The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

From Zisler Associates (mentioned recently here), included in a recent report on the state’s finances issued by the California State Controller’s Office:

>

speculative-bubbles –

Wholly unrelated to the prior post (US Job Hunters Look Overseas) I am leaving this evening for Berlin, to speak at a CityWire Conference .

I’m flying back Friday, but over the course of 3 days, I will have one morning, one afternoon and one evening free.

What’s fun to do in Berlin?

Doh: Why listen to his forecasts?

Hat tip Singer

As a bull on the reflation trade for most of this year (started in earnest when Bernanke ramped up QE on March 18th when the FOMC announced they were going to start buying US Treasuries as I thought the Fed will now stop at nothing to create inflation), I’m now wondering whether Bernanke’s comments about the US$ yesterday is the beginning of a rest in the trade. While I remain a long term bull on reflation, believe the secular trend remains down in the US$ and I firmly believe Bernanke will be all talk and no action with regards to our currency, the trade has gotten extremely crowded and we may now face further jawboning from Fed officials that can create a counter trend rally. While the US$ rallied for all of 10 minutes yesterday and FX traders quickly thereafter faded Ben’s comments, I can’t ignore Bernanke’s 1st attempt to talk about the US$ in such terms.

This is a somewhat pitiful development:

“Here’s one way to deal with the brutal U.S. job market: Leave the country.

With the nation’s unemployment rate at a 26-year-high of 10.2%, more Americans are hunting for, and landing, work overseas, according to staffing companies and executive search firms.

Fifty-four percent of executives said they’d be likely or highly likely to accept a foreign post, according to a survey of 114 executives Friday by talent management company Korn/Ferry. Just 37% of those surveyed in 2005 said they’d go abroad.

The hottest international job markets include India, China, Brazil, Dubai and Singapore, recruiters say. International companies are largely seeking candidates in engineering, computer technology, manufacturing, investment banking and consulting.” (emphasis added)

That is an astounding change in attitude . . .

>

Source:
More U.S. job hunters look for work in other countries
Paul Davidson
USA TODAY, November 16th, 2009

http://www.usatoday.com/money/economy/employment/2009-11-16-jobsabroad16_ST_N.htm

SIGTARP Report Nov 16 –

No surprise here: The Federal Reserve Bank of New York, in a desperate headlong rush to rescue American International Group, screwed the pooch. Despite holding all of the cards, cash and power, they still managed to manuver themselves into a corner with “little negotiating room.”

So says the most recent audit from the Office of the Special Inspector General (SIG) for the TARP program (full embed here) :

“SIGTARP concludes that: (1) the original terms of federal assistance to AIG, including the high interest rate it adopted from the private bank’s initial term sheet, inadequately addressed AIG’s long term liquidity concerns, thus requiring further Government support; (2) FRBNY’s negotiating strategy to pursue concessions from counterparties offered little opportunity for success, even in light of the willingness of one counterparty to agree to concessions; (3) the structure and effect of FRBNY’s assistance to AIG, both initially through loans to AIG, and through asset purchases in connection with Maiden Lane III effectively transferred tens of billions of dollars of cash from the Government to AIG’s counterparties, even though senior policy makers contend that assistance to AIG’s counterparties was not a relevant consideration in fashioning the assistance to AIG; and (4) while FRBNY may eventually be made whole on its loan to Maiden Lane III, it is difficult to assess the true costs of the Federal
Reserve’s actions until there is more clarity as to AIG’s ability to repay all of its assistance from the Government.  SIGTARP also draws lessons that should be learned regarding the importance of transparency andratings agencies had on the AIG bailout.”

In other words, the deal that was cut in November 2008 with AIGs counter-party banks resulted in those banks being paid off in full for high risk credit-market bets.

Had AIG gone bankrupt, these firms would have recieved pennies on the dollar.  The banks that benefited the most included Goldman Sachs Group Inc., Merrill Lynch and large French banks Société Générale and Calyon. (See table below)

The New York Fed said its goal was to “prevent a system-wide collapse” and not obtain the best deal possible. So they got played for patsies.

Here’s the WSJ:

The “SIGTARP” audit provides a window into a bailout effort that has been shrouded by a lack of disclosure — acknowledged in the report — and questions over why the U.S. government in effect funneled tens of billions of dollars to U.S. and European banks that were AIG’s trading partners.

In November 2008, less than two months after the New York Fed first bailed out AIG with an $85 billion credit line, the government restructured its aid to AIG as the insurer’s cash needs mounted amid the market downturn. The revamped package included a company called Maiden Lane III buying complex mortgage-linked securities from U.S. and European banks to cancel insurance contracts that AIG’s financial–products division had written on the securities. The banks were effectively paid par, or 100 cents on the dollar, for those securities, which had declined significantly in value due to rising home-loan defaults.

The report acknowledged challenges the regulators faced, including insistence by most of the banks and a French bank regulator that they be paid in full. But the report said the “refusal” of the Federal Reserve and New York Fed “to use their considerable leverage,” in negotiations with the trading partners “made the possibility of obtaining concessions from those counterparties extremely remote.”

Its simply embarrassing and pathetic . . .

>

Sources:
FACTORS AFFECTING EFFORTS TO LIMIT PAYMENTS TO AIG COUNTERPARTIES
SIGTARP-10-003
NOVEMBER 17, 200
http://bit.ly/49y3iI

SIGTARP Audit

http://www.sigtarp.gov/audits.shtml

Audit Is Critical of N.Y. Fed in AIG Bailout
SERENA NG and CARRICK MOLLENKAM
WSJ, NOVEMBER 16, 2009

http://online.wsj.com/article/SB10001424052748704431804574540290325376348.html

Some interesting stories to start off your week:

• China has now become the biggest risk to the world economy (Telegraph)

• Hedgies Unhinged (New York Magazine)

• Gold prices are a dead giveaway (Independent)

• The Debt Economy (James Surowiecki)

• Coming Soon: Jobs! (Slate)

• Gretchen Morganson: Home Builders (You Heard That Right) Get a Gift

• Water on the Moon (NASA)

• Belle de Jour revealed as research scientist (Times of London)  “She has been writing a novel, and the Belle blog will “continue for a bit — I’d like her to have happy ending”.” (I assume the pun was unintentional)

• Video: Leopard Seal teaches photographer how to hunt penguins (National Geographic)

What are you reading?

Chairman Ben S. Bernanke

At the Economic Club of New York, New York, New York
November 16, 2009

(Video)

On the Outlook for the Economy and Policy

When I last spoke at the Economic Club of New York a little more than a year ago, the financial crisis had just taken a much more virulent turn. In my remarks at that time, I described the extraordinary actions that policymakers around the globe were taking to address the crisis, and I expressed optimism that we had the tools necessary to stabilize the system.

Today, financial conditions are considerably better than they were then, but significant economic challenges remain. The flow of credit remains constrained, economic activity weak, and unemployment much too high. Future setbacks are possible. Nevertheless, I think it is fair to say that policymakers’ forceful actions last fall, and others that followed, were instrumental in bringing our financial system and our economy back from the brink. The stabilization of financial markets and the gradual restoration of confidence are in turn helping to provide a necessary foundation for economic recovery. We are seeing early evidence of that recovery: Real gross domestic product (GDP) in the United States rose an estimated 3-1/2 percent at an annual rate in the third quarter, following four consecutive quarters of decline. Most forecasters anticipate another moderate gain in the fourth quarter.

How the economy will evolve in 2010 and beyond is less certain. On the one hand, those who see further weakness or even a relapse into recession next year point out that some of the sources of the recent pickup–including a reduced pace of inventory liquidation and limited-time policies such as the “cash for clunkers” program–are likely to provide only temporary support to the economy. On the other hand, those who are more optimistic point to indications of more fundamental improvements, including strengthening consumer spending outside of autos, a nascent recovery in home construction, continued stabilization in financial conditions, and stronger growth abroad.

My own view is that the recent pickup reflects more than purely temporary factors and that continued growth next year is likely. However, some important headwinds–in particular, constrained bank lending and a weak job market–likely will prevent the expansion from being as robust as we would hope. I’ll discuss each of these problem areas in a bit more detail and then end with some further comments on the outlook for the economy and for policy.

Bank Lending and Credit Availability
I began today by alluding to the unprecedented financial panic that last fall brought a number of major financial institutions around the world to failure or the brink of failure. Policymakers in the United States and abroad deployed a number of tools to stem the panic. The Federal Reserve sharply increased its provision of short-term liquidity to financial institutions, the U.S. Treasury injected capital into banks, and the Federal Deposit Insurance Corporation (FDIC) guaranteed bank liabilities. The Federal Reserve and the Treasury each took measures to stop a run on money market mutual funds that began when a leading fund was unable to pay off its investors at par value. Throughout the fall and early this year, a range of additional initiatives were required to stabilize major financial firms and markets, both here and abroad.¹

The ultimate purpose of financial stabilization, of course, was to restore the normal flow of credit, which had been severely disrupted. The Federal Reserve did its part by creating new lending programs to support the functioning of some key credit markets, such as the market for commercial paper–which is used to finance businesses’ day-to-day operations–and the market for asset-backed securities–which helps sustain the flow of funding for auto loans, small-business loans, student loans, and many other forms of credit; and we continued to ensure that financial institutions had adequate access to liquidity. Additionally, we supported private credit markets and helped lower rates on mortgages and other loans through large-scale asset purchases, including purchases of debt and mortgage-backed securities issued or backed by government-sponsored enterprises.

Partly as the result of these and other policy actions, many parts of the financial system have improved substantially. Interbank and other short-term funding markets are functioning more normally; interest rate spreads on mortgages, corporate bonds, and other credit products have narrowed significantly; stock prices have rebounded; and some securitization markets have resumed operation. In particular, borrowers with access to public equity and bond markets, including most large firms, now generally are able to obtain credit without great difficulty. Other borrowers, such as state and local governments, have experienced improvement in their credit access as well.

However, access to credit remains strained for borrowers who are particularly dependent on banks, such as households and small businesses. Bank lending has contracted sharply this year, and the Federal Reserve’s Senior Loan Officer Opinion Survey on Bank Lending Practices shows that banks continue to tighten the terms on which they extend credit for most kinds of loans–although recently the pace of tightening has slowed somewhat. Partly as a result of these pressures, household debt has declined in recent quarters for the first time since 1951. For their part, many small businesses have seen their bank credit lines reduced or eliminated, or they have been able to obtain credit only on significantly more restrictive terms.² The fraction of small businesses reporting difficulty in obtaining credit is near a record high, and many of these businesses expect credit conditions to tighten further.

Read the rest of this entry »

I expect over the next few years, we will hear all manner of suggestion as to how to close the Federal deficit.   Sin taxes already exist on alcohol, tobacco, gambling — they filled a revenue void when passed.

How long is it before the next few taxable products get taxed: First Hemp, then Marijuana. Sloshspot estimates a substantial tax benefit, plus big savings in enforcement and incarceration:

>

click for bigger graphic

>

As the deficit gets larger, this one actually has a non-zero chance of passing . . .

>

Source:
If Marijuana Production Were Legal: Projected Tax Revenues, by State
Sloshspot, November 13, 2009

http://www.sloshspot.com/blog/11-13-2009/If-Marijuana-Production-Were-Legal-Projected-Tax-Revenues-by-State-245