We emphasized the euro is here to stay and Greece is not going to default, but the EU austerity program includes tax increases, public job cuts, wage cuts, and lower pension payments to current retirees. The problems in Greece cannot be solved until the mirror problems in Germany are solved: more internal demand and more productive labor wages. The trade account competitiveness gaps between the southern Eurozone countries and the northern Eurozone countries are a direct result of the structure of the euro and even the primary author of the Stability and Growth Pact has publicly said it was not designed to be applied and create economic harm.
China's hidden debt may push government debt to 96% of GDP in 2011 or about $5.8 trillion, because surging local government borrowing is not counted in official estimates of China's debt to GDP. China's banking regulator has begun an investigation and review of loans to local government's financing vehicles which were created as investment companies to circumvent regulations against local government direct borrowing. This crackdown could create a wave of bad loans as projects are left without funding. This debt could hamper China's ability to maintain growth and control inflation.
Kenneth Rogoff said China may be different, but that does not mean it will not have a financial crisis particularly since it is mired in debt and needs to spend to maintain growth. The global financial crisis is still filtering its way through China, which is the world's largest economy, and China sees itself as standing alone in a hostile global environment.
A Deputy Governor of the Bank of China said his biggest fear for 2010 is the risks of the dollar carry trade, which China estimates at $1.5 trillion. If the size of the Fed balance sheet is maintaining equilibrium in currency markets, which the 20 week correlation of .7 to .9 between the Fed balance sheet and value of the dollar appears to support, then any steps by the Fed to normalize rates or reduce its balance sheet (below $1.9-2.o trillion) too fast will tip the dollar into a deflationary rally.
US consumer credit in January went up $5 billion or 2.4% annualized. It was expected to go down $4.5 billion but December was revised up $4.6 billion. Credit card debt is down for 16th month in January, while auto and non-revolving debt is up $6.6 billion.
GM February sales up 11.5% vs year ago; Ford up 43.1% (and now has a 17% marketplace share); Toyota down 8.7%.
Pending home sales were down 7.6% in January.
US factory orders were up 1.7% in January (below 1.8 expected) propelled by aircraft sales which were up 118.6%; excluding transportation, orders were only up one-tenth percent.
10 Vanguard sector index funds, which were previously too concentrated for IRS favorable treatment, changed their MSCI benchmarks as did Fidelity previously.
On last Friday, Barney Frank agreed with the Administration that Fannie and Freddie debt should be backed by the US. He said he supports the earlier Treasury statement that it stands fully behind their debt. Earlier in the week Treasury testified before the financial investigatory commission that the US never guaranteed TBTF.
GM will reinstate 661 dealers of 1100 who sought arbitration over their terminations.
Stiglitz said the Fed structure is rife with conflicts of interest, because banks sit on the board of directors of each Fed district bank, which means the bankers are governing themselves. He said that when he ran the World Bank he would have denied assistance to any country which created a central bank with the Fed's governance system.
FDIC will auction $38 billion of securities backed by residential mortgage assets of failed banks in 3 tranches managed by Barclays.
On 2/28, 1.2 million people lost unemployment benefits. A temporary one month extension to April 5th was signed into law last week, but it does not effect those who have exhausted benefits or exhausted the final tier of extended benefits. It only extends the deadline for one month allowing the opportunity to qualify for emergency unemployment compensation or extended benefits to continue. The one month extension will cost $10 billion.
US consumer spending was up .5% in January; income was up .1% but disposable income was down .4%.
Construction (residential) spending was up 1.1% in January, but non-residential was down 1.4% for a total decline of .6%. Residential is down 6.4% vs year ago and non-residential is down 19.9%.
ISM manufacturing index was down to 56.5 in February from 58.4; new orders were down 6.4 points' employment was up 2.8 points; inventory was up .8.
Outstanding bank credit fell $3.3 billion during the week of 2/17. This is a 7 week cumulative decline of $150 billion. Lending to households fell at 12% annualized over the lst 13 weeks.
Pension funds hold 68% of commercial real estate equity.
ISM service sector index was up to 53.0 (highest since 12/07) in February from 50.6; employment up to 48.6 from 44.6; prices paid down to 60.4 from 61.2.
US productivity Q4 up 6.5%; labor costs down 5.9%. People are working harder for less. Some economists are speculating that temporary and part-time employment may be coming permanent.
Fed President Rosengren (Boston) like Lockhart (Atlanta) favors keeping rates low and Rosengren said low interest rates were not "solely" to blame for the housing bubble.
Italy 2009 GDP contracted 5% and is estimating a positive .7% for 2010. Unemployment was 8.6% in January. The deficit is up to 5.3% of GDP from 2.7% a year ago.
Average wages in Germany for 2009 were down .4%.
French unemployment was up .5% to 10.0% in Q4.
German factory orders were up 4.3% in January (most since 6/07) with input prices up 6.9% (7.7% in January), but economists expect weak economy will not sustain inflation.
The Chinese Premier at their National Party Conference said they need to address the inequality of wages (urban-coastal vs rural) by boosting public welfare in rural areas, by maintaining easy monetary policies, and by holding the yuan steady to support economic recovery.
Bank of England held its interest rate at .5%; ECB held its rate to 1%.
16 country Eurozone Q4 GDP was .1% and contracted 2.7% vs year ago.
Australian central bank raised its interest rate 25 basis points to 4% (4th raise in 5 meeting - did not raise in last meeting). Unemployment is 5.3% in January (5.8% in October). Q3 GDP was up .3% and Q4 was up .9% for 2.4% 2009 and 2.7% vs year ago. GDP is expected to grow 3.0% in 2010. Public spending was up 3.8% in Q4.
Sweden fell back into recession with Q4 GDP down .6% and Q3 revised to <.1%> from up .2%.
Copper prices are up as the result of the earthquake in Chile.
HSBS profits were down unexpectedly to $7.1 billion in 2009 from $9.3 billion in 2008. There was a $6.5 billion accounting loss on value of its debt (expected $5 billion loss). It is paying 3 investment bankers over 9 million pounds each in mostly shares over 3 years.
China manufacturing (PMI) fell to 52.0 in February from 55.8.
AIG will sell its Asian life insurance subsidiary to UK's Pru for $35.5 billion.
Fed vice-chair Kohn (67 years old) is quitting at the end of his term in June.
Fed President Hoenig (Kansas City) said Fed should not be guaranteeing markets zero interest rate for extended period and should raise rates sooner than later but very gradually. Plosser (Philadelphia) said the Fed must not lose regulatory powers and other bureaucracies are not needed. He also want TBTF concept to end and be replaced with orderly bankruptcy process. Fisher (Dallas) said let risky banks fail. Bullard (St. Louis) wants Fed to treat QE in the same manner as adjusting interest rate policy.
US Treasury auctioned $272.17 million of Bank of America warrants and got in excess of $1.5 billion with A warrants fetching $8.35/warrant ($7 minimum) and B warrants selling for $2.55/warrant ($1.50 minimum).
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Friday, March 12, 2010
Wednesday, March 10, 2010
State/Local Governments: Dupes or Incompetent?
The impact of derivative swaps by state and local governments to insure against interest rate swings is again surfacing in this continuing Fed policy of zero interest rates (ZIRP). The most recent story has been Los Angeles, which bought interest rate swaps from the Bank of New York Mellon to protect it from higher interest rates and in this zero interest Fed environment now finds itself paying the Bank of New York Mellon $10 million annually until either interest rates go up or until 2028.
The heart of the issue is were these governmental entities the victims of fraud or incompetent? They were convinced by sales presentations to convert 10 year bonds that could be retired or restructured into 30 derivatives contracts which did not allow call or retirement, without penalty, if interest rates fell. Some in the investment world have argued that it is buyer beware, although the governmental entities are often characterized as greedy, and, now, with lower interest rates they are whining. Some commentators have focused on a New York Times writer who cannot grasp the different types of derivatives and swaps despite repeated criticism. Was there a reliance upon the presentations of the securities brokers and investment bankers and were those presentations too optimistic and not forthcoming in the possible negatives? In Italy, as we have previously reported, Bank of America has become the focus of a national fraud investigation with respect to its advice and sales of swaps to municipalities. In Jefferson County, Alabama, the fraud was in the favorable placement of bonds and purchase of swaps with a securities broker. In that case the former mayor of Birmingham took bribes and got 15 years in prison, the broker got only 52 months, and the broker's consultant-intermediary got 4 years in prison. Notice the securities broker who wanted the business and made the bribe payments only got 52 months. JP Morgan Chase, Bear Stearns, and Goldman Sachs paid the broker to secure the business. While SEC fines have been paid the banks are demanding dismissal of fraud charges. Several states have found themselves stuck with swaps, such as New York which paid $103 million to terminate $2 billion of swaps and still had $3.74 billion of swaps as of 11/30/2009.
Obvious, world-wide, governmental entities have been taken by fast talking investment salesmen. As Felix salmon observes in this last link, interest rate swaps are sold rather than bought. He points out that if the governmental entities had known enough to design the swap they wanted and asked for bids, there would have been less problems. My experience is that governmental entities do not understand the counter party risks, the downsides, and the constraints and penalties, because they focus on the "savings" in the future of increasing interest rates. In doing so, they fail to cost out the different scenarios and options before being sold.
We have discussed how auction rate securities were sold as liquid investments when, in fact, there was no guarantee by the issuing banks that the auctions would be held or the securities bought back if the market froze. When the market did freeze, the cry of individual investors caused state and US regulators to force the banks to settle with these individual investors, but the governmental entities have had to fend for their selves.
Hawaii has lost $250 million in writedowns of $1 billion in auction rate securities bought from one securities broker, who had lobbied the Legislature to approve the investments, working for Citigroup. While the State was limited to no more than 20% of auction rate securities to cash assets, the investments may have actually approached 29%. Hawaii has rejected an unspecified offer from Citigroup to settle. Maui County is suing Merrill Lynch over a similar investment. There have been mixed judicial outcomes of governmental entities suing, because those which have tried to recoup 3 times the losses by alleging anti-trust violations have run afoul of SEC law and regulatory power over multiple participants preempting anti-trust law. The proper way to proceed is to allege fraudulent, unfair, and misleading practices.
The same is true with respect to the interest rate swaps bought by governmental entities. They should be repudiated and told to take the deceptive and misleading contracts back. If they will not make a reasonable offer to settle, they should be sued for felony fraud. However, one needs to be very careful in selecting an appropriately experienced attorney without conflicts of interest with the OTC dealer community.
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The heart of the issue is were these governmental entities the victims of fraud or incompetent? They were convinced by sales presentations to convert 10 year bonds that could be retired or restructured into 30 derivatives contracts which did not allow call or retirement, without penalty, if interest rates fell. Some in the investment world have argued that it is buyer beware, although the governmental entities are often characterized as greedy, and, now, with lower interest rates they are whining. Some commentators have focused on a New York Times writer who cannot grasp the different types of derivatives and swaps despite repeated criticism. Was there a reliance upon the presentations of the securities brokers and investment bankers and were those presentations too optimistic and not forthcoming in the possible negatives? In Italy, as we have previously reported, Bank of America has become the focus of a national fraud investigation with respect to its advice and sales of swaps to municipalities. In Jefferson County, Alabama, the fraud was in the favorable placement of bonds and purchase of swaps with a securities broker. In that case the former mayor of Birmingham took bribes and got 15 years in prison, the broker got only 52 months, and the broker's consultant-intermediary got 4 years in prison. Notice the securities broker who wanted the business and made the bribe payments only got 52 months. JP Morgan Chase, Bear Stearns, and Goldman Sachs paid the broker to secure the business. While SEC fines have been paid the banks are demanding dismissal of fraud charges. Several states have found themselves stuck with swaps, such as New York which paid $103 million to terminate $2 billion of swaps and still had $3.74 billion of swaps as of 11/30/2009.
Obvious, world-wide, governmental entities have been taken by fast talking investment salesmen. As Felix salmon observes in this last link, interest rate swaps are sold rather than bought. He points out that if the governmental entities had known enough to design the swap they wanted and asked for bids, there would have been less problems. My experience is that governmental entities do not understand the counter party risks, the downsides, and the constraints and penalties, because they focus on the "savings" in the future of increasing interest rates. In doing so, they fail to cost out the different scenarios and options before being sold.
We have discussed how auction rate securities were sold as liquid investments when, in fact, there was no guarantee by the issuing banks that the auctions would be held or the securities bought back if the market froze. When the market did freeze, the cry of individual investors caused state and US regulators to force the banks to settle with these individual investors, but the governmental entities have had to fend for their selves.
Hawaii has lost $250 million in writedowns of $1 billion in auction rate securities bought from one securities broker, who had lobbied the Legislature to approve the investments, working for Citigroup. While the State was limited to no more than 20% of auction rate securities to cash assets, the investments may have actually approached 29%. Hawaii has rejected an unspecified offer from Citigroup to settle. Maui County is suing Merrill Lynch over a similar investment. There have been mixed judicial outcomes of governmental entities suing, because those which have tried to recoup 3 times the losses by alleging anti-trust violations have run afoul of SEC law and regulatory power over multiple participants preempting anti-trust law. The proper way to proceed is to allege fraudulent, unfair, and misleading practices.
The same is true with respect to the interest rate swaps bought by governmental entities. They should be repudiated and told to take the deceptive and misleading contracts back. If they will not make a reasonable offer to settle, they should be sued for felony fraud. However, one needs to be very careful in selecting an appropriately experienced attorney without conflicts of interest with the OTC dealer community.
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Sunday, March 7, 2010
Credit Card Robbery
Both Karl Denninger of Market Ticker and Yves Smith of naked capitalist have commented on the new credit card user agreements that have been sent out in preparation for the new credit card law, which Citigroup wrote for the Administration, which has just recently taken effect. We have previously commented on several areas which will bear watching and will undoubtedly have negative effects on consumers. We commented on the radio show yesterday about the comments of Smith and Denninger, but it is serious enough that it deserves its own post rather than being lumped in with the Leftovers.
Using the JP Morgan Chase new user agreement as an example, both Smith and Denninger exposed the wording that would allow the bank to demand immediate and full payment of the credit card balance if they have any reason to "believe" the account holder may be unwilling or unable to pay as the result of "information" they may receive without regard to your account being current and no payments late or missed. Universal default was to be illegal, but the banks have used legal language to circumvent the prohibition and make make a "maybe if" rather than a specific act reason for immediate and full payment. This is not just a continuation of complex contract abuse; it is a direct threat to human liberty and due process.
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Using the JP Morgan Chase new user agreement as an example, both Smith and Denninger exposed the wording that would allow the bank to demand immediate and full payment of the credit card balance if they have any reason to "believe" the account holder may be unwilling or unable to pay as the result of "information" they may receive without regard to your account being current and no payments late or missed. Universal default was to be illegal, but the banks have used legal language to circumvent the prohibition and make make a "maybe if" rather than a specific act reason for immediate and full payment. This is not just a continuation of complex contract abuse; it is a direct threat to human liberty and due process.
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The Global Gambit vs. Regulatory Reform
In February, IMF managing director Dominique Strauss-Kahn at Davos, warned the US and European countries should not attempt financial regulatory reform nationally and urged governments pursue a multilateral, global approach. His concern is that different national reforms will be inconsistent. He is echoing concerns of international regulators and bank executives who do not want the "closely coordinated" efforts during the financial crisis in 2008-2009 giving why to concrete national initiatives providing reform regulation. These are the same bankers who tell countries proposing regulatory reforms that banks will just move to other countries.
They are reacting to the proposed "Volcker" rules in the United States, which, as we have discussed previously, would actually leave the big banks as is while imposing a ban on proprietary trading. The EU finance ministers publicly opposed this limitation on bank size and risk taking as inconsistent with the current European universal banking system.
Yet, when it is discovered that Greece, and other Eurozone countries, used legal currency swaps in 2002 to help hide debt, the EU wants to divert its attention from the real euro crisis to its current manifestation in the pan-European debt crisis to how international large banks made money legally but in a way which is fundamentally systemically dangerous. Even while we have a demonstration of systemically dangerous investment banking by large international banks, a German economist has written that the re-instatement of Glass-Steagall type laws as the "Volcker" rules imply are unnecessary, because the US "... system of bank separation remained fairly intact up to the outbreak of the crisis." He argues the US is actually trying to undo the Paulson-Geithner conversion of Goldman Sachs and Morgan Stanley into investment-commercial banks and reassert the legacy of separate commercial and investment banking which, in his opinion, made the crisis worse. According to this German economist, the cavalier risk taking that led to the crisis was actually "...due to their inadequate capital reserves."
While the need for better capital reserves is obviously necessary, the German economist is actually arguing for a continuation of the current universal European banking system, which the separation of commercial and investment banking would directly challenge. This raises the question of how systemically dangerous the universal European banking system is even if currently bureaucratic regulatory proposals are adopted and capital reserves increased.
The Baseline Scenario succinctly summed up the illusion of international governmental cooperation. The WTO and the IMF have no authority and the EU Financial Stability Board is a "paper tiger". The FSB is merely a forum for regulators and bankers to talk shop. The big international banks have known this and use it to keep the process "international" and going no where meaningful.
Paul Volcker in a recent speech in Europe argued that commercial banks will become more like hedge funds unless limits on proprietary trading are not imposed. He asserted that it is not in the public interest to have banks take deposits and use that money to engage in risky trading. ECB President Jean-Claude Trichet, in defense of the current universal European banking system, expressed concern this would just push regulated activities into the unregulated hedge fund sector.
Who said hedge funds, and other shadow banks, should be left unregulated?
It all comes down to Joseph Stiglitz's early February opinion piece that differing opinions and priorities make global coordination difficult, if not a prescription for paralysis, which would only benefit the bankers. The only way to stimulate effective global cooperation is for individual nations to establish what they believe is a good regulatory structure for their nation. This would force the bankers to fight multiple regulatory fires here and there and expose their attempts to prefer little regulation. It is in the best interests of self-protection for each country to deal with its own regulatory needs and the leave the subterfuge of global intertwining behind to enable global regulatory coordination to be addressed later as self-protected countries seek coordination from positions of strength.
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They are reacting to the proposed "Volcker" rules in the United States, which, as we have discussed previously, would actually leave the big banks as is while imposing a ban on proprietary trading. The EU finance ministers publicly opposed this limitation on bank size and risk taking as inconsistent with the current European universal banking system.
Yet, when it is discovered that Greece, and other Eurozone countries, used legal currency swaps in 2002 to help hide debt, the EU wants to divert its attention from the real euro crisis to its current manifestation in the pan-European debt crisis to how international large banks made money legally but in a way which is fundamentally systemically dangerous. Even while we have a demonstration of systemically dangerous investment banking by large international banks, a German economist has written that the re-instatement of Glass-Steagall type laws as the "Volcker" rules imply are unnecessary, because the US "... system of bank separation remained fairly intact up to the outbreak of the crisis." He argues the US is actually trying to undo the Paulson-Geithner conversion of Goldman Sachs and Morgan Stanley into investment-commercial banks and reassert the legacy of separate commercial and investment banking which, in his opinion, made the crisis worse. According to this German economist, the cavalier risk taking that led to the crisis was actually "...due to their inadequate capital reserves."
While the need for better capital reserves is obviously necessary, the German economist is actually arguing for a continuation of the current universal European banking system, which the separation of commercial and investment banking would directly challenge. This raises the question of how systemically dangerous the universal European banking system is even if currently bureaucratic regulatory proposals are adopted and capital reserves increased.
The Baseline Scenario succinctly summed up the illusion of international governmental cooperation. The WTO and the IMF have no authority and the EU Financial Stability Board is a "paper tiger". The FSB is merely a forum for regulators and bankers to talk shop. The big international banks have known this and use it to keep the process "international" and going no where meaningful.
Paul Volcker in a recent speech in Europe argued that commercial banks will become more like hedge funds unless limits on proprietary trading are not imposed. He asserted that it is not in the public interest to have banks take deposits and use that money to engage in risky trading. ECB President Jean-Claude Trichet, in defense of the current universal European banking system, expressed concern this would just push regulated activities into the unregulated hedge fund sector.
Who said hedge funds, and other shadow banks, should be left unregulated?
It all comes down to Joseph Stiglitz's early February opinion piece that differing opinions and priorities make global coordination difficult, if not a prescription for paralysis, which would only benefit the bankers. The only way to stimulate effective global cooperation is for individual nations to establish what they believe is a good regulatory structure for their nation. This would force the bankers to fight multiple regulatory fires here and there and expose their attempts to prefer little regulation. It is in the best interests of self-protection for each country to deal with its own regulatory needs and the leave the subterfuge of global intertwining behind to enable global regulatory coordination to be addressed later as self-protected countries seek coordination from positions of strength.
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Friday, March 5, 2010
Leftovers -- Radio Show 2/27/2010
Tyler Cowan and Felix Salmon both commented on Gary Gorton's new paper, "Questions and Answers about the Financial Crisis", with regard to the use of repos creating fragilities in the banking system. Banks no longer just use deposits as funding sources. The use of repos as funding sources creates a systemic risk, because the bond market depends on the denial of risk and when risk becomes questioned, the bond market comes to a grinding halt. We should not try to guarantee repos as we guarantee deposits, but all systemic risks should be regulated and decisions made on how commercial banks function and investment/trading banks function.
China's banking regulator told commercial banks to restrict new lending to local governments and stop lending to those projects backed only by expected fiscal revenues.
China has performed some stress tests of potential yuan appreciation. The tests which concentrated on the textile, shoe, garment, and toy exporters found that every percentage point of yuan appreciation would erode one percentage point of their profit.
While derivatives traders are still betting the euro will continue to slump, any speculation that the euro is doomed or will fade away is misplaced. It is here to stay, although the EMU needs to restructure its trade and monetary policies, as well as how it applies the Stability and Growth Pact.
The Greek central bank governor said the Greek balance of payments gap is unsustainable. As we have been saying, a crucial part of the current problem is the fixed trade exchange rates between the Eurozone countries, which create competitiveness gaps. The Greek central bank governor said, "The balance of payments deficit is not sustainable. A policy mix which will bring back the macroeconomic and microeconomic imbalance and improve the economy's competitiveness and productivity is needed to restore sustainability."
The economist, Carlo Bastasin, has written that the IMF cannot help Greece, because it is less able to address the problem of restoring equilibrium in the current account balances within the Eurozone. The Greek fiscal deficit and the loss of competitiveness are connected, because a current account deficit (imports over exports) will make it more difficult for the Greek government to raise taxes to cover the public deficit. "...If Greece's growth prospects are more limited, its existing debt burden is more onerous." To avoid this, the domestic demand of Greece's trade partners needs to increase. "In other words, the Greek problem is the mirror image of the 'hidden' German problem", which needs to increase domestic demand and lower labor costs. You cannot solve the Greek imbalances without correcting the German imbalances.
The role of large banks and hedge funds in threatening the survival of Greece and the value of the euro in order to make short term derivative trading profits is drawing the attention of other European countries and there is a growing consensus that regulatory action may be necessary as the credit default swaps are increasing systemic risk.
The ECB refuses to release information as to how many Greek bonds are on its balance sheet as the results of its repo operations. It is speculated that many of the Greek bonds, of which there are approximately 270 billion euro total, which were held by European banks are now in the possession of the ECB and 37 billion held by Greek banks.
After the EU commission visit, the Greek prime minister said that the worst fears of the Greek economy had been confirmed and the Greece would miss its deficit reduction efforts if it did not carry out more spending cuts which have already sparked demonstrations. The EU commission indicated that Greece may be able to cut its deficit by 2% rather than the 4% goal. There is increased antipathy between Germany and Greece, which will hinder Greece's ability to obtain EU support for its deficit reduction program.
Portugal has said it is under no pressure to speed up bond sales as 20% of its financing needs have been met for the year. Portuguese bonds are the worst performing in the region.
The Bank of Spain is considering raising the minimum amount banks must hold in provisions of potential losses in property assets. Many experts believe Spanish banks will face a new housing crisis in the coming months. They may have to absorb between 100,000 and 150,000 homes immersed in foreclosure cases.
The Irish government is being forced by the EU to take a 15.7% stake in the Bank of Ireland PLC in lieu of a 250 million euro cash dividend due the government despite the need to contain government deficits. The government holds 25% preference shares in both the Bank of Ireland PLC and Allied Irish Banks.
Italy has the second largest debt and is considered to the economy of the Eurozone according to the economist Robert Mundell, who won the Nobel prize in 1999 for research which lead to the creation of the euro. Italy's economy contracted .2% in Q4 and risks falling back into recession. It has 1.8 trillion euro in debt, which is five times that of Greece and one-quarter of the Eurozone debt.
US Treasury auctions:
30 year TIPS, $8 billion, yield 2.229%, bid-to-cover 3.33, foreign 42.4%, direct 15.1 in what was seen as a weak, soft demand.
2 year Treasury, $44 billion, yield .895%, bid-to-cover 3.33, foreign 53.6% (high) and 100% filled, direct 8.2%.
5 year Treasury, $42 billion, yield 2.395, bid-to-cover 2.75, foreign 40.3%, direct 12.8%.
7 year Treasury, $32 billion, yield 3.078%, bid-to-cover 2.98%, foreign 40.3%, direct 17.2%.
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China's banking regulator told commercial banks to restrict new lending to local governments and stop lending to those projects backed only by expected fiscal revenues.
China has performed some stress tests of potential yuan appreciation. The tests which concentrated on the textile, shoe, garment, and toy exporters found that every percentage point of yuan appreciation would erode one percentage point of their profit.
While derivatives traders are still betting the euro will continue to slump, any speculation that the euro is doomed or will fade away is misplaced. It is here to stay, although the EMU needs to restructure its trade and monetary policies, as well as how it applies the Stability and Growth Pact.
The Greek central bank governor said the Greek balance of payments gap is unsustainable. As we have been saying, a crucial part of the current problem is the fixed trade exchange rates between the Eurozone countries, which create competitiveness gaps. The Greek central bank governor said, "The balance of payments deficit is not sustainable. A policy mix which will bring back the macroeconomic and microeconomic imbalance and improve the economy's competitiveness and productivity is needed to restore sustainability."
The economist, Carlo Bastasin, has written that the IMF cannot help Greece, because it is less able to address the problem of restoring equilibrium in the current account balances within the Eurozone. The Greek fiscal deficit and the loss of competitiveness are connected, because a current account deficit (imports over exports) will make it more difficult for the Greek government to raise taxes to cover the public deficit. "...If Greece's growth prospects are more limited, its existing debt burden is more onerous." To avoid this, the domestic demand of Greece's trade partners needs to increase. "In other words, the Greek problem is the mirror image of the 'hidden' German problem", which needs to increase domestic demand and lower labor costs. You cannot solve the Greek imbalances without correcting the German imbalances.
The role of large banks and hedge funds in threatening the survival of Greece and the value of the euro in order to make short term derivative trading profits is drawing the attention of other European countries and there is a growing consensus that regulatory action may be necessary as the credit default swaps are increasing systemic risk.
The ECB refuses to release information as to how many Greek bonds are on its balance sheet as the results of its repo operations. It is speculated that many of the Greek bonds, of which there are approximately 270 billion euro total, which were held by European banks are now in the possession of the ECB and 37 billion held by Greek banks.
After the EU commission visit, the Greek prime minister said that the worst fears of the Greek economy had been confirmed and the Greece would miss its deficit reduction efforts if it did not carry out more spending cuts which have already sparked demonstrations. The EU commission indicated that Greece may be able to cut its deficit by 2% rather than the 4% goal. There is increased antipathy between Germany and Greece, which will hinder Greece's ability to obtain EU support for its deficit reduction program.
Portugal has said it is under no pressure to speed up bond sales as 20% of its financing needs have been met for the year. Portuguese bonds are the worst performing in the region.
The Bank of Spain is considering raising the minimum amount banks must hold in provisions of potential losses in property assets. Many experts believe Spanish banks will face a new housing crisis in the coming months. They may have to absorb between 100,000 and 150,000 homes immersed in foreclosure cases.
The Irish government is being forced by the EU to take a 15.7% stake in the Bank of Ireland PLC in lieu of a 250 million euro cash dividend due the government despite the need to contain government deficits. The government holds 25% preference shares in both the Bank of Ireland PLC and Allied Irish Banks.
Italy has the second largest debt and is considered to the economy of the Eurozone according to the economist Robert Mundell, who won the Nobel prize in 1999 for research which lead to the creation of the euro. Italy's economy contracted .2% in Q4 and risks falling back into recession. It has 1.8 trillion euro in debt, which is five times that of Greece and one-quarter of the Eurozone debt.
US Treasury auctions:
30 year TIPS, $8 billion, yield 2.229%, bid-to-cover 3.33, foreign 42.4%, direct 15.1 in what was seen as a weak, soft demand.
2 year Treasury, $44 billion, yield .895%, bid-to-cover 3.33, foreign 53.6% (high) and 100% filled, direct 8.2%.
5 year Treasury, $42 billion, yield 2.395, bid-to-cover 2.75, foreign 40.3%, direct 12.8%.
7 year Treasury, $32 billion, yield 3.078%, bid-to-cover 2.98%, foreign 40.3%, direct 17.2%.
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Argentina, Oh, Argentina: Playing With Fire
While the world watches Greece, Argentina is burning. Because both countries have debt problems and endemic private and public corruption, some commentators have tried to draw parallels between the two. In fact they are two very different situations. In 2002, Argentina defaulted on $95 billion of debt internationally. Greece is not in jeopardy of default and will not default. While both countries are still emerging from dictatorship, the level of private (including tax evasion), public, and political corruption is far more invasive in Argentina with its peronista culture. While Greece has a competitiveness problem within the Eurozone as the result of fixed trade exchange rates, the euro is not a pegged currency. The Argentine peso maintained a fixed peg with the US dollar for 11 years until 2002 which increased its dependence on US dollars and foreign debt leading to the 2002 default. Beginning in 2002 with the rescinding of the currency peg, inflation broke out and has continued to the present as a virtual way of life and may approach 20% this year.
In 2001, de la Rua resigned the presidency and Duhalde, an economically center left Peronist, became interim president with unemployment at 25% and capital fleeing the country. Despite intense social protests, the country used the currency devaluation to re-industrialize, increase internal demand and exports leading to fiscal and trade surpluses. In 2003, Kirchner, a social democratic Peronist, was elected president and Argentina paid off its IMF loans, restructured its defaulted debt at a 66% discount, renegotiated utility contracts, began nationalizing privatized businesses, applied price controls, and engaged in a sweeping public works investment program. Kirchner's approach to inflation was to remove those in charge of studying and issuing inflation statistics with his own people; consequently, "official" inflation statistics are less than one-half of reality. In 2007, Kirchner "stepped" aside to let his wife run and be elected president and she has continued his policies, which aggravate and continue the inflation. In 2009, the Kirchner's political party lost control of the Argentine Senate, which is leading to a potential political confrontation. The emergence of major bribery and corruption scandals from Nestor Kirchner's administration are continuing and will not die away.
In 2008, Fernandez de Kirchner had a law passed allowing the government to seize all private pension funds allowing the government to invest the pension funds in government bonds, which were used to make international debt payments. If Argentina is going to be able to borrow internationally, it must continue to repay its re-structured default debt. Despite the Argentine central bank being a political extension of the government, Fernandez de Kirchner fired its president Redrado, when he refused to transfer central bank foreign currency reserves to the Treasury, and replaced him with a political ally, Mercedes Marco del Pont, who will guide the central bank consistent with the economic policies of the government and who transferred $4.2 billion to the Treasury without the necessary legislative approval. These foreign currency reserves will be used to pay international debt.
The transportation monopolies, which accept only coins, are so corrupt that the country as a whole has a shortage of coins as these companies hoard the coins and charge exorbitant fees for paper currency exchanges. Regular businesses and individuals would rather give excess change in paper currency than part with a coin. Beef prices, as the result of production and export taxes (which effect supply) as well as inflation, are up 25% in this beef eating country. Argentina's budget deficit to GDP will double this and the country faces an inflation-wage price spiral as Fernandez de Kirchner aggressively seeks to appropriate money from whatever sources to pay international debt and continue an aggressive public works program in defiance of Argentina's Congress.
Is Argentina so systematically corrupt that its citizenry cannot demand a free society and have grown to expect the choices to be one type of corruption or another? At what point does this out of control inflation, which has been accompanied by growth, become socially intolerable? Is the massive public works program keeping enough people employed and fueling enough future growth? Will increased political confrontation require public diversions? Oil has been discovered in the Falkland Islands (Malvinas) and Argentina and the United Kingdom are butting heads. Both countries have economic difficulties, with Greece debt problems focusing a lot of analytical attention on the United Kingdom, and both could politically benefit internally from an international confrontation involving sovereignty and oil. Posturing rather than actual military confrontation is the most likely scenario, particularly since Argentina has cut military spending by 50%. Argentina has gone to the UN and the United States is not supporting the United Kingdom. The United States Supreme Court also allowed Argentina private pension money in the United States to be turned over to Argentina. While trying to mitigate Venezuela's, and its allies Iran and Russia, influence as well as China, the United States may be playing into their hands if the UK redeploys troops from Afghanistan to the Falklands in a demonstration of strength that could bolster Gordon Brown. The current situation could strengthen the Rio Group at the expense of the Organization of American States as well as the commercial-strategic position of China, Russia, and Iran in Central and South America.
Argentina's central bank has consistently failed to promote price stability and monetary policy and has been unable or unwilling to divorce itself from fiscal policy. It is a perfect example of the failure of a corrupt central banking system tied to a corrupt political system. Unfortunately, Argentina's inflation problem has geopolitical consequences.
Print Page
In 2001, de la Rua resigned the presidency and Duhalde, an economically center left Peronist, became interim president with unemployment at 25% and capital fleeing the country. Despite intense social protests, the country used the currency devaluation to re-industrialize, increase internal demand and exports leading to fiscal and trade surpluses. In 2003, Kirchner, a social democratic Peronist, was elected president and Argentina paid off its IMF loans, restructured its defaulted debt at a 66% discount, renegotiated utility contracts, began nationalizing privatized businesses, applied price controls, and engaged in a sweeping public works investment program. Kirchner's approach to inflation was to remove those in charge of studying and issuing inflation statistics with his own people; consequently, "official" inflation statistics are less than one-half of reality. In 2007, Kirchner "stepped" aside to let his wife run and be elected president and she has continued his policies, which aggravate and continue the inflation. In 2009, the Kirchner's political party lost control of the Argentine Senate, which is leading to a potential political confrontation. The emergence of major bribery and corruption scandals from Nestor Kirchner's administration are continuing and will not die away.
In 2008, Fernandez de Kirchner had a law passed allowing the government to seize all private pension funds allowing the government to invest the pension funds in government bonds, which were used to make international debt payments. If Argentina is going to be able to borrow internationally, it must continue to repay its re-structured default debt. Despite the Argentine central bank being a political extension of the government, Fernandez de Kirchner fired its president Redrado, when he refused to transfer central bank foreign currency reserves to the Treasury, and replaced him with a political ally, Mercedes Marco del Pont, who will guide the central bank consistent with the economic policies of the government and who transferred $4.2 billion to the Treasury without the necessary legislative approval. These foreign currency reserves will be used to pay international debt.
The transportation monopolies, which accept only coins, are so corrupt that the country as a whole has a shortage of coins as these companies hoard the coins and charge exorbitant fees for paper currency exchanges. Regular businesses and individuals would rather give excess change in paper currency than part with a coin. Beef prices, as the result of production and export taxes (which effect supply) as well as inflation, are up 25% in this beef eating country. Argentina's budget deficit to GDP will double this and the country faces an inflation-wage price spiral as Fernandez de Kirchner aggressively seeks to appropriate money from whatever sources to pay international debt and continue an aggressive public works program in defiance of Argentina's Congress.
Is Argentina so systematically corrupt that its citizenry cannot demand a free society and have grown to expect the choices to be one type of corruption or another? At what point does this out of control inflation, which has been accompanied by growth, become socially intolerable? Is the massive public works program keeping enough people employed and fueling enough future growth? Will increased political confrontation require public diversions? Oil has been discovered in the Falkland Islands (Malvinas) and Argentina and the United Kingdom are butting heads. Both countries have economic difficulties, with Greece debt problems focusing a lot of analytical attention on the United Kingdom, and both could politically benefit internally from an international confrontation involving sovereignty and oil. Posturing rather than actual military confrontation is the most likely scenario, particularly since Argentina has cut military spending by 50%. Argentina has gone to the UN and the United States is not supporting the United Kingdom. The United States Supreme Court also allowed Argentina private pension money in the United States to be turned over to Argentina. While trying to mitigate Venezuela's, and its allies Iran and Russia, influence as well as China, the United States may be playing into their hands if the UK redeploys troops from Afghanistan to the Falklands in a demonstration of strength that could bolster Gordon Brown. The current situation could strengthen the Rio Group at the expense of the Organization of American States as well as the commercial-strategic position of China, Russia, and Iran in Central and South America.
Argentina's central bank has consistently failed to promote price stability and monetary policy and has been unable or unwilling to divorce itself from fiscal policy. It is a perfect example of the failure of a corrupt central banking system tied to a corrupt political system. Unfortunately, Argentina's inflation problem has geopolitical consequences.
Print Page
Tuesday, March 2, 2010
Economic Warfare: China & the United States
A book, "The China Dream", written by a senior Chinese Army officer, Liu Mingfu, who is a professor at their National Defense University, has recently been published. This is the second book recently published by senior Chinese Army officers on China's relationship with the United States, as Colonel Dai Xu also published a book in which he argues that China is surrounded by countries largely influenced by the United States. Senior Colonel Liu Mingfu argues that China will become the number 1 economic power in the world within the next few years and this will involve economic warfare with the United States which could escalate into military warfare in ten to twenty years.
While the Chinese Army has been upset over military sales to the Taiwan government and the reception of the Dalai Lama by President Obama to the extent the Chinese Army has suggested China should start selling US debt, the Chinese government does have significant global economic power which is growing. Economic warfare is not new. The CIA has had an active economic warfare operation from almost the beginning of its existence.
A 2007 paper published by the United States Army School of Advanced Military Studies very conservatively predicted China would become the number 1 economic power by 2025 and argues that America's economic assets must be utilized in economic warfare strategy. It quotes extensively from the 2002 book "Unrestricted Warfare: China's Master Plan to Destroy America" written by Chinese Army Colonels Qiao Liang and Wang Xiangsui. Unrestricted Warfare concentrated on economic warfare, the use of trade, and the effect of revaluation and devaluation of currency and its effect on target countries.
While the United States needs China to buy US treasuries, China does not publish a breakdown of its foreign asset holdings and there has been recent controversy whether Japan has displaced China as the largest holder of US debt. This could easily be just a temporary re-balancing of China's central bank's foreign investments and currency holdings. There has been some speculation that China may be buying IMF gold, but this does make a lot of sense unless China is using the carry trade on the US dollar to divest itself of US dollars as one can presently obtain more value by buying gold with the euro.
The United States has repeatedly indicated China needs to appreciate the value of the renminbi which is tightly pegged by the Chinese government to the US dollar. The United States has also predicated its economic recovery on export growth and has advocated an unrealistic doubling of exports within five years. This can only be done at the expense of other countries, such as China.
We have seen oil used by the Arab countries in the 1970's as a form of limited economic warfare. While it has been obvious from 2007 to the present that oil futures prices are driven by speculators with futures contracts far exceeding actual delivery, to the point where oil prices make the refining of oil unprofitable in the United States despite a staggering over supply of oil. In James Norman's book, "The Oil Card", he argues that oil could be used as economic warfare against China by keeping the price high. The problem with keeping oil prices high is that it significantly impairs economic recovery in the United States and globally.
In 2009, the Pentagon held a war game which involved economic warfare only among five teams: China, Russia, United States, East Asia, and All Others. China won. The United States was second.
Print Page
While the Chinese Army has been upset over military sales to the Taiwan government and the reception of the Dalai Lama by President Obama to the extent the Chinese Army has suggested China should start selling US debt, the Chinese government does have significant global economic power which is growing. Economic warfare is not new. The CIA has had an active economic warfare operation from almost the beginning of its existence.
A 2007 paper published by the United States Army School of Advanced Military Studies very conservatively predicted China would become the number 1 economic power by 2025 and argues that America's economic assets must be utilized in economic warfare strategy. It quotes extensively from the 2002 book "Unrestricted Warfare: China's Master Plan to Destroy America" written by Chinese Army Colonels Qiao Liang and Wang Xiangsui. Unrestricted Warfare concentrated on economic warfare, the use of trade, and the effect of revaluation and devaluation of currency and its effect on target countries.
While the United States needs China to buy US treasuries, China does not publish a breakdown of its foreign asset holdings and there has been recent controversy whether Japan has displaced China as the largest holder of US debt. This could easily be just a temporary re-balancing of China's central bank's foreign investments and currency holdings. There has been some speculation that China may be buying IMF gold, but this does make a lot of sense unless China is using the carry trade on the US dollar to divest itself of US dollars as one can presently obtain more value by buying gold with the euro.
The United States has repeatedly indicated China needs to appreciate the value of the renminbi which is tightly pegged by the Chinese government to the US dollar. The United States has also predicated its economic recovery on export growth and has advocated an unrealistic doubling of exports within five years. This can only be done at the expense of other countries, such as China.
We have seen oil used by the Arab countries in the 1970's as a form of limited economic warfare. While it has been obvious from 2007 to the present that oil futures prices are driven by speculators with futures contracts far exceeding actual delivery, to the point where oil prices make the refining of oil unprofitable in the United States despite a staggering over supply of oil. In James Norman's book, "The Oil Card", he argues that oil could be used as economic warfare against China by keeping the price high. The problem with keeping oil prices high is that it significantly impairs economic recovery in the United States and globally.
In 2009, the Pentagon held a war game which involved economic warfare only among five teams: China, Russia, United States, East Asia, and All Others. China won. The United States was second.
Print Page
Thursday, February 25, 2010
Dysfunctional Governance
The subtitle of this post is: Or why Elizabeth Warren should be the first female Secretary of the Treasury Now.
In my prior post, Corporate Socialism vs Regulatory Reform, I made the case that the need for meaningful financial regulatory reform is crucial to the maintenance of democracy. Capitalism is not the privatization of profit and the socialization of risks and losses further enriching an elite group of profiteers at the expense of the common citizen. When corporation governance has become so corrupt that corporations are run for the benefit of the managers at the expense of the shareholders, there is something more than fundamentally wrong.
When Brooksley Born sought to have derivatives regulated in 1998, during the Clinton administration, and was crushed by Bob Rubin, Larry Summers, Alan Greenspan, and Arthur Levitt, the current global financial crisis was born and began to grow. With the financial crisis threatening to bring down banks worldwide and hurl the world into financial oblivion, the opportunity of crisis to provide decisive regulatory reform was decapitated by Tim Geithner, Hank Paulson, and the heads of the very banks and shadow banks which had perpetrated the crisis.
While the regulators and the government should have followed the successful Swedish example from the 1990's and seized the banks and shadow banks, stripped the toxic assets out and placed them in a resolution authority as had been done in the savings and loan crisis, dismissed the management, and then, after proper capital ratio improvements, spun the banks back into the private sector as financially stronger financial institutions, the American Congress was, instead, deceived into appropriating bailout money which was then used not as legislated but rather to fund the very banks and management which had caused the crisis. As a result the largest US banks have grown from 55% of GDP, pre-crisis, to 63% of GDP. Their concentration of the financial market has grown to the point where four banks have half the market in mortgages and two-thirds of the market for credit cards. Five banks control 95% of the derivatives market. Three US banks have over 40% of the global market for stock underwriting.
The very financial institutions which, by their risky conduct, created this global financial crisis have been allowed to become more powerful and more systemically dangerous, when they should have been broken up with a modern Glass-Steagall division between retail and investment banking, a transparent and regulated derivatives market should have been created, mark-to-market rules enforced, off balance sheet SIVs either prohibited or properly included in balance sheets, management and directors replaced, shareholder ownership reinforced, a consumer protection agency created, bank capital ratios raised, shadow banks formally identified and regulated as systemically dangerous financial institutions without respect to their original business structure, and systemically dangerous business and investment practices, including disproportionate salaries and bonuses not in the best interests of shareholders, penalized by transaction taxes on the business and the individual (with respect to salaries and bonuses).
As it is, the balance sheets of banks are not financially accurate, because they have been exempted from proper accounting rules. Citigroup wrote the new credit card "reforms" which became law and raised interest rates to 29.9% prior to its implementation and sent letters to its demand deposit account holders informing them the bank reserved the right to require seven days prior written notice of any withdrawal from a checking, savings, or money market account, while still being majority own by the United States government.
The Federal Reserve has failed to get banks, insurance companies, and hedge funds to agree on what derivatives should be transparently traded through a clearinghouse with proper collateral. The Administration has failed to decisively create proper regulations and a transparent market.
Purposefully complex and overly complicated mortgage loan, credit card, and other consumer loan agreements have been buried as a cause of the current crisis under the lobbyist's rosy picture of free market buyer beware fairy tales in which the wolves are victims. The unethical practices of banks, such as Goldman Sachs and J. P. Morgan have been increasingly chronicled and complex financial instruments and practices explained again and again only to have the PR people and lobbyists insist the public is not smart enough to understand finance. While Matt Taibbi has rigorously documented past Goldman Sachs and AIG dubious transactions and activities, some might think his recent article in which he uses the literary metaphor of different criminal con games to describe financial business practices was too factually loose, but the power of literature to transform truth into a universal visualization is not to be derided, as Emile Zola proved. Is an article any less powerful in its message against the spin of hundreds of lobbyists and the inaction of government just because it is published in Rolling Stone rather than the New Yorker? When elected officials fail to act and protect the citizenry, should public mockery of the obvious not be expected and escalated?
The recent announcement of a proposed Volcker rules which would limit the size of banks and a proposed ban on proprietary trading was seen as a ray of hope, although it left the banks as is without any reduction or limitations other than proprietary trading. The issue is really not size, as we have repeatedly said, it is systemically dangerous conduct and activities. Yet, Geithner has being preaching financial reform this week while recanting on proprietary trading saying it should be limited not banned. Fixing banks has become a question of power and the banks have been given more power by the very government which should be minimalizing their power through regulation. Protecting the banks has become more important than putting America to work and growing the economy, because the toxic assets were not stripped from the banks and the next financial crisis is peering around the corner at us.
Elizabeth Warren has been one of the few public officials focused and committed to financial regulatory reform and consumer protection. Canada has had a consumer protection agency for years and banking regulations in place which allowed it to weather this global financial crisis better than the United States and other countries. Yet, in the United States lobbyists have killed the proposed Consumer Financial Protection Agency and continue to dance on the grave of its aborted fetus with a "just another bloated government bureaucracy" headstone as testament to the power of money to create acceptable lies. The financial predators do not want anyone protecting the public; it is not profitable. Elizabeth Warren continues to promote the need of a CFPA as necessary to preserve the middle class which is growing smaller every day as the financial elite become even richer. She has made it perfectly clear that the battle has come down to the lobbyists versus American families and the lobbyists are winning.
The lobbyists are winning, because people, like Larry Summers and Tim Geithner among others, are helping the financial lobbyists to win. While Paul Volcker continues to be optimistic about the Volcker Rule while being marginalized again, he still is adamant that the real crisis facing the American people is the present bipartisan dysfunctional governance in which nothing gets done for the people. What chances of regulatory reform are there if it is completely acceptable for financial institutions to purposefully mislead investors and deceive markets while being paid a great deal of money to mislead people? What chances do we have that banks will be required to control leverage, improve their capital ratios, and operate with accurate balance sheets if the banks are allowed to be more powerful than the government? This should be an obvious need in any free society and should not require the financial innovation of more investment products, such as hybrid securities for contingent capital. All risks should be properly collateralized and proper capital ratios maintained. The Fed, the SEC, FDIC, OCC, and Treasury Department failed to do their jobs preferring to defer to their financial constituents.
President Obama was given and took advice to make Larry Summers his chief economic adviser, to make Tim Geithner his Secretary of the Treasury, and to make Rahm Emanuel his chief of staff. None of these individuals were a part of his campaign nor, by their actions, do they believe in what his campaign said to the American people. They support the financial interests, with which they have been intimately involved, and nothing is going to change. If there is going to be corrective action and if President Obama is going to be true to his beliefs, there need to be decisive changes that send a clear message to the the lobbyists and the American people. The President needs to replace Larry Summers with Christina Romer, Tim Geithner with Elizabeth Warren, and Rahm Emanuel with Evan Bayh.
I must admit that I knew Rahm Emanuel when he was still a college student and working in the Congressional campaign of a high school friend of mind. I am disappointed, but I wonder if he might be better suited to be the President's lobbyist.
This would be a clear message that shakes the walls of money. Otherwise, the corporate socialists love dysfunctional governance, not just in the United States, but worldwide in any country. Will their corporate flags become feudal flags?
Print Page
In my prior post, Corporate Socialism vs Regulatory Reform, I made the case that the need for meaningful financial regulatory reform is crucial to the maintenance of democracy. Capitalism is not the privatization of profit and the socialization of risks and losses further enriching an elite group of profiteers at the expense of the common citizen. When corporation governance has become so corrupt that corporations are run for the benefit of the managers at the expense of the shareholders, there is something more than fundamentally wrong.
When Brooksley Born sought to have derivatives regulated in 1998, during the Clinton administration, and was crushed by Bob Rubin, Larry Summers, Alan Greenspan, and Arthur Levitt, the current global financial crisis was born and began to grow. With the financial crisis threatening to bring down banks worldwide and hurl the world into financial oblivion, the opportunity of crisis to provide decisive regulatory reform was decapitated by Tim Geithner, Hank Paulson, and the heads of the very banks and shadow banks which had perpetrated the crisis.
While the regulators and the government should have followed the successful Swedish example from the 1990's and seized the banks and shadow banks, stripped the toxic assets out and placed them in a resolution authority as had been done in the savings and loan crisis, dismissed the management, and then, after proper capital ratio improvements, spun the banks back into the private sector as financially stronger financial institutions, the American Congress was, instead, deceived into appropriating bailout money which was then used not as legislated but rather to fund the very banks and management which had caused the crisis. As a result the largest US banks have grown from 55% of GDP, pre-crisis, to 63% of GDP. Their concentration of the financial market has grown to the point where four banks have half the market in mortgages and two-thirds of the market for credit cards. Five banks control 95% of the derivatives market. Three US banks have over 40% of the global market for stock underwriting.
The very financial institutions which, by their risky conduct, created this global financial crisis have been allowed to become more powerful and more systemically dangerous, when they should have been broken up with a modern Glass-Steagall division between retail and investment banking, a transparent and regulated derivatives market should have been created, mark-to-market rules enforced, off balance sheet SIVs either prohibited or properly included in balance sheets, management and directors replaced, shareholder ownership reinforced, a consumer protection agency created, bank capital ratios raised, shadow banks formally identified and regulated as systemically dangerous financial institutions without respect to their original business structure, and systemically dangerous business and investment practices, including disproportionate salaries and bonuses not in the best interests of shareholders, penalized by transaction taxes on the business and the individual (with respect to salaries and bonuses).
As it is, the balance sheets of banks are not financially accurate, because they have been exempted from proper accounting rules. Citigroup wrote the new credit card "reforms" which became law and raised interest rates to 29.9% prior to its implementation and sent letters to its demand deposit account holders informing them the bank reserved the right to require seven days prior written notice of any withdrawal from a checking, savings, or money market account, while still being majority own by the United States government.
The Federal Reserve has failed to get banks, insurance companies, and hedge funds to agree on what derivatives should be transparently traded through a clearinghouse with proper collateral. The Administration has failed to decisively create proper regulations and a transparent market.
Purposefully complex and overly complicated mortgage loan, credit card, and other consumer loan agreements have been buried as a cause of the current crisis under the lobbyist's rosy picture of free market buyer beware fairy tales in which the wolves are victims. The unethical practices of banks, such as Goldman Sachs and J. P. Morgan have been increasingly chronicled and complex financial instruments and practices explained again and again only to have the PR people and lobbyists insist the public is not smart enough to understand finance. While Matt Taibbi has rigorously documented past Goldman Sachs and AIG dubious transactions and activities, some might think his recent article in which he uses the literary metaphor of different criminal con games to describe financial business practices was too factually loose, but the power of literature to transform truth into a universal visualization is not to be derided, as Emile Zola proved. Is an article any less powerful in its message against the spin of hundreds of lobbyists and the inaction of government just because it is published in Rolling Stone rather than the New Yorker? When elected officials fail to act and protect the citizenry, should public mockery of the obvious not be expected and escalated?
The recent announcement of a proposed Volcker rules which would limit the size of banks and a proposed ban on proprietary trading was seen as a ray of hope, although it left the banks as is without any reduction or limitations other than proprietary trading. The issue is really not size, as we have repeatedly said, it is systemically dangerous conduct and activities. Yet, Geithner has being preaching financial reform this week while recanting on proprietary trading saying it should be limited not banned. Fixing banks has become a question of power and the banks have been given more power by the very government which should be minimalizing their power through regulation. Protecting the banks has become more important than putting America to work and growing the economy, because the toxic assets were not stripped from the banks and the next financial crisis is peering around the corner at us.
Elizabeth Warren has been one of the few public officials focused and committed to financial regulatory reform and consumer protection. Canada has had a consumer protection agency for years and banking regulations in place which allowed it to weather this global financial crisis better than the United States and other countries. Yet, in the United States lobbyists have killed the proposed Consumer Financial Protection Agency and continue to dance on the grave of its aborted fetus with a "just another bloated government bureaucracy" headstone as testament to the power of money to create acceptable lies. The financial predators do not want anyone protecting the public; it is not profitable. Elizabeth Warren continues to promote the need of a CFPA as necessary to preserve the middle class which is growing smaller every day as the financial elite become even richer. She has made it perfectly clear that the battle has come down to the lobbyists versus American families and the lobbyists are winning.
The lobbyists are winning, because people, like Larry Summers and Tim Geithner among others, are helping the financial lobbyists to win. While Paul Volcker continues to be optimistic about the Volcker Rule while being marginalized again, he still is adamant that the real crisis facing the American people is the present bipartisan dysfunctional governance in which nothing gets done for the people. What chances of regulatory reform are there if it is completely acceptable for financial institutions to purposefully mislead investors and deceive markets while being paid a great deal of money to mislead people? What chances do we have that banks will be required to control leverage, improve their capital ratios, and operate with accurate balance sheets if the banks are allowed to be more powerful than the government? This should be an obvious need in any free society and should not require the financial innovation of more investment products, such as hybrid securities for contingent capital. All risks should be properly collateralized and proper capital ratios maintained. The Fed, the SEC, FDIC, OCC, and Treasury Department failed to do their jobs preferring to defer to their financial constituents.
President Obama was given and took advice to make Larry Summers his chief economic adviser, to make Tim Geithner his Secretary of the Treasury, and to make Rahm Emanuel his chief of staff. None of these individuals were a part of his campaign nor, by their actions, do they believe in what his campaign said to the American people. They support the financial interests, with which they have been intimately involved, and nothing is going to change. If there is going to be corrective action and if President Obama is going to be true to his beliefs, there need to be decisive changes that send a clear message to the the lobbyists and the American people. The President needs to replace Larry Summers with Christina Romer, Tim Geithner with Elizabeth Warren, and Rahm Emanuel with Evan Bayh.
I must admit that I knew Rahm Emanuel when he was still a college student and working in the Congressional campaign of a high school friend of mind. I am disappointed, but I wonder if he might be better suited to be the President's lobbyist.
This would be a clear message that shakes the walls of money. Otherwise, the corporate socialists love dysfunctional governance, not just in the United States, but worldwide in any country. Will their corporate flags become feudal flags?
Print Page
Wednesday, February 24, 2010
Fed Exiting & Supplementary Financing
Recently, we talked about the possible scenario of the Fed exiting its MBS positions by transferring them over an extended period to Fannie May and Freddie Mac with the assistance of Treasury support of Fannie and Freddie. We have seen the Discount Rate increase as an exiting return to normal lending programs by the Fed.
Now, we have been quietly presented with the resumption of the Treasury's Supplementary Financing Program which was initiated in 2008 and shrunk in 2009 with the intent to unwind it. In the words of the Fed, the purpose of the Treasury Supplementary Financing Program was to create deposits at the Fed which would "serve to drain reserves from the banking system, and will therefore offset the reserve impact of recent Federal Reserve lending and liquidity initiatives." The resumption announced yesterday will increase the current $5 billion level to $200 billion and the first of 8 weekly $25 billion 56-day SFP bill auctions will begin today.
This will restore the SFP to the level maintained between February and September 2009. This again raises the question of does the Federal Reserve intend to exit its enormous balance sheet positions by selling them in an orderly fashion in the future or does it have more creative plans in mind? The Econobrowser correctly points out that the Fed could drain its reserves by selling MBAs, doing reverse repos, selling T-bills, or with the Term Deposit Facility. Supposedly, the Fed wants more flexibility in managing its balance sheet. This announcement comes at the same time the Fed is making its final MBA purchases for a total of $1.25 trillion and ceasing future purchases. The addition of $200 billion in deposits would certainly improve the Fed's balance sheet. Or will it?
As the Econobrowser reports, there is a discrepancy in the the purchases of MBAs reported by the New York Federal Reserve and the Atlanta Federal Reserve, which is reporting them at $152 billion more than New York. Is this significant and a factor in the decision to re-expand the Supplementary Financing Program or is the SFP renewal just providing improved balance sheet flexibility to the Fed. If the later, why are all comments anonymous and for background only?
Print Page
Now, we have been quietly presented with the resumption of the Treasury's Supplementary Financing Program which was initiated in 2008 and shrunk in 2009 with the intent to unwind it. In the words of the Fed, the purpose of the Treasury Supplementary Financing Program was to create deposits at the Fed which would "serve to drain reserves from the banking system, and will therefore offset the reserve impact of recent Federal Reserve lending and liquidity initiatives." The resumption announced yesterday will increase the current $5 billion level to $200 billion and the first of 8 weekly $25 billion 56-day SFP bill auctions will begin today.
This will restore the SFP to the level maintained between February and September 2009. This again raises the question of does the Federal Reserve intend to exit its enormous balance sheet positions by selling them in an orderly fashion in the future or does it have more creative plans in mind? The Econobrowser correctly points out that the Fed could drain its reserves by selling MBAs, doing reverse repos, selling T-bills, or with the Term Deposit Facility. Supposedly, the Fed wants more flexibility in managing its balance sheet. This announcement comes at the same time the Fed is making its final MBA purchases for a total of $1.25 trillion and ceasing future purchases. The addition of $200 billion in deposits would certainly improve the Fed's balance sheet. Or will it?
As the Econobrowser reports, there is a discrepancy in the the purchases of MBAs reported by the New York Federal Reserve and the Atlanta Federal Reserve, which is reporting them at $152 billion more than New York. Is this significant and a factor in the decision to re-expand the Supplementary Financing Program or is the SFP renewal just providing improved balance sheet flexibility to the Fed. If the later, why are all comments anonymous and for background only?
Print Page
Sunday, February 21, 2010
Leftovers --- Radio Show 2/20/2010
In the show we covered the Fed's Federal Open Market Committee minutes from January in which it was apparent the Fed is struggling with the meaning and economic impact of currently high unemployment, despite employment being one of the two mandates of the Federal Reserve. One quandary they were having is whether extended unemployment benefits were "... encouraging some who have lost their jobs to remain in the labor force." I found this whole paragraph to discouraging in that it tends to validate my long voiced opinion that the Fed is using unemployment to hold inflation down as the the banks recapitalize and adjust their balance sheets.
The whole paragraph is as follows: "Though participants agreed there was considerable slack in resource utilization, their judgments about the degree of slack varied. The several extensions of emergency unemployment insurance benefits appeared to have raised the measured unemployment rate, relative to levels recorded in past downturns, by encouraging some who have lost their jobs to remain in the labor force. If that effect were large—some estimates suggested it could account for 1 percentage point or more of the increase in the unemployment rate during this recession—then the reported unemployment rate might be overstating the amount of slack in resource utilization relative to past periods of high unemployment. Several participants observed that the necessity of reallocating labor across sectors as the recovery proceeds, as well as the loss of skills caused by high levels of long-term unemployment and permanent separations, could reduce the economy’s potential output, at least temporarily; historical experience following large adverse financial shocks suggests such an effect. On the other hand, if recent productivity gains were to be sustained, as some business contacts indicated they would be, potential output currently could be higher than standard measures suggested, and the high level of the unemployment rate could be a more accurate indication of slack in resource utilization than usual measures of the output gap."
In conjunction with those passages, we also noted that a recent speech by the Minneapolis Fed President Kocherlakota included the statement: "The point, though, is that the fall is not spread uniformly across all people. Some workers—those who lose their jobs—suffer much bigger falls in income. For this reason, many macroeconomists now believe that the true cost of a recession is not the fall in GDP per se, but the associated increase in the risk of people becoming, and staying, unemployed. " I have been saying this for over a year in trying to explain how serious the high unemployment rate and the fact that 21.5 - 22% (if you use the formula from the 1990's for determining discouraged workers) of the population is unemployed is in determining if this technical "jobless" recovery is sustainable and how destructive a long, slow growth recovery will be to the structure and membership of the American middle class while income inequality will continue to grow at the benefit of the top 1%.
In that Kocherlakota's speech devolved into a defense of the Fed's role as a necessary regulator of the banking system, it is unfortunate that the Fed did not get the job done. My opinion is that the Fed needs to continue having that responsibility as a member of a council of regulators.
Greece may (it has not been formally announced) attempt a bond auction this coming week. The EU has provided no commitments of assistance preferring to ratchet demands for austerity program plans and reports by March 16 and May 1. The Greek PM has indicated they are ahead of schedule. They have raised taxes, but they also have an aging population with a low birth rate. I pointed out that the EU rules for determining debt to GDP ratios is not based on national debt but also includes local government debt. The causes of the problems in Greece, Spain, Italy, and Portugal, if not Ireland also, goes directly to the formation of the euro, the exchange rates, low ECB interest rates, competitiveness gaps between Eurozone nations, and trade imbalances within a single monetary union of sovereign nations. If the EU refuses to deal with the problems of the euro and the lack of appropriate tools for the ECB and attempts to ignore the problems with political compromises and hard line positions, the economic consequences could snow ball from country to country. If the political compromise approach stimulates social protest and disruption in Eurozone countries, who have not enjoyed the benefits of the economic trade imbalances as Germany has, the question could devolve into one of sovereignty. How much sovereignty must EU nations, who have economically suffered from the adoption of the euro, surrender to please the more economically dominate EU member nations?
Interestingly, the Greek PM made a public statement that Greece did not need assistance from the EU and could handle the problem itself. He also indicated that if Greece did want help it may seek it directly from the IMF without the cooperation of the EU. I was struck by how much this was similar to the recent suggestion of Simon Johnson that Greece bypass the EU and approach the IMF for assistance unilaterally and in so ding put immense political pressure on the EU and particularly France, because French President Sarkozy sees the head of the IMF, Strauss-Kahn, as a potential political opponent for president of France.
Spain, which is seen by some as a potentially larger problem than Greece as it has a much larger economy, is struggling with growing unemployment and a EU imposed austerity program, but this last week it had a bond auction in which it offered 5 billion euro 15 year bonds which priced at a 12 basis points premium and an over subscribed book of 12 billion euro orders. Over all, it was an encouraging auction.
Iceland will hold its Icesave referendum on March 6tt. We have documented the Iceland, UK, and Netherlands dispute and various proposals for resolution. The question is not should Iceland make payments, but what constitutes fair payment under EU law and when payments should be made. The interest rate of 5.55% has already been denounced by many commentators as excessive and unfair. Anna Sibert of Birkbeck College, London, and a member of the Monetary Policy Committee of the Central Bank of Iceland has published an article on the legal background of the debate and posits that, if the likely recovery of Landsbanki's assets is close to 90%, it will not be crippling to Iceland's taxpayer's who have already experienced an unprecedented fall in disposable income at 3600 euro per capita or 14% of Iceland's GDP at end of 2015 with the average payment burden from 2016 to 2024 less than 1% of GDP per year.
The economist Thorvaldur Gylfason has written "Eleven lessons from Iceland", in which he lays down eight lessons requiring financial regulatory reform, a tenth that government needs to protect jobs and incomes in such financial crises, and an eleventh that the need for financial regulation and separation of government and private banking does not negate a capitalist approach.
Philly Fed business activity index up to 17.6 January from 15.2 (expected 17.0); new orders up to 22.3 from 3.0; inventory up 5 points.
Citibank, whose majority shareholder is the United States government, which has sent letters in the recent past jacking credit card rates up to 29%, has sent letters to deposit account holders in Texas that Citibank reserves the right to demand 7 days notice in writing before money could be withdrawn from checking accounts, money markets, or savings accounts, which are demand deposit accounts. While they insist this applies to Texas only, the actual disclosure statement is not limited in its application.
Remember, Citigroup also wrote the new credit card federal legislation which just took effect. You will find going forward that the fees, increased minimum payments, and lack of any prohibition of usury will not be the informative disclosure and consumer protection promised.
Capital One annualized credit card write offs rose to 10.41% in January from 10.14% and 30 day delinquent only increased to 5.8% from 5.78%.
Humana will reduce its workforce by 5%.
Morgan Stanley may hand over its $2.4 billion investment in a Japanese hotel chain it bought in 2007 to creditors when debt comes due in April.
AIG has said it plans to keep 25% of its derivatives portfolio, with a notional value of $300-500 billion, as its Financial Products unit winds down saying the derivatives have been "derisked" and have upside potential.
Japan Q4 GDP was 1.1%.
All UK MPC members voted not to expand QE citing the likelihood that inflation will be below target for the next 3 years (below 2% medium term) and further QE might increase asset prices (bubble).
Barclays allocated more in pay bonuses as a percent of revenue than Goldman Sachs by setting aside 38%.
Walmart sales disappointed but were up 4.6% to $112.82 billion (expected $114.36 billion) and profit was $1.21/share vs 96 cents/share a year ago. EPS, after exclusions and tax benefits, was $1.17/share (expected $1.12).
Simon Property made a hostile offer of $10 million for bankrupt General Growth after a private offer was ignored and is promising that $7 million of that will pay in full unsecured creditors.
RIM (makes Blackberry) warned of a bandwidth crisis in urban areas which requires software developers to come up with better applications and efficient services to conserve bandwidth.
Kraft posted 48 cents/share Q4 profit, which is up 12 cents vs year ago.
Merck, which has merged with Schering Plough, had $2.34/share Q4 profit vs 78 cents year ago.
Abercrombie posted 53 cents/share Q4 profit which is down from 79 cents; revenue fell 4.6%; sales fell 13% down 12% in the US but up 86% internationally.
UK consumer prices were up 3.5% January -- a 14 month high -- supposedly from the implementation of VAT and will fall to normal later this year.
Kansas City Fed President Hoenig said, if interest rates are kept low, major inflation could ensue. While arguing the Fed needs to remain independent of political pressure, he then ventured into the government's fiscal policy and asserted that the politicians should cut spending and increase revenue (taxes?).
Eurozone trade surplus was $6 billion in December, because exports contracted less than imports.
US gasoline demand is down 1.3% vs year ago. Refinery capacity is 79.8%
UK business loans fell 8.1% in December vs year ago in the sharpest drop since records began in 1999.
UK retail sales fell 1.8% in January but it is up nine tenths vs year ago.
Spain estimates its economy will contract 5 tenths in 2010. GDP fell 3.6% in 2009.
Russia cut its interest rate for the 11th time in less than a year by 25 basis points to 8.5%.
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The whole paragraph is as follows: "Though participants agreed there was considerable slack in resource utilization, their judgments about the degree of slack varied. The several extensions of emergency unemployment insurance benefits appeared to have raised the measured unemployment rate, relative to levels recorded in past downturns, by encouraging some who have lost their jobs to remain in the labor force. If that effect were large—some estimates suggested it could account for 1 percentage point or more of the increase in the unemployment rate during this recession—then the reported unemployment rate might be overstating the amount of slack in resource utilization relative to past periods of high unemployment. Several participants observed that the necessity of reallocating labor across sectors as the recovery proceeds, as well as the loss of skills caused by high levels of long-term unemployment and permanent separations, could reduce the economy’s potential output, at least temporarily; historical experience following large adverse financial shocks suggests such an effect. On the other hand, if recent productivity gains were to be sustained, as some business contacts indicated they would be, potential output currently could be higher than standard measures suggested, and the high level of the unemployment rate could be a more accurate indication of slack in resource utilization than usual measures of the output gap."
In conjunction with those passages, we also noted that a recent speech by the Minneapolis Fed President Kocherlakota included the statement: "The point, though, is that the fall is not spread uniformly across all people. Some workers—those who lose their jobs—suffer much bigger falls in income. For this reason, many macroeconomists now believe that the true cost of a recession is not the fall in GDP per se, but the associated increase in the risk of people becoming, and staying, unemployed. " I have been saying this for over a year in trying to explain how serious the high unemployment rate and the fact that 21.5 - 22% (if you use the formula from the 1990's for determining discouraged workers) of the population is unemployed is in determining if this technical "jobless" recovery is sustainable and how destructive a long, slow growth recovery will be to the structure and membership of the American middle class while income inequality will continue to grow at the benefit of the top 1%.
In that Kocherlakota's speech devolved into a defense of the Fed's role as a necessary regulator of the banking system, it is unfortunate that the Fed did not get the job done. My opinion is that the Fed needs to continue having that responsibility as a member of a council of regulators.
Greece may (it has not been formally announced) attempt a bond auction this coming week. The EU has provided no commitments of assistance preferring to ratchet demands for austerity program plans and reports by March 16 and May 1. The Greek PM has indicated they are ahead of schedule. They have raised taxes, but they also have an aging population with a low birth rate. I pointed out that the EU rules for determining debt to GDP ratios is not based on national debt but also includes local government debt. The causes of the problems in Greece, Spain, Italy, and Portugal, if not Ireland also, goes directly to the formation of the euro, the exchange rates, low ECB interest rates, competitiveness gaps between Eurozone nations, and trade imbalances within a single monetary union of sovereign nations. If the EU refuses to deal with the problems of the euro and the lack of appropriate tools for the ECB and attempts to ignore the problems with political compromises and hard line positions, the economic consequences could snow ball from country to country. If the political compromise approach stimulates social protest and disruption in Eurozone countries, who have not enjoyed the benefits of the economic trade imbalances as Germany has, the question could devolve into one of sovereignty. How much sovereignty must EU nations, who have economically suffered from the adoption of the euro, surrender to please the more economically dominate EU member nations?
Interestingly, the Greek PM made a public statement that Greece did not need assistance from the EU and could handle the problem itself. He also indicated that if Greece did want help it may seek it directly from the IMF without the cooperation of the EU. I was struck by how much this was similar to the recent suggestion of Simon Johnson that Greece bypass the EU and approach the IMF for assistance unilaterally and in so ding put immense political pressure on the EU and particularly France, because French President Sarkozy sees the head of the IMF, Strauss-Kahn, as a potential political opponent for president of France.
Spain, which is seen by some as a potentially larger problem than Greece as it has a much larger economy, is struggling with growing unemployment and a EU imposed austerity program, but this last week it had a bond auction in which it offered 5 billion euro 15 year bonds which priced at a 12 basis points premium and an over subscribed book of 12 billion euro orders. Over all, it was an encouraging auction.
Iceland will hold its Icesave referendum on March 6tt. We have documented the Iceland, UK, and Netherlands dispute and various proposals for resolution. The question is not should Iceland make payments, but what constitutes fair payment under EU law and when payments should be made. The interest rate of 5.55% has already been denounced by many commentators as excessive and unfair. Anna Sibert of Birkbeck College, London, and a member of the Monetary Policy Committee of the Central Bank of Iceland has published an article on the legal background of the debate and posits that, if the likely recovery of Landsbanki's assets is close to 90%, it will not be crippling to Iceland's taxpayer's who have already experienced an unprecedented fall in disposable income at 3600 euro per capita or 14% of Iceland's GDP at end of 2015 with the average payment burden from 2016 to 2024 less than 1% of GDP per year.
The economist Thorvaldur Gylfason has written "Eleven lessons from Iceland", in which he lays down eight lessons requiring financial regulatory reform, a tenth that government needs to protect jobs and incomes in such financial crises, and an eleventh that the need for financial regulation and separation of government and private banking does not negate a capitalist approach.
Philly Fed business activity index up to 17.6 January from 15.2 (expected 17.0); new orders up to 22.3 from 3.0; inventory up 5 points.
Citibank, whose majority shareholder is the United States government, which has sent letters in the recent past jacking credit card rates up to 29%, has sent letters to deposit account holders in Texas that Citibank reserves the right to demand 7 days notice in writing before money could be withdrawn from checking accounts, money markets, or savings accounts, which are demand deposit accounts. While they insist this applies to Texas only, the actual disclosure statement is not limited in its application.
Remember, Citigroup also wrote the new credit card federal legislation which just took effect. You will find going forward that the fees, increased minimum payments, and lack of any prohibition of usury will not be the informative disclosure and consumer protection promised.
Capital One annualized credit card write offs rose to 10.41% in January from 10.14% and 30 day delinquent only increased to 5.8% from 5.78%.
Humana will reduce its workforce by 5%.
Morgan Stanley may hand over its $2.4 billion investment in a Japanese hotel chain it bought in 2007 to creditors when debt comes due in April.
AIG has said it plans to keep 25% of its derivatives portfolio, with a notional value of $300-500 billion, as its Financial Products unit winds down saying the derivatives have been "derisked" and have upside potential.
Japan Q4 GDP was 1.1%.
All UK MPC members voted not to expand QE citing the likelihood that inflation will be below target for the next 3 years (below 2% medium term) and further QE might increase asset prices (bubble).
Barclays allocated more in pay bonuses as a percent of revenue than Goldman Sachs by setting aside 38%.
Walmart sales disappointed but were up 4.6% to $112.82 billion (expected $114.36 billion) and profit was $1.21/share vs 96 cents/share a year ago. EPS, after exclusions and tax benefits, was $1.17/share (expected $1.12).
Simon Property made a hostile offer of $10 million for bankrupt General Growth after a private offer was ignored and is promising that $7 million of that will pay in full unsecured creditors.
RIM (makes Blackberry) warned of a bandwidth crisis in urban areas which requires software developers to come up with better applications and efficient services to conserve bandwidth.
Kraft posted 48 cents/share Q4 profit, which is up 12 cents vs year ago.
Merck, which has merged with Schering Plough, had $2.34/share Q4 profit vs 78 cents year ago.
Abercrombie posted 53 cents/share Q4 profit which is down from 79 cents; revenue fell 4.6%; sales fell 13% down 12% in the US but up 86% internationally.
UK consumer prices were up 3.5% January -- a 14 month high -- supposedly from the implementation of VAT and will fall to normal later this year.
Kansas City Fed President Hoenig said, if interest rates are kept low, major inflation could ensue. While arguing the Fed needs to remain independent of political pressure, he then ventured into the government's fiscal policy and asserted that the politicians should cut spending and increase revenue (taxes?).
Eurozone trade surplus was $6 billion in December, because exports contracted less than imports.
US gasoline demand is down 1.3% vs year ago. Refinery capacity is 79.8%
UK business loans fell 8.1% in December vs year ago in the sharpest drop since records began in 1999.
UK retail sales fell 1.8% in January but it is up nine tenths vs year ago.
Spain estimates its economy will contract 5 tenths in 2010. GDP fell 3.6% in 2009.
Russia cut its interest rate for the 11th time in less than a year by 25 basis points to 8.5%.
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