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

I really like the way Michale Hirsh, author of Capital Offense: How Washington’s Wise Men Turned America’s Future Over to Wall Street, describes the causes of the crisis:

A now infamous 1999 Time magazine cover featured Alan Greenspan (then chairman of the Federal Reserve), Robert E. Rubin (then Treasury Secretary) and Lawrence H. Summers (then deputy Treasury secretary) as “The Committee to Save the World.” The three men, the magazine declared, had steered America through the perilous shoals of highly volatile world markets. The United States economy remained “astonishingly robust” and, by protecting American growth, the three had made “investors deliriously, perhaps delusionally, happy in the process.”

A decade later, in the wake of America’s 2008 fiscal meltdown, the thinking of Time’s “Three Marketeers” and their colleagues in Washington and on Wall Street would be cited as a major cause of that crisis. Mr. Greenspan has been chastised for keeping interest rates too low for too long, for failing to see the danger of subprime mortgages and falling house prices, and for neglecting to use the Fed’s regulatory clout to restrain the excesses in the market. Mr. Rubin has been taken to task for promoting the repeal of the Glass-Steagall Act, which was passed during the Great Depression and prohibited commercial banks from engaging in the investment business. And Mr. Summers has been criticized for failing to foresee the risks derivatives posed and for his reluctance to regulate these exotic financial instruments.

In fact, the main reason the financial crisis of 2008 occurred, the journalist Michael Hirsh argues in his provocative new book, “Capital Offense,” is that “the people in charge of our economy, otherwise intelligent and capable men like Greenspan, Rubin and Summers — and later Hank Paulson and Tim Geithner — permitted themselves to believe, in the face of a rising tide of contrary evidence, that markets are for the most part efficient and work well on their own.”

-Michiko Kakutani, NYT

I came to the same conclusion when tracing the origins of this crisis to the men who radically deregulated the markets in Bailout Nation.

Hirsh puts the prior history of regualtion and deregulation into broader context. Its really about whtehr you believe Human Beings are rational or irrational:

“In these pages Mr. Hirsh looks at how the ideas of John Maynard Keynes — predicated upon the belief that markets do not automatically self-correct, and that government intervention is sometimes necessary — were embraced in Washington in the wake of the Great Depression. He chronicles how the opposing ideas of Milton Friedman — who believed that free markets functioned efficiently without bureaucratic interference — gained ascendancy with the election of Ronald Reagan and the abrupt collapse of the Soviet Union. And he charts how the deregulation movement accelerated during the administrations of Bill Clinton and George W. Bush, arguing that it created an “indomitable zeitgeist” that would set the stage for disaster.

Regarding the differences between advocates of government intervention and those who contend that free markets operate better on their own, Mr. Hirsh says that such arguments, boiled down, are “largely about the issue of human rationality versus irrationality. One side holds that markets are basically rational and efficient on their own — that they are an optimal way for societies to allocate resources — and governments only interfere. The other side holds that markets and the people who make them up often behave irrationally, inefficiently and unjustly, and therefore the best course is to keep government involved at all times.” (emphasis added)

I am going to have to add this one to my credit crisis book queue . . .

The Global Macro Monitor blog was started b an independent trader and economist and, in a prior life, was a global macro hedge fund PM/trader, headed emerging market bond trading desks on Wall Street, and an economist/global strategist, beginning his career at the World Bank in the mid 1980’s. His unique and unconventional views are reflected on his website at marcromon.wordpress.com.

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Here’s an interesting chart we threw together showing the Fed’s ownership of Treasury securities maturing in each year on the curve.  There are no bonds maturing in 2032-35 due to the temporary discontinuance of the 30-year earlier in the millennium, which some believe contributed to the housing bubble.

The Fed owns a high of 35 percent of the $60 BN of bonds maturing in 2011,  and only 4.4 percent of $142 BN of 2040 bonds.  It doesn’t take a MOTU to recognize the potential for massive POMO generated short squeezes on the long-end of the curve, which we have seen and, will not doubt, continue see during this age of quantitative easing.

It will be also interesting to juxtapose the same chart in six months hence when QE2 is under full sail.   Stay tuned!

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Posted on December 14, 2010 by macromon

My pal David Rosenberg points out that the Value Line Arithmetic Composite Index is at an ALL TIME HIGH. (This is an equal weighted price index of the 1650 stocks surveyed by Value Line, averaged daily).

Dave writes: “The average stock, by the way, according to the Arithmetic Value line index, just hit a new all-time high. And not just a new high for the year, but a new high that breaks the old peak set in the fall of 2007.”

That statement is incorrect — No, the average stock is not at all time highs.

Dave errs in using the Value Line Arithmetic index — its 1650 stocks, disproportionately impacted by small, and microcap stocks. (Value Line Arithmetic membership list available from the Kansas City Board of Trade).

What this chart below reveals is that lots of smaller names have had great runs:

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Value Line Arithmetic Index

click for larger charts

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Meanwhile, the Value Line Geometric index — where tiny companies matter less and big companies matter more — tells a very different story. Not only is this index below the 2007 peak, its still below its 2000 highs!

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Value Line Geometric Index

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Last, let’s consider the full market –the Wilshire 5000, which is also market cap weighted. Same story here: Below both the 2007 and 2000 highs:

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Wilshire 5000 Total Market Index

Dan Greenhaus is at the Equity Strategy Group at Miller Tabak + Co. where he covers markets and portfolio theory. He has contributed several chapters to Investing From the Top Down: A Macro Approach to Capital Markets (by Anthony Crescenzi).

This is his most recent commentary:

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The FOMC meets today for the final time in 2010. As we discussed in our 2011 FOMC preview, Assessing the Change in the 2011 FOMC, next year brings a slightly more hawkish Fed although one not quite able to meaningfully later the path of monetary policy. In 2010, the slightly less hawkish Fed will finish out the year on a boring note as we expect very little in the way of significant changes to the FOMC statement.

Since the last FOMC statement, incoming economic data have been generally quite good. The November 3 FOMC statement preceded the October employment report as well as other releases, including the ISM index, which have generally shown a continuing expansion. Along with the recently-announced-but-not-yet-approved-tax-compromise, we have become more optimistic about 2011 than we had been. The Fed will probably have to acknowledge this improvement in its first paragraph, perhaps in the first sentence. However, all eyes will be on the second paragraph and the following sentence:

Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate

This is the sentence that has proven to be something of a lightening rod and we guess is the origin of the recent push to eliminate the Fed’s dual mandate. Changes to this line, despite the economic improvement, are quite unlikely. It is simply too soon for the Fed to judge its program a success or failure and they may include a section on the effectiveness of the asset purchase program saying, in December’s case, that it is too soon to judge the program. Going forward, this paragraph could be used to signal the Fed’s thoughts on the program to the market. If the Fed were to abandon the program earlier than its scheduled completion date, they could do so in this paragraph.

Other than that, we do not anticipate very many, if any, changes to the statement. The Fed will certainly leave itself the flexibility to “adjust the program as needed” while also leaving unchanged the sentence regarding “exceptionally low levels for the federal funds rate for an extended period.” They may include a section on the effectiveness of the asset purchase program saying, in December’s case, that it is too soon to judge the program.

On a related topic, we continue to field questions both internally and externally regarding the recent run up in yields and why, as Carl Quintanilla said on CNBC this morning, the bond market is not “playing ball.” To repeat, the Fed is not out to peg the 10 year rate at, say, 2.50%. If that’s what they wanted, Ben Bernanke could come out and just say “we will purchase any and all bonds in an effort to target a 2.50% rate on the 10 year note.” He hasn’t said something like that because that’s not the goal. The goal is deflation prevention. Viewed this way, the back up in rates is a welcome development, signaling and end, for now, to deflationary concerns. The Fed knows that an improved economic landscape is going to be associated with higher yields and higher inflation expectations. In that regard, they are quite happy and would more than likely judge the steps they’ve taken, from a communications and implementation standpoint, to be a success.

http://www.businessweek.com/news/2010-12-14/ecb-said-to-consider-asking-for-capitalincrease-as-cushion.html

^^This morning its being reported that the ECB is contemplating asking regional governments for a capital infusion to insure itself against any losses related to its efforts to shore up the sovereign debt market. We have nothing to add with regards to the story but this does give us an opportunity to once again opine on the possibility of Fed losses. As we know, the Fed’s balance sheet has ballooned up to $2.385 trillion as of the most recent week, nearly 50% of which is invested in MBS and agency debt securities. Another near 40% is in various forms of Treasury securities. This exposure has led to a modest bit of discussion as to whether, whenever short term rates begin to rise, the Fed will be able to sustain the losses it is sure to incur. However a related issue is worth mentioning, one that NY Fed President Dudley touched on this topic in an early October speech.

The concern about Fed funding arises from its decision to pay interest on excess reserves, currently 0.25%. In the Fed’s opinion, this newly granted ability was and is instrumental in building the foundation for an orderly exit from accommodative monetary policy. Simply put, as the FOMC begins to pay a higher IOER, they will of course have to lay out more money. As a self funding institution that cannot go to Congress for additional appropriations, this raises a concern about if and when the Fed may need funds to meet such outlays. One big potential complication regarding this issue is the fact that the Fed is forced to remit its earnings to the Treasury each year (they may remit as much as $80 billion in 2010 alone after sending $47.431 billion in 2009). They are, as best as we can tell and are told, not able to build up a capital cushion against potential future losses.

With the Fed earning about 4% on its various investments, there is no concern about paying out more money than it is currently earning. However, as rates rise, this spread will compress as the Fed pays a higher IOER. To be sure, there is ample time for this becomes a legitimate and pressing concern but it is one worth knowing exists.

The National Federation of Independent Business (NFIB) released its Small Business Economic Trends Report (SBET) [.pdf], and the news was an improvement over the prior month:

The National Federation of Independent Business Index of Small Business Optimism rose 1.5 points in November rising to 93.2, the highest reading since December 2007, and the fourth consecutive monthly gain.

Unfortunately, even a reading of 93.2 is still recessionary territory.

Two items of note:

Hiring Plans increased to +4, the best reading in about two years.  This measure has gone from -3 two months ago, to +1 last month, and now to +4.  Hopefully this will translate to some better payroll numbers over the next few months.  It would appear small businesses may at least be seeing some light at the end of this long tunnel.

“Poor Sales” remains mired at near record high levels as the “single biggest problem” facing small business owners — 30 this month, and at 29 or above since February 2009.  This indicator of what’s holding back small businesses has a very high correlation to the unemployment rate (0.86):

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Since the last FOMC meeting on Nov 3rd, interest rates have gone higher (6 mo high in 10 yr yield, 7 mo high in mortgage rates), some Congressional members want to end the Fed’s dual mandate, Ron Paul was named Chairman of the Domestic Monetary Policy subcommittee that will oversee the Fed, they’ve heard criticism from all parts of the world with their print money answer to every problem and Bernanke spoke again on 60 minutes defending their actions. Therefore, I believe the FOMC statement will try to be as low key and uneventful as possible. The Nov NFIB small business optimism index was 93.2, a touch above expectations of 92.3 and the best since Dec ’07. Most categories did rise.

Nov Retail sales rose .8% headline and 1.2% ex auto’s, both above expectations of .6% and .6% respectively. Ex auto’s and gasoline saw a sales gain of .8%, also better than expected. Declines in auto’s, furniture, electronics and building materials were more than offset by clothing, sporting goods, health/personal care, food/beverages, department stores and online retailing. Bottom line, sales were solid, particularly ex electronics where we saw confirmation from that with the earnings from Best Buy. The question though that today’s figures don’t answer is at what margin the sales were made in the context of a highly promotional environment and what influence higher cotton prices in particular helped to lift clothing sales which rose a large 2.7% m/o/m.

Nov PPI rose .8% headline and .3% ex f&f, both above expectations of .6% and .2% respectively. The headline gain was due to a 4.7% rise in gasoline, a 1% gain in food and a 1.7% jump in passenger car prices which comes after a 3% drop in Oct which was solely due to hedonic adjustments to the new 2011 models. Inflation in the pipeline was also very evident as intermediate goods prices rose 1.1% m/o/m and is now up 6.3% y/o/y. Crude goods, the 1st stage of production, saw prices rise 12.8% y/o/y. Bottom line, commodity inflation is becoming apparent in wholesale prices and the extent of the spillover into consumer prices is the only question with either the consumer eating the rise or company margins instead or the likely outcome, a combination of both.

Spain sold 12 month and 18 month bills at yields well above the auctions of a month ago. The 12 month bill was priced to yield 3.45% vs 2.36% in Nov and the 18 month bill yielded 3.72% vs 2.66% in Nov. S&P revised the credit outlook for Belgium to negative from stable. The Dec German ZEW 6 month economic outlook was slightly better than expected and the current condition component rose to the highest since July ’07. UK CPI rose 3.3% y/o/y, the highest since May and has been 3%+ for 11 straight months.

Let’s imagine the following scenario: You have a Jumbo mortgage with Bank of America. You are a good customer, do your banking with BofA, and you have never missed a payment. In fact, you always send your mortgage in on time.

But this fraudclosure mess has you curious. You wonder who actually holds your note, how many times its been sold, what MERS involvement is.

With your curiosity piqued, you decide to ask Bank of America where your actual mortgage note is, and who is holding it.

That is what long time BP reader SM did. He writes in to note what happened:

“FYI Just to let you know I ended up doing Where’s the Note and it resulted in this for me, see the 2 reported disputes in the attached screenshots below for my Jumbo 1st mortgage. 40 point hit on my scores. I will be speaking with an attorney soon. We need to get a warning out (SEIU has not responded).”

That is astonishing –

SM included a snapshot of his Credit report (Nice payment history!):
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BAC reporting to Experian and Trans union

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Looks like a job for Elizabeth Warren . . .

I have never seen a single episode of 24.

Amazon has 24: The Complete Series on sale for $139 . . . I am seriously tempted to order it for the holidays.

Here is the latest oddity out of Florida: Homestead-exemption tax break, intended for resident homeowners who actually live in their Florida homes, is instead accruing to the banks that are repossessing homes via foreclosure.

The Orlando Sentinel has the details:

Local governments across the state are losing revenue because banks are getting the homestead-exemption tax breaks intended for the homeowners whose properties the lenders have repossessed.

Homeowners qualify for Florida’s homestead exemption — a tax break intended for people who live in the house they own — on Jan. 1 of each year. Once a homeowner qualifies for the exemption, that property gets a tax break of at least $750, even if the house changes hands by the time its tax bill arrives in the fall.

The result: Banks are paying less in property taxes than they would otherwise because they inherit the previous owner’s homestead exemption when they foreclose on a property.

Another unintended consequence of a property tax break . . .

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Source:
Cities, counties lose big bucks as banks get tax breaks on repossessed homes
Mary Shanklin
Orlando Sentinel, December 12, 2010   
http://www.orlandosentinel.com/news/local/orange/os-banks-foreclosure-tax-break-20101209,0,1849976.story

Be sure to check out WikiRebels – The Documentary.

It is a rough-cut of the first in-depth documentary on WikiLeaks and the people behind it. Swedish Television reporters Jesper Huor and Bosse Lindquist investigate.