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FOMC plans to move away from ZIRP by the end of 2010

Author: Suresh
FOMC plans to move away from ZIRP by the end of 2010 Posted: Wed Mar 10, 2010 3:48 pm (GMT 0)
Topic Replies: 1

Zero Hedge: Morning Musings From Art Cashin - The Bubonic Plague And Healthcare Reform
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For some time now, Federal Reserve officials have been hesitant to put a precise time frame on when they will begin to tighten policy, except to note the action lies well into the future.

But on Monday, one of their chief lieutenants, the man charged with implementing Fed policy, offered a pretty clear take on the likely timing of a move up in interest rates. The official, New York Fed Markets Group chief Brian Sack, has no formal role in setting monetary policy. But his position elevates his importance, and he suggested in a speech some sort of rate tightening will occur by late year.

�The current configuration of yields and asset prices incorporates expectations that short-term interest rates will begin to rise around the end of this year,� Sack told a group of economists in Virginia. �The markets seem prepared for the risks toward tighter policy,� he said, adding a �decent-sized term premium� on longer-dated yields suggests low chances of a �sizable upward shift in yields� when that tightening comes....
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Suresh

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Clive Crook's voluntary fiscal deflation in three simple tax hike steps

Author: Suresh
Clive Crook's voluntary fiscal deflation in three simple tax hike steps Posted: Wed Mar 10, 2010 2:05 pm (GMT 0)
Topic Replies: 0

When Mr. Crook discusses the need for a broader income-tax base, I think he means applying a higher tax rate to more upper-class and middle-class taxpayers.

I don't even pretend to understand how higher income tax rates would create better incentives, as Mr. Crook posits. Higher income tax rates don't encourage workers to take risk or work harder. They encourage workers to demand more compensation in terms of untaxed benefits such as vacation days. They encourage workers to go John Galt.
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National Journal: Taxes Will Go Up -- Get Used To It
by Clive Crook
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There are countless stupid ways to raise more tax revenue but really just three intelligent ways. First, introduce a carbon tax; second, broaden the base of the income tax; third, design a national sales or value-added tax. In principle, each by itself, carried to an extreme, could close the gap. But it would be better to combine two or even all three approaches so that the rates of each tax would be lower for any amount of revenue raised.

We would need a VAT at close to European levels -- 10 percent or more -- if that were the only change. That would be quite a jolt. It would be easier to swallow, say, a 5 percent VAT together with a small carbon tax and a moderate broadening of the income-tax base. For further sweetening -- not to mention, added economic efficiency -- a revenue-boosting package of that kind could be designed around lower income-tax rates and more generous income support for the working poor.

Yes, obviously, this is unthinkable. Just like the Great Recession of 2008-09 was unthinkable. What I'm suggesting is about as likely to happen as the Troubled Asset Relief Program. So, bear with me.
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Think of [a carbon tax] ... as relatively cheap insurance against an uncertain but potentially grave risk. Taxing environmental "bads," even if the harm is less than certain, is good economics and not impossible to sell politically. In the meantime, a carbon tax would reduce dependence on imported oil, which is a legitimate security consideration, and spur development of cleaner fuels. And, by the way, it would raise some revenue, which the country has to do in any case.

The second option, reforming the federal income tax, would serve a similar dual purpose, raising money and creating better incentives at the same time. Like a carbon tax -- and, for that matter, a VAT -- income-tax reform would be good even if the need to raise more revenue did not make it necessary. Other things being equal, a carbon tax could be used to lower income-tax rates. Other things being equal, so could a broader income-tax base.

The scope for increasing revenue, making better use of scarce resources, and simplifying America's insanely complex income tax code is vast -- a tribute to the depredations that Congress has visited on the system since the last comprehensive reform in the 1980s. A column last month in The Washington Post by tax expert Len Burman of Syracuse University looked at the revenue losses from so-called tax expenditures -- preferences for things such as mortgage interest relief and employer-provided health insurance. These tax breaks force tax rates higher, for any sum of revenue collected, and clumsily interfere with the decisions that people would otherwise make about how to spend their incomes.

"Capping tax expenditures at 2012 levels for three years and indexing the cap for inflation after that, as proposed [by the president] for nonsecurity discretionary spending, would reduce the deficit by about $3.5 trillion" over the next decade, Burman says. "That's right -- 14 times as much as what the president's spending freeze would save."
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Suresh

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Corruption score indicates likelihood of voluntary fiscal deflation

Author: Suresh
Corruption score indicates likelihood of voluntary fiscal deflation Posted: Wed Mar 10, 2010 1:30 pm (GMT 0)
Topic Replies: 2

Zero Hedge: Columbia Prof Who Called Argentina Crisis: "Corruption Is The Reason Italy Will Be Next"

Columbia's Charles Calomiris, who predicted the Argentina sovereign debt crisis[,] ... was on Bloomberg TV....

Quote:

I think we need to focus on the unsustainable situation that Greece has gotten itself into, with the highest consumption to GDP ration in Europe, one of the lowest labor force participation rates in Europe, one of the highest government social protection rates in Europe, and deficits that have been outsized for several years during the boom, and the of course the fraudulent accounting. I should also note that within the Eurozone, Greece has the worst corruption score according to Transparency International which is a problem because it is telling you is that the institutional quality of the Greek government for reforming itself is very low."

Not surprisingly the next casualty of the rolling crisis (because, to quote Dubya, make no mistake, the crisis will be back very soon) will be not Spain or Portugal, but Italy - another nation using swap gimmickry to enter the Eurozone back in the day.

Quote:

"The real concern right now should be on Italy. Italy is the country that is most like Greece in this current situation. Highest Debt to GDP ratio, not as high deficits so with smaller changes they can stop the problem. They also, however are very corrupt. They are second to Greece in the level of corruption within the Eurozone."

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Suresh

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It could be another 2-2.5 yrs until real estate market sees clearing prices

Author: Suresh
It could be another 2-2.5 yrs until real estate market sees clearing prices Posted: Wed Mar 10, 2010 1:07 pm (GMT 0)
Topic Replies: 11

New York University Prof. Ann Lee notes that U.S. population growth is most notable among lower income households. Because real wage growth has either flat-lined or trended downward over many years, the segment of the U.S. population that is experiencing growth will not be able to afford houses until they come down in price significantly. Further, because excess housing inventory won't be cleared by purchases by the segment of the U.S. population experiencing growth, a large number of available housing units will end up as rentals.
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Credit Writedowns: Alpert: Two years until we see market-clearing prices in housing market
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Ann Lee and Dan Alpert joined Bloomberg�s Pimm Fox today to talk about the housing market recovery. Lee, a professor of finance at New York University, was sceptical that population growth predicts any substantial increase in housing transactions and prices simply due to the continued pressure on wages and disposable income. and Dan Alpert, managing director at Westwood Capital LLC, said we are not looking at market-clearing prices in the near-term because home ownership percentages need to drop. This process will take two to two and a half years in his view.

[Click here for] Short clip....
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Suresh

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Returns on junk-rated municipal bonds may be crimped as defaults increase

Author: Suresh
Returns on junk-rated municipal bonds may be crimped as defaults increase Posted: Wed Mar 10, 2010 12:29 pm (GMT 0)
Topic Replies: 11

Bloomberg: Defaults Signal Bursting Muni Junk Bubble on High-Yield Surge

Investors in search of better returns poured $7.8 billion into high-yield municipal bond funds last year, pushing assets to a two-year high. ...

Below-investment grade munis are typically issued by companies raising debt through a municipality for a project with a public interest such as hospitals, nursing homes, housing developments and sports stadiums, said Eric Jacobson, director of fixed-income research for Morningstar Inc.
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High-yield municipal bonds rated BB+ or lower by Standard & Poor�s or Ba1 by Moody�s Investors Service, 10 levels below investment-grade debt, have returned about 31 percent in the last 12 months compared with 11 percent for investment-grade municipal securities, according to the indexes from S&P/Investortools.

U.S. state and local government tax revenue fell 6.7 percent as of September from a year earlier, marking the fourth consecutive quarter of decline, according to a December Census Bureau report. That may drive defaults higher this year and next, according to Moody�s, which didn�t provide a number. The New York-based company also said it expects �somewhat higher rates of default� among bonds not rated and those below investment-grade.
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High-yield municipal bonds due in 8 years to 12 years were yielding an average 6.63 percent last month, almost double the 3.42 percent on similar maturity bonds in the broader tax-exempt market, according to Barclays Capital indexes. The average dividend yield on a stock in the Standard & Poor�s 500 Index was 1.98 percent on March 9 and the average interest on a taxable money market fund was 0.02 percent as of March 2.
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Suresh

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Europe cuts Wall Street banks out of non-$-denominated gov't bond sales

Author: Suresh
Europe cuts Wall Street banks out of non-$-denominated gov't bond sales Posted: Tue Mar 09, 2010 2:26 pm (GMT 0)
Topic Replies: 11

Guardian: Europe bars Wall Street banks from government bond sales

European countries are blocking Wall Street banks from lucrative deals to sell government debt worth hundreds of billions of euros in retaliation for their role in the credit crunch.

For the first time in five years, no big US investment bank appears among the top nine sovereign bond bookrunners in Europe, according to Dealogic data compiled for the Guardian. Only Morgan Stanley ranks at number 10.
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Investment banks insist their business areas are separated by confidentiality walls, but countries have been furious about some of their trades appearing to conflict � either on their own books, or on behalf of clients.
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Greece, Spain, Germany and France are also pushing for changes in the credit default swap market, where investors can bet against the possible default of a country, ultimately bringing more instability.

Britain, Spain, Ireland and Belgium have not used Wall Street firms in the largest 10 deals of the year, according to Dealogic.
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_________________
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MBS delinquencies will force Fed to monetize to boost balance sheet equity

Author: Suresh
MBS delinquencies will force Fed to monetize to boost balance sheet equity Posted: Tue Mar 09, 2010 2:19 pm (GMT 0)
Topic Replies: 40

Zero Hedge: Is The Federal Reserve Insolvent?
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Fannie had a 5.38% delinquency rate at December, while Freddie just passed the 4% threshold in January; both continue to rise rapidly each month.
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What, however, seems to have escaped public attention is what the impact of these delinquencies is on the one largest holder of Mortgage Backed Securities, the Federal Reserve. What also seems to have escaped the public is that the Fed is now the world's largest bank, with total assets near $2.3 trillion. We provide a weekly update of the Fed's balance sheet and while we briefly note the liability side, our, and everyone else's, attention, is traditionally focused on the asset side. Yet a more detailed look at the liability side reveals something very troubling, specifically that the Fed's capital, i.e. equity buffer, which as of most recently was $53.3 billion (a comparable metric for plain vanilla banks is their equity buffer, or Tier 1 Capital, or however the FASB wants to define it on any given day when it is covering up massive capital shortfalls) is in fact negligible and could well be substantially negative, if the Fed were to account for the rapidly rising level of delinquencies in its one largest asset holdings: the $1.027 trillion in settled MBS. And while there is no possibility of a run on the Fed, the reality is that the Fed now likely runs with a negative real capital balance, meaning that the US Federal Reserve is now essentially insolvent.
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Like any balance sheet, where there are assets, there are liabilities, and some version of capital/equity. The Fed's liabilities are two principal components: currency in circulation, which has been at about $900 billion for an extended period of time, and the much more relevant recently line item called "Bank Deposits", which has been popularized as Reserves with Federal Reserve Banks (or excess reserves). The Reserve line has increased from essentially nothing to nearly $1.3 trillion in the span of a few months. Furthermore, as more and more MBS purchased are settled, the excess reserve line will soon reach at least $1.6 trillion, if not more, if indeed Q.E. 2 is launched at some point in the future. The persistent discussions of potential inflation center precisely on the interplay between the green and blue blocks in the chart below: as long as the Currency in Circulation is flat, and Bank Deposits keep rising, the probability of inflation is slim to none. In essence, excess reserves exist only due to the Taylor rule implied negative Fed Funds rate. Should there be a material shift from green to blue, or from excess reserves to currency in circulation, that is when the hyperinflationary threat becomes all too real, as suddenly far too much money will chase a fixed amount of assets.
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The one item on the balance sheet that is often ignored, is the Fed's "Equity", or as it is defined, "Capital." As previously pointed out, this line item is currently $53.3 billion. It is shown graphically in the leftmost column of the chart below, which depicts actual Fed liabilities. Where the interesting part comes in, is when one analyzes what happens to the Fed's capital when the abovementioned MBS haircuts are applied.

[Chart of Federal Reserve Liabilities under differing assumptions for GSE delinquency rates]

A 5% realized haircut on MBS alone would result in a complete elimination of the Fed's capital balance. Applying a 10% or even 15% haircut, results in a capital deficiency of $50 billion and $100 billion respectively. This deficiency will grow as more and more MBS are settled, and as the serious delinquency rate on MBS keeps increasing (no danger in this moderating any time soon).
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The pragmatics among you will say: this is irrelevant, the Fed can just print more money and fill in any capital hole. Well, yes and no. As an increase in cash would have to be offset by a comparable increase in some asset, it is not that simple. For a refined analysis of what would happen in that moment of clarity when the world realizes the world's biggest bank is broke, we turn to a presentation by Chris Sims, given before Princeton University, titled "Fiscal/Monetary Coordination When The Anchor Cable Has Snapped." We encourage all readers to read this powerpoint cover to cover, as it discusses precisely the issues were are faced with today: namely a monetary policy that has run amok, seignorage, exploding excess reserves, the impact of these on "power money", and, in general, a Fed balance sheet that is increasingly reminiscent of a drunk, rapid and schizophrenic bull in a China store.
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So here is the crux of the issue: the only way to deal with a mark-to-market of the Fed currently is to embrace monetization. It is no longer a question of semantics, of who promised what: it is the only mechanical way by which the Fed can dig itself out of a capital deficiency. With GSE delinquencies exploding, and with the Fed (and Congress) singlehandedly facilitating imprudent lender policy by allowing ever more borrowers to become deliquent without consequences, the MBS delinquency rate will likely hit 10% over the next 6-12 months. At that moment, someone will ask the Fed: "what is the true basis of your capital account?" And when the Fed is forced to justify a valid response, is when monetizaton will begin.

Since the market deals in expectation absolutes, all it would take for rates to breach the inflection point black swan and commence going up, is the mere possibility of open monetization.

What we hope to show with this exercise is that no course of action, even the one currently employed by the Fed, can continue in perpetuity: you can't have infinitely low housing rates in an environment of exploding delinquencies, as even more MBS are onboarded on the taxpayer's balance sheet. The reality is that inflationary concerns will come to a fore, and have a material impact on rates, the second all these speculations are voiced in a more reputable arena. At that point the game will be up; the Fed's attempt to continue the status quo will be over, and the relentless rise up in rates will begin, culminating with the long-awaited Minsky moment.

As for the timing of this development? We will join the Bob Janjuah camp on this one.
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BP 2010Q1
_________________
Suresh

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Central banks suppressed gold price to artificially lower interest rates

Author: Suresh
Central banks suppressed gold price to artificially lower interest rates Posted: Tue Mar 09, 2010 1:44 pm (GMT 0)
Topic Replies: 4

Prior to becoming CFTC Commissioner, Gary Gensler was more than just another Goldman Sachs partner; he was Co-Head of Finance at Goldman Sachs worldwide.

As to Lawrence Summers, everyone remembers him as the former President of Harvard University. But, it's worth keeping in mind that he was a consultant to Goldman Sachs and a managing director of D.E. Shaw Group, the world's third-largest hedge fund and regarded as one of the most prominent "quantitative" funds on Wall Street.
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Zero Hedge: GATA Claims To Have Evidence Of "Massive Physical Short Gold And Silver Positions That Can Not Be Covered"

March 8, 2010

Gary Gensler, Chairman
U.S. Commodity Futures Trading Commission
3 Lafayette Centre
1155 21st St. NW
Washington, DC 20581

Dear Chairman Gensler:
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Initially we thought that the manipulation of the gold market was undertaken as a coordinated profit scheme by certain bullion banks, like JPMorgan, Chase Bank, and Goldman Sachs, and that it violated federal and state anti-trust laws. But we soon discerned that the bullion banks were working closely with the U.S. Treasury Department and Federal Reserve in a gold cartel, part of a broad scheme of manipulation of the currency, precious metals, and bond markets.

As an executive at Goldman Sachs in London, Robert Rubin developed an idea to borrow gold from central banks at minimal interest rates (around 1 percent), sell the bullion for cash, and use the cash to fund Goldman Sachs' operations. Rubin was confident that central banks would control the gold price with ever-more leasing or outright sales of their gold reserves and that consequently the borrowed gold could be bought back without difficulty. This was the beginning of the gold carry trade.

When Rubin became U.S. treasury secretary, he made it government policy to surreptitiously operate an identical gold carry trade but on a much larger scale.
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Subsequent treasury secretaries have repeated a commitment to a "strong dollar," suggesting that they were continuing to feed official gold into the market more or less clandestinely to support the dollar and suppress interest rates and precious metals prices.

Lawrence Summers, who followed Rubin as treasury secretary, was an expert in gold's influence on financial markets. Previously, as a professor at Harvard University, Summers co-authored an academic study titled "Gibson's Paradox and the Gold Standard," (see Footnote 1 below) which concluded that in a free market gold prices move inversely to real interest rates, and, conversely, if gold prices are "fixed," then interest rates can be maintained at lower levels than would be the case in a free market. This was the economic theory behind the "strong dollar policy."
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GATA has collected reams of evidence that Western central bank gold has long been mobilized and surreptitiously dishoarded to rig the gold market and influence related markets and that this rigging has drawn upon the U.S. gold reserves.
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GATA has long implicated the New York Commodities Exchange (Comex) as being a mechanism by which gold and silver price suppression is implemented. The smoking gun is the excessive concentration of bullion bank positions in the gold and silver futures markets. This concentration enables market manipulation....

The CFTC's own reports of November 2009 show that just two U.S. banks held 43 percent of the commercial net short position in gold and 68 percent of the commercial net short position in silver. In gold, these two banks were short 123,331 contracts but long only 523 contracts, and in silver they were short 41,318 contracts and long only 1,426 contracts.
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It has been possible to extrapolate that the two banks that hold these large manipulative short positions on the Comex are JPMorgan Chase and HSBC because of their huge positions in the OTC derivatives market, whose regulator, the U.S. Office of the Comptroller of the Currency, does not provide anonymity when it publishes market data. 6 In the first quarter 2009 OCC derivatives report, JPMorgan Chase and HSBC held more than 95 percent of the gold and precious metals derivatives of all U.S. banks, with a combined notional value of $120 billion. This concentration dwarfs the concentration in the gold and silver futures markets and should raise great concern about the lack of position limits on the Comex.

It is also disturbing to us that HSBC is the custodian for the major gold exchange-traded fund, GLD, and that JPMorgan Chase is the custodian for the major silver exchange-traded fund, SLV. It is a significant material omission to fail to disclose to GLD and SLV investors that the custodian banks of the two exchange-traded funds have an interest in falling prices in the futures and derivatives markets.
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GATA has evidence that there are enormous physical short positions in the gold and silver markets that cannot be covered. Because of the decades-long interference with the gold market, we estimate that the free-market price of gold is multiples of the current price. Growing stress caused by burgeoning physical bullion demand is threatening to lead to a price explosion, which will restore to the market the balance that regulation has failed to maintain. In our view, the Comex paper market will become dysfunctional, with "force majeure" having to be declared as the concentrated shorts are unable to deliver on their obligations.
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Sincerely,

WILLIAM J. MUPRHY III, Chairman
Gold Anti-Trust Action Committee Inc.
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Suresh

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RBS chief strategist Bob Janjuah still hopes for voluntary gov't austerity

Author: Suresh
RBS chief strategist Bob Janjuah still hopes for voluntary gov't austerity Posted: Tue Mar 09, 2010 1:05 pm (GMT 0)
Topic Replies: 3

SmartCompany: This giant debt bubble has to burst
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What happens when the penny drops that massive government spending packages, combined with unprecedented money printing by central banks, have not produced a sustainable economic recovery?

As RBS strategist Bob Janjuah points out in his latest newsletter, the "gap between the fantasy in markets...versus the reality of the real economy/private sector, is already worryingly large, but risks becoming dangerously large." Once again, markets are mispricing risk. In their frantic pursuit of high returns, investors are oblivious to the true risks they're taking.

Janjuah says that there hasn't been any sustainable recovery in private sector demand, and there won't be for some years to come. Furthermore, there is nothing that can be done about it. Major economies cannot generate growth by devaluing their currencies and trying to export their way out of trouble, because this is a strategy that everyone is using. All the big economies are trying to devalue and every country is looking to export. The problem is that there's no obvious candidate to buy all these exports.

Janjuah also takes aim at those who believe that the massive build-up in government debt isn't a problem because governments can simply erode the value of the debt through higher inflation. This strategy, he says, only works when inflation is unanticipated. When the market is expecting higher inflation, it pre-emptively prices in this risk of inflation in the form of higher interest rates. And already half the market is expecting to see governments try to inflate away their debts.

The other massive delusion that is buoying markets is that governments can keep pumping/printing/borrowing for long enough to compensate for the slump in demand from the private sector as it cuts back spending and tries to pay back debt. According to Janjuah, the time limits on this strategy are drawing nigh. "Those limits are pretty much already with us (Greece), or are soon to be with us, give or take a few months (in the United Kingdom), or at best, give or take a few quarters (in the case of the United States)."
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Suresh

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WTO win lets Brazil impose $560M in tariffs against U.S. products

Author: Suresh
WTO win lets Brazil impose $560M in tariffs against U.S. products Posted: Tue Mar 09, 2010 12:36 pm (GMT 0)
Topic Replies: 0

Financial Times: Tax move by Brazil risks US trade war

Brazil moved on Monday to raise tariffs on a wide range of American goods, potentially igniting a trade war with the US over cotton subsidies after eight years of litigation at the World Trade Organisation.

The decision takes effect next month, starting a 30-day period during which US and Brazilian officials will attempt to negotiate a solution to the dispute.
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Under the Brazilian plan, duties would rise most steeply on cotton products. Many that are currently taxed at between 6 per cent and 35 per cent would be taxed at 100 per cent. The tariffs on beauty products would double, from 18 per cent to 36 per cent. Duties on household goods such as cookers, refrigerators, TVs and video cameras would also double, from 20 per cent to 40 per cent. Duties on cars would rise from 35 per cent to 50 per cent.

Brazil is allowed to impose the tariff increases � worth $560m � after winning a case at the WTO last year. Brazil challenged the legality of direct subsidies to US cotton farmers to protect them against fluctuations in global prices and a loan guarantee programme for international buyers of US cotton.

Brazil could also impose further penalties � known as �cross-retaliation� � on US intellectual property rights, potentially breaking patents in the pharmaceuticals, technology and media industries.
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It is unclear how much room for manoeuvre US officials have. Significant changes to the cotton subsidy programme would require changes to the farm bill � and securing congressional approval might be difficult.
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_________________
Suresh

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Pell Grants as mandatory entitlements would add $200B to debt in 2011-2020

Author: Suresh
Pell Grants as mandatory entitlements would add $200B to debt in 2011-2020 Posted: Tue Mar 09, 2010 12:05 pm (GMT 0)
Topic Replies: 5

Wall Street Journal: That Other Government Takeover
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One of ... [the add-ons sought to be included in any ObamaCare reconciliation bill] rewrites the Higher Education Act to ban private companies from offering federally guaranteed student loans as of this July.
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The Democratic plan is to make ... [the] public option [offered through the Department of Education] the only option mere days before colleges send out their financial aid packages to incoming students.
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The plan that passed the House includes $67 billion in "savings," according to a Friday estimate from the Congressional Budget Office. But the bill also has more than $77 billion in new spending.

The net loss to taxpayers isn't limited to $10 billion. After inquiries from Senator Judd Gregg (R., N.H.) and Rep. John Kline (R., Minn.) last year, CBO explained that "savings" estimates are artificially high because of government accounting rules that undercount the risks of default when the government is originating the loans, while the new spending estimates are artificially low.
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The limited 20 hours of reconciliation debate will no doubt be consumed by ObamaCare, but another new entitlement could be hustled into law under cover of bloviating lawmakers.

Both the House-passed bill and the President's budget increase Pell Grants and also create automatic future increases, so individual grants will grow faster than inflation every year. Colleges will pocket the money by raising tuition, so we have yet another federal program ensuring that higher education costs continue to rise even faster than health-care spending.

Mr. Obama's budget also calls for making Pell Grants a mandatory entitlement.
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BP 2010Q1
_________________
Suresh

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Speculators allegedly want U.S. CDS settlements in gold, not euros

Author: Suresh
Speculators allegedly want U.S. CDS settlements in gold, not euros Posted: Mon Mar 08, 2010 6:03 pm (GMT 0)
Topic Replies: 0

This is the first I've heard about credit default swap investors wanting to get paid in gold instead of euros.

I don't see the problem the Ms. Tavakoli sees. Rather, I see a problem with an investor buying a credit default swap on debt that he doesn't own. It smacks of a naked short, wherein an investor might bet on a share price fall without actually owning the stock.
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Huffington Post: Washington Must Ban U.S. Credit Derivatives as Traders Demand Gold
by Janet Tavakoli
President, Tavakoli Structured Finance, Inc.

Congress should act immediately to abolish credit default swaps on the United States, because these derivatives will foment distortions in global currencies and gold. Failure to act now will only mean the U.S. will be forced to act after these "financial weapons of mass destruction" levy heavy casualties. These obligations now settle in euros, but the end game is to settle them in gold.
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Credit default swaps are not insurance. If you buy fire insurance on your home, you must own the house. If you buy credit protection on the United States, however, you do not need to own U.S. Treasury bonds. If your protection gains value after you buy it -- not because the U.S. defaults, but because of market mood changes -- you can resell that protection and make a profit.
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U.S. credit default swaps currently trade in euros. After all, if the U.S. defaults, who will want payment in devalued U.S. dollars? The euro recently weakened relative to the dollar, and market participants are calling for contracts that require payment in gold. If they get their way, speculators on the winning side of a price move will demand collateral paid in gold.

The market can create an unlimited number of these contracts very rapidly. The U.S. wouldn't have to ever default to trigger a major disruption in the gold market. Spreads (or prices) on the credit default swaps could simply move based on "news," and demand for gold would soar.
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[YouTube clip of a C-SPAN Q&A interview with Janet Tavakoli]
_________________
Suresh

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Lower job prospects and higher future taxes will shape Millenials' outlook

Author: Suresh
Lower job prospects and higher future taxes will shape Millenials' outlook Posted: Mon Mar 08, 2010 2:50 pm (GMT 0)
Topic Replies: 1

RealClearPolitics: The Real Generation Gap
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Consider a study of the 50 million millennials 18 and over by the Pew Research Center.
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According to Pew, almost two-fifths of 18- to 29-year-olds (37 percent) are unemployed or out of the labor force, "the highest share ... in more than three decades." Only 41 percent have a full-time job, down from 50 percent in 2006. Proportionately, more millennials have recently lost jobs (10 percent) than those over 30 (6 percent). About a third say they're receiving financial help from their families, and 13 percent of 22- to 29-year-olds have moved in with parents after living on their own.

The adverse effects could linger. An oft-quoted study by Yale University economist Lisa Kahn found that college graduates entering a labor market with high unemployment receive lower pay and that the pay penalty can last two decades.
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Regardless, more bad news may lie ahead. As baby boomers retire, higher federal spending on Social Security, Medicare and Medicaid may boost millennials' taxes and squeeze other government programs. It will be harder to start and raise families.

Millennials could become the chump generation. They could suffer for their elders' economic sins, particularly the failure to confront the predictable costs of baby boomers' retirement. This poses a question. In 2008, millennials voted 2-1 for Barack Obama; in surveys, they say they're more disposed than older Americans to big and activist government. Their ardor for Obama is already cooling. Will higher taxes dim their enthusiasm for government?
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Suresh

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Falling real income less transfer payments explains stagnant economy

Author: Suresh
Falling real income less transfer payments explains stagnant economy Posted: Mon Mar 08, 2010 2:02 pm (GMT 0)
Topic Replies: 7

The drop in real personal income less transfer payments since 2006 may explain why Wal-Mart customers struggle, while Sam's Club customers are doing ok so far.
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Tim Duy's Fed Watch: Real Personal Income Less Transfer Payments

Calculated Risk directed us to a lesser know economic indicator, real personal income less transfer payments, a measure intended to strip out some of the impact of automatic stabilizers in the personal income data.
...
To recreate the series, I took the difference of nominal personal income and current transfer payments and deflated the resulting series by the personal consumption expenditures price index. I then estimated the (log) linear trend over various time horizons.
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Using a longer sample to estimate the trend reveals that the Jan-91 to Dec-07 trend was set to trend just slightly above the longer Jan-75 to Dec-07 trend:

Graph of Real personal income less transfer payments 1975-2009

Importantly, the gap between trend and actual real personal income less transfer payments has reached its widest since 1975:

Graph of Gap between the actual income and the 1975-2007 trend

And we used to think the late 70s were bad! (The same qualitative result holds using the Jan-75 to Jan-10 sample).

Looking at per capita measures (linear trend) provides similar insights:

Graph of Real personal income less transfer payments 1975-2009

Graph of Gap between the actual income and the 1975-2007 trend
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Suresh

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Japan's government pension fund can't roll over its maturing bonds

Author: Suresh
Japan's government pension fund can't roll over its maturing bonds Posted: Mon Mar 08, 2010 1:26 pm (GMT 0)
Topic Replies: 10

I don't know which is the most incredible part of this story:
- that Japan is already rolling over $111 billion worth of Japanese Government Bonds ("JGBs") monthly,
- that Japan needs to roll over $2.4 trillion in JGBs this year,
- that Japan's average sovereign debt maturity is 6 years, or
- that some lender is willing to issue a line of credit to Government Pension Investment Fund so that it won't have to sell the JGBs in its portfolio to meet benefit payouts.

***9 MARCH 2010 UPDATE***
To put the $2.4 trllion figure in perspective, Zero Hedge notes that it is equivalent to 45% of Japan's GDP. There are three prospective categories of buyers of JGBs: 1) domestic households; 2) domestic corporations; and 3) foreign investors. In a post entitled, "Following Up On The Japan Disaster Scenario; Or Can Still We Learn From The Failure Of Keynesianism?", Zero Hedge notes that Societe Generale's Dylan Grice doesn't believe any of these categories will step up and buy JGBs in force. Aging households are dis-saving as they need cash to fund retirements. Corporations typically don't hold much cash. When they have cash, they either pay out dividends or buy companies. Foreigners demand a much higher rate of return on sovereign debt from insolvent governments.
***END OF 9 MARCH 2010 UPDATE***
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FT Alphaville: �Japan�s brewing fiasco�
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SocGen�s Dylan Grice has a note out on Japanese government bonds (JGBs) � and fears their maturity dates presage an imminent blow-up.

The canary in the mineshaft? As Grice explains (emphasis his) :

Quote:

The biggest JGB holder on the planet � the Government Pension Investment Fund (GPIF) � which has already admitted it�s no longer able to roll maturing bonds, has announced that it will open credit lines so it doesn�t have to sell them to fund its obligations�

� Japanese debt markets have been stable for such a long time it�s difficult to imagine anything different, so we don�t imagine anything different and predict that the future will look like the past. Now, Japan�s debt markets may well remain very stable in the future and I�m very open to the strong possibility that I�m barking up the wrong tree. But logic like that outlined above is lazy indeed.

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Grice says that ... there�s little evidence that corporate savings rates are large enough to take over from households, or that government assets would really be fungible in a crisis, given their domestic entanglements � such as the non-privatisation of Japan Post Bank.
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And it all makes Japan�s relatively short debt maturity (six years, compared to the UK�s fourteen) rather uncomfortable. Ten trillion yen rolls over this month alone.
...

Quote:

To spell that out: we are going into a year in which the government has �213 trillion of bonds to roll over� and the biggest holder of JGBs is openly admitting he has no new inflows of money.

3.6% mutual funds' cash level indicates equity market is running out of gas

Author: Suresh
3.6% mutual funds' cash level indicates equity market is running out of gas Posted: Mon Mar 08, 2010 1:08 pm (GMT 0)
Topic Replies: 2

Mutual funds' cash level is a contrary indicator, but does not provide an immediate sell signal. The cash level approaches historic lows when fund managers are more worried about being the next Jeff Vinik than about losing your money.

By way of historical comparison, the mutual funds' cash level in January 1973 was 3.9%, before a 45% correction in the S&P 500. More recently, we posted in March 2007 that mutual funds' cash levels had fallen to historic lows. The S&P 500 index double topped in July and October of that year and took a 17% tumble.
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Bloomberg: S&P Rally Slowed by Fastest Cash Depletion Since 1991
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Cash dropped to 3.6 percent of assets from 5.7 percent in January 2009, leaving managers with $172 billion in the quickest decrease since 1991, Investment Company Institute data show.
...
For Parnassus Investments and Janney Montgomery Scott LLC, depleted reserves is a sign returns will fall from last year, when the S&P 500 rose 23 percent, the most since 2003. Bulls say any pullback is a buying opportunity because investors have $3.17 trillion in money-market funds and may return to stocks after putting 16 times more money into bonds since last March.
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As reserves fell, the S&P 500 rallied 30 percent.
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Changes in reserves foreshadowed moves in equities in the past, according to data compiled by Bloomberg and ICI. The S&P 500 lost 16 percent on average the last three times managers boosted reserves. The index doubled on average when they cut.

Past Spending

The index rose threefold as cash dropped in April 1993 from 9.5 percent to 4 percent in March 2000. It sank 12 percent in the next eight months as the levels jumped to 6.5 percent. The S&P 500 gained 14 percent while balances shrank from 6.5 percent in November 2000 to 3.5 percent in June 2007.
...
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China's M1 broad money supply grew 39% year-over-year in January 2010

Author: Suresh
China's M1 broad money supply grew 39% year-over-year in January 2010 Posted: Mon Mar 08, 2010 12:47 pm (GMT 0)
Topic Replies: 2

As yet, China's consumer price inflation rate has not forced a revision in its loose monetary policy. However, once the consumer price inflation rate starts ratcheting upward, China will either widen the trading band between the yuan and the U.S. dollar or lose the dollar peg altogether.

Either way, that means less U.S. trade dollars to be invested in U.S. Treasuries, which in turn puts more pressure on the U.S. Federal Reserve to monetize U.S. Treasury debt.
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BusinessWeek: Yuan Options Most Expensive as China Pledges No Rise
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China�s accumulation of foreign reserves grew by $1 million per minute in the second half of 2009 to $2.4 trillion, a sum approaching the size of the U.K. economy, central bank data show. Money supply, as measured by M1, rose a record 39 percent in January, triple the average rate in 2005, according to the data.

Consumer prices probably climbed 2.5 percent in February from a year earlier, up from 1.5 percent in January in the biggest increase since October 2008, according to the median estimate from 23 economists. The inflation rate was 1.8 percent in July 2005, when the government loosened its grip on the currency by letting it appreciate 2.1 percent in one day after maintaining a peg of about 8.3 for a decade.
...
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Financial Times: Beijing studies severing peg to US dollar
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Zhou Xiaochuan, governor of the People�s Bank of China, gave the strongest hint yet from a senior official that China would abandon the unofficial dollar peg, in place since mid-2008. He said it was a �special� policy to weather the financial crisis.

�This is a part of our package of policies for dealing with the global financial crisis. Sooner or later, we will exit the policies.�

Mr Zhou�s comments contrasted with recent Chinese comments on its currency policy in the face of international criticism that the renminbi was undervalued. In December, premier Wen Jiabao said: �We will not yield to any pressure of any form forcing us to appreciate.� Chinese officials have repeatedly emphasised the need for a stable exchange rate.

However, while the recent increase in consumer prices in China has strengthened the hand of those officials who think the currency should now rise, it is not clear that this argument has yet won over the country�s senior leaders.
...
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Lenders were forced to buy back $20B in mortgages in 2009

Author: Suresh
Lenders were forced to buy back $20B in mortgages in 2009 Posted: Mon Mar 08, 2010 12:25 pm (GMT 0)
Topic Replies: 1

The more loans that need to be repurchased, the greater the loan loss reserves need to be. The greater the loan loss reserves, the less money available to loan out. Even assuming the availability of creditworthy borrowers, the risk of being forced to repurchase mortgages with shady underwriting means that lenders will raise their lending standards, thereby throwing the credit democratization trend in reverse.
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Wall Street Journal: Repurchased Loans Putting Banks in Hole
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Annual reports filed by major mortgage lenders show big surges in the volume of loans being repurchased in 2009. Wells Fargo said it bought back mortgages with balances of $1.3 billion, triple the 2008 total of $426 million. Losses on bought-back loans doubled to $514 million from $251 million in 2008, according to the San Francisco company.

Bank of America repurchased $1.5 billion of first-lien mortgages that were sold off by the Charlotte, N.C., bank through securitizations but are tied to faulty underwriting, up sharply from $448 million in 2008.

As of Dec. 31, J.P. Morgan had set aside $1.7 billion to meet repurchase claims from investors, a 55% jump from $1.1 billion a year earlier.

Last year, lenders bought back about $20 billion of loans with faulty underwriting, according to Barclays Capital estimates. About half of the total was written off because the loans were delinquent.
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Most mortgages bouncing back to lenders are coming from Fannie Mae and Freddie Mac, which bought or guaranteed the loans but now claim they were made improperly.
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Investors holding mortgages can force lenders to take back the loans if borrowers lied about their income, misstated that the property is their primary residence, relied on a fraudulent home appraisal or provided inadequate documentation, among other reasons.
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Auto-pilot of mandatory federal programs ensures fiscal deficits

Author: Suresh
Auto-pilot of mandatory federal programs ensures fiscal deficits Posted: Fri Mar 05, 2010 3:23 pm (GMT 0)
Topic Replies: 5

The Heritage Foundation: The Growth of Dependency on Government Threatens the Future of American Democracy

Today marks the seventh year that we have published the Index of Dependence on Government. And, for seven years running, our Index shows growing dependence. The Index now stands at 240, up from a value of 19 in 1962, or a nearly 13 fold increase since the Kennedy administration....

Even more disturbing is the confluence of growth in the index with increases in the percentage of taxpayers who pay no taxes and Congress�s control over spending. The percentage who pay no taxes jumped from 21.3 percent in 1980 to 34 percent in 2008. In 1980, 20 million tax filers paid nothing; in 2008, 48 million paid nothing. This number will growth dramatically next year when the Index counts for the first time taxpayers who took advantage of Obama era credits, such as Making Work Pay and the first-time homebuyers credits.

Combine these two indexes with the Steuerle-Roeper Fiscal Democracy Index, and you have a perfect storm for the future of our republican form of government. The Fiscal Democracy Index measures the percent of revenues not allocated by previous Congresses to mandatory spending. In short, it measure the control that Congress has over outlays. This Index nearly hit zero in 2009 and is forecasted to be steadily below zero in 10 years.

The steady growth of dependency creating program, particularly the so-called entitlement programs, and the equally steady shrinking number of taxpayers who have any financial stake in the government threaten rapid growth in mandatory, dependency programs and our very democracy. Are Americans closing in on a tipping point that endangers the workings of their form of government? If citizens can vote ever greater outlays for their income, health, housing, education, and food support; will the growth of government overwhelm the delicate political balances between those citizens who provide the means for helping other citizens in need?
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USA Today: The U.S. is broke. Here's why.
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Trouble is, the deficit is only a symptom of a chronic disease that strikes at the very heart of democratic government.

The disease? Fiscal sclerosis � setting future national priorities in stone long before the future has arrived. Our fiscal arteries are so clogged and hardened that to do anything new, meet any emergency, or engage any new opportunity, the president must renege on past legislators' promises regarding Medicare, Medicaid, Social Security and other such entitlement programs.
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To see what little give we have left, take a look at the nearby "fiscal democracy index" that I built, along with my former colleague, Tim Roeper.

[Click here for a graph of Gene Steuerle and Tim Roeper's Fiscal Democracy Index.]

This downward-drifting squiggle shows how much of current revenues remain after taking account of commitments by law to the programs and ideas of the past � even dead � policymakers.

Look closely. As the amount we can spend on the new and the unforeseen shrinks, so does each generation's democratic control of social and economic priorities. Gradually, over decades, Americans have committed almost all government revenues to what policy nerds call "mandatory programs" � those whose funding and funding growth are set by past laws � and to interest on the debt.

Unsustainable deficits

For the first time in U.S. history, in 2009 every single dollar of revenue was committed before Congress voted on any spending program. Meanwhile, most of government's basic functions � from justice to education to turning on the lights in the Capitol � are paid for out of swelling, unsustainable deficits.
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The index is poised to enter the dead zone again later this decade under current law if the president and the Congress don't take more spending and tax subsidy programs off the automatic growth path and then match up revenues to whatever size government they think is right for the times.
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_________________
Suresh

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GMAC is running a Ponzi scheme with residential mortgage-backed securities

Author: Suresh
GMAC is running a Ponzi scheme with residential mortgage-backed securities Posted: Fri Mar 05, 2010 1:46 pm (GMT 0)
Topic Replies: 0

Reuters: Moody's warns on GMAC mortgage bond servicing
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The rating company said GMAC commingled cash flows from multiple bonds in a single custodial account, Moody's said in a statement. This allowed GMAC to use cash from loans in one bond for principal and interest payments on another, it said.

By allowing the commingling, it "increases the likelihood that some RMBS deals may not be able to recover the amounts 'borrowed' by the servicer to fund advances or another RMBS deal if a servicer bankruptcy were to occur," Moody's said.
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