Monday, August 15, 2011

notes on the week ended Aug 13th

One-Year Chart for US Generic Govt TII 10 Year (USGGT10Y:IND)except for the stock market gyrations, which i normally dont follow, it was a relatively slow week as far as hard economic news goes...and with the S&P downgrade occurring so late last week, the econoblogosphere was still fixated on that for the first part of the week, so not much else was discussed... most objections to the downgrade seemed to come from those econobloggers on the left, accusing S&P of acting politically, which leads me to believe they hadnt really read the SP statement (pdf), which seemed to put most of the blame for the downgrade on the republican's anti tax stance; quoting from p4: "We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act." and as if that werent convincing enough, a S&P director further clarified the problem on thursday, saying our credibility was undermined by the fact that people in the political arena were even talking about a potential default,” "That a country even has such voices, albeit a minority, is something notable,” “This kind of rhetoric is not common amongst AAA sovereigns.

i cant say if the S&P downgrade had much to do with the stOne-Year Chart for US Generic Govt 10 Year Yield (USGG10YR:IND)ock market selloff; if any market should have been influenced by S&P's action, it should have been the market for US treasury debt, but that market turned in its best run-up of the year, with our long bonds rising all week...last friday, before the downgrade was made public, the interest rate on US 10-year bonds was 2.56%, by this friday, it was 2.24% (adjacent graph), and the yield on inflation-protected bonds actually went negative (top graph right)...(in contrast, borrowing costs for France, which is still rated AAA, went up last week)...and after all the handwringing over the weekend & early in the week that the downgrade would cause interest rates throughout the economy to skyrocket, and after Fannie, Freddie, & FHLB debt issues were also downgraded, mortgage rates still hit new record lows, with a 15 year fixed rate mortgage averaging 3 1/2%, with a one year ARM at 2.98%...even the 30 year fixed mortgage fell to 4.32%, slightly higher than the all time low of last november...

so at the end of the day, the S&P downgrade of the US will probably be a non-event, just as the downgrade of Japan was 9 years ago...although japan has twice the debt that we do compared to the size of their economy, their borrowing has never been impaired and their interest rates remain among the lowest in the world...and S&P will likely face a congressional investigation for their mischief, and well an insider trading inquiry from the SEC (yves smith related that certain hedge funds knew of the coming downgrade as early as the tuesday before & that others were briefed before the treasury) so we probably havent heard the last of it...

the FOMC (Fed Open Market Committee) meeting and following statement on tuesday set the tone for the rest of the week; some, noting the market weakness, were expecting another round of quantitative easing, but as that monetary policy bullet has probably been overused, they opted to change their statement to indicate that since the economy was much weaker than expected & not expected to improve soon, they would keep the fed funds rate between 0% & 1/4% for another two years...most opinion on this is that it was awful weak medicine (links on commentary are near the top of this week's blogpost), but as i've pointed out before, the Fed acts to protect & serve the banks; everything else is secondary, and the zero interest policy has one primary purpose, to allow the banks to recapitalize by borrowing at 0% & lending back to the Treasury & elsewhere at higher rates - despite the fact that the banks appear profitable, they are still carrying loads of bundled mortgages & commercial loans which are carried on their books at original value, and quirky accounting allows them to continue to pretend all is well...(more details in this old post: banks insolvent? extend and pretend…)

U.S. Trade Deficiton thursday we got another report which will likely cause some serious revisions to previously reported 2nd quarter GDP numbers; the trade deficit for June widened to $53.1B, up from $50.8B in May and quite a bit above expectations of around $48 billion; june's trade deficit was the largest since Oct 2008, the height of the financial crisis…for the purpose of illustrating this, i’m going to steal another one of bill mcbride’s graphs from his post on the trade deficit at calculated risk; he shows the trade deficit in blue (if you click on it, you’ll see the top of the graph is zero & all lines are negative), the oil trade deficit in black, and the trade deficit ex-petroleum in red…our trade deficit with China increased to $26.7 billion of the total, so it’s pretty obvious that chinese imports & oil make up the majority of our imbalance…

Consumer Sentiment

another dismal number we got this week was consumer sentiment; on friday, the thomson reuters/UofM survey indicated "consumers" were more negative than any time in the last 30 years; the index fell to 54.9, far below the median forecast of 63.0 and significantly off July’s reading 63.7; also reported on friday was that retail sales for july were up a half percent over june's, which was considered strong, so there was some confusion in the media as to how consumer sentiment could be at a 30 year low with retail sales up 5%...its a point ive made before; our bottom 90% of the population can go to hell, but the top 10%, controlling 93% of the wealth, will keep the gross aggregate numbers rising all by themselves...the rest of us are just economic baggage; we are no longer needed or wanted as consumers....nor as workers or voters, for that matter...

there were several posts on housing inventory this week; most were pretty routine reports on real estate owned by Fannie, Freddie, FHA & others, but there were also a couple that indicated those government agencies were looking for ways to either sell or lease the approximately 250,000 properties that they own; although one post indicated a rental proposal was already on the table, the others clearly stated that the FHFA, HUD, and the Treasury were jointly requesting ideas for sales or partnership ventures...another post, by yves smith, discovered that there are a large number of vacant foreclosed properties in new york state (where the delay in foreclosures is already over 2 years) which have title problems stemming from the way the banks handled the transfers of paperwork during the boom, which makes those properties virtually unsalable; she suggests this could be a problem nationwide, as we first surmised when the robosigning & foreclosure fraud scandals broke...and im sure you'll all be pleased to hear that we (as being liable for Fannie Mae) also took a portfolio of troubled mortgages off the hands of Bank of America this week, in something of a back door TARP...

i should also mention that the 12 members of the supercongress, who will be charged with finding $1.5 trillion in budget cuts between now and thanksgiving, have been selected, and although they're still officially on vacation, they've put their staffs to work on coming up with a compromise; the 12 were selected 3 each by harry reid, nancy pelosi, mitch mcconnell, and john boehner & are said to be loyal to each of them, so i'm guessing that those 4 have the ultimate power...rather than name them, i'll just point to the post that includes photos and backgrounds of this dirty dozen who may hold the future of this country in their hands...remember, that if they dont come up with a solution, $1.2 trillion in cuts spending cuts written into the new budget deal are automatically triggered, which include cuts to medicare and defense...and we also got a good indication on how our coming fiscal austerity might work from greece, where austerity has been imposed for over a year; their unemployment jumped to 16.6%, up from 12% a year earlier, and their economy shrank 6.9 percent in the second quarter of 2011 from the same period a year earlier...obviously, instead of having their deficit situation improve, the cutbacks there are making it worse...

in the area of jobs, the post office has announced plans for a major restructuring which will include elimination of 220,000 positions by 2015; they've also asked congress to remove the collective bargaining restrictions so the layoffs can proceed unhindered...and they're also asking congress to change legislation that requires postal workers to get federal health care and retirement benefits...there was also a report out that wall street was planning to eliminate another 101,000 jobs...being that its the banks, maybe they'll get more government aid to reverse the cuts...

i guess its not too much of a surprise to anyone that july set the record for the most weather extremes the US has ever seen in one month, led by warm minimums, record highs, & extremes in wetness & drought...but it was a surprise for me to hear that fires in russia had consumed more woodland than last years fires there; the difference this year was that most were in the unpopulated regions of the east and north, including siberia, so they really didnt make the news that last years fires near moscow did...

the last thing i want to leave you with is the adjacent chart, which comes from a recent report on the State of America’s Children; not only is it sad & and an embarrassment, its stupid; indicative of our short term thinking & unwillingness to invest in the future...those kids in poverty, malnourished & uneducated now will be the ones who will have to support the rest of us in 20 years...

the above is my weekly commentary 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, most coming from the aforementioned GGO posts, contact me

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