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Haven't heard too much about the fall-out from the bursting of the housing bubble in Reno, Nevada, but we've seen the thousands and thousands of homes built in the area after making a few loops around Lake Tahoe in recent years - they seem to go on and on forever.
That House committee hearing was about a four-hour ordeal yesterday and I only got through about two hours of it. Apparently, since it fits neatly into their job descriptions, others had to stick with it for the duration, resulting in little more for their efforts than what appeared here yesterday in the transcription of questioning by Henry Waxman (D-California) that opened the session.
The role of government regulators leading up to the current financial crisis was the subject of yesterday's gathering of the House Committee on Oversight and Government Reform and, just in case you're a real glutton for punishment, our government has made the entire transcript available in .pdf form - all 201 pages of it. Your tax dollars at work...
In today's WSJ account of what happened, Kara Scannell and Sudeep Reddy noted the same overall tone that struck me - Greenspan Admits Errors to Hostile House Panel.
The title for the story that was filed shortly after the panel concluded went by the name Greenspan Admits Some Mistakes Amid Grilling by House Lawmakers. Apparently, they felt the need to raise the ante for today's print edition (the two articles appear to be one-and-the-same).
Anyway, there's an online poll that accompanied today's story. I'm not sure if I should be surprised or not about the results - that first question is a little vague.
Not that the distinction is all that important...
That's the way I've always looked at it, though I must confess that given what has come to light over the last three or four years, it is now clear that he had a lot more help than first thought.
In the WSJ report, it was the closing paragraph that really brings this sad chapter in American financial history to something of a close. As some may have thought yesterday while listening to the proceedings, it really wasn't all that important what the old man had to say anymore - what was more telling was how he was being addressed and how his stature has been so diminished.The treatment was a striking contrast with one of Mr. Greenspan's last appearances before Congress as Fed chairman, on Nov. 3, 2005. "You have guided monetary policy through stock-market crashes, wars, terrorist attacks and natural disasters," Rep. Jim Saxton (R., N.J.) told him then. "You have made a great contribution to the prosperity of the U.S. and the nation is in your debt."
Quite a fall from grace.
Long-time reader David Hendrickson has assembled an informative guide to the current financial crisis, replete with graphs, charts, and oodles of commentary, all conveniently organized using Blogger labels. Click on the image to be immediately transported there.
The concluding chapter, Six Lessons From the Financial Crisis, is reproduced below:1. The conclusion seems irresistible that the defenders of capitalism proved its undoing. The most zealous proponents of free markets put them at profound risk. The financial institutions that stood at the epicenter of the world economic order proved to be based on a scam, at the center of which was the privatization of profit and the socialization of risk. Capital markets whose fundamental rationale was the most efficient allocation of scarce resources for investment failed miserably in their basic function. The most egregious rates of executive compensation ever produced the biggest failures of economic leadership ever. To those of us with a sentimental attachment to free markets as against command economies, all this is a blow.
Well, it looks like there are more rate cuts coming next week.
2. We are made aware of how grave a responsibility is the management of a country’s currency. Money and credit are like oxygen; taken for granted in most circumstances, but when withdrawn inducing asphyxia. In terms of economic theory, the whole experience bears out the vital importance the Austrian economists placed on the credit cycle and underlines their skepticism toward fractional reserve banking. This is not to urge a return to the gold standard, but it is to urge derision and contempt upon those who constructed the house of cards and who ignored its vulnerabilities. There are many villains in the piece, but Alan Greenspan will surely stand out in retrospect as bearing the heaviest responsibility. Blithely indifferent to the dangers of debt and derivatives, he led us down the garden path.
3. We move inexorably toward the socialization of credit risk and a much larger role for the state in the direction of the national economy. Courtesy of Bush and Greenspan, Marx has made a comeback. In The Communist Manifesto, the fifth proposal in Marx’s ten point plan for placing the means of production in the hands of the proletariat was the “centralization of credit in the banks of the state, by means of a national bank with state capital and an exclusive monopoly.” Marx didn’t get it quite right; we’re getting there via the dictatorship of the kleptocracy. But hey, it's a start.
4. The collapse of America’s credit bubble is very likely to lead, both here and abroad, to the revival of various forms of national socialism. That is not a prediction of the revival of German National Socialism, but simply that the direction of economic affairs is likely to be swayed much more by the dictates of nationalist and socialist impulses. The Euro is especially vulnerable to the centrifugal forces unleashed by the crisis, with unfavorable consequences for the European experiment. Sheer cronyism may win out over state socialism, to be sure, and financial internationalism will battle to survive against the reassertion of nationalism. Still, I wouldn't underestimate the power of nationalist and socialist tendencies in the new era.
5. The opportunity cost of the financial bailout is huge. Moreover, insofar as it is based on the idea of reflating the financial, insurance, and real estate sectors (the FIRE economy), it is very dangerous to long term economic revitalization. The old Wall Street model is broken because most of the things they made money on (securitization, fees, leverage) turned out, in due time, to be based on a fundamental misapprehension of risk. Real estate remains overvalued by various traditional measures. A far more logical use of public resources is the tackling of our energy and environmental problems, both of them requiring large investments in infrastructure and alternative energy. We face the challenge of a generation in adapting to these challenges; the economic crisis, and the response given to it thus far, constitutes a formidable obstacle in doing so.
6. The financial crisis has opened up a great gap between our aspirations and resources. This must have profound implications for American foreign policy. We have a foreign policy more ambitious than that crafted in the heady days of unipolarity in the late 1990s, when observers marveled at the sheer surfeit of American power in its military, economic, ideological, and cultural dimensions. Though American power has weakened on every count, there is no reconsideration of objectives. The last thing that presidential candidates wish to do is to reconcile themselves to limits on American purposes. It goes entirely against the American grain, which treasures happy talk and fairy tales over the recognition of constraint. But finance is inexorable: it sets limits, diminishes horizons, induces constraint. Surely a profound adjustment in America's world role is coming.
That should help ... maybe ... for a couple days.
The National Association of Realtors (NAR) reported sharply higher existing home sales in September, however, with foreclosures and short sales accounting for an estimated 35 to 40 percent of all sales, a real rebound in the nation's housing market is still far off. 
As shown above, inventory is still at historically high levels. Though down slightly from last month, supply remains about double normal levels and, while sales may continue to improve as more excess inventory is liquidated, prices will also continue to fall until supply and demand are brought back into balance.
With the number foreclosures still mounting, this will take a while.
The median price for all existing homes sold last month fell 9.0 percent from year ago levels, from $210,500 to $191,600, and further price reductions are expected in the year ahead. As the economy weakens further and credit continues to tighten, home price declines could accelerate.
The market is doing what markets are supposed to do - price discovery.
Interestingly, NAR chief economist Lawrence Yun noted, "The current market is not being dominated by speculative investors. Rather, 80 percent of current buyers are purchasing a primary residence, which is a bit higher than historic norms."
It's nice to see that home buyers who have waited patiently over the last five years are finally beginning to see housing become more affordable, though, in many areas, there is room for prices to move down much further.
There is no better example of why ordinary individuals are particularly unsuited for managing their own investment accounts than at this very moment.
Granted, these are extraordinary times, but, small fortunes can be made when bold investors seize the moment. Of course, modest savings with aspirations of becoming small fortunes can also be wiped out.
Hence the dilemma.
As perma-bears like Jeremy Grantham wake from a long slumber and as value investors like Warren Buffet open their wallets to snap up bargains (stocks that might be even better bargains next week, perhaps even more so next month), ordinary retail investors eye the stock market with a myriad of thoughts going through their heads.
That is, the ones that haven't already sold everything in a panic.
This report in BusinessWeek about Grantham's new outlook adds to the "fight versus flight" calculation:Now, Grantham, whose firm manages more than $120 billion in assets, is almost gleeful. The value manager, who earned the sobriquet "perma-bear" for his long-standing bearish outlook, is buying. Like Warren Buffett and a growing number of savvy value investors -- among them, Third Avenue Management's Marty Whitman and Longleaf Partners' Mason Hawkins -- Grantham is seeing opportunities in the cheap prices created by this autumn's rapid stock market unraveling. Stocks, Grantham says, are now cheaper than they've been since 1987. "You are looking at the best prices in 20 years, and you should be making 7% to 8% to 9% real (inflation-adjusted) returns. The last time I was this optimistic was in the summer of 1982."
Now, Mr. and Mrs. ordinary investor - push aside your own anxiety and go out there and seize the day!
Not that Grantham's blindly upbeat. "It's optimism with great trepidation," he says. That trepidation reflects the fact that Grantham doesn't know if the market will fall further. But he's not the type to try to time the bottom. In fact, he says, bubbles historically overcorrect, and usually quite dramatically. That's what happened after the stock market crash of 1929, the 1965 collapse of the Nifty Fifty, and the contraction in Japan in 1989. "We are reconciled to buying too soon," says the money manager. "A value manager buys too soon and sells too soon. That's the nature of the beast."
...
With a stomach of steel and a keen sense of history, Grantham feels no qualms about buying now: "I don't have any anxiety. I feel so much better with history on my side. Truly. I've been looking forward to this for years."
TOP STORIES
Wall St. futures frozen after plunge - AP
OPEC slashes production; crude continues to tumble - AP
'Perma-Bear' Backs Other Value Investors: Buy Now - BusinessWeek
AIG Has Used Much of Its $123 Billion Bailout Loan - Washington Post
Greenspan denies blame for crisis, admits 'flaw' - AP
Gold Standard Is Wrong Salve for Global Ills - Bloomberg
MARKETS/INVESTING
U.S. stock futures blasted after Asia plunge - MarketWatch
Oil falls despite production cuts - BBC
Balle, balle..great demand for India Post gold coins! - Commodity Online
Oil, Gold, Commodities in `Freefall' as Economic Slump Deepens - Bloomberg
Say it with Buffett: Stocks will rise - MSN Money
ECONOMY
U.S. September Home Resales Jump 5.5% to 5.18 Million Pace - Bloomberg
Wave of job cuts sweeps across corporate America - Reuters
The real tragedy of this financial crisis is that people will die - MarketWatch
HOUSING
Stockton, Calif., tries digging out - USA Today
Foreclosures Help Housing Market Find a Bottom - Bloomberg
Foreclosures in California on steep rise - SF Gate
Freddie Mac: Fixed-rate mortgages fall in latest survey - MarketWatch
FED/TREASURY/BANKING
Greenspan shocked at failure of free markets - SF Gate
Treasury To Invest In More Banks - Washington Post
Central banks need to calm disorderly FX markets - Reuters
Greenspan - I was wrong about the economy. Sort of - Guardian
INTERNATIONAL
Russian default risk tops Iceland as crisis deepens - Telegraph
Asia Money Rates May Rise as Korea, Argentina Economies Stumble - Bloomberg
UK economy officially on the brink of recession - AP
Brazil to Pump $50 Billion in Currency Market to Shore Up Real - Bloomberg
Yen rockets as risk aversion hits extremes - Reuters
China Urged to Fight Crisis By Asia, Europe Leaders - Bloomberg
Sterling falling at fastest rate since ERM debacle - Guardian
INTERESTING
Bloomberg gets vote allowing 3rd term NY mayor run - MarketWatch
Election Winner May Welcome Early Exit in 2013 - Bloomberg
Some bailout humor (hat tip DP).
Tomorrow's headlines will all look similar to what is now on the internet:
Henry Waxman: You were perhaps the leading proponent of deregulation of our financial markets, certainly you were the most influential voice for dergulation. You have been a staunch advocate for letting markets regulate themselves. Let me give you a few of your past statements:He then went on to explain that he believed the late Governor Gramlich was going to propose action via a subcommittee after his subprime warning and thatm since no proposals came forward, he assumed the issue had lost its importance.
And my question for you is simple: Were you wrong?
- In 1994, you testified at a Congressional hearing on regulation of financial derivatives. You said there was nothing involved with federal regulations that make it superior to market regulations.
- In 1997, you said there was no need for government regulation of "off-exchange" transactions.
- In 2002, when the collapse of Enron led to the renewd Congressional efforts to regulate derivatives, you wrote the Senate, "We do not believe a public policy case exists to justify government intervention"
- And earlier this year, you wrote in the Financial Times, bank loan officers, in my experience, know far more about the risks and working of their counterparties than do bank regulators.
Alan Greenspan: Partially. Let's separate these problems into their component parts. I took a very strong position on the issue of derivatives and the efficacy of what they were doing for the economy as a whole...
Waxman: So, you don't think you were wrong in not wanting to regulate derivatives?
Greenspan: Well, it depends which derivatives we're talking about. Credit default swaps have serious problems associated with them...
Waxman: Let me interrupt you because we do have a limited amount of time.
...
Waxman: Dr. Greenspan, Paul Krugman the Princeton Professor or Economics who just won a Nobel Prize wrote a column in 2006 as the subprime mortgage crisis started to emerge. He said, "If anyone is to blame for the current situation, it is Mr. Greenspan who poo-pooed warnings about an emerging bubble and did nothing to crack down on irresponsible lending".
He obviously believes that you deserve some of the blame for our current conditions. Do you have any personal responsibility for these financial crises.
Greenspan: Let me give you a little history, chairman. There's been a considerable amount of discussion about my views on the subprime market in the year 2000. And indeed, one of our most distinguished governors at the time, Governor Gramlich, who regrettably is deceased but who was unquestionably one of the best governors I've had to deal with, came to my office and said he was having difficulty with the problem of what turned out to be a fairly major problem in predatory lending...
Waxman: He urged you to move with the powers that you had as chairman of the Fed as both the Treasury Department and HUD suggested that you put in place regulations that would curb these emerging abuses in subprime lending, but you didn't listen to the Treasury Department or Mr. Gramlich.
Do you think that was a mistake on your part?
Greenspan: Well, I question the facts of that. He and I had a conversation. I said to him I have my doubts whether that would be successful. But to understand the process by which decisions are made at the Fed it's important to understand...
Waxman: Dr. Greenspan, I'm going to interrupt you. The question I have for you is... You had an ideology ... You had the authority to prevent the lending practices that led to the subprime mortgage crisis, you were advised to do so by many others, and now our whole economy is paying the price. Do you feel that your ideology pushed you to make decisions that you wished you had not made.
Greenspan: Well, remember what an ideology is. It's a conceptual framwork for the way people deal with reality. Everyone has one. To exist, you need an ideology. The question is whether it is accurate or not. And what I'm saying to you is that I found a flaw - I don't know how significant or permanent it is - but I've been very distressed by that fact. But if I may, can I just answer the previous question?
Waxman: You found a flaw in the reality...
Greenspan: I found a flaw in the model that I perceived is the critical functioning structure that defines how the world works.
Waxman: In other words you found that your view of the world, your ideology, was not right. It was not working.
Greenspan: That's precisely the reason I was shocked because I was going for forty years or more with very considerable evidence that it was working exceptionally well.
But, just let me finish if I may...
Waxman: Well, the problem is that time is already expired.
It's not clear who put on the most pathetic display today at the just-concluded committee hearing dubbed "The Role of Federal regulators in the Financial Crisis" - former Federal Reserve Chairman Alan Greenspan or Rep John Mica (R-Florida) who, along with others, sought to transform the meeting into a discussion of GSE oversight or the lack thereof.
Some highlights, during which former Treasury Secretary John Snow makes his most profound comment during the entire hearing:Mica: Do you know what comes before November 20th?
The Florida Congressman then went on to ask a number of rhetorical questions about lobbying money spent by Fannie Mae and Freddie Mac, Countrywide's preferential treatment meted out for Democratic senators, and campaign contributions directed toward Democrats, addressing former Fed Chairman Alan Greenspan as Mr. Bernanke in the process.
Snow: The 19th.
Mica: Of course as you might recall, it's a little thing called the election and we wouldn't want the trail to lead to people who have done the wrong things. What we don't want is for this committee to hold people who started this whole mess accountable. What we've been doing is tip-toeing around the tulips, when somebody's driven a bulldozer through our financial garden.
I have some questions for you...
Just pathetic.
By comparison, the former Fed chairman came off looking quite good.
This has got to be one of the saddest displays of partisan politics in Washington, a system that often times places a much higher priority on assigning blame to the folks on the other side of the aisle rather than attempting to understand the problems they are charged with solving.
Let's be clear. There is plenty of blame to go around here - Alan Greenspan, Fannie and Freddie, Countrywide, hedge funds (also scheduled for after the election), rating agencies, the SEC, individual homeowners, Wall Street firms ... the list is very long.
There will be more on this later today as there were a number of memorable interchanges and some revealing responses from the former Fed chairman.
Today is the last day for entries in the fifth semi-annual "Guess the price of oil and gold" contest - be sure to get your guesses in by midnight PST today or they will not be accepted. Here's one last look at the historical chart:
At some point, the recent direction will surely reverse - the question is when.
A free one-year subscription to the companion investment website Iacono Research will be awarded to the contestant with the lowest combined percentage error between their guesses and the prices for these two important commodities on December 31st.
The closing price for the near-month (February) NYMEX futures contract for WTI crude oil and the closing price for spot gold on the COMEX will be used.
Here's one last look at how things ended up at mid-year:
A new graphic will be provided either tomorrow or early next week containing all the entries for the current contest and then regular updates will occur between now and the end of the year. See the contest kickoff post and last week's reminder for further details.
Entries may be made either by posting them in the comments section of this post (or either of the prior two posts above) or sending mail to either tim-at-iaconoresearch.com or tliacono-at-yahoo.com.
The winner will be announced on December 31st - good luck to all!
Well, committee chairman Henry Waxman (D - California) just banged the gavel for today's session of the House Committee on Oversight and Government Reform, saying something like, "... if Federal regulators had paid more attention..."
The star witness today (pictured above) released his testimony to Bloomberg earlier today and they offer the following preview:Former Federal Reserve Chairman Alan Greenspan called for tighter regulation of financial companies, distancing himself from the free-market culture that he helped to create.
The former Fed chairman takes a shot at identifying the "root cause" of the current crisis, finding it far, far away from Washington D.C. in the "surge in global demand" for U.S. suprime mortgage debt which was facilitated by "unrealistically positive rating designations by credit agencies".
Firms that bundle loans into securities for sale should be required to keep part of those securities, Greenspan said in prepared testimony to the House Committee on Oversight and Government Reform. Other rules should address fraud and settlement of trades, he said. Greenspan's office released the text ahead of the hearing scheduled for 10 a.m. in Washington.
The comments contrast with Greenspan's aversion to increasing financial supervision as Fed chairman from August 1987 to January 2006. He said in a May 2005 speech that ``private regulation generally has proved far better at constraining excessive risk-taking than has government regulation.''
Today, the former chairman asked: ``What went wrong with global economic policies that had worked so effectively for nearly four decades?'' During his term at the Fed's helm, Greenspan repeatedly warned lawmakers against inhibiting markets, such as by tightening oversight of certain types of derivatives.
Greenspan, reiterated his ``shocked disbelief'' that financial companies failed to execute sufficient ``surveillance'' on their trading counterparties to prevent surging losses. The ``breakdown'' was clearest in the market where securities firms packaged home mortgages into debt sold on to other investors, he said.
More to come in a little while...
TOP STORIES
Greenspan Urges Tighter Regulation After `Breakdown' - Bloomberg
Credit Rating Agency Heads Grilled by Lawmakers - NY Times
GM suspends payments into 401K plans - Reuters
US foreclosure filings up 71 percent in 3Q - AP
U.S. Insurer of Pensions Has Lost $2 Billion - NY Times
Five things investors believed about the market six months ago - Telegraph
Goldman Sachs to cut staff by 10 pct - Reuters
MARKETS/INVESTING
Dollar roars back as global debts are called in - Telegraph
OPEC faces 'uphill battle' as oil prices plummet - MarketWatch
Gold Plunges to 13-Month Low as Dollar Gains, Funds Liquidate - Bloomberg
Oil rises to $67 as OPEC prepares to cut output - AP
ECONOMY
Jobless claims rise 15,000 to 478,000 - MarketWatch
Job Losses Accelerate, Signaling Deeper Distress - Washington Post
Chrysler cutting 1,825 jobs with moves at 2 plants - AP
HOUSING
Foreclosures up 21 percent from year ago - Reuters
Mortgage applications sink to 8-year low - Reuters
Economic Picture Pressures Housing, Foreclosures - Housing Wire
Bargain-hunters trickle back to U.S. housing market - Reuters
FED/TREASURY/BANKING
Bernanke May Seek New Ways to Ease Credit as Fed Rate Nears 1% - Bloomberg
Greenspan calls for more regulation, 'shocked' by crisis - MarketWatch
Struggling to Keep Up as the Crisis Raced On - NY Times
Volcker Says U.S. in Midst of `Unprecedented' Financial Crisis - Bloomberg
INTERNATIONAL
South Korea's Stocks, Won Plunge as Stimulus Fails to Convince - Bloomberg
Ottawa to guarantee inter-bank lending - Globe & Mail
S&P Cuts Russia's Credit Rating Outlook to Negative - Bloomberg
Shoppers cut back as unemployment and slowing wage growth take their toll - Guardian
Sweden Cuts Key Rate to Stimulate Lending, Economy - Bloomberg
INTERESTING
Out of Thin Air: How Money is Really Made - LiveScience
Self-Employed Forecaster Tops Big Banks With U.S. Housing Call - Bloomberg
The SPDR Gold Shares ETF (NYSE:Arca:GLD) reached a milestone of sorts today as shown below. For every dollar of the gold price there is now one tonne of gold in the trust.
After the "tonnes in the trust" made new highs over the last month as the price of gold was surging, passing the Bank of Japan as the world's lucky number 7 holder of the yellow metal in the process, there has been precious little selling despite the gold price dropping more than $150 as shown below.
For gold, the price goes down, but investors don't sell.Full Disclosure: Long GLD at time of writing.
About the only U.S. economic news this week is coming in anecdotal form or in the raft of layoff announcements, a list that seems to grow every day now.
Existing home sales will be reported on Friday and some will cheer the long-term bottom being carved out in home sales, which is not to be confused with home prices, a statistic that remains in free-fall in many areas.
Naturally, the less well-heeled seem to be bearing the brunt of the pain so far in this recession, as is usually the case when the economy goes south. Bloomberg reports sales on Rodeo Drive continue to boom, though this may change in the months ahead as the surging dollar and plunging commodity prices transform once rich foreigners into just average spenders who are less inclined to do that spending in the U.S.
On Main Street, times are getting very tough, very fast and sales statistics at Wal-Mart again provide insight into just what's going on inside the mind of your average American as detailed in this report in USA Today.Financial insecurity is forcing Wal-Mart (WMT) shoppers to change buying habits, cut credit card use and live more paycheck-to-paycheck, the CEO of the U.S. division of the world's largest retailer said Tuesday.
This will probably get much worse before it gets appreciably better.
Economic pain is leading to what Eduardo Castro-Wright termed "disturbing behaviors" among shoppers over the past few months.
For instance, more families are buying baby formula at the start of the month when they are more likely to have money. In the past, he said, the chain hadn't noticed such surges in formula sales.
"Credit has been declining dramatically," said the Ecuador-born executive who has run Wal-Mart Stores USA for three years. "That decline in credit means people have to make choices about how they spend their hard-earned money."
Many don't have a choice when it comes to their form of payment. "They have maxed out on their credit limits," Castro-Wright said in an interview after a speech to Town Hall Los Angeles, a non-profit that provides a forum for public figures and opinion makers. "Customers are really going through some hard times."
Cosmetic surgeons and those performing other elective procedures that were all rage a few years ago must be watching business slow to a trickle right about now. Really. What woman can afford liposuction and what man (yes, men - circa 2005) can afford breast implants with disposable wealth shriveling up as fast as home prices fall.
This story in the New York Times raises some serious questions about the health of Americans and the health of the health care industry, what has been the one shining light in an otherwise sour economy.For the first time in at least a decade, the nation’s consumers are trying to get by on fewer prescription drugs. As people around the country respond to financial and economic hard times by juggling the cost of necessities like groceries and housing, drugs are sometimes having to wait.
Just what we need - a sick economy and a sick population.
“People are having to choose between gas, meals and medication,” said Dr. James King, the chairman of the American Academy of Family Physicians, a national professional group. He also runs his own family practice in rural Selmer, Tenn.
“I’ve seen patients today who said they stopped taking their Lipitor, their cholesterol-lowering medicine, because they can’t afford it,” Dr. King said one recent morning. “I have patients who have stopped taking their osteoporosis medication.”
Through August of this year, the number of all prescriptions dispensed in the United States was lower than in the first eight months of last year, according to a recent analysis of data from IMS Health, a research firm that tracks prescriptions.
Although other forces are also in play, like safety concerns over some previously popular drugs and the transition of some prescription medications to over-the-counter sales, many doctors and other experts say consumer belt-tightening is a big factor in the prescription downturn.
The trend, if it continues, could have potentially profound implications.
Henry Waxman (D - California) has assembled an interesting cast of characters for tomorrow's meeting of the House Committee on Oversight and Government Reform.
I don't ever recall hearing Henry Waxman asking questions of former Fed Chairman Alan Greenspan in all the years I've been following the many appearances of Federal Reserve board members on Capitol Hill.
With the luster quickly fading on his reputation - what, with the world financial system in a state of perpetual chaos and asset values eroding at an ever faster pace - it's about time somebody starting asking some tough questions about regulation (or the lack thereof) earlier in the decade.
Don't expect much from former Treasury Secretary John Snow.
If his tenure at Treasury is any indication, he'll have about as much insight as a potted plant regarding how regulation went so wrong a few year back.
And Christopher Cox?
Has there ever been a man who seems to be so completely overwhelmed on a daily basis?
Wasn't it just a few years ago that Argentina was thumbing their nose at the IMF, asserting their independence after a tumultuous period in the 1990s, serving as something of a model for other South American countries?
What's this with nationalizing private pension funds?
Amid all the other dreary financial news today, this story is easy to miss. The government of Argentina announced it would nationalize almost $30 billion in private funds, purportedly to protect recipients from the vagaries of the stock market during the never-ending financial crisis, but also maybe to help pay some bills that will soon be due.
This New York Times report has the details:The measure, confirmed in a speech in Buenos Aires late Tuesday by Cristina Fernández de Kirchner, Argentina’s president, was criticized by political opponents and analysts as a move to shore up government coffers to try to head off a fiscal crisis in 2009, when Argentina might be struggling to make billions of dollars in debt payments.
Oh...
...
It may be the first time a Latin American government has expropriated cash. The move is expected to give the government breathing room as falling commodity prices drive down tax revenue from agriculture by as much as $6 billion next year, according to some estimates. Commodity prices have fallen as fears of a global slowdown have grown.
Argentina’s precarious fiscal situation predated the global financial crisis.
Well, aside from last year' election that saw the President's wife get voted in, the huge strike earlier this year, and the many stories about how cheap real estate is there, there hasn't been a whole lot of news about Argentina cross my desk.
Apparently, they're not such a good model any more.
While the Times report seems to get all the facts out on the table in workman-like fashion, Ambrose Evans-Pritchard over at the Telegraph has a few different, more inflammatory thoughts on recent developments:Here is a warning to us all. The Argentine state is taking control of the country's privately-managed pension funds in a drastic move to raise cash.
I'd be leery of buying any real estate in those parts.
Should we worry about our pensions?
It is a foretaste of what may happen across the world as governments discover that tax revenue, and discover that the bond markets are unwilling to plug the gap.
...
My fear is that governments in the US, Britain, and Europe will display similar reflexes. Indeed, they have already done so. The forced-feeding of banks with fresh capital - whether they want it or not - and the seizure of the Fannie/Freddie mortgage giants before they were in fact in trouble (in order to prevent a Chinese buying strike of US bonds and prevent a spike in US mortgage rates), shows that private property can be co-opted - or eliminated - with little due process if that is required to serve the collective welfare. This is a slippery slope. I hope Paulson, Darling, and Lagarde tread with great care. I do not expect Steinbruck to tread with any care.
TOP STORIES
Weak earnings rouse worries about global recession - AP
China: Shut plants a big sign of domestic, world woes' impact - USA Today
Fed Prepared to Prop Up Money-Market Funds - Washington Post
Mervyn King warns of Britain's 'long march' out of recession - Times Online
Argentina Nationalizes $30 Billion in Private Pensions - NY Times
Morgan Stanley's Bonuses Get Saved By You and Me - Bloomberg
As Oil Prices Drop, OPEC Ponders Tough Solutions - NY Times
MARKETS/INVESTING
Oil falls below $70 as demand worries trump OPEC - AP
Gold slips on firmer dollar, deflation fears - Reuters
Euro, British pound plunge - MarketWatch
Gold May Pay Only in Case of Maximum Despair - Bloomberg
'Comex paper gold can not manipulate gold price' - Commodity Online
ECONOMY
Pressure Builds for Boeing and Machinists to Settle - AP
Wal-Mart sees shifts in shoppers' buying habits - USA Today
In Sour Economy, Some Scale Back on Medications - NY Times
HOUSING
Mortgage applications fall 16.6 pct - Reuters
Bargains push bay home sales, but prices plunge - SF Chronicle
Lenders help more homeowners avoid foreclosure - USA Today
U.S. trying to stop millions of foreclosures, Paulson says - MarketWatch
FED/TREASURY/BANKING
Banks Weighing Other Uses for Bailout Money - Washington Post
Fed Adds to Its Efforts to Aid Credit Markets - NY Times
Fed will back up money market funds, to unfreeze lending - USA Today
INTERNATIONAL
Loonie dives under 80 U.S. cents - Globe & Mail
Pound falls to five-year low as Bank head admits recession is here - Guardian
Lehman Dynamic Spreads Through Chinese Economy - Bloomberg
Argentina seizes pension funds to pay debts. Who's next? - Telegraph
China Caps Bank Overhaul With Agricultural Bank Aid - Bloomberg
INTERESTING
6 ways to barter smarter online - MSN Money
Pirates Still Terrorize High Seas - LiveScience
Jim Bianco of Bianco Research was on Bloomberg earlier today and he had quite a few comments on the Federal Reserve's most recent move to provide up to $540 billion to shore up the ailing money market industry.
Click to play in a new windowAs long as all these bailout programs don't work, de-flation is the order of the day and prices will keep going down and you really have to worry about de-flation with a "d".And so, the debate continues.
But, the Federal Reserve and world central banks have engaged in activity, even up to today's money market fund action, that can best be described as hyper-inflationary. They are inflating their balance sheets and they are inflating the world money supply to a degree no one ever thought we would see.
The fear is that "when the chain catches the sprocket" and the credit starts flowing and everything starts moving again, then we flip into a hyper-inflationary environment because of all the money that's been put into the system.
The next update to the S&P Case-Shiller Home Price Index will be released next Tuesday and the next labor report is due the week after that. Until then, here's another look at home prices and job creation during the housing bubble and bust.
Jon Lansner of the Orange County Register polled his readers yesterday to find out what they thought the prospects were for home prices in the area now that sales have picked up significantly from a year ago. Here are the current results:
And we thought things were pretty crazy back in June...
Well, it's a little bit more complicated than that. It's better if he explains:
Jim's new book World Made by Hand is highly recommended.To switch metaphors, let's say that we are witnessing the two stages of a tsunami. The current disappearance of wealth in the form of debts repudiated, bets welshed on, contracts canceled, and Lehman Brothers-style sob stories played out is like the withdrawal of the sea. The poor curious little monkey-humans stand on the beach transfixed by the strangeness of the event as the water recedes and the sea floor is exposed and all kinds of exotic creatures are seen thrashing in the mud, while the skeletons of historic wrecks are exposed to view, and a great stench of organic decay wafts toward the strand.
Then comes the second stage, the tidal wave itself -- which in this case will be horrific monetary inflation -- roaring back over the mud flats toward the land mass, crashing over the beach, and ripping apart all the hotels and houses and infrastructure there while it drowns the poor curious monkey-humans who were too enthralled by the weird spectacle to make for higher ground. The killer tidal wave washes away all the things they have labored to build for decades, all their poignant little effects and chattels, and the survivors are left keening amidst the wreckage as the sea once again returns to normal in its eternal cradle.
Foreclosure sales continued to push real estate prices down in Southern California as reported yesterday by DataQuick. Equivalent price levels in San Diego County have not been seen since ... well, it's hard to say. The chart below only goes back to the end of 2002.
The closest that could be found was $336,000 in January of 2003.
Amazing...
The color coded intersection scheme above results in comparable prices for the six Southern California counties as indicated below:
At current prices, even though they are down considerably from their various peaks occurring between late-2005 and early-2007, homes are still quite expensive in Southern California.
If you've ever seen a median home in Southern California, you'd concur.
With foreclosures accounting for a full 50 percent of all transactions, sales volume increased an 'unprecedented' 65 percent from year ago levels, however, since most of these sales were placed under contract in August (before the latest escalation of the credit crisis), another sales record is not expected next month.
The fact that September of 2007, when the credit crisis first began, produced the lowest level of sales on record also helped to produce the astonishing increase in sales. Last month's record improvement was actually the second worst September in the DataQuick data going back to 1988.
Steep price declines, especially inland, have improved housing affordability quite a bit and may keep sales levels well above the record lows we saw late last year and early this year. It will depend on the severity of this economic downturn.
Nicely done.
The year-over-year changes in price shown below are starting to look "less bad", but when you improve from minus 40 percent to minus 37 percent (as was the case for poster child San Bernardino County last month), does it really matter?
For some reason, I always thought it would be a more gradual decline.
TOP STORIES
European Money-Market Rate Drops to Lowest Since Lehman Failure - Bloomberg
U.N.: Crisis will lead to 20M lost jobs - CNN/Money
Alternative Energy Suddenly Faces Headwinds - New York Times
Foreclosure shopping fuels ‘unprecedented’ SoCal rebound - OC Register
Bernanke breathes life into another stimulus bill - AP
Misinterpretation of Gold Lease Rates - Seeking Alpha
The Financial Crisis Blame Game - BusinessWeek
MARKETS/INVESTING
Dollar climbs as demand for cash trumps fundamentals - Reuters
Oil above US$74 as OPEC eyes production cut - AP
Investors fleeing market, their return uncertain - MarketWatch
Gold Declines in London as Dollar Advances, Equities Climb - Bloomberg
ECONOMY
The Coming Pink Slip Epidemic - BusinessWeek
Turmoil May Make Americans Savers, Worsening `Nasty' Recession - Bloomberg
Economic Stimulus Gains Traction - Washington Post
HOUSING
Key to the Crisis: It's the Housing Market, Stupid - Time
September home sales up 65% from last year in Southern California - LA Times
Fitch: Housing Prices Have 10% to Go Before Stabilizing - WSJ Economics Blog
Bernanke endorses fiscal stimulus - MarketWatch
FED/TREASURY/BANKING
How Will Paulson Pick Bank Winners and Losers? - BusinessWeek
U.S. Is Said to Be Urging New Mergers in Banking - NY Times
Fed's Lockhart Says U.S. Weakness to Persist in 2009 - Bloomberg
INTERNATIONAL
Pensions crisis as share falls leave company schemes facing cash shortage - Times Online
Sweden launches financial rescue package - Telegraph
China Plans to Bolster Its Slowing Economy - NY Times
French Bistros File Record Bankruptcies as Le Big Mac Reigns - Bloomberg
Collapse in mortgage lending intensifies - Times Online
French banks rally after $14 billion capital boost - MarketWatch
Loonie falls sharply on anticipation of rate cut - Globe & Mail
Haarde's Free-Market Embrace May Prompt Backlash by Icelanders - Bloomberg
INTERESTING
How to save $8,919.45 a year - CNN/Money
Gettysburg's Cannons Roar Again as Cyclorama Restored - Bloomberg
Look what popped up at USA Today when one of those annoying ads encroached into what is normally a content area of the website.
Presumably these ads are effective since they have continued to spread like a virus on the internet over the last year or so (it is particularly bothersome when one actually prevents you from clicking on something underneath it, sometimes taunting you by receding and then jumping back out when you get near your target).
I don't know about you, but every time one gets in front of me, I make a mental note not to buy anything from that company. Anyway, it made for a funny image.
Someone recently wrote in a dismissive, almost pompous, tone something to the effect of, "Everyone knows gold doesn't do well in recessions". But, is that true? Well, it depends...
This is common amongst financial writers who believe that history began in 1982.
So, what do gold price movements during recessions depend on?
As shown above, the gold price has moved up and down during recessions, the important distinction between the two being that the direction has been decidedly UP during commodity bull markets and DOWN during commodity bear markets.
Over the last thirty-some years, since the price of gold was allowed to seek a market value, there have been two commodity bull markets, the first ending around 1980 or 1981 and the second beginning around the turn of the century. In recessions during both of those periods, the price of gold has risen.
During the long commodity bear market, from 1981 to 2000, recessions resulted in a lower gold price.
The chart above shows price changes during the NBER defined recessions as well as an expanded time period (six months on either side) which serves to reinforce the point made by using the standard definition.
Save for the 1980 transition period, the data seems to be pretty clear.
Where does that leave us today?
If the 1974-1975 period offers a good model for the current period - a pause during the middle of a 12-18 year run which is typical for these cycles - then gold investors have nothing to fear. Regardless of when the current recession officially began and when it ends, the gold price is likely to move higher.
If, on the other hand, the summer plunge in the natural resource sector is a 1980-like event, where prices for both gold and crude oil made multi-decade highs, then that's an entirely different matter.
For anyone who has looked closely at the question, it should be clear that the more valid comparison is the former and not the latter.
One of the unfortunate consequences of plunging crude oil prices is that it throws the recent strategic planning for energy exploration and the development of alternative energy sources on its head.
Really. Why would Brazil attempt to develop their newly discovered (and very costly) giant offshore oil find if they can't pump the stuff out at a profit? They've got plenty of sugar cane to run their cars and the rest of the world isn't clamoring for any more black goo at the moment.
They're about to cut production at OPEC.
While $150 crude oil may have seemed ridiculous over the summer, prices at under $70 seem equally out-of-step in the fall, especially if you're working on a project that requires a price of $80 or $90 to break even.
Last week, former CIA director James Woolsey quipped:Every decade or 15 years or so, the Saudis drop the price of oil to where the economic impact wipes out most of the projects in the world that could lead to an alternative for oil. Then, after the projects get canceled, the Saudis let the oil price drift back up.
An intriguing idea to be sure, which is not to say that the Saudis had anything to do with the recent 50 percent haircut for their most important export.
Well, actually, "life-blood" would be a better characterization than "important export".
North of here, our Canadian neighbors are beginning to ask some hard questions now that the new reality of lower oil prices is starting to settle in.
In this report from today's Globe & Mail, they're wondering if digging all that tar out of the ground makes as much sense today as it did back in June.
Russia, Venezuela, Iran...
Other than the potential for a severe economic recession, the development of the oil sands is likely the most important economic and political issue for Canada for the coming decade. Based on present expectations, the oil sands will host at least $170-billion of investments during this period. Canada is already the main oil supplier to the U.S., and proven oil resources in Alberta are second only to Saudi Arabia.
The challenges remain daunting. The costs of mining and upgrading the resource have skyrocketed, and the break-even point for new projects is close to $85 (WTI) a barrel, an increase of $20 from just a year ago. Volatile oil prices, coupled with environmental and regulatory risks, and the massive investments required for long-term returns, have led many existing and potential players to adopt a more “prudent,” that is, conservative, approach. Over the last few months, the stock market correction has been particularly devastating for the oil sand players.
The impact of cheap oil is starting to be felt in ways never dreamed of just a few months ago.
Come to think of it, despite all their protestations a while back, the Saudis really did step up and boost production when the time was right.
Maybe Woolsey was right.
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