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

via Dilbert

Exercise, Lose Weight,  Quit Smoking or Drinking, Pay down debt, Stop [insert nasty habit here] . . . The typical New Year’s resolutions are well intentioned but hollow gestures, forgotten by February.

May I suggest something that might be longer lasting and more fruitful resolution? Knowledge.

Pick an area of study that truly interests you, then go to MIT’s OpenCourseWare and find a class (I found a few courses that look intriguing). Register for free, and get your learning on!

>

http://ocw.mit.edu/index.htm

It’s that time again when I stick my neck out even more than normal and set out my predictions for the next year. One of my friends tells me that my 2011 predictions were fairly reasonable – 2012, I suspect, is going to be much more challenging.

I believe that 2012 may well be a year of 2 halves, with markets under severe pressure through the 1st Q (possibly 1st half) of the year, followed by a (potentially significant) rebound thereafter.

The global economy will continue to weaken further, in particular during the 1st half of the year, though I expect some stabilisation towards the year end. Historically, political instability rises during
economic downturns, in particular in EM’s, as their economies deteriorate more so than DM’s. However, in 2012, DM’s will not be immune to political turmoil, particularly in Europe. Political tensions will clearly be market negative.

The global slowdown, combined with base effects and lower energy prices (see below), suggests to me that inflation should decline materially, in particular from the 2nd Q onwards, enabling Central banks worldwide to ease monetary policy further.

The BRIC economies will remain under severe pressure, as I see no respite for Russia, India or China, with political turmoil remaining elevated. Elections in Russia and a significant change in the Chinese
leadership (which is to be announced in October next year, but does not take effect until the following March) will increase political concerns. A slowing economy, corruption issues, a deteriorating budget
and current account position, weakening Rupee and continued political infighting does not bode well for India. The contraction of lending by European banks will act as a further drag on the BRIC’s and on Asia in particular, as will continued selling by equity investors and reduced FDI into the region.

Read the rest of this entry »

Nicolas Sarkozy becomes Angela Merkel’s tipsy butler in YouTube satire

Germany’s cult New Year’s Eve show ‘Dinner For One’ – where an increasingly drunken waiter tries to keep up with the demands of his eccentric mistress – has been reworked to feature German Chancellor Angela Merkel and French President Nicolas Sarkozy as her servant.

Hat tip Scott Frew

Via Socialrati, we get this graphic of the tech trends of the past year:

>
click for ginormous version

Insane Levels of Leverage by the Too Big to Fail Banks – Not Deadbeat Borrowers – Caused the Financial Crisis

The Cause of the Financial Crisis: Fraudulent Creation of 3,000 Times Leverage On House Prices by the Big Banks

We’ve repeatedly noted that fraud by the big banks – more than anything done by the little guy – caused the financial crisis.

And we’ve repeatedly noted that excessive leverage helped cause the Great Depression and the current crisis.

Reader McFid – who has been a breach of fiduciary duty expert since 2003 – sent me the following article (edited slightly) which provides a new angle on both themes.

This article disabuses the notion that “deadbeat borrowers” caused the financial crisis. And offers an answer to the question that still lurks in the mind of every American; whether black, white, native American, asian or Hispanic; whether educated or not; whether English, Spanish, or Mandarin speaking.

Taking a big step back, and looking at it like a business process: “How could so many Americans ALL have made the same ill-advised mortgage borrowing decisions?” The answer lies in what did they ALL have in common…

It was all about leverageWhat is leverage?

Leverage is a way to control more of something when you can’t pay for it in full. We do it all the time; when we buy a car — except few of us actually buy the car, we finance it or lease it. We also do it when we buy a house — except almost no one pays cash for a house, we finance the purchase with a loan; it’s secured by a mortgage on the property.

Example of 5 times leverage:

When we buy a house and put 20% down, we buy a house worth 5 times as much as the down payment. If we put $100 thousand down we can buy a house worth $500 thousand. $500 thousand divided by the $100 thousand we put down equals 5 times leverage.

100 times leverage:

By the same calculation ZERO down mortgages were suffice it to say, 100 times leverage, it’s actually more but that’s a discussion for later. Repeat after me, no money down mortgages equal 100 times leverage.

***

Who controlled and approved EVERY leverage decision?

Leverage Approval #1 by:

TBTF Banks (ultimately) approved every one of these loans and bundled thousands of others like them initially into mortgage backed securities (MBS).

Leverage Approval #2 by: [the key, little known fact]

In the past, TBTF Banks used to sell them off (remember that word) to investors like mutual funds, insurance companies and pension plans. In the 2000′s TBTF banks issued almost $17 Trillion of MBS, but did not sell all of them OFF to 3rd parties. They held massive amounts of them to turbo-juice their bonus checks in a 2nd set of books (legally) in OFF balance sheet, special purpose entities. As a refresher Enron did the same type of thing. In the decades, make that for over 60 years before the 2000′s TBTF banks’ leverage was around 12 times; however when they concealed trillions worth of MBS — their leverage increased to over 30 times. Remember 5 times leverage? It was based on how much the house was worth right? And when TBTF banks add more leverage on top of the borrower’s leverage we don’t just add it — we ______? You guessed it — we multiply it.

3,000 times leverage on house prices:

100 times leverage on the borrowers side times 30 times leverage on the TBTF banks’ side is 3,000 times leverage ON house prices.

Lather, rinse and repeat — 100 times 30 equals 3,000 times leverage. Lather, rinse and repeat.

100 times 30 equals 3,000 times leverage.

Remember what I first told you about leverage?

Leverage lets you (or TBTF bank) control something that you can’t fully pay for. Well the TBTF banks’ way of financing them in the Asset Backed Commercial Paper market began to dry up in August 2008, so they couldn’t pay for these assets. This is the direct cause (but not the root) for the Fed and US Treasury to (have to) step in and pay CASH for them in the bailouts of 2008, and again in 2009, and again in 2010 and yet again 2011 via the Fed’s QE trifecta to the tune of over $20 Trillion dollars.

The interactive portion is about to begin:

Is it any surprise that the assets backing the commercial paper were ________? You may have guessed it — MBS.

Is it any surprise that the Fed created a new category to track ABCP in_______? You would be correct if you guessed 2006; just two swift months after Ben Bernanke was appointed chairman of the Federal Reserve by President Bush.

Is it just a random coincidence that almost $17 Trillion of Mortgage Securitieswere created by TBTF banks from 2001 to 2008?

What was that word I asked you to remember?

Oh, right it was OFF.

When TBTF banks’ CEOs, executives or prop traders got their year end bonus check did we hear reports that anyone said it was OFF (or that it was too much)? Nope.

***

The top 12 reasons + oneTBTF banks, before 2008 created a hidden, secret “market” for MBS:

1. As stated above TBTF banks changed from financial intermediaries into speculators via their proprietary (for the house only) trading desks;
2. Hiding (the FDIC used the word “concealed”) trillions of MBS off balance sheet;
3. Allowing their own internal prop traders to value #2 (legal under the SEC’s 2004 Consolidated Supervised Entity (CSE) program) despite the fact few if any, of #2 had EVER seen the light of any “market” trade as one between arms-length parties;
4. Why? To maximize same prop traders’, managers’ and CEOs’ cash bonus checks;
5. All based on the assumption (almost a religious belief) that national median home prices had NEVER gone down — true, as you may recall;
6. BUT the past was under a 60 times house finance, prudently underwritten leverage regime (20% down payments, verified job, income, assets and 12 times bank balance sheet leverage);
7. TBTF Banks’ single handedly created 3,000 times leverage on house prices, the underlying collateral of any MBS, CDO, etc.;
8. 3,000 times leverage is the product of Zero down loans; 100 times leverage for the borrower and 30 or more times TBTF bank on and off balance sheet leverage;
9. Mr Bass testified to the FCIC in January 2010 that TBTF banks’ leverage at the end of 2007 — yes end of 2007 (see page 13) shows almost all TBTF Banks were over 30 times, Citigroup at 68 times leverage; meant an adverse swing (in the value of the underlying collateral or obligations) of as little as 1.5% wiped them out completely — insolvent;
10. And we know that leverage worsened in 2008…and we know from Goldman Sach’s 2007 to 2008 collateral call dispute with AIG that MBS valuation marks (not even CDO’s) were south of 90;
11. It’s not about Fannie or Freddie either; they were downstream of information from the TBTF banks — again TBTF banks held trillions of MBS, in secret OFF balance sheet; I’m not saying it was necessarily illegal but it was fraudulent; as it was knowing, willful and intentional fraud upon the other side to the mortgage — the borrowers. And it only went on as long as it did — BECAUSE they were hidden;
12. And we know it’s not about CRA as home ownership peaked in 2004 nor can we blame it on the variant of “homeownership for all” as just a few too many houses were not primary residences but 2nd, 3rd, 4th and 5th homes and condos — each time the loan was approved (ultimately) by TBTF banks;
13. Last, 3,000 times leverage on home prices represents a 50 fold increase over the 60 times historical norm; more importantly shows that TBTF Banks’ violated requirements of their banking charters; i.e. to operate according to “safety and soundness”.

[TBTF Banks on LSD indeed; massive amounts of Leverage, Swaps and Derivatives.]

Former High-Level Federal Reserve Official: Fed Secretly Bailing Out Europe

Yes, We Are Bailing Out Europe

Federal Reserve chair Ben Bernanke told Congress that the Fed would not bail out Europe.

But he might have been less than forthcoming.

Former Vice President of the Federal Reserve bank of Dallas, Gerald ODriscoll, says that the Fed is secretly bailing out Europe:

O’Driscoll wrote in a Wall Street Journal editorial:

America’s central bank, the Federal Reserve, is engaged in a bailout of European banks. Surprisingly, its operation is largely unnoticed here.

The Fed is using what is termed a “temporary U.S. dollar liquidity swap arrangement” with the European Central Bank (ECB). There are similar arrangements with the central banks of Canada, England, Switzerland and Japan. Simply put, the Fed trades or “swaps” dollars for euros. The Fed is compensated by payment of an interest rate (currently 50 basis points, or one-half of 1%) above the overnight index swap rate. The ECB, which guarantees to return the dollars at an exchange rate fixed at the time the original swap is made, then lends the dollars to European banks of its choosing.

***

The two central banks are engaging in this roundabout procedure because each needs a fig leaf. The Fed was embarrassed by the revelations of its prior largess with foreign banks. It does not want the debt of foreign banks on its books. A currency swap with the ECB is not technically a loan.

Ever since the housing boom bursted in 2005, Homebuilder Confidence collapsed and Prospective Buyer Traffic  has been at very low levels.

Yet another twitch upturn is being heralded as the real deal — as being driven by a real improvement in underlying fundamentals. These charts look to me a slow reversion towards normalcy – but we have a long way to go.

Homebuilder confidence and Traffic are tertiary indicators this Housing cycle — I am far more concerned with 1) Employment and Wage Gains, 2) Household formation; 3) Median Income to Median Home Price, and 4) Shadow Inventory.

>
click for ginormous charts

NAHB data via Investech

Click for ginormous chart

Source: National Post

By Art Cashin, UBS Financial Services Inc.

‘Tis two days yet to New Year
but despite what you’re hopin’
The folks in the Board Room
say “the full day we’re open”

So we’ll buy and we’ll sell
as the tape crawls along
And though “Bubbly’s” verboten
we may still sing a song

Two Thousand Eleven
looked good at the start
But deadlocks in D.C.
took things all apart

We finished up with a rally
thanks to old Santa Claus
But some late Euro troubles
Almost caused us to pause

We lost special people
as we seem to each year
It just makes us treasure
each one that’s still here

Peter Falk, dear Columbo
put his raincoat away
James Arness, Marshall Dillon
wears a new star today

Jack Kevorkian left us
without an assist
Harry Morgan, Colonel Potter
will also be missed

And Christopher Hitchens
said of God he had doubt
Now he’s taken that journey
when we each will find out

Andy Rooney’s curmudgeon
up to heaven has gone
Jack La Lanne and his juicer
have also moved on

Amy Winehouse so troubled
has joined heaven’s choir
And Betty Ford also
in this year did expire

Joe Frazier, once smokin’
went down for the count
And Jane Russell, the Outlaw
found a heavenly mount

Liz Taylor’s great beauty
now in heaven’s halls glows
Jackie Cooper, the child star
donned some angelic clothes

Steve Jobs left his iPad
he won’t need it now
His final words as he left us
were just a simple “Oh Wow!”

Mark Haines left the floor too
without saying good-bye
Though he growled & he grumbled
he was still a good guy

Read the rest of this entry »