The Mess That Greenspan Made: 2009-08-30

Rick Santelli squishes the heart of gold bugs

Monday, September 07, 2009

Rick Santelli and Mike Pento on Kudlow disagreeing on the reason for surging gold prices last week. Pento notes what was discussed here last month about sharply higher year-over-year inflation set to be reported in December due to comparisons against $40 oil late last year.

At about the 3:45 mark, Larry gleefully asks whether it's possible that we're looking at "an easy money, blow-out, V-shaped recovery that no on is anticipating".

The new face of U.S. mortgage lending

Today's must read housing market news comes via this story in the Washington Post where the near total control of the U.S. mortgage market by the U.S. government is detailed.

Mortgage Market Bound by Major U.S. Role
Classes of Borrowers Cannot Find Loans as Publicly Backed Debt Mounts
By Zachary A. Goldfarb and Dina ElBoghdady

In the go-go years of the U.S. housing boom, virtually anybody could get a few hundred thousand dollars to buy a home, and private lenders flooded the market, aggressively pursuing borrowers no matter their means or financial history.

Now the pendulum has swung to the other extreme. Only one lender of consequence remains: the federal government, which undertook one of its earliest and most dramatic rescues of the financial crisis by seizing control a year ago of the two largest mortgage finance companies in the world, Fannie Mae and Freddie Mac.

While this made it possible for many borrowers to keep getting loans and helped protect the housing market from further damage, the government's newly dominant role -- nearly 90 percent of all new home loans are funded or guaranteed by taxpayers -- has far-reaching consequences for prospective home buyers and taxpayers.

While the focus of the article is split between the long-term implications of such heavy government involvement in mortgage lending and how rapidly changing lending standards have caused credit-worthy borrowers to be excluded, you have to wonder why.

This relatively small side-effect of "freezing out" marginal buyers who may, in fact, truly deserve a new mortgage will probably end up working out in their favor as home prices continue to fall over the next year or so - they're probably doing them a favor...

The much more troublesome aspect of this story is the one we've all been reading about lately, particularly since news broke last week that the FHA may be in trouble after zooming from just a few percent of market share a couple years ago to writing nearly a quarter of all new mortgages, most of these loans requiring only 3.5 percent down payments.

At the same time, taxpayers are on the hook for most of the loans that are still being made if they go bad. And they are also on the line for any losses in the massive portfolios of old loans at Fannie Mae and Freddie Mac, which own or back more than $5 trillion in mortgages.

There is growing evidence that many loans being guaranteed by the government have a significant risk of defaulting. Delinquencies are spiking. And the Federal Housing Administration, another source of government support for home loans, is quickly eating through its financial cushion as losses mount.
...
All told, the government now stands behind 86 percent of all new home loans, up from about 30 percent just four years ago, according to Inside Mortgage Finance.

Here's where the writers go awry...

Some people who are no longer eligible for loans elsewhere have turned to FHA, which does not demand top-notch credit scores or sizable down payments. But for some consumers, such as Lisa McCracken of Stafford County, the FHA's minimum 3.5 percent down payment can be a stretch.

McCracken, a traveling nurse, has been scrimping to raise the down payment, living with her parents to save money. "I think I can swing it, but it won't be easy," she said. "I'll be wiping out a lot of my savings to buy a house." The self-employed face difficulties because they tend to have a tough time documenting their income, as required by Fannie Mae, Freddie Mac and FHA loans.

Donald Prieto, who owns a roof contracting business in San Diego, has shelved his plans to buy a new home. Five years ago, he and his wife purchased a small home without having to verify his income. They have made their payments on time, have maintained solid credit scores and have plenty of cash in the bank, he said. Now, they have three children. They want a larger home, but several lenders have turned them away because he does not have two years' worth of paychecks to show.

For that reason, Prieto has incorporated his company and started cutting himself formal paychecks. "No bank wants to take risks anymore, and I understand that," Prieto said. "I just have to wait."

Saving 3.5 percent is a stretch?

It's about one-third of the stretch that it should be and about one-sixth of the stretch it was for most of the 20th century.

Little or no "skin in the game" is a big part of the reason why we're in this mess.

As for the self-employed getting a mortgage, back about ten years or so ago, before mortgage lending went off its rails, even in a place like California you needed to come up with a downpayment of 25 percent if you wanted to finance the purchase of your primary residence while running your own small business.

No ifs, ands, or buts.

We seem to have veered so far away from what seemed to be quite prudent lending standards that worked so well during most of the 20th century that no one remembers what they were.

There's a lot to like in this article, but lamenting the woes of those who are being "frozen out" of new home purchases today is not one of them.

Doug Noland's most recent commentary at Prudent Bear offers a much harsher assessment of the new mortgage lending environment (skip to the end) and is also well worth a look. In fact, that should have been the subject of this post instead of the WaPo story.

Oh well ...

Labor Day celebrated across America

The staff at Voice of America take a look back at the origins of the Labor Day Holiday and how the event is celebrated in the U.S. today.

Labor Day links

TOP STORIES
China alarmed by US money printing - Telegraph
Mortgage Market Bound by Major U.S. Role - Wash. Post
A year after meltdown: Tough questions, choices - AP
China buying to push up gold prices to record level - Commodity Online
Wall Street Pursues Profit in Bundles of Life Insurance - NY Times
Possible October surprises - Hutchinson, Prudent Bear
How and When Will the Global Crisis End? - CNBC
No Exit - Noland, Prudent Bear

Get these links delivered to your inbox every day.

MARKETS/INVESTING
Oil up to near $68 ahead of OPEC meeting - AP
Gold bugs brace, as metal tests $1,000 again - MarketWatch
Chanos Warned about Coming Financial Crash in 2007 - Huffington Post
Equity Fund Outflows Surge, $4.29 Billion From U.S. - Bloomberg
New Exotic Investments Are Emerging on Wall Street - NY Times
Investors see few reasons to send market higher - AP

ECONOMY
Layoffs toughest on young, older workers - AP
Preview: Trade Gap Was Probably Little Changed - Bloomberg
Cash-strapped California schools seek commercial sponsors for funding - LA Times
Where delinquent borrowers go for help - AP
Economic crash in Oregon boomtown - BBC

INTERNATIONAL
Britain heading back to the dark ages - Telegraph
G-20 May Curb Banker Pay, Profit at Pittsburgh Summit - Bloomberg
Hong Kong and Shanghai extend rally as Nikkei rebounds - MarketWatch
Banks are overvaluing toxic property loans, experts warn - Guardian
China 2009 Vehicle Sales May Rise 28% on Stimulus, Pass U.S. - Bloomberg
Does the world have the courage to deal with its debts? - Telegraph
China to Use Regulatory Tools to Adjust Bank Lending - Bloomberg
Russia's one-factory towns struggle to survive - AP

REAL ESTATE
Housing market may be nearing equilibrium - LA Times
FHA Loans Starting to Default in Increasing Numbers - Benzinga
The "Other" Real Estate Issue- Revisited - Contrary Investor
4 signs your home value could drop - MSN Money

FED/TREASURY/BANKING
G-20 Europeans Defeated By Tim Geithner - ClusterStock
Will Rand Paul Take up the Federal Reserve Fight in the Senate? - ABN
What Would the United States Look Like Without the Federal Reserve? - Global Research
Did Bernanke save US from another Great Depression? - AFP

INTERESTING
Fla. boaters urged to look out for missing robot - AP
Morgan Stanley CEO No Longer Needs to Worry About Parking - Curbed
Madoff Scam Reached Family of SEC Official Whose Unit Got Tip - Bloomberg
Japan's new first lady says rode in a spaceship - Reuters

###

Economic crash in Oregon boomtown

Sunday, September 06, 2009

The BBC filed this report and produced a couple of short videos after a brief visit to our new home town of Bend, Oregon, a place they quite correctly characterize as a 21st century American boomtown that has gone bust (hat tip D, GN, KD, and PG).

Click to play in new window

If the video could have been embedded, it would have been, but it couldn't, so it isn't.

We've only been here a few months and, generally, we like the area quite a bit though we haven't made any final decision as to whether we'll stay.

The details of their report just add to the growing list of pluses and minuses that we'll have a look at sometime early next year when the expiration of our lease draws near.

It is a beautiful place, in the high desert of central Oregon, amid mountains.

The sunshine is warm, the air crisp and filled with the scent of bitterbrush and pine.
...
Between 2001 and 2005, the median value of a home in Bend rose by 80%.

By 2005, work was getting underway on 700 new homes each month. Some of the developments are stunning: houses filled with mountain light clinging to craggy hillsides.

More than 17% of the workforce was employed in construction - far higher than the national average.

In what had once been an isolated lumber and mill town, high-end restaurants and brewhouses opened. Shops selling expensive bric-a-brac bloomed. Massage therapists and hairdressers proliferated.

Downtown Bend looks like a shrine to post-millenial bijou: pricey shoes, scented candles, fancy coffee. There is even a shop specialising in beachwear - despite Bend's location in the high desert.

But when the US slumped, Bend crashed. The value of a home fell 40% in under two years.

And unemployment nearly quadrupled from around 4% two years ago to 15% in the summer of 2009.

"Everything that Bend produced relied on the credit market", says Carolyn Eagan, an economist with the Oregon Department of Employment.

"Construction materials, doors and fittings, recreational vehicles: everything depended on people being able to consume more than they could use."

Now the credit has dried up, and the building of Bend has stopped.

There are a few human interest stories in there that are quite compelling and a bit sad, the Bethlehem Inn being located just down the hill from where we currently call home.

I remember reading somewhere that, in one month recently, the city did not issue a single building permit - quite a fall from 700 new homes a month being built a few years back.

Lastly, the local paper reported (reg. req.) yesterday that Central Oregon is now ranked number six in homelessness nationwide.

ooo

This week's cartoon from The Economist:

A different way to analyze the labor market

Friday, September 04, 2009

The staff at The Onion offer this look at current conditions in the labor market and how things can appear quite different depending upon your state of mind.

Despite ongoing economic woes and a jobless rate that has been approaching 10 percent, U.S. unemployment projections drastically improved Monday after the consumption of five beers.

"It's going up," leading economist David Singleton said confidently, indicating the predicted growth in jobs with an upward wave of a Bud Light bottle. "All the way up. By the end of the month. No problem."

Singleton said the economy would begin its rebound once employers realized that there were many currently unemployed skilled laborers across the country who would "bust their asses" in a number of growing fields.

"Whether it's manufacturing, finance, hospitality, or manufacturing, these dudes trying to reenter the workforce right now have awesome skill sets and, most of all, they really deserve it," he said. "They're great, great guys. All of them."

According to analysts, both long- and short-term forecasts showed signs of recovery between the third and fourth beer, but the fifth alcoholic beverage was the point at which the employment rate began to close in on 100 percent.

It's all a matter of perspective...

Double dip recession Google trends

Nouriel Roubini was talking today about the possibility of a "U-shaped" economic recovery or a double dip recession, just one of a growing number of people who have been mentioning the dreaded "W-shaped" outcome, at least according to data collected by Google trends.
Roubini said there is just a small (but increasing) probability of this scenario and, if it occurs, it will be due to policy makers not getting the "exit strategy" right. Based on this logic - our economic future being dependent upon Washington economists doing a better job coming out of the recession than going into the recession - you'd think the odds of a "W-shaped" future would would be appreciably higher than as stated by Nouriel.

ooo

The housing wealth effect

This story in the Economist about the housing wealth effect and new debt creation demonstrates once again why there is no such thing as "pure" economics (i.e., where markets are rational and consumers do what economists think they're supposed to do).

Withdrawal symptoms
Most new borrowing during America’s housing boom was for spending

HOW big an influence on spending is housing wealth? Hopes for a consumer revival in countries where house prices have slumped rest, in part, on the answer. A purist view is that the value of homes has no “wealth effect” on consumption. An increase in house prices only raises the future cost of shelter. Those about to trade down or sell out receive a windfall, but first-time buyers and those hoping to buy a bigger home are worse off. The overall effect on wealth is a wash. But even if that is correct, house-price increases may still have an impact as they create housing collateral for consumers who could not otherwise borrow. A study by Atif Mian and Amir Sufi of the University of Chicago’s Booth School of Business pins down the size of this effect, using the credit records of almost 70,000 American borrowers.
...
By limiting their sample to those who were already homeowners in 1997, before the boom in housing and credit, the authors were able to measure how much of the rise in debt was the result of cashing in on higher home values. They reckon almost 60% of increased debt between 2002 and 2006 came from this source. Put another way, every $1 increase in home values led to a rise of 25-30 cents in borrowing. That is far bigger than some long-standing estimates of the wealth effect from rising asset values, which are in the 3-5 cent range (though these include the response of renters, too).

Four years later, economists are finally starting to understand the housing bubble...

ooo

Jobless rate to 9.7%, payrolls decline 216K

The Labor Department reported that the August U.S. unemployment rate reached its highest level in more than 26 years and nonfarm payrolls posted their smallest decline in a year.
The nation's jobless rate jumped from 9.4 percent to 9.7 percent last month, the highest rate since June 1983 but still more than a full percentage point short of the post-World War II high of 10.8 percent reached in late-1982, as employers remain cautious about hiring, unsure as to the strength of the economic recovery.

The U-6 measure of "under-employment" - including workers who have given up looking for a job and those who have settled for part-time work instead of full-time - rose from 16.3 percent to 16.8 percent.

Nonfarm payrolls declined by 216,000 in August following declines of 463,000 in June and 276,000 in July, these figures revised downward from 443,000 and 247,000, respectively. This follows a general trend in recent months of upward revisions to prior data, a sign that, perhaps, the improvement in labor market conditions is stalling.

The latest decline brings total job losses to 6.9 million since the current recession began in December 2007, making this the worst post-World War II recession in terms of job losses, and the total number of unemployed now stands at 14.9 million.

By category, job losses were widespread, the construction and manufacturing industry losing 65,000 and 63,000 jobs, respectively. Education and healthcare services was the only category with net job gains, up 52,000 from the month before.
Even the government pared back in August, total net job losses of 18,000 being reported across all levels of public service, paced by a decline of 12,300 in state and local education and the elimination of some 8,500 U.S. Postal Service positions.

The birth-death model added 118,000 jobs to the unadjusted nonfarm payrolls total last month. For the year, this estimated measure of new job creation has contributed a stunning +673,000 to the unadjusted nonfarm payrolls total of -4.9 million.

Friday morning links

TOP STORIES
Jobless rate at 9.7 pct.; 216K jobs lost in Aug - AP
White House’s new stimulus message: It’s helping you - CSM
Stiglitz Says U.S. Economic Recovery May Not Be ‘Sustainable’ - Bloomberg
Lehman downfall triggered by mix-up between London and Washington - Guardian
G20 to pledge stimulus until economic recovery certain - Reuters
Buttonwood: Be thankful they don't take it all - Economist
Odds of Robust US Rebound 'Very, Very Weak' - CNBC
U.S. junk bond default rate rises to 10.2 pct - Reuters

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MARKETS/INVESTING
Crude Oil Rises for First Time in Five Days - Bloomberg
Gold toys with $1,000, eyes U.S. jobs report - Reuters
Gary Gensler, derivatives cop: A new sheriff - Economist
Gas May Drop From Seven-Year Low to Less Than $2, Options Show - Bloomberg
Inquiry Stokes Unease Over Trading Firms That Shape Markets - NY Times
Gold Rush by Many Investors Could Push Price Up to $1,200 - CNBC

ECONOMY
U.S. Job Losses Increased, Unemployment Rose to 9.7% - Bloomberg
The wealth effect: Withdrawal symptoms - Economist
Stimulus Credited for Lifting Economy, Unemployment Worries Persist - Wash. Post
Next Hit for Jobless: Losing Unemployment Benefits - CNBC
Decoding money-supply data - Economist

INTERNATIONAL
Europe has mapped its monetary exit - FT
China to Implement Bank Capital Rules Over ‘Years’ - Bloomberg
European countries call on G-20 to tackle bonuses - AP
European Central Bank Warns of a Patchy Recovery - NY Times
Lead Surges in ‘Panic Buying’ as China Vows Industry Cleanup - Bloomberg
Economics focus: The incredible shrinking surplus - Economist
German services sector sales fall 11 pct in Q2 - AP
Canadian housing on brink of rebound - Globe Investor

REAL ESTATE
Housing's Hidden Strength - BusinessWeek
Judges’ Frustration Grows With Mortgage Servicers - NY Times
Bouyant Housing Market Funded by Government - Money Rates
Treasury May Give More Help to Homeowners - CNBC

FED/TREASURY/BANKING
Bernanke: Greenback’s New Father - NY Times
Banks' funding needs: Total liabilities - Economist
Fed's Fisher sees near-term strength for economy - Reuters
Banks Need to End $1 Trillion Kick the Can Game - Bloomberg

INTERESTING
Arctic Temperatures Are Warmest in 2,000 Years - Live Science
Finger Bitten Off In Fight At Health Care Rally - Huffington Post
Union says firefighters forced to bathe elephant - AP
Russia's past: The unhistory man - Economist

###

Relive the collapse!

Thursday, September 03, 2009

The Guardian has a nice interactive piece up where you can relive last year's global financial market collapse week by week, beginning with the events shown below.
A few items of note:

- 22 September -- Omaha, NB: Berkshire Hathaway buys $5bn stake in Goldman
- 29 September - New York: Dow plunges 777.7 by points after TARP rejected
- 13 October ---- Reykavik: Index of leading shares plunges 76%
- 10 November - Moscow: Russian stock market loses 22% in two days

ooo

Reluctant landlords, then and now

Having gone through the transition from homeowner to landlord during the early 1990s California housing bust, the concept of "reluctant landlord" is a familiar one to me.

In fact, not only were we reluctant landlords, but we completed the entire process that many are now just entering (though most of them probably think it will end quite differently) by closing the book on that ill-fated home purchase via a short-sale after having rented the place out for a year or two and watching its value continue to fall.

Believe me, it's a lot easier to throw in the towel when you no longer live there and are far less attached to the place. In fact, after a while, you can grow quite cold toward your former home, looking at only the numbers involved and quickly forgetting about the memories that were made there.

Depending upon the particulars - how large a downpayment was involved, how much the property is underwater, the chances of someday returning to live there, etc. - the decision to change from reluctant landlord to short-seller (or sender of jingle-mail) can happen very quickly, often times prompted by a phone call from your tenant informing you that they won't be renewing the lease.

That's what did it for us and it was a remarkably easy decision to make...

Of course, if we had waited another six or eight years, we would have seen the price rise back up to what we had paid for it and then, astonishingly, peak at almost double what we paid, but, in retrospect, it was the right decision.

Hanging onto it would have been a cash drain for years, a place that, today, Zillow says is actually worth less than what we paid for it in 1989 and, amazingly, recent sales of comparable homes at Realtor.com put the value closer to our short sale price in 1995!

Anyway, this fine WSJ report tells all about the new breed of reluctant landlords.

With housing prices still in the dumps, many Americans are finding themselves in the uncomfortable position of landlord.

Some have been forced to relocate for a job and can't sell their houses. Others have moved, but are holding on to their previous homes, hoping for prices to rebound before selling. Many are finding that rent checks don't come close to covering their mortgage payments.

Hard data are scant on how many homeowners are renting out their homes, but anecdotal evidence suggests numbers are up. In one indication of the trend: More homeowners are converting their homeowners insurance to landlord policies that cover the additional risks of leasing out a home. Allstate Corp., the second largest home insurer in the U.S., reported a 27% increase in conversions in the first quarter from the previous year.

That's funny - we managed to get our property taxes reduced due to the plunging home value, but we didn't even think to convert our homeowners insurance policy.

That 27 percent figure may be wildly underestimating the actual number.

Here's a pretty typical scenario, highlighted by the "wait a couple years for prices to rebound" approach that most homeowners naively adopt, as we did:

In Frederick, Md., Realtor Jim Bass says that because of rising demand, a couple of months ago his real-estate group started offering property-management services, tending to the rented homes of absent owners. Mr. Bass says a client recently rented out his 4,700-square-foot house after failing to sell his home, which he listed for $790,000. Now a tenant pays $2,995 per month—a shortfall of $2,000 from the $4,995 mortgage payment. The homeowner "feels that two years from now, the market will improve to the point where he can recapture that," Mr. Bass says.

Experts generally advise against becoming a landlord in hopes of recouping lost home value. In some hard-hit parts of the country, such as Florida, Nevada, Arizona and parts of Ohio, prices may not climb back to mid-2000s levels anytime soon. Landlords have to pony up money each year for property taxes, insurance, maintenance and repairs. Meanwhile, demand for rentals in many parts of the U.S. isn't strong: Apartment vacancy rates nationally are the highest in more than two decades and rents are falling in some areas, compounding the difficulty of finding a good, steady tenant.

In some ways this is like refusing to sell that stinker of a stock that has tanked - it's a lot easier to defer a decision than to make one (i.e., to take your loss and get on with things).

Of course, for many people who put virtually no money down and where plunging prices have long since made their downpayment disappear, the decision shouldn't be that difficult.

Homeowners who owe more than a house is worth in very depressed areas may be better off selling even in a short sale, whereby the bank agrees to accept less than the full amount owed on the mortgage, says economist Edward Leamer, director of the UCLA Anderson Forecast. Your credit rating takes a serious hit, but, he says, "better to take your losses and move on."

Funny story - about a year ago (June 2008) I was at an investment conference to speak on a panel about financial blogs and met Dr. Leamer.

He kind of chuckled when he read the name of my blog on my name tag.

He then went on to make a nearly hour long presentation about how we were not going to enter a recession and about how the credit crisis and housing market troubles had about peaked.

Another example that sounds pretty typical:

Kyle Becker, 27 years old, and his wife didn't feel they had much of a choice in becoming landlords. The couple and their infant son moved from Columbia, Mo., to Winchester, Va., last year so that Mr. Becker could attend pharmacy school at Shenandoah University.

Before they moved, they listed their three bedroom, two-bath ranch-style home in May 2008 for $139,000. They had bought it in 2005 for $110,000 and put $30,000 into roofing and siding. By February, they hadn't received a single bid.
"We had only seven lookers over the course of a year," Mr. Becker says. Meanwhile, the couple was paying $1,200 a month in rent for a Virginia house. Last spring, the Beckers finally leased the Missouri house for $675 a month—$225 less than their mortgage payment.

Because the home was no longer owner-occupied, Mr. Becker was unable to refinance his 6.1% mortgage when 30-year rates dipped below 5% briefly.

If he had to do it all over again, Mr. Becker says, he might have chopped the price of his Missouri house, where sales have been stagnant—with the exception of "distressed" properties in some stage of default.

When we were landlords, the rental income was about $800 a month and the mortgage was around $1,100 or so. Add in all the incidentals and this quickly becomes a drain that you can tolerate for only so long.

Once you get that phone call about having to find a new tenant, it becomes an easy decision to stop making the mortgage payment and start working on a deal with the bank.

Don't cross the streams!

Now here's something you don't see very often - the Kitco three-day gold chart with just the briefest of crossings yesterday morning at around $955 an ounce. The yellow metal appears determined to cross the $1,000 mark, now having clearly broken out of the "wedge" pattern that had contained it in recent months. Surely, the technical traders have worked themselves into a frenzy by now...

China to buy up to $50 billion in IMF SDRs

Word comes in this Bloomberg report that China will buy up to $50 billion in new debt from the IMF (International Monetary Fund) otherwise known as SDRs (special drawing rights).

The note-purchase deal enables China to take part in a $500 billion increase in the IMF’s coffers to which the Group of 20 industrial and emerging nations agreed in April.
...
Russia and Brazil said in June that they would each buy $10 billion of bonds from the IMF. India also has indicated it would contribute to an IMF bond program. The three nations plus China make up the so-called BRICs.

SDRs represent a basket of currencies consisting of the U.S. dollar, the euro, the yen and the British pound. They were created by the IMF in 1969 to support the Bretton Woods exchange-rate system that collapsed in 1971. They act as a unit of account rather than a currency. The cash is disbursed in proportion to the money each member nation pays into the fund.

It should be interesting to see how this all pans out - that is, how popular these become. The Chinese have been complaining loudly about the U.S. dollar for some time now, pining for an alternative of some sort with IMF SDRs being their preference since late last year.

ooo

Big Red's big red calculator

After discovering that most household calculators are not nearly big enough to display the national debt, Colorado businessman Matt Miles set out to fill that market niche by developing his Big Red Calculator - The Official Calculator of the National Debt.
It's available at Amazon.com for only $12.99 and, so far, there is one very positive review:

Don't let the novelty packaging fool you. This is a full-featured calculator with added features that set it above a run-of-the-mill unit.
- The display is large - 16 digits! That's up to quadrillions!
...
If there's any draw back is that it is not pocket-sized. It will easily fit in a backpack and on your desk.

Always one to be thinking ahead, I was wondering what comes after "trillion" and, as indicated in the product review, it is "quadrillion".

We may as well all get used to that one now - instead of $250 trillion, we'll soon be hearing the phrase, "a quarter of a quadrillion dollars".

Thursday morning links

TOP STORIES
World stocks tick higher; G20 eyed - Reuters
European Central Bank keeps rates steady - AP
White House to Propose Big Reserves at Banks - NY Times
Hong Kong recalls gold reserves, touts high-security vault - MarketWatch
Sheila Bair and the case against a super-regulator - Credit Writedowns
U.S. Consumer Bankruptcies Rose 24 Percent in August - Bloomberg
How Did Economists Get it So Wrong? - Krugman, NY Times
Blistering report faults SEC for Madoff misses - Reuters

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MARKETS/INVESTING
Oil up near $69 on dollar, OECD forecast - AP
Gold steadies above $975, eyes on G20 - Reuters
Asian Shares Mixed; Europe Slightly Higher - NY Times
Money rotating out of energy to gold and silver - Commodity Online
BP Finds 'Giant' Oil Source Deep Under Gulf of Mexico - Wash. Post
Canadian Stocks Rise as Gold Miners Gain on Economic Concern - Bloomberg

ECONOMY
More Americans File Jobless Claims Last Week - Bloomberg
A Reluctance to Retire Means Fewer Openings - NY Times
White House to Report on Jobs Saved and Created - CNBC
Who should get credit for a recovery - CNN/Money
Retailers report sales declines for August - AP

INTERNATIONAL
Chinese shares surge 4.8% on regulator assurance - CHINADaily
China’s Stocks Rise Most in Six Months; Citic Securities Gains - Bloomberg
Regulator stiffens lender's capital adequacy ratios to 9% - MarketWatch
China Agrees to Buy as Much as $50 Billion in Notes From IMF - Bloomberg
Gordon Brown’s $1 trillion global rescue package unravels - TimesOnline
UK economy to be last to exit global recession, OECD says - Telegraph
South Korean Economy Grows 2.6%, Faster Than Reported - Bloomberg
Joint call for bank bonus rules - BBC

REAL ESTATE
The Reluctant Landlords - WSJ
Housing Market Stabilization 'Undeniable' - U.S. News
Housing recovery hinges on foreclosure peak - O.C. Register
Housing market's bottom difficult to predict - Chicago Tribune

FED/TREASURY/BANKING
Fed officials more confident recession ending - MarketWatch
Fed Tries to Prepare Markets for End of Securities Purchases - Bloomberg
Risks to U.S. economy have eased "considerably": Fed - Reuters
Geithner Says Too Early to Implement Exit Strategies - Bloomberg

INTERESTING
Diane Sawyer takes aim at Brian Williams - MarketWatch
YouTube in talks with major movie studios - CNN/Money
Tricked-out jet combats Calif. blaze - CNN/Money
Giant national debt needs giant calculator - AP

###

Did Bernanke save the world?

Wednesday, September 02, 2009

Another Ben Bernanke retrospective with more questions about whether things might ultimately have turned out better if the Fed chairman hadn't "saved the world".

On his recent nomination for another four-year term, Dean Baker notes,"Reappointing Ben Bernanke because of how he has dealt with the crisis is like giving another command to the captain of the Titanic, based on how effectively he got people into the life boats".

An even bigger bubble now brewing

It's not hard to imagine how conditions today might look a few years hence. With the interest rate pedal nailed to the floorboard, money continuing to spew from Washington to buy all sorts of things, banks once again trying to figure out how to divide up bonus money, and the price of gold again approaching $1,000, officials are concerned about moving too fast toward restoring a more normal monetary policy environment as reported by Bloomberg.

Geithner: Too Early to Implement Exit Strategies
U.S. Treasury Secretary Timothy Geithner said the Group of 20 nations has been “very successful” in helping to end the global recession and cautioned that it’s too early to remove policies aimed at boosting growth.

“You’re seeing the first signs of positive growth now in this country and countries around the world,” Geithner told reporters in Washington today. “We’ve come a very long way but I think we have to be realistic, we’ve got a long way to go still.”
...
Geithner said talks in London will include the start of a discussion on bank capital standards as well as a “framework” for how the world’s largest industrial and developing economies can cooperate to remove policies to stimulate growth. While it’s “too early” to implement exit strategies, it’s not too soon to talk about them, he said.
...
It is “very important” to the U.S. to “reinforce the progress we are seeing,” Geithner said.

Assuming we navigate the deflationary abyss that continues to beckon from afar, we'll probably find out a couple years from now that we were very well "reinforced" at this point in time, well on the way to inflating an even more enormous bubble ... somewhere, in something ... to replace the one that just burst.

An interesting day for gold thus far

Twice this year, the yellow metal has tried to break through the $1,000 an ounce level - in February and then again in May - and here comes what looks to be another attempt.
Don't be surprised if it is again turned back. Then again, the third time is often the charm...

Defending the Fed

Now, here's something you don't see every day...

Amid a growing backlash against the Federal Reserve, whose popularity has been plunging in public opinion polls since they started spending trillion of dollars to prop up the financial industry, a lone voice defends their practices and argues against any audits.

Don't Punish Fed with Audit
...
Is the Federal Reserve hiding the identities of banks who received up to $2 trillion in loans in the last year? Representative Ron Paul (R:TX) and now Representative Barney Frank(D: MA) think the Fed should be audited to reveal the names of these foreign and domestic banks. Federal Reserve Chairman Ben Bernanke opposes Paul's audit bill, saying it would make it seem like the Fed was no longer setting interest rates independently of political oversight. This perception alone would increase inflation. However, the real threat is even worse than that.

The Federal Reserve has acted quickly and creatively to pull the economy back from the brink of a major depression. It did so because of its ability to act swiftly without going to Congress for approval. Secrecy was needed last year to allow banks to apply for liquidity from the Fed without fear they would be tagged as failing banks. Congressional auditing ability would seriously hamper the Fed's ability to act at a time when this creatively and innovation is needed the most.

Well, that's one school of thought.

There's a completely different line of thinking that involves the central bank having been created by and for big banks in order to foist bank losses on the public while keeping the gains private.

Moreover, some object to the not-so-inconsequential matter of a nearly century long debasement of the currency, where America's money has lost more than 90 percent of its value since the creation of the Federal Reserve in 1913.

And just what does Mrs. Amadeo think about money?

Her views are made abundantly clear at her website - World Money Watch.

Money is a mental concept. It is no longer based on anything tangible - not gold, not business values, and certainly not home values. Money has become an exchange of energy. As such, it provides a useful footprint that reflects the awareness level of the human race. Watching trends in the world's money helps us track our evolution.

Well, that explains a lot.

Interestingly, there's a section for comments on the About.com article.

After a brief survey, my favorite comment is the third one:

Pull your head out of your a$$

Of course we need to audit the Fed. All government activity should have accountability. It is almost treasonous not to hold the government accountable for their actions...

There are a total of 36 comments and, save for the one titled "I Love My Overlords" (which is believed to be facetious), none defend Ms. Amadeo or the Fed though a couple are critical of Ron Paul, figuring that Barney Frank has been brought on board to help Dr. Paul sell his forthcoming book titled "End the Fed".

American Casino

The trailer for the new documentary "American Casino" by investigative reporters Leslie and Andrew Cockburn on the subject of the worst economic crisis since the Great Depression.

Highlights include a clip of "Greenspan finds a flaw" at about the two minute mark.

Wednesday morning links

TOP STORIES
Bailout Propaganda Begins - True Slant
US stock futures fall after jobs data - AP
European, Asian Stocks Drop; Alcatel, Old Mutual, Sekisui Fall - Bloomberg
'Clunkers' program gives biggest boost to foreign carmakers - LA Times
V Defies Economic Pessimists Seeing L, U, W - Bloomberg
FDIC's Bair warns on commercial mortgages - Reuters
What Happened to the 'Depression'? - WSJ
Out of the Shadows - The New Yorker

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MARKETS/INVESTING
Oil hovers above $68 as US crude inventories drop - AP
Why gold prices rise in September? - Commodity Online
September has been the worst month for US stocks - Telegraph
Deutsche Bank to take back all shares in leveraged oil ETN - MarketWatch
Turning point for gold as Central Banks become buyers - Mineweb
BP makes "giant" oil find in Gulf of Mexico - Reuters
A worldwide worry: Is the rally over? - CNN/Money

ECONOMY
Q2 productivity revised up to 6.6% - Reuters
Better News, but Retail Prospects Are Still Dim - NY Times
Manufacturing in U.S. Expands More Than Forecast - Bloomberg
Groceries to cost even less as price war intensifies - LA Times
US pending home sales up 3.2 percent - CSM

INTERNATIONAL
China fund assets set to top $1 trillion - Reuters
Yen Trades Near 7-Week High on Banking Concern - Bloomberg
Banks 'hoarding credit' as lending falls a record £8.4bn - Telegraph
Skeptical European Central Bank to hike growth estimates - MarketWatch
Australian Economic Growth Accelerates, Points to Rate Increase - Bloomberg
Toyota, Hyundai Lead Asian Automakers’ U.S. Rebound - Bloomberg
China’s Exports, Not Altruism, Fund U.S. Deficit - Bloomberg
China closes doors to European businesses - Telegraph

REAL ESTATE
The housing recovery mirage - CNN/Money
For Commercial Real Estate, Hard Times Have Just Begun - LA Times
Mortgage Bankers Push for New Federal Loan Guarantee Program - Bloomberg
FHA on track for busiest year as it backs 23% of mortgages - USA Today

FED/TREASURY/BANKING
Weekly Audit: Four More Years of Bailout Ben - Huffington Post
Austrians vs. Keynesians: The end of the Federal Reserve - Creative Loafing
Ron Paul takes on the Federal Reserve with HR 1207 - Examiner
Don't Punish Fed With Audit - Kimberly's Economy Blog

INTERESTING
The Article Cash4Gold Doesn't Want You To Read - Consumerist
San Gabriel Mountains a daunting place to fight fire - LA Times
Mormons Become Victims in $50M Scam to Sell Gold Bullion - Bloomberg
Arrest made in theft ring that hit Bernankes - Reuters

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Making home affordable?

Tuesday, September 01, 2009

One man's effort to modify his mortgage under the Making Home Affordable government refinancing program - parts I and II.

Pounding the table for the "New Normal"

Boy, they really know how to stay "on message" over there at Pimco, their efforts to lower expectations for one of the most powerful stock market rallies in history perhaps beginning to bear fruit today as equities are not off to a very good start in September.

From this month's Investment Outlook:

Well, the surprise is that there’s been a significant break in that growth pattern, because of delevering, deglobalization, and reregulation. All of those three in combination, to us at PIMCO, means that if you are a child of the bull market, it’s time to grow up and become a chastened adult; it’s time to recognize that things have changed and that they will continue to change for the next – yes, the next 10 years and maybe even the next 20 years. We are heading into what we call the New Normal, which is a period of time in which economies grow very slowly as opposed to growing like weeds, the way children do; in which profits are relatively static; in which the government plays a significant role in terms of deficits and reregulation and control of the economy; in which the consumer stops shopping until he drops and begins, as they do in Japan (to be a little ghoulish), starts saving to the grave.

This focus on the DDRs – delevering, deglobalization, and reregulation – may be conceptually understandable, but nevertheless still a little hard to get one’s arms around. Why would they necessarily lead to a new, slower growth normal?

What's difficult to get your arms around about waaaaay too much leverage, the fastest pace of globalization the world has ever seen, and the dearth of regulation over the last couple decades that came with the blessing of you-know-who, who's name graces the top of this blog?

Bill elaborates anyway:

A little easier to grasp might be the following approach, which feeds off the same concept, but which extends it a little further by suggesting that DD and R lead to a number of broken business or economic models that may forever change the world we once knew and make even Barton Biggs a chastened adult. They are as follows:

1. American-style capitalism and the making of paper instead of things. Inherent in the “great moderation” of the past 25 years was the acceptance of a sort of reverse mercantilism. America would consume, then print paper assets and debt in order to pay for it. Developing (and many developed) countries would make things, and accept America’s securities in return. This game is over, and unless developing countries (China, Brazil) step up and generate a consumer ethic of their own, the world will grow at a slower pace.

2. Private vs. public-driven growth. The invisible hand of free enterprise is being replaced by the visible fist of government, a temporarily necessary, but (if permanent) damnable condition itself in terms of future growth and profits. The once successful “shadow banking system” is being regulated and delevered. Perhaps a fabled “110-pound weakling” may be an exaggeration of where our financial system is headed, but rest assured it will not be looking like Charles Atlas anytime soon. Prepare to have sand kicked in your face, if you believe you are a “child of the bull market!”

3. Global economic leadership. It’s premature to award the 21st century to the Chinese as opposed to the United States, but if the last six months have been any example, China is sort of lookin’ like Muhammad Ali standing over Sonny Liston in 1964 yelling, “Get up, you big ugly bear!” Not only has China spent three times the amount of money (relative to GDP) to revive its economy, but it has managed to grow at a “near normal” 8% pace vs. our “big R” recessionary numbers. Its equity market, while volatile and lightly regulated, has almost doubled in twelve months, making ours look like that ugly bear instead of a raging bull.

4. United States housing and employment. Old normal housing models in the U.S. encouraged home ownership, eventually peaking at 69% of households as shown in Chart 1. Subsidized and tax-deductible mortgage interest rates as well as a “see no evil – speak no evil” regulatory response to government Agencies FNMA and FHLMC promoted a long-term housing boom and now a significant housing bust. Housing cannot lead us out of this big R recession no matter what the recent Case-Shiller home price numbers may suggest. The model has been broken if only because homeownership is declining, not rising, sinking to perhaps a New Normal level of 65% as opposed to 69% of American households.

Similarly, the financialization of assets via the shadow banking system led to an American era of consumerism because debt was available, interest rates were low, and the livin’ became easy. Savings rates plunged from 10% to -1%, as many (if not most) assumed there was no reason to save – the second mortgage would pay for everything. Now things have perhaps irreversibly changed. Savings rates are headed up, consumer spending growth rates moving down. Get ready for the New Normal.

He goes on to talk about how the New Normal relates to a new climate for investors recommending that we should all "shake hands with government policies", something Pimco has been quite proficient at over the last couple years.

Weekend at Bernie's

The story of Bernie Madoff's weekend beach house going up for sale has been popping up everywhere this morning - "Weekend at Bernie's" seems to be the most popular theme for headline writers and bucking that trend seemed to be pointless.

The place is in Montauk, New York an area about which little is known to me other than what was learned during a mid-1980s Robin Williams stand up routine. Williams had a gift for mocking the aristocracy and I can still see him with one hand on his hip and his nose in the air, about to deliver a punch line in some haughty tone.

ooo

The Bobby Ewing market

This item from one of David Rosenberg's missives last week at Gluskin-Sheff has been hanging around in a draft folder for a few days, but I just couldn't bring myself to hit the Delete button as it is just too good not to share.

This is undoubtedly an exciting rally for the bulls, and a frustrating experience for the bears; however, at the same time we should all be informed about the extent to which the market is behaving rationally and whether the macroeconomic landscape that is currently being discounted is going to come to fruition.

The ongoing rally in the S&P 500 has taken the index all the way back to where it was last October. This prompted Brad Dunkley, one of our senior PMs, to email me this little ditty:

“I call this the Bobby Ewing market. Remember when Bobby appeared in the shower and the entire last season was just a dream? That's what people are saying, what Recession? It never happened.”

Those of you who were "Dallas" fans might get a particular kick out of this. Having never watched the show save for, perhaps, the resolution of "Who shot J.R.?" (and probably not even that, come to think of it), it was still pretty funny to me.

Is a Bob Newhart version of this next?

ooo

Manufacturing expands!

The Institute for Supply Management reported that, for the first time in 19 months, the U.S. manufacturing sector expanded last month, the ISM manufacturing index rising above the 50-level separating contraction and expansion, from 48.9 in July to 52.9 in August.
This move increases the likelihood that the current recession will be declared over within a month or two of this event, as was the case for the last five recessions going all the way back to the mid-1970s, though difficulties clearly remain for the U.S. economy.

From the report:

The August index of 52.9 percent is the highest since June 2007. The 4 percentage point increase was driven by significant strength in the New Orders Index, which is up 9.6 points to 64.9 percent, the highest since December 2004. The growth appears sustainable in the short term, as inventories have been reduced for 40 consecutive months and supply chains will have to re-stock to meet this new demand."

While it's not clear how much optimism should be derived from the characterization of "sustainable in the short-term", it is certainly good news for those working in the manufacturing industry, attention now turning to Friday's labor report to see what, if any, impact will be seen in manufacturing employment.

Here are the details:

Employment remains one of the weakest categories, however, it is contracting at a lesser rate than the prior month and is much improved from earlier in the year.

Tuesday morning links

TOP STORIES
Henry Paulson’s Longest Night - Vanity Fair
Why China's Stock Market Bubble Is Fizzling - Time
You are Part of the Biggest Ponzi Scheme of All - Plan B Economics
September historically has been the worst month for stocks - MarketWatch
The Bailout Bonanza: TARP's early returns are impressive - Bloomberg
The (Intentionally) Misleading Mainstream Media - Market Ticker
Citigroup shares fall on Barron's story - AP
End of Summer Blues - Kunstler, CFN

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MARKETS/INVESTING
Oil rises above $70 as markets stabilize - AP
Stocks: A down day in a strong month - CNN/Money
Lehman shares jump in over-the-counter trading - AP
“Thinking about thinking?” - Saut, Raymond James
Will Gold reach $5000 plus? - Money Talks
Copper and BHP - Pazzmundo

ECONOMY
"Clunkers" to boost U.S. auto sales - Reuters
One Thing's Clear on Economy: Mixed Signals - Wash. Post
The Savings Rate Has Recovered…if You Ignore the Bottom 99% - Naked Captialism
Fla. Unemployment Borrowing May Top $1 Billion - ProPublica
Beware, inflation is on the way - MarketWatch

INTERNATIONAL
Eurozone jobless at 10-year high - BBC
China manufacturing gains despite share gloom - CHINADaily
Canada Economy Shrank at 3.4% Pace in Second Quarter - Bloomberg
The Root Cause of China's Recent Stock Market Decline - The Epoch Times
Russian Delinquent Loans Grew to 5.5% in July, Report Shows - Bloomberg
It’s not yet the end of China’s massive stimulus - China Financial Markets
Irish state plans to take stake in debt-ridden banks - Guardian
Shanghai housing prices hit new high in Aug - CHINADaily

REAL ESTATE
What Banks Are Really Doing With Foreclosures - Olick, CNBC
Why are commercial real estate markets so often gridlocked? - Time
California homeowners facing insurance rate hikes - LA Times
Madoff's Long Island Beach Getaway Up for Sale - CNBC

FED/TREASURY/BANKING
Dudley: Fed Can Avoid ‘Bad Inflation Outcome’ - Bloomberg
Insiders: Bernanke Pick a Sign of Obama's Weakness - US News
What Would a Federal Reserve Audit Show? - WSJ Economics
The Duplicity of Ben Bernanke - Mises

INTERESTING
Marijuana's new high life - Times
BBC to Tell the World About Bend’s Bust - The Source
What Makes a Psychopath? Answers Remain Elusive - LiveScience
Why Craigslist Is Such a Mess - Wired

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