Sunday, November 28, 2010

comments on the week ended Nov 27th

if the Fed's quantitative easing was supposed to bring down borrowing costs, it's not working...2, 7, 10 and 30 year auctions of Treasuries have all come in at a higher interest rates than previous to QE2...this week a $35 billion 2 Year bond came at a .52% high yield, substantially more than the previous .40%...not only are the primary dealers in treasuries front running the Fed's buying schedule, but so are the bond funds, including PIMCO, the world's largest, and the chinese...moreover, the treasury/MBS spreads are at their highest in a year, meaning that mortgage rates will be higher...possibly front-running the expected ron paul Fed investigation, downtown denny kucinich has called for a congressional hearing on QE2, where he is expected to grill bernanke as to why the Fed is unable to change the jobs picture...

the major news in the mortgage mess related to a bankruptcy case in new jersey, where testimony revealed that countywide (now a unit of BofA) had not been conveying the notes to MBS trusts for at least 5 years; according to mortgage law experts testifying before congress, not only does this put the validity of those securities into question, but it also could raise questions about the titles to nearly every property transferred since the electronic registration system has been in use...even without the results of that case, analysts at realitytrac indicated the potential bank liability for MBS putbacks would be "enormous", subsequently analysts at barrons tried to put an number on that enormous & came up with $134B...on delinquent mortgages, the average number of days without a house payment before foreclosure is initiated is now 492 days, and in florida and new york most can count on staying in their homes free for 20 months before foreclosure...

a mixed batch of economic reports came out this week; existing home sales were down 2.2% for october, new home sales down were 8.1, first time claims for unemployment were the lowest of recession, but durable goods orders were the lowest in 18 months...forecasts from the minutes of the nov 2-3 Fed open market committee meeting, the one that hatched QE2, were also released this week; they forecast that it would take several years for the economy to return to normal growth; that unemployment would remain around 9% next year, and not fall to 8% until the end of 2012...

as i mentioned last week, the official CPI that came out at .6% seemed a little suspicious to me, and i wondered if the methodology to arrive at that number might reveal how that obfuscation was arrived at; i wasnt the only one; two analysts at ritholtz's blog did the digging for me (here and here)...as i suspected, the housing component of inflation has put a downward bias in the official figure over the past couple years; if you take the housing out for that period, our inflation has been 1.9%...that alone is close enough to the Fed inflation target to call into question the entire QE2 charade of attempting to head off deflation; moreover, QE2 is already inflating the commodities, affecting the prices of food & energy, which aren't even included in the "core inflation" that the Fed is looking at...in addition to this recent effect, the BLS method of computing inflation has changed over the past three decades to remove items which might result in "extreme values and/or sharp movements of prices" such as the cost of trucks, cards and textbooks...there are enough changes often enough to make the official figures meaningless...john williams at shadow stats estimates that if the BLS used the same methodologies for compiling the CPI today that it employed in 1990, the government’s number would be 4.5%; if they used the same methods as were used in 1980, the official CPI would be 8.5%... so why would the government want to deceive the public about inflation? there are automatic pay increases tied to the CPI written into many government jobs, pensions, and labor union contracts, and an annual cost of living adjustment to social security is also tied to the CPI...you didnt think it was to screw the banksters, did you?

as was indicated going into last weekend, the bailout of ireland to bailout german and british banks was enforced last sunday, with the IMF, EU, UK & sweden pledging loans of 90 Billion euros at below market rates (reports of amount & rates vary)...existing irish 10 year debt rallied briefly to yield below 8%, but it was above 8% within 24 hours and back above 9% by midweek...the eurozone focus almost immediately shifted to portugal, which has always been in the high risk category, and by extension, to spain, as portugal's biggest creditor is spain...the EU pressured portugal to accept bailout funds, but portugal said the EU cant force a bailout on them (echoing ireland's position last week)...portuguese debt cost more than 7%, and spanish debt hit a new high @ 5.2%...with speculation that both might eventually need a bailout, it became obvious that the trillion dollar financial facility put together during the greek crisis would be inadequate...the european commission floated the idea of doubling the promises in that fund, but was vetoed within hours by germany...the portuguese government passed an austere budget with severe cutbacks and a countrywide strike disrupted fuel supplies & shut down the country...belgium, with irish bank exposure at 5% of GDP and no functioning government, and italy were also mentioned as possible problems, and by friday the FT noted even france was seen at risk, as a star french soccer player called for everyone to withdraw their money from banks on Dec 7th...lost in the shuffle was that greece was not meeting its deficit reduction targets promised during the summer...the spillover from ireland made it difficult for european governments to obtain funding; both germany & hungary were unable to sell the amount of bonds they took to the market, & even china also failed to meet its sale target in a one-year note auction...short term spanish debt demanded twice the yield of a month ago, italian costs rose, and spanish electric & russian bond offers were withdrawn...all this & more is documented with about a hundred euro-related links at the end of this week's blog post...

some americans reporters & writers seem to be lumping the european problems into a package, as if all countries there were all inflicted with the same disease; but irish situation is not at all like that of greece; greece had a bloated government sector and ran excessive deficits going into the crisis, then had goldman contrive a deceptive swap deal to hide it's actual debt, ireland, on the other hand, had the lowest debt to GDP ratio (12% - germany's was 50%) of any country in europe going into the crisis; their problem stemmed from the world's biggest housing bubble and overextended, undercapitalized private sector banks, which the government first bailed out, then nationalized...portugal also has a large unionized public sector with higher debt to GDP ratio by virtue of borrowing for major infrastructure investments, whereas the problems with spain stem from a real-estate bubble that has deflated more than ours, subsequent 20% unemployment, and the extend & pretend of their insolvent cajas, or savings & loans...this summer, those spanish cajas passed the same euro stress tests the irish banks passed...spanish public debt, on the other hand, is only 53% of GDP - half the level of italy’s...

the above are my weekly comments that accompanied my sunday morning links mailing, which in turn was selected from my weekly blog post on the global glass onion…if you’d be interested in getting my weekly emailing of selected links that accompanies these commentaries, mostly from the aforementioned GGO posts, contact me...

1 comment:

  1. if the Fed's quantitative easing was supposed to bring down borrowing costs, it's not working...2, 7, 10 and 30 year auctions of Treasuries have all come in at a higher interest rates than previous to QE2...this week a $35 billion 2 Year bond came at a .52% high yield, substantially more than the previous

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