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|"Essentially, the originators
and credit raters shoved enough pigs and laying hens in with the
beef herd that investors expecting prime ribs on their silver platter
and money in their pocket ended up with pork ribs on their paper
plate and egg on their face"
Rep. Gary L. Ackerman (D-N.Y.)
"I cannot help but raise a dissenting voice to statements that we are living in a fool's paradise, and that prosperity in this country must necessarily diminish and recede in the near future."
- E. H. H. Simmons,
“I love money more than the things it can buy… but what I love more than money is other people's money.”
U.S. money market funds run by Bank of America Corp., Credit Suisse Group, Fidelity Investments and Morgan Stanley held more than $6 billion of CDOs with subprime debt in June, according to fund managers and filings with the U.S. Securities and Exchange Commission. Money market funds with total assets of $300 billion have invested in subprime debt this year.
Vanguard Group Inc., the second-largest mutual fund company in the U.S., has a policy of never buying CDO commercial paper for its $90 billion in money market funds or $325 billion in fixed- income mutual funds.
"It really gets down to transparency questions," says John Hollyer, risk management director at Valley Forge, Pennsylvania- based Vanguard. "Can you understand what you have? And can you measure it appropriately? We haven't been comfortable that we could."
September 23, 2007 | New York TimesThe facility’s managers quickly cut costs. Within months, the number of clinical registered nurses at the home was half what it had been a year earlier, records collected by the Centers for Medicare and Medicaid Services indicate. Budgets for nursing supplies, resident activities and other services also fell, according to Florida’s Agency for Health Care Administration.
The investors and operators were soon earning millions of dollars a year from their 49 homes.
Residents fared less well. Over three years, 15 at Habana died from what their families contend was negligent care in lawsuits filed in state court. Regulators repeatedly warned the home that staff levels were below mandatory minimums. When regulators visited, they found malfunctioning fire doors, unhygienic kitchens and a resident using a leg brace that was broken.
... As such investors have acquired nursing homes, they have often reduced costs, increased profits and quickly resold facilities for significant gains.
But by many regulatory benchmarks, residents at those nursing homes are worse off, on average, than they were under previous owners, according to an analysis by The New York Times of data collected by government agencies from 2000 to 2006.
The Times analysis shows that, as at Habana, managers at many other nursing homes acquired by large private investors have cut expenses and staff, sometimes below minimum legal requirements.
Regulators say residents at these homes have suffered. At facilities owned by private investment firms, residents on average have fared more poorly than occupants of other homes in common problems like depression, loss of mobility and loss of ability to dress and bathe themselves, according to data collected by the Centers for Medicare and Medicaid Services.
The typical nursing home acquired by a large investment company before 2006 scored worse than national rates in 12 of 14 indicators that regulators use to track ailments of long-term residents. Those ailments include bedsores and easily preventable infections, as well as the need to be restrained. Before they were acquired by private investors, many of those homes scored at or above national averages in similar measurements.
In the past, residents’ families often responded to such declines in care by suing, and regulators levied heavy fines against nursing home chains where understaffing led to lapses in care.
But private investment companies have made it very difficult for plaintiffs to succeed in court and for regulators to levy chainwide fines by creating complex corporate structures that obscure who controls their nursing homes.,,,
The Byzantine structures established at homes owned by private investment firms also make it harder for regulators to know if one company is responsible for multiple centers. And the structures help managers bypass rules that require them to report when they, in effect, pay themselves from programs like Medicare and Medicaid....
The Times’s analysis of records collected by the Centers for Medicare and Medicaid Services reveals that at 60 percent of homes bought by large private equity groups from 2000 to 2006, managers have cut the number of clinical registered nurses, sometimes far below levels required by law. (At 19 percent of those homes, staffing has remained relatively constant, though often below national averages. At 21 percent, staffing rose significantly, though even those homes were typically below national averages.) During that period, staffing at many of the nation’s other homes has fallen much less or grown.
In a lawsuit filed in federal court in Manhattan, the Teamsters Local 282 Pension Trust Fund alleged the New York company's ratings of bonds backed by subprime mortgages -- including bonds packaged as collateralized debt obligations -- were materially misleading to investors concerning the quality and relative risk of those investments.
"Moreover, even as a downturn in the housing market caused rising delinquencies of the subprime mortgages underlying such bonds, Moody's maintained its excessively high ratings, rather than downgrade the bonds to reflect the true risk of owning subprime-mortgage-backed debt instruments," the lawsuit says.
The lawsuit is seeking class-action status for all purchasers of Moody's shares from Oct. 25, 2006, to July 10, 2007.
Current Conditions Summary
Other than the above, the global economy seem pretty normal and rather well balanced. It's a tribute to just how well central bankers have done their jobs.
- Public spending is out of control in the US and UK.
- Banana Republic charges are being leveled at the US and UK.
- Runs on the bank occurred in the US and UK.
- The Fed is accepting mortgages as collateral in the US for the first time.
- Foreclosures are at all time high in the US.
- The US dollar is at all time lows.
- Japan is still struggling with deflation.
- Two failed banks in Germany were bailed out by the ECB.
- There are US Congressional threats of tariffs against China.
- There is a proposal to freeze short term commercial paper for up to 7 years in Canada.
- Housing bubbles in the US, Spain, and Australia are deflating.
- Housing bubble in Canada is still inflating.
- China refuses to float the RMB and sterilize US dollars flooding in. That in turn is fueling Chinese inflation.
- Price controls that can't possibly work were implemented in China in response to Chinese aforementioned Chinese inflation.
- Commodity prices are soaring.
- Oil is at record high prices.
- A Massive carry trade in Japan is fueling a plethora of asset bubbles around the globe.
- $500 Trillion in derivatives are floating around dwarfing the size of the global economy.
- The global credit bubble dwarfs by orders of magnitude the credit bubble preceding the great depression.
As recently reported housing starts have now fallen by 42% and now JP Morgan – one of the most respected research houses on Wall Street and a persistent proponent until recently of the view that the housing recession would bottom out – is predicting that housing starts will fall another 25% to a cumulative fall of 56% from peak and will bottom out at 999 thousand units some time in 2008.
September 25, 2007 | NYT
CURRENCIES are first and foremost relative prices — in essence, they are measures of the intrinsic value of one economy versus another. On that basis, the world has had no compunction in writing down the value of the United States over the past several years. The dollar, relative to the currencies of most of America’s trading partners, is off about 20 percent from its early 2002 peak. Recently it has hit new lows against the euro and a high-flying Canadian currency, likely a harbinger of more weakness to come.
... ... ...
Economic science is very clear on the implications of such huge imbalances: foreign lenders need to be compensated for sending scarce capital to any country with a deficit. The bigger the deficit, the greater the compensation. The currency of the deficit nation usually bears the brunt of that compensation. As long as the United States fails to address its saving problem, its large balance of payments deficit will persist and the dollar will keep dropping.
The only silver lining so far has been that these adjustments to the currency have been orderly — declines in the broad dollar index averaging a little less than 4 percent per year since early 2002. Now, however, the possibility of a disorderly correction is rising — with potentially grave consequences for the American and global economy.
... ... ...
Sadly, the endgame could be considerably more treacherous for the United States than it was seven years ago. In large part, that’s because the American consumer is now at risk. Consumption expenditures currently account for a record 72 percent of the gross domestic product — a number unmatched in the annals of modern history for any nation.
This buying binge has been increasingly supported by housing and lending bubbles. Yet home prices are now headed lower — probably for years — and the fallout from the subprime crisis has seriously crimped home mortgage refinancing. With weaker employment growth also putting pressure on income, the days of open-ended American consumption are likely to finally come to an end. That will make it hard to avoid a recession.
... ... ...
Why worry about a weaker dollar? The United States imported $2.2 trillion of goods and services in 2006. A sharp drop in the dollar makes those items considerably more expensive — the functional equivalent of a tax hike on consumers. It could also stoke fears of inflation — driving up long-term interest rates and putting more pressure on financial markets and the economy, exStephen S. Roach is the chairman of Morgan Stanley Asia.
“I will simply dismiss this (PPI) number as a “fraudulent miscalculation” designed to help the FOMC justify their rate cut… Let the action begin… Are you getting the feeling that this is all scripted anyway?”
Continue reading "Cara’s Wednesday Report, Sept. 19, 2007, 8:00 AM"
In order for me to be convinced that I should join the bearish dollar crowd, here are the questions I need answered:
- If the trade deficit is "unsustainable" at current levels, why has the U.S. been able to run a deficit more or less constantly for the last 30 years? [ "If something cannot go forever eventually it will stop; also there's not such thing as "the last 30 years". There are 13+17: 13 years with the USSR and seventeen years after its dissolution -- two completely different periods" --NNB]
- Same question on foreign debt loads. They have been high for a very long time. Why are conditions today so different? [Yes they are -- the USA role as a counterbalance to the USSR disappeared, recently the USA role as the technological superpower diminished --NNB]
- If the answer to either #1 is that the deficit is historically large, then why is deficit of 6% of GDP a drastically bigger problem than 3 years of 2% deficits? [ I do not understand the author reasoning here -- NNB]
- Can the notion of Bretton Woods II be disproved? Or more to the point, what would cause China, Japan, and others to allow the U.S. currency to depreciate? Particularly in a sudden fashion?
- If we assume that a declining dollar coincided with inflation, this would likely cause the Fed to hike interest rates. Why wouldn't this attract foreign investment and thus strengthen the dollar? [ they cannot hike interest rates because "dual mandate" and Greenspan politization legacy --NNB]
- If the theory for a dollar decline is portfolio diversification on the part of central banks, why would these central banks choose to diversify suddenly? [ not so suddenly -- this is probably six year trend that started with the launch of Iraq war --NNB]
- If the theory of a savings glut is accurate, then a dollar decline supposes that the glut of savings must travel elsewhere. But if there was someplace to travel, we wouldn't have a savings glut (or as some describe, an investment drought) in the first place. What's going to change in the short run? [A lot changed for the recent 10 years. Gold recently became available as a investment class via EFTs, commodities too -- NNB]
September 5, 2007 | Credit Crunch
Satyajit Das works in the area of financial derivatives and risk management. He is the author of a number of key reference works on derivatives and risk management and is the author of Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives (2006, FT-Prentice Hall).
Living in the Kaliyuga …
Inflexion points in financial markets are difficult to identify. As Yogi Berra observed: “making predictions is difficult, especially about the future”.
In Indian mythology, we are in the Age of Kali - the last age. The world ends when Kali dances the dance of death. There are no such clear markers in markets. Recently, we came close - Jim Cramer, a CNBC pundit, launched a “we’re in Armageddon” tirade on air. Embattled Bear Stearns’ CFO Samuel Molinaro pleaded: “I’ve been out here for 22 years, and this is as bad as I’ve seen it in the fixed-income markets.” Kali had begun to shake her booty. The credit bubble was finally deflating.
In 2007, householders in “cabbage-ville USA” (an English fund manager’s term) failed to make repayments triggering a global credit crisis. Markets ruminated about “a re-pricing of risk”. The faux “business as usual” calm masked the fact that the problems threaten to be the single largest credit crisis since the Savings and Loans collapse in the USA in the 1980s.
The early 2000s were a period of “too much” and “too little” – too much liquidity, too much leverage, too much complex financial engineering, too little return for risk, too little understanding of the risks. Steven Rattner (from hedge fund Quadrangle Group) summed it up in the pages of the Wall Street Journal: “No exaggeration is required to pronounce unequivocally that money is available today in quantities, at prices and on terms never before seen in the 100-plus years since U.S. financial markets reached full flower.” Traditional money fueled by loose monetary policy, excessive capital flows and now turbo-charged by “financial engineering” lies at the heart of the current credit crisis.
Structured Credit - Supersize My Debt!
Candyfloss (cotton candy or fairy floss) - spun sugar - consists mostly of air. It is the quintessential experience of a visit to a fairground. New financial technology is “candy floss” money 1- money spun out and expanded into ever larger servings. Derivatives, securitisation and collateralised lending allow fundamental changes in credit markets and leverage.
Global markets are likely to go through a protracted adjustment period following the recent financial turbulence triggered by the collapse of the U.S. subprime mortgage market, the International Monetary Fund (IMF) said Monday.The turbulence represents the first significant test of innovative financial instruments and markets used to distribute credit risks through the global financial system, with markets recognizing the extent to which credit discipline has deteriorated in recent years, said the report.
"Downside risks have increased significantly and even if those risks fail to materialize, the implications of this period of turbulence will be significant and far-reaching," the IMF said in its latest Global Financial Stability Report (GFSR).
The crisis "has caused a re-pricing of credit risk and a retrenchment from risky assets that, combined with increased complexity, has led to disruptions in core funding markets and increased market turbulence in August," the report added
Sept. 24 (Bloomberg) -- The Federal Reserve's interest rate cut was a mistake that will prompt ``skyrocketing'' agricultural prices worldwide, exacerbate a decline in the dollar and quicken inflation, investor Jim Rogers said.
The ``clowns in Washington'' have ``signaled to the world they don't care about the U.S. dollar,'' Rogers said in an interview from Singapore. The Fed reduced its benchmark rate by half a percentage point to 4.75 percent last week.
The commodities rally, which Rogers correctly predicted in 1999, may last 15 more years, he said. Oil may reach $150 a barrel during that time, Rogers added. In 2005, he said the commodity bull market may last until 2022 because of a lack of investment during the past two decades.
Rogers, 64, co-founded the Quantum hedge fund with George Soros in the 1970s and traveled the world by motorcycle and car in the 1990s researching investment ideas for his books, which include ``Adventure Capitalist'' and ``Hot Commodities.''
The dollar today fell to a record against the euro and weakened versus the yen on speculation U.S. growth is losing momentum, adding to pressure on the Fed to reduce interest rates again. The currency's slide has boosted gold as investors seek an alternative investment, lifting prices to the highest since 1980.
Crude oil has surged 32 percent in the past year, and last week reached a record $83.90 a barrel in New York. Wheat set an all-time high of $9.1125 a bushel on Sept. 12 as world consumption is forecast to exceed production for the seventh time in eight years.
`Place to Be'
On July 2, Rogers said agricultural commodities were ``the place to be,'' and that investors should buy them over stocks and bonds. Today, he advised against buying wheat, which has become the most expensive ever relative to corn, soybeans and cotton.
``I wouldn't buy it now,'' Rogers said. ``If you're going to buy something, buy coffee or cotton or sugar. Wheat has been going straight up for about a year. I don't like to jump on a moving bus.''
Prices will fall 30 percent to $6 a bushel within a year, said James Gutman at Goldman Sachs Group Inc. in London and Pierre Martin, manager of a $490 million commodity fund at DWS Investment GmbH. Chicago futures markets show a similar drop.
The Standard & Poor's 500 Index today lost 8.02, or 0.5 percent, to 1,517.73 after the International Monetary Fund warned of ``protracted'' economic instability.
To contact the reporters on this story: Betty Liu in New York at; Eric Martin in New York at .
Tiffany the luxury jeweler profit rose as sales went up 20% to $ 662.6 million. Other lower end retailer's sales fell across the board.
September 19th, 2007
Let's look at some of the potential reasons and personal benefits for the Federal Reserve to have cut rates by 50 basis points yesterday.
A perusal around the web and even mainstream economic outlets described the Fed as being between a rock and hard place. Article after article talked of how inflation pressures remained while a crashing housing industry was in need of assistance. Almost every article mentioned how desperately Wall Street was looking for a rate cut.
A rate cut was seen as being good for stocks and corporate America and as being a possible life boat for struggling American consumers and home owners. Those calling for a rate cut felt that the need to save the housing industry and stimulate a falling economy outweighed the risks of inflation.
At the same time a rate cut was seen as a potential kiss of death for the dollar and a risk of ushering in high inflation for the overall economy. With oil and gold near important break out levels many figured the Fed would not want to send them an inflationary message.
When trying to understand the actions of the Fed it is important to realize they are a private financial institution who is concerned with their overall economic success as anything else. Often times I read articles talking of how the Fed is more concerned with their "friends on Wall Street" than anything else. There might be some truth to that sentiment, but one must put it into context.
Like any profit based business the Fed is more concerned about their bottom line than anything else. Therefore, it may be true that they are not as concerned for the economic welfare of the average citizen as they like to portray themselves to be. Yet, their relationship to Wall Street isn't totally benevolent either.
Most of the time the economic health of Wall Street is a boon to the bottom line of the Fed. Since the Fed loans out money to the economy they stand to benefit by fostering a climate of expanding corporate profits. Corporations which are making money are ready to borrow to fund their growth and expansion.
Yet, like every business in a competitive economy they are ever vigilant for opportunities to increase market share in their field of interest. If you look at the Federal Reserve as a banking institution then it would be only logical that they would like to increase their market share in the banking industry. Since they are not in the business of mergers and take overs their ability to get increase in market share is somewhat limited.
Yet, in the current environment of potential financial and credit crisis their does appear to be a window of opportunity. While most commentators are labeling the Fed's actions of late towards the banks as a bailout, I see something different.
The way I see it the Fed is not bailing out the banks, but rather putting themselves in a power position. The Fed is not taking on bad loans and subprime toxic waste. What they are doing is giving out short term loans to banks while using their best assets and loans as collateral. In essence this means that the bank is losing their good money to the Fed while taking on more debt without getting rid of their defaulted loans. While appearing to be bailing out the banks they are actually lowering the credit rating of the banks by taking away their assets while adding to their liabilities.
What this means is that the Fed stands to benefit from the financial crisis in a number of ways. First, they will make money off of the banks whether they fold or recover. Second, they are not endangering themselves by taking on poor quality loans. Third they position themselves to be able to a creditor that a failing bank is beholding to, and could be in a prime position to take over the bank after the liquidation period. In other words the Fed could increase their market share by taking over failed banks.
Now, the fact that the Fed is not taking on bad debt shows that they have no desire to become sacrificial lambs or financial martyrs. In fact they are finding ways,like any other competitive company, to benefit from the current turbulence.
This analysis still leaves open the question of why the Fed cut rates. In fact the cutting of rates would seem to be counter intuitive to my argument of the Fed just being concerned about their economic survival. As I mentioned earlier most feared cutting rates would cause a dollar crash and a gold boom like none we've seen in our lifetime.
If the dollar were to die or gold became king, then it would seem logical that the Fed itself could cease to exist. After all the Federal Reserve is the reserve for the US dollar and if the dollar were to crash it would seem natural that the Fed would suffer or completely fail.
My assumption is that the Fed is self-serving and relatively intelligent and therefore they are not afraid of a dollar crash or gold/commodity bubble forming. So given the Fed's actions of cutting rates how could they be so sure that this popular logical scenario is not going to happen.
Well, if the Fed sees recessionary deflation on the horizon then the dollar would likely rebound as investors go to the dollar as a safe haven during a stock market crash, and likewise gold and commodities would tread water or go down due to deflationary pressures.
In such a scenario most people would suffer, but the Federal Reserve would stand to gain market share and possibly increase their wealth not only in relative but in real terms.
Maybe, I'm wrong and the Fed is not looking out for number one, but is rather a benevolent socialist leader of the welfare state. Yet, I see no evident to support that notion, do you?
Or was it a wink? Was he only funning the folks with all that malarkey about acting judiciously lest he encourage reckless financial behavior among the great unwashed -- moral hazard, as the cognoscenti like to put it? Or did he blanch at the notion of trudging up the Hill and facing a posse of angry lawmakers unless he dished up some red meat in advance of his slated appearance to mollify the wild beasts?
John Mitchell, Mr. Nixon's ill-fated attorney general, for all his sins was absolutely, if inadvertently, on the money as to how to treat office holders regardless of political party and however high their office. Referring to the administration he was such an integral part of, he urged one and all to "Pay attention not to what we say; watch what we do." (Unfortunately for Mr. Mitchell and the administration, that's exactly what one and all decided to do.)
Following that priceless piece of sage advice in judging the Fed's chairman's action last week in taking a half-point whack out of interest rates, we're forced to conclude that Ben Bernanke is Alan Greenspan with a beard.
Not, as all the world knows, that Mr. Bernanke's efforts were without effect. They ignited a vast and powerful rally in stocks, not only here but in bourses around the globe. Which, we have a hunch, was not exactly an unpredictable reaction that might just have crossed the chairman's mind as he weighed whether to go prudent or whole-hog in reducing rates
... "The moral imperative that inspired Mr. Bernanke to take down interest rates half a point instead of a quarter was to ease the pressure off the reeling housing market. In the event, though, he managed to steepen the Treasury yield curve, which means that the longer-term obligations, which effectively determine the level of mortgage rates, went up. Not, we suspect, the ideal medicine for what ails homebuilding."
...Meanwhile, though London appears to be the epicenter of conduit angst these days, our homegrownappears to have plenty of exposure. That's according to a friend who in an e-mail to me rattled off the following list of its structured investment vehicles, or SIVs: Beta Finance, Centauri, Dorada, Five Finance, Sedna Finance, Vetra Finance and Zela Finance. He was able to obtain a portfolio commentary for Beta Finance, in whose summary I found three interesting items.
First of all, for those folks who can't quite wrap their arms around what an SIV, an SPIV (special-purpose investment vehicle) or a conduit is, those names all stand for pretty much the same thing: special-purpose entities that reside off balance sheets. Think of them as virtual savings and loans that can be quite sizable. There are no real rules that govern what they can buy. And because they're off balance sheets, they operate with little regulation.
...Citigroup notes that the leverage in this particular vehicle, Beta Finance, is "only 14.24 times." Thus, Citigroup, a leveraged entity, owns a gaggle of leveraged S&Ls. That helps illustrate a point I've made many times: that the well of liquidity that bulls were citing two months ago as a reason to be bullish was just a wall of leverage. (It's worth noting that the net asset value of Beta Finance has declined 19% from its high and that Citigroup's other conduits are apparently down a similar amount.)
...It just boggles the mind how much leverage is employed by financial institutions and how little knowledge the world has of their workings.
As to why these infinitely leveraged black boxes (with extremely flexible accounting and disclosure rules) exist in the first place, I think we know the pat answer: so that financial institutions can employ them and utilize even more leverage than they are legally allowed to.
Which makes one wonder: Since these entities are designed specifically to circumvent the rules, why have they been countenanced by the rule makers?
September 23 2007 | FT
...Next comes a familiar line: don’t fight the Fed. Chairman Bernanke will do whatever it takes to save us.
This rather assumes today’s markets are amenable to central bank control. In credit especially, that looks an antiquated notion. Nor should we forget that the markets fought the Fed perfectly successfully on the way up. As Alan Greenspan has reminded us recently, in his time as chairman of the US Federal Reserve he tried to prick asset bubbles by raising rates, then gave up when he found it wasn’t working.
...For a start, as Northern Rock has forcibly reminded us in the UK, taxpayers are ultimately on the hook for the follies of the banks. The reaction is now underway, and an era of unregulated credit is over.
Banks will be forced into more candour about the risks they are running and to put up capital accordingly. Accounting rules will change. Risk will be made more expensive and credit will contract. As for the markets, they will swing – in the professors’ terminology – from a paranoid-schizoid state to a depressive one. Investors will now “recognise [that] investments have both attractive and unattractive characteristics, and judgments are imperfect”. They will balance risk and return, rather than swinging between extremes.
Let me put a similar point in a different way. There are some events which are simply too big to grasp at once. The ostensible reality may be clear enough – the collapse of the Soviet Union, say, or 9/11 – but it can take years for the full significance to emerge. In its more modest way, the credit crunch fits that description.
The crisis is not over yet, and there is no saying how long its implications will take to sink in. But when they do, investors will have more to think about than chasing the next bubble.
Copyright The Financial Times Limited 2007
The US M3 money supply is 14% higher than a year ago, its fastest growth rate in 35-years, the US Dollar Index is plunging to 15-year lows, gold is surging toward $725 /oz, a 28-year high, crude oil is cruising above $80 /barrel, wheat prices have doubled to $8.75 /bushel, an all-time high, and the Baltic Dry Freight Index has zoomed 300% higher to stratospheric levels.
... Food and energy prices are sharply higher from a year ago, and this time, the surge in these “volatile components” of inflation is not a flash in the pan. But remember, you’re in the “Twilight Zone,” where perception is more important than reality, and emotions often trump logic. Putting it another way, “there is nothing so disastrous as a rational investment policy, in an irrational world,” explained JM Keynes.
...Agri-flation on the Warpath,
Rising prices of agricultural commodities including wheat, soybeans, corn, and milk have helped stoke global inflation. This trend, referred to as “Agri-flation,” shows up in prices for farm products which reached record levels in 2007. A Food Commodity Index, which tracks a dozen agricultural raw materials used by food companies including wheat, barley, milk, cocoa and edible oils, show cost inflation of 21% this year – the biggest increase since the index started almost a decade ago.
In the past 12-months, the price of milk futures have soared 70% on the Chicago Mercantile Exchange, and in most of Europe, is up 50% this year. Why the sudden upward explosion? First, a domestic shortage of nonfat dry milk and strong international demand for protein has sent powder prices skyrocketing. Second, strong demand for corn for ethanol purposes has resulted in higher feed costs for cows. Farmers have responded by raising milk prices.
After warning about irrational exuberance in 1996, Greenspan embraced the "productivity miracle" and "dotcom revolution" in 1999. Mid-summer of 2000 Greenspan fell in love with his own analysis and was worried about inflation risks. Shortly thereafter the Greenspan Fed embarked on an incredible campaign slashing interest rates to 1% in panic over deflation.
Greenspan is now trumping up the idea that credit conditions are like 1998. I talked about this in No Greenspan, Conditions are NOT Like 1998.
On May 21,2006 Greenspan said housing prices won't fall nationally. That prompted me to write Greenspan Predicts Housing Bust.
History shows Greenspan was worried about Y2K problems (slashing interest rates and adding fuel to the dotcom bubble). Y2K went off without even minor glitches.
In 2001 Greenspan pleaded with Congress to adopt Bush's $1.35 trillion tax cut. Greenspan's rationale was the government would run huge $5.6 trillion surpluses over the subsequent decade after the cuts. It's right here in the Testimony of Chairman Alan Greenspan Before the Committee on the Budget, U.S. Senate January 25, 2001.The key factor driving the cumulative upward revisions in the budget picture in recent years has been the extraordinary pickup in the growth of labor productivity experienced in this country since the mid-1990s.Greenspan has been wrong at every critical juncture in his career. So now when Greenspan is warning of inflation just as he was in Summer of 2000, fears should be anything but inflation.
The most recent projections from the OMB indicate that, if current policies remain in place, the total unified surplus will reach $800 billion in fiscal year 2011, including an on-budget surplus of $500 billion. The CBO reportedly will be showing even larger surpluses.
The sequence of upward revisions to the budget surplus projections for several years now has reshaped the choices and opportunities before us. Indeed, in almost any credible baseline scenario, short of a major and prolonged economic contraction, the full benefits of debt reduction are now achieved before the end of this decade--a prospect that did not seem likely only a year or even six months ago.
But if inflation is the fear, then why is Bernanke on a shock and awe campaign surprising the markets with half point cuts first in the discount rate and second in the Fed Funds rate, during options expiration week in consecutive months?
WSJ Economics Blog
"Helicopter Ben has now officially earned his nom de plume and lost all the credibility he had been given. He showed his true colors with this rate increase. Long live Paul Volcker, a real central banker you could believe!"
... ... ...
It strikes me that all the talk about “helicopter Ben” having “no credibility left” and “bending over backwards” to help out speculators, shows the same depth of analysis and rational thought as Jim Cramer’s YouTube show.
... ... ...
don’t think the Fed lost credibility at all. I think they made the right decision. All of you knuckleheads are just jealous of Bernanke because you wish you were the man. Obviously their concern is not the price of borrowing money, but rather the availability of the money (for right now). All of you rookies just relax. He didn’t get to where he is because he is an idiot. He is doing his job and the market will use it’s invisible hand, as it always does… and this problem will be corrected in due time.
... ... ...I’m amazed at some of the comments coming from people on this blog who clearly aren’t trading. Yes, the Fed held rates too low too long and that contributed to the problems we’re now experiencing. However, orchestrating (or allowing) a collapse of the leveraged players including lenders who have made rock solid loans to punish hedge funds that buy rock solid loans is outright stupidity. It will destroy an already soft housing market and consequently the consumer led economy. The Fed has stepped in to allow dealers and banks to finance AAA’s and CP in an effort to keep the markets from collapsing. This is well within their mandate. They haven’t lost credibility as a result. They lost credibility on August 7th when they said inflation is the primary risk to the economy.
... ... ...the fed lost credibility when it did not police the leverage in the system which they could have done! now the system feels if whines enough they can make bigger bets, which after ltcm is what happened.
... ... ...
FED has no choice but to bail out the bad guys. The 2003 adventure of 1% interest rate would have failed miserably if not for Japan to buy up 367 billion US dollars and prevented the collapse of the dollar. After Japan’s dollar buying spree ends, FED then must defend the dollar from collapse by raising interest rates so many times under the name of fighting inflation. Thus the deflation of the debt bubble, which was inflated enormously by the move of 2003, has started. This morning’s FED action shows that the players in the market are so leveraged and inter-connected, any serious move to deflate the debt bubble will pull down the whole house, so FED has no choice but to reflate the bubble. The bubble will burst one day on its own weight and the world will plunge into a depression. That is how this irresponsible and ill-thought-of globalization process will end.
Marc Faber of the Gloom, Boom and Doom Report joins Bloomberg to discuss his predictions for the latest Fed actions and his assertion that the US economy is already in recession. Although Faber believes that the Fed will cut interest rates, he suggests that the better move would be to actually raise them in order to fulfill their real role of maintaining the integrity of money.
A long and insightful interview with Jim Rogers of Beeland Interests covering topics ranging from the looming Fed action, the state of the housing market and Rogers assertion that we are already in recession. Rogers suggests that the Fed is irrelevant in that they, in his view, they generally move after market turmoil has occurred. Rogers also points out astutely that the current market conditions shouldn’t qualify as being termed a “crisis” the as all the major indexes are only 4% – 6% below their all time highs.
Originally aired on: 9/17/2007 on Bloomberg
...in early 2007, foreign central banks alone held some two and a quarter trillion in U.S. dollars reserves, which represented about 66 percent of their total official foreign exchange reserves, with a bit more than 25 percent being held in euros.
...if the annual rate of depreciation of the dollar is five percent and the short term rate of return on U.S. T-bills is four percent, central banks are losing some $22.5 billion. Since private foreigners hold more than two trillion in short term dollar denominated debt, the net annual loss of foreign holders of U.S. dollars can easily reach $50 billion a year. The conclusion is easy to see: Not only have foreigners been heavily financing the large U.S. government's deficits over the last six years, but they are now being called upon to help finance the generous bailout of American financial institutions.
...With the Fed printing money and increasing the money supply on a high scale as if it was dropping money from a helicopter, thus the nickname of Fed Chairman Ben "Helicopter" Bernanke, short term interest rates will drop for a while, but long term interest rates will be edging up, unless a deep recession steps in.
...In effect, the Fed is suspending market discipline for the big financial players it puts under its protection, while letting market discipline crush small homeowners and small investors who bought now foreclosed houses on shaky mortgages or who invested their savings in fraudulent and risky collateralized debt obligations (CDOs). That is the net result of applying Bagehot's rule only in part.
...mortgage debt as a percentage of disposable income in the U.S. is at the highest level it has been in seventy-five years, reaching 100 percent, while consumer debt has risen to its highest level in history. All this makes the economy more vulnerable than it has been since the 1929-39 depression.
... FED has no choice but to bail out the bad guys. The 2003 adventure of 1% interest rate would have failed miserably if not for Japan to buy up 367 billion US dollars and prevented the collapse of the dollar. After Japan’s dollar buying spree ends, FED then must defend the dollar from collapse by raising interest rates so many times under the name of fighting inflation. Thus the deflation of the debt bubble, which was inflated enormously by the move of 2003, has started. This morning’s FED action shows that the players in the market are so leveraged and inter-connected, any serious move to deflate the debt bubble will pull down the whole house, so FED has no choice but to reflate the bubble. The bubble will burst one day on its own weight and the world will plunge into a depression. That is how this irresponsible and ill-thought-of globalization process will end.
September 19, 2007 | www.smartmoney.com
YOU CAN'T PLEASE all the people all the time, not even if you're Ben Bernanke, chairman of the Federal Reserve and number one friend of markets from New York to Hong Kong.
Once the Federal Reserve dropped rates a generous half-point to cope with the most serious credit crisis in decades, there was no holding back the cynics. To read some blogs and hear the rumblings from budding bond vigilantes, you'd think Bernanke had just dropped a bomb, or sold his soul.
How can the Federal Reserve bail out all the Wall Street risk takers? Why would "Bubble Ben" float in to rescue all the deadbeats from their just desserts? And the answer is that the Fed can't tell the financially innocent from the morally bankrupt. Helping all of us sinners collectively in our time of need is its reason for existence, and Bernanke's job. If that view seemed underrepresented yesterday, it's likely because so many of its adherents were so busy buying stocks.
As Alan Greenspan patiently explained to Jon Stewart yesterday, the Fed's essentially a regulator, there to act as a shock absorber for free-market forces and to decide just how much currency needs to be printed at any given point. And at times like these, when the financial system gets clogged and the economy seems to be teetering near a tipping point, it has the discretion and the mandate to print more.
Wall Street Journal.
Federal Reserve Chairman Ben Bernanke and his colleagues clearly explained why they cut interest rates this week by one-half percentage point: "To help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets."
But a vocal chorus is complaining that Bernanke & Co., instead, just bailed out a bunch of greedy speculators, imprudent lenders and short-sighted home buyers who got too-good-to-be-true mortgages. "This is like adding Jack Daniels to the AA-meeting punch bowl," emailed Rob Brantley, a Washington consultant. "The market's reaction provides proof." "I plan to now sell my house and upgrade to a $4 million or $5 million home in Highland Park. If I find I can't meet my mortgage payments, will Mr. Bernanke bail me out?" Cheryl Kawalsky emailed from Dallas. "Or, is that type of American socialism reserved for hedge-fund managers, investment bankers, and private-equity moguls? The truth is, in America today, I feel like I'm living in a huge house overrun by children. All the adults have left town."...
The more provocative attacks -- which come both from left and right -- accuse the Fed of encouraging people to take foolish risks by cutting rates now to protect them from harm.... Harvard's Richard Zeckhauser puts it in the Concise Encyclopedia of Economics. "Federal deposit insurance made savings and loans more willing to take on risky loans. Federally subsidized flood insurance encourages citizens to build homes on flood plains."... "Providing [after-the-fact] insurance for risk behavior ... encourages excessive risk-taking and sows the seeds of a future financial crisis," the governor of the Bank of England, Mervyn King, said with conviction Sept. 12, a few days before he and the British government had to move from the sidelines to fight a bank run.
But there also is an ethical dimension to the criticism, a righteous indignation at speculative excess. "There's a definite feeling, when the crisis comes along, that these un-Christian people are getting their comeuppance," says Brad Delong, an economic historian at the University of California, Berkeley. He cites British thinker Edmund Burke in 1790, bemoaning the ascendance of financiers following the French Revolution, who said, "The age of chivalry is gone; that of sophisters, economists, and calculators has succeeded, and the glory of Europe is extinguished forever."
Lower short-term interest rates do help banks that borrow in the short term and lend for the long term.... But there are moments -- and this may be one -- where one can worry too much about moral hazard. As Fed officials have quipped: We want to discourage people from smoking in bed, but do we want to prevent the fire department from putting out fires caused by such carelessness? Or, to paraphrase Charles Kindleberger, the late Massachusetts Institute of Technology economic historian: In a speculative boom, one wants to stir doubt as to whether the lender of last resort will step in. But when the bust comes, one certainly wants him to show up.
At times like these, it is the Fed's job to make sure the financial system functions.... [T]he Fed [should not] hesitate to cut rates or otherwise intervene when financial panic imperils otherwise sound investments and businesses; otherwise, people will be reluctant to make such sound investments in the future and the overall economy will suffer. At times like these, there is a danger that a principled stand to punish the profligate could inflict severe economic pain on millions of innocent bystanders...
In today’s testimony before the house, Fed Chairman Bernanke was questioned by Representative Ron Paul in what was a remarkable exchange. Remarkable for how straightforward, lucid, and anti-statist the question was. In his questioning, Ron Paul stated:
“I want to follow up on the discussion about moral hazard. I think we have a very narrow understanding about what moral hazard really is. Because I think moral hazard begins at the very moment that we create artificially low interest rates which we constantly do. And this is the reason people make mistakes. It isn’t because human nature causes us to make all these mistakes, but there is a normal reaction when interest rates are low that there will be overinvestment and malinvestment, excessive debt, and then there are consequences from this. My question is going to be around the subject of how can it ever be morally justifiable to deliberately depreciate the value of our currency?”
His statements continued (about how much oil, gold, wheat, corn, etc. has gone up since the rate decrease) but the heart of his question was the following moral question: ...consciously depreciating the value of the USD has winners and losers (Wall Street/banks/the rich and everyone else), Mr. Bernanke. How do you constantly choose Wall Street over the rest of America?
You will not be surprised to know that B-52 Ben didn’t answer the question. He couldn’t answer the question (at least truthfully). Was he going to say that the Federal Reserve is a quasi-private institution whose prime directive is to cartelize and protect the profits of the banking industry? Was he going to say that the only policy the Fed knows is based on the flawed Keynesian logic that wealth can be created out of thin air via printing presses? Of course not.
But his non-answer is not germane. The element that Ron Paul introduced is: the morality of the Federal Reserve’s constant injection of credit into the system at the slightest hint of macroeconomic distress. And I mean slightest: we haven’t even seen a GDP print below 0. We were only down 4.2% from the ALL TIME high in the Dow (the Fed’s own research suggests that the stock market is the best leading indicator of the economy).
Back in July of 2006, I wrote a piece introducing this moral element into the discussion of the Federal Reserve’s monetary policies. I wrote then words that today, after a pre-emptive, forestalling 50 basis points decrease and more than $1 trillion in worldwide central bank injections of credit, are as germane as ever:
“A constant loss of value in the monetary unit forces all manner of dire consequences on economic actors: it favors consumption over saving, speculation over investment, capital over labor, and the young over the old; it prevents accurate economic calculation about the future and thus clouds investment horizons; it hollows out a country's middle class making for more class conflict between haves and have nots… there are grave time preference consequences as well that impact not only long term investment projects (as noted above) but also the very manner in which parents raise their children and how children care for their ageing parents, as well as the lessons of frugality and hard work that once were the bedrock of this nation.”
Bravo to Ron Paul for giving voice to the hundreds of millions or pensioners, savers, working stiffs, poor, fixed income beneficiaries, laborers, gasoline-, bread-, milk-, and egg-buyers who weren’t able to ask Mr. Bernanke why he – like every Fed chairman before him since 1913 – screwed them for the benefit of the top 5% of the population of this country.
The Federal Reserve's job IS to bail out banks. It is owned by the banks, for the banks. Not the people. The Fed is no more Federal than Federal Express.
Keep in mind that:
The FOMC is composed exclusively of bankers.
The bankers know what their banks' books look like.
A 50 bp cut is extremely significant.
It was a unanimous vote for the 50 bp reduction.
From the foregoing, we deduce that the banks' books are in shambles and they all need this kind of significant relief so badly that there is not a single dissenting voice on the FOMC. This is, in and of itself, really disconcerting. What happened to "contained" or "only subprime" problems? Will 3q results show a scorched wasteland of shattered loans and collateral which is actually 50% of what it was said to be worth?
We also learn that the Fed will protect its constituent banks at the expense of the long-term health of the US.
We also learn that Bernanke is no kind of inflation hawk, that, when the chips are down, Bernanke is with the doves and his banks.
Tuesday, September 18, 2007 | SF cronicle
I called him "the one-eyed chairman" who could always spot reasons to stomp on the real economy of work and production, but was utterly blind to the destructive chaos in the financial system. No matter. The adoration of him was nearly universal.
Until now. The economic consequences of his rule are accumulating, and even the dullest financial reporters are stumbling on crumbs of truth about Greenspan's legendary reign. It sowed profound and dangerous imbalances in the U.S. economy. That's what happens when government power tips the balance in favor of capital over labor, favoring super-rich over middle class and poor, then holds it there for nearly a generation.
Things get out of whack and now the country is paying enormously. A pity reporters and politicians didn't have the nerve to ask these questions when Greenspan was in power.
He retired only a year ago, but is already trying to revise the history - to explain away blunders that are now a financial crisis facing his successor; to rearrange the facts in exculpatory ways; to deny his right-wing ideological bias and his raw partisanship in behalf of the Bush Republicans.
The man is shrewd. He can see the conservative era he celebrated and helped to impose upon the American economy is in utter ruin. He is trying to get some distance from it before the blood splashes all over his reputation. Of course, he also came back to cash in - an $8 million advance for a book that is sure to be a huge bestseller.
I don't want to be unkind, but Greenspan could have avoided all the embarrassing questions if his book was posthumous. I haven't read it yet. I have a hunch I am not going to like it.
Plummeting dollar, credit crunch...
By Mike Whitney
Consider this: US GDP is 70 percent consumer spending. That means that wages have to increase beyond the rate of inflation or the economy cannot grow. It’s just that simple...
...Greenspan knows that. So does Bush. But they chose to hide it behind an ‘easy credit’ smokescreen so they could weaken the dollar, off-shore thousands of industries, out-source 3 million manufacturing jobs, fund an illegal war, and maintain the lethal flow of the $800 billion current account deficit into American equities and treasuries. In truth, there hasn’t been any growth in the economy since Bush took office in 2000. What we’ve seen is an ever-expanding bubble of personal and corporate debt amplified by a “structured finance” system that magically transforms liabilities (subprime loans) into securities and increases their value through leveraging.
Home prices are in a downtrend, and the recovery in housing seems several years away. The consumer is weakening under the burden of the negative wealth effect of housing, a levered balance sheet and an eroding jobs outlook. Mortgage equity withdrawals have slowed to a crawl and seem destined to bump along the bottom as mortgage credit remains limited.
Retail sales are fading fast, while the price of oil threatens real incomes. Also, an explosion in mortgage resets in the coming two years suggests further pressure on personal consumption. Finally, the improved chances that the Democratic Party will recapture the presidency in 2008 raise the specter that the consumer will be "taxed" even further.
It also seems logical that, with equities only a few percentage points from their multiyear highs, the pendulum of excessive optimism has not shifted anywhere near excessive pessimism. Most sentiment measures -- such as the Investors Intelligence survey or expectations from leading strategists -- seem to remain bearish for stocks.
As I am usually cynical and cautious, I see no need to spoil that reputation in such uncertain times.
Interesting albeit containing questionable "Fed does not matter" hypothesis.. Contains an instructive table from research.stlouisfed.org/fred2 All figures are in billions of U.S. dollars:
Billions of $U.S.
CURRENT YEAR-AGO 2000 1990 Total Reserves at U.S. Banks
Total Borrowings of U.S. Depository Institutions from Federal Reserve
U.S. Currency in Circulation
Real Estate Loans at U.S. Comm. Banks
Total Loans at U.S. Comm. Banks
Federal Debt: held by public
(of which) Federal Debt: foreign held
Why is Alan Greenspan on 60 Minutes two days before, arguably, the most important day in Ben Bernanke's tenure? Talk about wanting to continue to hog the stage! I don't even want to discuss in length what he had to say. Just to refute one of his points, the Fed's job IS TO oversee bank lending practices and not to sit there like a mannequin. Imagine, this dude just said he saw the problem...but did nothing about it. This, after creating the problem.
Now...we have Bernanke. Amazingly, he is going to base his moves on simulations that his minions are going through. I have a sound question. What if the simulations are wrong?
Imagine it is January 1, 2007, and you have just been given the following information about what would unfold during the first 8 months of the year:
-- Oil prices would rally back to over $75/bbl;
-- The dollar would drop against every major currency;
-- Corporate earnings would benefit from the greenback's slide and continue to post double digit gains;
-- The housing industry, instead of bottoming, would continue to slide all year;
-- Home prices would actually be down in many major cities;
-- Over 90 mortgage lenders would cease operating and the survivors would be on life support;
-- The origination of subprime mortgages would all but cease;
-- All but prime, conforming mortgage loans would be either hard to get or very pricey;
-- Private equity deals would soar in the first half, but come to a halt after July 1;
-- Some prominent LBO deals would have to be "eaten" by commercial and investment banks;
-- The leveraged loan market would see stress;
-- High yield bond spreads would widen markedly;
-- Commercial paper would come into question and ABCP conduits would be in jeopardy;
-- T-Bill yields would plummet into the 2% area before rebounding to fed funds minus 85 bps;
-- LIBOR would actually rise from +10 bps to fed funds to +45 bps to fed funds;
-- Loans for all second tier credits would either be very costly or unavailable;
-- Prominent hedge funds would either blow up, face losses, or have investors seek redemptions;
-- Volatility, as measured by the VIX, would triple from 12 to 37, before settling in the mid 20's;
Given the above information, where would you expect the major stock averages to be in relation to their closes on December 31, 2006? Ah, you need more information about how the authorities responded, right? Well...
-- The fed funds rate would still be at 5.25%, but the discount rate would be down 50 bps
-- Regulators would be seeking ways to allow delinquent borrowers to remain in their homes
Now, given this admittedly limited information about market moving events and governmental responses to them, where would stock prices be? Down 10%, 20%, perhaps?
The answers are:
* The Dow is up just about 8% for the year
* The S&P is up just about 6% for the year
* The NASDAQ is up just shy of 10% for the year
If you are surprised, you are probably not alone.
...What most perma bulls fail to admit is the massive bullshit (ala these 300 point rallies) that come from nowhere are all the product of a system that is steadfastly in a state that is so far from reality they continue to just see it continuing for no other reason because...well it can.
Was it a coincidence that Goldman Sachs bought over 1000 SP contracts on that thursday (before the fed cut the discount rate) at the low of the day?? How do you spell manipulation?? CHINA and Goldman.
How many trips did Paulsen make already this year?
The notion of a business cycle has been replaced with continuous asset bubbles. If this were the late 1970's and early 1980's, we would be in a much different place, but that was before a never ending Bull Market was needed to prop up the economy and the ridiculous asset prices we see today.
"Greenspan in Feb 2004, five months before the Fed started ratcheting up rates but before he “got it about how dangerous lax lending was, counseled against using fixed rate mortgages because the premium for the security of such a loan was too rich. He recommended adjustables, and called on the mortgage industry to come up with more products. Since Greenspan knew the next change in rates had to be up from 1% and that such a move was not far off, how does his advice to borrowers differ from Ken Lay telling Enron employees to buy shares when he knew the company was in trouble?" It is funny that Greenspan was a recipient of the Enron Award for Public Service...
Anyway as on WSJ reader noted "He is only selling his book. He blew it big time and he got paid the big bucks to do it and unlike a corporate executive(s) that will go to jail for such things, he gets to stay in the spotlight and get paid for his meaningless speeches."
Greenspan in Feb 2004, five months before the Fed started ratcheting up rates but before he “got it about how dangerous lax lending was, counseled against using fixed rate mortgages because the premium for the security of such a loan was too rich. He recommended adjustables, and called on the mortgage industry to come up with more products. Since Greenspan knew the next change in rates had to be up from 1% and that such a move was not far off, how does his advice to borrowers differ from Ken Lay telling Enron employees to buy shares when he knew the company was in trouble?Comment by Steve H - September 13, 2007 at 5:50 pm
As for Greenspan saying he understood there were abuses but did not appreciate how dangerous they would become until late 2005, how are we to read his comments in 2004 and 2005 that praised endlessly the technology that relied on garbage data “Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately.”
If he knew there were abuses, where was at least a warning that such lending could be abused? Silence. What a toad.
I am appalled that the press keeps pushing the very guy that came close to destroying this economy. Now he admits that it was a little mistake and he is so sorry for the mess.
Chairman Greenspan, I am sorry too, but you don’t get to make such large mistakes without being mustered out of the prime spotlight and into the dark room where your policies put a lot of good people.
Mr. Greenspan deserves to have and opinion, as does everyone, but no one should give a hoot about what he says. He is only selling his book. He blew it big time and he got paid the big bucks to do it and unlike a corporate executive(s) that will go to jail for such things, he gets to stay in the spotlight and get paid for his meaningless speeches. I did not see it coming Mr. Greenspan is beyond sophomoric.
So can we let him go away quietly so we can get good nights sleep? PLEASEComment by Unique Insights - September 13, 2007 at 7:38 pm
Unfortunately, Allen Greenspan served his Wall Street masters well. Not everyone on Wall Street is completely corrupt, but a large number are. What they may not realize is that short term thinking buys the present, but only at the cost of selling out the future. Perhaps, more accurately, they simply don’t care. They want money now. They want it at all costs, no matter what. And, if getting money into their dirty pockets means bringing down the American economy, that is perfectly okay. Such people have no loyalty to our nation. Others, support their short sighted policies due to a lack of understanding of the impact of short term thinking. Low interest rates encourage wild speculation and misallocation of assets, inefficiency, and subsequent bubble crashes. Temporarily, low rates seem to help, but, in the long run, as noted above, they do not. We are in the present situation primarily because AG created the recipe for the 2000 stock market crash in 1998 by “printing” electronic money in 1998. After the crash of the stock bubble, he went back to the electronic printing press, and expanded the money supply again, to counter the popping of that bubble. That resulted in the real estate bubble, and the subsequent crash we are now experiencing. Be it the yen, franc or gold carry trade, or the bloated real estate and/or equities markets, or the selling out of American industry to the Chinese, such policies are destroying us, and Greenspan is certainly as responsible as anyone could possibly be. His masters, who are the master manipulators of Wall Street, are a blight upon the land, and, unfortunately, we have yet to see if Mr. Bernanke is willing to stand firm against their pressure. I doubt that he will. Because it is likely that Bernanke will behave the same as Greenspan, the USA is headed toward severe stagflation, or another Great Depression. Our children will pay, heavily, for the economic imbalances that such people create today.
Comment by Jim Jones - September 13, 2007 at 11:59 pm
===Comment by A View from the "Ground" - September 14, 2007 at 7:07 am
Second mortgage? No that’s not what happened in the subprime market. They used “seller’s concessions”. Buyer and seller agree to a price of $300,000. However, they put down a price of $340,000 on the contract with a $40,000 “seller’s concession” (or discount). Buyer gets 90% financing based on $340,000 price (or a loan of $304,000). Actual price is really $300,000. So buyer gets more money than he needs to buy house. Buyer in essence not only needs “no money down”, but walks away from transaction with money! Now that’s a deal you can’t even get on Wall Street.
It is hard to believe that it [market] could withstand another month of money-market rates' staying where they are. After all, some of the investors who own equities (and corporate debt) are hedge funds that use leverage; the cost of that leverage will be high as long as money market spreads are high. Friday's sell-off may be the sign that more stockmarket wobbles will occur before this crisis is over.
Far more important, they argue, is the risk that the private investors and central banks that have been funding America’s gaping current-account deficit become permanently less keen on dollar assets. Ken Rogoff, an economist at Harvard University, and a dollar bear, argues that America’s image as a great financial centre has been tarnished by the subprime mess. The “mystique” that has allowed America to borrow lavishly and cheaply has suffered a blow. The result, he argues, must be a lower dollar and higher interest rates in America relative to the rest of the world.
...Another argument against a sudden crash is that the dollar is already quite cheap. In real effective terms, it has slowly fallen by some 20% since its recent peak in 2002. That decline is already helping to shrink America’s external deficit. Add in the probability of sharply slower domestic demand in America, and the current-account deficit could shrink a fair bit over the coming months. A smaller need for foreign funds would itself put a floor under the dollar. All told, the doom-mongers’ script may play out in reverse. Instead of a financial crisis prompting a dollar crash, it may accelerate the unwinding of the imbalances that had the worrywarts so unnerved in the first place.
The money supply is rising at a rate of over 14% per year. So, I say, "It don't make no damned bit of difference whose money supply! Somebody is freaking doomed! Hahahaha!" ... Either way, I immediately reveal that it is, alas, the U.S. money supply that is growing so fast! Gaaaaah!
So if you never had the pleasure of hearing me say, "We're freaking doomed!", prepare yourself for a real treat, as I will now use a famous line from Marlon Brando's portrayal of Fletcher Christian in Mutiny on the Bounty as I bellow, "We're freaking dooooOOooommmmmed!" in your stupid face and urge you to pray to "whatever pig-god you pray to" to be somehow magically spared the inflationary horror.
I know that you don't believe me, and I would have no respect for you if you did, so instead I will turn to Addison Wiggin of the 5-Minute Forecast, who cleverly reveals the truth with some adroit juxtaposition, and first presents Bernanke as soothingly saying, "It is not the responsibility of the Federal Reserve - nor would it be appropriate - to protect lenders and investors from the consequences of their financial decisions", and then immediately qualifying that remark, "But developments in financial markets can have broad economic effects felt by many outside the markets, and the Federal Reserve must take those effects into account when determining policy." Hahahaha!
I’d argue that the real debate isn’t whether the dollar and the U.S. current account deficit must eventually decline; almost everyone agrees that they must. Instead, the debate is or should be about two questions. First, will there be an abrupt fall in the dollar – a dollar plunge? Second, if there is a dollar plunge, will it be merely embarrassing or a source of major macroeconomic problems?
The remainder of the paper is in five parts.
The first part argues that investor myopia is key to the question of whether a dollar plunge is likely: the dollar must eventually fall, but it will fall abruptly only if investors haven’t already factored that eventual fall into their portfolio decisions.
The second part offers an analytical treatment of the question of investor myopia and a potential dollar plunge.
The third part introduces some caveats and qualifications to that analysis.
The fourth part suggests a framework for thinking about the macroeconomic effects of a dollar plunge, if that’s what’s going to happen.
A final section suggests some conclusions and directions for research.
"The Fed could contribute to the problem while fixing it if they're not careful," said Kelly. "If the Fed promises further cuts, it gives people reasons to have doubts about the economy and a reason to wait to make investment decisions. If you're trying to pick up a house at a bargain, will you do it now or wait six months? You'll wait six months."
Another risk to the economy would be a drop in foreign investment here, according to some economists. And a Fed rate cut might cause more problems than it fixes because lower rates would make some U.S. investments, such as government-issued Treasuries, less attractive to foreigners.
Leamer and Wyss said a steeper drop in foreign investment would be a big problem for the economy because that flow of funds has been key to keeping long-term rates low.
"Last year we had $1 trillion come in net foreign investment, most of it into the bond market, and most into private bonds, not Treasures," said Wyss. "If that money stops coming in, that's going to be a big increase in borrowing costs."
The new numbers on consumer confidence are out. They show American consumers very confident that the economy is going down the tubes.
Over in Asia and Europe, stocks plunged on fears that Americans may no longer be able to find the second jobs and recklessly borrow the money needed to buy imported stuff. Economists now freely use the "recession" word following the report that American payrolls fell in August, the first monthly decline in four years.
American consumers, in other words, are all dried up. And the discussion has begun on what kind of baloney economy kept them lubricated for so long.
Among the jobs to be lost in coming months are up to 12,000 positions at the giant mortgage lender Countrywide Financial Corp. Like other mortgage companies, Countrywide is having a hard time these days palming risky loans off on sucker investors. This means that they can only make prudent loans, which translates into less business.
Of course, some professions thrive in tough economic times. Business should be brisk for bankruptcy lawyers. And we will need auctioneers to help unload foreclosed properties.
There will also be growth in certain "niche" occupations, such as mosquito-control technician. It seems that swimming pools behind abandoned homes in Southern California are turning green, a sign of mosquito infestation. That is a health hazard. Thus, local governments are hiring mosquito-control technicians to fumigate.
And it's vindication time for the economists who've argued for years that expanding household debt is not a brilliant formula for national greatness. And they no longer have to counter the free-lunch theories — among them that a rising population will power the housing-bubble machine unto eternity, and that if you change accounting methods, American families don't seem so much over their heads in debt.
Paul Kasriel, chief economist at Northern Trust in Chicago, has been one of the lonely voices of despair over Americans' personal finances. Last week, his prophetic warnings were reviewed in The Wall Street Journal.
For example, Kasriel wrote in 2004 that inflated housing prices created only an "illusion" of national wealth. "In recent years," he said, "growth in our capital stock has slowed and the composition of the slower growth has moved in favor of McMansions and SUVs, which do little to increase the productive capacity of our economy."
The following year, Kasriel wrote another essay titled, "Households Still Running on Empty!" (The exclamation point is his.) In it, he challenged popular arguments that personal income has been underestimated because of the way contributions to private pension funds are counted. His bottom line was that household borrowing in recent years had risen relative to household spending, and that household spending represented a record 76 percent of gross domestic product.
Today's "partying," he said, would lead to tomorrow's "hangover."
So here we are: The partygoers have downed a bottle and still they can avoid a hangover.
A recent article on the Motley Fool's British Web site offered "Five Ways to Prepare for a Recession." The prescriptions: Don't make big luxury purchases you can't pay for with cash. Build an emergency fund. Live more frugally. Reduce your debt. Find more work.
All sound advice, but consumers had better act fast — like five years ago.
It looks as though Americans will have to find an honest way to pay for the high life. Or they can learn to be happy with what they've got, which, before the McMansions and SUVs, was still quite a lot.
But there's no avoiding reality. The green in the swimming pools is not the color of money, but of happy mosquitoes.
September 14, 2007 | New York Times
Economists also note that spending by higher-income consumers has a far more significant impact on the economy than purchases by those who are less well- off, a group that appears to be most vulnerable to declining home prices, resetting mortgages and job loss.
“There are essentially two consumer economies right now, and they parallel the split between the very rich and everybody else,” said J. Walker Smith, president of Yankelovich, the consumer research firm based in Norwalk, Conn. “There is one part of the consumer economy that is unlikely to be affected at all by the recent events in the financial markets. Those are the people making the loans. The people taking the loans, however, are the people who are affected.”
But no amount of PR can change the fact the underlying fundamentals are deteriorating rapidly in the banking industry, thanks to the mortgage and housing bust. So the jury is definitely still out on whether or not this novel approach to confidence-building will work. It certainly is working in the short-term by boosting stock futures.
September 13, 2007 | Naked capitalism blog
The latest reporting disparity comes with the written submission to Parliament by Mervyn King, the governor of the Bank of England. The document, which took a tough position against providing liquidity because it would bail out speculators and might not prove to be necessary, was covered by the Financial Times, Bloomberg, and even the New York Times, yet got no mention in the Wall Street Journal (only a short post in its MarketBeat blog, which is not the same as putting it in the paper).
The Times gave a good overview:
In an unusual public display of discord, the British central bank criticized other central banks yesterday for injecting cash into the financial system to help stabilize credit markets, saying that such a policy amounted to a bailout of investors who made bad decisions.
The main thrust of his written testimony to Parliament, however, was a sharp warning about “moral hazard” — a term used to describe the downside of policies that effectively rescue investors when their bets turn out wrong.
“The provision of such liquidity support undermines the efficient pricing of risk by providing ex-post insurance for risky behavior,” Mr. King wrote. “That encourages excessive risk-taking and sows the seeds of a future crisis.”
14 June 2007 | www.voxeu.org
It matters greatly whose money is accepted as foreign exchange reserves. The reserve currency status of the dollar has conferred an “exorbitant privilege” on the United States3, which has been able to run large and prolonged current account deficits, financing them in its own currency. Over the past few decades, too, the US has functioned as a world banker, borrowing short and lending long. And it has earned a significantly higher rate of return on its assets than it has paid on its liabilities – another aspect of the "exorbitant privilege". Moreover, if foreign central banks were to shift the currency composition of their portfolios away from dollars, this would likely result in significant exchange rate movements – in particular, sizable dollar depreciation.
In a 2005 survey of central banks, most respondents said they did intend further diversification away from the dollar, and several have recently made public announcements along these lines. The euro is the major alternative placement. Its growing appeal comes from several factors: the euro zone is comparable to the U.S. economy in term of GDP and trade openness; the European Central Bank has kept inflation in check; and the EU experiences nothing like America’s current account deficit and external debt, which apply considerable pressures on the dollar. In addition, the spreads on transactions in the euro have fallen sharply, thus making diversification away from the dollar more attractive, and euro-area financial markets have developed very rapidly since the introduction of the single currency. All this is positive – but many euro-area firms and politicians would not find it welcome if a portfolio shift were to bring a substantial appreciation of the euro vis-à-vis the dollar.
My recent research with Elias Papaioannou and Grigorios Siourounis studies the composition of central banks’ foreign exchange reserves to learn how changes in the invoicing of financial and international trade transactions affect the composition of reserves. We find that the choice of currency pegs and the currencies of foreign exchange market intervention strongly influence the composition of reserves. This in turn may yield insights on other aspects of internationalisation, such as the vehicle currency role in foreign exchange markets.
We assess the impact of the euro on international reserve holdings via a dynamic mean-variance currency portfolio optimiser in a before-after event study framework. Making various assumptions about the returns to holding the five main international currencies (dollar, euro, Swiss franc, British pound, and Japanese yen), we obtain the optimal portfolio composition of central banks’ foreign exchange reserves for the 11 years surrounding the introduction of the euro in 1999. We look at a theoretical “representative central bank” at the aggregate level and compare these estimated optimal shares with the actual aggregate shares reported by the International Monetary Fund. The results show an increase in the shares of both the dollar and the euro in recent years at the expense of other currencies, with the euro gradually becoming more important, especially in the developing world.
The mean-variance optimisation framework yields roughly equal allocations of the four main non-dollar currencies. The optimal euro share is lower than what the IMF data show. This suggests an increasing international role for the euro, which leads to higher reserve holdings in the European currency than optimal portfolios would show. So far, however, this increased internationalisation has come primarily at the expense of the yen, Britain’s pound, and the Swiss franc rather than against the dollar.
We augment the currency-optimiser with constraints capturing the desire of central banks to hold sizable portions of their reserves in the currency of their external debt and in the trade invoicing currency. We perform some simulations for four emerging market countries (Brazil, Russia, India, and China) that have recently accumulated large foreign reserve assets and find larger weights for the euro than the aggregate estimate for the “representative central bank.” This indicates that the euro’s challenge to the dollar might occur sooner than imagined, as emerging market reserve holdings continue to rise rapidly.
We also find that the reference currency, or the choice of risk-free asset, is the chief determinant in the optimal composition of reserves in the mean-variance framework. But in practice, where there is a managed exchange rate regime, the reference currency is naturally the currency or currencies to which a country’s own currency is pegged. This suggests a major challenge to the dollar if more countries move away from managing their exchange rates with respect to the dollar and adopt euro-based anchors or baskets in which the euro figures strongly.
A substantial increase in the euro’s share of central bank reserves would require
- That more countries include the euro in their currency pegs (the composition of debt and trade having smaller effects than the choice of reference currency), and
- That the scope for active central bank management of their portfolios widen by permitting them to take short positions (which becomes increasingly important with the observed trend to increased co-movement of the major currencies).
Recent evidence of moves in the first direction comes from Russia and Eastern Europe, China, and Kuwait, whereas there is some suggestion of movement in the second direction from Japan, Singapore, and perhaps China.
A rising number of central banks now do pursue optimisation strategies similar to the framework we employ, consulting or even hiring money managers to assist them. Besides rebalancing the currency composition of foreign reserves, there is currently increasing pressure on central banks to invest in higher return assets, such as mortgage and asset-backed securities, highly rated corporate bonds and even equity. Several countries have created ‘stabilisation funds’ and ‘sovereign wealth funds’, such as the UAE’s Abu Dhabi fund and Russia’s stabilisation fund, as well as Norway’s GPF and Singapore’s Temasek and GIC. China is also establishing a sovereign wealth fund. These funds are typically managed as diversified portfolios, taking on riskier assets than US Treasury securities. China’s recently announced intention to put $3 billion into Blackstone is a prominent example. The funds may still invest substantial proportions of their holdings in dollars, as in this case, but it is likely that they will seek higher-return opportunities in other currencies. This too is likely to bring some reallocation towards euro-denominated assets.
The advocates of a ‘strong euro’ that will rival the dollar may be pleased. But some of them (President Sarkozy?) may also find the consequences unattractive, at least as regards the competitiveness of euro-area firms. And we should all recall that the last time there was a struggle for international currency hegemony was in the 1930s. The ‘hegemonic stability’ hypothesis arose from that experience – this period without a dominant international currency was a disaster for international economic relations. Let us hope that policy-makers can manage the transition better this time around.
1 Even then, some analyses suggested that the inertia which has typically characterised dominant international currency status need not block the euro’s rise in importance – see R. Portes and H. Rey, ‘The Emergence of the Euro as an International Currency’, Economic Policy, April 1998.
2 E. Papaioannou, R. Portes and G. Siourounis, ‘Optimal Currency Shares in International Reserves: The Impact of the Euro and the Prospects for the Dollar’, Journal of the Japanese and International Economies, December 2006; M. Chinn and J. Frankel, ‘Will the Euro Eventually Surpass the Dollar as Leading International Reserve Currency?’, in R. Clarida, ed., G7 Current Account Imbalances: Sustainability and Adjustment, The University of Chicago Press, 2007.
3 P.-O. Gourinchas and H. Rey, ‘From World Banker to World Venture Capitalist: U.S. External Adjustment and the Exorbitant Privilege’, in R. Clarida, ed., G7 Current Account Imbalances: Sustainability and Adjustment, University of Chicago Press, 2007.
This article may be reproduced with appropriate attribution. See Copyright (below).
The simplest (and best) refutation to date of the silly notion that there is some kind of "Global Savings Glut" came today from Professor John Succo on Minyanville. In Response to Ben Stein, Professor Succo had this to say.
Dear Mr. Stein,
I have been running a hedge fund for almost seven years now and prior ran derivative trading at several wall-street firms. My fund trades derivative instruments with our $1.5 billion in capital.
In addressing your first assertion, that hedge funds make their money on positive carry, I would say that you are partially right. There are most likely many hedge funds borrowing low and lending high in “safe” investments, but the key word is “safe”. There are many likely scenarios where these safe investments would turn toxic quickly. It is not only hedge funds that are speculating in this way; you can say the same thing of Goldman Sachs and JP Morgan.
I disagree for the most part on your thoughts of where this cheap money is coming from: It is not coming from a high savings rate from Asian investors but from the creation of credit by all central banks.
The Federal Reserve creates credit through its open market operations like REPOS and coupon passes. If the Fed wants to inject liquidity (credit) into the system, they simply call up large broker dealers and buy some of their bonds with credit they create out of thin air (this expands their balance sheet). The dealer then passes this credit on to “the market” by making loans to mortgage companies or margin accounts or whatever. Because each layer of lender is only required to keep marginal capital on hand, a $1 billion REPO done by the Fed eventually creates as much as $100 billion in new credit to the consumer.
That credit creates the liquidity for additional consumption in the U.S., but these days we are buying our stuff from China (other countries too but we will just say China to make it easy). When a Chinese company receives dollars in trade, this normally would drive up U.S. interest rates: the company goes to the central bank of China to exchange Yuan for dollars; the central bank of China would normally sell those dollars into the currency market for Yuan thus driving up U.S. interest rates. But in our world of today these dollars are being sterilized: the central bank of China prints the Yuan to give to the company and takes the dollars and buys U.S. securities.
It is not the excess savings of Chinese investors that are buying U.S. securities. It is central banks creating credit themselves to buy those securities. The tick data that measure foreign inflows of money does not distinguish between private investors and central banks going through brokers to buy U.S. securities. We believe that as much as 90% of foreign money buying U.S. securities (not just Treasury bonds, but corporate bonds, mortgages, and yes, stocks) is not private investment, but central banks.
In order for other central banks like China’s to print the Yuan necessary, they too must create credit. Public debt in Asian countries is expanding as a result and creating worries: this is why Thailand came out essentially raising margin requirements to reduce speculation that is occurring as a result. Notice how they were quickly slapped down by their trading partners who do not want to rock the boat at this time.
This situation is very unstable in the long run. The Federal Reserves’ balance sheet this year alone has expanded by $30 billion in this way and created $3.5 trillion of new credit in the U.S. Public debt around the world is growing exponentially and total debt in the U.S. now stands at nearly 3.6 times GDP (1929 was 2.8 times).
My hedge fund’s position is the opposite of the carry trade you mention. There is coming (timing is unclear where it may be tomorrow or may be years away) a massive correction in debt and derivatives whose magnitude is only growing with time.
I invite you to visit and spend a few hours with me to discuss in depth hedge funds, their role and growth, and specific positioning and risk control we employ.
A tip of the hat and thanks to both Professor Succo and Minyanville for exposing the myth of the global savings glut in a simple, easy to understand manner.
Mike Shedlock / Mish
Troops withdrawal might be an early sign. Also crisis of confidence is still not resolved. The currency can remain world reserve currency only if the country stays competitive. If competitiveness is eroded alternatives emerge...
The hope of every central bank is that the real problem can be kept from public view. The truth is that the public---even professionals on Wall Street---have no clue what the real problem is. They know it has something to do with derivatives, but none of them realize that it’s more than a $20 trillion mountain of unfunded, unregulated paper that has just been discovered to not have a market and, therefore, no real value… When the dollar realizes the seriousness of the situation---be that now or sometime soon---the bottom will drop out.” Jim Sinclair, Investment analyst
... How serious is it? Economist Liu puts it like this:
"Even if the Fed bails out the banks by easing bank reserve and capital requirements to absorb that massive amount, the raging forest fire in the non-bank financial system will still present finance capitalism with its greatest test in eight decades."
...Even more worrisome, the large investment banks have myriad “off-book” operations which are in distress. This has forced the banks to circle the wagons and reduce their issuance of loans which is accelerating the downturn in housing. Typically, housing bubbles unwind very slowly over a 5 to 10 year period. That won’t be the case this time. The surge in inventory, the financial distress of many homeowners and the complete breakdown in loan-origination (due to the growing credit crunch) ensures that the housing market will crash-land sometime in late 2008 or early 2009. The banks are expected to write-off a considerable portion of their CDO-debt at the end of the 3rd Quarter rather than keep the losses on their books. This will further hasten the decline in housing prices.
...In the first 7 months of 2007, LBOs accounted for “$37 of every $100 spent on deals in the US”.
Britain's biggest banks could be forced to cough up as much as £70bn over the next 10 days, as the credit crisis that has seized the global financial system sparks a fresh wave of chaos.
Almost 20 per cent of the short-term money market loans issued by European banks are due to mature between September 11 and September 19. Senior bankers fear that they will have to refinance almost all of these debts with funds from their own coffers, putting a further strain on bank balance sheets.
Tens of billions of pounds of these commercial paper loans have already built up in the financial system, because fear-ridden investors no longer want to buy them. Roughly £23bn of these loans expire on September 17 alone.
Fears of this impending call on bank credit lines are the true reason that lending between banks has ground to a halt, according to senior money market sources.
...Market sources believe confidence will be restored only when all the sub-prime losses in the system have been exposed.
Christopher Wood, the strategist at Hong Kong-based brokerage CLSA Asia-Pacific Markets credited with predicting the US sub-prime crisis two years ago, said: "The sub-prime crisis has exposed the structured credit asset class as highly dubious. In five years' time it won't exist."
As Romans used to say "Sic transit gloria mundi." I am not a specialist in Fed policy and finance and cannot answer the question but the question itself is quite legitimate and natural in the current circumstances: "Can Greenspan go into history as the most overrated person among Fed chairmen ?"Of course, as the mortgage-for-anyone-with-a-pulse party was in full bloom, Greenspan was busy cheerleading. In a speech April 8, 2005, Greenspan extolled the virtues of subprime lending:"With these advances in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers. . . . As we reflect in the evolution of consumer credit in the United States, we must conclude that innovation and structural change in the financial-services industry have been critical in providing expanded access to credit for the vast majority of consumers, including those of limited means. . . . This fact underscores the importance of our roles as policymakers, researchers, bankers and consumer advocates in fostering constructive innovation that is both responsive to market demand and beneficial to consumers."
Naturally, it was not until after the debacle unfolded that Greenspan warned banks about imprudent lending standards.
It looks like a 1990s Japan-style construction shift is now underway here in the U.S. - after bubbles in residential and commercial building, the government becomes the only big spender left standing.
The Securities and Exchange Commission, although previously lax in its enforcement of securities laws in the mortgage backed securities market, is stepping up its investigations of companies who have sold mortgage backed securities which contain portfolios of false and misleading loan applications, particularly those containing option ARMs, stated income-stated asset loans, and interest only provisions in their loan documentation.
Congress has forced Fannie Mae and Freddie Mac, through the Office of Federal Housing Enterprise Oversight to limit their assets and to slow down the raising of loan limits for conventional loans thus bringing a temporary halt to the monopolization of house pricing by fixing the maximum loan amounts for conventional borrowers.
Both of these federally guaranteed institutions have annually raised loan limits to ensure that their monopoly on conventional loan purchases was maintained over the past three decades, something which the Anti-Trust Division of the Justice Department is yet to crack down on.
The FBI has stepped up and is increasing its' national investigation of mortgage loan fraud which could bring the U.S Justice Department to prosecute as many as 2000 new criminal white collar fraud cases in 2007 where as much as $5 billion in losses will not be recovered by investors and hedge funds.
Private equity funds which now manage over a trillion dollars in liquid investable cash are staying away from riskier investments in the mortgage industry and focusing on buy outs of publicly traded companies such as Harrah's Entertainment, Equity Office Properties Trust, VaxGen, MGM Mirage, Kinder Morgan, Alliance Atlantis Communications, and thousands of other announced deals.
These funds are the best customers of the ten largest banks in the nation which have over $5 trillion in assets and are also shying away from investing in mortgage related business lending and investments.
May 31, 2007 by Mark Enslin
Fueled by investment banks who have invented new leveraging tools such as derivatives and the success achieved by leverage pioneers such as hedge funds and leveraged-buyout funds, the use of leverage has now reached mainstream America. Retirement funds and mutual-fund companies alike are investing heavily in derivatives. Public companies are loading up on debt to improve returns. Even individuals have entered the fray, borrowing a record $300 billion in March 2007 alone from brokerage firms to buy stocks. Industry experts estimate that borrowing by hedge funds, leverage at major securities firms, and margin loans to individuals totaled $4.9 trillion in 2006, compared with $1.8 trillion in 2002.
TOP 10 HOLDINGS ( 19.47% OF TOTAL ASSETS)
Company Symbol % Assets YTD Return % EXXON MOBIL CP XOM 3.35 12.06 GEN ELECTRIC CO GE 2.84 5.75 CITIGROUP INC C 1.96 -14.72 AT&T INC. T 1.92 11.69 MICROSOFT CP MSFT 1.87 -2.26 BK OF AMERICA CP BAC 1.78 -9.21 PROCTER GAMBLE CO PG 1.55 -2.22 ALTRIA GROUP INC MO 1.44 5.28 PFIZER INC PFE 1.40 -7.26 AMER INTL GROUP INC AIG 1.36 -10.01
TOP 10 HOLDINGS ( 17.45% OF TOTAL ASSETS)
[Sep 9, 2007]Company Symbol % Assets YTD Return % Royal Bank Of Scotland Grp N/A 2.28 N/A Rio Tinto N/A 2.10 N/A Tesco N/A 2.03 N/A Daewoo Shipbuilding & Marine Engineering N/A 1.73 N/A BG Grp N/A 1.71 N/A Nestle N/A 1.60 N/A Suez N/A 1.56 N/A Roche Holding N/A 1.55 N/A Toyota Motor N/A 1.52 N/A DEUTSCHE BANK AG DB 1.37 5.15
TOP 10 HOLDINGS ( 24.87% OF TOTAL ASSETS)
Company Symbol % Assets YTD Return % ALTRIA GROUP INC MO 3.12 5.28 BK OF AMERICA CP BAC 2.81 -9.21 IMPERIAL TOBAC ADSSC ITY 2.48 14.22 AT&T INC. T 2.48 11.69 CITIGROUP INC C 2.46 -14.72 PFIZER INC PFE 2.43 -7.26 JP MORGAN CHASE CO JPM 2.34 -6.88 CONOCOPHILLIPS COP 2.29 14.27 VERIZON COMMUN VZ 2.26 18.08 EXELON CORPORATION EXC 2.20 14.79
SEPTEMBER 17, 2007
Corporate earnings have defied gravity for quite a while, growing faster than expected even as the pace of economic growth slowed. But troubles in the financial markets and a softer economy are about to pull profits back down to earth.
According to Thomson Financial (TOC ), analysts have cut back third-quarter earnings estimates by over $2 billion for the financial sector, dragged down by investment banks, mortgage lenders, and consumer-finance companies.
That threatens the impressive run of earnings growth among financial companies. Over the previous four quarters, domestic profits for financials were up 14.5% from the prior year, significantly better than the 2.8% gain among nonfinancials.
... "The recent tightening in financial conditions likely will deepen and prolong the housing downturn," writes Morgan Stanley (MS )chief U.S. economist Richard Berner in a research note. That could hurt consumer and business spending in the U.S.
...on Sept. 5 the Organization for Economic Cooperation & Development trimmed their forecasts for both the U.S. and Europe.
As Citigroup equity strategist Tobias Levkovich noted...: "The top 20 percent of American income earners spend more in a given year than the bottom three quintiles combined. Thus, they have far more influence on economic direction." ... Consumer Expenditure Survey data ... indeed shows that in 2005, the average family in the top 20 percent spent $90,469 on consumer expenditures. The average families in the bottom three quintiles spent a combined $87,139. Consumer Expenditure Survey data ... indeed shows that in 2005, the average family in the top 20 percent spent $90,469 on consumer expenditures. The average families in the bottom three quintiles spent a combined $87,139.And how are the rich doing? Quite well, thank you. Median income has been stagnant ... and it is still below the level of 1999. But as ... reported .. in the New York Times last month, people making more than $1 million "reaped almost 47 percent of the total income gains in 2005, compared with 2000" and "received 62 percent of the savings from the reduced tax rates on long-term capital gains and dividends that President Bush signed into law in 2003." ...
In theory, the rich, and the ultra-rich, are subject to some of the same economic woes that trouble the middle class: the slumping housing market, the rising cost of credit, and job insecurity. But they aren't showing many signs of stress. Some hedge funds have imploded, and a few investment bankers have lost their jobs, but financial-services job losses have thus far been contained to the rank-and-file employees of subprime lenders.
Bonuses at Wall Street may be down this year, but many investment bankers are clearly still spending last year's haul. At Saks, same-store sales in August were up a stunning 18.2 percent; at Tiffany, same-store U.S. sales rose 17 percent in the second quarter. Indeed, luxury retailers are in an expansive mood. ...
Nationwide, the housing sales market may be a bust. But the Journal reports ... that while many California housing markets suffer, "[e]ye-popping sales are spreading along a 40-mile stretch of southern Santa Barbara County." In July, sales in the area, "the only region of California where the median sales prices surpassed $1 million," rose nearly 28 percent. ... Or take personal transport. While auto sales are down, "the market for private jets is stronger than it has ever been," said Richard Aboulafia... Economically speaking, a Gulfstream G550, which is made in the United States ..., is worth the equivalent of 3,200 Ford Focus coupes...
Data released by the New York Federal Reserve shows that foreign central banks have cut their stash of US Treasuries by $48bn since late July, with falls of $32bn in the last two weeks alone.
"It's certainly going to be into the weeks, maybe a number of months," he said. Investors seem to "learn their lesson every seven, eight, 10 years or what have you," he said. Paulson said the economy would pay a "penalty," but insisted that the U.S. and global economies were "very strong." Paulson said estimates of 2 million foreclosures are exaggerated. He said the Bush administration is not seeking to bail out "speculators."
As you are probably aware, job creation fell last month and we actually lost 4,000 jobs, on net, for the first time in several years.
I haven't done much forecasting here, I'm too optimistic and get too invested in my own calls when I do, and I find myself tending to interpret incoming data in ways that support the call. So I mostly avoid calling the economy. It's not a game you can win very often, and I don't devote enough time to looking at all the underlying data to really get a good sense of, say, what employment in this or that industry is doing this month, etc.
So I will leave forecasting to others, Tim does it here, but it's hard to interpret today's report and recent trends in job creation positively. Those who do make forecasts, some of whom have been calling a recession for a year or more - several years in a couple of cases - may finally see their forecasts validated and be able to pat themselves on the back, but I still find myself hoping that somehow this will work itself out and the workers who have lost their jobs will get reabsorbed quickly into equivalent employment in other sectors.
Peter “Dr. Doom” Schiff, President of Euro Pacific Capital, joins CNBC to discuss his outlook on the housing-mortgage crisis and its effects on the wider economy. Schiff states that he is “100% certain that we are headed for a severe and prolonged recession” while also suggesting that it will take time for all the aspects of the collapse to fully unwind.
Originally aired on: 9/4/2007 on CNBC.
Dr. Peter Morici (University of Maryland) is a dedicated China-basher on Yuan revaluation issues. His articles on Yuan revaluation issues appear in numerous national and international newspapers. I agree that China should allow more flexibility in Yuan exchange rates and it is in China’s own interests to let Yuan appreciate. But the reasoning based on which Dr. Morici reach his conclusion is problematic.
Let me comment on them one by one. Let's start from: “It’s high time for John Snow to cite China for manipulating the Yuan” – in Finfacts, Ireland
“US Treasury Secretary John Snow will soon issue his semiannual report on the currency policies of major trading nations....Secretary John Snow should determine that China manipulates the yuan to obtain an unfair competitive advantage. Sadly, he will likely again deny sound economics and finesse the issue.”
“Should determine”? I shall “determine” that from now on the sun will rise from the west? Does the world work in such an egoistic way? And I feel particularly disturbed that he think whoever don’t think the same way as he does is not “sound economics”
“China to obtain an unfair competitive advantage”? Seems that most of China’s exporters are foreigner-owned. Is Dr. Morici saying that some hard-working American entrepreneurs are gaining an unfair advantage against some American vested interest (unions, etc)?
“International trade and investment flows best promote global prosperity and progress in developing countries when those reflect comparative advantages and national differences in market-determined rates of return for capital. Exchange rate adjustments are vital for ensuring that national trade and investment balances reflect these fundamentals and promote the efficient geographic dispersion of production.”
I think it is quite true. So why doesn’t Dr. Morici accept that fact that many manufacturing tasks are not American’s comparative advantage any more?
“For example, the 1997 Asian currency crisis was caused by overvalued currencies, such as the Korean won, engineered to allow manufacturers to buy western capital goods and technology on the cheap. These required borrowing dollars to support currency values and betting those loans could be repaid with future export earnings."
Doesn’t Dr Morici know that currency overvaluation is simply redistribution of profits from Korean net exporters to Korean net importers, and for those who import machines and then export final products, the effects are more likely to be canceled out?
Also, does this mean that Americans consumers are buying goods “on the cheap”. Then why the complaints? It’s redistribution of profits from some low-tech American manufacturers to American consumers. If you feel it is unfair, go legislate a law to tax American consumers and use the proceeds to compensate unemployed American workers. It is simply an American domestic issue.
“(In Korea....) When bad investment choices and corruption kept export enterprises from paying out as needed, dollar denominated loans could not be repaid and calamity followed. Speculators were tarred but it was the stupidity of finance ministers that precipitated the crisis.”
Who is to be blamed for the Great Depression then? Treasury secretary of the United States?
“In the 1980s and 1990s, Japan prosecuted a mercantilist assault on European and North American durable goods industries by purposely undervaluing the yen. When rising wages and other costs finally limited export-led development, Japan’s economy sputtered, and it has suffered a decade of stagnation.”
Don’t disseminate false information. Let me correct you. Japan fell into recessions because she yielded to the pressure of the United States and drastically appreciated Yen.
“Clearly, China’s currency practices create an unfair trade advantage and are one reason manufacturing is not enjoying the same scale of expansion as the rest of the U.S. economy.”
Why should manufacturing enjoy the same scale of expansion as the other sector at all? Manufacturing employment share has been declining for decades. (remind you: China was busy in Cultural Revolution at that time and wasn’t doing business with the U.S. Who else do you want to blame then?) America prospers because she keeps moving away from low value-added manufacturing to higher valued-added services, research and development. It is an inevitable trend!
“Given China’s development status and trade surpluses, this pattern of official reserve purchases may be fairly characterized as currency manipulation. It may not be reasonably characterized as anything else.”
Remind me of: “Given that this person is Black or Hispanic, he may not be reasonably characterized as anything else other than a murder.” What an interesting conclusion!
“Sooner or later, China will reach the limits of its ability to sell cheap goods in the United States. With its surplus of underemployed labor, rising wages won’t pose too much of a problem. However, Wal-Mart can only sell so many cheap gadgets, and if China steals too many U.S. jobs, stagnant wages will severely constrain U.S. demand for its products.”
Why do you think Chinese won’t move up the value chain? And based on what do you established that China “steals”? Are theses jobs owned by the U.S., and not allowed to be occupied by poor people outside the U.S.? So whoever defeat you is stealing from you?
“China’s drain on oil and other global resources, and the inflation that creates, is about to preview that phenomenon”? Doesn’t the United States consume oil and global resources as well? So you don’t allow others to consumer too?
And an undervalued Yuan create inflation in the U.S. ? What kind of economics is this, Dr. Morici?
The liquidity crunch is a symptom, not the disease. The disease is a decade of permissive tolerance for credit abuse in which the banks, regulators and rating agencies were willing accomplices.
Paul Kasriel calls Greenspan "the luckiest Cenral Banker" because he was in charge during unusual once in a lifetime events. Disinflation, end of communism, increase of productivity due to tech, etc....
...Though the recent weakness in these stocks has prompted a great deal of interest in “bottom fishing,” my impression is that such efforts are based on the same untempered assumptions of high and growing earnings in this sector that existed months ago. P/E ratios ought to be well below historical norms when those P/Es are based on record earnings and record profit margins. In my view, existing valuations are based on untenable assumptions of permanently high profit margins in this sector, with optimistic growth assumptions as well.
... ... ...
Historically, strong buying points for financial stocks have generally occurred when the group has traded at about book value. Currently, the typical multiples are two and often three times that level. That isn't to imply that financials must retreat to those lower valuations in this instance, but it's important to recognize that many financials are only “cheap” based on comparisons with very recent norms, and on the assumption that the high profitability levels of recent years will be sustained indefinitely.
In any event, my impression is that the problems for financials are just beginning, and that the risk premiums demanded by investors are likely to rise. As investors have seen throughout market history, stocks having rich valuations, weakening fundamentals, and rising risk premiums typically don't constitute great bargains.
Axel Weber of the Bundesbank Picks Up on Paul Krugman's "Non-Bank Bank Run"Paul Kedrosky reports:
Paul Kedrosky: The First Non-Bank Bank Run: In a speech at the Jackson Hole economic conference this weekend, Bundesbank president Axel Weber did a nice put of putting into words what is really going in financial markets. Call it the first "non-bank bank run".
The current turmoil in the financial markets has all the characteristics of a classic banking crisis, but one that is taking place outside the traditional banking sector.... Mr Weber told fellow central bankers and economists at the Federal Reserve’s Jackson Hole symposium that the only difference between a classic banking crisis and the turmoil under way in the markets is that the institutions most affected at the moment are conduits and investment vehicles raising funds in the commercial bond market, rather than regulated banks. These entities were inherently vulnerable to a sudden loss of confidence on the part of their funders because “there is a maturity mismatch” on the part of financial institutions that have invested in long term mortgage-backed or asset-backed securities using short-term finance.
The ever-quotable Paul McCulley of Pimco went on to call it a "run on the shadow banking system".
As Paul Krugman put it two weeks ago:
It’s a Miserable Life - New York Times: Old-fashioned bank runs just don’t make sense these days. New-fashioned bank runs, on the other hand, do make sense — and they’re at the heart of the current financial crisis. The key to understanding what’s happening is taking a broad view of what constitutes a bank. From an economic perspective, a bank is any institution that offers people liquidity — the ability to convert their assets into cash on short notice — while still using their money to make long-term investments.
Traditional banks promise depositors the right to withdraw their funds at any time. Yet banks lend out most of the money depositors place in their care, keeping only a fraction in cash. The reason this works is that normally a bank’s depositors want to withdraw only a small proportion of their money on any given day. Banks get in trouble, however, when some event, like a rumor that major loans have gone bad, leads many depositors to demand their money at the same time. The scary thing about bank runs is that doubts about a bank’s soundness can be a self-fulfilling prophecy.... That’s why bank deposits are now protected by a combination of guarantees and regulation.... But these guarantees and regulations apply only to traditional banks. Meanwhile, a growing number of unregulated bank-like institutions have become vulnerable to the 21st-century version of bank runs.
Consider the case of KKR Financial Holdings, an affiliate of Kohlberg Kravis Roberts, a powerhouse Wall Street operator. KKR Financial raises money by issuing asset-backed commercial paper — a claim that’s sort of like a short-term C.D., used by large investors to temporarily park funds — and invests most of this money in longer-term assets. So the company is acting as a kind of bank, one that offers a higher interest rate than ordinary banks pay their clients. It sounds like a great deal — except that last week KKR Financial announced that it was seeking to delay $5 billion in repayments. That’s the equivalent of a bank closing its doors because it’s running out of cash.
The problems at KKR Financial are part of a broader picture in which many investors, spooked by the problems in the mortgage market, have been pulling their money out of institutions that use short-term borrowing to finance long-term investments. These institutions aren’t called banks, but in economic terms what’s been happening amounts to a burgeoning banking panic.
On Friday, the Federal Reserve tried to quell this panic by announcing a surprise cut in the discount rate, the rate at which it lends money to banks. It remains to be seen whether the move will do the trick. The problem, as many observers have noticed, is that the Fed’s move is largely symbolic. It makes more funds available to depository institutions, a k a old-fashioned banks — but old-fashioned banks aren’t where the crisis is centered. And the Fed doesn’t have any clear way to deal with bank runs on institutions that aren’t called banks...
2007 Jackson Hole Symposium: Housing and Monetary Policy Last Updated: Sep 02, 2007
March 4, 2007 | SF Chronicle
Today some economists think the U.S. economy is experiencing its own sword of Damocles: consumer debt. Just as agreeing to sit under that blade allowed Damocles to partake in a feast he really couldn't afford, record consumer debt has enabled consumers to buy--and keep on buying. Now, with business spending, the stock market, and major world economies all in retreat, American consumers alone are keeping not just the U.S. economy but pretty much the whole darned globe afloat [ that's a funny statement if we remeber that they pay with fiat currency --NNB] ...
... Consumer debt has sailed into uncharted territory. Household borrowing had been growing steadily since the mid-1980s before positively exploding during the last decade. It now stands at a record $7.4 trillion, almost double what it was at the beginning of the 1990s. Interest payments as a percentage of income have jumped from 2.2% to 3.2% since 1995 even though interest rates themselves have been falling. Debt service as a percentage of income is close to 14.5%, another record. And for the first time in history, American households are carrying a debt burden equal to their combined after-tax income. Obviously, there's a level at which debt-fueled consumption suddenly stops helping and becomes really, really bad for the economy. Trouble is, no one is sure exactly where the tipping point is, which makes it awfully hard to predict how this whole debt thing is going to play out.
Through the conduits’ convoluted structures, banks were able to “lend” huge amounts off-balance sheet and collect fees on no-capital-required lines of credit. No one - and I mean no one - ever expected these conduits to move from off-balance sheet back on-balance sheet and I don’t think the market yet understands the earnings, capital and liquidity impact of this migration.
If you figure you need anywhere from 6-8% capital per dollar of loans, then a move of $1.0 trln from off-balance sheet to on requires $60-80 bln in additional equity capital. I don’t know about you, but I don’t see this kind of free capital sitting around
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