Friday, December 30, 2011
Capital Markets Update
By Louis S. Barnes Friday, December 30, 2011
A New Year begins next week, and it is time for my annual dodge. Peter Drucker, one of the world's few worthwhile business theorists: "Nobody can predict the future. The idea is to have a good grasp of the present."
This year, no flinching from predicting. Why such foolish courage? In several econo-political arenas we have dithered and fiddled so long that things are going to happen, and all I have to do is guess what. In order from easiest to hardest….
Interest Rates. Nothing big. Maybe nothing at all. The bond market is behaving as though the Fed intends a 2.00% cap on 10-year T-notes. Why argue?
US Economy. As is. The fantastic stimulus in the pipeline should keep it afloat, but the housing drag will hold it low in the water. More people will find jobs, but paying less than the old ones. The primary risk: if the foreclosure engine resumes without an adequate mortgage supply, it will undercut home prices (again). All other risks to us are from overseas. Upside surprises will be limited to regions first-in to the housing bust, first to recover, my home state Colorado a fair bet. Don’t look for a general economic improvement, if only because fiscal austerity lies just over the horizon.
China. Got this one right last year, so double down. It had to fight inflation in 2011, and did, and is slowing as a result. Other than that, nobody knows what will happen there, not even China. Too big, and too preoccupied by power transfer under way. For the time being these leadership transfers are non-violent, but behind all the black suits, white shirts, and bland ties lies a contest that would impress Corleone and Capone.
Inflation. Just forget about it. Year after year after year people have worried about it, and it's not in the cards. Forces of deflation are still far too strong.
Europe. Toast. Said so last year, and nothing has changed. The ECB will prevent an immediate banking collapse, so timing will depend on Clinton's Law: "It's the economy, stupido." When austerity bites, economies shrink, tax revenue falls, and budgets get worse, then we'll see about political stability versus suicidal clinging to the euro.
That was the easy stuff. The Hard Three are related (ain't they all?).
1. Modern central banks date to Walter Bagehot's concept of "lender of last resort" in 1873. That entire project is on trial, doing well but not getting anywhere. Inventing non-inflationary cash with which to put down waves of global bank runs, cushioning but unable to stop an asset-value disaster, and creating a starvation-level credit supply. Bernanke has been inspired, now guiding Draghi at the ECB, but they cannot reach the root issues. Without a root-fix, the credit house of cards just gets bigger, more vulnerable to some ron-paul idiot tying the hands of one of the central banks.
2. The Fed and ECB in their desperation to prevent a replay of 1930-'32 are buying time not just for the financial system, but have become unwilling co-dependents of the local politicians who are wasting every second provided (UK excepted). I thought last year that the frustration and exhaustion of the American people would force a budget deal and a big one. Wrong. Both political parties are engaged in lies so big that they seem to believe themselves. Shrinking government and regulation will not balance our budget. Taxing rich people will not do it, either. The middle class has promised itself benefits that it cannot afford, and neither party is willing to say so. Yet, I cannot believe that the tombstone of the United States of America will say, "Liked Being Lied To."
3. Tuesday, November 6th. A bunch of Tea Party yahoos will be sent home, elected in frustration with the President, not to misbehave. Neither party will have a working majority in Congress. Just as well. Twelve-straight years of Presidential failure have consumed all margin of safety, and we will either fix our budget within the next Presidential term, or see "tombstone," above.
Maybe, just maybe, this mix will enable the next President to know what to do for us and to us: a stiff, bad-hair Michigander/Utahan Republican Governor of Massachusetts (wow) who, as he says, has signed both sides of paychecks.
2012 is make or break. Simple as that.
A New Year begins next week, and it is time for my annual dodge. Peter Drucker, one of the world's few worthwhile business theorists: "Nobody can predict the future. The idea is to have a good grasp of the present."
This year, no flinching from predicting. Why such foolish courage? In several econo-political arenas we have dithered and fiddled so long that things are going to happen, and all I have to do is guess what. In order from easiest to hardest….
Interest Rates. Nothing big. Maybe nothing at all. The bond market is behaving as though the Fed intends a 2.00% cap on 10-year T-notes. Why argue?
US Economy. As is. The fantastic stimulus in the pipeline should keep it afloat, but the housing drag will hold it low in the water. More people will find jobs, but paying less than the old ones. The primary risk: if the foreclosure engine resumes without an adequate mortgage supply, it will undercut home prices (again). All other risks to us are from overseas. Upside surprises will be limited to regions first-in to the housing bust, first to recover, my home state Colorado a fair bet. Don’t look for a general economic improvement, if only because fiscal austerity lies just over the horizon.
China. Got this one right last year, so double down. It had to fight inflation in 2011, and did, and is slowing as a result. Other than that, nobody knows what will happen there, not even China. Too big, and too preoccupied by power transfer under way. For the time being these leadership transfers are non-violent, but behind all the black suits, white shirts, and bland ties lies a contest that would impress Corleone and Capone.
Inflation. Just forget about it. Year after year after year people have worried about it, and it's not in the cards. Forces of deflation are still far too strong.
Europe. Toast. Said so last year, and nothing has changed. The ECB will prevent an immediate banking collapse, so timing will depend on Clinton's Law: "It's the economy, stupido." When austerity bites, economies shrink, tax revenue falls, and budgets get worse, then we'll see about political stability versus suicidal clinging to the euro.
That was the easy stuff. The Hard Three are related (ain't they all?).
1. Modern central banks date to Walter Bagehot's concept of "lender of last resort" in 1873. That entire project is on trial, doing well but not getting anywhere. Inventing non-inflationary cash with which to put down waves of global bank runs, cushioning but unable to stop an asset-value disaster, and creating a starvation-level credit supply. Bernanke has been inspired, now guiding Draghi at the ECB, but they cannot reach the root issues. Without a root-fix, the credit house of cards just gets bigger, more vulnerable to some ron-paul idiot tying the hands of one of the central banks.
2. The Fed and ECB in their desperation to prevent a replay of 1930-'32 are buying time not just for the financial system, but have become unwilling co-dependents of the local politicians who are wasting every second provided (UK excepted). I thought last year that the frustration and exhaustion of the American people would force a budget deal and a big one. Wrong. Both political parties are engaged in lies so big that they seem to believe themselves. Shrinking government and regulation will not balance our budget. Taxing rich people will not do it, either. The middle class has promised itself benefits that it cannot afford, and neither party is willing to say so. Yet, I cannot believe that the tombstone of the United States of America will say, "Liked Being Lied To."
3. Tuesday, November 6th. A bunch of Tea Party yahoos will be sent home, elected in frustration with the President, not to misbehave. Neither party will have a working majority in Congress. Just as well. Twelve-straight years of Presidential failure have consumed all margin of safety, and we will either fix our budget within the next Presidential term, or see "tombstone," above.
Maybe, just maybe, this mix will enable the next President to know what to do for us and to us: a stiff, bad-hair Michigander/Utahan Republican Governor of Massachusetts (wow) who, as he says, has signed both sides of paychecks.
2012 is make or break. Simple as that.
Friday, December 23, 2011
Capital Markets Update
By Louis S. Barnes Friday, December 23,2011
"Marley was dead; to begin with. There is no doubt whatever about that… Marley was dead as a doornail. Scrooge knew he was dead? Of course he did."
"Scrooge! A squeezing, wrenching, grasping, scraping, clutching, covetous, old sinner! Hard and sharp as flint, from which no steel had ever struck out generous fire; secret, and self-contained, and solitary as an oyster."
Very little real news this week, markets lurching to no account, trading so thin that the landing of a snowflake avalanched 300 points of Dow. Uphill.
The issue at hand: the debt and austerity trap. We must stop borrowing, but to stop we must cut spending or raise revenue or both. If we do that, and our economy or the ones over there or there slow down, then we will have less tax revenue and more need -- or wish -- for spending and borrowing.
How to escape? Devalue currency, stimulate exports. However, not everyone can be a net-exporter. There's no future in devaluing the dollar because we've been beaten to it by the Brits and the Euros (just begun), and China will soon switch from phony appreciation to very real devaluation, as Japan would do if it could figure out how.
On the Brit plan, devalue, cut spending, raise taxes, central bank prints, tolerate 5% inflation, force banks to lend and reform at the same time. Then kneel and pray.
On the Euro plan, pretend. The Japan plan:_____ .
China "Plan A": sell until customers can no longer buy, their wages undercut and debt too high, but by then China's domestic economy will be self-sustaining. Too bad: its customer-victims are tapped out a couple of decades too early. No "Plan B."
Caught in the ever-tighter mathematics of austerity and debt, what can we do to escape? That doesn't cost any money?
Ethics.
Simple as that. Start anywhere.
In boardrooms… if your CEO does not begin every day by considering the health of the markets and society in which the venture makes its money, and the contribution or damage the venture makes to the outer world, get another CEO. If commerce degenerates to cops and robbers, as it has, ultimately there will be too many rules and cops to conduct commerce.
The National Association of Realtors announced this week that it had over-counted sales of homes by 650,000-800,000 in each of the last four years. NAR, the voice of a million mostly hard-working brokers, which claims also to speak for homeowners, did not care enough to get it right. Or to say that it was guessing. Shame on you. Booooo.
New Fed rules require an independent committee of directors of large banks to be responsible for risk management. Wow. Directors to know what management is doing. Small banks, too, maybe? Might businesses other than banks take hint and heart?
We who feel disenfranchised, wondering if our silent Congressmen and Senators are still alive… we wish the spirit of Dickens gives them courage to speak blunt truth.
If you inhabit a wing of either political party, acknowledge daily to yourself and out loud to friends: "I know that my wishes will never prevail on the other three-quarters of Americans. Further, demanding my ideal will not increase my chances of getting part of what I want, and instead will lessen my chances and hurt my country."
Democracy and citizenship are easy: majorities may not oppress minorities, nor minorities paralyze majorities. Nothing to it except thinking about it once in a while.
Do not engage with fairy tales. 99.9% of the web does not have the benefit of an editor. Do not believe as fact anything that you see, forward it, or say it until crosschecked and verified. Goes triple for the economic realm, on the web or off.
If you have not discovered that your cell phone disturbs others nearby, or makes you drive as though stoned and lobotomized, work on it.
One no-cash way out: Ethical behavior enhances civil society and its productivity.
Merry Christmas!!
"Marley was dead; to begin with. There is no doubt whatever about that… Marley was dead as a doornail. Scrooge knew he was dead? Of course he did."
"Scrooge! A squeezing, wrenching, grasping, scraping, clutching, covetous, old sinner! Hard and sharp as flint, from which no steel had ever struck out generous fire; secret, and self-contained, and solitary as an oyster."
Very little real news this week, markets lurching to no account, trading so thin that the landing of a snowflake avalanched 300 points of Dow. Uphill.
The issue at hand: the debt and austerity trap. We must stop borrowing, but to stop we must cut spending or raise revenue or both. If we do that, and our economy or the ones over there or there slow down, then we will have less tax revenue and more need -- or wish -- for spending and borrowing.
How to escape? Devalue currency, stimulate exports. However, not everyone can be a net-exporter. There's no future in devaluing the dollar because we've been beaten to it by the Brits and the Euros (just begun), and China will soon switch from phony appreciation to very real devaluation, as Japan would do if it could figure out how.
On the Brit plan, devalue, cut spending, raise taxes, central bank prints, tolerate 5% inflation, force banks to lend and reform at the same time. Then kneel and pray.
On the Euro plan, pretend. The Japan plan:_____ .
China "Plan A": sell until customers can no longer buy, their wages undercut and debt too high, but by then China's domestic economy will be self-sustaining. Too bad: its customer-victims are tapped out a couple of decades too early. No "Plan B."
Caught in the ever-tighter mathematics of austerity and debt, what can we do to escape? That doesn't cost any money?
Ethics.
Simple as that. Start anywhere.
In boardrooms… if your CEO does not begin every day by considering the health of the markets and society in which the venture makes its money, and the contribution or damage the venture makes to the outer world, get another CEO. If commerce degenerates to cops and robbers, as it has, ultimately there will be too many rules and cops to conduct commerce.
The National Association of Realtors announced this week that it had over-counted sales of homes by 650,000-800,000 in each of the last four years. NAR, the voice of a million mostly hard-working brokers, which claims also to speak for homeowners, did not care enough to get it right. Or to say that it was guessing. Shame on you. Booooo.
New Fed rules require an independent committee of directors of large banks to be responsible for risk management. Wow. Directors to know what management is doing. Small banks, too, maybe? Might businesses other than banks take hint and heart?
We who feel disenfranchised, wondering if our silent Congressmen and Senators are still alive… we wish the spirit of Dickens gives them courage to speak blunt truth.
If you inhabit a wing of either political party, acknowledge daily to yourself and out loud to friends: "I know that my wishes will never prevail on the other three-quarters of Americans. Further, demanding my ideal will not increase my chances of getting part of what I want, and instead will lessen my chances and hurt my country."
Democracy and citizenship are easy: majorities may not oppress minorities, nor minorities paralyze majorities. Nothing to it except thinking about it once in a while.
Do not engage with fairy tales. 99.9% of the web does not have the benefit of an editor. Do not believe as fact anything that you see, forward it, or say it until crosschecked and verified. Goes triple for the economic realm, on the web or off.
If you have not discovered that your cell phone disturbs others nearby, or makes you drive as though stoned and lobotomized, work on it.
One no-cash way out: Ethical behavior enhances civil society and its productivity.
Merry Christmas!!
Friday, December 16, 2011
Capital Markets Update
By Lois S. Barnes Friday, December 16, 2011
Optimism about the US economy has actually crowded Europe off-screen from time to time this week.
The center of US happy-talk: an abrupt decline in new filings for unemployment insurance. Stuck near 400,000 each week for 18 months, last week’s figure dropped to 366,000. As in all things economic, changes in trend are more important than absolute numbers, and it will take a while to verify this one. If accurate and durable, fewer layoffs is a good thing, but it is not hiring. Might just be running out of people to lay off.
Optimists point for confirmation to the NFIB small business survey, whose overall index has risen four months running. However, it’s a hair weaker than a year ago and statistically unchanged since the post-pit summer of 2009. However, the employment sub-index is slightly in positive ground for the first time since 2007. Maybe it’s a turn, or maybe over-cut small biz has enough confidence in stability to staff an empty slot, but it’s no rocket. The sub-index of sales has weakened steadily since April.
One of the best overall indicators is Federal tax receipts, cutting through analytic fog and spin: Federal receipts last month were $13 billion ahead of last year. Ain’t nobody payin’ taxes on income they didn’t really get.
Inflation is a non-problem, CPI flat in November, and as the rest of the world slows, inflation is more likely to be a too-low problem than too high. Industrial production slipped .2% after a strong month. Wizards of forecasting think GDP will have grown 3.5% this month, and we’ll see. Feels more like a number than a sidewalk reality.
Europe. Mainstream media last week trumpeted Merkel’s great success in gaining agreement for pan-European fiscal enforcement, and pilloried David Cameron for his UK no-thanks. Now we know: bullied by Merkel in her pickelhaube and Kaiser Bill moustache, nasty little French poodle in her lap snapping at passersby, several of the others gave polite “Ja” without any agreement at all. European banks are imploding again. Desperate efforts at fiscal discipline to support sovereign bonds are undercutting economies and tax revenue, hurting European bonds by other means.
The fear-effect here: the Treasury this week auctioned masses of 10- and 30-year bonds, and bidders over-subscribed 3.5:1, two-thirds from overseas. The 10-year T-note today is 1.84%, last so low on October 1, unfortunately with no follow-through to mortgages stuck above 4.00%. That absence of mortgage buyers is yet another signal that financial markets here are still deeply impaired.
Lest European governments get all the credit for mangling the public interest, consider the newest adventure here, transcending dysfunction. The President took time out from his pre-campaign snit to demand an extension to the payroll tax cut, and even this free-spender insisted that new revenue would be found to “pay” for the cut. Predictably Republicans wanted to cut spending in alternate “payment.”
No serious person thinks the extension even if not paid for would do anything for the economy except to waste another couple of hundred billion bucks. However, the “pay for” mania no matter how done will convert the whole exercise into cutting a foot off of one end of a blanket and sewing it on the other end.
Except. None of the pay-fors propose replacing the revenue lost to Social Security, a high cost to pay for political posturing.
And except. I’m not sure that it will pass, but there has been bi-partisan support to pay for part of the payroll cut with a Fannie-Freddie mortgage surcharge, adding a tax on the weakest component of the US economy in the form of higher rates. Meanwhile, of course, the Fed’s “Twist” is trying to push down mortgage rates, and at any crack in economic optimism the Fed will deploy QE3 focused on mortgages.
Few people expect much from government, now, except two minority parties each content in its corner to glare at the other. Finding agreement only in the idiocy of a mortgage surcharge transcends black comedy. If we get some action out of the Ghost of Christmas Present this year, I hope it’s to awaken and embolden the political center.
Maybe, maybe… fingers crossed.
Optimism about the US economy has actually crowded Europe off-screen from time to time this week.
The center of US happy-talk: an abrupt decline in new filings for unemployment insurance. Stuck near 400,000 each week for 18 months, last week’s figure dropped to 366,000. As in all things economic, changes in trend are more important than absolute numbers, and it will take a while to verify this one. If accurate and durable, fewer layoffs is a good thing, but it is not hiring. Might just be running out of people to lay off.
Optimists point for confirmation to the NFIB small business survey, whose overall index has risen four months running. However, it’s a hair weaker than a year ago and statistically unchanged since the post-pit summer of 2009. However, the employment sub-index is slightly in positive ground for the first time since 2007. Maybe it’s a turn, or maybe over-cut small biz has enough confidence in stability to staff an empty slot, but it’s no rocket. The sub-index of sales has weakened steadily since April.
One of the best overall indicators is Federal tax receipts, cutting through analytic fog and spin: Federal receipts last month were $13 billion ahead of last year. Ain’t nobody payin’ taxes on income they didn’t really get.
Inflation is a non-problem, CPI flat in November, and as the rest of the world slows, inflation is more likely to be a too-low problem than too high. Industrial production slipped .2% after a strong month. Wizards of forecasting think GDP will have grown 3.5% this month, and we’ll see. Feels more like a number than a sidewalk reality.
Europe. Mainstream media last week trumpeted Merkel’s great success in gaining agreement for pan-European fiscal enforcement, and pilloried David Cameron for his UK no-thanks. Now we know: bullied by Merkel in her pickelhaube and Kaiser Bill moustache, nasty little French poodle in her lap snapping at passersby, several of the others gave polite “Ja” without any agreement at all. European banks are imploding again. Desperate efforts at fiscal discipline to support sovereign bonds are undercutting economies and tax revenue, hurting European bonds by other means.
The fear-effect here: the Treasury this week auctioned masses of 10- and 30-year bonds, and bidders over-subscribed 3.5:1, two-thirds from overseas. The 10-year T-note today is 1.84%, last so low on October 1, unfortunately with no follow-through to mortgages stuck above 4.00%. That absence of mortgage buyers is yet another signal that financial markets here are still deeply impaired.
Lest European governments get all the credit for mangling the public interest, consider the newest adventure here, transcending dysfunction. The President took time out from his pre-campaign snit to demand an extension to the payroll tax cut, and even this free-spender insisted that new revenue would be found to “pay” for the cut. Predictably Republicans wanted to cut spending in alternate “payment.”
No serious person thinks the extension even if not paid for would do anything for the economy except to waste another couple of hundred billion bucks. However, the “pay for” mania no matter how done will convert the whole exercise into cutting a foot off of one end of a blanket and sewing it on the other end.
Except. None of the pay-fors propose replacing the revenue lost to Social Security, a high cost to pay for political posturing.
And except. I’m not sure that it will pass, but there has been bi-partisan support to pay for part of the payroll cut with a Fannie-Freddie mortgage surcharge, adding a tax on the weakest component of the US economy in the form of higher rates. Meanwhile, of course, the Fed’s “Twist” is trying to push down mortgage rates, and at any crack in economic optimism the Fed will deploy QE3 focused on mortgages.
Few people expect much from government, now, except two minority parties each content in its corner to glare at the other. Finding agreement only in the idiocy of a mortgage surcharge transcends black comedy. If we get some action out of the Ghost of Christmas Present this year, I hope it’s to awaken and embolden the political center.
Maybe, maybe… fingers crossed.
Friday, December 9, 2011
Capital Markets Update
By Louis S. Barnes Friday, December 9th, 2011
The newest European maneuvers have trigged a stock rally, but credit markets are not buying the deal. The small upward pressure on US yields today is preparatory to a big borrowing binge by the Treasury next week, not anything fundamental.
Through the fog of Europe, dominating and concealing everything, one pattern is clear: the US economy is doing better than forecast 90 days ago, and the rest of the world is in some stage of sinking.
The two surveyors of US consumer confidence have each reported November-December gains. New claims for unemployment insurance last month were the lowest since February, and the small-business org, NFIB, has also found the first up-turn in small-business hiring since 2008. The Fed’s Z-1 reported a couple-trillion-dollar drop in US household net worth in the 3rd quarter; however, all of it was attributable to stock market losses then, all of which have been recovered.
The perma-optimists say that emerging economies will carry the globe. Uh-huh. China’s 18-months of inflation-fighting has dampened prices, but also hosed down its economy. Brazil’s GDP grew 7.5% last year, but went negative in the 3rd quarter.
The European predicament has been a source of amusement while markets there and everywhere for two years have tried to anticipate whatever new system will follow euro-folly. As of last night, it is no longer funny.
Germany has no answer to anything except to force unsustainable austerity on the weak dozen of the 17 nations in the euro currency. In their frailty, they dare not object. Feckless France for 150 years has asserted power that it does not possess, now coat-tailing German dragoons. Beyond the currency zone lie another 10 nations together comprising the European Union, a fantastic bureaucratic boondoggle based in Brussels.
Today minus one, the UK.
Once applying force, Germany has never known when to stop. Germany and France have long envied the City of London, second only to New York as a financial center. Among the fiscal-union treaty changes jammed at the EU-27 last night, the UK would lose protection from EU regulations which would dismantle the City and reassemble it in Paris and Frankfurt. To UK PM David Cameron’s great credit, despite the risk to UK exports, half of which go to Europe, he told Merkel and Sarkozy to bugger off.
Financial markets have been wagering on euro-breakup since July, one Friday after another guessing the precipitating event. First we expected sovereign-debt default as a catalyst for collapse, but just enough aid has been provided to the weak to prevent it. In July began the greatest bank run of all time, transcending even post-Lehman here, and markets bet on a banking collapse as endgame. European banks have indeed collapsed, but the husks are held open by ECB funding alone (example: in November US money-market funds pulled 68% of their money from French banks), and the absurd notion that all sovereign debt will be repaid at face value and in euros.
German muscle will prevail until European economies are crushed by austerity, and tax revenue falls out from under budgets. That will take a while. Marking the absurdity of this blockheaded pursuit: several sources report authorities in Ireland, Greece, and others inquiring about capacity to print new local-currency banknotes. Every investment house is handicapping the values of local currencies post-breakup. Emails circulate discussion of the lex monetae rules governing who-owes-what after currency change.
There is nothing holding Europe together except a political superstructure which will be thrown from power when the unified Europe project fails. Thus no matter how transparent the folly and failure, the harder that class tries to preserve the project.
The lesson for us, far more powerful than caution against financial profligacy: the more your political structure detaches from economic reality, the greater the danger. That hazard is masked here, now, by European distress. Cash flows to us for safety, keeping interest rates low, and global weakness inhibits inflation. We’ll take that as long as possible.
“Improvement” in confidence is relative.
The newest European maneuvers have trigged a stock rally, but credit markets are not buying the deal. The small upward pressure on US yields today is preparatory to a big borrowing binge by the Treasury next week, not anything fundamental.
Through the fog of Europe, dominating and concealing everything, one pattern is clear: the US economy is doing better than forecast 90 days ago, and the rest of the world is in some stage of sinking.
The two surveyors of US consumer confidence have each reported November-December gains. New claims for unemployment insurance last month were the lowest since February, and the small-business org, NFIB, has also found the first up-turn in small-business hiring since 2008. The Fed’s Z-1 reported a couple-trillion-dollar drop in US household net worth in the 3rd quarter; however, all of it was attributable to stock market losses then, all of which have been recovered.
The perma-optimists say that emerging economies will carry the globe. Uh-huh. China’s 18-months of inflation-fighting has dampened prices, but also hosed down its economy. Brazil’s GDP grew 7.5% last year, but went negative in the 3rd quarter.
The European predicament has been a source of amusement while markets there and everywhere for two years have tried to anticipate whatever new system will follow euro-folly. As of last night, it is no longer funny.
Germany has no answer to anything except to force unsustainable austerity on the weak dozen of the 17 nations in the euro currency. In their frailty, they dare not object. Feckless France for 150 years has asserted power that it does not possess, now coat-tailing German dragoons. Beyond the currency zone lie another 10 nations together comprising the European Union, a fantastic bureaucratic boondoggle based in Brussels.
Today minus one, the UK.
Once applying force, Germany has never known when to stop. Germany and France have long envied the City of London, second only to New York as a financial center. Among the fiscal-union treaty changes jammed at the EU-27 last night, the UK would lose protection from EU regulations which would dismantle the City and reassemble it in Paris and Frankfurt. To UK PM David Cameron’s great credit, despite the risk to UK exports, half of which go to Europe, he told Merkel and Sarkozy to bugger off.
Financial markets have been wagering on euro-breakup since July, one Friday after another guessing the precipitating event. First we expected sovereign-debt default as a catalyst for collapse, but just enough aid has been provided to the weak to prevent it. In July began the greatest bank run of all time, transcending even post-Lehman here, and markets bet on a banking collapse as endgame. European banks have indeed collapsed, but the husks are held open by ECB funding alone (example: in November US money-market funds pulled 68% of their money from French banks), and the absurd notion that all sovereign debt will be repaid at face value and in euros.
German muscle will prevail until European economies are crushed by austerity, and tax revenue falls out from under budgets. That will take a while. Marking the absurdity of this blockheaded pursuit: several sources report authorities in Ireland, Greece, and others inquiring about capacity to print new local-currency banknotes. Every investment house is handicapping the values of local currencies post-breakup. Emails circulate discussion of the lex monetae rules governing who-owes-what after currency change.
There is nothing holding Europe together except a political superstructure which will be thrown from power when the unified Europe project fails. Thus no matter how transparent the folly and failure, the harder that class tries to preserve the project.
The lesson for us, far more powerful than caution against financial profligacy: the more your political structure detaches from economic reality, the greater the danger. That hazard is masked here, now, by European distress. Cash flows to us for safety, keeping interest rates low, and global weakness inhibits inflation. We’ll take that as long as possible.
“Improvement” in confidence is relative.
Friday, December 2, 2011
Capital Markets Update
By Lou Barnes Friday, December 2, 2011
Everybody struggles now to find guideposts in the thicket of new economic information. Two old ideas may help. First, the time-sense of humanity is more calibrated to getting the bear out of the cave than musing about why bears like caves. Second, a version of frog-in-hot-water: we tend not to notice the gradual onset of lunacy, grasping the insanity only in retrospect.
US data are pretty good — relative to fears of new recession. November payrolls gained 120,000 jobs, and inclusive of all revisions added that many to prior months. If markets had any idea in September that payrolls had jumped by 210,000, double the original announcement, we would not have had that mortgage refinance party.
Reality break: the Treasury borrows and spends about $120 billion each month, and for that stimulus we get 120,000 jobs. Instead, why not just pay each of these people a million bucks and let them stay home? Europe is struggling with austerity, not us. Yet.
Markets liked the rise in the November ISM manufacturing index from 50.8 to 52.7, “50″ a breakeven economy. A major part of that improvement is coming from much better sales of cars, at a 13.6 million annual pace in November, way up from the barely 9 million in 2009.
Retro-perspective: we junk about 14 million cars each year. They wear out, unlike houses. Thus we are just now touching replacement-rate sales. Credit is restored for car buyers, unlike houses, which require rather larger loans and are harder to repossess (state Attorneys General have discovered that it’s cheap to buy votes by stopping foreclosures). Oh-by-the-way, the ISM in China fell to 49, and Europe to 46.
The strength in the stock market is a great thing; Dow 12,000 in new statements will reassure households. Fine, disciplined money-managers (Brad Bickham and Gary Beels in town), as opposed to the drunks on CNBC, point to solid corporate earnings miles above the return on bonds. Some stocks pay dividends beating bond yields.
Fluff, huff and puff… Wednesday’s 500-point up-day was the direct result of global central banks’ rescue of European banks. A run began on European banks 18 months ago, and intensified in July, including huge dollar deposits fleeing home, out of Europe for safety. The ECB can replace euros running, but needed other central banks to replenish dollars. The good-news intervention that caught so many short stocks was actually confirmation of very bad news.
Everyone is exhausted with Euro-soap and its fantastic display of self-deception, but it is more important than any other economic development. The next can-kick is scheduled for December 9, this time fiscal discipline to be enforced by surrender of sovereign budget authority to European Union bureaucrats in Brussels. Once that discipline is established, the IMF and ECB are supposed to ride to the rescue. Joined presumably by the Mounties, Mighty Mouse, and Batman.
Better to kick an anvil than this can. The central purpose of any parliament since the Magna Carta, since Rome, is the power of the purse. In the best lunacy check of the week, Nicolas Sarkozy: “It is not by going down the path of more supranationality that Europe will be re-launched.” Aha. France refuses external fiscal discipline not merely for its immense pride, but because its own situation is so dire that it cannot meet the requirements of the existing treaty. If France refuses, who would accept?
Germany’s unemployment has fallen to a two-decade low 5.5%. Spain’s is 22%. There is no rational basis for these nations to bolt themsleves to a common currency. One needs a much stronger one, and the painful lesson of the cost of beggar-thy-neighbor export mania, and the other desperately needs to devalue to revive exports.
The greatest hazard lies in continuing this charade. The most helpful and hopeful line of the week came from Jurgen Hoffman, finance director at Volkswagen Autoeuropa (from FT): “The overall impact [of leaving the euro] would not be so negative for our company.” The primary impediment to ending the euro fantasy now seems to be politicians trying to preserve themselves; the commercial world is more than ready.
Everybody struggles now to find guideposts in the thicket of new economic information. Two old ideas may help. First, the time-sense of humanity is more calibrated to getting the bear out of the cave than musing about why bears like caves. Second, a version of frog-in-hot-water: we tend not to notice the gradual onset of lunacy, grasping the insanity only in retrospect.
US data are pretty good — relative to fears of new recession. November payrolls gained 120,000 jobs, and inclusive of all revisions added that many to prior months. If markets had any idea in September that payrolls had jumped by 210,000, double the original announcement, we would not have had that mortgage refinance party.
Reality break: the Treasury borrows and spends about $120 billion each month, and for that stimulus we get 120,000 jobs. Instead, why not just pay each of these people a million bucks and let them stay home? Europe is struggling with austerity, not us. Yet.
Markets liked the rise in the November ISM manufacturing index from 50.8 to 52.7, “50″ a breakeven economy. A major part of that improvement is coming from much better sales of cars, at a 13.6 million annual pace in November, way up from the barely 9 million in 2009.
Retro-perspective: we junk about 14 million cars each year. They wear out, unlike houses. Thus we are just now touching replacement-rate sales. Credit is restored for car buyers, unlike houses, which require rather larger loans and are harder to repossess (state Attorneys General have discovered that it’s cheap to buy votes by stopping foreclosures). Oh-by-the-way, the ISM in China fell to 49, and Europe to 46.
The strength in the stock market is a great thing; Dow 12,000 in new statements will reassure households. Fine, disciplined money-managers (Brad Bickham and Gary Beels in town), as opposed to the drunks on CNBC, point to solid corporate earnings miles above the return on bonds. Some stocks pay dividends beating bond yields.
Fluff, huff and puff… Wednesday’s 500-point up-day was the direct result of global central banks’ rescue of European banks. A run began on European banks 18 months ago, and intensified in July, including huge dollar deposits fleeing home, out of Europe for safety. The ECB can replace euros running, but needed other central banks to replenish dollars. The good-news intervention that caught so many short stocks was actually confirmation of very bad news.
Everyone is exhausted with Euro-soap and its fantastic display of self-deception, but it is more important than any other economic development. The next can-kick is scheduled for December 9, this time fiscal discipline to be enforced by surrender of sovereign budget authority to European Union bureaucrats in Brussels. Once that discipline is established, the IMF and ECB are supposed to ride to the rescue. Joined presumably by the Mounties, Mighty Mouse, and Batman.
Better to kick an anvil than this can. The central purpose of any parliament since the Magna Carta, since Rome, is the power of the purse. In the best lunacy check of the week, Nicolas Sarkozy: “It is not by going down the path of more supranationality that Europe will be re-launched.” Aha. France refuses external fiscal discipline not merely for its immense pride, but because its own situation is so dire that it cannot meet the requirements of the existing treaty. If France refuses, who would accept?
Germany’s unemployment has fallen to a two-decade low 5.5%. Spain’s is 22%. There is no rational basis for these nations to bolt themsleves to a common currency. One needs a much stronger one, and the painful lesson of the cost of beggar-thy-neighbor export mania, and the other desperately needs to devalue to revive exports.
The greatest hazard lies in continuing this charade. The most helpful and hopeful line of the week came from Jurgen Hoffman, finance director at Volkswagen Autoeuropa (from FT): “The overall impact [of leaving the euro] would not be so negative for our company.” The primary impediment to ending the euro fantasy now seems to be politicians trying to preserve themselves; the commercial world is more than ready.
Friday, November 25, 2011
Capital Markets Update
By Louis S. Barnes Wednesday, November 23, 2011
It is Thanksgiving week here, not over there, but given the sudden silence over there you'd think they were the ones on holiday.
Here we got the mild disappointment of 3rd quarter GDP revised down from 2.5% to 2.0%. Stock market pollyannas are already spinning: since inventories were not re-built in the 3rd, contributing to the downward revision, the 4th is going to be hot, hot, hot! Not, not, not. Richmond and Chicago Fed metrics, as nearly every real-time indicator, show slight forward motion but no acceleration.
The failure of the Supercommittee did no particular harm, as markets hold all politicians in contempt and expectations were already near zero.
Now, we'll talk turkey -- technical, central bank turkey. Europe is out of all options except one: the ECB with invented money can buy a couple of trillion euros' worth of Club Med debt. How would that be different from the Fed's "quantitative easing"?
QE1 here was announced three years ago this week. The Fed promised to buy $1.7 trillion in MBS and Treasurys (2/3rds the former) to bypass a broken banking system and inject credit directly into the economy. The focus on mortgages: those rates had risen near 7% in 2008, adding to housing distress jumping out of the Bubble Zones.
Cries of INFLATION!! rang throughout the land. MONEY-PRINTING!!! The same people still screech the same lines, but three years later, no inflation. Credit still contracting, no money reaching the economy, no inflation.
Europe's bond markets in the last 10 days have begun to fail. They are headed for a day in which markets open but must be closed, and cannot open the next day... or the next or the next. Huge pressure on and expectation from Germany that it will agree to co-sign for wayward Club Med is ridiculous. The combined GDP of Italy, Spain, and France is nearly double Germany's. All of the invented-financing euro-bailout schemes are dead for the same reason: Dad doesn't make enough money to co-sign for 14 kids.
All central banks are legal counterfeiters. The ECB could bid for Club Med bonds, and pay banks for them by making credit entries on their accounts at the ECB. Investors would presumably stop dumping, Club Med borrowing costs would fall to a sustainable level, and they could roll over maturing debt.
Why not?
The most popular answer: Germany's historical-hysterical fear of inflation forbids such money-printing. Another: the euro-creating treaty also forbids the buys.
Wrong and wrong. Here the Fed bought only government guaranteed paper issued by its own nation. The ECB's first problem would be, whose paper to buy, and how much of each? Very much worse, the ECB knows that the Club Med paper is bad-credit paper. Rising market interest rates has been a symptom, not a cause of the underlying troubles. Club Med has so over-borrowed that it will default, leaving the ECB holding a bag that all of Europe has tried to drop.
The second problem is worse. Germany believes that if austerity is adopted, then markets for Club Med debt will re-open, somehow ignoring the revenue-wrecking that austerity will inflict. And no matter what austerity is adopted, or what the ECB buys, Club Med cannot recover: those nations cannot compete with Germany if bolted to the euro, not if Germany proceeds as a mono-maniacal exporter to Club Med, refuses to import, refuses to goose internal consumption, and insists on clenched monetary policy.
Germany demands austerity and reforms in exchange for nothing. And the ECB knows. Markets know. Even if the ECB comes in, big, it will not restore the status quo 1999-2010 to which Germany feels so entitled.
Last, be careful what you wish for. If the ECB is in, big, the euro would fall from $1.35 to something far lower, which would put China in agony about what to peg, dollar or euro, and with whom to start a currency/trade war. Same for Japan. Same for us.
Despite the short-term chaos, I do hope that Europe will break up this experiment quickly, before more damage is done. It's the ECB's call, very soon.
It is Thanksgiving week here, not over there, but given the sudden silence over there you'd think they were the ones on holiday.
Here we got the mild disappointment of 3rd quarter GDP revised down from 2.5% to 2.0%. Stock market pollyannas are already spinning: since inventories were not re-built in the 3rd, contributing to the downward revision, the 4th is going to be hot, hot, hot! Not, not, not. Richmond and Chicago Fed metrics, as nearly every real-time indicator, show slight forward motion but no acceleration.
The failure of the Supercommittee did no particular harm, as markets hold all politicians in contempt and expectations were already near zero.
Now, we'll talk turkey -- technical, central bank turkey. Europe is out of all options except one: the ECB with invented money can buy a couple of trillion euros' worth of Club Med debt. How would that be different from the Fed's "quantitative easing"?
QE1 here was announced three years ago this week. The Fed promised to buy $1.7 trillion in MBS and Treasurys (2/3rds the former) to bypass a broken banking system and inject credit directly into the economy. The focus on mortgages: those rates had risen near 7% in 2008, adding to housing distress jumping out of the Bubble Zones.
Cries of INFLATION!! rang throughout the land. MONEY-PRINTING!!! The same people still screech the same lines, but three years later, no inflation. Credit still contracting, no money reaching the economy, no inflation.
Europe's bond markets in the last 10 days have begun to fail. They are headed for a day in which markets open but must be closed, and cannot open the next day... or the next or the next. Huge pressure on and expectation from Germany that it will agree to co-sign for wayward Club Med is ridiculous. The combined GDP of Italy, Spain, and France is nearly double Germany's. All of the invented-financing euro-bailout schemes are dead for the same reason: Dad doesn't make enough money to co-sign for 14 kids.
All central banks are legal counterfeiters. The ECB could bid for Club Med bonds, and pay banks for them by making credit entries on their accounts at the ECB. Investors would presumably stop dumping, Club Med borrowing costs would fall to a sustainable level, and they could roll over maturing debt.
Why not?
The most popular answer: Germany's historical-hysterical fear of inflation forbids such money-printing. Another: the euro-creating treaty also forbids the buys.
Wrong and wrong. Here the Fed bought only government guaranteed paper issued by its own nation. The ECB's first problem would be, whose paper to buy, and how much of each? Very much worse, the ECB knows that the Club Med paper is bad-credit paper. Rising market interest rates has been a symptom, not a cause of the underlying troubles. Club Med has so over-borrowed that it will default, leaving the ECB holding a bag that all of Europe has tried to drop.
The second problem is worse. Germany believes that if austerity is adopted, then markets for Club Med debt will re-open, somehow ignoring the revenue-wrecking that austerity will inflict. And no matter what austerity is adopted, or what the ECB buys, Club Med cannot recover: those nations cannot compete with Germany if bolted to the euro, not if Germany proceeds as a mono-maniacal exporter to Club Med, refuses to import, refuses to goose internal consumption, and insists on clenched monetary policy.
Germany demands austerity and reforms in exchange for nothing. And the ECB knows. Markets know. Even if the ECB comes in, big, it will not restore the status quo 1999-2010 to which Germany feels so entitled.
Last, be careful what you wish for. If the ECB is in, big, the euro would fall from $1.35 to something far lower, which would put China in agony about what to peg, dollar or euro, and with whom to start a currency/trade war. Same for Japan. Same for us.
Despite the short-term chaos, I do hope that Europe will break up this experiment quickly, before more damage is done. It's the ECB's call, very soon.
Friday, November 18, 2011
Capital Markets Update
By Louis S. Barnes Friday, November 18, 2011
The top story is still Europe, but a bore except for the entertaining incompetence on parade. Dr. Johnson maintained that nothing so concentrates the mind as the prospect of one's hanging in the morning, but that concept has eluded Europe.
All bond markets there fell apart this week, saved from collapse only by the purchases of the European Central Bank, which said it is forbidden by treaty to do so, won't do, can't do, but is doing. All other paths to euro status quo salvation are dead.
Club Med will sooner or later default on a couple of trillion in euro-IOUs. The ECB can buy time, but the hopes that an enormous credit loss can be handed to the ECB -- like telling the Maitre d'hôtel to remove an unfortunate plate of fish -- would only magnify ultimate danger. And, contrary to hopeful policy-mongers, such an attempted burial of credit loss at the ECB has no parallel to our Fed's QE.
Here at home the stream of economic data is okay. However, the general run of commentary is now just as excessively positive now as it was negative in August into September. Inflation is no threat at all: core producer prices were unchanged in October and CPI rose only .1%. The values including energy and food fell, .3% and .1% respectively, indicating downward pressure in the pipeline. Industrial production (down Sept, up Oct), the NY- and Philly-Fed indexes -- just wobbling back and forth across baseline. A bright spot, retail sales up a half-percent in October...Careful with that. We should be getting something for $1.3 trillion in deficit spending this year.
Genuine reason for thanks: a lot of media and government people are suddenly speaking to housing. Six years in purgatory may be enough. Even those hostile to the likes of Fannie understand that credit is too tight. However, one debate remains: do we need jobs before housing can recover, or are jobs dependent on housing?
Time out from Europe for research, and the jury is in: housing first. (Sources NBER, NAR, Dept of Labor, and Freddie.)
Recession November '73 to March '75 Home sales rose from January 1975 bottom to the pre-recession level by July. Unemployment insurance claims did crest in March '75, and the rate of unemployment at 9.1%, but that rate was still above 8% in mid-'76, 16 months after the housing turn.
Recession October '79 to November '82 The NBER pegs the start in January 1980, and calls two separate recessions in the period, but I was there -- it began earlier and was all one crater. Home sales crashed by October '79 under the weight of Paul Volcker's jack of mortgage rates to 11.64% (top: 18.45% in '81, not below 14% until fall '82). The housing crash: from 3.77 million annualized in '79 to bottom in May '82 at 1.86 million, back to 2.57 million by January '83. Unemployment soared from 5.6% to 11.4%, at its worst simultaneous with that January '83 housing recovery, and unemployment did not fall below 8% for another 14 months. Pattern there.
Recession July '90 to March '91: Existing home sales fell from a 3 million pre-recession pace in to 2.6 million in December 1990, damage done by mortgage rates rising through 10%, sales back above 3 million by May '91. Pre-recession unemployment was 5.6%; it did not top out at 8.2% until nine months after home-sales recovery, did not fall below 8% for another year, and elevated claims for unemployment insurance did not normalize until another six months after that.
We have had two recessions since, the Mini from March-November 2001, and the Great, December 2007 to officially end (uh-huh) in June 2009. These two are anomalous: in the Mini, housing did fine throughout, supported by record-low rates and sign-here credit. Maybe that's why it was Mini? Could be? The Great of course was made Great by the collapse of idiot-credit, and not even all-time-record-low rates can overcome today's credit drought. 4%, but don't bother to apply.
I do try to write without saying something unpleasant about the President. However, in light of historical evidence his focus on shovel-in-the-mail jobs programs and utter, total absence of housing policy seem a bit odd.
In numbing detail, this fine academic work proves that the sun does, in fact, rise in the east. If anybody STILL wants to argue about housing as the central US economic problem, send 'em this. Teasing aside, it is very well done, and casket-shut conclusive. http://faculty.chicagobooth.edu/amir.sufi/MianRaoSufi_EconomicSlump_Nov2011.pdf
This week Bill Dudley, NY Fed Prez and certified White Hat, delivered the best speech on the economy, housing-heavy, since the Great Recession began. You may correctly assume that the Fed is exhausted with a White House, Treasury, and Congress that simply will not pay attention, and are void of imagination. Dudley's remarks are non-technical, refreshing to any real estate professional, and reassuring to any civilian feeling abandoned. The cavalry will come one day. http://www.newyorkfed.org/newsevents/speeches/2011/dud111118.html
The top story is still Europe, but a bore except for the entertaining incompetence on parade. Dr. Johnson maintained that nothing so concentrates the mind as the prospect of one's hanging in the morning, but that concept has eluded Europe.
All bond markets there fell apart this week, saved from collapse only by the purchases of the European Central Bank, which said it is forbidden by treaty to do so, won't do, can't do, but is doing. All other paths to euro status quo salvation are dead.
Club Med will sooner or later default on a couple of trillion in euro-IOUs. The ECB can buy time, but the hopes that an enormous credit loss can be handed to the ECB -- like telling the Maitre d'hôtel to remove an unfortunate plate of fish -- would only magnify ultimate danger. And, contrary to hopeful policy-mongers, such an attempted burial of credit loss at the ECB has no parallel to our Fed's QE.
Here at home the stream of economic data is okay. However, the general run of commentary is now just as excessively positive now as it was negative in August into September. Inflation is no threat at all: core producer prices were unchanged in October and CPI rose only .1%. The values including energy and food fell, .3% and .1% respectively, indicating downward pressure in the pipeline. Industrial production (down Sept, up Oct), the NY- and Philly-Fed indexes -- just wobbling back and forth across baseline. A bright spot, retail sales up a half-percent in October...Careful with that. We should be getting something for $1.3 trillion in deficit spending this year.
Genuine reason for thanks: a lot of media and government people are suddenly speaking to housing. Six years in purgatory may be enough. Even those hostile to the likes of Fannie understand that credit is too tight. However, one debate remains: do we need jobs before housing can recover, or are jobs dependent on housing?
Time out from Europe for research, and the jury is in: housing first. (Sources NBER, NAR, Dept of Labor, and Freddie.)
Recession November '73 to March '75 Home sales rose from January 1975 bottom to the pre-recession level by July. Unemployment insurance claims did crest in March '75, and the rate of unemployment at 9.1%, but that rate was still above 8% in mid-'76, 16 months after the housing turn.
Recession October '79 to November '82 The NBER pegs the start in January 1980, and calls two separate recessions in the period, but I was there -- it began earlier and was all one crater. Home sales crashed by October '79 under the weight of Paul Volcker's jack of mortgage rates to 11.64% (top: 18.45% in '81, not below 14% until fall '82). The housing crash: from 3.77 million annualized in '79 to bottom in May '82 at 1.86 million, back to 2.57 million by January '83. Unemployment soared from 5.6% to 11.4%, at its worst simultaneous with that January '83 housing recovery, and unemployment did not fall below 8% for another 14 months. Pattern there.
Recession July '90 to March '91: Existing home sales fell from a 3 million pre-recession pace in to 2.6 million in December 1990, damage done by mortgage rates rising through 10%, sales back above 3 million by May '91. Pre-recession unemployment was 5.6%; it did not top out at 8.2% until nine months after home-sales recovery, did not fall below 8% for another year, and elevated claims for unemployment insurance did not normalize until another six months after that.
We have had two recessions since, the Mini from March-November 2001, and the Great, December 2007 to officially end (uh-huh) in June 2009. These two are anomalous: in the Mini, housing did fine throughout, supported by record-low rates and sign-here credit. Maybe that's why it was Mini? Could be? The Great of course was made Great by the collapse of idiot-credit, and not even all-time-record-low rates can overcome today's credit drought. 4%, but don't bother to apply.
I do try to write without saying something unpleasant about the President. However, in light of historical evidence his focus on shovel-in-the-mail jobs programs and utter, total absence of housing policy seem a bit odd.
In numbing detail, this fine academic work proves that the sun does, in fact, rise in the east. If anybody STILL wants to argue about housing as the central US economic problem, send 'em this. Teasing aside, it is very well done, and casket-shut conclusive. http://faculty.chicagobooth.edu/amir.sufi/MianRaoSufi_EconomicSlump_Nov2011.pdf
This week Bill Dudley, NY Fed Prez and certified White Hat, delivered the best speech on the economy, housing-heavy, since the Great Recession began. You may correctly assume that the Fed is exhausted with a White House, Treasury, and Congress that simply will not pay attention, and are void of imagination. Dudley's remarks are non-technical, refreshing to any real estate professional, and reassuring to any civilian feeling abandoned. The cavalry will come one day. http://www.newyorkfed.org/newsevents/speeches/2011/dud111118.html
Friday, November 11, 2011
Capital Markets Update
By Louis S. Barnes Friday, November 11, 2011
Events this week are more Ripley's Believe It or Not, or Saturday Night Live, than financial market proceedings.
Italian bond yields (10s) screamed from mid-sixes to 7.48% on Wednesday, collapsing US-Europe stocks. Then somebody bought a lot of those bonds to put out the fire, or gave orders to banks to stop selling, yield back to 6.89%. The European Central Bank says it is forbidden to buy sovereign debt bail out nations, but the ECB is the last hope to buy significant time. And, on a continent in which everyone says one thing and does another...buying time, is all.
Italy sold some one-year notes at auction this week, yield 6.09% versus 3.57% last month. Not a good trend. We pay 0.10% for one year.
French banks hold a France-killing $560 billion in Italian IOUs. As the Italian contagion grew this week, rumors flew that S&P would cut France's AAA rating, which among other things would collapse the European Financial Stabilization Facility. S&P denied the rumor, but did not explain upon what basis it has rated France AAA.
The EFSF is a self-bailout fund guaranteed by all 17 euro-currency nations. Those who need to be bailed are also guarantors. The guarantees are not "joint and several," each guarantor liable for the entire amount; instead the guarantees are pro-rata to GDP. If some guarantees turn out to be worthless, creditors may not look to the surviving strong to pick up the trash left by the failed.
The EFSF is to sell its own IOUs to raise cash to execute the bailout promises to Ireland, Portugal and Greece, themselves EFSF co-guarantors. If this sounds like a Series 2005 Subprime CDO, you have been paying attention.
The EFSF has been trying for ten days to sell $4 billion of its IOUs, and for several days could not; it finally moved them at a 1.77% premium to German bunds, up from 0.51% spread in June. Marvelous. You are drowning, and you are tossed a life-line by another swimmer nearby, also drowning.
The 17 euro currency zone GDPs are as follows, in (billions). The three official wrecks: Greece ($305), Portugal ($228), and Ireland ($203), total $736 billion. The nine mini-members (Malta ($8), Cyprus ($25), Estonia ($19), Slovenia ($48), Luxembourg ($55), Slovakia ($90), Finland ($239), Austria ($376), and Belgium ($468), total $1,328 billion. Most of the minis are in good shape, except the biggest: Belgium has no functioning government, and Austria, whose banks made a lot of loans to Eastern Europe in Swiss Francs which will not be repaid.
The remaining six nations in the euro-zone break into three groups. The healthy, Germany ($3,310) and Holland ($783). The sick, Italy ($2,050) and Spain ($1,410). And the hopelessly exposed to contagion via shot-to-hell banks: France ($2,560).
The grand total is a big operation, $12,517 GDP. However...the three officially insolvent plus Italy and Spain (total $4,196) are to be bailed out by Holland and Germany ($4,093) and the minis (?), while hoping that France can huff, puff, and bluff its way for a decade? Ain't gonna happen. Just arithmetic. Nothing personal.
A lot of really smart people are trying to figure out the breaking point. Can't be done. Like watching an inevitable car accident with a closing speed of an inch per day.
Markets via bank run may step on the accelerator at any time. Or these boobs may stay on the Merkel Plan and let austerity run its course, which means recession throughout Europe, collapsing credit and then bank collapse. Unlike the US, Europe has understood for more than a century that banks are public utilities, but they forget that there are limits to capacity at the sewer plant. Once you have a sewer plant in trouble, be veeerrry careful with the valves.
Mercifully, since the world buys so little from us, we'll be less-impacted by global recession than anyone. No inflation, low or lower interest rates, Fed free to QE3, easy to sell Treasurys.
Born lucky.
Events this week are more Ripley's Believe It or Not, or Saturday Night Live, than financial market proceedings.
Italian bond yields (10s) screamed from mid-sixes to 7.48% on Wednesday, collapsing US-Europe stocks. Then somebody bought a lot of those bonds to put out the fire, or gave orders to banks to stop selling, yield back to 6.89%. The European Central Bank says it is forbidden to buy sovereign debt bail out nations, but the ECB is the last hope to buy significant time. And, on a continent in which everyone says one thing and does another...buying time, is all.
Italy sold some one-year notes at auction this week, yield 6.09% versus 3.57% last month. Not a good trend. We pay 0.10% for one year.
French banks hold a France-killing $560 billion in Italian IOUs. As the Italian contagion grew this week, rumors flew that S&P would cut France's AAA rating, which among other things would collapse the European Financial Stabilization Facility. S&P denied the rumor, but did not explain upon what basis it has rated France AAA.
The EFSF is a self-bailout fund guaranteed by all 17 euro-currency nations. Those who need to be bailed are also guarantors. The guarantees are not "joint and several," each guarantor liable for the entire amount; instead the guarantees are pro-rata to GDP. If some guarantees turn out to be worthless, creditors may not look to the surviving strong to pick up the trash left by the failed.
The EFSF is to sell its own IOUs to raise cash to execute the bailout promises to Ireland, Portugal and Greece, themselves EFSF co-guarantors. If this sounds like a Series 2005 Subprime CDO, you have been paying attention.
The EFSF has been trying for ten days to sell $4 billion of its IOUs, and for several days could not; it finally moved them at a 1.77% premium to German bunds, up from 0.51% spread in June. Marvelous. You are drowning, and you are tossed a life-line by another swimmer nearby, also drowning.
The 17 euro currency zone GDPs are as follows, in (billions). The three official wrecks: Greece ($305), Portugal ($228), and Ireland ($203), total $736 billion. The nine mini-members (Malta ($8), Cyprus ($25), Estonia ($19), Slovenia ($48), Luxembourg ($55), Slovakia ($90), Finland ($239), Austria ($376), and Belgium ($468), total $1,328 billion. Most of the minis are in good shape, except the biggest: Belgium has no functioning government, and Austria, whose banks made a lot of loans to Eastern Europe in Swiss Francs which will not be repaid.
The remaining six nations in the euro-zone break into three groups. The healthy, Germany ($3,310) and Holland ($783). The sick, Italy ($2,050) and Spain ($1,410). And the hopelessly exposed to contagion via shot-to-hell banks: France ($2,560).
The grand total is a big operation, $12,517 GDP. However...the three officially insolvent plus Italy and Spain (total $4,196) are to be bailed out by Holland and Germany ($4,093) and the minis (?), while hoping that France can huff, puff, and bluff its way for a decade? Ain't gonna happen. Just arithmetic. Nothing personal.
A lot of really smart people are trying to figure out the breaking point. Can't be done. Like watching an inevitable car accident with a closing speed of an inch per day.
Markets via bank run may step on the accelerator at any time. Or these boobs may stay on the Merkel Plan and let austerity run its course, which means recession throughout Europe, collapsing credit and then bank collapse. Unlike the US, Europe has understood for more than a century that banks are public utilities, but they forget that there are limits to capacity at the sewer plant. Once you have a sewer plant in trouble, be veeerrry careful with the valves.
Mercifully, since the world buys so little from us, we'll be less-impacted by global recession than anyone. No inflation, low or lower interest rates, Fed free to QE3, easy to sell Treasurys.
Born lucky.
Friday, November 4, 2011
Capital Markets Update
by Louis S. Barnes Friday, November 4th, 2011
US markets have begun to fibrillate, pumping wildly and pointlessly, unable to measure prospects for slow-slide recession here, and Europe confounding everyone. In the last five weeks, the S&P 500 has traded from 1097 to 1292, caving to 1244 now; the 10-year T-note in that time 1.75% to 2.37%, today back to 2.04%. The mortgage centerline is 4.25%, a huge spread to 10s which may soon draw the Fed’s attention.
The ISM surveys (old “purchasing managers”) arrived at 50.8 for manufacturing in October, teetering at breakeven and down from 52.1; the service sector 52.9 unchanged. Rather more ominous, the European equivalent dumped to 43, clear recession, and China is now below 50. August and September US payroll gains were revised up by about half, but far below levels necessary to absorb the unemployed. October’s 80,000 gain is statistically undetectable.
Europe. No blue-sky, just the facts, Jacque. Try not to get lost in individual-nation details (Greece is a sideshow). Hopes of external salvation are done, and even if Germany were willing, it alone does not have the strength for a pan-European fix. The euro zone now has three options. One: to stop a run in progress, the European Central Bank begins a massive and sustained buy of Italian, Spanish, and French debt. Two: Club Med plus France embark on brutal IMF-enforced Teutonic transformation. Three: give it up, back to francs, lira, and pesetas.
Option One is a can-kick, Lucy holding for Charlie. Might buy some time, but Germany will not stand for it, and there is no way to allocate whose bonds get bought and how much. Option Two might make it down the field a ways, months, but the enforced austerity will leave these economies in worse budget shape than now.
These Europeans do not merely distrust each other, they do not like each other; not just the leaders, but the peoples. Sarkozy refers to Merkel as “la Boche,” and last week told UK PM Cameron said that he had “missed an opportunity to shut up.” Berlusconi uses unprintable terms to describe the Merkel physique. The Germans and French regard the Greeks as subhuman (in the last go-round, “untermenschen”). This grotesque, inept show reads like the 1930s, or 1905-14, mercifully now just about money.
And right there lies link and lesson here. Not about financial foolishness, but about the social contract.
The link: Jon Corzine, late chairman of Goldman, United States Senator, Governor of New Jersey, fabulously wealthy, has in one year destroyed a 200-year-old commodity trading house, MF Global, by betting on leverage 40:1 that Europe would not allow sovereign debt to default. He will soon be the arch-villain exemplar of corporate excess, disgusting compensation, and runaway inequality in American income and outcome. The perfect 1% man to burn in effigy at Occupy demonstrations.
Yet… our greatest risk as a nation is to hear that music and rise to bi-lateral class anger. There was a time here, not long ago, when the 1% (or 10% or 20%) oppressed the rest, held them down: brutal Rockefeller, Gould, Carnegie… Robber Barons. Eighty years ago soldiers still turned out to shoot union strikers. Here. In this country.
Today, frustrated and fearful people accuse corporations of hoarding cash and refusing to hire here, unable to understand that they made the money elsewhere, not here, a couple of billion people in only 20 years willing to do the same work as Americans for less pay. The wounded feel justified to take the fruits of the successful, those who can compete in a global economy, but these are not “oppressors.”
The Left offers infrastructure work, telling college grads, “Your shovel is in the mail.” The Right like Germany thinks only to guard its own, telling all others to reform themselves, tell those without jobs to be more productive.
The deadly hazard here is not financial excess. The danger is fracturing into self-justified groups like Europe. Cross that line, and the others’ bad behavior and suspicious motive frees us from responsibility for our own. The desire to get even and to punish, slathered with contempt, excuses us from thought for the whole.
US markets have begun to fibrillate, pumping wildly and pointlessly, unable to measure prospects for slow-slide recession here, and Europe confounding everyone. In the last five weeks, the S&P 500 has traded from 1097 to 1292, caving to 1244 now; the 10-year T-note in that time 1.75% to 2.37%, today back to 2.04%. The mortgage centerline is 4.25%, a huge spread to 10s which may soon draw the Fed’s attention.
The ISM surveys (old “purchasing managers”) arrived at 50.8 for manufacturing in October, teetering at breakeven and down from 52.1; the service sector 52.9 unchanged. Rather more ominous, the European equivalent dumped to 43, clear recession, and China is now below 50. August and September US payroll gains were revised up by about half, but far below levels necessary to absorb the unemployed. October’s 80,000 gain is statistically undetectable.
Europe. No blue-sky, just the facts, Jacque. Try not to get lost in individual-nation details (Greece is a sideshow). Hopes of external salvation are done, and even if Germany were willing, it alone does not have the strength for a pan-European fix. The euro zone now has three options. One: to stop a run in progress, the European Central Bank begins a massive and sustained buy of Italian, Spanish, and French debt. Two: Club Med plus France embark on brutal IMF-enforced Teutonic transformation. Three: give it up, back to francs, lira, and pesetas.
Option One is a can-kick, Lucy holding for Charlie. Might buy some time, but Germany will not stand for it, and there is no way to allocate whose bonds get bought and how much. Option Two might make it down the field a ways, months, but the enforced austerity will leave these economies in worse budget shape than now.
These Europeans do not merely distrust each other, they do not like each other; not just the leaders, but the peoples. Sarkozy refers to Merkel as “la Boche,” and last week told UK PM Cameron said that he had “missed an opportunity to shut up.” Berlusconi uses unprintable terms to describe the Merkel physique. The Germans and French regard the Greeks as subhuman (in the last go-round, “untermenschen”). This grotesque, inept show reads like the 1930s, or 1905-14, mercifully now just about money.
And right there lies link and lesson here. Not about financial foolishness, but about the social contract.
The link: Jon Corzine, late chairman of Goldman, United States Senator, Governor of New Jersey, fabulously wealthy, has in one year destroyed a 200-year-old commodity trading house, MF Global, by betting on leverage 40:1 that Europe would not allow sovereign debt to default. He will soon be the arch-villain exemplar of corporate excess, disgusting compensation, and runaway inequality in American income and outcome. The perfect 1% man to burn in effigy at Occupy demonstrations.
Yet… our greatest risk as a nation is to hear that music and rise to bi-lateral class anger. There was a time here, not long ago, when the 1% (or 10% or 20%) oppressed the rest, held them down: brutal Rockefeller, Gould, Carnegie… Robber Barons. Eighty years ago soldiers still turned out to shoot union strikers. Here. In this country.
Today, frustrated and fearful people accuse corporations of hoarding cash and refusing to hire here, unable to understand that they made the money elsewhere, not here, a couple of billion people in only 20 years willing to do the same work as Americans for less pay. The wounded feel justified to take the fruits of the successful, those who can compete in a global economy, but these are not “oppressors.”
The Left offers infrastructure work, telling college grads, “Your shovel is in the mail.” The Right like Germany thinks only to guard its own, telling all others to reform themselves, tell those without jobs to be more productive.
The deadly hazard here is not financial excess. The danger is fracturing into self-justified groups like Europe. Cross that line, and the others’ bad behavior and suspicious motive frees us from responsibility for our own. The desire to get even and to punish, slathered with contempt, excuses us from thought for the whole.
Friday, October 28, 2011
Capital Markets Update
By Louis S. Barnes Friday, October 21st, 2011
“Vee now shivt coverage from our new breaktrough polizy vich hes saved ze euro, Europe, and all mankind to events in ze colonies….”
On the same morning the newest Euro-can clunked along came news that American 3rd Quarter GDP jumped 2.5% — not far above forecast, but the shape of the gain was a stunning surprise. The strength was in the consumer, a 2.4% increase in household spending. Common distortions were absent: no weird upside-downs in trade accounts, and inventories if anything understated GDP. Inflation also waned.
The Euro-can got all the ink, but in any cross-weaving flow of economic data, the most important thread is always US data. The report distributed concussions evenly among all of those who had bet on a new recession; and banged an especially embarrassing knot on the head of the respected Economic Cycle Research Institute. The ECRI had never in its history false-called a recession; two weeks ago it said that the US was either rapidly falling into recession or was already in one.
The Count Dracula of economics, Nouriel Roubini, brushing up his Transylvania accent for Halloween, expects a revision all the way down to 1%. The strong consumer does not at all crossfoot with September personal income gaining a mere point-one percent (nor the .1% decline in August), but a 2.5% GDP announcement — right, wrong, temporary or revised — if you had bought 10-year T-notes down to 1.70%, and shorted stocks, you got caught in a huge panic running to the other side of the boat.
The 10-year soared to 2.40%; although back now to 2.30% will take a lot of ugly news to do much better. Mortgages near 4.375% have ended the refi party altogether. Snide churls needle the Fed, saying so much for the Fed’s sell-short, buy-long Twist to knock down long-term rates — but, good grief, nobody stops an avalanche.
Economic data is always ambiguous, if only because instantly superseded by guesses at the next reports. Policy-making, on the other hand, tends to turn corners and stay turned. This week brought a turn in housing policy for the first time since meltdown six years ago. On Monday, October 24, Larry Summers wrote for the Financial Times the most compelling policy piece yet, noting among other things that Fannie and Freddie were created as counter-cyclical agencies, but during the Bubble aftermath have acted to make the cycle worse. Only anti-government diehards now fight re-mobilizing the GSEs. Sadly, there are a lot of those.
A mass-refi proposal for underwaters, HARP2, rolled out this week over the objection of the GSEs’ regulator, FHFA, and its director, Edward DeMarco. We’ll see. Borrower qualification requirements will not appear for three more weeks, and DeMarco, the top-termite of bureaucrats, all mandibles and no brain, has managed to undermine every previous initiative. Mr. Obama jumped on the bandwagon at the last instant, having offered not one single housing idea in the last 18 months. He does deserve great credit for this week’s student-loan proposal; please, more like that, sir.
Back to Europe, and a scorecard for colonials to follow the action. On Thursday, July 21 the EU announced a modified European Financial Stability Facility including a private-sector 21% haircut of Greek debt. Markets had a splendid day, no follow-through the Friday following, and on the next Monday began an eight-week freefall.
The breakthrough deal announced Thursday has no market follow-through Friday. Monday may be as entertaining as July 25, or may take a while; whichever, this new can-kick will have a short roll. It has not one new pfennig in cash or guarantee. The private-sector write-down of Greek debt (voluntary: “You, you, you, and you”) will be 50%, but limited to the e210 billion in private/bank hands, leaving at full-phony market value e140 billion held by the ECB. Thus the net debt relief to Greece leaves 67% outstanding, which on the market is worth 40%, and the Greeks can’t pay even that.
The EFSF is to lever-up from e440 billion to e1 trillion, method not specified, but aided by new private and foreign capital. European ministers are off to China, expecting it to throw in e100 billion, a deal so good that the Germans have passed on it.
Thursday’s report took GDP back to its pre-recession starting point for the first time, a marker showing how far we have come, and how far we have to go.
“Vee now shivt coverage from our new breaktrough polizy vich hes saved ze euro, Europe, and all mankind to events in ze colonies….”
On the same morning the newest Euro-can clunked along came news that American 3rd Quarter GDP jumped 2.5% — not far above forecast, but the shape of the gain was a stunning surprise. The strength was in the consumer, a 2.4% increase in household spending. Common distortions were absent: no weird upside-downs in trade accounts, and inventories if anything understated GDP. Inflation also waned.
The Euro-can got all the ink, but in any cross-weaving flow of economic data, the most important thread is always US data. The report distributed concussions evenly among all of those who had bet on a new recession; and banged an especially embarrassing knot on the head of the respected Economic Cycle Research Institute. The ECRI had never in its history false-called a recession; two weeks ago it said that the US was either rapidly falling into recession or was already in one.
The Count Dracula of economics, Nouriel Roubini, brushing up his Transylvania accent for Halloween, expects a revision all the way down to 1%. The strong consumer does not at all crossfoot with September personal income gaining a mere point-one percent (nor the .1% decline in August), but a 2.5% GDP announcement — right, wrong, temporary or revised — if you had bought 10-year T-notes down to 1.70%, and shorted stocks, you got caught in a huge panic running to the other side of the boat.
The 10-year soared to 2.40%; although back now to 2.30% will take a lot of ugly news to do much better. Mortgages near 4.375% have ended the refi party altogether. Snide churls needle the Fed, saying so much for the Fed’s sell-short, buy-long Twist to knock down long-term rates — but, good grief, nobody stops an avalanche.
Economic data is always ambiguous, if only because instantly superseded by guesses at the next reports. Policy-making, on the other hand, tends to turn corners and stay turned. This week brought a turn in housing policy for the first time since meltdown six years ago. On Monday, October 24, Larry Summers wrote for the Financial Times the most compelling policy piece yet, noting among other things that Fannie and Freddie were created as counter-cyclical agencies, but during the Bubble aftermath have acted to make the cycle worse. Only anti-government diehards now fight re-mobilizing the GSEs. Sadly, there are a lot of those.
A mass-refi proposal for underwaters, HARP2, rolled out this week over the objection of the GSEs’ regulator, FHFA, and its director, Edward DeMarco. We’ll see. Borrower qualification requirements will not appear for three more weeks, and DeMarco, the top-termite of bureaucrats, all mandibles and no brain, has managed to undermine every previous initiative. Mr. Obama jumped on the bandwagon at the last instant, having offered not one single housing idea in the last 18 months. He does deserve great credit for this week’s student-loan proposal; please, more like that, sir.
Back to Europe, and a scorecard for colonials to follow the action. On Thursday, July 21 the EU announced a modified European Financial Stability Facility including a private-sector 21% haircut of Greek debt. Markets had a splendid day, no follow-through the Friday following, and on the next Monday began an eight-week freefall.
The breakthrough deal announced Thursday has no market follow-through Friday. Monday may be as entertaining as July 25, or may take a while; whichever, this new can-kick will have a short roll. It has not one new pfennig in cash or guarantee. The private-sector write-down of Greek debt (voluntary: “You, you, you, and you”) will be 50%, but limited to the e210 billion in private/bank hands, leaving at full-phony market value e140 billion held by the ECB. Thus the net debt relief to Greece leaves 67% outstanding, which on the market is worth 40%, and the Greeks can’t pay even that.
The EFSF is to lever-up from e440 billion to e1 trillion, method not specified, but aided by new private and foreign capital. European ministers are off to China, expecting it to throw in e100 billion, a deal so good that the Germans have passed on it.
Thursday’s report took GDP back to its pre-recession starting point for the first time, a marker showing how far we have come, and how far we have to go.
Friday, October 21, 2011
Capital Markets Update
By Louis S. Barnes Friday, October 21st, 2011
Markets are barely trading at all while waiting for a conclusion in Europe. The continent that gave us Cirque du Soleil now has at center ring 17 panicked, flower-squirting clowns trying to jam themselves into a VW Bug. Although terribly at risk, financial people no longer care how it turns out. Fix it, blow it up, but drop this act.
Much as Euro-bears would like to bet on Euro-breakup by buying bonds and mortgages, they don’t dare — can-kicking will not end until it ends. And the bears are matched by a ton of people who still think that all the clowns will get in the car.
The Occupy Wall Street movement is a daily reminder of the greatest hazard to the world since 2007, and perhaps greater today than ever. I can’t take the OWS micro-mobs seriously — I am a child of the ’60s, and if we had turned out like OWS, water fountains would still be segregated and we’d still be drafting soldiers for Vietnam. Even when we were wrong, we had clear objectives; these OWS sign-makers do not know what Wall Street did before the Dark Side, during it, or what it does now.
That mass ignorance of money and banking is our deepest hazard, and has led to the strangest political confluence of my lifetime. The Left believes in regulation, that an infinite number of pages and agencies will stop the bad stuff and leave the good stuff operating. Professors of law think that way. The Right’s answer to ignorance is simplicity: shrink or dismantle the system and go back to cash. In combination, financial Luddites mixing up Jim Jones Kool-Aid.
Good things have happened in the Bubble aftermath: living wills for systemic-risk institutions, a global drive to limit the size of any bank, and a separation between safe, deposit-taking banking and risky operations. However, lost on the body politic: the near-absolute inability to shrink the system during a time of economic distress.
Example: the drive to increase bank capital. In good times, it’s not hard to sell stock. Excessive capital reduces profitability and lending capacity, but it can be done. Today, no sensible person would provide more capital to a bank only to watch it written off in new losses. The Europeans dare not let sovereign debt to default because it would wipe out banks; but, to force them to recapitalize and then write down fails also.
Bankers’ standard solution to capital-add pressure: shrink the bank. A given unit of capital then will meet new requirements. Unfortunate follow-on effects: a reduction in credit, which tends to stall economic recovery and to undercut assets and to increase losses. Worse, if every major bank tries to shrink at the same time, they must all try to sell the same stuff into the same markets, crashing the innocent along with the guilty.
At this moment of maximum vulnerability, enter the Kool-Aid team. Insist that in any bank failure that only depositors be made whole. In the US, not so bad; in Europe, 60% of bank funding is “wholesale,” IOUs issued mostly to other banks, the banks in the aggregate three to four times European GDP (in the US only about 70%).
Civilians in the 1930s knew exactly what a bank “run” was because they and their parents and their parent’s parents since childhood had seen long lines of frightened depositors in bank “panics.” Today’s civilians have no experience with nor concept of the utterly invisible bank-on-bank run that began in 2007. Disembodied, detached from their own wallets, it’s the easiest thing in the world for two opposite political wings to agree on free-lunch, disastrous solutions.
Thus to protect taxpayers, the Fannie-Freddie conservator DeMarco has adopted an ultra-conservative stance which is making taxpayer losses all the larger. To protect its taxpayers, Germany insists that before it will help the others they must adopt policies that will make their losses larger than Germany can solve.
One place has it right. Devalue your currency, accept some inflation, balance your budget mostly by cutting spending; and to keep things going until you heal, let your central bank buy assets with invented money, and force your banks to provide credit. Policy aside, all should study the unique national character traits that in difficulty avoid self-deception and allow getting on with it. In England, Wales, and Scotland.
Markets are barely trading at all while waiting for a conclusion in Europe. The continent that gave us Cirque du Soleil now has at center ring 17 panicked, flower-squirting clowns trying to jam themselves into a VW Bug. Although terribly at risk, financial people no longer care how it turns out. Fix it, blow it up, but drop this act.
Much as Euro-bears would like to bet on Euro-breakup by buying bonds and mortgages, they don’t dare — can-kicking will not end until it ends. And the bears are matched by a ton of people who still think that all the clowns will get in the car.
The Occupy Wall Street movement is a daily reminder of the greatest hazard to the world since 2007, and perhaps greater today than ever. I can’t take the OWS micro-mobs seriously — I am a child of the ’60s, and if we had turned out like OWS, water fountains would still be segregated and we’d still be drafting soldiers for Vietnam. Even when we were wrong, we had clear objectives; these OWS sign-makers do not know what Wall Street did before the Dark Side, during it, or what it does now.
That mass ignorance of money and banking is our deepest hazard, and has led to the strangest political confluence of my lifetime. The Left believes in regulation, that an infinite number of pages and agencies will stop the bad stuff and leave the good stuff operating. Professors of law think that way. The Right’s answer to ignorance is simplicity: shrink or dismantle the system and go back to cash. In combination, financial Luddites mixing up Jim Jones Kool-Aid.
Good things have happened in the Bubble aftermath: living wills for systemic-risk institutions, a global drive to limit the size of any bank, and a separation between safe, deposit-taking banking and risky operations. However, lost on the body politic: the near-absolute inability to shrink the system during a time of economic distress.
Example: the drive to increase bank capital. In good times, it’s not hard to sell stock. Excessive capital reduces profitability and lending capacity, but it can be done. Today, no sensible person would provide more capital to a bank only to watch it written off in new losses. The Europeans dare not let sovereign debt to default because it would wipe out banks; but, to force them to recapitalize and then write down fails also.
Bankers’ standard solution to capital-add pressure: shrink the bank. A given unit of capital then will meet new requirements. Unfortunate follow-on effects: a reduction in credit, which tends to stall economic recovery and to undercut assets and to increase losses. Worse, if every major bank tries to shrink at the same time, they must all try to sell the same stuff into the same markets, crashing the innocent along with the guilty.
At this moment of maximum vulnerability, enter the Kool-Aid team. Insist that in any bank failure that only depositors be made whole. In the US, not so bad; in Europe, 60% of bank funding is “wholesale,” IOUs issued mostly to other banks, the banks in the aggregate three to four times European GDP (in the US only about 70%).
Civilians in the 1930s knew exactly what a bank “run” was because they and their parents and their parent’s parents since childhood had seen long lines of frightened depositors in bank “panics.” Today’s civilians have no experience with nor concept of the utterly invisible bank-on-bank run that began in 2007. Disembodied, detached from their own wallets, it’s the easiest thing in the world for two opposite political wings to agree on free-lunch, disastrous solutions.
Thus to protect taxpayers, the Fannie-Freddie conservator DeMarco has adopted an ultra-conservative stance which is making taxpayer losses all the larger. To protect its taxpayers, Germany insists that before it will help the others they must adopt policies that will make their losses larger than Germany can solve.
One place has it right. Devalue your currency, accept some inflation, balance your budget mostly by cutting spending; and to keep things going until you heal, let your central bank buy assets with invented money, and force your banks to provide credit. Policy aside, all should study the unique national character traits that in difficulty avoid self-deception and allow getting on with it. In England, Wales, and Scotland.
Friday, October 14, 2011
Capital Markets Update
By Louis S. Barnes Friday, October 14, 2011
New, non-recession data here, more elegant pretending in Europe, now can-kicking at two-week intervals, and fear has left markets. For now.
September retail sales rose 1.1% over August, and the small business NFIB survey also found conditions in September slightly improved. In direct result, 10-year T-notes are trading up from 1.70% just two weeks ago to 2.25% -- last so high two months ago. Mortgage rates have risen accordingly, pressing 4.375%.
Some self-correction is in play, as mortgage refi demand is now shut off altogether, but the Treasury is a continuous seller of paper, the Fed's Operation Twist unable to offset. This last week the Treasury auctioned $66 billion long-term notes and bonds and everyone who bought is today under water. Until and unless markets get more negative news there is zero chance of rate improvement.
Pauses in news flow, and hence in markets are routine. This one…not routine.
Europe, as everyone now knows is the most immediate and powerful market-mover. Our rates would be much higher if there were any market belief that Europe will find a real solution. At its self-imposed deadline in two weeks, perhaps another band-aid, but the Euro-chatter sounds like any other failing deal. The wacky hope that China and other emergings will fund a Euro-bailout, or that banks will self-recapitalize in some miracle of loaves and fishes… all silly. Either Germany throws in, big, or not.
The Fed is paralyzed by internal politics. The dissenters, Fisher in Dallas, Plosser in Philly, and Kocherlakota in Minneapolis, are mistaken and rigid in their demand that the Fed leave the field. They could be overcome by the others, who are aware of peril, but they have lost the foundation for their case.
The Fed's staff is the power center. The staff forecast historically is more accurate than any other, public or private, but the staff is lost. Its forecasts going back two years have been more wrong than right, repeatedly betting on accelerating recovery only to have the economy slide back. At the Fed's September meeting, the staff revised down its near-term forecast for the fifth straight time, and that may be a mistake.
Everybody knows that the Administration and Congress are frozen, and may stay so for another 18 months. Events may warm them to action, but left to themselves they'll do nothing. A great deal of commentary from all political directions says that this state of locked and hostile partisanship is new.
It is not new. It is certainly as old as this country, and as old as democracy. In financial crises, the S&L disaster is the most recent example. Everyone connected to the thing knew by 1980 that a $3 trillion industry (in today's dollars) was toast. Paul Volcker, modern folk hero, pushed the S&Ls of the back of the sled without a shred of planning; Jimmy Carter in his last year did nothing; Ron Reagan at first ignored the matter, then his "grow-out" policies that quadrupled the damage, and the '86 tax reform accidentally doubled the losses again. Bush '41 finally raised the money to pay off the depositors, and the RTC by 1993 disposed the assets -- 14 years total!!
And the S&Ls were a small problem compared to this one.
A prior problem as big as this: the run-up in inflation from 1965 to 1981, punctuated by two oil crises, oil from $3/bbl to $38/bbl at the peak, and by two nasty recessions, unemployment as high or higher than this.
From 1929 to 1933, essentially every step taken by government either did nothing, or made the Depression worse.
Today, we are six years into blown housing bubble, twenty years into international-competitiveness absent-mindedness, and at the end of 45 years of borrowing to cover promises to ourselves that we cannot afford.
Today's trouble is real, but we are no different. Our institutions are intact. We are right on plan: we won't do anything until we get a better consensus on what went wrong, what is wrong now, and what to do. Just like always.
Patience. Although for the moment it is a real pain in the ass.
New, non-recession data here, more elegant pretending in Europe, now can-kicking at two-week intervals, and fear has left markets. For now.
September retail sales rose 1.1% over August, and the small business NFIB survey also found conditions in September slightly improved. In direct result, 10-year T-notes are trading up from 1.70% just two weeks ago to 2.25% -- last so high two months ago. Mortgage rates have risen accordingly, pressing 4.375%.
Some self-correction is in play, as mortgage refi demand is now shut off altogether, but the Treasury is a continuous seller of paper, the Fed's Operation Twist unable to offset. This last week the Treasury auctioned $66 billion long-term notes and bonds and everyone who bought is today under water. Until and unless markets get more negative news there is zero chance of rate improvement.
Pauses in news flow, and hence in markets are routine. This one…not routine.
Europe, as everyone now knows is the most immediate and powerful market-mover. Our rates would be much higher if there were any market belief that Europe will find a real solution. At its self-imposed deadline in two weeks, perhaps another band-aid, but the Euro-chatter sounds like any other failing deal. The wacky hope that China and other emergings will fund a Euro-bailout, or that banks will self-recapitalize in some miracle of loaves and fishes… all silly. Either Germany throws in, big, or not.
The Fed is paralyzed by internal politics. The dissenters, Fisher in Dallas, Plosser in Philly, and Kocherlakota in Minneapolis, are mistaken and rigid in their demand that the Fed leave the field. They could be overcome by the others, who are aware of peril, but they have lost the foundation for their case.
The Fed's staff is the power center. The staff forecast historically is more accurate than any other, public or private, but the staff is lost. Its forecasts going back two years have been more wrong than right, repeatedly betting on accelerating recovery only to have the economy slide back. At the Fed's September meeting, the staff revised down its near-term forecast for the fifth straight time, and that may be a mistake.
Everybody knows that the Administration and Congress are frozen, and may stay so for another 18 months. Events may warm them to action, but left to themselves they'll do nothing. A great deal of commentary from all political directions says that this state of locked and hostile partisanship is new.
It is not new. It is certainly as old as this country, and as old as democracy. In financial crises, the S&L disaster is the most recent example. Everyone connected to the thing knew by 1980 that a $3 trillion industry (in today's dollars) was toast. Paul Volcker, modern folk hero, pushed the S&Ls of the back of the sled without a shred of planning; Jimmy Carter in his last year did nothing; Ron Reagan at first ignored the matter, then his "grow-out" policies that quadrupled the damage, and the '86 tax reform accidentally doubled the losses again. Bush '41 finally raised the money to pay off the depositors, and the RTC by 1993 disposed the assets -- 14 years total!!
And the S&Ls were a small problem compared to this one.
A prior problem as big as this: the run-up in inflation from 1965 to 1981, punctuated by two oil crises, oil from $3/bbl to $38/bbl at the peak, and by two nasty recessions, unemployment as high or higher than this.
From 1929 to 1933, essentially every step taken by government either did nothing, or made the Depression worse.
Today, we are six years into blown housing bubble, twenty years into international-competitiveness absent-mindedness, and at the end of 45 years of borrowing to cover promises to ourselves that we cannot afford.
Today's trouble is real, but we are no different. Our institutions are intact. We are right on plan: we won't do anything until we get a better consensus on what went wrong, what is wrong now, and what to do. Just like always.
Patience. Although for the moment it is a real pain in the ass.
Friday, October 7, 2011
Capital Markets Update
Louis S. Barnes Fryday, October 7th, 2011
Maintain sense of humor. Most of the following could not be made up.
Freddie Mac yesterday announced the lowest mortgage rates ever found in its 40-year survey, 3.94% with .8% origination fee. National media today trumpet that result. Freddie takes its horse-and-buggy survey early each week and releases on Thursdays; in a financial world fully real-time for 20 years, consensus rates available at a keystroke, Freddie reports three-day-old trash. Clueless boobs.
In real time rates rose all week long, today about 4.25%, completing a second, perfect two-week cycle: the 10-year T-note broke below 2.00% to 1.72% on September 22, taking mortgages below 4.00% for the best borrowers (only). Lasted two days. By September 28 the 10-year was back to 1.99%, mortgages 4.125%. Over last weekend, 10s fell to 1.75%, mortgages to 3.875%; today, the 10-year is 2.10%.
This 2.10% is the highest high since mid-September, and has technical analysts fearful of an upward breakout. Likely not. These moves are driven by two things: first, new lows beget waves of refi rate-locks, which overwhelm financial markets that do not want to buy anything, and it takes a couple of weeks to digest the supply. Second, if you missed it, confused and frightened markets do not want to buy anything. At all.
One tell-tale: mortgage spreads to the 10-year are at least 35bps wider than normal, despite the Fed’s resumption of MBS buys in OpTwist.
Refi strategy: pick a target just above — above — the low that your banker says that you (or he) has just missed. Yes, we should revisit the lows, but they will fly by lickety-split. The idea is to get something done, not just enjoy the view.
Nothing in the economic picture has changed. Despite widespread forecasts of recession (40% chance by Goldman, guaranteed by the very reliable ECRI), we are not in recession or close to it. September job data confirm: another stumbling, sorry gain, half the jobs necessary for real growth, but a gain. The ISM’s September service-sector survey arrived at 53, only a hair off September, and three points into positive ground.
Europe. Merciful heavens. Club Med plus France are in a free-falling elevator. The plan: just before impact, all will jump up as high as they can. The European Financial Stability Facility is just that: the insolvent 60% of Europe offering its own guarantees to a new fund that will borrow new money to bail itself out. Rescued by lifting its own suspenders — that was the phony deal announced July 21 that pulled the plug on global markets for everything, banks in another all-time run on each other.
European Plan B: as the elevator car passes each floor, a new cry from inside to Angela Merkel standing outside: “Would you please do the proper thing for One Europe, and get down in the bottom of the shaft and catch this thing?”
Merkel stirred herself this week to advocate recapitalization of European banks, quickly, each nation to guarantee its own. France immediately requested access to the EFSF to do so because its bank-hole is too big for it to recap by itself. Among Europe’s problems, each of the weak has its own fatal illness; France has relatively low (to Italy) sovereign debt, pays its taxes, saves money, but has a banking system three or four times its GDP and with the largest holdings of Club Med bonds. Adieu, Cheri, adieu.
Everybody knows that if a way to save Spain and Italy cannot be found, the problem would be too big for Germany to fix, even if it were willing. However, right now France is key: banks are the arteries of post-coinage-and-barter economies.
The first big institution to run for cover, giving up on Euro-self-salvation: the Bank of England. Its Governor, Mervin King, was slow to understand in 2008, but not now; in anticipation of an unfortunate conclusion the BoE yesterday announced the doubling of its own QE. When the guy in the elevator next to you puts on his parachute….
Hanging over all is this other-world White House. Mr. Obama at last mentioned economic “emergency,” but his DOA jobs and tax plans, and sudden revelation of hard-Left conviction leave the Center that put him in office feeling deceived. And speechless, the spectacle too unnerving for discussion even among friends and at trading desks.
Maintain sense of humor. Most of the following could not be made up.
Freddie Mac yesterday announced the lowest mortgage rates ever found in its 40-year survey, 3.94% with .8% origination fee. National media today trumpet that result. Freddie takes its horse-and-buggy survey early each week and releases on Thursdays; in a financial world fully real-time for 20 years, consensus rates available at a keystroke, Freddie reports three-day-old trash. Clueless boobs.
In real time rates rose all week long, today about 4.25%, completing a second, perfect two-week cycle: the 10-year T-note broke below 2.00% to 1.72% on September 22, taking mortgages below 4.00% for the best borrowers (only). Lasted two days. By September 28 the 10-year was back to 1.99%, mortgages 4.125%. Over last weekend, 10s fell to 1.75%, mortgages to 3.875%; today, the 10-year is 2.10%.
This 2.10% is the highest high since mid-September, and has technical analysts fearful of an upward breakout. Likely not. These moves are driven by two things: first, new lows beget waves of refi rate-locks, which overwhelm financial markets that do not want to buy anything, and it takes a couple of weeks to digest the supply. Second, if you missed it, confused and frightened markets do not want to buy anything. At all.
One tell-tale: mortgage spreads to the 10-year are at least 35bps wider than normal, despite the Fed’s resumption of MBS buys in OpTwist.
Refi strategy: pick a target just above — above — the low that your banker says that you (or he) has just missed. Yes, we should revisit the lows, but they will fly by lickety-split. The idea is to get something done, not just enjoy the view.
Nothing in the economic picture has changed. Despite widespread forecasts of recession (40% chance by Goldman, guaranteed by the very reliable ECRI), we are not in recession or close to it. September job data confirm: another stumbling, sorry gain, half the jobs necessary for real growth, but a gain. The ISM’s September service-sector survey arrived at 53, only a hair off September, and three points into positive ground.
Europe. Merciful heavens. Club Med plus France are in a free-falling elevator. The plan: just before impact, all will jump up as high as they can. The European Financial Stability Facility is just that: the insolvent 60% of Europe offering its own guarantees to a new fund that will borrow new money to bail itself out. Rescued by lifting its own suspenders — that was the phony deal announced July 21 that pulled the plug on global markets for everything, banks in another all-time run on each other.
European Plan B: as the elevator car passes each floor, a new cry from inside to Angela Merkel standing outside: “Would you please do the proper thing for One Europe, and get down in the bottom of the shaft and catch this thing?”
Merkel stirred herself this week to advocate recapitalization of European banks, quickly, each nation to guarantee its own. France immediately requested access to the EFSF to do so because its bank-hole is too big for it to recap by itself. Among Europe’s problems, each of the weak has its own fatal illness; France has relatively low (to Italy) sovereign debt, pays its taxes, saves money, but has a banking system three or four times its GDP and with the largest holdings of Club Med bonds. Adieu, Cheri, adieu.
Everybody knows that if a way to save Spain and Italy cannot be found, the problem would be too big for Germany to fix, even if it were willing. However, right now France is key: banks are the arteries of post-coinage-and-barter economies.
The first big institution to run for cover, giving up on Euro-self-salvation: the Bank of England. Its Governor, Mervin King, was slow to understand in 2008, but not now; in anticipation of an unfortunate conclusion the BoE yesterday announced the doubling of its own QE. When the guy in the elevator next to you puts on his parachute….
Hanging over all is this other-world White House. Mr. Obama at last mentioned economic “emergency,” but his DOA jobs and tax plans, and sudden revelation of hard-Left conviction leave the Center that put him in office feeling deceived. And speechless, the spectacle too unnerving for discussion even among friends and at trading desks.
Friday, September 30, 2011
Capital Markets Update
By Louis S. Barnes Friday, Spetember 30,2011
Take a deep breath. Two. Un-clench your hands. Let loose your shoulders. Look out at a brilliant fall sky. Leaves. Breathe again, but for scent.
Put this global financial political… whatever-it-is… put it down. Back away from it, and look at it from a long ways off.
Domestic US growth is marginal, but not recession. New weekly unemployment claims are steady near 400,000, no new wave of layoffs. Purchase mortgage applications are too low to work off excess inventory, but they are stable. The Chicago Fed's national index is a minus-43, below the long-term trend line at zero in their index but far above the minus-70 that would mark recession. Orders for durable goods were flat in August, but held the huge July gain.
Flat and soggy, but hardly over the cliff that you'd think from listening to media, and especially people in financial markets. These are normally the Pollyannas of the airwaves: upon any devastating flood, nuclear accident, or outbreak of war, they've got a loopy grin and a new investment for you to buy. Note how strange it is that finance types all sound ready to get in a warm tub and open an artery.
People in markets rarely get their panties in a wad all at the same time. Yet the brightest -- Roubini, Schiller, Shiller, Wolf, Goldman Sachs itself, Soros -- are engaged in depression leap-frog, every day finding some new reason that the world will be unable to save itself. Risk-averse markets become a self-fulfilling prophecy, imploding.
The most immediate threat is Europe. In 1999 Europe embarked on a common currency to remove the trade-inhibiting risk of volatile rates of currency exchange. That minor problem, easily hedged, has created an entirely new and gigantic one: the euro nations must synchronize not just their borrowing and trade, but their entire economic cultures. I don't think it will happen, but it may -- but whichever, this talk of "global depression" as the inevitable result of breakup and/or austerity is nuts.
Italy knows how to run Italy, odd as it is, and France can run France, and so for each of them. Germany does not know how to run Spain, nor Ireland how to run Germany. If the union blows, back these nations will go to dealing with their own affairs. Separation would be a relief.
Financial types howl, "It's all so inter-connected that taking it apart will be the end of life on earth!" Translation: we don’t know how to trade it, and we can't figure out who is exposed and how much. The European Commission in Brussels, the nascent pan-European government that ain't gonna happen, says every day that the euro must survive and of course it will because nothing is wrong -- useless freeloaders trying to keep their paychecks running. Poor Angela Merkel, a scientist trained in Soviet East Germany, hopelessly unprepared, neither wants change nor can grasp its elements, clutches at status quo.
Europe has no voice. Change is going to come, briefly chaotic, but rationalizing a hopelessly irrational situation. However, the Euro is only 12 years old, and the status quo ante is hardly a mystery lost in ancient times. The lurch will be quite something, but the locals know what they are doing.
The economic situation here is different, but the problem is the same. No voice. No voice at all. No one to explain, to trust. The most powerful forces in Great Depression recovery were FDR's grasp of the essential -- nothing mattered but the economy -- and his voice. My Okie parents and grandparents spoke for the rest of their lives about gathering in front of the RCA when FDR would speak. "Nothing to feah but feah itself!"
Here, as in Europe, the locals know what they're doing. Every state and town is doing what it must to get its budget under control, to raise revenue as it can, and to look after its citizens.
From a safe distance, staring at this predicament, please do not mistake the temporary incapacity of the largest governments for an inability to manage our affairs. We go on. We adapt. Collective arrangements come and go.
Take a deep breath. Two. Un-clench your hands. Let loose your shoulders. Look out at a brilliant fall sky. Leaves. Breathe again, but for scent.
Put this global financial political… whatever-it-is… put it down. Back away from it, and look at it from a long ways off.
Domestic US growth is marginal, but not recession. New weekly unemployment claims are steady near 400,000, no new wave of layoffs. Purchase mortgage applications are too low to work off excess inventory, but they are stable. The Chicago Fed's national index is a minus-43, below the long-term trend line at zero in their index but far above the minus-70 that would mark recession. Orders for durable goods were flat in August, but held the huge July gain.
Flat and soggy, but hardly over the cliff that you'd think from listening to media, and especially people in financial markets. These are normally the Pollyannas of the airwaves: upon any devastating flood, nuclear accident, or outbreak of war, they've got a loopy grin and a new investment for you to buy. Note how strange it is that finance types all sound ready to get in a warm tub and open an artery.
People in markets rarely get their panties in a wad all at the same time. Yet the brightest -- Roubini, Schiller, Shiller, Wolf, Goldman Sachs itself, Soros -- are engaged in depression leap-frog, every day finding some new reason that the world will be unable to save itself. Risk-averse markets become a self-fulfilling prophecy, imploding.
The most immediate threat is Europe. In 1999 Europe embarked on a common currency to remove the trade-inhibiting risk of volatile rates of currency exchange. That minor problem, easily hedged, has created an entirely new and gigantic one: the euro nations must synchronize not just their borrowing and trade, but their entire economic cultures. I don't think it will happen, but it may -- but whichever, this talk of "global depression" as the inevitable result of breakup and/or austerity is nuts.
Italy knows how to run Italy, odd as it is, and France can run France, and so for each of them. Germany does not know how to run Spain, nor Ireland how to run Germany. If the union blows, back these nations will go to dealing with their own affairs. Separation would be a relief.
Financial types howl, "It's all so inter-connected that taking it apart will be the end of life on earth!" Translation: we don’t know how to trade it, and we can't figure out who is exposed and how much. The European Commission in Brussels, the nascent pan-European government that ain't gonna happen, says every day that the euro must survive and of course it will because nothing is wrong -- useless freeloaders trying to keep their paychecks running. Poor Angela Merkel, a scientist trained in Soviet East Germany, hopelessly unprepared, neither wants change nor can grasp its elements, clutches at status quo.
Europe has no voice. Change is going to come, briefly chaotic, but rationalizing a hopelessly irrational situation. However, the Euro is only 12 years old, and the status quo ante is hardly a mystery lost in ancient times. The lurch will be quite something, but the locals know what they are doing.
The economic situation here is different, but the problem is the same. No voice. No voice at all. No one to explain, to trust. The most powerful forces in Great Depression recovery were FDR's grasp of the essential -- nothing mattered but the economy -- and his voice. My Okie parents and grandparents spoke for the rest of their lives about gathering in front of the RCA when FDR would speak. "Nothing to feah but feah itself!"
Here, as in Europe, the locals know what they're doing. Every state and town is doing what it must to get its budget under control, to raise revenue as it can, and to look after its citizens.
From a safe distance, staring at this predicament, please do not mistake the temporary incapacity of the largest governments for an inability to manage our affairs. We go on. We adapt. Collective arrangements come and go.
Friday, September 23, 2011
Capital Markets Update
By Louis S. Barnes Friday, September 23, 2011
Financial markets seemed to react badly to the Fed's announcement of two new but minor operations, net-neutral as to new money. Some say the Fed's grim statement of risks did the damage; others claim it was the absence of a big policy move (more QE).
There's a lot more to this week than the Fed. The best case for Europe is a nasty recession -- if austerity and unity prevail. If not, they'll have a sharper-deeper affair in a scramble back to local currencies (I am one of very few who sees that scramble as quickly beneficial). Also, markets suddenly get the odds in favor of a new US recession.
And, purely a matter of personal opinion: markets are shaken to their souls by the spectacle of the worst-ever peacetime performance by Western Democracy.
10-year T-note to 1.75% from 2.07% in a week. Mortgages at yesterday's low (up .125% now): if you are 670 Fico, low equity, 4.25%; if you are 800, 50% LTV, 3.875%. Whatever you are, if you don't have a vanilla job, you ain't nuthin'.
Old folks like to talk about history. Infected as a pre-teen, by age 62 mulling history feels to me like putting on a favorite, tattered pair of moccasins. Mark Twain's great line: "History does not repeat itself. But it does rhyme."
The 1920s and 1930s were perfect pre-running harmony for today, cast and script verbatim, only clothes, cars, and phones different. Political lessons stand out: first how terribly difficult it is for us to grasp that events have moved from normal to emergency; and when we do get it, we crave the illusive safety of old times and ways...gone.
We are very slow to understand that previous good times were false and temporary, the Roaring Twenties' bubble just like our '95-'07. After '29, public policy was exactly that of today's Republicans: let markets run, let banks close, balance the budget, and let an idle Fed collapse the money supply and 75% of banks. No bailouts for no body.
Treasury Secretary Andrew Mellon gave us this masterpiece: "Liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate...t will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people."By 1932, "Hoovervilles" entered our language.
The worse this gets, the deeper the Right digs in on old ground. So do Democrats -- rightly proud of the New Deal, government intervention and income redistribution, they have never learned a new trick. Once you discover that you can reward your constituents with the contents of someone else's pocket, falling onto a greasy slope to self-righteousness and decadence has been inevitable. Lost: the difference between stimulative borrowing and spending when you owe the world 10% of your GDP, and when you'll soon owe 100%. Parts of the New Deal would work today -- credit restoration via guarantee agencies -- but not adding to government unrecognizably bloated since the 1930s.
All leadership looks bad. Republican officials in Congress this week sent a Mellonian demand to the Fed that it do nothing; the Three Blind Mice dissenting at the Fed were happy to accommodate. Mr. Obama's last three weeks, the phony jobs bill and so-old so-dead tax plan, was a performance so petulant and juvenile that he has become irrelevant without even knowing it. Republican candidates appeal to the deep American Populist desperation for protective simplicity: "I'm ignorant and I'm proud of it!"
There is hope. More than that. The people see all of this, the political center jaw-dropped at it. As a people, we tend to reject extremism and demagoguery (might google Father Coughlin and Huey Long). And the media are getting it. The toughest criticism and exposure of the President this week came from the Washington Post. The WSJ now runs stories on the cost of abandoning housing. Reporters who have listened to the same Right and Left nostrums for five years now think, "Wait a minute...."
Left and Right do not need to compromise with each other, they must compromise with history. Drop the peripheral and the old, and get to inventing, trying, and testing new approaches. Lots of them. And plenty damned quick.
Financial markets seemed to react badly to the Fed's announcement of two new but minor operations, net-neutral as to new money. Some say the Fed's grim statement of risks did the damage; others claim it was the absence of a big policy move (more QE).
There's a lot more to this week than the Fed. The best case for Europe is a nasty recession -- if austerity and unity prevail. If not, they'll have a sharper-deeper affair in a scramble back to local currencies (I am one of very few who sees that scramble as quickly beneficial). Also, markets suddenly get the odds in favor of a new US recession.
And, purely a matter of personal opinion: markets are shaken to their souls by the spectacle of the worst-ever peacetime performance by Western Democracy.
10-year T-note to 1.75% from 2.07% in a week. Mortgages at yesterday's low (up .125% now): if you are 670 Fico, low equity, 4.25%; if you are 800, 50% LTV, 3.875%. Whatever you are, if you don't have a vanilla job, you ain't nuthin'.
Old folks like to talk about history. Infected as a pre-teen, by age 62 mulling history feels to me like putting on a favorite, tattered pair of moccasins. Mark Twain's great line: "History does not repeat itself. But it does rhyme."
The 1920s and 1930s were perfect pre-running harmony for today, cast and script verbatim, only clothes, cars, and phones different. Political lessons stand out: first how terribly difficult it is for us to grasp that events have moved from normal to emergency; and when we do get it, we crave the illusive safety of old times and ways...gone.
We are very slow to understand that previous good times were false and temporary, the Roaring Twenties' bubble just like our '95-'07. After '29, public policy was exactly that of today's Republicans: let markets run, let banks close, balance the budget, and let an idle Fed collapse the money supply and 75% of banks. No bailouts for no body.
Treasury Secretary Andrew Mellon gave us this masterpiece: "Liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate...t will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people."By 1932, "Hoovervilles" entered our language.
The worse this gets, the deeper the Right digs in on old ground. So do Democrats -- rightly proud of the New Deal, government intervention and income redistribution, they have never learned a new trick. Once you discover that you can reward your constituents with the contents of someone else's pocket, falling onto a greasy slope to self-righteousness and decadence has been inevitable. Lost: the difference between stimulative borrowing and spending when you owe the world 10% of your GDP, and when you'll soon owe 100%. Parts of the New Deal would work today -- credit restoration via guarantee agencies -- but not adding to government unrecognizably bloated since the 1930s.
All leadership looks bad. Republican officials in Congress this week sent a Mellonian demand to the Fed that it do nothing; the Three Blind Mice dissenting at the Fed were happy to accommodate. Mr. Obama's last three weeks, the phony jobs bill and so-old so-dead tax plan, was a performance so petulant and juvenile that he has become irrelevant without even knowing it. Republican candidates appeal to the deep American Populist desperation for protective simplicity: "I'm ignorant and I'm proud of it!"
There is hope. More than that. The people see all of this, the political center jaw-dropped at it. As a people, we tend to reject extremism and demagoguery (might google Father Coughlin and Huey Long). And the media are getting it. The toughest criticism and exposure of the President this week came from the Washington Post. The WSJ now runs stories on the cost of abandoning housing. Reporters who have listened to the same Right and Left nostrums for five years now think, "Wait a minute...."
Left and Right do not need to compromise with each other, they must compromise with history. Drop the peripheral and the old, and get to inventing, trying, and testing new approaches. Lots of them. And plenty damned quick.
Friday, September 16, 2011
Capital Markets Update
by Louis S. Barnes Friday September 16 2011
This week is stumbling to an end, markets largely unchanged and I think exhausted at the sight of non-functioning government here and over there.
10-year T-notes did rise from all-time-bottom 1.90% to 2.10%, but either value is an emergency trade, and the rise did little to mortgages, still 4.125-4.25% and which three weeks ago stopped following the 10-year down.
The economy is conjugating the verb, “to stall.” Stalling, stalled, will stall… the NFIB small biz index fell for the sixth-straight month, now back to recession levels. Industrial production rose a mighty 0.2% in August, and regional surveys found a slower rate of slowing. August retail sales were flat, precisely zero change. In modest good news, layoffs have stalled, too, no real change in newly unemployed.
The Fed next Wednesday will announce some new effort to help the economy — the stronger the measure, perversely the more likely to push up mortgage rates in optimism. However, the Fed’s internal politics are a mess, and not helped by a .4% CPI reading in August; inflation isn’t going anywhere, but it’s impossible to argue the point with the Fed’s minority rockheads.
We depart Europe, boiling in its own reduction sauce, lectured today by Li’l Timmy Geithner to watch what you say or people might be scared by reality. And we depart a failing Presidency, never a pleasant sight, no matter who you don’t like.
We move to The Word That Cannot Be Spoken.
Housing.
Three sources: the FHFA home-price series, CoreLogic’s new report on underwaters, and today’s Z-1 “Flow of Funds” from the Fed.
The Fed, markets, and the standard run of economists seem confounded by economic stall. From the glowing forecasts of last winter, then slow on uptake in spring, in-denial insistence on a better 2nd half, now jaw-dropped at no second half at all. And in response to “Why?”… nothing but mumbling.
The FHFA national home-price index, reasonably stable at a value of 191 through last August, began a sharp new decline of ten points that bottomed in April — the one, single indicator leading the general economic decline. As of June FHFA shows an artificial rebound to 183.7, achieved by masses of foreclosures blocked by procedural obstruction. Everyone in the marketplace knows the defaulted homes are there, and fears what will happen to prices when they hit the market.
CoreLogic reports that 27.5% of all mortgaged homes as of June 30 had negative or near-negative equity. That’s 13,300,000 households. Not getting any worse, or better, but terribly vulnerable to renewed resales of foreclosures. The only forgiving aspect: trouble is concentrated in CA, FL, NV, AZ, and MI. The inhabitants of these states are, however, fellow citizens and participants in the national economy.
Z-1 confirms. As of the end of June the aggregate value of US homes in the prior year had lost one trillion dollars. And smarty-pants economists cannot explain why things are a little soggy. Last year’s loss is in addition to the five trillion lost in the prior four years (the total value decline: from $22.7 trillion to $16.2 trillion).
Connect some dots… mortgage balances outstanding since the bubble blew in 2006 have declined by only $775 billion to $10.4 trillion. Of all homes, about 30% are free and clear. Thus of the $16.2 trillion in remaining home value, homes worth about $11.3 trillion carry the entire national mortgage balance, $10.4 trillion. In the aggregate, the equity in the 70% of US homes that are mortgaged is less than 10%. On trend… evaporating.
If you run into one of the guys who thinks “deleveraging” is the way to heal the nation, before you punch him in the nose, ask if he is bright enough to grasp: home values have fallen eight times as fast as mortgage balances. The guy standing next to him, who thinks the only problem is that prices have not fallen far enough, and when they do everything will be okay… not worth bruised knuckles.
This week is stumbling to an end, markets largely unchanged and I think exhausted at the sight of non-functioning government here and over there.
10-year T-notes did rise from all-time-bottom 1.90% to 2.10%, but either value is an emergency trade, and the rise did little to mortgages, still 4.125-4.25% and which three weeks ago stopped following the 10-year down.
The economy is conjugating the verb, “to stall.” Stalling, stalled, will stall… the NFIB small biz index fell for the sixth-straight month, now back to recession levels. Industrial production rose a mighty 0.2% in August, and regional surveys found a slower rate of slowing. August retail sales were flat, precisely zero change. In modest good news, layoffs have stalled, too, no real change in newly unemployed.
The Fed next Wednesday will announce some new effort to help the economy — the stronger the measure, perversely the more likely to push up mortgage rates in optimism. However, the Fed’s internal politics are a mess, and not helped by a .4% CPI reading in August; inflation isn’t going anywhere, but it’s impossible to argue the point with the Fed’s minority rockheads.
We depart Europe, boiling in its own reduction sauce, lectured today by Li’l Timmy Geithner to watch what you say or people might be scared by reality. And we depart a failing Presidency, never a pleasant sight, no matter who you don’t like.
We move to The Word That Cannot Be Spoken.
Housing.
Three sources: the FHFA home-price series, CoreLogic’s new report on underwaters, and today’s Z-1 “Flow of Funds” from the Fed.
The Fed, markets, and the standard run of economists seem confounded by economic stall. From the glowing forecasts of last winter, then slow on uptake in spring, in-denial insistence on a better 2nd half, now jaw-dropped at no second half at all. And in response to “Why?”… nothing but mumbling.
The FHFA national home-price index, reasonably stable at a value of 191 through last August, began a sharp new decline of ten points that bottomed in April — the one, single indicator leading the general economic decline. As of June FHFA shows an artificial rebound to 183.7, achieved by masses of foreclosures blocked by procedural obstruction. Everyone in the marketplace knows the defaulted homes are there, and fears what will happen to prices when they hit the market.
CoreLogic reports that 27.5% of all mortgaged homes as of June 30 had negative or near-negative equity. That’s 13,300,000 households. Not getting any worse, or better, but terribly vulnerable to renewed resales of foreclosures. The only forgiving aspect: trouble is concentrated in CA, FL, NV, AZ, and MI. The inhabitants of these states are, however, fellow citizens and participants in the national economy.
Z-1 confirms. As of the end of June the aggregate value of US homes in the prior year had lost one trillion dollars. And smarty-pants economists cannot explain why things are a little soggy. Last year’s loss is in addition to the five trillion lost in the prior four years (the total value decline: from $22.7 trillion to $16.2 trillion).
Connect some dots… mortgage balances outstanding since the bubble blew in 2006 have declined by only $775 billion to $10.4 trillion. Of all homes, about 30% are free and clear. Thus of the $16.2 trillion in remaining home value, homes worth about $11.3 trillion carry the entire national mortgage balance, $10.4 trillion. In the aggregate, the equity in the 70% of US homes that are mortgaged is less than 10%. On trend… evaporating.
If you run into one of the guys who thinks “deleveraging” is the way to heal the nation, before you punch him in the nose, ask if he is bright enough to grasp: home values have fallen eight times as fast as mortgage balances. The guy standing next to him, who thinks the only problem is that prices have not fallen far enough, and when they do everything will be okay… not worth bruised knuckles.
Friday, September 9, 2011
Capital Markets Update
By Louis S. Barnes Friday, September 9, 2011
The good news: US data are not double-dipping. The fresh, August survey of purchasing managers by the ISM found the service sector improved to 53.3 from 52.7 in July, a reading corresponding to GDP growth in the 2% range.
This modest good news does not explain the stock market again in freefall today, nor the 10-year T-note thumping down to 1.90%. To explain the newest swan dive, look to Europe, and a tale of two speeches.
Default by Greece is imminent. Again. Maybe this weekend. Maybe Europe will buy more time, maybe default will be an anticlimax, but markets today anticipate chaos.
Then, the two speeches.
Perfesser Bernanke spoke at midday Thursday. After preamble, and dodging the Fed's intentions, the body of the speech began: "One striking aspect of the recovery is the unusual weakness in household spending."
Following my first, churlish thought (What recovery?), I began as always to search for and count up references to housing weakness. As in no other speech by the Perfesser, I lost count -- too many to count. The whole speech was devoted to housing wreckage as the force intercepting recovery. No proposals for what we might do, of course, as that action is the province of the Administration and Congress.
Three-and-a-half hours later Mr. Obama rose to deliver an energetic, tub-thumping speech. Content? Direct from the Boneless Chicken Ranch.
He's had a month-and-a-half to prepare since the "circus" we all deplored, and the rollover-in-progress of the US economy, and wanted the grand stage of a joint session of Congress. The finished product: $447 billion of "job-creating" spending at the intellectual level of 1964. Old-fashioned, warmed-over pork. To be "paid for." How? He said, next week we'll get to that. His own out-year deficit proposal? Two weeks.
I have a brilliant contractor/architect friend, who deflects all questions from families anxious about project completion by answering, "Two weeks." Foundation? Two weeks. Framing? Two weeks. Move in? Two weeks.
Half-baked aside, the American Jobs Act might have some merit if designed to stimulate aggregate demand. The word, "stimulus" has been excised from the White House lexicon (last night's best comedy: Anderson Cooper trying to trick Press Secretary Jay Carney into using the word, or admitting excision; but Carney, in Ron Ziegler's class for dead-eyed and relentless mendacity, could not be fooled). If we spend $447 billion, but "pay" for it with tax increases and spending cuts, we are not adding chickens to pots, just moving them from pot to pot. No net stimulus at all.
I counted the President's speech, too, for references to housing. Must do so in all official economic speeches, hoping for dawning awareness. Must preserve hope. Mr. Obama's speech had two mentions. The first, a murky thing: the Act would "...rehabilitate homes and businesses in communities hit hardest by foreclosures." Huh?
The second: "...We're going to work with federal housing agencies to help more people refinance....." The President was obviously surprised to be interrupted by bi-partisan applause, and a strange look crossed his face. He has no idea how to do the job, and knows it.
The administration panicked last winter, adding 60bps to FHA mortgage insurance for all new loans, refi or purchase. Given that hike, most FHA borrowers cannot refi -- not without a far deeper drop in rates.
Mass refis of underwater borrowers is a delusion not limited to the White House. New buyers for new loans must be found to pay off old ones: there is no method for automatic write-down of rate. The market cost to buy-down a rate a mere 1% is about $60 billion per trillion, and there are at least $2 trillion in underwater loans out here.
We need adequate credit for buyers. Not just re-arrange the existing lawn furniture. Buyers. Americans need faith in the value of their homes, mortgaged or not. Fail to assist prices to rise from catastrophic levels, or stay in this until doomsday.
The good news: US data are not double-dipping. The fresh, August survey of purchasing managers by the ISM found the service sector improved to 53.3 from 52.7 in July, a reading corresponding to GDP growth in the 2% range.
This modest good news does not explain the stock market again in freefall today, nor the 10-year T-note thumping down to 1.90%. To explain the newest swan dive, look to Europe, and a tale of two speeches.
Default by Greece is imminent. Again. Maybe this weekend. Maybe Europe will buy more time, maybe default will be an anticlimax, but markets today anticipate chaos.
Then, the two speeches.
Perfesser Bernanke spoke at midday Thursday. After preamble, and dodging the Fed's intentions, the body of the speech began: "One striking aspect of the recovery is the unusual weakness in household spending."
Following my first, churlish thought (What recovery?), I began as always to search for and count up references to housing weakness. As in no other speech by the Perfesser, I lost count -- too many to count. The whole speech was devoted to housing wreckage as the force intercepting recovery. No proposals for what we might do, of course, as that action is the province of the Administration and Congress.
Three-and-a-half hours later Mr. Obama rose to deliver an energetic, tub-thumping speech. Content? Direct from the Boneless Chicken Ranch.
He's had a month-and-a-half to prepare since the "circus" we all deplored, and the rollover-in-progress of the US economy, and wanted the grand stage of a joint session of Congress. The finished product: $447 billion of "job-creating" spending at the intellectual level of 1964. Old-fashioned, warmed-over pork. To be "paid for." How? He said, next week we'll get to that. His own out-year deficit proposal? Two weeks.
I have a brilliant contractor/architect friend, who deflects all questions from families anxious about project completion by answering, "Two weeks." Foundation? Two weeks. Framing? Two weeks. Move in? Two weeks.
Half-baked aside, the American Jobs Act might have some merit if designed to stimulate aggregate demand. The word, "stimulus" has been excised from the White House lexicon (last night's best comedy: Anderson Cooper trying to trick Press Secretary Jay Carney into using the word, or admitting excision; but Carney, in Ron Ziegler's class for dead-eyed and relentless mendacity, could not be fooled). If we spend $447 billion, but "pay" for it with tax increases and spending cuts, we are not adding chickens to pots, just moving them from pot to pot. No net stimulus at all.
I counted the President's speech, too, for references to housing. Must do so in all official economic speeches, hoping for dawning awareness. Must preserve hope. Mr. Obama's speech had two mentions. The first, a murky thing: the Act would "...rehabilitate homes and businesses in communities hit hardest by foreclosures." Huh?
The second: "...We're going to work with federal housing agencies to help more people refinance....." The President was obviously surprised to be interrupted by bi-partisan applause, and a strange look crossed his face. He has no idea how to do the job, and knows it.
The administration panicked last winter, adding 60bps to FHA mortgage insurance for all new loans, refi or purchase. Given that hike, most FHA borrowers cannot refi -- not without a far deeper drop in rates.
Mass refis of underwater borrowers is a delusion not limited to the White House. New buyers for new loans must be found to pay off old ones: there is no method for automatic write-down of rate. The market cost to buy-down a rate a mere 1% is about $60 billion per trillion, and there are at least $2 trillion in underwater loans out here.
We need adequate credit for buyers. Not just re-arrange the existing lawn furniture. Buyers. Americans need faith in the value of their homes, mortgaged or not. Fail to assist prices to rise from catastrophic levels, or stay in this until doomsday.
Friday, September 2, 2011
Capital Markets Update
By Louis S. Barnes Friday, September 2, 2011
The Great Recession has not followed any prior overall pattern, and this week's data confirm its unique path -- and that it never ended.
We are not re-entering a classic recession. The ISM manufacturing survey is still positive, 50.6 in August just barely so, but so. August sales of cars did just fine, near 12 million annualized, 7% above a year ago and roughly the same as July.
August employment numbers were flat, but we have no new wave of layoffs. New claims for unemployment insurance have been stuck near 400,000 weekly for a year. If your job is in technology, health care, most government, export trade, auto-manufacturing, or other manufacturing with globally competitive wages and productivity -- you're fine. Buyin' a car. If you're in direct competition with global wages, or provide services to those people, you're in a hole with no ladder.
We can stumble forward this way, even if GDP dips to negative occasionally. The limit: we cannot generate enough tax revenue to run the show, and deficits will kill us.
So next week Mr. Obama will announce "job creation." The one thing he may have right, an essential fumbled for two years: give total priority to economic emergency.
FDR's focus is legend. Even haters of the New Deal acknowledge the energetic drive to try something new. The White House did not believe in a magic fix, but did have faith in concerted action and persistence -- and sent the message to a frightened people that the President all day every day sought to find ways help the economy. And did things.
Job creation... The Civilian Conservation Corps put shovels, axes, saws, and small paychecks in the hands of broken farmers and shopkeepers, many without food or a place to sleep. Men in suits and street shoes in the bottom of ditches had not the few dollars to buy work boots and overalls. The Works Progress Administration "WPA" is stamped on sidewalks all over the Great Plains and Midwest. County courthouses all through that land were built in those years by men whose hands were already rough.
Today, we have armies of young college graduates trained in all sorts of disciplines who cannot find work. Aging 'Boomers, too. Offering "shovel-ready" employment to them has all the wisdom and compassion of Marie Antoinette.
Next week we'll hear of "investments" to produce jobs and repair infrastructure. Today. any money for these purposes must be borrowed, and must bring a direct durable, productive return, 1:1 or better. These "investments" will not. In normal times, they are properly called pork barrel waste. This public infrastructure approach was tested and failed in bridge-to-nowhere Japan. Education, especially German-style sophisticated apprenticeship, has a valuable place, but a long-future payout.
There are other ways. First, the DC mob must ask, "What is in the way of business?" We fell into this pit in large part because financial regulators failed to do their jobs. Our natural reaction has been a mountain of new rules and agencies, an immobilizing barbed wire thicket. We have also failed to examine our external competitive position, and allowed ourselves to be fleeced by trading "partners."
Neither Mr. Obama, nor for all their free-market yammering, Republicans in Congress, has any feel for what makes business and the nation productive. Get at it.
Last, since credit and housing got us into this, our natural, pea-brained instinct has been to put a collective knee on the throat of that engine. The desire to punish, to get even, and withdraw altogether has wrecked the net worth of the American household.
On Thursday, Fed governor Elizabeth Duke spoke on housing. Amazing concept! She described the situation well, but solutions... gracious. Reflecting the frozen state of government, she joined the proposal to put four million distressed homes into a rental pool to be administered by vague public-private partnership. I can think of no better way to lose value in those homes, or to preserve their crushing weight overhanging the housing market. Don't do something, just sit there. Don't rationalize a market, RTC-style, just dump it in drums of embalming fluid. Credit, Ms. Duke, CREDIT, and housing will recover just fine -- just as FNMA, FDIC, RFC, FHLB, and FHA did the trick last time.
The Great Recession has not followed any prior overall pattern, and this week's data confirm its unique path -- and that it never ended.
We are not re-entering a classic recession. The ISM manufacturing survey is still positive, 50.6 in August just barely so, but so. August sales of cars did just fine, near 12 million annualized, 7% above a year ago and roughly the same as July.
August employment numbers were flat, but we have no new wave of layoffs. New claims for unemployment insurance have been stuck near 400,000 weekly for a year. If your job is in technology, health care, most government, export trade, auto-manufacturing, or other manufacturing with globally competitive wages and productivity -- you're fine. Buyin' a car. If you're in direct competition with global wages, or provide services to those people, you're in a hole with no ladder.
We can stumble forward this way, even if GDP dips to negative occasionally. The limit: we cannot generate enough tax revenue to run the show, and deficits will kill us.
So next week Mr. Obama will announce "job creation." The one thing he may have right, an essential fumbled for two years: give total priority to economic emergency.
FDR's focus is legend. Even haters of the New Deal acknowledge the energetic drive to try something new. The White House did not believe in a magic fix, but did have faith in concerted action and persistence -- and sent the message to a frightened people that the President all day every day sought to find ways help the economy. And did things.
Job creation... The Civilian Conservation Corps put shovels, axes, saws, and small paychecks in the hands of broken farmers and shopkeepers, many without food or a place to sleep. Men in suits and street shoes in the bottom of ditches had not the few dollars to buy work boots and overalls. The Works Progress Administration "WPA" is stamped on sidewalks all over the Great Plains and Midwest. County courthouses all through that land were built in those years by men whose hands were already rough.
Today, we have armies of young college graduates trained in all sorts of disciplines who cannot find work. Aging 'Boomers, too. Offering "shovel-ready" employment to them has all the wisdom and compassion of Marie Antoinette.
Next week we'll hear of "investments" to produce jobs and repair infrastructure. Today. any money for these purposes must be borrowed, and must bring a direct durable, productive return, 1:1 or better. These "investments" will not. In normal times, they are properly called pork barrel waste. This public infrastructure approach was tested and failed in bridge-to-nowhere Japan. Education, especially German-style sophisticated apprenticeship, has a valuable place, but a long-future payout.
There are other ways. First, the DC mob must ask, "What is in the way of business?" We fell into this pit in large part because financial regulators failed to do their jobs. Our natural reaction has been a mountain of new rules and agencies, an immobilizing barbed wire thicket. We have also failed to examine our external competitive position, and allowed ourselves to be fleeced by trading "partners."
Neither Mr. Obama, nor for all their free-market yammering, Republicans in Congress, has any feel for what makes business and the nation productive. Get at it.
Last, since credit and housing got us into this, our natural, pea-brained instinct has been to put a collective knee on the throat of that engine. The desire to punish, to get even, and withdraw altogether has wrecked the net worth of the American household.
On Thursday, Fed governor Elizabeth Duke spoke on housing. Amazing concept! She described the situation well, but solutions... gracious. Reflecting the frozen state of government, she joined the proposal to put four million distressed homes into a rental pool to be administered by vague public-private partnership. I can think of no better way to lose value in those homes, or to preserve their crushing weight overhanging the housing market. Don't do something, just sit there. Don't rationalize a market, RTC-style, just dump it in drums of embalming fluid. Credit, Ms. Duke, CREDIT, and housing will recover just fine -- just as FNMA, FDIC, RFC, FHLB, and FHA did the trick last time.
Friday, August 26, 2011
Capital Markets Update
By Louis S. Barnes Friday August 26, 2011
Markets are stumbling to a standstill at week’s end, exhausted by the last month’s worries, and today big money in New York is distracted by Irene. Better send the help to batten the house in the Hamptons, and see if those eager one-off friends up the Hudson would mind short-notice company.
The 10-year T-note, after its dramatic dive from 3.00% to 2.00% has settled near 2.20%, no better indicator of deep concern still in place.
It is football season, and one sound from games fills the air. THUMP.
Punting.
The entire financial world had waited two weeks for Perfesser Bernanke’s speech at the annual gathering of central bankers in Jackson Hole. At 8:00am MST today, THUD. As punts go, a dribbler. This whiff — no new policy, no wisdom — reflects a divided Fed, dim country rascals at regional Feds in open rebellion. The ball landed at the Fed’s September 20 meeting, the Chairman adding the 21st for extended argument. The game will go on, but the Fed will be entirely off the field for a month, and maybe then.
The Perfesser did give a whole paragraph to housing, noting the credit-default spiral still underway, defaults producing tighter credit which in turn produces a weaker housing market and more defaults. What to do about the obvious? FHFA home prices down 5.9% year-over-year? New mortgage delinquencies declining through 2010, but gently rising in 2011? Mortgage rates failing to follow Treasurys down, the spread opening as in disastrous 2008? The Fed refusing to roll MBS purchased in QE1?
Didn’t swing his foot at any of that. Just passive, professorial observation.
Our other professor, benighted Mr. Obama, depending on the track and vigor of Irene may be helicoptered away from his vacation. No matter: he already punted to an economic policy speech on September 4. The nation trembles in anticipation. Uh-huh. Might have demanded that Congress stay in town, get to work; but that would require the same from him. THWACK. Shank.
Markets live in real time, and tempus fugit no matter how much you’d like it to pause. Markets attend the Church of What’s Happenin’ NOW, whether the punter is in town or not. 2nd Quarter GDP revised down to 1.0%. The University of Michigan’s measure of consumer confidence has plunged from 75 to 55; every such move since the 1970s has marked a new recession. Maybe this time we’re just peeved.
On Thursday September 1st we’ll get employment data from August, and the first of the August surveys from the ISM. Maybe the captains of the sidelines are right to wait to see the data. The fans get so emotional about things.
This week Warren Buffett executed a signature grandstand play, putting $5 billion into troubled Bank of America. A sign of the big turn, all-okay? CNBC stock-pushers said so. BofA stock sank steadily from $15 in January to $9.50 in July, then in a week crashed to $6. The Cripple-Shooter from Omaha didn’t just dump $5 billion into stock. He bought cumulative preferred paying a 6% dividend. You know any safe investments paying 6% guaranteed today? He also received warrants to buy 700 million shares at $7.14 and re-sell whenever the stock price rises a convenient distance above that level. Buffett did a similar deal with Goldman, but in the depth of panic in early ’09. No healthy institution would accept such terms today.
America is a big and diverse place. Asserting an understanding of the American state of mind at any moment is a tad grandiose. However, never since the 1930s has there been such an opening for leadership to get out of its boxes. We are learning the hard way, very hard, that the standard prescriptions of the Left and Right are dead ends. Neither more spending, income redistribution, and regulation, nor do-nothing, hard-money liquidation, or nut-case imaginings are going to get us out of this.
Salvation lies in basic things. Unity of purpose. Determination to compete. Pursuit of excellence. Abandon the past and self-congratulation, and adapt.
Perhaps disgust at the national punting team will do the trick.
Markets are stumbling to a standstill at week’s end, exhausted by the last month’s worries, and today big money in New York is distracted by Irene. Better send the help to batten the house in the Hamptons, and see if those eager one-off friends up the Hudson would mind short-notice company.
The 10-year T-note, after its dramatic dive from 3.00% to 2.00% has settled near 2.20%, no better indicator of deep concern still in place.
It is football season, and one sound from games fills the air. THUMP.
Punting.
The entire financial world had waited two weeks for Perfesser Bernanke’s speech at the annual gathering of central bankers in Jackson Hole. At 8:00am MST today, THUD. As punts go, a dribbler. This whiff — no new policy, no wisdom — reflects a divided Fed, dim country rascals at regional Feds in open rebellion. The ball landed at the Fed’s September 20 meeting, the Chairman adding the 21st for extended argument. The game will go on, but the Fed will be entirely off the field for a month, and maybe then.
The Perfesser did give a whole paragraph to housing, noting the credit-default spiral still underway, defaults producing tighter credit which in turn produces a weaker housing market and more defaults. What to do about the obvious? FHFA home prices down 5.9% year-over-year? New mortgage delinquencies declining through 2010, but gently rising in 2011? Mortgage rates failing to follow Treasurys down, the spread opening as in disastrous 2008? The Fed refusing to roll MBS purchased in QE1?
Didn’t swing his foot at any of that. Just passive, professorial observation.
Our other professor, benighted Mr. Obama, depending on the track and vigor of Irene may be helicoptered away from his vacation. No matter: he already punted to an economic policy speech on September 4. The nation trembles in anticipation. Uh-huh. Might have demanded that Congress stay in town, get to work; but that would require the same from him. THWACK. Shank.
Markets live in real time, and tempus fugit no matter how much you’d like it to pause. Markets attend the Church of What’s Happenin’ NOW, whether the punter is in town or not. 2nd Quarter GDP revised down to 1.0%. The University of Michigan’s measure of consumer confidence has plunged from 75 to 55; every such move since the 1970s has marked a new recession. Maybe this time we’re just peeved.
On Thursday September 1st we’ll get employment data from August, and the first of the August surveys from the ISM. Maybe the captains of the sidelines are right to wait to see the data. The fans get so emotional about things.
This week Warren Buffett executed a signature grandstand play, putting $5 billion into troubled Bank of America. A sign of the big turn, all-okay? CNBC stock-pushers said so. BofA stock sank steadily from $15 in January to $9.50 in July, then in a week crashed to $6. The Cripple-Shooter from Omaha didn’t just dump $5 billion into stock. He bought cumulative preferred paying a 6% dividend. You know any safe investments paying 6% guaranteed today? He also received warrants to buy 700 million shares at $7.14 and re-sell whenever the stock price rises a convenient distance above that level. Buffett did a similar deal with Goldman, but in the depth of panic in early ’09. No healthy institution would accept such terms today.
America is a big and diverse place. Asserting an understanding of the American state of mind at any moment is a tad grandiose. However, never since the 1930s has there been such an opening for leadership to get out of its boxes. We are learning the hard way, very hard, that the standard prescriptions of the Left and Right are dead ends. Neither more spending, income redistribution, and regulation, nor do-nothing, hard-money liquidation, or nut-case imaginings are going to get us out of this.
Salvation lies in basic things. Unity of purpose. Determination to compete. Pursuit of excellence. Abandon the past and self-congratulation, and adapt.
Perhaps disgust at the national punting team will do the trick.
Friday, August 19, 2011
Capital Markets Update
By Louis S. Barnes Friday, August 19, 2011
"Volatility" is Wall Street's favorite term for losing your shirt. Volatility means down and up and down and up, a transient emotional upset.
That's not what this is.
The Dow set one of its highs since the Great Recession began, on July 21 at 12,724. That was the same day that Europe announced its newest effort to save itself. On the next day the plan was exposed as a sham, and the Dow has since unraveled not quite 2,000 points. That is not "volatility."
In the same span, the 10-year T-note has fallen almost one full percent, and almost broken 2.00% for the first time since 1950. That is not an investment. That is cash running to mattresses.
Only a minor portion of this trading traces to faltering recovery here. This is Europe.
The most immediate and fatal hazard in Europe, growing all week long: its banks and the European Central Bank itself are packed with sovereign bonds not worth face value. Exactly as the Great Freeze in July 2007, the financial system ceases to function when nobody knows what collateral is worth. We take collateral for loans in assurance that we can sell it if we have to, and make ourselves whole, or mostly so.
The sovereign debt problem inside European banks takes two forms. First is the mass of government bonds on their balance sheets as long-term holdings. In the mysterious world of bank capital, none is required to back up holdings of sovereign bonds because we all know that they will not default. (Not a joke.) Unlike any other loan on bank books, any loss on sovereign bonds is a hit to capital required to support other loans. The risk to these bonds today comes in either outright default (missed payment), or currency risk (payment in New Drachmas). Bank imploders.
The second risk is worse. Banks everywhere are linked by loans to each other, backed by collateral. The best collateral: government bonds. Today, every bank in Europe knows that every counter-party bank is impaired to one degree or another, and every one is studying the prospect of fire-selling semi-phony collateral into a market with only one buyer: the European Central Bank.
The ECB is exposed to nearly $500 billion of Greek debt alone, holdings of bonds bought to support a crashing market, and a great deal more held as collateral against cash hosed into banks, replenishing runs on each other. The ECB began two weeks ago to buy Spanish and Italian bonds when those markets began to crash, and to take French bonds with them. Jean Claude Trichet, a true believer in the European experiment, has executed these policies over the violent objections of Germany, the only country in the zone strong enough to back the ECB's central bank fiction.
The inherent, structural weakness of the ECB is the source of this week's panicked trading. Faith in all central banks rests on national capacity to pay taxes, and upon faith itself. The euro-currency zone has no taxpayers, just 17 parliaments with disparate and contradictory interests. The ECB rests on faith alone. If the zone is unable to find sound financial footing, and soon (as PIMCO's El-Erian said, "Weeks and days, not years and months"), then the world will have to deal with the bankruptcy of the ECB.
Even if it comes to that, or any number of other European disaster permutations, in the US we are likely to be okay. We are less dependent on exports than anybody. As commodity prices collapse, inflation here will disappear. It will be easy to sell Treasurys for a long time, and we have a lot to sell.
Take all of that to the mortgage markets... at any authentic European salvation, the 10-year and mortgages will run up, and fast. Even the Fed's two-year sorta-promise to stay at zero will not hold us here.
And as it is, our markets are frustrating borrowers. Only a handful of giant securitizer-wholesalers survive, and they are raising margins, not passing through all of the market gains. That situation will improve the longer we stay on Europe-watch, but see above: any European rescue, and this record-low episode will conclude.
Both of these charts are one-month "Euribor." Libor, which mortgage borrowers have seen, is the interbank cost of dollars worldwide. Euribor is the same thing, but in euros. Despite the massive funding exertions of the ECB, European interbank distress is easy to see.
"Volatility" is Wall Street's favorite term for losing your shirt. Volatility means down and up and down and up, a transient emotional upset.
That's not what this is.
The Dow set one of its highs since the Great Recession began, on July 21 at 12,724. That was the same day that Europe announced its newest effort to save itself. On the next day the plan was exposed as a sham, and the Dow has since unraveled not quite 2,000 points. That is not "volatility."
In the same span, the 10-year T-note has fallen almost one full percent, and almost broken 2.00% for the first time since 1950. That is not an investment. That is cash running to mattresses.
Only a minor portion of this trading traces to faltering recovery here. This is Europe.
The most immediate and fatal hazard in Europe, growing all week long: its banks and the European Central Bank itself are packed with sovereign bonds not worth face value. Exactly as the Great Freeze in July 2007, the financial system ceases to function when nobody knows what collateral is worth. We take collateral for loans in assurance that we can sell it if we have to, and make ourselves whole, or mostly so.
The sovereign debt problem inside European banks takes two forms. First is the mass of government bonds on their balance sheets as long-term holdings. In the mysterious world of bank capital, none is required to back up holdings of sovereign bonds because we all know that they will not default. (Not a joke.) Unlike any other loan on bank books, any loss on sovereign bonds is a hit to capital required to support other loans. The risk to these bonds today comes in either outright default (missed payment), or currency risk (payment in New Drachmas). Bank imploders.
The second risk is worse. Banks everywhere are linked by loans to each other, backed by collateral. The best collateral: government bonds. Today, every bank in Europe knows that every counter-party bank is impaired to one degree or another, and every one is studying the prospect of fire-selling semi-phony collateral into a market with only one buyer: the European Central Bank.
The ECB is exposed to nearly $500 billion of Greek debt alone, holdings of bonds bought to support a crashing market, and a great deal more held as collateral against cash hosed into banks, replenishing runs on each other. The ECB began two weeks ago to buy Spanish and Italian bonds when those markets began to crash, and to take French bonds with them. Jean Claude Trichet, a true believer in the European experiment, has executed these policies over the violent objections of Germany, the only country in the zone strong enough to back the ECB's central bank fiction.
The inherent, structural weakness of the ECB is the source of this week's panicked trading. Faith in all central banks rests on national capacity to pay taxes, and upon faith itself. The euro-currency zone has no taxpayers, just 17 parliaments with disparate and contradictory interests. The ECB rests on faith alone. If the zone is unable to find sound financial footing, and soon (as PIMCO's El-Erian said, "Weeks and days, not years and months"), then the world will have to deal with the bankruptcy of the ECB.
Even if it comes to that, or any number of other European disaster permutations, in the US we are likely to be okay. We are less dependent on exports than anybody. As commodity prices collapse, inflation here will disappear. It will be easy to sell Treasurys for a long time, and we have a lot to sell.
Take all of that to the mortgage markets... at any authentic European salvation, the 10-year and mortgages will run up, and fast. Even the Fed's two-year sorta-promise to stay at zero will not hold us here.
And as it is, our markets are frustrating borrowers. Only a handful of giant securitizer-wholesalers survive, and they are raising margins, not passing through all of the market gains. That situation will improve the longer we stay on Europe-watch, but see above: any European rescue, and this record-low episode will conclude.
Both of these charts are one-month "Euribor." Libor, which mortgage borrowers have seen, is the interbank cost of dollars worldwide. Euribor is the same thing, but in euros. Despite the massive funding exertions of the ECB, European interbank distress is easy to see.
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