Tuesday, October 19, 2010

U.S. won't devalue its dollar to boost exports, Geithner says

There is no future in the U.S. devaluing its dollar to gain an economic advantage, and the government has no intention of trying slash the dollar's value to boost exports, Treasury Secretary Timothy Geithner said. "It is very important for people to understand that the United States of America and no country around the world can devalue its way to prosperity, to [be] competitive," he said. "It is not a viable, feasible strategy, and we will not engage in it." Reuters

That dog wont hunt... talk about trying to close the open barn door...Timmy the horse is gone!! OMG, I am still laughing….

Monday, October 18, 2010

Decline and Fall of the American Empire

Fed Chairman Ben Bernanke said he thought the current high unemployment and low inflation environment would linger into 2011 and as a result there is a "case for further action" on the monetary policy front. Mr. Bernanke said the Fed might expand its holdings of longer-term securities. He also said that the Fed has little experience in judging the economic effects of more asset purchases.

..the dollar will fall lower and probably substantially lower. $1.50 to $1.70 to the euro is on the cards. The Yen, the Swiss Franc and the Pound Sterling and just about all other currencies will try to follow the dollar down. This isn't just a ‘pebble in the pond", but a great big boulder. The ‘ripples will likely start over this weekend. They will hit every market there is.
· A look in the last week at these three markets has shown quick reactions to the falling dollar. All three went up, but both silver and gold went up the amount that the dollar fell. If that were to continue and the dollar to fall say to $1.70 against the euro, then without the gold price being pushed up by demand, the gold price would go up to $1,663.57 from the current $1,370. In the euro the gold price would not rise at all.
· Silver would follow a similar path too. Technically to discount the dollar's fall alone the price would go from $24.3 to $29.51.
· We know that O.P.E.C. members are calling for a $100 oil price to remove the impact of a falling dollar at current levels. With a $1.70: €1 dollar we should be looking much higher here too.
The U.S. Balance of Payments would look great initially [except on the China account]. But internally there would be howls, as inflation took off at a rate of knots. The point made by the Fed that they don't have experience in this area worries us. They might have a tiger by the tail. When Volker shattered 25% inflation in the mid-eighties, there were very different circumstances, such as a healthy economy and undisputed dollar hegemony. The U.S. dominated the gold market - with European cooperation. This time they have none of these and such actions won't work without them!
Possibly the end of the beginning of the decline and fall of the American Empire!
(Click on heading for full story)

Tuesday, October 12, 2010

Work a lifetime and the Goverment confiscates 90%

"Inflation has now been institutionalized at a fairly constant 5% per year. This has been scientifically determined to be the optimum level for generating the most revenue without causing public alarm. A 5% devaluation applies, not only to the money earned this year, but also to all that is left over from previous years. At the end of the first year, a dollar is worth 95 cents. At the end of the second year, the 95 cents is reduced again by 5%, leaving its worth at 90 cents, and so on. By the time a person has worked 20 years, the government will have confiscated 64% of every dollar he saved over those years. By the time he has worked 45 years, the hidden tax will be 90%. The government will take [in purchasing power] virtually everything a person saves over a lifetime."- G. Edward Griffin

So you have to invest to earn more than an average of 5% a year over you lifetime. Pension funds try for 9% and lately have trimmed that somewhat to maybe 8%. Still pie -in-the sky.
US Treasury bonds pay 3.75% for the privilege of tying your money up for 30 years - a lifetime. All that just to gurantee that the government gets 90% of your earnings. Remember the Feds get tax on the interest they pay you on these bonds!!!

Mortgae Fraud: How it actually works

This is a precise summary of the foreclosure fraud crisis facing this country and the world.

Mr Grayson did not tell you that much of the assignments to mortgage note servicing companies of rights to collect your mortgage payments, and foreclose if you don't are in essence void. This is because ownership of the notes and mortgages was not legally transferred. The transferring companies did not have the ownership rights to transfer!

This is an especially difficult problem for very many securitizations because these instruments required that ownership of the assets in them be legally and properly transferred by a finite, unchangeable date that has long since passed.This cannot be fixed by a later assignment,legal or not. The deadline has passed.

Follow closely now: The vast majority of these securitizations have been sliced and diced into an alphabet soup of derivative securities that were sold world wide. If the underlying collateral - the very mortgages and notes we are talking about - were never legally assigned then these further securitizations and alphabet soup derivatives have been created and sold fraudulently.Imagine the lawsuits waiting to be filed everywhere!

Nobody knows who actually owns what. That will have to be decided by, no doubt lengthy, court cases.

Additionally, trillions of dollars, yen, francs, zloty, euro and on of liability hangs over the heads of the financial institutions who solicited these mortgages in the first place, or who bought them and fraudulently repackaged and resold them!!!!

Yep, the major players in this cesspool are our very own US banking giants: Citi Bank; Wells Fargo; Bank of America and of course the investment banks that aided and abetted the securitizations and sold them on: Goldman, Merril Lynch, Lehmann, etc etc

Too big to fail?? They are too big to survive.

Think about this too: you, the law abiding homeowner have been making your payments on time, to a servicer who does not have the legal right to collect them from you because that right to assign did not legally belong to the institution who said it had legal ownership if your note - it clearly did not.
So you have been making payments to a servicer who has a disputed authority to collect them, and has been sending them on (less its fees, of course) to entities that did not have proper legal ownership of the notes.
What happens if someone else comes along and sues you for non-payment under the note you signed that they now allege they legally own? Mr Grayson tells you this has already happened in Florida!!

All you will be left with is crippling legal expense to prove that you are the victim of fraud.

The Florida courts and many of the other foreclosure courts have only very recently been grudgingly coming to terms with this. Remember, judges are elected, are usually lawyers or politicians, who are presiding over proceedings in which their fellow legal practitioners are presumed to be ethical. They dispense justice in these courts, or do they? They are swamped, have not got the time to read documents, dispose of cases in 90 seconds in the interest of clearing the docket. All on the say so of lawyers for document mills representations!!

Click on the Heading for a link to an absolutely scary summary of organized crime at work with our Government Blessing.

The unsaid consequence of all of this is that banks and other owners of affected mortgages have a bunch of unenforceable contracts that they show as assets. These will have to be "marked to market" - and reserved for on balance sheets or written off.

Whichever path they go down, the destination is the same - banks are bankrupt. That means that the value of their assets (including all the money we the taxpayers gave them) is arguably less than their liabilities. They should be dealt with through the bankruptcy courts: sell their assets for what can be recovered and pay off as much of the liabilities as the proceeds allow.

Then of course we the people must find a way to keep the promise of the American Dream enshrined in the tax code: homeownership - a safe and secure roof over your head - is an entitlement written in the tax code for decades. It is a legally sanctioned "entitlement".

There is a way to do this and solve the problem once and for all. I have laid it out in detail in several previous posts. They are in the archives. I will re-post them, updated,for convenience of readers.

Wednesday, September 29, 2010

Many U.S. households are reducing debt by defaulting

News that U.S. households are spending less and saving more, ultimately reducing their debt, might appear to be an uplifting scenario. In reality, many of those households are defaulting on their debt, not tightening their belts. Capital Economics Group reported that almost half of a $77 billion decline in total household debt during the second quarter was because of bank charge-offs of credit card debt, residential mortgages and other consumer loans.
click on heading for full story

Wednesday, September 22, 2010

QE2 in round trillions

As commenbted on by Ambrose Evans-Pritchard in The Telegraph September 20th.(Ambrose Evans-Pritchard has covered world politics and economics for 25 years, based in Europe, the US, and Latin America. He joined the Telegraph in 1991, serving as Washington correspondent and later Europe correspondent in Brussels. He is now International Business Editor in London)

"Here is a back-of-an-envelope guess by David Greenlaw at Morgan Stanley on what the Fed can expect from a second blitz of bond purchases, or `Shock & Awe’ as he calls it.
If Ben Bernanke does a further $2 trillion (on top of the $1.7 trillion already in the bag) the yield on 10-year US Treasuries will drop 50 basis points to around 2.2pc.
GDP growth will be 0.3pc higher than otherwise in 2011 and 0.4pc higher in 2012.
The unemployment rate will be 0.3pc lower in 2011 and 0.5pc lower in 2012 — (in other words drop from 9.6pc to 9.1pc, ceteris paribus).
That looks like trivial returns for a collosal adventure into the unknown, with risks of dollar flight and mounting Chinese suspicions that the US intends to default on its external debts by debasement."


click heading for link to full story

Tuesday, September 21, 2010

Federal Reserve

News Alert
from The Wall Street Journal

The Federal Reserve hinted it is becoming uneasy about the outlook for the U.S. economy in 2011, but deferred taking any new steps to boost the recovery amidst intense internal debate about what to do next.

Fed officials signaled at the end of their one-day policy meeting they are uncomfortable with the recent very low levels of inflation and said they expect the economy's recovery from a deep recession to be modest in the near term. This indicates that more bond purchases to stimulate growth could soon take place.


Monday, September 13, 2010

The Wall Street Journal, a quote regarding the Basel III developments:

"Officials want banks to have large stockpiles of capital so that they will be able to continue lending even if the economy worsens." Is this really the intent of the Basel Committee? To the degree the outlook for an economy worsens, borrowing/lending will increasingly contract as investment is based on forward-looking conditions and lending is based on counter-party risk. If the market hasn't already taught us this lesson, then it's because the market was not able to fully operate with an obstacle course of bad bailout practices.
(click on heading tfor link)

Thursday, September 9, 2010

Subprime 2.0 Is Coming Soon to a Suburb Near You: Edward Pinto

Commentary by Edward Pinto
(Edward Pinto, a mortgage-finance consultant, was executive vice president and chief credit officer at Fannie Mae from 1987 to 1989. The opinions expressed are his own.)

Sept. 8 (Bloomberg) -- On the second anniversary of the bailouts of Fannie Mae and Freddie Mac, it’s now obvious that weak lending standards, serving the political interest of affordable housing for all, were the main reason for the nation’s mortgage meltdown.
But the government just can’t permit lending to anyone and everyone; it must insist on prudent judgment about who will repay and who will default. Not only will borrowers who lack a down payment, steady income, employment and a good credit history probably get into trouble -- surprise! -- but too much irresponsible lending also creates artificial demand for houses, driving prices into the stratosphere and, as we have just experienced, puts all homeowners at risk.
The same mistake occurred in 1929, when any investor could buy stocks on margin with as little as 10 percent down. Small wonder that after the crash the U.S. government instituted a margin requirement of 50 percent down.
Congress should apply the same principle to housing purchases, increasing the amount a buyer must put down and other safeguards to assure prudent lending. Congress refuses to do this. Why? Giving citizens cheap, easy housing is a great way to win votes, no matter what horrific repercussions ensue.

Who’s Following Whom?

Consider the prevailing narrative that holds a greed-driven private sector responsible for the 2008 financial crisis. A secondary narrative points to a greed-driven Fannie Mae and Freddie Mac abandoning their credit standards in an effort to follow the lead of Wall Street.
If these explanations fail to convince, a third blames a combination of deregulation and insufficient regulation, again driven by greed, as rulemakers were asleep at their posts.
What is missing is the central role played by an affordable housing policy built upon the misguided concept of loosened underwriting -- a policy created by Congress and implemented for
15 years by the Department of Housing and Urban Development and banking regulators.
From 1993 onward, regulators worked with weakened lending policies as mandated by Congress. These policies systematically dismantled a housing-finance system based on the common sense principles of adequate down payments, good credit, and an ability to handle the mortgage debt.

No Money Down

Substituted was a scam of liberalized lending standards that turned out to be no standards at all. In 1990, one in 200 home-purchase loans (all government insured) had a down payment of less than or equal to 3 percent. By 2003, one in seven home buyers had such a low down payment, and by 2006 about one in three put no money down.
These policies led millions of Americans to buy homes with little or no money down, impaired credit and insufficient income. As a result, our economy has been brought down and the taxpayers have had to foot the bill for bailout after bailout.
Congress and U.S. President Barack Obama’s administration refuse to learn the lesson that is painfully aware to American taxpayers, and they have made it clear that they have no intention of fixing broken underwriting.
Let’s start with the latest pieces of evidence. The Dodd- Frank Bill, signed in July 2010 by the president, omitted both an adequate down payment and a good credit history from the list of criteria indicating a lower risk of default as regulators sought to define a qualified residential mortgage.

‘Prudent Underwriting’

This was no oversight. Republican Senator Robert Corker and others proposed an amendment that would have added both a minimum down-payment requirement and consideration of credit history along with the establishment by regulators of a “prudent underwriting” standard. This amendment was defeated.
In early September 2010, Fannie and Freddie’s regulator, the Federal Housing Finance Agency, following requirements set out in 2008 by Congress, finalized affordable housing mandates that are likely to prove more risky than those that led to Fannie and Freddie’s taxpayer bailout. As required by Congress, these new goals almost exclusively relate to very low- and low- income borrowers. Meeting these goals will necessitate a return to dangerous minimal down-payment lending, along with other imprudent lending standards.
Of course, FHFA Director Edward DeMarco notes that Fannie and Freddie aren’t to undertake risky lending to meet these goals. As has already been noted, Congress doesn’t consider low down payments and poor credit as indicative of risky lending.
How convenient.

Return to Subprime

The Federal Housing Administration, in its actuarial study released late last year, projected that it will return to an average FICO credit score of 635 by 2013. This signals the FHA’s intention to return to subprime lending. Once again, Dodd-Frank supports this policy change.
The FHA, the Veterans Affairs Department and the Agriculture Department’s grip on the home-purchase market increases month by month. They now guarantee more than half of all home-purchase loans. However, skin in the game isn’t a requirement. For example, the FHA’s average down payment is just
4 percent. Even this meager amount disappears after adjusting for seller concessions and financed insurance premiums.
On Christmas Eve in 2009, the Treasury Department announced new terms to the bailouts of Fannie and Freddie. Starting on Jan. 1, 2013, the terms of the bailout agreement provide for a continuing obligation to provide about $274 billion in capital to Fannie and Freddie. This amount is in addition to the unlimited sums that are available between now and Dec. 31, 2012.
As a result, one or both of these entities can now continue indefinitely as zombie institutions under conservatorship.
As a society, we have to go back to at least 20 percent down, with limited exceptions. Credit histories need to be solid. Documentation has to be iron-clad. Lender capital levels need to be raised.
Here’s my proposal to bring Congress’s penchant for imprudent lending to a quick end: All congressional pension assets should be invested in funds backed solely by the high- risk loans mandated by federal housing legislation. I have a feeling that things would change fast.

Tuesday, September 7, 2010

Underwater mortgages are the real problem in housing

It doesn't make sense for the U.S. to spend money to prop up the housing market by giving buyers incentives, but that doesn't mean sitting back and letting prices crash would "magically" bring the housing market back to life, as some have suggested, according to The Economist. At the core of the problem are homeowners with underwater mortgages who can't afford to sell at prices buyers are willing to pay. "Driving those prices lower won't change that fact," the magazine notes.

Finally, recognition of the root of the housing problem!

Wednesday, September 1, 2010

Quotable Mark Twain

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so. – Mark Twain

Harrisburg, Penn., will skip a municipal bond payment

Harrisburg, the capital of Pennsylvania, is planning to default on a $3.29 million payment for municipal bonds in two weeks. The incident would be the secondlargest
municipal bond default in 2010. Harrisburg's bond insurer is expected to cover the payment, but the situation is expected to fuel investor concern about the municipal bond market.

Analysis: There's nothing to celebrate in U.S. home-price data

Markets have overlooked a crucial fact in their joy for the latest S&P/Case-Shiller U.S. National Home Price Index, which shows a 4.4% increase for the second quarter, according to The Economist. Because of the way the index is calculated, nearly all transactions that went into the data were concluded before a homebuyers' tax credit expired. The housing market has suffered serious deterioration since, and that is likely to show up in future home-price data, the magazine notes.
The Economist

Milton Friedman on spending

“ I am in favor of cutting taxes under any circumstances and for any excuse, for any reason, whenever it's possible. The reason I am is because I believe the big problem is not taxes, the big problem is spending. The question is, "How do you hold down government spending?" Government spending now amounts to close to 40% of national income not counting indirect spending through regulation and the like. If you include that, you get up to roughly half. The real danger we face is that number will creep up and up and up. The only effective way I think to hold it down, is to hold down the amount of income the government has. The way to do that is to cut taxes.”
Milton Friedman

Thursday, August 26, 2010

New-home sales are nearly nonexistent in many U.S. cities

Statistics on new-home sales in the U.S. are as troublesome as those for existing homes, according to The Economist. Last month, 25,000 new homes were sold, a 90% drop from nearly 120,000 in July 2005. "When one takes into account that sales aren't
spread evenly around the country -- most are taking place in tighter markets xperiencing job growth -- it becomes clear that in some metropolitan areas housing markets have all but shut down," the magazine notes.
The Economist (click on headig for a link)

Wednesday, August 25, 2010

Fewer recently modified mortgages are falling into foreclosure

LIES, Damn Lies and Statistics

Recent mortgage modifications in the U.S. are more successful at keeping borrowers from losing their homes in foreclosure than those completed earlier in the housing crisis, according to a report by the State Foreclosure Prevention Working Group. Homeowners who obtained a mortgage modification in 2009 were nearly 50% less likely to fall 60 days behind on their payments compared with those whose mortgages were modified in 2008, according to the report. Google

Exactly opposite of almost everything I have read. Curious.

Thursday, August 19, 2010

Billions spent on housing tax breaks accomplish little, experts say

The U.S. government spent $230 billion last year to support homeownership but accomplished almost nothing beyond putting money into the pocket of the rich, experts told a conference on housing policy. The rate of homeownership in the U.S.
is about the same as in Canada and less than that of Australia, Britain, Ireland and Spain, which all offer little in the way of homeownership tax breaks. The Urban Institute said tax incentives for U.S. mortgage holders are worth $5,459 a year to people making more than $250,000 but only $91 a year to those earning less than $40,000. USA TODAY
No one working on FNM/FRE is even paying attention to this it seems (click on heading to read the full article)

Fed might no longer have control of the fed-funds rate

Worth thinking about who might be in control when the Fed loses it? Mr. Market? Politicians? Burocrats? Heaven help us!

Benn Steil and Paul Swartz, director of international economics and an analyst, respectively, at the Council on Foreign Relations, explain how the Federal Reserve has sustained "extraordinary lending and monetary policies," as Chairman
Ben Bernanke put it, by reinvesting proceeds from its mortgage-bond portfolio. Eventually, the Fed must exit from such stimulus, with the strategy involving a transformation, Steil and Swartz write. The plan also implies that the central bank will not be able to control any interest rate, including the federal-funds rate.
The Wall Street Journal (click on heading above for full article)

Wednesday, August 18, 2010

Maintaining Cofidence in the Dollar is our responsibility

The growth in foreign dollar holdings has placed upon the United States a special responsibility--that of maintaining the dollar as the principal reserve currency of the free world. This required that the dollar be considered by many countries to be as good as gold. It is our responsibility to sustain this confidence. - President John F. Kennedy days after he took office in January, 1961

Tuesday, August 17, 2010

Copper looks good

The outlook for the copper market remains robust with the supply demand roughly balanced this year and moving into deficit in 2011

"Our price forecast for copper is $3.70 for 2011 - at this point we're sticking with it and this price basically suggests that we're going to have considerable supply deficits where we're likely looking at some 280,000 tonnes deficit in 2011 - and on average, a balanced market in 2010 that could very easily move into deficit territory as we move closer to the conclusion of the year. So we're quite optimistic for copper with prices up $3.70 considerably beyond the cost curve, mainly because of the very tight and tightening supply-demand conditions."

This is a quote from Bart Melek: Commodity strategist, BMO Capital Markets and the full interview can be read, and listened to, by clicking on the heading above.

Santelli rant on housing

Rick Santelli tells it like it is. Again.

The problem he points to is that a further collapse of the housing in dustry is inevitable as long as the Fed continues to meddle.

It is an axiom of economics that the longer you interfere and distort a market the harsher the ultimate inevitable correction becomes.

The interest rate on the mortgage is irrelevant if there is no equity left to lend against..even for well qualified borrowers with a job and an income.

Sunday, August 15, 2010

From Visual Literacy.org: A periodic Table of Visualization Methods

(Click on heading to get a brainload full)
Thanks to Barry ritholz for pointing me at this. He's right..it is cool!

Saturday, August 14, 2010

A Must Watch: Especially William K Black - the last 8 mns

(click on the heading above for full interview)

The startling nature of the coverup of wrongdoing in the current financial crisis is revealed by William K Black. He has the perfect credentials for making this indictment ...he ran the Savings and Loan cleanup in the 1980's.
Quite successfully, mind you.
This is something everyone can understand and must take to heart. The next financial crisis is baked in and there is no recovery from the current crisis until the issues Black discusses are addressed.

A song I like

Heres a blast from 25 yrs ago....I like it ..hope you do
(click on the heading above)

Thursday, August 12, 2010

Mortgage Debt Solutions - Alan Greenspan makes the case

Alan Greenspan said it best on Meet the Press (click on heading above for full interview) recently:

"It's a critical issue because, as you point out and as I've always believed, we underestimate the impact of stock prices on economic activity. Asset prices are having a profoundly important effect.What created the extent of the contraction globally was the loss of $37 trillion in market value. It collapsed the value of collateral in the system and it disabled finance. We've come all the way back--maybe a little more than halfway, and it's had a very positive effect. I don't know where the stock market is going, but I will say this, that if it continues higher, this will do more to stimulate the economy than anything we've been talking about today or anything anybody else was talking about."

The whole mess started with the unravelling of mortgage values used in plain vanilla CMO's and their highly complex derivative securities. Fix the value of mortgages by arresting the drop in property values and voila! a Greenspan fix.

I have been recommending for more than two years now, that Government has an obligation to step in and underpin the value of the most important asset worldwide: the stock of real estate.

A very large number of companies with exchange listings of their stocks are in a real estate related business; bolstering the value of their collateral the right way by refinancing mortgages at a Federal Agency, can rocket the price of the collateral, and hence their stock prices.

It can also save some vital corporations with huge exposure to mortgages (GE)that when properly accounted for, must unmask their bankruptcy.

And the greatest benefit: preserving the American Dream of home ownership at an affordable level for homeowners. Who knows, a renewed sense of security migh change sentiment around and ignite the economic growth we all want.

The truth shall set you free!

Quotable - Winston Churchill

If you will not fight for right when you can easily win without bloodshed; if you will not fight when your victory is sure and not too costly; you may come to the moment when you will have to fight with all the odds against you and only a precarious chance of survival. There may even be a worse case. You may have to fight when there in no hope of victory, because it is better to perish than to live as slaves. - Winston Churchill

Analysis: Major banks bolster reserves for mortgage repurchases

The four largest commercial banks in the country -- Bank of America, JPMorgan Chase, Citigroup and Wells Fargo -- booked $2.5 billion in second-quarter charges to cope with requests for mortgage repurchases.

Most of the requests came from Fannie Mae and Freddie Mac. The banks have faced soaring costs as mortgage buyers and insurers search borrowers' files for issues.

How in this wide world does the Government expect co-operation from the banking community in solving the mortgage crisis this way?

They force the banking community to sit on huge excess reserves, and prudent bankers now reserve a large portion of these excess reserves to give back to the Government via Fannie and Freddie mortgage repurchases!!

To make matters even worse, the uncertainty over the fate of said GSE's and the present panicked desperation surfacing in the form of clawbacks from the banks on any pretext, cannot make these "prudent" bankers enthusiastic about taking on any more risk with new mortgages or Heaven Forbid refinancing on terms favourable to the borrowers!

And now, to add misery to these woes the new Finance Reform contains provisions that mandate lending quotas....a major contributing factor in this mortgage mess in the first place!! ...the eggs of the next financial crisis have been laid and will soon hatch!

Imagine that your Government is here to help: you have made more loans to white borrowers than black and hispanics.

So in order to correct this unacceptable statistical anomaly you are ordered to make more loans the other way or face sanctions that will force you out of business!

It matters not a whit to the politicians that statistically, financially and in every other sane and rational deployment of centuries old criteria for lending that this population of borrowers is less credit worthy by any standard. Incomes are lower, collateral is poorer quality, credit histories are far worse, delinquencies are rife... but we are to ignore these inconvenient truths.

Rational business people dont make suicidal investment decisions guranteed to lead to their business demise.

The Federal Government does just that. It's sending more billions to 12 states that it deems most in need of mortgage help so that distressed borrowers can be forgiven parts of their loans. Of course, the new rules will apply. So how can this not again lead to lower lending standards just to meet quotas?

This morass is too difficult for lenders to negotiate. Better they make no loans to anyone except the Government which still allows them to borrow money at effectively no interest and lend it right back at a 2%-3% positive interest carry. And all this is risk free!


Marie Antoinette could not have said it better. They're hungry for bread? Let em eat cake. Sheesch!

Debts Rise, and Go Unpaid, as Bust Erodes Home Equity

Good article in yesterday's NY Times titled “Debts Rise, and Go Unpaid, as Bust Erodes Home Equity” (click on heading for full article link)saying the delinquency rate on home equity loans is higher than all other types of consumer loans, including auto loans, boat loans, personal loans and even bank cards.

Lenders say they are trying to recover some of that money but their success has been limited, in part because so many borrowers threaten bankruptcy and because the value of the homes, the collateral backing the loans, has often disappeared.

The result is one of the paradoxes of the recession: the more money you borrowed, the less likely you will have to pay up, it says.

Lenders wrote off as uncollectible $11.1B in home equity loans and $19.9B in home equity lines of credit in 2009, more than they wrote off on primary mortgages, government data shows. So far this year, the trend is the same, with combined write-offs of $7.88B in the first quarter.

Even when a lender forces a borrower to settle through legal action, it can rarely extract more than 10 cents on the dollar!

Wednesday, August 11, 2010

The Day after the Fed announcement: uncertainty

Courtesy of Kimberly DuBord, Briefing.com

Kimberly DuBord is the Director of Research for Briefing Research, Briefing.com's new strategic investment research service. To request a free trial please email researchsales@briefing.com.

It is the morning after the FOMC meeting and market participants globally are feeling a renewed, heightened level of uncertainty. U.S. equity futures are pointing to over a 100-point drop in the Dow, while the Treasury market strengthens with 10-year yields falling to 2.72%. The global risk appetite has evaporated with crude falling and gold and the yen gaining ground.

The Fed's policy statement Tuesday did little to alleviate double-dip concerns. In actuality, it may have fanned the fears of a downturn.

The directive from the FOMC suggests to us that the Fed is as uncertain about the outlook as the rest of us, especially when taking into account the Aug. 2 speech from Chairman Bernanke who thought then that growth in real consumer spending seemed likely to pick up in coming quarters. In any event, waffling by the Fed is not a confidence builder.

There is clear disconnect amongst Fed members with St. Louis President James Bullard and the Kansas City President Thomas Hoenig taking opposite views. While Hoenig is arguing for a contraction in the Fed's balance sheet and more restrictive language, Bullard is arguing for moves to prevent deflation.

The FOMC decided to keep the Fed's balance sheet steady, choosing to reinvest maturing principal payments from agency debt and MBS in Treasuries. The markets' reaction reflects disparate signals. The fact that the Fed still has to act in a stimulative manner at this point in the process is contributing to concerns that this will be a protracted recovery.

The equity, bond, and currency markets are being re-priced accordingly.

The yen hit a 15-year high against the dollar at 84.73 -- causing a sell-off in the Nikkei. The dollar made gains against the euro and pound, with the U.S. Dollar Index holding above 81.50. Commentary from the Paris-based International Energy Agency of "significant' risks to an economic downturn is only adding more downward pressure to oil prices, which has little fundamental footing above $80 per barrel in this economic climate.

Add in a downbeat growth forecast and slowing inflation forecast from the Bank of England, coupled with weaker economic data in China only stoking the "slower for longer" fires further. The BOE forecasted inflation of 1.5%, under its stated goal of 2.0%, while growth is now targeted to peak at 3.0%, below its May estimate of 3.6%.

The economic data out of China is holding influence over the market. While data ranging from industrial production to retail sales and new lending came in generally as expected, market participants are taking note of the downturn in economic activity. The fears of a hard landing remain close to the surface. For their part, local market participants took a more benign view of the data, lifting stocks despite broad-based declines in the rest of Asia overnight. China has, thus far, executed a "soft landing."

Tuesday, August 10, 2010

Unemployment Currently: a primer on the real numbers

A tip of the hat to Thomas de Marco and David Sackler of Fidelity Capital markets for this summary excerpted from their Market Note of today:

"I thought I would take some space to tie together some anecdotes/data on unemployment.

In our Monday Morning Wake Up call my associate David Sackler commented that listeners should not read too much into the fact that the unemployment rate stayed flat at 9.5% in last Friday’s NFP report.

I second that thought as just like the prior month it was a fiction created by shrinkage in the labor force. We have seen a nearly one million decline in the labor force since April, so holding the labor participation rate constant at April’s level would equate to an unemployment rate of about 10.4% (I think the odds are good the official unemployment rate may flirt with 10% again this year).
David also pointed out that the fixation on private payrolls (warranted to an extent) masks what is going on at state/local government employment. According to his calculations, over the past three months private payrolls showed a gain of +153k, but factoring in the fact that state/local governments shed 102k jobs the net jobs creation was a putrid 51k.

Ignoring the fact that the bulk of the growth in private sector jobs took place in two months (March and April) this accelerated state/local government job cutting has a potential multiplier effect on spending as government jobs are better paying than private sector jobs (which is a sad statement in and of itself).
Over the weekend the NYT had a sobering article titled ‘Jobless and Staying That Way’ (NYT 8/7/10) which had the following kernel: “….half the 14.6 million unemployed have been out of work for more than six months, a level not seen since the Depression….

Not only are more people out of work longer, but their options are narrowing. Roughly 1.4 million people have been jobless for more than 99 weeks, the point at which unemployment benefits run out.

“The situation is devastating,” said Robert Gordon, an economics professor at Northwestern and an expert on the labor market. “We are legitimately beginning to draw analogies to the Great Depression, in the sense that there is a growing hopelessness among job seekers.” (emphasis mine).

Today’s WSJ OP/ED section has a good chart on the civilian
employment-population ratio – which is another and I think instructive way of looking at the jobs market.

The civilian employment-population ratio measures the percentage of working age Americans who have a job – whether they are actively seeking one or not.
As you can see from the related graphic this measure has fallen from a peak of 63% to 58.5% in June (which was the second consecutive decline in the measure). The author pointed out that even in the brutal 1979-1982 recession where the unemployment rate reached 10.8%, the civilian employment-population ratio only fell three percentage points from 60% to 57%.

Finally I would like to point to a July 24 Economist article (citing a recent Pew survey) found that more than half of all workers have experienced a spell of unemployment, taken a cut in pay or hours or been forced to go part-time... Nearly six in ten Americans have cancelled or cut back on holidays… About a fifth says their mortgages are underwater… Fewer than half of all adults expect their children to have a higher standard of living than theirs, and more than a quarter say it will be lower…and the real kicker: One in four of those between 18 and 29 have moved back in with parents!"

Where's the copper to come from to meet future demand?

Mineweb reports (click on heading above for full article) that a shortage of copper will surely develope as the world recovers. Excerpts from the article appear below.

According to Robert Friedland we need to mine as much copper in the next 20 years as we have in the past 110 - where is this copper to come from?

Author: Lawrence Williams
Posted: Monday , 09 Aug 2010


"We need more copper in the next 20 years than was mined in the last 110 years," Ivanhoe Chairman Robert Friedland is reported as saying at the Diggers and Dealers conference in Kalgoorlie, Western Australia, last week. "Those of us in the business don't have any idea where this metal is going to come from."

Now Friedland, whose Ivanhoe Mines still controls the huge Oyu Tolgoi copper-gold project in Mongolia which is being developed in conjunction with Rio Tinto, may be talking from a biased viewpoint, but he has a point. Once economies recover, even if slowly, copper in particular may well find itself in a major demand squeeze.

But, it's unlikely to be a smooth ride for copper ahead, whatever the longer term prospects may suggest. Price performance so far this year has been, to say the least, pretty volatile and this pattern is likely to continue as positive, and negative, assessments continue to be made on the state of the global economy on which the copper market is very dependent. China - and reports on speeding up or slowing down of growth there, will be a major factor, as will speculation and running down, or building up, of inventories.

Copper is also vulnerable to disruptions - particularly when the price rises and the copper miners are seen as making excessive profits.

Political disruptions may also occur as new mine development moves into countries where political stability is more suspect.

Growth in global copper requirements is almost assured though as it is very much an ‘infrastructure' dependent metal and growth aspirations of countries like China, India and the BRIC economies - and virtually all developing nations - where aspirations for Western-type wealth and consumerism is forcing unprecedented levels of global growth. This too will impact other metals and minerals, but few quite so heavily as copper. The future for the red metal looks strong - but will we be able, as Friedland suggested, to supply the world's requirements over the next 20 years

Monday, August 9, 2010

Fed set to downgrade outlook for US

We wait with bated breath for Wednesdays Fed Statement.

By James Politi in Washington Full article in Financial Times (click heading above)

Published: August 8 2010 19:15 | Last updated: August 8 2010 19:15

"The Federal Reserve is set to downgrade its assessment of US economic prospects when it meets on Tuesday to discuss ways to reboot the flagging recovery.

Faced with weak economic data and rising fears of a double-dip recession, the Federal Open Market Committee is likely to ensure its policy is not constraining growth and to use its statement to signal greater concern about the economy. It is, however, unlikely to agree big new steps to boost growth."

Friday, August 6, 2010

An Argentinaville Stimulus?

Today the Wall Street Journal (article linked here:http://online.wsj.com/article/SB10001424052748703748904575411553343672456.html?mod=ITP_opinion_2, or click on heading above)commented on yesterdays rumors of another "stimulus" that might come in August.

This trial balloon could presage something good, something that might stave off the disaster that a monetization of the deficit would create.

Christine Romer follows Peter Orzag out of the current Administration, removing the intellectual barriors to further "stimulus" (Romer has written an embarrassing analysis with her husband, that casts serious doubt in the multiplyer effect of stimulus).

These excertps illustrate the scepticism that greets such an effort:

" The argument behind the "free stimulus" is that Fannie, Freddie and the Federal Housing Administration own or back about 37 million loans, and so the government "already owns the risk." If the mortgage agencies effectively forgive some of that debt, voila, the indebted homeowners have more cash to spend.

Skeptical mortgage analysts were quick to point out that the government's two existing programs for struggling homeowners—HAMP for loan modifications and HARP for refinancings—have poor acceptance records. Their failure suggests that even a huge new forgiveness program is unlikely to work as hoped. An analysis this week by Credit Suisse, which calls the idea "too difficult to do properly," estimates the "stimulus" would be more like $10 billion to $15 billion."

I do not propose a "Free Stimulus" ..again the journalistic uninitiated have mis-diagnosed the problem.

I propose a disciplined, simple method of relieving the mortgage crisis which is at the heart of our financial malaise.

No debt is "forgiven", it is attached to a tangible asset and is recovered over time by the lender with the most ability and patience to wait for that recovery - the Federal Government.

"Stimulus" spending using money created out of thin air is a doomed exercise for all.

Creating the conditions for the population to assume sane levels of debt and spend their surplus income WILL create the conditions for economic growth.

The only way out of our impending economic disaster is to create these conditions and unleash the great creative, economic might currently curled up in fear in the bosom of all citizens.

The time is now, soon it will be too late.

Times That Try Our Souls a follow up to the warning the Chines issued about dollar devaluation

This story is posted over at theenergyreport.com.

It's a long interview with ShadowStats.com's John Williams.

What John envisions—and he's by no means looking to the far horizon—is a systemic collapse, a hyperinflationary great depression... and the cessation of normal commerce. This is a 10-15 minute read headlined "John Williams: Times That Try Our Souls"... and the link is http://www.theenergyreport.com/pub/na/7005. Or click on the heading above.

Some excerpts:

I expect an accelerating pace of downturn in the next couple of months. The numbers will turn sharply worse. Consensus estimates are already moving in that direction and most everything will follow. Industrial production is still up but retail sales have been falling. Payroll numbers have been flat when you take out the effects of the census hiring. Those employment numbers will turn down in the next month or two, providing an important indicator of renewed economic contraction.

So we'll see how it develops, but we're at that turning point. It is happening as we speak. At the end of July, we got an estimate of the second quarter GDP, where the pace of annualized growth slowed to 2.4%. The early GDP estimates are very heavily guessed at, so most of the time you don't know if you're getting a positive or a negative number. You get a margin of error of plus or minus 3% around the early reporting. That happens also to be about average growth.

Nevertheless, on a quarter-to quarter-basis, I think we'll see GDP down again in the third quarter.

The popular press will describe it as a double dip, but we never had a recovery. Actually, this is just a very protracted, very deep downturn that has had a pattern of falling off a cliff, bottoming out, having a little bit of bump due to stimulus and then turning down again. Sort of shaped like the path of a novice skier going down a jump for the first time. Speeding sharply down the hill, he goes up in the air and starts spinning wildly as he tries to figure out which end is up with his skis. Then he takes a pretty bad tumble. We're beginning to spin in the air.

Significantly they did not call an end to this recession. They said it was too early to call, but I think they had a pretty good sense of what was going to happen. So what we're seeing now just looks like an ongoing deep recession. The next down leg is going to be particularly painful and I'm afraid particularly protracted.

So consumer income is a key factor.

Absolutely. If you put in housing that's related to the consumer, that's three-quarters of the GDP. The average household is not staying ahead of inflation, and unless income grows faster than inflation, the economy won't grow faster than inflation—and that means that GDP is not growing. Income sustains consumption. When income grows, consumption grows. The only way to have sustainable long-term economic growth is to have healthy growth in income. You can buy some short-term economic growth, though, without growth in income, through debt expansion, which is what Greenspan tried.

Most of the growth we'd seen in the last decade prior to this downturn was due to debt expansion. The debt structures have pretty much been put through the wringer and consumers are not expanding credit, generally because it's not available to them. Absent debt expansion and/or significant growth in income, no way can the consumer expand personal consumption. You have to address employment, quality of jobs.

We no longer really have the option of expanding the debt and it's doubtful that even short-term stimulus will have much impact. Looking at this next leg down against that backdrop, what projections would you make about unemployment, housing prices, GDP as we look through the end of 2010 and into '11?

Unemployment will be a lot worse than most people expect. Housing will continue to suffer in terms of weak demand. But in this crazy, almost perverse circumstance, the renewed weakness to a large extent will help push us into higher inflation. Real estate tends to do better with higher inflation, but it's not going to be a happy circumstance for anyone.

The government is effectively bankrupt. Using GAAP accounting principles, the annual deficit is running in the range of $4 trillion to $5 trillion. That's beyond containment. The government can't cover it with taxes. They'd still be in deficit if they took 100% of personal income and corporate profits. They'd also still be in deficit if they cut every penny of government spending except for Social Security and Medicare. Washington lacks the will to slash its social programs severely, to change its approach to ever bigger government. The only option left going forward is for the government eventually to print the money for the obligations it cannot otherwise cover, which sets up a hyperinflation.

All of what I just described was already in place when the systemic solvency crisis broke. Before this crisis the government was effectively bankrupt. In response to the crisis, the government may have gone beyond what it had to do, but you err on the side of conservatism when you're trying to prevent a systemic collapse. That was a real risk. It still is. Irrespective of the politics of big government spending, quantitative easing, renewed bailing out of banks, whatever is involved, I'd argue that the government still will do whatever it takes to prevent a systemic collapse. That last series of actions had the effect of rapidly exploding the deficit. In just a year, we went from something under $500 billion in official reporting, on a cash basis as opposed to GAAP basis, to something close to $1.5 trillion.

What will plunge us into this abyss? And when?

I think the odds are extremely high that we'll see it break within the next year. I would put it six months to a year, outside.

We're getting extraordinary protestations from other central banks about the U.S. finances, its solvency, risk of the dollar.

As this breaks, it's going to be obvious that the U.S. is moving to debase its dollar. It'll have no option to do otherwise.

So what we end up with is a circumstance where the dollar is under heavy selling pressure. People will feel the squeeze on their inflation-adjusted income with much higher prices for gasoline and fuel oil.

The route to the monetary inflation will take hold from the Fed's direct monetization of Treasury debt.

US economy sheds 131,000 jobs in July

The US economy shed 131,000 jobs in July, as weaker-than-expected private sector hiring cast doubt over the recovery.

Official figures showed job losses mounting for the second month running, following five consecutive months of gains from the start of the year. Some Wall Street analysts had predicted that payrolls would fall by 65,000 in July, leaving the month’s losses twice as severe as feared.

July nonfarm payrolls declined 131,000, more than the consensus estimate of -87,000. The prior month was revised to -221,000 from -125,000. Encouraging indicators include private payrolls of 71,000, hourly earnings that rose 0.2% (vs. estimates of 0.1%), and the average workweek rising to 34.2 (vs. estimates of 34.1).

Simply put, there is not enough jobs being created to put a dent in unemployment.

The official unemployment rate held steady at 9.5%, a further sign the economic recovery may be losing momentum.

The real unemployment rate stayed at 16.5%.

Thursday, August 5, 2010

Mortgage Workout 4: The real urgency

China is warning the USA not to inflate the dollar. Economic activity is declining as unemployment rises and home prices fall further.

The investment banks are warning that the Fed Reserve Board is running out of options to fix the malaise and will soon turn to the problem of the GSE's Fannie Mae and Freddie Mac.... unless we focus laser-like on the problem a POLITICAL solution will compromise the recovery.

It is time for politicians to be patriotic and not parochial.

They MUST rescue the people of this great nation or the American Dream of home ownership will be lost forever.

They must do this for the benefit of the country. To do anything other than a clean fix aimed laser-like at the problem of home valuation is to charge the country headlong out of the current recession into a second Great Depression of unimagined magnitude and consequence.

Here is an example of how this would work to restore the great hope of prosperity for this great nation and the world:


The Smith Family owns a house with a current mortgage of $700,000 ( Smith had refinanced to take out rising equity). It is their primary residence - they live in it.

Smith household income reported on 2009 Federal tax return was $125,000 gross before any deductions (ie NOT their taxable income).

Current US 30 year Treasury notes have an interest rate of approximately 4%.

So, 30% of $125,000 means Smith can afford to pay no more than $37,500 per year or $3,125 per month for Principal & Interest on the mortgage. He is still on the hook for taxes and insurance.

Smith gets a new mortgage under this program with a 30 year term at 4.5% (4+0.5) for a nominal value of approx $600,000 (arrived at through DCF analysis based on what Smith can afford to pay).
This may/may not be more than the current appraised value.

The Government gets the right to 80% of the difference between $600,000 and the original mortgage amount of $700,000 when the house is sold.

Ten years from now Smith sells the house for $700,000 the value of the original mortgage.

He has paid about $2,900/month in interest for 10 yrs or $348,000 that has gone back into the US treasury.

He has also paid about $27,000 in principal.

He owes $573,000 on the new government mortgage, and $100,000 difference between his old and new mortgage originally financed by the US govt. ( The Treasury has already recovered nearly 50% of the amount loaned).

His gross profit on the sale of his house is $127,000.

He owes 80% of this or $101,600, under his mortgage contract so that the Government gets the $573,000 and its $100,000 back and $1,600 more.

Smith has had his property written down to a reasonable value and his mortgage therefore becomes valuable in a resale.

Banks and the Government can resell it.

Smith has lived with a new lower payment and still got the tax deduction for interest AND has made a profit on the sale of the home!

Most importantly, Smith is not tempted to hand the keys of the house to the bank because he is upside down in the mortgage.

The bankruptcy/foreclosure process is completely avoided.

There is a very real potential for gain by the government.

Interest and principal on mortgages comes into the Fed Reserve balance sheet NOT from new taxes.

Potential for profit exists on sale of properties.

No new government agencies need to be established.

The Fed will hire the necessary personnel to administer the program. Unemployment declines!

The banking system is unclogged and consumer confidence is restored.

Economic recovery can begin.

Mortgage Workout 3: Benefits to Mortgage Holders under water on the Mortgage

Current law-abiding households who are seeing negative real value of their primary residence will be able to remain in their homes at affordable cost with a potential for some upside appreciation in the value of their property and a participation in the realization of that potential together with Government on sale of their property.
Banks, issuers of mortgages and other mortgage owners will have a value, real and ascertainable, assigned to each and every such distressed mortgage AND they will have, therefore a viable asset to sell to mortgage re-packagers; this frees up capital to lend out on new mortgages under more appropriate terms ( minimum 20% down-payment, 30% max housing cost : household income)
Government gets a real, visible path to recovery of money appropriated to this program, with interest.
Government will be helping citizens who most need help and restoring their confidence in The American Dream.
Government will restore confidence in the banking system worldwide by establishing a system of mortgage valuation and that establishes a valuation methodology that could easily be cloned by private investors and capitalized on by the Financial Services industry worldwide.
Bankers and other lenders will now have a method of assessing the value of collateral offered interbank and lending between institutions, can be reinvigorated.
g. No new government agency needed. FNMA/FHLMC become effective arms of the Federal Reserve who is charged with housing stability as a third mandate.

The result will be a very viable, self-funding solution to the current housing/banking crisis.

Homeowners will see their property values written down to reasonable values.
Mortgages then become easy to value as the underlying properties have a value.
Homeowners have an affordable mortgage payment, freeing up discretionary income for spending on other goods and services.

Most importantly, homeowners will not be tempted to walk away from unaffordable payments, or houses worth less than they owe,
Foreclosure and bankruptcy is avoided completely.

There is a very real potential for gain by the government.
Interest on mortgages comes into the Fed Reserve balance sheet. Potential for profit exists on sale of properties. No new government agencies need to be established.

The banking system is unclogged and consumer confidence is restored. All without requiring additional tax burdens on unborn generations.

Mortgage Workout 2: Funding

FUNDING for this Program: No new taxes.

Congress will authorize Treasury to issue up to $800 billion in 30 year Treasury bonds, at prevailing rates, to implement this program; or the balance of uncommitted TARP funds be used to reduce the amount of extra funding required until $800 billion is allocated to the Federal Reserve Banks for this purpose.

These funds will be placed in a separate segregated Federal Reserve Board administered fund that cannot be invaded by Congress. These funds will be used to purchase mortgages funded by Freddie Mac/Fannie Mae/Federal reserve Banks.

Chairman of Fed to be responsible for disbursement and oversight of the program through FNMA/FHLMC/Federal reserve banks so co-ordination with Monetary policy will be maximized.

Reporting to Congress on program status twice a year.

Mortgage Workout Plan Revised

I first published this plan in this blog on January 20 2009, inauguration day for the new President. Since then the economic crisis has become immeasurably worse in all respects.

It is not arguable that housing prices are down 30%-50% from then; that the US deficit has hit the unprecedented level of $1.5 TRILLION and climbing;that consumer confidence is in the toilet that economic activity worldwide is decling rapidly; that welfare payments are rising to unsustainable levels worldwide;that harsh and punitive tax increases are being threatened in the USA;that the unintended consequences and uncertainties of new legislation are squelching the recovery of profitable, sustainable economic activities.

We face rising unemployment and the very real threat of deflation or what is worse a government induced runaway inflation.

This morning I drew your attention to the shot across the bows of the sinking ship USA fired by China. They are telling us in plain terms that inflating the dollar will not be tolerated. Dont believe for a moment that they have not already cornered a very significant share of gold and stockpiled natural resources and bought up resource and precious metals producers around the world just because they are short of these resources!

Certainly not! The Chinese KNOW that a confrontation with the USA is close.

The first week any Business School student hits the classroom is devoted to learning to correctly diagnose the problem.

Well: the thing that broke the banks in the USA and therefore the world, is mortgage securitazion run amok. The reasons for this are well analysed.

So: It is the DUTY of Government here in the USA, where the unwritten constitutional right to home ownership enshrined for decades in the tax code, to identify the problem, and fix it appropriately.


Home prices must be returned to an upward trajectory.

Here is how to do it:(reprised and updated from January 20 2009)
Tuesday, January 20, 2009

A Mortgage Workout for the People of the USA 1: The Plan

This is a plan to help every citizen of the USA whose current mortgage obligation exceeds the value of their primary home.

Principle no 1: No household should pay a housing cost (mortgage payment: principal + Interest only) that exceeds 30% of their gross income( before any deductions) as reported on their latest Federal Tax Return.

Principle no 2: The Federal Government will refinance through Fannie Mae and Freddie Mac or directly through the Federal Reserve Banks (buy existing mortgage and reissue a new 1st and 2nd mortgage to homeowner) existing mortgages for homeowners who are under water with their mortgage on their primary residences.

Principle no 3: New mortgages issued under this program, based on household ability to pay, will contain a provision that allows FNMA/FHLMC/Fed Reserve Bank to recover, on sale of such re-mortgaged property, 80% of the difference between the nominal value of the new mortgage issued and the then sale price of the property, until full amount of original refinanced mortgage is recovered. These agencies will be allowed to charge a 0.5% fee in addition to 30yr treasury rate to cover cost of implementing program.

Principle no 4: FNMA/FHLMC/Federal reserve Banks will be allowed to continue to repackage these new mortgages in CMO’s etc for resale through traditional resale channels.

Principle no 5: These newly issued mortgages will be transferrable to other citizens who meet the income qualifications to assume these mortgages provided they are to use the purchased home as their PRIMARY RESIDENCE.

The next 3 parts follow.

Treasuries Lack Safety, Liquidity for China, Yu Yongding Says

ALARM! ALARM! - US Government policies are unmasked for the threat they pose to the Wealth of Nations and worldwide stability. Can a war be far behind?

Excerpts from an article that appeared on Bloomberg yesterday. For full article click on headlie above for a direct link to it.

By Bloomberg News Aug 3, 2010 4:06 AM EDT

U.S. Treasuries fail to provide safety or liquidity when it comes to managing China’s $2.45 trillion foreign-exchange reserves, said Yu Yongding, a former central bank adviser.

“I do not think U.S. Treasuries are safe in the medium-and long-run,” Yu, a member of the state-backed Chinese Academy of Social Sciences, wrote yesterday in an e-mailed response to questions. China is unable to sell the securities in a “big way” and a “scary trajectory” of budget deficits and a growing supply of U.S. dollars put their value at risk, he said.

The cost of pegging the Chinese currency to the dollar is “intolerably high” and threatens the welfare of Chinese people, Zhang Ming, deputy chief of the International Finance Research Office at the Chinese Academy of Social Sciences, wrote today on the website of China Finance 40 Forum.

“The U.S. government has strong incentives to reduce its real burden of debt through inflation and dollar devaluation,” he said. “Whichever way it is, the yuan-recorded market value of Treasuries will fall, causing huge capital losses to China’s central bank.”

Wednesday, August 4, 2010

U.S. companies:Healthy balance sheets? They owe $7.2 trillion, the most ever

By Brett Arends
As ever, the truth is someone else's problem and no one's responsibility.

BOSTON -- You may have heard recently that U.S. companies have emerged from the financial crisis in robust health, that they've paid down their debts, rebuilt their balance sheets and are sitting on growing piles of cash they are ready to invest in the economy.
It all sounds wonderful for investors and the U.S. economy. There's just one problem: It's a crock.

American companies are not in robust financial shape. Federal Reserve data show that their debts have been rising, not falling. By some measures, they are now more leveraged than at any time since the Great Depression.

A look at the facts shows that companies only have "record amounts of cash" in the way that Subprime Suzy was flush with cash after that big refi back in 2005. So long as you don't look at the liabilities, the picture looks great.

According to the Federal Reserve, nonfinancial firms borrowed another $289 billion in the first quarter, taking their total domestic debts to $7.2 trillion, the highest level ever. That's up by $1.1 trillion since the first quarter of 2007; it's twice the level seen in the late 1990s.

The debt repayments made during the financial crisis were brief and minimal: tiny amounts, totaling about $100 billion, in the second and fourth quarters of 2009.

Remember that these are the debts for the nonfinancials -- the part of the economy that's supposed to be in better shape. The banks? Everybody knows half of them are the walking dead.

Central bank and Commerce Department data reveal that gross domestic debts of nonfinancial corporations now amount to 50% of GDP. That's a postwar record. In 1945, it was just 20%. Even at the credit-bubble peaks in the late 1980s and 2005-06, it was only around 45%.

The Fed data "underline the poor state of the U.S. private sector's balance sheets," reports financial analyst Andrew Smithers, who's also the author of "Wall Street Revalued: Imperfect Markets and Inept Central Bankers," and chairman of Smithers & Co. in London.

"While this is generally recognized for households," he said, "it is often denied with regard to corporations. These denials are without merit and depend on looking at cash assets and ignoring liabilities. Cash assets have risen recently, in response to the fall in inventories, but nonfinancials' corporate debt, whether measured gross or after netting off bank deposits and other interest-bearing assets, is at peak levels."

By Smithers' analysis, net leverage is nearly 50% of corporate net worth, a modern record.

There is one caveat to this, he noted: It focuses on assets and liabilities of companies within the United States. Some U.S. companies are holding net cash overseas. That may brighten the picture a little, but the overall effect is not enormous, and mostly just affects the biggest companies.

That U.S. companies are in worse financial shape than we're being told is clearly bad news for those thinking of investing in U.S. stocks or bonds, as leverage makes investments riskier. Clearly it's bad news for jobs and the economy.

But why is this line being spun about healthy balance sheets? For the same reason we're told other lies, myths and half-truths: Too many people have a vested interest in spinning, and too few have an interest in the actual picture.

As ever, the truth is someone else's problem and no one's responsibility.

The Fed has few policy choices left

The Fed has few policy choices left in a world where deflationary forces continue to grow and US domestic growth is in trouble. Government stimulus doesn't work and has only weakened the US economy, helping to make monetary policy impotent. Thus, an implicit weak dollar policy may be very high on the Fed's list of tools it has left to use.
The big trigger for a decline in the US dollar last time was the announcement of the Feds' Quantitative Easing program. Stay tuned.

Corporate America is borrowing at record low rates

Corporate America is borrowing at record low rates. U.S. nonfinancial companies have a record $837 billion of cash on their balance sheets. Both are the ingredients for a surge in corporate takeovers. Mix in a healthy helping of Fed's newly affirmed fear the money supply might not grow fast enough, and the long case for stocks looks compelling.

US Treasury yields fall to record low on Fed's 'QE lite' plan

Yields on short-term US Treasury debt have fallen to the lowest in history on mounting expectations of extra stimulus from the Federal Reserve.

Two-year rates fell to 0.52pc after a further batch of grim data hinted at a sharp slowdown in the second half of the year. Factory orders fell 1.2pc in June, while consumer spending fell flat.

The savings rate has risen to a one-year high of 6.4pc as Americans adapt to the new era of austerity and build a safety buffer against unemployment. "Households are repaying debt at a rapid clip," said Gabriel Stein from Lombard Street Research. "With an output gap at around 3pc, the US economy could move into outright deflation in 2011 for the first time since records began."

ADP Employment Change

Economic Calendar

Aug 04 08:15 ADP Employment Change Jul 42K vs a consensus of 25K

Actual refers to the actual figures after their release.
Consensus represents the market consensus estimate for each indicator.

This is news the markets will like. Employment up for July ..this is a huge upward revision from the 13k previously estimated.

Tuesday, August 3, 2010

Fannie and Freddie need fundamental change, another "Entitlement?"

Government-controlled mortgage giants Fannie Mae and Freddie Mac must be subjected to "dramatic" change, but this can't be done quickly while the housing market is still weak, said Treasury Secretary Timothy Geithner. He said the government will always have to provide some support to the mortgage industry to provide "reasonable security that you can borrow to finance a house even in a deep recession."
The Wall Street Journal
Interesting that the Government sees home-ownership support as another "entitlement".

Investors need a better way to reward fund managers

All too often, fund managers collect spectacular fees from investors for doing nothing more than keeping up with the performance of broader equity markets, according to The Economist. A study proposes measuring managers' performance against an "inertia benchmark," comparing returns from a manager's portfolio with those of a manager who does nothing. "Clients would face a lot of opposition if they tried to restrict managers' fees," the magazine notes. "But after a decade of dismal returns it is time for them to act."
The Economist

Inertia benchmark - I love it.

China's trade and investment shield it from shaky developed economies

China is increasingly hedging against weakness in developed economies by weaving a web of business relationships with Asia, the Middle East, Africa and Latin America, economists said. This network of trade and investment is called "the new silk
road" by economists. China's exports to emerging economies jumped from 2% of gross domestic product in 1985 to 9.5% in 2008. Iran is investing in a revival of the silk road to break a U.S.-led effort to isolate its economy.

Monday, August 2, 2010

Banks in "peripheral" Europe face $122 billion in maturing bonds

Italian, Spanish, Irish and Greek banks face high interest charges in rolling over existing debt, even after European regulators concluded that they are in sound condition and ready to ride out another economic downturn. Banks in countries with the region's heaviest debt loads have $122 billion in bonds maturing this year. Bloomberg
Stress Tests? The tests did not solve the funding issue.

Falling home prices could take U.S. back to recession, Greenspan says

"Tragic unemployment" has trapped every part of the U.S. economy except the wealthy, and the weak recovery might turn into a double-dip recession if home prices keep falling, said former Federal Reserve Chairman Alan Greenspan. Asked on NBC's
"Meet the Press" whether a deepening housing crisis will send the U.S. back into recession, Greenspan said, "It is possible, if home prices go down."
Los Angeles Times

Friday, July 30, 2010

Economists project slower second-half growth

Many economists have lowered their expectations of GDP growth in the second half of the year due to slow job creation, a rocky housing market and sluggish retail sales. Today the government will release its report on output figures for the second quarter, and many economists predict an annualized gain of 2.6%, a dip from 2.7% in the first quarter and 5.6% in the fourth quarter of last year. The New York Times (free registration) (7/29)
Click heading for full story

Foreclosure activity up across most US metro areas

Households across a majority of large U.S. cities received more foreclosure warnings in the first six months of this year than in the first half of 2009, new data shows. The trend is the latest sign that the nation's foreclosure crisis is worsening as homeowners battling high unemployment, slow job growth and an uneven rebound in home prices continue to fall behind on their mortgage payments.
As I've said since the beginning of 2007 call me in 2013 and we'll talk about the bottom of the U.S. real estate market.

Click on heading for link to full story

Cities threaten to cut 500,000 jobs

NEW YORK (CNNMoney.com) -- Cash-strapped cities and counties have been cutting jobs to cope with massive budget shortfalls -- and that tally could edge up to nearly 500,000 if Congress doesn't step up to help.

Local governments are looking to eliminate 8.6% of their total full-time equivalent positions by 2012, according to a new survey released Tuesday by the National League of Cities, the National Association of Counties and United States Conference of Mayors
Click on heading for full story-- quite scary

Italy escapes a fiscal crisis despite its enormous debt

European policymakers are wondering whether they can learn something from the way Italy managed its public finances during the economic downturn, according to Der Spiegel. Italy's sovereign debt is 115.8% of gross domestic product, the highest in Europe, but the country was largely untouched by the euro zone's debt crisis. Italy has not bailed out banks, experienced a housing bubble or dealt with a bloated construction industry, Der Spiegel notes.
Der Spiegel

IMF: Reform law fails to simplify the complex U.S. regulatory system

The U.S. law to overhaul financial regulation leaves the fate of mortgage giants Fannie Mae and Freddie Mac undecided and does not simplify the complicated system that governs securities and banking, the International Monetary Fund said. How the law is implemented will determine whether it accomplishes its objectives, the IMF said. The New York Times. Ha, at last someone noticed this and we haven't even begun the myriad of studies that have to be done as part of this.

U.S. GDP Growth Slowed to 2.4% in Second Quarter

The U.S. economy slowed in the second quarter of this year and the government said the recession was deeper than earlier believed, adding to concerns over the recovery's strength. U.S. gross domestic product rose at an annualized seasonally adjusted rate of 2.4% in April to June. In its first estimate of the economy's benchmark indicator, the government report showed growth was lifted by business investments and exports. Consumer spending made a smaller contribution to growth.

In the first quarter, the economy grew by 3.7%, revised up from an originally reported 2.7% increase. But growth estimates all the way back to the start of 2007 were revised lower.


Thursday, July 29, 2010

U.S. banks are already finding regulatory loopholes

Bank analysts who worried that regulatory reform would cripple the U.S. financial sector have relaxed, after they looked over the law and saw opportunities to get around the rules, industry experts said. Dick Bove, a banking analyst at Rochdale Securities, said it won't take long for executives to show that they know more about how the financial system works than politicians who wrote the law. CNBC
Totally agree with that last sentence.

Credit card users benefit from those who pay with cash

The Federal Reserve Bank of Boston discovered in a recent analysis of credit card fees in the U.S. that they amount to a huge transfer of wealth from low-income to high-income households, accomplished through rewards given to big-spending cardholders. On top of that, merchants increase their prices to pay an interchange fee of 1% to 2% but don't compensate consumers who pay with cash. "As a result, cash customers are subsidising credit-card users," The Economist notes. "And because credit-card users tend to be richer, the transfer of wealth is regressive." The Economist
Pretty interesting stuff.

U.S. Needs To Articulate Credible Fiscal Consolidation Plan - Moody's:

U.S. government needs to articulate clearly a credible plan to tackle its bulging debt profile in order to keep its triple-A credit rating, Moody's Investors Service's lead sovereign analyst for the country said Thursday. The comments indicate
Moody's views on the U.S. have changed little since the ratings agency warned in March on the need for action, and hints a sense of urgency is required from the U.S. government to deal with its rising borrowing needs and interest costs. Dow Jones A sense of urgency?! Give me a break, they have the patience of Job. It is an outrage that the outlook for US is not negative in my opinion.

Tuesday, July 27, 2010

New York Banks compete for New Yorkers seeking jumbo mortgages

New York consumers interested in jumbo mortgages were recently being turned away by most large banks, but that trend has reversed this summer. Banks have been developing new products and offering attractive options for borrowers seeking jumbos, which are home loans too big to receive a guarantee from Fannie Mae, Freddie Mac or the Federal Housing Administration. The Wall Street Journal

Rating agencies' move reveals their Achilles' heel

Columnist Dennis K. Berman explains how a recent power play by the major credit rating agencies revealed their weakness. After the Dodd-Frank act passed, the agencies refused to let issuers use their credit ratings, which are legal requirements in the world of asset-backed securities. The move brought the market to a halt. "Yet what looks like a demonstration of political and market power is anything but," Berman writes. "In fact, it speaks to the raters' own weakness that their greatest leverage comes after an inconvenient, if unintended, short-circuiting of the bond markets." The Wall Street Journal

 Low interest rates start to hit profits at large banks

The Federal Reserve's monetary policy of maintaining low interest rates for an extended period has helped boost earnings at banks such as JPMorgan Chase and Bank of America. However, the policy is starting to make it more difficult for the major lenders to generate profit. "That's the gift from the Fed," Christopher Whalen, co-founder of Institutional Risk Analytics, said of the interest rate. "But at the same time, the cash flow on your assets eventually starts to re-price and match the low-rate environment. The zero-rate environment is eventually bad for everybody." Bloomberg

Can GE survive much longer?

Jeff Immelt at GE just surprised the Markets with "better than expected" results. Is it all flim-flam? Porter Stansberry thinks so and his comments are below...

GE surprised Mr. Market late last week. Now... Mr. Market has the wisdom of a four-year old hopped up on cotton candy, so surprising him is about as difficult as replacing a light bulb. We offer you a more substantial (and sober) review of GE's earnings, below.

Here's a preview: We are less than impressed. In fact, we view the whole charade as sad and tawdry. It's flimflam on a grand scale, from no less than what used to be America's greatest corporation...

Let's begin with the much-ballyhooed dividend increase. GE says it will now pay out $0.12 per share every quarter instead of $0.10. While it is true that $0.12 is 20% more than $0.10, we doubt this arithmetic is very meaningful to bona-fide shareholders, who were collecting a quarterly $0.31 per share until early 2009.

The last time GE shareholders saw regular dividends around $0.12 per quarter was last century – 1999 to be specific. So, while you may regard this dividend increase as a significant step in the right direction, you might also see this extremely low payout level as the result of a "lost decade" at GE.

No matter how you view the news – as an exciting surprise or as a disheartening reality – there is one objective way to measure the dividend: by the yield it will produce for shareholders. Assuming GE continues to pay investors $0.12 per quarter, and assuming you buy the stock today for $16 (where it's trading now), you will earn a grand total of 3% per year on your capital.

GE's managers also want you to know its earnings were up last quarter – by 15%, to $3.3 billion. The results are so good, the company has promised to "extend" its share buyback program.

We've never seen that term used this way before. GE's managers clearly believe it's good news for shareholders. But what it really means is the company never bought the stock it promised to buy back previously. So the deadline for purchasing the stock had to be "extended." Imagine if your employer told you, "Great news, Bob, the company made more money than we thought it would, so we're going to extend your bonus payment – the one we didn't send you last year – to 2015."

Oh... one more thing. It's true that GE's reported earnings increased. But what the managers didn't mention was the company accomplished the increase despite a 4.3% decline in revenues. As any pizza chef can tell you, skimping on ingredients will only carry you for so long. Sooner or later, you gotta actually make more dough.

Finally... here's what GE CEO Jeffrey Immelt definitely didn't mention along with the promised 3% dividend and the "extended" buyback program: negative amortization mortgages.

When you think of GE, you probably think of its slogan: We Bring Good Things to Life. What GE actually does, however, is run a huge, highly leveraged global hedge fund that's almost totally unregulated. And the upcoming losses from this enormous financial operation will almost surely overwhelm the company's ability to finance its matching debtload. Let's run down the real numbers...

GE Capital has nearly $600 billion in assets. That's roughly 75% of all of GE's assets. When we say GE is really a giant, unregulated, global hedge fund, that's what we mean: Three-quarters of its assets are committed to the hedge fund, which it calls "GE Capital."

GE Capital does what most banks do... It borrows a ton of other people's money, invests it in ridiculously risky projects, and pays out bonuses to its managers, who retire before anyone realizes how much money they've lost.

GE Capital's nearly $600 billion in assets include $333 billion in receivables (think credit cards, car loans, and mortgages), $53 billion in property (think commercial real estate), and $81 billion in "other." We have no idea what "other" represents and would challenge anyone outside the company to explain it to us, as GE Capital's reporting is entirely indecipherable. Here's a good example... In one of its dozens of summary pages regarding its real estate investments, you will find this footnote: "Includes real estate investments related to Real Estate only."

We've never found a company that couldn't make its business easy to understand if it chose to do so. Warren Buffett, for example, runs a business that's similar in scale to GE. He writes the annual report personally, going over every key business unit in plain, clear English. GE's reporting is complex because it doesn't want you to know what's happened.

In any case... even assuming all $81 billion of "other" is money-good, we still believe the company is likely to declare bankruptcy because of investment losses within the next three years. Here's why: The company's total tangible net equity is only $40 billion. Thus, if GE were to lose 7% across all of its investments, its equity would be completely wiped out. In truth, whole book losses of even 2% or 3% would spook the capital markets enough that GE wouldn't be able to roll over its debts. And its near-term capital needs are massive: $227 billion comes due before the end of 2013.

We think its investment losses will total more than $50 billion over the next two to three years. Here's why...

GE Capital's total European exposure is $95 billion – that includes credit-card debt, auto loans, and mortgages. Any significant decline in the value of the euro would cause massive losses in these investments. And even if nothing bad happens to the euro currency (and we believe the euro must soon either be significantly devalued or significantly restructured), GE is still likely to lose an enormous amount of money on these loans. The reason why is buried in a footnote on page 21 of its second-quarter credit-quality report. It says:

"...At origination, we underwrite loans with an adjustable rate to the reset value. 81% of these loans are in our U.K. and France portfolios, which comprise mainly loans with interest-only payments and introductory below market rates..."

What that means is that GE Capital invested heavily in interest-only, variable-rate mortgages in the U.K. and France. Most of these loans haven't "reset" yet. And when they do, they have enormously high default rates.

Specifically, in the UK, 24.9% of GE's mortgages are more than 30 days delinquent. In Spain, almost 30% of GE's mortgages are 30 days or more delinquent. On average, of $50 billion in non-U.S. mortgages, more than 14% are delinquent. We estimate that at least 50% of these loans will end up defaulting.

According to Wells Fargo, defaults on these types of loans have been producing losses of between 60% and 70%. So... if you assume half of the mortgages default and you assume loss severity of 70%, GE should see losses on its non-U.S. mortgage portfolio of between $15 and $20 billion – not including losses on its $160 billion American mortgage portfolio... not including its commercial real estate losses... and not including its exposure to a euro currency crisis.

For taking on all of these risks, Immelt is offering you 3% a year. Plus a share buyback that's been "extended." Any takers?

Trichet Challenges Inflationism

The Financial Times published the following article by Jean-Claude Trichet (Head of the European Central Bank)..cut and paste the link into your browser to read the whole story.


Doug Noland at prudentbear.com has dissected it for you 2/3 down in the article linkrd above and the crux of his analysis is:
"Washington – or the states – can’t spend its way to fiscal recovery. Instead, we’re witnessing a fiscal train wreck. Our policymakers, economists, and pundits should read Mr. Trichet carefully and contemplate a course other than inflationism."

Click on the heading above and READ the whole thing...and ponder deeply.

Obama signs a bill that lets banks have US over a barrel once more

Another from The Telegraph. The article states that... "Last week, President Obama signed into law the Dodd-Frank Wall Street Reform bill – hailed as the most sweeping overhaul of US financial regulation since the 1930s." But reporter Liam Halligan thinks otherwise... "Based on sound-thinking courageous judgment, the Glass-Steagall legislation was only 17 pages long. Packed with wheezes and loop-holes, Dodd-Frank runs to 2,319 pages. Enough said."

Urgent: Real Estate Recovery is a fairy tale;Why Are Banks Withholding High-End Repossessions Over $300,000 From the Market?

The recently touted "recovery" in real estate sales (see post below) is a dangerous myth. At some point soon the Real Estate market will implode; and with it the banks holding the mortages to high end (More than $300,000 in price) foreclosed houses.
Bank Withholding of High-End Foreclosures from the Market is Nationwide

The Data from RealtyTrac reveal a clear pattern on the part of banks to withhold most repossessed homes from the market and nearly all of those listed on RealtyTrac for more than $300,000. Is this occurring throughout the nation?

Will this bank strategy keep the market for homes over $300,000 from imploding? Not a chance.

For example: In Bergen County NJ, just across the GW Bridge, there are 615 already bank repossessed homes, according to RealtyTrac. 31 (5%) are on the market currently, but only 4 (less than 1%)are priced over $300,000!

This is a better example; look at the article linked above for much worse numbers.

Fannie Mae now requires an average down payment of 30% for securitized loans which it purchases or guarantees. According to Fitch Ratings, mortgage delinquencies for prime jumbo mortgages soared to 10.3% in May as underwater owners walked away in droves. That spells serious trouble for the five states which account for 2/3 of all outstanding jumbo loans - California, Florida, New Jersey, Virginia and New York. The problem goes well beyond these states, however. Housing markets throughout the United States for $300,000+ homes are in for rough sailing and prices are extremely likely to be headed for a real plunge.

Lessons from History:The Death of Paper Money

From Ambrose Evans-Pritchard of the Telegraph. Click on header for full story. A very interesting read.

As they prepare for holiday reading in Tuscany, City bankers are buying up rare copies of an obscure book on the mechanics of Weimar inflation published in 1974.
Ebay is offering a well-thumbed volume of "Dying of Money: Lessons of the Great German and American Inflations" at a starting bid of $699 (shipping free.. thanks a lot).

The crucial passage comes in Chapter 17 entitled "Velocity". Each big inflation -- whether the early 1920s in Germany, or the Korean and Vietnam wars in the US -- starts with a passive expansion of the quantity money. This sits inert for a surprisingly long time. Asset prices may go up, but latent price inflation is disguised. The effect is much like lighter fuel on a camp fire before the match is struck.
People’s willingness to hold money can change suddenly for a "psychological and spontaneous reason" , causing a spike in the velocity of money. It can occur at lightning speed, over a few weeks. The shift invariably catches economists by surprise. They wait too long to drain the excess money.

Some might smile at the Bank of England "surprise" at the recent the jump in Brtiish inflation. Across the Atlantic, Fed critics say the rise in the US monetary base from $871bn to $2,024bn in just two years is an incendiary pyre that will ignite as soon as US money velocity returns to normal.

Morgan Stanley expects bond carnage as this catches up with the Fed, predicting that yields on US Treasuries will rocket to 5.5pc. This has not happened so far. 10-year yields have fallen below 3pc, and M2 velocity has remained at historic lows of 1.72.

As a signed-up member of the deflation camp, I think the Bank and the Fed are right to keep their nerve and delay the withdrawal of stimulus -- though that case is easier to make in the US where core inflation has dropped to the lowest since the mid 1960s. But fact that O Parsson’s book is suddenly in demand in elite banking circles is itself a sign of the sort of behavioral change that can become self-fulfilling.

Ford works with the SEC on a sale of bonds backed by auto loans

Politicians, in their naieve zeal to regulate, have forced a pre-birth exception to the new law that is likely to become permanent:

Ford Motor Credit delayed a sale of bonds backed by auto loans last week because of regulatory uncertainty caused by the financial overhaul. On Monday, Ford sold a billion-dollar bond by working with the Securities and Exchange Commission. Ford and
the SEC created a reprieve to a part of the law that holds credit rating agencies liable for ratings they issue. "Clearly, the SEC recognizes the importance of the public [asset-backed securities] markets, and we are glad the staff is taking temporary measures to ensure public markets continue to be available by establishing a transitional period through Jan. 24, 2011," a spokeswoman wrote.
The Wall Street Journal

The SEC realizes the importance of keeping credit markets open; laws written by lobbyists and political operatives with no actual experience of real life business operations are inevitably going to harm the economy. They will force "exceptions" until the reality of daily business makes a mockery of the law now administered by an increased burocracy at immense permanent additional expense to the taxpayer.

Regulatory reform will affect municipal and corporate bonds differently

The overhaul of financial regulation will affect corporate bonds and municipal bonds differently, partly because corporate bonds are registered securities. That difference is meaningful as market participants work to unravel the law and its
unintended consequences, according to CNBC.

Report: Chinese local governments probably will default on bank loans

China's banks loaned more than $1 trillion to provincial financing agencies to stimulate the economy, but many of the loans are expected to go into default, according to Century Weekly, citing information from the China Banking Regulatory Commission. Almost a quarter of the loans are at risk of going unpaid, according to the publication. Many of the borrowers are of "questionable credit quality," a Standard & Poor's analyst said.

U.S. new-home sales rebound, but builders are forced to slash prices

New-home sales increased 23.6% last month compared with May, topping economists' forecasts, but the sales level, 330,000, was the second-lowest since the government started tracking such data in 1963. Builders were forced to keep cutting prices to get those sales. The average selling price dropped to $242,900, the lowest for June since 2003.
The Christian Science Monitor

Analysis: Geithner and Bernanke differ on a tax issue

U.S. Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke have been in sync on most issues during the past three years, but recent comments from the officials suggest they are on opposite sides of a tax issue, according to The Wall Street Journal. Bernanke told lawmakers that he supports continuing tax rates that expire early next year.
Geithner, on the other hand, said those tax rates should be allowed to expire.
The Wall Street Journal

Friday, July 23, 2010

Fed not looking to buy more mortgage securities, NY Times

So how in Gods name is the mortgage market to recover?

The Fed holds mortgage securities worth more than $1T, and is not eager to expand that portfolio further at this point, according to the New York Times


Need for electricity drives soaring global demand for coal

Coal consumption to produce electricity is expanding at a phenomenal rate worldwide, and the International Energy Agency projected that demand will keep growing rapidly for at least the next 20 years. Carbon capture and storage technology might solve the
problem of greenhouse-gas emissions, according to Der Spiegel, but they create another one -- a location for the captured gas, which can be dangerous in high concentration. Der Spiegel

The immediate fallout from "Financial Reform"

Umintended consequences strike again. Dodd-Frank is already an economic disaster: German Banks are fleeing the NYSE, parts of the Mortgage market are shut down or operating with emergency exemptions and under temporary rules from the SEC, Fannie and Fredie are bankrupt..why dont they have to operate under the same rules?

.At least 2 issuers pull sales of asset-backed bonds: Ford Motor Credit and at least one other issuer reacted to problems with credit rating agencies by pulling planned sales of asset-backed bonds, fund managers and traders said. Rating agencies are no longer allowing issuers of asset-backed securities to use their ratings in bond
prospectuses because of liability raised by the regulatory overhaul. Reuters

.SEC temporarily eases rules for issuers of asset-backed bonds The Securities and Exchange Commission is aiming to help issuers of asset-backed bonds comply with rules that are part of the regulatory revamp by temporarily allowing them to omit credit ratings on their filings. Meredith Cross, director of the corporatefinance
division at the SEC, said credit rating agencies are not allowing borrowers to include rankings in registration statements. "This action will provide issuers, rating agencies and other market participants with a transition period in order to implement changes to comply," Cross said. Bloomberg

.Germany's corporate giants pull out of the U.S. stock market The biggest companies in Germany are walking away from the New York Stock Exchange and other U.S. securities markets, deciding that financial regulation, lawsuits and accounting rules in the country are more trouble than they're worth. Deutsche Telekom and Allianz are the latest German blue-chip corporations to flee Wall Street. Germany's DAX index of prestigious, household-name firms once had 11 companies on the NYSE, but the number has fallen to four.
Spiegel Online

The Tax Tsunami On The Horizon

Todays Investors Business Daily Editorial says it all...goodbye any economic recovery

Many voters are looking forward to 2011, hoping a new Congress will put the country back on the right track. But unless something's done soon, the new year will also come with a raft of tax hikes — including a return of the death tax.
Through the end of this year, the federal estate tax rate is zero — thanks to the package of broad-based tax cuts that President Bush pushed through to get the economy going earlier in the decade.

But as of midnight Dec. 31, the death tax returns — at a rate of 55% on estates of $1 million or more. The effect this will have on hospital life-support systems is already a matter of conjecture.

Resurrection of the death tax, however, isn't the only tax problem that will be ushered in Jan. 1. Many other cuts from the Bush administration are set to disappear and a new set of taxes will materialize. And it's not just the rich who will pay.

The lowest bracket for the personal income tax, for instance, moves up 50% — to 15% from 10%. The next lowest bracket — 25% — will rise to 28%, and the old 28% bracket will be 31%. At the higher end, the 33% bracket is pushed to 36% and the 35% bracket becomes 39.6%.

But the damage doesn't stop there.

The marriage penalty also makes a comeback, and the capital gains tax will jump 33% — to 20% from 15%. The tax on dividends will go all the way from 15% to 39.6% — a 164% increase.

Both the cap-gains and dividend taxes will go up further in 2013 as the health care reform adds a 3.8% Medicare levy for individuals making more than $200,000 a year and joint filers making more than $250,000. Other tax hikes include: halving the child tax credit to $500 from $1,000 and fixing the standard deduction for couples at the same level as it is for single filers.

Letting the Bush cuts expire will cost taxpayers $115 billion next year alone, according to the Congressional Budget Office, and $2.6 trillion through 2020.

But even more tax headaches lie ahead. This "second wave" of hikes, as Americans for Tax Reform puts it, are designed to pay for ObamaCare and include:

The Medicine Cabinet Tax. Americans, says ATR, "will no longer be able to use health savings account, flexible spending account, or health reimbursement pretax dollars to purchase nonprescription, over-the-counter medicines (except insulin)."
The HSA Withdrawal Tax Hike. "This provision of ObamaCare," according to ATR, "increases the additional tax on nonmedical early withdrawals from an HSA from 10% to 20%, disadvantaging them relative to IRAs and other tax-advantaged accounts, which remain at 10%."

Brand Name Drug Tax. Makers and importers of brand-name drugs will be liable for a tax of $2.5 billion in 2011. The tax goes to $3 billion a year from 2012 to 2016, then $3.5 billion in 2017 and $4.2 billion in 2018. Beginning in 2019 it falls to $2.8 billion and stays there. And who pays the new drug tax? Patients, in the form of higher prices.

Economic Substance Doctrine. ATR reports that "The IRS is now empowered to disallow perfectly legal tax deductions and maneuvers merely because it judges that the deduction or action lacks 'economic substance.'"

A third and final (for now) wave, says ATR, consists of the alternative minimum tax's widening net, tax hikes on employers and the loss of deductions for tuition:

• The Tax Policy Center, no right-wing group, says that the failure to index the AMT will subject 28.5 million families to the tax when they file next year, up from 4 million this year.

• "Small businesses can normally expense (rather than slowly deduct, or 'depreciate') equipment purchases up to $250,000," says ATR. "This will be cut all the way down to $25,000. Larger businesses can expense half of their purchases of equipment. In January of 2011, all of it will have to be 'depreciated.'"

• According to ATR, there are "literally scores of tax hikes on business that will take place," plus the loss of some tax credits. The research and experimentation tax credit will be the biggest loss, "but there are many, many others. Combining high marginal tax rates with the loss of this tax relief will cost jobs."

• The deduction for tuition and fees will no longer be available and there will be limits placed on education tax credits. Teachers won't be able to deduct their classroom expenses and employer-provided educational aid will be restricted. Thousands of families will no longer be allowed to deduct student loan interest.

Then there's the tax on Americans who decline to buy health care insurance (the tax the administration initially said wasn't a tax but now argues in court that it is) plus a 3.8% Medicare tax beginning in 2013 on profits made in real estate transactions by wealthier Americans.
Not all Americans may fully realize what's in store come Jan. 1. But they should have a pretty good idea by the mid-term elections, and members of Congress might take note of our latest IBD/TIPP Poll (summarized above).

Fifty-one percent of respondents favored making the Bush cuts permanent vs. 28% who didn't. Republicans were more than 4 to 1 and Independents more than 2 to 1 in favor. Only Democrats were opposed, but only by 40%-38%.

The cuts also proved popular among all income groups — despite the Democrats' oft-heard assertion that Bush merely provided "tax breaks for the wealthy." Fact is, Bush cut taxes for everyone who paid them, and the cuts helped the nation recover from a recession and the worst stock-market crash since 1929.

Maybe, just maybe, Americans remember that — and will not forget come Nov. 2.