally voiced the possibility of a double dip if unemployment is not quickly and effectively corrected. James Gagnon in an article which has attracted posts by Tom Duy, Brad Delong, and others has entered the fray with the assertion that the the Fed's monetary easing policy needs to be continued but used to create jobs. While one might argue over the use of monetary easing policies to combat unemployment, his argument is essentially that the data indicates the economy is too weak, particularly with high continued unemployment, to not require a second, more effective stimulus. In fact there are commentators and members of Congress talking about using the returned TARP monies to provide small business loans to create new businesses and to provide the credit small businesses need to operate and hire.
Given the Fed's use of unemployment to hold inflation down and its obvious policy, despite its public positions, to decrease lending and contract credit, I do not see anyone but large banks continuing to get low cost money while they build their cash reserves and fail to lend. The failure of Congress to pass credit card usury laws and to allow the time for banks to jack their interest rates up, without respect to credit worthiness, in the interim (Citi says it wants to lend but it is changing credit card rates to 29.99% on consumers with high credit scores) as they also continue the arbitrary reduction in credit limits. Is Citi's policy, which is 37% government owned, a silent acknowledgment that banks make more money driving an account holder into bankruptcy rather than placing them in a closed account fixed interest loan they could pay? It is as if we are being conditioned to ask why waste government money on consumers by creating jobs and providing them the means to start spending again? We are even being told saving is bad.
In fact China's savings are increasing substantially faster than those of the US. But economists expect increased spending to fuel recovery. It does not appear that the Fed or Treasury have a recovery plan which includes the American middle class. However, a strong argument is being made by a variety of economist's that the excessive use of leverage is leading us right back to another financial crisis, that the US is following the example of Japan in the 1990's, and that China is not that fall behind. There are economic indicators adding emphasis to the possibility that China is tied to the global financial system and on the road to following the financial policies of the developed world in favoring its financial elite and it is creating tension between its coastal financial elite and the interior masses in China. In fact, we are being told that the middle class is growing in China at the same time the financial elite are consolidating power in China. There is no decoupling.
For months I have cautioned my radio show listeners that a double dip is a significant possibility, but you never fight the market. For over a year, I have said the current stimulus is ineffective and if there is no significant improvement in unemployment by the 2nd Quarter of 2010, it will be a very long haul. Unemployment figures today are being trumpeted as huge improvement, but if you look at the data in the BLS release, you will see that the figures are the result of people no longer in the labor force and the continuation of the collection errors in the Birth/Death Model which continues to show job growth and which is on track to be corrected in February for an overestimate of jobs filled of approximately 824,000+.
I read John Hussman's weekly commentary religiously, because his viewpoint is based on fundamental and technical analysis. Obviously, he has been too conservative this year, but that does not negate the correctness of his interpretation of the market data and the failure of the market to reflect the fundamentals and the technical divergences. As of this last Monday, he has moved his conservative hedge mutual funds out of TIPS, because their yields are too low. His post last Monday said, "Frankly, I've come to believe that the markets are no longer reliable or sound discounting mechanisms. The repeated cycle of bubbles and predictable crashes over the recent decade makes that clear. Rather, investors appear to respond to emerging risks no more than about three months ahead of time. Worse, far too many analysts and strategists appear to discount the future only in the most pedestrian way, by taking year-ahead earnings estimates at face value, and mindlessly applying some arbitrary and historically inconsistent multiple to them." He goes on, "In part, the market's increasing propensity toward speculation reflects the increasing lack of fiscal and monetary discipline from our leaders. Policy makers who seek quick fixes and could care less about long-term consequences undoubtedly encourage investors to embrace the same value system. Paul Volcker was the last Fed Chairman to have any sense that discipline and the acceptance of temporary discomfort was good for the nation." He believes the market is 40% overvalued using both a q and CAPE analysis and said, "In my estimation, there is still close to an 80% probability (Bayes' Rule) that a second market plunge and economic downturn will unfold during the coming year. This is not certainty, but the evidence that we've observed in the equity market, labor market, and credit markets to-date is simply much more consistent with the recent advance being a component of a more drawn-out and painful deleveraging cycle. Meanwhile, valuations are clearly unfavorable here, and even under the “typical post-war recovery” scenario, we are observing an increasing number of internal divergences and non-confirmations in market action."
He said an 80% probability of a second market plunge. The problem is when and it is only a probability not an actuality. What we saw today was an irrational upward movement in the market that quickly met resistance. In fact, on December 2nd, Afraid to Trade posted charts showing the choppy boundary ranged S&P (SPY) with gaps from November to that date which would indicate that there is a Failed Breakout or Bull Trap. Bull Traps can be the precursor of a sharp downside move.
If the Fed and Treasury are merely maintaining the financial status quo and using the credit contraction, unemployment, weak dollar, and low US interest rates to grow the stock market as a risk asset bubble in order to allow the systemically dangerous to re-capitalize while they grow even larger and the American middle class dwindles as unworthy of protection, why should there not be a double dip? After all what is good for Goldman Sachs is good for America; they are just "doing God's work" to quote the CEO of Goldman Sachs.
Print Page
If you read the post below in detail with all its links you can see the multiple foundations for a recurrence of the financial crisis. Other commentators and economists are positing similar concerns for a variety of reasons. Even Paul Krugman has finally voiced the possibility of a double dip if unemployment is not quickly and effectively corrected. James Gagnon in an article which has attracted posts by Tom Duy, Brad Delong, and others has entered the fray with the assertion that the the Fed's monetary easing policy needs to be continued but used to create jobs. While one might argue over the use of monetary easing policies to combat unemployment, his argument is essentially that the data indicates the economy is too weak, particularly with high continued unemployment, to not require a second, more effective stimulus. In fact there are commentators and members of Congress talking about using the returned TARP monies to provide small business loans to create new businesses and to provide the credit small businesses need to operate and hire.
Given the Fed's use of unemployment to hold inflation down and its obvious policy, despite its public positions, to decrease lending and contract credit, I do not see anyone but large banks continuing to get low cost money while they build their cash reserves and fail to lend. The failure of Congress to pass credit card usury laws and to allow the time for banks to jack their interest rates up, without respect to credit worthiness, in the interim (Citi says it wants to lend but it is changing credit card rates to 29.99% on consumers with high credit scores) as they also continue the arbitrary reduction in credit limits. Is Citi's policy, which is 37% government owned, a silent acknowledgment that banks make more money driving an account holder into bankruptcy rather than placing them in a closed account fixed interest loan they could pay? It is as if we are being conditioned to ask why waste government money on consumers by creating jobs and providing them the means to start spending again? We are even being told saving is bad.
In fact China's savings are increasing substantially faster than those of the US. But economists expect increased spending to fuel recovery. It does not appear that the Fed or Treasury have a recovery plan which includes the American middle class. However, a strong argument is being made by a variety of economist's that the excessive use of leverage is leading us right back to another financial crisis, that the US is following the example of Japan in the 1990's, and that China is not that fall behind. There are economic indicators adding emphasis to the possibility that China is tied to the global financial system and on the road to following the financial policies of the developed world in favoring its financial elite and it is creating tension between its coastal financial elite and the interior masses in China. In fact, we are being told that the middle class is growing in China at the same time the financial elite are consolidating power in China. There is no decoupling.
For months I have cautioned my radio show listeners that a double dip is a significant possibility, but you never fight the market. For over a year, I have said the current stimulus is ineffective and if there is no significant improvement in unemployment by the 2nd Quarter of 2010, it will be a very long haul. Unemployment figures today are being trumpeted as huge improvement, but if you look at the data in the BLS release, you will see that the figures are the result of people no longer in the labor force and the continuation of the collection errors in the Birth/Death Model which continues to show job growth and which is on track to be corrected in February for an overestimate of jobs filled of approximately 824,000+.
I read John Hussman's weekly commentary religiously, because his viewpoint is based on fundamental and technical analysis. Obviously, he has been too conservative this year, but that does not negate the correctness of his interpretation of the market data and the failure of the market to reflect the fundamentals and the technical divergences. As of this last Monday, he has moved his conservative hedge mutual funds out of TIPS, because their yields are too low. His post last Monday said, "Frankly, I've come to believe that the markets are no longer reliable or sound discounting mechanisms. The repeated cycle of bubbles and predictable crashes over the recent decade makes that clear. Rather, investors appear to respond to emerging risks no more than about three months ahead of time. Worse, far too many analysts and strategists appear to discount the future only in the most pedestrian way, by taking year-ahead earnings estimates at face value, and mindlessly applying some arbitrary and historically inconsistent multiple to them." He goes on, "In part, the market's increasing propensity toward speculation reflects the increasing lack of fiscal and monetary discipline from our leaders. Policy makers who seek quick fixes and could care less about long-term consequences undoubtedly encourage investors to embrace the same value system. Paul Volcker was the last Fed Chairman to have any sense that discipline and the acceptance of temporary discomfort was good for the nation." He believes the market is 40% overvalued using both a q and CAPE analysis and said, "In my estimation, there is still close to an 80% probability (Bayes' Rule) that a second market plunge and economic downturn will unfold during the coming year. This is not certainty, but the evidence that we've observed in the equity market, labor market, and credit markets to-date is simply much more consistent with the recent advance being a component of a more drawn-out and painful deleveraging cycle. Meanwhile, valuations are clearly unfavorable here, and even under the “typical post-war recovery” scenario, we are observing an increasing number of internal divergences and non-confirmations in market action."
He said an 80% probability of a second market plunge. The problem is when and it is only a probability not an actuality. What we saw today was an irrational upward movement in the market that quickly met resistance. In fact, on December 2nd, Afraid to Trade posted charts showing the choppy boundary ranged S&P (SPY) with gaps from November to that date which would indicate that there is a Failed Breakout or Bull Trap. Bull Traps can be the precursor of a sharp downside move.
If the Fed and Treasury are merely maintaining the financial status quo and using the credit contraction, unemployment, weak dollar, and low US interest rates to grow the stock market as a risk asset bubble in order to allow the systemically dangerous to re-capitalize while they grow even larger and the American middle class dwindles as unworthy of protection, why should there not be a double dip? After all what is good for Goldman Sachs is good for America; they are just "doing God's work" to quote the CEO of Goldman Sachs.
Print Page
Thursday, December 3, 2009
The FED, Asset Bubbles, AIG, & Fraud
For over a year I have questioned why bank executives were not removed, why toxic assets were not ripped out, and why AIG and Citi were allowed to survive in essentially unchanged form. It has become increasing clear that it was more important to continue the financial system status quo than to establish financially strong but non-systemically dangerous banks and shadow banks. Financial reforms in Congress have been watered down to the extent that the financial sector is likely to come out ahead in special privileges rather than reformed. We are constantly told this reform and that reform will deter liquidity when the actual problem is insolvency and a private financial system that gets the profits and pushes the losses off to the the public.
Tom Duy in a post on the Economist's view entitled, "FED Watch: Bubbles and Policy", asks the question are asset bubbles in foreign countries any concern of the Fed and are asset bubbles better contained by monetary policy or regulatory authority. He now believes that the Fed should be concerned about the US only and that asset bubbles should be controlled by regulation. In coming to this conclusion, he acknowledges the effect of the weak dollar and US low interest rates on commodity prices as the proper result of monetary policy.
On the other hand, Washington's Blog, had a widely distributed post, "Questions for Bernanke's Senate Confirmation Hearing" in which he made a very detailed argument that the Fed had been repeatedly warned by the Bank for International Settlements (the Central Banks' bank) that a credit bubble was forming as early as 2005. These excerpts show the BIS concerns:
"The Bank for International Settlements, the world's most prestigious financial body, has warned that years of loose monetary policy has fueled a dangerous credit bubble, leaving the global economy more vulnerable to another 1930s-style slump than generally understood...
The BIS, the ultimate bank of central bankers, pointed to a confluence a worrying signs, citing mass issuance of new-fangled credit instruments, soaring levels of household debt, extreme appetite for risk shown by investors, and entrenched imbalances in the world currency system."
"Indeed, BIS slammed the Fed and other central banks for blowing the bubble, failing to regulate the shadow banking system, and then using gimmicks which will only make things worse... More dramatically, BIS slammed "the use of gimmicks and palliatives", and said that anything other than (1) letting asset prices fall to their true market value, (2) increasing savings rates, and (3) forcing companies to write off bad debts "will only make things worse"...Instead, they are doing everything they can to (2) prop up asset prices by trying to blow a new bubble by giving banks trillions, (2) re-write accounting and reporting rules to let the big banks and other giants keep bad debts on their books (or in sivs or other "second sets of books") and to hide the fact that they are bad debts, and (3) encourage consumers to spend spend spend!"
"... the central bankers knew exactly what was going on, a full two-and-a-half years before the big bang. All the ingredients of the looming disaster had been neatly laid out on the table in front of them: defective rating agencies, loans repackaged to the point of being unrecognizable, dubious practices of American mortgage lenders, the risks of low-interest policies. But no action was taken. Meanwhile, the Fed continued to raise interest rates in nothing more than tiny increments..."
The article also cited a 2005 letter from the Mortgage Insurance Companies of America, a trade association of mortgage lender, sent to the Fed: "In the letter, MICA warned that it was "very concerned" about some of the risky lending practices being applied in the US real estate market. The experts even speculated that the Fed might be operating on the basis of incorrect data. Despite a sharp increase in mortgages being approved for low-income borrowers, most banks were reporting to the Fed that they had not lowered their lending standards. According to a study MICA cited entitled "This Powder Keg Is Going to Blow," there was no secondary market for these "nuclear mortgages."..." The Fed either did not understand what they were told or they ignored it.
Even the new President of the New York Federal Reserve has publicly stated "the causes of the crisis as the excessive use of leverage and maturity mismatches embedded in financial activities carried out off the balance sheets of the traditional banking system...this crisis was caused by the rapid growth of the so-called shadow banking system over the past few decades and its remarkable collapse over the past two years.”
Robert Alford in a post on naked capitalist entitled, "The FED, Treasury, and AIG", makes a detailed argument that the bailout of AIG was illegal. If anything was to be done, it should have been the responsibility of the Treasury and not the Fed. Janet Tavakoli has gone so far as to say Goldman Sachs was the primary beneficiary of the AIG bailout and it should buy the maiden lane III fund from the Fed and get those toxic assets off its balance sheet and on Goldman Sach's balance sheet. Alford made some compromise recommendations on how the Fed should be run in the future:
"• The Fed agrees to cease and desist from lending to any capital impaired institution unless specifically authorized by law.
• The Fed agrees to cease and desist from acting in a fiscal role.
• The Fed agrees to never again assume management responsibility for a capital impaired institution unless specifically authorized by Congress
• Treasury assumes all the Fed assets related to AIG and Bear. I believe that there is enough TARP money left.
• The selection process for reserve bank presidents is left unchanged.
• The audit provisions are left unchanged."
In another Washington's Blog post, "Former Managing Director of Goldman Sachs: Accounting Fraud of the Too Big to Fails May be Worse than Enron" asks, as many of us have, how much of banks revenue is real banking vs trading (risk taking). He cites Nomi Prins' article, "Worse than Enron", details how the banks have used re-classification and opaqueness in doctoring their balance sheets, which is an issue we have discussed on the radio show numerous times. She waded through over 1000 pages of SEC filings and pretty well lays out how Citi, Bank of America, and Wells Fargo are playing the game. She asks, given the long time it took to catch Enron, how long is it going to take to catch the banks. My question is will it take another financial crisis to bring everything into the open. There are, however, those who are more pessimistic and wonder if we are not seeing the re-institution of Feudalism.
In a Raw Finance post, " Meet the New Crisis, Same As the Old Crisis", Simon Johnson said
"The problem, in the simplest terms, is this: the government policies that have staved off a depression have driven down the value of the dollar and lowered yields on the safest assets to near zero, while the banking system and those who run it remain largely intact and unchanged; therefore, bankers and investors are encouraged to take on extreme risk once again to achieve acceptable gains and they do this by borrowing dollars generally to buy risky assets, generally in emerging markets that have strong growth potential. Thus, the asset bubbles that formed in U.S. real estate that caused the 2008 financial crisis appear to be forming again, but rather in non-U.S. assets (see U.S. Current Account Deficit Likely the Cause of Next Financial Crisis)." He also proposes three best practices: 1) preventing banks from collapsing in an uncontrolled manner, 2) taking over and implementing orderly resolution for banks that are insolvent (this would include firing management and bringing in a new team), and 3) addressing immediately underlying weaknesses in corporate governance which created potential vulnerability to crisis. Again, we have to ask what is it going to take to make the people who caused this financial crisis responsible for their actions in a way which engenders the public trust?
The Baseline Scenario had a post, "Some Questions for Mr, Bernanke" which intellectually poses three issue crunching questions: 1) what about the doom loop?, 2) how should the bailout mechanism be modified?, and 3) since history has shown that large financial institutions find ways to get around and ahead of regulators, should the large banks be broken up if they are systemically dangerous?
Many commentators are focusing on Bernanke when the actual problem is to what extent do the financial systemically dangerous entities, like Goldman Sachs, influence the Fed and Treasury. To what extent does the Fed protect the interests of banks as opposed to the public good and to what extent does Treasury under any administration allow itself to be swayed by powerful interests and strategically placed government assistants who used to work for those systemically dangerous private entities? Who would replace Bernanke? Larry Summers wants the job but he cannot effectively perform his current job. If a Fed president, would it be Yellin? The other Fed presidents have staked ideological turf. Will they seek another academic economist? What would happen if they were presented with the choice of a person with a regulatory passion?
Print Page
Tom Duy in a post on the Economist's view entitled, "FED Watch: Bubbles and Policy", asks the question are asset bubbles in foreign countries any concern of the Fed and are asset bubbles better contained by monetary policy or regulatory authority. He now believes that the Fed should be concerned about the US only and that asset bubbles should be controlled by regulation. In coming to this conclusion, he acknowledges the effect of the weak dollar and US low interest rates on commodity prices as the proper result of monetary policy.
On the other hand, Washington's Blog, had a widely distributed post, "Questions for Bernanke's Senate Confirmation Hearing" in which he made a very detailed argument that the Fed had been repeatedly warned by the Bank for International Settlements (the Central Banks' bank) that a credit bubble was forming as early as 2005. These excerpts show the BIS concerns:
"The Bank for International Settlements, the world's most prestigious financial body, has warned that years of loose monetary policy has fueled a dangerous credit bubble, leaving the global economy more vulnerable to another 1930s-style slump than generally understood...
The BIS, the ultimate bank of central bankers, pointed to a confluence a worrying signs, citing mass issuance of new-fangled credit instruments, soaring levels of household debt, extreme appetite for risk shown by investors, and entrenched imbalances in the world currency system."
"Indeed, BIS slammed the Fed and other central banks for blowing the bubble, failing to regulate the shadow banking system, and then using gimmicks which will only make things worse... More dramatically, BIS slammed "the use of gimmicks and palliatives", and said that anything other than (1) letting asset prices fall to their true market value, (2) increasing savings rates, and (3) forcing companies to write off bad debts "will only make things worse"...Instead, they are doing everything they can to (2) prop up asset prices by trying to blow a new bubble by giving banks trillions, (2) re-write accounting and reporting rules to let the big banks and other giants keep bad debts on their books (or in sivs or other "second sets of books") and to hide the fact that they are bad debts, and (3) encourage consumers to spend spend spend!"
"... the central bankers knew exactly what was going on, a full two-and-a-half years before the big bang. All the ingredients of the looming disaster had been neatly laid out on the table in front of them: defective rating agencies, loans repackaged to the point of being unrecognizable, dubious practices of American mortgage lenders, the risks of low-interest policies. But no action was taken. Meanwhile, the Fed continued to raise interest rates in nothing more than tiny increments..."
The article also cited a 2005 letter from the Mortgage Insurance Companies of America, a trade association of mortgage lender, sent to the Fed: "In the letter, MICA warned that it was "very concerned" about some of the risky lending practices being applied in the US real estate market. The experts even speculated that the Fed might be operating on the basis of incorrect data. Despite a sharp increase in mortgages being approved for low-income borrowers, most banks were reporting to the Fed that they had not lowered their lending standards. According to a study MICA cited entitled "This Powder Keg Is Going to Blow," there was no secondary market for these "nuclear mortgages."..." The Fed either did not understand what they were told or they ignored it.
Even the new President of the New York Federal Reserve has publicly stated "the causes of the crisis as the excessive use of leverage and maturity mismatches embedded in financial activities carried out off the balance sheets of the traditional banking system...this crisis was caused by the rapid growth of the so-called shadow banking system over the past few decades and its remarkable collapse over the past two years.”
Robert Alford in a post on naked capitalist entitled, "The FED, Treasury, and AIG", makes a detailed argument that the bailout of AIG was illegal. If anything was to be done, it should have been the responsibility of the Treasury and not the Fed. Janet Tavakoli has gone so far as to say Goldman Sachs was the primary beneficiary of the AIG bailout and it should buy the maiden lane III fund from the Fed and get those toxic assets off its balance sheet and on Goldman Sach's balance sheet. Alford made some compromise recommendations on how the Fed should be run in the future:
"• The Fed agrees to cease and desist from lending to any capital impaired institution unless specifically authorized by law.
• The Fed agrees to cease and desist from acting in a fiscal role.
• The Fed agrees to never again assume management responsibility for a capital impaired institution unless specifically authorized by Congress
• Treasury assumes all the Fed assets related to AIG and Bear. I believe that there is enough TARP money left.
• The selection process for reserve bank presidents is left unchanged.
• The audit provisions are left unchanged."
In another Washington's Blog post, "Former Managing Director of Goldman Sachs: Accounting Fraud of the Too Big to Fails May be Worse than Enron" asks, as many of us have, how much of banks revenue is real banking vs trading (risk taking). He cites Nomi Prins' article, "Worse than Enron", details how the banks have used re-classification and opaqueness in doctoring their balance sheets, which is an issue we have discussed on the radio show numerous times. She waded through over 1000 pages of SEC filings and pretty well lays out how Citi, Bank of America, and Wells Fargo are playing the game. She asks, given the long time it took to catch Enron, how long is it going to take to catch the banks. My question is will it take another financial crisis to bring everything into the open. There are, however, those who are more pessimistic and wonder if we are not seeing the re-institution of Feudalism.
In a Raw Finance post, " Meet the New Crisis, Same As the Old Crisis", Simon Johnson said
"The problem, in the simplest terms, is this: the government policies that have staved off a depression have driven down the value of the dollar and lowered yields on the safest assets to near zero, while the banking system and those who run it remain largely intact and unchanged; therefore, bankers and investors are encouraged to take on extreme risk once again to achieve acceptable gains and they do this by borrowing dollars generally to buy risky assets, generally in emerging markets that have strong growth potential. Thus, the asset bubbles that formed in U.S. real estate that caused the 2008 financial crisis appear to be forming again, but rather in non-U.S. assets (see U.S. Current Account Deficit Likely the Cause of Next Financial Crisis)." He also proposes three best practices: 1) preventing banks from collapsing in an uncontrolled manner, 2) taking over and implementing orderly resolution for banks that are insolvent (this would include firing management and bringing in a new team), and 3) addressing immediately underlying weaknesses in corporate governance which created potential vulnerability to crisis. Again, we have to ask what is it going to take to make the people who caused this financial crisis responsible for their actions in a way which engenders the public trust?
The Baseline Scenario had a post, "Some Questions for Mr, Bernanke" which intellectually poses three issue crunching questions: 1) what about the doom loop?, 2) how should the bailout mechanism be modified?, and 3) since history has shown that large financial institutions find ways to get around and ahead of regulators, should the large banks be broken up if they are systemically dangerous?
Many commentators are focusing on Bernanke when the actual problem is to what extent do the financial systemically dangerous entities, like Goldman Sachs, influence the Fed and Treasury. To what extent does the Fed protect the interests of banks as opposed to the public good and to what extent does Treasury under any administration allow itself to be swayed by powerful interests and strategically placed government assistants who used to work for those systemically dangerous private entities? Who would replace Bernanke? Larry Summers wants the job but he cannot effectively perform his current job. If a Fed president, would it be Yellin? The other Fed presidents have staked ideological turf. Will they seek another academic economist? What would happen if they were presented with the choice of a person with a regulatory passion?
Print Page
Monday, November 30, 2009
Radio Show 11/28/2009 Leftover & Additional AIG & FED Policy Information
We talked about AIG and Goldman Sachs and how Goldman Sachs profited in shorting mortgage backed assets while dumping them on AIG and while refusing to make collateral concessions on AIG credit default swaps which the monolines did. Goldman got 100% in the bailout while the monolines got stuck. Janet Tavakoli has said Goldman Sachs should be made to buy the Maiden Lane III from the FED and carry them on their own balance sheet. Here is another good AIG/Goldman analysis in naked capitalism.
We talked about Fed policy and how Tom Duy, an economist who writes about the Fed, was upset and the comments Yves Smith of naked capitalism had on his article: here is that post for you to read in full. And here is an earlier Duy post on how the FED has put itself in a corner and is engendering a lack of trust from the public.
Bernanke wrote a commentary as well as gave Congressional testimony that proposed financial reforms threaten the independence of the Fed and would seriously impair the economic stability of the US and could damage the financial health of the future. He said these measures are very much out of step with the global consensus, but in actuality the UK has been far more aggressive in seeking financial reforms and regulations to the point that Geithner has said the US would not go that far. Naked capitalism had a very good article on Bernanke's published commentary which you should read.
St. Louis Fed President, Bullard, not only said he would support continued purchase of mortgage backed assets past the March deadline, but he also said the Fed would have a hard time raising rates in the face of worsening unemployment, but "if inflation expectations start to get out of control, that could trump the unemployment rate".
Chicago Fed President Evans is very over optimistic when he expects unemployment to peak at 10.5%, because he was also surprised to see it reach 10.2%. I think it will go to 11%. He sees no problem with core inflation and expects rates to remain low for an extended time.
At the end of the show I was observing that Lloyd's Bank is planning to issue $22.3 billion shares at 37 pence per share which will dilute existing shareholders by 59.5% at 1.34 to 1 existing shares as of the closing price on 11.23/2009 -- that is 36.5 billion shares.
There are a growing number of articles expressing concern about Chinese over capacity, because it wastes resources, erodes profits, deters research and development, encourages companies to but corners on health, safety, environmental impact, and quality control. Unneeded capacity raises the risk of non-performing loans, which is the real concern of the financial world; they could live with all the rest of the negatives of over capacity.
The five largest Chinese banks have had to submit plans to the Chinese regulators on how they will raise capital after unprecedented lending has eroded their capital levels. Earlier in the year the minimum capital level ratio was raised to 10%.
FDIC's Bair has cautioned that financial reforms which contemplate the break up of banks should be carefully and fully evaluated for safety and soundness isues.
There was a pro-con post in Economist's view on psychological sentiment and its value in determining whether a recovery is happening. I found it interesting but lacking as it did not fully addressed how expectations may be facticity based or fear based or over exuberant based. Proper policy should be more important. There is a difference between rational and irrational behavior.
The private sector economist, Dave Rosenberg, said last week that we are in a form of Depression resulting from a prolonged period of credit excess which collapses yielding asset deflation and credit contraction. I think we have definitely seen asset sector deflation as opposed to general deflation and definitely credit contraction, but we have also seen the formation of asset bubbles globally on the weak dollar and low interest rates in the US. The stock market is at least 20%over valued. He went on to say that having so many people say the recession is over causes him to be nervous. In my opinion this shows the reason many people see the possibility of a double dip just as there was in the Great Depression and could occur is any serious recession without proper job creating stimulus.
Janet Tavakoli (see above) in another publication questioned a Warren Buffet interview (she wrote a book on Buffet) in which he seemingly implied that his Goldman Sachs investment was made because the government had removed the moral hazard. This incensed Tavakoli to write that it was as if Buffet was saying it is okay to use someone else's credit card because they won't notice it and they will have more wealth by the time the payment is due.
Print Page
We talked about Fed policy and how Tom Duy, an economist who writes about the Fed, was upset and the comments Yves Smith of naked capitalism had on his article: here is that post for you to read in full. And here is an earlier Duy post on how the FED has put itself in a corner and is engendering a lack of trust from the public.
Bernanke wrote a commentary as well as gave Congressional testimony that proposed financial reforms threaten the independence of the Fed and would seriously impair the economic stability of the US and could damage the financial health of the future. He said these measures are very much out of step with the global consensus, but in actuality the UK has been far more aggressive in seeking financial reforms and regulations to the point that Geithner has said the US would not go that far. Naked capitalism had a very good article on Bernanke's published commentary which you should read.
St. Louis Fed President, Bullard, not only said he would support continued purchase of mortgage backed assets past the March deadline, but he also said the Fed would have a hard time raising rates in the face of worsening unemployment, but "if inflation expectations start to get out of control, that could trump the unemployment rate".
Chicago Fed President Evans is very over optimistic when he expects unemployment to peak at 10.5%, because he was also surprised to see it reach 10.2%. I think it will go to 11%. He sees no problem with core inflation and expects rates to remain low for an extended time.
At the end of the show I was observing that Lloyd's Bank is planning to issue $22.3 billion shares at 37 pence per share which will dilute existing shareholders by 59.5% at 1.34 to 1 existing shares as of the closing price on 11.23/2009 -- that is 36.5 billion shares.
There are a growing number of articles expressing concern about Chinese over capacity, because it wastes resources, erodes profits, deters research and development, encourages companies to but corners on health, safety, environmental impact, and quality control. Unneeded capacity raises the risk of non-performing loans, which is the real concern of the financial world; they could live with all the rest of the negatives of over capacity.
The five largest Chinese banks have had to submit plans to the Chinese regulators on how they will raise capital after unprecedented lending has eroded their capital levels. Earlier in the year the minimum capital level ratio was raised to 10%.
FDIC's Bair has cautioned that financial reforms which contemplate the break up of banks should be carefully and fully evaluated for safety and soundness isues.
There was a pro-con post in Economist's view on psychological sentiment and its value in determining whether a recovery is happening. I found it interesting but lacking as it did not fully addressed how expectations may be facticity based or fear based or over exuberant based. Proper policy should be more important. There is a difference between rational and irrational behavior.
The private sector economist, Dave Rosenberg, said last week that we are in a form of Depression resulting from a prolonged period of credit excess which collapses yielding asset deflation and credit contraction. I think we have definitely seen asset sector deflation as opposed to general deflation and definitely credit contraction, but we have also seen the formation of asset bubbles globally on the weak dollar and low interest rates in the US. The stock market is at least 20%over valued. He went on to say that having so many people say the recession is over causes him to be nervous. In my opinion this shows the reason many people see the possibility of a double dip just as there was in the Great Depression and could occur is any serious recession without proper job creating stimulus.
Janet Tavakoli (see above) in another publication questioned a Warren Buffet interview (she wrote a book on Buffet) in which he seemingly implied that his Goldman Sachs investment was made because the government had removed the moral hazard. This incensed Tavakoli to write that it was as if Buffet was saying it is okay to use someone else's credit card because they won't notice it and they will have more wealth by the time the payment is due.
Print Page
Sunday, November 29, 2009
Bank Tier 1 Ratios
On the 11/28/2009 show I mangled a Tier 1 commentary and may have ended up implying the opposite of what I meant as I was rapid firing information.
A Tier 1 ratio can be in two forms: 1) a capital ratio in which it is core equity to core capital or total assets or 2) a risk capital ratio in which it is core equity to total risk weighted assets. It is a measure of financial strength and the higher the ratio (2:10 is 20%) the better.
The example and information I was using on the show should have been to remember that when Lehman Brothers failed it had a Tier 1 ratio of 11%. The median Tier 1 ratio for large and mid-cap banks is in the range of 8.4 to 10%, which is lower (riskier) than Lehman when it failed. That means many banks are lower (worse). The higher the ratio/percentage the better
The FED/Treasury stress tests set a minimum of 4% for Tier 1 in determining tangible common equity, which yields a lower percentage than Tier 1 core equity. What would the minimum have been for core equity Tier 1? They should have included the core equity Tier 1 for comparison. See this older post from Baseline Scenario for an explanation of tangible common equity. Also banks have not had to mark to market toxic assets and some do not even include toxic assets which are government insured on their balance sheets, which brings a significant question of how accurate and comprehensive the risk weighted assets were.
I had a lingering feeling from the show that I misspoke and botched a clear conveyance of the magnitude of how fragile the current situation really is.
Print Page
A Tier 1 ratio can be in two forms: 1) a capital ratio in which it is core equity to core capital or total assets or 2) a risk capital ratio in which it is core equity to total risk weighted assets. It is a measure of financial strength and the higher the ratio (2:10 is 20%) the better.
The example and information I was using on the show should have been to remember that when Lehman Brothers failed it had a Tier 1 ratio of 11%. The median Tier 1 ratio for large and mid-cap banks is in the range of 8.4 to 10%, which is lower (riskier) than Lehman when it failed. That means many banks are lower (worse). The higher the ratio/percentage the better
The FED/Treasury stress tests set a minimum of 4% for Tier 1 in determining tangible common equity, which yields a lower percentage than Tier 1 core equity. What would the minimum have been for core equity Tier 1? They should have included the core equity Tier 1 for comparison. See this older post from Baseline Scenario for an explanation of tangible common equity. Also banks have not had to mark to market toxic assets and some do not even include toxic assets which are government insured on their balance sheets, which brings a significant question of how accurate and comprehensive the risk weighted assets were.
I had a lingering feeling from the show that I misspoke and botched a clear conveyance of the magnitude of how fragile the current situation really is.
Print Page
Friday, November 27, 2009
Krugman and the Tobin Tax
In a 11/20/2009 post below entitled, Jobless Prosperity", I included a communication I had sent Paul Krugman and another I had sent Mark Thoma about unemployment, deficits, and the Nobel economist James Tobin. On the 26th, Krugman published "Taxing the Speculators" in the New York Times and Thoma republished it on his blog Economist's View. I had also mentioned the more aggressive UK program to regulate financial institutions and their executives. Please read the article in either one of the links.
I also had in my communication a questions relating to deficits and how the are exited after sustained recovery. In blog post today, "Deficits: The Causes Matter", Krugman discussed how the causes of a deficit are important and how the causes, to an extent, define, how the deficit must be dealt with and when.
I do not know how coincidental the article and the blog post were, but they are both greatly appreciated. Tobin's Tax was a concept developed to decrease economically undesirable and dangerous trading by taxing the specific type of financial transactions. And just today we are seeing that financial institutions are already trying to test how credit default swaps are settled in this article on Bloomberg,com. The current process was designed to abnegate the need for regulation. If they do not get it, and have all kinds of reasons why a clearinghouse is liquidity "inconvenient", then maybe a Tobin Tax is just what they should get.
Print Page
I also had in my communication a questions relating to deficits and how the are exited after sustained recovery. In blog post today, "Deficits: The Causes Matter", Krugman discussed how the causes of a deficit are important and how the causes, to an extent, define, how the deficit must be dealt with and when.
I do not know how coincidental the article and the blog post were, but they are both greatly appreciated. Tobin's Tax was a concept developed to decrease economically undesirable and dangerous trading by taxing the specific type of financial transactions. And just today we are seeing that financial institutions are already trying to test how credit default swaps are settled in this article on Bloomberg,com. The current process was designed to abnegate the need for regulation. If they do not get it, and have all kinds of reasons why a clearinghouse is liquidity "inconvenient", then maybe a Tobin Tax is just what they should get.
Print Page
Wednesday, November 25, 2009
FED: Asset Bubbles -- We Ain't Got No Stinkin' Asset Bubbles
Last week the Fed was out in full asset bubble denial in public speech after public speech from different Fed officials. Mr. Bernanke said "it is not obvious there are any large misalignments in asset prices today." But El-Erian, CEO of Pimco, said, "In seeking to avoid qa depression occasioned by the financial crisis, the Federal Reserve now finds itself having inadvertently placed a large bet on a recovery driven by asset prices."
Fed Vice-Chairman Kohn said U.S. asset prices do not clearly appear to be out of line with the economic outlook and business prospects or the level of risk free interest rates. He continued to say if asset bubbles are recognized, they should be addressed with regulation and supervision of specific markets or financial firms rather than raising rates.
Yellen, Fed President San Francisco, said further research was necessary to determine the connections between monetary policy, systemic risk, and financial firms. She said uncertainty remains over whether central bankers should attempt to lean against potentially dangerous swings in asset prices. "The answer is far from clear, because the use of monetary policy for these ends necessarily compromises the attainment of other macroeconomic goals."
Yet, there were reports at the same time that supposedly knowledgeable sources were saying the Fed will be increasing scrutiny of banks to ensure they can withstand reversal of soaring global asset prices.
Yves Smith in a naked capitalist blog, said in relation to the Fed's low interest policy:
"But the second reason for keeping rates low is explicitly to keep asset prices aloft. The bubble is an explicit goal of policy. Remember, early in the crisis, they was talk of the markets being irrationally depressed. Funny how it is only prices that are seen as inconveniently low, and not ones that are insanely high, that are criticized."
In the November FOMC minutes released this week, they said
"However, some participants noted that the recent rise in the prices of oil and other commodities, as well as increases in import prices stemming from the decline in the foreign exchange value of the dollar, could boost inflation pressures."
"Members noted the possibility that some negative side effects might result from the maintenance of very low
short-term interest rates for an extended period, including the possibility that such a policy stance could lead
to excessive risk-taking in financial markets or an unanchoring of inflation expectations."
Print Page
Fed Vice-Chairman Kohn said U.S. asset prices do not clearly appear to be out of line with the economic outlook and business prospects or the level of risk free interest rates. He continued to say if asset bubbles are recognized, they should be addressed with regulation and supervision of specific markets or financial firms rather than raising rates.
Yellen, Fed President San Francisco, said further research was necessary to determine the connections between monetary policy, systemic risk, and financial firms. She said uncertainty remains over whether central bankers should attempt to lean against potentially dangerous swings in asset prices. "The answer is far from clear, because the use of monetary policy for these ends necessarily compromises the attainment of other macroeconomic goals."
Yet, there were reports at the same time that supposedly knowledgeable sources were saying the Fed will be increasing scrutiny of banks to ensure they can withstand reversal of soaring global asset prices.
Yves Smith in a naked capitalist blog, said in relation to the Fed's low interest policy:
"But the second reason for keeping rates low is explicitly to keep asset prices aloft. The bubble is an explicit goal of policy. Remember, early in the crisis, they was talk of the markets being irrationally depressed. Funny how it is only prices that are seen as inconveniently low, and not ones that are insanely high, that are criticized."
In the November FOMC minutes released this week, they said
"However, some participants noted that the recent rise in the prices of oil and other commodities, as well as increases in import prices stemming from the decline in the foreign exchange value of the dollar, could boost inflation pressures."
"Members noted the possibility that some negative side effects might result from the maintenance of very low
short-term interest rates for an extended period, including the possibility that such a policy stance could lead
to excessive risk-taking in financial markets or an unanchoring of inflation expectations."
Print Page
Tuesday, November 24, 2009
Saturday 11/21 Radio Show Leftover Information
As is well known, there is no way to cover all information and topics every week. These were leftover from last Saturday.
Treasury will auction the TARP warrants of J. P. Morgan, CapitalOne, and TCF Financial, because those banks do not want to buy their warrants back.
IMF officials made opposing public statements over whether the dollar should continue as a single world reserve currency or whether it is no longer reliable, implying the need for a basket of currencies as is already used to settle trade accounts between nations,
China said low United States interest rates threaten the world economy.
United Kingdom regulators will be allowed to tear up some bank bonus agreements --- they also are proposing to limit banker salaries and to make it easier for banks to be sued (until the late 19th Century, British bankers could be held personally liable for bank failures).
UK currency still bears "Bank of England: I promise to pay bearer on demand ___ pounds."
Lloyd's faces paying 54 million pounds tax bill on HBOS tax avoidance in which HBOS transferred swap transactions to Cayman Islands subsidiary.
Roubini, the NYU economist, said there are two economies --- a small recovery economy and a larger economy in a deep, persistent downturn; he expects lower revision of Q3 GDP from 3.5% as does Dallas FED President, Fisher.
60 day delinquent mortgage loans are up to 6.25% in Q3 2009 --- record high --- foreclosure action is at 1.42% --- there are 14.4% loans in foreclosure.
Fitch warned insurers face $23 billion loss on commercial property --- insurers hold $450 billion in commercial loans --- MetLife and Prudential have both indicated defaults will rise next year,
Japan Q3 GDP was up 1.23% but it is expected to slow to .3% in Q4 and to .1% in Q1 2010.
Some analysts are voicing a concern that a real estate bubble may be building in China (although Krugman says their population requires building --- no big deal) because their stimulus program appears to be encouraging investment in unused buildings, implying speculation.
Geithner is urging Congress to legislate financial system reforms but he only wants a single regulator --- the Fed. Democrat Representative DeFazio has called for the resignations of Geithner and Larry Summers.
UCBH, whose bank failure two weeks ago cost TARP $298.7 million, paid $7.5 million in dividends in May and did not make their August TARP payment.
The Dodd financial reform proposals, which are functionally dead in a a puddle of pretense, would actually politicize the Fed by substituting political appointees for the 3 business sector directors and 3 public interest with no bank ownership interests of each Fed district bank. 6 political appointees combined with 3 bank member directors is a major step to dis-functional abuse. On the other hand, it would have the boundaries of each Fed district redrawn. This is long overdue --- San Francisco is way too big, as one example.
Bernanke said, "The flow of credit remains constrained, economic activity weak, and unemployment much too high. Future setbacks are possible." He also said economic headwinds have reduced bank lending.
Bullard, St. Louis Fed President, said we need a falling unemployment rate before the Fed can take action to avoid spurring inflation.
Plosser, Philadelphia Fed President, denied asset bubble in Asia and sees no concern in the weak dollar, although commercial real estate remains a problem.
Lacker, Richmond Fed President, is hopeful there will be a reasonable rate of growth, but there will not be a rapid improvement in the labor market conditions. Patches of weakness will persist into recovery and that creates a threat that business and consumer sectors will develop a lack of confidence with respect to inflation and the necessity to continue policies to promote recovery.
Hoenig, Kansas City Fed President, said the economy faces significant weakness, financial institutions need to be allowed to fail, there were flaws in financial oversight, and credit agencies need reform.
Print Page
Treasury will auction the TARP warrants of J. P. Morgan, CapitalOne, and TCF Financial, because those banks do not want to buy their warrants back.
IMF officials made opposing public statements over whether the dollar should continue as a single world reserve currency or whether it is no longer reliable, implying the need for a basket of currencies as is already used to settle trade accounts between nations,
China said low United States interest rates threaten the world economy.
United Kingdom regulators will be allowed to tear up some bank bonus agreements --- they also are proposing to limit banker salaries and to make it easier for banks to be sued (until the late 19th Century, British bankers could be held personally liable for bank failures).
UK currency still bears "Bank of England: I promise to pay bearer on demand ___ pounds."
Lloyd's faces paying 54 million pounds tax bill on HBOS tax avoidance in which HBOS transferred swap transactions to Cayman Islands subsidiary.
Roubini, the NYU economist, said there are two economies --- a small recovery economy and a larger economy in a deep, persistent downturn; he expects lower revision of Q3 GDP from 3.5% as does Dallas FED President, Fisher.
60 day delinquent mortgage loans are up to 6.25% in Q3 2009 --- record high --- foreclosure action is at 1.42% --- there are 14.4% loans in foreclosure.
Fitch warned insurers face $23 billion loss on commercial property --- insurers hold $450 billion in commercial loans --- MetLife and Prudential have both indicated defaults will rise next year,
Japan Q3 GDP was up 1.23% but it is expected to slow to .3% in Q4 and to .1% in Q1 2010.
Some analysts are voicing a concern that a real estate bubble may be building in China (although Krugman says their population requires building --- no big deal) because their stimulus program appears to be encouraging investment in unused buildings, implying speculation.
Geithner is urging Congress to legislate financial system reforms but he only wants a single regulator --- the Fed. Democrat Representative DeFazio has called for the resignations of Geithner and Larry Summers.
UCBH, whose bank failure two weeks ago cost TARP $298.7 million, paid $7.5 million in dividends in May and did not make their August TARP payment.
The Dodd financial reform proposals, which are functionally dead in a a puddle of pretense, would actually politicize the Fed by substituting political appointees for the 3 business sector directors and 3 public interest with no bank ownership interests of each Fed district bank. 6 political appointees combined with 3 bank member directors is a major step to dis-functional abuse. On the other hand, it would have the boundaries of each Fed district redrawn. This is long overdue --- San Francisco is way too big, as one example.
Bernanke said, "The flow of credit remains constrained, economic activity weak, and unemployment much too high. Future setbacks are possible." He also said economic headwinds have reduced bank lending.
Bullard, St. Louis Fed President, said we need a falling unemployment rate before the Fed can take action to avoid spurring inflation.
Plosser, Philadelphia Fed President, denied asset bubble in Asia and sees no concern in the weak dollar, although commercial real estate remains a problem.
Lacker, Richmond Fed President, is hopeful there will be a reasonable rate of growth, but there will not be a rapid improvement in the labor market conditions. Patches of weakness will persist into recovery and that creates a threat that business and consumer sectors will develop a lack of confidence with respect to inflation and the necessity to continue policies to promote recovery.
Hoenig, Kansas City Fed President, said the economy faces significant weakness, financial institutions need to be allowed to fail, there were flaws in financial oversight, and credit agencies need reform.
Print Page
Subscribe to:
Posts (Atom)
Posts
