IMF And Fed Data: A Wake-Up Call For Long Term Investors [View article]
Lets put some of your numbers in perspective.
Global GDP is around $77 trillion and and lets say debt is around 3X this amount or $231 trillion.
In this light $11 trillion is a rounding error and is clearly insufficient to absorb losses of any serious magnitude which is why US banks are making few domestic loans while reducing their exposure to Europe.
Thank Europe For Friday's Market Upheaval [View article]
It's highly unlikely the Jobs program will pass and the uber liberal NYT ran a piece today saying reductions in payroll taxes would not spur job growth as the math is not compelling. And the idea the program would be paid for by cuts is laughable as any cuts would be largely illusory and in future years, increasing the deficits and debt in the short term because of asymmetry between spending and savings.
As the author notes, the real problem is in Europe where Greece is not implementing measures approved by parliament in the face of widespread opposition to spending cuts and labor market reforms. Resultantly, there is now open talk about Greece leaving the euro area and fending for itself.
Wolfgang Schäuble, the German finance minister, said if Greece does not meet the conditions it agreed to, as assessed by monitors from the International Monetary Fund, European Central Bank and European Commission, then payments will stop. He then added, Greece would then need to determine how to access financial markets without help from the troika.
The prime minister of the Netherlands on Wednesday said that countries receiving aid should either cede control over their budgets or leave the euro zone. “Countries which are not prepared to be placed under administratorship can choose to use the possibility to leave the euro zone."
There are fissures all across Europe with little support for transfers to profligate and reluctant states. It's only a matter of time before Greece, and perhaps others, leave the zone. And when this happens the markets will shudder as the costs will be staggering.
Warren Buffett's Bank Of America Deal [View article]
It's classic Buffet. He gives himself plenty of time, is paid to wait, is expensive to dispose of and enjoys plenty of upside. The warrants increased in value $350 million today. The terms of the other deal are shown below (sorry its a bit messy).
Below are the terms of all three deals: Bank of America Goldman Sachs General Electric ----------------------... Investment size $5 billion $5 billion $3 billion Annual dividend 6 percent 10 percent 10 percent Warrants 700 mln 43.5 mln 135 mln Pct of then-outstanding* 7 pct 11 pct 1 pct Redemption premium 5 pct 10 pct* 10 pct Strike price $7.14 $115 $22.25 Pre-deal share price* $6.99 $120.78 $25.50
The Subprime Debacle, Act II Part II [View article]
Obviously others were aware of the widespread collusion, deception, corruption and racketeering taking plaguing Wall Street but, predictably, when the problem came to light the Treasury and Fed responded to a very complex problem with only liquidity measures.
And while there was a liquidity crisis, it was borne of a solvency issue that remains to this day. Only through unprecedented purchases of MBS by the Fed, fraudulent stress tests which allowed the banks to raise capital, low interest rates and a steep yield curve, relaxed accounting standards and other devices have the banks been able to remain viable while burdened by toxic assets and fundamental solvency issues.
For reasons not entirely clear, we refuse to address the criminal activities that defined the sub-prime crisis and remaining solvency issues. Quoting Charles Hugh Smith “The U.S. government and the Fed had a stark choice: either impose the rule of law and indict and convict hundreds, if not thousands, of people who perpetrated and profited from the systemic fraud and embezzlement at the heart of the mortgage and mortgage-securities industries, or socialize the corrupted, poisoned markets and use taxpayer funds to prop up the wizened shell of a stripmined market and reward the criminals with freedom.
They chose to reward the criminals and prop up a simulacrum market with only one buyer: the Federal Reserve. You can go to the the Fed's balance sheet and see the $1.2 trillion in mortgage-backed securities it owns. There is no effort to hide the brazen socialization of what once was a private-sector, free market.
When the well has been poisoned, the only players dumb enough to drink from it are the taxpayers, who have no choice as the politico toadies of the investment banking/financial Power Elites have funneled some $13 trillion in cash, backstops and guarantees into their "partners" who fund their campaigns and write the laws via their lobbyist proxies.
By failing to cleanse the financial sysytem of endemic corruption and force banks to deal with fundamenatal solvency issues we are underwriting economic policies designed to perpetuate failure and misery. QE2 will be nothing more than Japan2.
Wall Street Breakfast: Must-Know News [View article]
OECD sees global economy slowing. The global economy appears to be slowing, and most developed and large developing countries are already in a downturn, according to the OECD's latest composite leading indicators. It's the second month of decline for the forward-looking CLIs, which are designed to provide early signals of turning points between economic expansion and slowdown, and "the outlook given by the CLIs for Canada, France, Italy, the United Kingdom, Brazil, China and India points strongly to a downturn." ______________________...
Against this backdrop, further QE, continued structural imbalances, and extreme international currency and capital strains, it's only appropriate that the market rally to new highs.
Wall Street Breakfast: Must-Know News [View article]
Obama vetoes foreclosure bill. In the first effective veto of his presidency, Obama blocked a bill that would have required state and federal courts to accept the validity of out-of-state document notarizations; the bill would have made it harder to challenge the authenticity of foreclosures and other legal documents. ______________________...
I have mixed feelings about this whole mess but the Community Organizer in Chief's veto of this foreclosure bill was entirely too predictable. Whatever the shortcomings in title transfers, we know money is owed and the people living in the house owe it.
Wall Street Breakfast: Must-Know News [View article]
With a deteriorating US economy and the mosaic of snippets from above, including fading recoveries in Japan and the eurozone, it's easy to agree with Roubini's sober, if not somber, assessment of the global economy. Consistent with this, the Fed is likely to join Japan in further quantitative easing which is likely to depreciate the value fiat currencies prompting European central banks to suspend gold for bond swaps. This appears to the mean view to which all other views revert.
Edward, you make a number of well substantiated points which support your broader thesis that banks are being kept alive through fraudulent accounting, punishing rates on savings and artificially low interest rates that permit interest rate arbitrage.
All of these measures, by design, work to the advantage of large banks and enable the steady transfer of wealth from households and others to larger financial institutions. Even if there is not loan demand today, the transfer of wealth will weaken the capacity of future borrowers to enable lending institutions to shoulder increasing levels of NPL's.
This will ensure weaker loan demand in the future, diminished economic activity and the need for greater cash cushions to offset growth in NPL's. In broad terms, we are repeating the mistakes of Japan.
Tim is basically living in the past as president of the NY Fed; the fact that he largely responsible for the fate of the dollar and the future of our finances has not dawned on him.
The very essence of being Secretary of the Treasury may be so challenging, he takes comfort and solace in dispensing financial huggies to his former buddies who secretly view him as a water boy. The G20 dismissed him and his message as being irrelevant.
Stress tests, recapitalization and PPIP's were announced to be essential to revitalization the banking sector. PPIP never happened and the perceived success of the banking system rests upon a raft of fraudulent accounting gimmicks including effective repeal of FAS 157, whatever guideline which permits banks to recognize income when their bond prices decrease and the ability to shuffle about, increase or decrease reserves at will.
As to the stress tests, at the end the amount of additional capital required was "negotiated" rather than determined by hard analytics.
Consumer credit is lousy but that only puts it on par with all of the other asset sectors. From Rosenberg's daily missive:
Whether this is due to a lack of demand (the National Association of Credit Managers index fell in May) or supply, the reality is that banking sector is contracting and once the fiscal largesse is through the system, so will the economy. Banking sector assets contracted at a 10.8% annual rate and the declines were broad based:
-Residential mortgages fell 10.4% at an annual rate; -Home equity loans of credit fell 4.5%; -Commercial real estate loans slipped 8.9%; and, -Consumer credit slid at a 16.6% pace (with credit cards down an amazing 24.8%).
Worries of a New Debt Contagion Rattle Wall Street [View article]
Under the IMF/EU proposed plan Greece's debt to GDP will actually worsen between now and 2014. Some feel it will peak in 2015, strongly underscoring the point that the issue of sovereign debt will be with us for some time and during this period it is certain to spread to other countries.
Before I share some material from the FT, let me add that the level of restructuring being proposed for Greece, as measured by the primary deficit, is of epic proportions and few countries have successfully achieved this order of change. This points to how far out of control matters are in Greece and how difficult it will be to rebalance the primary account. From the FT:
The presentation of the main economic arithmetic behind the Greek Economic Policy Programme (EPP), as agreed with the IMF, EC and ECB, reveals the enormity of the task ahead. The programme envisages that the general government deficit will be cut from 13.6% of GDP in 2009 (which could be revised to about 14%) to 8.1% of GDP this year, 7.6% in 2011, 6.5% in 2012, 4.9% in 2013 and 2.6% in 2014. Assuming Greek real GDP expansion is about 2.1% by 2013-14, this implies the debt/GDP ratio would peak at 149% in 2013 (note that the authorities seem to be including an assumption that the public debt/GDP ratio will be revised up 7pp, which would take the 2009 ratio to 122%).
Hidden Benefits of a Greek Debt Default [View article]
I'm sure there are bankers supporting "reform" and additional lending to Greece but the primary culprits behind this bankrupt idea are the political leaders who supported the eurozone and the technocrats in Brussels who embrace collectivism in any and all forms. On any given day, you can see thousands of these little creatures, who populate the EU, EUC, ECB, ESCB and EuroStat, donned in trench coats scurrying about with Blackberry's while busily texting and planning the economic revival of Western Europe. For these progressives, a default within the EU would represent failure of the EU of the itself; this would create a serious fissure in the groundless arguments for collectivism and the need for thousands of apparatchiks. Who knows they might have to join the ranks of many in Greece and get a real job.
It's still early in the game but it comes as no surprise that revenue misses (7) are outpacing earnings misses (5). Notwithstanding the global inventory correction, I do not think final demand is firmly in place and revenues are harder to "manage" than other P&L line items.
Sweden Did Not Nationalize Entire Banking System [View article]
Rather than deal with the myriad problems within the banking sysytem, we have devised an elaborate scheme to work around the underlying problem and treat the symptoms. Here is a more complete checklist (developed my someone else) and current status as to how we have handled the banking crisis:
1- Have the Federal Reserve reduce Fed Funds Rate to Zero Done
2- Have the Federal Reserve hold down rates for a historic length of time i.e. a "very extended period" Done
3- Have Federal Reserve flood market with money (i.e. Quantitative Easing) Done
4- Have Government initiatives that support asset appreciation (i.e. housing, auto programs) Done
5- Have accounting changed that forced asset liquidation for mal-investments (see Accounting) Done
6- Change Margin requirements or Leverage Pricing ISE had instituted special rebates for specific option liquidity providers - April 1 Done
NYSE Euronext's U.S. Options Exchanges Announce New Pricing and Fee - April 5 Done
ISE to Introduce a Modified Maker/Taker Fee Schedule - March 29 Done
New interest rate futures contracts and futures options on Eurodollar & US Treasuries Done
7- Spin or exaggerate economic news through the media in a positive manner only In Process
8- Decrease risk premiums and increase levels of speculation Returning
Phantom volume at 3 am on Sunday night In Process
Is volume merely hiding in plain sight, dark pools and structured notes? In Process
The obvious overhang of CFTC position limits In Process The cross-pollination of inter-continental routing capabilities In Process
9- Establish a Carry Trade that will flow monies to US assets (i.e. re-establish Yen Carry Trade) In Process Market Melt Up? More Like Yen Meltdown In Process
10- Weaken the US$ to solidify Carry Trade returns and reduce currency risk Expected
11- Give the market a surprise jolt -> China revising currency peg (China biggest US collateral holder) Expected
12- Increase the Velocity of Money by instilling an inflation worry in the public Failing to mixed
13- Place restrictions on market shorting (i.e. shortages on key dates) Expected
I agree with much of what the author submits but if nothing else the Volcker rule would remove the insanity of offering these grotesque financial behemoths FDIC insurance and access to the Fed window while, simultaneously, allowing them to gamble and play in global casinos.
We have the regulatory authority to contain and manage systemic risk: stringent underwrting standards. If the loans underlying MBS or CDO's are sound, then you can slice, dice and securtize as much as you want and expect to be repaid. There are a number of reforms I would like to see but one of the most important is limiting CDS to those that actually hold debt being hedged.
IMF And Fed Data: A Wake-Up Call For Long Term Investors [View article]
Global GDP is around $77 trillion and and lets say debt is around 3X this amount or $231 trillion.
In this light $11 trillion is a rounding error and is clearly insufficient to absorb losses of any serious magnitude which is why US banks are making few domestic loans while reducing their exposure to Europe.
I'm short financials.
Thank Europe For Friday's Market Upheaval [View article]
As the author notes, the real problem is in Europe where Greece is not implementing measures approved by parliament in the face of widespread opposition to spending cuts and labor market reforms. Resultantly, there is now open talk about Greece leaving the euro area and fending for itself.
Wolfgang Schäuble, the German finance minister, said if Greece does not meet the conditions it agreed to, as assessed by monitors from the International Monetary Fund, European Central Bank and European Commission, then payments will stop. He then added, Greece would then need to determine how to access financial markets without help from the troika.
The prime minister of the Netherlands on Wednesday said that countries receiving aid should either cede control over their budgets or leave the euro zone. “Countries which are not prepared to be placed under administratorship can choose to use the possibility to leave the euro zone."
There are fissures all across Europe with little support for transfers to profligate and reluctant states. It's only a matter of time before Greece, and perhaps others, leave the zone. And when this happens the markets will shudder as the costs will be staggering.
Warren Buffett's Bank Of America Deal [View article]
Below are the terms of all three deals: Bank of America Goldman Sachs General Electric ----------------------... Investment size $5 billion $5 billion $3 billion Annual dividend 6 percent 10 percent 10 percent Warrants 700 mln 43.5 mln 135 mln
Pct of then-outstanding* 7 pct 11 pct 1 pct Redemption premium 5 pct 10 pct* 10 pct Strike price $7.14 $115 $22.25
Pre-deal share price* $6.99 $120.78 $25.50
The Subprime Debacle, Act II Part II [View article]
And while there was a liquidity crisis, it was borne of a solvency issue that remains to this day. Only through unprecedented purchases of MBS by the Fed, fraudulent stress tests which allowed the banks to raise capital, low interest rates and a steep yield curve, relaxed accounting standards and other devices have the banks been able to remain viable while burdened by toxic assets and fundamental solvency issues.
For reasons not entirely clear, we refuse to address the criminal activities that defined the sub-prime crisis and remaining solvency issues. Quoting Charles Hugh Smith “The U.S. government and the Fed had a stark choice: either impose the rule of law and indict and convict hundreds, if not thousands, of people who perpetrated and profited from the systemic fraud and embezzlement at the heart of the mortgage and mortgage-securities industries, or socialize the corrupted, poisoned markets and use taxpayer funds to prop up the wizened shell of a stripmined market and reward the criminals with freedom.
They chose to reward the criminals and prop up a simulacrum market with only one buyer: the Federal Reserve. You can go to the the Fed's balance sheet and see the $1.2 trillion in mortgage-backed securities it owns. There is no effort to hide the brazen socialization of what once was a private-sector, free market.
When the well has been poisoned, the only players dumb enough to drink from it are the taxpayers, who have no choice as the politico toadies of the investment banking/financial Power Elites have funneled some $13 trillion in cash, backstops and guarantees into their "partners" who fund their campaigns and write the laws via their lobbyist proxies.
By failing to cleanse the financial sysytem of endemic corruption and force banks to deal with fundamenatal solvency issues we are underwriting economic policies designed to perpetuate failure and misery. QE2 will be nothing more than Japan2.
Wall Street Breakfast: Must-Know News [View article]
______________________...
Against this backdrop, further QE, continued structural imbalances, and extreme international currency and capital strains, it's only appropriate that the market rally to new highs.
Wall Street Breakfast: Must-Know News [View article]
______________________...
I have mixed feelings about this whole mess but the Community Organizer in Chief's veto of this foreclosure bill was entirely too predictable. Whatever the shortcomings in title transfers, we know money is owed and the people living in the house owe it.
Wall Street Breakfast: Must-Know News [View article]
Hiding Bank Losses [View article]
All of these measures, by design, work to the advantage of large banks and enable the steady transfer of wealth from households and others to larger financial institutions. Even if there is not loan demand today, the transfer of wealth will weaken the capacity of future borrowers to enable lending institutions to shoulder increasing levels of NPL's.
This will ensure weaker loan demand in the future, diminished economic activity and the need for greater cash cushions to offset growth in NPL's. In broad terms, we are repeating the mistakes of Japan.
The Trouble With Tim's Treasury [View article]
The very essence of being Secretary of the Treasury may be so challenging, he takes comfort and solace in dispensing financial huggies to his former buddies who secretly view him as a water boy. The G20 dismissed him and his message as being irrelevant.
Stress tests, recapitalization and PPIP's were announced to be essential to revitalization the banking sector. PPIP never happened and the perceived success of the banking system rests upon a raft of fraudulent accounting gimmicks including effective repeal of FAS 157, whatever guideline which permits banks to recognize income when their bond prices decrease and the ability to shuffle about, increase or decrease reserves at will.
As to the stress tests, at the end the amount of additional capital required was "negotiated" rather than determined by hard analytics.
Consumer Credit: Not So Rosy [View article]
Whether this is due to a lack of demand (the National Association of Credit Managers index fell in May) or supply, the reality is that banking sector is contracting and once the fiscal largesse is through the system, so will the economy. Banking sector assets contracted at a 10.8% annual rate and the declines were broad based:
-Residential mortgages fell 10.4% at an annual rate;
-Home equity loans of credit fell 4.5%;
-Commercial real estate loans slipped 8.9%; and,
-Consumer credit slid at a 16.6% pace (with credit cards down an amazing 24.8%).
Worries of a New Debt Contagion Rattle Wall Street [View article]
Before I share some material from the FT, let me add that the level of restructuring being proposed for Greece, as measured by the primary deficit, is of epic proportions and few countries have successfully achieved this order of change. This points to how far out of control matters are in Greece and how difficult it will be to rebalance the primary account. From the FT:
The presentation of the main economic arithmetic behind the Greek Economic Policy Programme (EPP), as agreed with the IMF, EC and ECB, reveals the enormity of the task ahead. The programme envisages that the general government deficit will be cut from 13.6% of GDP in 2009 (which could be revised to about 14%) to 8.1% of GDP this year, 7.6% in 2011, 6.5% in 2012, 4.9% in 2013 and 2.6% in 2014. Assuming Greek real GDP expansion is about 2.1% by 2013-14, this implies the debt/GDP ratio would peak at 149% in 2013 (note that the authorities seem to be including an assumption that the public debt/GDP ratio will be revised up 7pp, which would take the 2009 ratio to 122%).
Hidden Benefits of a Greek Debt Default [View article]
Earnings Season So Far [View article]
Sweden Did Not Nationalize Entire Banking System [View article]
1- Have the Federal Reserve reduce Fed Funds Rate to Zero Done
2- Have the Federal Reserve hold down rates for a historic length of time i.e. a "very extended period" Done
3- Have Federal Reserve flood market with money (i.e. Quantitative Easing) Done
4- Have Government initiatives that support asset appreciation (i.e. housing, auto programs) Done
5- Have accounting changed that forced asset liquidation for mal-investments (see Accounting) Done
6- Change Margin requirements or Leverage Pricing
ISE had instituted special rebates for specific option liquidity providers - April 1 Done
NYSE Euronext's U.S. Options Exchanges Announce New Pricing and Fee - April 5 Done
ISE to Introduce a Modified Maker/Taker Fee Schedule - March 29
Done
New interest rate futures contracts and futures options on Eurodollar & US Treasuries Done
7- Spin or exaggerate economic news through the media in a positive manner only In Process
8- Decrease risk premiums and increase levels of speculation Returning
Phantom volume at 3 am on Sunday night In Process
Is volume merely hiding in plain sight, dark pools and structured notes? In Process
The obvious overhang of CFTC position limits In Process
The cross-pollination of inter-continental routing capabilities
In Process
9- Establish a Carry Trade that will flow monies to US assets (i.e. re-establish Yen Carry Trade) In Process
Market Melt Up? More Like Yen Meltdown In Process
10- Weaken the US$ to solidify Carry Trade returns and reduce currency risk Expected
11- Give the market a surprise jolt -> China revising currency peg (China biggest US collateral holder) Expected
12- Increase the Velocity of Money by instilling an inflation worry in the public Failing to mixed
13- Place restrictions on market shorting (i.e. shortages on key dates) Expected
More Thoughts on the Volcker Rule [View article]
We have the regulatory authority to contain and manage systemic risk: stringent underwrting standards. If the loans underlying MBS or CDO's are sound, then you can slice, dice and securtize as much as you want and expect to be repaid. There are a number of reforms I would like to see but one of the most important is limiting CDS to those that actually hold debt being hedged.