Has Chinese Premier Wen Jiabao given risk markets a big green light? Writing in the FT, he says China's battle against inflation has worked, with price levels expected to "drop steadily" from here. A key market worry - tight money and a slowdown in China - may have just been lifted. Asian markets and commodities are up sharply. Non-paywall summary here. [View news story]
It's part of a two pronged attack - first, get oil prices lower, and secondly boost global stock markets.
All well and good, but the fact remains, growth is slowing as a consequence of the debt overhang.
For what it's worth, I don't see much evidence that the battle against inflation has been won.
Carter tried to tell Americans the truth and was slaughtered for it at the ballot box. Americans prefer to their politicians to lie to them and make unaffordable promises and tell them to keep on consuming with abandon.
Too much debt, finite reserves of oil, excessive consumption - these are terms most Americans cannot understand.
U.S. pension funds are underfunded even when allowing them their projected 8% annual return. Given a risk-free rate of 4%, not only is 8% unrealistic, but the scramble for yield could result in something worse. Imagine 0% returns for 20 years. "Fingers crossed and eyes closed" isn't an acceptable strategy. [View news story]
If you think about it, the Euro crisis is a consequence of it being a hard currency, as no member state is able to print money to resolve their debt crisis, unlike the US.
This is why, despite all the problems, the Euro is still around 1.44.
Next Global Credit Crisis: U.S. Banks and Greek Debt Will Be the Toxic Trigger [View article]
"What is Greece going to export when they can't compete because their government produced goods and services are obsolete compared to the rest of the world?"
This hits at the heart of the issue. Greek industry produces goods that are no better, and often worse, than produced by their neighbors in Macedonia and Bulgaria, but the trade unions have pushed for wage deals that would make the Germans blush. Often, manufacturers rely on selling output to the state for survival, but the state goes along with this in order to "keep things in order".
Joining the Euro was supposed to force Greece to change, to modernize manufacturing, improve efficiencies and specific development aid was provided. In reality, nothing was done, and the situation got even worse. As the government gorged itself on cheaper credit, the entire economy became every more dependent on state largesse, but the cost of basics such as housing rocketed, meaning most saw no real improvement.
The Greek economy must change, and if the Greek citizens cannot see this, there is no alternative to turning off the taps. The tragedy is that the politicians have been turned inside out by the bankers, who would prefer to see a significant devaluation of the Euro than for one cent of bondholder haircuts. So, the Greek charade will be allowed to continue a little longer until some politicians in the Eurozone finally have the sense to stand up to the bankers.... so it might be a while.
Iceland's Higher Growth and Lower Unemployment: A Model for Greece [View article]
What the author somehow ignores, or maybe doesn't understand, is that ICELAND DID NOT DEFAULT.
Iceland's banking system collapsed owing to excessive risks taken on foreign investments, that were largely funded by outside creditors and depositors. The decision not to guarantee senior unsecured creditors or unlimited deposits was an entirely rational one for a nation of just 300,000. Even so, sovereign debt went from about 30% to 90% of GDP between 2007 and 2011, as a result of the costs of the limited deposit guarantees. However, Iceland was a country that enjoyed budget surpluses prior to 2007 and has a relatively small public sector and high tax rates which cover the generous welfare programs.
Greece's massive debts are entirely due to the profligacy of the state, the woefully inadequate tax raising efforts and the concealment of debts. It has a massively bloated and inefficient public sector, far too many loss making state owned enterprises, totally under the control of the militant trade unions. It simply ignores the basic rules of budget management but has been able to amass debts as the private banking cartel assumes that the Germans will be compelled to bail them out.
The fact is, it only takes a cursory examination of the facts to see that Iceland has nothing in common with Greece at all. The most important factor is Iceland was a private banking crisis which was not creating a massive housing bubble, as in Ireland, nor a public debt crisis caused by years of overspending and corruption, like Greece.
The U.S. is becoming a "squatter nation," where homeowners don't make a payment for as much as five years while continuing to live in their homes. Nationwide, it takes an average of 565 days to foreclose on borrowers in default from their first missed payments to the final auction. [View news story]
This mess is something that has been obvious for a long time now. Sometimes the banks cannot foreclosure owing to procedural problems such as missing notes, but just as often, the banks preferred to have the property occupied, even with no payment, because the alternative was either to sell the REO property and recognize the loss, or to keep it in shadow inventory but pay property taxes and maintenance costs. Despite little press coverage, the word spread that people could stop paying and often the banks would do nothing. Many cases involve people who repeatedly remortgaged, taking out far more than they ever put in and living the high life or people who aren't even living in the properties, but getting the rental income (they know there is no equity left so why worry about losing the place).
The people who suffer are those who pay their mortgage, or who own their homes outright and the investors, especially equity holders, in banks, who are being taken for the ride of the century through absurd accounting rules that mask real losses.
To try to make this into a political issue is frankly absurd, this is a massive failure of regulation, both in mortgage brokerage and accounting which has created a mess that nobody has a workable solution for.
Incessant blustering about debt default by politicians will eventually erode faith in the dollar, but an actual default, even for one day, could lead to catastrophic consequences similar to what Argentina faced in 2002. Of course, the U.S. is helped by having the world's reserve currency... for now. [View news story]
It's sometimes hard to visualize the scale of the deficit, but there is something that struck me. Accruing a deficit of $6 billion per day is equivalent to the profits for Apple's recent blowout quarter.
This is what, the second largest company by market cap, and the US government would need to take 100% of the profit of 90 Apples to balance the books. If this doesn't terrify you, I don't know what will.
Stocks are back to flat as Fed chief Bernanke's speech begins. He acknowledges the economic slowdown and says accommodative policies are still necessary. He's also worried about sharp fiscal consolidation given the weakened state of the economy. Full text here. [View news story]
No, the market is still desperately hoping they are going to continue with QE.
Interestingly, despite the move in stocks, Euro hasn't budged. I don't know who this will worry more - Bernanke or Trichet..
The new administration taking power in Spain's Castilla-la Mancha region finds billions in hidden debt and no money to make good on next month's payrolls. The region, which covers about 16% of Spain's area, but just 4% of its population, also has €2B in unpaid invoices to suppliers. [View news story]
I am highly confident that this is not limited to the PIIGS. I imagine that there are plenty of horror stories in the (or rather off the) books of many US munis and states. The world is drowning in public sector liabilities that we have no way to cover.
Want to beat the market? Easy; for starters, don't count the market's total returns. Many advisers and newsletter writers - bound only by ethics, rather than SEC rules - like to leave out market dividends in comparing performance, and it's no small gap: Over the past decade, S&P 500 is up 0.72% annually without dividends and 2.81% with them. [View news story]
The market has had a couple of sharp down days, following some poor economic data that really took the "experts" by surprise.
However, to suggest that people are "cowards" for choosing to sell is utterly ridiculous. The individual investor should always focus on wealth preservation, and anyone who has had a good run should know not to get too greedy.
I cannot make an argument to be long this market at these levels, and would argue that there are a number of signal flashing red right now. I don't think we're about to reach the total collapse point, but I think we are in for a nasty correction before they make another attempt to stimulate out of it.
That's because there has still been no progress in resolving the problems around MERS etc. There are still millions not paying their mortgages and the banks don't know what to do. Also, by delaying the sale of foreclosures, the property is held on the books at par.
The point is, the low numbers have nothing to do with the market reaching a bottom...
May Payroll Weakness: Soft Patch, Or Something More Serious? [View article]
It's hard to come up with a simple explanation for the recent sharp deterioration.
It could be a consequence of heightened inflation expectations, with companies worried about maintaining margins and high food and energy costs squeezing disposable incomes. If this is the case, this is very much a result of excessive liquidity supporting the markets but hurting the real economy.
It could be a knock-on effect from the events in Japan. I suspect there is an agreement to try and conceal the full impact of the earthquake as much as possible, but we can see the consequence in other ways.
It could be that there has been very little trickle-down from the government's largesse, so businesses are worried about abnormally high inventory.
It could be that the government is trying to build the case for more QE, so is being deliberately less optimistic in its adjustments (though with a 200k birth death adjustment, this seems unlikely)
Or, it could be the government trying to pressure congress to raise the debt ceiling, by showing how vulnerable the economy is.
Whatever it is, it is a sudden and dramatic change, so I just hope the Fed and the government has a better idea as their response to this is going to be crucial....
The Sound of Something Bad Not Happening...Yet [View article]
I love it - markets rallied on something bad not happening. I think that sums it up, as well as a coordinated short squeeze, which started out of Japan, despite poor data, managers said they expected things to start picking up, so the markets rallied 2%!
There was such a blatant ramp job, (aka, banging the close, which is illegal but hey) at the end of the day, despite the trifecta of terrible reports.
So where are we? Manufacturing turning down, housing still poor, jobs still poor, confidence sagging, Japan still in crisis, Greece still in crisis, US debt ceiling debate still nowhere, QE2 coming to an end with no promise of more. Bond yields are nailed to the floor, commodity prices and bank stocks looking weak and yet indices are not far shy of recent highs.
It's merely confirmation that the Wall Street recovery has failed to trickle down.
Another point is, the more they throw money at the problem, i.e. devalue the currency, the less affordable the suburban lifestyle becomes. Many homes are in areas that are simply unviable, and no matter how long the banks hold them on their books, houses 30 miles out of Phoenix, no matter how pretty, will never attain the bubble prices.
Chicago PMI:56.6 vs. 63 expected, 67.6 prior. Employment 60.8 vs. 63.7 prior. New orders 53.5 vs. 66.3 prior. Prices paid 78.6 vs. 81.8 prior. [View news story]
Yes, October 2008 was worse, but this is the second biggest drop since 1980 and the fourth largest in it's history (since 1967).
Has Chinese Premier Wen Jiabao given risk markets a big green light? Writing in the FT, he says China's battle against inflation has worked, with price levels expected to "drop steadily" from here. A key market worry - tight money and a slowdown in China - may have just been lifted. Asian markets and commodities are up sharply. Non-paywall summary here. [View news story]
All well and good, but the fact remains, growth is slowing as a consequence of the debt overhang.
For what it's worth, I don't see much evidence that the battle against inflation has been won.
The timing of the release of 60M barrels of oil is a puzzle: The war in Libya, the purported cause of the move, has been raging for months, and prices had already fallen ~10% since April. So why the release now? This isn't really about oil; it's the economy, stupid. Some see it as "a sign of desperation" with prices recovering after a few months. [View news story]
Too much debt, finite reserves of oil, excessive consumption - these are terms most Americans cannot understand.
U.S. pension funds are underfunded even when allowing them their projected 8% annual return. Given a risk-free rate of 4%, not only is 8% unrealistic, but the scramble for yield could result in something worse. Imagine 0% returns for 20 years. "Fingers crossed and eyes closed" isn't an acceptable strategy. [View news story]
This is why, despite all the problems, the Euro is still around 1.44.
Next Global Credit Crisis: U.S. Banks and Greek Debt Will Be the Toxic Trigger [View article]
This hits at the heart of the issue. Greek industry produces goods that are no better, and often worse, than produced by their neighbors in Macedonia and Bulgaria, but the trade unions have pushed for wage deals that would make the Germans blush. Often, manufacturers rely on selling output to the state for survival, but the state goes along with this in order to "keep things in order".
Joining the Euro was supposed to force Greece to change, to modernize manufacturing, improve efficiencies and specific development aid was provided. In reality, nothing was done, and the situation got even worse. As the government gorged itself on cheaper credit, the entire economy became every more dependent on state largesse, but the cost of basics such as housing rocketed, meaning most saw no real improvement.
The Greek economy must change, and if the Greek citizens cannot see this, there is no alternative to turning off the taps. The tragedy is that the politicians have been turned inside out by the bankers, who would prefer to see a significant devaluation of the Euro than for one cent of bondholder haircuts. So, the Greek charade will be allowed to continue a little longer until some politicians in the Eurozone finally have the sense to stand up to the bankers.... so it might be a while.
Iceland's Higher Growth and Lower Unemployment: A Model for Greece [View article]
Iceland's banking system collapsed owing to excessive risks taken on foreign investments, that were largely funded by outside creditors and depositors. The decision not to guarantee senior unsecured creditors or unlimited deposits was an entirely rational one for a nation of just 300,000. Even so, sovereign debt went from about 30% to 90% of GDP between 2007 and 2011, as a result of the costs of the limited deposit guarantees. However, Iceland was a country that enjoyed budget surpluses prior to 2007 and has a relatively small public sector and high tax rates which cover the generous welfare programs.
Greece's massive debts are entirely due to the profligacy of the state, the woefully inadequate tax raising efforts and the concealment of debts. It has a massively bloated and inefficient public sector, far too many loss making state owned enterprises, totally under the control of the militant trade unions. It simply ignores the basic rules of budget management but has been able to amass debts as the private banking cartel assumes that the Germans will be compelled to bail them out.
The fact is, it only takes a cursory examination of the facts to see that Iceland has nothing in common with Greece at all. The most important factor is Iceland was a private banking crisis which was not creating a massive housing bubble, as in Ireland, nor a public debt crisis caused by years of overspending and corruption, like Greece.
The U.S. is becoming a "squatter nation," where homeowners don't make a payment for as much as five years while continuing to live in their homes. Nationwide, it takes an average of 565 days to foreclose on borrowers in default from their first missed payments to the final auction. [View news story]
The people who suffer are those who pay their mortgage, or who own their homes outright and the investors, especially equity holders, in banks, who are being taken for the ride of the century through absurd accounting rules that mask real losses.
To try to make this into a political issue is frankly absurd, this is a massive failure of regulation, both in mortgage brokerage and accounting which has created a mess that nobody has a workable solution for.
Incessant blustering about debt default by politicians will eventually erode faith in the dollar, but an actual default, even for one day, could lead to catastrophic consequences similar to what Argentina faced in 2002. Of course, the U.S. is helped by having the world's reserve currency... for now. [View news story]
This is what, the second largest company by market cap, and the US government would need to take 100% of the profit of 90 Apples to balance the books. If this doesn't terrify you, I don't know what will.
Stocks are back to flat as Fed chief Bernanke's speech begins. He acknowledges the economic slowdown and says accommodative policies are still necessary. He's also worried about sharp fiscal consolidation given the weakened state of the economy. Full text here. [View news story]
Interestingly, despite the move in stocks, Euro hasn't budged. I don't know who this will worry more - Bernanke or Trichet..
The new administration taking power in Spain's Castilla-la Mancha region finds billions in hidden debt and no money to make good on next month's payrolls. The region, which covers about 16% of Spain's area, but just 4% of its population, also has €2B in unpaid invoices to suppliers. [View news story]
Want to beat the market? Easy; for starters, don't count the market's total returns. Many advisers and newsletter writers - bound only by ethics, rather than SEC rules - like to leave out market dividends in comparing performance, and it's no small gap: Over the past decade, S&P 500 is up 0.72% annually without dividends and 2.81% with them. [View news story]
However, to suggest that people are "cowards" for choosing to sell is utterly ridiculous. The individual investor should always focus on wealth preservation, and anyone who has had a good run should know not to get too greedy.
I cannot make an argument to be long this market at these levels, and would argue that there are a number of signal flashing red right now. I don't think we're about to reach the total collapse point, but I think we are in for a nasty correction before they make another attempt to stimulate out of it.
Housing: Wasn't it a spectacular bubble? Almost in relief, observers like Wells Fargo's John Stumpf figure we've bottomed out and better prices are ahead. Jeremy "Bearemy" Glaser has six reasons why that's not the case. Spoiler alert: Jobs are at the top. [View news story]
The point is, the low numbers have nothing to do with the market reaching a bottom...
May Payroll Weakness: Soft Patch, Or Something More Serious? [View article]
It could be a consequence of heightened inflation expectations, with companies worried about maintaining margins and high food and energy costs squeezing disposable incomes. If this is the case, this is very much a result of excessive liquidity supporting the markets but hurting the real economy.
It could be a knock-on effect from the events in Japan. I suspect there is an agreement to try and conceal the full impact of the earthquake as much as possible, but we can see the consequence in other ways.
It could be that there has been very little trickle-down from the government's largesse, so businesses are worried about abnormally high inventory.
It could be that the government is trying to build the case for more QE, so is being deliberately less optimistic in its adjustments (though with a 200k birth death adjustment, this seems unlikely)
Or, it could be the government trying to pressure congress to raise the debt ceiling, by showing how vulnerable the economy is.
Whatever it is, it is a sudden and dramatic change, so I just hope the Fed and the government has a better idea as their response to this is going to be crucial....
The Sound of Something Bad Not Happening...Yet [View article]
There was such a blatant ramp job, (aka, banging the close, which is illegal but hey) at the end of the day, despite the trifecta of terrible reports.
So where are we? Manufacturing turning down, housing still poor, jobs still poor, confidence sagging, Japan still in crisis, Greece still in crisis, US debt ceiling debate still nowhere, QE2 coming to an end with no promise of more. Bond yields are nailed to the floor, commodity prices and bank stocks looking weak and yet indices are not far shy of recent highs.
Something's got to give...
Party like it's 1999: With the housing double-dip "confirmed," real housing prices and price-to-rent ratios have regressed to 1999 levels... and there's still no end in sight. "Prices have now fallen by more than they did during the Great Depression [and] will fall by at least a further 3% this year, and perhaps even further next year." [View news story]
Another point is, the more they throw money at the problem, i.e. devalue the currency, the less affordable the suburban lifestyle becomes. Many homes are in areas that are simply unviable, and no matter how long the banks hold them on their books, houses 30 miles out of Phoenix, no matter how pretty, will never attain the bubble prices.
Chicago PMI: 56.6 vs. 63 expected, 67.6 prior. Employment 60.8 vs. 63.7 prior. New orders 53.5 vs. 66.3 prior. Prices paid 78.6 vs. 81.8 prior. [View news story]