Wednesday, April 29, 2009

Corporate Sector Says No Green Shoot

Green Shooters are Betting the Corporate Sector is Wrong

"The real change in private inventories subtracted 2.79 percentage points from the first-quarter"
"Real nonresidential fixed investment decreased 37.9 percent in the first quarter, compared with a
decrease of 21.7 percent in the fourth"

Business spending and inventories are tanking, it seems that the corporate sector is skeptical of any increase in demand so they are resetting to a new 'lower' level of activity and inventories. The market seems excited about consumer spending being up, this was lead by 'Personal Taxes' being down increasing disposable income, likely as a result of the stimulus package. The savings rate still rose even though spending was up(outlays rose less than the income increase), which shows cautious consumers as well. All categories of investment fell, animal spirits haven't been fixed yet the green shooters seem to think so

Tuesday, April 28, 2009

The Rule of Law Ain't Going to Get Me Reelected

US Government is Recklessly Raising Risk Premiums

So far the government has managed to make a few mistakes that are probably raising uncertainty in the marketplace and raising risk premiums just in the middle of a credit crisis where premiums are already high. Here's some of them

-US Congress trying to disrupt US contract law by going after bonuses after the fact

-Bernanke and Paulson lied after Lehman's bankruptcy by saying it was intentional and they had things under control. Bernanke went as far as saying LEH CDS had already priced in that possibility. Meanwhile the Friday before the bankruptcy weekend the CDS stood at 700bps, it was just the opposite, the only reason the CDS wasn’t at Icelandic levels was because the market thought they were too big to fail, Citi CDS is close to that level, I dont think Bernanke would accept that the market is pricing in Citi's failure. Paulson said at no moment he thought of putting tax payer money to save LEH, turns out that was a lie
Later on Bernanke reveled that they wanted to bail them out but they could not because by a lack of Fed authority(no good collateral) and Paulson almost certainly must have considered using the currency stabilization fund but may have decided against due fear of a political problem(This was before the presidential election), just a few days later he did use that authority which shows it was always in his radar

-Treasury bails out Citigroup by giving preferential treatment to private preferred stock holders, which include foreign government bodies, to the expense of Citi public preferred holders

-Government favors unions in debt to equity swap negotiations in the Chrysler and GM bailout. The bondholders and the union are on the same legal level as unsecured creditors but the administration tried to hand more of the new auto companies to the unions. This will be deeply worrying if political pressure is extended to the bankruptcy court that will deal with the likely bankruptcy of the autos

-Government has a clause in TARP legislation that enables them to change that contract at any time for any reason. They already used this for compensation reform and other changes. TARP Bank shareholders and creditors are probably depressing the value of their holdings but more than usual because of that

-Treasury might be trying to mislead the markets by understating the level of capital needs of US banks. This could come back to haunt them as their credibility will be depressed even further

-Paulson might have encouraged a CEO to hide material information from bank shareholders

This is a credit crisis, now creditors and capitalists need to consider more factors when they are doing their investment decisions, the fact that the government can change rules, lie about systemic events, favor certain political groups(maybe even in bankruptcy), make unconstitutional moves, etc

Since the US is going to a new world where the government will play a bigger role in the private sector(because of bailouts, nationalizations, regulation etc) the fact that they are not behaving in a way that is consistent stable markets is troubling

The Fed seems to be trying its best to lower interest rates but other arms of the government are trying to hike it even if they are not aware of it

Friday, April 24, 2009

Soros says Thank You

Go Ahead George Soros, Congratulate Hank Paulson for Encouraging Securities Fraud

Hank Paulson took a lot of heat for 'allowing Lehman to fail', George Soros went as so far as to saying "The claim that they lacked the necessary legal powers is a lame excuse. In an emergency they could and should have done whatever was necessary to prevent the system from collapsing.", Paulson was the treasury secretary, the only way he could have bailed out Lehman at the time was using the US Exchange Stabilization Fund(there was no TARP money), those funds(about $50b) are supposed to be used to in foreign exchange intervention, so the only way he could have saved Lehman was to lie to the American public that Lehman threatened the US dollar in some way.

Essentially Soros wanted Paulson to mislead people in order to save the financial system. Well it turns out that Paulson might have encouraged Ken Lewis to commit securities fraud and withhold material information from his shareholders to assure that the MER merger would not fall out of bed. Now just where are Soros congratulations letter to Paulson for putting the financial system above his integrity?
I bet we wont be hearing from him that 'Paulson did the right thing' yet that’s what he suggested in a article I quoted the line above.

The same thing applies to Bernanke, the only way he could bailed out Lehman was to lend against the commercial real estate garbage that Lehman has on its books and lie that 'We think this collateral is appropriate' and its possible that Bernanke encouraged securities fraud as well, just where are the flowers from Soros and an invitation for a tennis match?

Wednesday, April 22, 2009

Banks Are Lending Lies

The Great Garbage Rally of 2009 is un-backed by Bank Lending

This great rally of 2009 has been lead by the worse most levered companies in the stock market, Bloomberg reports "The 130 companies in the S&P 500 and Europe's Dow Jones Stoxx 600 Index with debt-to-equity ratios above 50 percent and a return on assets of less than zero... rose an average of 82 percent from March 9 through April 17."
What seems to have trigged it was a expectation that banks are out of the woods with chances of lending again with now positive earnings and the economy is reaching bottom as the 'second derivative' improves.

As far as bank lending is concerned, its simply not happening
Fed H8 Bank Credit Report. This fed report shows that bank credit has gone down every month in 2009, meanwhile cash assets in banks balance sheets continues to soar
Deposits in banks are down more than $100b in Apr, that is the side effect of a rising stock market and improved confidence, banks get less funding(therefore can lend less) as people take risks and stop hiding behind FDIC guaranteed deposits and deposit taking too big to fail institutions.

As far as bank capital is concerned Geithner just said 'everything is ok, most don’t need any money', which means there is trouble coming down the pipe. The treasury doesn’t have the money to plug in the holes so its natural they would say more money is not needed, the last thing they would do is to say "Guys there is a $500b hole in the largest banks and we don’t have the cash!!", I mean what are the chances that the additional capital needed somehow will be conveniently less than the $130b in TARP money left when they report results in May 4? I'd say the odds are pretty high, the odds are also high that we are being mislead. If it looks too much like a made-up coincidence it probably is

As far as bank earnings are concerned we had a few groups those who became hedge funds ‘earning’ their money from trading and other highly volatile revenue streams(JPM, GS) those revenue streams can easily lose them money as it happened in the Q4, those who mislead equity investors about their reserves(WFC) and those who have more rare non-recurring one time items than an art gallery(C, BAC).
Since housing is still collapsing at a fast pace with CA stuck in a looming foreclosure crisis, with notices-of-default soaring nationally, credit card lines getting cut hurting the consumer and unemployment still jumping there is little or no hope for bank earnings recovery in 2009

This suggests that this great garbage rally is unfounded, these levered companies cannot refinance their debts, they cant pay it all off, they need either raise equity or go bankrupt there is no way around it. GGP will be just one of a bunch, there will be a heck of a lot more companies going bankrupt because of maturing debt obligations. Reits, airlines, utilities and other levered sectors are in for a new downleg when the market finds out there is still little credit or liquidity coming into the markets

Friday, April 17, 2009

CA to lead ES lower

Are the Credit Markets starting to smoke Crack as well?
Credit markets are beginning to show signs of improvement. The CDS counter-party index plunged 5% yesterday, LQD and JNK are both rising, so the stock market isnt the only one pricing in better outcomes this year this suggests that maybe its incorrect to be bearish and perhaps I need to cover short positions in banks/brokers, REITs, airlines, life insurers, levered utilities,etc

There is however one problem that the market simply doesnt know. CA is 35% of the foreclosure count and 45% of the dollar foreclosure figures(this data might have changed since 2008) nationwide. The Notices of Default(NOD) are simply soaring according ForeclosureRadar(reached a new record last month). NOD are a leading indicator for foreclosures down the road(they are the first step in that process), they were depressed for months as the government demanded moratoriums and other silly tools to 'fix' the problem. So we pretty much know that CA will be hit with a big supply jam down the road and Case-Shiller will keep nosediving(It collapsed at a 33% annualized rate in Jan, I would not be surprised if other US bubble markets were having high NODs as well). Unless decades of econometric evidence all the sudden break down there is simply little reason to expect the economy to 'pickup' in the 2nd half as asset markets lead by housing(and soon to follow stock and credit markets) keep diving

More home price declines will lead to the wealth effect on consumer spending, the capex effect on the corporate sector and the balance sheet effect of the banking sector and that simply wont sustain economic recovery in the 2nd half. Risk markets seem to be pricing in some kind of recovery in the 2nd half(consensus of economists is that the recession will end in September), however this looming CA foreclosure crisis should hit the banks hard and drive asset prices lower

Why I assume this data is not currently priced in by the securities markets? Because of the crazy reactions markets have on the slightest upticks in housing data, furthermore data disseminated by foreclosure radar doesnt seem to be widely followed, when dozens of Goldman traders glued to bloomberg terminals start to jam or crash ES futures or the CDS counterparty risk index swaps based on CA NODs then I might be inclined to listen to market signals more closely. You almost cant find anyone who follow these numbers, yet they love to pay attention to existing home sales upticks when those upticks tend to be generated by higher foreclosure sales

At this point however I'm inclined to agree that the post Lehman depression seems to be over and thats as bullish I'm willing to go

Mr. Mortgage new secret(not public yet) blog about the looming CA crisis
CA Foreclosures about to Soar

Monday, April 13, 2009

The Bernanke Inflation

Why Bernanke's Paranoia Will Lead to High US inflation

Lots of folks scorn the idea of inflation coming down the road, the argument goes as follows “money printing wont work, banks are hoarding liquidity, savings rates are rising, credit is being paid back, the output gap and unemployment will make deflation stay with us”. While I believe this argument is right for the next year or two it isn’t right for period after that, why?

Because in that scenario that world would end and since the world won’t end that means we will have high inflation. Its a bit of a exaggeration to say that world would end but that scenario implies downright dangerous deflation rates, the US simply cant survive with a 3-5%+ deflation rate, standards of livings would be smashed, debt and deflation is a deadly poison, the minimum wage would go up every year under deflation, debt burdens would go up, foreclosures, defaults all would soar and borrowers suffer the ‘pay option ARM’ effect of their real debt burdens going up every year and being more insolvent as the day goes by.

If sustained that kind of deflation would lead to something worse than the great depression since leverage is higher and global trade/flows are getting hit harder, thats what I mean by the world would end. Bernanke's paranoia is justified

The US central bank will simply not tolerate any kind of sustained deflation and those who think the fed is 'all-in' because of 0% central bank rates and money printing are mistaken. Bernanke is printing money like mad yet he continues to make apologies for it, he keeps assuring the markets they have a 'exit strategy' and it 'wont be inflationary in the end', he does this to prevent the 10y and 30y treasuries from tanking and also because inflationary expectations are still reasonably anchored as show by the TIPS market.

So in the US currently deflation is still not an issue, the core CPI and core PCE are still well into the fed's comfort zone, if they do take a nosedive and TIPS tumble its very likely the fed will change their tone, they wont just print huge money they will also try to convince people that their dollars are garbage. If people get convinced their money will lose purchasing power tomorrow they will spend it today creating a self-fulfilling prophecy of inflation. The fed have just began this process by creating a long-term inflation target of 2% but they are still waiting for the core indexes to go down

Japan had 1% deflation rates even though their central bank is headed by incompetents, had they pursued better policies instead of being paranoid about losing face they quite likely would have had positive inflation and better growth

What about the output gap and unemployment?
In 1933 when FDR devalued the dollar against gold, took the US off the gold standarad and allowed the fed to print its way out of the problem(the 30's version of quantitative easing), the unemployment rate was at 25% and GDP way bellow its potential having dropped 27% from its 1929 peak every single year, talk about output gap and deflationary forces. Yet the Producer Price Index jumped 25% y-o-y a little after the devaluation then averaged 7% up to 1938, the CPI jumped 6-7% then avg around 2.5% up to 1938. GDP then grew 30% from 33 to 38, the unemployment rate dropped from 25% to 15%. M1 grew something like 40% from 1933 to 1936
Yes, monetary policy works, when FDR screwed dollar holders overnight through devaluation that induced people to be worried their dollars were going to be worth less tomorrow and people spent today as a result(higher velocity of money), that shows in the private consumption data(83% of GDP) that jumped 25% during that period and private investment(2.7% of GDP) that jumped 80%, government spending(20% of GDP) jumped 20%, so it wasn’t FDR public spending that bottomed out the economy, it was his monetary policy inducing personal consumption(although effects on consumer sentiment from his programs probably account for some of the improvement, an additional positive factor was stabilization of banks)

The higher velocity coupled with money printing(higher supply) lead to a rise in prices stopping the debt deflation collapse and that showed up in the improvement in GDP and employment, prices rose even though the unemployment rates was still well above the Non-Accelerating Inflation Rate of Unemployment(NAIRU, in this case being above the NAIRU should create deflation). Why didn’t I considered the data from 1938 and on? Because in 38 the US suffered a government induced recession lead by higher taxes, higher reserve requirements for banks and cut back on public spending, its unlikely that mistake will be made again

Bottom line is the fed will not tolerate deflation, and to think that prices are outside the fed's control is to think that what the central bank says won’t have an impact, Bernanke has crashed the dollar twice with QE announcements, those were huge moves much bigger then what the Geithner comments on SDR ever made. That is because Bernanke not Geithner sets US dollar policy and gigantic levels of deficit monetization coupled with manipulating people into thinking the Fed doesn’t care about inflation is quite likely to make US inflation rates to be quite high after the recession/depression is over.

If by some oddity money printing stops working the fed will literally pay the entire national debt and finance the federal government forever, of course in equilibrium that is not possible because inflation would soar and this should end up being the Bernanke plan just in a smaller more cautious scale

I can only imagine what the gold market will behave like when Bernanke tries to fool people into thinking they will print money and 'drive the dollar down', that wont be true of course, the fed will pullback when inflation goes up alot but the gold conspiracy theorists will be puzzled when one of the bigger verbal supporters of higher gold becames Ben Bernanke

sources: The Recovery from the Depression of the 1930s
Inflation figures are from economagic

Thursday, April 9, 2009

Employment now leading

Has the unemployment rate turned into a leading indicator?
Some people like the folks are pimco are speculating massive jumps on unemployment are not lagging indicators but rather leading ones because they affect sentiment and keep animal spirits depressed.

This argument makes sense even though you statistically employment lags as the evidence shows over the last decades. That evidence is not important because you cant find much evidence of a stock market collapse of this magnitude over the last decades either or a number of other plunges in economic data, so in these unprecendeted times it could very well make sense to throw some of these backward looking models out of the window. In the end it comes down to 'do you believe your crazy old theories or your lying eyes?', I dont think these eyes are lying, by observation you can tell these massive jumps have to affect sentiment, otherwise you are arguing massive reported economic destruction doesnt affect human behavior which simply not likely. So it looks like a good percentage bet to believe employment might have turned to leading indicator in this credit crisis

This suggests people(like stock bulls) ignoring employment because it lags are in for a big surprise when the very indicators that are slightly better now and which they are now cheerleading might turn back down or stay depressed killing off the 2nd half recovery they are antecipating

Monday, April 6, 2009

Does the Swiss National Bank suck more than Roger Federer?

The Swiss needs to show the world how to beat deflation

Switzerland is on the headlines as one of the first countries to reach deflation. Since the BOJ has been headed by morons for so long it could be the swiss central bankers who might show the world how to create reflation/inflation, avoiding nominal price declines and the downward spirals it creates

It might very well be the
swiss price indexes one of the most important indicators of 2009/2010, success or failure there would signal whats to come for US, UK and EU