The Big Picture commented on a recent National Bureau of Economic Research statement by their Business Cycle Dating Committee in which they said, " In both recessions and expansions, brief reversals in economic activity may occur --- a recession may include a short period of expansion followed by further decline; an expansion may include a short period of contraction followed by further growth." The Big Picture than looked at the St. Louis Fed tracking the recession indicators page and found the indicators clearly in conflict with each other.
Credit Writedowns cited the above article and then carried it further by going through a series of NBER member comments and statistical indicators throughout last year which were used to argue the recession is over. Ed Harrison also continues his criticism of economic multipliers. Despite when the recession may have technically ended or whether it is a real or fake recovery, Credit Writedowns still continues to point to a depression with a small "d" and a coming double dip.
Many commentators and economists have been warning about the possibility of a double dip just as we have for many months. At the very least, given the over valuation of the stock market, we have yet to see a healthy 10% correction from this March 2009 rally which would shake out some of the over valuation. A double dip is a 30%-50% correction.
As we have reported on the Radio Show, there has been speculation the Fed or U.S. Treasury may be buying S&P futures each month and selling them each month which would inject a large multiple amount into stock market equity. This began with a Trim Tabs report that could not account for all the sources of money invested in the stock market beginning with the March rally. If the Fed or Treasury were buying equities or futures contracts to boost the market, this is not illegal. At the same time, it has also been noted that there has been an informal 1989 agreement the Fed, banks, and stock exchanges to buy stock if there appears to be a problem. We have commented that the March 2009 rally has moved forward without apparent reason on large volume increases towards the end of the trading day which do not appear normal. We have also commented that this rally has been used by the banks to raise capital through debt and stock issuance.
It is now being speculated that the Fed is timing MBS purchases with options expiration week each month. This actually appears to be a reasonable market timing method and not a manipulation. Its primary impact will be when The Fed begins to sell MBS and how that will affect the market.
Of more concern, one Treasury trader has observed that there is a very well organized buying surge of U.S.Treasury denominations, driving the price up, 2 weeks to 1 week prior to the Fed making an announcement it would be buying that denomination at the inflated price. The question is this front running and, if it is, who is doing it? Is it a Fed tool to increase the price of Treasury denominations or is someone trading on illegal information?
As we have been reporting, there are a variety of unusual and repetitious market activities beginning with the March 2009 rally that have market analysts scratching their heads and trying to find rational explanations. It makes this "bullet proof" rally all the more weak in a rational market context.
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Friday, January 22, 2010
Banking Reform & Geithner
As we wrote yesterday, the new proposal to limit the scope and size of systemically dangerous banks appears to be very limited and vague. We used the specific information of the background briefing after the announcement which indicated the size of banks would be limited "as is". This is in line with the soft bank tax previously announced of 15 basis points on banks with $50 billion only to discover, despite the cries of anguish from bankers, that the bank tax is deductible on their corporate tax returns.
Much of the concern from the scope and limit proposals yesterday is circling around proprietary trading and how will proprietary trading be defined. If everyone knew what comprised proprietary trading before yesterday, why is the definition so obscure today? It is not just a matter of asking all the attorneys to leave the room, the smoky confusion is also emanating from the aft decks of the retreating banking fleet. The banking analyst Meredith Whitney has questioned the meaning of scope and size with emphasis on proprietary trading. In actuality, proprietary trading in easily defined by its operational impact and purpose.
The absolute vagueness of yesterday's proposals have engendered a response that it is a political play and not designed to be a substantial reality. Given the need for financial reform and the failure of Congress and the President to push any effective financial reform with real teeth to fruition, this new emphasis needs to be very real or the public will seek change elsewhere.
Of more concern is comments by Treasury Secretary Geithner would appear to further confirm that either the Administration is not serious or he is not on board with limiting the scope and size of banks, because he has voiced concern that the proposals, which he supposedly helped draft with Larry Summers and Paul Volcker, would sacrifice good economic policy. Did anyone see Larry Summers at President Obama's announcement yesterday? Of even more concern is Geithner's PBS interview in which he answered "No, this does not propose that" to a question is this meant the break up of big banks.
Any attempt at financial regulatory reform must include a definition of "systemically dangerous". The term "Too Big To Fail" is bogus and misleading as we have discussed many times and as Joseph Stiglitz has enumerated on more than one occasion. Systemically dangerous should not just be banks but any financial institution whether it is a hedge fund, insurance company, or some other company engaged in shadow banking.
This Administration has put forward too many proposals without specific details, which has allowed the lobbyists to mangle, neuter, and fulgaratively defenestrate originally content empty legislation. It is time to be purposeful and definitive.
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Much of the concern from the scope and limit proposals yesterday is circling around proprietary trading and how will proprietary trading be defined. If everyone knew what comprised proprietary trading before yesterday, why is the definition so obscure today? It is not just a matter of asking all the attorneys to leave the room, the smoky confusion is also emanating from the aft decks of the retreating banking fleet. The banking analyst Meredith Whitney has questioned the meaning of scope and size with emphasis on proprietary trading. In actuality, proprietary trading in easily defined by its operational impact and purpose.
The absolute vagueness of yesterday's proposals have engendered a response that it is a political play and not designed to be a substantial reality. Given the need for financial reform and the failure of Congress and the President to push any effective financial reform with real teeth to fruition, this new emphasis needs to be very real or the public will seek change elsewhere.
Of more concern is comments by Treasury Secretary Geithner would appear to further confirm that either the Administration is not serious or he is not on board with limiting the scope and size of banks, because he has voiced concern that the proposals, which he supposedly helped draft with Larry Summers and Paul Volcker, would sacrifice good economic policy. Did anyone see Larry Summers at President Obama's announcement yesterday? Of even more concern is Geithner's PBS interview in which he answered "No, this does not propose that" to a question is this meant the break up of big banks.
Any attempt at financial regulatory reform must include a definition of "systemically dangerous". The term "Too Big To Fail" is bogus and misleading as we have discussed many times and as Joseph Stiglitz has enumerated on more than one occasion. Systemically dangerous should not just be banks but any financial institution whether it is a hedge fund, insurance company, or some other company engaged in shadow banking.
This Administration has put forward too many proposals without specific details, which has allowed the lobbyists to mangle, neuter, and fulgaratively defenestrate originally content empty legislation. It is time to be purposeful and definitive.
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Thursday, January 21, 2010
To Systemically Dangerous Banks: No More Hostages
In my last post I talked about FDR's 1936 speech in which he threw down the gauntlet and challenged the bankers with a clear, defining word picture: "We had to struggle with the old enemies of peace--business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism, war profiteering.
"They had begun to consider the Government of the United States as a mere appendage to their own affairs. We know now that Government by organized money is just as dangerous as Government by organized mob."
In our last post we talked about the need for President Obama to step up to his vision of change and stop avoiding the consequences of real financial regulatory reform. We have repeatedly, through the Radio Show and this blog, conveyed the calls by economists, such as Joseph Stiglitz and Paul Volcker, for the regulation of systemically dangerous financial institutions (banks, hedge funds, insurance companies, as well as any other member of the shadow banking system), the need for a modern Glass-Steagall bill (Senators Cantwell and McCain have introduced a bill) to remove business activities which are in obvious conflict of interest, the need to transparently monitor and record the transactions of derivatives trading, the need to create a Consumer Financial Protection Agency, and the need to require fiduciary responsibility since sales people cannot exercise fiduciary duty (which is conflict free).
We have documented how financial reform has been gutted by banking lobbyists, the CFPA neutered if not aborted, and otherwise filled with so many holes and exemptions as to constitute a coup d'etat by the financial industry. Derivatives are still not traded on an open market and the only consideration is what derivatives, if any, should be defined as requiring transparent market trading in which the trades are recorded and we have an idea of the extent of synthetic exposure exists globally (it still appears to be over $600 trillion but no one really knows for sure).
Paul Volcker was isolated by Larry Summers and Tim Geithner and he defied them and went on a European speaking tour which got wide coverage outside of the United States but was often portrayed within the United States by main stream media as a pathetic "who is listening?". Today, Paul Volcker stood with President Obama and President Obama said, after the official statement, "Never again will the American taxpayer be held hostage by a bank that is too big to fail."
His proposal would limit scope by preventing a bank from engaging in trading and investment for their own profit and limit size to an unspecified market share of liabilities and deposits. Just as we disclosed in our last post that his bank tax of 15 basis points was tax deductible to the corporations, the background briefing today after the official statement, indicated the bank size would be limited "as is".
There needs to be a very specific definition of "systemically dangerous", because it is not all about size. While the big banks are obvious, the shadow banking community which directly participated in the weaving of this financial crisis are dangerous by their very hidden anonymity and business in the unregulated shadows of global finance.
President Obama has tried to placate and please the financial industry on the advice of others and now the American people are speaking out that they have had enough and they want the systemically dangerous regulated, they want target government programs creating jobs now, and they want the politicians who find lobbyists more important than constituents to have the opportunity to find a new career path which is less parasitic.
Given the failure of other current financial reforms, we need well defined specifics and the public leadership to push those specifics in defiance of organized financial money mobs.
Wednesday, January 20, 2010
Leftovers - Radio Show 1/16/2010
The Baseline Scenario had a post in which Kevin Drum is asking why President Obama has not, with respect to financial regulatory reform, let us know what side he is on. James Kwak notes there is no powerful lobbyist support for financial regulatory reform, unless you count Elizabeth Warren who is the Chairperson of the TARP Congressional Oversight panel. Drum cites FDR's 1936 gauntlet to the bankers and Kwak says it is not too late for Obama to pick up the mantle.
President Obama has three problems in seeking financial regulatory reform and a sustainable economic recovery in which there is job creation: Tim Geithner, Larry Summer, and the people who recommended them. The economist, Randall Wray, is calling for Geithner to be replaced and a new economic team installed which recognizes: 1) banks are not facing a liquidity crisis, but are insolvent, 2) saving financial systems does not save the economy, 3) all bailouts and guarantees to financial institutions need to be unwound, and 4) a need to understand government finance.
Bill Black, who is a professor of economics and law at the same University as Wray and who has regulatory experience with the unwinding of the Savings and Loan bubble of the 90's, has an article delineating the history of the Federal Reserve's opposition to regulation despite Bernanke's recent statements. He particularly concentrates on the Greenspan and Bernanke periods, including Bernanke's appointing an economist, Patrick Parkinson, with no regulatory experience and who has publicly stated derivatives do not need regulation as the Fed's top regulator.
Prior to President Obama announcing a 15 basis points tax on banks liabilities if they have assets of $50 billion or more and accepted TARP money, The Baseline Scenario put forward the argument for a supertax on bank bonuses. It is expected to raise $90 billion dollars over 10 years, but TARP losses are approximately $117 billion. While banks call it unconstitutional, others say it does not go far enough. Some Congressmen have proposed a 50% tax on bank bonuses. The UK and France already have a tax on bank bonuses but they assessed it wrong by making the banks pay the tax rather than the bankers.
What has not been disclosed in the vast majority of stories about the proposed bank tax is that the tax is deductible on corporate tax returns, consequently reducing the economic impact to the banks by approximately 35%.
Bernanke has been arguing that the housing bubble was not caused by low interest rates but a lack of regulation. To that end Bernanke has engaged in a direct argument with John Taylor over the effectiveness of the Taylor Rule, which is designed to indicate the appropriate Fed target interest rate. Tyler Cowan has written on the Taylor-Bernanke argument and the failure of the Fed to critique its monetary policy. Taylor has an op-ed piece which is direct reply to Bernanke in which he criticizes the Fed's inflation forecasts and failure to develop a vigilant program for detecting bubbles. Taylor also has his own blog.
Richard Alford, who is a former NY Fed economist, wrote an article, "Why Bernanke's Defense of Super Low Interest Rates Does Not Hold Up", argues Bernanke's definition of deflation does not hold with Bernanke's favorite favorite inflation indicator, the PCE. Alford believes that between 1996 and 2006, there was a fundamental mismatch between the causes of disinflation, unemployment, and the policy steps taken in response with undesirable domestic side effects. He holds that the Fed should have listened to the many voices after 2002 warning about trade imbalances and decline in private savings.
Tom Duy in his Fed Watch says "It's Not About Interest Rates Yet" and the Fed will hold interest rates at low, rock bottom levels. Consumers have failed to resume spending,, retail activity remains well below the trend expected in 2007, and there has been no offsetting improvements in trade balances. The underlying rate of growth is doubtful, industrial production is improving, the reversal of unemployment is elusive, households are hobbled, and the trade imbalance is not turning around. There is little likelihood interest rates will be raised and the possibility of future asset purchases may be resumed is not unlikely. I have been saying for some time that, historically, the Fed does not raise interest rates until 12-18 months after the end of a recession.
Hussman still remains concerned about the over valuation of the stock market and the weak recovery. Consequently, he still expects an abrupt market decline within the next few months.
John Prestbo has written that it appears the stock market inflation adjusted return for 12/31/1999 to 12/31/2009 was actually negative.
John Mauldin still believes in the V-shaped recovery and cites a variety of minor improvements, but still sees 2010 as a year of uncertainty and believes that a tax cut is necessary. However, I would disagree, because tax cuts have seen growth in unemployment, while tax increases have seen growth in employment. Government spending spurs employment more than private spending. I think we need to target creating jobs now with government programs and creating more credit availability for small businesses if we are to see job creation in the foreseeable future.
Nouriel Roubini is saying that the second half of 2010 may bring downside surprises with the possibility of a double dip recession. The stimulus has not spurred top line revenue growth fast enough and thinks US GDP will be anemic at 2%-3%, which is not enough to drive GDP growth or job creation.
The CFTC has announced proposals to limit big energy traders, but they would apply to only the ten biggest position holders.
ECB Governing Council member, Nowotny, warned that US banks need to curb risk taking.
US banks are lifting executive salaries as they but bonuses just as many have predicted. They want their cake whatever frosting it has on it.
China's $1.2 trillion 2009 exports edged out Germany's $1.17 trillion to become the world's top exporter.
Central banks in South Korea, Indonesia, India, and Singapore bought US dollars to curb the gains in their currencies. There was also speculation China would let its yuan rise.
Bullard, St. Louis Fed President, said global growth, particularly in Asia, is driving the US recovery. I have been saying and publishing in my blog and in nationally published articles that China has a spending bubble, real estate bubble, and increasing use of leverage. As China tightens its monetary policy, how will that braking effect the global recovery. I think the stock market showed us an advertisement for what might happen on 1/12.
UK trade deficit decreased November from $11.4 to 11.0 billion; the Canadian trade deficit was $331 million in November, but it was the 4th monthly deficit in five months.
The German economy was down 5% in 2009 as exports fell 14.7% in Q4 and is estimated to grow 1.2%-1.5% in 2010.
China renewed vows to curb real estate speculation amid concerns over a possible asset bubble and said it will keep an eye on excessive lending.
California's credit rating was reduced another level by S&P, which said the state will run out of cash in April.
Foxwoods Casino (owned by The Pequots tribe) is in financial difficulty. Since the casino is owned by a sovereign tribe, only they can own the casino. Where does this leave lenders who have no legal right to foreclose? Why did the lenders provide credit without addressing this issue in the loan contract?
Heineken is to acquire FEMSA in a $7.7 billion deal.
Treasury auctions:
10 yr TIPS, $10 billion, yield 1.43%, bid-to-cover 2.69, foreign 40.7%.
3yr Treasury, $40 billion, yield 1.49%, bid-to-cover 2.98, foreign 38.0%.
10yr Treasury, $21 billion, yield 3.754% (lower than expected), bid-to-cover 3.01 (strong), foreign 29.02% (Primary Dealers took over 50%).
30yr Treasury, $13 billion, yield 4.640%, bid-to-cover 2.69, foreign 40.7%.
Print Page
President Obama has three problems in seeking financial regulatory reform and a sustainable economic recovery in which there is job creation: Tim Geithner, Larry Summer, and the people who recommended them. The economist, Randall Wray, is calling for Geithner to be replaced and a new economic team installed which recognizes: 1) banks are not facing a liquidity crisis, but are insolvent, 2) saving financial systems does not save the economy, 3) all bailouts and guarantees to financial institutions need to be unwound, and 4) a need to understand government finance.
Bill Black, who is a professor of economics and law at the same University as Wray and who has regulatory experience with the unwinding of the Savings and Loan bubble of the 90's, has an article delineating the history of the Federal Reserve's opposition to regulation despite Bernanke's recent statements. He particularly concentrates on the Greenspan and Bernanke periods, including Bernanke's appointing an economist, Patrick Parkinson, with no regulatory experience and who has publicly stated derivatives do not need regulation as the Fed's top regulator.
Prior to President Obama announcing a 15 basis points tax on banks liabilities if they have assets of $50 billion or more and accepted TARP money, The Baseline Scenario put forward the argument for a supertax on bank bonuses. It is expected to raise $90 billion dollars over 10 years, but TARP losses are approximately $117 billion. While banks call it unconstitutional, others say it does not go far enough. Some Congressmen have proposed a 50% tax on bank bonuses. The UK and France already have a tax on bank bonuses but they assessed it wrong by making the banks pay the tax rather than the bankers.
What has not been disclosed in the vast majority of stories about the proposed bank tax is that the tax is deductible on corporate tax returns, consequently reducing the economic impact to the banks by approximately 35%.
Bernanke has been arguing that the housing bubble was not caused by low interest rates but a lack of regulation. To that end Bernanke has engaged in a direct argument with John Taylor over the effectiveness of the Taylor Rule, which is designed to indicate the appropriate Fed target interest rate. Tyler Cowan has written on the Taylor-Bernanke argument and the failure of the Fed to critique its monetary policy. Taylor has an op-ed piece which is direct reply to Bernanke in which he criticizes the Fed's inflation forecasts and failure to develop a vigilant program for detecting bubbles. Taylor also has his own blog.
Richard Alford, who is a former NY Fed economist, wrote an article, "Why Bernanke's Defense of Super Low Interest Rates Does Not Hold Up", argues Bernanke's definition of deflation does not hold with Bernanke's favorite favorite inflation indicator, the PCE. Alford believes that between 1996 and 2006, there was a fundamental mismatch between the causes of disinflation, unemployment, and the policy steps taken in response with undesirable domestic side effects. He holds that the Fed should have listened to the many voices after 2002 warning about trade imbalances and decline in private savings.
Tom Duy in his Fed Watch says "It's Not About Interest Rates Yet" and the Fed will hold interest rates at low, rock bottom levels. Consumers have failed to resume spending,, retail activity remains well below the trend expected in 2007, and there has been no offsetting improvements in trade balances. The underlying rate of growth is doubtful, industrial production is improving, the reversal of unemployment is elusive, households are hobbled, and the trade imbalance is not turning around. There is little likelihood interest rates will be raised and the possibility of future asset purchases may be resumed is not unlikely. I have been saying for some time that, historically, the Fed does not raise interest rates until 12-18 months after the end of a recession.
Hussman still remains concerned about the over valuation of the stock market and the weak recovery. Consequently, he still expects an abrupt market decline within the next few months.
John Prestbo has written that it appears the stock market inflation adjusted return for 12/31/1999 to 12/31/2009 was actually negative.
John Mauldin still believes in the V-shaped recovery and cites a variety of minor improvements, but still sees 2010 as a year of uncertainty and believes that a tax cut is necessary. However, I would disagree, because tax cuts have seen growth in unemployment, while tax increases have seen growth in employment. Government spending spurs employment more than private spending. I think we need to target creating jobs now with government programs and creating more credit availability for small businesses if we are to see job creation in the foreseeable future.
Nouriel Roubini is saying that the second half of 2010 may bring downside surprises with the possibility of a double dip recession. The stimulus has not spurred top line revenue growth fast enough and thinks US GDP will be anemic at 2%-3%, which is not enough to drive GDP growth or job creation.
The CFTC has announced proposals to limit big energy traders, but they would apply to only the ten biggest position holders.
ECB Governing Council member, Nowotny, warned that US banks need to curb risk taking.
US banks are lifting executive salaries as they but bonuses just as many have predicted. They want their cake whatever frosting it has on it.
China's $1.2 trillion 2009 exports edged out Germany's $1.17 trillion to become the world's top exporter.
Central banks in South Korea, Indonesia, India, and Singapore bought US dollars to curb the gains in their currencies. There was also speculation China would let its yuan rise.
Bullard, St. Louis Fed President, said global growth, particularly in Asia, is driving the US recovery. I have been saying and publishing in my blog and in nationally published articles that China has a spending bubble, real estate bubble, and increasing use of leverage. As China tightens its monetary policy, how will that braking effect the global recovery. I think the stock market showed us an advertisement for what might happen on 1/12.
UK trade deficit decreased November from $11.4 to 11.0 billion; the Canadian trade deficit was $331 million in November, but it was the 4th monthly deficit in five months.
The German economy was down 5% in 2009 as exports fell 14.7% in Q4 and is estimated to grow 1.2%-1.5% in 2010.
China renewed vows to curb real estate speculation amid concerns over a possible asset bubble and said it will keep an eye on excessive lending.
California's credit rating was reduced another level by S&P, which said the state will run out of cash in April.
Foxwoods Casino (owned by The Pequots tribe) is in financial difficulty. Since the casino is owned by a sovereign tribe, only they can own the casino. Where does this leave lenders who have no legal right to foreclose? Why did the lenders provide credit without addressing this issue in the loan contract?
Heineken is to acquire FEMSA in a $7.7 billion deal.
Treasury auctions:
10 yr TIPS, $10 billion, yield 1.43%, bid-to-cover 2.69, foreign 40.7%.
3yr Treasury, $40 billion, yield 1.49%, bid-to-cover 2.98, foreign 38.0%.
10yr Treasury, $21 billion, yield 3.754% (lower than expected), bid-to-cover 3.01 (strong), foreign 29.02% (Primary Dealers took over 50%).
30yr Treasury, $13 billion, yield 4.640%, bid-to-cover 2.69, foreign 40.7%.
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Monday, January 18, 2010
Yield Curve & Bank Profits
Rolfe Winkler published a post in which he showed the banks are not profiting from the steep yield curve. One reason is the banks are not lending; they are plowing their cash into more liquid securities. He argues banks need to lend at higher rates, because the curve is steep at low rates and they cannot capture the whole spread based on what they actually have to pay for more deposits. The banks also carry floating assets in the form of credit card and corporate loans and ARMs that key off indices. Higher rates would would in turn mean lower real estate prices and higher default rates.
Tyler Durden had a post in which he demonstrated that foreign investors (indirect bidders) were fleeing the short bond. Contrary to conventional wisdom, foreign investors are buying the longer bonds with steeper yields. Yet, each auction is seeing high Primary Dealer (US banks and bond broker-dealers) purchases. With the expectation of inflation around the corner, how are investors going to be persuaded to leave the short-term bills and buy the "riskier" long-term bills?
Karl Denninger observed that the Primary Dealers (banks) are heavy buyers (crowding out?) of the 13 week and 26 week bills with near zero yield. This means they are not only not lending, but, in my opinion, they are hoarding cash. The question becomes what do they know? What makes them afraid to lend and make money? Who does the steep yield curve benefit?
Econbrowser has published a post breaking down the Fed's recent profit of $46.1 billion given to the Treasury, Besides finding the number is coincidentally the same as the revenue from US Treasuries and MBS, James Hamilton found the profits were from a strategy of borrowing short and lending long. The Fed may be funding the purchase of MBS with near zero interest Treasuries. This means the Fed must be able to continue to rollover the short term debt (continue to convince banks to keep holding excess reserves) or liquidate the long position (sell the MBS) without a loss or uncontrolled impact on interest rates.
We have been commenting for many months that the Fed appears to be encouraging banks to deposit excess reserves rather than lend. Meanwhile, unemployment will stay high for years, consumer credit and spending will remain low, and small business credit availability will remain unusually low. For whose benefit is this "recovery"?
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Tyler Durden had a post in which he demonstrated that foreign investors (indirect bidders) were fleeing the short bond. Contrary to conventional wisdom, foreign investors are buying the longer bonds with steeper yields. Yet, each auction is seeing high Primary Dealer (US banks and bond broker-dealers) purchases. With the expectation of inflation around the corner, how are investors going to be persuaded to leave the short-term bills and buy the "riskier" long-term bills?
Karl Denninger observed that the Primary Dealers (banks) are heavy buyers (crowding out?) of the 13 week and 26 week bills with near zero yield. This means they are not only not lending, but, in my opinion, they are hoarding cash. The question becomes what do they know? What makes them afraid to lend and make money? Who does the steep yield curve benefit?
Econbrowser has published a post breaking down the Fed's recent profit of $46.1 billion given to the Treasury, Besides finding the number is coincidentally the same as the revenue from US Treasuries and MBS, James Hamilton found the profits were from a strategy of borrowing short and lending long. The Fed may be funding the purchase of MBS with near zero interest Treasuries. This means the Fed must be able to continue to rollover the short term debt (continue to convince banks to keep holding excess reserves) or liquidate the long position (sell the MBS) without a loss or uncontrolled impact on interest rates.
We have been commenting for many months that the Fed appears to be encouraging banks to deposit excess reserves rather than lend. Meanwhile, unemployment will stay high for years, consumer credit and spending will remain low, and small business credit availability will remain unusually low. For whose benefit is this "recovery"?
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Leftovers - Radio Show 1/9/2010
Paul Krugman had two articles during this week. His "That 1937 Feeling" warns us of blips, which are statistical illusions, that appear to convey good news and are often caused by inventory bumps, which is when inventory levels have been reduced to the point that they must be at least minimally replenished in order to continue to do business. He indicates the housing and employment problems are not coming back yet in this recovery, which is something I have been saying for some time. He indicates a boom in business investment would be very helpful right now, but I have been observing that business lending is down and the Fed appears to be discouraging bank lending by accepting excess reserve deposits without penalty to the depositors. Krugaman indicates that the current stimulus will have played itself out economically by the middle of 2010 and any attempts by the Fed to exit by ceasing to purchase long-term debt and mortgaged backed securities will amount to monetary tightening without raising interest rates.
Krugman.s "Bubble and the Banks" asserts that the bursting of the housing bubble brought the financial system to a grinding halt with the significant reduction of liquidity in the financial system. However, the banks got themselves in this plight by raising their leverage ratios in order to maximize short-term profits which directly affected the size of their bonuses. While their is every need for transparency and regulatory reform, there is every incentive for bankers to engage in a repeat performance as they are now doing. There needs to be a limit on bank leverage and a tax on excessive risk taking activities.
Karl Denninger of The Market Ticker had a post entitled, "Here It Comes (You Were Just warned Folks)" in which he argues that the only direction for interest rates to go is up, that P/E ratios are at record highs, and investors are piling in to the financial sector which needs regulation from the tech sector which has been on a tear. He references the BIS warnings on Central Banks low interest rate policies and the China real estate bubble. He indicates that we are presently worse off than in early 2007. He ends with regulators warning of liquidity and interest rate risk at the same time it is preparing an exit from the liquidity programs put in place to seal the dam.
Marshall Auerbach published an article entitled, "Spain and the EU: Deficit Terrorism in Action" in which he criticizes the EU arbitrary fiscal rules with respect to the 3% of GDP limitation of deficit spending, because it is significantly deterring the ability of some EU member nations to adequately respond to their economic conditions during this period of global financial crisis. The need for targeted government spending to increase employment and spur GDP growth is in direct conflict with the EU fiscal rules. This is posing a a particular problem for Spain which adheres to the EU rules and is also a looming problem for Portugal and Ireland. This conflict can also be seen in the friction between Greece and the EU over Greece's attempts to reduce its budget deficit. There have been polite but harsh words on both sides as we have seen in several stories this week.
The Chicago Board Options Exchange intends to wait until the second half of this year to start a new platform for high-speed, high frequency traders. The SEC has not yet announced any decision yet on its proposals on regulating flash orders. The CBOE is just going to keep muddling on as usual until it gets firm directions. The process of regulatory reform is very slow when there is no one making it happen.
China raised the rate on its 3 month bills at the most recent auction and this is seen a a tightening of monetary policy.
FDIC is considering a plan to tie banks payment for deposit insurance to risks involved in their pay structures. Also, after a receiver of failed bank distressed CRE loans, the FDIC set up a LLC to hold these distressed loans with unpaid principal of $1.02 billion and sold 40% of the LLC to Colony Capital for $90.5 million net of working capital.
Bill Gross of PIMCO said that when the Fed stops buying MBA's the Fed will be unable to sell them and it will put pressure on interest rates. PIMCO is also cutting it exposure to US and UK debt.
Meredith Whitney, the banking analyst, lowered Goldman Sachs earnings estimates for 2010 through 2012 for the second time in less than a month.
The Illinois pension fund, Central laborer's Pension Fund, is suing Goldman Sachs over bonuses citing the compensation system as a complete breakdown of corporate oversight. $17 billion has been set aside for bonuses through Q3 and may approach $22 billion for year on what the Pension Fund calls government bailout inflated revenues.
The ISM Manufacturing Index is up to 55.9 in December from 53.6; new orders up to 656.5 from 60.3; production up to 61.8 from 59.9; employment up to 52.0 from 50.8; supplies deliveries up to 56.6 from 55.7; inventories up to 43.4 from 41.3; prices up to 61.5 from 55.0; exports down and imports up; customer inventory still contracting.
Construction spending down .6% in November.
ISM Service Sector up to 50.1 in December from 48.7 with 12 of 18 industries reporting a decrease and 2 reporting no change.
US durable goods factory orders up 1.1% in December; shipment up 1.0%; unfilled orders down .7%; inventory up .2%.
Mortgage demand at a 6 month low.
Pending home sales down 16% November but up year on year.
HAMP 2nd lien modification program is on hold with no listed servicers.
US apartment vacancy rate hits 3 year high; office vacancy rates hit 15 year high; and strip mall vacancy rate at 10.6%.
Small and medium size business loans, leases, and lines of credit more than 180 days behind are up to .91 from .87 for a 22nd monthly increase.
2009 personal bankruptcy at 1.41 million which is up 32% from 2008.
The Euro 16 nation unemployment at 11 year high of 10% and it is estimated it will continue to rise into Q3 2010. Eurozone factory activity rose to 51.6 from 51.2 at the fastest rate in 21 months of 4/10ths of a percent.
German exports are up 1.6% in November.
Canadian unemployment is 8%.
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Krugman.s "Bubble and the Banks" asserts that the bursting of the housing bubble brought the financial system to a grinding halt with the significant reduction of liquidity in the financial system. However, the banks got themselves in this plight by raising their leverage ratios in order to maximize short-term profits which directly affected the size of their bonuses. While their is every need for transparency and regulatory reform, there is every incentive for bankers to engage in a repeat performance as they are now doing. There needs to be a limit on bank leverage and a tax on excessive risk taking activities.
Karl Denninger of The Market Ticker had a post entitled, "Here It Comes (You Were Just warned Folks)" in which he argues that the only direction for interest rates to go is up, that P/E ratios are at record highs, and investors are piling in to the financial sector which needs regulation from the tech sector which has been on a tear. He references the BIS warnings on Central Banks low interest rate policies and the China real estate bubble. He indicates that we are presently worse off than in early 2007. He ends with regulators warning of liquidity and interest rate risk at the same time it is preparing an exit from the liquidity programs put in place to seal the dam.
Marshall Auerbach published an article entitled, "Spain and the EU: Deficit Terrorism in Action" in which he criticizes the EU arbitrary fiscal rules with respect to the 3% of GDP limitation of deficit spending, because it is significantly deterring the ability of some EU member nations to adequately respond to their economic conditions during this period of global financial crisis. The need for targeted government spending to increase employment and spur GDP growth is in direct conflict with the EU fiscal rules. This is posing a a particular problem for Spain which adheres to the EU rules and is also a looming problem for Portugal and Ireland. This conflict can also be seen in the friction between Greece and the EU over Greece's attempts to reduce its budget deficit. There have been polite but harsh words on both sides as we have seen in several stories this week.
The Chicago Board Options Exchange intends to wait until the second half of this year to start a new platform for high-speed, high frequency traders. The SEC has not yet announced any decision yet on its proposals on regulating flash orders. The CBOE is just going to keep muddling on as usual until it gets firm directions. The process of regulatory reform is very slow when there is no one making it happen.
China raised the rate on its 3 month bills at the most recent auction and this is seen a a tightening of monetary policy.
FDIC is considering a plan to tie banks payment for deposit insurance to risks involved in their pay structures. Also, after a receiver of failed bank distressed CRE loans, the FDIC set up a LLC to hold these distressed loans with unpaid principal of $1.02 billion and sold 40% of the LLC to Colony Capital for $90.5 million net of working capital.
Bill Gross of PIMCO said that when the Fed stops buying MBA's the Fed will be unable to sell them and it will put pressure on interest rates. PIMCO is also cutting it exposure to US and UK debt.
Meredith Whitney, the banking analyst, lowered Goldman Sachs earnings estimates for 2010 through 2012 for the second time in less than a month.
The Illinois pension fund, Central laborer's Pension Fund, is suing Goldman Sachs over bonuses citing the compensation system as a complete breakdown of corporate oversight. $17 billion has been set aside for bonuses through Q3 and may approach $22 billion for year on what the Pension Fund calls government bailout inflated revenues.
The ISM Manufacturing Index is up to 55.9 in December from 53.6; new orders up to 656.5 from 60.3; production up to 61.8 from 59.9; employment up to 52.0 from 50.8; supplies deliveries up to 56.6 from 55.7; inventories up to 43.4 from 41.3; prices up to 61.5 from 55.0; exports down and imports up; customer inventory still contracting.
Construction spending down .6% in November.
ISM Service Sector up to 50.1 in December from 48.7 with 12 of 18 industries reporting a decrease and 2 reporting no change.
US durable goods factory orders up 1.1% in December; shipment up 1.0%; unfilled orders down .7%; inventory up .2%.
Mortgage demand at a 6 month low.
Pending home sales down 16% November but up year on year.
HAMP 2nd lien modification program is on hold with no listed servicers.
US apartment vacancy rate hits 3 year high; office vacancy rates hit 15 year high; and strip mall vacancy rate at 10.6%.
Small and medium size business loans, leases, and lines of credit more than 180 days behind are up to .91 from .87 for a 22nd monthly increase.
2009 personal bankruptcy at 1.41 million which is up 32% from 2008.
The Euro 16 nation unemployment at 11 year high of 10% and it is estimated it will continue to rise into Q3 2010. Eurozone factory activity rose to 51.6 from 51.2 at the fastest rate in 21 months of 4/10ths of a percent.
German exports are up 1.6% in November.
Canadian unemployment is 8%.
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Friday, January 15, 2010
Leftovers - Radio Show 1/2/2010
Goldman Sachs was deceptive in its marketing of synthetic CDO products according to Yves Smith of naked capitalism. Any company should bear responsibility for their products, but the sellers of synthetic CDO's have access to hidden information, which even the most sophisticated buyers using modeling software cannot reasonably access for evaluation. Other banks such as Morgan Stanley also profited with the assistance of the rating agencies which would assign high investment credit ratings to these synthetic CDO's. Even more ominous is that banks, such as Goldman Sachs, were on both sides of the transaction by shorting the very products it was packaging and selling. It has become very hard to get information on the AIG bailout, because the Treasury and the Fed does not want to release information relative to that bailout and the 100 cents on the dollar payments made to Goldman Sachs and other banks to cover CDS positions. Yves Smith also points to senior advisors to Secretary of the Treasury Geithner who came from firms directly involved in CDO marketing.
The Chinese premier pledged to cool property prices and keep inflation reasonable, while also saying China should anticipate inflation. He indicated the government will maintain a moderately loose monetary policy and a proactive fiscal position. Bllomberg.com also had another article indicating China's manufacturing production is cementing recovery. This substantially begs china's spending bubble, real estate bubble, leverage growth, export tax incentives, peg of the yuan to the US dollar, internal consumption, and the growing rift between the coastal elite and the internal population as I have detailed in the my China's Spending Bubble and Double Dip Probability posts below.
Yves Smith also had a post on ten reasons to kill the Senate Health care bill. I have mixed thought on this issue. I firmly believe that the United States as the only developed democracy in the world which does not have universal health care needs to provide universal health care to every citizen. I do not understand why Congress and the the health insurance industry lobbyists are so intent on recreating the wheel and recreating it inefficiently and incompetently. The present health care bills will not cover everyone, but the are being pushed to establish a program that can be perfected in the future. If the Administration had had a real plan, the process would not have been so corrupt and incompetent. The Swiss, Netherlands, and France all have universal health care with private insurance. France has one of the lowest individual health care costs with the highest rated quality of service in the world while the United States has one of the most expensive health care systems with one of the poorer levels of quality of care in the world. Without universal participation, the age bands for insurance, as used in Switzerland, with no discrimination would not be economically sustainable. If universal health care met or exceeded Medicare services, there be no need for Medicare, Medicaid, or veteran's hospitals. The three countries I mentioned have accomplished this with private insurance in slightly different ways. The only real wrinkle in the United States is that the States have the legal right to regulate insurance companies within their borders. The United States does not need to usurp that State responsibility, but it can require any insurance company which wants to participate in universal health care to be licensed to do business in all fifty states and territories and to meet the Federal minimum requirements or higher State requirements. Insurance companies want to continue denying health care procedures, denying insurance availability, and practicing medicine while cherry picking which states they want to do business in.
In France, you choose your doctor, the primary care doctor must to go to your home if you cannot see them, the doctor and patient decide what medical procedures and methods are appropriate (no medical procedure or therapy can be denied if recommended by the doctor and agreed to by the patient), there are no waiting lists like Canada, and the government has an active anti-fraud program. All of this for 1/3 the cost of health care in the United States and with the #1 rating for quality of health care in the world.
The fastest growing part of the municipal debt market is Build America bonds, but the yields demanded by investors are higher than corporate debt with similar ratings. You have to be in the highest tax brackets to gain the most from these tax exempt securities. They are expected to increase 46.6% in 2010 to $85 billion from an estimated $58 billion in 2009.
Tax free municipal debt issuance is expected to rise 7.9% to $450.5 billion in 2010 from $418 billion in 2009.
sales taxes nationally are down 9% in Q3.
Credit card write-offs rose to 10.56% in November and is likely to go to 12-13% according to Moody's in 2010. 30 day delinquencies are up to 6.2%
The Chicago Fed Midwest Factory Index is up 1.2% to 84.2 which is the highest since 12/2008; the Automobile component is up 1.1% within that.
Treasury auctions:
2yr $44 billion yield 1.089%, bid-to-cover 2,91, foreign 34.8%; large Primary Dealer purchases.
5yr $42 billion yield 2.665, bid-to-cover 2.59, foreign 44.0%.
7yr $32 billion yield 3.345%, bid-to-cover 2.72; foreign 44.7%.
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The Chinese premier pledged to cool property prices and keep inflation reasonable, while also saying China should anticipate inflation. He indicated the government will maintain a moderately loose monetary policy and a proactive fiscal position. Bllomberg.com also had another article indicating China's manufacturing production is cementing recovery. This substantially begs china's spending bubble, real estate bubble, leverage growth, export tax incentives, peg of the yuan to the US dollar, internal consumption, and the growing rift between the coastal elite and the internal population as I have detailed in the my China's Spending Bubble and Double Dip Probability posts below.
Yves Smith also had a post on ten reasons to kill the Senate Health care bill. I have mixed thought on this issue. I firmly believe that the United States as the only developed democracy in the world which does not have universal health care needs to provide universal health care to every citizen. I do not understand why Congress and the the health insurance industry lobbyists are so intent on recreating the wheel and recreating it inefficiently and incompetently. The present health care bills will not cover everyone, but the are being pushed to establish a program that can be perfected in the future. If the Administration had had a real plan, the process would not have been so corrupt and incompetent. The Swiss, Netherlands, and France all have universal health care with private insurance. France has one of the lowest individual health care costs with the highest rated quality of service in the world while the United States has one of the most expensive health care systems with one of the poorer levels of quality of care in the world. Without universal participation, the age bands for insurance, as used in Switzerland, with no discrimination would not be economically sustainable. If universal health care met or exceeded Medicare services, there be no need for Medicare, Medicaid, or veteran's hospitals. The three countries I mentioned have accomplished this with private insurance in slightly different ways. The only real wrinkle in the United States is that the States have the legal right to regulate insurance companies within their borders. The United States does not need to usurp that State responsibility, but it can require any insurance company which wants to participate in universal health care to be licensed to do business in all fifty states and territories and to meet the Federal minimum requirements or higher State requirements. Insurance companies want to continue denying health care procedures, denying insurance availability, and practicing medicine while cherry picking which states they want to do business in.
In France, you choose your doctor, the primary care doctor must to go to your home if you cannot see them, the doctor and patient decide what medical procedures and methods are appropriate (no medical procedure or therapy can be denied if recommended by the doctor and agreed to by the patient), there are no waiting lists like Canada, and the government has an active anti-fraud program. All of this for 1/3 the cost of health care in the United States and with the #1 rating for quality of health care in the world.
The fastest growing part of the municipal debt market is Build America bonds, but the yields demanded by investors are higher than corporate debt with similar ratings. You have to be in the highest tax brackets to gain the most from these tax exempt securities. They are expected to increase 46.6% in 2010 to $85 billion from an estimated $58 billion in 2009.
Tax free municipal debt issuance is expected to rise 7.9% to $450.5 billion in 2010 from $418 billion in 2009.
sales taxes nationally are down 9% in Q3.
Credit card write-offs rose to 10.56% in November and is likely to go to 12-13% according to Moody's in 2010. 30 day delinquencies are up to 6.2%
The Chicago Fed Midwest Factory Index is up 1.2% to 84.2 which is the highest since 12/2008; the Automobile component is up 1.1% within that.
Treasury auctions:
2yr $44 billion yield 1.089%, bid-to-cover 2,91, foreign 34.8%; large Primary Dealer purchases.
5yr $42 billion yield 2.665, bid-to-cover 2.59, foreign 44.0%.
7yr $32 billion yield 3.345%, bid-to-cover 2.72; foreign 44.7%.
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