Friday, October 30, 2009
The Worry Trade Again!
Worry is back! What a roller coaster this week!
Dollar up
Stocks down
Commodities down
Treasuries up
Stock Market Rout Follows Stock Market Rally
Treasuries Rising Again
NEW YORK -- A dismal batch of personal income and expenditure figures helped Treasurys reverse some of the previous session's steep price declines early Friday.
By midmorning, the two-year note was 3/32 higher, yielding 0.94%, and the 10-year note was up 17/32, yielding 3.44%. Yields move inversely to prices.
The government report showing the largest drop in consumer spending in almost a year comes just a day after a surprisingly strong reading on third-quarter growth in the U.S.
Mortgage Loan Losses Continue to Rise
from WSJ:
The Federal Home Loan Banks, still struggling with soured investments in mortgage securities, reported a combined net loss of $165 million for the third quarter.
The loss reflected write-downs totaling $1.04 billion in the value of private-label mortgage-backed securities. Such securities, which generally were packaged and sold by Wall Street firms, aren't backed by any U.S. government entity.
Thursday, October 29, 2009
GDP Rises and Jobless Claims Still Stubbornly Above 500,000
WSJ:
The U.S. economy expanded in the third quarter for the first time in more than a year thanks to a bounce back in consumer spending, but a weak labor market is expected to keep the recovery subdued.
Gross domestic product rose by a higher-than-expected seasonally adjusted 3.5% annual rate July through September, the Commerce Department said Thursday in its first estimate of third-quarter GDP.
MW:
The number of people filing for state unemployment benefits for the first time fell 1,000 to a seasonally adjusted 530,000 last week, the Labor Department reported Thursday.
Wednesday, October 28, 2009
Doom and Worry Rule the Day
from Bloomberg:
Oct. 29 (Bloomberg) -- An eight-month, 68 percent rally in global stocks failed to convince investors and analysts that it’s time to take on more risk or dispel their concerns about U.S. economic policies and its banking system.
Only 31 percent of respondents to a poll of investors and analysts who are Bloomberg subscribers in the U.S., Europe and Asia see investment opportunities, down from 35 percent in the previous survey in July. Almost 40 percent in the latest quarterly survey, the Bloomberg Global Poll, say they are still hunkering down. U.S. investors are even more cautious, with more than 50 percent saying they are in a defensive crouch.
“The doubt and the pessimism just won’t go away,” says James Paulsen, who helps oversee $375 billion as chief investment strategist at Wells Capital Management in Minneapolis. “They’re still so shell-shocked by what they went through despite the improvement in the market and the economy.”
Stock markets have bounded higher as the economic outlook has improved. The MSCI AC World Index of emerging and developed markets has risen by 68 percent since March. The S&P 500 index has gained 54 percent during that time.
Worldwide, investors and analysts now view the U.S. as the weak link in the global economy, with its markets seen as among the riskiest by a plurality of those surveyed. One in four respondents expects an unemployment rate of 11 percent or more a year from now, compared with a U.S. administration forecast of 9.7 percent. The jobless rate now is 9.8 percent, a 26-year high.
Dollar’s Decline
The skepticism about the U.S. is taking a toll on the dollar, with a plurality of respondents saying it will weaken against most other currencies in the next year, the yen being the major exception among the 11 currencies tested. Thirty-seven percent say the dollar should not continue as the world’s reserve currency in 10 years.
The poll is based on interviews conducted Oct. 23-27 with a random sample of 1,452 Bloomberg subscribers, representing decision makers in markets, finance and economics on six continents. It has a margin of error of plus or minus 2.6 percentage points.
“The stock market has had quite a run since July when more Bloomberg customers thought the Standard & Poor’s 500 index would rally than predicted a downturn,” says J. Ann Selzer, president of Selzer & Co., the Des Moines, Iowa-based firm that conducted the polls. “That rally may have dampened views of what to expect next. They may also think that there are better markets now for investments than the U.S.”
Emerging Markets
Respondents see China, Brazil and India as the markets with the most potential, and commodities as the asset of choice, replacing stocks as the most desirable investment class in last quarter’s survey. Real estate and bonds are out of favor, with 40 percent saying bonds will have the worst returns over the next year.
“Asia is the best place to put money as there are not mountains of consumer debt, bad mortgage lending, trade deficits or high unemployment,” says Peter J. Emblin, a fund executive at Thai Strategic Capital Management Co. in Bangkok who took part in the poll.
Investors and analysts in Asia are the most bullish, while those in the U.S. are the most cautious. A majority of Asian investors expect their country’s benchmark stock index to rise while a plurality of U.S. and European respondents thought their benchmarks would fall in the next six months.
Equity Rebound
“A lot of people have been surprised by the speed of the equity rebound,” says Dan Greenhaus, chief economic strategist at Miller Tabak & Co. in New York, adding that the rally has probably been fueled by buying from hedge funds and traders. “It caught them off guard and they don’t believe it.”
Fund manager Paulsen thinks the stock markets rose largely because of the disappearance of panicked sellers. “I don’t think the market has gone up because of heavy buying. You only need a little bit of buying when there are no sellers.”
Asia’s optimism is understandable. The region is leading the global economy out of the worst recession since World War II, according to the Washington-based International Monetary Fund. The IMF said on Oct. 1 that the world economy will expand 3.1 percent next year after shrinking 1.1 percent this year, with China growing by 9 percent and India by 6.4 percent.
Global investors and analysts agree that the world economy is on the mend. Almost 75 percent describe the global economy as stable or improving, up from just over 60 percent in July.
Higher Rates
The worldwide recovery is seen as pushing up long-term interest rates, with 55 percent of those surveyed forecasting higher rates in their respective countries in the next six months. As a result, only 9 percent surveyed thought bonds were the best place to invest over the next year, half the number who favored bonds in July.
More than half of respondents see the yield on the 10-year Treasury note rising in the next half year, up from 47 percent in the July poll. In Asia, where some of the biggest holders of Treasury securities are located, led by China with almost $800 billion, investors are less convinced that yields will rise. Forty-five percent of those surveyed in the region think that. The 10-year note ended trading in New York yesterday at 3.42 percent.
Commodities are expected to benefit from an Asian-led worldwide economic expansion, according to the survey. More than one in three investors say commodities will offer the highest return over the next year. Oil, gold, copper, corn and soybean prices are all seen rising in the next six months.
$100 Oil
“It’s an emerging-market story,” says Matthew Johnson, director of interest rate strategy for UBS AG in Sydney and a poll participant. “It’s all about inelastic supply and fast- growing demand.” He sees oil prices rising to $100 per barrel in the coming months from around $77 now.
China garnered the most votes from investors when they were asked to pick which one or two markets would offer the best opportunities over the next year. Brazil came in second, followed by India.
By contrast, a majority of investors worldwide are pessimistic about the investment climate in the U.S. and the European Union, according to the poll, though the gloom about Europe was less pronounced than it was in July.
“The U.S. market has the most downside risk in the coming year,” says Marty Beskow, a poll participant and portfolio manager for Blue Water Capital Advisors in Duluth, Minnesota, formed in January. “Although the U.S. may experience a quarter or more of growth, the driver is not real demand but rather stimulus from the Federal Reserve and government spending that is unsustainable.”
More Pessimistic
Investors have turned more pessimistic about the U.S. government’s economic plan since the last poll, with more than 60 percent saying they feel that way, compared with 55 percent in July. Almost 20 percent expect U.S. banks to be in worse shape a year from now, about double the number who felt that way in July. Two in three say the banks will improve over the next year but will still have problems.
Billionaire investor George Soros said on Oct. 5 in Istanbul that the U.S. recovery will be sluggish as “basically bankrupt” financial companies and indebted consumers impede it.
Worldwide, investors see large budget deficits as the biggest threat to the U.S. economy over the next year. The deficit hit a record $1.4 trillion in the year ended Sept. 30.
Persistently high unemployment is seen as the next biggest threat. More than three-quarters of respondents expect the U.S. unemployment rate to be 9.5 percent or more a year from now.
Tax Increases
Unlike investors elsewhere, those in the U.S. see higher taxes as the biggest danger. “The increase in taxes is going to slow the growth rate of our economy to below 2 percent for the next 25 years,” says Gary Singleterry, who participated in the poll and is president of Singleterry Mansley Asset Management in Summit, New Jersey, which manages about $200 million.
Three-quarters of U.S. investors think the dollar should remain the world’s reserve currency over the next decade. No more than half their counterparts in Europe and Asia feel that way.
“I heard a story the other day from an old French lady who was in her 100’s when she died,” says Ben Watson, director of quantitative analytics for RBS Group (Australia) Pty Limited in Sydney and a poll participant. “In the 1920’s she remembers the U.S. being an emerging market very much like China is today. The 19th century was the European century, the 20th was the American century and the 21st will be China’s century.”
Click here for additional information on methodology and a full list of survey questions.
Saudis Sever Link to NYMEX Crude Contract
from FT:
Saudi Arabia on Wednesday decided to drop the widely used West Texas Intermediate oil contract as the benchmark for pricing its oil, dealing a serious blow to the New York Mercantile Exchange.
The decision by the world’s biggest oil exporter could encourage other producers to abandon the benchmark and threatens the dominance of the world’s most heavily traded oil futures contract. It is the main contract traded on Nymex.
Stocks Begin Freefall
The Worry Trade is Back!
- The Dollar continues to rebound higher, as do treasuries.
- Stocks continue to sink, reaching the 50-day SMA support level
- Commodities have reversed direction and become bearish again across the board.
- Gold is drifting lower as the Dollar strengthens.
Broader Markets Weigh on Grains
New Home Sales Disappoint, Stocks Drift Lower
from MW:
U.S. new home sales unexpectedly fell 3.6% in September, the Commerce Department estimated Wednesday. The decline in new-home sales to a seasonally adjusted annual rate of 402,000 was well below the 438,000 pace expected by economists surveyed by MarketWatch. New-home sales in August were revised to a 417,000 level compared with the previous estimate of 429,000. This is the first decline in new home sales after five consecutive monthly gains. New-home sales are down 7.8% compared with a year ago. The supply of homes on the market fell to 251,000 in September, which is the lowest level since November 1982. Median sales prices have fallen 9.1% in the past year to $204,800.
S&P 500 Futures Drop Back to 50-Day Moving Average
Evening Rises Yield to Continued Slide Overnight for Grains
Most areas of Midwest should see up to a week of dry weather to make harvest progress as we move into next week
$$ higher & commodities sinking after European desks open. corn dn 6, beans dn 10, wheat dn 9
Shippers Sink Stocks
from WSJ:
Lending Still Losing
from WSJ:
A Wall Street Journal report that GMAC Financial Services and the Treasury Department were in advanced talks to prop up the lender with its third helping of taxpayer money was adding to the cautious tone, serving as a reminder of how some battered financial firms remain dependent on government lifelines. Dow Jones Industrial Average futures recently rose three points in screen trade.
The Longer and More Draw-Out the Top, the More Extended the Ensuing Decline
from Dr. Brett:
As a rule, the longer a market spends topping out (i.e., the longer the time that elapses between a momentum peak and an ultimate price peak), the more extended the subsequent decline. The trick is that the decline can become extended in time (as we saw during the June to July period) as well as price.
With the September momentum peak and the October price high, I expect that any decline could be extended in time--not just price--which is keeping me so far from buying this most recent dip below the 20-day VWAP. I will begin nibbling at the long side when we see signs of bottoming in the new highs/lows, Demand/Supply, and percentage of stocks below their 20-day moving averages.
Tuesday, October 27, 2009
Grains Stumble Despite Bullish Weather
...but Stock Bulls Defend Modest Gains
Consumer Confidence Reaches 26-year Low
WASHINGTON (MarketWatch) -- U.S. consumers doubt that the much-touted economic recovery is under way, according to the latest report on consumer confidence released by the Conference Board on Tuesday.
The consumer confidence index was much weaker than expected, falling for the second straight month as the assessment of present-day conditions fell to its lowest level in 26 years. "This indicator, and its component detail, appears to be pointing to a longer and more difficult journey to recovery than most would like to believe at the moment," said Josh Shapiro, chief economist at MFR Inc., in a note to clients.
Monday, October 26, 2009
Cap and Trade to Devastate Farms, Food Production
A new report on the effects of cap-and-trade legislation, released by Senators Kit Bond, R-Mo., and Kay Bailey Hutchison, R-Texas, says under House climate change legislation, America's farmers and ranchers would be hit with a considerable fuel tax increase. The outlook is for $550 million in higher fuel costs in 2020 and $1.65 billion in 2050. The senator's report is the first such report.
A Texas crop and livestock producer, visiting Washington, said cap-and-trade climate change legislation could hike the cost of fuel used for farming to the point that it will have a devastating economic impact on his and similar family-owned businesses. Richard Cortese, who farms near Little River, Texas says the type of gasoline and diesel fuel cost increases described in this report will make it very difficult for him to continue on the farm.
"I use diesel fuel for tillage, planting, harvesting and spraying and I use gasoline for service vehicles for checking livestock, utility vehicles and small engines," Cortese said. "Having a reliable and affordable supply of gasoline and diesel fuel is very important for my operation to continue to make a living for me and my family."
Phenomenon: Stocks, Bonds Sink Simultaneously
This is an interesting phenomenon because stocks and bond rarely decline at the same time. People buy bonds when the are worried and want a "safe" investment. I don't know what the implications are, but it is worrisome to me.
Stocks sink
Treasuries sink too
Socialism Is Force!
original link
image link
Treasury Downtrend Emerging?
Daily chart
Saturday, October 24, 2009
Global Trade Anemic
from WSJ:
LONDON -- Global trade flows slipped in August after rising for the two previous months, an indication that the economic recovery is more fragile and anemic than previous data have hinted.
The Netherlands Bureau for Economic Policy Analysis said trade volumes fell 2% from July, according to an algorithm based on customs data from 23 developed countries and 60 emerging markets, accounting for 95% of global trade.
The report is closely watched because it comes out before those compiled by the World Trade Organization and other institutions.
Global trade flows plummeted in the final months of last year as demand slowed and banks financed fewer cross-border transactions. Volumes were down 13% in August compared with the previous year.
The trade crisis has hit exporting powerhouses such as Japan and Germany particularly hard, sparked minor waves of protectionism almost everywhere, and inspired world leaders to make more funds available for trade finance.
The International Monetary Fund says world trade will fall 11.9% overall in 2009, the biggest drop since the Great Depression. The IMF sees a modest 2.5% increase in 2010.
Flows steadied during the second quarter of 2009, inspiring hopes of a recovery. The Organization for Economic Cooperation and Development said Friday that exports from the Group of Seven leading industrial nations rose 0.8% from the first quarter, although imports continued to fall, by 2.5%.
The Netherlands Bureau for Economic Policy Analysis, also known by its Dutch acronym CPB, calculated that trade was up 3.7% in July over June, prompting many observers to conclude that a true recovery was under way.
Many analysts, however, say the trend has bottomed out but that it is too early to predict where it will end in the next few months.
Grains Rise Steadily
from WSJ:
Chicago Board of Trade grain and soybean futures ended sharply higher on the week as wet weather doused producers' hopes of harvesting corn and soybeans and planting wheat.
After late selling on Friday following the price run-ups, nearby December corn closed up 25.75 cents on the week at $3.9775 per bushel, while November soybeans climbed 28.5 cents on the week to $10.06. December wheat soared 49 cents last week to $5.4775.
The U.S. harvests are off to their slowest start since the government began keeping records in 1985, due to persistently cool, wet conditions. Worries that the prolonged harvest will damage corn and soybeans helped ignite rallies at the CBOT, with strong support seen from speculative buying.
The markets could easily extend gains if the lousy weather continues, said Dale Durchholz, analyst for AgriVisor, a farm marketing service in Bloomington, Ill. Private forecaster T-Storm Weather said a powerful storm system next week would likely prevent substantial harvesting from taking place until November.
"If we come in Monday and these forecasts for seven to 10 days out are still a problem, we can see this thing leap sharply higher," Mr. Durchholz said.
Wheat has benefited from investor money flowing into the markets and from worries about delayed plantings of soft red winter wheat, the type used to make pastries and snack foods. Producers in the Midwest and South often plant SRW wheat after soybeans but can't put it in the ground until the soybeans come out.
There is uncertainty about how many acres of wheat will be planted because the delay may prompt producers to consider other crops, Mr. Durchholz said. Late-planted wheat can produce lower yields.
Uncertainty will persist in the corn and soybean markets until harvest makes significant strides and traders get a handle on how big the crops are, said Sid Love, analyst for Kansas-based Kropf & Love Consulting. The crops were projected to be massive before they ran into harvest troubles.
"We're trading on an uncertainty," Mr. Love said. "We don't know what the crop is."
The U.S. Department of Agriculture will issue an update on harvest progress Monday but won't issue fresh production estimates until Nov. 10.
Friday, October 23, 2009
Pravda: America Is Destroying Itself
from Pravada:
As my readers know, I am a fan of economics and of history, as well as politics, a combination that forms some very interesting cycles to research, discuss and argue on. None is so interesting than the death of great nations, for here there is always the self destruction that comes before the final breakups and invasions. As they say: Rome did not fall to the barbarians, all they did was kick in the rotting gates.
It can be safely said, that the last time a great nation destroyed itself through its own hubris and economic folly was the early Soviet Union (though in the end the late Soviet Union still died by the economic hand). Now we get the opportunity to watch the Americans do the exact same thing to themselves. The most amazing thing of course, is that they are just repeating the failed mistakes of the past. One would expect their fellow travelers in suicide, the British, to have spoken up by now, but unfortunately for the British, their education system is now even more of a joke than that of the Americans.
While taking a small breather from mouthing the never ending propaganda of recovery, never mind that every real indicator is pointing to death and destruction, the American Marxists have noticed that the French and Germans are out of recession and that Russia and Italy are heading out at a good clip themselves. Of course these facts have been wrapped up into their mind boggling non stop chant of "recovery" and hope-change-zombification. What is ignored, of course, is that we and the other three great nations all cut our taxes, cut our spending, made life easy for small business...in other words: the exact opposite of the Anglo-Sphere.
That brings us to Cap and Trade. Never in the history of humanity has a more idiotic plan been put forward and sold with bigger lies. Energy is the key stone to any and every economy, be it man power, animal power, wood or coal or nuclear. How else does one power industry that makes human life better (unless of course its making the bombs that end that human life, but that's a different topic). Never in history, with the exception of the Japanese self imposed isolation in the 1600s, did a government actively force its people away from economic activity and industry.
Even the Soviets never created such idiocy. The great famine of the late 1920s was caused by quite the opposite, as the Soviets collectivized farms to force peasants off of their land and into the big new factories. Of course this had disastrous results. So one must ask, are the powers that be in Washington and London degenerates or satanically evil? Where is the opposition? Where are the Republicans in America and Tories in England?
The unfortunate truth here is: the Republicans and Tories are the Mensheviks to the Democrat and Labour Bolsheviks. In other words, they are the slightly less radical fellow travellers who are to stupid to realize that once their usefulness is done, they will go the very camps they will help send the true opposition to. A more deserving lot was rarely born. Of course half of the useful idiots in the Bolshevik groupings will go to those very same camps.
One express idiocy of Cap and Trade in America will be the approximately additional $.19 per liter of gasoline, which is a rather very large increase in taxation, however indirectly. Of course this will not only hit the American working serfs in the pocket at fuel up, but will hit them in everything they buy and do, as America has almost no real rail to even partially off set the cost of transporting goods.
But how will this work itself out? Very simple and the chain of events has been worked out often enough.
First, the serfs will start to scream at the cost of fueling up and the cost of all their goods. The government, ever anxious not to take responsibility, will single out the petroleum factories and oil companies for gauging the people. They will make demands for them to cut prices, which of course means working for a loss. When plants start to close down or move overseas, they will be called racketeers and saboteurs. Their facilities will be nationalized so that the government can show them how to do things properly. Shortages will follow as will show trials and that's as long as the USD holds up and foreign nations are still willing to sell oil and gasoline for other than gold, silver and other hard resources.
When food goes up, and it surely will, as the diesel the farmer uses goes up as well as his fertilizers, the government will scream that the farmers are hording, thus undermining the efforts of the enlightened. There will be confiscations of all feed crops while the farmers will get production quotas to meet or have their land nationalized again. Do not believe me? Look at the people running your governments and ask yourself: would they rather take some one's land or admit that they screwed up and ruined everything? After a point, only the corporate farms will remain, food by oligarch, just a like the factory farms. There will be plenty of dissidents to work them.
This will of course spread from industry to industry and within a rather short order, you will be living the new fractional dream, that is a fraction of what you have now. But on the bright side, for once, your children, working for government/oligarch run joint ventures, will be able to compete adequately with the Chinese, to feed the demands of Europe and Latin America. But that will take at least a generation or two first along with a cultural revolution or two.
Stanislav Mishin
Wednesday, October 21, 2009
Tuesday, October 20, 2009
Niall Ferguson Quotes
"From the point of view of a foreign investor... there has been no stock market rally. The stock market rally is a money illusion rally because the dollar depreciation has negated all the appreciation of the S&P 500 since March."
"It's clear where we're headed. Ten years from now there will be more than one international reserve currency,"
The Declining Dollar
Despite the gloom about the Dollar, today it has risen significantly, probably on stock market and commodity weakness.
The weakening dollar is dying a slow death.
"It's clear where we're headed," says Niall Ferguson, author of The Ascent of Money. "Ten years from now there will be more than one international reserve currency," he tells Tech Ticker.
Ferguson dismisses the dollar loyalists, citing the British pound – the last international reserve currency - as his example. "These things don't last forever" but don't expect it to happen overnight. "It's a long multi-decade process," he states. Even with the dollar near a 14-month low against the Euro, he claims it's not without historical precedence for the greenback to lose "another 20%" this year.
For international investors the loss is enough to offset this year's stock market gains. Not exactly great motivation for foreigners to keep buying the almighty dollar.
The U.S. is an empire in decline, according to Niall Ferguson, Harvard professor and author of The Ascent of Money.
"People have predicted the end of America in the past and been wrong," Ferguson concedes. "But let's face it: If you're trying to borrow $9 trillion to save your financial system...and already half your public debt held by foreigners, it's not really the conduct of rising empires, is it?"
Given its massive deficits and overseas military adventures, America today is similar to the Spanish Empire in the 17th century and Britain's in the 20th, he says. "Excessive debt is usually a predictor of subsequent trouble."
Putting a finer point on it, Ferguson says America today is comparable to Britain circa 1900: a dominant empire underestimating the rise of a new power. In Britain's case back then it was Germany; in America's case today, it's China.
"When China's economy is equal in size to that of the U.S., which could come as early as 2027...it means China becomes not only a major economic competitor - it's that already, it then becomes a diplomatic competitor and a military competitor," the history professor declares.
The most obvious sign of this is China's major naval construction program, featuring next generation submarines and up to three aircraft carriers, Ferguson says. "There's no other way of interpreting this than as a challenge to the hegemony of the U.S. in the Asia-Pacific region."
As to analysts like Stratfor's George Friedman, who downplay China's naval ambitions, Ferguson notes British experts - including Winston Churchill - were similarly complacent about Germany at the dawn of the 20th century.
"I'm not predicting World War III but we have to recognize...China is becoming more assertive, a rival not a partner," he says, adding that China's navy doesn't have to be as large as America's to pose a problem. "They don't have to have an equally large navy, just big enough to pose a strategic threat [and] cause trouble" for the U.S. Navy.
Just as U.S. policymakers are too sanguine about China's military power, Harvard Professor Niall Ferguson says Washington D.C. is too complacent about China's ability to wean itself off the dollar.
With about 1.7 trillion of dollar-denominated assets (mainly Treasuries) in its foreign currency reserves, conventional wisdom goes something like this: If China were to diversify away from the dollar or merely allow the renminbi to float, much less dump its greenbacks wholesale, they would be shooting themselves in the proverbial foot. That's both as investors and because further dollar weakness would put a damper on their biggest export market. (A weaker dollar makes foreign goods more expensive for Americans, meaning Chinese imports would become less "cheap.")
This view is "slightly naive," according to Ferguson, author of The Ascent of Money.
"The idea they don't have anywhere else to go or would shoot themselves in the foot if there were a steep decline in the dollar or appreciation of their currency reassures many people in Washington ‘we can relax'," he says. "An appreciation of the renminbi may reduce value of their international reserves but increases the value of every other asset the Chinese own," most notably the commodity assets they have been buying all over the world.
China's "current strategy is to diversify out of dollars and into commodities," Ferguson says. Furthermore, China's recent pact with Brazil to conduct trade in their local currencies is a "sign of the times."
Perhaps most importantly, China's massive stimulus program is helping to generate internal consumption in the People's Republic, meaning local manufacturers are less dependent on exports. Because of the "rapid growth" of Chinese domestic consumption, Ferguson predicts China's international trade surplus could be gone by next year.
"People in Washington rather assume because the U.S. consumer was so dominant there really isn't a substitute," Ferguson says. But China's trade surplus stood at $12.9 billion in September, down about 56% from a year earlier, according to MarketWatch.com.
From 1998-2007, China engaged in a form of vendor financing, lending money to the U.S. so the U.S. would buy Chinese goods, Ferguson explains. "I think that model has basically broken. They know it and have a new one in which we play a much less important role."
Housing Data Turns Apple Rally Into Housing Rout
Monday, October 19, 2009
David Einhorn Bets On Major Currency Collapse
David Einhorn is a giant. He warned of the collapse of Lehman Bros well in advance. He even shorted it heavily.
from Marketwatch:
NEW YORK (MarketWatch) -- Greenlight Capital is betting on the possibility of a major currency collapse and a surge in interest rates, the hedge-fund firm's manager David Einhorn said Monday, citing ballooning government deficits in some of the world's most developed countries.
Einhorn, who warned about Lehman Brothers' frailty before it collapsed last year, also said financial institutions that are deemed as "too big to fail," such as Citigroup Inc. /quotes/comstock/13*!c/quotes/nls/c (C 4.55, -0.04, -0.87%) , should be broken up.Greenlight has been buying physical gold this year because Einhorn is concerned that efforts to save the financial system and fuel economic recovery are undermining the value of such currencies as the U.S. dollar.
On Monday, he said Greenlight has added new trades to this investment theme, buying long-dated options on much higher interest rates in Japan and other developed regions -- effectively giving the firm the chance to make big profits from a jump in rates. The options, bought from major banks, are tied to interest rates four to five years out, Einhorn noted.
"Japan may already be past the point of no return," he said during a presentation at the Value Investing Congress in New York.
Japan's debt is equal to 190% of the country's gross domestic product and its government deficit will be 10% of GDP this year, according to Einhorn.
Japan has been able to borrow money at roughly 2% a year to finance these deficits, partly because the country has many savers willing to buy low-yielding government bonds. However, some of these savers may begin spending instead as they enter retirement, Einhorn argued.
"When the market refuses to refinance at cheap rates, problems emerge," he said, adding that this could trigger a "currency death spiral."
Interest rates have been very stable in Japan for years, so the options on higher rates that Greenlight bought were relatively cheap. Einhorn said the "asymmetry" of that trade was interesting: If rates were to jump suddenly in Japan, Greenlight stands to make "multiples" on its positions.
"There remains a possibility that I'm wrong, and I hope I am," he commented. But earlier in the speech he remarked: "Just because something hasn't happened before, that doesn't mean it won't."
Remedy to shore up system
Einhorn also compared potential problems in sovereign-debt markets to the financial crisis that engulfed markets last year.When Lehman collapsed, investors reacted by dramatically increasing the cost of borrowing for rival Wall Street firms to the point where their business models were threatened, he Einhorn. The collapse of any major currency could have same impact of rerating the cost of financing governments in deficit.
Unlike Japan, the United States isn't past the point of no return, the fund manager stressed. However, he criticized financial-reform proposals pushed by Treasury Secretary Timothy Geithner, arguing they provide a government backstop for the largest institutions, entrenching them further.
No institution should be too big to fail, Einhorn contended. "The real solution is to break up anything that fails that test. Lehman shouldn't have existed in any size to threaten the financial system."
The same applies to Citigroup and Bear Stearns, which J.P. Mortgage Chase & Co. /quotes/comstock/13*!jpm/quotes/nls/jpm (JPM 46.06, +0.08, +0.17%) acquired, as well as American International Group Inc. /quotes/comstock/13*!aig/quotes/nls/aig (AIG 41.37, +0.20, +0.49%) and "dozens" of other firms, he said.
FDIC Admits "We're BROKE!"
from CNNMOney:
NEW YORK (CNNMoney.com) -- The government insurance fund designed to protect consumer bank deposits will likely stay in the red through 2012, Federal Deposit Insurance Corp. chief Sheila Bair said Wednesday.
Testifying before members of the Senate Banking Committee, the nation's top commercial bank regulator stressed that her agency was taking immediate steps to replenish the dwindling fund. But she said those efforts would not put the rescue fund in the black until a little more than two years from now at the earliest.
The fund has come under severe strain in recent months amid the recent surge in bank failures. Ninety-eight banks have failed so far this year, which has reduced the fund's value to $10 billion from $45 billion a year ago.
Last month, the agency painted an even more dire picture, estimating that the fund is currently in the red after taking into account future bank failures it anticipates will happen.
That would not be the first time the fund has had a negative balance. During the S&L crisis of the late 1980s and early 1990s, it slipped into the red.
"The problem we are facing is one of timing," Bair said, according to a copy of her prepared remarks.
One proposal currently under consideration would have banks prepay their deposit insurance premiums for the next three years. Under FDIC guidelines, bankers and others have until the end of October to comment on the proposal before it becomes a rule.
Saturday, October 17, 2009
More Mauldin Muddle-Through?
from John Mauldin:
Muddle Through, R.I.P.?
I defined a Muddle Through Economy in the past as one of slow growth (in the area of 1-2%) and a slack employment environment, such as we had in 2002 and the early part of 2003. In early 2007, I suggested we would return at some point to such an environment at the end of the recession I was predicting. I am not surprised about the response of the Fed to the current recession and credit crisis, whether it's the large monetization of debt or the low interest rates. Assuming they more or less remove the monetary easing in a reasonable manner, there is nothing that would make me think we do not eventually recover, albeit at a very slow Muddle Through pace, with a jobless recovery that lasts for several years. It will not be pleasant, but we'll survive.
However, gentle reader, never in my wildest dreams did I think we could be looking at government deficits of $1.5 trillion dollars and actually budgeting future deficits of over $1 trillion as far as the eye can see. And there is real reason to think that under current plans, $1 trillion deficits are optimistic. Look at the graph above from the Heritage Foundation. They suggest that current policy would bring us closer to a $2 trillion deficit by 2019.
And that assumes nominal growth that is north of 3% and unemployment dropping back below 5% in reasonably short order. If you make less optimistic assumptions, the number can become much larger rather quickly. Where do we find that much money to finance that large a deficit? We will look at what might be the answer, but first we need to look at a basic concept in economics.
Savings Equal Investments
GDP (Gross Domestic Product) is defined as Consumption (C) plus Investment (I) plus Government Spending (G) plus [Exports (E) minus Imports (I)] or:GDP = C + I + G + (E-I)
(For the wonks out there, GDP is usually termed "Y".)
You can calculate national savings as GDP minus consumption and government spending. That means that investment equals savings plus net exports. If there are no net exports, then money must come back into the US from outside the country to finance investments, along with savings.
This equation is known as an identity. An identity is an equality that remains true regardless of the values of any variables that appear within it. That means it is not a guess or an approximation. It is simple reality.
Thus, if there is a government deficit, there must be savings by both consumers and businesses, plus capital flows from outside the country, to offset that deficit in order for there to be any money left over for investments.
In the short run, an increase in government spending can offset a decline in consumption (a recession), but absent savings a government deficit crowds out investment in the long run. There must be savings in order for there to be investment. And without investment, you do not get job growth or economic growth.
Japanese Disease
Some readers wrote this week telling me I am far too worried about a rising government deficit. Right now we are at roughly 42% of debt to GDP. In 1989, at the start of the lost decades, Japan had a debt-to-GDP ratio of 51%. Now it is at 178%, and the world has not come to an end for them. In fact, they are running massive government deficits today and plan to do so for a long time. Why, I am asked, can't we be like Japan? And my answer is that it is possible, but the cost that Japan has paid has been high.In 1989, private Japanese debt (businesses and consumers) was at a debt-to-GDP ratio of 212%. Now it is at 110%. And the total of both government and private debt is roughly the same (within 5%) of where it was 20 years ago. Along with running large trade surpluses, private debt has been exchanged for government debt. Savings have fallen from the mid-teens to about 2% today, as the country is rapidly aging and now using its savings to live on. And how much has all that government spending helped the country? Before I answer that, read these paragraphs from Hoisington Asset Management's latest letter (last week's Outside the Box):
"The federal government's promise to extricate the U.S. economy from this recession involves more spending (increasing public debt) and more subsidies for consumers, such as car rebates and home buying incentives (more private debt). In other words, more debt is supposed to solve the problem of over-indebtedness. The truth is that this policy merely indentures its citizens further without providing any income for repayment of debt. In previous letters we have discussed the fact that the government spending multiplier is zero (read Professor Robert Barro's book, Macroeconomics - a Modern Approach, p. 370).
"This means there is no long term income benefit from stimulus programs. According to the latest academic research, the most recent $800 billion stimulus plan will boost economic activity in the short run, but will surely depress economic activity over time. The government problem is complicated by the fact that the tax multiplier is 3, meaning that a 1% change in taxes will change GDP by about 3% over time. More recent research (Barro & Redlick, September 2009, "NBER Working Paper 15369") suggests that a 1% cut in the marginal tax rate would raise GDP in the ensuing year by 0.6%. With the deficit rising due to a zero spending multiplier, the tendency will be to try to raise taxes to pay for this higher level of expenditures, which will further depress aggregate spending and output."
For all intents and purposes, Japan has had no growth for almost two decades. Their nominal GDP is where it was 17 years ago, and the number of employed people is at 20-years-ago levels. An aging population has masked their unemployment problems, as older citizens retire. Their savings went to government debt. Taxes were raised numerous times. Since government deficit spending has no long-term multiplier effect, growth has been nonexistent. (By the way, that research about multiplier effects has also been done by Christina Romer, the chairman of the current President's Council of Economic Advisors, and further explored by European economists. There is general agreement on these facts.)
In 1998, the US had a total debt- (government plus private) to-GDP ratio of 260%. Today it is 373%. We have added over $15 trillion in debt, yet total employment today is roughly where it was 9 years ago. But the current economic leadership wants to solve the problem of too much debt with even more debt. I am sympathetic with the idea that in the short run the government should step in and the Fed should print (within limits) money to keep us from deflation. But the equation we spent time on earlier suggests that if we continue to run massive deficits, we run the risk of catching Japanese disease - a decade-long (or longer) period of slow growth and high unemployment, especially since our population is growing and our Boomers are going back to work (and surveys suggest they intend to work longer).
Large government deficits choke off the very investment that we need to create jobs. In the name of doing good, the unintended consequence is to make it more difficult for small businesses to start up and create jobs. And we all know that small business is the engine for job creation.
The way out of the current morass is to create jobs and increase productivity. But if the government runs deficits of $1.5 trillion, that means whatever savings (corporate and consumer) we have will not go into the investments we need, but into government debt.
Who Will Buy the Debt?
Now, let's go back to the problem of who will buy the debt. How can we find $1.5 trillion each and every year? Some of it will come from foreign central banks, as we continue to run a trade deficit. Once those dollars leave our shores, they do not disappear. They can only go back into a dollar-denominated investment. Up to now, that has typically been US government debt. If China decides to use its dollars to buy commodities or other assets, whoever sells them the assets now has the dollars and must decide what to do with them. So give or take a few billion, about $400 billion will come back to the US from our trade deficit next year. That still leaves $1.1 trillion.Upon reflection, and cutting to the chase, I think that the buyers of the debt could be US banks for quite some time. The next graph shows commercial and industrial loans at US banks falling precipitously. Banks have (correctly) tightened lending standards, but that means that small and medium-sized businesses, which account for over 85% of all jobs, have been cut off from the life blood of growth. Is it any wonder they are cutting jobs at a prodigious rate?
The next graph shows bank credit (of all types), going back to 1974. Notice that even during recessions (gray shaded areas) bank lending either grows or at the most goes flat. But now we are experiencing something new: bank lending is falling. Notice the sharp increase in lending in 2008 as corporations decided to draw down their banks' lines of credit, afraid that the banks might cut back. And with good reason, as banks did exactly that.
So where do banks put their cash and reserves they are not lending? At the Fed and in Treasury debt. If you can leverage capital at ten to one (as banks can) and if you get 2% (for longer-term debt) and if you only have costs of, say, 50 basis points (or 0.5%), you can make a return on equity of 15% with no risk.
And that is what we are seeing. Banks are taking the money the Fed is printing and the government is giving them and putting it back at the Fed. Bank reserves at the Fed are exploding. And they are likely to continue to do so, since bank balance sheets are still deteriorating, especially at smaller and regional banks exposed to commercial real estate loans. Banks own 45% of commercial real estate loans, compared to only 21% of single-family loans. Banks (in general) are going to have to raise capital and reduce their loan portfolios in order to keep within the guidelines for adequate reserve capital. Small wonder that my friend Chris Whalen (one of the real experts on banks) thinks we will see over 400 banks fail in this cycle.
One quick chart to further highlight the problem that banks are facing. I have been writing for several years that commercial real estate loans will be the next shoe to drop. Moody's calculates that commercial real estate prices have dropped 30%. Over a trillion dollars in commercial real estate loans are coming due in the next few years. Banks are going to continue to reduce their loan portfolios in order to deal with the massive write-offs they are going to have to make. And my bet is they put those reserves they are not lending into government debt.
Given that the current Congress is hell bent on massively raising taxes in 2011, we are likely to dip back into recession by then, if not before. Remember, taxes have a multiplier effect of three. That means tax cuts increase GDP (over time) by three times their amount. But tax increases reduce GDP by three times the increase. That will make deficits worse, and unemployment will again start to rise from already high levels. Twenty states have already raised sales taxes, and more are raising other taxes. It is a vicious spiral.
The New Muddle Through Economy
This is not a prescription for a return to normal growth. We are headed for a New Normal that is less than what the market currently believes. Unless the deficit comes under control at some point, we face the real prospect of catching Japanese Disease and suffering yet another lost decade. Can we Muddle Through? We have no choice but to do so. But it will not be fun. It will not be long-term 2% growth and employment going back to 6% any time soon. Can we reverse the course? With a different attitude and leadership in Congress, maybe we can. But it won't happen next year, and it's unlikely in 2011.I am afraid we will have to put my old friend Muddle Through, as I previously defined him, back in his box for a while. But wait, if my friend at PIMCO, Mohammed El-Erian, can tell us we are going to a "New Normal," then I can decide that we are going to a "New Muddle Through Economy." Just not one as benign as I used to think.
In the end, that is what we will do. We will figure out how to deal with the environment in which we find ourselves. That is what free markets and entrepreneurs do. Things will sort out, but not before we have what could be an even more difficult crisis, which will force us to make hard choices.
As an aside, I am not expecting that we will see the crisis I am thinking of any time soon. We can move along with positive GDP for some time. I am thinking of the longer term, 1-3 years out. We will become complacent. I will get letters telling me I am too pessimistic. Just as I did in late 2006 when I said we would be in a recession by late 2007. But I firmly believe we will see a double-dip recession within another 18 months (at the most). Stock markets drop on average about 40% in a recession. Adjust your portfolios accordingly.
Friday, October 16, 2009
Thursday, October 15, 2009
Economic Data; Stocks Uneasy, But Holding
CPI up .2%, more than expected, still modest
Foreclosure filings 928,000 for 3rd quarter
NY Manufacturing inched higher - Manufacturing activity in the New York area improved at the fastest pace in five years, the New York Federal Reserve Bank reported Thursday, while a similar report from the Philadelphia Fed indicated a slower pace of expansion.
Meanwhile, the Philly Fed's index fell to 11.5 in October from 14.1 in September, with 28% saying business had improved and 17% saying it had worsened. The decline was in line with expectations
Wednesday, October 14, 2009
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