We are repeating the lead story on our last Radio Show, because the fact that the State of Illinois had its credit rating effectively lowered by Moody's to just above California's Baa1 making Illinois 49th out of the 50 states has, to my knowledge, received no media attention in paper, radio, or television. Why?
General obligation bonds went from A1 to A2 citing problems from the US recession; other Illinois bonds including sales tax revenue bonds from A1 to A2. Illinois has dropped from the middle of the pack of 50 States to next to last in one fell swoop. Moody's said Illinois has not taken action of any sort to deal with the budget gap it is facing. Moody's said that gap is in the order of $11 billion. Actually, it is conservatively a deficit of $12 billion and could be closer to $15 billion depending on how you account for Federal stimulus money, funds from borrowing, and other one time monies which are not revenue.
It is well known we have made the case for State employee's Pension reform. It is not funded and there is no economically competent system for funding Illinois pensions. Despite a recession in which taxes should not be increased according to economic theory, Illinois has been so corruptly and incompetently run for so many years that a flat income tax increase is so imperative it has become a rotting corpse. Illinois local governments have placed an intolerable burden of regressive taxes and levies (in Chicago 25%, approximately, of the cost of gasoline at the pump goes to taxes and Chicago has the highest sales tax in the country) that the burden on the lowest 40% of taxpayers in Illinois is unconscionable. But no politician wants to help those people. While cost savings should always be investigated and pursued each and every year just as private business does, cutting expenses cannot in any rational, conceivable way balance the Illinois budget. The Democrats need to conduct rational program and employee reviews of double exempt and exempt personnel and the Republicans need to bite the tax bullet. Given the coming Primary in February, neither political party wants to assume any responsibility for getting the job done. They just want to be elected. Maybe it is time to just vote against any incumbent and make the lobbyist fork out even more money to buy the new legislators and executive branch officers.
The Illinois budget situation is so beyond hope that the solutions are few and narrow. The pretense and posturing of political purity is a poor disguise for a deadly social disease. Represent the people and get it done. It does not take a rocket scientist to figure out the obvious much less require the unanimity of any 13 politicians with a bag of 30 silver coins. No Hope.
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Sunday, December 13, 2009
Leftovers from 12/12/2009 Radio Show
Japan Q3 GDP up 1.3% (revised from earlier estimate of 4.8%).
Germany trade surplus up 2.5% as imposts fell 2.4%.
French industrial output fell .8% October; up .5% in Italy from 5.1% in September.
Hong Kong Finance chief publicly worried about risks of asset bubble and continuing capital inflows.
US consumer credit declined for the ninth straight month (12 out of last 13); Oct down 1.7%; Q3 down 3.3%; Q3 revolving credit down 7.4%; Sept revised down to 4.2%; Oct is down 3.6% vs year ago -- prior low record was down 1.9% in 1991.
Wholesale inventory up .3% Oct; Sept revised down to .8% from .6%>; wholesale sales up 1.2% Oct but inventory ratio still fell to 1.16 months from 1.17.
US trade deficit down to $32.9 billion Oct ($35.7 billion Sept); imports and exports were both up; oil imports dropped sharply.
Weekly jobless claims up 17,000 to 474,000; 4 week average down 7750 to 475,500; continuing claims down 303,000 to 5,170,000 (to extended benefits?).
Treasury yield curve (between 2 year and 30 year) 368 basis points -- widest in 17 years.
US retail sales up 1.3% in Nov adjusted -- 1.9% vs year ago; total sales Sept-Nov down 2.1% vs year ago -- bottomed?? --- anecdotal: retailer said 1st two days of Holiday shopping busy but now traffic is like middle of August. Discover card survey indicated Christmas spending will be down 15%.
ECB urged IMF to pursue global tax on financial transactions to limit economic risk.
US business inventory up .2% Oct (first up since Aug '08) -- ex-auto down .2%; inventory ratio 1.3 months down from 1.31.
UK and France both considering taxing bank bonuses and have floated several % and trigger amounts -- looks like 50% over approximately $40,000.
Bair said FDIC reviews found 83% of failed banks had inadequate board supervision of risk -- in general too many banks have insider dealings with board members.
Pay Czar would limit TARP banks high paid employees (ranking 26th to 100th) to $500,000; 5 AIG executives led by AIG's General Counsel (violation of fiduciary duty?) who arranged private attorney for group as they threatened to leave if pay limited putting pressure back on pay czar in another extortion against the government.
$40 billion 3 year Treasury auction yield 1.223%, bid-to-cover 2.98; foreign interest 60.9%. Good.
$21 billion 10 year Treasury auction yield 3.448%, bid-to-cover 2.62 (average has been 2.92), foreign interest 34.9%. Woops!
$13 Billion 30 year Treasury auction yield 4.520%, bid-to-cover 2.45, foreign interest 40.3%. Not so good.
Goldman Sachs played the media on bank bonuses by announcing they were limiting bonuses to restricted stock with one of the restrictions being that the stock cannot be sold for 5 years (good) but limited to only their 30 member management committee; what about the traders?
Early in the week Geithner talked about winding TARP down but ended this week extending TARP to Oct 2010 and indicated unspent money may be given to banks to "help" homeowners and small business lending.
Treasury expects to recover all but $42 billion of $370 billion lent under TARP --- has spent $450 billion under TARP ($290 billion to banks) -- estimated $311 billion cost may be only $141 billion.
Bank of America completed its $45 billion TARP payment in an attempt to evade the pay czar. The question now is do they have enough cash reserves and the government has asked them what business units it plans to sell next year to raise money.
Citi is negotiating a possible TARP payment; started at $45 billion with $20 billion stock offering but the stock holders are upset at the dilution and the government is not in agreement in how much they need to raise -- the amounts to pay and raise by stock offering appear to be decreasing for this truly Zombie bank.
Geithner does not like the concept of a transaction tax to limit economically risky behavior; he thinks it may force companies to leave the US or find a way "around" (evade) tax. He also does not like a job tax credit believing it will not influence hiring. As Yves Smith of naked capitalist would say: Quelle Surprise!
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Germany trade surplus up 2.5% as imposts fell 2.4%.
French industrial output fell .8% October; up .5% in Italy from 5.1% in September.
Hong Kong Finance chief publicly worried about risks of asset bubble and continuing capital inflows.
US consumer credit declined for the ninth straight month (12 out of last 13); Oct down 1.7%; Q3 down 3.3%; Q3 revolving credit down 7.4%; Sept revised down to 4.2%; Oct is down 3.6% vs year ago -- prior low record was down 1.9% in 1991.
Wholesale inventory up .3% Oct; Sept revised down to .8% from .6%>; wholesale sales up 1.2% Oct but inventory ratio still fell to 1.16 months from 1.17.
US trade deficit down to $32.9 billion Oct ($35.7 billion Sept); imports and exports were both up; oil imports dropped sharply.
Weekly jobless claims up 17,000 to 474,000; 4 week average down 7750 to 475,500; continuing claims down 303,000 to 5,170,000 (to extended benefits?).
Treasury yield curve (between 2 year and 30 year) 368 basis points -- widest in 17 years.
US retail sales up 1.3% in Nov adjusted -- 1.9% vs year ago; total sales Sept-Nov down 2.1% vs year ago -- bottomed?? --- anecdotal: retailer said 1st two days of Holiday shopping busy but now traffic is like middle of August. Discover card survey indicated Christmas spending will be down 15%.
ECB urged IMF to pursue global tax on financial transactions to limit economic risk.
US business inventory up .2% Oct (first up since Aug '08) -- ex-auto down .2%; inventory ratio 1.3 months down from 1.31.
UK and France both considering taxing bank bonuses and have floated several % and trigger amounts -- looks like 50% over approximately $40,000.
Bair said FDIC reviews found 83% of failed banks had inadequate board supervision of risk -- in general too many banks have insider dealings with board members.
Pay Czar would limit TARP banks high paid employees (ranking 26th to 100th) to $500,000; 5 AIG executives led by AIG's General Counsel (violation of fiduciary duty?) who arranged private attorney for group as they threatened to leave if pay limited putting pressure back on pay czar in another extortion against the government.
$40 billion 3 year Treasury auction yield 1.223%, bid-to-cover 2.98; foreign interest 60.9%. Good.
$21 billion 10 year Treasury auction yield 3.448%, bid-to-cover 2.62 (average has been 2.92), foreign interest 34.9%. Woops!
$13 Billion 30 year Treasury auction yield 4.520%, bid-to-cover 2.45, foreign interest 40.3%. Not so good.
Goldman Sachs played the media on bank bonuses by announcing they were limiting bonuses to restricted stock with one of the restrictions being that the stock cannot be sold for 5 years (good) but limited to only their 30 member management committee; what about the traders?
Early in the week Geithner talked about winding TARP down but ended this week extending TARP to Oct 2010 and indicated unspent money may be given to banks to "help" homeowners and small business lending.
Treasury expects to recover all but $42 billion of $370 billion lent under TARP --- has spent $450 billion under TARP ($290 billion to banks) -- estimated $311 billion cost may be only $141 billion.
Bank of America completed its $45 billion TARP payment in an attempt to evade the pay czar. The question now is do they have enough cash reserves and the government has asked them what business units it plans to sell next year to raise money.
Citi is negotiating a possible TARP payment; started at $45 billion with $20 billion stock offering but the stock holders are upset at the dilution and the government is not in agreement in how much they need to raise -- the amounts to pay and raise by stock offering appear to be decreasing for this truly Zombie bank.
Geithner does not like the concept of a transaction tax to limit economically risky behavior; he thinks it may force companies to leave the US or find a way "around" (evade) tax. He also does not like a job tax credit believing it will not influence hiring. As Yves Smith of naked capitalist would say: Quelle Surprise!
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Friday, December 11, 2009
Geithner and Summers: Doing God's Work
It has been perfectly clear from the beginning of the Obama administration that if you have not been part of the problem, you are not qualified to understand the problem. Geithner and Larry Summers both played significant roles in the creation and the precipitation of the current Financial Crisis and have continued their roles in effecting a "recovery" which benefits the financial sector at the expense 22% of the workforce who do not have jobs, at the expense of families who are losing their homes, and at the expense of the children of this country of whom a minimum of 25% nationwide (in some areas it is 90%) are currently on food stamps. Meanwhile, the bankers get their salaries and their bonuses: can you imagine the horror of only getting $500,000 (26th to 100th highest paid in TARP banks) per year or being limited to only $7,000,000 salary and only $3,000, 000 in stock options (AIG CEO, who threatened to quit in disgust at the indignity). The bankers have resumed the high risk trading which caused this crisis: they have avoided regulation with their cries of liquidity, liquidity! and raised the Ultimate Extortionist threat in the Zombie bank and the Systemically Dangerous financial institution with government guarantees: The Moral Hazard gold plated. Even after TARP banks pay back the TARP money, they still continue to enjoy government guarantees that keep their credit rating higher than if those government guarantees were not in place.
The bankers get to keep the profits and the public gets the losses. This "jobless recovery" has been all about saving the financial sector and continuing business as usual. Geithner and Larry Summers were installed by the banks with the assistance of a Citigroup executive who went to college with Obama relegating all those economists you worked the campaign with Obama in secondary roles and Volcker isolated and neutered.
Not only was the AIG bailout illegal as we have discussed in an earlier post, but Geithner as New York Fed president actually had a direct role in designing the AIG bailout. Matt Taibbi has worked hard to document the Citi connection, although there are those who would say Goldman Sachs benefited the most. The recent AIG move to spin off two insurance subsidiaries and have their Treasury debt reduced has raised the question of how legal is it for the government to give up collateral from a company in which it has 79.9% ownership for preferred stock in the two subsidiaries and reduction of AIG debt to the government in the amount of $25 million while AIG retains the common stock of the two subsidiaries. There is obviously no economic benefit to the government. To these questions, Representative Grayson has sent a letter the Federal Reserve (he should have also sent it to the Treasury) asking how can these actions be justified or reasonable. It is nothing short of an accounting boondoggle for AIG at the expense of the American people, including those who are jobless, hungry, and becoming homeless.
In yet another article on Geithner as a regulatory failure and a protector of our financial system as it existed prior to the Financial Crisis and the restoration of the status quo, William K. Black, who has actual successful regulatory experience from the savings-and-loan crisis (interestingly, the same parts of the country were effected by that housing crisis as in the current crisis) says and shows how Geithner did not protect the public, is not competent, and may not have been honest in his actions.
For eight reasons why Larry Summers should be sacked as the manipulative director of this rescue of the financial system status quo, an article by Joseph Mazza details the history of Summers in creating this Crisis from the 1990's to the present. The Australian economist Bill Mitchell has also called for the sacking of Obama's economic advisors, particularly Summers, and for whoever is responsible for writing Obama's economic speeches citing the December 3rd speech on joblessness in which the President implied the United States is running out of money. He finds it unconscionable that whoever is doing the writing does not understand basic economics.
Mr. Bernanke has also been a diversion from the action "heroes" of Geithner and Summers. There is a strong move to not reappoint him, when the nation would be a lot healthier and more ethical if Geithner and Summers were the ones tarred and feathered. Still, Mr. Bernanke has questions the people should have answered and here are ten reasons to fire Bernanke. As I have said previously, I do not want Bernanke fired until we know who the replacement might be. It is very unlikely that a regulatory economist is ever going to get the job, because it would not be good for Goldman Sachs and what is good for Goldman Sachs is good for America, because banks, according to the CEO of Goldman Sachs, do God's work.
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The bankers get to keep the profits and the public gets the losses. This "jobless recovery" has been all about saving the financial sector and continuing business as usual. Geithner and Larry Summers were installed by the banks with the assistance of a Citigroup executive who went to college with Obama relegating all those economists you worked the campaign with Obama in secondary roles and Volcker isolated and neutered.
Not only was the AIG bailout illegal as we have discussed in an earlier post, but Geithner as New York Fed president actually had a direct role in designing the AIG bailout. Matt Taibbi has worked hard to document the Citi connection, although there are those who would say Goldman Sachs benefited the most. The recent AIG move to spin off two insurance subsidiaries and have their Treasury debt reduced has raised the question of how legal is it for the government to give up collateral from a company in which it has 79.9% ownership for preferred stock in the two subsidiaries and reduction of AIG debt to the government in the amount of $25 million while AIG retains the common stock of the two subsidiaries. There is obviously no economic benefit to the government. To these questions, Representative Grayson has sent a letter the Federal Reserve (he should have also sent it to the Treasury) asking how can these actions be justified or reasonable. It is nothing short of an accounting boondoggle for AIG at the expense of the American people, including those who are jobless, hungry, and becoming homeless.
In yet another article on Geithner as a regulatory failure and a protector of our financial system as it existed prior to the Financial Crisis and the restoration of the status quo, William K. Black, who has actual successful regulatory experience from the savings-and-loan crisis (interestingly, the same parts of the country were effected by that housing crisis as in the current crisis) says and shows how Geithner did not protect the public, is not competent, and may not have been honest in his actions.
For eight reasons why Larry Summers should be sacked as the manipulative director of this rescue of the financial system status quo, an article by Joseph Mazza details the history of Summers in creating this Crisis from the 1990's to the present. The Australian economist Bill Mitchell has also called for the sacking of Obama's economic advisors, particularly Summers, and for whoever is responsible for writing Obama's economic speeches citing the December 3rd speech on joblessness in which the President implied the United States is running out of money. He finds it unconscionable that whoever is doing the writing does not understand basic economics.
Mr. Bernanke has also been a diversion from the action "heroes" of Geithner and Summers. There is a strong move to not reappoint him, when the nation would be a lot healthier and more ethical if Geithner and Summers were the ones tarred and feathered. Still, Mr. Bernanke has questions the people should have answered and here are ten reasons to fire Bernanke. As I have said previously, I do not want Bernanke fired until we know who the replacement might be. It is very unlikely that a regulatory economist is ever going to get the job, because it would not be good for Goldman Sachs and what is good for Goldman Sachs is good for America, because banks, according to the CEO of Goldman Sachs, do God's work.
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Banker's Coup over Reform
Financial Reform has failed.
What the House passed today is a banker's lobbyist triumph. The loopholes are so numerous and big enough to drive all of GM's products through at one time. While the bill puts a false facade of reform, the loopholes have so benefited the banks that they should assume those government posts which they do not already defacto control. The new stories are already glossy over the loopholes to obscure them from public view. However, Washington's Blog succinct dissected the so called reforms and even included a link to the House Amendment which was acted on today.
Economics professor L. Randall Wray further delineates the "wimpy" reforms which fail to protect society from those whose greed would destroy for profit and proposes that any regulated and protected financial institution should be prohibited from trading derivatives and a need to concentrate on the systemically dangerous.
This coup by the financial services lobbyist has been brewing as we have reported on the radio show since last Summer as this blog entry from Satyjit Das from July shows. He demolishes the proposed derivatives protections.
State authority over banks is diminished. Investment advisors associated with a broker-dealer have been saved from regulatory oversight and inspection of their business practices, while we lowly conflict-free registered investment advisors must submit to the regulatory oversight any investment advisor should be required to accept. Professional fiduciary duty is a "dream" while the wolves net of suitability swims and the heads bow towards the inevitability of "unavoidable" conflict of interest fiduciary "responsibility" of sales people.
Of the many Democrats and Republicans who carried the financial interest banners high from the mast of their check books, one of the more prominent is Melissa Bean of Illinois.
Yves Smith of naked capitalist has a good post on Coup by Bankers that covers the many proposed amendments diluting reform and in a later post urged individuals to call their representatives no matter how much politics sucks.
I do not enjoy negative comments, but the truth is the driver. When you read the links above and then read the news stories tonight and tomorrow, be prepared to puck.
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What the House passed today is a banker's lobbyist triumph. The loopholes are so numerous and big enough to drive all of GM's products through at one time. While the bill puts a false facade of reform, the loopholes have so benefited the banks that they should assume those government posts which they do not already defacto control. The new stories are already glossy over the loopholes to obscure them from public view. However, Washington's Blog succinct dissected the so called reforms and even included a link to the House Amendment which was acted on today.
Economics professor L. Randall Wray further delineates the "wimpy" reforms which fail to protect society from those whose greed would destroy for profit and proposes that any regulated and protected financial institution should be prohibited from trading derivatives and a need to concentrate on the systemically dangerous.
This coup by the financial services lobbyist has been brewing as we have reported on the radio show since last Summer as this blog entry from Satyjit Das from July shows. He demolishes the proposed derivatives protections.
State authority over banks is diminished. Investment advisors associated with a broker-dealer have been saved from regulatory oversight and inspection of their business practices, while we lowly conflict-free registered investment advisors must submit to the regulatory oversight any investment advisor should be required to accept. Professional fiduciary duty is a "dream" while the wolves net of suitability swims and the heads bow towards the inevitability of "unavoidable" conflict of interest fiduciary "responsibility" of sales people.
Of the many Democrats and Republicans who carried the financial interest banners high from the mast of their check books, one of the more prominent is Melissa Bean of Illinois.
Yves Smith of naked capitalist has a good post on Coup by Bankers that covers the many proposed amendments diluting reform and in a later post urged individuals to call their representatives no matter how much politics sucks.
I do not enjoy negative comments, but the truth is the driver. When you read the links above and then read the news stories tonight and tomorrow, be prepared to puck.
Print Page
Wednesday, December 9, 2009
China's Spending Bubble
In an earlier post on double dip probability, I discussed leverage and how Japan, the US, and now China appear to be moving in the same direction. It is an area of growing discussion as the links in my prior post indicate. Another research report has been published, "China's Investment Boom: the Great Leap into the Unknown", by Pivot Capital Management. The naked capitalist blog has done an excellent synopsis of the study.
The Pivot research study is not as comprehensive as some of the other papers I have previously referenced, but it is succinct. Here are a few excerpts:
"In our view investors have underestimated both the maturity of the Chinese growth cycle as well as the degree to which recent growth is a direct extension of the global credit bubble. This bubble had two major manifestations. The first, which started unraveling globally in early 2007, was evident in excesses in real estate, consumption and private equity. The second manifestation, which has yet to fully deflate, was a boom in capital expenditure, led primarily by China."
"However, the decreasing efficiency of investments will ultimately lead to a pullback in capital expenditures. In a soft landing scenario, China is likely to shift to a lower growth trajectory for the next decade. In a hard landing scenario, which is entirely feasible, there would be an abrupt decline in capital spending exacerbated by a banking crisis."
"If loans continue to grow at the current 35% rate, credit to GDP ratio will be close to 200% in China already in 2010, even with GDP expanding at 10%. This is a level similar to the pre-crisis Japan in 1991 and USA in 2008. All this points to that credit in China is not going to be able to grow for much longer without risking a
major crisis."
"In the period from 2000 to 2008, it took on average $1.5 of credit to generate $1 of GDP growth in China. This compares very favorably with the peak $4 of credit for $1 of GDP in USA in 2008. However in H1 2009 in China this ratio was already at around $7 to $1. Credit might be going into the luxury property and stock markets, but the trickle down to the real economy is very poor."
"The Chinese government also explicitly guarantees $400bn worth of debt of the three “policy banks”. In total, these off-balance sheet liabilities are equal to $1.7tn, which would bring China’s public debt to GDP ratio up to 62%, a level that is comparable to the Western European average."
"Price to income ratios have reached 15-20 times in major cities and around 10 times in regional cities. This compares with 9 times in London and 12 times in Los Angeles at the peak."
"It is hard to over-emphasize what this shift to consumption-driven economy means for China’s overall growth rates. On a simple mathematical level it means that average growth rates are going to be capped at 7-8%, so that the overall economy grows at 5-6% for the foreseeable future, and probably slowing down even more later on. It also has enormous consequences on what China imports from the rest of the world as it shifts from commodity and capital goods heavy into (most likely locally produced) consumer goods and services driven economy."
"Anything that is cyclical and dependent on Chinese investment demand would obviously be the most vulnerable to a Chinese growth disappointment. That would include industrial commodities as well as equities and credit of industrial and consumer cyclicals. There would also be a general rotation into more defensive areas taking place across most asset classes. The biggest uncertainty relates to what China means for the debate on deflation versus inflation. In principle, a Chinese slowdown should initially be deflationary, especially given the overcapacity currently building up in various Chinese industries. This should be negative for credit in general and also for most equities. However, depending on how aggressive the policy response will be in China and elsewhere, investors may very well start focusing on the inflationary risks again."
My rationale for posting is to inform and provide the means and some incentive for people to dig into issues and deal with the different viewpoints. Proper investing is not about relying upon a financial guru or political or economic bias. Proper investing methodology is about research and developing the ability to critically analyze information from many different sources. Will there be a China bubble? Given the developing pattern of credit leverage it is possible. There is no predicting when and it could be delayed or even turned into a more positive soft landing with proper economic policies, but it would require China doing what Japan did not do in a timely fashion and acting more decisively than the authorities in the US, who are still struggling with turning the rescue of the financial sector, for the benefit of the financial sector, into a stimulus which benefits the citizens of the US whose participation is required for a real sustainable economic recovery.
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The Pivot research study is not as comprehensive as some of the other papers I have previously referenced, but it is succinct. Here are a few excerpts:
"In our view investors have underestimated both the maturity of the Chinese growth cycle as well as the degree to which recent growth is a direct extension of the global credit bubble. This bubble had two major manifestations. The first, which started unraveling globally in early 2007, was evident in excesses in real estate, consumption and private equity. The second manifestation, which has yet to fully deflate, was a boom in capital expenditure, led primarily by China."
"However, the decreasing efficiency of investments will ultimately lead to a pullback in capital expenditures. In a soft landing scenario, China is likely to shift to a lower growth trajectory for the next decade. In a hard landing scenario, which is entirely feasible, there would be an abrupt decline in capital spending exacerbated by a banking crisis."
"If loans continue to grow at the current 35% rate, credit to GDP ratio will be close to 200% in China already in 2010, even with GDP expanding at 10%. This is a level similar to the pre-crisis Japan in 1991 and USA in 2008. All this points to that credit in China is not going to be able to grow for much longer without risking a
major crisis."
"In the period from 2000 to 2008, it took on average $1.5 of credit to generate $1 of GDP growth in China. This compares very favorably with the peak $4 of credit for $1 of GDP in USA in 2008. However in H1 2009 in China this ratio was already at around $7 to $1. Credit might be going into the luxury property and stock markets, but the trickle down to the real economy is very poor."
"The Chinese government also explicitly guarantees $400bn worth of debt of the three “policy banks”. In total, these off-balance sheet liabilities are equal to $1.7tn, which would bring China’s public debt to GDP ratio up to 62%, a level that is comparable to the Western European average."
"Price to income ratios have reached 15-20 times in major cities and around 10 times in regional cities. This compares with 9 times in London and 12 times in Los Angeles at the peak."
"It is hard to over-emphasize what this shift to consumption-driven economy means for China’s overall growth rates. On a simple mathematical level it means that average growth rates are going to be capped at 7-8%, so that the overall economy grows at 5-6% for the foreseeable future, and probably slowing down even more later on. It also has enormous consequences on what China imports from the rest of the world as it shifts from commodity and capital goods heavy into (most likely locally produced) consumer goods and services driven economy."
"Anything that is cyclical and dependent on Chinese investment demand would obviously be the most vulnerable to a Chinese growth disappointment. That would include industrial commodities as well as equities and credit of industrial and consumer cyclicals. There would also be a general rotation into more defensive areas taking place across most asset classes. The biggest uncertainty relates to what China means for the debate on deflation versus inflation. In principle, a Chinese slowdown should initially be deflationary, especially given the overcapacity currently building up in various Chinese industries. This should be negative for credit in general and also for most equities. However, depending on how aggressive the policy response will be in China and elsewhere, investors may very well start focusing on the inflationary risks again."
My rationale for posting is to inform and provide the means and some incentive for people to dig into issues and deal with the different viewpoints. Proper investing is not about relying upon a financial guru or political or economic bias. Proper investing methodology is about research and developing the ability to critically analyze information from many different sources. Will there be a China bubble? Given the developing pattern of credit leverage it is possible. There is no predicting when and it could be delayed or even turned into a more positive soft landing with proper economic policies, but it would require China doing what Japan did not do in a timely fashion and acting more decisively than the authorities in the US, who are still struggling with turning the rescue of the financial sector, for the benefit of the financial sector, into a stimulus which benefits the citizens of the US whose participation is required for a real sustainable economic recovery.
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Tuesday, December 8, 2009
BIS Issues Low Interest Warning AGAIN
The Bank of International Settlements, the world's Central Banks Bank, has again issued a warning to Central Bankers that low interest rates foster risk taking. In my post below, "The FED, Asset Bubbles, AIG, and Fraud", I referenced BIS reports going back several years that low interest rates encourage risk taking and how the Fed ignored the BIS reports prior to the current Financial Crisis and continues down the road of another new crisis which is the same as the old crisis. The Overview of the BIS report said, "The low interest rates in the advanced economies, combined with the earlier and stronger recovery in a number of emerging economies, continued to drive significant capital inflows into emerging markets, particularly in Asia and
the Pacific. Although difficult to quantify, a related development was increasing FX carry trade activity funded in US dollars and other low interest rate currencies. The result was rapid asset price increases in several emerging economies as well as substantial exchange rate appreciation with respect to the US dollar". The actual chapter on monetary policy and risk taking said, "Easy monetary conditions are a classic ingredient of financial crises: low interest rates may contribute to an excessive expansion of credit, and hence to
boom-bust type business fluctuations."
In the my post which I referenced at the beginning, I also referenced a Raw Finance article on "Meet the New Crisis, Same as the Old Crisis". The New BIS report which repeats yet again the same warning they have issued for several years. Baseline Scenario recently had an article on "Measuring the Fiscal Cost of Not Fixing the Financial System" in which Simon Johnson said, "At the heart of every crisis is a political problem – powerful people, and the firms they control, have gotten out of hand. Unless this is dealt with as part of the stabilization program, all the government has done is provide an unconditional bailout. That may be consistent with a short-term recovery, but it creates major problems for the sustainability of the recovery and for the medium-term. Again, this is the problem in the U.S. looking forward." He also said the the US crisis has worsened as a direct result of how the FED and Treasury dealt with the financial crisis and " Even more problematic is the underlying incentive to take excessive risk in the financial sector. With downside limited by generous government guarantees of various kinds, the head of financial stability at the Bank of England bluntly characterizes our repeated boom-bailout-bust cycle as a “doom loop.” The implication is repeated bailout and fiscal stimulus-led recovery programs."
Joseph Stiglitz has written yet again in "Too Big to Live" that the global controversy on whether banks are too big to fail and what regulations are needed, but it boils down to the bankers either swindled their shareholders and investors or they did not understand the nature of risk and reward. The condition then becomes, if they are permitted to survive, the smaller the entity the easier it will be to regulate them for the protection of society. Size itself is not the real issue it is whether the bank/shadow bank in its conduct presents itself as a systemically dangerous firm by its business activity: "Too-big-to-fail banks have perverse incentives; if they gamble and win, they walk off with the proceeds; if they fail, taxpayers pick up the tab.
· Financial institutions are too intertwined to fail; the part of AIG that cost America’s taxpayers $180 billion was relatively small.
· Even if individual banks are small, if they engage in correlated behavior – using the same models – their behavior can fuel systemic risk;
· Incentive structures within banks are designed to encourage short-sighted behavior and excessive risk taking.
· In assessing their own risk, banks do not look at the externalities that they (or their failure) would impose on others, which is one reason why we need regulation in the first place.
· Banks have done a bad job in risk assessment – the models they were using were deeply flawed."
Stiglitz's recommendation is very rational: "These are not matters of black and white: the more we limit the size, the more relaxed we can be about these and other details of regulation. That is why King, Paul Volcker, the United Nations Commission of Experts on Reforms of the International Monetary and Financial System, and a host of others are right about the need to curb the big banks. What is required is a multi-prong approach, including special taxes, increased capital requirements, tighter supervision, and limits on size and risk-taking activities."
But we are already seeing how the howling and circling packs of lobbyists are diluting and milking attempts at financial reform to benefit the large banks and the shadow banks as they have become larger, resumed their risk taking, and remain without sufficient regulation of their business and trading activities. The stage is set for an encore performance.
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the Pacific. Although difficult to quantify, a related development was increasing FX carry trade activity funded in US dollars and other low interest rate currencies. The result was rapid asset price increases in several emerging economies as well as substantial exchange rate appreciation with respect to the US dollar". The actual chapter on monetary policy and risk taking said, "Easy monetary conditions are a classic ingredient of financial crises: low interest rates may contribute to an excessive expansion of credit, and hence to
boom-bust type business fluctuations."
In the my post which I referenced at the beginning, I also referenced a Raw Finance article on "Meet the New Crisis, Same as the Old Crisis". The New BIS report which repeats yet again the same warning they have issued for several years. Baseline Scenario recently had an article on "Measuring the Fiscal Cost of Not Fixing the Financial System" in which Simon Johnson said, "At the heart of every crisis is a political problem – powerful people, and the firms they control, have gotten out of hand. Unless this is dealt with as part of the stabilization program, all the government has done is provide an unconditional bailout. That may be consistent with a short-term recovery, but it creates major problems for the sustainability of the recovery and for the medium-term. Again, this is the problem in the U.S. looking forward." He also said the the US crisis has worsened as a direct result of how the FED and Treasury dealt with the financial crisis and " Even more problematic is the underlying incentive to take excessive risk in the financial sector. With downside limited by generous government guarantees of various kinds, the head of financial stability at the Bank of England bluntly characterizes our repeated boom-bailout-bust cycle as a “doom loop.” The implication is repeated bailout and fiscal stimulus-led recovery programs."
Joseph Stiglitz has written yet again in "Too Big to Live" that the global controversy on whether banks are too big to fail and what regulations are needed, but it boils down to the bankers either swindled their shareholders and investors or they did not understand the nature of risk and reward. The condition then becomes, if they are permitted to survive, the smaller the entity the easier it will be to regulate them for the protection of society. Size itself is not the real issue it is whether the bank/shadow bank in its conduct presents itself as a systemically dangerous firm by its business activity: "Too-big-to-fail banks have perverse incentives; if they gamble and win, they walk off with the proceeds; if they fail, taxpayers pick up the tab.
· Financial institutions are too intertwined to fail; the part of AIG that cost America’s taxpayers $180 billion was relatively small.
· Even if individual banks are small, if they engage in correlated behavior – using the same models – their behavior can fuel systemic risk;
· Incentive structures within banks are designed to encourage short-sighted behavior and excessive risk taking.
· In assessing their own risk, banks do not look at the externalities that they (or their failure) would impose on others, which is one reason why we need regulation in the first place.
· Banks have done a bad job in risk assessment – the models they were using were deeply flawed."
Stiglitz's recommendation is very rational: "These are not matters of black and white: the more we limit the size, the more relaxed we can be about these and other details of regulation. That is why King, Paul Volcker, the United Nations Commission of Experts on Reforms of the International Monetary and Financial System, and a host of others are right about the need to curb the big banks. What is required is a multi-prong approach, including special taxes, increased capital requirements, tighter supervision, and limits on size and risk-taking activities."
But we are already seeing how the howling and circling packs of lobbyists are diluting and milking attempts at financial reform to benefit the large banks and the shadow banks as they have become larger, resumed their risk taking, and remain without sufficient regulation of their business and trading activities. The stage is set for an encore performance.
Print Page
Sunday, December 6, 2009
Questioning the November Employment Report
Many economists and analysts are finding the November BLS Employment Report released this last week hard to swallow. I went over it in some detail on the Radio Show, but the questions on the data merit posting for reader's review.
The Report showed a job loss of 11,000 jobs when the month before was 195,000 and it showed the unemployment rate going down to 10% from 10.2 despite the loss. However, the BLS figures are usually close to the ADP private survey and the ADP showed a loss of 169,000 jobs. Calculated Risk asked "If the Economy lost Jobs, why did the Unemployment Rate decline?" The article used scatter graphs of one month and two month rolling averages and a 3rd order polynomial and concluded it was at best statistical noise: "The bottom line is the decline in the unemployment rate this month was noise, and the unemployment rate will probably increase further. If the economy adds about 2 million payroll jobs next year, we'd expect the unemployment rate to still be at about 10% at the end of the year." For every point of unemployment which lasts two years, the cost is $400 billion.
GDP growth below 2.5% will not substantially change the unemployment rate. Slower growth could mean 10% unemployment through 2012 into 2013. Krugman has commented on this as has Calculated Risk in "Employment and Real GDP".
If you look at page five (5) of the Report, you will see that there was a 98,000 decline in the civilian labor force with a 325,000 decline in unemployment but there was an increase of 291,000 in people no longer in the labor force. You can also see this analysis on Shedlock's blog. U6, discouraged workers no longer in labor force is shown at 17.2% in the BLS Report, an alternative model using the same statistical definition in use in the middle 1990's indicates 22%, unchanged from last month.
Some people have tried to reconcile the BLS Report with the ADP and have found they cannot get the BLS Report to add up, but that may be because different statistical methodologie3s are used for different components of the BLS Report. It is well acknowledged that the BLS Birth/Death Model is flawed and will be corrected in its annual review in February for an overestimate of at least 824,000 jobs filled error, although some say the error may be an overestimate of about 80,000 per month, which would be 960,000. One attempt at the ADP to BLS figures summed up with "We are looking at a three-month ADP-BLS net jobs divergence of roughly 230%, with ISM non-manufacturing employment still deep in contraction. Again, whom are we supposed to believe?"
Trim Tabs, which is a professional fee analytical service, calculated a November job loss of 255,000 and The Money Game provided a month by month Trim Tabs to BLS comparison estimates and revisions. It is not pretty.
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The Report showed a job loss of 11,000 jobs when the month before was 195,000 and it showed the unemployment rate going down to 10% from 10.2 despite the loss. However, the BLS figures are usually close to the ADP private survey and the ADP showed a loss of 169,000 jobs. Calculated Risk asked "If the Economy lost Jobs, why did the Unemployment Rate decline?" The article used scatter graphs of one month and two month rolling averages and a 3rd order polynomial and concluded it was at best statistical noise: "The bottom line is the decline in the unemployment rate this month was noise, and the unemployment rate will probably increase further. If the economy adds about 2 million payroll jobs next year, we'd expect the unemployment rate to still be at about 10% at the end of the year." For every point of unemployment which lasts two years, the cost is $400 billion.
GDP growth below 2.5% will not substantially change the unemployment rate. Slower growth could mean 10% unemployment through 2012 into 2013. Krugman has commented on this as has Calculated Risk in "Employment and Real GDP".
If you look at page five (5) of the Report, you will see that there was a 98,000 decline in the civilian labor force with a 325,000 decline in unemployment but there was an increase of 291,000 in people no longer in the labor force. You can also see this analysis on Shedlock's blog. U6, discouraged workers no longer in labor force is shown at 17.2% in the BLS Report, an alternative model using the same statistical definition in use in the middle 1990's indicates 22%, unchanged from last month.
Some people have tried to reconcile the BLS Report with the ADP and have found they cannot get the BLS Report to add up, but that may be because different statistical methodologie3s are used for different components of the BLS Report. It is well acknowledged that the BLS Birth/Death Model is flawed and will be corrected in its annual review in February for an overestimate of at least 824,000 jobs filled error, although some say the error may be an overestimate of about 80,000 per month, which would be 960,000. One attempt at the ADP to BLS figures summed up with "We are looking at a three-month ADP-BLS net jobs divergence of roughly 230%, with ISM non-manufacturing employment still deep in contraction. Again, whom are we supposed to believe?"
Trim Tabs, which is a professional fee analytical service, calculated a November job loss of 255,000 and The Money Game provided a month by month Trim Tabs to BLS comparison estimates and revisions. It is not pretty.
Print Page
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