Wednesday, December 24, 2008
Good news! The transmission mechanism (via housing) is not completely broken.
The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended December 19 soared 48.0 percent to 1,245.4, the highest reading since the week ended July 18, 2003, when it reached 1,284.3.
Spencer Rascoff, chief operating officer at Zillow.com, a real estate website based in Seattle, said historically low mortgage rates are a boon for the mortgage industry and to many borrowers, but it remains to be seen if they will have a substantial effect on the housing market.
"The good news is that these refis could help some homeowners avoid expensive resets on adjustable rate mortgages, and in turn prevent some foreclosures," he said on Monday.
Read full article here.
Monday, December 22, 2008
Let's hope Obama follows through on this.
"...lawmakers are emboldened, seeing both the crude-price collapse and the systemic failure of the credit-derivatives market as reason to push ahead with rules to prevent what they call "excessive speculation" in commodity markets."
This is good...
"Even if speculators only had a small impact [on price], that's not right. Our job is to guard against fraud and abuse," said CFTC Commissioner Bart Chilton, a Democratic appointee. "Congress should act expeditiously to prevent the type of excessive speculation and leveraging we have seen."
But this may represent the real attitude:
"The anti-speculation talk may have subsided in the market slide, but its ugly head is likely to rise again," said Greg Mocek, a former head of enforcement at the Commodity Futures Trading Commission, now a partner at law firm McDermott Will & Emery in Washington.
And Gary Gensler, Obama's CFTC Chairman, is a former Goldman Sachs partner, which makes it hard to imagine he is going to crack down on speculation.
Friday, December 19, 2008
Over a three month period the Fed's foreign currency holdings have gone from virtually zero to over $600 billion. Foreign currencies now comprise the largest single asset holding on the Fed's balance sheet. This accumulation has gone on virtually unnoticed. No one in the media or in Congress has asked about this.
The accumulation of foreign currencies have been negative for the dollar. These currency holdings also represent loans--in the same magnitude--to foreign central banks that are being used to fund foreign institutions. Neither the Fed nor the Federal Government has any oversight on these loans. Who are they going to? What collateral is being pledged? We know nothing.
It is highly likely that some of this money has gone to foreign automakers like BMW, Daimler, Volkswagon, Nissan, Toyota, Honda, Hyundai, Kia, etc. And for sure a big chunk of this money has gone to foreign banks and financial institutions.
As the debate rages on in America as to whether or not we should help our own businesses, the Fed is quietly lending money to foreign companies in amounts greater than what has already been spent through TARP.
It is an outrage!
The American electorate, and especially American workers who have recently lost their jobs, should be up in arms about this. Instead, we see near-universal-opposition to the token loans (with huge strings attached) that are being given to companies like GM and Chrysler.
Unless we wise up and complain about the right things, we will continue to see policy that is counterproductive and fashioned, by design, to make Americans poorer vis-a-vis the rest of the world.
Thursday, December 18, 2008
Fed basing its lending on credit ratings provided by S&P, Moody's, Fitch--the same idiots that said all the toxic subprime stuff was AAA. Amd the same idiots that will ultimately downgrade U.S. sovereign debt.
This is the blind leading the blind. Totally absurd!! God help us!!!
Read full story here.
Barack Obama nominated Gary Gensler to head up the Commodity Futures Trading Commission.
Gensler is a former partner at Goldman Sachs--one of the biggest futures market speculators in the world--so it is hard to imagine that we will see any real change when it comes to speculative activity in the markets.
Earlier this year another former Goldman partner--Hank Paulson--testified before Congress that "speculation had nothing to do with the rise in the price of oil and other strategic commodities."
Obama again goes for the status quo in his selection of Gensler. Where's the "Change we can believe in???"
Read story here.
Conservative Republican Senators from Tennessee, Alabama, Mississippi, Kentucky, South Carolina and Louisiana appear to be getting to Bush. Following the defeat of the aid package in the Senate the president gave flat-out assurances that he would not let the Big 3 go under.
Now, however, it appears that he is buying the arguments of Senators like Bob Corker (R-TN), when he says that giving help to Detroit is the equivalent of "throwing good money after bad."
These senators are monumental hypocrites and should be exposed as such. Their states receive far more from the Federal Government than they give to Washington, and they use that Federal money to subsidize the foreign automakers that set up shop in their states. Do their constituents benefit? Hardly. They are among the poorest in the nation.
Tuesday, December 16, 2008
Inflation occurs when the economy is growing faster than its ability to produce given its resources and available capital. We are nowhere near this. Look at some of the current data:
Total industrial capacity utilization at 75.4 percent
3.1 million unsold cars
5.3 million unsold homes
10 percent more oil inventory than same time last year
10 million people unemployed
Wholesale inventories up $33 billion y-o-y
Real earnings by workers 17 percent below 1973 peak
40 million people without health care
Half of all families can't afford to send their kids to college
How do you know when the Fed and/or government has done too much? When the slack and excess in those numbers go away. We are a long way from that anytime soon. Another way to say that is that we are living far below our means.
If you had a child that had incredible talents and abilities you'd strive to make sure that he used those attributes to the fullest. Yet, when it comes to the economy, we are resigned to live below our means (become poorer, vis-a-vis the rest of the world) because of fears of deficits.
The yen hit a 13-year high against the dollar following news of the Madoff scandal and the euro is now at a two month high versus the greenback. Some of the foreign institutions that have been affected include: HSBC, Nomura, BNP Paribas, Reichmuth & Co, Union Bancaire Privee and Europe's second largest bank by market value, Banco Santander.
Foreign investors (and many Americans) view this as a massive regulatory failure by the SEC and other U.S. regulatory agencies. This is probably exacerbating the selling in the dollar. It could go on for several more days as fund selling and other liquidations are conducted.
Friday, December 12, 2008
Senator Bob Corker of Tennessee.
Tennessee offered huge tax incentives (read: subsidies) to foreign automaker, Volkswagon.
What did it do for the state's economy and its residents?
His state ranks 39th in the nation in per capita income, but 13th in the nation when it comes to receiving money from the Federal Government!
I watched him this morning on CNBC, where he gave such a phony display of dissapointment that they "couldn't reach a deal." It was sickening. He deserves and Oscar for that performance.
Thursday, December 11, 2008
Senators Shelby, Vitter, McConnell, Cochran, Wicker et al.
I believe there is a widely held view in America that we are a nation of sinners--profligate spenders, debt-junkies and commie leeches of the government or advocates of the social cause who suck off the tit of the true "wealth creator," which is the free market.
In the eyes of most people, unfortunately, these sins must be punished. In their mind this is a fundamental requirement for absolution.
I am convinced that this view is held with a zealousness that rivals the most extreme form of religious fanaticism (Muslim extremism, for example) and those that hold it are prepared to sacrifice themselves, and innocents, in the name of this cause. (Just as Muslim extremists show no compunction in strapping a bomb on themselves or even their children, then walking onto a bus filled with innocents and blowing it up.)
In the movie "The Godfather II," there is a scene in which Michael Corleone is in Cuba and is about to make a signficant investment. Right before going ahead with the decision, however, he witnesses something that causes him to change his mind. On his way back to the hotel he watches as a group of rebels attack the government forces and in the skirmish some of the rebels blow themselves up, killing a few members of the government forces along with them.
Later on that evening, while everyone is celebrating their new "venture" in Cuba, Corleone expresses reservation. When asked why, he recounts the events he witnessed earlier that day and pointed out that those who are prepared to kill themselves along with innocents cannot be easily vanquished. He understood that the overthrow of the Cuban regime could not be far off. After all, he had just witnessed, first hand, the unwavering resolve of those who opposed it--willing to die freely for their cause.
The free market economic extremists in America today are of the same ilk. They are the economic equivalent of Cuba's revolutionaries or the Muslim extremists that routinely target civilians and innocents. The are driven by what can only be described as a fundamental fanaticism and their doctrine is the only true one. All others are corrupt, immoral and the preachings of the devil and the infidel.
That is why I think we cannot win this. I have become increasingly disheartened by what I see. It is useless to fight with logic, fact and reason, just as it is useless to tell fanatical Muslim extremists to sit down and "let's all just respect each other and get along."
Nothing good can come of this.
Lawmakers like Richard Shelby of Alabama, David Vitter of Louisiana, Mitch McConnell of Kentucky, Thad Cochran and Roger Wicker of Mississippi, who opposed giving aid to the U.S. automakers, represent states that sport some of the lowest economic rankings of all the states in the Union. They've enticed foreign automakers there with tax breaks and other lucrative incentives, yet the residents of their states are among the poorest in the nation. While their brand of capitalism may be good for Toyota, Honda, Hundai, BMW and Kia, it is nothing short of serfdom for the workers who labor for these companies.
Most egregious, however, is that these Senators, who preach so sanctimoniously about "looking out for taxpayer money," represent states whose per capita "take" from the Federal Government is among the highest in the nation. They are monumental hypocrites and liars, who want to do for America what they have done for their constituents: impoverish us all.
Another very large increase. Part of this gain could be due to mark-to-market forex adjustment of its currency holdings, however, most of it is probably new swap lines.
Get weekly statement here.
Blaming U.S. automakers is naive. There are a whole set of complicated reasons that foreigners have "comparative advantage," but it pretty much all boils down to policy.
Read full article here.
"Under the new phenomenon called "globalization", the so-called "comparative advantage" which underpinned the early centuries is no longer God-given or determined by the weather, as was the case, two centuries ago, with David Ricardo's English woolens and Portuguese wine. Now commercial success is largely created, or not, by government policies, and the United States government refuses to compete for such success, even though, as The Economist magazine reported recently, "Business these days is all about competing with everyone from everywhere for everything."
Right after World War II, Japan started its trade war by competing in international trade for market share rather than profit. Japan closed its domestic market and sold its exports at cost, making up the profit in its closed market. It subsidized production and targeted certain items in trade - first textiles, then electronics, machine tools, robots and, finally, automobiles. As a consequence, Toyota is today #1 as General Motors, Chrysler and Ford struggle just to survive."
The United States Congress looks at the BMW plant in South Carolina, my home State, and the Nissan plant in Mississippi as examples of relative success and wonders what's the matter with Detroit?
• Yet BMW received a tax deferral benefit of $100 million to locate in South Carolina and Nissan received over $300 million to locate in Mississippi. And all Detroit got - Ford, GM and Chrysler alike - was tax incentives to leave the United States and offshore its jobs and production.
• The supervisory personnel from Germany and Japan who run BMW's and Nissan's plants have health care and retirement benefits paid for by Germany and Japan. Detroit has to pay for the health care and retirement benefits of its supervisory personnel.
• BMW and Nissan have deductible health care for its employees. Detroit has to pay full health costs on its employees.
• BMW and Nissan hire forty-five year olds and under in order to minimize health costs. Detroit has a lot of senior people and legacy costs.
• The major parts that BMW and Nissan use to assemble cars in the United States are produced 16% cheaper in Germany and 5% cheaper in Japan because BMW's and Nissan's VAT taxes are rebated when parts are shipped for assembly in the United States. Detroit pays all local, state and federal taxes on its parts.
• Nissan, with a largely closed domestic market, does not have to make a profit, and thus located in the United States for market share. Detroit needs to make profits.
• BMW and Nissan high-ball the costs of their imported parts so as to minimize profits and taxes to the United States. Detroit has to pay taxes on its profits.
"Russia has drained almost a quarter of its foreign-currency reserves, the world’s third-largest, since August as it tries to slow the ruble’s decline. The central bank has widened the trading band five times in the past month, effectively reducing its defense of the currency amid plunging oil prices."
Russia would be better off raising domestic spending and investment to boost the economy, rather than trying to support its currency. We're no longer on a fixed exchange rate or gold standard. I guess they haven't figured that out yet.
Read full article here.
There's a limit to what the Saudis and Opec can produce, but they have a lot of room to cut production and that's exactly what they are doing.
“The Saudis might have been impatient with the market’s skepticism, so they’ve decided some transparency is needed,” said Mike Wittner, head of oil market research at Societe Generale SA in London. “It shows they’re deadly serious about cutting already and serious about cutting more.”
Expect to see inventory overhangs reduced--even in this weak, global economy--and prices will rise again.
Read article here.
For the past three months the pattern has been that any bad news for the U.S. economy was good news for the dollar (and bad news for foreign currencies). However, this pattern has now been broken.
The dollar's trend has been reversed, thanks to large-scale dollar selling by the Fed. With a top in place, traders will view any negative event for the U.S. economy as bearish for the buck and they will sell it. In addition there are many who feel the dollar is due for a big fall thanks to bailouts and growth in the monetary base, etc. These folks already have their reasons to sell and as they see the dollar falling, there will be pile on effect.
Wednesday, December 10, 2008
Good article by Professor James K. Galbraith. Below is a chart that shows what a dollar of stimulus puts back into the economy, when spent on various things.
Read the entire article here.
Alabama Senator Shelby and Louisiana Senator Vitter should take responsibility for their states' terrible economies
Both Shelby and Vitter are opposed to the loans to the Big 3 automakers and they will try to block this legislation. If they succeed it will likely result in another major blow to the U.S. economy.
One look at the horrendous economic ranking of the states represented by these senators should expose them for the hypocrites and liars that they are.
Gross State Product
-Alabama gross state product 25th in the nation
-Louisiana gross state product 24th in the nation
-Michigan gross state product is 9th in the nation, even with all the difficulties they are having.
Per capita earnings
-Alabama per capita net earnings $20,965 43rd in the nation
-Louisiana per capita net earnings $22,720 34th in the nation
-Michigan per capita net earnings $23,204 29th in the nation (even with the problems and layoffs)
But here's the real kicker...
Transfer payments received from the Federal Government (per capita):
-Alabama: 13th in the nation when it comes to receiving transfer payments per capita
-Louisiana: 12th in the nation
-Michigan: 20th in the nation.
So the residents of Mr. Shelby's and Mr. Vitter's states are more on the dole from the Federal Government than the people in Michigan! Outrageous!!!
Let them know how you feel. Their email is below:
Vitter email: http://vitter.senate.gov/?module=webformiqv1
Shelby email: firstname.lastname@example.org
While the public, lawmakers and the know-nothing media rail against the government's intervention to protect the U.S. economy, there has been zero mention of the massive buying of foreign currencies by the Fed. (Read: massive selling of the dollar.)
Foreign currency holdings of the Fed have gone from virtually zero three months ago, to above $600 billion and are now the single biggest asset on the Fed's balance sheet.
Foreign currencies are non-convertible, so all the Fed has is a piece of paper. In constrast, most of the U.S. bank regulated assets that the Fed lent against to help domestic institutions are cash flow positive.
There should be huge public outcry over this, but there isn't.
Fed already does this. They're called "Federal Reserve Notes." It's the cash you carry around in your wallet.
The Fed has unlimited ability to add to bank reserves, however, it needs things to sell to manage those reserves. Historically, Treasuries have served that purpose, however, if it decides to issue its own debt it's only to lend more flexibility to this function. Even so, it is only designed for reserve maintenence. That's it. The media will misconstrue this one big time.
This is taken verbatim from the Fed's, Federal Reserve System Purposes and Functions manual. (Chapter 3, page 34.)
"The Treasury is not a depository institution, so a payment by the Treasury to the public (for example, a Social Security payment) raises the volume of Federal Reserve balances available to depository institutions."
That says it all. If the Treasury were like a bank, that took our money and kept it on deposit to be used at some point down the road for its spending needs, then payments by the Treasury to us would result in NO NET CHANGE IN RESERVE BALANCES IN THE SYSTEM. However, it is clearly stated that the Treasury is NOT a despository institution and that payments made to the public result in a rise in reserve balances available to depository institutions.
I don't know how much more clear that can be.
Access the full manual here.
Tuesday, December 9, 2008
Fed expanding bank reserves and that is what has pushed rates to zero (negative). Fed believes that low rates will spur credit demand, however, lending is pro-cyclical, meaning that credit demand is normally low in a weak economy. There is much history to suggest that this strategy may not work, particularly in the current environment.
In addition, many financial intermediaries are no longer in business or not functioning as before, so the transmission mechanism to the economy is impaired. Finally, a lot of banks are still struggling with capital issues and that is also constraining their ability to lend.
Monday, December 8, 2008
Both the monetery base and bank reserves hit new highs in the past week.
$1.51 Trillion, up from $886 billion on September 17
Reerve Balances at Federal Reserve Banks
$634 billion, up from $7.9 billion on September 10!
This is the money that will be used to buy Treasuries.
The money to buy government securities and pay taxes comes from government spending!! The media and nearly all mainstream economists don't understand this.
Foreigners do not LEND us money! Government spending funds the savings of foreigners!!!
"The euro area has so far defied Milton Friedman’s forecast that it would splinter as soon as the “global economy hits a real bump.” As it marks its 10th birthday, it’s hitting the biggest bump yet."
Yeah, but Friedman probably never thought the Fed would lend hundreds of billions to the Europeans to keep that from happening. If those loans were not made, Friedman's prediction would have come true.
Very ironic how we hear screams of "moral hazard" when applied to the U.S. and domestic policy, however, the mother of all moral hazard has been the Fed's decision to backstop the Eurozone. This eliminates all need for political and structural reform. Europe can continue as is, without having a viable fiscal and monetary authority, because it now has that in the form of the Fed and U.S. taxpayers.
Friday, December 5, 2008
From Neil Mellor at the Bank of New York.
"For the first time since China abandoned its peg to the USD, it appears that the authorities there are now targeting a weaker CNY."
"Perhaps the clearest signal of the apparent change of policy, however, came from the currency market itself. Having fallen steadily from July 2005 onwards, USD/CNY’s downtrend came to an abrupt halt on July 16th of this year as the authorities stopped moving the daily band lower. The NDF market duly took this apparent shift in stance to heart with the one-year NDF rallying aggressively from mid-July onwards. Between July 18th and the end of last month the market moved from predicting a 6.1% y/y decline to calling for a 3% y/y rally.
Since the start of this week, however, there appears to have been a further palpable shift in policy. Following a clear shift in the wording in the latest quarterly monetary policy report and a speech over the weekend by President Hu Jintao (warning that China’s competitiveness and trade strength were being threatened), the PBOC on Monday set the central parity rate of USD/CNY aggressively higher. After four and a half months of sideward trading, the market reacted strongly to this apparent change in attitude by pushing USD/CNY to the top end of its band. The reaction in the NDF market was even more dramatic with the one-year NDF jumping 3.16% (its largest ever one day move in either direction). This upward pressure has continued over the last two days to leave the NDF now forecasting a 6% y/y rise (spurred on today by comments from Vice premier Wang Qishan that China will do all it can to stabilise exports)."
Interesting, July 2005 is exactly when housing stocks peaked. The reversal in the renmimbi trend could be very important.
The Fed's foreign exchange holdings increased by $21.6 billion in the week ending December 4. Could be due to mark-to-market exchange rate adjustment or some new forex swaps. This was the biggest gainer on the Fed's balance sheet for the week.
Access Fed's statement here.
Paulson went begging on his knees to Congress for $700 billion then decided he was not going to spend all of it. At the same time he told lawmakers what he thought was the real intent of the legislation, despite it being clearly spelled out in the bill.
"The Treasury has ignored the 'clear congressional intent' of the TARP to reduce home foreclosures, Frank, a Massachusetts Democrat, told reporters yesterday after a speech at a Consumer Federation of America conference in Washington. “At the very least, he’d have to agree that some of that money was going to be used for foreclosure relief."
Paulson's a joke. Who'd give this guy any more money?
Read full article here.
A generation or two ago our parents and grandparents handed us a legacy of debt. It was a debt that was enormous—nearly 10 times the size of the current debt we have today. That debt was the cost of fighting WWII.
According to the current crop of “Debt Doomsday” folks, that debt should have made us poorer. It should have resulted in us having to “pay back” that burdensome legacy. The things we enjoy today—our homes, cars, clothing, food, education, health care, leisure activities and the capital that creates all that—really doesn’t belong to us according to these people. By their analysis we haven’t the money to pay for it because we should be paying back the debt of a past generation. Rather than living at our current, higher standard of living, we should be poorer than our parents and far, far, poorer than our grandparents.
But it’s not the case. So what happened?
The debt back then provided the consumption and investment power that drove private production, which helped to employ people and create factories, plant, equipment and other things, which were the things that were part of the real heritage left to the future.
The same holds true now.
Government spending that brings us to a level where we are fully utilizing the resources of our nation—all of our capital and human capital—is not detrimental. Detrimental is not living at the level at which we are capable of, due to some irrational fear.
To be sure, government spending in excess of what the full and efficient use of our resources can achieve is bad, but we are nowhere near that. At the current time 6.5 percent of our workforce is out of work, only 75 percent of our industrial capacity is being utilized and millions of homes, automobiles, computers and other consumer items are sitting unsold. Food sits in storage facilities and elevators, rotting away.
Moreover, a rising number of people in this country cannot afford to go to college, though there is room for them, and millions don’t have health care when the services are there to provide it. That is an enormous underutilization of our resources and it is a tacit embrace of a declining standard of living.
During WWII much of the capital we created was eventually destroyed. The planes, ships, tanks and other war materiel was sent to the battlefield and blown up. However, even the destruction of so much of our capital did not result in us becoming poorer as a nation. We emerged from WWII far richer.
Spending by the government now, to bring us to a level where we are fully utilizing our resources and capital will make us richer, not poorer. It will provide the income and investment to create the real wealth that will become what we leave to our kids and grandkids. The debt used to create this wealth will, as a percentage, be far smaller to future generations, just as the debt our grandparents left to us is tiny now. In contrast, by not living to our capability now, we will leave a larger debt to our children and in so doing; reduce their standard of living.
If Roosevelt had worried about deficits we’d all be saying, “Heil Hitler” right now.
Wednesday, December 3, 2008
Media picking up on this now.
BEIJING (AP) - The deepening world economic crisis and a possible spat over currency levels hung in the air as the United States and China sat down Thursday to discuss the future of their economic relations.
U.S. officials say Treasury Secretary Henry Paulson will press Beijing to let its yuan rise against the dollar to ease trade tensions at the two-day Strategic Economic Dialogue. American companies contend that China keeps the yuan undervalued, giving its exporters an unfair advantage and adding to its swollen trade surplus.
But with China's exporters suffering, the yuan plunged Monday in government-controlled trading—a possible message to Washington to go easy on the issue.
"The signal China sent on Monday is: We also have our own political problems and issues in a slowing economic environment," Frank F.X. Gong, chief Asia economist for JPMorgan Securities Ltd., said in a report to clients.
State media said Thursday a rapid rise of the Chinese currency would harm the global economy further as it would hurt Chinese exports and increase unemployment.
"China's foreign exchange policy should be aimed at helping domestic economic growth, for which the yuan should not rise too fast against the U.S. dollar now when the global financial market is in turmoil," said a report Thursday in the China Daily, an English-language newspaper aimed at foreign readers.
The twice-a-year dialogue, launched in 2006, is meant as a relationship-building exercise rather than a forum for negotiation. But Treasury Undersecretary David McCormick told reporters this week that officials at the dialogue would urge China to continue allowing the yuan to rise—a key issue for American lawmakers who are pressing for punitive action if Beijing fails to take faster action on trade complaints.
Both economies are struggling—the United States with a recession and China with a sharp slowdown in growth—and how well they keep one of the world's biggest trading relationships stable and productive could be of global importance.
"The need to coordinate and collaborate gets even more urgent as the current recession bites deeper," the China Daily said in an editorial Thursday.
The talks are to cover a broad agenda, including cooperation in energy conservation and environmental protection. Paulson's delegation includes the U.S. secretaries of agriculture, labor and health, the U.S. trade representative, officials of the Treasury and Commerce departments, and others.
Agreements on product quality, food safety and trade and investment could be signed, the newspaper said, citing sources with the Finance Ministry.
Beijing broke a direct link between its yuan and the dollar in July 2005 and has let its currency rise by about 20 percent since then. That has hurt Chinese exporters, which are seeing their goods get more expensive in foreign markets just as demand slows.
In a speech Tuesday, Paulson said it was important for China to stick to its currency reforms and rely more on domestic demand to drive growth.
"As I have said in the past, continued reform of China's exchange-rate policies is an integral part of this broader reform process," Paulson said.
The yuan's fall Monday was its sharpest one-day fall since 2005, erasing almost 1 percent of its value against the dollar.
Gong said Beijing's move might have been meant as a warning to President-elect Barack Obama, who has yet to say whether he will continue the dialogue, that talking will be more effective than confrontation.
"Our negotiators do disagree, and even quarrel from time to time. But the beauty of the SED lies in the fact that they have a platform to talk face to face," the China Daily said. "Listening to each other is conducive to avoiding ill-informed decisions."
Chinese exporters have lobbied the government to slow or reverse the yuan's rise against the dollar to make their goods more competitive abroad. But Gong said Beijing understands the problem is lack of demand, not price, and is likely to let the yuan continue to rise over the long term.
"It was a strong auction, the cover ratio was high," said Tony Crescenzi, chief bond market strategist at Miller, Tabak & Co in New York, adding "it may speak more to the preference for short-term debt instruments than it does to (demand for) U.S. debt instruments on the whole."
No, Tony. It speaks more to the fact that recent actions taken by Treasury and the Fed have caused reserves in the system toswell by $600 billion!
Given this, how hard did you think it would be for $25 billion of those reserves to be swapped for higher interest bearing notes?
Go to this link to listen to an interview Jim Rogers gave to Bloomberg TV, where he said he was shorting Treasuries.
Here's a chart of the 30-yr Treasury:
Look at the period of October 13. He sold at the absolute bottom!
I don't like to criticize people for bad market calls--it can happen to anyone--but Rogers deserves this. He is a cynical manipulator of people and still operates under an inapplicable paradigm--the gold standard. And the know-nothing media fawns over him.
If he wasn't selling books and if he didn't unload his NYC townhouse, he'd be broke by now. And come to think of it, Peter Schiff's been putting out a few books too, lately.
From a Reuters newswire story. Robert Rubin again!!!
NEW YORK (Reuters) - An investor lawsuit contends that Citigroup Inc (NYSE:C - News) insiders, including senior counselor and former U.S. Treasury Secretary Robert Rubin, sold more than $150 million of their own shares at inflated prices while concealing the bank's true financial health.
Unreal!! Rubin needs to go to jail. Didn't they sentence Ken Lay to prison for that?
Read full story here.
Some of you have asked for the link to Professor William Black's testimony before Congress back in October. He spoke about the role of financial derivatives in the ongoing crisis. Some of the points he touched upon were deregulation, perverse compensation, credit default swaps and their role in augmenting risk and volatility, the Community Reinvestment Act and Fannie Mae/Freddie Mac. It's excellent stuff!
Read the entire testimony here.
Tuesday, December 2, 2008
Excellent article by John Makin of the American Enterprise Institute. (Those guys love tax cuts, but this idea happens to be a good one!)
"The best available fiscal policy measure would be a sharp reduction in the payroll tax, which would boost household disposable income while giving firms an incentive to retain more workers on their payrolls. Total annual collections from households and firms of payroll tax levies total about $625 billion, about 7 percent of disposable personal income..."
"The payroll tax is a poorly designed fiscal measure because it acts as a tax on employing labor and, in times of falling demand, a tax on retaining labor. The payroll tax is the primary tax paid by more than 60 percent of American households and so constitutes a marginal disincentive to further work."
"If the payroll tax (of which households pay half directly) were suspended--say, for a year or eighteen months--households would experience an immediate 3.5 percent increase in disposable income that they could employ to sustain consumption and pay down debts. Since the payroll tax is regressive, falling more heavily on lower income households, its repeal would be progressive, while transferring a substantial increase in disposable income to the low-income households who are likely to need it most and therefore likely to spend most of it."
Read entire article here.
Yet another display of gross misunderstanding of the current paradigm, which is non-convertible currency/floating exchange rates. This time from Peter Fisher, Managing Director at Blackrock Financial. Curiously, Fisher was a former undersecretary of the Treasury.
In the following article he suggests that the Federal gov't "lock in" low interest rates by issuing 100 year bonds. (And while it's at it, maybe the Federal Gov't can lock in a good rate on a mortgage, too!)
Dec. 2 (Bloomberg) -- BlackRock Inc.’s Peter Fisher said the U.S. Treasury should consider selling 100-year bonds to ease the federal government’s borrowing costs as it faces a budget deficit expected to top $1 trillion.
The government spends by crediting bank accounts. The sale of securities functions as a reserve maintenance operation and is done solely to sustain the Fed's interest rate target. There is no "borrowing" per se.
“If you issued a 100-year bond and had principal and interest pay down smoothly over the last 50 years, you create a great borrowing device for the Treasury that would let us move this hump of borrowing over the generational retirement that’s coming up,” Fisher, managing director and co-head of fixed income at BlackRock in New York, said in a Bloomberg Radio interview.
Again, the Treasury doesn't borrow (as per my comment above). Moreover, the Fed sets the overnight lending rate, which determines the rate on all securities. It can directly set rates along the entire term structure if it wishes or do so indirectly via the overnight rate.
The Treasury last month tripled its estimate of planned debt sales in the final three months of the year to a record $550 billion as it attempts to fund bailouts for banks and fiscal stimulus programs to jump start economic growth. Treasury Secretary Henry Paulson told a conference in Washington Nov. 17 that the U.S. will issue some $1.5 trillion worth of Treasury securities in the fiscal year that began Oct. 1.
Wrong again. The Treasury is not "funding" anything. Actions by the Treasury and Fed have caused bank reserves to swell by $600 billion in the past two months. The planned sale of $550 billion will simply reduce reserve balances. The public swaps a reserve balance for a higher paying Treasury security. The net financial position of the public has not changed. You'd think this guy would understand this. Sheesh!
Fisher, Treasury undersecretary from August 2001 to October 2003, eliminated 30-year bond auctions in 2001 to reduce government borrowing costs after four years of federal budget surpluses. The U.S. hasn’t been in the black since. The government revived sales of the security in February 2006.
Since the government spends by crediting bank accounts and doesn't borrow, per se, selling nothing more than the shortest term T-Bills would be sufficient to manage reserves. The only reason the Treasury sells longer dated securities is because various maturity lengths are demanded by portfolio investors. It is simply satisfying that demand, but doesn't hav to.
Treasury yields have plummeted as investors have flocked to the safety of U.S. government debt during the worst financial crisis since the Great Depression. Bonds rallied for a fourth day yesterday, sending yields on two-, 10- and 30-year debt to the lowest since the Treasury began regular sales of the securities.
Yields plummeted because actions by the Treasury and the Fed boosted reserves by an historic amount. In other words the government provided the funds--in historic quantity--with which to buy the securities. Simple supply and demand.
Federal Reserve Chairman Ben S. Bernanke said yesterday that he may use less conventional policies, such as buying Treasury securities, to revive the economy.
He's working to bring down long-term rates under the assumption that it will lead to more credit demand. May not work. Didn't work in Japan. A boost in aggregate demand is what is really needed now. The Fed does not control that. The government can.
The 30-year Treasury bond, the U.S. government’s longest maturity debt, has higher borrowing costs because of the uncertainty caused by a lump-sum payment of the bond’s principal at the maturity date, Fisher said. He said the Treasury would have to eliminate that volatility on a 100-year bond by paying down the principal over time.
Inapplicable analysis. He doesn't understand how the government spends and its effect on reserves balances, etc. The guy's totally confused. How do these people get these jobs??
In 1993, Walt Disney Co. became the first company since at least 1954 to issue 100-year bonds. In 1997, Ford Motor Co. sold $500 million of 100-year bonds, exploiting a decline in Treasury yields. Demand for the Ford bonds, priced to yield 7.81 percent, was so high that it sold out within 25 minutes of the start of the sale.
Apples to oranges here. Disney is not the Federal Gov't. They DO need to borrow and their borrowing costs matter. It's not the same for the government. Bad analogy and misses a critical, yet fundamental, distinction.
“There are a lot of investors, pension funds, endowments, who would love to get a long-term annuity like that,” Fisher said. “They love to get an interest-only stripped off the 30- year, and they’d love to get something even longer. I think there would be a lot of demand from investors for that.”
Yes, as I said before...the only reason the government sells anything other than the shortest dated T-Bill is to satisfy the demand of portfolio investors. Aside from that, it doesn't need to.
Ben Stein's critique of Obama's choice for Treasury, Tim Geithner, is right on!
Posted on Tuesday, December 2, 2008, 12:00AM
The change it had to come
We knew it all along.
We were liberated from the fold, that's all.
And the world looks just the same
And history ain't changed
‘Cause the banners, They are flown in the next war.
I'll tip my hat to the new Constitution
Take a bow for the new revolution
Smile and grin at the change all around
Pick up my guitar and play
Just like yesterday.
Then I'll get on my knees and pray
We don't get fooled again.
This snippet from the greatest of great songs by the Who keeps running through my head as I read about Timothy F. Geithner, chosen to be the new secretary of the Treasury by President-elect Barack Obama. I have studied this song for decades and never has it been more apt.
If it were scientifically possible to create a man who is the exact opposite of "change" in the political and financial realm, which is what I recall Senator Obama talking about during the campaign, it would be Mr. Geithner.
Scion of East Coast eggheads, a Dartmouth graduate, an honor student at the Johns Hopkins School of Advanced International Studies, this is no Che Guevara. Mr. Geithner was a colleague of Henry Kissinger at Kissinger Associates, a toiler at the Council on Foreign Relations and a bureaucrat at the Treasury under Larry Summers and Robert Rubin (of course, of Goldman Sachs). Mr. Geithner even made his Brooklyn-born self into a fly fisherman in the mold of Paul Volcker.
Mr. Geithner appears to be the Eastern establishment finance gentleman and scholar incarnate. A frequent defender of scant financial market regulation, à la Alan Greenspan, Mr. Geithner makes Paul O'Neil and John W. Snow, the first two Treasury secretaries under George W. Bush, look like Lenin and Trotsky.
In no sense does this make Mr. Geithner anything less than a fine man and possibly a superb steward at 15th and Pennsylvania N.W. But it does raise some interesting questions about just what kind of "change" Mr. Obama has in mind in the economic world.
Along with Henry M. Paulson Jr., the current Treasury secretary, Mr. Geithner was part of the decision not to save Lehman Brothers when it fell into crisis two months ago. Yet it now seems that allowing a bank as central as Lehman to fail was the shove that sent the world's financial system over the cliff. The rescue of Citi and the market's reaction tells us a lot about just how important a failure that fiasco with Lehman was.
We could have avoided the whole catastrophe of the last ten weeks if Geithner had had a clue. I wonder if Mr. Geithner would now acknowledge that he made a spectacular mistake. I wonder if he would promise to never even consider allowing a big financial institution to fail, and to do everything conceivable under the Constitution to keep the country from falling into a depression.
From what I read, Mr. Geithner helped fashion the so-called Troubled Asset Relief Program, the bailout program that received $700 billion from a terrified Congress a couple of months ago. Mr. Geithner and Mr. Paulson, as well as Ben S. Bernanke of the Federal Reserve, told the legislators that the money was needed to avoid financial calamity. It would be used to buy troubled assets - that is, loans - from banks and insurers and unclog lending.
After some fits and starts the legislation passed. Then for two months plus the Treasury didn't use a dime of the money for that purpose, after all, but instead bought stock in banks and for other similar purposes. This was a bait and switch of historic proportions. You need only consult bank stock prices to see how well it has worked. Earlier this month, Mr. Paulson declared that he would not buy troubled loans at all. That move battered the bond market and especially the commercial real estate bond and REIT markets.
I have not heard one word from Mr. Geithner repudiating those moves. It would be nice to know his position on them. Maybe his part in rescuing Citi tells us he and Paulson have learned something. That would be nice.
Perhaps while he's at it, Mr. Geithner might explain just what he's been doing as head of the Federal Reserve Bank of New York for the last five years. That job involves vital supervision of key "money center" banks. When did he notice that there were problems in excess leverage involving questionable assets and issues of accountability of hedge funds?
Did he do anything about it? Did he call in the lords of finance and tell them to cut down on leverage, to stop selling credit default swaps they could never pay off in a downdraft, and to act like bankers instead of gamblers? If he did, he kept it pretty quiet, and it didn't have much measurable effect. What's his explanation?
Now step back and ask the basic question: Was he, in his five years at the New York Fed part of the problem or part of the solution? I do not doubt that he worked cooperatively to put liquidity into the system along with Mr. Bernanke. But when the moment of decision for Lehman Brothers came in September, where was he?
And as the clock of destiny is ticking now for the auto makers, and thus for all of us, where is he? Or, to put it even more bluntly, it sure looks as if Mr. Geithner, charming as he may be, is not stepping up to save an economy deeply imperiled by the failures of the current financial ruling class. I have not seen one word from him that shows any marked difference from his boss, Mr. Paulson.
In fact, if it had been possible for George W. Bush to run for and win a third term, wouldn't Mr. Geithner have been exactly whom he would have chosen to replace Henry Paulson if Mr. Paulson ever decided to leave the Treasury? But wait a second. Didn't Mr. Obama campaign against Bush policies? Is he now giving us a third Bush term? Geithner at Treasury, Gates at DOD, Mrs. Clinton at State? Sure looks a lot like what Bush would have chosen if he had been able to run and win.
Not that this is a big surprise: There is a permanent ruling class in this country, whatever they call themselves, no matter how they talk about change. They may not be very good at it, but there they are. "Meet the new boss," as the Who said, "same as the old boss."
Krugman is a big name in economics and his debunking of the deficit myth is helpful.
"...the deficit worriers have it all wrong. Under current conditions, there’s no trade-off between what’s good in the short run and what’s good for the long run; strong fiscal expansion would actually enhance the economy’s long-run prospects."
"The idea that tight fiscal policy when the economy is depressed actually reduces private investment isn’t just a hypothetical argument: it’s exactly what happened in two important episodes in history.
The first took place in 1937, when Franklin Roosevelt mistakenly heeded the advice of his own era’s deficit worriers. He sharply reduced government spending, among other things cutting the Works Progress Administration in half, and also raised taxes. The result was a severe recession, and a steep fall in private investment.
The second episode took place 60 years later, in Japan. In 1996-97 the Japanese government tried to balance its budget, cutting spending and raising taxes. And again the recession that followed led to a steep fall in private investment."
Read the article here.
Monday, December 1, 2008
Some of his comments below and my remarks in blue.
"Even if the functioning of financial markets continues to improve, economic conditions will probably remain weak for a time," he said.
Need a large fiscal stimulus to resolve this. Larger tax rebate checks, suspension of the payroll tax, etc. Large and ongoing until the economy improves.
In his speech, Bernanke noted that the bracing impact of the Fed's aggressive rate reductions has been somewhat stymied by the worst credit and financial crises to hit the world economy since the 1930s. Despite lower borrowing costs ordered by the Fed, skittish banks have been reluctant to lend money to people and businesses, a vicious cycle that has seriously hobbled the U.S. economy.
The Great Depression finally ended for the U.S. when spending ramped up dramatically for the war effort. Most of the rest of the world pulled out of the depression before the U.S. because they adhered to a strict, Keynesian policy approach.
"Although further reductions ... are certainly feasible, at this point the scope for using conventional interest rate policies to support the economy is obviously limited," Bernanke said in the speech. The Fed can lower its key rate only so far — to zero — and it's getting ever closer to that threshold.
Bernanke said there are other ways that the Fed might bolster economic activity.
The Fed, for instance, could buy longer-term Treasury or agency securities on the open market in substantial quantities, he said. This might lower rates on these securities, "thus helping to spur aggregate demand," Bernanke said.
Lower long-term rates still may not spur aggregate demand. Sharply higher levels of gov't spending will. A better approach at this point would be if the Fed bought stock index futures to boost the stock market. This would be a very effective transmission mechanism and there would be almost an immediate, positive wealth effect to households. Japan did this in 2002-2004 and it worked, however, the buying was limited to bank shares. Imagine the effect if the Fed put $615 billion into the purchase of S&P futures! Sound crazy? Just remember, that's what they gave to foreign central banks--all in the space of two months!
The Chinese would be wise not to listen to Paulson. Anyway, he lacks any sort of credibility now with his terrible handling of the crisis (flip flopping on this TARP proposal, letting Lehman fail, not using the money he begged Congress for, etc.)
With a big cut in interest rates and a large stimulus coming, the yuan is likely to fall and the Chinese will be happy to do that because they know it will helping their export industries.
From a Bloomberg article.
"An isolated European country with an economy geared toward finance and winter sports is no longer a monetary bastion as credit evaporates around the globe. Banks teeter, the once-impregnable currency depreciates and a proudly independent people question whether a centuries-old go-it-alone strategy can survive.
Even Switzerland is wondering if it's immune to the forces ravaging Iceland."
Of course it can go it alone, with the right policies. Switzerland's deficit is a paltry, 1.5% of GDP. This is far to small to stabilize the economy.
What Switzerland needs is a good, old-fashioned, dose of deficit spending, however, the notoriously "hard money" nation will be loathe to do that. That's why the dowturn and the pain will last long.
In addition, false ideas, like this guy saying, "Switzerland can't go it alone," will cause policymakers to believe that they don't have control over their own destiny. That, somehow, it's in the hands of others.
In the U.S. this kind of thinking is pervasive as well and will constrain our ability to help ourselves.
This totally flies in the face of all those who have been predicting rising interest rates because of the Fed's "printing of money."
The fact is, there is huge demand for Treasuries simply because actions taken by Treasury and the Fed have caused reserves to balloon by $600 billion. These are the funds being used to buy Treasuries.
U.S. not having to "raise rates to attract capital." A ridiculous statement that displays a monumental lack of understanding of monetary operations. Yet, you hear it stated all the time.
Foreign exchange holdings of the Fed declined by $85.5 billion in the latest week. I do not know if that is due to some of these swaps being settled, or if the decline is due to mark-to-market losses in forex positions. (Probably the former, as currencies foreign currencies rallied in the week in question.)
Access the full report here.