basehitz

Employment: Neither Quality Nor Quantity

Your solution would probably be well received by my nominee for Federal Reserve chairman, Paul Volcker. I have no confidence that Congress has the stomach. If Bernanke does not, this could get really ugly.

Recently at the gym, a PhD in Chemistry told me as rebuttal to my debt concerns, that debt doesn't matter. We could just default on all this debt, enforce trade protectionism, and it would work out fine. Then he cited the Weimar Republic as an example. I thought he was kidding. He wasn't. I asked him (as just one example) what we do about oil if the dollar is destroyed? After his first nonsensical response (which my memory banks purged for fear of contaminating other data), I reminded him we import 70% of our oil and if that were cut off, our economy would be destroyed. He changed topics.

The frightening part is this is a well "educated" person. He really believes this.

Home Purchase Tax Credit Extended: Is This Wise?

We are on the same page.

“Realtor Magazine. . . stated that the expiring tax credit law was taken advantage of by approximately 2 million people”

That is overstated per NAR (well known for spinning everything in their favor), From an AP article:
“About 1.4 million first-time homebuyers have qualified for the credit through August, and the National Association of Realtors estimates that 350,000 of them would not have purchased their homes without the credit.”
finance.yahoo.com/news...=

Above was August totals. Assume 2 million was reached, but only 25% additional purchases from the handout. 75% would have bought anyway. Assume that the 75% who didn’t need the money were the most qualified buyers. It is also reasonable to assume that those who wouldn’t have bought, didn’t have the means without the taxpayer subsidy. So for the marginal buyers, let’s see how that’s working out. From the NY Times:
“. . . 20 percent of F.H.A. loans insured last year — and as many as 24 percent of those from 2007 — faced serious problems including foreclosure.”
www.nytimes.com/2009/1...
(NYT article gives specific examples of marginal buyers. The risk is obvious.)

Mind you, the 2007/8 loans were originated before the $8K subsidy, when at least the buyer presumably had the 3.5% FHA downpayment. Now we have “buyers” (the 25%) who NEED the $8K to make the downpayment. What do they do when the A/C breaks or the roof leaks? If 20% defaulted within 2 years who had the 3.5%, what do you figure the rate will be for those who don’t?

Bottom line as I see it. . . the govt knows many banks can’t take another round of heavy writedowns of both mortgages and CRE loans, that market forces would likely deliver. They also know of the shadow inventory that CNBC and other propaganda outfits don’t want us to know about. So in desperation they are trying anything to artificially prop up prices hoping the new foreclosures they are NOW creating won’t sink them next year.

But remember, all these new FHA loans carry taxpayer backing. So the taxpayer gives them the $8K, then sucks up the loss if (when) it defaults.

Fannie Mae's Deal: Rent Your Home from the Government

Peter Schiff expresses my sentiment on the govt now becoming the world's largest landlord (in addition to already being the world's largest hedge fund).
www.youtube.com/watch?...

Further, the 2nd homebuyer tax credit is about to get signed. Many rave about how the 1st handout was so successful. Besides what Mark has pointed out in unqualified buyers with no downpayment, the following was from NAR on previous package:
"About 1.4 million first-time homebuyers have qualified for the credit through August, and the National Association of Realtors estimates that 350,000 of them would not have purchased their homes without the credit."

To rephrase, 1.05 out of 1.4 would have purchased WITHOUT the handout. So the real cost per additional sale was (1.4/0.35 * $8K = $32,000) tax credit for each ADDITIONAL purchase from rebate. And given the % of defaults already from these new "homeowners", FHA is in the que for future bailout(s). Here's the full article with above quote:
finance.yahoo.com/news...=

Cost of Jobs 'Saved or Created'

If you believe the White House economic "experts" of how many jobs were created/saved, this is a really pathetic result. Now, what if you think WH estimates are too flattering? In that case, we're talking numbers that even Goldman Sachs would work for. Either way, all the debt created is still on our collective balance sheet, and we will pay interest on that forever.

Can't wait for economis stimulus 2.0. Or is it 6.0 now?

The Secret to the Banking Sector's Success

I subscribe to Rosenberg and recommend it. Were it not for the endless handouts, bailouts and backstops financed in a major way by money printing, we'd face very different economic data. But it has come at the risk of the currency. Too high a price to pay IMO for a temporary boost.

As for the banksters, Dylan Ratigan weighed in on what he calls “corporate communism”. After the 2 minute mark he gets pretty intense over GS trying to justify their egregious pay.

www.msnbc.msn.com/id/3...

Microsoft Windows 7 - FINALLY - A real challenge for Apple

test post.

Time for an FHA Shakeup?

Karl,
Spent some time on your blog this weekend. I share your passion on the ubiquitous corruption.

Thoughts on SPY Calls and Yet Another Housing Subsidy

So, on the one hand Banana Ben and others proclaim the recession is over, and then pile more debt on top of an unsustainable debt. Which way is it?

United States Natural Gas Fund: Back in Business

"The rally was apparently driven in part by a report from Goldman Sachs analysts indicating that they expect natural gas prices to triple over the winter"

Barring some freak event, the above isn't even worthy of comment.

Interview with Goldman Sachs on Financial Markets

Before considering GS opinions for your own investments, understand how GS makes their money. Note in particular the last item.

From a 9/13 AP article:
• That Wall Street is making money again in essentially the same ways that thrust the banking system into chaos last fall
• Proposals that have been made to better monitor the financial system and to police the products banks sell to consumers have been held up by lobbyists, lawmakers and turf-protecting regulators.
• The government's response to last year's meltdown was to spend whatever it takes to protect the financial system from collapse -- a precedent that could encourage even greater risk-taking from the private sector.
• "We're seeing the same kind of behavior from the banks, and that could lead to some huge and scary parallels," says Simon Johnson, former chief economist with the International Monetary Fund.
• Also in the second quarter, the five biggest banks' average potential losses from a single day of trading topped $1 billion, up 76 percent from two years ago, according to regulatory filings.
• During the fourth quarter of 2008, when the financial crisis made even the shrewdest bankers risk-averse, Goldman's trading of risky assets nearly stopped. But in the second quarter of 2009, TRADING REVENUE HAD CLIMBED TO NEARLY 50 PERCENT OF TOTAL REVENUE, closer to where it was two years ago before the recession began. JP Morgan's reliance on trading revenue has exhibited a similar pattern.

Over 50% of their revenue in trading. So for whom do you think they are issuing their “analysis”? To Goldman Sucks, we are all just a source of funds.

Full article:
finance.yahoo.com/news...=

Interview with Goldman Sachs on Financial Markets

Some questions I would have asked GS:

1) You said derivatives with AIG as counterparty were hedged and you were not at risk. Why then did you accept the $12.9B back door payout through AIG since you had no risk? And why was there an additional $6B similar type of payout?
2) According to a NYT article, after your HFT program was stolen “"Goldman raised the possibility that there is a danger that somebody who knew how to use this pro gram could use it to manipulate the market in unfair ways.”. What did you use if for? Are you willing to publicly disclose how you used that program?
3) You admitted recently that “admitted that banks lost control of the exotic products they sold in the run-up to the financial crisis, and said that many of the instruments lacked social or economic value”. Yet all indications are that you are now pursuing just as aggressive of a trading strategy as before the crisis that let to a taxpayer bailout. What specifically are you doing differently now to not add systemic risk to the system?
4) The NYT got hold of Paulson's phone records for Sept. 2008, which detailed many calls between him and Goldman right before the government's decision to bail out AIG. AIG had taken large trading risks including many with Goldman on the other side of the transaction. You also had many discussions with Paulson PRIOR TO obtaining a waiver to an agreement from Paulson not to contact you directly due to obvious conflict of interest. What was discussed in those many discussions?
5) Did Hank Paulson contact Goldman after a lunch with Bernanke on Thurs., Aug. 16, 2007? That day Wall Street seemed to get wind of the idea that the Fed was planning to do something big, and stock prices rallied strongly at the very end of that trading session. The very next morning Bernanke cut interest rates, the first of many such moves. Are you willing to swear you had no tip-off from your former CEO?
6) The ubiquitous “stick save” in the final hour of trade has become so mechanical and predictable to be a standard joke in the blogosphere. Does GS have any part, either for it’s own account or on behalf of a very deep-pocketed clandestine player, to artificially support the market to give the appearance of a healthy market?
7) Why does GS hold private meetings giving investment advise to a select group of clients, but others get the info days later? Has GS ever heard of Reg FD?
8) How is that 6 months after getting $10B TARP money plus the $19B AIG backdoor payout, that you miraculously were paying record bonuses again? We learned this through your Europe office, which you initially denied but now we know your denial was phony. Explain how question 2) and 3) are now integral with your newfound “prosperity”. Please try to explain how all that happened in a manner that is at least somewhat plausible.
9) Would you agree to repeat this entire interview under oath?

I’m sure many readers could expand greatly on the above. I welcome more ideas.

Bond Expert: Monday Outlook

Not the first time:
1) the economic stimulus package required purchase of domestic steel.
2) Mexican truckers were banned from driving in the US. There were 98 truckers involved vs thousand of Teamsters truckers.

Both countries are important to us, yet he angered both. Now we're trying for the hat trick with China? The pattern is clear. Most people recognize the precarious position this debtor nation has put itself in. We don't have the luxury of playing hard ball on minor issues while risking fallout on major issues. Does he think we don't realize the potential harm to the nation to protect the select groups? Unfortunately, another pattern is the biased MSM fails to report much of what is unfavorable to this administration. Still, the folks are figuring it out, and their viewership as well as Obama's poll ratings reflect that.

Waiting for UNG's New Issuance to Prove Itself

HTL, thanks for the update. I had hoped UNG would be an investment (rather than a trade) given it is locally available and relieves somewhat our dependence on energy imports. Unfortunately, we haven't taken full advantage of the abundant supply. And UNG has other variables that have nothing to do with fundamentals. It remains on my screen, but only as a trade for now.

Federal Reserve's Kohn: We Plan to Keep Throwing Gasoline onto the Fire

Your closing remark on the Fed’s track record unfortunately reflects reality. And Kohn seems on board with the current program.

On a less discouraging note, Barron’s interviewed Hoenig, president of the Kansas City Federal Reserve Bank and the longest-serving member of the FOMC. Key points:
• In June Hoenig stirred up controversy when he accused the federal government of "regulatory malpractice" by creating another regulatory regime without addressing "too big to fail." He warned of an "oligarchy of interest that will fail to serve the best interests of business, the consumer and the U.S. economy."
• His main point: Talk about the prudent supervision of banks is putting the cart before the horse; standing in the way of real reform is failure to find a means of systematically dealing with the too-big-to-fail policy.
• To Hoenig, they represent the new aristocracy of U.S. commerce. For months the Kansas City Fed chief has called for policymakers to create a plan to break up the most insolvent of these institutions, putting them first into receivership. "If we hesitate to make needed changes," he says, "we will perpetuate an oligarchy of interest." Chairman Bernanke has said he doesn't favor "too big to fail" policies. (oh really?)
• Hoenig is probably the most visible proponent of the traditionalist view of Federal Reserve governance -- a view that opposed many of the emergency measures applied in the financial crisis. The billions flushed into the banking system have led to a doubling of the Fed's balance sheet in the name of averting global calamity -- and to what traditionalists perceive as a loss of independence for the Fed.
• "The distrust of centralization and monolithic power is a theme throughout American history. This should not be lost on Americans," says Hoenig.
• "Today," he notes, "the top 20 banks own 70% of the [banking system's] assets." In fact, argues Hoenig, the Fed has been behind the process of creating the giants that today tower over the financial industry. "Because of too-big-to-fail, the Fed has encouraged merging sick banks into larger ones, a process that tends to concentrate risk."

Hoenig is described as being on a mission. Barron’s adds:
“The phrase [TBTF] describes the special status apparently conferred on America's biggest banks, which have received billions in taxpayer bailouts and guarantees in the name of keeping the financial system working. The federal government through bailouts has placed them beyond the normal penalties for failure -- receivership, bankruptcy and disgrace. . . . . . These big banks also happen to be among the largest contributors to both political parties.”

Ugh! That last statement, plus bankster lobbying and former banksters now in key regulatory and govt positions has dampened my hopefulness. At least he's trying.

Link to Barron’s
online.barrons.com/art...

Canary in the Gold Mine

Peter, I understand that you were in communication with John Mauldin recently on the inflation/deflation analysis.
www.frontlinethoughts....

I respect both of you. I’m sure you are aware of his conclusion. For others who have not yet read John’s post, his closing remarks were:
“A mentor of mine once told me that the market would do whatever it could to cause the most pain to the most people. One way to do that would be to allow deflation to develop over the next few quarters, thereby probably really hurting gold and other investments, before inflation and then stagflation become (hopefully) the end of our perilous journey. Which of course would be good for gold. If you can hold on in the meantime.”

As an investment thesis, my interest now is commodities. It appears that Banana Ben has decided to trash the dollar as a “solutions” to our parabolic debt. Asset reflation also provides cover for the fraudulent bank mark-to-myth balance sheets. So owning “stuff” protects wealth. The complication is how traders behave in the interim. Printing infinite money reflates assets with what will be a worthless currency. I hope they are not that reckless, but I’m not confident.

Given our consumption led economy, my “tell” will be if govt stimulus carpet bombing and Tout TV endless cheerleading can persuade recently frugal consumers to stop saving/paying down debt, and resume reckless overspending. Back-to-school shopping results are due soon. If unsuccessful in spite of 6 months of this campaign, then I expect the following:

• Market selloff
• USD and UST move higher as a “safe haven”
• Commodities selloff in reaction to USD.

The goal then would be to load up on commodities and those that produce them, and short UST and USD. All data to date indicates that most of the folks aren’t buying the hype as measured by increased savings and debt reduction. As long as that continues, this is how I play it.

Eventually, I expect you will be right in a big way.