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.
Friday, August 6, 2010
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%.
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:
EXAMPLE:
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.
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:
EXAMPLE:
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
a.
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.
b.
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)
c.
Government gets a real, visible path to recovery of money appropriated to this program, with interest.
d.
Government will be helping citizens who most need help and restoring their confidence in The American Dream.
e.
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.
f.
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.
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.
b.
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)
c.
Government gets a real, visible path to recovery of money appropriated to this program, with interest.
d.
Government will be helping citizens who most need help and restoring their confidence in The American Dream.
e.
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.
f.
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.
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.
ALL POLITICS ASIDE...THE ROOT PROBLEM THAT MUST BE FIXED NOW IS HOME VALUATION
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.
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.
ALL POLITICS ASIDE...THE ROOT PROBLEM THAT MUST BE FIXED NOW IS HOME VALUATION
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.”
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.
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.
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."
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.
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".
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.
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.
Bloomberg
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.
Bloomberg
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.
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
"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
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
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
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
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.
http://online.wsj.com/article/SB10001424052748703999304575398870021765454.html?mod=djemalertNEWS
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.
http://online.wsj.com/article/SB10001424052748703999304575398870021765454.html?mod=djemalertNEWS
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.
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.
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.
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?
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.
http://www.ft.com/cms/s/0/1b3ae97e-95c6-11df-b5ad-00144feab49a.html
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.
http://www.ft.com/cms/s/0/1b3ae97e-95c6-11df-b5ad-00144feab49a.html
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?
CLICK ON HEADING FOR LINK TO ARTICLE WITH A REVEALING TABLE AND DECIDE FOR YOURSELF
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.
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?
CLICK ON HEADING FOR LINK TO ARTICLE WITH A REVEALING TABLE AND DECIDE FOR YOURSELF
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.
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.
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.
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.
Google
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
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
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
http://www.nytimes.com/2010/07/23/business/23banks.html?_r=2&adxnnl=1&ref=todayspaper&adxnnlx=1279881242-Cv3ErJ2b9rjLjOjVZUkfww
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
http://www.nytimes.com/2010/07/23/business/23banks.html?_r=2&adxnnl=1&ref=todayspaper&adxnnlx=1279881242-Cv3ErJ2b9rjLjOjVZUkfww
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
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
.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.
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.
Thursday, July 22, 2010
Joblessness is down in 39 states, but few jobs are being created
A decline in unemployment in 39 U.S. states and the District of Columbia last month is another sign that job seekers are giving up the hunt, not that the labor market is strengthening, experts said. Only 21 states posted a net job gain in June, compared with 41 in May, the Labor Department said. Nationwide, private employers added 83,000 workers.
Another sign of a failure of current US economic policy.
Another sign of a failure of current US economic policy.
Rising yuan pushes China's exporters to innovate and introduce tech
A strengthening yuan is forcing China's exporters to move up the value chain and become more innovative, said Zhang Yansheng, a researcher for the National Development and Reform Commission. Ge Yafang, head of Black Peony, which exports clothing to the U.S. and Japan, said if the firm hadn't shifted from dependence on cheap labor to a technology-driven operation, the rising yuan would haven driven it into bankruptcy.
Xinhuanet.com
An opportunity for US companies to gain sales in China?
Xinhuanet.com
An opportunity for US companies to gain sales in China?
Weaker EU members' dependence on the ECB is at a record high
Data show that weaker members of the EU are more dependent on the European Central Bank than ever before. The revelation comes as European regulators prepare to release results of stress tests on 91 banks, part of efforts to reassure markets
about the stability of the financial sector. However, sources said some regulators are urging that results be released before the start of trading in Europe, rather than after, as planned. The Wall Street Journal
about the stability of the financial sector. However, sources said some regulators are urging that results be released before the start of trading in Europe, rather than after, as planned. The Wall Street Journal
Bernanke discusses the Fed's stance on economic uncertainty
Ben Bernanke, chairman of the Federal Reserve, said the central bank is prepared to stimulate growth if the U.S. economy deteriorates, but officials are also ready to increase interest rates and rein in its balance sheet. "We will continue to carefully
assess ongoing financial and economic developments, and we remain prepared to take further policy actions as needed to foster a return to full utilization of our nation's productive potential in a context of price stability," Bernanke told the Senate banking committee. Bloomberg
assess ongoing financial and economic developments, and we remain prepared to take further policy actions as needed to foster a return to full utilization of our nation's productive potential in a context of price stability," Bernanke told the Senate banking committee. Bloomberg
Wednesday, July 21, 2010
America's AAA Rating Is Cut in Land of Bubbles
“While Moody’s and S&P ignore the wreckage that America’s finances have become, Beijing-based Dagong Global Credit Rating Co. is uncorrupted by the system that enables developed-world debt addicts to appear fiscally clean. It rates U.S. debt AA, two levels below the top grade.
Dagong is right to turn the world of A- and Baa1 on its head even though rating China higher than the U.S. is hubristic at best. Anyone who thinks China deserves a top rating or is devoid of debt landmines isn’t looking very hard.”
William Pesek
Dagong is right to turn the world of A- and Baa1 on its head even though rating China higher than the U.S. is hubristic at best. Anyone who thinks China deserves a top rating or is devoid of debt landmines isn’t looking very hard.”
William Pesek
Reform bill might halt the ABS market, insiders say
Another unintended consequence of legislation stifling another desperately needed industry.... pushing economic recovery further out into the ether.
Bank analysts and an industry group said regulatory reform legislation heading to President Barack Obama might hurt the asset-backed securities market by bolstering credit raters' liability risk. The major credit rating agencies informed the industry that underwriters will no longer be allowed to use their ratings in bond-registration statements because their risk of being sued has increased. Bloomberg
Bank analysts and an industry group said regulatory reform legislation heading to President Barack Obama might hurt the asset-backed securities market by bolstering credit raters' liability risk. The major credit rating agencies informed the industry that underwriters will no longer be allowed to use their ratings in bond-registration statements because their risk of being sued has increased. Bloomberg
U.K. seems to be moving to monetize its debt
What makes you think the Fed (here in the USA) is not doing the same thing? Watch what is done, not what is said.
The British government denied that it plans to inflate away debt, but its actions suggest that is exactly what it intends to do, according to The Economist. A program
by the government's National Savings and Investments that paid the rate of inflation plus 1% was closed because of its runaway popularity. Meanwhile, the Bank of England recently bought more than enough debt to fund the deficit for a year, a classic debt-monetization technique that dates back to Germany's Weimar republic, The Economist notes.
The British government denied that it plans to inflate away debt, but its actions suggest that is exactly what it intends to do, according to The Economist. A program
by the government's National Savings and Investments that paid the rate of inflation plus 1% was closed because of its runaway popularity. Meanwhile, the Bank of England recently bought more than enough debt to fund the deficit for a year, a classic debt-monetization technique that dates back to Germany's Weimar republic, The Economist notes.
The Statist Truth About China
China's Anxiety About Successful Companies ... China is turning independent coal-mines into state-run operations, showing its impatience with private companies that get too big. China's high-profile battle with foreign companies makes it seem as though those businesses keep the nation's economic planners awake at night. It has arrested a Rio Tinto executive on trumped-up charges, blocked Facebook and YouTube, and restricted (in practice if not in name) foreign firms from key industries such as oil, media, and metals. ... While the government has claimed it's putting forth better companies at the expense of weaker ones, the root cause remains that an ever-insecure China wants to rein in independent sources of influence (and wealth) that it feels have become too independent to control. This trend, known in Chinese as "the country advances and the private retreats," allows the government to increase its control over the economy by funneling resources and growth potential into more pliable state companies. – Newsweek
Tuesday, July 20, 2010
No relief is in sight for the U.S. housing market
It is clear that the U.S. housing supply was too big to be affected much by the tax credit for buyers, and for that reason, a bleak future awaits the market, according
to The Economist. "A durable solution to the crisis in housing needed to involve an answer to the epidemic of negative equity and a meaningful labour market recovery," The Economist notes. "America has neither."
The Economist
I'm concerned my outlook for further house price declines may be too conservative
to The Economist. "A durable solution to the crisis in housing needed to involve an answer to the epidemic of negative equity and a meaningful labour market recovery," The Economist notes. "America has neither."
The Economist
I'm concerned my outlook for further house price declines may be too conservative
Monday, July 19, 2010
NYU STERN SYSTEMIC RISK RANKINGS
The RISK page of the Volatility Laboratory presents a variety of risk measures for top US Financial Firms. These measures are updated daily and reveal several dimensions of risk. Some measure the risks of individual firms and others are firm contributions to the risk of the financial system and the economy as a whole. Historical estimates of each of these risk measures can be plotted to see the changing performance of individual firms.
The heart of the analysis is the analysis of Marginal Expected Shortfall or MES. This is a prediction of how much the stock of a particular financial company will decline in a day, if the whole market declines by 2%. The measure incorporates the volatility of the firm and its correlation with the market, as well as its performance in extremes. To estimate the equity losses in a future financial crisis, the debt equity ratio of the firm is combined with the MES to reflect the decline that might be expected in a crisis when many firms are undercapitalized. This is called ERISK. Finally, the ERISK measure is used to determine the capital shortfall that a firm would face in a crisis. When equity values fall below prudential levels, the debt loses value and creditors throughout the economy are impacted. The Systemic Risk Contribution, SRISK%, is the percentage of all capital shortfall that would be experienced by this firm in the event of a crisis. Firms with a high percentage of capital shortfalls in a crisis are not only the biggest losers in a crisis but also are the firms that create or extend the crisis. This SRISK% is the NYU Stern Systemic Risk Ranking of the US Financial sector. Some of the firms on this list are already under government protection. Their risk status is a reflection of the costs to the system if the government guarantees were suddenly withdrawn.
To sort the firms by any of these categories, simply click on the heading. To plot any of the series, click on the firm name and select the series to be plotted. You can select the time horizon of the plot. To see help, click on the "?s" in the page.
http://vlab.stern.nyu.edu/analysis/RISK.USFIN-MR.MES
Systemic Risk Top Five
Bank Of America 15.86%, Citigroup 14.86%, Freddie Mac 10.46%, Fannie Mae 10.05%, JP Morgan Chase 7.71%
The Top Ten is rounded out with AIG, Goldman Sachs, Morgan Stanley, Prudential Financial, Hartford Financial Services Group.
The heart of the analysis is the analysis of Marginal Expected Shortfall or MES. This is a prediction of how much the stock of a particular financial company will decline in a day, if the whole market declines by 2%. The measure incorporates the volatility of the firm and its correlation with the market, as well as its performance in extremes. To estimate the equity losses in a future financial crisis, the debt equity ratio of the firm is combined with the MES to reflect the decline that might be expected in a crisis when many firms are undercapitalized. This is called ERISK. Finally, the ERISK measure is used to determine the capital shortfall that a firm would face in a crisis. When equity values fall below prudential levels, the debt loses value and creditors throughout the economy are impacted. The Systemic Risk Contribution, SRISK%, is the percentage of all capital shortfall that would be experienced by this firm in the event of a crisis. Firms with a high percentage of capital shortfalls in a crisis are not only the biggest losers in a crisis but also are the firms that create or extend the crisis. This SRISK% is the NYU Stern Systemic Risk Ranking of the US Financial sector. Some of the firms on this list are already under government protection. Their risk status is a reflection of the costs to the system if the government guarantees were suddenly withdrawn.
To sort the firms by any of these categories, simply click on the heading. To plot any of the series, click on the firm name and select the series to be plotted. You can select the time horizon of the plot. To see help, click on the "?s" in the page.
http://vlab.stern.nyu.edu/analysis/RISK.USFIN-MR.MES
Systemic Risk Top Five
Bank Of America 15.86%, Citigroup 14.86%, Freddie Mac 10.46%, Fannie Mae 10.05%, JP Morgan Chase 7.71%
The Top Ten is rounded out with AIG, Goldman Sachs, Morgan Stanley, Prudential Financial, Hartford Financial Services Group.
Firms cancel health coverage:
The relentlessly rising cost of health insurance is prompting some small Massachusetts companies to drop coverage for their workers and encourage them to sign up for statesubsidized care instead, a trend that, some analysts say, could eventually weigh heavily on the state’s alreadystressed budget. Boston.com
Given that Obamacare is based on the Mass model, then we are about to "bend the cost curve" the wrong way.
Given that Obamacare is based on the Mass model, then we are about to "bend the cost curve" the wrong way.
Direct investors are outbidding bond dealers for U.S. Treasurys
Wall Street bond dealers have been the major buyers of U.S. Treasurys since 2003, when the government started releasing data on buyers, but the pattern is changing. U.S. banks, mutual funds and foreign central banks purchased 57% of the $1.26 trillion in Treasury notes and bonds auctioned this year. Bloomberg•
Soething is changing in the world! But what prompts this, do you suppose?
Soething is changing in the world! But what prompts this, do you suppose?
Collapse of talks for a Hungarian rescue might trigger market panic
The sovereign-debt market might remain in turmoil for a while, after the International Monetary Fund and the EU walked away from discussions with Hungary regarding its budget deficit, experts said. The decision puts the IMF's $25.8 billion bailout for Hungary on the back burner. Bloomberg Businessweek so far market taking this in stride. There should be caution with Greece ahead of next disbursement of funds in August.
Friday, July 16, 2010
Persian Isolation: setting up for a war against IRAN?
By Alexander Smoltczyk and Bernhard Zand FROM THE MAGAZINE DER SPIEGEL (English Edition)
Israel and the Arab states near the Persian Gulf recognize a common threat: the regime in Tehran. A regional diplomat has not even ruled out support by the Arab states for a military strike to end Iran's nuclear ambitions.
"The Jews and Arabs have been fighting for one hundred years. The Arabs and the Persians have been going at (it) for a thousand,"
Almost all Arab neighbors have a hostile relationship with the Islamic Republic. Saudi Arabia suspects Iran of stirring up the Shiite minority in its eastern provinces. The Arab emirates accuse Iran of occupying three islands in the Persian Gulf. Egypt has not had regular diplomatic relations with Iran since a street in Tehran was named after the murderer of former Egyptian President Anwar el-Sadat.
Jordanian King Abdullah II warns against the establishment of a "Shiite crescent" between Iran and Lebanon. And Kuwait, fearing the Iranians, installed the Patriot air defense missile system in the spring.
Closely Aligned
Arab governments are concerned about a strong Iran, its nuclear program and the inflammatory speeches of Iranian President Mahmoud Ahmadinejad. They share these concerns with another government in the Middle East -- Israel's.
Never have the strategic interests of the Jewish and Arab states been so closely aligned as they are today. While European and American security experts consistently characterize a military strike against Iran as "a last option," notable Arabs have long shared the views of Israel's ultra-nationalist foreign minister, Avigdor Lieberman. If no one else takes it upon himself to bomb Iran, Saudi cleric Mohsen al-Awaji told SPIEGEL, Israel will have to do it. "Israel's agenda has its limits," he said, noting that it is mainly concerned with securing its national existence. "But Iran's agenda is global."
But Arab countries are pursuing a delicate seesaw policy. The UAE cannot afford to openly offend Iran, which explains why Ambassador Otaiba was promptly ordered to return home on Wednesday.
This caution only conceals the deep divide between the Arabs and the Persians. Despite their public expressions of outrage over Israeli behavior, such as the blockade of the Gaza Strip, Arab countries in the region continue to pursue their pragmatic course. On June 12, The Times in London wrote that Saudi Arabia had recently "conducted tests to stand down its air defenses to enable Israeli jets to make a bombing raid on Iran's nuclear facilities" -- in the event of an attack on the nuclear power plant in Bushehr. In March, Western intelligence agencies reported that there were signs of secret negotiations between Jerusalem and Riyadh to discuss the possibility.
"We are aligned (with the United States) on every policy issue there is in the Middle East," Ambassador Otaiba said in Aspen.
Israel and the Arab states near the Persian Gulf recognize a common threat: the regime in Tehran. A regional diplomat has not even ruled out support by the Arab states for a military strike to end Iran's nuclear ambitions.
"The Jews and Arabs have been fighting for one hundred years. The Arabs and the Persians have been going at (it) for a thousand,"
Almost all Arab neighbors have a hostile relationship with the Islamic Republic. Saudi Arabia suspects Iran of stirring up the Shiite minority in its eastern provinces. The Arab emirates accuse Iran of occupying three islands in the Persian Gulf. Egypt has not had regular diplomatic relations with Iran since a street in Tehran was named after the murderer of former Egyptian President Anwar el-Sadat.
Jordanian King Abdullah II warns against the establishment of a "Shiite crescent" between Iran and Lebanon. And Kuwait, fearing the Iranians, installed the Patriot air defense missile system in the spring.
Closely Aligned
Arab governments are concerned about a strong Iran, its nuclear program and the inflammatory speeches of Iranian President Mahmoud Ahmadinejad. They share these concerns with another government in the Middle East -- Israel's.
Never have the strategic interests of the Jewish and Arab states been so closely aligned as they are today. While European and American security experts consistently characterize a military strike against Iran as "a last option," notable Arabs have long shared the views of Israel's ultra-nationalist foreign minister, Avigdor Lieberman. If no one else takes it upon himself to bomb Iran, Saudi cleric Mohsen al-Awaji told SPIEGEL, Israel will have to do it. "Israel's agenda has its limits," he said, noting that it is mainly concerned with securing its national existence. "But Iran's agenda is global."
But Arab countries are pursuing a delicate seesaw policy. The UAE cannot afford to openly offend Iran, which explains why Ambassador Otaiba was promptly ordered to return home on Wednesday.
This caution only conceals the deep divide between the Arabs and the Persians. Despite their public expressions of outrage over Israeli behavior, such as the blockade of the Gaza Strip, Arab countries in the region continue to pursue their pragmatic course. On June 12, The Times in London wrote that Saudi Arabia had recently "conducted tests to stand down its air defenses to enable Israeli jets to make a bombing raid on Iran's nuclear facilities" -- in the event of an attack on the nuclear power plant in Bushehr. In March, Western intelligence agencies reported that there were signs of secret negotiations between Jerusalem and Riyadh to discuss the possibility.
"We are aligned (with the United States) on every policy issue there is in the Middle East," Ambassador Otaiba said in Aspen.
"Inflating War: Central banking and militarism are intimately linked".
The Great Depression of 1920 only lasted one year, however, thanks to President Warren Harding’s inspired policy of cutting both government spending and taxes dramatically.
A most urgent question : will the current President have the courage to do what is right for the good of the nation as Warren Harding did, or will he succumb to baser instincts and refuse to cut spending and taxes dramatically?
Thomas DiLorenzo lays out the disasterous historical connection between politics, militarism and central banking. Heed the warnings contained or this nation will again see its wealth devestated.
Government can finance war (and everything else) by only three methods: taxes, debt, and the printing of money. Taxes are the most visible and painful, followed by debt finance, which crowds out private borrowing, drives up interest rates, and imposes the double burden of principal and interest. Money creation, on the other hand, makes war seem costless to the average citizen. But of course there is no such thing as a free lunch.
As a general rule, the longer a war lasts, the more centrally planned and government-controlled the entire economy becomes. And it remains so to some degree after the war has ended. War is the health of the state, as Randolph Bourne famously declared, and the growth of the state means a decline in liberty and prosperity. (Think Socialism, Communism, Totalianarism as epitomized by North Korea, Nazi Germany...who would want to live in a regime like those?)
Special interests joined the political coalition that created the Federal Reserve Board in 1913, which became an important source of finance for America’s disastrous participation in World War I four years later. The Fed did not just print greenbacks, as was the case during the Civil War. It printed enough money to purchase more than $4 billion in government bonds that were used to finance the war. The amount of money in circulation doubled between 1914 and 1920—as did prices. This was an enormous hidden war tax on the American people: wealth was cut in half, along with real wages, and just about everything consumers purchased became more expensive.
The boom created by the Fed’s war financing inevitably caused a bust—the Depression of 1920, the first year of which was even worse than the first year of the Great Depression of the 1930s. Gross domestic product declined by 24 percent from 1920-21, while the number of unemployed Americans more than doubled, from 2.1 million to 4.9 million. The Great Depression of 1920 only lasted one year, however, thanks to President Warren Harding’s inspired policy of cutting both government spending and taxes dramatically.
A most urgent question : will the current President have the courage to do what is right for the good of the nation as Warren Harding did, or will he succumb to baser instincts and refuse to cut spending and taxes dramatically?
Thomas DiLorenzo lays out the disasterous historical connection between politics, militarism and central banking. Heed the warnings contained or this nation will again see its wealth devestated.
Government can finance war (and everything else) by only three methods: taxes, debt, and the printing of money. Taxes are the most visible and painful, followed by debt finance, which crowds out private borrowing, drives up interest rates, and imposes the double burden of principal and interest. Money creation, on the other hand, makes war seem costless to the average citizen. But of course there is no such thing as a free lunch.
As a general rule, the longer a war lasts, the more centrally planned and government-controlled the entire economy becomes. And it remains so to some degree after the war has ended. War is the health of the state, as Randolph Bourne famously declared, and the growth of the state means a decline in liberty and prosperity. (Think Socialism, Communism, Totalianarism as epitomized by North Korea, Nazi Germany...who would want to live in a regime like those?)
Special interests joined the political coalition that created the Federal Reserve Board in 1913, which became an important source of finance for America’s disastrous participation in World War I four years later. The Fed did not just print greenbacks, as was the case during the Civil War. It printed enough money to purchase more than $4 billion in government bonds that were used to finance the war. The amount of money in circulation doubled between 1914 and 1920—as did prices. This was an enormous hidden war tax on the American people: wealth was cut in half, along with real wages, and just about everything consumers purchased became more expensive.
The boom created by the Fed’s war financing inevitably caused a bust—the Depression of 1920, the first year of which was even worse than the first year of the Great Depression of the 1930s. Gross domestic product declined by 24 percent from 1920-21, while the number of unemployed Americans more than doubled, from 2.1 million to 4.9 million. The Great Depression of 1920 only lasted one year, however, thanks to President Warren Harding’s inspired policy of cutting both government spending and taxes dramatically.
Fed's volte face sends the dollar tumbling,economy in decline, QE II to start soon?
The very respected Ambrose Evans-Pritchard writes in the Telegraph fom London:
"Rarely before have a few coded words in the minutes of the US Federal Reserve caused such an upheaval in the global currency system, or such a sudden flight from the dollar."
I also note that "quantative easing" is mentioned in this article.
The Fed minutes warned of "significant downside risks" and a possible slide into deflation, an admission that zero interest rates, $1.75 trillion of QE, and a fiscal deficit above 10pc of GDP have so far failed to lift the economy out of a structural slump.
"The Committee would need to consider whether further policy stimulus might become appropriate if the outlook were to worsen appreciably," it said. The economy might not regain its "longer-run path" until 2016.
"The Fed is throwing in the towel," said Gabriel Stein, of Lombard Street Research. "They are preparing to start QE again. This was predictable because the M3 broad money supply has been contracting for months."
The Fed minutes amount to a policy thunderbolt, evidence of how quickly the recovery has lost steam. Just weeks ago the Fed was mapping out withdrawal of stimulus.
This is a must read. Its a little long but compelling. Click on the heading above for the link.
"Rarely before have a few coded words in the minutes of the US Federal Reserve caused such an upheaval in the global currency system, or such a sudden flight from the dollar."
I also note that "quantative easing" is mentioned in this article.
The Fed minutes warned of "significant downside risks" and a possible slide into deflation, an admission that zero interest rates, $1.75 trillion of QE, and a fiscal deficit above 10pc of GDP have so far failed to lift the economy out of a structural slump.
"The Committee would need to consider whether further policy stimulus might become appropriate if the outlook were to worsen appreciably," it said. The economy might not regain its "longer-run path" until 2016.
"The Fed is throwing in the towel," said Gabriel Stein, of Lombard Street Research. "They are preparing to start QE again. This was predictable because the M3 broad money supply has been contracting for months."
The Fed minutes amount to a policy thunderbolt, evidence of how quickly the recovery has lost steam. Just weeks ago the Fed was mapping out withdrawal of stimulus.
This is a must read. Its a little long but compelling. Click on the heading above for the link.
Thursday, July 15, 2010
Thomas Jefferson said it all
I predict future happiness for Americans if they can prevent the government from wasting the labors of the people under the pretense of taking care of them. - Thomas Jefferson
Is the wipeout in offshore drillers over?
Time to buy offshore drillers?
DO Diamond Offshore bounced off its early June bottom of $60 and is at $64.43 today... after a pullback of nearly $1.50 intraday.
It is 7.4% above its 3-month low and yesterday it was as near as dammit is to swearing, to being up 10%!!
Its in the buy range for me.
DO Diamond Offshore bounced off its early June bottom of $60 and is at $64.43 today... after a pullback of nearly $1.50 intraday.
It is 7.4% above its 3-month low and yesterday it was as near as dammit is to swearing, to being up 10%!!
Its in the buy range for me.
"Wall of debt" could hurt the fragile economic recovery
U.S. and European governments are expected to sell about $4 trillion in bonds this year, creating a "wall of debt" that could course through the global financial
system for years. One concern is whether the market and the fragile economy could absorb the debt or whether the situation would result in a Greek-style crisis for less creditworthy governments. Analysts differ on their assessment of the issue.
The Washington Post
system for years. One concern is whether the market and the fragile economy could absorb the debt or whether the situation would result in a Greek-style crisis for less creditworthy governments. Analysts differ on their assessment of the issue.
The Washington Post
Signs of things getting better?
From Zacks Update July 2010
Sentiment on The Street has begun to turn positive as the stock market has enjoyed a sustained 7 day rally. Fears of a double dip recession are subsiding as companies report better than expected earnings this week.
The BP oil well has been capped, and durability testing is underway which proved to be a strong psychological hurdle for the market, and seems to have renewed hope that better times are ahead.
Update In Brief
Corporate cash and equivalent assets as a percentage of total assets are at their highest level in decades. This is a vast improvement from 2008 when we had a highly leveraged corporate sector.
As recovery in the market slowly continues, positive signs that the economy is also well on its way are beginning to firm up. Treasury rates have maintained their historic low levels for some time now, which of course begs the question of what the Federal Reserve’s short term move may be, if anything.
For full Zacks Market Commentary click on the heading above
Sentiment on The Street has begun to turn positive as the stock market has enjoyed a sustained 7 day rally. Fears of a double dip recession are subsiding as companies report better than expected earnings this week.
The BP oil well has been capped, and durability testing is underway which proved to be a strong psychological hurdle for the market, and seems to have renewed hope that better times are ahead.
Update In Brief
Corporate cash and equivalent assets as a percentage of total assets are at their highest level in decades. This is a vast improvement from 2008 when we had a highly leveraged corporate sector.
As recovery in the market slowly continues, positive signs that the economy is also well on its way are beginning to firm up. Treasury rates have maintained their historic low levels for some time now, which of course begs the question of what the Federal Reserve’s short term move may be, if anything.
For full Zacks Market Commentary click on the heading above
Wednesday, July 14, 2010
Interest rate dilemma
"At 4.6 percent, 30-yr mortgage rates are already at historic lows, yet housing demand cratered as soon as the government's homebuyer tax credit expired in April. If you think lowering long-term rates and reducing the spread between short and long rates will stimulate the economy,think again. The steep yield curve is the most powerful thing the economy has going for it right now."
Caroline Baum
Caroline Baum
Monday, July 12, 2010
Chinese credit rating agency rates the 50 biggest economies
Dagong Global Credit Rating released sovereign-debt ratings for 50 countries that account for 90% of the world's economy, in a move to break the credit rating monopoly of Moody's Investors Service, Standard & Poor's and Fitch Ratings. The Chinese firm gave the U.S. an AA rating, lower than the top AAA rating it assigned to Norway, Denmark, Luxembourg, Switzerland, Singapore, Australia and New Zealand. Xinhuanet.com
U.S. debt could "destroy the country from within," officials say
Erskine Bowles, a member of U.S.
President Barack Obama's deficit commission, delivered a stark warning that the runaway deficit "is like a cancer." Bowles, previously chief of staff for President Bill Clinton, was joined by former Sen. Alan Simpson in saying that debt "will destroy the country from within" if left unchecked.
The Washington Post
President Barack Obama's deficit commission, delivered a stark warning that the runaway deficit "is like a cancer." Bowles, previously chief of staff for President Bill Clinton, was joined by former Sen. Alan Simpson in saying that debt "will destroy the country from within" if left unchecked.
The Washington Post
Saturday, July 10, 2010
Actions should be shaped by beliefs and values
Actions should be shaped by beliefs and values, not emotions. When investors understand volatility, they can manage market movements better and make better decisions. They can steer their financial ship with confidence, rather than sitting powerless and being pushed around by the market’s powerful tides.
Index Summary
The major market indices were higher this week. The Dow Jones Industrial Index rose 5.28 percent.
The S&P 500 Stock Index gained 5.41 percent, while the Nasdaq Composite finished 5.00 percent higher.
Barra Growth underperformed Barra Value as Barra Value finished 5.57 percent higher while Barra Growth rose 5.25 percent. The Russell 2000 closed the week with a gain of 5.09 percent.
The Hang Seng Composite finished higher by 2.99 percent; Taiwan was up 4.32 percent and the Kospi advanced 3.06 percent.
The 10-year Treasury bond yield closed at 3.05 percent, up 9 basis points for the week.
Index Summary
The major market indices were higher this week. The Dow Jones Industrial Index rose 5.28 percent.
The S&P 500 Stock Index gained 5.41 percent, while the Nasdaq Composite finished 5.00 percent higher.
Barra Growth underperformed Barra Value as Barra Value finished 5.57 percent higher while Barra Growth rose 5.25 percent. The Russell 2000 closed the week with a gain of 5.09 percent.
The Hang Seng Composite finished higher by 2.99 percent; Taiwan was up 4.32 percent and the Kospi advanced 3.06 percent.
The 10-year Treasury bond yield closed at 3.05 percent, up 9 basis points for the week.
Friday, July 9, 2010
Geithner indicates good news on taxes for capital gains and dividends
Treasury Secretary Timothy Geithner said the White House wants to keep the top tax rate on dividends and capital gains at a proposed 20%.
The rate is 15%, so 20% would be a large increase, but it would be less than the 39.6% rate congressional Democrats want for dividends.
The Wall Street Journal
The rate is 15%, so 20% would be a large increase, but it would be less than the 39.6% rate congressional Democrats want for dividends.
The Wall Street Journal
Optimizing Social Security: It's More Complicated Than You Think
Christine Benz of Morningstar suggests (for full article click on heading - a must read)deferring the collection of Social Security benefits as long as you can...at least until 70 years of age if practical.
Rally in Stocks Starts Now
Ninety-eight percent of the time, when we've been in this situation, stocks end up higher three months later.
By "this situation" I mean when investor pessimism is high…
When pessimism is high, it's time to buy.
Right now, only 21% of individual investors are bullish on stocks, according to the latest weekly survey by the American Association of Individual Investors. That's "one of the lowest readings in the last 15 years," says my friend Jason Goepfert, who tracks these things at his website: SentimenTrader.
According to Jason, stocks were up an average 8.5% three months after hitting bullish readings of 21% or lower. That's data going back to 2003. Going back to 1987, this indicator has been at 21% or below just 47 times. And 46 out of 47 times (98% of the time), stocks were higher three months later.
When you combine that pessimism with Wednesday's 3% "up" move, you've got a recipe for a big rally. Jason said, "When we get a buying surge like yesterday, coming off a multi-month low, it has usually led to dramatic gains long term."
Stocks are a great value right now, particularly in relation to interest rates. Your money earns nothing in the bank, but you get paid a 5% dividend to own stocks like Pfizer.
Pfizer, for just one example, trades at a forward P/E ratio of 6.5. What that means is, if you bought that business privately, the earnings of the business would pay off your entire investment in 6.5 years – and all the rest of your earnings out to infinity would be "free."
That is crazy. You never get buys like that. And drug stocks like Pfizer aren't the only cheap sector… Big banks (like Citigroup and Bank of America) trade at single-digit forward P/Es. And so do big oil companies (like Exxon and Chevron).
My point is, many blue-chip stocks are super cheap. Based on the latest poll of individual investors, stocks are hated now. And with Wednesday's 3% move, it could be the start of the uptrend – the start of "dramatic gains" as Jason Goepfert described it.
By "this situation" I mean when investor pessimism is high…
When pessimism is high, it's time to buy.
Right now, only 21% of individual investors are bullish on stocks, according to the latest weekly survey by the American Association of Individual Investors. That's "one of the lowest readings in the last 15 years," says my friend Jason Goepfert, who tracks these things at his website: SentimenTrader.
According to Jason, stocks were up an average 8.5% three months after hitting bullish readings of 21% or lower. That's data going back to 2003. Going back to 1987, this indicator has been at 21% or below just 47 times. And 46 out of 47 times (98% of the time), stocks were higher three months later.
When you combine that pessimism with Wednesday's 3% "up" move, you've got a recipe for a big rally. Jason said, "When we get a buying surge like yesterday, coming off a multi-month low, it has usually led to dramatic gains long term."
Stocks are a great value right now, particularly in relation to interest rates. Your money earns nothing in the bank, but you get paid a 5% dividend to own stocks like Pfizer.
Pfizer, for just one example, trades at a forward P/E ratio of 6.5. What that means is, if you bought that business privately, the earnings of the business would pay off your entire investment in 6.5 years – and all the rest of your earnings out to infinity would be "free."
That is crazy. You never get buys like that. And drug stocks like Pfizer aren't the only cheap sector… Big banks (like Citigroup and Bank of America) trade at single-digit forward P/Es. And so do big oil companies (like Exxon and Chevron).
My point is, many blue-chip stocks are super cheap. Based on the latest poll of individual investors, stocks are hated now. And with Wednesday's 3% move, it could be the start of the uptrend – the start of "dramatic gains" as Jason Goepfert described it.
Kitco just came out with a new investment product for rhodium. Why rhodium? What's the appeal for investors?
John nadler of KITCO explains in an interview linked above ( click on the heading)
Platinum group metals, as a niche (and as opposed to gold), are endowed with decent fundamentals. They've got a tenuous supply of metal, coming primarily out of South Africa and Russia, and decent demand from their primary usage in autocatalysts. These make sense as part of the global economic recovery story. You're talking about a sector (automotive applications) that nobody has figured out substitutions or new technologies for. If the crisis doesn't completely throw the world into a second recessionary dip, then the fundamentals argue that these metals have not only been neglected, but also underpriced.
With rhodium, we looked at even more of a tight market. It's a tiny market of 900,000 ounces per annum, and one where carmakers can't substitute with cheaper metal, because it is the only such noble metal that can remove the nitrous oxide from tailpipe emissions. When you add that together, you get a good picture, especially as the U.S. and European carmakers come out of their "car recessions." And then there's China and India, who are in the driver's seat in the recovery of auto sales.
It's also a market that doesn't have futures or options trading available at the moment. But because of that, it's a bit thinner and a bit more volatile, and the spreads are wider. But it doesn't mean that an individual investor cannot participate in it. Our situation was that we had pool accounts in rhodium for years, but we saw increasing interest from investors for this in the longer- to medium-term trade, three to five years. So since it's really costly and difficult to create 1 ounce coins, we decided to take the really basic refined material (called "sponge"—a gray powder, really) that the refiners use and literally bottle it, seal it and put it into safekeeping with a custodian.
It's not for everyone, by any means. You should definitely understand the market and where the supply and the demand come from. But as a recovery play, and as a medium-term speculative play, I think it deserves a closer look.
Platinum group metals, as a niche (and as opposed to gold), are endowed with decent fundamentals. They've got a tenuous supply of metal, coming primarily out of South Africa and Russia, and decent demand from their primary usage in autocatalysts. These make sense as part of the global economic recovery story. You're talking about a sector (automotive applications) that nobody has figured out substitutions or new technologies for. If the crisis doesn't completely throw the world into a second recessionary dip, then the fundamentals argue that these metals have not only been neglected, but also underpriced.
With rhodium, we looked at even more of a tight market. It's a tiny market of 900,000 ounces per annum, and one where carmakers can't substitute with cheaper metal, because it is the only such noble metal that can remove the nitrous oxide from tailpipe emissions. When you add that together, you get a good picture, especially as the U.S. and European carmakers come out of their "car recessions." And then there's China and India, who are in the driver's seat in the recovery of auto sales.
It's also a market that doesn't have futures or options trading available at the moment. But because of that, it's a bit thinner and a bit more volatile, and the spreads are wider. But it doesn't mean that an individual investor cannot participate in it. Our situation was that we had pool accounts in rhodium for years, but we saw increasing interest from investors for this in the longer- to medium-term trade, three to five years. So since it's really costly and difficult to create 1 ounce coins, we decided to take the really basic refined material (called "sponge"—a gray powder, really) that the refiners use and literally bottle it, seal it and put it into safekeeping with a custodian.
It's not for everyone, by any means. You should definitely understand the market and where the supply and the demand come from. But as a recovery play, and as a medium-term speculative play, I think it deserves a closer look.
So what is the "right" price for gold?
John Nadler of KITCO( click on title for full article) opines:
Of course, now we've heard that such a price should be anywhere between $8,000 and even $15,000, but I still think that between $680 and $880, or in that range, gold would be much more in balance with its fundamentals.
Eight hundred is a number that you saw come up in the GFMS surveys as a potential target, and they gave it up to two years (even with the potential overshoot of up to $1,320).
Yeah, that could still happen, but it's all a cycle, a phase in the markets. It's currently driven by a circumstance (Europe), but not some "new dynamic" (a return to a gold-based world) that has suddenly become the new paradigm.
You also have had Barclays Wealth Management coming out, saying they envision $800 gold by January 2012, and saying in an interview on TheStreet.com that they're "shorting the GLD and buying put options on gold for Jan 2012."
Further, what am I to make of Societe Generale, which also said in April of this year that $800 gold is in the cards before the end of 2010? And so on; I am not alone in computing such figures.
Of course, now we've heard that such a price should be anywhere between $8,000 and even $15,000, but I still think that between $680 and $880, or in that range, gold would be much more in balance with its fundamentals.
Eight hundred is a number that you saw come up in the GFMS surveys as a potential target, and they gave it up to two years (even with the potential overshoot of up to $1,320).
Yeah, that could still happen, but it's all a cycle, a phase in the markets. It's currently driven by a circumstance (Europe), but not some "new dynamic" (a return to a gold-based world) that has suddenly become the new paradigm.
You also have had Barclays Wealth Management coming out, saying they envision $800 gold by January 2012, and saying in an interview on TheStreet.com that they're "shorting the GLD and buying put options on gold for Jan 2012."
Further, what am I to make of Societe Generale, which also said in April of this year that $800 gold is in the cards before the end of 2010? And so on; I am not alone in computing such figures.
How Government idiocy steals future prosperity for all: The Underfunded Pension scandal
The fix for all underfunded pension liabilities (Scial Security included) is to use a realistic assumption for return on investment. Thomas DeMarco, CFA, FCM Market Strategist in a Market Note today discusses this in some detail.
His analysis is to the point and a must read for all citizens concerned about their financial future and that of their children:
"In a recent Market Note I highlighted the abysmal condition of State pensions and the inappropriate (my opinion) discount rate used to measure those liabilities. At the risk of being overly repetitive I thought I would highlight a few items from another report on the topic, this one titled ‘Valuing Liabilities in State and Local Plans’ from the Center for Retirement Research (CFRR; Boston College).
1. The author agrees that the generic 8% assumed rate of return on investments is inappropriate to PV pension liabilities and instead argue for use of a risk free rate. The paper succinctly raised the following points: “…adopting a riskless rate has clear advantages: it would accurately reflect the guaranteed nature of public sector benefits; it would increase the credibility of public sector accounting with private sector analysts; and it could well forestall unwise benefit increaseswhen
the stock market soars” . I can’t stress the last two points enough.
2. Furthermore, “Benefits promised under a public plan are accorded a higher degree of protection than those under a private sector plan because, under the laws of most states, the sponsor cannot close down the plan for current participants”. Investors should pay attention to this as a recent issue of The Economist bluntly points out that several state constitutions (including Illinois and NY) make state pensions senior to bond debt.
3. In my prior note I mentioned that pension benefit obligations were no longer a distant worry – that a peak in obligations was coming around 2020 (only 10yrs from now).
4. To hammer the point about accurately measuring liabilities and forestalling unwise benefit increases the author points to CalPERS as a poster child: “in 1999, the California Public Employees’ Retirement System (CalPERS) reported that assets equaled 128 percent of liabilities, and the California legislature enhanced the benefits of both current and future employees. It reduced the retirement age, increased benefit accrual rates, and shortened the salary base for benefits to the final year’s salary. If CalPERS liabilities had been valued at the riskless rate,the
plan would have been only 88 percent funded. An accurate reporting of benefits to liabilities would avoid this type of expansion for current employees” (emphasis mine).
5. The author also brings up the point that the discipline of making state and local governments pay the annual costs discourages governments from awarding “excessively generous pensions in lieu of current wages”. I agree in theory, but the problem is a number of states/localities do not make the required annual payments and some even use the most brazen gimmickry to make said “payments” that bondholders should be insulted, repulsed, and afraid (I am thinking of a recent New York proposal to allow the state and municipalities to borrow about $6B from the state pension fund to, wait for it, make their payments to the same fund!).
6. The authors did point out one system that appears to be run more conservatively (outside of the discount rate question): Florida. “Despite being more than fully funded from 1998 through 2006, Florida succeeded in restraining benefit increases through statutory stabilization methods. Article X of the Florida constitution, passed in 1976, requires that any proposed benefit increase must be accompanied by actuarially sound funding provisions. The subsequent addition of Part VII of
Chapter 112 of the Florida statutes stipulates that total contributions must cover both the normal cost and an amount sufficient to amortize the unfunded liability over no more than 40 years. What is more, the combination of an employee’s pension and Social Security benefits cannot exceed 100 percent of final salary. As a result of this legislation, Florida has not increased benefits substantially since the late 1970s”.
Its far past the time for State Legislatures and the Congress to take the obvious lessons from this and reform all Government pension practises.
His analysis is to the point and a must read for all citizens concerned about their financial future and that of their children:
"In a recent Market Note I highlighted the abysmal condition of State pensions and the inappropriate (my opinion) discount rate used to measure those liabilities. At the risk of being overly repetitive I thought I would highlight a few items from another report on the topic, this one titled ‘Valuing Liabilities in State and Local Plans’ from the Center for Retirement Research (CFRR; Boston College).
1. The author agrees that the generic 8% assumed rate of return on investments is inappropriate to PV pension liabilities and instead argue for use of a risk free rate. The paper succinctly raised the following points: “…adopting a riskless rate has clear advantages: it would accurately reflect the guaranteed nature of public sector benefits; it would increase the credibility of public sector accounting with private sector analysts; and it could well forestall unwise benefit increaseswhen
the stock market soars” . I can’t stress the last two points enough.
2. Furthermore, “Benefits promised under a public plan are accorded a higher degree of protection than those under a private sector plan because, under the laws of most states, the sponsor cannot close down the plan for current participants”. Investors should pay attention to this as a recent issue of The Economist bluntly points out that several state constitutions (including Illinois and NY) make state pensions senior to bond debt.
3. In my prior note I mentioned that pension benefit obligations were no longer a distant worry – that a peak in obligations was coming around 2020 (only 10yrs from now).
4. To hammer the point about accurately measuring liabilities and forestalling unwise benefit increases the author points to CalPERS as a poster child: “in 1999, the California Public Employees’ Retirement System (CalPERS) reported that assets equaled 128 percent of liabilities, and the California legislature enhanced the benefits of both current and future employees. It reduced the retirement age, increased benefit accrual rates, and shortened the salary base for benefits to the final year’s salary. If CalPERS liabilities had been valued at the riskless rate,the
plan would have been only 88 percent funded. An accurate reporting of benefits to liabilities would avoid this type of expansion for current employees” (emphasis mine).
5. The author also brings up the point that the discipline of making state and local governments pay the annual costs discourages governments from awarding “excessively generous pensions in lieu of current wages”. I agree in theory, but the problem is a number of states/localities do not make the required annual payments and some even use the most brazen gimmickry to make said “payments” that bondholders should be insulted, repulsed, and afraid (I am thinking of a recent New York proposal to allow the state and municipalities to borrow about $6B from the state pension fund to, wait for it, make their payments to the same fund!).
6. The authors did point out one system that appears to be run more conservatively (outside of the discount rate question): Florida. “Despite being more than fully funded from 1998 through 2006, Florida succeeded in restraining benefit increases through statutory stabilization methods. Article X of the Florida constitution, passed in 1976, requires that any proposed benefit increase must be accompanied by actuarially sound funding provisions. The subsequent addition of Part VII of
Chapter 112 of the Florida statutes stipulates that total contributions must cover both the normal cost and an amount sufficient to amortize the unfunded liability over no more than 40 years. What is more, the combination of an employee’s pension and Social Security benefits cannot exceed 100 percent of final salary. As a result of this legislation, Florida has not increased benefits substantially since the late 1970s”.
Its far past the time for State Legislatures and the Congress to take the obvious lessons from this and reform all Government pension practises.
Gold and silver push to fresh highs
09-Jul-10
10:22 COMDX
Gold now up $17.70 to $1213.80; silver is higher by 31.3 cents to $18.185
10:22 COMDX
Gold now up $17.70 to $1213.80; silver is higher by 31.3 cents to $18.185
Thursday, July 8, 2010
• Behind the gold takedown… central banks
Mystery solved. We think.
Given the news cycle and the buying habits of the world’s central banks of late, we’ve been wondering why gold has traded down nearly $40 bucks from its near-historic high last Thursday. And has stayed there…
Today, we believe, despite becoming net buyers of gold for the first year since 1988, central banks are “pawning” that gold at the Bank for International Settlements (BIS) -- the central bankers’ central bank -- and helping to depress the price.
“When Reserve Bank of India bought 200 tonnes of International Monetary Fund (IMF) gold in November last year,” confirms a report from International Business Times, “the bullion market received one of the biggest boosts ever and the gold prices soared in the subsequent weeks to new record heights. Reason for this was that all central banks across the globe have been increasing their gold holdings fearing the recession looming large over the world.”
Commercial banks, too, appeared to be getting into the game. For individual buyers of the yellow metal, the arrival of the big global institutions signaled the next phase of a sustained bull market in gold that would, in turn, vindicate years of nail-biting insecurity and the endurance of hushed cocktail party snickers.
Why then the reversal in the price over this past week?
While it’s not clear if India’s is among them, central banks have swapped 349 metric tons of the yellow metal with the BIS, according to The Wall Street Journal -- 82% of all the gold that central banks snapped up last year.
In exchange, the BIS has handed out $14 billion in paper cash, agreeing to sell the gold back to the central banks sometime in the future, just like your friendly neighborhood tattoo parlor/pawnshop.
“At this rate,” IBT asserts “the BIS holdings represent the biggest gold swap in history.”
As you well know, “gold is often regarded as a protection against inflation and is thought to benefit from the inflationary impact of governments’ economic stimulus packages. It has also been used as a haven against another financial meltdown.”
The fear is now if banks that lent their gold are for any reason unable to make good on the loan, “the BIS could opt to sell the gold in order to get its money back, which would amount to flooding the market with an unexpected boost to the global supply.”
Worth keeping an eye on.
Given the news cycle and the buying habits of the world’s central banks of late, we’ve been wondering why gold has traded down nearly $40 bucks from its near-historic high last Thursday. And has stayed there…
Today, we believe, despite becoming net buyers of gold for the first year since 1988, central banks are “pawning” that gold at the Bank for International Settlements (BIS) -- the central bankers’ central bank -- and helping to depress the price.
“When Reserve Bank of India bought 200 tonnes of International Monetary Fund (IMF) gold in November last year,” confirms a report from International Business Times, “the bullion market received one of the biggest boosts ever and the gold prices soared in the subsequent weeks to new record heights. Reason for this was that all central banks across the globe have been increasing their gold holdings fearing the recession looming large over the world.”
Commercial banks, too, appeared to be getting into the game. For individual buyers of the yellow metal, the arrival of the big global institutions signaled the next phase of a sustained bull market in gold that would, in turn, vindicate years of nail-biting insecurity and the endurance of hushed cocktail party snickers.
Why then the reversal in the price over this past week?
While it’s not clear if India’s is among them, central banks have swapped 349 metric tons of the yellow metal with the BIS, according to The Wall Street Journal -- 82% of all the gold that central banks snapped up last year.
In exchange, the BIS has handed out $14 billion in paper cash, agreeing to sell the gold back to the central banks sometime in the future, just like your friendly neighborhood tattoo parlor/pawnshop.
“At this rate,” IBT asserts “the BIS holdings represent the biggest gold swap in history.”
As you well know, “gold is often regarded as a protection against inflation and is thought to benefit from the inflationary impact of governments’ economic stimulus packages. It has also been used as a haven against another financial meltdown.”
The fear is now if banks that lent their gold are for any reason unable to make good on the loan, “the BIS could opt to sell the gold in order to get its money back, which would amount to flooding the market with an unexpected boost to the global supply.”
Worth keeping an eye on.
Mid-Year Update: Taxation should be about raising the maximum amount of revenue for the government in the least economically disruptive way.
Equities of all persuasion saw mid-year losses after a first quarter surge.
MARKET RETURNS
Year-to-date (1/1/10-07/02/10)*
Dow Jones Indus Avg. -7.38%
S&P 500 -8.44%
NASDAQ -7.96%
Russell 2000 -4.23%
MSCI World Index -11.33%
DJ STOXX Europe 600 -6.55%
Year-to-date (1/1/10-07/01/10)
90 Day T-Bill 0.09%
2-Year Treasury 1.46%
10-Year Treasury 5.91%
ML High Yield Index 2.79%
JPM EMBI Global Diversified 5.40%
JP Morgan Global Hedged 4.42%
Year-to-date (1/1/10-07/01/10)
U.S. $ / Euro (1.26) -11.9%
U.S. $ / British Pound (1.52) -6.2%
Yen / U.S. ($ 87.74) -5.7%
Gold ($/oz) ($1,210.68) 10.4%
Oil ($72.01) -9.3%
*Returns reported as of 9:15 a.m. Pacific Standard Time
What accounts for the second quarter downturn?
Various theories are being put forward.
One is that corporations are pulling pro fits forward into 2010 to avoid the higher taxes coming in 2011. Yes, it is still possible to manipulate earnings despite Sarbanes-Oxley, you just have to be smarter than before.
Another possible reason for the decline is the fear of a double dip recession starting early next year. This is supported in part by numerous factors including robbing 2011 results by the earnings manipulations described above, expiration of the Federal economic stimulus (yes, even bad stimulus has some effect on the economy) and uncertainty arising from the fallout expected from the financial reform legislation now pending in Congress and the actual fallout from the health care legislation.
Finally, there is the expectation that corporate earnings and competitive position internationally will be negatively affected by the higher corporate tax rates
in 2011. The often repeated mantra that ‘the more you tax something the less of it you get’ is running into opposition by the Obama administration which is more concerned with ‘fairness’.
Taxation should be about raising the maximum amount of revenue for the government in the least economically disruptive way. Fairness should be addressed on the spending side of the ledger. To mix the two politicizes revenue raising and invites special interests to corrupt the taxation process with social engineering thereby doing greater harm to the economy.
Individual investors have still to be heard from since they are expected to take profits on their holdings before year-end to avoid higher tax rates.
Such individuals may well opt to sit on the cash proceeds from such tax sales until the outlook clarifies. This will only add to short term market weakness.
Despite the fact that Congress seems to be playing a losing hand, they seem unlikely to change course before the November elections.
Should the Democrats lose control of the House of Representatives, we can expect a major market rally since a stalemated Congress would be a welcome relief for the markets.
This may be short lived, however, since a lame duck Congress may well try to finish their agenda before leaving office (think carbon tax or a VAT). In short, equities don’t look promising between now and November and don’t look all that great for next year.
A healthy position in cash and gold still look like safe bets.
Interest Rate Outlook
At mid-year we see ten year Treasuries below 3% and thirty year Treasuries below 4%.
What would possess an asset manager to buy 30 year Treasuries with a locked in yield of 4% when the outlook for inflation over the next few years promises to make this a loosing proposition if not a disastrous one?
The only answer I can devise is fear and special situations.
Fear by those who have gotten burned in the financial crisis and therefore consider credit risk in the short term more important than market risk over the longer term.
Special situation buyers include insurance companies who are matching long term
payout commitments on annuities with the interest payments on the Treasuries.
Other special situation players would be hedge funds playing the carry trade game where they buy these Treasuries with short term loans at 25 basis points. It is this group who represent the greatest threat to the interest rate outlook since they
will unload their positions en masse the moment they see a turn in rates.
This is why I feel an interest rate rise will come suddenly and not be dependant on actual inflation. It may in fact be a cause of the inflation.
Considerable media attention has been given to the municipal bond market in recent weeks.
We see yields on ten year AAA munis going from 3.91% at year end 2008 to 3.25% at year end 2009 to 3.13% at mid-year 2010.
Much of this decline is due to the high demand for tax free munis by individual investors in high tax states as well as generally, given the pending tax rate rises in 2011.
The decline in muni yields is also influenced by the continued perception that munis are safe because they have always been so. This perception is due some re-evaluation.
Municipalities have rarely faced the kind of budget pressures they are experiencing today because of the revenue declines resulting from the recession. Added to this is the retirement of government employed baby boomers, whose pension liabilities have gone mostly unfunded.
This is an increase in current expenditures which is not discretionary and growing rapidly. It promises to create a budget crisis at the city and county level since these entities now face a cash expense they can no longer ignore.
Warren Buffet, who rushed into the bond insurance business during the financial crisis has since backed away. He notes that in the coming budget crunch, municipalities will likely stiff insurers or bondholders before firing employees. Bankruptcy filings may also prove to be more palatable politically than cutting services.
In any case, don’t think that past history is the best indication of what the future holds for municipal bonds.
Thanks to Richard Lehmann at incomesecurities.com and Payden & Rygel [paydenrygel@payden.com]for the data tables
MARKET RETURNS
Year-to-date (1/1/10-07/02/10)*
Dow Jones Indus Avg. -7.38%
S&P 500 -8.44%
NASDAQ -7.96%
Russell 2000 -4.23%
MSCI World Index -11.33%
DJ STOXX Europe 600 -6.55%
Year-to-date (1/1/10-07/01/10)
90 Day T-Bill 0.09%
2-Year Treasury 1.46%
10-Year Treasury 5.91%
ML High Yield Index 2.79%
JPM EMBI Global Diversified 5.40%
JP Morgan Global Hedged 4.42%
Year-to-date (1/1/10-07/01/10)
U.S. $ / Euro (1.26) -11.9%
U.S. $ / British Pound (1.52) -6.2%
Yen / U.S. ($ 87.74) -5.7%
Gold ($/oz) ($1,210.68) 10.4%
Oil ($72.01) -9.3%
*Returns reported as of 9:15 a.m. Pacific Standard Time
What accounts for the second quarter downturn?
Various theories are being put forward.
One is that corporations are pulling pro fits forward into 2010 to avoid the higher taxes coming in 2011. Yes, it is still possible to manipulate earnings despite Sarbanes-Oxley, you just have to be smarter than before.
Another possible reason for the decline is the fear of a double dip recession starting early next year. This is supported in part by numerous factors including robbing 2011 results by the earnings manipulations described above, expiration of the Federal economic stimulus (yes, even bad stimulus has some effect on the economy) and uncertainty arising from the fallout expected from the financial reform legislation now pending in Congress and the actual fallout from the health care legislation.
Finally, there is the expectation that corporate earnings and competitive position internationally will be negatively affected by the higher corporate tax rates
in 2011. The often repeated mantra that ‘the more you tax something the less of it you get’ is running into opposition by the Obama administration which is more concerned with ‘fairness’.
Taxation should be about raising the maximum amount of revenue for the government in the least economically disruptive way. Fairness should be addressed on the spending side of the ledger. To mix the two politicizes revenue raising and invites special interests to corrupt the taxation process with social engineering thereby doing greater harm to the economy.
Individual investors have still to be heard from since they are expected to take profits on their holdings before year-end to avoid higher tax rates.
Such individuals may well opt to sit on the cash proceeds from such tax sales until the outlook clarifies. This will only add to short term market weakness.
Despite the fact that Congress seems to be playing a losing hand, they seem unlikely to change course before the November elections.
Should the Democrats lose control of the House of Representatives, we can expect a major market rally since a stalemated Congress would be a welcome relief for the markets.
This may be short lived, however, since a lame duck Congress may well try to finish their agenda before leaving office (think carbon tax or a VAT). In short, equities don’t look promising between now and November and don’t look all that great for next year.
A healthy position in cash and gold still look like safe bets.
Interest Rate Outlook
At mid-year we see ten year Treasuries below 3% and thirty year Treasuries below 4%.
What would possess an asset manager to buy 30 year Treasuries with a locked in yield of 4% when the outlook for inflation over the next few years promises to make this a loosing proposition if not a disastrous one?
The only answer I can devise is fear and special situations.
Fear by those who have gotten burned in the financial crisis and therefore consider credit risk in the short term more important than market risk over the longer term.
Special situation buyers include insurance companies who are matching long term
payout commitments on annuities with the interest payments on the Treasuries.
Other special situation players would be hedge funds playing the carry trade game where they buy these Treasuries with short term loans at 25 basis points. It is this group who represent the greatest threat to the interest rate outlook since they
will unload their positions en masse the moment they see a turn in rates.
This is why I feel an interest rate rise will come suddenly and not be dependant on actual inflation. It may in fact be a cause of the inflation.
Considerable media attention has been given to the municipal bond market in recent weeks.
We see yields on ten year AAA munis going from 3.91% at year end 2008 to 3.25% at year end 2009 to 3.13% at mid-year 2010.
Much of this decline is due to the high demand for tax free munis by individual investors in high tax states as well as generally, given the pending tax rate rises in 2011.
The decline in muni yields is also influenced by the continued perception that munis are safe because they have always been so. This perception is due some re-evaluation.
Municipalities have rarely faced the kind of budget pressures they are experiencing today because of the revenue declines resulting from the recession. Added to this is the retirement of government employed baby boomers, whose pension liabilities have gone mostly unfunded.
This is an increase in current expenditures which is not discretionary and growing rapidly. It promises to create a budget crisis at the city and county level since these entities now face a cash expense they can no longer ignore.
Warren Buffet, who rushed into the bond insurance business during the financial crisis has since backed away. He notes that in the coming budget crunch, municipalities will likely stiff insurers or bondholders before firing employees. Bankruptcy filings may also prove to be more palatable politically than cutting services.
In any case, don’t think that past history is the best indication of what the future holds for municipal bonds.
Thanks to Richard Lehmann at incomesecurities.com and Payden & Rygel [paydenrygel@payden.com]for the data tables
The New Trend - Asia ascendant
Get long Asia.
The long-term case for owning Asian assets versus assets in the U.S. and Western Europe is simple. Over the past 40 years, the Western world has cooked up a hellish stew of huge, unfunded entitlement programs, monstrous government debts, and vast populations who've adopted the "something for nothing" way of life. This produces a headwind for stock and property prices.
Asia isn't burdened with parasitic welfare states. Most Asians are poor… but they're working and saving like crazy in order to catch up to the rich Westerners they see on TV and YouTube. This produces a tailwind for stock and property prices.
Singapore sits in the center of Asian trade. It's one of the world's top-five financial centers. It's home to the world's largest water port. Most importantly, it's considered the world's easiest place to set up and conduct business.
While stocks of all kinds are suffering through massive selling pressure right now, EWS sits comfortably near a new 52-week high. Expect this "Asia up, the West not so much" trend to continue for decades.
You can see this uptrend at work with this chart Click on the heading above). It shows the price action in the Singapore investment fund (EWS).
The long-term case for owning Asian assets versus assets in the U.S. and Western Europe is simple. Over the past 40 years, the Western world has cooked up a hellish stew of huge, unfunded entitlement programs, monstrous government debts, and vast populations who've adopted the "something for nothing" way of life. This produces a headwind for stock and property prices.
Asia isn't burdened with parasitic welfare states. Most Asians are poor… but they're working and saving like crazy in order to catch up to the rich Westerners they see on TV and YouTube. This produces a tailwind for stock and property prices.
Singapore sits in the center of Asian trade. It's one of the world's top-five financial centers. It's home to the world's largest water port. Most importantly, it's considered the world's easiest place to set up and conduct business.
While stocks of all kinds are suffering through massive selling pressure right now, EWS sits comfortably near a new 52-week high. Expect this "Asia up, the West not so much" trend to continue for decades.
You can see this uptrend at work with this chart Click on the heading above). It shows the price action in the Singapore investment fund (EWS).
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