Ireland Ireland Ireland. Of growing concern is the potential mortgage default torrent building up in Ireland as families struggle to pay bills and keep up on mortgage payments. At least one in eight, or approximately 100,000 are under water. In a country where losing your home is a deep shame, there is a growing feeling that the homeowners played by the rules, but the banks did not. Now the banks are being saved and the homeowners are not, while their government has chosen insolvency to aid the banks but not its citizens. Ireland had until September to renounce the bank guarantees on the grounds they had withheld material information and turn the approximately 75 billion euro debt held by the government into shares. Instead, the Irish government chose to repay 55 billion euro of bank bonds maturing in September, primarily to other European banks. Are the Irish politicians beginning to be perceived by the Irish as more concerned about their eurozone partners than the Irish people?
The material this week on the crisis in Ireland and the EU has been voluminous and we used much of it in this post on "Ireland Betrayed".
Just as they did in January during the Greek crisis, Germany casts doubt on European fiscal solvency again with Ireland and the cost of debt and bond spreads went up just as they had in January. These increased costs and doubts have spread not just to Portugal but also to Spain and Italy. Still, Germany persists in raising the debate on restructuring debt resolution, private creditor participation, and the bailout mechanism.
As students protested in London over austerity cuts in education, the proponents of austerity are still arguing that austerity is a proper reaction to financial crisis, because it destroys access to capital markets making it harder for countries to issue debt. It is interesting how these papers and viewpoints always seem to pick narrow periods of time and discreet time examples within a country and ignore the more complete time line and different situations, responses by different governments, and the which were the most successful.
When Sweden discontinued emergency loans a month ago, short term interest rates began going up putting pressure on covered bonds, which are composed of mortgage revenue, and creating a sell off in the mortgage market. Swaps and spreads increased creating liquidity pressures. This should serve the ECB and Trichet as a case study of what might happen when the ECB withdraws emergency measures.
At the G20 meeting in South Korea, Geithner backed away from current account targets and China endorsed the Fed QE2 (quantitative easing) in an easing of tensions. This did not stop other, particularly emerging, countries from criticizing QE2 as an attack on their currencies, as promoting inflation in their countries, and, by Germany, as delays in belt tightening, while others in the United States praised QE2 as promoting the need for global fiscal expansion and financial reform. Wolfgang Munchau took German economic and financial leaders to task for philosophical intransigence on QE2 while they ignore economic policies which have created European and global current account problems which directly benefited German trade, reaping the huge financial rewards which was very much needed in the difficult process of integrating East Germany into a unified Germany. Munchau also criticized the German leaders as basically wrong in their perception and application of common economic thought on monetary policy and real exchange rates as opposed to nominal exchange rates. The World Bank said other countries may need to resort to capital controls as QE spurs asset bubbles in equity, currency, and property.
Asian Pacific economies (APEC), including China and the Untied States, are laying the groundwork for a vast free trade area despite currency disputes and geopolitical rivalries. At the same time, the United Kingdom was seeking increased trading ties with China. Cameron and Obama were both traveling the world to promote trade (exports) just as the countries they visited want to export more also. Could their time be better spent promoting the development of products at prices others want to import?
Fisher, Dallas fed President, said that QE2 could create a bubble in U.S. private equity. Bank of America and J. P. Morgan are leading lenders in doubling leveraged-loan sales.
In the United States the debate ( even Fed officials are split) on the effectiveness of QE2 continued with Roubini calling it a necessary evil and advocating that the ECB needed to exercise monetary easing in Europe despite German objections. Alford has characterized QE2 as an attempt to make two wrongs into one right by trying to increase GDP and employment via asset price increases and wealth effects while devaluing the dollar. Alford argues that the Fed does not know how to deal with external shocks and should refocus on regulation and offsetting swings in popular anticipation of economic movement contrary to actual economic conditions, such as anticipating inflation when the economy is disinflationary. Stiglitz is concerned that QE2 will do little to help the economy, but it may trigger currency and trade wars leaving the U.S. alienated and the world worse off, because competitive devaluation comes at the expense of others. Stiglitz would prefer that world leaders enter into a growth compact and cooperation of efforts. He would like countries to discourage short term inflows and encourage long term investment by regulation. Tom Duy notes that despite some positive economic data the economy still appears to be stagnating at the potential level when we need dramatic faster growth. This would mean that potential output rather than growth should be the target and the Fed should step up its quantitative easing, but Bernanke has made it obvious that he has no such plans. At the same time, Duy acknowledges that the QE plan is ineffectual while monetarily risky with the persistently low levels of labor utilization as the dark side. It comes down to the need of the government to deploy fiscal programs necessary for economic growth.
Econbrowser demonstrates that the run up in commodity prices is correlated with a monetary phenomenon such as a weak dollar and a fixed trading range renminbi. More importantly, he feels that the Fed needs to pay attention to commodity prices in the exercise of their monetary policies, particularly if the price of oil approaches $90. Interestingly enough, commodity prices fell during this week as China made several announcements on interest rates and how housing purchases are financed which caused the international markets to believe economic tightening is coming to China. China has been making such announcements for some time as it slowly attempts to control inflation, but these were more than usual and even included multiple announcements in essentially the same economic areas.
Prior to the G20 , the head of the World Bank intimated that the world should consider a return to the gold standard letting loose a barrage of criticism against him as the gold standard has been seen as a driving reason the Great Depression lasted as long as it did. Zoellick back pedaled later and said that was not what he meant, but Bill Mitchell took him to extensive task in very detailed fashion as to why Zoellick must have had a "brain attack".
Daniel Gros succinctly details the monetary consequences of a reserve currency, a free floating currency, and a managed currency with capital controls. Emerging nations now and Germany with the Deutschmark in the 1970's want and wanted no part of being a reserve currency with wide exchange rate swings which do not help exports. When the Deutschmark became a reserve currency in the 1980's, just such swings had a large impact on the German economy and the adoption of the euro allowed the reserve currency effect to be spread over a wider area with Germany benefiting from favorable exchange rates within the eurozone. The United States benefits with low debt costs and has never relied on exports (exports and imports average only about 15% of GDP). China benefits from a competitive advantage of being able to set the exchange rate for its currency. This has created a situation in which the United States envies China for its jobs and China envies the Untied States for its investment opportunities. While the United States could prohibit China from buying U.S. debt and thereby impose capital controls, it could also destroy the U.S. position as the financial center of the world. For Gros, the choice the U.S. has is between job creation and a more competitive exchange rate or the privilege of cheap debt financing. Europe is stuck in the middle with all of the disadvantages of the U.S, and none of its privileges.
In a letter to the Financial Stability Oversight Committee, Simon Johnson explained the importance of the proper implementation of the Volcker Rule in controlling systemic risk in financial institutions which financially motivated to not practice proper risk management. In an interview, James Gorman, the chief executive of Morgan Stanley, said financial institutions which are failing as the result of reckless mismanagement should be allowed to fail and went to express concern that the Volcker Rule could cause financial institutions to not be able to make markets resulting in market liquidity problems, depending on how it is implemented. The financial sector, as we have indicated in the past is attempting to neuter the Volcker Rule through lobbyist efforts in this implementation process.
Questions have arisen as to whether Citi's auditors, KPMG, have provided inadequate advice which has resulted in Citi putting only $1 billion in reserves against repurchase risk when it has a half trillion dollars in mortgages with put back exposure. The banks want the foreclosure mess/fraud to just go away, but documents are being found defective and some state attorney generals, such as Ohio's Richard Cordray are actively seeking settlements. The sale of derivatives to local and state governments has cost taxpayers over $4 billion as the interest-rate bets turned sour. Meredith Whitney expects increased financial regulation to decrease regional banks profitability and has characterized the foreclosure mess as similar to the tobacco lawsuits that have been going on for over forty years. G20 nation Banks got a one year relief from tighter risk management rules, because the study on how it is to be done will not be complete by the end of 2010 and will take another year until the end of 2011.
The deficit Commission report has made quite a splash as people have begun wading through it, but it has been highly criticized as very muddled in its analysis of what is a long term debt problem and its failure to address the cost of health care as a major driver of increased spending. It did go after social security, defense spending, retirement plans, Medicare, taxes, "tort reform", discretionary spending, and federal salaries and workforce without substantive scenarios documenting actual efficiencies. The blog, ataxingmatter, did a good analysis of the report and came up worried that it does nothing to solve the current economic problems and would probably be counter productive to creating growth and jobs. Mark Thoma listed several commentaries and reactions. Do not be surprised as this unfolds and more time is spent looking at this report that it just may raise taxes for the middle class and lower taxes for the wealthy.
Cisco disappointed on its Q3 results and the weaknesses were attributed to local and state government austerity.
The Kauffman Foundation released a new study on ETFs characterizing them as sources of significant market disruption. It accuses the ETFs of setting the market prices rather than the underlying stocks in the ETF. Industry commentators immediately took exception in which the study was characterized as just plain wrong, a big lie, and a rambling diatribe. The news release, the actual study, and the three responses cited are embedded in this paragraph for you to read and draw your own conclusions. ETFs have been traced to the market flash disruptions, although primarily in the way they are traded by market makers, and I have often pointed out that, although they track indexes, they have a pattern of volatility which requires them to have a stop-loss limit order in place just as you would treat a stock. I have not found them particularly comparable to mutual funds, or as well diversified, as a whole. It is tedious digging out the tax consequences and distribution policies, which should be transparent to any investor, of a ETF or ETN
John Hussman in his weekly commentary (Monday 11/8) accuses the Fed of treating the symptoms rather than the disease with QE2 and an attempt to replace one economic bubble with another. In his opinion we have allowed the Fed to assume the role of creator of bubbles when it should be concerned about the level and need of liquidity. He thinks it is misguided for the Fed to be concerned with unemployment and the cause of inflation is always the expansion of unproductive government spending. In the sense that the Fed's ability to influence unemployment is directly contingent on the fiscal policy of government, Hussman is correct. In the sense that unproductive spending by both private and public sources is inefficient and likely to increase leverage in inappropriate sectors and to inappropriate levels, he is correct. However, inflation is not solely caused by unproductive spending and price stability is a legitimate monetary policy concern. Hussman is concerned about unemployment and its drag on economic growth, but he sees it improving gradually in 2011 and is more worried about the vulnerability of the housing and financial markets.
Consumer Metrics Institute in its November 9th commentary sees a possible bottom in the contraction event of the current economic event despite its extended duration.
SIFMA, which is a securities industry association, has changed its opposition to a fiduciary standard to one in which a fiduciary standard would put broker-dealers out of business and result in the loss of low cost financial advice to consumers. This is essentially the same position of the insurance industry and sees fiduciary duty to the best interests of the consumer as impediments to selling. The CFP board (Certified Financial Planner) has passed a 80% increase in dues to be used in a public relations campaign to influence the American consumer that the financial planning designation, with the lowest educational and experience standards and a long and current history of an inability or unwillingness to enforce strong ethical standards of conduct conducive to serving the fiduciary interests of clients which would be contrary to the best interests of many of its commission based members, is the "only" financial planning designation. The majority of retirement plan sponsors and retirement plan consultants want mandatory enrollment on defined contribution programs, immediate vesting, government incentives, and tough loan provisions. While I favor participation in retirement plans, the automatic enrollment and other issues tied to it are often pushed by the very people who are providing the products and earning money managing money, while the employees automatically get enrolled in the most conservative investments which will not finance retirement. It is all about salespeople in whatever garb making more money at the expense of the sheep.
Market:3 banks failed = 146; unofficial problem banks list = 898
DOW/ Volume NASDAQ/ Volume
Mon <37.24>;/ down 26.8% 1.07/ down 14.1%
Tue <60.09>;/ up 22.2% distribution day <17.07>/ up 20.3%
Wed 10.29/ up .6% 15.80/ down 7.7%
Thu <73.94>/ down 14.8% <23.26>/ down 25.1%
Fri <90.52> / up 6.2% Dow distribution day <37.31>/ down 11.4%
Total <251.50> <60.77>
Mon: Oil up 21 cents to $87.06; Dollar stronger but mixed against the yen; little economic news; cyclical stocks up; gold topped $1400.
Tue: Oil down 34 cents to 86.72; Dollar stronger; commodity stocks hurts the most on dollar rally; margin raised on silver positions; gold hit new high and fell; home builders down on bank lawsuits.
Wed: Oil up 1.09 to 87.81; Dollar stronger but mixed against the pound; afternoon rally saved the day; weekly jobless claims down 24,000 to 435,000, 4 week moving average down 10,000 to 456,500, and continuing claims down 86,000 to 4,301,000; oil supplies down 3.3 million barrels, gas supplies down 1.9 million barrels, and distillate down 5.0 million barrels.
Thu: Oil unchanged at 87.81; Dollar stronger; Cisco disappointed on lower capital spending by local/state government austerity.
Fri: Oil down 2.93 to 84.88; Dollar weaker (yen weaker U.S. but stronger Asia); hopes for Ireland bailout but China tightened and commodities sold off; gold ($1365.50) and silver down.
United States:
President Obama was in India on Sunday to drum up trade.
Warsh, Fed Governor, said it is necessary to monitor weak dollar and rising commodity prices to see if Fed asset buys inflationary and the U.S. needs to resume trade leadership.
U.S. mortgage delinquencies were 2.7% Q3 up from 2.6% Q2; 457,000 foreclosures.
Consumer debt was down .9% Q3 to $11.6 trillion; almost one trillion below Q3 2008.
McDonald's same store sales were up 6.5% beating expectations of 5.4%; European stores up 5.8% (expected 4.2%) on France, UK, and Russia; U.S. stores were up 5.6% (expected 6.1%); Asia, Mideast, and Africa were up 5.3%.
Fed survey shows banks eased some criteria for business ad some consumers Q3, but demand for loans stayed weak and is not expected to return to normal levels until after 2012.
The NFIB Small Business Economic Survey showed business optimism up 2.7 to 91.7, which is still a recession reading; sales were up 4 to <13>; <16%> of owners reported inventory increases.
The SEC is very interested in program trading which becomes disruptive and it also issued rules effectively prohibiting "stub quotes" (default one penny trades by market makers).
U.S. wholesale inventory was up 1.5% September; biggest increase (surge?) in more than two years matching July; wholesale sales were up .4% (less than expected).
Ambac filed for Chapter 11 bankruptcy as expected.
Goldman Sachs has suspended foreclosures in all states with judicial review and others as it reviews its Litton Loan Service unit procedures.
FDIC has changed assessments for it insurance fund as required by the Dodd-Frank legislation and large banks will pay more as the assessment will now be based on total liabilities and not the amount of deposits held.
J.P. Morgan faces two class action lawsuits on the mortgage mess.
Ally Financial is being sued by Cambridge Place Investment Management to recoup subprime losses.
PNC Financial is being sued by FHLA Chicago for misrepresentation and omissions on MBS sales.
Schwab joined those suing Bank of America.
Geithner backed away from numerical limits on current account balances prior to the G20 meeting; IMF endorsed the numerical limits idea and Germany dismissed the idea.
Gasoline demand is down .4% for week ending 11/5; down 1.2% vs year ago as retail prices climb prior to holidays.
Volcker said he does not know how to cut unemployment near term as economic growth is likely to remain weak for another year (did he mean if one only used monetary policy?).
IRS set deductible limits for LTC (long term care) purchased in 2011 at <=40 years old --- $340, <=50 --- $640, <=60 --- $1270, <=70 --- $3390, and >70 --- $4240.
GM Q3 profit was $2 billion.
U.S. exports September were up .4%; imports were down 1%; trade gap was down to $44.0 billion from $46.5 billion.
Prudential priced $1 billion stock offering to finance the purchase of two Japanese life insurance units from AIG with 18.3 million shares @ $54.50.
Fed began QE2 with the purchase of $7.23 billion U. S. Treasuries; bond prices lower; yields on 7 and 5 year up.
Individual investors may have difficulty purchasing GM IPO next week as 31 brokers have not been allocated shares, including Schwab, E-Trade, and Ameritrade. The IPO has drawn $60 billion in orders or 6 times the offering.
Commodities down the most in 18 months on speculation China will boost rates (borrowing costs) to dampen inflation.
U.S. postal service lost $8.5 billion in its most recent fiscal year - for the fourth straight yearly loss.
Intel dividend will be 15% higher in Q1 to 18 cents a share.
30 Year fixed mortgage is down to 4.17%; the lowest since records began in 1971.
October bank repossessions fell 9% from September as faulty paperwork halted the foreclosure process.
The National Association of Realtors reported Q3 home prices were up in 77 of 155 metro areas, which is down from 100 in Q2.
ECRI Weekly Leading Indicators were up to <5.7> by end of week from <6.5> last week. This is a 24 week high.
U.S. Treasury auctions:
3 year Treasury, $32 billion, yield .575%, bid to cover 3.26, foreign 35.01%, direct 39.72%.
10 year Treasury, $24 billion, yield 2.636%, bid to cover 2.81, foreign 56.6%, direct 9.37%.
30 year Treasury, $16 billion, yield 4.320%, bid to cover 2.31 (worst in year), foreign 38.4% (weak), direct 10.16%.
International:
Brazil's central bank engineered a rescue of mid-sized lender, Banco PanAmericano, which presented no systemic danger but needed $1.45 billion in the form of a loan from the country's deposit insurer. It generated some panic selling of similar bank shares on the 10th. The bank had evidently sold some loan assets and kept them on its balance sheet and some may have been sold more than once. Here are the details and also information on the twenty top Brazilian banks.
South Korea has found an undetermined deposit of rare earths.
Prime Minister Cameron, United Kingdom, was in China to talk trade.
Commerzbank Q3 profit was $158 million (113 million euro) with a drop in bad loan costs on their income sheet. Analysts expected a profit of 148.4 million euro. Dresden Bank acquisition operational profit was down 40% vs year ago on weak securities business.
The OECD said China, Britain, France, and India are slowing down while U.S., Germany, Japan, and Russia are picking up economic steam.
Juncker has called for a common eurozone bond, which is a concept I have proposed in past writings on the Pan-European Debt Crisis.
German industrial output was surprisingly down .8% September (expected to go up .5%). German exports September were up 3% and imports were down 1.5%.
China expressed willingness to help Portugal but did not commit to buy bonds.
China's pension fund chief, Dai Xianglong, has proposed the the U.S. dollar should trade within a fixed trading range like the renminbi.
China auctioned 1 year bills at a higher rate than last week at 2.3497% (prior 2.2913%) and caught the market by surprise. It is seen as tightening.
Barclay's is confidant is twill achieve Tier 1 capital ratio of 11.5% by the end of 2013. It cited shrinking bad debts (expected to decline 30%) despite income down 14% (2.83 billion pounds) from Q2. Q3 had a pre-tax profit of 1.27 pounds.
U.K. factory growth was down to .1% in September --- the lowest in 5 months; industrial output was up .4%.
China October exports were up 22.9%; imports were up 25.3%; trade surplus was $27.1 billion ($16.9 billion in September).
China unveiled new capital inflow curbs.
Ireland's central bank Governor, Honohan, indicated Ireland's troubled banks could be potential objects of foreign ownership. Ireland's borrowing costs were at a record high on Thursday the 11th.
Greek unemployment in August was up to 12,2% and is projected to climb to 14.5% in 2011 and 15% in 2012.
On Thursday China hiked bank reserves again --- 50 bps effective November 16th and also told six other banks to increase their rates another 50 bps as of November 15th: KBC, Construction Bank, Agricultural Bank of China, Bank of China, Bank of Communications, and the Shanghai Pudong Development Bank.
Moody's upgraded China's bond ratings to Aa3 from A1 and maintained a positive outlook citing resilient economic performance and balance of payments.
Dubai Group missed a payment on its $330 million loan.
Eurozone Q3 GDP was up .4% (Q2 was up 1%) and 1.9% vs year ago; Germany was up .7% on sales and 3.9% vs year ago; France was up .4% and 1.8% vs year ago; Greece was down 1.1%; Portugal was up .4%. The full report is here
Eurozone industrial production fell in September to 5.2% (expected 7.1%) with a sharp drop in durable goods. On monthly terms output fell in Germany, Italy, Spain, and was flat in France. A fill can be found here.
The Financial Stability Board told the G20 it will be the end of 2011 before it can render a report on rules to prevent a collapse of systemically dangerous financial institutions which it was supposed to provide by the end of 2010. This gives large banks a one year reprieve.
Spain's economy was flat in Q3 vs Q2.
Russia's Q3 growth was 2.7% annualized (5.2% in Q2) as the result of a severe drought.
China's inflation is 4.4%, which is a 25 month high.
Joseph Stiglitz said developing countries need to control short-term capital inflows to keep economic recovery stable, but they also need to continue to allow long-term investment to create jobs.
Print Page
Friday, November 19, 2010
Thursday, November 18, 2010
Ireland Betrayed
As the EU auditors descend on Ireland this week to examine the Irish banks, last week had more information than could be dealt with in our Ireland posts and the forthcoming Economy & Market post for last week.
There has been a general agreement with our opinion that Germany's position on debt resolution and restructuring with respect to bondholders in future eurozone bailouts led to market disruption, but we also held the view that the ECB, EU, and the European monetary Union has not supported Ireland to the extent that Ireland played the austerity poster child and protected other European banks. Now, there is pressure to accept a sovereign bailout rather than economic support with apparently three options on the table in the form of sovereign and bank loans, banks loans, or sovereign only loans. The bond market rallied at the very suggestion of possible assistance.
The fact remains that Ireland proves austerity has not only failed but has made the economy worse. The ECB and EU are reluctant to move decisively to support Ireland and sort the Irish banks out. Given the Irish bonds based on Ireland's NAMA program to guarantee bank private debt and restructure their toxic assets and balance sheets are, by many accounts, deposited with the ECB, the ECB may not have Ireland's best interests at heart. I, and many others, have argued in the past that the EMU lacks proper fiscal policy and coordination which significantly hobbles the member nations from exercising appropriate fiscal policy consistent with monetary policy. For all practical purposes, the EMU does not have the structure to promote fiscal unity among sovereign nations. What the EU and ECB do not appreciate is that Ireland is not Greece and Ireland may have more cause and reason to protect its citizens by withdrawing from the euro and renouncing and restructuring Irish bank debt. Except for the United Kingdom, Ireland has a current account surplus. If presented with the choice of joining Iceland or Greece, the Irish people may want to have a say.
There are two significant problems to such a national course of action and one is the economic consequences of credit default swaps being paid by the international banks and the other is the Irish government is the same political party which oversaw the housing bubble and poorly regulated, and highly speculative, economic expansion which went bust in 2008. Obviously, the opposition party has not done its job as well and has indicated it would continue guarantees on private bank senior bondholders, who are primarily European banks. Hopes that exports could drive recovery while reducing government spending defies recognition of the reality of global trading in which exporting is global and importing is national. The ECB has bought Irish bonds and provided liquidity loans, which alone amount to approximately 130 billion euro, to Irish banks.
Still it has become obvious from the beginning of these denied negotiations that Ireland wants nothing to do with a sovereign bailout and wants the support of the EMU and ECB as an austerity team player and equal eurozone nation. The IMF, as I have predicted, voiced its willingness to help Ireland, which undoubtedly spurred the EU to move at a faster pace amid internal debate. Meanwhile, the current market crisis continues to unfold as a currency crisis, despite reports this week, and last, that corporations are withdrawing funds from Irish banks. If these are foreign corporations, that would be consistent with a currency crisis and if these are predominantly Irish corporations and individual demand deposits that would be consistent with a banking crisis, but the reports have made no attempt to distinguish which corporations are withdrawing funds. There is little doubt the euro would be strengthened by EU and ECB support of Ireland.
Ireland deserves better leadership and the European Union and the EMU need to demonstrate support despite member nations not wanting any demonstration of fiscal union however artificially fabricated. If the ECB refuses or fails to fully support the need to unwind the Irish government from the private bank debts and guarantees of senior bondholders of those banks, because it is not in the best interests of the ECB balance sheet or other European banks, does Ireland have cause to assert its right to protect its citizens without respect of the global economic consequences?
Print Page
There has been a general agreement with our opinion that Germany's position on debt resolution and restructuring with respect to bondholders in future eurozone bailouts led to market disruption, but we also held the view that the ECB, EU, and the European monetary Union has not supported Ireland to the extent that Ireland played the austerity poster child and protected other European banks. Now, there is pressure to accept a sovereign bailout rather than economic support with apparently three options on the table in the form of sovereign and bank loans, banks loans, or sovereign only loans. The bond market rallied at the very suggestion of possible assistance.
The fact remains that Ireland proves austerity has not only failed but has made the economy worse. The ECB and EU are reluctant to move decisively to support Ireland and sort the Irish banks out. Given the Irish bonds based on Ireland's NAMA program to guarantee bank private debt and restructure their toxic assets and balance sheets are, by many accounts, deposited with the ECB, the ECB may not have Ireland's best interests at heart. I, and many others, have argued in the past that the EMU lacks proper fiscal policy and coordination which significantly hobbles the member nations from exercising appropriate fiscal policy consistent with monetary policy. For all practical purposes, the EMU does not have the structure to promote fiscal unity among sovereign nations. What the EU and ECB do not appreciate is that Ireland is not Greece and Ireland may have more cause and reason to protect its citizens by withdrawing from the euro and renouncing and restructuring Irish bank debt. Except for the United Kingdom, Ireland has a current account surplus. If presented with the choice of joining Iceland or Greece, the Irish people may want to have a say.
There are two significant problems to such a national course of action and one is the economic consequences of credit default swaps being paid by the international banks and the other is the Irish government is the same political party which oversaw the housing bubble and poorly regulated, and highly speculative, economic expansion which went bust in 2008. Obviously, the opposition party has not done its job as well and has indicated it would continue guarantees on private bank senior bondholders, who are primarily European banks. Hopes that exports could drive recovery while reducing government spending defies recognition of the reality of global trading in which exporting is global and importing is national. The ECB has bought Irish bonds and provided liquidity loans, which alone amount to approximately 130 billion euro, to Irish banks.
Still it has become obvious from the beginning of these denied negotiations that Ireland wants nothing to do with a sovereign bailout and wants the support of the EMU and ECB as an austerity team player and equal eurozone nation. The IMF, as I have predicted, voiced its willingness to help Ireland, which undoubtedly spurred the EU to move at a faster pace amid internal debate. Meanwhile, the current market crisis continues to unfold as a currency crisis, despite reports this week, and last, that corporations are withdrawing funds from Irish banks. If these are foreign corporations, that would be consistent with a currency crisis and if these are predominantly Irish corporations and individual demand deposits that would be consistent with a banking crisis, but the reports have made no attempt to distinguish which corporations are withdrawing funds. There is little doubt the euro would be strengthened by EU and ECB support of Ireland.
Ireland deserves better leadership and the European Union and the EMU need to demonstrate support despite member nations not wanting any demonstration of fiscal union however artificially fabricated. If the ECB refuses or fails to fully support the need to unwind the Irish government from the private bank debts and guarantees of senior bondholders of those banks, because it is not in the best interests of the ECB balance sheet or other European banks, does Ireland have cause to assert its right to protect its citizens without respect of the global economic consequences?
Print Page
Friday, November 12, 2010
Economy & Market Week Ended 11/5/2010
Samuel Brittan had an excellent updated (original in May) article on "The futile attempt to save the eurozone" this week which I did not use in my post "On the Road out of Ireland" on the bubbling credit/liquidity crisis brewing in Ireland. Using a private, subscriber available only paper published by Capital Economics and written by Christopher Smallwood, Brittan cites Germany's insistence on impossibly severe fiscal policies as reason to wonder if Germany wants the euro to continue and the fiscal tightening of Greece as an example of how to "... dampen the economy and risk creating a vicious cycle of debt and deflation." Yet, Germany has been the prime beneficiary of the European Monetary Union's creation of exchange rate and current account trade imbalances.
All of this has Brittan asking if the eurozone member nations might be better off with their own currencies. While I do not believe it is necessary to abandon the euro, I find the refusal of eurozone member nations to recognize the need for monetary support of individual member nation's internal fiscal policy needs as essentially self-destructive and not salvageable by nominal adjustments alone. Brittan is not anti-European but Ireland is on the brink of a credit/liquidity crisis.
This weekly report has become increasingly late to publication as I have been repeatedly diverted to the problem in Ireland and writing three posts this week on the subject.
United States unemployment for October remained unchanged at 9.6% with employment up 151,000 job with a substantial decline in government layoffs/terminations. This 151,000 job increase just barely keeps up with population growth and at this anemic rate of growth it would take until about 2030 or later to return to ful employment. The labor participation rate was down to 64.5% from 64.7%. The employment to population ratio was down to 58.3% from 58.5%. Involuntary part-time workers were down 318,000 to 9.2 million. Those unemployed more than 26 weeks rose to 6,206,000 from 6,123,000 who "still want a job". The U6 discouraged workers was down to 17.0% from 17.1%, but, if one used the 1994 calculation for discouraged workers, it would be closer to approximately 22%.
Retail sales were mixed, although the media emphasized growth, with soft weather related sales and significant discounting. There is every appearance that the beginning of the Christmas shopping season is being pushed up from its traditional Friday after Thanksgiving and discounting will be a prime marketing approach.
The U.S. election brought to the forefront the failure of President Obama to clearly, consistently, and forcefully enunciate a domestic policy which focuses on reducing high unemployment. His post election day news conference showed him at his worst as he rambled and prolonged his answers to questions, because he lacked a central focused message. His attempts to achieve consensus at the expense of what needs to be done combined with his willingness to accept poor economic advice from discreditable economic advisers, such as Summers, who is leaving, and Geithner, has only sharpened the impression he cares more for the financial elite and little for the hardships and the imposed economic burdens of the financial bailout of the disappearing American middle class. Austerity will not create jobs and it will dampen the economy even more with further concentration of wealth in the top 1%. We need productive fiscal programs not pandering to delusional or self-serving politicians spewing misguided and destructive economic propaganda
The toll of unemployment continues with a job gap of 11.8 million jobs down just slightly from September at 11.9 million. At the best average monthly rate (208,000) of job growth in the 2000's, it would take 12 years
to eliminate the job gap; at the average monthly rate (321,000) from the 1990's, it would take 5 years. As wages decline, deflation is reinforced. At the same time, the ratio of household debt to GDP has risen to 95% and the ratio of household liabilities to disposable personal income has risen to 135% which is creating a nation of zombie households.
Mark Thoma posted on a George Evans' paper on economic stagnation in a low interest rate environment in which the proper economic solutions are a sufficiently aggressive fiscal policy (targeted spending) of which fiscal aid to state and local governments has proven to provide quicker economic improvement and tax cuts have proven themselves ineffective unless targeted at liquidity constrained households. Since these fiscal policies may be politically "undesirable", the Fed would maintain low interest rates in an attempt to increase consumption and start purchasing longer term government bonds, although such monetary policy may not work as it builds negative expectations. Such approaches all have limitations in achieving timely economic impact. While not discouraging states from balancing their budgets, the use of federal fiscal spending on productive infrastructure capital projects, which are not constrained by a balanced state budget, on the state and local level may provide a more robust approach to reviving aggregate demand future output growth. As I have mentioned on several past occasions, China has implemented such a program in the last two years, although some of their projects, such as an empty mega mall and an entirely empty city, have been apparently wasteful.
Krugman demonstrated his position that a higher targeted inflation rate of 4% might possibly resolve unemployment and create an exit from a liquidity trap. Since thresh holds exist in which too low or too high a rate would not be productive, the amount of inflation needs to be modeled with the level of unemployment to properly achieve full employment without credibility or inflationary problems.
The Fed announced a second quantitative easing (QE2) in which they will buy 600 billion dollars of longer tern U.S. Treasuries at a pace of $75 billion per month. Some people saw this as slightly higher than expected although others had expected at least a trillion. The purchases will be in the 2.5 to 10 year range. This QE2 has already been priced into the market and now the market is speculating that a third will be needed. This is a switch from the Fed's normal practice of buying short term bonds and reinforces its current inflation target. There are those market analysts who believe QE2 will do nothing for the economy and, in more extreme views, may cause inflation and the destruction of the currency. Confirming Krugman's view it reinforces the current inflation target, Bernanke asserted that QE2 will not spark unwanted inflation. The St. Louis Fed, whose president, James Bullard, believes continued low interest rates are potentially deflationary, has published a small article on the benefits and costs of low interest rates. Yves Smith has characterized Bernanke as disengaged from reality and QE2 is nothing more than deceptive window dressing and goes on to cite El-Erian of Pimco, who says QE2 has risky adverse consequences and does nothing to resolve the need for meaningful structural reforms. QE2 risks stoking inflation in emerging countries and putting pressure on their currencies and creating disruptive capital inflows. In fact, emerging countries and countries preparing to attend the G20 meeting in South Korea have denounced the QE2 as a threat requiring protective responses. On Friday, Hoenig, Kansas City Fed President, renewed his call for higher interest rates now to avoid higher future inflation from pumping liquidity into the market.
Meanwhile, the Fed continues to be viewed as raining money on financial corporations, doing nothing about unemployment, and continuing a policy which is promoting slow growth squeezing out savers and destroying retirees as middle America is left exposed and vulnerable to flap in the wind. Now, the banks have made it clear they intend to defeat the Volcker Rule inhibiting systemically risky and dangerous business activity by using the rule making process to blunt and neuter that portion of the Dodd-Frank Reform. In the meantime, the mortgage foreclosure fraud participants continue to blow a smoke screen as they steam away from any factual discussions of the fraudulent documents, fraudulent submissions to the courts, and fraudulent process of the mortgage business and foreclosure process. Flaws in some $50 billion of Citigroup moves of mortgages to mortgage-backed securities show it to be vulnerable to lawsuits and put-backs. J. P. Morgan has received requests for files on $8.1 billion in mortgage loans which may be candidates for buybacks. Six large U.S. banks are estimated to have additional exposure to $31 billion in buybacks over the already recognized $12.4 billion in losses.
Nobel Prize winning economist George Akerlof has argued that prosecution of criminal fraud is necessary for the economy to have a sustained recovery and Joseph Stiglitz agreed that a failure to enforce a equitable judicial code would result in indentured servitude. Stiglitz is adamant in "Justice for Some" that the "rule of law" is under substantial attack in the mortgage mess with a denial of property rights, a bankruptcy process that takes rather than repairs, and a legal process that is turning justice for all into justice for those who can afford it. As laws on campaign financing by corporations and non-profit lobbying groups, which do not have to disclose funding sources, we have seen the U. S. Chamber of Commerce become the lobbyist and conduit of campaign contributions from the international financial elite. If you have money, you have power, while always true, is inconsistent with a free republican democracy.
The FDIC has sued executives of a failed Illinois bank to recover as much as $2 billion in losses, because they issued $11.8 million in dividends and incentive payments while masking problems in commercial real estate loans with new loans for $8.5 million of losses failing to preserve capital and provide sufficient reserves.
The attack on consumer friendly regulation in the securities and financial services business is hitting high gear with SIFMA arguing that commission based accounts are more cost effective and the "flawed" fiduciary standard would cost investors money. These arguments all assume lumping financial salespeople with fiduciary advisers just as they are now and the objection is against disclosure and actual legal fiduciary responsibility. Others are all upset that FINRA is contemplating an ADV like form requiring disclosure to clients from brokers of conflicts of interest and limitations of duty to the client; all of which is seen as overkill in providing information by the salespeople. The ICI dislikes the SEC proposal to limit 12(b)1 fees, which requires a distinction between a continuing sales charge and a "marketing and service fee" and which the provider would have the choice of constructing within limits, as potentially increasing cost to the consumer.
John Hussman, in his weekly commentary on Monday the 1st, said "... greater risk does not imply greater reward if the risks investors take are overvalued and inefficient ones." Using his forward operating earnings methodology, the ten projected return on the S&P 500 is 4.69% annually. With the S&P 500 dividend yield at 1.96%, the ten year projection on a dividend based model would be only 2.30% annually. On quantitative easing, Hussman believe the original QE had little effect on real GDP or inflation and what kicked the can down the road was not the QE but the guarantee of Fannie and Freddie debts and the suppression of fair and accurate financial disclosure via the FASB suspension of mark-to-market rules. He still believes the market is overvalued, overbought, and over-bullish with a shift to neutral on not yet rising yield pressures. He believes we have not yet cleared the recent months of economic concerns, but the economic data has been better than expected but still mixed enough to not be decisive. The recent GDP report with 2% growth had 70% of that growth represented by inventory growth with final sales at only .6% annual gain. The ECRI Weekly Leading Index improved to <6.5> from <11.0> in July but the same index improved from <10.8> in March 2008 to <5.9> in May 2008. Short term activity has been reasonably quiet and modestly positive, but it is taking place over a more fragile economic structure than observers appreciate.
Market Report: 4 banks failed = 143; unofficial problem bank list = 894
DOW/Volume NASDAQ/Volume
Mon 6.13/ down 7.3% <2.57>/ down 9.9%
Tue 64.10/ down 4.8% 28.68/ down .1%
Wed 26.41/ up 20.6% 6.75/ up 4.0%
Thu 219.71/ up 23.3% 37.07/ up 25.5%
Fri 9.24/ down 8.6% 1.64/ down 15.5%
TOTAL 325.59 71.57
Mon: Oil up $1.52 to $82.95; Dollar stronger but mixed against the pound; volatile price day ending flat; mixed economic reports.
Tue: Oil up 95 cents to 83.90; Dollar stronger but mixed against the euro; low volume on market hopes on election and Fed QE; Nasdaq flirted with April high again.
Wed: Oil up 79 cents to 84.69; Dollar weaker but mixed against the yen; new 2010 high for Nasdaq - best since June 2008; oil supplies were up 1.9 million barrels, gas was down 2.7 million barrels, and distillate was down 3.6 million barrels; oil was affected in part by French refinery strikes and Canadian Irving St. John refinery maintenance.
Thu: Oil up 1.80 to 86.69; Dollar weaker; world wide stock rally on QE2 but gold and bond prices went up on inflation fears; weekly jobless claims were up 20,000 to 457,000, 4 week moving average was up 2000 to 456,000, and continuing claims were down 42,000 to 4.340,000.
Fri: Oil up 36 cents to 86.85; Dollar stronger; market turned positive at end and gold ended at $1397.40.
United States:
ECRI Weekly Leading Index was unchanged at <6.5>.
U.S. consumer spending was up .2% September (.5% in August); core PCE for 12 months was up 1.2% (lowest since September 2001); core inflation September was flat (.1 August); personal income was down .1% and disposable income was down .2%
ISM manufacturing activity was up to 56.9 October from 54.4; new orders were up to 58.9 from 51.1.
AMBAC indicated it will not pay interest on bonds as it was unable to raise capital as an alternative to Chapter 11 bankruptcy.
Pfizer Q3 missed revenue expectations by $500 million on weaker overseas sales and generic competition.
1.47 million Americans have been out of work 99 weeks or longer as of September.
Fannie Mae posted $4.1 billion Q3 loss and will be asking for $100 million more aid.
ADP private employer survey for October was up 43,000 jobs.
U.S. manufacturing new orders were up 2.1% September; ex-transportation they were up .4%; non-defense capital goods orders were down .2% (up 5.1% August).
ISM service sector was up to 54.3 from 53.2.
GM sales were up 3.5% October.
Fed plans to spend $600 billion in QE2 by the middle of next year at $75 billion per month on longer term U.S. Treasury purchases.
SEC banned brokers from allowing clients access to direct exchange trading with broker access codes without pre-trade risk controls.
In GM's IPO (seeking $13 billion), U.S. will reduce its 61% stake to 41-43% by selling at least $365 million in shares at $26-29. Why not wait to sell?
Ford sales were up 19% October; GM sales were up 13%; Chrysler sales were up 37%; Toyota sales were down 4%.
U.S. productivity Q3 was up 1.9% (it was down 1.8% Q2); labor costs were down .1%.
Bernanke said QE low interest rates will not stoke inflation.
President Obama backtracked and indicated he may consider extension of Bush tax cuts for all income levels.
Fed may release guidelines allowing "well capitalized" banks to raise dividends.
AIG Q3 loss is $2.4 billion on asset sale losses and mixed insurance business results; operating income was up 47% to $1.07 billion.
Bank lobbyists hope to blunt the Volcker Rule during the implementation process; Representative Bacchus has warned Secretary Geithner to be careful and not be rigid.
In response to investor claims, including the New York Federal Reserve, that Bank of America should buy back mortgages improperly made, Bank of America said the lawsuit would speed up the foreclosure process and force it to evict homeowners and the losses on the mortgages sold were the result of the economic downturn and not from any underlying problem with how the mortgages were sold to investors.
Pending home sales index was down 1.8% September.
Sear will be open on Thanksgiving Day for the first time in 85 years.
Consumer credit was up $2.1 billion September in the first gain since January; August was revised down to <$4.9villion>; revolving credit (credit cards) was down $8.3 billion in the 25th straight month drop.
Berkshire Hathaway operating profit was up 28% to $1692 per share but net profit was down 8% to $2.99 billion with losses on derivatives (derivatives portfolio is about $60 billion).
REO (real estate owned) inventory for Fannie, Freddie, and FHA through Q3 is up 24% from Q2 and up 92% vs year ago.
International:
ECB has refused to release files on how the prior Greek government used derivatives to hide debt.
The Bank of Japan held interest rates at .1% and held off on further monetary policy easing, although it said it intended to buy index linked ETFs, AA or higher rated REITs, and government bonds.
The Reserve Bank of Australia raised its interest rate 25 bps to 4.75% in what some economists thought unnecessary. The Australian dollar shot up in response. Controversy stormed up when the Commonwealth Bank of Australia, the country's largest home lender, raised its variable mortgage rate 45 bps to 7.81% in the face of profits indicating costs had risen 15%. Analysts subsequently pointed out that nearly 50% of homeowners are suffering mortgage stress deep in the mortgage belt, but the act has cause a political firestorm.
China PMI (Purchasing Managers Index) was up to 54.7 October from 53.8, which was more than expected, to a six month high; total new orders were up to 58.2 from 56.3; export new orders were down to 52.6 from 52.8.
China ordered banks to charge more interest to first time home buyers by halving the interest rate discount from 30% to 15%.
South Korea exports were up 29.9% October vs year ago; imports were up 22.4%; CPI was 4.1%, which is a 20 month high.
Distressed loans in Spanish banking system reached 102.5 billion euro in August at 5.6% of all loans, which is the highest proportion since 1996. Some banks, including BBVA, are selling branches and then leasing them back in order to book short term gain and conceal mortgage losses.
Spanish unemployment statistics, in the complete survey, show unemployment did not drop to 19.79% by the end of September but rose to 20.8% from 20.5%.
India's Central Bank raised its interest rate for the 6th time --- repurchase rate to 6.25% and reverse repurchase rate to 5.25% --- in order to slow inflation and protect purchasing power of the poor.
BP profit was down 67% to $1.79 billion Q3 but Q2 had been <$17.2 billion>.
China's five year plan may create large changes, but a Central Bank governor said progress towards current account convertability and global yuan will be gradual.
French and Spanish car sales were down in October with the end of economic incentives.
Markit eurozone PMI was up to 54.6 October from 53.7 with Germany, France, and Italy up, Spain and Ireland struggling, and Greece declining.
German Economic Minister, Bruederle, expressed concern U.S. is trying to stimulate by injecting liquidity and using monetary policy to influence the dollar's exchange rate.
Asian and European markets liked the Fed QE move; both saw it as a willingness to support economic recovery. How long will that view last?
China is considering setting up reserve of 10 metals, including rare earth; China has 95% of the global market in rare earths.
Canada block BHP's bid for Potash Corp as not in the national interest.
Portugal broke political gridlock and voted an austerity budget to reduce the deficit at 7.3% of GDP to 4.6% next year.
China auto sales were down in September to 1.27 million units but up 27% vs year ago.
Toyota Q2 profit more than quadrupled to $1.2 billion but missed views; sales were up 6%, but it revised down its annual forecast to $4.3 billion on lower U.S. sales.
CDS (credit default swaps) for Ireland, Greece, and Portugal were at their highest levels at the end of the week since September 2009; Spanish CDS were also up.
Print Page
All of this has Brittan asking if the eurozone member nations might be better off with their own currencies. While I do not believe it is necessary to abandon the euro, I find the refusal of eurozone member nations to recognize the need for monetary support of individual member nation's internal fiscal policy needs as essentially self-destructive and not salvageable by nominal adjustments alone. Brittan is not anti-European but Ireland is on the brink of a credit/liquidity crisis.
This weekly report has become increasingly late to publication as I have been repeatedly diverted to the problem in Ireland and writing three posts this week on the subject.
United States unemployment for October remained unchanged at 9.6% with employment up 151,000 job with a substantial decline in government layoffs/terminations. This 151,000 job increase just barely keeps up with population growth and at this anemic rate of growth it would take until about 2030 or later to return to ful employment. The labor participation rate was down to 64.5% from 64.7%. The employment to population ratio was down to 58.3% from 58.5%. Involuntary part-time workers were down 318,000 to 9.2 million. Those unemployed more than 26 weeks rose to 6,206,000 from 6,123,000 who "still want a job". The U6 discouraged workers was down to 17.0% from 17.1%, but, if one used the 1994 calculation for discouraged workers, it would be closer to approximately 22%.
Retail sales were mixed, although the media emphasized growth, with soft weather related sales and significant discounting. There is every appearance that the beginning of the Christmas shopping season is being pushed up from its traditional Friday after Thanksgiving and discounting will be a prime marketing approach.
The U.S. election brought to the forefront the failure of President Obama to clearly, consistently, and forcefully enunciate a domestic policy which focuses on reducing high unemployment. His post election day news conference showed him at his worst as he rambled and prolonged his answers to questions, because he lacked a central focused message. His attempts to achieve consensus at the expense of what needs to be done combined with his willingness to accept poor economic advice from discreditable economic advisers, such as Summers, who is leaving, and Geithner, has only sharpened the impression he cares more for the financial elite and little for the hardships and the imposed economic burdens of the financial bailout of the disappearing American middle class. Austerity will not create jobs and it will dampen the economy even more with further concentration of wealth in the top 1%. We need productive fiscal programs not pandering to delusional or self-serving politicians spewing misguided and destructive economic propaganda
The toll of unemployment continues with a job gap of 11.8 million jobs down just slightly from September at 11.9 million. At the best average monthly rate (208,000) of job growth in the 2000's, it would take 12 years
to eliminate the job gap; at the average monthly rate (321,000) from the 1990's, it would take 5 years. As wages decline, deflation is reinforced. At the same time, the ratio of household debt to GDP has risen to 95% and the ratio of household liabilities to disposable personal income has risen to 135% which is creating a nation of zombie households.
Mark Thoma posted on a George Evans' paper on economic stagnation in a low interest rate environment in which the proper economic solutions are a sufficiently aggressive fiscal policy (targeted spending) of which fiscal aid to state and local governments has proven to provide quicker economic improvement and tax cuts have proven themselves ineffective unless targeted at liquidity constrained households. Since these fiscal policies may be politically "undesirable", the Fed would maintain low interest rates in an attempt to increase consumption and start purchasing longer term government bonds, although such monetary policy may not work as it builds negative expectations. Such approaches all have limitations in achieving timely economic impact. While not discouraging states from balancing their budgets, the use of federal fiscal spending on productive infrastructure capital projects, which are not constrained by a balanced state budget, on the state and local level may provide a more robust approach to reviving aggregate demand future output growth. As I have mentioned on several past occasions, China has implemented such a program in the last two years, although some of their projects, such as an empty mega mall and an entirely empty city, have been apparently wasteful.
Krugman demonstrated his position that a higher targeted inflation rate of 4% might possibly resolve unemployment and create an exit from a liquidity trap. Since thresh holds exist in which too low or too high a rate would not be productive, the amount of inflation needs to be modeled with the level of unemployment to properly achieve full employment without credibility or inflationary problems.
The Fed announced a second quantitative easing (QE2) in which they will buy 600 billion dollars of longer tern U.S. Treasuries at a pace of $75 billion per month. Some people saw this as slightly higher than expected although others had expected at least a trillion. The purchases will be in the 2.5 to 10 year range. This QE2 has already been priced into the market and now the market is speculating that a third will be needed. This is a switch from the Fed's normal practice of buying short term bonds and reinforces its current inflation target. There are those market analysts who believe QE2 will do nothing for the economy and, in more extreme views, may cause inflation and the destruction of the currency. Confirming Krugman's view it reinforces the current inflation target, Bernanke asserted that QE2 will not spark unwanted inflation. The St. Louis Fed, whose president, James Bullard, believes continued low interest rates are potentially deflationary, has published a small article on the benefits and costs of low interest rates. Yves Smith has characterized Bernanke as disengaged from reality and QE2 is nothing more than deceptive window dressing and goes on to cite El-Erian of Pimco, who says QE2 has risky adverse consequences and does nothing to resolve the need for meaningful structural reforms. QE2 risks stoking inflation in emerging countries and putting pressure on their currencies and creating disruptive capital inflows. In fact, emerging countries and countries preparing to attend the G20 meeting in South Korea have denounced the QE2 as a threat requiring protective responses. On Friday, Hoenig, Kansas City Fed President, renewed his call for higher interest rates now to avoid higher future inflation from pumping liquidity into the market.
Meanwhile, the Fed continues to be viewed as raining money on financial corporations, doing nothing about unemployment, and continuing a policy which is promoting slow growth squeezing out savers and destroying retirees as middle America is left exposed and vulnerable to flap in the wind. Now, the banks have made it clear they intend to defeat the Volcker Rule inhibiting systemically risky and dangerous business activity by using the rule making process to blunt and neuter that portion of the Dodd-Frank Reform. In the meantime, the mortgage foreclosure fraud participants continue to blow a smoke screen as they steam away from any factual discussions of the fraudulent documents, fraudulent submissions to the courts, and fraudulent process of the mortgage business and foreclosure process. Flaws in some $50 billion of Citigroup moves of mortgages to mortgage-backed securities show it to be vulnerable to lawsuits and put-backs. J. P. Morgan has received requests for files on $8.1 billion in mortgage loans which may be candidates for buybacks. Six large U.S. banks are estimated to have additional exposure to $31 billion in buybacks over the already recognized $12.4 billion in losses.
Nobel Prize winning economist George Akerlof has argued that prosecution of criminal fraud is necessary for the economy to have a sustained recovery and Joseph Stiglitz agreed that a failure to enforce a equitable judicial code would result in indentured servitude. Stiglitz is adamant in "Justice for Some" that the "rule of law" is under substantial attack in the mortgage mess with a denial of property rights, a bankruptcy process that takes rather than repairs, and a legal process that is turning justice for all into justice for those who can afford it. As laws on campaign financing by corporations and non-profit lobbying groups, which do not have to disclose funding sources, we have seen the U. S. Chamber of Commerce become the lobbyist and conduit of campaign contributions from the international financial elite. If you have money, you have power, while always true, is inconsistent with a free republican democracy.
The FDIC has sued executives of a failed Illinois bank to recover as much as $2 billion in losses, because they issued $11.8 million in dividends and incentive payments while masking problems in commercial real estate loans with new loans for $8.5 million of losses failing to preserve capital and provide sufficient reserves.
The attack on consumer friendly regulation in the securities and financial services business is hitting high gear with SIFMA arguing that commission based accounts are more cost effective and the "flawed" fiduciary standard would cost investors money. These arguments all assume lumping financial salespeople with fiduciary advisers just as they are now and the objection is against disclosure and actual legal fiduciary responsibility. Others are all upset that FINRA is contemplating an ADV like form requiring disclosure to clients from brokers of conflicts of interest and limitations of duty to the client; all of which is seen as overkill in providing information by the salespeople. The ICI dislikes the SEC proposal to limit 12(b)1 fees, which requires a distinction between a continuing sales charge and a "marketing and service fee" and which the provider would have the choice of constructing within limits, as potentially increasing cost to the consumer.
John Hussman, in his weekly commentary on Monday the 1st, said "... greater risk does not imply greater reward if the risks investors take are overvalued and inefficient ones." Using his forward operating earnings methodology, the ten projected return on the S&P 500 is 4.69% annually. With the S&P 500 dividend yield at 1.96%, the ten year projection on a dividend based model would be only 2.30% annually. On quantitative easing, Hussman believe the original QE had little effect on real GDP or inflation and what kicked the can down the road was not the QE but the guarantee of Fannie and Freddie debts and the suppression of fair and accurate financial disclosure via the FASB suspension of mark-to-market rules. He still believes the market is overvalued, overbought, and over-bullish with a shift to neutral on not yet rising yield pressures. He believes we have not yet cleared the recent months of economic concerns, but the economic data has been better than expected but still mixed enough to not be decisive. The recent GDP report with 2% growth had 70% of that growth represented by inventory growth with final sales at only .6% annual gain. The ECRI Weekly Leading Index improved to <6.5> from <11.0> in July but the same index improved from <10.8> in March 2008 to <5.9> in May 2008. Short term activity has been reasonably quiet and modestly positive, but it is taking place over a more fragile economic structure than observers appreciate.
Market Report: 4 banks failed = 143; unofficial problem bank list = 894
DOW/Volume NASDAQ/Volume
Mon 6.13/ down 7.3% <2.57>/ down 9.9%
Tue 64.10/ down 4.8% 28.68/ down .1%
Wed 26.41/ up 20.6% 6.75/ up 4.0%
Thu 219.71/ up 23.3% 37.07/ up 25.5%
Fri 9.24/ down 8.6% 1.64/ down 15.5%
TOTAL 325.59 71.57
Mon: Oil up $1.52 to $82.95; Dollar stronger but mixed against the pound; volatile price day ending flat; mixed economic reports.
Tue: Oil up 95 cents to 83.90; Dollar stronger but mixed against the euro; low volume on market hopes on election and Fed QE; Nasdaq flirted with April high again.
Wed: Oil up 79 cents to 84.69; Dollar weaker but mixed against the yen; new 2010 high for Nasdaq - best since June 2008; oil supplies were up 1.9 million barrels, gas was down 2.7 million barrels, and distillate was down 3.6 million barrels; oil was affected in part by French refinery strikes and Canadian Irving St. John refinery maintenance.
Thu: Oil up 1.80 to 86.69; Dollar weaker; world wide stock rally on QE2 but gold and bond prices went up on inflation fears; weekly jobless claims were up 20,000 to 457,000, 4 week moving average was up 2000 to 456,000, and continuing claims were down 42,000 to 4.340,000.
Fri: Oil up 36 cents to 86.85; Dollar stronger; market turned positive at end and gold ended at $1397.40.
United States:
ECRI Weekly Leading Index was unchanged at <6.5>.
U.S. consumer spending was up .2% September (.5% in August); core PCE for 12 months was up 1.2% (lowest since September 2001); core inflation September was flat (.1 August); personal income was down .1% and disposable income was down .2%
ISM manufacturing activity was up to 56.9 October from 54.4; new orders were up to 58.9 from 51.1.
AMBAC indicated it will not pay interest on bonds as it was unable to raise capital as an alternative to Chapter 11 bankruptcy.
Pfizer Q3 missed revenue expectations by $500 million on weaker overseas sales and generic competition.
1.47 million Americans have been out of work 99 weeks or longer as of September.
Fannie Mae posted $4.1 billion Q3 loss and will be asking for $100 million more aid.
ADP private employer survey for October was up 43,000 jobs.
U.S. manufacturing new orders were up 2.1% September; ex-transportation they were up .4%; non-defense capital goods orders were down .2% (up 5.1% August).
ISM service sector was up to 54.3 from 53.2.
GM sales were up 3.5% October.
Fed plans to spend $600 billion in QE2 by the middle of next year at $75 billion per month on longer term U.S. Treasury purchases.
SEC banned brokers from allowing clients access to direct exchange trading with broker access codes without pre-trade risk controls.
In GM's IPO (seeking $13 billion), U.S. will reduce its 61% stake to 41-43% by selling at least $365 million in shares at $26-29. Why not wait to sell?
Ford sales were up 19% October; GM sales were up 13%; Chrysler sales were up 37%; Toyota sales were down 4%.
U.S. productivity Q3 was up 1.9% (it was down 1.8% Q2); labor costs were down .1%.
Bernanke said QE low interest rates will not stoke inflation.
President Obama backtracked and indicated he may consider extension of Bush tax cuts for all income levels.
Fed may release guidelines allowing "well capitalized" banks to raise dividends.
AIG Q3 loss is $2.4 billion on asset sale losses and mixed insurance business results; operating income was up 47% to $1.07 billion.
Bank lobbyists hope to blunt the Volcker Rule during the implementation process; Representative Bacchus has warned Secretary Geithner to be careful and not be rigid.
In response to investor claims, including the New York Federal Reserve, that Bank of America should buy back mortgages improperly made, Bank of America said the lawsuit would speed up the foreclosure process and force it to evict homeowners and the losses on the mortgages sold were the result of the economic downturn and not from any underlying problem with how the mortgages were sold to investors.
Pending home sales index was down 1.8% September.
Sear will be open on Thanksgiving Day for the first time in 85 years.
Consumer credit was up $2.1 billion September in the first gain since January; August was revised down to <$4.9villion>; revolving credit (credit cards) was down $8.3 billion in the 25th straight month drop.
Berkshire Hathaway operating profit was up 28% to $1692 per share but net profit was down 8% to $2.99 billion with losses on derivatives (derivatives portfolio is about $60 billion).
REO (real estate owned) inventory for Fannie, Freddie, and FHA through Q3 is up 24% from Q2 and up 92% vs year ago.
International:
ECB has refused to release files on how the prior Greek government used derivatives to hide debt.
The Bank of Japan held interest rates at .1% and held off on further monetary policy easing, although it said it intended to buy index linked ETFs, AA or higher rated REITs, and government bonds.
The Reserve Bank of Australia raised its interest rate 25 bps to 4.75% in what some economists thought unnecessary. The Australian dollar shot up in response. Controversy stormed up when the Commonwealth Bank of Australia, the country's largest home lender, raised its variable mortgage rate 45 bps to 7.81% in the face of profits indicating costs had risen 15%. Analysts subsequently pointed out that nearly 50% of homeowners are suffering mortgage stress deep in the mortgage belt, but the act has cause a political firestorm.
China PMI (Purchasing Managers Index) was up to 54.7 October from 53.8, which was more than expected, to a six month high; total new orders were up to 58.2 from 56.3; export new orders were down to 52.6 from 52.8.
China ordered banks to charge more interest to first time home buyers by halving the interest rate discount from 30% to 15%.
South Korea exports were up 29.9% October vs year ago; imports were up 22.4%; CPI was 4.1%, which is a 20 month high.
Distressed loans in Spanish banking system reached 102.5 billion euro in August at 5.6% of all loans, which is the highest proportion since 1996. Some banks, including BBVA, are selling branches and then leasing them back in order to book short term gain and conceal mortgage losses.
Spanish unemployment statistics, in the complete survey, show unemployment did not drop to 19.79% by the end of September but rose to 20.8% from 20.5%.
India's Central Bank raised its interest rate for the 6th time --- repurchase rate to 6.25% and reverse repurchase rate to 5.25% --- in order to slow inflation and protect purchasing power of the poor.
BP profit was down 67% to $1.79 billion Q3 but Q2 had been <$17.2 billion>.
China's five year plan may create large changes, but a Central Bank governor said progress towards current account convertability and global yuan will be gradual.
French and Spanish car sales were down in October with the end of economic incentives.
Markit eurozone PMI was up to 54.6 October from 53.7 with Germany, France, and Italy up, Spain and Ireland struggling, and Greece declining.
German Economic Minister, Bruederle, expressed concern U.S. is trying to stimulate by injecting liquidity and using monetary policy to influence the dollar's exchange rate.
Asian and European markets liked the Fed QE move; both saw it as a willingness to support economic recovery. How long will that view last?
China is considering setting up reserve of 10 metals, including rare earth; China has 95% of the global market in rare earths.
Canada block BHP's bid for Potash Corp as not in the national interest.
Portugal broke political gridlock and voted an austerity budget to reduce the deficit at 7.3% of GDP to 4.6% next year.
China auto sales were down in September to 1.27 million units but up 27% vs year ago.
Toyota Q2 profit more than quadrupled to $1.2 billion but missed views; sales were up 6%, but it revised down its annual forecast to $4.3 billion on lower U.S. sales.
CDS (credit default swaps) for Ireland, Greece, and Portugal were at their highest levels at the end of the week since September 2009; Spanish CDS were also up.
Print Page
Germany's Irish Hair Shirt
The bond market fears on Ireland's guarantees of the liabilities of three Irish banks, of which the Bank of Ireland has already essentially recapitalized with only 36% government ownership, and the nationalization of two smaller mortgage financing banks has spread to the stock markets as Irish bank stocks sold off yesterday.
The Wall Street Journal had a good article, which was profiled by Felix Salmon, on the development of the current concerns and how the banks loans collateralization and value had been under reported and underestimated. A blog post by one of the article's writer makes some additional observations and then veers off into lesser, minor issues with respect to mortgages, lending practices for mortgages, property leverage, and the Irish tax code as if they were major players in the current credit/liquidity crisis. Felix Salmon also concludes that Ireland's guarantee of the liabilities was a mistake as we have written and maintained for months. However, this is a credit/liquidity crisis and not a banking crisis which has shifted from the banks to the government of Ireland.
Of far more interest is why Ireland made the decision, or was encouraged to make the decision, to guarantee the liabilities of the banks and protect the senior bondholders as well as the depositors. As we have written, this decision is the very core and crux of the current credit/liquidity crisis and brings into the spotlight the necessity of the European Monetary Union and the ECB to take a proactive and consistent supportive position despite the counterproductive position of Germany which wants sovereign bondholders to share in the burden of any eurozone nation bailout by the ESFS, which has yet to be activated, with a proposal which would require a treaty change. Merkel's statements have not only created a bond market reaction, as Merkel's statements on this subject have done in the past, but Germany refuses to back away from a concept that has a legitimate point but is being put forward at a time when it cannot be considered and effectively decided and implemented in any timely fashion while significantly aggravating the current situation. Germany's position is particularly perplexing as we have shown in "On the Road Out of Ireland" that the BIS statistics (p. 6) show German banks have the largest exposure to Irish private debt and, consequently, should be receiving the largest protection from the Irish government's guarantees on the private Irish banks' senior bonds. Apparently, Merkel finds the unusual protection of risky private investments by German banks acceptable but finds that German bank risk assumed by sovereign debt guarantees of a nation which is not Germany unappealing.
EU leaders have sought to reassure the bond markets that sovereign bondholders would not be affected and issued a statement from the G20 meeting that the ESFS activation does not require private sector involvement. A proposal from Breugel as commented on by the blog The Irish Economy would create a mechanism for the resolution of a sovereign debt crisis.
EuroIntelligence has been adamant in its reporting and opinion that Ireland is going down and on the verge of seeking a bailout from the ESFS. To me this seems premature. If the ECB and EMU do not publicly demonstrate support for Ireland, and the ECB tends to be too secretative about its support efforts, then I would expect the IMF to publicly support Ireland and force the hands of the EMU and ECB, particularly as this has had direct negative effects on the bond and swaps cost of Portugal, Spain, Greece, and Italy.
The relevant articles on Ireland and this issue have become voluminous. Here are some for your review without additional comment:
Investor concerns hits banks
Central Bank of Ireland Governor Honohan comments
2000 billion euro contagion
Ireland on brink as beggar for aid
Irish borrowing costs hit high
Honohan wants foreign buyers for banks
Bank of Ireland profit down
repo margin increased
Irish investors head for exits
income tax rates to rise
EU commissioner sees light at end of tunnel
no confidence 3% deficit target will be reached
corporate tax revenue
make European defaults not bailouts
revised Irish risk parameters
eurozone bond records
sovereign debt doubts grow
Berlin cast doubt and spreads contagion (Spanish)
Europe ready to split in two or recover (Spanish)
wait until mortgage defaults hit home
ECB bond purchasing
bond buyers strike
Irish debt revives concern about Europe
costs rise on financing fears
sovereign risk and budget woes
Print Page
The Wall Street Journal had a good article, which was profiled by Felix Salmon, on the development of the current concerns and how the banks loans collateralization and value had been under reported and underestimated. A blog post by one of the article's writer makes some additional observations and then veers off into lesser, minor issues with respect to mortgages, lending practices for mortgages, property leverage, and the Irish tax code as if they were major players in the current credit/liquidity crisis. Felix Salmon also concludes that Ireland's guarantee of the liabilities was a mistake as we have written and maintained for months. However, this is a credit/liquidity crisis and not a banking crisis which has shifted from the banks to the government of Ireland.
Of far more interest is why Ireland made the decision, or was encouraged to make the decision, to guarantee the liabilities of the banks and protect the senior bondholders as well as the depositors. As we have written, this decision is the very core and crux of the current credit/liquidity crisis and brings into the spotlight the necessity of the European Monetary Union and the ECB to take a proactive and consistent supportive position despite the counterproductive position of Germany which wants sovereign bondholders to share in the burden of any eurozone nation bailout by the ESFS, which has yet to be activated, with a proposal which would require a treaty change. Merkel's statements have not only created a bond market reaction, as Merkel's statements on this subject have done in the past, but Germany refuses to back away from a concept that has a legitimate point but is being put forward at a time when it cannot be considered and effectively decided and implemented in any timely fashion while significantly aggravating the current situation. Germany's position is particularly perplexing as we have shown in "On the Road Out of Ireland" that the BIS statistics (p. 6) show German banks have the largest exposure to Irish private debt and, consequently, should be receiving the largest protection from the Irish government's guarantees on the private Irish banks' senior bonds. Apparently, Merkel finds the unusual protection of risky private investments by German banks acceptable but finds that German bank risk assumed by sovereign debt guarantees of a nation which is not Germany unappealing.
EU leaders have sought to reassure the bond markets that sovereign bondholders would not be affected and issued a statement from the G20 meeting that the ESFS activation does not require private sector involvement. A proposal from Breugel as commented on by the blog The Irish Economy would create a mechanism for the resolution of a sovereign debt crisis.
EuroIntelligence has been adamant in its reporting and opinion that Ireland is going down and on the verge of seeking a bailout from the ESFS. To me this seems premature. If the ECB and EMU do not publicly demonstrate support for Ireland, and the ECB tends to be too secretative about its support efforts, then I would expect the IMF to publicly support Ireland and force the hands of the EMU and ECB, particularly as this has had direct negative effects on the bond and swaps cost of Portugal, Spain, Greece, and Italy.
The relevant articles on Ireland and this issue have become voluminous. Here are some for your review without additional comment:
Investor concerns hits banks
Central Bank of Ireland Governor Honohan comments
2000 billion euro contagion
Ireland on brink as beggar for aid
Irish borrowing costs hit high
Honohan wants foreign buyers for banks
Bank of Ireland profit down
repo margin increased
Irish investors head for exits
income tax rates to rise
EU commissioner sees light at end of tunnel
no confidence 3% deficit target will be reached
corporate tax revenue
make European defaults not bailouts
revised Irish risk parameters
eurozone bond records
sovereign debt doubts grow
Berlin cast doubt and spreads contagion (Spanish)
Europe ready to split in two or recover (Spanish)
wait until mortgage defaults hit home
ECB bond purchasing
bond buyers strike
Irish debt revives concern about Europe
costs rise on financing fears
sovereign risk and budget woes
Print Page
Thursday, November 11, 2010
Banking Crisis vs. Currency Crisis
It is very common for commentators, even economists, to improperly characterize a credit/liquidity crisis as a banking crisis, when a banking crisis is defined by a withdrawal of demand deposits and a credit/liquidity crisis is characterized by a withdrawal of foreign investment, lending, and deposits. When the perception grows that the sovereign government will not undertake the necessary monetary and fiscal policy actions necessary to counteract and stabilize a credit/liquidity crisis, then, as foreign doubts increase, the risk of a currency crisis grows with the failure of the sovereign government to solve the fiscal and monetary problems behind a credit/liquidity crisis, even if it has been caused by the business activity of systemically dangerous financial institutions of whatever size.
In the case of Ireland, and any other eurozone country, it has no control over monetary policy and is reliant upon the European Monetary Union, the ECB, and the EU to provide monetary policy and backup. Consequently, as overnight bank funding dries up and bond costs continue to escalate, the European Monetary Union and the ECB are faced with a potential currency crisis, which is a lack of faith the EMU will stand behind its member nations, which would cause a serious, roiling global credit/liquidity crisis.
The ECB, the EMU, and the European Union need to get their act together and act decisively and consistently without the counterproductive interference of member nations promoting their more immediate self-serving political and economic agendas.
Print Page
In the case of Ireland, and any other eurozone country, it has no control over monetary policy and is reliant upon the European Monetary Union, the ECB, and the EU to provide monetary policy and backup. Consequently, as overnight bank funding dries up and bond costs continue to escalate, the European Monetary Union and the ECB are faced with a potential currency crisis, which is a lack of faith the EMU will stand behind its member nations, which would cause a serious, roiling global credit/liquidity crisis.
The ECB, the EMU, and the European Union need to get their act together and act decisively and consistently without the counterproductive interference of member nations promoting their more immediate self-serving political and economic agendas.
Print Page
Tuesday, November 9, 2010
On the Road Out of Ireland
Ireland has been celebrated as the European Union poster child for eurozone austerity. Yet, its efforts have received little respect from the bond market, which has become increasingly aware that austerity will not make Ireland again prosperous. In attempting to be the good European Union partner, Ireland created a "bad" bad bank which gave government guarantees to all liabilities of three private banks which had engaged in risky investment policies and poor management. In doing so, the government bailed out incompetent management and bondholders at the expense of the Irish people. Rather than providing equity for toxic assets, the Irish government issued government bonds for the toxic debt of three Irish banks of which Anglo Irish, whose senior debt has become a serious international problem, had to be nationalized. While junior bondholders have had to accept subsequent haircuts and the three banks significant reductions in assets as toxic assets were stripped out, the depositors and senior bondholders have been untouched. Questions on the guaranteed status of the senior bondholders has had detrimental effects on Ireland's ability to obtain and pay for credit as the position does not appear in the best interests of the Irish people while the bond market fears a haircut to senior bond holdings despite guarantees, because the austerity budget is viewed as too ambitious. Some observers have even questioned whether it would be in the best interest of Ireland to default on these senior bonds as Iceland refused to accept responsibility for private bank debt and just as the Irish Free State, under de Valera, refused to pay the land annuities (an annual payment of 250,000 pounds for Britain's loans to finance land reform) to Britain in 1933, which led to the Anglo-Irish Trade War in which Ireland did not fare well. In fact, these guarantees of Irish private bank debt have come to amount to 32% of Ireland's GDP.
The people of Ireland have endured centuries of oppression and economic servitude and a tumultuous transition to Irish Free State in 1922, Ireland in 1937, and Republic in 1949 with a bitter refusal to remain in the Commonwealth. After a long period of poverty and out bound emigration, the 1990's saw the beginning of economic growth built on exports which lasted until the 2008 financial crisis. Now, the Irish people face being prisoners of debt and indentured servants to the banks of the eurozone, who are the senior bondholders, almost 100 banks including Goldman Sachs, being protected by the Irish government.
Ireland is not Iceland, which has its own fiat currency, and it has sought to appease the European Union upon which it is dependent for monetary policy and economic support. As NAMA, the Irish agency responsible for sorting the private bank mess out, has dug into the assets and finances, it has issued haircuts up to 47% on assets stripped from the banks and proposed 80% haircuts to junior bondholders, which has led the bond market to fear similar threats to subordinated debt in other eurozone countries. While bondholders are the source of funds which keep banks functioning, the investment is one of acknowledged risk in a private bank. It is even feared that an Anglo senior bond default/haircut would bring Ireland down. To give bondholders immunity from losses is recognized by many as removing the assessment of risk from the investment process and increasing systemic risk. Switzerland has required its large banks to issue contingent convertible bonds which can be used to write-off losses in cases of non-viability.
It is being argued that revenue will not be sufficient for deficit reduction and has increased concern that bond investors must not be discouraged and market perception is more important than fiscal or monetary policy. Debt costs have jumped for Ireland and Portugal, Greece, Spain, and Italy. European Union support has become all the more important if Ireland is to succeed.
Yet, this current chapter in the Pan-European Credit Crisis has been spawned by European Union leaders in the midst of debate on the ESFS, due to expire in 2013, bailout continuation and political upheaval in the eurozone as Germany has pushed a proposal for orderly insolvency and debt restructuring, which has rattled the bond markets. The Franco-German proposal would require a treaty change and a permanent debt resolution system with sanctions, but it has largely gained acceptance by the EU. When Germany threatened to veto any financial crisis resolution authority unless a treaty change was approved, it painted the eurozone into a corner surrounded by bond vigilantes. In an attempt at deficit economic ideological purity, Germany threw the peripheral eurozone countries to their fate while demanding that bond holders share the burden, which spread fear in the bond market and directly threatened German banks which have a significant exposure to private Irish debt.
Bond and swap prices escalated, despite proposed budget cuts with a sense of impending doom settling in as to whether Ireland, as well as Greece, Portugal, and Spain, can execute their austerity budgets. Even sovereign default swaps surged. As credit costs ramped up, bond investors dumped bonds and the perception of risk spread. Perhaps at the urging of one wealthy Russian bondholder, the Russian sovereign wealth fund took Ireland and Spain off their eligible investment list and a European clearing house warned that members might have to deposit more cash to trade in Irish bonds. All of this has aggravated the bond market perception that the peripheral countries cannot control their European Union imposed austerity budgets.
In fact, Ireland's budgeting, as well as Spain's budget and economic forecasts, have been increasingly questioned as scary as Ireland has taken a three month holiday from bond auctions to avoid the current spreads as it has enough money to last into Q2 of 2011 and as it seeks European Union agreement and assistance with its 6 billion euro proposed budget cuts. All of this has left the Irish wondering, if they knew all along that the budget cuts would be contractionary, what do the bond markets want? Unfortunately, Ireland does not have its own currency and, therefore, is more at risk to market perception which may not always be in the best economic interests of a sovereign country. Despite projections, Ireland cannot depend on substantial export growth in its budget. As long as Germany and France pursue an irresponsible ideological exercise which threatens other eurozone countries, if not the monetary union, then the efforts of Ireland and the other peripheral countries risk nullification.
While the U.S. Federal Reserve plan to buy more Treasuries helped revive the bond market for Spain, Portugal, Greece, and Italy, the ensuing weaker dollar will not help the euro and its effect on bond prices. While the ECB has stepped in and bought bonds from time to time to stabilize markets from time to time, it has not been easy to determine when and exactly how much and some reports have been mistaken. Since Ireland was encouraged to protect senior bondholders, which includes eurozone banks which have a large exposure to Irish private debt as shown in the BIS September Quarterly report on international banking (page 6) with Germany followed by great Britain leading the way as of Q1 2010 with other European areas close behind and then France, it would be in the best interests of the European Union, eurozone, and the ECB to assist and support Ireland. A failure to support Ireland or hesitation to act will endanger the very European banks Ireland got suckered, as a eurozone team player, into protecting.
The European Union needs to get beyond the ESFS temporary bailout to a permanent financial crisis resolution which does not acknowledge too big to fail banks and holds investors accountable for a share of the burden of restructuring systemically risky financial institutions rather than foisting the losses off onto government and the citizenry. As long as the European Union and the eurozone members refuse to learn the lessons of deficit reduction in a monetary union in which the sovereign countries have no monetary control to combine with fiscal policy and member nations continue to engage in "smokestack chasing" as Germany is doing with its treaty change proposals which directly undermine other eurozone countries, if not the monetary union itself, the welfare of the monetary union as a whole and each of its members, including Germany, are endangered from within.
Given Ireland's continued attempts to please the ECB and the European Union, it may find, given its budget cuts already, the IMF a more practical partner in economic recovery, which does not say much about the ability of the ECB to act and of the European Monetary Union to assist members in order to strengthen the economy of the monetary union as a whole. The Irish government's surrender to the private bank bondholders doomed them to bailout. In as much as the ECB and European Union may have encouraged and supported that bad economic decision in order to protect other European banks makes it all the more necessary that the ECB and European Union, most especially those countries whose banks are being protected at the expense of the Irish people, support Ireland's unwinding of the three private banks and the Irish debt created by the banks and its investors. Ireland faces insolvency and its people indentured servitude to the very European banks (with German banks heading the list) given immunity from investment risk, as the Irish people choose which bills to not pay in order to pay mortgages as mortgage losses mount, which will only increase the pressure on banks and the government's liability guarantees.
One has to ask, if Ireland found it unavoidable to offer equity or some other haircut to senior bondholders, would a currency crisis ensue? Has the ECB and the European Union, with the help of Germany and France, boxed itself in to the point it has no choice but to help Ireland or abolish the monetary union?
The road out of Ireland is submerged. The people of Ireland may have to do it all by themselves again, if they wish to remain free.
Print Page
The people of Ireland have endured centuries of oppression and economic servitude and a tumultuous transition to Irish Free State in 1922, Ireland in 1937, and Republic in 1949 with a bitter refusal to remain in the Commonwealth. After a long period of poverty and out bound emigration, the 1990's saw the beginning of economic growth built on exports which lasted until the 2008 financial crisis. Now, the Irish people face being prisoners of debt and indentured servants to the banks of the eurozone, who are the senior bondholders, almost 100 banks including Goldman Sachs, being protected by the Irish government.
Ireland is not Iceland, which has its own fiat currency, and it has sought to appease the European Union upon which it is dependent for monetary policy and economic support. As NAMA, the Irish agency responsible for sorting the private bank mess out, has dug into the assets and finances, it has issued haircuts up to 47% on assets stripped from the banks and proposed 80% haircuts to junior bondholders, which has led the bond market to fear similar threats to subordinated debt in other eurozone countries. While bondholders are the source of funds which keep banks functioning, the investment is one of acknowledged risk in a private bank. It is even feared that an Anglo senior bond default/haircut would bring Ireland down. To give bondholders immunity from losses is recognized by many as removing the assessment of risk from the investment process and increasing systemic risk. Switzerland has required its large banks to issue contingent convertible bonds which can be used to write-off losses in cases of non-viability.
It is being argued that revenue will not be sufficient for deficit reduction and has increased concern that bond investors must not be discouraged and market perception is more important than fiscal or monetary policy. Debt costs have jumped for Ireland and Portugal, Greece, Spain, and Italy. European Union support has become all the more important if Ireland is to succeed.
Yet, this current chapter in the Pan-European Credit Crisis has been spawned by European Union leaders in the midst of debate on the ESFS, due to expire in 2013, bailout continuation and political upheaval in the eurozone as Germany has pushed a proposal for orderly insolvency and debt restructuring, which has rattled the bond markets. The Franco-German proposal would require a treaty change and a permanent debt resolution system with sanctions, but it has largely gained acceptance by the EU. When Germany threatened to veto any financial crisis resolution authority unless a treaty change was approved, it painted the eurozone into a corner surrounded by bond vigilantes. In an attempt at deficit economic ideological purity, Germany threw the peripheral eurozone countries to their fate while demanding that bond holders share the burden, which spread fear in the bond market and directly threatened German banks which have a significant exposure to private Irish debt.
Bond and swap prices escalated, despite proposed budget cuts with a sense of impending doom settling in as to whether Ireland, as well as Greece, Portugal, and Spain, can execute their austerity budgets. Even sovereign default swaps surged. As credit costs ramped up, bond investors dumped bonds and the perception of risk spread. Perhaps at the urging of one wealthy Russian bondholder, the Russian sovereign wealth fund took Ireland and Spain off their eligible investment list and a European clearing house warned that members might have to deposit more cash to trade in Irish bonds. All of this has aggravated the bond market perception that the peripheral countries cannot control their European Union imposed austerity budgets.
In fact, Ireland's budgeting, as well as Spain's budget and economic forecasts, have been increasingly questioned as scary as Ireland has taken a three month holiday from bond auctions to avoid the current spreads as it has enough money to last into Q2 of 2011 and as it seeks European Union agreement and assistance with its 6 billion euro proposed budget cuts. All of this has left the Irish wondering, if they knew all along that the budget cuts would be contractionary, what do the bond markets want? Unfortunately, Ireland does not have its own currency and, therefore, is more at risk to market perception which may not always be in the best economic interests of a sovereign country. Despite projections, Ireland cannot depend on substantial export growth in its budget. As long as Germany and France pursue an irresponsible ideological exercise which threatens other eurozone countries, if not the monetary union, then the efforts of Ireland and the other peripheral countries risk nullification.
While the U.S. Federal Reserve plan to buy more Treasuries helped revive the bond market for Spain, Portugal, Greece, and Italy, the ensuing weaker dollar will not help the euro and its effect on bond prices. While the ECB has stepped in and bought bonds from time to time to stabilize markets from time to time, it has not been easy to determine when and exactly how much and some reports have been mistaken. Since Ireland was encouraged to protect senior bondholders, which includes eurozone banks which have a large exposure to Irish private debt as shown in the BIS September Quarterly report on international banking (page 6) with Germany followed by great Britain leading the way as of Q1 2010 with other European areas close behind and then France, it would be in the best interests of the European Union, eurozone, and the ECB to assist and support Ireland. A failure to support Ireland or hesitation to act will endanger the very European banks Ireland got suckered, as a eurozone team player, into protecting.
The European Union needs to get beyond the ESFS temporary bailout to a permanent financial crisis resolution which does not acknowledge too big to fail banks and holds investors accountable for a share of the burden of restructuring systemically risky financial institutions rather than foisting the losses off onto government and the citizenry. As long as the European Union and the eurozone members refuse to learn the lessons of deficit reduction in a monetary union in which the sovereign countries have no monetary control to combine with fiscal policy and member nations continue to engage in "smokestack chasing" as Germany is doing with its treaty change proposals which directly undermine other eurozone countries, if not the monetary union itself, the welfare of the monetary union as a whole and each of its members, including Germany, are endangered from within.
Given Ireland's continued attempts to please the ECB and the European Union, it may find, given its budget cuts already, the IMF a more practical partner in economic recovery, which does not say much about the ability of the ECB to act and of the European Monetary Union to assist members in order to strengthen the economy of the monetary union as a whole. The Irish government's surrender to the private bank bondholders doomed them to bailout. In as much as the ECB and European Union may have encouraged and supported that bad economic decision in order to protect other European banks makes it all the more necessary that the ECB and European Union, most especially those countries whose banks are being protected at the expense of the Irish people, support Ireland's unwinding of the three private banks and the Irish debt created by the banks and its investors. Ireland faces insolvency and its people indentured servitude to the very European banks (with German banks heading the list) given immunity from investment risk, as the Irish people choose which bills to not pay in order to pay mortgages as mortgage losses mount, which will only increase the pressure on banks and the government's liability guarantees.
One has to ask, if Ireland found it unavoidable to offer equity or some other haircut to senior bondholders, would a currency crisis ensue? Has the ECB and the European Union, with the help of Germany and France, boxed itself in to the point it has no choice but to help Ireland or abolish the monetary union?
The road out of Ireland is submerged. The people of Ireland may have to do it all by themselves again, if they wish to remain free.
Print Page
Friday, November 5, 2010
The Fed, Printing Money, & Reserves
I sometimes find myself disagreeing with economics writers whom I respect, because they have made good arguments in an article and then make an inconsistent statement on debt, bank reserves, or net government savings with statements on debt and net government savings usually lacking stock flow consistency..
Alea wrote a much linked short piece on the Fed does not print money which is factually correct despite some economic textbooks and commonly accepted myth. The Pragmatic Capitalist, which I find a very useful source of opinion and information, expanded upon the Alea piece by commenting that bank reserves constrained lending, when bank lending is actually constrained by the price of reserves (see answer for question #3) and bank capitalization. Consequently, the leverage created by banks in lending can be good (stimulates growth) or bad (overheats the economy) just as the failure to lend can be bad (deflates the economy) or good (cools the economy).
When economically incorrect beliefs reach commonly held mythic proportions of an icon, the political debate becomes falsely conceived and subject to hidden agendas as the myths are manipulated to influence and control the citizenry.
Print Page
Alea wrote a much linked short piece on the Fed does not print money which is factually correct despite some economic textbooks and commonly accepted myth. The Pragmatic Capitalist, which I find a very useful source of opinion and information, expanded upon the Alea piece by commenting that bank reserves constrained lending, when bank lending is actually constrained by the price of reserves (see answer for question #3) and bank capitalization. Consequently, the leverage created by banks in lending can be good (stimulates growth) or bad (overheats the economy) just as the failure to lend can be bad (deflates the economy) or good (cools the economy).
When economically incorrect beliefs reach commonly held mythic proportions of an icon, the political debate becomes falsely conceived and subject to hidden agendas as the myths are manipulated to influence and control the citizenry.
Print Page
Everything You want to Know About Health Reform (PPACA) Law
As I have remarked in the past, occasionally Maxine Udall has a succinct post that needs no elaboration.
Here is her post presenting the Kaiser Family Foundation video explaining the 1000 page Health Care Reform Law (PPACA). This is a must see no matter what your opinion of President Obama's health care reform.
Print Page
Here is her post presenting the Kaiser Family Foundation video explaining the 1000 page Health Care Reform Law (PPACA). This is a must see no matter what your opinion of President Obama's health care reform.
Print Page
Wednesday, November 3, 2010
Economy & Market Week Ended 10/29/2010
The Q3 United States GDP was estimated this week at 2.0% of which inventory added 1.44% compared to .82% in Q2. Without the inventory build up, Q3 would have been barely positive. Personal consumption was 2.6% (2.2% in Q2). This shows a slower trend growth and a generally weak (Consumer Metrics Institute October 29 commentary) and long recovery.
The unemployment rate for everyone 55-64 has more than doubled. I have been maintaining for some time that unemployment for this age group could be a permanent condition. At the very least it means not working at the same pay at one's full ability level. This is a huge loss of productive talent which has nothing to do with appropriate skills for the marketplace. It has to do with age discrimination and filling the positions with younger workers who will cost less and theoretically stay with the job longer. At the same time the highest unemployment is among the 20-24 year old college educated who will, as a consequence of unemployment at this early stage of their careers, suffer a life long possibility of lower earnings. This recession has the distinct possibility of creating a very negative social divide magnifying the wage inequality and wealth inequality problems which directly threaten our republican democracy and the sustainability of a market economy as opposed to a feudal corporate economy. Every 34th wage earner in 2008 went through 2009 not earning a single dollar. In 2009 dollars total wages have fallen $5.9 trillion. Average wages and median wages are down and the number of idle workers grew by 6 million in 2009 with real unemployment, including discouraged workers, at 22%. At the same time, while the number of Americans making $50 million or more fell from 131 in 2008 to 74, the average wage increased from $91.2 million in 2008 to $518.8 million in 2009 or almost $10 million per week. Those 74 people made as much as the lowest paid 19 million workers who comprise one in every eight workers.
Econbrowser had an interesting piece on demand shocks in trade and how they manifested themselves in different countries with Japan and China showing distinct deviations from the mean, which would indicate there were alternative reasons which were not consistent with Germany and the Untied States. It makes you wonder where all the increasing exports in the world are expected to go. The line that caught my attention was "The finding that demand shocks working through the composition of trade ... explained the bulk of the drop and recovery in trade suggests the stronger the rebound in GDP, the faster the recovery in trade in proportionate terms." This is exactly what we are not seeing in the present recession/recovery. The GDP is not growing fast enough to reduce unemployment and the government is not exercising fiscal policy to reduce unemployment and everyone is surprised that consumers are not spending. Consumer spending is not going to bring recovery if unemployment remains high. A weak dollar is not going to sufficiently drive exports when it also appreciates foreign currencies and inflation in other countries. To lay this problem on the door step of China is disingenuous. China has internal problems, and perhaps more complicated problems, just as the Untied State, the eurozone, Japan, and Germany have internal economic problems which must be addressed internally. The failure of these countries and others to not address their economic problems which have a global economic impact only aggravates the tension among those who would rather blame than act. The G20 and the PR show on currency accords and trade collapsed before the delegate departed the airport. The failure of the G20 to address and resolve the different trade and capital needs of emerging and developed countries, foreign currency reserves, current trade imbalances, and the vastly different saving and borrowing needs of emerging and developed countries is a failure to acknowledge the differences and the necessity of each country to implement different internal fiscal policies. It is not a global chess board which can be mended by duck tape. It is also not resolvable by including emerging nations currencies in a new reserve currency basket. Emerging nations do not want their currencies to be a reserve currency. For instance, there is presently no way the Chinese renminbi can be accumulated by foreigners who are not allowed to have renminbi accounts. It will take China a very long time to reduce its current accounts surplus and develop a deficit. Given its internal problem of cheap capital which transfers income from households and reduces household consumption, it would be very politically and economically difficult for China to rebalance internally in the short time that a fast appreciating renminbi would demand. It is more likely that China's capital outflows could be matched by foreign capital inflows in the form of investments, which would require a gross change in the form of ownership and governance in China. That is an unrealistic expectation, particularly, when the Untied States refuses to deploy the fiscal policy necessary to reduce high unemployment and kick start GDP growth.
Quantitative easing (QE) is designed to lower long term interest rates, but The Pragmatic Capitalist argues that it fails historically to do so and the attempt actually increases asset prices without any underlying change in fundamental value. QE is merely an asset swap with little real impact on the economy. In fact, historically the market has collapsed following the end of each of the last three major QE programs. Models and Agents cites a 2003 Eggertsson and Woodford paper and argues that its conclusion that QE is redundant and the optimal policy should be price level targeting historically based rule will not work, because the rule lacks credibility since its implementation is only a verbal intention and, consequently, only a bluff. She wants to call a spade a spade and call the purchases "debt monetization", because the only true way, in her opinion, to boost aggregate demand at this stage is to implement a fiscal operation whose goal is to protect productive capacity and assist companies and households in their deleveraging efforts. In such an operation, the role of the Fed would be to provide the financing. Econbrowser believes the market has already priced in a trillion dollar QE and that the QE is being justified by the Fed as a means of combating negative real interest rates, which mean people can get a positive real return by stuffing money under a mattress, in disinflationary, deflationary times. The Fed can help but it cannot solve the zero lower bound problem with QE and one should keep an eye on commodity prices and real rates. A fiscal stimulus would not only target the creation of jobs now but also assisting the states and local governments who are under revenue pressures and have been reducing employees to the extent that government layoffs and terminations exceed growth in private hiring. This could be partially accomplished by the Fed and Treasury buying state and local municipal bonds.
In a recent paper on the correlation of bonds and stocks, it found "...the changing risks of nominal bonds are related to the changing relationship between inflation and economic growth." If the stock-bond correlation implies investors believe government bonds are a hedge against the possibility of deflation and low growth, while at the same time, despite being uncertain about the direction of inflation over the next five years, believing any increase in inflation will likely be accompanied by growth, making it less painful for their portfolios, then bonds should carry a negative inflation risk premium and higher prices. The question becomes whether investors are correct. Another question is the study assumed the CAPM (Capital Asset Pricing Model) use of the stock market as a proxy for the economy, but CAPM also assumes an efficient market which is not substantiated by modern experience and more modern economic/finance models. Consequently, in my opinion, the determination of a bond bubble could be lagging information and/or a divergence from the mean. The use of a negative or positive trend based on the assumption of an efficient market is not enough information to make an investor decision.
When talking about the current high unemployment, low interest rate, slow growth economy and the use of quantitative easing and fiscal stimulus, political gridlock and austerity policies become all the more destructive.
In John Hussman's weekly commentary from Monday the 25th, he provides a different analysis of a liquidity trap and the inevitable failure of QE through his dislike of "unproductive" fiscal spending and the invocation of the velocity of money. Yet, he manages to end up with the proper conclusions that QE will not induce businesses and households to spend when their gut tells them to save save save and that fiscal spending targeted at economically productive targets is useful. Of more interest is his references to the work of Nathaniel Mass whose work involved the application of microeconomic methods to macroeconomics. Hussman still finds the market overvalued, overbought, and overbullish with a negative trend and high risk profile which could result in a sharp downturn after a string of new highs, 2-3 day pullbacks followed by sharp recoveries.
Consumer Metrics Institute, in their October 25 commentary, shows that the current contraction has surpassed the recent "Great Recession" in length and there is no end in sight.
Wells Fargo is refiling 55.000 foreclosures, because they have found no faults with them. This drew the immediate objection of the Ohio Attorney General, who said the quick turnaround of Wells Fargo does not speak well of the review process. Attorney General Cordray followed with letter to several banks indicating it was not proper or sufficient to just replace false court document with new, "fixed" documents. Of additional concern in the mortgage mess is the exposure of home builders who originated $205 billion in loans and may now face $1 billion or more in put backs. Pulte, Hovnanian, DR Horton, and Lennar may have the most risk.
Treasury concealed $40 billion in tax payer losses on the AIG bailout, according to the Inspector General of TARP. Treasury refused to correct the report after information was sent by the Inspector General to Treasury. Representative Issa indicated he thought the report was misleading and, if it had been issued by a private company, it would have been subject to a SEC investigation. At the same time Treasury has thumbed its nose at the Bloomberg FOIA request for information on Citi guarantees, which is information at least two years old. Bloomberg has won in court, but Treasury has a history of stringing these FOIA TARP related requests out. In this vein, it is relevant that Washington's Blog had a post on how fraud contributed to the Great Depression.
The CFTC has found repeated attempts to influence and control the price of silver in the markets. This is a subject we have commented on in the past. It remains to be seen if the CFTC will do anything about their findings. Here is the complete CFTC statement.
Protests in France against an increase of the retirement age to 62 failed as the measure became law. The retirement age is a big issue in many countries, particularly those in which have an aging population with a low birth rate. Retirement ages are all over the map from as low as 45. Most discussion of increasing retirement ages never touches on age discrimination in job seeking and the work place or the productive value of experience and knowledgeable workers; it is all about the cost of retirement.
Market Report No banks failed this week == 139 (140 last year); Unofficial Problem bank list = 894
DOW/Volume NASDAQ/Volume
Mon
31.49/ up 30.7% 11.46/ up 7.4%
Tue
5.41/ down 4.1% 6.44/ up 9.3%
Wed
<43.18>/ up 5.9% distribution day 5.97/ up 7.0%
Thu
<12.33>/ down 1.4% 4.11/ sown .2%
Fri
4.54/ up 2.7% .04/ up 2.7%
Total <14.07> 28.02
Mon: Oil up 87 cents to $82.52; Dollar weaker; chemicals offset financials; highest close since April 29th but still closed near session lows.
Tue: Oil up 3 cents to 82.55; Dollar stronger but mixed against the pound; highest close since April 26 on low volume and struggle during day.
Wed: Oil down 61 cents to 81.94; Dollar stronger; markets pummeled by worries over Fed easing but pared losses at end; oil supplies were up 5 million barrels; gas supplies were down 4.4 million barrels; distillate supplies were down 1.6 million barrels.
Thu: Oil up 24 cents to 82.18; Dollar weaker; market could not make up its mind with several economic reports due Friday; weekly jobless claims were down 21,000 to 434,000 (lowest since July); 4 week moving average was down 5500 to 453,250, and continuing claims were down 122,000 to 4,356,000 (but number of workers with exhausted benefits is increasing).
Fri: Oil down 75 cents to 81.45; Dollar weaker; market ended flat at end of higher volume day despite mediocre GDP report; trade below average for 6th day i row on NYSE -- what will happen after next week's election and Fed meeting?
United States:
Bernanke (Fed) said regulators are reviewing foreclosure practices of large financial institutions and will publish a report next month.
Freddie Mac says foreclosure pipeline is slowing down (8 months --- 2 months longer than normal).
In the last two months, the U.S. dollar was effectively devalued 14% by the market.
Chicago Fed economic activity index was down to <.33> September from <.32> ; national activity was down to <.58> from <.49>.
Core Logic August housing prices were down in 78 of 100 metro areas.
NAR existing home sales were up 10% September to 4.53 million (19.1% vs year ago) but inventory is 10.7 months, which is down 1.9% September but up 8.9% vs year ago.
Case-Schiller 20 City house prices index (3 month average) was up 1.7 vs August 2009 (slower) with 15 reporting lower prices.
Dallas Fed manufacturing activity showed production up to 6.9 from 4.0 (2nd month up); new orders were down to <4.3> from <3.0> (5th month); finished inventory was down to <12.5> from 1.0; prices paid for raw materials was up to 29.9 from 24.4 (15th month); prices received for finished goods was down to <3.5> from .5.
Volcker said inflation is not the problem and will not be the problem for several years; no possibility of deflation.
Berkshire Hathway is disputing SEC claims that their Q2 should have written down $1.9 billion in losses from Kraft, US Bancorp, and other firms; contends the losses are temporary and expected to rebound.
Bank write-offs of credit card uncollectibles were up to 10.03% August from 9.45%; 30 day past due was down to 4.7% n a small decline.
Ford Q3 EPS were up 48 cents per share ex items (expected 38 cents); sales were up 6% ex Volvo which was sold; paid $2 billion in debt and $3.6 billion to retirees health trust.
September new home sales were up to an annual rate of 307,000 from 288,000 with months of supply down to 8.0 from 8.6; still weakest September on record.
Mortgage defaults Q3 were up 18.9% from prior quarter but down 25.5% vs Q3 2009.
Philadelphia Fed State Coincident Index for September increased in 24 states, down in 14 states, and unchanged in 12 states; this shows sluggish recovery.
U.S. durable goods orders in September were up 3.3%; exclude transportation and orders were down .8%; exclude defense orders were up 2.9%; shipment were down .4% for 2nd month; inventory was up .5% for 9th month. Capital goods new orders, non-defense, were up 8.6%; inventory was up 1.3%.
On Wednesday cotton prices were the highest since the U. S. Civil War.
Hedge funds have been advised by law firms specialists and MBS traders at a conference that the coming wave of MBS put backs will cost banks at least %97 billion.
Freddie Mac 90 day delinquencies were down to 3.89% from 3.83%.
P&G Q1 EPS were down 4% to $1.02 per share (expected $1); sales were up 2% but below views; expects Q2 to suffer from higher commodities prices and marketing costs.
Kansas City Fed manufacturing survey showed continued moderate expansion. Increased activity was reports by 10 down from 14; new orders were up to 16 from 9 firms.
GM is preparing for an IPO; it will repay $2.1 billion to Treasury and make payments to pension and retiree health plan ($2.8 billion); after IPO it will pay $4 billion cash and $2 billion common stock to treasury and buy back preferred at a 2% premium. It has an agreement with ten large banks for a five year, $5 billion credit facility for backup liquidity.
Institute of Supply management (ISM) Chicago PMI (Purchasing Manager's Index) was up to 60.6 from 60.4; new orders were up to 65.0 from 61.4.
Reuters survey of 80 economists project GDP in 2011 will only be 2.4%.
ECRI Weekly Leading Index was up to <6.5> from <6.9> the prior week.
Hoenig (Kansas City Fed) said there are real risks to QE; it is "very dangerous", hazardous bet which could set in motion a boom-bust cycle.
Dudley (New York Fed) said the Fed cannot wave a magic wand but can provide essential support for the long bumpy road.
U. S.Treasury Auctions:
2 yr Treasury, $35 billion, yield .40%, bid to cover 3.46, foreign 39.98%, direct 15.9%.
5 yr treasury, $35 billion, yield 1.33% (1.26% last month), bid to cover 2.82, foreign 39.5%, direct 11.7% (highest since May).
International:
UBS Q3 was a massive miss 50% below consensus due to investment bank and wealth management results; fixed income plunged due to "negative debt valuation adjustment".
Japanese exports were up 14.4% September (slowest gain this year).
Ireland will attempt to cut $21 billion form their annual budget in 4 years; deficit set to hit 32% of GDP on the bank bailouts which favored management and bond holders at the expense of the public.
Portugal budget talks have collapsed Wednesday on political gridlock.
The French lower house voted for the Senate bill on pension reform and the bill goes to President Sarkozy.
Greece is experiencing lower than expected tax revenue growth after austerity tax hikes.
Japan cut its GDP estimate to 2.1% from 2.6% and sees 1.8% for next year down from 1.9%.
China says it will cut its trade surplus by encouraging consumer spending.
Eurzone October inflation was up 1.9% (1.8% September).
French refinery workers returned to their jobs on Friday ending the strike.
Japanese factory output was down 1.9% in the 4th straight monthly decline; consumer prices fell for the 19th month vs year ago.
A weak U. S. dollar, which will result from any new Fed QE, will hurt Europe more than it will help the U.S.
Print Page
The unemployment rate for everyone 55-64 has more than doubled. I have been maintaining for some time that unemployment for this age group could be a permanent condition. At the very least it means not working at the same pay at one's full ability level. This is a huge loss of productive talent which has nothing to do with appropriate skills for the marketplace. It has to do with age discrimination and filling the positions with younger workers who will cost less and theoretically stay with the job longer. At the same time the highest unemployment is among the 20-24 year old college educated who will, as a consequence of unemployment at this early stage of their careers, suffer a life long possibility of lower earnings. This recession has the distinct possibility of creating a very negative social divide magnifying the wage inequality and wealth inequality problems which directly threaten our republican democracy and the sustainability of a market economy as opposed to a feudal corporate economy. Every 34th wage earner in 2008 went through 2009 not earning a single dollar. In 2009 dollars total wages have fallen $5.9 trillion. Average wages and median wages are down and the number of idle workers grew by 6 million in 2009 with real unemployment, including discouraged workers, at 22%. At the same time, while the number of Americans making $50 million or more fell from 131 in 2008 to 74, the average wage increased from $91.2 million in 2008 to $518.8 million in 2009 or almost $10 million per week. Those 74 people made as much as the lowest paid 19 million workers who comprise one in every eight workers.
Econbrowser had an interesting piece on demand shocks in trade and how they manifested themselves in different countries with Japan and China showing distinct deviations from the mean, which would indicate there were alternative reasons which were not consistent with Germany and the Untied States. It makes you wonder where all the increasing exports in the world are expected to go. The line that caught my attention was "The finding that demand shocks working through the composition of trade ... explained the bulk of the drop and recovery in trade suggests the stronger the rebound in GDP, the faster the recovery in trade in proportionate terms." This is exactly what we are not seeing in the present recession/recovery. The GDP is not growing fast enough to reduce unemployment and the government is not exercising fiscal policy to reduce unemployment and everyone is surprised that consumers are not spending. Consumer spending is not going to bring recovery if unemployment remains high. A weak dollar is not going to sufficiently drive exports when it also appreciates foreign currencies and inflation in other countries. To lay this problem on the door step of China is disingenuous. China has internal problems, and perhaps more complicated problems, just as the Untied State, the eurozone, Japan, and Germany have internal economic problems which must be addressed internally. The failure of these countries and others to not address their economic problems which have a global economic impact only aggravates the tension among those who would rather blame than act. The G20 and the PR show on currency accords and trade collapsed before the delegate departed the airport. The failure of the G20 to address and resolve the different trade and capital needs of emerging and developed countries, foreign currency reserves, current trade imbalances, and the vastly different saving and borrowing needs of emerging and developed countries is a failure to acknowledge the differences and the necessity of each country to implement different internal fiscal policies. It is not a global chess board which can be mended by duck tape. It is also not resolvable by including emerging nations currencies in a new reserve currency basket. Emerging nations do not want their currencies to be a reserve currency. For instance, there is presently no way the Chinese renminbi can be accumulated by foreigners who are not allowed to have renminbi accounts. It will take China a very long time to reduce its current accounts surplus and develop a deficit. Given its internal problem of cheap capital which transfers income from households and reduces household consumption, it would be very politically and economically difficult for China to rebalance internally in the short time that a fast appreciating renminbi would demand. It is more likely that China's capital outflows could be matched by foreign capital inflows in the form of investments, which would require a gross change in the form of ownership and governance in China. That is an unrealistic expectation, particularly, when the Untied States refuses to deploy the fiscal policy necessary to reduce high unemployment and kick start GDP growth.
Quantitative easing (QE) is designed to lower long term interest rates, but The Pragmatic Capitalist argues that it fails historically to do so and the attempt actually increases asset prices without any underlying change in fundamental value. QE is merely an asset swap with little real impact on the economy. In fact, historically the market has collapsed following the end of each of the last three major QE programs. Models and Agents cites a 2003 Eggertsson and Woodford paper and argues that its conclusion that QE is redundant and the optimal policy should be price level targeting historically based rule will not work, because the rule lacks credibility since its implementation is only a verbal intention and, consequently, only a bluff. She wants to call a spade a spade and call the purchases "debt monetization", because the only true way, in her opinion, to boost aggregate demand at this stage is to implement a fiscal operation whose goal is to protect productive capacity and assist companies and households in their deleveraging efforts. In such an operation, the role of the Fed would be to provide the financing. Econbrowser believes the market has already priced in a trillion dollar QE and that the QE is being justified by the Fed as a means of combating negative real interest rates, which mean people can get a positive real return by stuffing money under a mattress, in disinflationary, deflationary times. The Fed can help but it cannot solve the zero lower bound problem with QE and one should keep an eye on commodity prices and real rates. A fiscal stimulus would not only target the creation of jobs now but also assisting the states and local governments who are under revenue pressures and have been reducing employees to the extent that government layoffs and terminations exceed growth in private hiring. This could be partially accomplished by the Fed and Treasury buying state and local municipal bonds.
In a recent paper on the correlation of bonds and stocks, it found "...the changing risks of nominal bonds are related to the changing relationship between inflation and economic growth." If the stock-bond correlation implies investors believe government bonds are a hedge against the possibility of deflation and low growth, while at the same time, despite being uncertain about the direction of inflation over the next five years, believing any increase in inflation will likely be accompanied by growth, making it less painful for their portfolios, then bonds should carry a negative inflation risk premium and higher prices. The question becomes whether investors are correct. Another question is the study assumed the CAPM (Capital Asset Pricing Model) use of the stock market as a proxy for the economy, but CAPM also assumes an efficient market which is not substantiated by modern experience and more modern economic/finance models. Consequently, in my opinion, the determination of a bond bubble could be lagging information and/or a divergence from the mean. The use of a negative or positive trend based on the assumption of an efficient market is not enough information to make an investor decision.
When talking about the current high unemployment, low interest rate, slow growth economy and the use of quantitative easing and fiscal stimulus, political gridlock and austerity policies become all the more destructive.
In John Hussman's weekly commentary from Monday the 25th, he provides a different analysis of a liquidity trap and the inevitable failure of QE through his dislike of "unproductive" fiscal spending and the invocation of the velocity of money. Yet, he manages to end up with the proper conclusions that QE will not induce businesses and households to spend when their gut tells them to save save save and that fiscal spending targeted at economically productive targets is useful. Of more interest is his references to the work of Nathaniel Mass whose work involved the application of microeconomic methods to macroeconomics. Hussman still finds the market overvalued, overbought, and overbullish with a negative trend and high risk profile which could result in a sharp downturn after a string of new highs, 2-3 day pullbacks followed by sharp recoveries.
Consumer Metrics Institute, in their October 25 commentary, shows that the current contraction has surpassed the recent "Great Recession" in length and there is no end in sight.
Wells Fargo is refiling 55.000 foreclosures, because they have found no faults with them. This drew the immediate objection of the Ohio Attorney General, who said the quick turnaround of Wells Fargo does not speak well of the review process. Attorney General Cordray followed with letter to several banks indicating it was not proper or sufficient to just replace false court document with new, "fixed" documents. Of additional concern in the mortgage mess is the exposure of home builders who originated $205 billion in loans and may now face $1 billion or more in put backs. Pulte, Hovnanian, DR Horton, and Lennar may have the most risk.
Treasury concealed $40 billion in tax payer losses on the AIG bailout, according to the Inspector General of TARP. Treasury refused to correct the report after information was sent by the Inspector General to Treasury. Representative Issa indicated he thought the report was misleading and, if it had been issued by a private company, it would have been subject to a SEC investigation. At the same time Treasury has thumbed its nose at the Bloomberg FOIA request for information on Citi guarantees, which is information at least two years old. Bloomberg has won in court, but Treasury has a history of stringing these FOIA TARP related requests out. In this vein, it is relevant that Washington's Blog had a post on how fraud contributed to the Great Depression.
The CFTC has found repeated attempts to influence and control the price of silver in the markets. This is a subject we have commented on in the past. It remains to be seen if the CFTC will do anything about their findings. Here is the complete CFTC statement.
Protests in France against an increase of the retirement age to 62 failed as the measure became law. The retirement age is a big issue in many countries, particularly those in which have an aging population with a low birth rate. Retirement ages are all over the map from as low as 45. Most discussion of increasing retirement ages never touches on age discrimination in job seeking and the work place or the productive value of experience and knowledgeable workers; it is all about the cost of retirement.
Market Report No banks failed this week == 139 (140 last year); Unofficial Problem bank list = 894
DOW/Volume NASDAQ/Volume
Mon
31.49/ up 30.7% 11.46/ up 7.4%
Tue
5.41/ down 4.1% 6.44/ up 9.3%
Wed
<43.18>/ up 5.9% distribution day 5.97/ up 7.0%
Thu
<12.33>/ down 1.4% 4.11/ sown .2%
Fri
4.54/ up 2.7% .04/ up 2.7%
Total <14.07> 28.02
Mon: Oil up 87 cents to $82.52; Dollar weaker; chemicals offset financials; highest close since April 29th but still closed near session lows.
Tue: Oil up 3 cents to 82.55; Dollar stronger but mixed against the pound; highest close since April 26 on low volume and struggle during day.
Wed: Oil down 61 cents to 81.94; Dollar stronger; markets pummeled by worries over Fed easing but pared losses at end; oil supplies were up 5 million barrels; gas supplies were down 4.4 million barrels; distillate supplies were down 1.6 million barrels.
Thu: Oil up 24 cents to 82.18; Dollar weaker; market could not make up its mind with several economic reports due Friday; weekly jobless claims were down 21,000 to 434,000 (lowest since July); 4 week moving average was down 5500 to 453,250, and continuing claims were down 122,000 to 4,356,000 (but number of workers with exhausted benefits is increasing).
Fri: Oil down 75 cents to 81.45; Dollar weaker; market ended flat at end of higher volume day despite mediocre GDP report; trade below average for 6th day i row on NYSE -- what will happen after next week's election and Fed meeting?
United States:
Bernanke (Fed) said regulators are reviewing foreclosure practices of large financial institutions and will publish a report next month.
Freddie Mac says foreclosure pipeline is slowing down (8 months --- 2 months longer than normal).
In the last two months, the U.S. dollar was effectively devalued 14% by the market.
Chicago Fed economic activity index was down to <.33> September from <.32> ; national activity was down to <.58> from <.49>.
Core Logic August housing prices were down in 78 of 100 metro areas.
NAR existing home sales were up 10% September to 4.53 million (19.1% vs year ago) but inventory is 10.7 months, which is down 1.9% September but up 8.9% vs year ago.
Case-Schiller 20 City house prices index (3 month average) was up 1.7 vs August 2009 (slower) with 15 reporting lower prices.
Dallas Fed manufacturing activity showed production up to 6.9 from 4.0 (2nd month up); new orders were down to <4.3> from <3.0> (5th month); finished inventory was down to <12.5> from 1.0; prices paid for raw materials was up to 29.9 from 24.4 (15th month); prices received for finished goods was down to <3.5> from .5.
Volcker said inflation is not the problem and will not be the problem for several years; no possibility of deflation.
Berkshire Hathway is disputing SEC claims that their Q2 should have written down $1.9 billion in losses from Kraft, US Bancorp, and other firms; contends the losses are temporary and expected to rebound.
Bank write-offs of credit card uncollectibles were up to 10.03% August from 9.45%; 30 day past due was down to 4.7% n a small decline.
Ford Q3 EPS were up 48 cents per share ex items (expected 38 cents); sales were up 6% ex Volvo which was sold; paid $2 billion in debt and $3.6 billion to retirees health trust.
September new home sales were up to an annual rate of 307,000 from 288,000 with months of supply down to 8.0 from 8.6; still weakest September on record.
Mortgage defaults Q3 were up 18.9% from prior quarter but down 25.5% vs Q3 2009.
Philadelphia Fed State Coincident Index for September increased in 24 states, down in 14 states, and unchanged in 12 states; this shows sluggish recovery.
U.S. durable goods orders in September were up 3.3%; exclude transportation and orders were down .8%; exclude defense orders were up 2.9%; shipment were down .4% for 2nd month; inventory was up .5% for 9th month. Capital goods new orders, non-defense, were up 8.6%; inventory was up 1.3%.
On Wednesday cotton prices were the highest since the U. S. Civil War.
Hedge funds have been advised by law firms specialists and MBS traders at a conference that the coming wave of MBS put backs will cost banks at least %97 billion.
Freddie Mac 90 day delinquencies were down to 3.89% from 3.83%.
P&G Q1 EPS were down 4% to $1.02 per share (expected $1); sales were up 2% but below views; expects Q2 to suffer from higher commodities prices and marketing costs.
Kansas City Fed manufacturing survey showed continued moderate expansion. Increased activity was reports by 10 down from 14; new orders were up to 16 from 9 firms.
GM is preparing for an IPO; it will repay $2.1 billion to Treasury and make payments to pension and retiree health plan ($2.8 billion); after IPO it will pay $4 billion cash and $2 billion common stock to treasury and buy back preferred at a 2% premium. It has an agreement with ten large banks for a five year, $5 billion credit facility for backup liquidity.
Institute of Supply management (ISM) Chicago PMI (Purchasing Manager's Index) was up to 60.6 from 60.4; new orders were up to 65.0 from 61.4.
Reuters survey of 80 economists project GDP in 2011 will only be 2.4%.
ECRI Weekly Leading Index was up to <6.5> from <6.9> the prior week.
Hoenig (Kansas City Fed) said there are real risks to QE; it is "very dangerous", hazardous bet which could set in motion a boom-bust cycle.
Dudley (New York Fed) said the Fed cannot wave a magic wand but can provide essential support for the long bumpy road.
U. S.Treasury Auctions:
2 yr Treasury, $35 billion, yield .40%, bid to cover 3.46, foreign 39.98%, direct 15.9%.
5 yr treasury, $35 billion, yield 1.33% (1.26% last month), bid to cover 2.82, foreign 39.5%, direct 11.7% (highest since May).
International:
UBS Q3 was a massive miss 50% below consensus due to investment bank and wealth management results; fixed income plunged due to "negative debt valuation adjustment".
Japanese exports were up 14.4% September (slowest gain this year).
Ireland will attempt to cut $21 billion form their annual budget in 4 years; deficit set to hit 32% of GDP on the bank bailouts which favored management and bond holders at the expense of the public.
Portugal budget talks have collapsed Wednesday on political gridlock.
The French lower house voted for the Senate bill on pension reform and the bill goes to President Sarkozy.
Greece is experiencing lower than expected tax revenue growth after austerity tax hikes.
Japan cut its GDP estimate to 2.1% from 2.6% and sees 1.8% for next year down from 1.9%.
China says it will cut its trade surplus by encouraging consumer spending.
Eurzone October inflation was up 1.9% (1.8% September).
French refinery workers returned to their jobs on Friday ending the strike.
Japanese factory output was down 1.9% in the 4th straight monthly decline; consumer prices fell for the 19th month vs year ago.
A weak U. S. dollar, which will result from any new Fed QE, will hurt Europe more than it will help the U.S.
Print Page
Subscribe to:
Posts (Atom)
Posts
