King World News did a great interview with Mark Hanson who is a Founder and Managing Director of Mhanson Advisor. He knows more about housing than anyone I follow. He is very very bearish on housing and explains why the headline in July will be house sales down double digits.
Interview can be found here. Great interview. Recommend it strongly.
Thursday, April 29, 2010
More on My Indignation About Europe
So today I wake up in a decent mood. I hadn't been feeling well lately because of a dog bite followed by a needed tetanus shot (my body did not like the tetanus shot). Anyway, I wake up feeling better again and get to my office surfing the news when I read this from Euro Intelligence: referring to the bailout package:
The loans will be junior to those of the existing bondholders.
Are you freaking kidding me? 7 billion of American taxpayer money is going over to Greece and now we are going to be junior to all the banks who made ridiculously stupid loans????? Who has ever heard of such a thing? The freaking banks won't take 1 cent of writedown on loans worth probably around 30 to 50 cents on the dollar in a default scenario.
So instead, we are just going to turn a blind eye and let the absurdity build. There is still some probability that the German parliament won't agree to these measures. I am losing hope.
This was quoted on several other blogs. I get David Rosenburgs stuff. I couldn't agree more.
First we have governments bailing out banks (and auto companies and mortgage providers), homeowner debtors, and now we have governments bailing out governments. When does someone finally say — enough is enough!
Look, Greece is not going to “fail”. They are going to default. There will be a debt restructuring. And there will be some recovery. Bondholders will take a haircut — why shouldn’t they? Why should Angela Merkel care if German banks own Greek bonds? Greece has been in default in its recent 200-year history almost half the time. So has most of Latin America come to think of it. What about Russia?
The end is complete collapse. The fate is already sealed. The question is severity and timing. The severity issue just gets worse the more we do these idiotic bailouts coupling the system. Personally, I would rather the collapse come now so I can start moving forward in a few years.
If you see what is going on, it freezes you. I would love to be buying companies but how do you do that knowing that in the next three years (heck even the next five) this whole thing collapses? What are you buying unless you plan on flipping.
The thing is I have never been apocalyptic. That isn't my personality. I am naturally skeptical but always thought collapse was a joke...until 2009 when I saw what the U.S. government was doing. Now I see it as a certainty and whether it come quicker than later so at some point I can move on with my life as an opportunity to progress and build with the knowledge that I will not be building when the floor collapses under me.
The loans will be junior to those of the existing bondholders.
Are you freaking kidding me? 7 billion of American taxpayer money is going over to Greece and now we are going to be junior to all the banks who made ridiculously stupid loans????? Who has ever heard of such a thing? The freaking banks won't take 1 cent of writedown on loans worth probably around 30 to 50 cents on the dollar in a default scenario.
So instead, we are just going to turn a blind eye and let the absurdity build. There is still some probability that the German parliament won't agree to these measures. I am losing hope.
This was quoted on several other blogs. I get David Rosenburgs stuff. I couldn't agree more.
First we have governments bailing out banks (and auto companies and mortgage providers), homeowner debtors, and now we have governments bailing out governments. When does someone finally say — enough is enough!
Look, Greece is not going to “fail”. They are going to default. There will be a debt restructuring. And there will be some recovery. Bondholders will take a haircut — why shouldn’t they? Why should Angela Merkel care if German banks own Greek bonds? Greece has been in default in its recent 200-year history almost half the time. So has most of Latin America come to think of it. What about Russia?
The end is complete collapse. The fate is already sealed. The question is severity and timing. The severity issue just gets worse the more we do these idiotic bailouts coupling the system. Personally, I would rather the collapse come now so I can start moving forward in a few years.
If you see what is going on, it freezes you. I would love to be buying companies but how do you do that knowing that in the next three years (heck even the next five) this whole thing collapses? What are you buying unless you plan on flipping.
The thing is I have never been apocalyptic. That isn't my personality. I am naturally skeptical but always thought collapse was a joke...until 2009 when I saw what the U.S. government was doing. Now I see it as a certainty and whether it come quicker than later so at some point I can move on with my life as an opportunity to progress and build with the knowledge that I will not be building when the floor collapses under me.
Europe's Price Tag
Price tag of solving Europe keeps going up and up and up. On the way to the superbubble that eventually ends civilization if they actually do this. (actually the fate may have already been sealed without them doing this) This is nothing different than what started WWII with all the cross guarantees of defense. Poland has a pact with Hungary and England has a pack with Poland and France has a pact with England. So if Hungary is attacked everyone declares war on everyone else. Except now you have financial bailout pacts.
This is from Bloomberg yesterday.
European policy makers may need to provide as much as 600 billion euros ($794 billion) in aid or buy government bonds if they are to stamp out the region’s spreading fiscal crisis, said economists at Goldman Sachs Group Inc., JPMorgan Chase & Co. and Royal Bank of Scotland Group Plc.
and
With Greece’s budget turmoil infecting markets from Rome to Madrid, economists are urging German Chancellor Angela Merkel, European Central Bank President Jean-Claude Trichet and other officials to come up with unprecedented measures. Other steps could see governments guaranteeing bonds and the ECB abandoning collateral rules or reviving unlimited lending to banks, the economists said.
and
The extra yield that investors demand to hold Portuguese 10-year bonds over bunds rose 59 basis points to 277 points yesterday, the most since 1997, before slipping 3 points today. The spread on Spanish debt increased to the most in more than a year yesterday and the spread on the bonds of Italy, the euro region’s third-largest economy, was the highest since July. The premium on Greek bonds surpassed 8 percentage points.
“This is like Ebola,” Organization for Economic Cooperation and Development Secretary General Gurria told Bloomberg Television today. “It’s threatening the stability of the financial system.” The World Health Organization calls Ebola “one of the most virulent viral diseases known to humankind.”
Heck yeah, the virus is a perfect comparison because the financial system is so dang interconnected that someone like Greece who shouldn't matter at all holds the world hostage. So the fact we are too interconnected means the solution is to become more interconnected. Now that is Harvard like genius at its best right there.
This is from Bloomberg yesterday.
European policy makers may need to provide as much as 600 billion euros ($794 billion) in aid or buy government bonds if they are to stamp out the region’s spreading fiscal crisis, said economists at Goldman Sachs Group Inc., JPMorgan Chase & Co. and Royal Bank of Scotland Group Plc.
and
With Greece’s budget turmoil infecting markets from Rome to Madrid, economists are urging German Chancellor Angela Merkel, European Central Bank President Jean-Claude Trichet and other officials to come up with unprecedented measures. Other steps could see governments guaranteeing bonds and the ECB abandoning collateral rules or reviving unlimited lending to banks, the economists said.
and
The extra yield that investors demand to hold Portuguese 10-year bonds over bunds rose 59 basis points to 277 points yesterday, the most since 1997, before slipping 3 points today. The spread on Spanish debt increased to the most in more than a year yesterday and the spread on the bonds of Italy, the euro region’s third-largest economy, was the highest since July. The premium on Greek bonds surpassed 8 percentage points.
“This is like Ebola,” Organization for Economic Cooperation and Development Secretary General Gurria told Bloomberg Television today. “It’s threatening the stability of the financial system.” The World Health Organization calls Ebola “one of the most virulent viral diseases known to humankind.”
Heck yeah, the virus is a perfect comparison because the financial system is so dang interconnected that someone like Greece who shouldn't matter at all holds the world hostage. So the fact we are too interconnected means the solution is to become more interconnected. Now that is Harvard like genius at its best right there.
Tuesday, April 27, 2010
One Day Wonder?
So was today the beginning of something big? Who knows. I liked the close and the fact that it was below 1185. I sent this email to a friend last night:
"We are close to a tipping point (if we haven't reached it already) where this widening is only going to cause more widening as banks are forced to sell and margin calls in one market is going to cause selling in another and a nasty cycle. I tend to think there will be something to calm this down for a few weeks or months before it really hits sky high but the fuse is becoming shorter."
Greece will not be the powder keg. The U.S. markets have been ignoring for that reason. However Greece can be the match that lights the powder keg if the contagion isn't contained ASAP. The move down today was not so much about Greece as the contagion.
This is an email I sent out earlier. I still don't think Germany will do a direct bailout.
"As I said today the more likely outcome is no "bailout" but agreed upon debt restructuring where banks write downs the loans to Greece by say 30%. Greece has 1 billion in loans and that is reduced to $300 million. The banks take a $300 million loss. To the extent the banks are in trouble because of capital Germany funnels money to German banks. There is still no bailout. No legal challenge issue. And probably more politically doable. The other possibility which is real is that the IMF comes in and just does the whole thing."
That scenario is not without risk either. Who all owns Greece debt. What does an agreed upon haircut mean. Does it tip over another institution in some other country and that starts the Chain reaction? The other concern is rumors of a major Greek bank failing. That has profound impact.
People are comparing this to Bear Stearns and I still think it is a little smaller than that. More like a New Century Financial in 2007.
Anyway, we need to hold 1200 tomorrow on any rebound. That would be about a 50% retracement. Anything else and it starts looking like a one day wonder.
"We are close to a tipping point (if we haven't reached it already) where this widening is only going to cause more widening as banks are forced to sell and margin calls in one market is going to cause selling in another and a nasty cycle. I tend to think there will be something to calm this down for a few weeks or months before it really hits sky high but the fuse is becoming shorter."
Greece will not be the powder keg. The U.S. markets have been ignoring for that reason. However Greece can be the match that lights the powder keg if the contagion isn't contained ASAP. The move down today was not so much about Greece as the contagion.
This is an email I sent out earlier. I still don't think Germany will do a direct bailout.
"As I said today the more likely outcome is no "bailout" but agreed upon debt restructuring where banks write downs the loans to Greece by say 30%. Greece has 1 billion in loans and that is reduced to $300 million. The banks take a $300 million loss. To the extent the banks are in trouble because of capital Germany funnels money to German banks. There is still no bailout. No legal challenge issue. And probably more politically doable. The other possibility which is real is that the IMF comes in and just does the whole thing."
That scenario is not without risk either. Who all owns Greece debt. What does an agreed upon haircut mean. Does it tip over another institution in some other country and that starts the Chain reaction? The other concern is rumors of a major Greek bank failing. That has profound impact.
People are comparing this to Bear Stearns and I still think it is a little smaller than that. More like a New Century Financial in 2007.
Anyway, we need to hold 1200 tomorrow on any rebound. That would be about a 50% retracement. Anything else and it starts looking like a one day wonder.
Saturday, April 24, 2010
Rhyming with Creditanstalt
I don't usually do this but this was so good I had to paste it verbatim. It is from creditwritedowns have been talking about the Austrian banks for months in investor debates and in disuctions. It is amazing how loudly we are rhyming with the 30s except the whole thing is much bigger. Creditanstalt got the whole thing headed back down again. After that what put the nail in the coffin was UK being forced to go off the gold standard in fall of 1931. Can we be rhyming any louder? What is happening seems so freaking obvious and hardly anyone sees it (at least judging by the U.S. equity markets).
Honestly, it is formatted better if you just go to creditwritedowns but the whole thing is pasted below.
The Greek Crisis Has Me Thinking About 1931
The news about Greece’s bailout has me thinking a lot about Creditanstalt, the Austrian bank which collapsed in 1931. This account bears remembering because we should see the 1929-1933 descent as a two-part episode, with the second part starting in the Spring of 1931 with Creditanstalt.
It should be noted that there were a lot of positive economic signs before the Creditanstalt ruined this. The key difference to today is the monetary liquidity and fiscal stimulus, which has buoyed both asset markets and the real economy. But, the situation in Greece makes me think a lot about Creditanstalt.
The similarities and the differences for the US economy were brought home for me by two data points I want to share.
News from 1931
First, there is the blog site News from 1930 which provides verbatim news from the Wall Street Journal exactly 79 years ago because the September 2008 Lehman bankruptcy roughly corresponds to the October 1929 crash. They have an entry from yesterday with a lot of good data points. The ones I want to highlight are bulleted below. By and large, they are very bullish. Everything is upbeat.
Thomas E. Dewey, Chief Asst. US Attorney, announces Amer. Bond & Mortgage is being investigated by Justice Dept. Company issued about $90M of mortgage bonds in past few years, most of which are now in default. Company owns and operates the Mayflower Hotel in Wash. and several NY hotels.
H. Bancroft, Wall St. Journal publisher, says unclear if business has definitely passed low point of depression, but “whether or not business has passed the extreme low point, it is very close to it.” Cites rapid US increase in savings and paying down of debt.
Pres. Hoover receives reports from editors of business papers covering seven major industries on "What Is Holding Back Industry." List by industry: Automotive – tariff and "hand-to-mouth buying." Construction – lack of standardization and banks’ hesitancy in making loans. Food – waste in distribution and failure of big baking cos. to lower bread prices. Chemical – lack of price stability, taxes, inadequate statistics, and bad trade practices. S. Dennis, chair. of nat’l conf. of business paper editors, proposes committee of outstanding business leaders headed by Owen Young to help business plan national economic policy and restore prosperity. Attacks "individualistic trend based upon the philosophy of ‘devil take the hindmost.’" Labor Sec. Doak warned editors it would be dangerous to reduce wages as percentage of nat’l income. Dr. J. Klein, Asst. Commerce Sec., pointed to some positive news including recent steadying in prices and European markets.
US seen likely to ease credit further if large export of gold from France threatens to follow recent $3.5M shipment; objective is to divert gold to where it’s needed.
A number of economists believe business is scraping bottom; they don’t expect quick improvement, since summer is usually dull for business, but believe a further sharp decline is unlikely.
W. Atterbury, Pennsylvania RR pres., notes business decline has lasted almost two years; precedent certainly indicates we’re scraping bottom and trend should turn upward before long. Wrong to single out rail difficulties in the depression; rails have been affected similarly to other industries, should recover similarly.
Last week’s bank statements contained some encouraging signs: loans and investments reversed downtrend, increasing $206M to $23.051M, though bulk of the increase went into buying securities; demand deposits increased, possibly due to veterans’ bonus money; purchases of non-govt. securities continued.
Harvard Economic Society says gains in seasonal spring recovery this year have been
far less widespread than a year ago, but, since they started from a much lower base, should be longer lasting. "We anticipate that they will continue and spread and that an upturn of general business is in early prospect."
B. Hutchinson, Chrysler VP: "Automobile production and sales are steadily progressing toward what we regard as normal volume and may reach that point this summer." Expects more sustained production for remainder of the year than in previous years; inventories in very satisfactory shape.
C. Mitchell, Bank of US chairman, admitted under defense cross-examination that he attended the directors’ meeting at which large loans to affiliates were approved; Mitchell previously contended he had little to do with those loans.
Refineries ran at 68.2% in week ended Apr. 18; stocks of gasoline declined 383,000 barrels to 46.384M. Crude oil production in week was 2.422M barrels/day, up 113,750 from prev. week but down 138,900 from a year ago.
There is a lot more from this entry. Notice the bullet on Mitchell; they had their scandals too. And they were just then surfacing, much as they are today.
But that last bullet is important. Refineries were operating at only 68% of capacity. That is much worse than today. Utilization rates are depressed but they are well above 80%. To me, this speaks to the robustness of the 2010 real economy as compared to the 1931 real economy.
Nevertheless, the bullets showing extreme levels of rebound confidence (in what we now realize was the middle of a terrific slide into Depression) are frightening to say the least.
The Greek disaster
Then you have Peter Boone and Simon Johnson writing on Greece, The IMF, And What Comes Next.
These two are pretty bearish on a positive outcome for Greece and the Eurozone. Earlier this month, I wrote a post "Greece And The Potential Upside In An IMF Rescue" as a sort of optimistic spin on their depressing "Greece And The Fatal Flaw In An IMF Rescue." But, I was just brainstorming potential exit strategies. The reality for Greece is very much as Boone and Johnson present it: dire.
Here’s what they say in their latest post. This is what had me thinking Creditanstalt:
The latest developments from Europe – including Greece appealing for an IMF program today – may well be a watershed, but if so, it is not a good one. The key event yesterday was that the yield on all the debt of weak eurozone governments widened while German yields fell. The spreads show all you need to know: a very clear and large contagion risk.
The five year Portuguese yields rose from 3.84% to 4.26%. The five year Spanish bonds rose from 2.89% to 3.03%, and the five year Irish bonds rose from 3.74% to 3.97%. These are not minor moves for investment grade sovereign bond funds. This kind of change means, for example (and roughly), you lose 0.5% on the value of a bond in one day. These are bonds that just pay 3% per year – and one such day may be enough to cause “investment grade investors” to decide not to stay involved and not to come back for a long while…
These higher government bond yields are also hitting banks. No doubt there is a bank run on in Greece to some extent at the wholesale level. This will spread to other banks in the region. Since their marginal funding costs are tied to the creditworthiness of the sovereign, and since the collateral for these banks’ portfolios is tied to local property values and assets, these changes in sovereign yields will have a negative impact on banks’ balance sheets.
Irrespective of the next move – which lies this weekend with the International Monetary Fund and the ministers of finance meeting in Washington for the Fund’s spring meetings – this looks like the moment when the Greek problems really start to generate contagion across the eurozone region. We’ll see rates on government debt trending higher, asset prices (such as real estate) falling even more, and renewed concern about banks on the European “periphery”.
It is that contagion and bank run part that I find worrying. I wrote about 1931 in March of last year, quoting from Charles Kindelberger (read it here). What essentially happened was that an innocuous notice from a Dutch bank that it was raising the lending rate for a fairly insignificant Austrian bank created a panic run on that bank, Creditanstalt. This bank was bailed out. But rather than calm things down, the bailout created a rout on the entire country. Eventually, Austria’s collapse reverberated around the world through bank interconnectedness and Depression ensued.
As Spring 1931 corresponds to right now, I see parallels to what is occurring in Greece and what occurred in 1931 Austria. This as a critical juncture in the Euro experiment, not just for Greece, but globally. Boone and Johnson suggest that a bailout of Greece is now perceived as a collective backstop of Portugal, Spain, Ireland and Italy too.
And this is simply not credible. So, the sovereign bond contagion is already with us. However, if a Greek bank run ensues, I am pretty sure Swiss, German or Austrian bank exposure to these banks would be a serious problem. the question is what can the Eurozone due about this? Is the US involved in any way? Yes it is.
Johnson and Boone say:
Yesterday was also a wake-up call for the United States. It is no longer reasonable or responsible to say: “US banks have no exposure to Greece”. US banks are heavily exposed to Europe, and this is turning into a serious Europe-wide problem. The US badly needs to make sure this does not spread beyond Greece and Portugal/Ireland.
To restore confidence in buying Spanish and other major European nation bonds, it would surely help to have clear signals that President Obama himself, and the Federal Reserve, are taking an active stance now on making sure this does not spread to become another threat to global financial stability. A broader wall of preventive financing must now be put in place – after all, this is exactly why (in principle) the IMF was recapitalized this time last year.
Such a push by the US would be awkward, to be sure, as the French and Germans (and British) are not keen to have more US involvement in their affairs. But the Europeans have handled matters so badly in the past few months, it is time for a much more scaled-up US role.
The following passages are excerpts from Charles Kindleberger’s book "The World in Depression."
The Creditanstalt
Just as in May 1873 and July 1914, with tension growing among Germany, France, and Britain, the crack, when it came, appeared in Austria. In the early spring of 1931, a Dutch bank wrote a polite letter to the Creditanstalt in Vienna saying that it was obliged to raise the charge on its acceptance credits from 0.25 percent a month to 0.375 percent. It was a timorous letter, says Beyen, not a prescient one, and the bank was somewhat surprised when the Creditanstalt chose to pay off the loan rather than renew at the higher rate. Three months later the Creditanstalt could have used the money.
The Austrian economy had been in disarray since the Treaty of St. Germain of 1920. Its finances had required League of Nations loan assistance, which entailed international supervision between 1922 and 1926…Industrial capital was consumed in the postwar inflation, and financial capital in the unsuccessful bear speculation against the French franc in 1924 that produced failures of the Allgemeine Industriebank, the Austro-Polnische Bank, and the Austro-Orientbank, as well as the private Union Bank owned by one Bosel, with grave difficulties for Kolmar& Co., Kettner, and the Brothers Nowak. Maerz calls this episode "the opening shot of a series of bank failures culminating in the breakdown of the Creditanstalt seven years later."…
In May 1931 losses were still at 140 million schillings, and capital at 125 million plus disclosed reserves of 40 million for a total of 165 million. Under Austrian law, if a bank lost half its capital it had to "turn in its balance sheet," or close down. In an effort to rescue the Creditanstalt, the government, the National Bank, and the House of Rothschild, the last with help of the Amsterdam branch, furnished 100 million, 30 million, and 22.5 million schillings, respectively. But the announcement of the support operation on May 11, 1931, started a run, partly foreign, partly Austrian…
By June 5 the credit [for the entire country] was exhausted and the Austrian National Bank requested another. Still under pressure, the bank raised its discount rate to 6 percent on June 8 and 7.5 percent on June 16. The new credit was arranged by the BIS, by June 14 this time, but subject to the condition that the Austrian government should obtain a two-to-three year loan abroad for 150 million schillings. At this point the French interposed the condition that the Austrian government should abandon the customs union with Germany. The Austrian government refused, and it fell…
The demise of the Creditanstalt and the Austrian government was followed by a run on Germany and an attack on Sterling, which was depreciated a massive 25 percent as a result. Afterwards, central banks began a run on the U.S. dollar, liquidating it for gold. The banks included the Bank of France, the National Bank of Belgium, the Netherlands Bank and the Swiss National Bank. The result was an immediate need to increase the interest rate in the U.S. from 1.5 to 3.5 percent.
These events triggered further panics and bank runs in the U.S.. Later, the U.S. dollar was depreciated and multiple bank holidays were called to contain the panic.
The U.S. economy bottomed only in April 1933.
Honestly, it is formatted better if you just go to creditwritedowns but the whole thing is pasted below.
The Greek Crisis Has Me Thinking About 1931
The news about Greece’s bailout has me thinking a lot about Creditanstalt, the Austrian bank which collapsed in 1931. This account bears remembering because we should see the 1929-1933 descent as a two-part episode, with the second part starting in the Spring of 1931 with Creditanstalt.
It should be noted that there were a lot of positive economic signs before the Creditanstalt ruined this. The key difference to today is the monetary liquidity and fiscal stimulus, which has buoyed both asset markets and the real economy. But, the situation in Greece makes me think a lot about Creditanstalt.
The similarities and the differences for the US economy were brought home for me by two data points I want to share.
News from 1931
First, there is the blog site News from 1930 which provides verbatim news from the Wall Street Journal exactly 79 years ago because the September 2008 Lehman bankruptcy roughly corresponds to the October 1929 crash. They have an entry from yesterday with a lot of good data points. The ones I want to highlight are bulleted below. By and large, they are very bullish. Everything is upbeat.
Thomas E. Dewey, Chief Asst. US Attorney, announces Amer. Bond & Mortgage is being investigated by Justice Dept. Company issued about $90M of mortgage bonds in past few years, most of which are now in default. Company owns and operates the Mayflower Hotel in Wash. and several NY hotels.
H. Bancroft, Wall St. Journal publisher, says unclear if business has definitely passed low point of depression, but “whether or not business has passed the extreme low point, it is very close to it.” Cites rapid US increase in savings and paying down of debt.
Pres. Hoover receives reports from editors of business papers covering seven major industries on "What Is Holding Back Industry." List by industry: Automotive – tariff and "hand-to-mouth buying." Construction – lack of standardization and banks’ hesitancy in making loans. Food – waste in distribution and failure of big baking cos. to lower bread prices. Chemical – lack of price stability, taxes, inadequate statistics, and bad trade practices. S. Dennis, chair. of nat’l conf. of business paper editors, proposes committee of outstanding business leaders headed by Owen Young to help business plan national economic policy and restore prosperity. Attacks "individualistic trend based upon the philosophy of ‘devil take the hindmost.’" Labor Sec. Doak warned editors it would be dangerous to reduce wages as percentage of nat’l income. Dr. J. Klein, Asst. Commerce Sec., pointed to some positive news including recent steadying in prices and European markets.
US seen likely to ease credit further if large export of gold from France threatens to follow recent $3.5M shipment; objective is to divert gold to where it’s needed.
A number of economists believe business is scraping bottom; they don’t expect quick improvement, since summer is usually dull for business, but believe a further sharp decline is unlikely.
W. Atterbury, Pennsylvania RR pres., notes business decline has lasted almost two years; precedent certainly indicates we’re scraping bottom and trend should turn upward before long. Wrong to single out rail difficulties in the depression; rails have been affected similarly to other industries, should recover similarly.
Last week’s bank statements contained some encouraging signs: loans and investments reversed downtrend, increasing $206M to $23.051M, though bulk of the increase went into buying securities; demand deposits increased, possibly due to veterans’ bonus money; purchases of non-govt. securities continued.
Harvard Economic Society says gains in seasonal spring recovery this year have been
far less widespread than a year ago, but, since they started from a much lower base, should be longer lasting. "We anticipate that they will continue and spread and that an upturn of general business is in early prospect."
B. Hutchinson, Chrysler VP: "Automobile production and sales are steadily progressing toward what we regard as normal volume and may reach that point this summer." Expects more sustained production for remainder of the year than in previous years; inventories in very satisfactory shape.
C. Mitchell, Bank of US chairman, admitted under defense cross-examination that he attended the directors’ meeting at which large loans to affiliates were approved; Mitchell previously contended he had little to do with those loans.
Refineries ran at 68.2% in week ended Apr. 18; stocks of gasoline declined 383,000 barrels to 46.384M. Crude oil production in week was 2.422M barrels/day, up 113,750 from prev. week but down 138,900 from a year ago.
There is a lot more from this entry. Notice the bullet on Mitchell; they had their scandals too. And they were just then surfacing, much as they are today.
But that last bullet is important. Refineries were operating at only 68% of capacity. That is much worse than today. Utilization rates are depressed but they are well above 80%. To me, this speaks to the robustness of the 2010 real economy as compared to the 1931 real economy.
Nevertheless, the bullets showing extreme levels of rebound confidence (in what we now realize was the middle of a terrific slide into Depression) are frightening to say the least.
The Greek disaster
Then you have Peter Boone and Simon Johnson writing on Greece, The IMF, And What Comes Next.
These two are pretty bearish on a positive outcome for Greece and the Eurozone. Earlier this month, I wrote a post "Greece And The Potential Upside In An IMF Rescue" as a sort of optimistic spin on their depressing "Greece And The Fatal Flaw In An IMF Rescue." But, I was just brainstorming potential exit strategies. The reality for Greece is very much as Boone and Johnson present it: dire.
Here’s what they say in their latest post. This is what had me thinking Creditanstalt:
The latest developments from Europe – including Greece appealing for an IMF program today – may well be a watershed, but if so, it is not a good one. The key event yesterday was that the yield on all the debt of weak eurozone governments widened while German yields fell. The spreads show all you need to know: a very clear and large contagion risk.
The five year Portuguese yields rose from 3.84% to 4.26%. The five year Spanish bonds rose from 2.89% to 3.03%, and the five year Irish bonds rose from 3.74% to 3.97%. These are not minor moves for investment grade sovereign bond funds. This kind of change means, for example (and roughly), you lose 0.5% on the value of a bond in one day. These are bonds that just pay 3% per year – and one such day may be enough to cause “investment grade investors” to decide not to stay involved and not to come back for a long while…
These higher government bond yields are also hitting banks. No doubt there is a bank run on in Greece to some extent at the wholesale level. This will spread to other banks in the region. Since their marginal funding costs are tied to the creditworthiness of the sovereign, and since the collateral for these banks’ portfolios is tied to local property values and assets, these changes in sovereign yields will have a negative impact on banks’ balance sheets.
Irrespective of the next move – which lies this weekend with the International Monetary Fund and the ministers of finance meeting in Washington for the Fund’s spring meetings – this looks like the moment when the Greek problems really start to generate contagion across the eurozone region. We’ll see rates on government debt trending higher, asset prices (such as real estate) falling even more, and renewed concern about banks on the European “periphery”.
It is that contagion and bank run part that I find worrying. I wrote about 1931 in March of last year, quoting from Charles Kindelberger (read it here). What essentially happened was that an innocuous notice from a Dutch bank that it was raising the lending rate for a fairly insignificant Austrian bank created a panic run on that bank, Creditanstalt. This bank was bailed out. But rather than calm things down, the bailout created a rout on the entire country. Eventually, Austria’s collapse reverberated around the world through bank interconnectedness and Depression ensued.
As Spring 1931 corresponds to right now, I see parallels to what is occurring in Greece and what occurred in 1931 Austria. This as a critical juncture in the Euro experiment, not just for Greece, but globally. Boone and Johnson suggest that a bailout of Greece is now perceived as a collective backstop of Portugal, Spain, Ireland and Italy too.
And this is simply not credible. So, the sovereign bond contagion is already with us. However, if a Greek bank run ensues, I am pretty sure Swiss, German or Austrian bank exposure to these banks would be a serious problem. the question is what can the Eurozone due about this? Is the US involved in any way? Yes it is.
Johnson and Boone say:
Yesterday was also a wake-up call for the United States. It is no longer reasonable or responsible to say: “US banks have no exposure to Greece”. US banks are heavily exposed to Europe, and this is turning into a serious Europe-wide problem. The US badly needs to make sure this does not spread beyond Greece and Portugal/Ireland.
To restore confidence in buying Spanish and other major European nation bonds, it would surely help to have clear signals that President Obama himself, and the Federal Reserve, are taking an active stance now on making sure this does not spread to become another threat to global financial stability. A broader wall of preventive financing must now be put in place – after all, this is exactly why (in principle) the IMF was recapitalized this time last year.
Such a push by the US would be awkward, to be sure, as the French and Germans (and British) are not keen to have more US involvement in their affairs. But the Europeans have handled matters so badly in the past few months, it is time for a much more scaled-up US role.
The following passages are excerpts from Charles Kindleberger’s book "The World in Depression."
The Creditanstalt
Just as in May 1873 and July 1914, with tension growing among Germany, France, and Britain, the crack, when it came, appeared in Austria. In the early spring of 1931, a Dutch bank wrote a polite letter to the Creditanstalt in Vienna saying that it was obliged to raise the charge on its acceptance credits from 0.25 percent a month to 0.375 percent. It was a timorous letter, says Beyen, not a prescient one, and the bank was somewhat surprised when the Creditanstalt chose to pay off the loan rather than renew at the higher rate. Three months later the Creditanstalt could have used the money.
The Austrian economy had been in disarray since the Treaty of St. Germain of 1920. Its finances had required League of Nations loan assistance, which entailed international supervision between 1922 and 1926…Industrial capital was consumed in the postwar inflation, and financial capital in the unsuccessful bear speculation against the French franc in 1924 that produced failures of the Allgemeine Industriebank, the Austro-Polnische Bank, and the Austro-Orientbank, as well as the private Union Bank owned by one Bosel, with grave difficulties for Kolmar& Co., Kettner, and the Brothers Nowak. Maerz calls this episode "the opening shot of a series of bank failures culminating in the breakdown of the Creditanstalt seven years later."…
In May 1931 losses were still at 140 million schillings, and capital at 125 million plus disclosed reserves of 40 million for a total of 165 million. Under Austrian law, if a bank lost half its capital it had to "turn in its balance sheet," or close down. In an effort to rescue the Creditanstalt, the government, the National Bank, and the House of Rothschild, the last with help of the Amsterdam branch, furnished 100 million, 30 million, and 22.5 million schillings, respectively. But the announcement of the support operation on May 11, 1931, started a run, partly foreign, partly Austrian…
By June 5 the credit [for the entire country] was exhausted and the Austrian National Bank requested another. Still under pressure, the bank raised its discount rate to 6 percent on June 8 and 7.5 percent on June 16. The new credit was arranged by the BIS, by June 14 this time, but subject to the condition that the Austrian government should obtain a two-to-three year loan abroad for 150 million schillings. At this point the French interposed the condition that the Austrian government should abandon the customs union with Germany. The Austrian government refused, and it fell…
The demise of the Creditanstalt and the Austrian government was followed by a run on Germany and an attack on Sterling, which was depreciated a massive 25 percent as a result. Afterwards, central banks began a run on the U.S. dollar, liquidating it for gold. The banks included the Bank of France, the National Bank of Belgium, the Netherlands Bank and the Swiss National Bank. The result was an immediate need to increase the interest rate in the U.S. from 1.5 to 3.5 percent.
These events triggered further panics and bank runs in the U.S.. Later, the U.S. dollar was depreciated and multiple bank holidays were called to contain the panic.
The U.S. economy bottomed only in April 1933.
Monday, April 19, 2010
Markets and a Great German Interview
Tomorrow and Wednesday are keys days. I said a week ago I was sniffing some sort of top. Obviously Friday we had the hard sell off. Tomorrow we can move up but if we do we can't on Wednesday also. Tomorrow actually sets up interestingly becasue if Goldman's results are to good that could actually be bad for Goldmand and hence bad for the stock market. I mean if your Goldman do you really want to blow out earnings and show how much money you are making? That will just make the situation worse.
Greece continues to fall apart. New highs for yields on government debt. Not a good situation. China was down over 4% yesterday. Chopping about sideways today which seems bearish.
I think the top holds (at least for the S&P 500) for now and we get continued selling.
Interesting interview in the German newspaper the Spiegal of German Finance Minister Wolfgang Schauble. Shows everything wrong in the world. One of the few Germans who actually wants to bail out Greece. From the Spiegal
Schäuble: I'm a firm believer in the monetary union. At the time, I felt exactly the same way as the current president. The only problem is that the world has changed. The capital market has become globalized to a degree that we couldn't have imagined at the time. And we have experienced a financial crisis from which we in Europe must draw a clear lesson: We cannot allow the bankruptcy of a euro member state like Greece to turn into a second Lehman Brothers.
Interviewer hits the next question on the head.
SPIEGEL: You are exaggerating. In past years, it's happened again and again that a country couldn't pay its debts, and yet that hasn't led to a collapse of the global financial system. Why should this be different in Greece's case?
Look at the response. It tells everything wrong in the world. How does a country as meaningless as Greece become so important?
Schäuble: Because Greece is a member of the European monetary union. Greece's debts are all denominated in euros, but it isn't clear who holds how much of those debts. For that reason, the consequences of a national bankruptcy would be incalculable. Greece is just as systemically important as a major bank.
He is probably right but continuing on bailing out Greece doesn't solve the problem. It just makes it bigger.
The rest of the interview turns into more of an argument where the interviewer is nailing the German Finance Minister. Why don't we have this type of journalism here?
Look at this exchange. Wow!!
SPIEGEL: In other words, you were playing poker.
Schäuble: Playing poker is the wrong expression. The situation is too serious for that. Germany has embraced its leading role in Europe. We will help Greece in the event that its government, despite a comprehensive restructuring program, falls victim to international currency speculation once again.
and what about contagion? The ostrich head in the sand is always the preferred approach it seems.
SPIEGEL: The Greek crisis is particularly controversial, because there are other euro countries that are also up to their necks in debt. What happens if Portugal or Italy requests financial assistance next?
Schäuble: There are no indications that this will happen, which is why no finance minister would answer such a speculative question. If he did, he wouldn't be doing his job well.
and the municipal situation apparently isn't much better in Germany
Schäuble: Germany's municipalities are in an unusually difficult financial situation at the moment.
SPIEGEL: Are Germany's towns and municipalities truly in such bad shape?
Schäuble: Some are. They have fewer and fewer options, and some are now under the mandatory supervision of the federal states. This is a dangerous development, because local self-administration is the core of our democratic system. That's why the government has made the municipalities' financial problems a priority
Greece continues to fall apart. New highs for yields on government debt. Not a good situation. China was down over 4% yesterday. Chopping about sideways today which seems bearish.
I think the top holds (at least for the S&P 500) for now and we get continued selling.
Interesting interview in the German newspaper the Spiegal of German Finance Minister Wolfgang Schauble. Shows everything wrong in the world. One of the few Germans who actually wants to bail out Greece. From the Spiegal
Schäuble: I'm a firm believer in the monetary union. At the time, I felt exactly the same way as the current president. The only problem is that the world has changed. The capital market has become globalized to a degree that we couldn't have imagined at the time. And we have experienced a financial crisis from which we in Europe must draw a clear lesson: We cannot allow the bankruptcy of a euro member state like Greece to turn into a second Lehman Brothers.
Interviewer hits the next question on the head.
SPIEGEL: You are exaggerating. In past years, it's happened again and again that a country couldn't pay its debts, and yet that hasn't led to a collapse of the global financial system. Why should this be different in Greece's case?
Look at the response. It tells everything wrong in the world. How does a country as meaningless as Greece become so important?
Schäuble: Because Greece is a member of the European monetary union. Greece's debts are all denominated in euros, but it isn't clear who holds how much of those debts. For that reason, the consequences of a national bankruptcy would be incalculable. Greece is just as systemically important as a major bank.
He is probably right but continuing on bailing out Greece doesn't solve the problem. It just makes it bigger.
The rest of the interview turns into more of an argument where the interviewer is nailing the German Finance Minister. Why don't we have this type of journalism here?
Look at this exchange. Wow!!
SPIEGEL: In other words, you were playing poker.
Schäuble: Playing poker is the wrong expression. The situation is too serious for that. Germany has embraced its leading role in Europe. We will help Greece in the event that its government, despite a comprehensive restructuring program, falls victim to international currency speculation once again.
and what about contagion? The ostrich head in the sand is always the preferred approach it seems.
SPIEGEL: The Greek crisis is particularly controversial, because there are other euro countries that are also up to their necks in debt. What happens if Portugal or Italy requests financial assistance next?
Schäuble: There are no indications that this will happen, which is why no finance minister would answer such a speculative question. If he did, he wouldn't be doing his job well.
and the municipal situation apparently isn't much better in Germany
Schäuble: Germany's municipalities are in an unusually difficult financial situation at the moment.
SPIEGEL: Are Germany's towns and municipalities truly in such bad shape?
Schäuble: Some are. They have fewer and fewer options, and some are now under the mandatory supervision of the federal states. This is a dangerous development, because local self-administration is the core of our democratic system. That's why the government has made the municipalities' financial problems a priority
Tuesday, April 13, 2010
Good Read
Very good article. Thanks goes to Chad.
It starts touching on two key issues:
Two articles, one by Christopher Booker describing the impending bankruptcy of the UK and another by Victor Davis Hanson describing the catatonic walk over the financial edge by California are united by a single theme: the power of denial.
Then goes to explain why we have become a third world country. This isn't the first time I have heard this comparison.
Until recently the difference between the First and Third Worlds was a that the Western future was real. The Western tomorrow was a definite quantity; loans would mature at a certain date, elections would be held at scheduled times and the pension check would arrive in the mail every 15th and 30th of the month. By contrast the Third World timescale had only the present. Tomorrow was ink on a calendar. Only things you could touch, take or use now were real. Checks in the future were as unreal as rocket ships and rayguns.
What a whole generation of Western political leaders have done is abolish the future. Comprehensively and perhaps irretrievably. And since that hasn’t happened in two generations, very few can even come to terms with it. Victor Davis Hanson describes the bewilderment of Californians who find that, for the first time in living memory, tomorrow isn’t coming. It’s so absurd people treat the fact with disbelief. People continue to act rich even though they’re poor. They live as if that check will arrive tomorrow even though no one can give a reason why it should.
and quotes from various articles what America has become
So I am as worried about the elite upscale yuppie as the poor illegal alien. The former have lost almost all connection with physical labor, the physical world, or the ordeal that civilization endures to elevate us from the savagery of nature.
While many were fit, and seem to work out, bike, ski, and hike, none understood the mechanics that lie beneath the veneer of the good life — the chain-sawing, hammering, drain-unplugging, tractor-driving, irrigating, and welding that allows a pleasant afternoon Greek salad and cappuccino on University Avenue — the disconnect between those Pennsylvania “clingers” and Obama’s arugula-eating crowd.
Than turns to the UK reality:
Britain, at least, is not coming up for air. Blighty’s tomorrows have arrived. And there’s no check in the mail. Its public indebtedness has reached the point where interest charges alone are unsustainable. Like Jefferson County, the UK can’t pay the interest charges let alone the principal.
And the policy response:
When there’s no money left in the till talk inevitably turns to what color of the garbage bins should be or whether Christians should be allowed to wear crucifixes to work. The really important public issues like carbon trading take center stage. Across the Atlantic in California, Victor Davis Hanson was noticing the same obsession with irrelevant forms in a state facing the same challenges as Britain. As the actual poverty rose in California the “socially conscious” turned in upon themselves, living in overpriced, politically correct communities, seeking solace in “ambiance — that is, living among people like themselves … Why? I have a theory. It allows them to be liberal and progressive in the abstract, without having to live the logical consequences of their utopianism, or deal with the underbelly of American life.”
Very good read throughout.
It starts touching on two key issues:
Two articles, one by Christopher Booker describing the impending bankruptcy of the UK and another by Victor Davis Hanson describing the catatonic walk over the financial edge by California are united by a single theme: the power of denial.
Then goes to explain why we have become a third world country. This isn't the first time I have heard this comparison.
Until recently the difference between the First and Third Worlds was a that the Western future was real. The Western tomorrow was a definite quantity; loans would mature at a certain date, elections would be held at scheduled times and the pension check would arrive in the mail every 15th and 30th of the month. By contrast the Third World timescale had only the present. Tomorrow was ink on a calendar. Only things you could touch, take or use now were real. Checks in the future were as unreal as rocket ships and rayguns.
What a whole generation of Western political leaders have done is abolish the future. Comprehensively and perhaps irretrievably. And since that hasn’t happened in two generations, very few can even come to terms with it. Victor Davis Hanson describes the bewilderment of Californians who find that, for the first time in living memory, tomorrow isn’t coming. It’s so absurd people treat the fact with disbelief. People continue to act rich even though they’re poor. They live as if that check will arrive tomorrow even though no one can give a reason why it should.
and quotes from various articles what America has become
So I am as worried about the elite upscale yuppie as the poor illegal alien. The former have lost almost all connection with physical labor, the physical world, or the ordeal that civilization endures to elevate us from the savagery of nature.
While many were fit, and seem to work out, bike, ski, and hike, none understood the mechanics that lie beneath the veneer of the good life — the chain-sawing, hammering, drain-unplugging, tractor-driving, irrigating, and welding that allows a pleasant afternoon Greek salad and cappuccino on University Avenue — the disconnect between those Pennsylvania “clingers” and Obama’s arugula-eating crowd.
Than turns to the UK reality:
Britain, at least, is not coming up for air. Blighty’s tomorrows have arrived. And there’s no check in the mail. Its public indebtedness has reached the point where interest charges alone are unsustainable. Like Jefferson County, the UK can’t pay the interest charges let alone the principal.
And the policy response:
When there’s no money left in the till talk inevitably turns to what color of the garbage bins should be or whether Christians should be allowed to wear crucifixes to work. The really important public issues like carbon trading take center stage. Across the Atlantic in California, Victor Davis Hanson was noticing the same obsession with irrelevant forms in a state facing the same challenges as Britain. As the actual poverty rose in California the “socially conscious” turned in upon themselves, living in overpriced, politically correct communities, seeking solace in “ambiance — that is, living among people like themselves … Why? I have a theory. It allows them to be liberal and progressive in the abstract, without having to live the logical consequences of their utopianism, or deal with the underbelly of American life.”
Very good read throughout.
Monday, April 12, 2010
Greece "Bailout"
The supposed third, or maybe fourth, are we up to 5th??, bailout of Greece occurred over the weekend. Like I said, be careful of the headlines. Essentially, there was absolutely nothing new. The only slight surprise was the "supposed" number of money backstopping was a little bigger than thought.
Several things.
1) This was a bending by Germany. This does not solve the problem. It doesn't even come close to solving the problem for Greece or the Euro
2) This is no guarantee what is proposed will even occur. My understanding is this has to be voted on by individual legislatures of various countries. Ireland has to approve this. Umm, Ireland legislature is going to vote in favor after they have swallowed extremely bad tasting medicine (that which Greeks violently protest) to solve their own problems? Maybe. Seems like drama is coming.
3) Very quickly you had German politicians playing well politics saying this plan wasn't anything different from what was said previously. So try to convince the market of one anything and the home base it is something else.
4) The proposed interest rate is 5%. This is below market interest rates but is still pretty high.
5) Lawsuits will start soon as it isn't even clear if this constitutional.
6) Greece needs money by the end of this month. Not clear whether the mechanisms will be in place by then (probably will be).
7) The market barely reacted. Like I said, from a market perspective it was a one sided bet. A good outcome was expected, a bad outcome would have been horrific.
I am not sure how long Greece won't be an issue but it will be a major issue again in 2010. I am almost sure about that.
Several things.
1) This was a bending by Germany. This does not solve the problem. It doesn't even come close to solving the problem for Greece or the Euro
2) This is no guarantee what is proposed will even occur. My understanding is this has to be voted on by individual legislatures of various countries. Ireland has to approve this. Umm, Ireland legislature is going to vote in favor after they have swallowed extremely bad tasting medicine (that which Greeks violently protest) to solve their own problems? Maybe. Seems like drama is coming.
3) Very quickly you had German politicians playing well politics saying this plan wasn't anything different from what was said previously. So try to convince the market of one anything and the home base it is something else.
4) The proposed interest rate is 5%. This is below market interest rates but is still pretty high.
5) Lawsuits will start soon as it isn't even clear if this constitutional.
6) Greece needs money by the end of this month. Not clear whether the mechanisms will be in place by then (probably will be).
7) The market barely reacted. Like I said, from a market perspective it was a one sided bet. A good outcome was expected, a bad outcome would have been horrific.
I am not sure how long Greece won't be an issue but it will be a major issue again in 2010. I am almost sure about that.
More on Housing
I was asked a few questions on housing and how the next wave would possibly not be as bad because of the low rates. The subprime loans reset when rates were much higher back in 2007. It depends whether it is a reset or recast. Unfortunately the media gets this horrendously wrong when talking about it and Wall St. honestly doesn't do much better. This makes getting accurate information difficult because the terms are used interchangeably. So a reset does depend on interest rates. A recast mostly does not. The Option ARM was a nasty little creation that was useful in very unique circumstances but got rolled out for mass public consumption. To walk through an example, in 2006 you could buy a 300,000 house and put no money down. I believe the interest rate could be fixed or floating (if someone knows different please correct me) but the kicker is you could decide to only pay a portion of the interest payment. Sort of like paying the minimum on a credit card without causing you to be delinquent. Anything you didn't pay would be added to the principal of the loan. Talk about toxic.
So if you had this 300,000 mortgage and you owed say $1500 a month you could decide to pay $300 and the other $1200 would be added so that now your mortgage was $301,200. Usually the principal was capped at 15% above the original mortgage value so the mortgage couldn't balloon above $345,000 in our example.
This would not go on indifferently. At some point in the future (typically something like five years from the loan origination date) these loans are "recast." Because of the extra benefit of having an option the loans often times carried slightly higher interest rates when they are recast. When a recast occurs the option usually disappears. So instead you are required to make a $1200 payment instead of paying the $300 payment.
For those interested in looking further click on this link . On the right hand side click on the T2 partners presentation. It is "An Overview of the Housing and Credit Crises And Why There is More Pain to Come." It is 203 slides of everything what you want to know about housing. I would draw readers attention to slide 35 (the subprime resets that are mostly behind us), slide 46 (the Alt A resets that are ahead of us), slide 61 (the massive amount of hidden inventory) and most importantly slide 72 which shows how we are sitting between the two waves and the massive Option ARM wave that is coming.
Whitney unfortunately also does not differentiate between recast and reset.
The one silver lining is I have read speculation that the Option ARMs were so horrifically written that some of the home owners couldn't even make the $300 in my example and have already defaulted. As a result some of the wave has already occurred and been move forward. This is speculation and I haven't seen any numbers that quantified it.
Like I said though, regardless I do not believe this force will bring down the system again or cause a double dip because the government will ensure it won't. It will be a tailwind for all the forces that will cause the system to start to buckle and at a minimum keep a lid on prices for a long time to come. Housing is in horrific shape regardless of what anyone would tell you. It is simply being manipulated by the government like everything else.
So if you had this 300,000 mortgage and you owed say $1500 a month you could decide to pay $300 and the other $1200 would be added so that now your mortgage was $301,200. Usually the principal was capped at 15% above the original mortgage value so the mortgage couldn't balloon above $345,000 in our example.
This would not go on indifferently. At some point in the future (typically something like five years from the loan origination date) these loans are "recast." Because of the extra benefit of having an option the loans often times carried slightly higher interest rates when they are recast. When a recast occurs the option usually disappears. So instead you are required to make a $1200 payment instead of paying the $300 payment.
For those interested in looking further click on this link . On the right hand side click on the T2 partners presentation. It is "An Overview of the Housing and Credit Crises And Why There is More Pain to Come." It is 203 slides of everything what you want to know about housing. I would draw readers attention to slide 35 (the subprime resets that are mostly behind us), slide 46 (the Alt A resets that are ahead of us), slide 61 (the massive amount of hidden inventory) and most importantly slide 72 which shows how we are sitting between the two waves and the massive Option ARM wave that is coming.
Whitney unfortunately also does not differentiate between recast and reset.
The one silver lining is I have read speculation that the Option ARMs were so horrifically written that some of the home owners couldn't even make the $300 in my example and have already defaulted. As a result some of the wave has already occurred and been move forward. This is speculation and I haven't seen any numbers that quantified it.
Like I said though, regardless I do not believe this force will bring down the system again or cause a double dip because the government will ensure it won't. It will be a tailwind for all the forces that will cause the system to start to buckle and at a minimum keep a lid on prices for a long time to come. Housing is in horrific shape regardless of what anyone would tell you. It is simply being manipulated by the government like everything else.
Sunday, April 11, 2010
James Galbraith Response
Yesterday I posted a video of economist James Galbraith where I had issue with his response to a question about ruling out a double dip recession. He commented on the blog post clarifying his position. Since most of my followers do not follow the comment section (never a tool I have put much emphasis on), out of fairness I wanted to give his response its due. I appreciate intellectual thought and him taking the time to clarify his views. His full response is as follows:
My meaning may not have been as clear as it should have been.
To rephrase: "a double-dip recession seems unlikely to me, because housing and other construction have already collapsed, and it would be hard for them to collapse much farther than they already have. Other forms of spending (such as household consumption) are supported by income flows that come from wages and from government transfers, and these are much more stable. What I fear more, is an inexcusably slow expansion."
By the same token, avoiding a second-dip of the recession should not be considered much of an accomplishment.
Finally, I interpreted the question as referring to the situation in the US. The situation in Europe is very dangerous.
JG
In some ways I agree with his response, though probably not in the way he would guess. My thesis has been that we have started the third and final bubble. A bubble that will end all bubbles for decades. We had the equity market bubble that never fully corrected but was stopped short by the Fed morphing it into primarily a private debt bubble. This private debt bubble kept the equity bubble propped up. With the collapse that started in 2007, the market forces once again were not allowed to work their magic with massive intervention by the government to create the third bubble, the government bubble. This government bubble is propping up the equity market and the private debt market. We should have had a small recession in 1998 with the failure of LTCM, without that small recession we should should have had a severe recession in 2001 and 2002, without that severe recession we should have a depression that would be ongoing currently. Every step of the way, the government has stepped in ratcheting the pressure ever higher, refusing to let the market work, and in the last iteration taking the risk of the private sector onto the government balance sheet. In finance theory terms, the bubbles have simply moved down the CAPM line never fully correcting and now the risk free rate is mispriced as systemic risk weighs more heavily than unsystematic risk. In my mind it is unconscionable what has occurred and puts the entire system at risk.
So when James makes the comment that a second double dip is unlikely because housing and construction will not cause the double dip and steady income flows from government transfers will continue to support the consumer, I would be inclined to agree with him. In the same breadth I would also counter that is not what is important.
At this point, the private sector has been backstopped by the government. The private sector won't fail (or reach a natural equilibrium point) unless we have system failure. In my opinion this is unamerican and is what I have coined Sociapitalism. It is a new financial order that has slowly socialized risk. From a stock picker standpoint, someone like Regions Financial which is an insolvent institution has become less risky as its risk has been diluted. In contrast, Wal Mart has become more risky as it has taken a slice of Regions Financial risk.
So to housing. Housing left to itself is in a world of hurt. According to Fannie Mae there are over 5 million mortgages that are seriously delinquent. 5 million!!! Think about that number compared to existing home sales and new home sales. Amherst Securities estimates the number is closer to 7 million. Bank of America has indicated that they expect their foreclosure to increase 600% this year. By the end of the year, Bank of America alone is expected to foreclose on 300,000 homes. To put that in perspective, the new home sales rate in the entire United States is currently running at 308,000. That isn't what is scary though. The area of the financial system that brought our system crashing down was the resets/recasts of the subprime loans that started in the fall of 2007. This wave essentially ended in late 2008 and total loan resets bottomed in September of 2009. The next wave has just started. The subprime wave is over with. The next big wave is Option ARM and Alt A resets/recasts. This wave is just as big as the first wave. The first peak occurs around October of 2010 and than a much bigger peak in October of 2011.
Even from its current level left to market forces, I believe housing would not only cause a double dip but lead to a depression. I agree however that the government will not allow this to happen, until the government can't stop it from happening.
At some point, a month from now, three months from now, a year from, three years from now, there will be an event that calls into question the ability of the federal government to be able to backstop the entire private market. This could come from problems in Europe, Japan, or something closer to home. This is when the end game will occur. This will cause the popping of the final bubble, the government bubble and cause systemic risk to be repriced. Because of the stealth Sociapitalism that has sneaked into our system, the risk that is shared by all will be revealed for what it is.
I am sure James would disagree with me but this is one the core problem of Keynesian economics. It simply acts as a pimp to various politicians to give them cover to buy votes. What politician wants to hear that a market equilibrium (something very basic to economics 101) needs to be pursued and for that to occur you need a recession/depression to clear the system? No one and so it is occupational hazard to think of such views. Instead the answer is to spend which the politicians love to hear because it makes them popular as well. It is a system that feeds on itself until there is nothing left to consume and the system collapses. The great Japanese miracle is they have lasted as long as they have without a market cleansing continuing to string out their problems pushing them off until tomorrow. The great Japanese tragedy is they have lasted as long as they have without a market cleansing preventing them from participating in one of the greatest growth stories just a few hundred miles from its border, in China. Think what could have been if Japan would have allowed financial collapse and reorganized in the early 90s. Sure the early 90s would have been much worse than what they ended up being but the rewards today would have far outweighed any costs of yesterday as they would have had a clean system to feed China's growth appetite.
So to summarize, my view is essentially that we will not double dip until the market reprices the systemic risk because the government has created a government bubble. The government is the private market at this point. The government is propping up equity prices, consumption through wealth transfers, the housing market through tax credits, the debt market through all sorts of programs etc etc. The government is the market. If housing starts going down hard again a new government program will come along. The entire private market is being held up by various scaffolding of the government. Until a storm comes that destroys the scaffolding the private market will most likely muddle, which is James baseline view. Like I said originally, I basically agree with his response but for probably much different reasons than he believes his response.
There is one caveat. There is a growing American anger at this whole con game and the Keynesian's thought process. A new political order could sweep into office this fall through a movement like the Tea Party that puts huge pressure at removing the scaffolding. If that occurs, the whole system will come collapsing down faster than you can say capitalism. While this is what was needed in 1998 or 2002, my fear is at this point the system is beyond saving. It is a catch 22. At this point, I believe there is no way to rebuild without tearing down. But if you tear down will there be anything left to rebuild?
My meaning may not have been as clear as it should have been.
To rephrase: "a double-dip recession seems unlikely to me, because housing and other construction have already collapsed, and it would be hard for them to collapse much farther than they already have. Other forms of spending (such as household consumption) are supported by income flows that come from wages and from government transfers, and these are much more stable. What I fear more, is an inexcusably slow expansion."
By the same token, avoiding a second-dip of the recession should not be considered much of an accomplishment.
Finally, I interpreted the question as referring to the situation in the US. The situation in Europe is very dangerous.
JG
In some ways I agree with his response, though probably not in the way he would guess. My thesis has been that we have started the third and final bubble. A bubble that will end all bubbles for decades. We had the equity market bubble that never fully corrected but was stopped short by the Fed morphing it into primarily a private debt bubble. This private debt bubble kept the equity bubble propped up. With the collapse that started in 2007, the market forces once again were not allowed to work their magic with massive intervention by the government to create the third bubble, the government bubble. This government bubble is propping up the equity market and the private debt market. We should have had a small recession in 1998 with the failure of LTCM, without that small recession we should should have had a severe recession in 2001 and 2002, without that severe recession we should have a depression that would be ongoing currently. Every step of the way, the government has stepped in ratcheting the pressure ever higher, refusing to let the market work, and in the last iteration taking the risk of the private sector onto the government balance sheet. In finance theory terms, the bubbles have simply moved down the CAPM line never fully correcting and now the risk free rate is mispriced as systemic risk weighs more heavily than unsystematic risk. In my mind it is unconscionable what has occurred and puts the entire system at risk.
So when James makes the comment that a second double dip is unlikely because housing and construction will not cause the double dip and steady income flows from government transfers will continue to support the consumer, I would be inclined to agree with him. In the same breadth I would also counter that is not what is important.
At this point, the private sector has been backstopped by the government. The private sector won't fail (or reach a natural equilibrium point) unless we have system failure. In my opinion this is unamerican and is what I have coined Sociapitalism. It is a new financial order that has slowly socialized risk. From a stock picker standpoint, someone like Regions Financial which is an insolvent institution has become less risky as its risk has been diluted. In contrast, Wal Mart has become more risky as it has taken a slice of Regions Financial risk.
So to housing. Housing left to itself is in a world of hurt. According to Fannie Mae there are over 5 million mortgages that are seriously delinquent. 5 million!!! Think about that number compared to existing home sales and new home sales. Amherst Securities estimates the number is closer to 7 million. Bank of America has indicated that they expect their foreclosure to increase 600% this year. By the end of the year, Bank of America alone is expected to foreclose on 300,000 homes. To put that in perspective, the new home sales rate in the entire United States is currently running at 308,000. That isn't what is scary though. The area of the financial system that brought our system crashing down was the resets/recasts of the subprime loans that started in the fall of 2007. This wave essentially ended in late 2008 and total loan resets bottomed in September of 2009. The next wave has just started. The subprime wave is over with. The next big wave is Option ARM and Alt A resets/recasts. This wave is just as big as the first wave. The first peak occurs around October of 2010 and than a much bigger peak in October of 2011.
Even from its current level left to market forces, I believe housing would not only cause a double dip but lead to a depression. I agree however that the government will not allow this to happen, until the government can't stop it from happening.
At some point, a month from now, three months from now, a year from, three years from now, there will be an event that calls into question the ability of the federal government to be able to backstop the entire private market. This could come from problems in Europe, Japan, or something closer to home. This is when the end game will occur. This will cause the popping of the final bubble, the government bubble and cause systemic risk to be repriced. Because of the stealth Sociapitalism that has sneaked into our system, the risk that is shared by all will be revealed for what it is.
I am sure James would disagree with me but this is one the core problem of Keynesian economics. It simply acts as a pimp to various politicians to give them cover to buy votes. What politician wants to hear that a market equilibrium (something very basic to economics 101) needs to be pursued and for that to occur you need a recession/depression to clear the system? No one and so it is occupational hazard to think of such views. Instead the answer is to spend which the politicians love to hear because it makes them popular as well. It is a system that feeds on itself until there is nothing left to consume and the system collapses. The great Japanese miracle is they have lasted as long as they have without a market cleansing continuing to string out their problems pushing them off until tomorrow. The great Japanese tragedy is they have lasted as long as they have without a market cleansing preventing them from participating in one of the greatest growth stories just a few hundred miles from its border, in China. Think what could have been if Japan would have allowed financial collapse and reorganized in the early 90s. Sure the early 90s would have been much worse than what they ended up being but the rewards today would have far outweighed any costs of yesterday as they would have had a clean system to feed China's growth appetite.
So to summarize, my view is essentially that we will not double dip until the market reprices the systemic risk because the government has created a government bubble. The government is the private market at this point. The government is propping up equity prices, consumption through wealth transfers, the housing market through tax credits, the debt market through all sorts of programs etc etc. The government is the market. If housing starts going down hard again a new government program will come along. The entire private market is being held up by various scaffolding of the government. Until a storm comes that destroys the scaffolding the private market will most likely muddle, which is James baseline view. Like I said originally, I basically agree with his response but for probably much different reasons than he believes his response.
There is one caveat. There is a growing American anger at this whole con game and the Keynesian's thought process. A new political order could sweep into office this fall through a movement like the Tea Party that puts huge pressure at removing the scaffolding. If that occurs, the whole system will come collapsing down faster than you can say capitalism. While this is what was needed in 1998 or 2002, my fear is at this point the system is beyond saving. It is a catch 22. At this point, I believe there is no way to rebuild without tearing down. But if you tear down will there be anything left to rebuild?
Saturday, April 10, 2010
Economist James Galbraith - Say What?
George Soros poured millions of dollars into the Institute of New Economic Thinking conference in Cambridge which is a collaboration of ideas to help prevent crises like the one we have now from repeating.
Bloomberg did a series of interviews. One of them was of James Galbraith. Fairly renowned economist from the University of Texas, just down the road from me. He talked alot about Greece and than at 3:04 he is asked if he will rule out a double dip recession.
His answer was
"I am not looking to a double dip recession because that would require something new and dreadful on top of all the dreadful things that have already occurred."
Say what? First he didn't totally answer the question. Second, he made it sound like he won't consider it because it would simply be to horrible to contemplate something horrible. It is an ostrich response. It may be coming, I am not going to look for it. I just want to put my head into the sand.
Europe went into the weekend with Greece future hanging in the balance (really the whole European Union). I still say Germany won't break but they may bend finding some very short term (few month) patchwork band aide. Be careful of whatever headline comes out. I would bet a bunch of my net worth (if there was a way to do it) that Greece problems will not be solved this weekend (once again short term they may get a little more time). Still think some sort of top (short term or otherwise) is coming and was shorting into the close on Friday. Would not be surprised to see a pop on Monday with some sort of superficial announcement out of Europe before rolling over as the week goes on.
Bloomberg did a series of interviews. One of them was of James Galbraith. Fairly renowned economist from the University of Texas, just down the road from me. He talked alot about Greece and than at 3:04 he is asked if he will rule out a double dip recession.
His answer was
"I am not looking to a double dip recession because that would require something new and dreadful on top of all the dreadful things that have already occurred."
Say what? First he didn't totally answer the question. Second, he made it sound like he won't consider it because it would simply be to horrible to contemplate something horrible. It is an ostrich response. It may be coming, I am not going to look for it. I just want to put my head into the sand.
Europe went into the weekend with Greece future hanging in the balance (really the whole European Union). I still say Germany won't break but they may bend finding some very short term (few month) patchwork band aide. Be careful of whatever headline comes out. I would bet a bunch of my net worth (if there was a way to do it) that Greece problems will not be solved this weekend (once again short term they may get a little more time). Still think some sort of top (short term or otherwise) is coming and was shorting into the close on Friday. Would not be surprised to see a pop on Monday with some sort of superficial announcement out of Europe before rolling over as the week goes on.
Thursday, April 8, 2010
Sniffing Some Sort of Top
Wanted to respond to the comment in the previous post before mentioning a couple of other things.
Justin brought up Greece and gave the opinion on why Germany won't allow Greece to fail. He may be right. When push comes to shove at the end, Germany may acquiesce. There is the rub. The market is pricing either Germany or the IMF coming in as what sort of probability? 90%, 95%, 99%, 100%???? Probably close to 100%. I mean, we are up on a rocket ship for getting close to 2 months once the market decided Greece was fine. So if it comes to pass that Greece is fine, than who cares. No one cares about Greece anyway, so it won't matter. Already priced into the market. Personally at this point, I put a very bad outcome at a coin flip which means a good outcome is also only a coin flip. What happens if the good outcome happens? Nothing. The market expects it. What happens if a bad outcomes occurs? All hell likely to break loose. Not priced into the market at all.
The point was made that the EU regulators and EU bankers are in the ear of Germany telling them they can't let Greece go. I am sure they are. France is very exposed to Greece. Not surprisingly France has been very vocal about some sort of bailout package. But Germany is driving the bus. Think about how many stupid stupid stupid things our government has done to get reelected. Germany's Prime Minister Angela Merkel loses the next election if Greece is bailed out. Maybe it is the right thing to do (I don't think it is even if it is the chain reaction that starts the next phase of the depression) and maybe she is the type of person (like a Paul Volcker) who doesn't care and will do it even if she knows it is going to lose an election. That would be one heck of a politician and I doubt it based on things I have read she is that type of person.
To put this into perspective, think of NAFTA having a shared currency. Now Mexico is in dire troubles and going to default. Would Obama bail out Mexico if he knew he was going to lose the election over it? I highly doubt it. Same situation here except the feelings Germans have against Greeks and Greeks against Germans are not very good. Bordering on downright spite.
So than that brings the IMF, but the bailout number the IMF can bring to the table to allow Greece not to default at some point in the future is not enough. At least not likely enough.
Finally, the austerity measure Greece has "imposed" is so far a joke. Greece newspapers today annouced that something like the department of health insurance has already used 50% of its budget for the entire year in 2 months.
Anyway, the market believes Greece is fine (through some bailout at the last second) and if they aren't fine that it doesn't matter. I give 50% that Greece is fine and 30% chance that it doesn't matter.
Regardless of Greece, I am starting to feel bearish again. I have been fairly good at sniffing out tops over the last six months. I have been horrible in thinking that they were the top. Well, I think we are within 2 to 4% of a top in the markets that will once again mark a possible final top. Everything is at extremes. Some things at extremes that I haven't seen in my lifetime. If your looking at valuations, stocks are very very expensive. If you look at dividend yield stocks have only had this low dividend yield (which means the stock have been bid way high) twice. Once in 2000 and once in the fall of 2007. Technically we are extremely extended with large amounts of technical resistance just over our head. From a psychological perspective, the boat is very lopsided. Sentiment indicators are back to extremes.
The question like all previous tops (if we are indeed close to one), is this the ultimate top. I have thought twice before it was. Maybe third time is the charm.
Justin brought up Greece and gave the opinion on why Germany won't allow Greece to fail. He may be right. When push comes to shove at the end, Germany may acquiesce. There is the rub. The market is pricing either Germany or the IMF coming in as what sort of probability? 90%, 95%, 99%, 100%???? Probably close to 100%. I mean, we are up on a rocket ship for getting close to 2 months once the market decided Greece was fine. So if it comes to pass that Greece is fine, than who cares. No one cares about Greece anyway, so it won't matter. Already priced into the market. Personally at this point, I put a very bad outcome at a coin flip which means a good outcome is also only a coin flip. What happens if the good outcome happens? Nothing. The market expects it. What happens if a bad outcomes occurs? All hell likely to break loose. Not priced into the market at all.
The point was made that the EU regulators and EU bankers are in the ear of Germany telling them they can't let Greece go. I am sure they are. France is very exposed to Greece. Not surprisingly France has been very vocal about some sort of bailout package. But Germany is driving the bus. Think about how many stupid stupid stupid things our government has done to get reelected. Germany's Prime Minister Angela Merkel loses the next election if Greece is bailed out. Maybe it is the right thing to do (I don't think it is even if it is the chain reaction that starts the next phase of the depression) and maybe she is the type of person (like a Paul Volcker) who doesn't care and will do it even if she knows it is going to lose an election. That would be one heck of a politician and I doubt it based on things I have read she is that type of person.
To put this into perspective, think of NAFTA having a shared currency. Now Mexico is in dire troubles and going to default. Would Obama bail out Mexico if he knew he was going to lose the election over it? I highly doubt it. Same situation here except the feelings Germans have against Greeks and Greeks against Germans are not very good. Bordering on downright spite.
So than that brings the IMF, but the bailout number the IMF can bring to the table to allow Greece not to default at some point in the future is not enough. At least not likely enough.
Finally, the austerity measure Greece has "imposed" is so far a joke. Greece newspapers today annouced that something like the department of health insurance has already used 50% of its budget for the entire year in 2 months.
Anyway, the market believes Greece is fine (through some bailout at the last second) and if they aren't fine that it doesn't matter. I give 50% that Greece is fine and 30% chance that it doesn't matter.
Regardless of Greece, I am starting to feel bearish again. I have been fairly good at sniffing out tops over the last six months. I have been horrible in thinking that they were the top. Well, I think we are within 2 to 4% of a top in the markets that will once again mark a possible final top. Everything is at extremes. Some things at extremes that I haven't seen in my lifetime. If your looking at valuations, stocks are very very expensive. If you look at dividend yield stocks have only had this low dividend yield (which means the stock have been bid way high) twice. Once in 2000 and once in the fall of 2007. Technically we are extremely extended with large amounts of technical resistance just over our head. From a psychological perspective, the boat is very lopsided. Sentiment indicators are back to extremes.
The question like all previous tops (if we are indeed close to one), is this the ultimate top. I have thought twice before it was. Maybe third time is the charm.
Wednesday, April 7, 2010
Pressure Points
The pressure finalllllly sent the market a little lower today. The market tried to rally in the face of horrific news floor but at least for the day, couldn't quite do it.
Greece is basically done. The 10 year is up to 7%. The three month is up to 4% ish. Basically the market is saying expect a default or some major event by the July time frame. It may be sooner than that. According to Greek newspapers big European banks are pulling repo lines. That is what happened to Bear Stearns and Lehman about a week before they collapsed. The country may survive longer than that, who knows but if that is true, Greece is toast.
The EU could still step in but as I have been saying for two months despite all the supposed press to the opposite, the Germans won't bail out the Greeks. With as much name calling on both sides of the aisles, I think that is even more unlikely now.
The bigger question is what this means for everyone else. It definitely weakens the concept of the European Union. Does it mean the Euro is doomed? What about a domino affect into Spain, Italy, and Portugal? Does this possible chain reactions start right away or is it months away. So should you be shorting hard now or on a market drop expect another rally as the time for the imminent collapse is yet to come? I wish I knew. I wish I knew.
Closer to home, Moody's downgraded Los Angeles. Yesterday the LA comptroller said they have until early May before the city runs out of cash. They are already drawing on reserve funds. They will figure out how to buy time. According to the LA Times, the mayor declared that all non mandatory safety city employees will start working three days next week. More workers underemployed.
LA isn't the only one. Detroit has an imminent bankruptcy filing also.
Are these all canaries in the coal mind or will it finally start turning the economy and the markets? Economy has looked strong the last month. Job gains were probably understated in March but these numbers are climbing at a snails pace. A better economy won't cut it until the problems above catch up with it if they haven't already. The world needs a booming economy and that is simply near an impossibility.
With Greece hanging over everyone, it should be an interesting day tomorrow / weekend.
Greece is basically done. The 10 year is up to 7%. The three month is up to 4% ish. Basically the market is saying expect a default or some major event by the July time frame. It may be sooner than that. According to Greek newspapers big European banks are pulling repo lines. That is what happened to Bear Stearns and Lehman about a week before they collapsed. The country may survive longer than that, who knows but if that is true, Greece is toast.
The EU could still step in but as I have been saying for two months despite all the supposed press to the opposite, the Germans won't bail out the Greeks. With as much name calling on both sides of the aisles, I think that is even more unlikely now.
The bigger question is what this means for everyone else. It definitely weakens the concept of the European Union. Does it mean the Euro is doomed? What about a domino affect into Spain, Italy, and Portugal? Does this possible chain reactions start right away or is it months away. So should you be shorting hard now or on a market drop expect another rally as the time for the imminent collapse is yet to come? I wish I knew. I wish I knew.
Closer to home, Moody's downgraded Los Angeles. Yesterday the LA comptroller said they have until early May before the city runs out of cash. They are already drawing on reserve funds. They will figure out how to buy time. According to the LA Times, the mayor declared that all non mandatory safety city employees will start working three days next week. More workers underemployed.
LA isn't the only one. Detroit has an imminent bankruptcy filing also.
Are these all canaries in the coal mind or will it finally start turning the economy and the markets? Economy has looked strong the last month. Job gains were probably understated in March but these numbers are climbing at a snails pace. A better economy won't cut it until the problems above catch up with it if they haven't already. The world needs a booming economy and that is simply near an impossibility.
With Greece hanging over everyone, it should be an interesting day tomorrow / weekend.
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