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

Catherine Mann, a formal Federal Reserve economist who’s now a professor at Brandeis University, talks about Federal Reserve policy and its labor and inflation targets. Fed policy makers, in their January minutes, took a more optimistic view of the U.S. economy last month while maintaining their dissatisfaction with job growth as they pressed forward with an expansion of record monetary stimulus. Mann talks with Carol Massar and Matt Miller on Bloomberg Television’s “Street Smart.”

Feb. 16 (Bloomberg)

• Stocks: fastest double ever (Fortune) The fastest 2X that hasn’t given it all back, anyway

• S&P 500 Cash Hoards Shrink for First Time Since 2009 (Bloomberg)

• Victor Shih on the Chinese Economy (Browser)

• Empirical Evidence About How the Foreclosure Crisis is Impacting the Recovery (Rorty Bomb)

• Fed Tells U.S. Banks to Test Capital for Recession (Bloomberg)

• Its all about the LTV –  Banks Push Home Buyers to Put Down More Cash (WSJ)

• SAC Capital’s Cohen Opens Up (Dealbook)

• How the middle class became the underclass (CNN/Money)

• Hey, liberals: Time to give the Beck bashing a rest  (Salon)

Busted: Fox News Fakes CPAC Presidential Straw Poll

Bizarre deception by Fox News via boingboing, running the 2010 crowd noise booing Ron Paul’s 2011 win here.

At the 4:40 mark, you can hear the actual 2011 crowd — and they cheer Ron Paul for a full minute:

When reporting that Ron Paul had defeated mainstream Republican Mitt Romney in the CPAC straw poll, Fox News superimposed archive footage of people booing from last year’s event.

Bonus Fox misbehavior! When a liberal blogger asked Fox News reporter Jesse Watters for comment on recent claims from an insider that the network makes stuff up, Watters ignored the question and mocked the interviewer’s cheap camera. After MSNBC ran the clip, which makes Watters appear evasive and smarmy, Fox produced heavily edited versions of the clip for its own shows, claimed their man was ambushed (he was in fact approached at the same heavily-attended conservative event) and praised its reporter for ‘trash talking’ the interviewer.

VIDEO

Hickory, the Scottish Deerhound who won Best in Show at this year’s Westminster Dog Show.

2/16/2011 7:05:30 PM

I am on Taking Stock with Pimm Fox and Dave Wilson today:

*3:00PM – Hedge Funds May Pose Systemic Risk: Barry Ritholtz, Fusion IQ

Taking Stock on WBBR 1130AM New York, Bloomberg.com, and XM 129/Sirius 130.

>

You can stream Bloomberg Radio live by clicking below:

>

I have to take issue with William Cohan’s Op-Ed, How Goldman Killed A.I.G.

First off, let me start out by saying that these are two bad actors; there are no “good guys” here. Second, let me remind the reader that AIG under-wrote $3 trillion worth of derivatives, a massive high-risk exposure — and collected $3 billion (10 bps) in fees on their exposure.

Tom Savage, President, the head of AIG’s Financial Products, it free money: “The models suggested that the risk was so remote that the fees were almost free money. Just put it on your books and enjoy the money.”

Gee, how could that go bad?

Thus, looking at what was done, I think its more accurate to say that AIG committed suicide. Goldman was merely one of the many Brute(s) that thrust their daggers into Caesar.

Goldman became a counter-party of AIG by paying them $100 million to insure $23 billion of mortgage securities. The contract included several triggering events that required AIG to post more reserves. These included AIG’s loss of their Triple AAA ratings, as well as a drop in the value of the underlying securities. Both events occurred, forcing AIG to pony up billions.

The “dispute” between GS and AIG was over the timing and amount of the collateral call. I must emphasize that this was part of the contract between two very sophisticated financial firms — AIG was the world’s biggest insurer, and GS was one of the world’s biggest bankers.

As Cohan states “On July 27, 2007, Goldman sent a $1.81 billion collateral call to A.I.G. Financial Products.” But Cohan’s mention that: “Goldman — pretty much alone at that point — thought represented the decline in the value of the securities.”

But so what? That AIG gave GS the ability to demand increased collateral based on their own valuations is pretty astonishing — and dumb as hell. AIG ultimately negotiated down the $1.8B collateral call to “only” $450m; eventually, they ponied up an additional $1.55 billion in collateral. AIG also had to pay collateral to Merrill and Soc Gen.

So the question I ask: Is Goldman to blame for enforcing its legal rights against AIG?

>

Source:
How Goldman Killed A.I.G.
WILLIAM D. COHAN
NYT Opinionator, February 16, 2011, 9:00 pm
http://opinionator.blogs.nytimes.com/2011/02/16/how-goldman-killed-a-i-g-and-other-stories/

Previously:
AIG’s Financial Products Division (December 2008)

Revenge of the Black Swan (December 2008)

Why AIG Counter-Parties Recieved 100% on Derivatives (January 2010)

Solvent Insurer / Insolvent Insurer (March 2009)

Backdoor Bailouts for Goldman Sachs? (March 2009)

Myths of the AIG Collapse (September 2009)

Khamsin
February, 17, 2011
David R. Kotok

>

“This is not just a warm wind, but a dust-laden, suffocating hot wind! It blows in the desert regions of certain Arab-populated countries. Khamsin is the Arabic word for “fifty” and it is quite appropriate since this far from friendly wind blows for fifty days and during its “occupation” of the area all activity ceases and there is no outward sign of life. The natives merely remain inside their dwellings and resign themselves to waiting for Khamsin to use up the allotted time. It should be evident that the denizens of such a region have all learned how to count up to half a hundred…The music itself has a sort of lonely quality which is intended to portray the hopelessness of a situation that can only be met by perseverance and a determination to outlast the ever present Khamsin.”

Source: liner notes: third movement of “Warm Winds” by Lyle Murphy, recorded by the Hollywood Saxophone Quartet in the 1950s. Wikipedia.

>

Khamsin is the hot wind of North Africa and the Middle East. Wikipedia will give you the details. Google will take you there. I’ve personally felt its parching bite on trips to the Middle East. But I was just a visitor. Today, country-by-country, residents plan their ways to deal with this period. They are trying to survive multiple tornadoes.

Khamsin arrived two months early this year. It blew in on the back of food riots. It mixed with ethanol thanks to the madness of US policy of spending many billions of taxpayer subsidy to grow food in order to distill it and put it in fuel tanks. Iowa Senator Grassley (R) and Iowa Senator Harkin (D): how much global blood is on your hands? Yours is a true bi-partisan effort when it comes to hunger and strife.

Now we have a firestorm raging in a dozen countries. And now we see know about the true colors of murder and mayhem revealed in Iran, Syria, Libya, Lebanon (Hezbollah) and others. When you do not see TV the images, when a young person uses a social network at personal peril, you can assume the very worst.

We set out to write more and then saw Ed Yardeni and his pen do the job for us this morning. So we credit him with the following four paragraphs. Thank you Ed for summarizing what I am now calling true contagion and not just young people demonstrating peacefully for some human rights. We fear this gets worse before it stabilizes.

Ed Yardeni, www.yardeni.com, wrote:

“Iran’s Mad Mullahs need a diversion. The pro-democracy Green Revolution remains a big threat to their regime, especially after the Egyptians deposed their autocrat. So their game plan may be to stir up a conflict with Israel and to drag Egypt into the mess. Why not send a couple of Iranian gunboats through the Suez Canal and at the same time escalate tension between Israel and Lebanon? Yesterday, Israeli Foreign Minister Avigdor Lieberman claimed that two Iranian gunboats were planning to sail to Syria through Egypt’s Suez Canal in what he called a “provocation.” Israeli Prime Minister Benjamin Netanyahu said Iran is trying to push Egypt into breaking its 32-year-old peace treaty with Israel. On Tuesday, Israeli Defense Minister Ehud Barak toured his military’s northern command and told soldiers there that the quiet along the frontier might not last. In Lebanon, Hezbollah’s leader, Sheik Hassan Nasrallah, told his Shiite guerrilla group Wednesday to be prepared to invade northern Israel “if war is imposed on us.” This morning’s Washington Post reports that the Iran warships cancelled their request to transit the Suez Canal.

“There is a serious potential for continuing and widespread civil disorder in the Middle East. Now that Mubarak has been deposed, the Egyptian economy faces a new challenge of widespread labor strikes. Yesterday’s WSJ reported: “Egypt’s unofficial labor unions have a record of using walkouts to wring concessions from government-owned companies. The labor movement first joined political protesters on February 10 to demand increased wages, improved benefits and the sacking of corporate bosses who many workers believe enjoyed corrupt relationships with the former ruling regime.” Even some Iraqis seem to want a revolution, even though George W. Bush deposed Saddam Hussein and brought the semblance of democracy to Iraq. Iraqi groups on Facebook are calling for a coordinated protest on February 25.

“Rapidly rising food prices triggered the latest round of civil disorder around the world, as they did the first round during 2008. Today’s WSJ observes that American farmers are preparing to plant their next crop and that “[o]nly a limited amount of idle land can be brought into production, further capping supply.” The US provides more than half of global corn exports and over 40% of soybean exports.

Globally, current corn stocks amount to about 5% of annual use, far below the average of 13.6% over the past 15 years, according to the USDA. Last year, 5 billion bushels of corn produced in the US went for livestock feed; ethanol production approached 5 billion bushels; exports, 2 billion; sweeteners and corn starch, 1.2 to 1.3 billion. That added up to about 13.5 billion bushels of demand for corn, while American farmers produced about 12.4 billion bushels last year, a shortfall of about 1 billion. Ethanol is eating up 40% of America’s corn crop to meet no more than 10% of America’s gasoline demand! So our ethanol policy is exacerbating the global food fight, destabilizing the Middle East, and pushing up oil prices. Is that insane, or what?”

At Cumberland, we believe regional firestorm is now becoming large enough to impact world growth. And it will certainly cause higher prices for oil. Brent is telling the oil price story of over $100. WTI is distorted by Cushing, Oklahoma inventory problems. We expect higher gasoline prices will accompany the Khamsin. Markets seem too sanguine for us.

We are maintain a cash reserves in US ETF accounts. We continue to be overweight the energy sector.

~~~~

David R. Kotok, Chairman and Chief Investment Officer

Following an in line NY manufacturing survey on Tues, the Feb Philly Fed # was well above expectations at 35.9 vs the consensus of 21. It’s up from 19.3 in Jan and the best since Jan ’04. The components however were mixed as the headline figure is not a sum of its parts. New Orders were little changed, albeit at a still healthy level but Backlogs rose 6 pts. Employment rose 6 pts to the highest since ’73 but measures the direction of change, not the degree. A great thing to see nonetheless. The average workweek rose 2 pts and Inventories fell 4.7 pts. As has been seen, the manufacturing strength came with rising inflation pressures as Prices Paid rose 13 pts to the most since July ’08 and Prices Received rose 4 pts to the highest since Aug ’08. The increase specifically in input prices “continued to be widespread.” The overall 6 month outlook fell for a 3rd month, by 3 pts to a 4 month low as expectations for higher inflation rose.

Long-term growth of both Egypt and China, via Visualizing Economics, charted over the past 20 centuries:

>

click for ginormous version

Jan CPI rose .4% m/o/m headline, .2% m/o/m core, both above expectations of up .3% and .1%. The .4% gain is for a 2nd straight month and the .2% core gain is the most since Oct ’09. The y/o/y headline gain is now 1.6% and core is up 1% y/o/y. The absolute level of inflation is at a new record high. Energy prices were up 2.1% and food was up .5%. Owners Equivalent Rent, 24% of headline and about 40% of core, was up a modest .1% but look for that to change in ’11 as apartment vacancies continue to drop, more people want to rent and landlord’s get pricing power. Evidence of this is that ‘rent of primary residence’ rose .2% for a 3rd straight month. Commodities, 40% of CPI, rose .9% and likely reflecting the increase in cotton prices, apparel prices rose 1% for the month. Bottom line, US Treasuries aren’t fazed by the data but the inflation worm has turned at the consumer level and will continue to rise in ’11.

In what seems like a clean data point, free of weather distortion seen over the past month, Initial Jobless Claims totaled 410k, 10k above expectations and up from a revised 385k last week. Smoothing out the lumpiness over the past few weeks has the 4 week average at 418k vs 416k last week. Continuing Claims rose 1k but Extended Benefits fell a net 85k. Bottom line, the pace of firings remain near the lowest since the recovery began but still claims remain stubbornly above 400k. That pattern should change if the economy continues to improve of course but the pace of improvement in both firings and new hiring’s still point to an uneven recovery.