Monday, November 29, 2010

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...

Tuesday, November 23, 2010

notes & comments on the week ended Nov 20th

the debate about the effects of the 2nd round of quantitative easing, which had been ongoing among the financial & economic blogs, became partisan this week...it was almost as if that obama's defense of QE at the G20 meetings last week prompted a knee jerk reaction from the right...first, a number of republican economists published a letter in the WSJ attacking QE, then pence of indiana & corker of tennessee introduced bills to have the Fed stripped of its mandate to strive for full employment, then even sarah palin suddenly became a monetary policy wonk, criticizing bernanke for inflating the price of groceries...of course, the chinese have also continued their attacks on QE; one effect of the weaker dollar in combination with the approximate chinese peg to it is to raise costs in china, and since food is a larger part of the typically chinese budget, their inflation rate has been increasing accordingly...as a result, this week food price controls were announced accompanied by penalties against those caught hoarding...also caught by the weakening dollar are other countries with similar large dollar reserves; both the thai prime minister & the asian development bank came out favoring using the yuan instead of the dollar for trade in asia, while a UN report advocated switching to IMF drawing rights..

one of the stated aims of QE is to bring down long-term interest rates, ostensibly to encourage borrowing demand, but those lower rates arent whats happening at all: yields on the benchmark 10-year treasuries rose during the first week of QE by the most since last december, up 26 basis points, or 0.26 percentage point, to 2.79 percent...so what's really happening? the NY Fed publishes its buying schedule, the primary dealers in Treasuries, which are the mega banks, front run the Fed schedule, then profit by selling to the Fed, & then the bonds sell off...just more evidence that all QE is just another stealth bailout; all its about is recapitalizing the still insolvent banks...

the simpson-bowles deficit plan which was released last week has spawned a number of other budget plans and has been taken up by two major papers a well; first the NY times published an interactive budget game, where readers could pick their own fiscal choices, a combination of spending cuts and tax increases, and later in the week the Economist ran the US budget as a cover story...another bipartisan plan was also released, this one by alice rivlin and pete domenici, & paul ryan's medicare plan resurfaced for further discussion...one libertarian tax plan, called the fair tax, proposes across the board sales taxes of 23%, eliminating the income tax altogether...according to wage stats for 2009 from the SSA, 66% of all Americans made less than $40,000, while half actually made less than $26,261...these are the people who live paycheck to paycheck, who spend all they earn, so rather than being fair, such a tax system would be diminish the standard of living most people could afford after paying those taxes; & thus the so-called "fair tax" would effectively put 1/2 the population below the federal poverty threshold...

here's an earlier much more detailed interactive of the proposed 2011 budget: http://www.nytimes.com/interactive/2010/02/01/us/budget.html; it came in at about $1.4 trillion above expected revenues...i remain unabashedly in favor of soaking the rich...i'd let the bush tax cuts expire & then some...the bush tax cuts, mostly for the rich, are scheduled to EXPIRE; they cant be renewed without support from the democrats & obama...it's clear that tax cuts, especially for the rich, dont do much to stimulate the economy, on the other hand, each dollar spent on the expiring unemployment rations, which were defeated in congress in the first vote this week, would generate about $1.60 in new economic activity...never before this year have we allowed extended unemployment benefits to expire when the unemployment rate was above 7.2 percent...

what had started as a congressional investigation into foreclosure fraud when the robo-signers scandal erupted several weeks ago ended up in hearings before the banking committees in both the house & senate this week, and more evidence that the notes were not properly conveyed to the RMBS trusts came to light...there was a lot of talk about systemic risk if the MBS market collapses, so i'm getting a sense another retroactive re-write of the laws or similar bailout is in the works...on foreclosure fraud itself, there are class action lawsuits against the banks now ongoing in at least a half dozen states (scroll down to my notes in red for links to videos of robo-signer depositions and the flowchart of the securitization of just one mortgage) ...the mortgage bankers assoc reported that 13.52% of all loans were either delinquent or in foreclosure in the 3rd quarter; the delinquency rate actually declined, in part because of the increase in the number of houses foreclosed on...

the euro-mess became harder to follow this week; one day, a statement would made suggesting that ireland was on the way to accepting a bailout, the next day, or even the same day hours later, there would be an denial of the same; but near the end of the week it became clear a bailout was on the way; a financial swap team from the IMF, the ECB, & the european commission was said to have "parachuted in" to ireland to negotiate (read impose) terms of a bailout...it's estimated that $650 billion is at stake in terms of loans from german & british banks to ireland & it's banks...earlier in the week, 60billion euros was being mentioned, now it appears the bailout figure will be 100 billion euros, or $136 billion dollars, with 13% of that supplied by the UK...100B euros is about 60% of ireland's GDP; so its roughly the equivalent to the US getting a bailout of $9 trillion; almost lost in the irish shuffle was that greece had failed to meet its targets under its bailout, with a deficit of 15.4% of GDP, and another restructuring was being discussed there, and the OECD said that poland and slovakia needed a similar deficit reduction to greece & ireland; also, a bloomberg analysis showed that 33 eurozone companies are less risky than their governments, including six each in italy & spain... both simon johnson and roubini have been reading the tea leaves to see the underlying patterns here; and it appears that portugal will be next to need a bailout, and spain, still with 20% unemployment & a housing crisis worse than ours, is the elephant in the euro-room; if spain goes, europe would have to ask for help, and johnson believes it wont come from the US, that only china has a big enough pile of reserves to bailout a crumbling europe and impose its terms...there are at least 5 dozen links to euro-mess stories at the end of this week's blogpost...

other news notes, just listed:

early in the week, the NYTimes ran a front page story by ocean studies experts that due to rising ocean levels, major coastal infrastructure should be planned anticipating a sea level rise of 2 meters (7 feet) this century...you can argue about whether its anthropogenic or not, but it now seems certain that glacier melt, especially in greenland, is having an impact on ocean levels...

the one year boom in solar and wind power projects may be coming to an end, as the stimulus money, which supplied outright grants of up to 30% of the cost of such projects, is running out...

the NY Fed manufacturing survey recorded the sharpest drop since 9-11: the new orders index fell 37 points to -24.4; prices received have turned negative

possibly due to euro contagain, or a big california bond issue, a full year of gains in the municipal bond market has been wiped out over the past 2 weeks...

the october inflation rate was reported as 0.6% annualized, the lowest since '57...i have a feeling that the declining cost of housing skewers that, but i havent seen those figures broken out...the price impact of the new model cars is incorporated in the october index each year as well, so even though new car prices rose last month, they rose by less than in previous years..under the seasonal adjustment process, that translates into a lower price.

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...

Monday, November 15, 2010

picturing data

David McCandless turns complex data sets (like worldwide military spending, media buzz, Facebook status updates) into beautiful, simple diagrams that tease out unseen patterns and connections. Good design, he suggests, is the best way to navigate information glut -- and it may just change the way we see the world.

Monday, November 8, 2010

a QE2 perspective

as you can see from the above, some in the blogosphere as well as many in the business & financial worlds have had their knickers in knots over the prospect of the Fed's announced quantitative easing this past week; some are even talking like its the end of the world, that tomorrow we'll all wake up in zimbabwe...

let me try to put it in perspective; the announced QE2, which amounts to a total purchase of $600 billion in 2-10 year Treasuries, represents roughly a 25% increase in Fed assets; that's only about a third of the size of the first QE, which came 2 years ago at the height of the crisis, when the Fed almost tripled its balance sheet assets from around $875 billion, to near the current $2.3 trillion (here's a graphic of that)...we went thru all this hyperinflation hype back then, too, and what has materialized so far?  while at $75B a month plus reinvestments they may be covering most of the treasury issue over the planned 8 month effort, they're not hardly monetizing the total publicly held debt, which is $8.6 trillion...

my sense of what might happen is that QE2 will drive a commodities/market bubble and not affect unemployment, the publically stated objective…the fed will be buying medium term treasuries, driving down their yields; in turn, those big bond funds, such as PIMCO (with $1.2 trillion) who are now in treasuries will move their funds to other markets, possibly into corporate debt or emerging market bonds, chasing a higher yield…the liquidity thus produced eventually works its way into equities and commodities; to an extent, its already happening; global stock markets have already hit a 25 month high...and to the degree that commodities play into prices you might see some price increases at the street level…although wheat is up 60%, its down from it’s high following the heat wave & fires in russia; corn is also up, but the ethanol subsidy is partly to blame for that…but even though corn and wheat are both up over 60%, theyre still a minor cost in food; the cost of wheat in a loaf of bread is only a few cents...& although cotton is up 80%, at a record price, that's also largely the impact of bad weather in china, india & pakistan...similar weather related issues are affecting coffee's high...while most of the metals are near year highs, the more serious threat for street level inflation would be if we get a spike in the price of oil, since transport costs affect everything...the dollar weakening attendant with QE, which has already taken place in anticipation, will make imports more expensive; but since china, for the most part, still has it's yuan pegged to the dollar, most of what you buy wont see much price appreciation, unless you're into buying a lot of gold and silver trinkets...

im still thinking a big part of this new round of QE is the ongoing bailing out of the banks, which i detailed here: banks insolvent? extend and pretend…(see the last paragraphs in red), and is still a problem as long as the toxic real estate bonds are still carried on banks books at cost, rather than their market value...as recently as six months ago, all the discussion of monetary policy concerned what would be the exit strategy to unwind the first balance sheet expansion, so despite the public pronouncements of not meeting their targets for inflation and unemployment as the reason, i'd tend to believe the bank balance sheets have probably deteriorated further in the face of deteriorating commercial & residential MBS...thus keeping rates low will continue to allow the banks to recapitalize, but its still a pushing on a string effort for the general economy; just like the first QE was, there will still be no incentive for the public or business to borrow at 1/2% lower rates when the public is overextended already & businesses are still below capacity…so without accompanying fiscal policy there will be no increase in spending, and no boost to the overall economy…and remember, the Fed will have to eventually try to reverse this, and that's where the game really gets real tricky...

the big downside to this QE and low interest policy domestically will be to those living on fixed incomes; according to the census, there are more than 39 million americans over 65; many elderly count on CD or bond interest to live on, and not many have the options to safely take on more risk that a sophisticated investor would have; furthermore, many pension funds have already taken losses on their equity portfolios and have switched into fixed income, even so, the largest of those pension plans are still being funded anticipating a return of 7 1/2% or more...

the reaction overseas to our QE was all bad: german finance minister schauble said it was a horrendous decision, and called the Fed "clueless"; japan's finance minister threatened yen currency intervention in response, brazil's finance minister declared it an acceleration of the ongoing currency war, and the newly elected brazilian president suggested the last time this happened, it led to WW II...amidst other rhetoric, china demanded an explanation for the dollar devaluation, and malaysia and thailand called for a meeting of the ASEAN counties to plan a coordinated response, as capital inflows are feeding bubbles in those emerging markets...a showdown is expected at the G20 this week, where it looks like it will be the G19 vs us

the above is adapted from the weekly comments that accompany my sunday morning links mailing, which in turn is selected from my weekly blog post on the global glass onion; that blog contained over 100 links to news & commentary regarding QE this past week, and you can find those near the beginning of that post, as you typically can for other posts from previous weeks…if you’d be interested in getting my weekly emailing of selected links, mostly from these GGO posts, contact me...

Wednesday, November 3, 2010

it aint over, part 3: corexit

another collection of gulf coast headlines from Washington’s Blog; this set mostly relating to recent tests on residual dispersant and oil…

In related news:

for the headlines from last week, see part 1 and part 2….

Tuesday, November 2, 2010

RealityZone; A New Era ?: GM Could Be Free Of Taxes For Years: a tax break that could be worth as much as $45 billion.

RealityZone; A New Era ?: GM Could Be Free Of Taxes For Years: a tax break that could be worth as much as $45 billion.

Schlesinger: "The Peak Oil Debate is Over"

Dr. James Schlesinger served as Chairman of the Atomic Energy Commission (1971-73), Secretary of Defense (1973-75), Director of the CIA and was the first Secretary of Energy (1977-79). His wealth of experience at the highest levels of public administration is consolidated by his octogenarian wisdom.

Dr. James Schlesinger "The Peak Oil Debate is Over" from ASPO-USA on Vimeo.

for the full transcript, click here

& here’s where we’re at now…

our civilization, which has been running on cheap oil, is running out…

Monday, November 1, 2010

the coffee party manifesto

from William Easterly of aid watch…

The Coffee Party is alarmed that our discourse has been hijacked by Partys named after other Beverages. The Coffee Party is for all the reasonable people, which happens to be correlated with drinking good coffee.

Here is our manifesto:

  1. The Coffee Party has had the privilege to meet people from many different creeds and races, and despises fear-mongering towards any one group.
  2. The Coffee Party also hates xenophobia towards immigrants. We don’t plan to vote for any candidate who first exploited an immigrant for nine years and now wants to deport her.
  3. And ixnay on Yet Another Xenophobia aimed at particular trading partners, falsely blamed for our economic woes. The Coffee Party likes free trade — how else are we going to get our Coffee?
  4. While we’re at it, we don’t want Homophobia or Misogyny either.   
  5. The Coffee Party wishes the tax debate would also discuss whether we are getting our money’s worth. We have a tax-bloated government here at Coffee Party HQ, so why did they cut the one government activity we actually find useful – subways!?#!
  6. Suppose you had to make an agonizing decision whether to endanger the mother of your child by going through with a pregnancy. Pick one: (1) you and the mother should decide yourselves, (2) some Old Fart on a Bench or Legislature should decide for you.  The Coffee Party does not consider this a difficult pick.
  7. The Coffee Party wonders why all candidates from all parties have forgotten to mention that we are still waging war for reasons no longer clear, not to mention still violating civil liberties of both citizens and foreigners?
  8. Speaking of wars, how about ending the War on Drugs, which is so destructive  to our inner cities and to the source countries? (link to Nick Kristof){Wait a minute, we could even tax pot and restore subway service! (see 5) }
  9. Oh yes, Development. Frankly, the candidates are doing so badly on our issues 1 through 8, the Coffee Party is not expecting much from them on Global Development. At this point, we would just ask them not to destroy industries in poor countries with some arbitrary trade policy decision.
  10.   Our country is based on the ideals that ALL “are by nature equally free and independent,” and have “inalienable rights, among them life, liberty, and the pursuit of happiness,” men and women, blacks and whites, gays and straights, immigrants and natives, Christians and Muslims, citizens and foreigners, rich and poor. The Coffee Party wants our country back.