Posts filed under “Think Tank”
Today – SPMs are down 14.60 in Sunday night trading because Obama’s chief economic adviser, Larry Summers, asserted while appearing on Fox News Sunday, that the economic freefall is over but, “I expect the economy will continue to decline… [with] sharp declines in employment for quite some time this year.” (Reuters)
• “The anticipation over the white paper appears to be much ado about nothing,” said Josh
Rosner…“The most significant numbers provided by the Fed in the paper appear to be the page
• “A lot of triple talk,” said Jim Glickenhaus… “I think they’re going to say while things are bad, the end is not at hand. Maybe.”
• “The question I have, by using fourth-quarter numbers, is this skewed positively?” said Lawrence Kaplan, an attorney with Paul Hastings, who served as a senior attorney in the chief counsel’s office at the Office of Thrift Supervision. “Because January and February were pretty lousy, and as a result that’s when it hit the fan.” (Bloomberg)
As most people guessed, the ‘stress test’ is an innocuous exercise based on rosy economic projections. Besides, why is a ‘stress test’ needed when there are already three agencies (Fed, FDIC, OCC) that apply metrics to measure banks’ solvency and financial condition?
A major problem with the ‘stress test’ is it depends on modeling and it’s the precise practice responsible for much of this economic and financial mess. It’s extraordinary that so many people believe that the Fed and Treasury, after missing the financial disaster, housing debacle, recession and derivative implosion, can now extrapolate economic conditions and resultant financial affects from its models. How did all that rocket-science modeling for subprime defaults and securitization workout? Yet many people already forget or ignore this reality.
Here’s another reality that most investors are missing – banks must raise more capital. So who’s the patsy in recent days that has been driving financial stocks higher? The FT: Fed will seek bank capital increase. Some of the country’s biggest banks will be asked to raise more capital by US authorities following the completion of bank stress tests, senior Federal Reserve officials said on Friday. (Financial Times)
Banks May Need $1 Trillion After U.S. Tests, KBW Says (Bloomberg)
What few analysts realize is that economic ‘muddling’, the best case scenario for the next two years, gives no relief to an economy burdened with record debt. If you lose a high paying job and you are struggling to pay your debts, you will not suddenly be able to pay your debt with a job a Wal-Mart.
What analysts should do is quantify the US private and public sector debt load and then extrapolate the needed income and GDP to service the debt. And then they should calculate how much debt will implode with little or no income and GDP growth.
The ‘real budget deficit’, “Treasury Gross Public Debt”, is now $1.85 Trillion (Barron’s p. M70).
The most disturbing aspect of the current scheme to manipulate markets, economic data and industrial data into something benign enough to increase consumer confidence and reinflate assets is that it is the precise scheme that Easy Al and others perpetrated over many years. And it created the current mess.
Solons again are trying to inflate assets to a level that is a huge disconnect with economic reality in
the misguided belief that they can paper over structural US economic problems and fostering
‘confidence through asset bubbles’ that will translate into economic activity. We are back to square one in ‘the new economy’ gambit.
And because we are back to square one in ‘the new economy’ of inflating assets to paper over problems, the markets are diving back into inflation mode. Commodities are soaring; bonds are struggling even with Fed support and the dollar is finally buckling.
Bill King is a Wall Street veteran with 35 years of institutional equity, proprietary and derivatives trading experience, giving him a unique perspective on current market conditions and forecast. As author of The King Report, Bill’s candid observations and forecast on the economic, financial, and political forces that are impacting the markets is read by major institutions and hedge funds. However, this report is not the usual garden variety tripe that is issued by the financial media and Wall Street. Bill, in plain language, refutes conventional rant about Wall Street activity and articulates the real factors and impetuses that drive market activity. The inside world of Wall Street is far different than what is disseminated to the masses. Wall Street insiders seldom adorn their own portfolios or trading accounts with ‘recommended list’ issues.
“Words from the Wise” this week comes to you in a shortened format as my traveling in the US precludes me from doing my customary commentary. However, a full dose of excerpts from interesting news items and quotes from market commentators is provided.
On Friday, Federal Reserve regulators have released a white paper outlining the criteria they used to assess the financial health of the nation’s 19 biggest banks. On the same day they also briefed the banks about how their companies had fared in the examination. The banks will have until Tuesday to dispute any of the results before they are made public on May 4.
According to the Financial Times, senior Fed officials said US authorities will ask some of the country’s biggest banks to raise more capital following the completion of bank stress tests. The officials also indicated that a second, larger, group of banks will be asked to improve the quality of their capital by increasing their amount of common equity.
Last week investors’ mood was also influenced by tentative signs of economic stabilization in a number of countries and a barrage of earnings report – generally better than feared. As the equity rally ground to a halt on some bourses, the US dollar and government bonds offered little safety appeal and edged weaker. Gold, on the other hand, advanced after China revealed it has almost doubled its gold reserves since 2003. Treasury Inflation Protected Securities (TIPS) also improved on the week.
The performance of the major asset classes is summarized by the chart below, courtesy of StockCharts.com.
After rising for six consecutive weeks, global stock markets experienced a volatile week, including the worst losses since early March on Monday. In the end, the MSCI World Index gained 0.1% (YTD -4.1%) on the week and the MSCI Emerging Markets Index 0.7% (YTD +14.2%), but the S&P 500 Index shaved off -0.4% (YTD -4.1).
Click on the table below for a larger image.
As far as the earnings season is concerned, Bespoke indicated that 156 S&P 500 companies had reported earnings by Thursday, beating estimates in 67% of the cases. Also, so far earnings are down 16.6% versus the first quarter of 2008. While down, this is much better than the -37.3% expected at the start of the earnings season. “The earnings season still has a long way to go, but the current trend has investors optimistic,” said Bespoke.
In an attempt to cast light on the debate of whether we are dealing with a bull market or a bear market rally, William Hester (Hussman Funds) highlighted the following: “Contracting volume is not enough evidence to qualify that this is a bear-market rally with certainty. There are other measures that are showing more strength – such as various indicators of market breadth. But new bull markets, whether at their inception or soon after, have a history of recruiting noticeable improvements in volume. So far this rally lacks that important quality. Over the next few weeks stock market volume will be a metric to watch closely.”
The stock market will show its hand in due course, but it is crucial that the lows of March 9 hold in order for base formation development to remain intact. Should these levels – 677 for the S&P 500 and 6,547 for the Dow Jones – be breached, further downside movements may be in store.
For more discussion on the direction of stock markets, see my recent posts “Video-o-rama: Economy – Recovery or relapse?” and “Has stock market rally run its course?” (And do make a point of listening to Donald Coxe’s webcast of April 24, which can be accessed from the sidebar of the Investment Postcards site.)
Next, a quick textual analysis of my week’s reading. No surprises here, with key words such as “banks”, “market”, “economy”, “economic”, “government” and “prices” featuring prominently.
“Global business sentiment remains very poor, but it has taken on a slightly better hue in recent weeks. Broad assessments of current and prospective conditions have also moved up measurably since the beginning of the year,” said the latest Survey of Business Confidence of the World conducted by Moody’s Economy.com. “It is premature to conclude that businesses are turning measurably more upbeat, but recent survey results are somewhat encouraging.”
For a further perspective on the outlook for the global economy, also read my posts “Economic rate of decline slowing down?“, “Goldman raises China’s growth forecasts” and “Chinese economy on the rebound“.
Back to the Future Recession
April 24, 2009
By John Mauldin
Financial Innovation: The Round Trip
Back to the Future Recession
The Fed at the Crossroads
How Did We Get It So Wrong?
The Trend Is Not Your Friend When It Ends
Orlando, Naples, Cleveland, and Grandkids
This week we look at the second half of my speech from a few weeks ago at my annual Strategic Investment Conference in La Jolla. If you have not read the first part, you can review it here.
The first few paragraphs are a repeat from last week, to give us some context. Please note that this is somewhat edited from the original, and I have added a few ideas. You can also go there to sign up to get this letter sent to you free each week.
Okay, when you become a central banker, you are taken into a back room and they do a DNA change on you. You are henceforth and forever genetically incapable of allowing deflation on your watch. It becomes the first and foremost thought on your mind: deflation, we can’t have it.
MV=PQ. This is an important equation, right up there with E=MC2. M (money or the supply of money)
times V (velocity — which is how fast the money goes through the system — if you have seven kids it goes faster than if you have one) is equal to P (the price of money in terms of inflation or deflation) times Q (roughly standing for the Quantity of production, or GDP)
So what happens is, if we increase the supply of money and velocity stays the same, and if GDP does not grow, that means we’ll have inflation, because this equation always balances. But if you reduce velocity (which is happening today) and if you don’t increase the supply of money, you are going to see deflation. We are watching, for reasons we’ll get into in a minute, the velocity of money slow. People are getting nervous, they are not borrowing as much, either because they can’t or the animal spirits that Keynes talked about are not quite there.
To fight this deflation (which we saw in this week’s Producer and Consumer Price Indexes) the Fed is going to print money. A few thoughts on that. The Fed has announced they intend to print $300 billion (quantitative easing, they call it). That is different than buying mortgages and securitized credit card debt — that money (credit) already exists.
When they just print the money and buy Treasuries, as with the $300 billion announced, they can sop that up pretty easily if they find themselves facing inflation down the road. But that problem is a long way off.
Sports fans, $300 billion is just a down payment on the “quantitative easing” they will eventually need to do. They can’t announce what they are really going to do or the market would throw up. But we are going to get quarterly or semi-annual announcements, saying, we are going to do another $300 billion here, another $500 billion there. Pretty soon it will be a really large total number.
When we first started out with TALF and everything, it was a couple hundred billion, and now we just throw the word trillions around and it just drips off of our tongues and we don’t even think about it. A trillion is a lot. It’s a big number. And the total guarantees and backups and all this stuff we are into — I saw an estimate of $10-12 trillion. That’s a lot of money.
Understand, the Fed is going to keep pumping money until we get inflation. You can count on it. I don’t know what that number is; I’m guessing maybe as much as $2 trillion. I’ve seen various studies. Ray Dalio of Bridgewater thinks it’s about $1.5 trillion. It’s some very big number way beyond $300 billion, and they are going to keep at it until we get inflation.
Side point: what happens if the $300 billion they put in the system comes back to the Fed’s books because banks don’t put it into the Libor market because they are worried about credit risks? It does absolutely nothing for the money supply. Okay? It’s like, goes here, goes back there — it doesn’t help us. The Fed has somehow got to get it into the financial system. They’ve got to figure out how to create some movement.
Will it create an asset bubble in stocks again? I don’t know, it could. Dennis [Gartman] talked about being nervous yesterday. I would be nervous about stock markets both on the long side, as I think we are in a bear market rally, but also there is real risk in being short. Bill Fleckenstein will be here tonight. He is a very famous short trader. He closed a short fund a couple of months ago. He says he doesn’t have as many good opportunities, and basically he’s scared of being short with so much stimulus coming in. So it’s going to work, at least in terms of reflation, but the question is, when? A year? Two years?
March New Home Sales, a measure of=20 contract signings of new homes, totaled 356k annualized, almost 20k more tha= n=20 expected and Feb was revised up by 21k. Months supply fell to 10.7 from 11.2= and=20 its the lowest since Oct. Jan saw the high in this cycle when it reached 12.= 5.=20 The absolute…Read More
Category: Think Tank
The Credit Crisis and Cycle Proof Regulation1
1 Remarks delivered by Raghuram G. Rajan, Eric Gleacher Distinguished Service Professor of Finance at the Homer Jones Lecture organized by the Federal Reserve Bank of St Louis in St Louis on April 15, 2009. I thank Luigi Zingales for very useful discussion including some of the ideas in this talk. All errors are mine.
The 2009 Homer Jones Lecture
by Raghuram Rajan
Eric J . Gleacher Distinguished Service Professor of Finance,
University of Chicago Booth School of Business
Federal Reserve Bank of St. Louis
April 15, 2009
We are currently engaged in a search for the causes of the current financial disaster. But in
pinning the disaster on specific agents, we could miss the cause that links them al. I will argue that this common cause is cyclical euphoria, and unless we recognize this, our regulatory efforts are likely to fall far short of preventing the next crisis.
But let me start at the beginning. There is some consensus that the proximate causes of the crisis are: (i) the U.S. financial sector misallocated resources to real estate, financed through the issuance of exotic new financial instruments; (ii) a significant portion of these instruments found their way, directly or indirectly, into commercial and investment bank balance sheets; (iii) these investments were largely financed with short-term debt. (iv) The mix was potent, and imploded starting in 2007. On these, there is broad agreement. But let us dig a little deeper.
This is a crisis born in some ways from previous financial crises. A wave of crises swept
through the emerging markets in the late 1990’s: East Asian economies collapsed, Russia
defaulted, and Argentina, Brazil, and Turkey faced severe stress.
In response to these problems, emerging markets became far more circumspect about borrowing from abroad to finance domestic demand. Instead, their corporations, governments, and households cut back on investment and reduced consumption.
Here is our latest comment FYI. Barry is wandering the wilds of Michigan and will be back soon with lots of channel observations. Chris
April 23, 2009
“What’s right about America is that although we have a mess of problems, we have great capacity – intellect and resources – to do some thing about them.”Henry Ford II
(1917 – 1987)
First, next Thursday, April 30, 2009, we will be participating in an important event in Philadelphia, “The Financial System, Banks & Economy: After the Storm…Where Are We Now?” The morning program includes Barry Ritholtz of Fusion IQ, David Kotok and Bob Eisenbeis of Cumberland Advisers, William Poole of CATO Institute and Diane Swonk of Mesirow Financial. For more information or to register, please click here: http://www.interdependence.org/Event-04-30-09.php
Next, we wish to thank the FDIC for the quick response to our last comment (“Can Citigroup Be Restructured Without an FDIC Resolution?”), where we suggested that the public record of the US banking industry is incomplete. We revised same to reflect their views. Bottom line is that the FDIC is presenting the bank unit data gathered from insured depository institutions correctly and consistent with GAAP.
Trouble is, while the current methodology may be precisely correct in a compliance and GAAP sense as it applies to federally insured legal entities, in our view and from a portfolio perspective, the FDIC dataset still is missing significant historic loss data, not just in 2008 but in previous years. Part of this situation stems from the “survivor bias” in the data. More, the impact of the timing of certain transactions and the use of GAAP purchase accounting has created some seemingly significant anomalies in both the historic record of the industry’s loss experience and in how GAAP accounting creates hidden reserves for acquirers, reserves that largely are invisible to retail investors but seemingly create distortions in reported earnings.
One reason that we took the risk of pissing off our friends at the FDIC by persisting with questions about the accounting treatment of the purchase of Wachovia Bank by Wells Fargo (NYSE:WFC), for example, is not only because the Q4 2008 industry data does not, in fact, include the charge-offs from Wachovia, realized losses that total into the tens of billions dollars. No, we were also interested in understanding how WFC got a little side benefit – a “cookie jar” in earnings terms – that is an effective subsidy for WFC to help absorb the cost of remediating the Wachovia portfolio.
Jonathan Weil of Bloomberg News wrote a very good analysis of WFC that puts the size of the cookie jar at $7.5 billion: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a6sv0hG.nW7g
For those not familiar with the cookie jar concept, we turn back the pages of the proverbial comic book to pre-2004, when Sanford I. Weill was the King of the Citi and the folks at the SEC were sound asleep when it came to hidden reserves. During Sandy’s shopping spree to build the great financial bodega now know as Citigroup, Weill accumulated a number of acquisitions and, thanks to the benefits of good legal advice and purchase accounting, was able to amass a considerable, undisclosed reserve position.
Via Jeff Harding, here’s yet another look at the so-called Green Shoots, and the hangover from the biggest credit bubble in history: Consumer prices fell 0.4% in February, the first time since 1955 (54 years). Retail sales decreased 1.1% from February to March (seasonally adjusted); sales are off 10.7% from March 2008 (retail and food…Read More
Good Evening: After spending most of Earth Day solidly and appropriately in the green, stocks returned to Terra Firma late in the session. Various earnings reports and some conflicting stories about the current state of U.S. home prices all contributed to the crosscurrents that ruled Wednesday’s trading. It’s still too soon to say if “countertrend…Read More
Testimony Before the Joint Economic Committee United States Congress Thomas M. Hoenig President and Chief Executive Officer Federal Reserve Bank of Kansas City Washington, D.C. April 21, 2009 2 Madam Chair Maloney, Vice Chair Schumer, ranking members Brady and Brownback, and members of the committee. Thank you for the opportunity to testify at this hearing….Read More
Good Evening: While many investors felt stressed yesterday about the upcoming release of our government’s attempts to test bank balance sheets under various economic scenarios, today appeared to be an official attempt to mollify those worries. And it worked — somewhat. Treasury Secretary Geithner and Fed Vice Chair Kohn offered enough soothing words that our…Read More