In the present system, the more unrestricted the banks are, the more money they can generate “out of thin air,” and the more damage they can inflict upon the wealth-generation process. FULL ARTICLE by Frank Shostak
Add comment February 20th, 2010
In a report entitled “Worst-case debt scenario”, the bank’s asset team said state rescue packages over the last year have merely transferred private liabilities onto sagging sovereign shoulders, creating a fresh set of problems.
Overall debt is still far too high in almost all rich economies as a share of GDP (350pc in the US), whether public or private. It must be reduced by the hard slog of “deleveraging”, for years.
“As yet, nobody can say with any certainty whether we have in fact escaped the prospect of a global economic collapse,” said the 68-page report, headed by asset chief Daniel Fermon. It is an exploration of the dangers, not a forecast.
Under the French bank’s “Bear Case” scenario (the gloomiest of three possible outcomes), the dollar would slide further and global equities would retest the March lows. Property prices would tumble again. Oil would fall back to $50 in 2010.
Governments have already shot their fiscal bolts. Even without fresh spending, public debt would explode within two years to 105pc of GDP in the UK, 125pc in the US and the eurozone, and 270pc in Japan. Worldwide state debt would reach $45 trillion, up two-and-a-half times in a decade.
(UK figures look low because debt started from a low base. Mr Ferman said the UK would converge with Europe at 130pc of GDP by 2015 under the bear case).
The underlying debt burden is greater than it was after the Second World War, when nominal levels looked similar. Ageing populations will make it harder to erode debt through growth. “High public debt looks entirely unsustainable in the long run. We have almost reached a point of no return for government debt,” it said.
Inflating debt away might be seen by some governments as a lesser of evils.
If so, gold would go “up, and up, and up” as the only safe haven from fiat paper money. Private debt is also crippling. Even if the US savings rate stabilises at 7pc, and all of it is used to pay down debt, it will still take nine years for households to reduce debt/income ratios to the safe levels of the 1980s.
The bank said the current crisis displays “compelling similarities” with Japan during its Lost Decade (or two), with a big difference: Japan was able to stay afloat by exporting into a robust global economy and by letting the yen fall. It is not possible for half the world to pursue this strategy at the same time.
SocGen advises bears to sell the dollar and to “short” cyclical equities such as technology, auto, and travel to avoid being caught in the “inherent deflationary spiral”. Emerging markets would not be spared. Paradoxically, they are more leveraged to the US growth than Wall Street itself. Farm commodities would hold up well, led by sugar.
Mr Fermon said junk bonds would lose 31pc of their value in 2010 alone. However, sovereign bonds would “generate turbo-charged returns” mimicking the secular slide in yields seen in Japan as the slump ground on. At one point Japan’s 10-year yield dropped to 0.40pc. The Fed would hold down yields by purchasing more bonds. The European Central Bank would do less, for political reasons.
SocGen’s case for buying sovereign bonds is controversial. A number of funds doubt whether the Japan scenario will be repeated, not least because Tokyo itself may be on the cusp of a debt compound crisis.
Mr Fermon said his report had electrified clients on both sides of the Atlantic. “Everybody wants to know what the impact will be. A lot of hedge funds and bankers are worried,” he said.
Add comment November 22nd, 2009
Financial Times
Yapping away at gold: lessons from the last days of the Rai
By Willem Buiter
November 16, 2009
Comment 5 from Jesse
“Perhaps if I phrase it this way it might be more clear.
In one philosophic sense, gold is indeed a fiat valuation, if all valuations are fiat,
nothing being essential but air to breathe, food to eat, shelter and clothing in
roughly that order. All else is discretion.
Gold, however, may be less fiat, less arbitrary a a money, a medium of exchange
and a store of value, rather than the essential itself,
in an other than barter economy. Just as the Aussie dollar or the euro may be less ephemeral than the US dollar,
This is what is happening. The Bank of England made an error in selling its nation’s
gold ‘at the bottom’ and will pay a price for this; live with it.
Oh, and try to move on please, else you may begin to resemble King Canute, sitting
on his throne at ocean’s edge, ordering the incoming tide to stop its inundation.
Thank you. Mr. Buiter Apparently Does Not Like Gold
Add comment November 21st, 2009
“Hindsight is a wonderful thing,” said Timothy W. Long, the chief bank
examiner for the Office of the Comptroller of the Currency. “At the height of
the economic boom, to take an aggressive supervisory approach and tell people to
stop lending is hard to do.” Post Mortems Reveal Obvious Risks at Banks, NY Times
Add comment November 21st, 2009
Myths of Our Times
By Paul Craig Roberts
Humanity has endeavored for millennia to control evil with morality. In the American “superpower,” this effort has collapsed and failed. Continue
Add comment November 14th, 2009
Public trust has economic consequences, by Howard Davies, Commentary, Project Syndicate: Public trust in financial institutions, and in the authorities that are supposed to regulate them, was an early casualty of the financial crisis. That is hardly surprising, as previously revered firms revealed that they did not fully understand the very instruments they dealt in or the risks they assumed. … But … if this loss of trust persists, it could be costly for us all.
As Ralph Waldo Emerson remarked, “Our distrust is very expensive.” The Nobel laureate Kenneth Arrow made the point in economic terms almost 40 years ago: “It can be plausibly argued that much of the economic backwardness in the world can be explained by the lack of mutual confidence.”
Indeed, much economic research has demonstrated a powerful relationship between the level of trust in a community and its aggregate economic performance. Without mutual trust, economic activity is severely constrained. …
So if it is true that trust in financial institutions – and in the governments that oversee them – has been damaged by the crisis, we should care a lot, and we should be devising responses which seek to rebuild that trust. …
In the United States,… a … systematic, independent survey promoted by economists at the University of Chicago Booth School of Business … did show a sharp fall in trust in late 2008 and early 2009, following the collapse of Lehman Brothers.
That fall in confidence affected banks, the stock market, and the government and its regulators. Furthermore, the survey showed that … if your trust in the market and in the way it is regulated fell sharply, you were less likely to deposit money in banks or invest in stocks.
So falling trust had real economic consequences. Fortunately, the latest survey, published in July this year, shows that trust in banks and bankers has begun to recover, and quite sharply. This has been positive for the stock market.
There is also a little more confidence in the government’s response and in financial regulation than there was at the end of last year. The latter point, which no doubt reflects the Obama administration’s attempts to reform the dysfunctional system it inherited, is particularly important, as the sharpest declines in investment intentions were among those who had lost confidence in the government’s ability to regulate.
It would seem that rebuilding confidence in the Federal Reserve and the Securities and Exchange Commission is economically more important than rebuilding trust in Citibank or AIG. Continuing disputes in Congress about the precise details of reform could, therefore, have an economic cost if a perception that the system will not be overhauled gains ground. …
Researchers at the European University Institute in Florence and UCLA recently demonstrated that there is a relationship between trust and individuals’ income. …
The data show, intriguingly, that … if you diverge markedly from society’s average level of trust, you are likely to lose out, either because you are so distrustful of others that you miss out on opportunities for investment and mutually beneficial exchange, or because you are so trusting that you leave yourself open to being cheated and abused. …
Maybe we should trust each other more – but not too much.
Add comment October 17th, 2009
The Future of Investing
FT writers join major world figures in examining the implications of the credit crunch on our investment system.
Add comment October 10th, 2009
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Australian Theoretical Price of Gold
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| M3 growth in Australia for 2009/10 has got off to a sluggish start. The Theoretical price of gold remains largely steady as a result. The actual price of gold has fallen just over 2% this financial year as the Aussie dollar rallies again.
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Add comment October 3rd, 2009
Unemployment will almost certainly in double-digits next year — and may remain there for some time. And for every person who shows up as unemployed in the Bureau of Labor Statistics’ household survey, you can bet there’s another either too discouraged to look for work or working part time who’d rather have a full-time job or else taking home less pay than before (I’m in the last category, now that the University of California has instituted pay cuts). And there’s yet another person who’s more fearful that he or she will be next to lose a job.
In other words, ten percent unemployment really means twenty percent underemployment or anxious employment. All of which translates directly into late payments on mortgages, credit cards, auto and student loans, and loss of health insurance. It also means sleeplessness for tens of millions of Americans. And, of course, fewer purchases (more on this in a moment).
Unemployment of this magnitude and duration also translates into ugly politics, because fear and anxiety are fertile grounds for demagogues weilding the politics of resentment against immigrants, blacks, the poor, government leaders, business leaders, Jews, and other easy targets. It’s already started. Next year is a mid-term election. Be prepared for worse.
So why is unemployment and underemployment so high, and why is it likely to remain high for some time? Because, as noted, people who are worried about their jobs or have no jobs, and who are also trying to get out from under a pile of debt, are not going do a lot of shopping. And businesses that don’t have customers aren’t going do a lot of new investing. And foreign nations also suffering high unemployment aren’t going to buy a lot of our goods and services.
And without customers, companies won’t hire. They’ll cut payrolls instead.
Which brings us to the obvious question: Who’s going to buy the stuff we make or the services we provide, and therefore bring jobs back? There’s only one buyer left: The government.
Let me say this as clearly and forcefully as I can: The federal government should be spending even more than it already is on roads and bridges and schools and parks and everything else we need. It should make up for cutbacks at the state level, and then some. This is the only way to put Americans back to work. We did it during the Depression. It was called the WPA.
Yes, I know. Our government is already deep in debt. But let me tell you something: When one out of six Americans is unemployed or underemployed, this is no time to worry about the debt.
When I was a small boy my father told me that I and my kids and my grand-kids would be paying down the debt created by Franklin D. Roosevelt during the Depression and World War II. I didn’t even know what a debt was, but it kept me up at night.
My father was right about a lot of things, but he was wrong about this. America paid down FDR’s debt in the 1950s, when Americans went back to work, when the economy was growing again, and when our incomes grew, too. We paid taxes, and in a few years that FDR debt had shrunk to almost nothing.
You see? The most important thing right now is getting the jobs back, and getting the economy growing again.
People who now obsess about government debt have it backwards. The problem isn’t the debt. The problem is just the opposite. It’s that at a time like this, when consumers and businesses and exports can’t do it, government has to spend more to get Americans back to work and recharge the economy. Then – after people are working and the economy is growing – we can pay down that debt.
But if government doesn’t spend more right now and get Americans back to work, we could be out of work for years. And the debt will be with us even longer. And politics could get much uglier.
The Truth About Jobs That No One Wants To Tell You by Robert Reich
Add comment October 3rd, 2009
Pittsburgh protesters demand G20 do more for jobs
Forbes
“We’re not going to accept a jobless recovery,” said Larry Adams, a postal worker who came from Jersey City, New Jersey, for the protest. …
1 comment September 21st, 2009
By the time of Trajan in 117 AD, the denarius was only about 85 percent silver, down from Augustus’s 95 percent. By the age of Marcus Aurelius, in 180, it was down to about 75 percent silver. In Septimius’s time it had dropped to 60 percent, and Caracalla evened it off at 50/50. read more…
Add comment September 21st, 2009
The expansion of international “supply chains” from Asian factories to American consumers has certainly created global trade imbalances and international currency flows that are not necessarily sustainable over the long run. A readjustment of the world economy, not a slackening demand for inexpensive consumer products, strikes me as the greatest threat to the Wal-Mart business model. And, for its part, the chain is already adapting to new circumstances. In recent years, Wal-Mart has expanded well beyond the borders of North America into Europe, Mexico and Asia. It imports factory goods from China and also operates its own retail stores there. But the stores look very different from their American counterparts. In Kunming, near the border with Myanmar, Wal-Mart rents space inside its store to independent vendors, who pay $1.20 per day to hawk Yunnan coffee, tobacco bongs filled with local rice wine and condiments made from eggplant, soybeans and ginger. The atmosphere is “festival-like, even chaotic,” as vendors shout out their wares, sometimes through loudspeakers or while pounding on drums, and customers crowd a stall to fish pears out of a solution of sugar, salt and licorice root–”a Wal-Mart store sans Wal-Martism,” according to sociologist Eileen Otis. Another Chinese employee explains his loyalty to the company by suggesting that Sam Walton was, in fact, a student of Chairman Mao who “adopted the revolutionary strategy of ‘the countryside encircling the city.’&nthinsp;” And so the revolution continues.
How Wal-Mart’s Ruthlessness Led to Its Undoing – Jefferson Decker, Nation
1 comment September 18th, 2009
Stiglitz Says U.S. Economic Recovery May Not Be ‘Sustainable’
By Michael McKee
Sept. 4 (Bloomberg) — The U.S. economy faces a “significant chance” of contracting again after emerging from its worst recession since the 1930s, Nobel Prize-winning economist Joseph Stiglitz said.
“It’s not clear that the U.S. is recovering in a sustainable way,” Stiglitz, a Columbia University professor, told reporters yesterday in New York.
Economists and policy makers are expressing concern about the strength of a projected economic recovery, with Treasury Secretary Timothy Geithner saying two days ago that it’s too soon to remove government measures aimed at boosting growth.
Stiglitz said he sees two scenarios for the world’s largest economy in coming months. One is a period of “malaise,” in which consumption lags and private investment is slow to accelerate. The other is a rebound fueled by government stimulus that’s followed by an abrupt downturn — an occurrence that economists call a “W-shaped’ recovery.
“There’s a significant chance of a W, but I don’t think it’s inevitable,” he said. The economy “could just bounce along the bottom.”
Stiglitz said it’s difficult to predict the economy’s trajectory because “we really are in a different world.” He said the crisis of the past year was made worse by lax regulation that allowed some financial firms to grow so large that the system couldn’t handle a failure of any of them.
Big Banks
“These institutions are not only too big to fail, they are too big to be managed,” he said.
Finance ministers and central bankers from the Group of 20 nations meet in London Sept. 4-5 to lay the groundwork for a summit in Pittsburgh later this month, where leaders will consider measures to overhaul supervision of the financial system…
With so much excess capacity, the American economy faces a short-term threat of disinflation and possibly deflation, Stiglitz said. Wages may even decline, given recent high productivity and the likelihood of an extended period of high unemployment, he said.
Longer term, he said the Fed’s aggressive monetary policy will mean inflation becomes the greater threat. “With the magnitude of the deficits and the balance sheet of the Fed having been blown up, it’s understandable why there are anxieties about inflation,” he said.
While the Fed says it has the tools to deal with it, there are still concerns, Stiglitz said. Because monetary policy takes six to 18 months to have its full effect, the central bank will have to begin withdrawing monetary stimulus on the basis of forecasts.
The Fed’s record on its economic forecasts isn’t enough to reassure investors and, as a result, the U.S. currency may suffer, he said.
Dollar ‘Weakness’
“Whether or not they’re able to do it, the uncertainty today about whether they can do it can contribute to the weakness of the dollar,” Stiglitz said. “That’s one of the reasons there is increasing interest around the world in discussing alternatives to the dollar system.”
Stiglitz, who is a member of a United Nations commission that will study the global financial system and currency regimes, said “the logic is compelling” for a new global currency.
The current system creates instability, weakens global confidence, and is fundamentally unfair to developing countries that are in essence lending the U.S. trillions of dollars and bearing the risk, he said.
“In most quarters, there is a feeling we should move away from the dollar system. The question is do we do it in an orderly way, or a chaotic way,” Stiglitz said. “The size of the deficit and the size of the balance sheet of the Fed have just increased the anxiety and the desire that something be done.”
While some think it would hurt the U.S. to no longer be able to borrow cheaply in dollars, “that era is over,” he said. “We’re moving to a more multi-polar world.”
Between the fall of the Berlin Wall and the collapse of Lehman Brothers was “the short period of American triumphalism, where we dominated the global scene. That period is over,” Stiglitz said.
September 4th, 2009
If we’re lucky, the recession is winding down, and life will start to feel a bit more comfortable before long. But that doesn’t mean things will go back to the way they used to be.
The global recession that began in America’s housing market has shaken the world’s economic order and possibly knocked the United States down a notch or two. The spendthrift American consumer is out of money. American wages are flat. Despite some hopeful signs, the U.S. economy could muddle along for years.
[See why a housing rebound could take 20 years.]
Meanwhile, actions in China—rather than the United States—may have been the initial trigger for a global economic recovery. Many other nations will grow faster than the United States over the next few years and command an increasing share of the world’s resources. “The message to Americans,” says Mauro Guillen, an economist at the University of Pennsylvania’s Wharton School, “is you need to redouble your efforts to be more competitive.”
American innovation has solved daunting problems before and could again. But it would be a mistake to assume that American prosperity will continue on some preordained upward course. Nations rise and fall, often realizing what happened only in retrospect. Here are four problems that are undermining our future prosperity:
We don‘t like to work. Sure, now that jobs are scarce, everybody’s willing to put in a few extra hours to stay ahead of the ax. But look around: We still expect easy money, hope to retire early, and embrace the oversimplistic message of bestsellers like The One Minute Millionaire and The 4-Hour Workweek. Unfortunately, the rest of the world isn’t sending as much money our way as it used to, which makes it harder to do less with more.
White-collar jobs are now migrating overseas just like blue-collar ones. Kids in Asia spend the summer studying math and science while American mall rats are texting each other about Britney and Miley. “We need a different mind-set,” says Guillen. “People need to invest more in their own future. Instead of buying stuff at the mall, spend the money on evening classes. Learn a language or skills you don’t have.”
I recently interviewed entrepreneur Gary Vaynerchuk, who transformed his father’s neighborhood liquor store into a $60 million business anchored by the Web site winelibrarytv.com. An overnight success? Hardly. Vaynerchuk has big plans, and he works at least 16 hours a day to achieve them. “If you want to work eight hours a day,” he says, “you’re going to get eight-hour-a-day results. There’s nothing wrong with that, but I don’t want to hear you bitch about money if you’re only willing to work eight hours a day.”
Vaynerchuk is 33 and has something in common with John Bogle, the founder of the Vanguard mutual fund firm, who’s 80. I talked to Bogle recently about how Americans need to change their approach to work and money. He told me this: “We need more caution, more savings, and we may have to work harder. Maybe we need more people who like to work and don’t count down every day till retirement.”
[Read Bogle's thoughts on how to invest smarter after the recession.]
Nobody wants to sacrifice. Why should we? The government is standing by with stimulus money, banker bailouts, homeowner aid, cash for clunkers, expanded healthcare, and maybe more stimulus money. And most Americans will never have to pay an extra dime for any of this. Somehow, $9 trillion worth of government debt will just become somebody else’s problem.
When he was campaigning, candidate Obama dabbled with the “personal responsibility” theme, and in his acceptance speech in November he called for a “new spirit of sacrifice.” But now that he’s in office, there’s less interest in such quaint ideas. During his prime-time news conference about healthcare reform in July, a reporter asked Obama if ordinary Americans would have to give up anything in exchange for better, more widely available care. Obama’s answer: “They’re going to have to give up paying for things that don’t make them healthier.” Hooray! Something for nothing! He may as well have said, “Here’s a magic pill that will make all your problems go away.”
Obama’s plan is to get a tiny portion of the American public—the wealthy—to pay higher taxes for the benefit of the majority. Hey, while we’re at it, let’s see if we can convince 1 percent of the population to bear the entire responsibility for fighting two open-ended wars that are supposedly in the interest of every American. It would just be too uncomfortable to tell the middle class that if they want something, they need to earn it themselves.
[See how the bailouts could have gone better.]
We‘re uninformed. The healthcare smackdown—sorry, “debate”—is Exhibits A, B, and C. The soaring cost of healthcare is a problem that affects most Americans. It’s shrinking paychecks, squeezing small businesses, bankrupting families and swelling the national debt. Yet outraged Americans seem most concerned about fictions like death panels and government-enforced euthanasia, while clinging to the myth that our current system of selective availability and perverse incentives somehow represents capitalist ideals. But let’s take a break from that burdensome issue to examine the likelihood that President Obama was born in a foreign country and hoodwinked America into believing he was eligible to run for president.
People who lack the sense to question Big Lies always end up in deep trouble. Being well informed takes work, even with the Internet. In a democracy, that’s simply a civic burden. If we’re too foolish or lazy to educate ourselves on healthcare, global warming, financial reform, and other complicated issues, then we’re signing ourselves over to special interests who see nothing wrong with plundering our national—and personal—wealth.
[See why postal-style healthcare might not be so bad.]
iCulture. We may be chastened by the recession, but Americans still believe they deserve the best of everything—the best job, the best healthcare, the best education for our kids. And we want it at a discount—or better yet, free—which brings us back to the usual disconnect between what we want and what we’re willing to pay for.
Rationing is a dirty word, so we can’t have a system that officially rations something as vital as healthcare or education. Instead, we have unacknowledged, de facto rationing that directs the most resources to those with the best connections, the most money, or the savvy to game the system. What keeps the rest of us content is the illusion that we, too, will be able to game the system someday—as long as the government doesn’t interfere.
Solutions that serve some public good—like Social Security and bank deposit insurance in the 1930s and Medicare in the 1960s—usually require everybody to give something to get something. If it works, the overall benefits outweigh the costs. Good programs leave individuals the option to pay more if they want more. Bad programs promise more than they can deliver. But often we don’t know that until it’s too late.
Four Problems That Could Sink America – Rick Newman, Flow Chart
Add comment September 3rd, 2009
As U.S. deficits increased, global investors edged away from the dollar into the German mark, the Japanese yen, the Swiss franc, the Euro, and more recently baskets of Asian currencies.
Which brings us to today. Only goodwill (defined both as an accounting term and as political deference to military might) now supports the U.S. dollar as a reserve currency, which is what allows the United States to issue dollar-denominated bonds in world money markets.
It is this borrowing capacity that allows the Obama administration to bailout the banking industry, offer to pay for universal health care, fight colonial wars in the Middle East, stimulate the economy, send billions to Egypt and Israel, buy out General Motors, and subsidize every windmill start-up company in Nancy Pelosi’s home district. (Madoff’s problem was that he failed to set himself up as a country. He otherwise understood deficit spending.) But the shell game requires full faith in the dollar.
For those riding out financial storms by “sitting on cash,” here is what’s under your seat: in recent months U.S. federal debt has grown to $11.3 trillion, almost equivalent to gross domestic production. About one quarter of this indebtedness, or $2.8 trillion, is held abroad, and China and Japan hold just under half of those assets (liabilities to Uncle Sam).
Elsewhere on the American balance sheet is another $11.4 trillion in household debt, an annual trade deficit of about $725 billion, and a federal budget deficit that is estimated in 2009 to be approaching $1.8 trillion. That’s if the economy grows at 3 percent.
Off-balance sheet risks, what accountants call contingent liabilities, include about $10 trillion in new bailout guarantees (Fannie Mae, Bear Stearns, Countrywide, and whatever the administration launches as its New Deal of the Day). None of the above includes the unfunded liabilities of Social Security ($41 trillion), which, by comparison, make the shares of Lehman Brothers and AIG look like Scottish bonds held for widows and orphans.
The geese laying the golden eggs of U.S. financial stability are the printing presses of the U.S. Treasury, and, for now, those collecting them in their Easter baskets include a number of countries and regions perhaps tiring of American arrogance, if not of the drop in the dollar’s value. Who would blame such popular targets of moral abuse as China, Russia, Switzerland, Arabia, or Latin America for dumping their dollar-denominated assets?
All that lies between the U.S. dollar and a financial Armageddon is the Faustian house of credit cards under which Asian economies invest their trade surpluses in U.S. Treasury instruments — to keep the dollar strong, their own currencies weak, and purchases brisk between the likes of Wal-Mart and the Asian Greater Co-Prosperity Sphere.
Sooner than we think, China and Japan, like all nervous creditors, may send the United States a letter, suggesting that, henceforward, if Washington needs to borrow money, the bonds be issued in renmimbi, yen, or a basket of Asian currencies (a Pacific Euro).
Wall Street bankers did the same to the farm interests in the late nineteenth century, when they insisted that debt be based on a gold standard, as opposed to “free silver.” President Obama may be as eloquent as William Jennings Bryan. But at that point he will need to use all his oratory for the business of selling junk bonds.
The Dollar: Running On Reserve – Matthew Stevenson, newgeography
Add comment August 2nd, 2009
Fear itself: “Swine flu is not the only thing we are neurotic wrecks about. Over at the Home Office, ministers warn about the likelihood of an al Qaeda terrorist attack,” says a Daily Mail op-ed on “today’s culture of fear.” As to which, Prison Planet maintains its drum beat of reporting on pandemic-flu-related mass graves being dug and martial law plans being laid here and abroad — while The Pakistan Daily assures readers it’s not the H1N1 virus we should fear but the pending vaccine. Two thirds of New Zealand travelers now view the world as more dangerous than when they first went abroad — with terrorism, crime and disease topping their worries, NZCity has an insurance company survey showing.
Add comment July 30th, 2009
Homeowners are turning to the “strategic default” — walking away from a mortgage even when there are funds available to keep paying. “Increasingly, the determination of when to default is not guided by the moral question: Is this the right thing to do? It is guided by the pragmatic concern: Am I too far underwater on my mortgage?” writes Kelsey VanOverloop. Read more »
1 comment July 25th, 2009
The reason that the savings gauge has leapt is not that Americans are saving more, but only that they are paying off their past, huge borrowings because of financial distress. Americans actually cut savings in the form of financial assets held by 0.5 per cent of their incomes in the first quarter, while cutting borrowing even more aggressively, by 5 per cent of income. This telling data leads to two important conclusions.
First, it suggests that immediate US recovery prospects may be even more frail than supposed, and than Mr Bernanke is liable to admit. With Americans now battling to pay down debt against a backdrop of still-plunging house prices and soaring unemployment, while shoring up spending power with cuts in their savings, the resurgence of consumer demand on which recovery hopes are pinned may well prove elusive. The position could grow worse still once the boost to US personal incomes from the Obama Administration’s fiscal giveaway also fades, as it soon will.
Second, and critically, it is clear that America has yet to begin to address the real roots of this crisis and embark on the long road to a more sustainable economic future. Until it does so, the future will remain a hostage to fortune.
The U.S. Is Not Yet Free of Economic Peril – Gary Duncan, Times of London
1 comment July 21st, 2009
Error One was to permit a bubble in the 1980s. Error Two was to wait a decade before opting for monetary “shock and awe” through quantitative easing.
The US Federal Reserve has moved faster but already seems to think the job is done. “Quantitative tightening” has begun. Its balance sheet has contracted by almost $200bn (£122bn) from the peak. The M2 money supply has stagnated since January. The Fed is talking of “exit strategies”.
Is this a replay of mid-2008 when the Fed lost its nerve, bristling over criticism that it had cut rates too low (then 2pc)? Remember what happened. Fed hawks in Dallas, St Louis, and Atlanta talked of rate rises. That had consequences. Markets tightened in anticipation, and arguably triggered the collapse of Lehman Brothers, AIG, Fannie and Freddie that Autumn.
The Fed’s doctrine – New Keynesian Synthesis – has let it down time and again in this long saga, and there is scant evidence that Fed officials recognise the fact. As for the European Central Bank, it has let private loan growth contract this summer.
The imperative for the debt-bloated West is to cut spending systematically for year after year, off-setting the deflationary effect with monetary stimulus. This is the only mix that can save us.
My awful fear is that we will do exactly the opposite, incubating yet another crisis this autumn, to which we will respond with yet further spending. This is the road to ruin.
Fiscal Ruin of Western World Beckons – A Evans-Pritchard, Daily Telegraph
Add comment July 21st, 2009
July 15 (Bloomberg) — Congress can’t make up its mind. First, legislators pushed to let banks take a rosy view of the value of some hard-hit holdings. Now, two key committee chairmen claim banks aren’t being realistic enough about the values of some loans.
The allegation by House Financial Services Chairman Barney Frank and Senate Banking Chairman Christopher Dodd that banks are holding some loans at “potentially inflated values” should trouble investors, since it came just days before institutions like JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc. are due to report second-quarter results. If some loan values are “inflated,” that again calls into question the quality of banks’ results.
Why, after arguing for banks to have more leeway, is Congress now pushing back? Because many government responses to the financial crisis are more about manipulating prices — and behavior — than truly getting markets back on their feet.
Dressing up bank balance sheets was a first-quarter political priority. Now there is a push to get banks to modify more troubled mortgages. That effort is being stymied by a rosy view taken by many banks of the value of home-equity loans and second-lien mortgages.
Many banks have marked down these loans only by 3 percent to 4 percent, said Paul Miller, bank analyst at Friedman Billings Ramsey & Co. These loans in many cases would likely fetch about 40 cents on the dollar if sold in today’s market.
The losses are “a big part of the toxic asset issues facing banks,” Miller added.
Balk at Losses
A first mortgage on a house often can’t be restructured without the agreement of the holder of the second loan, which would entail writing it down in value. Banks have balked at doing that, due to the losses that would result. And why shouldn’t they? Congress, the Obama administration and regulators all told them earlier this year to hope for the best when it came to valuing their assets.
Let’s review. Congress this spring browbeat accounting rulemakers to make it easier for banks to ignore dour market prices for some holdings battered by the credit crisis. That was designed to help banks’ finances look better.
Without subsequent rule changes by the Financial Accounting Standards Board, earnings at 45 banks and financial companies would have been 42 percent lower than reported, according to a report last month by Jack Ciesielski, editor of The Analyst’s Accounting Observer.
The rule changes allowed companies to sidestep some impact of mark-to-market accounting on securities, many of them backed by mortgages, that have fallen in value for an extended period.
Saved From Losses
The “maneuver saved eight of the firms — Prudential Financial Inc., SI Financial Group Inc., First Commonwealth Financial Corp., National Penn Bancshares Inc., Bank of New York Mellon Corp., Zenith National Insurance Corp., Sun Bancorp Inc. and American Equity Investment Life Holding Co. — from reporting first-quarter losses instead of net income,” Ciesielski wrote.
Another rule change allowed companies in some cases to ignore market values and use their own estimates for troubled assets. That helped Wells Fargo & Co. avoid what may otherwise have been a $4.5 billion hit to its capital.
This was all part of ongoing and often unsuccessful efforts to push prices in a particular direction.
Last fall, the Securities and Exchange Commission instituted a temporary ban on selling financial stocks short — or betting they would decline in value — to try and prop up the value of bank shares. Talk about reining in speculation in commodity markets, meanwhile, is designed to keep prices for oil and some foodstuffs from rising too high. And all arms of government have tried since the credit crunch began to keep home prices from falling.
Buyers Don’t Play
Efforts to direct prices usually fail because buyers aren’t willing to play along. Financial stocks continued to fall despite the short ban.
And the congressional flip-flop on how banks should value assets shows that such efforts can backfire.
The logjam in the drive to modify troubled mortgages is vexing the Obama administration. It is in some ways a problem of the government’s own making. To try and undo it, the House’s Frank and the Senate’s Dodd wrote late last week to banking regulators complaining about valuations of home-equity loans.
The chairmen said, “We are concerned that the loss allowances associated with these subordinated liens may be insufficient to realistically and accurately reflect their value.”
Fudging Confirmed
Throughout the crisis, investors have worried that banks are fudging their numbers. Now congressional leaders are confirming those fears.
Underlining the political nature of their request, Dodd and Frank didn’t call for an investigation of the supposedly “inflated” values.
That’s no reason for the SEC to stand pat. The agency needs to act, now that it has an allegation from top legislators that potential financial-reporting abuses are taking place at banks.
Failure to follow up will send a message that it is all right for banks to cook their books, so long as the resulting values are seasoned to suit the current political taste.
(David Reilly is a Bloomberg News columnist. The opinions expressed are his own.)
Barney Frank, Chris Dodd Do Banking Back Flip – David Reilly, Bloomberg
Add comment July 15th, 2009
Returning from China last month, U.S. Congressman Mark Kirk had a bearish take on a high-level visit by American officials.
Treasury Secretary Timothy Geithner claimed the U.S.’s biggest creditor voiced great confidence in its debt. Kirk, an Illinois Republican, came back with the opposite impression.
“China is beginning to cancel Congress’s credit card,” he told Fox News on June 10. It “doesn’t want to lend much more money to the United States and especially is worried about the Fed’s policy of printing money to buy new debt.”
A month later, there’s no doubt about whose assessment was more accurate. Chinese leaders are clearly very concerned about the dollar. How they will react is a key question hanging over markets, and it’s time to take the discussion to the next level.
Everyone knows China wants to reduce its dollar holdings. Little is known about how that process may unfold and how much work and preparation needs to go into it. Lots, in fact.
Think of China and the U.S. in history’s most expensive divorce. The two economies total $17 trillion of output, and polls in China show little support for adding to almost $800 billion of U.S. Treasuries.
This argument can be broadened to the rest of Asia. The idea that China or Japan — with $686 billion of Treasuries — can just start selling massive blocks of dollars is ridiculous. It would devastate markets the world over and the fallout would boomerang back on Asia. If you think markets are shaky now, just wait until word of a central-bank fire sale gets around.
Copycat Selling
Sure, Singapore (with $40 billion of Treasuries), India ($39 billion) or South Korea ($35 billion) could try to dump dollars on the stealth. Good luck in this highly connected, around-the-clock world. News that a key economy seeks a first- mover advantage over peers would inspire copycat selling. Expect investors and traders to respond with massive sell orders.
Warren Buffett can discreetly trim Berkshire Hathaway Inc.’s interest in a company or a currency. How a central bank divests itself of tens or hundreds of billions of dollars on the sly is another matter.
Governments that may be concerned about getting stuck with their dollars for good have a point. And by curtailing investments in dollars today, Asia is ensuring that the U.S. currency will be worth less a year from now. Bernard Madoff can tell you a thing or two about how this process works.
Dollar Accord
What may be necessary is a global framework or pact to end the dollar’s dominance. A “Plaza Accord” of sorts may be needed to dismantle the so-called Bretton Woods II system of tying currencies to the dollar that emerged after the global crises of 1997 and 1998. A Dollar Accord, anyone?
Just as stocks take a hit when additional shares are issued, Asia faces a debt-dilution dynamic for which it never bargained. The Federal Reserve’s zero-interest-rate policies don’t help. And Asia can’t do a lot on its own here.
This process will require considerable cooperation, be it through the International Monetary Fund, the Group of 20, the Asia-Pacific Economic Cooperation forum, the Association of Southeast Asian Nations or a yet-to-be-created entity. Goals must be set, mechanics discussed and timing negotiated. If ever there were a time for a currency summit, it’s now.
Politics will be a stumbling block. It’s hard to envision the U.S. signing on to scrap the dollar as the reserve currency. Neither the euro nor the yen is ready to replace it. And China’s designs on currency domination are a decade away — or longer.
IMF Solution
The amount of scrutiny the dollar’s successor would face makes you wonder who would want to print the reserve currency. That explains why the most credible argument making the rounds involves the IMF’s so-called Special Drawing Rights, or SDRs.
They are really an account of exchange, rather than legal tender, and are calculated according to a basket of currencies consisting of the dollar, euro, yen and pound. Chinese central bank Governor Zhou Xiaochuan wants the IMF to move toward creating a “super-sovereign reserve currency.”
Or, here’s another suggestion: Brady bonds for less- troubled economies. The idea behind bonds created in the 1980s as part of Latin America’s debt restructuring was to let investors swap their claims on nations in turmoil for tradable instruments. A similar process may work with the dollar.
Rumors of the dollar’s demise are no longer exaggerated. What is being exaggerated, though, is how easy it will be for Asia to get out of the quandary it’s in. Cutting off the U.S. government’s credit card, for example, means American consumers can’t buy your goods. And any sudden divorce between the world’s two main economic powers won’t be pretty. Far from it.
It’s time to figure out what the next step is, and policy makers need to get serious. Complaining about our dollar-based system won’t get us there. Some brainstorming about where to go from here would be far more constructive.
(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)
Our $17 Trillion Chinese Split Won’t Be Pretty – William Pesek, Bloomberg
Add comment July 14th, 2009
What’s the best way to express just how bad the job market is? You could look at the soaring unemployment rate, or perhaps the ever-shortening work week. How about this: Total nonfarm payrolls, notes economist James Hamilton, are now back to where they were in mid 2000, and in a few months they’ll certainly be back to pre-2000 levels. 21st century job creation: gone.
All Jobs Created in the 21st Century Are Now Gone – Clusterstock
Add comment July 10th, 2009
Nearly 13 years after making ‘irrational exuberance’ one of the most familiar phrases of all time, stock market investors are anything but exuberant. On 12/5/96, when Greenspan suggested that stock market investors may be out of touch with reality, the S&P 500 was at 744.38. As of the end of the second quarter, the S&P 500 has gained 53.4% on a total return basis. At face value, this seems like a respectable return on one’s investment. However, compared to alternatives the gain loses its luster quickly.
Consider the three month US T-Bill, which is one of the safest, most conservative, and lowest yielding investments out there. Back when Alan Greenspan was talking about ‘irrational exuberance,’ putting your money in three-month T-Bills was akin to stuffing it in the mattress. Currently, three month T-Bills are yielding 0.1575%, which means you will receive 15.75 cents of interest for every $100 you invest. Even with their low relative yields, however, T-Bills have had a total return of 56.4% since Greenspan’s memorable quote, outperforming stocks by 300 basis points. Equity market investors can only hope now that the years ahead look similar to what happened the last time stocks were underperforming T-Bills back in late 2002.
Who Needs Stocks When You Have a Mattress? – Bespoke Investment Group
Add comment July 7th, 2009
June is the month for mid-year revisions to economic forecasts by the major international financial organizations and other forecasters. The Organization for Economic Cooperation and Development (OECD) released its new forecasts Wednesday, predicting that the deep global recession is nearing a bottom. It’s projections of world real GDP growth of -2.2% for 2009 and +2.3% for 2010 represent the first upward revisions in OECD’s growth projections since June of 2007. In remarks last week, the First Deputy Managing Director of the IMF, John Lipsky, said he expects that his institution will be revising its projections “modestly upward, mainly with regard to 2010.” The sister organization of the IMF, the World Bank, took a contrary stance at the beginning of the week, setting back global equity markets with a downward revision of its projection for the global economy this year to -2.9%, coupled with strong negative comments on the effects of the global credit crisis on developing countries.
We are in broad agreement that a turning point in the global economy is likely in the coming months. This follows a period of particularly sharp contraction (“falling off a cliff”) in the six-month period to March of this year. A recovery appears to be already underway in many of the emerging-market economies. Among the advanced economies, the United States and Japan appear likely to begin to recover in the course of the second half, driven by what the OECD characterizes as “massive policy stimulus and progress in stabilizing financial institutions and markets.” Continued balance-sheet problems for consumers, aggravated by further increases in unemployment, will likely put a damper on the pace of recovery in the US. Continued heavy deflationary forces will continue to be a challenge to policy makers in Japan, following what was probably that country’s most severe recession in its post-war history.
While there are some “green shoots” also appearing in the euro area, the eventual recovery looks likely to lag that in the US and Japan. External demand for the region’s exports has collapsed; and tight financial conditions, rising unemployment, and financial-sector problems have constrained domestic demand. Positive growth probably will not appear until the fourth quarter of this year at the earliest.
There is broad agreement on the positive economic outlook for the Chinese economy, which appears to be on course for strong growth. The World Bank raised its 2009 forecast for China from 6.5% to 7.2%. The OECD expects 7.7% growth for China this year and 9.3% in 2010. We would not be surprised to see Chinese economic growth top 8% this year and be close to 10% in 2010. The government’s fiscal stimulus of $590 billion, along with sizable monetary stimulus, has clearly been successful in helping the economy ride out the global recession. This is quite an achievement in a year in which world trade growth is on track to register a 16% decline. In May there were notable advances in urban fixed investment (largely government-sponsored), real estate investment, and retail sales. Industrial production accelerated to an 8.9% rate. Declining exports have been a depressing factor in the first half. This trend should reverse with the expected recovery in the global economy.
Global equity markets, as is often the case, anticipated the end of the global financial crisis, the coming recovery and advanced strongly in recent months after bottoming in early March. International investors’ appetite for risk evidently returned to more normal levels as fears of “worst-case scenarios” lessened substantially. The very rapid pace of the advance in equity markets over the March through May period has been followed by a modest 6% pullback in global equities since early June. Markets clearly had gotten somewhat ahead of themselves. While risk appetite seems to have moderated in this period, there are no indications that it has turned negative. Investor flows into equity markets, particularly emerging markets, are continuing. Cumberland’s equity portfolios remain fully invested.
China’s strong performance on the economic front is reflected in its equity markets. The MSCI Index for China is up 28% year-to-date through June 23rd. An important reflection of the continuing strength of China’s market is the fact that this index drew back only -1.8% thus far in June while the MSCI Index for Emerging Markets dropped by -6.4%.
We utilize three ETFs to provide exposure to the Chinese market. The first is the iShares FTSE/XINHUA China 25, FXI. This ETF is by far the most popular China ETF, and therefore is the most liquid, an important consideration. It invests in just 25 ultra-large-caps, mostly government-sponsored Chinese firms. It is heavily concentrated in the financial sector (45.5%) and has 0% in the technology sector. The second is the SPDR S&P China, GXC. It has reached an adequate level of liquidity, with net assets of $315 million (although much less than FXI’s $9.2 billion). It provides considerably more diversified exposure to China than FXI, investing in some 130 firms, mixing large caps and small caps. It also has a high exposure to financials (32%) and includes some tech exposure (8.1%). Thirdly, we also use the Claymore/AlphaShare China Small Cap, HAO. Here we have to limit our position because the net assets of this fund are only $70 million. We are attracted by the differences in its sector exposure as compared to the previous two ETFs, including 16% exposure to information technology and only 7.7% to financials.
China’s strong performance is an important positive factor for other economies in the region, including Hong Kong (iShares MSCI Hong Kong Index Fund, EWH), Taiwan (iShares MSCI Taiwan Index Fund, EWT), and Singapore (iShares MSCI Singapore Index Fund, EWS), all of which we are overweighting in our International, Global Multi-Asset Class, and Emerging Markets ETF portfolios. China’s huge appetite for commodities is also boosting the markets for commodity-exporting economies, including Australia (iShares MSCI Australia Index Fund, EWA), Canada (iShares MSCI Canada Index Fund, EWC, and the Claymore/SWM Canadian Energy Income Index, ENY), Brazil (iShares MSCI Brazil Index Fund, EWZ) and Chile (iShares MSCI Index Fund, ECH).
Thus far we have not seen any evidence of a reemergence of the previous speculative excesses in China. Valuations continue to look relatively attractive. The price-to-trailing 12-month earnings ratio is 14.5, still below its 10-year average of 15.9%, whereas the same measures for Korea, Hong Kong, India, and Brazil are now all higher than their 10-year averages. Nevertheless, as the last 12 months have amply demonstrated, the Chinese market, like other emerging markets, can be highly volatile and requires careful monitoring.
Bill Witherell, Chief Global Economist
Global Recovery In Sight, China at the Wheel – Bill Witherell, Cumberland
Add comment July 1st, 2009
In the past three weeks there have been several indications that the Federal Reserve is reconsidering the extent and perhaps necessity of its extraordinary liquidity provisions to the Treasury market. How far have the chairman and governors pulled back from their quantitative easing policy?
On June 3rd Chairman Bernanke commented in Congressional testimony that federal deficits cannot continue forever. In fact the deficits can continue, but the Fed’s $300 billion Treasury purchase plan will end unless additional funding is authorized by the Fed governors. At this past week’s FOMC meeting the board specifically did not authorize further Treasury purchases. The Fed is also letting one of its emergency liquidity programs expire and curtailing two others. None of these developments is an overt change in policy, but they are assurances that the chairman and the board view these liquidity measures as crisis expedients and not as permanent institutions of monetary and economic policy.
It is easy to forget that the Fed policy of direct support for credit markets was an emergency response to the crisis of confidence that overwhelmed the financial system last fall. Fed purchases of various securities supplied liquidity to non-functioning markets; they were not intended to be permanent. The Fed said as much at the time, though in the ensuing months market focus shifted from the programs themselves to the lack of a clear strategy for absorbing the excess money supply from the economy.
In March the market reaction to the financial crisis was at its peak. Treasury prices had been driven to historical highs by sustained panic buying of US Treasuries. Treasury interest rates and rates on 30-year fixed rate mortgages were at record lows. But even though mortgages rates were extraordinarily low the Fed judged that the reeling economy could not tolerate the surge in interest rates that would occur if Treasury prices began to fall. The governors may have suspected that the Treasury market would begin to drive prices lower and rates higher on its own as credit conditions normalized
In that context the Fed announced its $300 billion Treasury purchase in the FOMC statement of March 18th. The governors may also have been worried about the impact of the federal deficit on the bond market whose reaction was then an unknown quantity. But despite the Fed backstop the Treasury market fell relentlessly after March 18 with the 10-year rate rising more than 1.5%. More dangerously the dollar index fell 10% from March 18th to June 2nd. For the currency markets the Fed Treasury program has had one meaning, monetization of the Federal debt. Judging by the subsequent rise in Treasury rates the Fed governors may have known that the $300 million committed would be insufficient to hold the line on Treasury rates. But that relatively minor amount had a deadly effect on the dollar. The merest suspicion that monetization of US debt was possible sent the dollar into a three month swoon. The inflation that would result from a rapidly falling dollar and the effect of a collapsing dollar on the Treasury market itself could undo much of the economic and rate stabilization that the Fed was striving to achieve.
The Fed concern about the Treasury market was for the economic effect of higher interest rates on the US economy, particularly on the housing market thought by many to be at the heart of the economic collapse. But higher Treasury yields and mortgage rates have not, at least so far, choked whatever positive change in the economy has occurred since March. 30-year fixed mortgages have gained more than a point but the housing market has stabilized; new home and existing home sales in May were both in the center of the range they have exhibited since January.
The Personal Consumption Expenditures Index has revived since last December. It gained 0.9% in January, 0.4% in February, 0.3% in May, was flat in April and lost 0.3% in March. The half year prior to January had six negative months in a row. Non Farm Payrolls were substantially improved in May at -345,000, with the three month moving average (-500,000) having gained almost 200,000 since March (-691,000). Consumer sentiment numbers have moved up steadily since the beginning of the quarter. The economic situation that prompted the Fed quantitative easing has returned to more normal territory.
The Treasury market has also stabilized in the past two weeks. After reaching 4.00% the yield on the 10-year note had declined to 3.54% on the Friday close. The government Treasury auctions, a record $104 billion in the past week alone, have been subscribed at higher rates than normal. The bond markets are not demanding substantially higher rates on American debt, despite the vast continuing supply of US issuance.
The key to the extension of the Fed Treasury program is the attitude of the credit markets. It is relatively simple. If bond purchasers do not demand higher yields for US debt, then whatever the long term effect of the ballooning US debt and inflation the government will not be forced to pay higher rates. If Treasury prices are not falling the Fed will not have to support the market with further Treasury purchases and the currency markets will not be stampeded away from the dollar by monetization.
Foreign central banks have been unusually critical of the US government’s fiscal and debt policy. The Chinese were so again this week. But what matters are not the banker’s words or their musings about a world reserve currency. What matters is action. As long as the Chinese, Russians, Japanese and private investors continue to buy US Treasuries, the Fed will not have to choose between supporting the US economy and supporting the dollar.
It is a delicate balance but so far the Fed has, with the cooperation of the Treasury markets, kept the pointer right in the middle of the scale. The Fed has managed to mitigate the scare it threw into the currency markets in March with its recent statements and actions.
There are still a huge amount of Treasuries to be sold over the next three months and the economic situation is still dangerous. But the Fed view as reflected in the FOMC statement, no more quantitative easing and a slight though significant withdrawal from the credit markets may be the right and artful balance between keeping down US interest rates and avoiding a dollar panic in the currency markets
Last Call for Monetization? – Joseph Trevisani, FX Solutions
Add comment July 1st, 2009
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