On the show, while discussing the new CPI inflation numbers, I mentioned an article by the economist Robert Murphy, who is of the Austrian School of economics and would be expected to be talking about deflation, in which he talked about the growing inflation rate going forward just as I have been. His paper actually predicted the November inflation announced in December as 1.7% and it was 1.84%. He indicated correctly that inflation will continue to rise, perhaps sharply, because the year to year is starting with the end of the 4th Quarter 2008 when prices had fallen significantly. He is projecting 2.7 for December inflation announced in January; I am saying it will be between 2.8 and 2.9% His paper can be found here.
I mentioned that Bloomberg.com and other US media have been ignoring or calling Volcker's European speaking tour in which he calling for financial reform now and the end of "too big to fail" as ineffective and meaningless. Simon Johnson of The Baseline Scenario and a former IMF economist thinks otherwise and has had two posts demonstrating the strength of Volcker's call for reform and the attention it has gotten. In "Paul Volcker Picks up a Bat" he lays out the strength of Volcker's strategy to influence financial reform and in "Wake Up Gentlemen" he lists Volcker's reform points and the public platform he is using more and more. We talked two weeks ago about his UK speech and here is his interview with Der Spiegel when he gave a Berlin speech. Larry Summers has gone to excessive lengths to limit and marginalize and muzzle Paul Volcker. Fortunately, when you limit the options of a man like Paul Volcker you get a man who has nothing to lose and acts.
The economist Nouriel Roubini has made a comparison of the current financial crisis and the the 1930's and found that the same optimism that pervades the media and market in 1937 before a double dip is very similar to what is happening now. I have made similar historical and data comparisons on more than one occasion. I have been talking about the weak US dollar and the carry trade it has spawned, which the Fed denies is happening, and Roubini has been talking about it also and sees at least six months more of carry trade. Two weeks ago we talked about gold and how a savings account over the last thirty years would have had more appreciation than Gold. It is a matter of when one bought gold and at what price. It is one thing to have bought it at $250 or $400 and another if you bought it at $800 or higher. Roubini has written about the flaws in gold investing and how gold may presently be in a bubble and posed to decline in "The Gold Bubble and the Gold Bugs".He ends by indicating that if investors really fear a global meltdown then they should be buying guns, ammunition, canned food, stocking water, and other commodities which can actually be used rather than buying gold.
There has also been two studies published on whether gold is a safe haven from equities or bonds in developed and developing nations and the results were quite mixed and disparate. What it comes down to is it is not just correlation but the price purchased and the holding period and the country.
Greece has had recent credit downgrades and the ECB has made it clear they will not bailout member states. The new Greek government has made cuts in its budget to address its mounting deficit and made a difficult bond placement this last week. There have been youth riots earlier this year which have abated but various demonstrations are continuing. Greece will have to make more cuts and it is difficult to determine how social unrest this will create. It is a country high on our two country watch lists in an older post.
The ECB has made it clear that banks in the 16 nation union, which have already written down 2/3rds of loan losses, may have to write down another 1/3rd in the amount of $267 billion for a total of $796 billion. The ECB also made several comments about the uneven recovery throughout the economy and from country to country.
Fitch said the US high yield corporate bond default is declining and expects 2010 to decline to 6-7% (average is 4.7%) default.
Empire State Manufacturing index fell 21 points to 2.6; new orders fell 14 points to 2.2; shipments fell 7 points to 6.3; unfilled orders fell 18 points to 21.1, lowest in 9 months; prices paid up 9 points to 19.7 while prices received fell 6.6 to 9.2; employment fell 7 points to 5.3; average work week fell 11 points to 5.3.
Philly Fed manufacturing index up to 20.4 from 16.7; prices paid up 19 points to 33.8 while prices received down .3 to1.8; new orders down 8 to 6.5; employment up 7 to 6.3; inventory up 10 to7.4.
ECB made its final tender of 12 months funds to banks($141 billion).
Canadian inflation rate 1% (1/10th % last month).
British retail sales for November down .3 from October but up 3.1% vs year ago; UK prices up 1.9% in November.
US current foreign trade account deficit up 10.3% to $108 billion in Q3 vs Q2.
China industrial production up 19.2% in November; retail sales up 15.8%; consumer prices up but down .9% vs year ago; producer prices down 2.1% vs year ago.
UK banks are voting on whether to abolish checks and require all transactions be by plastic or on-line.
The 3rd largest container shipping company, CMA CGM SA, warned bondholders that bankruptcy is an option if they do not approve plan to allow new lenders first claim on assets --- they want to raise money but need the $570 million current bond holders to modify the bond terms.
Bank of Japan held its interest rate at 1/10th percent.
Mexico S&P rating cut to BBB.
Gross of Pimco has increased the funds cash holdings to the highest level since the Lehman collapse from <7%> to 7% and reduced government securities from 63% to 51%.
Greenspan (Mr. Asset Bubble) said this last week that the stock market rally has negated any need for another "stimulus". As I have asked previously, how has the weak US dollar carry trade not created a US stock market asset bubble?
TCF Financial TARP warrant auction went at $3/share (expected $1.82-4.89) and netted $9.45 million for the US Treasury.
CapOne credit card charge offs rose to 9.6 from 9.11; Discover rose to 8.98 from 8.54.
Home buyers are less likely to buy foreclosed properties than 6 months ago citing hidden costs according to a Harris Interactive survey.
Moody's issued an analysis in which they indicated they expect long-term rates may increase more rapidly than expected; that Aaa rated governments will probably not have the luxury of waiting for recovery before implementing fiscal consolidation plans; and Brazil, India, Russia, and China are unlikely to replace large Aaa rated countries as anchors to the global financial system anytime soon.
The US House of Representatives passed a plug the hole "stimulus" to basically throw life preservers to the states in the amount of $155 billion with 48.3 for infrastructure projects that put people to work by April 2010, 27.5 highway, 8.46 transit systems, 23 to pay teachers and repair schools, 1.2 to pay 5500 police, and 23 for the state's share of health care for the poor. The bill also would extend Cobra 3 months to 15 and extend expiring year end unemployment benefits 6 months.
Print Page
Sunday, December 20, 2009
Friday, December 18, 2009
IRS Comps Citi
In an IRS ruling this week, prior to the Citi Stock offering, Citi will be allowed to keep approximately $38 billion dollars in deferred losses when the government sells its shares. In direct contradiction to a law passed earlier this year which reversed a ruling benefiting Wells Fargo and specifically restricted the ability of the IRS to make further changes in the Internal Revenue Code by ruling, the IRS ruling allows Citi to be exempt from the law which prohibits the use of past losses if a company changes hands in order to discourage profitable companies from buying unprofitable companies to avoid taxes. This is lost money to the government when lower revenue is 56% of the current deficit.
The Citi stock offering subsequently failed miserably pricing in at $3.15 a share only after the underwriter stepped in and bought stock to keep the price from going below $3. Consequently, the government did not sell part of their 34% holdings as planned, because their basis is $3.25. Treasury will not sell any Citi stock now for at least 90 days. The Bank of America stock offering was marginal, particularly given their determination to make no break from the way they have done business as evidenced by their refusal to consider a CEO successor from outside who would have made necessary changes. Still, Citi's stock offering failure only reaffirms the true Zombie nature of their company.
Of course, Congress will investigate the IRS ruling, but the subcommittee is chaired by Rep. Kucinich who asks the hard questions but has no real respect from his lobbyist indebted fellow members of Congress.
Print Page
The Citi stock offering subsequently failed miserably pricing in at $3.15 a share only after the underwriter stepped in and bought stock to keep the price from going below $3. Consequently, the government did not sell part of their 34% holdings as planned, because their basis is $3.25. Treasury will not sell any Citi stock now for at least 90 days. The Bank of America stock offering was marginal, particularly given their determination to make no break from the way they have done business as evidenced by their refusal to consider a CEO successor from outside who would have made necessary changes. Still, Citi's stock offering failure only reaffirms the true Zombie nature of their company.
Of course, Congress will investigate the IRS ruling, but the subcommittee is chaired by Rep. Kucinich who asks the hard questions but has no real respect from his lobbyist indebted fellow members of Congress.
Print Page
Thursday, December 17, 2009
Obama & Wall Street Controversy
In an earlier post I touched on Matt Taibbi's Obama & Wall Street article in which he attempts to show Obama is controlled by Wall Street. His basic argument is that Obama relied upon people he knew and those people had their own agenda based on their work associations or, perhaps, as a result of their cultural biases. Just because you know a member of the elitist class does not mean you can trust their judgment. Yet, we are constantly being told if you have not been part of the problem you are not qualified to solve the problem. Imagine what The President's advisers must tell him.
Consequently, I think it is important that you view the links in this post to get a perspective on how facts spin.
Here is an overview of the controversy from Harper's. Here is the reaction to Taibbi's article by Tim Fernholz. Here is Salmon's criticism of Fernholz. Of course, Fernholz continued to react in clarification.
Personally, I think Obama has been played and used and it is now a matter of does he know it and what is he going to do about it. Brad Delong provides a good nutshell analysis.
Any book, any article in a magazine or news paper, any article on the internet has to be approached with a critical analysis. The failure to assess information methodologically is the road to poor judgment and false beliefs.
Print Page
Consequently, I think it is important that you view the links in this post to get a perspective on how facts spin.
Here is an overview of the controversy from Harper's. Here is the reaction to Taibbi's article by Tim Fernholz. Here is Salmon's criticism of Fernholz. Of course, Fernholz continued to react in clarification.
Personally, I think Obama has been played and used and it is now a matter of does he know it and what is he going to do about it. Brad Delong provides a good nutshell analysis.
Any book, any article in a magazine or news paper, any article on the internet has to be approached with a critical analysis. The failure to assess information methodologically is the road to poor judgment and false beliefs.
Print Page
Wednesday, December 16, 2009
Laws: Banks Don't Need Laws
It just keeps getting worse.
The Basel Committee has new international bank accounting rules scheduled for 2012, but this week they announced they are considering allowing banks a transition period of ten to twenty years to implement, The rules would require an 8% minimum capital ratio and stricter definition of core capital. Remember Lehman had a Tier 1 ratio of 11% when it failed.
The FDIC is going to create a permanent safe harbor for securitizations and participations existing prior to March 31, 2010 and will consider how to treat new ones created after March 31, 2010. This effectively removes the banks from putting over $1 trillion of off balance sheet holdings and securitizations at market value rather than par on their balance sheets. This defeats the FASB rules scheduled to take effect 2010.
The President of the United States summoned bankers to a meeting and Goldman Sachs, J. P Morgan, and Citigroup had more important things to do than meet with the President of the United States and discuss what lending is necessary to create a sustained recovery with jobs. They have key people in the Treasury and economic policy positions (Geithner and Larry Summers to name just two) in the government and they do not have to listen to the President.
The bankers have given lip service to financial reform, but their lobbyists have defeated and built a false facade in the House bill. In fact the banks publicly view any attempt at regulation to be a direct threat to liquidity and the stability of interest rates, which is an argument which depends upon the poor education of the public as their real purpose is to protect high risk (and very profitable) trading and investments while they hoard money for cash reserves to bolster their capital ratios, escape TARP, and resume business as usual with renewed grotesque bonuses. A good description of the bank's political agenda and lobbyist strategy is in a post by Yves Smith on naked capitalist.
How have banks survived the crisis? We have all been exposed to the Financial Crisis and the necessity to rescue the banks at the expense of common citizen's retirement, savings, homes, and jobs and the victory of recovery and jobless prosperity. However, the United Nations Office on Drugs and Crime has evidence that the only liquid investment capital banks on the brink of collapse last year had was proceeds from organized crime. Gang money was used to save some banks when lending seized up. Drug money funded inter-bank loans. While these may have been marginal to Central Bank actions, marginal makes a big difference in the banking industry. Are we to be surprised by the connections between organized crime and drug cartels with banks given the amount of money involved? The complete Guardian article is here.
Print Page
The Basel Committee has new international bank accounting rules scheduled for 2012, but this week they announced they are considering allowing banks a transition period of ten to twenty years to implement, The rules would require an 8% minimum capital ratio and stricter definition of core capital. Remember Lehman had a Tier 1 ratio of 11% when it failed.
The FDIC is going to create a permanent safe harbor for securitizations and participations existing prior to March 31, 2010 and will consider how to treat new ones created after March 31, 2010. This effectively removes the banks from putting over $1 trillion of off balance sheet holdings and securitizations at market value rather than par on their balance sheets. This defeats the FASB rules scheduled to take effect 2010.
The President of the United States summoned bankers to a meeting and Goldman Sachs, J. P Morgan, and Citigroup had more important things to do than meet with the President of the United States and discuss what lending is necessary to create a sustained recovery with jobs. They have key people in the Treasury and economic policy positions (Geithner and Larry Summers to name just two) in the government and they do not have to listen to the President.
The bankers have given lip service to financial reform, but their lobbyists have defeated and built a false facade in the House bill. In fact the banks publicly view any attempt at regulation to be a direct threat to liquidity and the stability of interest rates, which is an argument which depends upon the poor education of the public as their real purpose is to protect high risk (and very profitable) trading and investments while they hoard money for cash reserves to bolster their capital ratios, escape TARP, and resume business as usual with renewed grotesque bonuses. A good description of the bank's political agenda and lobbyist strategy is in a post by Yves Smith on naked capitalist.
How have banks survived the crisis? We have all been exposed to the Financial Crisis and the necessity to rescue the banks at the expense of common citizen's retirement, savings, homes, and jobs and the victory of recovery and jobless prosperity. However, the United Nations Office on Drugs and Crime has evidence that the only liquid investment capital banks on the brink of collapse last year had was proceeds from organized crime. Gang money was used to save some banks when lending seized up. Drug money funded inter-bank loans. While these may have been marginal to Central Bank actions, marginal makes a big difference in the banking industry. Are we to be surprised by the connections between organized crime and drug cartels with banks given the amount of money involved? The complete Guardian article is here.
Print Page
Tuesday, December 15, 2009
Countries to Watch
In talking about Dubai on the last radio show, I briefly mentioned a few other countries. I also questioned whether the strong US dollar last week was, rather than a possible bottoming as other analyst have speculated, was the result of seeking a safe haven from sovereign default. This week with the welcome but inadequate $10 billion from Abu Dhabi to Dubai, the market "sighed relief " and the US dollar reverted to being weaker. Was I right?
Moody's Misery Index listed countries with public debt in relation to sovereign default risk in descending order or risk: Spain, Latvia, Lithuania, Ireland, Greece, United Kingdom, Iceland, United States, Jamaica, France, Estonia, Portugal, Hungary, Germany, Italy, and the Czech Republic. Take note of number 6 and number 8 on the list.
The 6th largest Austrian Bank, Hypo Group Alpe Adria, was was nationalized by the Austrian government as insolvent with 40 billion Euros in assets at the insistence of the ECB's chairman Trichet. The bank is a subsidiary of the German bank, Bavaria BayernLB, which had reported losses of over 1 billion Euros for the second quarter in a row from HGAA. Austrian banks have been the subject of how much exposure they have to lending in weak Eastern European countries and some analysts consider German banks fragile as the result of reckless lending seeking high returns. Credit Writedowns has an excellent article on the nationalization of HGPP and its relation to what is going on in Austria, Germany, Eastern Europe, and Dubai. Sweden and Poland also have large exposure to Eastern Europe.
CMA DataVision has issued a Q4 report on the Global of countries by percentage of risk for sovereign default based on CDS prices. It is a multi-page report but here is page 13 with a listing of countries by percentage probability of default. The top ten are Venezuela, Ukraine, Argentina, Latvia, Iceland, Dubai, Lithuania, Romania, Lebanon, and Greece. It should be noted that Greece has started to take serious action to curtail spending and has about a year to get its debt and budget under control. It will be interesting to see if the public demonstrations by young people in Greece will moderate or increase. Spain has serious economic contraction and, while the economy appears to be picking up in Italy, there have been reports of right wing reactions, particularly against immigrants.
Print Page
Moody's Misery Index listed countries with public debt in relation to sovereign default risk in descending order or risk: Spain, Latvia, Lithuania, Ireland, Greece, United Kingdom, Iceland, United States, Jamaica, France, Estonia, Portugal, Hungary, Germany, Italy, and the Czech Republic. Take note of number 6 and number 8 on the list.
The 6th largest Austrian Bank, Hypo Group Alpe Adria, was was nationalized by the Austrian government as insolvent with 40 billion Euros in assets at the insistence of the ECB's chairman Trichet. The bank is a subsidiary of the German bank, Bavaria BayernLB, which had reported losses of over 1 billion Euros for the second quarter in a row from HGAA. Austrian banks have been the subject of how much exposure they have to lending in weak Eastern European countries and some analysts consider German banks fragile as the result of reckless lending seeking high returns. Credit Writedowns has an excellent article on the nationalization of HGPP and its relation to what is going on in Austria, Germany, Eastern Europe, and Dubai. Sweden and Poland also have large exposure to Eastern Europe.
CMA DataVision has issued a Q4 report on the Global of countries by percentage of risk for sovereign default based on CDS prices. It is a multi-page report but here is page 13 with a listing of countries by percentage probability of default. The top ten are Venezuela, Ukraine, Argentina, Latvia, Iceland, Dubai, Lithuania, Romania, Lebanon, and Greece. It should be noted that Greece has started to take serious action to curtail spending and has about a year to get its debt and budget under control. It will be interesting to see if the public demonstrations by young people in Greece will moderate or increase. Spain has serious economic contraction and, while the economy appears to be picking up in Italy, there have been reports of right wing reactions, particularly against immigrants.
Print Page
Sunday, December 13, 2009
Illinois Credit Rating Tanks
We are repeating the lead story on our last Radio Show, because the fact that the State of Illinois had its credit rating effectively lowered by Moody's to just above California's Baa1 making Illinois 49th out of the 50 states has, to my knowledge, received no media attention in paper, radio, or television. Why?
General obligation bonds went from A1 to A2 citing problems from the US recession; other Illinois bonds including sales tax revenue bonds from A1 to A2. Illinois has dropped from the middle of the pack of 50 States to next to last in one fell swoop. Moody's said Illinois has not taken action of any sort to deal with the budget gap it is facing. Moody's said that gap is in the order of $11 billion. Actually, it is conservatively a deficit of $12 billion and could be closer to $15 billion depending on how you account for Federal stimulus money, funds from borrowing, and other one time monies which are not revenue.
It is well known we have made the case for State employee's Pension reform. It is not funded and there is no economically competent system for funding Illinois pensions. Despite a recession in which taxes should not be increased according to economic theory, Illinois has been so corruptly and incompetently run for so many years that a flat income tax increase is so imperative it has become a rotting corpse. Illinois local governments have placed an intolerable burden of regressive taxes and levies (in Chicago 25%, approximately, of the cost of gasoline at the pump goes to taxes and Chicago has the highest sales tax in the country) that the burden on the lowest 40% of taxpayers in Illinois is unconscionable. But no politician wants to help those people. While cost savings should always be investigated and pursued each and every year just as private business does, cutting expenses cannot in any rational, conceivable way balance the Illinois budget. The Democrats need to conduct rational program and employee reviews of double exempt and exempt personnel and the Republicans need to bite the tax bullet. Given the coming Primary in February, neither political party wants to assume any responsibility for getting the job done. They just want to be elected. Maybe it is time to just vote against any incumbent and make the lobbyist fork out even more money to buy the new legislators and executive branch officers.
The Illinois budget situation is so beyond hope that the solutions are few and narrow. The pretense and posturing of political purity is a poor disguise for a deadly social disease. Represent the people and get it done. It does not take a rocket scientist to figure out the obvious much less require the unanimity of any 13 politicians with a bag of 30 silver coins. No Hope.
Print Page
General obligation bonds went from A1 to A2 citing problems from the US recession; other Illinois bonds including sales tax revenue bonds from A1 to A2. Illinois has dropped from the middle of the pack of 50 States to next to last in one fell swoop. Moody's said Illinois has not taken action of any sort to deal with the budget gap it is facing. Moody's said that gap is in the order of $11 billion. Actually, it is conservatively a deficit of $12 billion and could be closer to $15 billion depending on how you account for Federal stimulus money, funds from borrowing, and other one time monies which are not revenue.
It is well known we have made the case for State employee's Pension reform. It is not funded and there is no economically competent system for funding Illinois pensions. Despite a recession in which taxes should not be increased according to economic theory, Illinois has been so corruptly and incompetently run for so many years that a flat income tax increase is so imperative it has become a rotting corpse. Illinois local governments have placed an intolerable burden of regressive taxes and levies (in Chicago 25%, approximately, of the cost of gasoline at the pump goes to taxes and Chicago has the highest sales tax in the country) that the burden on the lowest 40% of taxpayers in Illinois is unconscionable. But no politician wants to help those people. While cost savings should always be investigated and pursued each and every year just as private business does, cutting expenses cannot in any rational, conceivable way balance the Illinois budget. The Democrats need to conduct rational program and employee reviews of double exempt and exempt personnel and the Republicans need to bite the tax bullet. Given the coming Primary in February, neither political party wants to assume any responsibility for getting the job done. They just want to be elected. Maybe it is time to just vote against any incumbent and make the lobbyist fork out even more money to buy the new legislators and executive branch officers.
The Illinois budget situation is so beyond hope that the solutions are few and narrow. The pretense and posturing of political purity is a poor disguise for a deadly social disease. Represent the people and get it done. It does not take a rocket scientist to figure out the obvious much less require the unanimity of any 13 politicians with a bag of 30 silver coins. No Hope.
Print Page
Leftovers from 12/12/2009 Radio Show
Japan Q3 GDP up 1.3% (revised from earlier estimate of 4.8%).
Germany trade surplus up 2.5% as imposts fell 2.4%.
French industrial output fell .8% October; up .5% in Italy from 5.1% in September.
Hong Kong Finance chief publicly worried about risks of asset bubble and continuing capital inflows.
US consumer credit declined for the ninth straight month (12 out of last 13); Oct down 1.7%; Q3 down 3.3%; Q3 revolving credit down 7.4%; Sept revised down to 4.2%; Oct is down 3.6% vs year ago -- prior low record was down 1.9% in 1991.
Wholesale inventory up .3% Oct; Sept revised down to .8% from .6%>; wholesale sales up 1.2% Oct but inventory ratio still fell to 1.16 months from 1.17.
US trade deficit down to $32.9 billion Oct ($35.7 billion Sept); imports and exports were both up; oil imports dropped sharply.
Weekly jobless claims up 17,000 to 474,000; 4 week average down 7750 to 475,500; continuing claims down 303,000 to 5,170,000 (to extended benefits?).
Treasury yield curve (between 2 year and 30 year) 368 basis points -- widest in 17 years.
US retail sales up 1.3% in Nov adjusted -- 1.9% vs year ago; total sales Sept-Nov down 2.1% vs year ago -- bottomed?? --- anecdotal: retailer said 1st two days of Holiday shopping busy but now traffic is like middle of August. Discover card survey indicated Christmas spending will be down 15%.
ECB urged IMF to pursue global tax on financial transactions to limit economic risk.
US business inventory up .2% Oct (first up since Aug '08) -- ex-auto down .2%; inventory ratio 1.3 months down from 1.31.
UK and France both considering taxing bank bonuses and have floated several % and trigger amounts -- looks like 50% over approximately $40,000.
Bair said FDIC reviews found 83% of failed banks had inadequate board supervision of risk -- in general too many banks have insider dealings with board members.
Pay Czar would limit TARP banks high paid employees (ranking 26th to 100th) to $500,000; 5 AIG executives led by AIG's General Counsel (violation of fiduciary duty?) who arranged private attorney for group as they threatened to leave if pay limited putting pressure back on pay czar in another extortion against the government.
$40 billion 3 year Treasury auction yield 1.223%, bid-to-cover 2.98; foreign interest 60.9%. Good.
$21 billion 10 year Treasury auction yield 3.448%, bid-to-cover 2.62 (average has been 2.92), foreign interest 34.9%. Woops!
$13 Billion 30 year Treasury auction yield 4.520%, bid-to-cover 2.45, foreign interest 40.3%. Not so good.
Goldman Sachs played the media on bank bonuses by announcing they were limiting bonuses to restricted stock with one of the restrictions being that the stock cannot be sold for 5 years (good) but limited to only their 30 member management committee; what about the traders?
Early in the week Geithner talked about winding TARP down but ended this week extending TARP to Oct 2010 and indicated unspent money may be given to banks to "help" homeowners and small business lending.
Treasury expects to recover all but $42 billion of $370 billion lent under TARP --- has spent $450 billion under TARP ($290 billion to banks) -- estimated $311 billion cost may be only $141 billion.
Bank of America completed its $45 billion TARP payment in an attempt to evade the pay czar. The question now is do they have enough cash reserves and the government has asked them what business units it plans to sell next year to raise money.
Citi is negotiating a possible TARP payment; started at $45 billion with $20 billion stock offering but the stock holders are upset at the dilution and the government is not in agreement in how much they need to raise -- the amounts to pay and raise by stock offering appear to be decreasing for this truly Zombie bank.
Geithner does not like the concept of a transaction tax to limit economically risky behavior; he thinks it may force companies to leave the US or find a way "around" (evade) tax. He also does not like a job tax credit believing it will not influence hiring. As Yves Smith of naked capitalist would say: Quelle Surprise!
Print Page
Germany trade surplus up 2.5% as imposts fell 2.4%.
French industrial output fell .8% October; up .5% in Italy from 5.1% in September.
Hong Kong Finance chief publicly worried about risks of asset bubble and continuing capital inflows.
US consumer credit declined for the ninth straight month (12 out of last 13); Oct down 1.7%; Q3 down 3.3%; Q3 revolving credit down 7.4%; Sept revised down to 4.2%; Oct is down 3.6% vs year ago -- prior low record was down 1.9% in 1991.
Wholesale inventory up .3% Oct; Sept revised down to .8% from .6%>; wholesale sales up 1.2% Oct but inventory ratio still fell to 1.16 months from 1.17.
US trade deficit down to $32.9 billion Oct ($35.7 billion Sept); imports and exports were both up; oil imports dropped sharply.
Weekly jobless claims up 17,000 to 474,000; 4 week average down 7750 to 475,500; continuing claims down 303,000 to 5,170,000 (to extended benefits?).
Treasury yield curve (between 2 year and 30 year) 368 basis points -- widest in 17 years.
US retail sales up 1.3% in Nov adjusted -- 1.9% vs year ago; total sales Sept-Nov down 2.1% vs year ago -- bottomed?? --- anecdotal: retailer said 1st two days of Holiday shopping busy but now traffic is like middle of August. Discover card survey indicated Christmas spending will be down 15%.
ECB urged IMF to pursue global tax on financial transactions to limit economic risk.
US business inventory up .2% Oct (first up since Aug '08) -- ex-auto down .2%; inventory ratio 1.3 months down from 1.31.
UK and France both considering taxing bank bonuses and have floated several % and trigger amounts -- looks like 50% over approximately $40,000.
Bair said FDIC reviews found 83% of failed banks had inadequate board supervision of risk -- in general too many banks have insider dealings with board members.
Pay Czar would limit TARP banks high paid employees (ranking 26th to 100th) to $500,000; 5 AIG executives led by AIG's General Counsel (violation of fiduciary duty?) who arranged private attorney for group as they threatened to leave if pay limited putting pressure back on pay czar in another extortion against the government.
$40 billion 3 year Treasury auction yield 1.223%, bid-to-cover 2.98; foreign interest 60.9%. Good.
$21 billion 10 year Treasury auction yield 3.448%, bid-to-cover 2.62 (average has been 2.92), foreign interest 34.9%. Woops!
$13 Billion 30 year Treasury auction yield 4.520%, bid-to-cover 2.45, foreign interest 40.3%. Not so good.
Goldman Sachs played the media on bank bonuses by announcing they were limiting bonuses to restricted stock with one of the restrictions being that the stock cannot be sold for 5 years (good) but limited to only their 30 member management committee; what about the traders?
Early in the week Geithner talked about winding TARP down but ended this week extending TARP to Oct 2010 and indicated unspent money may be given to banks to "help" homeowners and small business lending.
Treasury expects to recover all but $42 billion of $370 billion lent under TARP --- has spent $450 billion under TARP ($290 billion to banks) -- estimated $311 billion cost may be only $141 billion.
Bank of America completed its $45 billion TARP payment in an attempt to evade the pay czar. The question now is do they have enough cash reserves and the government has asked them what business units it plans to sell next year to raise money.
Citi is negotiating a possible TARP payment; started at $45 billion with $20 billion stock offering but the stock holders are upset at the dilution and the government is not in agreement in how much they need to raise -- the amounts to pay and raise by stock offering appear to be decreasing for this truly Zombie bank.
Geithner does not like the concept of a transaction tax to limit economically risky behavior; he thinks it may force companies to leave the US or find a way "around" (evade) tax. He also does not like a job tax credit believing it will not influence hiring. As Yves Smith of naked capitalist would say: Quelle Surprise!
Print Page
Friday, December 11, 2009
Geithner and Summers: Doing God's Work
It has been perfectly clear from the beginning of the Obama administration that if you have not been part of the problem, you are not qualified to understand the problem. Geithner and Larry Summers both played significant roles in the creation and the precipitation of the current Financial Crisis and have continued their roles in effecting a "recovery" which benefits the financial sector at the expense 22% of the workforce who do not have jobs, at the expense of families who are losing their homes, and at the expense of the children of this country of whom a minimum of 25% nationwide (in some areas it is 90%) are currently on food stamps. Meanwhile, the bankers get their salaries and their bonuses: can you imagine the horror of only getting $500,000 (26th to 100th highest paid in TARP banks) per year or being limited to only $7,000,000 salary and only $3,000, 000 in stock options (AIG CEO, who threatened to quit in disgust at the indignity). The bankers have resumed the high risk trading which caused this crisis: they have avoided regulation with their cries of liquidity, liquidity! and raised the Ultimate Extortionist threat in the Zombie bank and the Systemically Dangerous financial institution with government guarantees: The Moral Hazard gold plated. Even after TARP banks pay back the TARP money, they still continue to enjoy government guarantees that keep their credit rating higher than if those government guarantees were not in place.
The bankers get to keep the profits and the public gets the losses. This "jobless recovery" has been all about saving the financial sector and continuing business as usual. Geithner and Larry Summers were installed by the banks with the assistance of a Citigroup executive who went to college with Obama relegating all those economists you worked the campaign with Obama in secondary roles and Volcker isolated and neutered.
Not only was the AIG bailout illegal as we have discussed in an earlier post, but Geithner as New York Fed president actually had a direct role in designing the AIG bailout. Matt Taibbi has worked hard to document the Citi connection, although there are those who would say Goldman Sachs benefited the most. The recent AIG move to spin off two insurance subsidiaries and have their Treasury debt reduced has raised the question of how legal is it for the government to give up collateral from a company in which it has 79.9% ownership for preferred stock in the two subsidiaries and reduction of AIG debt to the government in the amount of $25 million while AIG retains the common stock of the two subsidiaries. There is obviously no economic benefit to the government. To these questions, Representative Grayson has sent a letter the Federal Reserve (he should have also sent it to the Treasury) asking how can these actions be justified or reasonable. It is nothing short of an accounting boondoggle for AIG at the expense of the American people, including those who are jobless, hungry, and becoming homeless.
In yet another article on Geithner as a regulatory failure and a protector of our financial system as it existed prior to the Financial Crisis and the restoration of the status quo, William K. Black, who has actual successful regulatory experience from the savings-and-loan crisis (interestingly, the same parts of the country were effected by that housing crisis as in the current crisis) says and shows how Geithner did not protect the public, is not competent, and may not have been honest in his actions.
For eight reasons why Larry Summers should be sacked as the manipulative director of this rescue of the financial system status quo, an article by Joseph Mazza details the history of Summers in creating this Crisis from the 1990's to the present. The Australian economist Bill Mitchell has also called for the sacking of Obama's economic advisors, particularly Summers, and for whoever is responsible for writing Obama's economic speeches citing the December 3rd speech on joblessness in which the President implied the United States is running out of money. He finds it unconscionable that whoever is doing the writing does not understand basic economics.
Mr. Bernanke has also been a diversion from the action "heroes" of Geithner and Summers. There is a strong move to not reappoint him, when the nation would be a lot healthier and more ethical if Geithner and Summers were the ones tarred and feathered. Still, Mr. Bernanke has questions the people should have answered and here are ten reasons to fire Bernanke. As I have said previously, I do not want Bernanke fired until we know who the replacement might be. It is very unlikely that a regulatory economist is ever going to get the job, because it would not be good for Goldman Sachs and what is good for Goldman Sachs is good for America, because banks, according to the CEO of Goldman Sachs, do God's work.
Print Page
The bankers get to keep the profits and the public gets the losses. This "jobless recovery" has been all about saving the financial sector and continuing business as usual. Geithner and Larry Summers were installed by the banks with the assistance of a Citigroup executive who went to college with Obama relegating all those economists you worked the campaign with Obama in secondary roles and Volcker isolated and neutered.
Not only was the AIG bailout illegal as we have discussed in an earlier post, but Geithner as New York Fed president actually had a direct role in designing the AIG bailout. Matt Taibbi has worked hard to document the Citi connection, although there are those who would say Goldman Sachs benefited the most. The recent AIG move to spin off two insurance subsidiaries and have their Treasury debt reduced has raised the question of how legal is it for the government to give up collateral from a company in which it has 79.9% ownership for preferred stock in the two subsidiaries and reduction of AIG debt to the government in the amount of $25 million while AIG retains the common stock of the two subsidiaries. There is obviously no economic benefit to the government. To these questions, Representative Grayson has sent a letter the Federal Reserve (he should have also sent it to the Treasury) asking how can these actions be justified or reasonable. It is nothing short of an accounting boondoggle for AIG at the expense of the American people, including those who are jobless, hungry, and becoming homeless.
In yet another article on Geithner as a regulatory failure and a protector of our financial system as it existed prior to the Financial Crisis and the restoration of the status quo, William K. Black, who has actual successful regulatory experience from the savings-and-loan crisis (interestingly, the same parts of the country were effected by that housing crisis as in the current crisis) says and shows how Geithner did not protect the public, is not competent, and may not have been honest in his actions.
For eight reasons why Larry Summers should be sacked as the manipulative director of this rescue of the financial system status quo, an article by Joseph Mazza details the history of Summers in creating this Crisis from the 1990's to the present. The Australian economist Bill Mitchell has also called for the sacking of Obama's economic advisors, particularly Summers, and for whoever is responsible for writing Obama's economic speeches citing the December 3rd speech on joblessness in which the President implied the United States is running out of money. He finds it unconscionable that whoever is doing the writing does not understand basic economics.
Mr. Bernanke has also been a diversion from the action "heroes" of Geithner and Summers. There is a strong move to not reappoint him, when the nation would be a lot healthier and more ethical if Geithner and Summers were the ones tarred and feathered. Still, Mr. Bernanke has questions the people should have answered and here are ten reasons to fire Bernanke. As I have said previously, I do not want Bernanke fired until we know who the replacement might be. It is very unlikely that a regulatory economist is ever going to get the job, because it would not be good for Goldman Sachs and what is good for Goldman Sachs is good for America, because banks, according to the CEO of Goldman Sachs, do God's work.
Print Page
Banker's Coup over Reform
Financial Reform has failed.
What the House passed today is a banker's lobbyist triumph. The loopholes are so numerous and big enough to drive all of GM's products through at one time. While the bill puts a false facade of reform, the loopholes have so benefited the banks that they should assume those government posts which they do not already defacto control. The new stories are already glossy over the loopholes to obscure them from public view. However, Washington's Blog succinct dissected the so called reforms and even included a link to the House Amendment which was acted on today.
Economics professor L. Randall Wray further delineates the "wimpy" reforms which fail to protect society from those whose greed would destroy for profit and proposes that any regulated and protected financial institution should be prohibited from trading derivatives and a need to concentrate on the systemically dangerous.
This coup by the financial services lobbyist has been brewing as we have reported on the radio show since last Summer as this blog entry from Satyjit Das from July shows. He demolishes the proposed derivatives protections.
State authority over banks is diminished. Investment advisors associated with a broker-dealer have been saved from regulatory oversight and inspection of their business practices, while we lowly conflict-free registered investment advisors must submit to the regulatory oversight any investment advisor should be required to accept. Professional fiduciary duty is a "dream" while the wolves net of suitability swims and the heads bow towards the inevitability of "unavoidable" conflict of interest fiduciary "responsibility" of sales people.
Of the many Democrats and Republicans who carried the financial interest banners high from the mast of their check books, one of the more prominent is Melissa Bean of Illinois.
Yves Smith of naked capitalist has a good post on Coup by Bankers that covers the many proposed amendments diluting reform and in a later post urged individuals to call their representatives no matter how much politics sucks.
I do not enjoy negative comments, but the truth is the driver. When you read the links above and then read the news stories tonight and tomorrow, be prepared to puck.
Print Page
What the House passed today is a banker's lobbyist triumph. The loopholes are so numerous and big enough to drive all of GM's products through at one time. While the bill puts a false facade of reform, the loopholes have so benefited the banks that they should assume those government posts which they do not already defacto control. The new stories are already glossy over the loopholes to obscure them from public view. However, Washington's Blog succinct dissected the so called reforms and even included a link to the House Amendment which was acted on today.
Economics professor L. Randall Wray further delineates the "wimpy" reforms which fail to protect society from those whose greed would destroy for profit and proposes that any regulated and protected financial institution should be prohibited from trading derivatives and a need to concentrate on the systemically dangerous.
This coup by the financial services lobbyist has been brewing as we have reported on the radio show since last Summer as this blog entry from Satyjit Das from July shows. He demolishes the proposed derivatives protections.
State authority over banks is diminished. Investment advisors associated with a broker-dealer have been saved from regulatory oversight and inspection of their business practices, while we lowly conflict-free registered investment advisors must submit to the regulatory oversight any investment advisor should be required to accept. Professional fiduciary duty is a "dream" while the wolves net of suitability swims and the heads bow towards the inevitability of "unavoidable" conflict of interest fiduciary "responsibility" of sales people.
Of the many Democrats and Republicans who carried the financial interest banners high from the mast of their check books, one of the more prominent is Melissa Bean of Illinois.
Yves Smith of naked capitalist has a good post on Coup by Bankers that covers the many proposed amendments diluting reform and in a later post urged individuals to call their representatives no matter how much politics sucks.
I do not enjoy negative comments, but the truth is the driver. When you read the links above and then read the news stories tonight and tomorrow, be prepared to puck.
Print Page
Wednesday, December 9, 2009
China's Spending Bubble
In an earlier post on double dip probability, I discussed leverage and how Japan, the US, and now China appear to be moving in the same direction. It is an area of growing discussion as the links in my prior post indicate. Another research report has been published, "China's Investment Boom: the Great Leap into the Unknown", by Pivot Capital Management. The naked capitalist blog has done an excellent synopsis of the study.
The Pivot research study is not as comprehensive as some of the other papers I have previously referenced, but it is succinct. Here are a few excerpts:
"In our view investors have underestimated both the maturity of the Chinese growth cycle as well as the degree to which recent growth is a direct extension of the global credit bubble. This bubble had two major manifestations. The first, which started unraveling globally in early 2007, was evident in excesses in real estate, consumption and private equity. The second manifestation, which has yet to fully deflate, was a boom in capital expenditure, led primarily by China."
"However, the decreasing efficiency of investments will ultimately lead to a pullback in capital expenditures. In a soft landing scenario, China is likely to shift to a lower growth trajectory for the next decade. In a hard landing scenario, which is entirely feasible, there would be an abrupt decline in capital spending exacerbated by a banking crisis."
"If loans continue to grow at the current 35% rate, credit to GDP ratio will be close to 200% in China already in 2010, even with GDP expanding at 10%. This is a level similar to the pre-crisis Japan in 1991 and USA in 2008. All this points to that credit in China is not going to be able to grow for much longer without risking a
major crisis."
"In the period from 2000 to 2008, it took on average $1.5 of credit to generate $1 of GDP growth in China. This compares very favorably with the peak $4 of credit for $1 of GDP in USA in 2008. However in H1 2009 in China this ratio was already at around $7 to $1. Credit might be going into the luxury property and stock markets, but the trickle down to the real economy is very poor."
"The Chinese government also explicitly guarantees $400bn worth of debt of the three “policy banks”. In total, these off-balance sheet liabilities are equal to $1.7tn, which would bring China’s public debt to GDP ratio up to 62%, a level that is comparable to the Western European average."
"Price to income ratios have reached 15-20 times in major cities and around 10 times in regional cities. This compares with 9 times in London and 12 times in Los Angeles at the peak."
"It is hard to over-emphasize what this shift to consumption-driven economy means for China’s overall growth rates. On a simple mathematical level it means that average growth rates are going to be capped at 7-8%, so that the overall economy grows at 5-6% for the foreseeable future, and probably slowing down even more later on. It also has enormous consequences on what China imports from the rest of the world as it shifts from commodity and capital goods heavy into (most likely locally produced) consumer goods and services driven economy."
"Anything that is cyclical and dependent on Chinese investment demand would obviously be the most vulnerable to a Chinese growth disappointment. That would include industrial commodities as well as equities and credit of industrial and consumer cyclicals. There would also be a general rotation into more defensive areas taking place across most asset classes. The biggest uncertainty relates to what China means for the debate on deflation versus inflation. In principle, a Chinese slowdown should initially be deflationary, especially given the overcapacity currently building up in various Chinese industries. This should be negative for credit in general and also for most equities. However, depending on how aggressive the policy response will be in China and elsewhere, investors may very well start focusing on the inflationary risks again."
My rationale for posting is to inform and provide the means and some incentive for people to dig into issues and deal with the different viewpoints. Proper investing is not about relying upon a financial guru or political or economic bias. Proper investing methodology is about research and developing the ability to critically analyze information from many different sources. Will there be a China bubble? Given the developing pattern of credit leverage it is possible. There is no predicting when and it could be delayed or even turned into a more positive soft landing with proper economic policies, but it would require China doing what Japan did not do in a timely fashion and acting more decisively than the authorities in the US, who are still struggling with turning the rescue of the financial sector, for the benefit of the financial sector, into a stimulus which benefits the citizens of the US whose participation is required for a real sustainable economic recovery.
Print Page
The Pivot research study is not as comprehensive as some of the other papers I have previously referenced, but it is succinct. Here are a few excerpts:
"In our view investors have underestimated both the maturity of the Chinese growth cycle as well as the degree to which recent growth is a direct extension of the global credit bubble. This bubble had two major manifestations. The first, which started unraveling globally in early 2007, was evident in excesses in real estate, consumption and private equity. The second manifestation, which has yet to fully deflate, was a boom in capital expenditure, led primarily by China."
"However, the decreasing efficiency of investments will ultimately lead to a pullback in capital expenditures. In a soft landing scenario, China is likely to shift to a lower growth trajectory for the next decade. In a hard landing scenario, which is entirely feasible, there would be an abrupt decline in capital spending exacerbated by a banking crisis."
"If loans continue to grow at the current 35% rate, credit to GDP ratio will be close to 200% in China already in 2010, even with GDP expanding at 10%. This is a level similar to the pre-crisis Japan in 1991 and USA in 2008. All this points to that credit in China is not going to be able to grow for much longer without risking a
major crisis."
"In the period from 2000 to 2008, it took on average $1.5 of credit to generate $1 of GDP growth in China. This compares very favorably with the peak $4 of credit for $1 of GDP in USA in 2008. However in H1 2009 in China this ratio was already at around $7 to $1. Credit might be going into the luxury property and stock markets, but the trickle down to the real economy is very poor."
"The Chinese government also explicitly guarantees $400bn worth of debt of the three “policy banks”. In total, these off-balance sheet liabilities are equal to $1.7tn, which would bring China’s public debt to GDP ratio up to 62%, a level that is comparable to the Western European average."
"Price to income ratios have reached 15-20 times in major cities and around 10 times in regional cities. This compares with 9 times in London and 12 times in Los Angeles at the peak."
"It is hard to over-emphasize what this shift to consumption-driven economy means for China’s overall growth rates. On a simple mathematical level it means that average growth rates are going to be capped at 7-8%, so that the overall economy grows at 5-6% for the foreseeable future, and probably slowing down even more later on. It also has enormous consequences on what China imports from the rest of the world as it shifts from commodity and capital goods heavy into (most likely locally produced) consumer goods and services driven economy."
"Anything that is cyclical and dependent on Chinese investment demand would obviously be the most vulnerable to a Chinese growth disappointment. That would include industrial commodities as well as equities and credit of industrial and consumer cyclicals. There would also be a general rotation into more defensive areas taking place across most asset classes. The biggest uncertainty relates to what China means for the debate on deflation versus inflation. In principle, a Chinese slowdown should initially be deflationary, especially given the overcapacity currently building up in various Chinese industries. This should be negative for credit in general and also for most equities. However, depending on how aggressive the policy response will be in China and elsewhere, investors may very well start focusing on the inflationary risks again."
My rationale for posting is to inform and provide the means and some incentive for people to dig into issues and deal with the different viewpoints. Proper investing is not about relying upon a financial guru or political or economic bias. Proper investing methodology is about research and developing the ability to critically analyze information from many different sources. Will there be a China bubble? Given the developing pattern of credit leverage it is possible. There is no predicting when and it could be delayed or even turned into a more positive soft landing with proper economic policies, but it would require China doing what Japan did not do in a timely fashion and acting more decisively than the authorities in the US, who are still struggling with turning the rescue of the financial sector, for the benefit of the financial sector, into a stimulus which benefits the citizens of the US whose participation is required for a real sustainable economic recovery.
Print Page
Subscribe to:
Posts (Atom)
Posts
