The people of Ireland have been impressed into a life of indentured servitude by the financial engineers of the IMF and EU to pay the debts of bankers (723 billion euro of guarantees) which were not their debts and to docilely accept their role as servile cash cows to be milked and milked to insure European banks will not suffer and the financial elite can become more wealthy. The forced bailout of Ireland was not about Ireland's debt, it was about the Irish banks senior bond holders -- other European banks with Germany (and the German government may not know the extent) and the United Kingdom the most exposed. Yet, countries harboring these financial predators have been reluctant to share the burden with Ireland after the ECB, in 2008, convinced the Irish government that it had to save the Irish banks at all costs and with no direct economic help. In coercing the Irish government to make private bank debt public debt, the ECB and European (and global) financial interests turned a country with manageable debt and a current account trade surplus (except with the Untied Kingdom) into a ticking time bomb, but the bomb was not in Ireland; it is in Europe and the banks of Europe and it is still ticking.
The problem of the Irish banks was a combination of no proper risk management by the banks, a lack of regulation and politicians looking the other way, an intransigence of some eurozone members to consider a fiscal mechanism, and an inflow of foreign money, particularly from other European banks, as a result of the exchange rates established for the euro between the eurozone countries, creating a housing and construction bubble with the help of developers. When the bubble burst, the Irish government was cajoled into saving the banks and compounding the problem with a poorly formed "bad" bad bank rather than letting the banks fail and be restructured. Instead, they were encouraged to endow a capitalism without losses. Yet, as Iceland demonstrated, any sovereign country with its own currency has the power to protect its people and remain free. Iceland banks saw many European investors, individual and corporate, chasing higher interest rates depositing money. When the financial crisis of 2008 hit, liquidity froze up globally and eventually over a two week period the Icelandic banks had increasing difficulty in obtaining interbank and overnight liquidity loans. Faced with the failure of the banks, the government of Iceland chose to let them fail, nationalized the remaining assets and devalued the krona some 80% against the euro. The people of Iceland rejected an imposed Icesave program to indemnify foreign investors. The only real aid was an IMF loan partially subsidized by other Scandinavian countries which Iceland has never fully drawn upon and which should be paid by 2012. In fact, Iceland emerged from recession in Q3 of this year. But Ireland is not Iceland, because Ireland does not have its own currency; if it were to default, it would have to leave the euro and adopt its own currency, perhaps by converting debt into legal tender during a transition period.
An IMF/EU bailout is another loss of sovereignty. The ticking time bomb ticked louder as the government discovered more toxic debt and capital needs than estimated by auditors in the the banks, as the cost of debt and swaps kept going up, as the banks liquidity problems grew with the growing lack of international confidence, as international corporate depositors withdrew money, as the Irish government poured more and more money into the banks while the ECB bought Irish bonds here and there, as subordinated bond holders were forced to share the losses and the senior bond holder's guarantees were questioned, and as other eurozone nations repeatedly voiced intentions to not help or to hinder help until Ireland had only bailout or eventual default as choices. In continuation of Ireland's political establishment's predilection towards being the good euro partner, the challenges of default and an Icelandic type of resurrection were churlishly ignored. Besides, pressure was building for the world to discover the real risks of all European banks.
At least the head of the Irish Central Bank tried to send a veiled message to the ECB and European banks when he said there would be no more money for the Irish banks and they were all for sale to foreigners. He was letting them know they had a responsibility in this and they had the most to lose.
Rather than paying attention to the cost to the Irish people, international attention was focused on preserving special indemnity for the senior bond holders and the lack of international confidence exhibited in rising debt and swaps costs at any hint of bond holders sharing the burden of losses of investment. At the same time the Irish 4 year deficit reduction budget, containing a 15 billion euro austerity program, necessary to facilitate the IMF/EU bailout of 85 billion euro, of which 35 billion would be for the Irish banks and 17.5 billion would have to be contributed from Irish pension funds, and based on an unlikely economic growth of 2.5% to 2.75% was proposed to cut child welfare, minimum wage, increase taxes including the VAT affecting families the most but not the corporate tax (a source of revenue as it encouraged foreign corporations to incorporate in Ireland), have pension funds load up on government bonds, and change pension rates and ages. What type of world prefers to raid public pensions to protect private senior bond holders from sharing in the losses of their investments? Ireland has even been required to post collateral for the ESFS loan. Political opposition and public discontent appears to be growing despite the budget approval. The augmented austerity package as well as current austerity program were seen as obvious drags on economic growth, which may only be .9% next year as a result of these measures, and Irish standard of living. Despite serious rumors of bank restructuring or burden sharing by senior bond holders, there was nothing in the budget or bailout which implies any change for the banks or senior bond holders. While eurozone countries were concerned about Irish debt and the costs of a bailout, the Irish public and the world were puzzling over the different interest rates being reported for the IMF portion, the overall bailout (5.8%), and the EFSF contribution, which must be a higher rate than the total bailout rate since the IMF rate was lower than the bailout rate. Amid all of the planning, the very essential piece of the ESFS was being ignored, because it is not only unfunded, but as the ticking bomb ticks louder through the euro countries its funding is more precarious without the establishment of a euro bond.
The question became is Ireland solvent or is it not. Ireland had the money to continue through at least the first half of 2011 without help. The real problem was the suicidal guarantee of private Irish bank debt. To me, the whole question of solvency was actually the fear it might be economically wise and beneficial for Ireland to default by restructuring debt and the banks and the risks of the European banks would be naked with potential liabilities of 2245 billion euro, if the EMU will not form a fiscal mechanism or fiscal stabilization emergency program. Without national fiscal space, the future rollover risk of debt and perception of risk premium vulnerability not only crippled Ireland, but is a risk vulnerability of any euro nation as the eurozone has no means of absorbing asymmetric region-specific shocks.
The sad state of affairs is Ireland is not being saved because the Irish need help, but because the eurozone, in its failure to structure a fiscal mechanism and refusal to deal with the national imbalances of not having a fiscal union, has placed European banks in a position in which they are vulnerable and dependent on the international faith and confidence in the euro to support the eurozone countries. The financial contagion of "Ireland" cannot be stopped unless the eurozone imbalances are addressed by the establishment of a fiscal mechanism consistent with a union of sovereign nations in which sovereign debt is not really sovereign. Ireland's problem is a fiscal problem and it is a fiscal problem that grew from the private sector not the public sector. As such it is a clear refutation of the German perspective of the euro and the eurozone. As this euro currency crisis spreads from weak link to weak link with continued reluctant and late intervention by the eurozone and ECB, the keystone moment will be Spain and Italy, as one of the four largest EU economies, will be the death knell. Attempts to ignore the inevitable, without fiscal action by the eurozone as a whole, by throwing blame around and putting eurozone countries in opposing camps is courting euro death. Despite attempts to mask the debate as about beggar nation debt, the number of German banks and European banks (there are two active lists in this link for German banks on left column and lower on the left European banks) exposed to Ireland demonstrate the interwoven systemic danger of European banking encouraged by government guarantees of debt to engage in riskier investing within a union which does not have the authority to act as a union of sovereign nations. All it takes to turn the euro crisis around is the establishment of a fiscal mechanism, stronger bank regulation, and the commitment of the eurozone countries to a one for all and all for one loyalty. Unfortunately, the ESFS without a euro bond is not a fiscal mechanism and the national politics of many eurozone countries are not as self sacrificing as Ireland.
The bomb is ticking and even German bonds have seen three recent auction failures. All for one and one for all or global financial chaos.
Print Page
Thursday, December 9, 2010
Wednesday, December 8, 2010
Citigroup's "Too Interwoven" Threat
On the same day (12/7/2010) the United States Treasury sold the last 2.4 billion shares of its former 27% ownership of Citigroup, the Chairman of Citigroup said it is not whether Citi is "too big to fail" but that its global operations are "too interwoven" in the global economy to fail.
Less than a week ago Jaime Dimon of J.P. Morgan Chase argued that "too big" is good for the economy. I have argued that the Volcker Rule is not about "too big to fail" but about financial institutions of any size which constitute a systemic danger. Still, the concept of "too big to fail" keeps framing the public debate rather than the more accurate "systemically dangerous" criteria. Anat Admati, a finance professor, has taken Jaime Dimon's comments and put them in the analytical framework of "too big" and the risks of leverage.
How can you measure a bank's leverage risk, if it is legally allowed by the suspension of the FASB rule on mark-to-market of assets to fair value to carry assets at unreal values creating fraudulent financial balance sheets?
I have discussed, on the basis of disparate but similar economic research, that leverage can be used to stimulate an economy, to cool an economy, and as a possible indicator of financial bubbles. As such, too much leverage can be a direct risk to an economy. Banks, shadow banks, and any financial entity however large or small needs to be regulated and proper risk management supervised to ensure they are not systemically dangerous and any systemically dangerous financial institution of whatever size must be wound down and broken up until it no longer presents a systemic threat. The Dodd-Frank Bill left the formation, definition, and extent of the Volcker Rule to regulators to construct. In this age of political gridlock created by the financial sector lobbyists and their bought and purchased minions, there is little hope that the Volcker Rule will establish proper risk management much less a trigger to wind a systemically dangerous entity down.
While there has been some back room effort to discuss a strong and effective Volcker Rule, I am not going to hold my breath for a Treasury Secretary, who was a one of those directly responsible for the financial crisis and TARP, or a President, whose advisers are mired in a New Political Reality which favors the financial elite, to act in the best interests of a stable democratic economy which recognizes the plebeian populace as the people who government serves and protects.
At what point do the threats of either "too big to fail", "too big", or "too interwoven to fail" become an extortionate threat or even a terrorist threat?
Print Page
Less than a week ago Jaime Dimon of J.P. Morgan Chase argued that "too big" is good for the economy. I have argued that the Volcker Rule is not about "too big to fail" but about financial institutions of any size which constitute a systemic danger. Still, the concept of "too big to fail" keeps framing the public debate rather than the more accurate "systemically dangerous" criteria. Anat Admati, a finance professor, has taken Jaime Dimon's comments and put them in the analytical framework of "too big" and the risks of leverage.
How can you measure a bank's leverage risk, if it is legally allowed by the suspension of the FASB rule on mark-to-market of assets to fair value to carry assets at unreal values creating fraudulent financial balance sheets?
I have discussed, on the basis of disparate but similar economic research, that leverage can be used to stimulate an economy, to cool an economy, and as a possible indicator of financial bubbles. As such, too much leverage can be a direct risk to an economy. Banks, shadow banks, and any financial entity however large or small needs to be regulated and proper risk management supervised to ensure they are not systemically dangerous and any systemically dangerous financial institution of whatever size must be wound down and broken up until it no longer presents a systemic threat. The Dodd-Frank Bill left the formation, definition, and extent of the Volcker Rule to regulators to construct. In this age of political gridlock created by the financial sector lobbyists and their bought and purchased minions, there is little hope that the Volcker Rule will establish proper risk management much less a trigger to wind a systemically dangerous entity down.
While there has been some back room effort to discuss a strong and effective Volcker Rule, I am not going to hold my breath for a Treasury Secretary, who was a one of those directly responsible for the financial crisis and TARP, or a President, whose advisers are mired in a New Political Reality which favors the financial elite, to act in the best interests of a stable democratic economy which recognizes the plebeian populace as the people who government serves and protects.
At what point do the threats of either "too big to fail", "too big", or "too interwoven to fail" become an extortionate threat or even a terrorist threat?
Print Page
Monday, December 6, 2010
Economy & Market Week Ended 11/26/2010
Ireland was pushed towards a bailout not of its own choosing as the European Monetary Union and the EU sought relentlessly through the ECB to protect European and other international banks on the impressed bodies of the Irish people. There was so much information and speculation as to what would or could or should happen from default and retreat from the euro to years of austerity, low economic growth, and debt, as the result of Cowen, the Irish head of government having been persuaded by Trichet, the head of the ECB, demanding in 2008 to not let the Irish banks fail no matter what had to be done, inappropriately creating public debt out of private debt in an amount that overwhelmed the Irish government's ability to fund without its own currency or direct EMU participation. I found myself spending over parts of two days just trying to organize the week's information and finding myself with the awareness that I would have to try to write three different articles at the same time. The Irish politicians, knowing the government's days are numbered, have worked over time as lawyers tried to justify the government investing new money in the Irish banks without making senior bond holders share the burden as would have happened in a private bankruptcy reorganization. I find this argument of pari passu, the senior bond holders having the same status of the depositors, under the Irish Constitution to be not worthy of consideration as the the depositors were covered by insurance and only the amounts above insurance would have been subject to the same treatment as the senior bond holders, who are predominantly European banks. The Irish politicians sought to dress up and disguise any forthcoming bailout as anything else, while knowing full well that the foolish attempt to assume the private debt of the Irish banks without adequate knowledge of the extent and value of their toxic assets was doomed to failure. Meanwhile, the IMF drones had descended and, combined with EU operatives and ECB coercion, were busy designing what Ireland must do in their usual elitist attitude oblivious to the rights or needs of the Irish people. The IMF and EMU are ignoring the political fallout and the inevitable collapse of the Irish government and new elections after the December 7th budget vote --- and we in the United States know how disastrous the 7th of December can be --- as the EU and the IMF essentially run the economy of Ireland for the next three years, without respect to the will of the Irish people, preferring to protect and serve the interests of the European private financial institutions (exposure information is mixed, but bank by bank breakdown would seem to indicate Germany is the most exposed followed by the UK which I will show in another article) with continuation at any cost of the Zombie Irish banks. It appeared that about an 85 billion euro bailout was being designed and that turned out in this following week ending 12/3/2010 to be the case with 35 billion to go to the Irish banks of which 17.5 billion euro was to be taken from the Irish pension funds with unknown interest rates for the IMF and EMU loans which appeared to average around 5.8%, but the IMF loan was supposedly in the 3.5% range which had many people asking if the EMU was demanding over 7%, despite the bailout being financed on the back of the Irish citizenry in the form of reduced services and social safety nets and increased taxes. One commentator equated the bailout with an economic occupation of Ireland forcing the people of Ireland into a decade or more of grinding poverty which will safeguard the profits of the banks of Europe.
This mishandled bailout of the Irish banks to save the banks of Europe did not stop the awareness that the euro without a fiscal mechanism will continue to be exposed to currency crisis in the form of international lack of confidence. Even the cost of swaps and bonds of countries like Germany and France started to go up. The United Kingdom will participate in lending money, because they need to protect Ireland as a large export market as well as UK banks bur, as we have previously written, there are those in the UK who do not believe it is in the best interests of Ireland to stay in the euro.
During the whole mishandled process of bailout or no bailout, haircuts for bondholders or not, German politicians playing to their electorate and not seeming to care if they were creating international economic and market turmoil, and Irish politicians being pushed around and manhandled as if they were children, the pressure on bond costs, spreads, and swaps continued to grow. Speculation on who would be next became a parlor game acknowledging that the structural weakness of the euro made continued pressure on all member nation bonds unavoidable. While poor Portugal was being picked on as the smallest, Spain was also taking its licks. Spain geared up its proactive stance and made several moves to encourage international confidence in Spain's banks and budget spending cuts. Portugal tried to draw a line in the sand and huff and puff that the EU could not force them to take money, but economic concerns that their budget is not accurately estimated abound. While Spain may be the keystone as where the cascade of declining confidence in the euro can be stopped, Italy is the elephant in the room whose debt comprises approximately one-fourth of the debt of EMU countries and much of which has been bought by Italian banks, but which provides very significant exposure for other European banks (Table 9D - Italy on the left and then page through). The situation has given plenty of room for people to hyperbolize and even suggest the currency contagion will extend to the UK as a misperceived debt contagion as many people remain confused by debt which has been used to frame public debate away from the structural weakness of the euro in not having a fiscal mechanism. The UK has its own currency and can provide fiscal stimulus if it has the political will. Given the growing disenchantment and failure of austerity in the UK as inflation grows anyway, the current coalition government may not last to the end of 2011.
The G20 conference was inconclusive and provided no real assistance to the global trade imbalances or the developing problems of the euro which many, such as the author of this article, want to confuse with a debt crisis as exemplified but the article's citation of the Asian debt crisis in the 1990's without reference to it being caused by the Russian currency crisis.
The Pragmatic Capitalist wrote of three things he thinks he thinks which were the recession is over but which recession citing mixed economic data and the euro crisis, corrects Rosenberg on why the stock market rallied in September as not the result of quantitative easing but improving economic data after a technical bottom on August 25th, and his reiteration with cautions that gold and treasuries will continue to be a trading hedge with the growing euro crisis, although I continue to warn that piling into gold on the high end is a magnificent way for the market sharks to harvest the fish. Gold is a crisis hedge, but it will not maintain its inflated value when crisis abates and economic growth kicks in for real for the 99% of people who are not wealthy. Interestingly, Treasuries were heading for the second monthly decline. But long term U. S. Treasuries and intermediate corporate bonds should still remain diversifiers in portfolios.
The Baseline Scenario had a guest post on unemployment, student debt, and college graduate employment bleak prospects entitled, "How are the kids? Unemployed, Underwater, and Sinking".
The Economist's view cites David Cay Johnston at length in his appeal to President Obama to call the deficit hawks bluff when they hypocritically demand continued tax breaks for the rich, which will raise the deficit and slow economic growth. Brad Delong, in the same vein, took on the flawed logic on tax provisions in the Bowles-Simpson Deficit Reduction Proposal. The Republican economic commentator, Bruce Bartlett, again takes on the misguided economic concept of Starve the Beast is nonsensical and did not work in the George W. Bush administration where it did not restrain spending much less bring it down.
U.S. bank earnings increased 600% in Q3. If you pay attention to John Hussman, you know this is something to raise your defensive data mining efforts. As I and others have been pointing out they have been reducing reserves by lowering their loan loss provisions; this is exactly the wrong time to be doing that. In fact, under the Basel III reforms, U.S. banks will need to raise $100 billion in capital to meet new 8% capital ratio guidelines. The continued dispensation from the FASB mark-to-market rules which would require banks to report assets held at fair value allows the banks to legally present fraudulent balance sheet statements which hid true asset value and risk. I continue to look with disfavor upon mutual fund portfolios with financial institution holdings and concentrations, despite bank stocks going up in value. Cooked financial books are always risky.
Court testimony has shown that Countrywide never sent mortgages to trust ignoring a proper securitization legal process. Yves Smith at naked capitalism has been hammering away at the mortgage fraud mess almost every day.
Meanwhile rich bankers, who get wealthy making risky investments and trades inconsistent with a well risk managed bank and regulated financial system, creating systemic risk, and get the government to pass their losses off to you and me while they always rake the profits in, are starting to live the glamorous party life of the rich and special people who's elite status exempts them from the constraints of a democratic society, which is becoming since the 1960's increasingly polarized with historically high wage inequality between the top 1% and the rest of humanity.
Elizabeth Warren is being given credit for the failure of Congress to override the President's veto of the bill which would have made the improper titling process used in the mortgage fraud mess retroactively legal.
The Federal Reserve Open Meeting Committee minutes for the October meeting were released and the raised their projections on unemployment, expect slower growth, and lower inflation. They saw output and employment improving slowly, but the current rate of output is more likely to increase unemployment. While they do not expect the economy to slide back into recession, it is vulnerable to shocks. The housing sector remains depressed. They noted that financial institutions risk losses if misrepresented mortgages are put back to the sellers. Inflation has tended lower as has nominal wage growth. Inflation is expected to remain below levels consistent with maximum employment and price stability. The participants were very divided on quantitative easing in form and consequences but only Hoenig voted against it. The Fed will buy $600 billion of longer term U.S. Tresuries at $75 billion a month through the second quarter of 2011. The Econbrowser provides suggestions to the Fed on how it could communicate to the public more effectively by providing the public with a clear explanation of how it plans to do when it returns the interest rate to something higher than zero and the limits of what monetary policy can be expected to do. The public is confused and worried about inflation and does not really understand the role of inflation in growth and the need to both encourage it and control it. The quantitative easing program of the Fed is viewed by many economists as ineffective in creating economic growth and employment and by others as a threat of increased inflation. It has every appearance of primarily creating liquidity and allowing financial institutions to increase their reserves and I have been maintaining that will be its primary result. We need a stimulus providing targeted programs to increase employment and economic growth in the short term. The money supply is low and trending lower. The Fed is deserving of legitimate criticism, but many people are confused about inflation, monetary policy, what the Fed has done and not done, and what the Fed can and cannot do. Many people have seen the video of the bunnies trying to explain to each other what the Fed is, does, and how quantitative easing works, but the video is not completely accurate as Econbrowser explains.
Actual PCE (Personal Consumption Expenditures) Inflation was only .1% annualized in October and the core PCE fell 3 tenths to .9%.
A proposed Federal Trade Commission rule which is supposedly aimed at protecting families of people who have died in debt is being questioned by consumer advocates as possibly unleashing aggressive collection tactics.
Michael Pettis believes European bank stress tests were not rigorous enough and that Ireland is under such pressure from the ECB, EMU, IMF, and the EU to take a bailout, because European banks could not be successfully restructured. He also believes that if Spain were to come under pressure to take a bailout, it would leave the euro rather than give sovereignty to Germany. He also thinks a junk bond market will spring up in Europe as it did in the 1980's in the U.S. With respect to China, he is skeptical that China's banks will be able to keep within loan quotas, inflation is rising faster than rising interest rates, and he is concerned that raising interest rates may increase inflation rather than reduce inflation as one might intuitive think. The pegging of the Chinese currency to the U.S. dollar is directly related to the increase of China's trade surplus and raising interest rates, according to BNP Parabas, would increase capital inflows into China. U.S. quantitative easing effectively reduces the value of the dollar against other free floating currencies, but the renminbi is pegged to the dollar and has generally fallen in value, particularly against the currencies of other emerging market countries, even though the peg has increased 3.1% in the last five months. On Friday the 26th, the Chinese 3 month yuan bill auction failed to attract sufficient demand for the first time since June, attracting only 11.6 billion yuan ($1.7 billion) from a 20 billion yuan offering and yielded 2.7372% and this is seen as signaling tightening to come. If China takes liquidity out of the market, it will probably mean that Australia may see its unemployment rate increase, its interest rates not go as high as expected, and it trade terms with China peak. On the other hand many people think a contraction in China's trade surplus would be a global positive.
The eurozone, emerging Europe, and China are economic sectors which require careful attention.
Sheila Barr, head of the FDIC, weighed into the deficit debate in the Untied States in a disappointing display of not really understanding the problem. Too many public officials are pandering to a public disaffection with government not getting things done that really help people and are using the deficit as a mask for not providing the stimulus the economy needs to create jobs and improve lives of its citizenry. Even President Obama appears to have fallen into the deficit hawk pit. Social Security is not part of the Federal debt and opposition to health reform betrays the fact that health costs are the one of the largest parts of the increase in Federal debt. Those who would deny unemployment benefits and demand lower taxes for the wealthy while demanding deficit reductions are hypocrites at best. Ataxingmatter has torn the deficit argument apart in detailed fashion and places the problem on politicians and media, who avoid rigorous analysis.
Krugman bemoans the intellectual, political, and financial instability of moderation in the perception of history after this last Recession as detailed by Brad Delong in his macroeconomic disappointment that, despite economic history, any developed nation would allow a business cycle to wreak havoc to the extent of continued and prolonged high unemployment. Politicians are playing crowds and public disaffection with inefficient government to advance political agendas that favor the financial interests and wealthy rather than the interests and needs to the people. Brad Delong also gave a speech in which he reviewed the financial crisis and Recession and how we have become side tracked and economic recovery has been put on the back burner as politicians churn public resentment.
John Hussman in his 11/22/2010 weekly commentary said investors have not learned that historical evidence shows that consistently low yields and elevated valuations are followed by dismal subsequent returns over the next decade. S&P 500 yield is 1.95% which means one could expect 2.2% annually over the next decade, although his use of normalized earnings result in a projection of 4.8%. Using forward operating earnings, the projection result would be 4.7%. This is not a dividend story. He still is opposed to the Fed's QE2 and cites several economist's with whom he agrees, including Stiglitz, who are opposed or would be opposed and also again affirms the need for targeted investment stimulus. He also goes into detail on why he thinks the Maiden Lane vehicles created by the Fed to hold toxic securities bought outright from the financial institutions and held for over two years are illegal under The Federal Reserve Act.
In dealing with global imbalances, and imbalances within the eurozone, one of the problems is the focus on current account balances control by using target current account levels when the problem is actually one of fiscal policy and exchange rates. To correct a deficit current account balance really requires international and national investment, austerity damages investment and nominal wage and price adjustments are not going to create sufficient competitiveness improvement. Jan Kregel and Rob Parenteau have argued for the European Investment Bank to step in and make investments to create competitive output and I have maintained that it is necessary to invest to create competitiveness internally and with exports. Unfortunately, the EIB does not provide these types of loans, does not believe it is empowered by the EU to do these types of loans, has a history of infrastructure improvement loans, and does not have the business experience or psychological disposition to make loans that are not consistent with how they do business as bankers. The problem is no one wants to make the necessary investment loans and the euro and austerity deprive EMU member countries of the ability to make efficient internal investment. This is why a fiscal mechanism (and the relinquishment of national sovereignty to create a fiscal union is not a political reality and it will be necessary to construct without loss of sovereignty --- some, such as Edward Harrison, have suggested fiscal stabilizers) and European bond (Germany is against this type of bond and believes it would require a treaty change) to provide funding is functionally created. Such a fiscal mechanism will not work if designed to respond to budget deficits rather than investment needs (encouragement or discouragement) to create competitiveness and efficiencies or to cool a nation's economy.
Market: No banks failed the week of 11/26; the problem bank list is 919.
DOW/Volume Nasdaq/Volume
Mon: <24.97>/down 16.8% 13.90/down 1.9%
Tue: <142.21>/up 11.7% <37.07>/up 3.7%
Wed: 150.91/down 19.2% 48.17/down 13.1%
Thu: Holiday
Fri: <95.28>/down 48.2% <8.56>/down 60.6%
Total <111.55> 16.44
Mon: Oil down 24 cents to $81.74; Dollar stronger but weaker against the yen; banks down on insider trading raid; eurozone contagion worries; U.S. banks need $150 billion more capital under Basel II.
Tue: Oil down 49 cents to 81.25; Dollar stronger but weaker against the yen; Korean fighting.
Wed: Oil up 2.61 to 83.36 (December contract); Dollar stronger; commodities market ignored oil supply up ; oil price up on Pre-Holiday short covering; weekly jobless claims were down 34,000 to 407,000, 4 week moving average was down 7500 to 436,000, continuing claims were down 262,000 to 4,660,000 -- these are positive news but may reflect seasonal adjustment assumptions that claims increase between Veteran's Day and Thanksgiving Day; oil supplies were up 1 million barrels, gas was up 1.9 million barrels, and distillate was down 500,000 barrels.
Fri: Oil down 10 cents to 83.76 (January contract); Dollar stronger; only half day market; Europe fears of contagion on talk of senior bond holders haircut; Korean conflict; Ireland's banks downgraded.
United States: Agricultural exports are creating an economic boom in parts of the Midwest.
ECRI WLI (Weekly Leading Index) is up to <3.1> from <4.5>.
Mishkin, a former Fed governor, said the Fed is under unprecedented attack for being unable to clearly articulate monetary policies and its credibility has been damaged by its failure to put monetary policy in a long term context and internal dissension.
CoreLogic reported shadow housing (pending supply) inventory of about 2.1 million with total visible and shadow inventory of approximately 6.3 million.
Chicago Fed National Activity Index was up to <.28> October from <.52> with 3 month average down to <.46> from <.33> which is the lowest since November 2009.
Three hedge funds were raided on Monday in an insider trading investigation: Diamond Capital Management, Level Global Investors, and Capital Management.
Kocherlakota (Minneapolis Fed) voiced support to QE2 as "move in the right direction", but he warned that uncertainty over tax policy drags on growth. He believes inflation is not a concern and that unemployment is dragging the economy.
Health insurers are required to spend 80% of premiums on heath costs and no more than 20% on administration under newly released Federal regulations.
Commercial property prices were up 4.3% September for the biggest monthly gain in the ten years records have been kept.
Mortgage delinquency rate was down to 6.44% Q3 from 6.67% Q2 and up to 6.25% vs year ago (historical average is 1.5-2%) according to Trans Union.
Q3 GDP was revised up to an annualized rate of 2.5% from 2.0% and real PCE from 2.6% TO 2.8%. State government expenditures were revised up from <2.%> to .8%. Continued high unemployment is expected to lower growth. Non-residential construction investment was revised down to <5.7> from 3.9 as expected.
Existing home sales were down 2.2% October with inventory up 8.4% vs year ago.
Illinois unemployment was down October to 9.8% from 10.9% a year ago.
Richmond Fed Business Activity Survey was up 4 to 9 in October; finished goods inventory was up 10 to 16; raw materials were up 5 to 15; new orders were up 2 to 10.
U.S. PCE was up 1.0% September annualized (2.3% August) with core PCE up .3% (.8% August).
Fannie Mae and Freddie Mac will resume sale of foreclosed home.
Sheila Blair, head of FDIC, wrote a Washington Post opinion piece asserting the next debt crisis could be the U.S. with Baby Boomers impacting government spending, special interest tax codes, military spending, and tax subsidies for housing and health as misallocated resources. She predicted the debt to GDP ratio could rise from 62% to 185% in 2035. We have already commented on our disappointment in her display of economic illiteracy.
U.S. durable goods orders were down 3.3% October and down 2.7% ex-transportation in the largest drop since March 2009.
International: The EU has drafted a strategy to obtain continuing sufficient supplies of raw materials.
Estonia PPI (Producer Price Index) was up .3% in October.
Despite a 2.3 bid to cover on 3 and 6 month Spanish bonds, Spain sold less that the 4 billion euro minimum it offered (4-5 billion) indicating the bids received were too low and rejected.
China ordered local governments to ban hoarding of oil, coal, and other key commodities to keep prices from climbing.
Union strikes against austerity measures have shut down public services in Portugal.
Irish government majority fell to two votes with the election of an anti-austerity candidate in special election.
China protested U.S. and South Korea military exercises.
India is expanding its bribery probe among bankers and developers.
Peru GDP was 9.5% Q3.
China will rely next year on fiscal stimulus to maintain economic growth at 8%, set inflation target of 4% up from 3%, further cut bank lending target, and be less reliant on exports.
German inflation was up on food and energy to 1.6% (expected 1.4%) November from 1.3%.
United Kingdom students have renewed educational fee protests.
The People's Bank of China will use price tools (interest rates) and other measures to curb growth.
India arrested 8 bankers and brokers for bribery triggering the biggest one day jump in swaps.
The Australian Central Bank said interest rates will remain steady for the next several months.
Japanese deflation slowed as consumer prices continued to fall for the 20th month, because the increase of tobacco taxes impacted prices.
Print Page
This mishandled bailout of the Irish banks to save the banks of Europe did not stop the awareness that the euro without a fiscal mechanism will continue to be exposed to currency crisis in the form of international lack of confidence. Even the cost of swaps and bonds of countries like Germany and France started to go up. The United Kingdom will participate in lending money, because they need to protect Ireland as a large export market as well as UK banks bur, as we have previously written, there are those in the UK who do not believe it is in the best interests of Ireland to stay in the euro.
During the whole mishandled process of bailout or no bailout, haircuts for bondholders or not, German politicians playing to their electorate and not seeming to care if they were creating international economic and market turmoil, and Irish politicians being pushed around and manhandled as if they were children, the pressure on bond costs, spreads, and swaps continued to grow. Speculation on who would be next became a parlor game acknowledging that the structural weakness of the euro made continued pressure on all member nation bonds unavoidable. While poor Portugal was being picked on as the smallest, Spain was also taking its licks. Spain geared up its proactive stance and made several moves to encourage international confidence in Spain's banks and budget spending cuts. Portugal tried to draw a line in the sand and huff and puff that the EU could not force them to take money, but economic concerns that their budget is not accurately estimated abound. While Spain may be the keystone as where the cascade of declining confidence in the euro can be stopped, Italy is the elephant in the room whose debt comprises approximately one-fourth of the debt of EMU countries and much of which has been bought by Italian banks, but which provides very significant exposure for other European banks (Table 9D - Italy on the left and then page through). The situation has given plenty of room for people to hyperbolize and even suggest the currency contagion will extend to the UK as a misperceived debt contagion as many people remain confused by debt which has been used to frame public debate away from the structural weakness of the euro in not having a fiscal mechanism. The UK has its own currency and can provide fiscal stimulus if it has the political will. Given the growing disenchantment and failure of austerity in the UK as inflation grows anyway, the current coalition government may not last to the end of 2011.
The G20 conference was inconclusive and provided no real assistance to the global trade imbalances or the developing problems of the euro which many, such as the author of this article, want to confuse with a debt crisis as exemplified but the article's citation of the Asian debt crisis in the 1990's without reference to it being caused by the Russian currency crisis.
The Pragmatic Capitalist wrote of three things he thinks he thinks which were the recession is over but which recession citing mixed economic data and the euro crisis, corrects Rosenberg on why the stock market rallied in September as not the result of quantitative easing but improving economic data after a technical bottom on August 25th, and his reiteration with cautions that gold and treasuries will continue to be a trading hedge with the growing euro crisis, although I continue to warn that piling into gold on the high end is a magnificent way for the market sharks to harvest the fish. Gold is a crisis hedge, but it will not maintain its inflated value when crisis abates and economic growth kicks in for real for the 99% of people who are not wealthy. Interestingly, Treasuries were heading for the second monthly decline. But long term U. S. Treasuries and intermediate corporate bonds should still remain diversifiers in portfolios.
The Baseline Scenario had a guest post on unemployment, student debt, and college graduate employment bleak prospects entitled, "How are the kids? Unemployed, Underwater, and Sinking".
The Economist's view cites David Cay Johnston at length in his appeal to President Obama to call the deficit hawks bluff when they hypocritically demand continued tax breaks for the rich, which will raise the deficit and slow economic growth. Brad Delong, in the same vein, took on the flawed logic on tax provisions in the Bowles-Simpson Deficit Reduction Proposal. The Republican economic commentator, Bruce Bartlett, again takes on the misguided economic concept of Starve the Beast is nonsensical and did not work in the George W. Bush administration where it did not restrain spending much less bring it down.
U.S. bank earnings increased 600% in Q3. If you pay attention to John Hussman, you know this is something to raise your defensive data mining efforts. As I and others have been pointing out they have been reducing reserves by lowering their loan loss provisions; this is exactly the wrong time to be doing that. In fact, under the Basel III reforms, U.S. banks will need to raise $100 billion in capital to meet new 8% capital ratio guidelines. The continued dispensation from the FASB mark-to-market rules which would require banks to report assets held at fair value allows the banks to legally present fraudulent balance sheet statements which hid true asset value and risk. I continue to look with disfavor upon mutual fund portfolios with financial institution holdings and concentrations, despite bank stocks going up in value. Cooked financial books are always risky.
Court testimony has shown that Countrywide never sent mortgages to trust ignoring a proper securitization legal process. Yves Smith at naked capitalism has been hammering away at the mortgage fraud mess almost every day.
Meanwhile rich bankers, who get wealthy making risky investments and trades inconsistent with a well risk managed bank and regulated financial system, creating systemic risk, and get the government to pass their losses off to you and me while they always rake the profits in, are starting to live the glamorous party life of the rich and special people who's elite status exempts them from the constraints of a democratic society, which is becoming since the 1960's increasingly polarized with historically high wage inequality between the top 1% and the rest of humanity.
Elizabeth Warren is being given credit for the failure of Congress to override the President's veto of the bill which would have made the improper titling process used in the mortgage fraud mess retroactively legal.
The Federal Reserve Open Meeting Committee minutes for the October meeting were released and the raised their projections on unemployment, expect slower growth, and lower inflation. They saw output and employment improving slowly, but the current rate of output is more likely to increase unemployment. While they do not expect the economy to slide back into recession, it is vulnerable to shocks. The housing sector remains depressed. They noted that financial institutions risk losses if misrepresented mortgages are put back to the sellers. Inflation has tended lower as has nominal wage growth. Inflation is expected to remain below levels consistent with maximum employment and price stability. The participants were very divided on quantitative easing in form and consequences but only Hoenig voted against it. The Fed will buy $600 billion of longer term U.S. Tresuries at $75 billion a month through the second quarter of 2011. The Econbrowser provides suggestions to the Fed on how it could communicate to the public more effectively by providing the public with a clear explanation of how it plans to do when it returns the interest rate to something higher than zero and the limits of what monetary policy can be expected to do. The public is confused and worried about inflation and does not really understand the role of inflation in growth and the need to both encourage it and control it. The quantitative easing program of the Fed is viewed by many economists as ineffective in creating economic growth and employment and by others as a threat of increased inflation. It has every appearance of primarily creating liquidity and allowing financial institutions to increase their reserves and I have been maintaining that will be its primary result. We need a stimulus providing targeted programs to increase employment and economic growth in the short term. The money supply is low and trending lower. The Fed is deserving of legitimate criticism, but many people are confused about inflation, monetary policy, what the Fed has done and not done, and what the Fed can and cannot do. Many people have seen the video of the bunnies trying to explain to each other what the Fed is, does, and how quantitative easing works, but the video is not completely accurate as Econbrowser explains.
Actual PCE (Personal Consumption Expenditures) Inflation was only .1% annualized in October and the core PCE fell 3 tenths to .9%.
A proposed Federal Trade Commission rule which is supposedly aimed at protecting families of people who have died in debt is being questioned by consumer advocates as possibly unleashing aggressive collection tactics.
Michael Pettis believes European bank stress tests were not rigorous enough and that Ireland is under such pressure from the ECB, EMU, IMF, and the EU to take a bailout, because European banks could not be successfully restructured. He also believes that if Spain were to come under pressure to take a bailout, it would leave the euro rather than give sovereignty to Germany. He also thinks a junk bond market will spring up in Europe as it did in the 1980's in the U.S. With respect to China, he is skeptical that China's banks will be able to keep within loan quotas, inflation is rising faster than rising interest rates, and he is concerned that raising interest rates may increase inflation rather than reduce inflation as one might intuitive think. The pegging of the Chinese currency to the U.S. dollar is directly related to the increase of China's trade surplus and raising interest rates, according to BNP Parabas, would increase capital inflows into China. U.S. quantitative easing effectively reduces the value of the dollar against other free floating currencies, but the renminbi is pegged to the dollar and has generally fallen in value, particularly against the currencies of other emerging market countries, even though the peg has increased 3.1% in the last five months. On Friday the 26th, the Chinese 3 month yuan bill auction failed to attract sufficient demand for the first time since June, attracting only 11.6 billion yuan ($1.7 billion) from a 20 billion yuan offering and yielded 2.7372% and this is seen as signaling tightening to come. If China takes liquidity out of the market, it will probably mean that Australia may see its unemployment rate increase, its interest rates not go as high as expected, and it trade terms with China peak. On the other hand many people think a contraction in China's trade surplus would be a global positive.
The eurozone, emerging Europe, and China are economic sectors which require careful attention.
Sheila Barr, head of the FDIC, weighed into the deficit debate in the Untied States in a disappointing display of not really understanding the problem. Too many public officials are pandering to a public disaffection with government not getting things done that really help people and are using the deficit as a mask for not providing the stimulus the economy needs to create jobs and improve lives of its citizenry. Even President Obama appears to have fallen into the deficit hawk pit. Social Security is not part of the Federal debt and opposition to health reform betrays the fact that health costs are the one of the largest parts of the increase in Federal debt. Those who would deny unemployment benefits and demand lower taxes for the wealthy while demanding deficit reductions are hypocrites at best. Ataxingmatter has torn the deficit argument apart in detailed fashion and places the problem on politicians and media, who avoid rigorous analysis.
Krugman bemoans the intellectual, political, and financial instability of moderation in the perception of history after this last Recession as detailed by Brad Delong in his macroeconomic disappointment that, despite economic history, any developed nation would allow a business cycle to wreak havoc to the extent of continued and prolonged high unemployment. Politicians are playing crowds and public disaffection with inefficient government to advance political agendas that favor the financial interests and wealthy rather than the interests and needs to the people. Brad Delong also gave a speech in which he reviewed the financial crisis and Recession and how we have become side tracked and economic recovery has been put on the back burner as politicians churn public resentment.
John Hussman in his 11/22/2010 weekly commentary said investors have not learned that historical evidence shows that consistently low yields and elevated valuations are followed by dismal subsequent returns over the next decade. S&P 500 yield is 1.95% which means one could expect 2.2% annually over the next decade, although his use of normalized earnings result in a projection of 4.8%. Using forward operating earnings, the projection result would be 4.7%. This is not a dividend story. He still is opposed to the Fed's QE2 and cites several economist's with whom he agrees, including Stiglitz, who are opposed or would be opposed and also again affirms the need for targeted investment stimulus. He also goes into detail on why he thinks the Maiden Lane vehicles created by the Fed to hold toxic securities bought outright from the financial institutions and held for over two years are illegal under The Federal Reserve Act.
In dealing with global imbalances, and imbalances within the eurozone, one of the problems is the focus on current account balances control by using target current account levels when the problem is actually one of fiscal policy and exchange rates. To correct a deficit current account balance really requires international and national investment, austerity damages investment and nominal wage and price adjustments are not going to create sufficient competitiveness improvement. Jan Kregel and Rob Parenteau have argued for the European Investment Bank to step in and make investments to create competitive output and I have maintained that it is necessary to invest to create competitiveness internally and with exports. Unfortunately, the EIB does not provide these types of loans, does not believe it is empowered by the EU to do these types of loans, has a history of infrastructure improvement loans, and does not have the business experience or psychological disposition to make loans that are not consistent with how they do business as bankers. The problem is no one wants to make the necessary investment loans and the euro and austerity deprive EMU member countries of the ability to make efficient internal investment. This is why a fiscal mechanism (and the relinquishment of national sovereignty to create a fiscal union is not a political reality and it will be necessary to construct without loss of sovereignty --- some, such as Edward Harrison, have suggested fiscal stabilizers) and European bond (Germany is against this type of bond and believes it would require a treaty change) to provide funding is functionally created. Such a fiscal mechanism will not work if designed to respond to budget deficits rather than investment needs (encouragement or discouragement) to create competitiveness and efficiencies or to cool a nation's economy.
Market: No banks failed the week of 11/26; the problem bank list is 919.
DOW/Volume Nasdaq/Volume
Mon: <24.97>/down 16.8% 13.90/down 1.9%
Tue: <142.21>/up 11.7% <37.07>/up 3.7%
Wed: 150.91/down 19.2% 48.17/down 13.1%
Thu: Holiday
Fri: <95.28>/down 48.2% <8.56>/down 60.6%
Total <111.55> 16.44
Mon: Oil down 24 cents to $81.74; Dollar stronger but weaker against the yen; banks down on insider trading raid; eurozone contagion worries; U.S. banks need $150 billion more capital under Basel II.
Tue: Oil down 49 cents to 81.25; Dollar stronger but weaker against the yen; Korean fighting.
Wed: Oil up 2.61 to 83.36 (December contract); Dollar stronger; commodities market ignored oil supply up ; oil price up on Pre-Holiday short covering; weekly jobless claims were down 34,000 to 407,000, 4 week moving average was down 7500 to 436,000, continuing claims were down 262,000 to 4,660,000 -- these are positive news but may reflect seasonal adjustment assumptions that claims increase between Veteran's Day and Thanksgiving Day; oil supplies were up 1 million barrels, gas was up 1.9 million barrels, and distillate was down 500,000 barrels.
Fri: Oil down 10 cents to 83.76 (January contract); Dollar stronger; only half day market; Europe fears of contagion on talk of senior bond holders haircut; Korean conflict; Ireland's banks downgraded.
United States: Agricultural exports are creating an economic boom in parts of the Midwest.
ECRI WLI (Weekly Leading Index) is up to <3.1> from <4.5>.
Mishkin, a former Fed governor, said the Fed is under unprecedented attack for being unable to clearly articulate monetary policies and its credibility has been damaged by its failure to put monetary policy in a long term context and internal dissension.
CoreLogic reported shadow housing (pending supply) inventory of about 2.1 million with total visible and shadow inventory of approximately 6.3 million.
Chicago Fed National Activity Index was up to <.28> October from <.52> with 3 month average down to <.46> from <.33> which is the lowest since November 2009.
Three hedge funds were raided on Monday in an insider trading investigation: Diamond Capital Management, Level Global Investors, and Capital Management.
Kocherlakota (Minneapolis Fed) voiced support to QE2 as "move in the right direction", but he warned that uncertainty over tax policy drags on growth. He believes inflation is not a concern and that unemployment is dragging the economy.
Health insurers are required to spend 80% of premiums on heath costs and no more than 20% on administration under newly released Federal regulations.
Commercial property prices were up 4.3% September for the biggest monthly gain in the ten years records have been kept.
Mortgage delinquency rate was down to 6.44% Q3 from 6.67% Q2 and up to 6.25% vs year ago (historical average is 1.5-2%) according to Trans Union.
Q3 GDP was revised up to an annualized rate of 2.5% from 2.0% and real PCE from 2.6% TO 2.8%. State government expenditures were revised up from <2.%> to .8%. Continued high unemployment is expected to lower growth. Non-residential construction investment was revised down to <5.7> from 3.9 as expected.
Existing home sales were down 2.2% October with inventory up 8.4% vs year ago.
Illinois unemployment was down October to 9.8% from 10.9% a year ago.
Richmond Fed Business Activity Survey was up 4 to 9 in October; finished goods inventory was up 10 to 16; raw materials were up 5 to 15; new orders were up 2 to 10.
U.S. PCE was up 1.0% September annualized (2.3% August) with core PCE up .3% (.8% August).
Fannie Mae and Freddie Mac will resume sale of foreclosed home.
Sheila Blair, head of FDIC, wrote a Washington Post opinion piece asserting the next debt crisis could be the U.S. with Baby Boomers impacting government spending, special interest tax codes, military spending, and tax subsidies for housing and health as misallocated resources. She predicted the debt to GDP ratio could rise from 62% to 185% in 2035. We have already commented on our disappointment in her display of economic illiteracy.
U.S. durable goods orders were down 3.3% October and down 2.7% ex-transportation in the largest drop since March 2009.
International: The EU has drafted a strategy to obtain continuing sufficient supplies of raw materials.
Estonia PPI (Producer Price Index) was up .3% in October.
Despite a 2.3 bid to cover on 3 and 6 month Spanish bonds, Spain sold less that the 4 billion euro minimum it offered (4-5 billion) indicating the bids received were too low and rejected.
China ordered local governments to ban hoarding of oil, coal, and other key commodities to keep prices from climbing.
Union strikes against austerity measures have shut down public services in Portugal.
Irish government majority fell to two votes with the election of an anti-austerity candidate in special election.
China protested U.S. and South Korea military exercises.
India is expanding its bribery probe among bankers and developers.
Peru GDP was 9.5% Q3.
China will rely next year on fiscal stimulus to maintain economic growth at 8%, set inflation target of 4% up from 3%, further cut bank lending target, and be less reliant on exports.
German inflation was up on food and energy to 1.6% (expected 1.4%) November from 1.3%.
United Kingdom students have renewed educational fee protests.
The People's Bank of China will use price tools (interest rates) and other measures to curb growth.
India arrested 8 bankers and brokers for bribery triggering the biggest one day jump in swaps.
The Australian Central Bank said interest rates will remain steady for the next several months.
Japanese deflation slowed as consumer prices continued to fall for the 20th month, because the increase of tobacco taxes impacted prices.
Print Page
Sunday, November 28, 2010
Economy & Market Week Ended 11/19/2010
The problems of the euro nations as magnified in Ireland have created a whirlwind of concern and doubts among international investors increasing debt costs, bank access to liquidity lending, withdrawal of corporate (foreign?) deposits in Ireland, and currency crisis pressure on the euro. The amount of research available is almost overwhelming and much will have to be overlooked given time constraints. As you do go through the overview we are providing, please understand that I use the links in paragraphs to provide substantive information which should not be skipped.
Over a week ago in the week ending 11/19/2010, Ireland, the ECB, EU, and IMF were going back and forth and the rumors were flying with Ireland denying bailout talks and the ECB and IMF supposedly demanding bailout for Ireland. What the focus on Ireland has done is more brightly expose the problems of the European Monetary Union and its failure to construct a fiscal union, of which Munchau wrote during the week, structure which would allow it to respond to the particular fiscal needs of its individual sovereign nation members and how this is creating a growing, and potentially, cascading currency crisis which is reflected not only in debt and swap prices but in the declining value of the euro. While the banks in Ireland created, with the help of foreign investment, serious financial problems through the profitable misallocation of resources until the mismanagement and/or fraud caught up to them in the financial crisis of 2008 and the debts and losses of the banks suddenly became those of the common citizenry rather than the bankers and senior bond holders who want the profits and not the losses. Then, having taken on the private bank debts and guaranteeing the senior bond holders and earning accolades for its austerity program, the government of Ireland met the inevitable in reduced revenue and less economic growth aggravated by austerity programs and bank toxic assets worth far less than estimated rolling around in an ill conceived bad bank, which made government issued bonds a problem for the ECB, and nationalized framework compounded by growing loss of faith by foreign investors. Rather than focusing on the banks and their financial participants, the people of Ireland are being told they have too much debt and its their fault the government budget has a growing deficit gap. While the government has made political spending mistakes and cultivated some inefficient policies, the primary cause of their present dilemma is private bank debt assumed as public debt as the Irish government curried favor with the European Union and the European banks who are among the senior bond holders of the Irish banks.
The bailout debate revolved around whether the bailout would provide funding for Irish banks only or the sovereign government of Ireland or both. The formal process of bailout application and consideration was much touted but pushed aside as the IMF, ECB, and EMU sought a forced bailout to stem the loss of faith in eurozone debt and failure of fiscal policy response within the eurozone as the result of how the euro was created as well as concern the EMU emergency funding mechanism (ESFS) has not been funded. The bailout figures were rumored to be 80 billion to 140 billion euro with EU "partner" enthusiasts voicing approval of a bailout which would provide support and those who saw a bailout as the only hope for an austerity deprived country without its own currency, weak banks with liquidity problems, rising debt costs, and only limited authority to exercise normal fiscal policy. While members of the Irish government kept insisting Ireland is well funded and does not need a bailout, the Governor of the Irish central bank was publicly adamant there was no choice. Given the ruling political party has been in charge during the growth of bank financial abuse and mismanagement prior to the 2008 financial crisis and readily assumed the bank's private debt as public debt, the current political situation appears to be leading to new parliamentary elections. Many are pointing out that Ireland is not Greece and it may have the economic strength to default, withdraw from the euro, give bank equity, through the issuance of contingent convertible bonds or the use of debt as legal tender, for bank debt (bondholders), or form a monetary union, as Samuel Brittan has in "Conventional Wisdom, the Royals, and the Republic", with the United Kingdom. Attempts to get Ireland to raise its corporate tax, even though it is not substantially different from other corporate tax rates in Europe, have been seen as yet another attempt to destroy Irish independence. Much of this anger has been directed at Germany which continues to insist that future bailouts must include bondholders sharing in the losses, which is not an unreasonable request except that, at this particular point in time, it is increasing international doubt about the euro and encouraging increases in debt costs. Given the exposure of German banks to Irish private and bank debt, Germany's insistence on bondholders sharing in the losses, while politically popular in Germany, is counter productive to Germany's own economic stability, which it clearly understands would not be served well by failure to support Ireland. If this credit crisis is allowed to fester and move from country to country on growing doubts the European Monetary Union will continue to refuse to allow the currency to support appropriate fiscal policy, it will spread beyond Portugal to Spain, Italy, Belgium, and even Germany as the costs mount towards 1650 billion euro of untimely and austere responses. If the eurozone were to act with any reasonable degree of fiscal unity, or even just move towards a mechanism of fiscal unity involving support of fiscal policy relevant to each individual sovereign member ( some people might call these fiscal stabilizers), the demonstration of compromise and a common benefit would do more to stabilize international doubts than bailout after bailout.
While the European Council has agreed to consider a sovereign debt default mechanism, but the politics of its construction may very well make the eurozone more fragile, much like the failed Exchange Rate Mechanism and its incentives for speculation, by an acceptance of continuing financial crisis. It has also accented the possibility of default and bond haircuts at a time of current interest rate pressure on debt. A monetary union requires fiscal assistance between its members rather than a reliance on moral hazard, in which the inconsistencies of the European Monetary Union are excused in the name of debt vigilantism austerity and the necessity to protect banks at the expense of the people. Despite Ireland's insistence it is well funded into 2011, the banks in Ireland have seriously limited access to interbank lending internationally; this has aggravated the Irish banks long term liquidity in a threat from bank funding constraints.
Yet, the financial forces in Europe and the world are insistent it would be preferable to have sovereign default in which private bank debt has been made public debt rather than banks failing and bankers losing money. On the one hand Germany is pushing for a sovereign default mechanism and bondholders sharing in the losses as if Germany does not have a clue that German banks followed by UK banks have the most exposure to Irish bank and private debt. Germany's leadership is bringing the question of whether the euro can survive into ever more contention and that contention is costing other euro nations more and more in debt costs. In the meantime, the myth of German prosperity under austerity belies the large fiscal stimulus program which buffered Germany in the 2008 financial crisis. Of more concern is the refusal of German politicians to acknowledge the success of their fiscal stimulus program and continue to assert austerity as the only economic path. Germany is headed back to a record current account surplus despite its captive eurozone market countries debt problems, which have been partially caused by the different exchange rates and the effect of those rates over the years to create seriously out of balance current accounts within the single currency eurozone. This can bee seen most clearly in Greece, in which the loss of competitiveness as the result of these current account imbalances and exchange rate dynamics, may demand Germany extend its credit to Greece in order to stimulate the divergence in the cost of capital with the emergence of counterparty risk.
As the austerity infection multiplies worldwide, the United States is proving itself an increasingly willing victim as politicians avoid getting things done, such as creating jobs and reducing excessively high unemployment and creating regulations which will make bankers responsible for systemically dangerous, however profitable, business conduct, as it is easier to join the crowd which proclaims the bailout of banks as enlightenment and the very fault of the people upon whose backs the cost of the bank bailouts is being foisted as shared sacrifice; people who obviously cannot properly manage the debts placed on their backs by bailouts as well as the banks can shift their losses to the people and become larger and more powerful. There are those who would rewrite history, and President Obama has fallen into this trap, and insist President Franklin Roosevelt did not take action until riots forced his hand in 1934 which is patently false. Unlike President Obama, President Roosevelt was not persuaded by the financial interests and outgoing President Hoover to reaffirm the status quo commitments to a gold standard, support of the private banks, and austerity. With the recent report of the Deficit Commission, which reads like a litany of its members vested interests and historical prejudices, the economic debate may be pushed back even further from public debate as blame is transferred from bankers and financial traders to the irresponsible people and any government which provides programs to serve people. As this report is analyzed going forward, it is obvious that it just places more of the burden on the backs of the citizenry, even proposing a national sales tax., and the diminishment of that troublesome middle class. But when it comes to tax breaks for the wealthy, the economic cost to government is thrown out the window as we have demonstrated in past articles with false arguments that such tax breaks will stimulate the broader economy. President Obama appears willing to cave, yet again, to the financial elite.
The mortgage mess continues despite financial institutions attempts to throw the problem back onto the victims of the fraud who are just trying, in the version put forth by the banks and mortgage servicers, to put off foreclosures resulting from their deadbeat life styles. The problem with these fraudulent documents is not just a subversion of contract law and due process but the possible risk of billions of dollars in losses, as we have reported previously. The Congressional Oversight Panel has issued a new report on the mortgage processing problems with detailed analysis of different scenarios depending on the depth of the legal problems involved. Congressional hearings have not gone well for the bankers and the mortgage servicers. But public hearings do not always translate into real governmental action as the public performance is always easier than the delivery of service to the public good. Already a backdoor attempt is being made to retroactively make the whole mortgage processing mess and lack of legal documentation legitimate, although many financial bloggers have sniffed it out and raised the hue and cry of the hunt, despite PR attempts to dress the proposed legislation as just a modernization of the Interstate Commerce laws. Still the lobbyist and lawyers are hard at work to build a see no evil, hear no evil, speak no evil defense.
Federal Reserve Chairman, Bernanke, gave two speeches in Europe: one on "Rebalancing the Global Recovery" and the other on "Emerging from the Crisis: Where do We Stand?" in which he recognized the need for fiscal stimulus (by government) to impact high unemployment to enhance long term growth, criticized China for its undervalued currency and use of capital controls noting the long term effects on the world economy are negative, and noted slower expansion in the United States, declining inflation, and continued high employment while defending QE2. With China's internal concerns with rising inflation and lending bubbles, it is unlikely they will do more than allow the renminbi to slowly appreciate within a trading range as they adjust the middle point slowly up and will concentrate on interest rates, price controls, and industrial production for internal consumption. Many view the Chinese monetary policies and the Fed's QE2 as both promoting inflation in other countries and as self-serving exchange rates in trade, defacto devaluation, and favored monetary credit position. The G20 meeting did nothing to defuse the confused global monetary systems and exchange problems flirting with currency trade wars, despite the growing awareness that what we have now does not work and will be replaced one way or another. The political scare mongering in the United States that QE2 will cause inflation is so hyper unrealistic as to deny the factual reality of the economic data. I have been very vocal that QE2 will have little effect on the economy and will primarily benefit bank liquidity as the banks continue to build cash reserves. The political attacks on the Fed and QE2 have gone beyond monetary policy debate and have become a construction project in which the mess created by the banks and their political supporters is being excavated and transported to the door step of the Fed alone rather than taken to Wall Street and Washington, D.C. where the dirt belongs. QE2 is a basic acknowledgment that the yield curve on short term Treasuries had no room for movement and lowering the rates of longer term Treasuries, through Fed purchase on the secondary market, might spur new investment and consumption. The thinking is correct, but the situation is such that the consumers pocket is under pressure and corporations only spend money to make money and if not enough people are buying than no one is going to be spending as much as the economy needs to revive itself from this most recent sacking by the financial vandals who grow fatter as their failures are are sugar coated with profitable bailouts.
More analysts are predicting a Chinese real estate supply shock within a year which might destabilize prices short term but this could be seriously aggravated by how the inventory wave comes to the market, i.e., how fast and how large. China has been tightening interest rates, lending policies, and increasing down payments. China is fully aware that this potential real estate bubble exists and must be controlled as we have written in the past.
Michael Pettis wrote an interesting analysis of the need for China's growth to slow and what the effect of that slowing down will have on the world economy and to China internally in which he took exception to the commonly voiced concerns that a Chinese slowly would mean a sharp downturn in global growth and cause social and political instability within China, because he believes the impacts will be very dependent on how China actually rebalances. He uses the Japanese slowdown, which began in 1990, as a detailed example of what might happen in China.
Eggertsson and Krugman wrote an economics paper on Debt and Deleveraging which attracted vast attention for an economics paper which created a model and economic logic in which a temporary deficit is shown to be necessary and beneficial during a balance sheet recession. Like all model and economic logic constructs it includes assumptions which are worth investigating and has caused much comment.
John Hussman in his November 15th commentary again stressed the need to evaluate the market with in the full context of conditions and indicators as well as the historical relationship between current high profit margins and poor earnings growth going forward over five year periods. The failure to adjust richly valued stocks with high P/E multiples for the level of profit margins ignores the measures of sustainable, long term, full cycle financial performance. He is concerned that the "economic recovery" with high unemployment and stagnant personal income with huge amounts of debt hidden under rugs and dressed up for balance sheets is illusory and festering until it reignites. He believes the only way to deal with a major debt crisis is through debt/equity swaps, restructuring, and writedowns. His example is the failure to resolve the mortgage problems equitably for both lender and borrower. He wants to see swaps of principal for pooled property appreciation right administered, but not subsidized, by Treasury. "...until our policy makers wake up to the need to restructure debt, so that the obligation is modified for both the debtor and the creditor ... we are racing toward the financial equivalent of a mathematical singularity, where the quantities become so large and the outcomes become so sensitive to small changes that the whole system becomes unstable." He finds the market climate for both stocks and bonds to have become unfavorable.
Market: 3 banks failed = 149; unofficial problem bank list = 903
Dow/Volume Nasdaq/Volume
Mon: 9.39/down 13.1% <4.39>/down 16.1%
Tue: <178.47>/up 51.9% market in correction <43.98>/up 21.2%
Wed: <15.69>/down 28.5% 6.17/down 18.8%
Thu: 173.35/up 27.2% 38.39/up 12.6%
Fri: 22.32/down 9.1% 3.72/down 10.0%
Total 10.90 <.09>
Mon: Oil down 2 cents to $84.86; Dollar stronger; day ended flat after being up most of the day; retail sales were up moderately but the New York Fed Empire State Index (manufacturing) was surprisingly down; Ireland and EU in talks despite Ireland's denial of bailout need.
Tue: Oil down 2.52 to 82.34; Dollar stronger; European "debt" problems and Ireland resisting aid; Chinese expected to place inflation curbs on food, etc by end of week.
Wed: Oil down 1.90 to 80.44; Dollar weaker; lower volume rally ends slightly down and mixed; oil supplies were down 7.3 million barrels, gas supplies were down 2.7 million barrels, and distillate was down 1.1 million barrels.
Thu: Oil up 1.41 to 81.85; Dollar weaker but stronger against the yen; GM IPO surges world markets but ends day at lower end of GM trading range; Ireland assistance expected; weekly jobless claims were up 2000 to 439,000, 4 week moving average was down 4000 to 443,000, and continuing claims were down 48,000 to 4,295,000.
Fri: Oil down 34 cents to 81.51; Dollar stronger but weaker against euro; very low trading for an options expiration day.
United States:
The Consumer Price Index for October was up .2 for an annualized 1.2% rounded. Core CPI for October was zero with an annualized rate of .6, which is the smallest 12 months in the history of the index which dates to 1957. If the 1980's calculation for CPI was used the annualized rate would be approximately 8.3%; if the 1990's calculation was used the annualized rate would be approximately 4.4%.
The ECRI Weekly Leading Index is up to <4.5> from <5.5> and, just as last week, this is the highest in 5 weeks.
We have repeatedly emphasized the large contribution of inventory rebuilding in the growth of GDP in recent quarters. Given the build up over those quarters and the $110 billion inventory increase in Q3, it is possible that Q4 GDP will see a negative impact even if there is a strong inventory increase but substantially less than Q3. With the mismatch between new orders and inventory levels, it is conceivable growth will be negatively impacted in coming quarters. Despite other indicators, the mathematics of inventories could expose a recession.
California intends to restructure the sell of $`14 billion in bonds in the face of a sell off in the municipal bond market. California will sell $10 billion in revenue anticipation bonds due May and June, then $2 billion in Build America Bonds, and then $1.75 billion in tax exempt bonds.
30 year AAA muni bonds rose 15 bps points in the week ended 11/12; largest increase in 18 months.
Goldman Sach's plan to repay Berkshire Hathaway has been delayed as the Fed reviews the process for setting a dividend increase policy for banks. By Wednesday, the Fed announced it would examine large bank holding company's ability to absorb losses and meet new capital requirements under Basel III when deciding whether banks may increase dividends or buy back shares.
The government amended the regulation on grandfathered status under the health law to allow group health plans to switch health insurers providing similar coverage at a lower cost without losing their grandfathered status.
U. S. retail sales in October were up 1.2%.
New York Fed Empire State Index (manufacturing activity) was down to 11.7 from 15.7 --- unexpected --- for first time in more than a year; new orders were down to <24.4> from 12.9; inventory was up to zero from <11.7.
U.S. business inventory was the highest since October 2008 up .9% to $1.4 trillion; sales were up .5%; inventory to sales ratio was unchanged at 1.27 months.
EMC will buy Isilon for $2.25 billion; Caterpillar will buy Bucyrus for $8.6 billion. Is this a wise use of cash? When companies buy another company, are they investing for synergistic growth or are they using idle cash not worth using to increase sales?
BHP is abandoning its Potash bid and will do a $4.2 billion stock buy back. This is another possible misuse of idle cash depending on the fair value of the company's stock making the buy back.
Lowe's sales missed analyst's expectations with Q3 earnings of $404 million or 29 cents per share; sales were up 1.9% to $11.59 million (expected $11.75 million) and up .2% same store.
Home Depot beat Q3 EPS estimates on tighter cost controls, but softened its full year sales forecast; net income was $834 million or 51 cents per share; sales were up 1.4%.
Wal-Mart Q3 earnings were 95 cents per share (expected 90 cents) up from 82 cents a year ago; sales were up 2.6% vs year ago (below expectations); U.S. same store, ex fuel sales, were down .7%.
CapitalOne credit card charge offs in October were to to 7.26% from 8.38%; 30 day delinquencies were down to 4.45% from 4.53%.
Lacker (Richmond Fed) said the Fed's new monetary easing is potentially dangerous and likely to be ineffective. "Trying to keep unemployment lower than it otherwise would be is a recipe for continually accelerating inflation." He does not believe Fed QE2 is designed to weaken the dollar and is not currency manipulation.
Dudley (New York Fed) said QE is not aimed at weakening the dollar; the Fed has no dollar value level target; it is just trying to ease financial conditions. QE2 will not have a powerful effect on the U.S. economy, but even a little nudge will help according to Dudley. He said the Fed is trying to avoid a "stall speed for the economy". He rejected the idea the Fed should target a higher inflation rate.
GM raised the price range of its IPO to $32-33. We have already written that it is oversubscribed and not offered through several discount brokerages, which means individual investors will have a very difficult time buying and that may be just as well. It might be better to see how it is trading six months after the IPO.
Paulson & Co. hedge fund sold 100% of its Goldman Sachs holdings, 18% of its bank of America shares, 16% of Citi, and 11% of Wells Fargo as the result of regulatory changes and the mortgage mess.
FHA auditors said its capital reserve ratio was down from .53 to .50 primarily as the result of more conservative assumptions of future housing values.
PPI (Producer Price Index) wholesale prices were up .4% (expected up .8%) and core PPI was down .6% (expected up .1%). These were considered deflationary.
Federal Reserve reported October capital utilization was flat at 74.8 with industrial production unchanged at 74.6.
Senator Corker wants the Fed to forget about price stability and full employment and focus on inflation, which is price stability.
Bank of America was ordered to $500 million of deposits seized from Lehman.
Bullard (St. Louis Fed) said that "to extent possible" the U. S. needs to let the private sector provide the bulk of U.S. housing financing and he wants lower income financing support separated.
Rosegren (Boston Fed) said U.S. needs short term fiscal stimulus to boost jobs and complement the Fed's moves. He said that without QE2, there was a risk of further disinflation.
CoreLogic reported housing prices in September (3 month average) was down 1.8%. According to the Census Bureau, housing starts were down 11.7% in October from September, which is an 18 month low.
Foreign ownership of U. S. Treasuries was up $39.5 billion in September; China's purchases were up 1.7% to $883.5 billion in the third monthly increase.
19 banks will have new stress test by the Fed in early 2011.
The FDIC is probing at least fifty cases of possible fraud and other criminal conduct at failed banks.
Mortgage applications were down 14.4% the week ended 11/12 to a four month low; 30 year mortgage was up 18 bps to 4.46%, which is a two month high.
Two million people will lose unemployment benefits by the end of December if Congress does not renew extended benefits.
Bank of America modified 52% more mortgages in October than September.
Philadelphia Fed business activity index was up to 22.5 November from 1.0 October --- the highest since last December --- and new orders were up to 10.4 from <5.0>; inventory was down to <18.6> from <5.9>. This is in direct contrast to the New York Empire State Index.
S&P 500 earnings since Q1 2009 low have increased over 900% (see the Hussman commentary above) to just over the level at the peak of the last dot com bubble.
SEC will consider a proposal to require registration of advisers to hedge and private equity funds with more than $150 million in assets under management. With the CFTC, they are working out the details of what and how swap trade data will collected and stored.
Mortgage delinquency rate was down .72% Q3 to 9.13%; the foreclosure pipeline was down .18% to 4.39%.
U.S. has found 13 million metric tons of rare earth deposits.
After the market closed Friday, Green Mountain Coffee said it will restate its financial statements for the last 4 years to correct reporting errors.
Fuel prices are expected to be the highest in 3 years this Thanksgiving despite oil prices dropping. Fuel prices are expected to fall after the Holiday.
International:
United Kingdom inflation was up to 3.2% October on increased taxes, fuel, bank/mortgage fees, and computer games. Core was unchanged at 2.7%. Next Plc, the second largest clothing retailer, indicated prices are going up approximately 8%.
There is originator support of structured finance deals in Spain which are enabling the banks to maintain collateral eligibility for repo with the ECB.
Benedicto Marzinotto argues that the G20 definition of the 27 member EU as a single region, including the eurozone, makes the trade imbalance seem better than it really is for the member nations. She also argues that the EU commission's position that trade imbalance are the result of competitiveness issues and can be controlled by wages and prices and exports ignores much more complicated nation by nation problems.
Austria is insisting Greece has not met its commitments and Austria is refusing to release its contributions to the Greek bailout.
Goldman Sach's has a sixteen page analysis of Ireland which sees more upside than downside. By the end of the week much was being made about the corporate account withdrawals (foreign?) from Irish banks, which was being hyper characterized as a "bank run" when there is no evidence domestic demand deposits are being withdrawn, and about the contradictions and counter productive actions and policies within the EU and eurozone.
Japanese GDP Q3 was 3.9% annualized, but Rebecca Wilder says it is not sustainable and has a decent chance of turning negative in Q4 2010. On a side note, Rebecca Wilder subsequently announced she will not be blogging any longer due to work and family commitments, her intelligent observations will be missed and hopefully she will post from time to time. She is a very intelligent economist and any objection or question I may have had in the past about the use of a term is to me a normal part of educational discussion and debate.
German Landesbanken (savings banks) have refused German government offers of recapitalization and have only until year end when the offer terminates.
Bank of Korea raised its 7 day repurchase by 25 bps to 2.5% to curb inflation.
Spain Q3 GDP was flat to Q2 as the result of austerity cuts.
Strauss-Kahn (IMF) said Germany's recovery will not last long if conditions do not improve elsewhere.
Singapore GDP was 10.6% Q3, but expects it will slow sharply next year with lower U.S. and European demand.
The OECD expects 2.8% growth for its 33 member nations (4.6% for the world) as households and firms reduce debt.
South Korea is considering a tax on foreign investment in its government bonds.
Spain sold 3.6 billion euro of 10 year and 30 year bonds, both of which were up 50 bps in yield. This auction was essentially a positive investor response.
China, for the second time in two weeks, ordered bank reserves raised 50 bps to 18.5% to strengthen liquidity management as they continue to manage price pressures cautiously. The frequency of these announcements spooked the market which went down as did the price of oil.
The OECD expects Germany's current account balance surplus will back to 7.2% by 2012, which would be close to the record 7.6% in 2007, and sees Germany going back to the same pre-crisis pattern.
Allied Irish Bank says customers, but made no attempt to specify what kind of customers, have pulled 13 billion euro this year and mortgage problems worsened in Q3.
Samuel Brittan suggested Ireland withdraw from the euro and form a monetary union with the United Kingdom. Gavyn Davies wrote of the need for Europe to compromise if financial crisis and the fiscal problems of the eurozone are to be solved. Wolfgang Munchau wrote of the failure of the eurozone to structure a fiscal union, which is a problem I have also written about on more than one occasion. All of these were linked in the Irish paragraphs at the beginning of this article, but I am repeating them here because they are important.
Strauss-Kahn of the IMF said, "Europe needs a holistic growth strategy. where every country benefits from the efforts of all others."
Print Page
Over a week ago in the week ending 11/19/2010, Ireland, the ECB, EU, and IMF were going back and forth and the rumors were flying with Ireland denying bailout talks and the ECB and IMF supposedly demanding bailout for Ireland. What the focus on Ireland has done is more brightly expose the problems of the European Monetary Union and its failure to construct a fiscal union, of which Munchau wrote during the week, structure which would allow it to respond to the particular fiscal needs of its individual sovereign nation members and how this is creating a growing, and potentially, cascading currency crisis which is reflected not only in debt and swap prices but in the declining value of the euro. While the banks in Ireland created, with the help of foreign investment, serious financial problems through the profitable misallocation of resources until the mismanagement and/or fraud caught up to them in the financial crisis of 2008 and the debts and losses of the banks suddenly became those of the common citizenry rather than the bankers and senior bond holders who want the profits and not the losses. Then, having taken on the private bank debts and guaranteeing the senior bond holders and earning accolades for its austerity program, the government of Ireland met the inevitable in reduced revenue and less economic growth aggravated by austerity programs and bank toxic assets worth far less than estimated rolling around in an ill conceived bad bank, which made government issued bonds a problem for the ECB, and nationalized framework compounded by growing loss of faith by foreign investors. Rather than focusing on the banks and their financial participants, the people of Ireland are being told they have too much debt and its their fault the government budget has a growing deficit gap. While the government has made political spending mistakes and cultivated some inefficient policies, the primary cause of their present dilemma is private bank debt assumed as public debt as the Irish government curried favor with the European Union and the European banks who are among the senior bond holders of the Irish banks.
The bailout debate revolved around whether the bailout would provide funding for Irish banks only or the sovereign government of Ireland or both. The formal process of bailout application and consideration was much touted but pushed aside as the IMF, ECB, and EMU sought a forced bailout to stem the loss of faith in eurozone debt and failure of fiscal policy response within the eurozone as the result of how the euro was created as well as concern the EMU emergency funding mechanism (ESFS) has not been funded. The bailout figures were rumored to be 80 billion to 140 billion euro with EU "partner" enthusiasts voicing approval of a bailout which would provide support and those who saw a bailout as the only hope for an austerity deprived country without its own currency, weak banks with liquidity problems, rising debt costs, and only limited authority to exercise normal fiscal policy. While members of the Irish government kept insisting Ireland is well funded and does not need a bailout, the Governor of the Irish central bank was publicly adamant there was no choice. Given the ruling political party has been in charge during the growth of bank financial abuse and mismanagement prior to the 2008 financial crisis and readily assumed the bank's private debt as public debt, the current political situation appears to be leading to new parliamentary elections. Many are pointing out that Ireland is not Greece and it may have the economic strength to default, withdraw from the euro, give bank equity, through the issuance of contingent convertible bonds or the use of debt as legal tender, for bank debt (bondholders), or form a monetary union, as Samuel Brittan has in "Conventional Wisdom, the Royals, and the Republic", with the United Kingdom. Attempts to get Ireland to raise its corporate tax, even though it is not substantially different from other corporate tax rates in Europe, have been seen as yet another attempt to destroy Irish independence. Much of this anger has been directed at Germany which continues to insist that future bailouts must include bondholders sharing in the losses, which is not an unreasonable request except that, at this particular point in time, it is increasing international doubt about the euro and encouraging increases in debt costs. Given the exposure of German banks to Irish private and bank debt, Germany's insistence on bondholders sharing in the losses, while politically popular in Germany, is counter productive to Germany's own economic stability, which it clearly understands would not be served well by failure to support Ireland. If this credit crisis is allowed to fester and move from country to country on growing doubts the European Monetary Union will continue to refuse to allow the currency to support appropriate fiscal policy, it will spread beyond Portugal to Spain, Italy, Belgium, and even Germany as the costs mount towards 1650 billion euro of untimely and austere responses. If the eurozone were to act with any reasonable degree of fiscal unity, or even just move towards a mechanism of fiscal unity involving support of fiscal policy relevant to each individual sovereign member ( some people might call these fiscal stabilizers), the demonstration of compromise and a common benefit would do more to stabilize international doubts than bailout after bailout.
While the European Council has agreed to consider a sovereign debt default mechanism, but the politics of its construction may very well make the eurozone more fragile, much like the failed Exchange Rate Mechanism and its incentives for speculation, by an acceptance of continuing financial crisis. It has also accented the possibility of default and bond haircuts at a time of current interest rate pressure on debt. A monetary union requires fiscal assistance between its members rather than a reliance on moral hazard, in which the inconsistencies of the European Monetary Union are excused in the name of debt vigilantism austerity and the necessity to protect banks at the expense of the people. Despite Ireland's insistence it is well funded into 2011, the banks in Ireland have seriously limited access to interbank lending internationally; this has aggravated the Irish banks long term liquidity in a threat from bank funding constraints.
Yet, the financial forces in Europe and the world are insistent it would be preferable to have sovereign default in which private bank debt has been made public debt rather than banks failing and bankers losing money. On the one hand Germany is pushing for a sovereign default mechanism and bondholders sharing in the losses as if Germany does not have a clue that German banks followed by UK banks have the most exposure to Irish bank and private debt. Germany's leadership is bringing the question of whether the euro can survive into ever more contention and that contention is costing other euro nations more and more in debt costs. In the meantime, the myth of German prosperity under austerity belies the large fiscal stimulus program which buffered Germany in the 2008 financial crisis. Of more concern is the refusal of German politicians to acknowledge the success of their fiscal stimulus program and continue to assert austerity as the only economic path. Germany is headed back to a record current account surplus despite its captive eurozone market countries debt problems, which have been partially caused by the different exchange rates and the effect of those rates over the years to create seriously out of balance current accounts within the single currency eurozone. This can bee seen most clearly in Greece, in which the loss of competitiveness as the result of these current account imbalances and exchange rate dynamics, may demand Germany extend its credit to Greece in order to stimulate the divergence in the cost of capital with the emergence of counterparty risk.
As the austerity infection multiplies worldwide, the United States is proving itself an increasingly willing victim as politicians avoid getting things done, such as creating jobs and reducing excessively high unemployment and creating regulations which will make bankers responsible for systemically dangerous, however profitable, business conduct, as it is easier to join the crowd which proclaims the bailout of banks as enlightenment and the very fault of the people upon whose backs the cost of the bank bailouts is being foisted as shared sacrifice; people who obviously cannot properly manage the debts placed on their backs by bailouts as well as the banks can shift their losses to the people and become larger and more powerful. There are those who would rewrite history, and President Obama has fallen into this trap, and insist President Franklin Roosevelt did not take action until riots forced his hand in 1934 which is patently false. Unlike President Obama, President Roosevelt was not persuaded by the financial interests and outgoing President Hoover to reaffirm the status quo commitments to a gold standard, support of the private banks, and austerity. With the recent report of the Deficit Commission, which reads like a litany of its members vested interests and historical prejudices, the economic debate may be pushed back even further from public debate as blame is transferred from bankers and financial traders to the irresponsible people and any government which provides programs to serve people. As this report is analyzed going forward, it is obvious that it just places more of the burden on the backs of the citizenry, even proposing a national sales tax., and the diminishment of that troublesome middle class. But when it comes to tax breaks for the wealthy, the economic cost to government is thrown out the window as we have demonstrated in past articles with false arguments that such tax breaks will stimulate the broader economy. President Obama appears willing to cave, yet again, to the financial elite.
The mortgage mess continues despite financial institutions attempts to throw the problem back onto the victims of the fraud who are just trying, in the version put forth by the banks and mortgage servicers, to put off foreclosures resulting from their deadbeat life styles. The problem with these fraudulent documents is not just a subversion of contract law and due process but the possible risk of billions of dollars in losses, as we have reported previously. The Congressional Oversight Panel has issued a new report on the mortgage processing problems with detailed analysis of different scenarios depending on the depth of the legal problems involved. Congressional hearings have not gone well for the bankers and the mortgage servicers. But public hearings do not always translate into real governmental action as the public performance is always easier than the delivery of service to the public good. Already a backdoor attempt is being made to retroactively make the whole mortgage processing mess and lack of legal documentation legitimate, although many financial bloggers have sniffed it out and raised the hue and cry of the hunt, despite PR attempts to dress the proposed legislation as just a modernization of the Interstate Commerce laws. Still the lobbyist and lawyers are hard at work to build a see no evil, hear no evil, speak no evil defense.
Federal Reserve Chairman, Bernanke, gave two speeches in Europe: one on "Rebalancing the Global Recovery" and the other on "Emerging from the Crisis: Where do We Stand?" in which he recognized the need for fiscal stimulus (by government) to impact high unemployment to enhance long term growth, criticized China for its undervalued currency and use of capital controls noting the long term effects on the world economy are negative, and noted slower expansion in the United States, declining inflation, and continued high employment while defending QE2. With China's internal concerns with rising inflation and lending bubbles, it is unlikely they will do more than allow the renminbi to slowly appreciate within a trading range as they adjust the middle point slowly up and will concentrate on interest rates, price controls, and industrial production for internal consumption. Many view the Chinese monetary policies and the Fed's QE2 as both promoting inflation in other countries and as self-serving exchange rates in trade, defacto devaluation, and favored monetary credit position. The G20 meeting did nothing to defuse the confused global monetary systems and exchange problems flirting with currency trade wars, despite the growing awareness that what we have now does not work and will be replaced one way or another. The political scare mongering in the United States that QE2 will cause inflation is so hyper unrealistic as to deny the factual reality of the economic data. I have been very vocal that QE2 will have little effect on the economy and will primarily benefit bank liquidity as the banks continue to build cash reserves. The political attacks on the Fed and QE2 have gone beyond monetary policy debate and have become a construction project in which the mess created by the banks and their political supporters is being excavated and transported to the door step of the Fed alone rather than taken to Wall Street and Washington, D.C. where the dirt belongs. QE2 is a basic acknowledgment that the yield curve on short term Treasuries had no room for movement and lowering the rates of longer term Treasuries, through Fed purchase on the secondary market, might spur new investment and consumption. The thinking is correct, but the situation is such that the consumers pocket is under pressure and corporations only spend money to make money and if not enough people are buying than no one is going to be spending as much as the economy needs to revive itself from this most recent sacking by the financial vandals who grow fatter as their failures are are sugar coated with profitable bailouts.
More analysts are predicting a Chinese real estate supply shock within a year which might destabilize prices short term but this could be seriously aggravated by how the inventory wave comes to the market, i.e., how fast and how large. China has been tightening interest rates, lending policies, and increasing down payments. China is fully aware that this potential real estate bubble exists and must be controlled as we have written in the past.
Michael Pettis wrote an interesting analysis of the need for China's growth to slow and what the effect of that slowing down will have on the world economy and to China internally in which he took exception to the commonly voiced concerns that a Chinese slowly would mean a sharp downturn in global growth and cause social and political instability within China, because he believes the impacts will be very dependent on how China actually rebalances. He uses the Japanese slowdown, which began in 1990, as a detailed example of what might happen in China.
Eggertsson and Krugman wrote an economics paper on Debt and Deleveraging which attracted vast attention for an economics paper which created a model and economic logic in which a temporary deficit is shown to be necessary and beneficial during a balance sheet recession. Like all model and economic logic constructs it includes assumptions which are worth investigating and has caused much comment.
John Hussman in his November 15th commentary again stressed the need to evaluate the market with in the full context of conditions and indicators as well as the historical relationship between current high profit margins and poor earnings growth going forward over five year periods. The failure to adjust richly valued stocks with high P/E multiples for the level of profit margins ignores the measures of sustainable, long term, full cycle financial performance. He is concerned that the "economic recovery" with high unemployment and stagnant personal income with huge amounts of debt hidden under rugs and dressed up for balance sheets is illusory and festering until it reignites. He believes the only way to deal with a major debt crisis is through debt/equity swaps, restructuring, and writedowns. His example is the failure to resolve the mortgage problems equitably for both lender and borrower. He wants to see swaps of principal for pooled property appreciation right administered, but not subsidized, by Treasury. "...until our policy makers wake up to the need to restructure debt, so that the obligation is modified for both the debtor and the creditor ... we are racing toward the financial equivalent of a mathematical singularity, where the quantities become so large and the outcomes become so sensitive to small changes that the whole system becomes unstable." He finds the market climate for both stocks and bonds to have become unfavorable.
Market: 3 banks failed = 149; unofficial problem bank list = 903
Dow/Volume Nasdaq/Volume
Mon: 9.39/down 13.1% <4.39>/down 16.1%
Tue: <178.47>/up 51.9% market in correction <43.98>/up 21.2%
Wed: <15.69>/down 28.5% 6.17/down 18.8%
Thu: 173.35/up 27.2% 38.39/up 12.6%
Fri: 22.32/down 9.1% 3.72/down 10.0%
Total 10.90 <.09>
Mon: Oil down 2 cents to $84.86; Dollar stronger; day ended flat after being up most of the day; retail sales were up moderately but the New York Fed Empire State Index (manufacturing) was surprisingly down; Ireland and EU in talks despite Ireland's denial of bailout need.
Tue: Oil down 2.52 to 82.34; Dollar stronger; European "debt" problems and Ireland resisting aid; Chinese expected to place inflation curbs on food, etc by end of week.
Wed: Oil down 1.90 to 80.44; Dollar weaker; lower volume rally ends slightly down and mixed; oil supplies were down 7.3 million barrels, gas supplies were down 2.7 million barrels, and distillate was down 1.1 million barrels.
Thu: Oil up 1.41 to 81.85; Dollar weaker but stronger against the yen; GM IPO surges world markets but ends day at lower end of GM trading range; Ireland assistance expected; weekly jobless claims were up 2000 to 439,000, 4 week moving average was down 4000 to 443,000, and continuing claims were down 48,000 to 4,295,000.
Fri: Oil down 34 cents to 81.51; Dollar stronger but weaker against euro; very low trading for an options expiration day.
United States:
The Consumer Price Index for October was up .2 for an annualized 1.2% rounded. Core CPI for October was zero with an annualized rate of .6, which is the smallest 12 months in the history of the index which dates to 1957. If the 1980's calculation for CPI was used the annualized rate would be approximately 8.3%; if the 1990's calculation was used the annualized rate would be approximately 4.4%.
The ECRI Weekly Leading Index is up to <4.5> from <5.5> and, just as last week, this is the highest in 5 weeks.
We have repeatedly emphasized the large contribution of inventory rebuilding in the growth of GDP in recent quarters. Given the build up over those quarters and the $110 billion inventory increase in Q3, it is possible that Q4 GDP will see a negative impact even if there is a strong inventory increase but substantially less than Q3. With the mismatch between new orders and inventory levels, it is conceivable growth will be negatively impacted in coming quarters. Despite other indicators, the mathematics of inventories could expose a recession.
California intends to restructure the sell of $`14 billion in bonds in the face of a sell off in the municipal bond market. California will sell $10 billion in revenue anticipation bonds due May and June, then $2 billion in Build America Bonds, and then $1.75 billion in tax exempt bonds.
30 year AAA muni bonds rose 15 bps points in the week ended 11/12; largest increase in 18 months.
Goldman Sach's plan to repay Berkshire Hathaway has been delayed as the Fed reviews the process for setting a dividend increase policy for banks. By Wednesday, the Fed announced it would examine large bank holding company's ability to absorb losses and meet new capital requirements under Basel III when deciding whether banks may increase dividends or buy back shares.
The government amended the regulation on grandfathered status under the health law to allow group health plans to switch health insurers providing similar coverage at a lower cost without losing their grandfathered status.
U. S. retail sales in October were up 1.2%.
New York Fed Empire State Index (manufacturing activity) was down to 11.7 from 15.7 --- unexpected --- for first time in more than a year; new orders were down to <24.4> from 12.9; inventory was up to zero from <11.7.
U.S. business inventory was the highest since October 2008 up .9% to $1.4 trillion; sales were up .5%; inventory to sales ratio was unchanged at 1.27 months.
EMC will buy Isilon for $2.25 billion; Caterpillar will buy Bucyrus for $8.6 billion. Is this a wise use of cash? When companies buy another company, are they investing for synergistic growth or are they using idle cash not worth using to increase sales?
BHP is abandoning its Potash bid and will do a $4.2 billion stock buy back. This is another possible misuse of idle cash depending on the fair value of the company's stock making the buy back.
Lowe's sales missed analyst's expectations with Q3 earnings of $404 million or 29 cents per share; sales were up 1.9% to $11.59 million (expected $11.75 million) and up .2% same store.
Home Depot beat Q3 EPS estimates on tighter cost controls, but softened its full year sales forecast; net income was $834 million or 51 cents per share; sales were up 1.4%.
Wal-Mart Q3 earnings were 95 cents per share (expected 90 cents) up from 82 cents a year ago; sales were up 2.6% vs year ago (below expectations); U.S. same store, ex fuel sales, were down .7%.
CapitalOne credit card charge offs in October were to to 7.26% from 8.38%; 30 day delinquencies were down to 4.45% from 4.53%.
Lacker (Richmond Fed) said the Fed's new monetary easing is potentially dangerous and likely to be ineffective. "Trying to keep unemployment lower than it otherwise would be is a recipe for continually accelerating inflation." He does not believe Fed QE2 is designed to weaken the dollar and is not currency manipulation.
Dudley (New York Fed) said QE is not aimed at weakening the dollar; the Fed has no dollar value level target; it is just trying to ease financial conditions. QE2 will not have a powerful effect on the U.S. economy, but even a little nudge will help according to Dudley. He said the Fed is trying to avoid a "stall speed for the economy". He rejected the idea the Fed should target a higher inflation rate.
GM raised the price range of its IPO to $32-33. We have already written that it is oversubscribed and not offered through several discount brokerages, which means individual investors will have a very difficult time buying and that may be just as well. It might be better to see how it is trading six months after the IPO.
Paulson & Co. hedge fund sold 100% of its Goldman Sachs holdings, 18% of its bank of America shares, 16% of Citi, and 11% of Wells Fargo as the result of regulatory changes and the mortgage mess.
FHA auditors said its capital reserve ratio was down from .53 to .50 primarily as the result of more conservative assumptions of future housing values.
PPI (Producer Price Index) wholesale prices were up .4% (expected up .8%) and core PPI was down .6% (expected up .1%). These were considered deflationary.
Federal Reserve reported October capital utilization was flat at 74.8 with industrial production unchanged at 74.6.
Senator Corker wants the Fed to forget about price stability and full employment and focus on inflation, which is price stability.
Bank of America was ordered to $500 million of deposits seized from Lehman.
Bullard (St. Louis Fed) said that "to extent possible" the U. S. needs to let the private sector provide the bulk of U.S. housing financing and he wants lower income financing support separated.
Rosegren (Boston Fed) said U.S. needs short term fiscal stimulus to boost jobs and complement the Fed's moves. He said that without QE2, there was a risk of further disinflation.
CoreLogic reported housing prices in September (3 month average) was down 1.8%. According to the Census Bureau, housing starts were down 11.7% in October from September, which is an 18 month low.
Foreign ownership of U. S. Treasuries was up $39.5 billion in September; China's purchases were up 1.7% to $883.5 billion in the third monthly increase.
19 banks will have new stress test by the Fed in early 2011.
The FDIC is probing at least fifty cases of possible fraud and other criminal conduct at failed banks.
Mortgage applications were down 14.4% the week ended 11/12 to a four month low; 30 year mortgage was up 18 bps to 4.46%, which is a two month high.
Two million people will lose unemployment benefits by the end of December if Congress does not renew extended benefits.
Bank of America modified 52% more mortgages in October than September.
Philadelphia Fed business activity index was up to 22.5 November from 1.0 October --- the highest since last December --- and new orders were up to 10.4 from <5.0>; inventory was down to <18.6> from <5.9>. This is in direct contrast to the New York Empire State Index.
S&P 500 earnings since Q1 2009 low have increased over 900% (see the Hussman commentary above) to just over the level at the peak of the last dot com bubble.
SEC will consider a proposal to require registration of advisers to hedge and private equity funds with more than $150 million in assets under management. With the CFTC, they are working out the details of what and how swap trade data will collected and stored.
Mortgage delinquency rate was down .72% Q3 to 9.13%; the foreclosure pipeline was down .18% to 4.39%.
U.S. has found 13 million metric tons of rare earth deposits.
After the market closed Friday, Green Mountain Coffee said it will restate its financial statements for the last 4 years to correct reporting errors.
Fuel prices are expected to be the highest in 3 years this Thanksgiving despite oil prices dropping. Fuel prices are expected to fall after the Holiday.
International:
United Kingdom inflation was up to 3.2% October on increased taxes, fuel, bank/mortgage fees, and computer games. Core was unchanged at 2.7%. Next Plc, the second largest clothing retailer, indicated prices are going up approximately 8%.
There is originator support of structured finance deals in Spain which are enabling the banks to maintain collateral eligibility for repo with the ECB.
Benedicto Marzinotto argues that the G20 definition of the 27 member EU as a single region, including the eurozone, makes the trade imbalance seem better than it really is for the member nations. She also argues that the EU commission's position that trade imbalance are the result of competitiveness issues and can be controlled by wages and prices and exports ignores much more complicated nation by nation problems.
Austria is insisting Greece has not met its commitments and Austria is refusing to release its contributions to the Greek bailout.
Goldman Sach's has a sixteen page analysis of Ireland which sees more upside than downside. By the end of the week much was being made about the corporate account withdrawals (foreign?) from Irish banks, which was being hyper characterized as a "bank run" when there is no evidence domestic demand deposits are being withdrawn, and about the contradictions and counter productive actions and policies within the EU and eurozone.
Japanese GDP Q3 was 3.9% annualized, but Rebecca Wilder says it is not sustainable and has a decent chance of turning negative in Q4 2010. On a side note, Rebecca Wilder subsequently announced she will not be blogging any longer due to work and family commitments, her intelligent observations will be missed and hopefully she will post from time to time. She is a very intelligent economist and any objection or question I may have had in the past about the use of a term is to me a normal part of educational discussion and debate.
German Landesbanken (savings banks) have refused German government offers of recapitalization and have only until year end when the offer terminates.
Bank of Korea raised its 7 day repurchase by 25 bps to 2.5% to curb inflation.
Spain Q3 GDP was flat to Q2 as the result of austerity cuts.
Strauss-Kahn (IMF) said Germany's recovery will not last long if conditions do not improve elsewhere.
Singapore GDP was 10.6% Q3, but expects it will slow sharply next year with lower U.S. and European demand.
The OECD expects 2.8% growth for its 33 member nations (4.6% for the world) as households and firms reduce debt.
South Korea is considering a tax on foreign investment in its government bonds.
Spain sold 3.6 billion euro of 10 year and 30 year bonds, both of which were up 50 bps in yield. This auction was essentially a positive investor response.
China, for the second time in two weeks, ordered bank reserves raised 50 bps to 18.5% to strengthen liquidity management as they continue to manage price pressures cautiously. The frequency of these announcements spooked the market which went down as did the price of oil.
The OECD expects Germany's current account balance surplus will back to 7.2% by 2012, which would be close to the record 7.6% in 2007, and sees Germany going back to the same pre-crisis pattern.
Allied Irish Bank says customers, but made no attempt to specify what kind of customers, have pulled 13 billion euro this year and mortgage problems worsened in Q3.
Samuel Brittan suggested Ireland withdraw from the euro and form a monetary union with the United Kingdom. Gavyn Davies wrote of the need for Europe to compromise if financial crisis and the fiscal problems of the eurozone are to be solved. Wolfgang Munchau wrote of the failure of the eurozone to structure a fiscal union, which is a problem I have also written about on more than one occasion. All of these were linked in the Irish paragraphs at the beginning of this article, but I am repeating them here because they are important.
Strauss-Kahn of the IMF said, "Europe needs a holistic growth strategy. where every country benefits from the efforts of all others."
Print Page
Subscribe to:
Posts (Atom)