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More amazing gains for the U.S. dollar
Saturday, March 07, 2009
From the Wall Street Journal:
The shape of the recovery
Friday, March 06, 2009
From the Tom Toles archive at the Washington Post:
History will be the judge
After finally getting around to finishing up the second half of CNBC's House of Cards, it came as something of a surprise to see how much airtime the former Fed chairman got.
Also during the program, he made the point (slightly altered here for your enjoyment) that none of the 100+ PhD economists at the Federal Reserve were able to see the iceberg before they slammed into it, so it's understandable that the captain with his hand on the rudder wouldn't see it either. I wonder how many of the staff have read this:
Read more...
The market crash in Money Magazine covers
As noted here often before, there are many things to like and dislike about the nation's number one personal finance magazine, but their unwavering dedication to stocks as the only important asset class certainly falls into the latter category.
Given their propensity for equities, it's natural to wonder just how they are coping over there these days, given that, over the last 18 months, we've experienced the biggest stock market decline since the Great Depression and, unfortunately, we're not done yet.
After noticing the change in tone for recent Money Magazine covers, that is, since late last year when all four wheels flew off of the world-wide financial system, it occurred to me that it might be an interesting little exercise to see how these covers have changed over the last year and a half. The latest issue is shown to the right.
Just what sort of transformation has occurred, if any, as the writers and editors endured these tumultuous times? Without a doubt, they have had to become less certain of their long-standing asset allocation preferences and, surely, they've heard more than an earful from loyal subscribers who have followed their advice, only to witness their retirement dreams slip away.
Can anyone really "rescue" their retirement today?
To find out how dramatically things have changed, all you have to do is turn back the clock and look at the cover from the S&P500 peak in the fall of 2007. Back then, there was nothing in need of rescuing - it was just a matter of how RICH we'd all be and how best to get there.October 2007 - S&P500 at 1,549
Compared to the conditions today, the credit crunch was just a flicker back then - little did anyone at Money Magazine know what was to follow.
The font on the word RICH is slightly smaller but, in November, there's no question about where we're all headed.November 2007 - S&P500 at 1,481
And, of course, along with being RICH you get "financial freedom", a feeling that, today, doesn't come very easy for anybody. I wonder how that couple on the cover is doing these days.
In December, things are looking a little precarious, as if a major top in equity markets had just been completed. The word RICH is still there on the cover, but now it's a tiny little thing.December 2007 - S&P500 at 1,468
This couple too. Where are they? How are they holding up these days? What ever happened to that tech stock rally?
It's a new year - 2008 - and, oddly, October's headline "Roadmap to a rich life" is just below the magazine title for some reason. Hmmm...January 2008 - S&P500 at 1,378
Safe moves? Little did they know at the time just how frequently they would be using the word "safe" in 2008.
There it is again in the February issue - the word "safe" in big bold type as in "Your Safest Investment Now". As it turns out, those investments weren't very safe at all.February 2008 - S&P500 at 1,330
The subtitle "Roadmap to a rich life" is still there, though the font is just a little bit smaller.
Well, here comes the March issue and the Bear Stearns crisis is set to unfold. Equity markets are only down about ten percent so far, but people are starting to whisper "bear market".March 2008 - S&P500 at 1,322
There's a hint of things to come with just the idea of making yourself "recession-proof". The current recession began in December of 2007, but its start date was not determined until almost a year after that. At least one person at Money Magazine knew it was coming.
In the April issue, the bad stuff had already started and the economy had turned "mean" as commodity prices soared, but equity markets were still hanging in there.April 2008 - S&P500 at 1,385
Paying zero taxes always sounds like great idea and, after a one-month hiatus, the subtitle "Roadmap to a rich life" has reappeared.
Time for a short break from the market driven covers - some top 100 lists to peruse. At this point, many thought that the stock market was recovering, but, as it turns out, it was just the oil companies setting themselves up for a fall.May 2008 - S&P500 at 1,400
"Roadmap to a rich life" under the title looks to be back full time now.
As the May issue hit the stands, everyone was thinking about how they were going to pay for gasoline over the summer and equity markets begin to stumble.June 2008 - S&P500 at 1,280
They were already talking about at stock market rebound - back in June of 2008??
With the July issue, the stage was being set for a sequence of event that would change the world forever. Crude oil was headed to $147 and then to $47 and people were getting really worked up about inflation.July 2008 - S&P500 at 1,267
Little did we know how quickly the fear of inflation would turn into a completely different (and much more horrifying) fear and "Roadmap to a rich life" remains a fixture under the title.
It's summer time - a month for happy magazine covers about idylic places to live. Equity markets are still hanging tough, above "bear market" territory, but that would not last long.August 2008 - S&P500 at 1,282
That really does look like a nice place to go fishing.
The kids are about to go back to school and the stock market has now turned into a "bear market". People are still worried about the safety of their money.September 2008 - S&P500 at 1,164
The "Roadmap to a rich life" subtitle is hanging tough, even if equity markets are not.
Now the really bad stuff starts to happen, but not much of it made it into the October issue due to their publishing schedule. Ironically, there's another cover story on taxes (in October?) and retiring rich remains a viable option for some.
October 2008 - S&P500 at 968
Have a good look at that "Roadmap to a rich life" under the title because, understandably, that's the last time you'll see it.
The November issue hit the newsstands in October, so it had all the post-Lehman Brothers market mayhem in a special report - that's a lot of questions there on the cover.November 2008 - S&P500 at 896
With the benefit of 20-20 hindsight, there weren't many good answers to these questions.
In December, the questions get even more dire. "Can I ever retire?" is something that millions of Americans have asked themselves over the last six months. Unfortunately, here too, there are no good answers.December 2008 - S&P500 at 903
They want readers to be positioned for the rebound again. And poor Warren Buffet - he's going to have a hard time living down his late-2008 buy recommendations if this turns out to be a protracted affair.
After the worst few months for stocks since the Great Depression, equity markets continue to tumble and readers are tempted with ideas about how to "get your money back".January 2009 - S&P500 at 825
Hey, didn't they just have a crisis report. Note that "Roadmap to a rich life" is still absent from the cover. Will it ever reappear?
Hope for the new Obama administration runs high in the February issue with hope for a better economy about all that is left.February 2009 - S&P500 at 735
Can you really "beat the recession" as they promise?
All of this brings us full circle to the March 2009 issue that talks about rescuing your retirement. In the span of 18 months, the Money Magazine editors went from RICH in monstrous fonts with people happily riding horses to this dismal broken nest egg image, all the while never wavering from their advice to buy-and-hold U.S. stocks - all the way from 1,500 down to below 700.March 2009 - S&P500 at 700And, of course, there is no longer a "Roadmap to a rich life".
Payrolls plunge 651K, jobless rate at 8.1%
The Labor Department reported a net job loss of 651,000 during the month of February and an unemployment rate of 8.1 percent, the highest in 25 years. 
Payrolls were also revised downward for the prior two months, the December total adjusted from -577,000 to -681,000 and the January figure revised from -598,000 to -655,000 for a combined downward revision of 161,000.
The revised job loss in December was the largest monthly decline since 1949 and, over just the last four months, more than 2.5 million jobs have vanished.
By category, the story remains largely the same as it has been for many months with manufacturing, construction, and trade losing jobs at a fast pace. But, professional and business services led the way down in February with a decline of 180,000 paced by a net decline of 78,000 in temporary help, a key indicator for economic activity which points to further weakness in the economy.
Stalwarts health care and government were the only groups to add jobs as, surprisingly, local governments added 12,000 positions last month.
Friday morning links
TOP STORIES
• Employers Cut 651,000 Jobs; Unemployment Rose to 8.1% - Bloomberg
• Time is ‘running out’ to save US automakers - CSM
• Undisclosed losses at Merrill Lynch lead to a trading inquiry - IHT
• Two-Thirds of Chinese Economists Favor Gold Over US Bonds - China Stakes
• U.S. to invite wealthy to invest in bailout - Reuters
• The U.S. Financial System Is Effectively Insolvent - Forbes
• Buttonwood: The grand illusion - Economist
• Central banks look again at bullion sales pact - Financial Times
MARKETS/INVESTING
• Gold up on flight to safety, SPDR stays at record - Reuters
• Oil rises above $44 despite grim US corporate news - AP
• A change in newsletters' long-term rankings - MarketWatch
• The stock market's historically bad run - Curious Capitalist
• Stockmarkets and dividends: Slash and burn - Economist
• Gold fails to glitter on India wedding season - Commodity Online
ECONOMY
• Payrolls sink 651,000, jobless rate soars to 8.1% - MarketWatch
• Workers clobbered by relentless layoffs - AP
• Bay Area unemployment jumps higher - SF Gate
• GM pensions: who's responsible? - Globe & Mail
• Factory orders fall for sixth straight month - MarketWatch
INTERNATIONAL
• BOE’s King ‘Groping in the Dark’ as U.K. Prints Money - Bloomberg
• Monetary policy takes effect, adjustment possible - CHINADaily
• Rush to buy government bonds - Guardian
• Zhou Pledges Fast, Heavy-handed Policies - Bloomberg
• Q&A: How will quantitative easing affect me? - Times Online
• Japan's slump tests faith in the resilience of stocks - IHT
• Wen boosts spending without adding to stimulus package - Guardian
• Bankers: Scapegoat millionaire - Economist
HOUSING
• Most foreclosures pack into a few counties - USA Today
• RE experts: Investment opportunities on horizon - Jacksonville Biz
• Low Prices Aren't Luring Homebuyers - TheStreet.com
• Job losses add to home foreclosures - Oregon Live
FED/TREASURY/BANKING
• Fed official sees late-year recovery - Reuters
• Senators Ask Who Got Money From A.I.G. - NY Times
• Treasury secretary's choice for deputy withdraws - AP
• Frank Seeks to Curb ‘Phenomenon of Securitization’ - Bloomberg
INTERESTING
• Craigslist sued over erotic-services ads - SF Gate
• Is Europe Falling Out of Love with Obama? - Time
• World's heaviest man gets a lift in custom van - AP###
Kohn takes a beating
The fellas at the Wall Street Journal Real Time Economics blog watched Federal Reserve Vice Chairman Donald Kohn testify before the Senate Banking Committee today so I didn't have to.
Apparently there was only one question: "Where's all the AIG money going?" The answer wasn't forthcoming as described in their report:
Now, I did happen to catch that hearing...“My judgment would be that giving the names would undermine the stability of the company,” Kohn said in a contentious Senate hearing.
...
It didn’t go over well.
“Public confidence in what we’re doing is at stake, it’s their money that is being poured into these institutions,” Senate Banking Chairman Christopher Dodd, D-Conn., told Kohn. “That kind of an answer undermines that very significantly.”
...
Kohn’s rejection of the idea contrasts how Bernanke has handled the AIG counterparty question in the past.
According to a transcript of a Nov. 18, 2008, House Financial Services Committee hearing, Rep. Carolyn Maloney, D-N.Y., asked Bernanke, “will you make public who those [AIG] counterparties are and how much they received?”
The Fed chairman was quite agreeable in a "the check's in the mail" sort of way.
Bernanke replied, “I think that information can be made available,” though he noted that AIG had many counterparties. Bernanke added, “we will see what we have.”Those Freedom of Information Act lawsuits by Bloomberg and Fox News should be just about ready to get underway... Read more...
In a letter Wednesday to Bernanke, Maloney said she’s still waiting. “To date, your office has not provided that information to me nor, as far as I am aware, to the Financial Services Committee,” Maloney wrote.
Asked about that same issue in a Senate hearing two days ago, Bernanke said AIG counterparties made “legal, legitimate, financial transactions” and normally “would have presumption to privacy about their commercial decisions.”
“So that is a consideration we have to take into account,” Bernanke said, adding “we understand your concern and we want to make sure that we provide all the information that’s needed to make the public policy judgments.”
That’s still a far cry from “no.”
Kohn appeared to finally deliver that Thursday, to much abuse.
Do you know where your money is?
On CNBC they just said, "It's 4 PM on Wall Street. Do you know where your money is?"
Well, apparently, a little less of it is invested in stocks on Wall Street. The S&P500 plunged more than four percent to close at its lowest level since September 1996, breaking decisively below the 700 mark in the process.
A few moments before, Dylan Ratigan was walking around the floor of the New York Stock Exchange saying something about a cherry being on top of something and that the U.S. economy is still fundamentally sound.
If so, then why is everyone scared to death?
Here's some more from Bloomberg:U.S. and European stocks tumbled, driving the Standard & Poor’s 500 Index to the lowest level since 1996, after Moody’s Investors Service said it may cut JPMorgan Chase & Co.’s credit rating and China quelled speculation the government will add to its stimulus plan.
Don't be surprised if after tomorrow's labor report, where some analysts are predicting a net job loss of more than 800,000 in February and a national unemployment rate of over 8 percent, things become even more frightening.
JPMorgan dropped 14 percent as lenders led the plunge. Wells Fargo & Co. and Bank of America Corp. slumped 12 percent after Moody’s said it’s reviewing their ratings, while Citigroup slipped below $1 for the first time. General Motors Corp. sank 15 percent after its auditor said the automaker may not survive. European stocks fell after Aviva Plc, the biggest U.K. insurer, reported a loss.
...
Concern corporate defaults will rise, the deepening global recession, and dividend cuts at companies from General Electric Co. to JPMorgan have dragged the S&P 500 to three consecutive weeks of declines, pushing the index down 24 percent this year. It has fallen 7.2 percent since Feb. 27.
The new Paul Volcker "PLOVER" plan
Bruce Krasting worked on Wall Street for 25 years, which is 25 more years than I worked there, which is probably the reason why I haven't got a clue what he's talking about in this piece, which I'm pretty sure is satire - Secret conversation between Volker and Geithner.
BIG PAULIE: Good evening Tim. How you doing Kiddo? You still in the office?You see, I'm lost here already. TurboTax, Jeff Immelt, kum by ya... Once they start talking about zero coupon bonds my eyes just start to glaze over.
TIMMY: Hi Paul. Thanks for calling. I guess I am okay. It was another bad day for me.
BIG PAULIE: Those Senators tough on you? I could not tell. CNBC had you on in a small box in the corner with no sound.
TIMMY: Yes it was tough. Not as bad as the House though. They all want to blame someone and I am always in the way. I am at my desk now, looking at the email and phone messages. 90% are negative. The press, half of Washington, foreign finance officials, industry leaders. Irate voters from every State. They all hate me. They blame me because I am the one in the hot seat.
BIG PAULIE: That bad huh?
TIMMY: You should see the Blogs. It breaks my heart. Half of them refer to me as a tax cheat.
BIG PAULIE: You are a tax cheat.
TIMMY: That was a computational problem. 80% of all Americans have had this problem at one time or another. I did get one nice note from Jeff Immelt. He wrote of kum by ya. What does that mean?
Here's the rest of it:
BIG PAULIE: Oh boy…. Speaking of GE I got a call from Jack Welch. He said he would become a Democrat if the President spoke nice about GE. Heh.heh.heh. (the noise of the lighting of a cigar is heard)Read more...
TIMMY: Well, I am so sorry that I have failed the Administration in these critical times.
BIG PAULIE: What fail? You are doing a great job. Perfect in fact.TIMMY: I don’t get it. How is that possible given the negative reviews my financial plans have received? The markets are collapsing!
BIG PAULIE: We set it up for you to fail Tim. Sorry. We needed a beard. We needed to have someone propose the conventional approaches to economic problems as a blue print for addressing today’s black hole. We knew you could not sell that sack of weeds. Before we came forward with Plan B we had to let you and the “conventional wisdom” have a shot. (Puff, Puff, Puff) And then let you fail.
TIMMY: You set me up? Who is we? What the hell is plan B and how come I do not know about it? What does a beard have to do with it?
BIG PAULIE: Slowdown. Here is the deal. (Puff, Puff) There are going to be some changes announced. I am going to become actively involved in the big issues we are facing. You are going to continue to be Treasury Secretary. I will assume the title of Uber Secretary of Treasury.
TIMMY: Uber? Does this mean I lose my office?
BIG PAULIE: You can keep the office and get to go to all the meetings. But, you report to me. Get it? You can call me Boss.
TIMMY: Well, I guess that is a relief. So, Boss What is plan B?
BIG PAULIE: I am calling it the Low/Short, High/Long - Gap Fund Program.
TIMMY: What? I did not understand a word you said. Let me get some paper. You talk too fast. Hold on….. Okay, now I have a pencil. What did you say about gaps?
BIG PAULIE: Plan B is the VolkerII Plan. I call it PLOVER. It will bring Shock and Awe to the global financial markets. In less than one week I will solve the $2T funding gap and also solve the balance sheet problems of the top fifteen banks in the Country.
TIMMY: Hold on. I am writing this down. Shock and awe… All the funding… Fix the banks... One week... Hmm. I can’t wait. How are you going to do this?
BIG PAULIE: Treasury will create a new evergreen security. It has no stated maturity. It is a floater. It is re-set based on the future t-bill rate. It will be priced at 35 BP over Treasuries. We will sell two Trillion of this in one week.
TIMMY: No way Jose!. We are having troubling lining up buyers for 50-60 billion. Forget 2 Trillion. In a week no less! Even you can’t do that. No one can sell that many bonds. If you price something like that at 35 beeps no one will come to your party!
BIG PAULIE: Let’s just say I know the buyers.
TIMMY: Huh?BIG PAULIE: The fifteen banks are going to buy it. All of it. In exchange for the American people extending a hand and setting them right the banks return the favor and buy the bonds. Get it? I am going to stuff the banks with this. Remember, we own the banks. They will do anything I tell them to. You think EPS means anything anymore? I will call these new notes Federal Agency Resolution Trust Securities. This is the Low/Short side of PLOVER. Low interest rates for Short-term borrowing.
TIMMY: Okay. I am writing. Let’s see. Stuff the banks…. No EPS….We own them….Low interest. That does seem easy! Now the name. F as in Federal… A as in Agency…. R as in Resolution… Oh! I see a problem! With the name I mean. How about this? We can call them Perpetual Tees. People will think of underwear that lasts for decades! See! I am contributing to the process! But how do you fix the banks? Surely the banks can’t buy these Notes unless they are made sound. That is the core problem!
BIG PAULIE: In the same week Treasury will issue $2 trillion of 20-year zero-coupon bonds. The yield on the bonds will be set at 10% The cash price for the zero’s will be 15% of par with the big implied coupon. The fifteen banks I choose will get the right to buy these beauties. They will use the Zero’s to immunize themselves against principal loss on $2 trillion of dodgy paper they have on their books. We will capitalize the lucky fifteen with the remaining TARP money. They will use that new capital to buy the zeros. 300B in 300B out. We round trip the money. Therefore there is no money. I already have the accountants in my pocket on this. That was a lay up.
The banks will agree to use this accounting break to restructure all manner of loans providing real debt relief. With the zero’s behind them they can no longer take a loss and therefore any settlement is bottom line income.This is the Long term/High rate part of PLOVER.
That is it. We start on Monday. We finish on Friday with the securitization of $2T in stinky paper backed by the zeros, the banks are saved, the deficit is pre-funded for the next 18 months, Treasury has raised $2.3 T in cash with a decent duration and a reasonable average blended cost. Saturday I go to Canada to fish for Salmon. (Puff, Puff, Puff)
TIMMY: This seems so simple. Why didn't I think of it? One thing I see is that your plan is at risk to rising short-term rates. What is your response to that?
BIG PAULIE: That is the gap funding part of PLOVER. Get your seat belt on Timmy. We are making a big rate bet. Let’s say I have an understanding with Bernanke. PLOVER keeps the assets off of the FED’s balance sheet. In exchange Ben will set rates where I need them. It’s all a deal Timmy. I gotta go.
TIMMY: Good night Boss.
CLICK.
Heard from TIMMY: I think he just took over Treasury. Gulp
Heard from BIG PAULIE: I just took over Treasury. Puff, Puff, Puff
Save thousands in California
Treasury Department examples of how the new Homeowner Affordability and Stability Plan will slash mortgage payments are all well and good - a monthly savings of about $400 for a house purchased a few years back at just over $200,000 will mean a lot to many people - but what kind of savings might be seen in former real estate hot spots such as California where, just a few years ago, the median house price was a half million dollars?
As shown below, some Californians might stand to save thousands of dollars a month and, as was the case back in 2005, the fact that the half million dollar house might be worth only $250,000 doesn't seem to matter.
The table above assumes a household income of $80,000 which means that the new maximum allowed 31 percent mortgage payment (including Principal, Interest, Taxes, and Insurance) is $2,067. This appears in the top row and is based on a 40-year mortgage, because you can't get there with anything other than that, even at two percent.
The four rows underneath indicate monthly payments based on 30-year loans at various interest rates assuming a 2005-era original loan amount of a half million dollars. The monthly savings achieved with the new loan are shown in the right-most column.
Principal reduction is omitted from this discussion, something that could add even more savings on top of what is shown above.
To zero and beyond!
Another combined one hundred basis points were lopped off of short-term lending rates in Europe this morning as shown in the graphic below from Reuters.
Once again, savers are being punished (though nearly everyone thinks the West should save more) and another page is turned in the story of how the worst financial crisis since the Great Depression, caused by too much easy money, is being rectified with even more easy money.
The British central bank went so far as to announce that the British government had authorized the printing department to whip up another £150 billion for the cause.
Regardless of how this all works out, the historians are going to have a field day when looking at charts like the one above.
They'll look at it and say, "Why, I've never seen anything quite like that"
The ECB (European Central Bank) cut its key interest rate from 2.0 percent to 1.5 percent, the lowest since the euro was launched more than ten years ago, and ECB president Jean-Claude Trichet slashed forecasts for economic growth in the eurozone to somewhere between minus 2.2 percent and minus 3.2 percent.
There were no new measures announced to spur an economic recovery.
In contrast, the BOE (Bank of England) cut short term lending rates to a new multi-century low, from 1.0 percent to 0.5 percent, down from a rate of 5.75 percent just 18 months ago. The bank also promised to print up £75 billion to pump into the financial system, vowing to create another £75 billion in the months ahead if the first £75 billion doesn't do the trick.
The Telegraph reports on these new measures being implemented to rescue the economy.The Bank, which has cut the cost of money dramatically since the collapse of Lehman Brothers in September intensified the financial crisis, is now moving beyond making money cheaper. By adding new money to the economy at a time when interest rates are hovering above zero, Mr King will be hoping that money is lent and helps ease the credit drought suffered by consumers and businesses alike.
This handy video was supplied to explain what exactly quantitative easing is, how it works, and how the world may or may not be better off as a result.
“Savers lose out again as the Bank of England opts to cut rates and inject more adrenaline into the ailing economy," said Stuart Porteous, Head of RBS Group Economics. "The Bank takes UK policy into uncharted territory - printing money."
The Bank will target purchases of government debt, or gilts, because they are among the most liquid assets around and owned by a range of investors including banks and institutional investors. The hope will be that the money received for the gilts will be lent out, invested in other assets and driven around an economy starved of credit.
In this report also at the Telegraph, Edmund Conway provides a few more details.Why do this? Because money growth is directly tied to both inflation and GDP growth, and it has hit the buffers recently. By increasing the amount of cash in the system the Bank intends to raise one or both of these two.
Yes, we're all hoping for a good contagion.
Will it work? That is the big unanswerable question - though these measures give the Bank a good chance of averting the deflation trap the US suffered in the 1930s. The objective, as I've said, is to increase the amount of cash both in peoples' and companies' bank accounts and pockets. However, since it has stopped short of a literal helicopter drop of cash onto families' homes, the Bank is doing this slightly indirectly. It buys assets from the private sector by creating money (with the press of a button rather than a printing press - this stuff will be done electronically); this in turn increases the amount of cash in banks' reserves.
According to Simon Ward of New Star, whose blog has a handy primer on the subject:
"This can boost the economy in two ways. First, if the central bank buys from individuals or firms, the money in their accounts with commercial banks increases, matching the rise in the banks' reserves with the central bank. This increase in the broad money supply then encourages higher spending.
"Secondly, the higher level of reserves may encourage commercial banks to lend more. The higher lending may be associated with a rise in spending and results in a further expansion of the broad money supply, with additional stimulative effects."
So, we hope that this money, funnelled into a relatively small part of the financial system, will become contagious, persuading banks to lend more and people to spend more, thus averting deflation and depression.
Thursday morning links
TOP STORIES
• BOE cuts rates, announces plans to print money - Telegraph
• Euro area interest rates hit record low of 1.5% - BBC
• Auditors raise doubts about GM's viability - IHT
• NY AG to question 7 Merrill execs about bonuses - AP
• U.S. Launches Plan to Steady Housing Market - Washington Post
• Goldman Cuts Global GDP Forecast to 0.6% Decline - Bloomberg
• China says 8 percent growth possible in 2009 - AP
• Bair: FDIC Could Be Insolvent This Year - Bloomberg
MARKETS/INVESTING
• Gold ticks up on safe-haven buying - Globe & Mail
• Oil falls to near $44 on continuing demand worries - AP
• Treasuries Rise on Bets Central Banks Will Buy More Assets - Bloomberg
• Wall Street begins to hear 'buy stocks' rumblings - USA Today
• Economic crisis scrambles retirement math - Time
• Rush for gold reserves as countries dump dollar - Commodity Online
ECONOMY
• Jobless claims slip back to 639,000 - MarketWatch
• Productivity Declines, Labor Costs Jump - Bloomberg
• Recession Deepening Across Regions, Industries, Fed Says - Wash. Post
• More companies turn to furloughs to save money, jobs - USA Today
• Tentacles of recession still growing, Fed says - MarketWatch
INTERNATIONAL
• What on earth does the BOE do now rates are near zero? - Telegraph
• China pledges to keep real estate market stable - Xinhuanet
• Wall Street on the Tundra - Vanity Fair
• Chavez Orders Expropriation of Cargill Plant - Bloomberg
• Premier vows to promote employment, exports - CHINADaily
• The Bank of England's printing presses are ready to roll - Telegraph
• China Exporters Blame Yuan in ‘Life and Death’ Crisis - Bloomberg
• Europe’s banks face a $2 trillion dollar shortage - Telegraph
HOUSING
• Details of plan to rescue housing Ways to keep people afloat - SF Gate
• Radar Logic Reports Rising Home Sales Amid Falling Prices - Radar Logic
• Housing: Pennies where there was once dollars - Today's Financial News
• Mortgage Plan Targets Up to Four Million Homeowners - NY Times
FED/TREASURY/BANKING
• Fed Refuses to Release Bank Lending Data - Bloomberg
• At the Federal Reserve, nothing succeeds quite like failure - Taipai Times
• Congress wants answers to questions about AIG - CNN/Money
• Fed Approves Intercontinental Credit-Default Swap Clearing Plan - Bloomberg
INTERESTING
• Darth Wall Street and Credit-Default Swaps - Bloomberg
• America's Ski Resorts: Saved by the Snow - Time
• India Failing to Control Open Defecation Blunts Growth - Bloomberg###
Let running dogs sleep
Wednesday, March 04, 2009
A good pet owner would have perhaps put the camera down at some point, but it's still funny.
It's Bend! Oregon!
Well, we're not going there to look for a job, and that's probably a good thing given the story below from the local paper, but we have decided to go give Bend, Oregon a try rather than other parts of the state or areas in Washington as discussed over the last few months.
Thanks again everyone for helping out in this decision. We'll be renting for a while, so it's anything but a permanent change - of all the places we looked, we liked Bend the best.
Mostly, it had to do with the winter weather (sunnier but colder versus gloomier and wetter) and the size of the town (big enough for all the good shopping, dining, etc. but with no freeway running through it).
The local real estate market offers some fantastic bargains on rentals and home prices appear to be in a virtual free-fall at the moment with lots of home built in 2004-2007 now going back to the bank faster than they know what to do with them.
Of course, the outdoor activities are why people go there and we'll be sure to take advantage of all of them - we might even take up fly-fishing.
-------------------------------
UPDATE: Wednesday, March 4th, 9:25 PST
In no particular order, a few of the most important pros and cons about the Bend area that are specific to our situation (e.g., things like the local job market and being so far from the ocean are just not that important to us):
Pros:
- Moderate summer temperatures
- Outdoor activities - hiking, camping, winter sports, golf
- Shopping and restaurants
- Not too big of a town (~80,000)
- Good selection of rental and foreclosed housing
- ROUNDABOUTS!!
Cons:
- Cold winters
- A little more isolated
- May be hit hard during this recession
Jump-starting the shadow banking system
A funny thing happened on the way from the lead story to the summary column in today's Wall Street Journal - the phrases "jump-start" and "shadow banking system" were placed right next to each other, making for a rather embarrassing admission of exactly what is going on.
Reporters Liz Rappaport and Jon Hilsenrath were careful to use the term "jump-start" only once in their report and placed it far, far away from the phrase "shadow banking system", but, obviously, whoever was charged with compiling the summary section didn't feel the need.
Here's the report about yesterday's announcement by the Federal Reserve to spend another trillion dollars to try to save yet another part of the financial system.The U.S. launched a program to finance up to $1 trillion in new lending to consumers and businesses, in an ambitious attempt to jump-start credit for everything from car loans to equipment leases.
Then again, after the enormous problems that it's caused over the last year or so, maybe the shadow banking system should be left to wither up and die.
The Federal Reserve and the Treasury Department hope to revive the moribund market for so-called securitized lending, which until last year was central to providing consumer and business loans. Starting March 17, large investors -- including hedge funds and private-equity firms -- can obtain cheap credit from the Fed and use the money to buy newly issued securities backed by such loans.
The Fed, which announced the program's outlines in November in tandem with the Treasury, had already expanded the size of the program and on Tuesday further expanded its targets. Originally limited to backing securities for consumer and small-business loans, it now will also target securitized loans for heavy industrial equipment, agricultural-equipment leases and rental-car fleets. And the central bank sweetened some terms to draw investors and debt issuers. For instance, participants won't have to adhere to limits on executive compensation that apply to banks that accept bailout government money. Such restrictions were originally planned for some participants.
Much is riding on the initiative, known as TALF for Term Asset-Backed Securities Loan Facility. At the height of the credit boom, Wall Street issued more than $1 trillion a year of securities that were backed by consumer credit, and trillions more backed by mortgages. These markets -- sometimes called "the shadow banking system" because they operate outside traditional bank activity -- accounted for roughly 40% of all consumer lending before the financial crisis erupted last year. But the market dried up last year. Issuance of securities tied to consumer loans dropped to less than $8 billion in the final three months of last year.
"There has been somewhat of a collapse of the banking system, but an almost total collapse of the shadow banking system," said Princeton University economist Alan Blinder. "Given our reliance on the latter, we need to get that shadow banking system revived."
Government's new 5-year ARM at 2 percent
Details of the Treasury Department's Homeowner Affordability and Stability Plan were announced today. It's quite an interesting undertaking that seems like it will be good fun for at least the next couple years as stories of abuse and odd goings-on come to light.
There are three basic components - aid for refinancing, foreclosure avoidance, and more support to Fannie Mae and Freddie Mac. It is the middle component, more properly known as the "Homeowner Stability Initiative", that is most intriguing and most likely to be abused in ways that can only be imagined today. Here's how the plan will work:
- The lender will have to first reduce interest rates on mortgages to a specified affordability level (specifically, bring down rates so that the borrower's monthly mortgage payment is no greater than 38% of his or her income).The old days of a maximum 28 percent of income toward servicing a mortgage have almost returned. Over the years, many have been turned down for mortgages because they failed to meet this requirement - it's crazy to think that this figure got as high as 50 or 60 percent a few years back and then, well beyond that, when people started to lie about how much they made.
- Next, the initiative will match further reductions in interest payments dollar-for-dollar with the lender, down to a 31% debt-to-income ratio for the borrower.
- To ensure long-term affordability, lenders will keep the modified payments in place for five years. After that point, the interest rate can be gradually stepped-up to the conforming loan rate in place at the time of the modification. Note: Lenders can also bring down monthly payments to these affordability targets through reducing the amount of mortgage principal. The initiative will provide a partial share of the costs of this principal reduction, up to the amount the lender would have received for an interest rate reduction.
In the second step above - where government money enters the picture - there is a downward limit of two percent for the mortgage rate which, effectively, creates a lower limit on income for qualifying.
In other words, your mortgage payment won't get reduced to zero if you lost your job.
Here's an example of how it would work for "Family C" who, back in 2006, took out a 30-year subprime mortgage of $220,000 at 7.5 percent, on a house worth $230,000 at the time. Since the purchase, their home's value has fallen 18 percent to $189,000 and their income has shrunk such that their monthly mortgage payment of $1,538 is now 42 percent of their $3,650 monthly income.
Here's how lucky "Family C" gets their mortgage payment reduced by $406.
Here's the part about the lower limit on the new interest rate:Protecting Taxpayers: To protect taxpayers, the Homeowner Stability Initiative will focus on sound modifications. If the total expected cost of a modification for a lender taking into account the government payments is expected to be higher than the direct costs of putting the homeowner through foreclosure, that borrower will not be eligible. For those borrowers unable to maintain homeownership, even under the affordable terms offered, the plan will provide incentives to encourage families and lenders to avoid the costly foreclosure process and minimize the damage that foreclosure imposes on lenders, borrowers and communities alike. Moreover, Treasury will not provide subsidies to reduce interest rates on modified loans to levels below 2%.In the first part of the passage above, it's not clear how they'll determine if it makes more sense to modify the loan or to foreclose, but the two percent lower limit is very clear.
You can just see some of the possibilities here where people will figure out what they need to do to get their income down to that two percent rate - it will usher in a whole new wave of "liar loans", only this time people will be wanting their income to show up on the paperwork at a lower level.
Most importantly perhaps, this sets up a whole new wave of mortgage rate resets in five years as all of these loans revert to
This is, effectively, a government subsidized 5-year ARM with rates as low as 2 percent.
My, what progress we're making... Read more...
Bernanke: AIG makes me angry
A clip from yesterday's Q&A session with Fed chief Ben Bernanke talking about problem child AIG (from this Reuters report). Also see "A huge regulatory gap condoned by the Fed".
Wednesday morning links
TOP STORIES
• Feds unveil plan to help 9 million stay in homes - AP
• Ex-Leaders of Countrywide Profit From Bad Loans - NY Times
• As Markets Slump, U.S. Tries to Halt Cycle of Fear - Wash. Post
• Fed Chairman Backs Call for Higher Spending - NY Times
• MGM Mirage delays 10K; warns of default - MarketWatch
• Already Bleak, Auto Sales Take a Fall in February - NY Times
• 'Gold is still vulnerable' - Telegraph
• AIG: The Nexus of Capital, Debt and Insurance - YMOYL
MARKETS/INVESTING
• Oil Gains on Speculation China Will Boost Stimulus - Bloomberg
• Gold flat as investment demand cools - Globe & Mail
• Elliott Wave predicts bear-market rally? - MarketWatch
• 'Investors are embracing gold stocks & ETFs' - Commodity Online
• Obama's words do little to spur Wall Street - LA Times
• Oil producers running out of storage space - MSNBC
ECONOMY
• U.S. private sector cuts 697,000 jobs in February - Reuters
• Bass: Government Creating ‘Inflationary Time Bomb’ - Bloomberg
• How can U.S. break the vicious economic cycle? - SF Gate
• Google CEO Says Economic Situation 'Pretty Dire' - Dow Jones
• STAIRWAY TO RETAIL HEAVEN - Financial Sense
INTERNATIONAL
• China said to mull buying oil with foreign reserves - MarketWatch
• Boom gives way to bust in Ireland's oversold economy - LA Times
• Brown to US: 'Seize the moment' on economic crisis - AFP
• Australia's GDP shrinks for first time in eight years - MarketWatch
• Global policy shortcomings will cost us dear - Financial Times
• The NPC meets, Krugman refers to savings glut - China Financial Markets
• China built enormous stake in US equities just before crash - Telegraph
• Countries Stepping in to Finance Export Trade - NY Times
HOUSING
• Report: Nearly One in Five Owe More Than Homes Are Worth - Time
• As projects grind to a halt, home sites turn to wasteland - LA Times
• Bank-Owned Homes Surge, Communities Stung - Washington Indpendent
• Citi Homeowner Assist Launches for Unemployed Borrowers - Blown Mortgage
FED/TREASURY/BANKING
• Does Tim Geithner have a plan? - Curious Capitalist
• Banks brace for mortgage remodels under Obama plan - USA Today
• Geithner Says U.S. Financial Rescue ‘Might Cost More’ - Bloomberg
• Bernanke defends AIG rescue, says U.S. had no choice - Reuters
INTERESTING
• The Rick Santelli 'Tea Party' Controversy - Alternet
• Madoff agrees to give up property, art, tickets - AP
• Google CEO: Twitter A 'Poor Man's Email System' - CNN/Moneyooo
Jim Rogers still looking for a good currency
Tuesday, March 03, 2009
Adventure Capitalist Jim Rogers talks about buying farm land in Brazil and Canada, the world's currencies, and he apparently still has those gold coins in his pocket.
Last week he said something about civil unrest in the U.S. - yikes! Read more...
Brit Hume on hyperinflation and gold
Normally, all the Sunday morning talk shows are faithfully recorded around here by a trusty Tivo that just entered its sixth year of service with nary a hint of ever stopping (we have an even more mature Tivo Series One that must be at least a decade old now - still works like a charm).
But, nowadays, more often than not, these political talk shows just get deleted to make room for something else after a week or so, never making it up the cable to the TV for viewing.
With the election over, what's the point?
Plus, with Tim Russert gone, all of these shows have a different feel now.
Well, it just so happened that there was a half hour or so to kill the other day so Fox News Sunday was summoned and, after the two guest segments proved largely uneventful despite Chris Wallace's desperate attempts to induce somebody into making a gaffe, the round table discussion with Brit, Mara, Bill, and Juan commenced and they began to talk about last week's whirlwind of activity in Washington.
Juan Williams sighed when Bill Kristol talked about "massive government programs to regulate carbon emissions" and Brit Hume let out a monstrous sigh and slumped over as if he'd just heard that a relative had died when Juan Williams suggested the only real Republican plan for an economic recovery was to cut taxes for the rich.
It seems that nothing has really changed in the conduct of the nation's political discourse except for the party in power.
But then came something quite interesting. Brit Hume started talking about the barbarous relic gold and then, of all things, hyperinflation, apparently under the impression that he had correctly deciphered the message that was being sent by the citizenry in their rush to buy gold coins and gold bars at a pace not seen in decades.Ask yourself this question. Why is the price of gold, at this moment, so high?
Brit is surely onto something there, and just the fact that he uttered such words on national television will surely warm the hearts of many gold lovers, but he's a bit wide of the mark on his analysis.
Well, some people say that gold goes up because it's a flight to quality and people are afraid. But, really, that usually results in a flight to cash.
The price of gold is up because people fear one thing - people who have money to spend and who are looking to invest or who are looking to the future - and that is that they fear a wave of inflation, perhaps a hyperinflation.
So the people who are voting with their money are not voting in favor of these policies.
The three month surge in the price of gold that came to a screeching halt about ten days ago likely had little to do with the fear of inflation, though, that will come soon enough - probably later this year.
As the latest trillion or so in spending, stimulus, and bailouts have been announced over the last week, the price of gold has actually been falling.
What Brit really should have said was that gold is up because it's a flight to quality that used to be satisfied with U.S. Dollars, but after both parties have done such a horrible job of managing things over the years that, when people get afraid now, they run to cash and gold.
It is understandable that Brit may not be tuned in to the recent changes in the dollar-gold relationship as noted here a number of times recently.
However, what is beyond anyone's understanding is how both parties in Washington could lead the nation down the road we are now on, where, in all likelihood, much more protection will be sought in gold than in the dollar in the months and years ahead.
Jon Stewart on twitter
Old Man Stewart shakes his fist at twitter.
According to Samantha Bee, Congress and the media are enthralled with twitter because they are "rotting corpses grabbing for any glimmer of relevance". How do you disagree with that? Read more...
A huge regulatory gap condoned by the Fed
Fed Chairman Ben Bernanke testified before the Senate Banking Committee earlier today on the many challenges the U.S. economy now faces. He had a few thoughts to share about the government's most troublesome ward, failed insurer AIG.
Yes, there was a huge gap in the system. There is little disagreement on that fact. But, interestingly, it wasn't viewed as a "gap" at the time.I think if there is a single episode in this entire 18 months that has made me more angry, I can’t think of one other than AIG.
AIG exploited a huge gap in the regulatory system. There was no oversight of the financial-products division. This was a hedge fund basically that was attached to a large and stable insurance company.
They made huge numbers of irresponsible bets. They took huge losses. There was no regulatory oversight because there was a gap in the system. We were then forced - we had no choice but to stabilize the system - because of the implications that the failure would have had on the broad economic system.
In fact, no one seemed to mind all that much that giant insurance companies were creating trillions of dollars worth of unregulated liabilities, particularly the Federal Reserve.
That is, until the wheels started falling off.
It takes only a few minutes to cull, from the Fed's website, these gems:
Remarks by Chairman Alan GreenspanSo far, it looks like the net loss is about $150 billion over the last six months.
Before the Council on Foreign Relations, Washington, D.C.
November 19, 2002
International Financial Risk Management
Today I would like to share with you some of the evolving international financial issues that have so engaged us at the Federal Reserve over the past year. I, particularly, have been focusing on innovations in the management of risk and some of the implications of those innovations for our global economic and financial system.
...
The market for credit derivatives has grown in prominence not only because of its ability to disperse risk but also because of the information it contributes to enhanced risk management by banks and other financial intermediaries. Credit default swaps, for example, are priced to reflect the probability of the net loss from the default of an ever-broadening array of borrowers, both financial and nonfinancial.As the market for credit default swaps expands and deepens, the collective knowledge held by market participants is exactly reflected in the prices of these derivative instruments. They offer significant supplementary information about credit risk to a bank's loan officer, for example, who heretofore had to rely mainly on in-house credit analysis. To be sure, loan officers have always looked to the market prices of the stocks and bonds of a potential borrower for guidance, but none directly answered the key question for any prospective loan: What is the probable net loss in a given time frame? Credit default swaps, of course, do just that and presumably in the process embody all relevant market prices of the financial instruments issued by potential borrowers.
And, when the housing bubble was almost fully inflated, these thoughts a few years later.
Remarks by Chairman Alan GreenspanThere really wasn't a gap - as in some sort of an omission in regulatory oversight...
Risk Transfer and Financial Stability
To the Federal Reserve Bank of Chicago's Forty-first Annual
Conference on Bank Structure, Chicago, Illinois (via satellite)
May 5, 2005
As is generally acknowledged, the development of credit derivatives has contributed to the stability of the banking system by allowing banks, especially the largest, systemically important banks, to measure and manage their credit risks more effectively. In particular, the largest banks have found single-name credit default swaps a highly attractive mechanism for reducing exposure concentrations in their loan books while allowing them to meet the needs of their largest corporate customers. But some observers argue that what is good for the banking system may not be good for the financial system as a whole. They are concerned that banks' efforts to lay off risk using credit derivatives may be creating concentrations of risk outside the banking system that could prove a threat to financial stability.
...
While available data cannot resolve these issues, a study conducted last year by the Joint Forum, which was based on interviews with market participants, does shed some light. The study concluded that notional values had significantly overstated the amount of credit risk that had been transferred outside the banking system to that point and that the amount of risk transfer was quite modest relative to the total amount of credit risk that exists in the financial system. The study found no evidence of "hidden concentrations" of credit risk.
...
Some other concerns about the transfer of credit risk outside the banking system seem to be based on questionable assumptions. Some observers believe that credit risks will be managed more effectively by banks because they generally are more heavily regulated than the entities to which they are transferring credit risk. But those unregulated and less heavily regulated entities generally are subject to more-effective market discipline than banks. Market participants usually have strong incentives to monitor and control the risks they assume in choosing to deal with particular counterparties. In essence, prudential regulation is supplied by the market through counterparty evaluation and monitoring rather than by authorities.
It was a conscious decision by the central bank and others charged with regulating financial markets to allow these credit derivatives to be a self-regulating.
ooo
Read more...
Niall Ferguson on moral hazard
In what is otherwise a very nicely done piece by historian Niall Ferguson, whose PBS documentary "The Ascent of Money" should be considered required viewing for every individual on the planet (particularly economists and bankers), comes this rather stunning view of moral hazard as it relates to fixing the housing mess.
The second step we need to take is a generalised conversion of American mortgages to lower interest rates and longer maturities. About 2.3 million US households face foreclosure and that number is certain to rise. For example, $US97 billion of $US200 billion of option adjustable-rate mortgages will reset in the next two years. The average monthly payment will increase by more than 60 per cent. As a result, up to eight million households could be driven into foreclosure, driving down home prices even further. Few of those affected have any realistic prospect of refinancing at more affordable rates. So, once again, what is needed is state intervention.Paraphrasing Mark Twain, the housing bubble kind of rhymed with the stock bubble...The idea of modifying mortgages appalls legal purists as a violation of the sanctity of contract. But, as with the principle of eminent domain, there are times when the public interest requires us to honour the rule of law in the breach.
...
Another objection to such a procedure is that it would reward the imprudent. But moral hazard only really matters if bad behaviour is likely to be repeated. I do not foresee anyone asking for, or being given, an option adjustable-rate mortgage for many, many years. The issue, then, is simply one of fairness.
My take on things over the last ten years is that the housing bubble was made much worse than it otherwise might have been as a result of the millions of individuals who just sat by and watched equity markets rise, then fall, then get rescued by one percent interest rates.
I can't remember how many wild-eyed individuals I talked to who didn't know a thing about ETRADE or Ameritrade back in 2002 or 2003, but who "understood" the real estate market. Read more...
The British go caravaning
The British cut back on their vacation plans, opting to go camping caravaning instead of taking more expensive vacations. Yes, they're equipment is quite puny when compared to that in the U.S. where gas is cheap and most outdoor enthusiasts figure that "bigger is better".
Tuesday morning links
TOP STORIES
• Downturn to be considerably deeper than IMF forecast - Reuters
• Toyota, Facing First Loss in 59 Years, Seeks Loans From Japan - Bloomberg
• Citigroup to lower some mortgage payments - AP
• College-Savings Plans in U.S. Shrank $23.4B Last Year - Bloomberg
• Few takers for gold jewellery in Gulf countries - Commodity Online
• Why the AIG bailout just keeps getting bigger - Curious Capitalist
• Buffett’s Berkshire Cuts Jobs, Closes Facilities - Bloomberg
• Pension bombs going off - Chicago Business
MARKETS/INVESTING
• Stock fund shareholders retreat, sell out - USA Today
• Oil Rebounds Amid OPEC Outlook, Nigeria Attack - Bloomberg
• Old gold flow hits India’s bullion imports - Commodity Online
• Retirement losses: What now? - CNN/Money
• Message to the US Mint: Your Customers Are Not Happy - Mint News Blog
• Where Are Rogers, Faber and Casey Investing? - Seeking Alpha
ECONOMY
• U.S. Jan. pending home sales down 7.7% - MarketWatch
• Recessions, depressions, take your pick - BusinessWeek
• ‘Tidal wave’ of homeless students hits schools - MSNBC
• Oracle of Omaha Warns of 'Onslaught of Inflation' - Seeking Alpha
• Manufacturing index shows surprise rise - CNN/Money
INTERNATIONAL
• Lending Rate to 0.5%, Lowest Ever - Globe & Mail
• Switzerland enters recession - MarketWatch
• Darling Suggests BOE May Print Money This Week - Bloomberg
• Northern Rock mortgage arrears soar 394% - Guardian
• Australia keeps policy rate unchanged - MarketWatch
• Ukraine risks unrest as ills worsen - Financial Times
• Most Asian Stocks Decline on Economic Concern - Bloomberg
• China to Send Investment Mission to Europe - Bloomberg
HOUSING
• Mortgage delinquencies up for 8th straight quarter - AP
• 73% of Vegas home sales are foreclosures - OC Register
• Metro Detroit home sales up, but prices drop by 48.4 percent - Detroit News
• More on Decelerating Home Price Declines - Voice of San Diego
FED/TREASURY/BANKING
• ‘Unscathed’ JPMorgan Said to Reap $5B Derivatives Profit - Bloomberg
• Fed's Lockhart says U.S. banks still under strain - Reuters
• New program could boost lending by $1 trillion, Fed says - MarketWatch
• Get bad assets off bank books: Fed's Rosengren - MarketWatch
INTERESTING
• What Next? - Kunstler, CFN
• Starbucks Addresses the Price Issue, and Breakfast - NY Times
• Jim Rogers: Let AIG Go Bankrupt, Not America - CNBCooo
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