Even as he wins plaudits for his prescience, Roubini, 50, says worse lies ahead. Banks face bigger credit losses than they realize, more financial companies will require state takeovers and the world economy will keep shrinking throughout 2009, he says.
“The consensus is catching up with me, but it’s still behind,” Roubini said in an interview in Davos. “I don’t know what some people are smoking.”
“I was intellectually vindicated,” Roubini says. “But I was vindicated by having an economic disaster which has political and social consequences.”
While the U.S. government is resisting nationalizing its biggest banks, Roubini says it will have no choice because they are now “effectively insolvent.” And the outcome may be even worse than even he anticipates if governments fail to take aggressive steps to recapitalize banks and revive their economies, he says: “The risk of a near-depression shouldn’t be underestimated.”
Saturday, January 31, 2009
Here is the full article.
Treasuries fell for a second week after the U.S. sold $78 billion of notes, the start of what’s forecast to be a record amount of debt this year to pay for a burgeoning budget deficit and fiscal stimulus programs...
“In the long term, you’re going to see Treasury yields rise as we deal with the mother of all supply challenges,” said Kevin Flanagan, a Purchase, New York-based fixed-income strategist for Morgan Stanley’s individual-investor clients...
The U.S. will probably borrow $2.5 trillion this fiscal year ending Sept. 30, almost triple the $892 billion in notes and bonds sold the prior 12 months, according to Goldman Sachs Group Inc., one of the 17 primary dealers required to bid at Treasury auctions.
“Creative pricing of toxic assets will only postpone the pain, extend the duration of the crisis, and present a bigger bill,” Northern Trust Securities Inc. economist Asha Bangalore said in a Jan. 23 research note.
If the government purchases the security at $85, the future losses and bill to the public purse would be less. The problem is, this price could cause banks to recognize as permanent their losses on other securities. Right now, they claim those losses are temporary.
Such a move would cripple banks’ regulatory capital ratios. Plenty of banks could still fail. In that case, banks and taxpayers both get hit.
Buying the security at the market price of $65 means banks and the financial system immediately face a day of reckoning. While bank balance sheets would get unclogged, many wouldn’t be able to, or willing to, face the losses.
Friday, January 30, 2009
Also from Minanville:
The reality is that printing money, which is precisely what is going to take place under this $888 billion "economic stimulus" package, cannot create real savings or wealth, it can only redistribute it.
Here is some perspective from Minanville:
According to Time Magazine (via Barry Ritholtz), since October, the government has deposited $165 billion into the accounts of the nation's eight largest banks, which are now worth $418 billion less than they were four months ago. Also, the Congressional Budget Office estimates that the government's preferred shares are showing a $20 billion loss, the magazine reports.
"All told, the government's annualized rate of return on its investment in the nation's largest banks is -1,096%."
Perhaps when President Obama uses his latest poll-induced buzzword, "investment", with the American People to make his spending plan appear palatable, we should be very skeptical. In fact, we should run, not walk, for the exits! The fact is that the so-called stimulus plan is nothing of the kind. It is spending. It is nothing more... than more pork! It's more of the same we've come to see from Washington for decades and generations of Americans! It's no change at all!
Thursday, January 29, 2009
Isn't this the same commodity that, a year ago, its scarcity was causing riots all over the world? Today it was limit down (see intraday chart, above). The daily chart is shown below. The price of rice has been plunging for months without much fanfare!
The FOMC attempted to use a verbal intervention to force interest rates lower, but it didn't work! The bond vigilantes would have none of it, and they didn't take the challenge lying down. They sold treasuries forcefully today in an open challenge to the Fed to do so. The 5-year note auction showed weaker-than-expected bids, and the sale was on in earnest.
With the U.S. government borrowing money in unprecedented quantities, bond holders world-wide are beginning to demand higher interest rates in order to hold debt that is more and more likely to be labeled with down-graded debt ratings and a higher probability of default. They want to be compensated for the increased risk!
On the blog of another financial blogger who is a bond specialist, he said that, "Investors are punishing profligate taxpayers for prodigious spending." Well said. His blog is located here:
Across the Curve
By restricting the capital markets in this way, Congress risks the following:
- Capital will flow out of the United States to futures exchanges in other countries. This, in turn will drive the Dollar lower, and commodities prices will move higher. Money and commodities flow to places where they are welcome. If Congress creates an unwelcome environment in the United States, both the capital and the commodities will go elsewhere. Can the U.S. afford to create long lines at gas pumps by creating a fuel shortage here? Can the U.S. afford to see capital flight to other countries, collapsing the Dollar and run the risk of the Dollar being dumped as the world's primary reserve currency?
- Liquidity will dry up, giving greater power to large market participants to control prices and manipulate the markets. George Soros is a master at manipulating small, illiquid financial markets. Remember the Hunt Brothers and their manipulation of the silver market? As prices rose, more and more participants entered the market, until the Hunt Brothers lost control and they could no longer manipulate the small silver market. Liquidity brought an end to their manipulations. Strong liquidity in any futures market is critical to prevent any market participant from exercising too much control.One reason for the current crisis is that derivatives products were created for which there was no market. A market without liquidity exacerbates the wild price swings when a single market participant need to change positions or exit the market and can't find a willing buyer or seller. Liquidity prevents this. This is precisely what has caused the current crisis. The absence of a liquid market eventually caused the government to step in and buy toxic assets for which no liquid market existed.
- It will make price discovery more difficult and constrained. One of the reasons that this financial crisis occurred is because so many derivatives products were created without price transparency. This action will reduce transparency, and amplify the very problem that created the crisis in the first place.
Bloomberg said this:
Prospects for an economic recovery this year dimmed after reports today showed new-home sales collapsed, durable-goods orders slumped and a record number of Americans collected unemployment benefits.
“There really isn’t any hiding place in this economy,” said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts.
U.S. unemployment lines stretched to the longest on record, the Labor Department reported Thursday, a sign that the U.S. labor market continues to worsen.
Continuing jobless claims rose by 159,000 in the week ending Jan. 17 to a seasonally adjusted 4.78 million, the most since the government's records begin in 1967. That is the same week the government surveyed hundreds of thousands of workplaces and households to gather information for the January employment report.
I would call attention in the above quote to the words "seasonally adjusted". These figures are changed by the government with the intent to smooth out the peaks and valleys. The real numbers are far worse! The "unadjusted" unemployment rate, according to BLS figures, is 13.5%!
Wednesday, January 28, 2009
"The Committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets."
"The Federal Reserve will be implementing the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses."
Tuesday, January 27, 2009
Monday, January 26, 2009
From Nouriel Roubini:
The US banking system is borderline insolvent in the aggregate and it will take a huge amount of public financial resources and complex and time-consuming work-out of insolvent institutions to restore its financial health and allow it to lend again in ways that support sustained economic growth.
This was his written, prepared answer. He was clearly answering on behalf of President Obama."President Obama -- backed by the conclusions of a broad range of economists -- believes that China is manipulating its currency. President Obama has pledged as President to use aggressively all the diplomatic avenues open to him to seek change in China's currency practices."
China's Commerce Ministry issued the following statement in response:
Why is this significant?
"/China/ has never used so-called currency manipulation to gain benefits in its international trade. Directing unsubstantiated criticism at China on the exchange-rate issue will only help US protectionism and will not help towards a real solution to the issue."
- China owns more U.S. treasuries than any other country in the world. If China should begin to dump them suddenly, in a spirit of retaliation, it would almost certainly force interest rates in the United States to rise significantly and rapidly. It may also cause the Dollar to plunge, sending prices of nearly everything sky-high, as commodities respond to a Dollar collapse. As the world's largest debtor nation, the United States can not afford to see a sell-off of its debt.
- If the United States declares China as a currency manipulator, and retaliates with sanctions of any kind, China would almost certainly respond in kind by limiting or restricting U.S. goods and services. This would make the United States economy worse. Quite frankly, the United States has more to lose.
- One of the lessons that nearly all economists and students of economic history agree is that one of the factors that powerfully amplified the gravity of the Great Depression were policies that ignited a trade war. If a trade war begins between the world's two largest economic powers, the consequences could be catastrophic.
Job cuts announced this morning:
- Phillips cutting 6,000 jobs
- Sprint cutting 8,000 jobs
- Caterpillar cutting 20,000 jobs
- ING cutting 7,000 jobs
- Home Depot cutting 7,000 jobs
They're Not Credit Cards. They're Debt Cards! They're Not Freedom! They're Chains!
Despite my opinion here described, I will strive to ignore it when trading. Now that I have acknowledged my bias for the financial markets, I will try to ignore it when taking trades and making a living. I need to leave my emotional biases behind when trading.
Sunday, January 25, 2009
This quote doesn't do justice but here it is:
Read the whole kit and kaboodle here.
It is going to take a lot more TARP and private money to capitalize the banks. A whole lot more. And that is before any of the other stimulus. And all that next $1 trillion does is get the banks back to where they were two years ago. Further, it does not give them the capital they need to make up for the loss of the Shadow Banking System. It is going to take some time to build what I call the new private credit system.
From the New York Post:
"The capital injections haven't worked," said Edward Yardeni, an independent market analyst...
With a little over $350 billion already infused into the banking industry through TARP and countless billions through the Fed, many see the cash having little benefit for the economy. Plus, some Wall Street firms have estimated that it will take $3 trillion to right the banks.
"The size of the problem is growing faster than the banks' ability to handle it," said Joe Battipaglia, market strategist at Stifel Nicolaus.
"We're halfway through the bailout money, and the banks are in worse shape than they were six months ago."