A short break

Those of you who may have wondered if there was something amiss around here in recent weeks would have been correct in your suspicion. After a brief illness, a dear family member passed away late last night and she will be sorely missed by all of us.

Look for something new here in a few days or so.

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The shadow banking system in stick figures

Marketplace senior editor Paddy Hirsch explains what the shadow banking system is and why it needs to be bailed out via the TALF (Term Asset-Backed Securities Loan Facility) program.

Shadow banking from Marketplace on Vimeo

About halfway through he talks about how the shadow banking system accounted for 60 percent of all lending with traditional (i.e., regulated) banks contributing just 40 percent. Maybe we should just go back to the 40 percent of non-toxic lending...

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"I'm passing out"

You'd think that if Columbia professor David Buckner knew he was about to pass out and he was able to tell Glenn Beck so, he'd maybe try to get on the ground so he doesn't hurt himself.

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Kennedy: "It looks almost Madoffian"

They've already had quite a few interesting items over at Bloomberg this week and it's only Tuesday morning. Here's a commentary by Paul Kennedy, author of the must-read jaunt through history - The Rise and Fall of Great Powers. He fears for the U.S. dollar.

The third dog barking in the night was the dramatic news last month that the Federal Reserve Bank of New York (that is, on Fed chief Ben Bernanke’s instructions) would purchase as much as $300 billion of U.S. government debt and furthermore double its purchases of Fannie Mae and Freddie Mac housing securities to an enormous $1.45 trillion. No wonder the Financial Times headline on the next morning read “Fed Purchase Plan Stuns Investors.”

Now I am not a professionally trained economist or banker, merely a historian of the reasons why Great Powers seem to have risen over time, and then steadily collapsed some generations later. Yet it appears to my non-scientific mind that if a particular national government decides on the one hand to issue more and more Treasury debt, and on the other hand to have its national bank purchase large amounts of the same, it runs a serious risk of scaring investors about its long-term credit- worthiness.
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Heavens, it looks almost Madoffian! Just think about it. If you and I could issue a loan to our neighbor, then proceed to buy it before he even reaches for his wallet, what would the eventual value be down the street? What, the neighbor might ask, were we doing?

And they're just getting started...

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Stephen Roach on false recoveries

In a piece at Bloomberg today, Stephen Roach, Chairman of Morgan Stanley Asia and well known "perma-bear" (who happens to have have been right about many more things than any "perma-bull" in this decade), thinks that policymakers have it all wrong.

The Fed wants to get credit flowing again to still overextended American consumers, especially in mortgage markets. The Congress wants to stop the bleeding in the housing market -- irrespective of the persistent imbalance between supply and demand. And the White House wants consumers to start spending again -- to avoid the perceived pitfalls of the “paradox of thrift” brought about by too much saving.

Put it together and it all smacks of a dangerous sense of déjà vu: promoting a false recovery by kick-starting overextended, saving-short American consumers to borrow once again by leveraging their major asset.

Fortunately, the American consumer is smarter than the quick-fix Washington mindset. Shell-shocked families -- especially some 77 million baby boomers for whom retirement planning is an urgent imperative -- know they have no choice other than to save. The personal saving rate has risen from 0.8 percent to 4.2 percent in the past six months alone, and is on its way to a new post-bubble equilibrium that I would place in the 7.5 percent to 10 percent zone.

Yet policy makers fear such an outcome...

There are no easy solutions here. The last easy solution was used up in 2002-2003 when a stock market bubble transitioned to a housing bubble.

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Retail sales unexpectedly decline

To the surprise of most analysts, the Commerce Department reported retail sales fell 1.1 percent in March following an upwardly revised gain of 0.3 percent in February, the most recent decline paced by tumbling sales of electronics, appliances, and automobiles.
On a year-over-year basis, retail sales were down 9.4 percent, an improvement from the December low of minus 10.5 percent, but worse than February's 7.9 percent annual decline.

Excluding automobiles, retail sales fell 0.9 percent in March after a gain of 1.0 percent in February and, from year ago levels, retail sales ex-autos are now down 6.0 percent.

The higher jobless rate was blamed for the most recent downturn, lower prices and other incentives at clothing stores and auto dealers failing to spur buying interest from the public, however, a relatively late Easter holiday may have also had an impact.

Sales at electronics and appliance stores tumbled 5.9 percent, automobile dealers saw a 2.5 percent reduction in overall sales, and spending at clothing stores fell 1.8 percent.

With the exception of modest increases at food and beverage stores and for health and personal care items, receipts for every other retail category declined. The 1.4 percent drop in spending at food services and drinking places was the sharpest decline in three years.

The effect of the long, slow decline in housing continues to be felt in the home furnishings industry as sales fell 1.7 percent in March and are now 13.1 percent lower than a year ago.
The year-over-year decline in furniture sales is exceeded only by the 34 percent decline in gasoline station sales (mostly due to lower prices) and the 26 percent decline in automobile sales (mostly due to fewer sales).

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Tuesday morning links

TOP STORIES
• Goldman Sachs to raise $5bn from investors - Telegraph
• Treasury Plans to Tap Fannie Mae Chief to Run Bailout - Wash. Post
• Bernanke Sees Signs U.S. Contraction May Be Slowing - Bloomberg
• The Case of the Missing Month - Norris, NY Times
• Wells Fargo May Need $50 Billion in Capital, KBW Says - Bloomberg
• Much Vilified, Financial Titans Find a Friend in Bloomberg - NY Times
• The Global Financial Crisis: How bad will it get? - Debt Deflation
• What’s the tab for the bailout? Take your pick - MSNBC

MARKETS/INVESTING
• Oil gains on bank reports - AP
• India gold imports resume as prices fall - Commodity Online
• Dollar’s Fade Won’t Support Wall Street’s Party - Kennedy, Bloomberg
• Survey finds all-time low in Americans' retirement confidence - MarketWatch
• A Simple Decision - Butler, Investment Rarities
• “Economic Stability?” - Saut, Raymond James

ECONOMY
• Retail Sales Unexpectedly Drop as Jobs Evaporate - Bloomberg
• Wholesale prices fall unexpectedly in March - AP
• Oregon's jobless rate soars to 12.1% in March - Seattle Times
• Averting Depression as Consumer in U.S. Fades - Roach, Bloomberg
• Investment guru fears inflation - CHINADaily

INTERNATIONAL
• China’s Fan Calls for Asia to Diversify Reserves - Bloomberg
• Singapore economy shrinks more than expected - MarketWatch
• China imports record volume of iron ore in March - CHINADaily
• Unemployment Surges in Germany’s Golden City - NY Times
• Carry Trade Comeback Means Biggest Gains Since 1999 - Bloomberg
• Fed's Fisher: China cannot abandon U.S. - CNN/Money
• China housing prices could halve by 2011: report - MarketWatch
• McDonald's to step up hiring in China this year - CHINADaily

HOUSING
• Investors Dive Back into Las Vegas Housing Market - Las Vegas Now
• Latest Housing Market Indicator: More Siblings Sharing Rooms - WSJ
• Foreclosure sales stalled by red tape - MSNBC
• The price is right - MarketWatch

FED/TREASURY/BANKING
• Bernanke sees 'signs' decline is easing - CNN/Money
• Libor Falling Fastest Since January on Credit Revival - Bloomberg
• Fed Buys $7.37 Billion in Two- and Three-Year Debt - Bloomberg
• TALF Needs Chaperon Before Investors Will Dance - Bloomberg

INTERESTING
• North Korea to end talks, restart nuclear program - MarketWatch
• Lehman Sitting on Bomb’s Worth of Uranium - Bloomberg
• When fast food gets in the fast lane - LA Times

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Laid-off dad puts resume on cars

These human interest stories are only going to get more heart-jerking throughout the year and, unfortunately, into 2010 - the American dream is quickly fading for many.

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It's the lost jobs, not the mortgage payments

Filed under the category "no easy solutions to the foreclosure crisis" comes a report at CNN/Money about how the recent White House plan to rescue homeowners by lowering their mortgage payments may be a bit wide of the mark given all the recent job losses.

Unemployment is a bigger reason for missed mortgage payments than high interest rates, according to a study from the Boston Federal Reserve that raises questions about President Obama's plan to stem foreclosures by modifying loans.

Borrowers are more likely to default on their payments because they have lost their jobs or because the price of their homes has plummeted than because of tough terms on their mortgages, the study found.

Normally, foreclosures are an after-effect of recessions - people lose their jobs, then they lose their homes because they can't make their mortgage payments. It seems as though we're now just entering that phase after the loss of 3.7 million jobs over just the last six months.

What's the solution? Naturally, it's the same solution that has been offered for nearly every phase of the financial crisis - more money from the government.

Since the government owns or guarantees most of the mortgages in the U.S. these days, it's more than a little funny that one agency in Washington D.C. would be lending you money so you can make a payment that winds up in another Washington D.C. office.

The economists suggest that the government could instead replace part of an individual homeowner's lost income from a job loss through loans and grants and help those whose predicament is more permanent become renters.

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Rogers likes agriculture over oil over gold

Famed investor Jim Rogers was on Bloomberg TV earlier today and had a few thoughts on oil, gold, and his new book - A Gift to My Children: A Father's Lessons for Life and Investing.

That's not a very flattering freeze-frame above - parts 2 and 3 are also available at YouTube.

For at least the last year or so, he's been pretty consistent about his favorite investment over the short-term and there were no changes today - agricultural commodities.

On market bottoms:

I don't know if this is going to be as bad as the 1930s - it may well be. But a rally is not unusual at a time like this. We've certainly seen a bottom. Is this the bottom? I don't think so. I think we're going to see more bottoms in the next few years.
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I would expect to see more problems. Probably this fall or next year we're going to see currency problems. We're going to see more bankruptcies, so there are going to be more problems in the financial markets which does not mean that we can't have big rallies.

We're having one.

I don't know how much longer it's going to last. I am not participating - at least in the stock part of the rally. I'm participating by buying commodities because, if the world economy is going to be better, commodities are going to be the best place to be. If the world economy is not going to be better, commodities are still going to be the best place to be, or at least the least bad place to be.

On whether to hold oil or gold through the rest of the year:

Of those two I would rather own oil. The IMF is trying to sell its gold. The IMF is one of the largest holders of gold, so you’ve got this huge supply overhang. Whether they sell it or not, the world is expecting them to sell it, so I'd rather own oil than gold.

I'd rather own agriculture than either.

Apparently he hasn't heard about the willing buyers in Asia for all the IMF gold - that seems to be the consensus opinion of nearly all who have commented on this subject. Interestingly, for as far back as I remember, Rogers has never been real bullish on gold simply because, in his view, central banks have too much of it and are more than happy to continue to sell it.

It's a half-hour long interview - here's the summary:

00:00 Inflation; Asia; agricultural commodities
06:21 Investors should expect more "bottoms"
08:40 Commodities; U.S. stocks, bonds "last bubble"
13:24 Japan love hotels, stocks; Thai politics
18:09 Currency crisis; agriculture, China strategy
26:27 Prefer oil to gold; China, Brazil real estate
28:44 Angola. Ethiopia; U.S. bailouts, economy

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The Fed's "squandered independence"

With growing optimism that the worst may now be behind it for the U.S. economy, a growing number of observers are starting to look at what sort of an economic landscape might take shape should the optimists be right, given all the money creation over the last year or so to bailout financial firms and effectively nationalize the mortgage lending industry.

According to Allan Meltzer, one of the world's foremost experts on U.S. monetary policy, the outlook is not good and it has much to do with the historical role of the Federal Reserve as an independent organization as described in this report at Bloomberg.

Meltzer says political pressure will prevent Bernanke, 55, and fellow policy makers from withdrawing liquidity quickly enough as the economy recovers. That’s similar to the pattern that occurred back in the 1970s, he says. Then-Chairman Arthur Burns allowed excessive money-supply growth because he was unable or unwilling to resist pressure from President Richard Nixon’s White House to hold down unemployment, leading to the “great inflation” of that era, he says.

Now, Bernanke and fellow policy makers have “squandered their independence” by becoming involved in bailouts of financial firms and by taking long-term and illiquid assets onto their balance sheet, Meltzer says. “They don’t have the political ability to control inflation.”

It really is too bad for the central bankers of the world that the labor market is a lagging indicator. During the latter stages of a recession, when other economic statistics begin pointing unambiguously upward, job losses generally continue at a healthy pace and this can make reining in easy money an exceedingly difficult task.

That's one of the most important reasons why the Federal Reserve was created as an independent organization - to do what's best for the economy in the long-term regardless of the political whims and wishes in Washington.

[Note: Yes, the most important reason for the Fed's independence is its unholy relationship with big New York banks, but that's an entirely different discussion.]

Anyway, with many now seeing "green shoots" all over the landscape, the inflation/deflation debate looks set to heat up once again, and Fed policy is right in the thick of things.

“All that money is going to find a home,” says Ken Mayland, president of ClearView Economics LLC in Pepper Pike, Ohio. He sees oil prices increasing to “$80, $90, $100 before the end of next year” from $52 a barrel now.

Commodity prices may be more prone to rise as the world economy recovers because tight credit and volatile pricing will discourage investment in new supplies, says Mark Zandi, chief economist at Moody’s Economy.com, in West Chester, Pennsylvania.
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Some Fed policy makers seem more worried about deflation than they do about inflation. A sustained fall in prices can debilitate the economy by causing consumers and businesses to postpone purchases.

“For some time to come, disinflation, and even deflation, will represent greater risks than inflation,” San Francisco Fed President Janet Yellen said in a speech on March 25.

At the root of that concern is substantial and growing slack in the economy, which, according to White House chief economist Christina Romer, is operating 5 percent to 10 percent below potential. That means the economy will have to grow a percentage point above trend -- reckoned by the administration to be about 2.5 percent annually -- for five or more years before the slack is used up.

The Phillips curve -- developed by economist A.W. Phillips using Keynesian concepts -- posits that such excess will reduce inflation as firms stuck with idle capacity cut prices and workers facing layoffs accept smaller wage hikes.

Not everyone at the Fed buys into that argument. Noting that some economists forecast substantial slack will keep inflation low for several years, Richmond Fed President Jeffrey Lacker said in a March 26 speech that he would be “cautious about relying on this correlation.”

The Fed is “running a laboratory experiment” on what drives inflation: the money supply or the output gap, says Laurence Meyer, a former Fed governor and now vice chairman of St. Louis-based Macroeconomic Advisers

“How it turns out will do a lot to influence the economic debate,” he says, adding that his money is on Bernanke.

How it turns out will also do a lot to influence whether the Federal Reserve continues to exist in its current form and whether there are major revisions to current economic theory.

If the amount of inflation bears any resemblance to the size of recent asset bubbles or the volume of money printing deemed necessary to combat their bursting, there may be a wholesale rethinking of what a central bank is and what economists do.

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Two thousand economists crunching numbers

Just in case anyone was wondering what some of the faces look like behind all the numbers that come out of the Bureau of Labor Statistics...

[I have no idea what that clicking sound is, the one that is heard when this video is loaded on MS Explorer under Vista - I don't think a WaPo video has ever been embedded here before.]

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Monday morning links

TOP STORIES
• GM told to prep for bankruptcy filing - Reuters
• Gross Raises U.S. Debt Holdings to Highest Since 2007 - Bloomberg
• Schwarzenegger Debt Defies Academics as Negotiations Trump Bids - Bloomberg
• Goldman Sachs Raises $5.5 Billion Private-Equity Fund - Bloomberg
• Tanzanian Royalty CEO Provides Clarification On Barron's Article - Business Wire
• Russell 2000 Rising 36% Flashes Warning for S&P Rally - Bloomberg
• Commodities follow stock market but demand is key - Reuters
• Gas prices: Up 5% in three weeks - CNN/Money

MARKETS/INVESTING
• Oil falls below $50 on IEA demand forecast - AP
• Gold Premiums firm to 2-month high, Indian festival eyed - Reuters
• Greed, fear and the US dollar - Commodity Online
• The pitfalls of short-selling - Fleckenstein, MSN Money
• Green Shoots over Thin Ice - Hussman Funds
• Awake and Sing! - Rich, NY Times

ECONOMY
• Manufacturing, Retail Reports May Disappoint - Wash. Post
• Why We're Not at the Beginning of the End - Robert Reich Blog
• In this recession, sin is a loser - MSN Money
• More companies meet virtually as conventions canceled - USA Today
• US charities take double blow as economy slows - AFP

INTERNATIONAL
• China’s Lending Surge ‘Cause for Worry,’ UBS Says - Bloomberg
• Japan Producer Prices Fall at Fastest Pace Since 2002 - Bloomberg
• China Slows Purchases of U.S. and Other Bonds - NY Times
• Thai protest violence mounts as army cracks down - MarketWatch
• India's gold exports to Dubai boom - Commodity Online
• China Mulls New Stimulus to Boost Consumption - Bloomberg
• The thoughts of Governor Zhou - MarketWatch
• The dark side of Dubai - The Independent

HOUSING
• Generation Y: Bullish on U.S. Housing Market - Earth Times
• Foreclosure Sales Stalled by Red Tape - Wash. Post
• Housing Slump Begins to Hit Manhattan & the Hamptons - ForexHound
• Haven't First-Time Homebuyers Heard of Roubini? - Seeking Alpha

FED/TREASURY/BANKING
• Bernanke Bet on Keynes, Meltzer Sees 1970s-Style Inflation - Bloomberg
• Treasurys gain ground ahead of Fed purchases - MarketWatch
• Bailed-out banks face probe over fee hikes - Reuters
• Fed’s Flood May Leave Democracy Needing Bailout - Bloomberg

INTERESTING
• Celeb Realty Realities - ABC News
• Goldman Sachs hires law firm to shut blogger's site - Telegraph
• In Boston, Paper’s Peril Hits a Nerve - NY Times

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They make golf carts in Augusta?

It looks like Messrs. Mickelson and Woods are putting on quite a show today at the Masters on a beautiful Easter Sunday - some news about the local economy in Augusta, Georgia.

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Easter Sunday links

TOP STORIES
• Market rally could trip over the bottom line - AP
• Credit Suisse starts shutting U.S. offshore accounts - Reuters
• Investments Can Yield More on K Street, Study Indicates - Wash. Post
• China's twin-pronged strategy on commodities - Commodity Online
• Is That Recovery We See? - Mauldin, SafeHaven
• Crisis Altering Wall Street as Big Banks Lose Top Talent - NY Times
• Obama Stakes His Fortunes on Failed Banksters - Bloomberg
• Up from the abyss - LA Times

MARKETS/INVESTING
• Wall Street: Bracing for profit shock - CNN/Money
• Gold is an undervalued asset held by IMF - Commodity Online
• Target-date retirement funds: Not quite 'set it and forget it' - LA Times
• Investing Rules Remade for the Post-Crisis Era* - Wash. Post
• Demand for oil drops as outlook for G7 remains grim - Guardian
• He Doesn’t Let Money Managers Off the Hook - NY Times

ECONOMY
• Preview: Retail Sales Probably Rose, Output Fell - Bloomberg
• Obama sees signs of economic progess - Reuters
• Staying Covered After a Layoff - Wash. Post
• When an Economic Cure Fights Itself - Stein, NY Times
• Green shoots and tea leaves - Krugman, NY Times

INTERNATIONAL
• Chinese premier says economy improving - AP
• Ireland is ECB's sacrifical lamb to satisfy Germans - Telegraph
• China Must Make Yuan Convertible to Extend Influence - Bloomberg
• The shoots of recovery look pale green at best - Guardian
• China Loans, Money Supply Jump to Records on Stimulus - Bloomberg
• Dubai emerges as big export market for Indian gold - Commodity Online
• Toyota operating loss may hit $5 billion in 2009/10: report - AP
• China's runaway steel train - Globe & Mail

HOUSING
• Real Estate: Taking a look at pending home sales - Hometown Annapolis
• First-time buyers a ray of sunshine in dismal housing market - Eagle Tribune
• It's Now a Renter's Market - BusinessWeek
• Hamptons, N.Y. Home Sales Plunge 67% in First Quarter - Bloomberg

FED/TREASURY/BANKING
• Restore Order and Win a Financial War - Blinder, NY Times
• North Carolina, Colorado Banks Shut as 2009 Failures Reach 23 - Bloomberg
• Banking Luddites threaten to wreck the engine of recovery - Telegraph
• U.S. budget deficit triples to $957 billion for year - MarketWatch

INTERESTING
• International Space Station Comes Together - USA Today
• Some U.S. troops tempted by reconstruction cash - LA Times
• Software That Monitors Your Work, Wherever You Are - NY Times

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