April 20, 2024

Bonds Sell Off, Credit Ratings In Doubt & Mortgages ReDefault

June 6, 2009 by Leave a Comment

Every day there are many great posts on the web.  Here are some  from the past week  that merit a full read.  The listing order  is random.

Ok, I’m Done With Being Nice

Karl Denninger does not play nice in his counter point to a NY Times article about “mortgage relief” tax dollars going to those who were fiscally irresponsible and should have never owned a house in the first place.  The really galling part of the Times story was their tacit approval of the sense of entitlement exhibited by those who deserve nothing.

Bond Binge Hangover

With a lot of hysteria over the increase in long interest rates recently, this is a good measured analysis that looks at the history of rates and the implications for investors holding bonds.

Obama’s Deficits Put US Credit Rating At Risk

The huge US deficits and debt won’t matter until it does matter.  No one doubts that the US will pay on obligations, but what will they pay with?  Markets perceptions of risk can change quickly, upsetting any perceived economic recovery.

The State Vs. Federal Schism

The growing budget deficits on a State level have been getting some serious notice lately but have not reached the crisis stage.  How exactly does the Fed monetize this problem?  If the States have to cut budgets enough to match spending with drastically declining tax receipts, this will more than wipe out any stimulus spending at the Federal level.

A Tale of Two Depressions

Some great charts with not so great implications for the world economies.  The policy response this time is different but will it make any difference?

Fed In Foreclosure, Mortgage Rates Battered

Some discussion on the Fed’s losing battle to manipulate rates lower by buying treasuries and mortgage debt.  Investors are not amused and are voting  with an avalanche of sell orders in the long government debt markets.  So what does the Fed do next?

Filed Under: Federal Reserve, Interest Rates, loan modification

Geithner – “I am not a crook”

June 4, 2009 by 1 Comment

“Chinese assets are very safe”

This remarkable assertion regarding the safety of US debt securities held by China was made by Timothy Geithner, US Treasury Secretary, during his visit to China.   That Mr. Geithner felt compelled to make this statement probably reinforced the unease China has about the finances of the United States.  If the Chinese assets were actually “safe” and everyone knew it, there would have been no need to say that they were safe.

Mr. Geithner’s denial brings to mind another famous denial made by Richard  Nixon during the Watergate affair – “I am not a crook”.  We all know how that turned out.  If it wasn’t obvious that everyone knew Nixon was a crook, he would not have had to deny it.  If US assets are really safe, Geithner would not have to say that they are safe.

Almost a Vaudeville Act

Mr Geithner’s “Chinese assets are very safe” line was  greeted with loud laughter by the student audience he made his remark to.   The laughter speaks for itself regarding the credibility given to Mr. Geithner’s assurances.  Perhaps our Treasury Secretary should have countered the laughter by saying, “I am totally serious about this”.

At the same time, the President and Chairman of the Federal Reserve were very publicly proclaiming that the US deficits would be cut, future spending would be “disciplined” and that fiscal imbalances would be addressed.  These remarks probably confused the Chinese as they watch the United States implement programs that require trillions of dollars a year of new deficit spending.  You can say you will do something but what really counts is what you actually do.   Words are a cheap commodity while confidence is precious.

The recent remarks by Geithner, Obama and Bernanke promising fiscal restraint may have something to do with the following chart.

10 Year Treasury

10 Year Treasury

Courtesy: Yahoo finance

Despite the Fed’s massive purchases of mortgage and treasury securities,  price action in the long term treasury market clearly indicates more sellers than buyers, with rates nearly doubling since late last December.  Rates at 3.75% on the 10 year treasury are certainly not a disaster, but if all the powers of the Fed and Treasury to lower interest rates are failing, then maybe things aren’t so “safe” after all.

Filed Under: Bernanke, Confidence, Federal Reserve, Geithner, Government spending, Interest Rates Tagged With: , ,

Mr Greenspan, “There You Go Again”

May 13, 2009 by Leave a Comment

Greenspan Insists He Was And Is The Maestro

Alan Greenspan, probably more responsible for the financial bust

Greenspan: "I didn't do it".

Greenspan: "I didn't do it".

than anyone else on planet earth, attempts to influence the history books by again (unsuccessfully) defending his record.

WASHINGTON — Former Federal Reserve Chairman Alan Greenspan Tuesday brushed back critics who contend that easy monetary policy fueled the housing bubble and ensuing bust, saying, “I respectfully disagree; they’re wrong.”

“I think there is a recalibration of financial history that I find very puzzling,” Mr. Greenspan said.

In his speech, Mr. Greenspan said he is starting to see “seeds of bottoming” in the U.S. housing market, though that isn’t reflected yet in home prices.

Alan, give it a rest, your final legacy will be based on what actually happened rather than what you say happened.   The housing bubble that happened under your watch, which you couldn’t recognize, has devastated the economy.

The reckless lending at super low rates that fueled the housing bubble  was viewed by you at the time as normal price appreciation due to a healthy economy.  The sub prime lenders that you praised for providing financing to those who could not afford the mortgage payments are gone and their customers’ homes foreclosed on.  The 50 to 1 leverage you allowed to occur at the investment firms and banks made a few very wealthy but subsequently caused economic misery for millions as they collapsed.  Those who were thrifty and saved were rewarded with 1% rates on savings so that deadbeats  could borrow money that could not be paid back.  Your economic policies resulted in millions of people losing their jobs not only at Bear Stearns, Merrill Lynch, Citigroup, etc but at millions of businesses across the country.  The list goes on…

Your prediction of a housing recovery is chilling news based on your own admission of your inability to see the bubble and collapse in housing until it was well underway.

Greenspan’s Remarks Reaction to Geithner’s Criticism of Fed Policies

The only one trying to recalibrate financial history is you, Mr. Greenspan.  Perhaps you should read the surprising admission from one of your own that artificially low rates and poor Fed policy decisions are the root cause of the economic mess that you put us in.

Geithner’s Revelations

The Earth stood still, the seas parted and a member of the U.S. political class admitted last week that the Federal Reserve helped to cause the financial meltdown.

The revelation came from Timothy Geithner last Wednesday with PBS’s Charlie Rose, who asked the Treasury Secretary: “Looking back, what are the mistakes and what should you have done more of?

Mr. Geithner: “But I would say there were three types of broad errors of policy and policy both here and around the world. One was that monetary policy around the world was too loose too long. And that created this just huge boom in asset prices, money chasing risk. People trying to get a higher return. That was just overwhelmingly powerful.”

Mr. Geithner went on to cite a lack of supervision over bank risk-taking and the slow pace of government response to the problem — both of which are now conventional wisdom. But the real news here is Mr. Geithner’s concession that monetary policy was “too loose too long.” The Washington crowd has tried to place all of the blame for the panic on bankers, the better to absolve themselves. But as Mr. Geithner notes, Fed policy flooded the world with dollars that created a boom in asset prices and inspired the credit mania. Bankers made mistakes, but in part they were responding rationally to the subsidy for credit created by central bankers.

Mr. Geithner’s concession is important nonetheless because before he moved to Treasury he was vice chairman of the Fed’s Open Market Committee that sets monetary policy. His comments mark a break with the steadfast refusal of Fed Chairmen Alan Greenspan and Ben Bernanke to admit any responsibility. They prefer to blame bankers and what they call the “global savings glut,” as if the Fed had nothing to do with creating that glut.

Mr. Geithner’s remarks are a sign of intellectual progress, and they suggest that at least some in government are thinking about their own part in creating the mess. The role of Fed policy should also be at the heart of the hearings that Speaker Nancy Pelosi is planning on the causes of the financial meltdown. We won’t begin to understand the credit mania and panic until we acknowledge their monetary roots.

Apparently, the only one still puzzled by the  economic bust is the very same person who caused it.

Filed Under: Federal Reserve, Geithner, Greenspan Tagged With:

Chinese Likely To Halt Purchases Of US Treasury Debt

March 13, 2009 by 4 Comments

Nervous Times In China

The Chinese are learning the hard way about an old American banking story. The man who owes the bank $50,000 dollars on a secured loan may lay awake at night worrying about how he can repay the loan. If the same man owes the bank $5,000,000 of unsecured debt, it is probably the banker who is awake all night wondering if he is going to get paid.

Chinese Premier Wen sounds like he is having some sleepless nights worrying about whether or not the US will be able to repay the $700 billion that China invested in US treasury securities. In a remarkable statement, Premier Wen publicly stated that he is “worried” about the ability of the US to pay back its huge debts to China. As reported in Bloomberg, Wen is asking for assurances from the US that the debt is safe.

“We have lent a huge amount of money to the United States,” Wen said at a press briefing in Beijing today after the annual meeting of the legislature. “Of course we are concerned about the safety of our assets. To be honest, I am a little bit worried. I request the U.S. to maintain its good credit, to honor its promises and to guarantee the safety of China’s assets.”

U.S. Secretary of State Hillary Clinton urged China, while visiting officials in Beijing on Feb. 22, to continue buying U.S. debt, which she called a “safe investment.”

“China is worried that the U.S. may solve its problems with the fiscal deficit and banks by printing money, which will stoke inflation,” said Zhao Qingming, a Beijing-based analyst at China Construction Bank Corp., the country’s second-biggest lender. “If the U.S. can make sure this won’t happen, then China will continue to invest.”

Delegates of China’s legislative advisory body suggested that the biggest foreign holder of U.S. debt diversify away from Treasuries into more risky assets at the annual meeting that started on March 3.

Jesse Wang, executive vice president of China Investment Corp., said on March 4 that his $200 billion sovereign wealth fund may invest in “undervalued” commodity assets. Zhang Guobao, head of the National Energy Administration, said China should invest more in commodities instead of hoarding the U.S. dollar, the official Xinhua News Agency reported on March 7.
China should seek to “fend off risks” as it diversifies its $1.95 trillion in foreign-exchange reserves and will safeguard its own interests, Wen said. Chinese investors held $696 billion of U.S. Treasuries as of Dec. 31, an increase of 46 percent from the prior year.

Chinese Concerns Justified

China is justified in worrying about its large US treasury investment, despite the worthless assurances from our Secretary of State. Congress is blithely spending money by the trillions, as Chairman Bernanke continues to speak of buying mortgage backed securities and long term treasuries. One of the major constraints on Chairman Bernanke’s desire to print money (via the purchase of US government debt) has, no doubt, been the worry about a potential backlash from China, the biggest buyer of US debt.

The heretofore mutually beneficial arrangement of China purchasing US debt with trade surpluses generated by American purchases of Chinese goods is drawing to a close. China’s trade surplus has all but evaporated, eliminating the need or ability of China to purchase additional US debt. In addition, the Chinese have made it clear that their national interests are best served by diversifying into commodities and other real assets, the value of which is not contingent upon an overleveraged debtor nation.
End Game Clear

As long as China continues to purchase US debt, Bernanke is constrained from blatantly printing money. As China throttles way back on its purchase of US debt, America will have three choices – 1. Borrow and spend less 2. Raise taxes tremendously or 3. Print money. Based on what we have seen so far, it will be some of number 2 and a lot of number 3.

The odds are that China will ultimately get its money back, but the value of what they receive will be far less than what they gave.

Filed Under: Bernanke, China, Federal Reserve, Sovereign Default, Uncategorized Tagged With: , , ,

Greenspan Makes A Fool Of Himself – Again

March 12, 2009 by 2 Comments

It Wasn’t My Fault

Alan Greenspan insists on setting the record straight, proclaiming that his ultra easy monetary policies had nothing to do with causing the world financial crisis.  This was about as convincing as his past statements that the housing bubble could not have been recognized until after it burst.

Alan, I previously suggested that you simply fade away to enjoy your large unearned government pension.   Unfortunately, you continue to publicly deny all culpability for the financial Armageddon that you have created.   Your latest interview with the Wall Street Journal has resulted in near unanimous derision of your statements; you should have taken my advice.

Greenspan Forgets Where He Put His Asset Bubble

Even if one missed the headline (“The Fed Didn’t Cause the Housing Bubble”) and the byline (Alan Greenspan) on the op-ed in yesterday’s Wall Street Journal, there could be no confusion over authorship: That “Master of Garblements” and former Federal Reserve chairman was back to defend his legacy.

Greenspan lays out his case that the Fed’s easy money policies can’t possibly be to blame for “the U.S. housing bubble that is at the core of today’s financial mess.” It is long-term interest rates that determine “the prices of long-lived assets,” such as housing, he writes. And those rates, which stayed low as a result of a “global savings glut,” are out of the Fed’s control.

Greenspan’s op-ed is full of explanations, correlations and obfuscations. He defends himself against accusations by “my good friend,” Stanford economist John Taylor, who has argued that “monetary excesses” were the main cause of the boom and resulting bust.

No Mea Culpa

He also ignores the literature on asset bubbles.

“Greenspan is a student of history,” Kasriel says. “Surely he’s read (Charles) Kindleberger’s book on asset price bubbles.”

One element common to all bubbles, according to “Manias, Panics and Crashes,” is cheap credit. With so much cheap credit coming from abroad, Greenspan didn’t need to add to it.

And that’s the point. If he’s satisfied with his explanation of a savings glut — the idea that there was too much credit being supplied from the rest of the world — why not reduce the supply of Fed credit? That raises the price and reduces the quantity demanded.

Victim isn’t a role Greenspan plays particularly well, especially when it’s an attempt to exonerate himself from responsibility.

Alan Greenspan Still Hasn’t Got A Clue

On the same day that his successor signaled dramatic policy changes that would see the Federal Reserve “take away the punchbowl” before inflating yet another asset bubble, radically altering the way financial market regulators operate in the process, former Fed chairman Alan Greenspan was readying yet another in a long series of op-ed pieces aimed at defending his legacy.

He didn’t cause the housing bubble, or so he says.

After yesterday’s commentary by David Leonhardt at the New York Times about how the central bank had been played like a fiddle by big financial firms who took on “excessive risk” knowing that the government would be there to bail them out, you’d have thought that maybe there would be some reluctance to go forward with the editorial.

Apparently not.

Maybe what the smartest economists in the world thought was “sustainable growth” wasn’t sustainable at all and all that “risk taking” was just a way for bankers to enrich themselves.

Greenspan A Glutton For His Own Punishment

Why Greenspan continues to try and defend his deplorable record as Fed Chairman is unknown.  What is known is that the once powerful Sir Alan has seen his reputation steadily deteriorate to a level not much higher than laughing-stock. Here is what Greenspan had to say in his most recent commentary:

Perhaps it is time that Mr. Greenspan stops trying to quarantine discussion of the bubble and, at minimum, acknowledge that undermining the desired availability of subprime credits would have been an excellent idea (an idea Greenspan ignored). Astonishingly, and after yet another ‘don’t blame me for the bubble’ rant, Greenspan – almost – admits exactly this:

In other words, Greenspan knew the housing mania was supporting an unsustainable increase in consumption**, he knew that the subprime complex was ridden with fraud, and he knew that the Federal Funds rate was no longer dictating mortgage rates. But even with this knowledge Greenspan still did absolutely nothing because, in his words, it “would have been a huge effort”.  Surely the exhausted Fed Chairman Bernanke, who has adopted innumerable new policy efforts since taking over, can not be impressed as Greenspan inexplicably reminisces about his effortless tenure as Fed boss.

Alan, give yourself a break and stop giving these foolish interviews; you can’t change the facts and no one believes your ridiculous statements.  You were instrumental in causing the financial meltdown but you are certainly not a part of the solution.  It’s time to just fade away.

Filed Under: Federal Reserve, Greenspan Tagged With: , ,

Do Bernanke And Obama Talk To Each Other?

February 24, 2009 by 1 Comment

Bernanke Gives Upbeat Assessment On Economy

Chairman Bernanke predicted today that the recession would end in 2009.  Some of his upbeat, optimistic comments included:

“If actions taken by the administration, the Congress and the Federal Reserve are successful in restoring some measure of financial stability — and only if that is the case, in my view — there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery”.

“I would anticipate some stabilization in the housing market going forward.”

“I do believe that once the economy begins to recover, we will see improvement in the financial market.”

The Big Question

The really big question is, was the President listening to him?

The Bloomberg report that follows is really tough to reconcile with Bernanke’s comments earlier in the day.  Do these guys talk to each other?  There does not appear to be a consistent message or plan for dealing with the greatest economic chaos since the 1930’s.

Feb. 24 (Bloomberg) — President Barack Obama will tell the public tonight the “day of reckoning has arrived,” and that pulling the U.S. out of a recession will mean sacrificing “some worthy priorities” the nation can no longer afford.

“We have lived through an era where too often, short-term gains were prized over long-term prosperity; where we failed to look beyond the next payment, the next quarter, or the next election,” Obama will say in his first address to a joint session of Congress, according to excerpts released by the White House.

“The only way this century will be another American century is if we confront at last the price of our dependence on oil and the high cost of health care; the schools that aren’t preparing our children and the mountain of debt they stand to inherit,” he will say

Obama is seeking to convince lawmakers and voters that his plans to revive growth will succeed while cautioning that the recovery will take time. The president has spent his first month in office focused on three initiatives — a $787 billion stimulus bill, a bank-rescue plan and an effort to limit home foreclosures — while warning of economic “catastrophe” if the government doesn’t take aggressive action.

With all the warnings about the severity of the economic crisis, Obama now must look for ways to boost public optimism, analysts and economists say.

“It’s a real balancing act,” said Stuart Rothenberg, a Washington-based political analyst. “The president’s got to walk this fine line between reminding people of the difficult situation we’re in and emphasizing the inevitable victory.”

“It’s all about confidence,” said Bruce Foerster, a former Lehman Brothers Holdings Inc. managing director and now president of South Beach Capital Markets in Miami. “That’s the heart of what is going on. We have problems but they are being exacerbated because there’s no confidence in the capital markets.”

I applaud the President’s honesty on the challenges we face and I wish him the best of luck. The stock market, however, has lately been registering a resounding vote of no confidence in the actions taken by Washington.  The nation is searching for a thoughtful, workable plan to solve the economic problems we face.  A coherent and unified message from Washington would be good for starters.

Predicting an end to the recession in 2009 while concurrently describing the economic situation as “catastrophic” and a “day of reckoning” does not project a coherent message.   But it could have been worse – at least they didn’t let Tim Geithner say anything.

Filed Under: Bernanke, Confidence, Economy, Federal Reserve Tagged With: ,

Bernanke Predicts 2010 Recovery In Stocks, Housing & Economy

February 24, 2009 by Leave a Comment

Bernanke Predicts Recession To End In 2009

The stock market jumped over 200 points today, partly due to Federal Reserve Chairman Ben Bernanke’s optimistic comments to the Senate Banking Committee.  Some selected comments by the Chairman follow:

“If actions taken by the administration, the Congress and the Federal Reserve are successful in restoring some measure of financial stability — and only if that is the case, in my view — there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery”.

Mr. Bernanke also sounded optimistic on housing as well, although without a specific time projection for recovery.

“I would anticipate some stabilization in the housing market going forward.”

Mr. Bernanke seemed to dismiss the need for bank nationalization stating that:

“I don’t see any reason to destroy the franchise value or to create the huge legal uncertainties of trying to formally nationalize a bank when that just isn’t necessary”.

Better financial market performance was also seen by the Chairman:

“I do believe that once the economy begins to recover, we will see improvement in the financial market.”

Mr. Bernanke also stressed his commitment to provide ample amounts of credit for all purposes:

“Our objective is to improve the function of private credit markets so that people can borrow for all kinds of purposes.”

Mr. Bernanke did temper his optimistic statements by noting that his forecast

“is subject to considerable uncertainty, and I believe that, overall, the downside risks probably outweigh those on the upside.”

Conclusion?

If the downside risks outweigh those on the upside, how can Bernanke be so optimistic for a recovery in stocks, housing and the economy??  Based on the confusion and conflicting signals, let’s examine some previous comments by the Chairman for perspective on his batting average as an economic prophet.

Previous Forecasts By The Chairman

“At present, my baseline outlook involves a period of sluggish growth, followed by a somewhat stronger pace of growth starting later this year as the effects of monetary and fiscal stimulus begin to be felt.”
—February 14, 2008

The U.S. federal budget deficit has declined recently and is officially projected to improve further over the next few years. Unfortunately… the United States has already reached the leading edge of major demographic changes that will result in an older population and a more slowly growing workforce. A major effort to increase public and private saving is needed to prepare for the economic consequences of this demographic transition and to address external imbalances. As the global perspective makes clear, the reduction of the U.S. current account deficit also requires efforts on the part of the surplus countries to reduce the excess of their desired saving over desired investment.
—September 11, 2007

“Overall, the U.S. economy appears likely to expand at a moderate pace over the second half of 2007, with growth then strengthening a bit in 2008 to a rate close to the economy’s underlying trend.”
—July 18, 2007

“We will follow developments in the subprime market closely.  However, fundamental factors—including solid growth in incomes and relatively low mortgage rates—should ultimately support the demand for housing, and at this point, the troubles in the subprime sector seem unlikely to seriously spill over to the broader economy or the financial system.”
—June 5, 2007

“We at the Federal Reserve will do all that we can to prevent fraud and abusive lending and to ensure that lenders employ sound underwriting practices and make effective disclosures to consumers. At the same time, we must be careful not to inadvertently suppress responsible lending or eliminate refinancing opportunities for subprime borrowers.”
—May 17, 2007

“The information, expertise, and powers that the Fed derives from its supervisory authority enhance its ability to contribute to efforts to prevent financial crises; and, when financial stresses emerge and public action is warranted, the Fed is able to respond more quickly, more effectively, and in a more informed way than would otherwise be possible. “
—January 5, 2007

No need to assign a grade letter to the Chairman, but maybe we should hold off on celebrating the economic recovery.

Filed Under: Bernanke, Economy, Federal Reserve, Housing Tagged With: , ,

Notable Links

February 11, 2009 by Leave a Comment

Living Beyond Yours Means – California’s Economy Gets Worse

California’s Pain Is Only Beginning

BIG SUR, Calif. — As Sacramento squabbles over the state’s $42 billion deficit, Californians are getting a bitter taste of what’s to come after the steep budget cuts that are inevitable when legislators and Gov. Arnold Schwarzenegger finally hammer out a deal.

Some world-famous parks like Pfeiffer Big Sur State Park may not open this year. After-school programs in low-income areas are being scuttled, putting high-risk teens on the street just as police forces are being cut. Schools are closing classrooms, and some highway projects have ground to a halt. The state may not be able to monitor some sex offenders as required under law.

Other states face budget cuts too, but California’s budget mess stands out for its size. Its deficit is projected at $42 billion by mid-2010. Since Gov. Schwarzenegger declared a fiscal emergency 14 weeks ago, he and lawmakers have been deadlocked over how to close the gap. Democrats want tax increases and moderate spending cuts; Republicans seek deep cuts and no tax increases; the governor wants a combination.

The governor’s office warned Tuesday that if no budget deal is reached by Friday, the state would send layoff warnings to 20,000 workers. Gov. Schwarzenegger also said he intends to cut 10,000 jobs through layoffs and attrition to save $750 million over 17 months.

If it’s true that California sets the trend for the nation, we can all expect more economic pain.  California has discovered the limits of the theory that a government can borrow and spend its way to prosperity.  It will be interesting to see what outcome the state arrives at with its budget process.  Raising taxes would be self defeating and borrowing more would be total lunacy.  The last option result of cutting spending is already being deployed and will likely continue, putting a further drag on the state’s economy.  The era of reduced expectations is slowly dawning on California.

China Becomes Nervous Over US Debt Holdings

China Needs US Guarantee for Treasuries

Feb. 11 (Bloomberg) — China should seek guarantees that its $682 billion holdings of U.S. government debt won’t be eroded by “reckless policies,” said Yu Yongding, a former adviser to the central bank.

The U.S. “should make the Chinese feel confident that the value of the assets at least will not be eroded in a significant way,”  He declined to elaborate on the assurances needed by China, the biggest foreign holder of U.S. government debt.

Benchmark 10-year Treasury yields climbed above 3 percent this week on speculation the government will increase borrowing as President Barack Obama pushes his $838 billion stimulus package through Congress. Premier Wen Jiabao said last month his government’s strategy for investing would focus on safeguarding the value of China’s $1.95 trillion foreign reserves.

“In talks with Clinton, China will ask for a guarantee that the U.S. will support the dollar’s exchange rate and make sure China’s dollar-denominated assets are safe,” said He in Beijing. “That would be one of the prerequisites for more purchases.”

“The biggest concern for China to continue buying U.S. Treasuries is that if Obama’s stimulus doesn’t work out as expected, the Fed may have to print money to cover the deficit,” said Shen Jianguang, a Hong Kong-based economist at China International Capital Corp., partly owned by Morgan Stanley. “That will cause a dollar slump and the U.S. government debt will lose its allure for being a safe haven for international investors.”

The Chinese are correct to worry about the value of their US Treasury holdings.  It is becoming more obvious by the hour that the huge spending proposals coming out of Washington guarantee that the Fed will be printing money.  The Chinese may currently not be able or willing to liquidate their holdings in Treasuries.  The one certainty here is that the Chinese appetite for additional US debt securities will greatly diminish going forward.

Real Estate Long Way From Bottoming

The Reality Behind Real Estate

by Michael Pento, Delta Global Advisors, Inc. | February 10, 2009

Much has been written lately about the beginnings of a recovery in the real estate market. Just last week housing bugs (investment “bugs” are not exclusive to those who only love gold) were cheering the latest data point which they claimed as evidence the market is making a comeback.

So with all this good news out there, why am I still projecting a continuation of falling home prices? Inventories, especially the key reading of vacant homes for sale. The reason the number of vacant homes for sale is more salient than those that are occupied is that a home sitting vacant is much more likely to stay on the market until it is sold, regardless of price (as opposed to occupied homes, with owners who might simply pull the listing if they don’t like the price). Because the owners of so many unoccupied homes are banks, they are especially motivated to hit the bid on a property.

The reason there is an intractable level of homes for sale clearly stems from the faltering economy, which is causing massive layoffs and skyrocketing unemployment. The rate is currently 7.6%, a 17-year high. This compels homeowners (many of whom owe more on their home than it is worth) to walk away from their properties. After all, how much motivation do home owners need to abort if they are already upside down on the home and now find themselves without a job?

Home prices and mortgages rates may have to fall well below historical levels in order to clear away the massive buildup in inventories, and it’s a condition which may need to exist for a protracted period of time before home price stability can occur.

Healing takes time, but that is not part of our new administration’s plan to fix the real estate market. Instead, like his predecessor George W. Bush, the Obama team feels it is better to artificially prop up home prices at an unsustainable level rather than have them retreat to a price that can be supported by the free market. But then again, isn’t this just more evidence that the idea of free market capitalism is being trampled—by both parties.

The Government will waste huge amounts of resources trying to fight free market forces and fail in the end.  Attempts to establish artificial market prices has never worked and it will not work now.

PIMCO Demands That Fed Print Money

PIMCO Says World Faces Second Wave of Economic Crisis

Feb. 11 (Bloomberg) — Pacific Investment Management Co., which runs the world’s biggest bond fund, said the global economy faces a “second wave” of turmoil unless governments adopt larger spending plans.

“The economic setback is still in its early stages,” Koyo Ozeki, head of Asia-Pacific credit research at Pimco’s Tokyo office, wrote in a report on the firm’s Web site. “Any further decline in housing prices could accelerate the downturn, intensifying the pernicious feedback loop and possibly leading to a second wave in the financial crisis in the next six to 12 months.”

Bill Gross, Pimco’s co-chief investment officer, said on Feb. 5 the Federal Reserve will have to buy Treasuries to curb yields as debt sales increase.

“To overcome that second wave, governments worldwide would have to spend vast quantities,” Ozeki wrote. “The resulting erosion in their finances would increase the risk of dangerous side effects.”

It sounds like the largest bond fund in the world is getting so nervous about their bond holdings that Bill Gross is calling on the Fed to print money via the purchase of Treasuries.   We are reaching a very dangerous point in the nation’s finances when there seems to a consensus that printing money is the only solution to our economic woes.  The free market solution of restructuring and bankruptcies is being avoided at all costs.  Expect a long drawn out economic nightmare.

What is the end result of printing money?   See The Zimbabwean Dollar – The Point of No Return – this may be our future.

Japan’s GDP Down 50% In One Year?

Titanic Sails Again to Sink Deck-Chair Economy

Feb. 11 (Bloomberg) — NEC Corp. started a trend that will forever change Japan.

The nation’s largest personal-computer maker on Jan. 30 said it will fire more than 20,000 employees. That announcement would have been shocking enough had it not opened the floodgates. Since then, Panasonic Corp. said it will cut 15,000 jobs. Nissan Motor Co. is cutting 20,000.

Even during the darkest days of the 1990s — deflation, bank failures, public bailouts — companies avoided mass layoffs. NEC’s precedent seems to have made it fashionable to do just that. What’s next? Sony Corp. firing 50,000 people in Tokyo?

The psychological blow to Japan’s already skeptical consumers is sure to deepen the recession at a speed few thought remotely possible just two months ago.

“Japan’s recent economic decline is faster than that of the U.S., which has been experiencing the worst financial crisis in a century,” Kazuo Momma, head of research and statistics at the Bank of Japan, said in Tokyo on Feb. 9.

Momma said the world’s second-largest economy may have shrunk at an “unimaginable” speed last quarter. Gross domestic product fell at an annual 11.7 percent pace in the fourth quarter of 2008, according to the median estimate of 23 economists surveyed by Bloomberg News. That would be the steepest decline since 1974.

At this rate, Japan’s GDP gets cut in half in about a year.  The social and economic devastation we are experiencing will test governments worldwide.  Based on the governmental “solutions” we have seen so far, I would not be optimistic.   See the next link for what our future may look like.

Is There A Possibility For Optimism?

Boomers – Your Crisis Has Arrived

by James Quinn
February 10, 2009

“There is a mysterious cycle in human events. To some generations, much is given. Of other generations, much is expected. This Generation has a rendezvous with destiny.” Franklin Roosevelt – 1936

President Roosevelt was correct. The generation he was speaking to was already dealing with the worst financial crisis in the history of the United States, the Great Depression. By 1945, over 400,000 of this generation had lost their lives. Another 600,000 men were wounded. Much was expected and much was sacrificed. Every generation has a rendezvous with destiny. The generation that won World War II passed the ultimate test and proceeded to produce the next generation, the Baby Boom Generation. Their rendezvous with destiny is underway. Will it be a rendezvous with history that results in World War III, the collapse of the Great American Republic, dictatorship, or a return to the original Constitutional principles upon which this country was founded?

Based on the foolish actions of most politicians in Washington over the last thirty years, I fear for the future of our country. I don’t think the politicians in Washington comprehend the state of affairs. I sense the mood of the country turning. Fear, anger and disillusionment are the prevalent themes. Change is coming, but it is not the change that Barack Obama campaigned for. It will be forced upon us by circumstances beyond any one person’s control. While we are hurtling towards our summit with destiny, Congress continues its path of pork barrel spending, short term solutions, party politics, and condemning our children and grandchildren to a lower standard of living. The “leaders” of this country are using the tried and true method of using fear to ram through their $900 billion tax on future generations. President Bush used the same fear tactics to launch his invasion of Iraq. I see a similar success story with the coming stimulus package. Maybe the coming crisis will ultimately lead to Great Leaders rising to the occasion.

Another insightful writing by James Quinn with some very profound thoughts – well worth reading the full text.

When Does Gold Break Out To The Upside?

Investors Bet Gold To Reach $1,000

Feb. 10 (Bloomberg) — Gold speculators have increased their bets this year by 24 percent that prices will reach $1,000 an ounce by April.

Open interest in options that allow the holder to buy gold at $1,000 by April surged to 9,934 contracts as of Feb. 6 from 8,005 at the start of the year on the New York Mercantile Exchange’s Comex division. Mounting financial turmoil is boosting demand for the precious metal as a haven. Since Jan. 15, the price of the option has almost doubled, outpacing the 12 percent gain in gold futures.

Gold has gained for eight straight years and soared to a record $1,033.90 an ounce in March as mounting bank losses and a declining dollar increased demand for the metal as a store of value. Financial turmoil may push the price above that record to $2,000 as traders buy the metal as a haven, said Eric Sprott, the Canadian money manager who last year predicted banking stocks would collapse.

“The focal point is $1,000,” said Philip Gotthelf, the president of Equidex, who correctly predicted in October crude oil would fall below $40 a barrel. Gold above $1,000 is a “warning signal to central banks that people have already lost faith in currencies,” Gotthelf said.

My only question is why gold is not already selling at $5,000.  Once the $1,000 barrier is decisively breached, expect a massive gold rally with up moves of hundreds of dollars a day.  Gold is a thin market and the price will move accordingly.



Filed Under: Economy, Federal Reserve, Housing, Layoffs, Notable Links, Stimulus Plan Tagged With: , , , , ,

“Financial Catastrophe” – Part II

February 5, 2009 by 2 Comments

President Predicting Catastrophe

President Obama declared today that “A failure to act and to act now will turn crisis into catastrophe and guarantee a longer recession.”

Alan Blinder, a former vice chairman of the Federal Reserve, echoed the President by proclaiming “It would be an act of extreme stupidity not to enact a big stimulus”.  Mr Blinder did not expound on the logic of his remark.  Presumably, if you were too stupid not to vote for spending one trillion dollars, then you would be too stupid to understand his rationale.

A short 6 months ago President Bush, Chairman Bernanke and Treasury’s Paulson were predicting a financial meltdown if the $700 billion TARP bill did not pass.   The $700 billion was approved and the money passed out to banks and other assorted supplicants.  How wisely was the $700 billion spent?   All we do know is that the bankers managed to pay themselves huge bonuses, the money is gone and we now face financial Armageddon (again) if we do no spend another massive amount of borrowed money.   All we really know about the new, almost $1 trillion dollar “stimulus package”, is that it must be passed immediately, no questions asked.   Maybe more questions should have been asked the first time, when $700 billion was supposed to have solved the financial crisis.

Bernanke Proclaims Financial Crisis Resolved: October 2008

In October 2008, after passage of the $700 billion TARP bill, Chairman Bernanke spoke at the Economic Club of New York.

“The problems now evident in the markets and in the economy are large and complex, but, in my judgment, our government now has the tools it needs to confront and solve them.

Generally, during past crises, broad-based government engagement came late, usually at a point at which most financial institutions were insolvent or nearly so. Waiting too long to respond has usually led to much greater direct costs of the intervention itself and, more importantly, magnified the painful effects of financial turmoil on households and businesses. That is not the situation we face today. Fortunately, the Congress and the Administration have acted at a time when the great majority of financial institutions, though stressed by highly volatile and difficult market conditions, remain strong and capable of fulfilling their critical function of providing new credit for our economy. This prompt and decisive action by our political leaders will allow us to restore more normal market functioning much more quickly and at lower ultimate cost than would otherwise have been the case.

Reading the Chairman’s comments today, we know that his assessment of the situation was wrong. TARP 2008 did not resolve anything nor will the stimulus package of 2009.

Did the original $700 billion “save” our country from a “catastrophe”?.  In hindsight, much of the money spent was wasted on zombie banks that should have been shut down.  The executives running Bank of America, Citibank, JP Morgan and Wells Fargo, etc. still have their high paying jobs, while many others are unemployed.

What Does The Stimulus Spending Accomplish?

If we are facing a financial catastrophe, why is so little of the spending being directed  towards solving the root of the problem –  insolvent banks and the decline in home values?  Some of the spending goes towards minimalistic tax breaks – up to $500 per individual or $1,000 per couple.  Is an extra $10 or $20 a week going to make a real difference to most people?  The vast majority of the spending goes for expanded funding of various social programs and special interest groups.  The money will be disbursed through Government agencies that will need a much larger bureaucratic staff to administer spending and regulation.  This will accomplish nothing for the real economy and we are still left with insolvent banks and foreclosed homeowners.   Maybe after passing the bill, someone should say “mission accomplished”.

End Result

The one certainty is that this will not be the last trillion asked for.  The banking industry will need many more trillions of dollars to become solvent.  Fortune Magazine estimates the ultimate banking bailout cost at $4 trillion, maybe more.  Yet there is still no overall coherent plan for resolving this crisis.  Watching the elite ruling class operate in Washington reminds me of Groundhog Day.   Washington keeps doing the same thing over and over again, expecting a different result – isn’t that the definition of insanity?

Filed Under: Bailout, Banking Industry, Economy, Federal Reserve, Stimulus Plan Tagged With: ,