JasonC's Comments RSS Syndication from SeekingAlpha.com http://seekingalpha.comuser/209922/comments http://seekingalpha.com/article/174584-u-s-debt-hysteria-is-getting-ridiculous?source=feed#comment-769691 769691 Spots - flat wrong. The Fed hasn't been buying treasuries since October, and it owns no more today than it did the day Bear went bankrupt. The size of the Fed's total sheet is the same as it was last October. All of the buying of treasuries only rebuilt the position sold off earlier in 2008 as it moved from ownership of treasuries to direct loans to the banking system. The only net new position is the mortgage backeds, which have run up only as fast as loans to the banking system have been repaid. The Fed did expand the sheet one-off during the actual panic, but has been doing nothing but reposition from short loans to the money market into long term securities, since then.

Once again we see that any error is tolerated and any slipshod fallacy is indulged provided it alleges doom and criticizes present institutions. It is just ridiculous at this point, the title of the article is correct. There isn't anything a doom mongering hyperinflationist can allege that won't be lapped up eagerly by the endless legions of lemmings all betting on the exact same thing that cause the bubble of the "oughts" in the first place - the metaphysical faith that anything you can hit with a stick is worth infinity, while anything denominated in money and especially in dollars doesn't exist.

It's crap, the same crap that gave us $147 oil and $1 million 3 bedroom houses 20 years old. It is an inflationary brainstorm but the much maligned authorities are simply not living up to the doom mongers' script.

The reason the bubble burst last year is the Fed held M1 completely flat for 3 years. That is all it took to make all the blown inflation-monger bubbles collapse of their own absurdity. The same will happen this time around. How many times do these idiots have to lose $10 trillion before they wake up to the fact that prices of real assets you can hit with a stick, can and do go down?]]> Fri, 20 Nov 2009 17:00:28 -0500 Spots - flat wrong. The Fed hasn't been buying treasuries since October, and it owns no more today than it did the day Bear went bankrupt. The size of the Fed's total sheet is the same as it was last October. All of the buying of treasuries only rebuilt the position sold off earlier in 2008 as it moved from ownership of treasuries to direct loans to the banking system. The only net new position is the mortgage backeds, which have run up only as fast as loans to the banking system have been repaid. The Fed did expand the sheet one-off during the actual panic, but has been doing nothing but reposition from short loans to the money market into long term securities, since then.

Once again we see that any error is tolerated and any slipshod fallacy is indulged provided it alleges doom and criticizes present institutions. It is just ridiculous at this point, the title of the article is correct. There isn't anything a doom mongering hyperinflationist can allege that won't be lapped up eagerly by the endless legions of lemmings all betting on the exact same thing that cause the bubble of the "oughts" in the first place - the metaphysical faith that anything you can hit with a stick is worth infinity, while anything denominated in money and especially in dollars doesn't exist.

It's crap, the same crap that gave us $147 oil and $1 million 3 bedroom houses 20 years old. It is an inflationary brainstorm but the much maligned authorities are simply not living up to the doom mongers' script.

The reason the bubble burst last year is the Fed held M1 completely flat for 3 years. That is all it took to make all the blown inflation-monger bubbles collapse of their own absurdity. The same will happen this time around. How many times do these idiots have to lose $10 trillion before they wake up to the fact that prices of real assets you can hit with a stick, can and do go down?]]> http://seekingalpha.com/article/174275-dr-copper-spots-a-monster-crash?source=feed#comment-768028 768028 Believing that inflation is on the horizon is not inflation actually on the horizon. It is a lot of people speculating recklessly on the thesis that is clearly false.

The charts showing all that build are not prices, they are stockpiles. The equilibrium price for anything is where the market for willing sellers and buyers clears - not where stockpiles build up continually. Lots of speculators are piling up every commodity they can think of, but nobody is buying it off of them to actually use it. Because demand is punk at these levels of economic activity, and at the nonsense fake prices the speculator's extra buying creates.

All the speculators have the same inflationary brainstorm that anything they can hit with a stick is worth infinity and anything printed on paper is worth zero. This was horribly false for houses and it is just as horribly false for copper or oil. Giant buildups in stockpiled copper, oil, all industrial commodities, do not signal inflation "on the horizon", they just signal that speculators are using low rates to bet on another inflation that isn't happening.

You might think losing $12 trillion in a year would teach these genuises that prices go down as well as up. But you'd be wrong.

It isn't a thought, it is an ideology and a fantasy, and only bankruptcy can cure it.]]> Thu, 19 Nov 2009 16:16:50 -0500 Believing that inflation is on the horizon is not inflation actually on the horizon. It is a lot of people speculating recklessly on the thesis that is clearly false.

The charts showing all that build are not prices, they are stockpiles. The equilibrium price for anything is where the market for willing sellers and buyers clears - not where stockpiles build up continually. Lots of speculators are piling up every commodity they can think of, but nobody is buying it off of them to actually use it. Because demand is punk at these levels of economic activity, and at the nonsense fake prices the speculator's extra buying creates.

All the speculators have the same inflationary brainstorm that anything they can hit with a stick is worth infinity and anything printed on paper is worth zero. This was horribly false for houses and it is just as horribly false for copper or oil. Giant buildups in stockpiled copper, oil, all industrial commodities, do not signal inflation "on the horizon", they just signal that speculators are using low rates to bet on another inflation that isn't happening.

You might think losing $12 trillion in a year would teach these genuises that prices go down as well as up. But you'd be wrong.

It isn't a thought, it is an ideology and a fantasy, and only bankruptcy can cure it.]]> http://seekingalpha.com/article/174212-oil-ready-to-break-higher?source=feed#comment-768005 768005
This is just another inflationary brainstorm, there is no demand to meet it, and it will be another round trip. Everyone expecting higher prices for everything is ignoring the huge excess capacity and punk demand everywhere. ]]> Thu, 19 Nov 2009 16:05:40 -0500
This is just another inflationary brainstorm, there is no demand to meet it, and it will be another round trip. Everyone expecting higher prices for everything is ignoring the huge excess capacity and punk demand everywhere. ]]> http://seekingalpha.com/article/174101-fed-sends-gold-higher-but-what-is-it-good-for?source=feed#comment-766208 766208 Yes it is absurd, because (1) dollar currency rather than monetary base is only $900 billion not $1.7 trillion - you could redeem every dollar in existence for gold below $3000 an ounce (2) the Fed owns 85 cents of US treasuries, 84 cents of mortgages, 15 cents of agencies, and 35 cents of other assets (loans to the banking system, foreign exchange, swap lines to foreign central banks etc), on top of the 40 cents of gold - for every physical dollar.

Halve those figures if you like to cover all the core deposits rather than the physical currency, it remains true that all of the liabilities are over-backed by valuable assets. You have to pretend every other asset on the sheet is worthless and only the gold worth anything to support the idiotic $6300 figure.

If you think $750 billion each of treasuries and mortgages aren't worth anything, go ahead and short them; it is a saner bet that expecting gold to go to $6300.

And the Fed owns the same position in treasuries today that it did the day Bear went broke. It merely rebuilt the position this year that it sold off in 2008 as it moved its sheet to direct loans to the banking system. Remember those silly stories of last August about the Fed "running out of treasuries"? - lol The only new position is $750 billion of mortgage backeds. In case everyone just forgot, Fannie and Freddie are in receivorship and foreign holders are selling off their agencies; the Fed and GNMA have replace them as buyers.

Everyone expecting inflation because narrow money is $1 trillion higher is ignoring the fact that total assets are $12 trillion lower. Why the former is considered more inflationary than the latter is deflationary is one of those magical mysteries of monetarist fanatics.

No the Fed isn't going to monetize another trillion or three to fund the treasury. It hasn't taken a single action since the start of the crisis to accomodate the US treasury, which doesn't need the accomodating (because its credit is rock solid). All of its actions have been in support of the banking system and private credit markets, which is case everybody just forgot, are the ones who required it. It wasn't treasuries that went begging at 15% offered yields this time last year.

Ideology is no substitute for objectivity in finance...]]> Wed, 18 Nov 2009 18:36:02 -0500 Yes it is absurd, because (1) dollar currency rather than monetary base is only $900 billion not $1.7 trillion - you could redeem every dollar in existence for gold below $3000 an ounce (2) the Fed owns 85 cents of US treasuries, 84 cents of mortgages, 15 cents of agencies, and 35 cents of other assets (loans to the banking system, foreign exchange, swap lines to foreign central banks etc), on top of the 40 cents of gold - for every physical dollar.

Halve those figures if you like to cover all the core deposits rather than the physical currency, it remains true that all of the liabilities are over-backed by valuable assets. You have to pretend every other asset on the sheet is worthless and only the gold worth anything to support the idiotic $6300 figure.

If you think $750 billion each of treasuries and mortgages aren't worth anything, go ahead and short them; it is a saner bet that expecting gold to go to $6300.

And the Fed owns the same position in treasuries today that it did the day Bear went broke. It merely rebuilt the position this year that it sold off in 2008 as it moved its sheet to direct loans to the banking system. Remember those silly stories of last August about the Fed "running out of treasuries"? - lol The only new position is $750 billion of mortgage backeds. In case everyone just forgot, Fannie and Freddie are in receivorship and foreign holders are selling off their agencies; the Fed and GNMA have replace them as buyers.

Everyone expecting inflation because narrow money is $1 trillion higher is ignoring the fact that total assets are $12 trillion lower. Why the former is considered more inflationary than the latter is deflationary is one of those magical mysteries of monetarist fanatics.

No the Fed isn't going to monetize another trillion or three to fund the treasury. It hasn't taken a single action since the start of the crisis to accomodate the US treasury, which doesn't need the accomodating (because its credit is rock solid). All of its actions have been in support of the banking system and private credit markets, which is case everybody just forgot, are the ones who required it. It wasn't treasuries that went begging at 15% offered yields this time last year.

Ideology is no substitute for objectivity in finance...]]> http://seekingalpha.com/article/174005-u-s-treasuries-in-a-bubble-not-commodities?source=feed#comment-766183 766183 Problem - the premise is false. The Fed isn't pumping out money. The Fed's balance sheet is the same size as it was last October. All that happened in the meantime is the emergency short term loans to the banking system etc were repaid, and the Fed parked the proceeds in treasuries and agency mortgage backeds.

Everyone in the world is predicting the same US inflation and dollar collapse that was the bubble in the first place. It didn't happen 2005 to 2008 because the Fed held M1 completely constant over that span. It isn't going to happen this time either because the Fed hasn't moved its sheet size in a year.

The treasury auctions are 4 times oversubscribed in bills at zero and 2.5 times oversubscribed for the 10 years with actual yield.

Foreign investors did stop buying agencies over the last year but continue to buy treasuries hand over fist. China, Hong Kong, Japan, the UK, everybody else in smaller amounts. They may talk about the dollar being old hat but it continues to be the place they are parking their net new reserves. Foreign investors have also been buying the US stock market since April, at a $15 billion a month clip.

And the reason is clear - they are not willing to see their current account surpluses disappear, by actually pushing the US to trade balance. So the net capital inflow ot the US has slowed but it remains an inflow.

As for the much vaunted "carry trade", US investors owned less in foreign assets at the end of last year than nearly ever, really. Their foreign stocks got slammed; Americans don't buy foreign government bonds. Meanwhile the supposedly stupid US treasury positions all the foreigners have piled up earned plus 13% in that smash year. Foreign ownership of US assets went down because of the stock market decline, but only by $1 trillion, while US holdings abroad dropped $2.5 trillion - because we own their stock and they own our bonds.

As of the end of 2008, US investors had only a 5% position in foreign stocks and only 3% in foreign bond assets, and 80% of the latter are dollar denominated. The total US investor position in the BRICs is less than 0.5% of US household assets. Some carry trade. Nor can this change much net in the short run, because the net flow of capital remains inward at a $400 billion a year rate.

People talk their ideology but their actual trading positions are saying something quite different. Risk aversion is off the charts after last year's smash, and secular deleveraging continues.]]> Wed, 18 Nov 2009 18:14:35 -0500 Problem - the premise is false. The Fed isn't pumping out money. The Fed's balance sheet is the same size as it was last October. All that happened in the meantime is the emergency short term loans to the banking system etc were repaid, and the Fed parked the proceeds in treasuries and agency mortgage backeds.

Everyone in the world is predicting the same US inflation and dollar collapse that was the bubble in the first place. It didn't happen 2005 to 2008 because the Fed held M1 completely constant over that span. It isn't going to happen this time either because the Fed hasn't moved its sheet size in a year.

The treasury auctions are 4 times oversubscribed in bills at zero and 2.5 times oversubscribed for the 10 years with actual yield.

Foreign investors did stop buying agencies over the last year but continue to buy treasuries hand over fist. China, Hong Kong, Japan, the UK, everybody else in smaller amounts. They may talk about the dollar being old hat but it continues to be the place they are parking their net new reserves. Foreign investors have also been buying the US stock market since April, at a $15 billion a month clip.

And the reason is clear - they are not willing to see their current account surpluses disappear, by actually pushing the US to trade balance. So the net capital inflow ot the US has slowed but it remains an inflow.

As for the much vaunted "carry trade", US investors owned less in foreign assets at the end of last year than nearly ever, really. Their foreign stocks got slammed; Americans don't buy foreign government bonds. Meanwhile the supposedly stupid US treasury positions all the foreigners have piled up earned plus 13% in that smash year. Foreign ownership of US assets went down because of the stock market decline, but only by $1 trillion, while US holdings abroad dropped $2.5 trillion - because we own their stock and they own our bonds.

As of the end of 2008, US investors had only a 5% position in foreign stocks and only 3% in foreign bond assets, and 80% of the latter are dollar denominated. The total US investor position in the BRICs is less than 0.5% of US household assets. Some carry trade. Nor can this change much net in the short run, because the net flow of capital remains inward at a $400 billion a year rate.

People talk their ideology but their actual trading positions are saying something quite different. Risk aversion is off the charts after last year's smash, and secular deleveraging continues.]]> http://seekingalpha.com/article/170798-bond-expert-tuesday-outlook-meeting-the-treasury?source=feed#comment-743031 743031 The threat in the near term remains deflation and there is no reason for the Fed to tighten yet. The economy could not take it, it would be a 1938 style mistake and Bernanke is not going to make that one, he knows the history too well.

Longer term the trade on the board is to go short the 2 to 10 year spread. It won't stay this wide forever. Likely the short end moves upward as the economy recovers, along with an overall upward shift of the curve. Possibly the long end breaks downward on significant additional weakness, though I would put the chances of the first at 3-4 times those of the second. But here is what won't happen - 2s staying under 1% while 10s go to 5%...]]> Tue, 03 Nov 2009 16:31:56 -0500 The threat in the near term remains deflation and there is no reason for the Fed to tighten yet. The economy could not take it, it would be a 1938 style mistake and Bernanke is not going to make that one, he knows the history too well.

Longer term the trade on the board is to go short the 2 to 10 year spread. It won't stay this wide forever. Likely the short end moves upward as the economy recovers, along with an overall upward shift of the curve. Possibly the long end breaks downward on significant additional weakness, though I would put the chances of the first at 3-4 times those of the second. But here is what won't happen - 2s staying under 1% while 10s go to 5%...]]> http://seekingalpha.com/article/169601-today-in-commodities-dollar-up-again?source=feed#comment-734474 734474 Wed, 28 Oct 2009 16:35:23 -0400 http://seekingalpha.com/article/168848-monday-fx-view-the-dollar-stands-still?source=feed#comment-730938 730938
Is anyone watching the actual markets, or does everyone just make things up to fit their political world-view or trading book and just hope it turns out to be true?]]> Mon, 26 Oct 2009 13:28:31 -0400
Is anyone watching the actual markets, or does everyone just make things up to fit their political world-view or trading book and just hope it turns out to be true?]]> http://seekingalpha.com/article/166661-why-everyone-is-wrong-about-the-inflation-deflation-debate?source=feed#comment-718056 718056 The no-risk trade is so crowded it is clearly doomed.

Gold is up because it is perceived as a safe haven.
Treasuries are bid at tiny yields because --- same.
Commodities - same.
Cash yielding zero - same.

All of it is Pavlovian investing in reaction to last year's pain. As usual with rear view mirror anything, it is precisely wrong, 180 degrees.

There is no inflation and there is no prospect of any.

The dollar is about where it was a year ago. Everyone talks about its decline over 9 months and not the huge spike it had in the 2 right before that, in the crisis peak. In case everyone just forgot, the entire world being short dollars (for debt, to fund real anything, etc) and unable to cover *was* the bubble.

It will be a long slow recovery, with GDP growth positive but below peaks in both GDP for a while and asset values for longer. Unemployment will decline only slowly. Deleveraging is a long slow slog and not over quickly. But there will be no inflation to speak of during it.

Everyone thinking they have to play the next shift in the exchange value of money to get ahead is exactly focused on the wrong issue. Where can capital earn reasonable returns with moderate safety in the present environment? Anywhere it can, it will be paid handsomely because credit is ridiculously cheap and will stay so. Anyone willing to take the slightest risk will be paid. Except those betting the house (again...) on outlier monetary movements --- which is approximately the entire financial pundit class, plus every populist fad-chaser on the planet.

Think stable income producers. Think credit, utilities, preferreds. Add modest leverage at near-zero cost, and carry. Don't pay any attention to all the heavy breathing scare mongers peddling their ridiculous washboard fantasies of hyperinflation or great depression reruns -- they are a total crock, start to finish.]]> Fri, 16 Oct 2009 16:45:52 -0400 The no-risk trade is so crowded it is clearly doomed.

Gold is up because it is perceived as a safe haven.
Treasuries are bid at tiny yields because --- same.
Commodities - same.
Cash yielding zero - same.

All of it is Pavlovian investing in reaction to last year's pain. As usual with rear view mirror anything, it is precisely wrong, 180 degrees.

There is no inflation and there is no prospect of any.

The dollar is about where it was a year ago. Everyone talks about its decline over 9 months and not the huge spike it had in the 2 right before that, in the crisis peak. In case everyone just forgot, the entire world being short dollars (for debt, to fund real anything, etc) and unable to cover *was* the bubble.

It will be a long slow recovery, with GDP growth positive but below peaks in both GDP for a while and asset values for longer. Unemployment will decline only slowly. Deleveraging is a long slow slog and not over quickly. But there will be no inflation to speak of during it.

Everyone thinking they have to play the next shift in the exchange value of money to get ahead is exactly focused on the wrong issue. Where can capital earn reasonable returns with moderate safety in the present environment? Anywhere it can, it will be paid handsomely because credit is ridiculously cheap and will stay so. Anyone willing to take the slightest risk will be paid. Except those betting the house (again...) on outlier monetary movements --- which is approximately the entire financial pundit class, plus every populist fad-chaser on the planet.

Think stable income producers. Think credit, utilities, preferreds. Add modest leverage at near-zero cost, and carry. Don't pay any attention to all the heavy breathing scare mongers peddling their ridiculous washboard fantasies of hyperinflation or great depression reruns -- they are a total crock, start to finish.]]> http://seekingalpha.com/article/163345-10-more-reasons-why-the-recession-will-last-forever?source=feed#comment-718032 718032 What an idiotic article.

Wanna bet this recession ends like every other?

No it is not different this time, it never is. What goes around comes around, it is a cycle. Grow up.]]> Fri, 16 Oct 2009 16:35:22 -0400 What an idiotic article.

Wanna bet this recession ends like every other?

No it is not different this time, it never is. What goes around comes around, it is a cycle. Grow up.]]> http://seekingalpha.com/article/166985-bofa-and-stating-the-obvious-about-bank-profits?source=feed#comment-718012 718012 The real story in the B of A report is they remain cash flow positive as they have throughout. They added another $2.1 billion to their loss reserves, matching the loss to the common pretty much. There was also the $1.8 billion item from writing *up* the value of debt issued by Merrill because its credit improved.

Trust me, they won't go bankrupt through an improving credit rating.

They tick over around break even until the credit loss rate turns, then they pop upward. The net cost of the entire crisis will be a dilution a bit under half, from being forced to issue lots of stock at lousy prices to maintain capital at the bottom. In return they will have Merrill and be a $2.5 trillion bank in the next up cycle.

Everyone reacting to it as some disaster is smoking something, it was a non-event report...]]> Fri, 16 Oct 2009 16:32:41 -0400 The real story in the B of A report is they remain cash flow positive as they have throughout. They added another $2.1 billion to their loss reserves, matching the loss to the common pretty much. There was also the $1.8 billion item from writing *up* the value of debt issued by Merrill because its credit improved.

Trust me, they won't go bankrupt through an improving credit rating.

They tick over around break even until the credit loss rate turns, then they pop upward. The net cost of the entire crisis will be a dilution a bit under half, from being forced to issue lots of stock at lousy prices to maintain capital at the bottom. In return they will have Merrill and be a $2.5 trillion bank in the next up cycle.

Everyone reacting to it as some disaster is smoking something, it was a non-event report...]]> http://seekingalpha.com/article/166985-bofa-and-stating-the-obvious-about-bank-profits?source=feed#comment-718007 718007 The Fed isn't going to lose anything buying agencies MBS securities. It is going to make somewhat more profit than it makes in treasuries.]]> Fri, 16 Oct 2009 16:28:38 -0400 The Fed isn't going to lose anything buying agencies MBS securities. It is going to make somewhat more profit than it makes in treasuries.]]> http://seekingalpha.com/article/166834-even-alan-greenspan-thinks-the-banks-have-become-too-large?source=feed#comment-717982 717982 Um, the idea that banks can be allowed to fail if only they are small enough is a delusion.

We can let banks under $100 billion in assets fail these days because they are a tiny portion of the entire financial sector. But if you slice Citi and B of A and the rest into $100 billion pieces, can you let each of them fail when credit weakens?

You cannot. They own the same stuff, and 25 $100 billion banks going down the same week is no more livable than one $2.5 trillion bank going down. You have to stop them from failing if the event gets large enough, full stop.

Authorities save little ones by selling them to bigger ones and then only worry about keeping the big ones afloat, and the true small fry can just be liquidated. Check. Then the "burn it all down" liquidationists imagine they'd get their way if only all the banks were small enough. Um, no, not remotely.

The whole reason $2.5 trillion banks can't be allowed to fail is the real economy can't take the money supply collapsing like that. But exactly the same money supply collapse is threatened by multiple failures of medium sized banks. The saving effort is just more complicated, that is all.

Everyone deludes themselves that the authorities can get out of paying by just refusing to save failing banks. That too is a delusion. Widespread bank failure sticks the whole bill for the mess on the authorities' desk, it does not avoid a dime of it. In fact, the longer you wait and the more reluctantly you pay up, the more you get to pay because the lower confidence has gone and the higher risk premiums have soared.

You cannot make capital cheaper by refusing to pay for it. Grok already. Capital is paid for, in full, or is evaporates. In a world in which vast quantities of capital value are allowed to evaporate, you pay more not less for capital because it is scarcer and riskier.]]> Fri, 16 Oct 2009 16:09:30 -0400 Um, the idea that banks can be allowed to fail if only they are small enough is a delusion.

We can let banks under $100 billion in assets fail these days because they are a tiny portion of the entire financial sector. But if you slice Citi and B of A and the rest into $100 billion pieces, can you let each of them fail when credit weakens?

You cannot. They own the same stuff, and 25 $100 billion banks going down the same week is no more livable than one $2.5 trillion bank going down. You have to stop them from failing if the event gets large enough, full stop.

Authorities save little ones by selling them to bigger ones and then only worry about keeping the big ones afloat, and the true small fry can just be liquidated. Check. Then the "burn it all down" liquidationists imagine they'd get their way if only all the banks were small enough. Um, no, not remotely.

The whole reason $2.5 trillion banks can't be allowed to fail is the real economy can't take the money supply collapsing like that. But exactly the same money supply collapse is threatened by multiple failures of medium sized banks. The saving effort is just more complicated, that is all.

Everyone deludes themselves that the authorities can get out of paying by just refusing to save failing banks. That too is a delusion. Widespread bank failure sticks the whole bill for the mess on the authorities' desk, it does not avoid a dime of it. In fact, the longer you wait and the more reluctantly you pay up, the more you get to pay because the lower confidence has gone and the higher risk premiums have soared.

You cannot make capital cheaper by refusing to pay for it. Grok already. Capital is paid for, in full, or is evaporates. In a world in which vast quantities of capital value are allowed to evaporate, you pay more not less for capital because it is scarcer and riskier.]]> http://seekingalpha.com/article/165268-the-dogma-of-low-interest-rates-is-wrong?source=feed#comment-707676 707676 ETFs are not the United States. They are preferred vehicles for speculators who play fads and momentum.

There is a giant flow of capital to the US. It is called the trade deficit. It is less giant than it was a year ago, but real capital continues to leave Asia and land in the US.

People who simultaneously want to run up currency balances and attract and use real capital do not understand basic accounting, and want to eat cake and have it.

Whether it makes economic sense for Americans to run trade deficits depends entirely on whether the future return from holding dollar bonds at near zero interest rates will be greater or less than the returns from investing real capital in the US. Those simultaneously moaning that the dollar is certain to implode while real everything must soar, and that the trade deficit is ruinous, do not understand basic accounting either. Foreign savers are the ones going long the dollar by accumulating our bonds; we are the ones going long real assets by buying things for issued debt.

As usual, the doom mongering press and pundit set looks at one half of each transaction and predicts horrors from a selected side of it, while pretending the other side does not exist.

The reality is there is no inflation in the US, it is a deflation, and the world has yet to get used to Americans saving for their own capital needs instead of outsourcing it. Interest rates at zero reflect the complete lack of bargaining power of our foreign creditors, who simply do not see how or where to invest their own savings.

If they learn to, fine, we save to fund our own investments and the trade deficit disappears. They've got a giant pile of dollar claims, we've got tons of real stuff already delivered and worth every cent paid for it, to a free consumer.

Everyone is trying to tell other men what to do with their own wealth...]]> Wed, 07 Oct 2009 18:07:57 -0400 ETFs are not the United States. They are preferred vehicles for speculators who play fads and momentum.

There is a giant flow of capital to the US. It is called the trade deficit. It is less giant than it was a year ago, but real capital continues to leave Asia and land in the US.

People who simultaneously want to run up currency balances and attract and use real capital do not understand basic accounting, and want to eat cake and have it.

Whether it makes economic sense for Americans to run trade deficits depends entirely on whether the future return from holding dollar bonds at near zero interest rates will be greater or less than the returns from investing real capital in the US. Those simultaneously moaning that the dollar is certain to implode while real everything must soar, and that the trade deficit is ruinous, do not understand basic accounting either. Foreign savers are the ones going long the dollar by accumulating our bonds; we are the ones going long real assets by buying things for issued debt.

As usual, the doom mongering press and pundit set looks at one half of each transaction and predicts horrors from a selected side of it, while pretending the other side does not exist.

The reality is there is no inflation in the US, it is a deflation, and the world has yet to get used to Americans saving for their own capital needs instead of outsourcing it. Interest rates at zero reflect the complete lack of bargaining power of our foreign creditors, who simply do not see how or where to invest their own savings.

If they learn to, fine, we save to fund our own investments and the trade deficit disappears. They've got a giant pile of dollar claims, we've got tons of real stuff already delivered and worth every cent paid for it, to a free consumer.

Everyone is trying to tell other men what to do with their own wealth...]]> http://seekingalpha.com/article/164452-recession-is-over-depression-has-just-begun?source=feed#comment-704080 704080 The article has followed a few true points in Minsky to a ridiculous conclusion that capitalism inherently self destructs, which is nonsense.

There is nothing remotely incompatible about a positive private savings rate and balanced government and trade budgets. The accounting identity misread comes from ignoring the income side of savings. Savings do not disappear into a black hole, sucking the economy into nothingness after them; nor are they mere transfers to those who borrowed those savings (first order, first year cash flow statement effect). Debt service isn't paid to a black hole in the sky either. Instead, they are intertemporal transfers.

Attempting to understand intertemporal trades by looking at the balanced current income statements of the counterparties only, and then pretending this is a complete picture if repeated through time, is the underlying error. You can't understand any intertemporal credit transaction without using all 3 statements of modern accounting, balance sheet, income, and cash flow.

The Minsky stabilizer point that is sound, is that government deficits deliberately run in a recession do enable private sector actors (households and business) to improve their own balance sheets. The private sector savings rate rising, is recessionary yes, and government decifit spending allows a larger upward move in the private sector savings rate for the same drop in current output.

But only while the savings rate is increasing. At any level of that rate, the accounting is dead-stable with a government budget in balance. There is no need for a perpetually unhinged deficit merely to sustain a non-zero savings rate. The reason the article misses this, is it notices only the savings-allocation income-statement side of the credit transactions, and not the raised-later-income from repayment side of them, that necessarily follows from the improvement the former brings to private balance sheets.

Government deficits run in the recession enable an increase in the private savings rate. Once economic growth resumes, there is no further need for the private savings rate to ratchet endlessly higher to infinity, and this need is over. Sure, the withdrawal of government stimulus should be gradual and moderated to the actual pace of the recovery, and wait for actual voluntary stabilization in the private savings rate. But that is quite completely all that is required.

The next misconception in the article is that the debt service levels of the private sector are horribly high, or that the populace in general is in some deep financial hole. The net worth of the US household sector is positive $53 trillion. It's leverage level is 5 to 4.

Somebody owns every scrap of that debt, you see. It isn't a liability without counterparty, of wealth disappearing into a black pit in the sky. When involuntary debt restructuring occurs, when $2 trillion in debt defaults, yes that draws down asset values - but of course it does so precisely while reducing net indebtedness and future debt service payments. A transfer has occurred from creditors to debtors, and both sides have shrunk their sheets on both the asset and the liability side.

Under ordinary conditions of ongoing growth, debt rises in line with the economy, as a portion of the new asset value being continually created is financed by debt rather than by equity. Debt is not negative net worth. It is merely one form in which assets may be financed. What causes the asset values in the first place is the income stream of real services being thrown off by capital. It is quite irrelevant (for its size) how that stream is divided, between equity and debt financing. The most one can say, following Minsky, is that too high a portion of it being debt financing tends to increase credit-instability.

This is an ordinary feedback. Anything smooth and safe enough will be leveraged until it isn't smooth and safe anymore. Anything showing rocky returns and jumping all over the place, will be carried only by equity and capital will exit that use, which will calm its returns over time. There is no possibility of endlessly sustained calm; calm is itself the inducement or signal that leverage can be added. That traditional point about the inherent instability of credit was reiterated by Minsky, though hardly noticed by him first.

There is no need for continual trillion dollar deficits to avoid economic collapse. There is no need for the private sector to run its savings rates up to 20% or more, let alone increase them continually. Positive private savings rates are not a Keynesian "hording" bete noir consuming entire economies through errors of one-entry accounting.

People can save the portion of their income they like; they will receive income from doing so; they will create real capital that produces real incomes maintain those capital values (with the pie redivided amongst investors based on their individual success forecasting equilibrium rates of return and their associated asset prices, to be sure).

Economics is less dramatic and much less political than pundits of this sort suppose. There are lots of freely choosable alternative places the economy can sustain itself. There is no tendency to necessary inflationary or deflationary doom. There is merely a cycle, and no it isn't any different this time. The long financial cycle is longer than many commentators expect and some of its adjustments more gradual, playing out over multiple GDP cycles. Who cares?]]> Mon, 05 Oct 2009 15:50:58 -0400 The article has followed a few true points in Minsky to a ridiculous conclusion that capitalism inherently self destructs, which is nonsense.

There is nothing remotely incompatible about a positive private savings rate and balanced government and trade budgets. The accounting identity misread comes from ignoring the income side of savings. Savings do not disappear into a black hole, sucking the economy into nothingness after them; nor are they mere transfers to those who borrowed those savings (first order, first year cash flow statement effect). Debt service isn't paid to a black hole in the sky either. Instead, they are intertemporal transfers.

Attempting to understand intertemporal trades by looking at the balanced current income statements of the counterparties only, and then pretending this is a complete picture if repeated through time, is the underlying error. You can't understand any intertemporal credit transaction without using all 3 statements of modern accounting, balance sheet, income, and cash flow.

The Minsky stabilizer point that is sound, is that government deficits deliberately run in a recession do enable private sector actors (households and business) to improve their own balance sheets. The private sector savings rate rising, is recessionary yes, and government decifit spending allows a larger upward move in the private sector savings rate for the same drop in current output.

But only while the savings rate is increasing. At any level of that rate, the accounting is dead-stable with a government budget in balance. There is no need for a perpetually unhinged deficit merely to sustain a non-zero savings rate. The reason the article misses this, is it notices only the savings-allocation income-statement side of the credit transactions, and not the raised-later-income from repayment side of them, that necessarily follows from the improvement the former brings to private balance sheets.

Government deficits run in the recession enable an increase in the private savings rate. Once economic growth resumes, there is no further need for the private savings rate to ratchet endlessly higher to infinity, and this need is over. Sure, the withdrawal of government stimulus should be gradual and moderated to the actual pace of the recovery, and wait for actual voluntary stabilization in the private savings rate. But that is quite completely all that is required.

The next misconception in the article is that the debt service levels of the private sector are horribly high, or that the populace in general is in some deep financial hole. The net worth of the US household sector is positive $53 trillion. It's leverage level is 5 to 4.

Somebody owns every scrap of that debt, you see. It isn't a liability without counterparty, of wealth disappearing into a black pit in the sky. When involuntary debt restructuring occurs, when $2 trillion in debt defaults, yes that draws down asset values - but of course it does so precisely while reducing net indebtedness and future debt service payments. A transfer has occurred from creditors to debtors, and both sides have shrunk their sheets on both the asset and the liability side.

Under ordinary conditions of ongoing growth, debt rises in line with the economy, as a portion of the new asset value being continually created is financed by debt rather than by equity. Debt is not negative net worth. It is merely one form in which assets may be financed. What causes the asset values in the first place is the income stream of real services being thrown off by capital. It is quite irrelevant (for its size) how that stream is divided, between equity and debt financing. The most one can say, following Minsky, is that too high a portion of it being debt financing tends to increase credit-instability.

This is an ordinary feedback. Anything smooth and safe enough will be leveraged until it isn't smooth and safe anymore. Anything showing rocky returns and jumping all over the place, will be carried only by equity and capital will exit that use, which will calm its returns over time. There is no possibility of endlessly sustained calm; calm is itself the inducement or signal that leverage can be added. That traditional point about the inherent instability of credit was reiterated by Minsky, though hardly noticed by him first.

There is no need for continual trillion dollar deficits to avoid economic collapse. There is no need for the private sector to run its savings rates up to 20% or more, let alone increase them continually. Positive private savings rates are not a Keynesian "hording" bete noir consuming entire economies through errors of one-entry accounting.

People can save the portion of their income they like; they will receive income from doing so; they will create real capital that produces real incomes maintain those capital values (with the pie redivided amongst investors based on their individual success forecasting equilibrium rates of return and their associated asset prices, to be sure).

Economics is less dramatic and much less political than pundits of this sort suppose. There are lots of freely choosable alternative places the economy can sustain itself. There is no tendency to necessary inflationary or deflationary doom. There is merely a cycle, and no it isn't any different this time. The long financial cycle is longer than many commentators expect and some of its adjustments more gradual, playing out over multiple GDP cycles. Who cares?]]> http://seekingalpha.com/article/164011-market-outlook-bill-gross-has-it-exactly-right?source=feed#comment-698627 698627 "Banks have what is called "core capital". I think Treasuires count as "core capital" whereas a car loan doesn't count as core capital"

Um no. The capital of a bank is a liability side item, while both treasuries it owns and car loans in makes are asset side items.

The core capital of a bank is its common stock equity, its preferred stock equity, and its loan loss reserves. All at book value.

(As an aside notice, when a bank marks down its assets to add to loan loss reserves, this figure does not change. Realized losses do reduce it, provisions for future ones do not).

What you are probably thinking of is the credit risk reserve requirement under Basel II. Banks must have capital equal to 8% of risk-adjusted assets. The risk adjustment for loans or corporate credits is 100%, for first mortgages secured by real property it is 50%, and for government bonds it is 0%. (Some agencies and foreign government bonds get 20%).

So when a bank shifts part of its portfolio from car loans to treasuries it does not change its core capital - nothing moved on the asset side of the sheet changes the liability side of the sheet. What it does do is reduce their Basel II regulatory requirements for the ratio of capital to total assets.

So yes, shifting to governments from general loans to the market does reduce a banks capital *requirements*, but it doesn't change its *capital*.

Also note that all banks must also keep capital against interest rate risk, as distinct from credit risk. They often run swap books to manage this. A move from a T-bill to a 10 year treasury requires either extra capital against the greater interest rate risk, or a swap position to hedge it that will give up much of the incremental yield.

A move from a home mortgage to a 10 year, on the other hand, gains the bank convexity with the immediate interest rate risk reduced somewhat, while also reducing its credit risk capital requirements (to 0% of 8% of loan amount moved from 50% of 8% of loan amount moved).

Those are mechanics. ]]> Thu, 01 Oct 2009 12:14:42 -0400 "Banks have what is called "core capital". I think Treasuires count as "core capital" whereas a car loan doesn't count as core capital"

Um no. The capital of a bank is a liability side item, while both treasuries it owns and car loans in makes are asset side items.

The core capital of a bank is its common stock equity, its preferred stock equity, and its loan loss reserves. All at book value.

(As an aside notice, when a bank marks down its assets to add to loan loss reserves, this figure does not change. Realized losses do reduce it, provisions for future ones do not).

What you are probably thinking of is the credit risk reserve requirement under Basel II. Banks must have capital equal to 8% of risk-adjusted assets. The risk adjustment for loans or corporate credits is 100%, for first mortgages secured by real property it is 50%, and for government bonds it is 0%. (Some agencies and foreign government bonds get 20%).

So when a bank shifts part of its portfolio from car loans to treasuries it does not change its core capital - nothing moved on the asset side of the sheet changes the liability side of the sheet. What it does do is reduce their Basel II regulatory requirements for the ratio of capital to total assets.

So yes, shifting to governments from general loans to the market does reduce a banks capital *requirements*, but it doesn't change its *capital*.

Also note that all banks must also keep capital against interest rate risk, as distinct from credit risk. They often run swap books to manage this. A move from a T-bill to a 10 year treasury requires either extra capital against the greater interest rate risk, or a swap position to hedge it that will give up much of the incremental yield.

A move from a home mortgage to a 10 year, on the other hand, gains the bank convexity with the immediate interest rate risk reduced somewhat, while also reducing its credit risk capital requirements (to 0% of 8% of loan amount moved from 50% of 8% of loan amount moved).

Those are mechanics. ]]> http://seekingalpha.com/article/162927-federal-reserve-readying-a-stealth-tightening-of-monetary-policy?source=feed#comment-687726 687726 $700 billion in short term credits the Fed supplied as of this April have already been repaid.]]> Wed, 23 Sep 2009 12:00:15 -0400 $700 billion in short term credits the Fed supplied as of this April have already been repaid.]]> http://seekingalpha.com/article/157709-prepare-yourself-for-the-inflation-invasion?source=feed#comment-645742 645742 Um, default is a ridiculous concern. TIPS are a better bet long term than nominal notes at 3.5% certainly, that just isn't saying much. I can get intermediate and long corporates at 7% and change - first tier names.

On TIPS and any difficulty paying them, again not a serious concern, there simply aren't enough of them outstanding to be material. The Fed would frankly like a larger and more liquid demand for them to assess inflation expectations more reliably, but they are complex enough that demand for them has been punk since inception.

When they are over 3% real yield they are good long term value though...]]> Tue, 25 Aug 2009 14:11:27 -0400 Um, default is a ridiculous concern. TIPS are a better bet long term than nominal notes at 3.5% certainly, that just isn't saying much. I can get intermediate and long corporates at 7% and change - first tier names.

On TIPS and any difficulty paying them, again not a serious concern, there simply aren't enough of them outstanding to be material. The Fed would frankly like a larger and more liquid demand for them to assess inflation expectations more reliably, but they are complex enough that demand for them has been punk since inception.

When they are over 3% real yield they are good long term value though...]]> http://seekingalpha.com/article/157709-prepare-yourself-for-the-inflation-invasion?source=feed#comment-644706 644706 Sethbru is the only one so far to get his facts straight.

The size of the Fed's sheet peaked on April 23rd. It has contracted 10% since then, $200 billion. This has coincided with stocked bottoming and the rally. Everyone pretending that the Fed is still inflating is simply not doing their homework by reading the actual balance sheet.

I see pundit after pundit predicting that as soon as the Fed stops expanding the market will tank, when it stopped over 4 months ago and the market took off like a rocket.

$700 billion in the short term loans, 90 days and under, that the Fed made at the peak of the crisis, have run off into cash, repaid to the Fed. If the Fed had just extinguished all of it immediately, it would have been the most rapid deflation in history. As it is, the run-down rate is as fast as the early 30s.

The Fed lent $500 billion to US banks in term auction credit and through the discount window. 45% of that has been repaid already. The Fed lent $250 billion directly to US corporations in its commercial paper and asset backed facilities. 65% of that has been repaid. The Fed lent $250 billion to foreign central banks via swap lines, indirectly supporting the dollar business of European banks especially. 70% of that has been repaid.

The Fed has extinguished a third of the money as it flowed back to them, invested a third in mortgage backed securities, and the remaining third in treasuries (plus actually about 40%, with 10% in agency debt).

In doing so, the Fed has rebuilt the treasury position it had back in 2007, but no more than that. It sold off the bulk of that position between Bear Stearns and Lehman, while it was running up its loans to the banking system. Those loans did not grow the sheet before Lehman, because they were offset dollar for dollar by feeding treasuries into the market. After Lehman they doubled the sheet size. Now they are running off all the extraordinary short term stuff and rebuilding the treasury position they had at the outset.

The only large new item on the sheet is the big position in mortgage backed securities. In case nobody noticed, Fannie and Freddie went broke in the meantime. The home loan banks have run off $250 billion in their sheet while the Fed has expanded. Overall, the Fed has taken over the busted role of the agencies in supplying marginal new mortgage financing, while the agencies concentrate on workout stuff and controlling their credit losses.

It is completely unsurprising that the result has been a decline not an increase in average prices, 2% at the consumer level and 5% at the producer level. The biggest being energy - the swing in the terms of trade there alone comes to several percent of GDP.

Also in case everyone just forgot, the inflationary brainstorm that any real asset would go to infinity in money terms, *was* the bubble and it comprehensively busted. Those so predicting were wrong to the tune of $15 trillion in asset price losses.

But the same crowd are still chirping away their sacred hymnal that inflation must be right around the corner. If they think so, hey, buy up all the mansions and all the half empty new suburbs and all the half occupied strip malls. Oh wait, they tried that already.

Sometimes a debt denominated in nominal dollars is simply worth more than a real asset you can hit with a stick. Value isn't a material thing. And no, central banks that put their economies through the wringer we just went through when necessary to maintain the purchasing power of their currency, do not see that currency repudiated by the people, which is what hyperinflation is. All of the hyperinflation predictions are utter nonsense.

Next to those who think the public debt is so ruinous it must bankrupt everything. They continually confuse debt with negative net worth. Take TARP, which is always presented as "costing" $700 billion. Um, where do they think that money went, to the great money-pit in the sky? Every dollar of it was someone's receipt, so yeah I think it will be available to the private sector. And oh yeah, the government got $700 billion in bank preferred stock for it, at depression prices and terms. All of it entirely profitable already, let alone longer term.

Anybody here think you can go broke borrowing at 2 to lend at 5 with a nice double on the capital after converting? Anyone think if the amount so deployed is really big, it means you are that much moer broke? It was merely a good trade, better than half the people here can boast of recently.

In the last 2 years and a quarter, the treasury has placed over $3 trillion in net new debt at rates under 4%, with a blended cost more like 2%. How have you done, in comparison? Oh and the Fed took a net zero of that, while US private investors took 65%. The vaunted Chinese buyer mentioned in every single breathless news report took 11%. The rise in the US savings rate since last summer replaces everything the Chinese invest here 3 times over and to spare.

Why does no one do their homework on this stuff, even here?

On Aug 24 12:53 AM lance sjogren wrote:

> Inthemoney: I agree the stock market rise the last several months
> is probably largely due to monetary expansion.
>
> In my view, stocks have become severely overvalued due to too much
> money sloshing around looking for a home.
>
> What I wonder is when will that stop. Stocks represent companies
> that operate in the REAL economy (aside from fiancials, of course).
> The REAL economy sucks.
>
> Stocks are way overvalued considering the horrendous state of the
> real economy.
>
> But still, the money printing goes on, and all that new money has
> to go somewhere.
>
> The smart investor is one that can figure out where people are going
> to shift all that money once they realize that stocks are overvalued
> and due for a major correction.
>
> I wish I knew.
>
> I think at some point it will be commodities, especially precious
> metals, but that may still be 2-3 years down the road.]]> Tue, 25 Aug 2009 05:07:49 -0400 Sethbru is the only one so far to get his facts straight.

The size of the Fed's sheet peaked on April 23rd. It has contracted 10% since then, $200 billion. This has coincided with stocked bottoming and the rally. Everyone pretending that the Fed is still inflating is simply not doing their homework by reading the actual balance sheet.

I see pundit after pundit predicting that as soon as the Fed stops expanding the market will tank, when it stopped over 4 months ago and the market took off like a rocket.

$700 billion in the short term loans, 90 days and under, that the Fed made at the peak of the crisis, have run off into cash, repaid to the Fed. If the Fed had just extinguished all of it immediately, it would have been the most rapid deflation in history. As it is, the run-down rate is as fast as the early 30s.

The Fed lent $500 billion to US banks in term auction credit and through the discount window. 45% of that has been repaid already. The Fed lent $250 billion directly to US corporations in its commercial paper and asset backed facilities. 65% of that has been repaid. The Fed lent $250 billion to foreign central banks via swap lines, indirectly supporting the dollar business of European banks especially. 70% of that has been repaid.

The Fed has extinguished a third of the money as it flowed back to them, invested a third in mortgage backed securities, and the remaining third in treasuries (plus actually about 40%, with 10% in agency debt).

In doing so, the Fed has rebuilt the treasury position it had back in 2007, but no more than that. It sold off the bulk of that position between Bear Stearns and Lehman, while it was running up its loans to the banking system. Those loans did not grow the sheet before Lehman, because they were offset dollar for dollar by feeding treasuries into the market. After Lehman they doubled the sheet size. Now they are running off all the extraordinary short term stuff and rebuilding the treasury position they had at the outset.

The only large new item on the sheet is the big position in mortgage backed securities. In case nobody noticed, Fannie and Freddie went broke in the meantime. The home loan banks have run off $250 billion in their sheet while the Fed has expanded. Overall, the Fed has taken over the busted role of the agencies in supplying marginal new mortgage financing, while the agencies concentrate on workout stuff and controlling their credit losses.

It is completely unsurprising that the result has been a decline not an increase in average prices, 2% at the consumer level and 5% at the producer level. The biggest being energy - the swing in the terms of trade there alone comes to several percent of GDP.

Also in case everyone just forgot, the inflationary brainstorm that any real asset would go to infinity in money terms, *was* the bubble and it comprehensively busted. Those so predicting were wrong to the tune of $15 trillion in asset price losses.

But the same crowd are still chirping away their sacred hymnal that inflation must be right around the corner. If they think so, hey, buy up all the mansions and all the half empty new suburbs and all the half occupied strip malls. Oh wait, they tried that already.

Sometimes a debt denominated in nominal dollars is simply worth more than a real asset you can hit with a stick. Value isn't a material thing. And no, central banks that put their economies through the wringer we just went through when necessary to maintain the purchasing power of their currency, do not see that currency repudiated by the people, which is what hyperinflation is. All of the hyperinflation predictions are utter nonsense.

Next to those who think the public debt is so ruinous it must bankrupt everything. They continually confuse debt with negative net worth. Take TARP, which is always presented as "costing" $700 billion. Um, where do they think that money went, to the great money-pit in the sky? Every dollar of it was someone's receipt, so yeah I think it will be available to the private sector. And oh yeah, the government got $700 billion in bank preferred stock for it, at depression prices and terms. All of it entirely profitable already, let alone longer term.

Anybody here think you can go broke borrowing at 2 to lend at 5 with a nice double on the capital after converting? Anyone think if the amount so deployed is really big, it means you are that much moer broke? It was merely a good trade, better than half the people here can boast of recently.

In the last 2 years and a quarter, the treasury has placed over $3 trillion in net new debt at rates under 4%, with a blended cost more like 2%. How have you done, in comparison? Oh and the Fed took a net zero of that, while US private investors took 65%. The vaunted Chinese buyer mentioned in every single breathless news report took 11%. The rise in the US savings rate since last summer replaces everything the Chinese invest here 3 times over and to spare.

Why does no one do their homework on this stuff, even here?

On Aug 24 12:53 AM lance sjogren wrote:

> Inthemoney: I agree the stock market rise the last several months
> is probably largely due to monetary expansion.
>
> In my view, stocks have become severely overvalued due to too much
> money sloshing around looking for a home.
>
> What I wonder is when will that stop. Stocks represent companies
> that operate in the REAL economy (aside from fiancials, of course).
> The REAL economy sucks.
>
> Stocks are way overvalued considering the horrendous state of the
> real economy.
>
> But still, the money printing goes on, and all that new money has
> to go somewhere.
>
> The smart investor is one that can figure out where people are going
> to shift all that money once they realize that stocks are overvalued
> and due for a major correction.
>
> I wish I knew.
>
> I think at some point it will be commodities, especially precious
> metals, but that may still be 2-3 years down the road.]]> http://seekingalpha.com/article/154201-why-did-aig-rally-yesterday?source=feed#comment-620248 620248 AIG is a giant bond fund, as well as several sound operating insurance companies. Bonds have been in an epic rally since November, accelerating since March. They just reported earning $1.8 billion for the quarter. The shares are a warrant. Yes they have a huge hole to climb out of...]]> Fri, 07 Aug 2009 15:08:40 -0400 AIG is a giant bond fund, as well as several sound operating insurance companies. Bonds have been in an epic rally since November, accelerating since March. They just reported earning $1.8 billion for the quarter. The shares are a warrant. Yes they have a huge hole to climb out of...]]> http://seekingalpha.com/article/144554-big-banks-in-trouble-huge-mortgage-write-downs-seem-inevitable?source=feed#comment-558496 558496
The IMF estimate of loan losses is a gross figure. In addition to capital raises, all net interest on all performing loans for the period is available to cover those losses.

The banking system has, to date, taken large write offs and raised large amounts of new capital, while simultaneously earning net interest on most of its loan book, recently at very high rates (because funding costs have cratered).

Fundamentally, banks are middlemen. When people do not repay their loans, savers do not earn anything on their deposits. Borrowers are charged far more than savers earn. The resulting wider spread covers loan losses. Until it does, the spread between rates charged to borrowers and rates paid to savers will widen and widen.

In fact they have already done so. Beyond subprimes, try to name a loan category for which the loss rate exceeds the rate charged on such loans. Yes, credit card loss rates around 10% are horrible and unprecedented, fine. But they are still much lower than the 13-18% rates charged on credit card loans. When funding costs are an immaterial 1-2%, that alone is enough to preserve capital (if not to earn anything).

The other usual doom mongering distortion in the article is to conflate deliquency rates with write off rates. Of course the former always run higher, frequently twice the latter.

Another way of analyzing the situation objectively is to look at cash fllow losses at banks since the crisis began. Additions to loan loss reserves and price mark downs are non-cash charges. Actual write offs of loans as irrecoverable are a different story. But those have basically been covered by net interest margin all along. Yes the banks have real losses compared to their previous accounting expectation from all of the above. But that is quite different from actual consumption of their capital. Cash flow can also forced toward a bank simply by running off its loan book.

It is really hard to run out of capital with a cash flow in your own direction of $45 billion per quarter.]]> Tue, 23 Jun 2009 04:16:55 -0400
The IMF estimate of loan losses is a gross figure. In addition to capital raises, all net interest on all performing loans for the period is available to cover those losses.

The banking system has, to date, taken large write offs and raised large amounts of new capital, while simultaneously earning net interest on most of its loan book, recently at very high rates (because funding costs have cratered).

Fundamentally, banks are middlemen. When people do not repay their loans, savers do not earn anything on their deposits. Borrowers are charged far more than savers earn. The resulting wider spread covers loan losses. Until it does, the spread between rates charged to borrowers and rates paid to savers will widen and widen.

In fact they have already done so. Beyond subprimes, try to name a loan category for which the loss rate exceeds the rate charged on such loans. Yes, credit card loss rates around 10% are horrible and unprecedented, fine. But they are still much lower than the 13-18% rates charged on credit card loans. When funding costs are an immaterial 1-2%, that alone is enough to preserve capital (if not to earn anything).

The other usual doom mongering distortion in the article is to conflate deliquency rates with write off rates. Of course the former always run higher, frequently twice the latter.

Another way of analyzing the situation objectively is to look at cash fllow losses at banks since the crisis began. Additions to loan loss reserves and price mark downs are non-cash charges. Actual write offs of loans as irrecoverable are a different story. But those have basically been covered by net interest margin all along. Yes the banks have real losses compared to their previous accounting expectation from all of the above. But that is quite different from actual consumption of their capital. Cash flow can also forced toward a bank simply by running off its loan book.

It is really hard to run out of capital with a cash flow in your own direction of $45 billion per quarter.]]> http://seekingalpha.com/article/142119-what-if-bernanke-succeeds?source=feed#comment-539556 539556 Fools are still fighting the Fed.

The article is right and the ideologues are wrong, as usual.

Don't. Fight. The Fed.

Use to be every trader knew this. Now they don't, and think it is some grand libertarian heroism on their part. It isn't, it is just blind stubbornness.

The hyperinflation thesis died in the summer and fall of 2008. It isn't coming back. Give it up already. ]]> Tue, 09 Jun 2009 19:21:56 -0400 Fools are still fighting the Fed.

The article is right and the ideologues are wrong, as usual.

Don't. Fight. The Fed.

Use to be every trader knew this. Now they don't, and think it is some grand libertarian heroism on their part. It isn't, it is just blind stubbornness.

The hyperinflation thesis died in the summer and fall of 2008. It isn't coming back. Give it up already. ]]> http://seekingalpha.com/article/141578-latvia-why-should-we-care?source=feed#comment-534018 534018 Mortgages denominated in a foreign currency in a real estate bubble are not any great problem, but political unreality about it is.

The mortgages will default as the domestic economy contracts, hitting incomes, and as real estate prices adjust. Devaluations can't stop that and won't help.

When the mortgages default, creditors take the houses and sell them for market prices. That puts new owners back in them, and hands large losses to the lenders. But it also wipes out the foreign hard currency debt completely. All the creditors get is the devalued collateral because it is all they contracted for.

Now, the government's own debt can be recycled by the IMF and should be. Nothing wrong with that, it is what the IMF is for. But household debts become foreign banks owning real property.

European governments may want to cover some of their banks' losses in eastern European property markets and are free to do so. No problem. In my opinion they should as a practical matter - those face even larger losses and costs if instead they moralize themselves into a second dip iof panic depression.

Do western taxpayers wind up with some of the bill? Of course, any loss ricochets around the system until it hits a body sufficiently strong to actually pay it. There aren't any in the east and it is a delusion to think the losses in their property bubbles can all be allocated there, alone.

Just take the hits and pay the bills and get on with it.]]> Fri, 05 Jun 2009 15:56:01 -0400 Mortgages denominated in a foreign currency in a real estate bubble are not any great problem, but political unreality about it is.

The mortgages will default as the domestic economy contracts, hitting incomes, and as real estate prices adjust. Devaluations can't stop that and won't help.

When the mortgages default, creditors take the houses and sell them for market prices. That puts new owners back in them, and hands large losses to the lenders. But it also wipes out the foreign hard currency debt completely. All the creditors get is the devalued collateral because it is all they contracted for.

Now, the government's own debt can be recycled by the IMF and should be. Nothing wrong with that, it is what the IMF is for. But household debts become foreign banks owning real property.

European governments may want to cover some of their banks' losses in eastern European property markets and are free to do so. No problem. In my opinion they should as a practical matter - those face even larger losses and costs if instead they moralize themselves into a second dip iof panic depression.

Do western taxpayers wind up with some of the bill? Of course, any loss ricochets around the system until it hits a body sufficiently strong to actually pay it. There aren't any in the east and it is a delusion to think the losses in their property bubbles can all be allocated there, alone.

Just take the hits and pay the bills and get on with it.]]> http://seekingalpha.com/article/112168-the-origin-of-financial-crises?source=feed#comment-352523 352523 Actually, the true reason for the "failure of efficient markets theory" is that not one of its premises has the slightest bearing on reality. It is an ideology meant to justify non-intervention and not a coherent body of thought. It was first created simply to try to reduce the complexity of real economies to simple calculus of marginals already known to Ricardo, but its actual informational assumptions have been worked out since and proven to be utterly false from top to bottom. Any calculative device with imperfect information that could arb away all marginals to efficient intertemporal equilibrium could solve the halting problem; it is formally non-computable and nothing in the world can accomplish it.

What should regulators or governments do about it? Much the same thing investors should do about it. Sell bubbles and buy busts. If free private investors did so on enough scale they'd smooth the bubbles away themselves, but they don't. It is profitable to do so. Even modest portions of market value trading on a mean-reverting, rather than trend following, trading rules is sufficient to stabilize bubbly markets. Not completely, but dramatically reduced amplitude of swings etc.

This simply means the government should intervene counter-cyclically in financial markets, if private capital isn't smart enough to do so, itself. Free market ideologues can howl about it all they want, but those they champion as the supposedly infallible all knowing efficient private traders manifestly are not getting it done. Somebody will.]]> Sun, 11 Jan 2009 13:51:37 -0500 Actually, the true reason for the "failure of efficient markets theory" is that not one of its premises has the slightest bearing on reality. It is an ideology meant to justify non-intervention and not a coherent body of thought. It was first created simply to try to reduce the complexity of real economies to simple calculus of marginals already known to Ricardo, but its actual informational assumptions have been worked out since and proven to be utterly false from top to bottom. Any calculative device with imperfect information that could arb away all marginals to efficient intertemporal equilibrium could solve the halting problem; it is formally non-computable and nothing in the world can accomplish it.

What should regulators or governments do about it? Much the same thing investors should do about it. Sell bubbles and buy busts. If free private investors did so on enough scale they'd smooth the bubbles away themselves, but they don't. It is profitable to do so. Even modest portions of market value trading on a mean-reverting, rather than trend following, trading rules is sufficient to stabilize bubbly markets. Not completely, but dramatically reduced amplitude of swings etc.

This simply means the government should intervene counter-cyclically in financial markets, if private capital isn't smart enough to do so, itself. Free market ideologues can howl about it all they want, but those they champion as the supposedly infallible all knowing efficient private traders manifestly are not getting it done. Somebody will.]]> http://seekingalpha.com/article/113114-citigroup-s-derivatives-reduce-bailout-to-a-non-event?source=feed#comment-346732 346732 Mon, 05 Jan 2009 15:57:10 -0500 http://seekingalpha.com/article/112040-how-will-we-finance-the-mbs-fix?source=feed#comment-336606 336606 It is a fairer question than the comments realize. But here is the right way to do it --- not saying it is how they will...

First, the unmarketable tranche structure of existing MBSs needs to be wiped out. They lower tiers are not marketable in less than perfect conditions, ergo that whole model is dead. The way to fix this is to buy up all the subordinate tranches of existing mortgage pools and then combine them with ownership of the top tier, to recreate whole loans. An owner of all tranches is free to move what he likes among his various pockets, so all the subordination issues and cash flow ownership issues can simply be eliminated. The whole loan pool belongs to the entity that bought up the whole original lissue.

Second, simplest triage of the loans within the now-owned pool. First, all the performing loans become a full quality MBS, get an underwriting guarantee from GMNA, Fannie et al, and out the door they go. This brings in some cash from the investing community early in the process, to repay what was spent on the tranche buy-up. Since they now own a (1) transparent (2) whole loan consisting entirely of (3) performing loans with (4) a government guarantee underwriting it, this portion of the pool will be valued at a 5% cap rate or thereabouts. Which is much better than the secondary market for these things right now. The gain on that revaluation of the stable portion of the cash flows will fund a lot of the rest of it, though not all.

Then you have a big remainder left of non-performing loans. The remainder of the triage is to refinance loans that can remain performing on recent bailout terms, which need to "season" against re-default for up to a year before they can be added to an investment grade loan pool. And the third category, property already owned as a result of foreclosures plus additional loans that will foreclose. The best thing, if there were enough capital working this market, would be to auction off the latter two rapidly, but at the moment there isn't. Instead, use an auction procedure for bundles of the properties in the last category only.

The model for the auctions is the 1990s RTC and its handling of the assets of failed savings and loans. Announce pools of properties in the financial press and take bids on them. Yes, some will buy up a lot of property cheaply that way. Better to get it into hands of speculators making profits, than leave it zombifying banks treating it all as dead weight loss. The speculator-buyer has every incentive to turn the things he bought back into money as rapidly as he can, and to fix up things, and to hire efficient servicers, etc.

That is the way to get it to work.

And it is a problem, I can tell you. In real estate markets I actively track and bid within, the biggest remaining issue is no longer financing stuff. Rates at 5% for prime buyers plus most of the price adjustment already having happened, can deal with getting bidders, though low ball bids. No, the issue is getting anyone at a bank to even look at all their short sale offers and approve them. It can take months, and the entire time, the properties are sitting on the market at low asking prices without actually moving. They have to move. The issue it to restore liquidity, above all, and that can only happen if banks stop sitting on their short sale offers and just sell them all, instead.

Is there a need to police that pretty closely? Certainly. Otherwise sharpers will just stick banks with losses and keep properties they failed to pay for, by using cut-outs and the like. It will be work, a lot of it. And the original writer is correct, with tens of thousands of people in the industry let go in the last year or so as profits disappeared, the experience base to handle it all isn't working the problem yet. They need to end up rehired by loan-pool bidders and government contract servicers, etc.]]> Tue, 23 Dec 2008 10:44:56 -0500 It is a fairer question than the comments realize. But here is the right way to do it --- not saying it is how they will...

First, the unmarketable tranche structure of existing MBSs needs to be wiped out. They lower tiers are not marketable in less than perfect conditions, ergo that whole model is dead. The way to fix this is to buy up all the subordinate tranches of existing mortgage pools and then combine them with ownership of the top tier, to recreate whole loans. An owner of all tranches is free to move what he likes among his various pockets, so all the subordination issues and cash flow ownership issues can simply be eliminated. The whole loan pool belongs to the entity that bought up the whole original lissue.

Second, simplest triage of the loans within the now-owned pool. First, all the performing loans become a full quality MBS, get an underwriting guarantee from GMNA, Fannie et al, and out the door they go. This brings in some cash from the investing community early in the process, to repay what was spent on the tranche buy-up. Since they now own a (1) transparent (2) whole loan consisting entirely of (3) performing loans with (4) a government guarantee underwriting it, this portion of the pool will be valued at a 5% cap rate or thereabouts. Which is much better than the secondary market for these things right now. The gain on that revaluation of the stable portion of the cash flows will fund a lot of the rest of it, though not all.

Then you have a big remainder left of non-performing loans. The remainder of the triage is to refinance loans that can remain performing on recent bailout terms, which need to "season" against re-default for up to a year before they can be added to an investment grade loan pool. And the third category, property already owned as a result of foreclosures plus additional loans that will foreclose. The best thing, if there were enough capital working this market, would be to auction off the latter two rapidly, but at the moment there isn't. Instead, use an auction procedure for bundles of the properties in the last category only.

The model for the auctions is the 1990s RTC and its handling of the assets of failed savings and loans. Announce pools of properties in the financial press and take bids on them. Yes, some will buy up a lot of property cheaply that way. Better to get it into hands of speculators making profits, than leave it zombifying banks treating it all as dead weight loss. The speculator-buyer has every incentive to turn the things he bought back into money as rapidly as he can, and to fix up things, and to hire efficient servicers, etc.

That is the way to get it to work.

And it is a problem, I can tell you. In real estate markets I actively track and bid within, the biggest remaining issue is no longer financing stuff. Rates at 5% for prime buyers plus most of the price adjustment already having happened, can deal with getting bidders, though low ball bids. No, the issue is getting anyone at a bank to even look at all their short sale offers and approve them. It can take months, and the entire time, the properties are sitting on the market at low asking prices without actually moving. They have to move. The issue it to restore liquidity, above all, and that can only happen if banks stop sitting on their short sale offers and just sell them all, instead.

Is there a need to police that pretty closely? Certainly. Otherwise sharpers will just stick banks with losses and keep properties they failed to pay for, by using cut-outs and the like. It will be work, a lot of it. And the original writer is correct, with tens of thousands of people in the industry let go in the last year or so as profits disappeared, the experience base to handle it all isn't working the problem yet. They need to end up rehired by loan-pool bidders and government contract servicers, etc.]]> http://seekingalpha.com/article/111592-the-battle-of-the-flations?source=feed#comment-333933 333933
The Fed isn't stupid. But a lot of traders fighting it are stone cold morons.]]> Fri, 19 Dec 2008 11:01:23 -0500
The Fed isn't stupid. But a lot of traders fighting it are stone cold morons.]]> http://seekingalpha.com/article/111208-great-depression-not-imminent-but-inevitable?source=feed#comment-332386 332386 Simply dumb. What covers real risks is spreads, spreads are at epic levels, ergo even epic levels of risk can be objectively handled now. The silly and dangerous bit was the low spread world we just exited --- exiting it has destroyed so much capital taking credit risk for a living (which used to be known as "banking", duh) that spreads have reacted to the opposite, silly extreme. Someone will realize these epic spreads are buys when the narrow ones were sells, and be profitable as a banker again. Those who believed that it was possible to be a banker at spreads of zero were wrong, those who now believe it is impossible to be a banker at spreads of 10% over risk free rates are just as wrong.

Both are trend following idiots and not bankers.]]> Wed, 17 Dec 2008 15:37:51 -0500 Simply dumb. What covers real risks is spreads, spreads are at epic levels, ergo even epic levels of risk can be objectively handled now. The silly and dangerous bit was the low spread world we just exited --- exiting it has destroyed so much capital taking credit risk for a living (which used to be known as "banking", duh) that spreads have reacted to the opposite, silly extreme. Someone will realize these epic spreads are buys when the narrow ones were sells, and be profitable as a banker again. Those who believed that it was possible to be a banker at spreads of zero were wrong, those who now believe it is impossible to be a banker at spreads of 10% over risk free rates are just as wrong.

Both are trend following idiots and not bankers.]]> http://seekingalpha.com/article/111198-deflation-is-just-around-the-corner?source=feed#comment-332137 332137
Housing, silly, a third of consumer costs. Plus energy, a tenth or so, direct and indirect. That is 40% of costs that have been cut in half. We've only seen the headline CPI number drop 3%.]]> Wed, 17 Dec 2008 12:15:27 -0500
Housing, silly, a third of consumer costs. Plus energy, a tenth or so, direct and indirect. That is 40% of costs that have been cut in half. We've only seen the headline CPI number drop 3%.]]> http://seekingalpha.com/article/111020-fed-s-latest-move-means-low-profit-high-risk-for-banks?source=feed#comment-331409 331409
You've got to be kidding. Banks can buy corporate bonds yielding 10-20%. Spreads are at record levels. They are *not* going to get killed by absence of interest margin. Their net interest margins were running 3% before the last quarter's crash, short rate falls, and further widening of credit spreads. There isn't a single category of loans outside of the original subprime mortgage area (already written off to zero, long since) where rates on the loans don't cover the loan losses and to spare.

Banks were sells at full prices and narrow spreads a year or two ago, but they are screaming buys at low prices and wide spreads now. The forward PE of major money center banks, not on one year out earnings but likely long run averages, is about 2 right now. Yes you read that correctly. ]]> Tue, 16 Dec 2008 17:50:51 -0500
You've got to be kidding. Banks can buy corporate bonds yielding 10-20%. Spreads are at record levels. They are *not* going to get killed by absence of interest margin. Their net interest margins were running 3% before the last quarter's crash, short rate falls, and further widening of credit spreads. There isn't a single category of loans outside of the original subprime mortgage area (already written off to zero, long since) where rates on the loans don't cover the loan losses and to spare.

Banks were sells at full prices and narrow spreads a year or two ago, but they are screaming buys at low prices and wide spreads now. The forward PE of major money center banks, not on one year out earnings but likely long run averages, is about 2 right now. Yes you read that correctly. ]]>