Some graphic details from Europe:
Austria’s bank exposure to emerging markets is equal to 85pc of GDP – with a heavy concentration in Hungary, Ukraine, and Serbia – all now queuing up (with Belarus) for rescue packages from the International Monetary Fund.
Exposure is 50pc of GDP for Switzerland, 25pc for Sweden, 24pc for the UK, and 23pc for Spain. The US figure is just 4pc. America is the staid old lady in this drama.
Amazingly, Spanish banks alone have lent $316bn to Latin America, almost twice the lending by all US banks combined ($172bn) to what was once the US backyard. Hence the growing doubts about the health of Spain’s financial system – already under stress from its own property crash – as Argentina spirals towards another default, and Brazil’s currency, bonds and stocks all go into freefall.
Broadly speaking, the US and Japan sat out the emerging market credit boom. The lending spree has been a European play – often using dollar balance sheets, adding another ugly twist as global “deleveraging” causes the dollar to rocket. Nowhere has this been more extreme than in the ex-Soviet bloc.
The region has borrowed $1.6 trillion in dollars, euros, and Swiss francs. A few dare-devil homeowners in Hungary and Latvia took out mortgages in Japanese yen. They have just suffered a 40pc rise in their debt since July. Nobody warned them what happens when the Japanese carry trade goes into brutal reverse, as it does when the cycle turns.
This is the article Paul Kedrosky commented on. I think it is one of the more intelligent ones, and I mostly agree with everything. It kind of puts the current situation in perspective, which is dire, but it also talks about a few solutions with should or should not be done.
...To date the focus of public policy has been on the extension of credit to banks and other financial institutions by the Federal Reserve so as to ensure their liquidity. This strategy is appropriate but may be reaching its limits. Where the problems a financial institution faces are of confidence or liquidity, lending can be highly efficacious. When the problems are of underlying solvency and the constraint on lending is a lack of capital, lending is not an availing strategy. It is necessary, at least on a contingency basis, to plan policy responses to such problems....
...Today, the end of the current financial crisis looks further away than it did in August 2007. Policy is not yet ahead of the curve. I used to remark in the context of the emerging market crises of the 1990s that I would date the moment of recovery from the first time an official pronouncement proved to be too pessimistic. By this standard, recovery is not at hand....
July 14 (Bloomberg) -- The U.S. Treasury Department's plan to shore up Fannie Mae and Freddie Mac is an ``unmitigated disaster'' and the largest U.S. mortgage lenders are ``basically insolvent,'' according to investor Jim Rogers.
According to the latest report by the California State Board of Equalization (BoE), taxable retail sales in San Diego County have fallen 2.9 percent since 2005. Over this same time period, the number of retail businesses in the County has also declined by nearly 2,900. This in spite of the fact that the County population has increased by 2.3 percent and payroll jobs are up 2.1 percent over the same period.
From Paul Kangas' interview with Sir John in 1999:
SIR JOHN TEMPLETON: So many people think they're wiser than they are, and they take risks. They buy on borrowed money, not thinking they're ever going to be called to pay it back. So, I believe the most dangerous thing you can do, business-wise, is to be excessively optimistic and use borrowed money or base your whole career on any one concept or asset.
Sir John Templeton passed away yesterday at the age of 95 near his home in the Bahamas.
Great 60 Minutes piece featuring Jim Grant. I love this part, 'you had to apply NOT to get a loan'. He is spot on.
"I mean free money. I mean you had to apply not to get a loan, almost. Sometimes you have to apply to get a loan, you almost had to apply not to get one," Grant says.
"It turns out that if you give people free money, they will take it without really worrying too much about giving it back. Because after all, it was free," Jim Grant says.
"Bonds marked triple-A are now quoted at 50 cents to the dollar, 40 cents on the dollar. Some of them, much less," Grant says.
"Some of them are worth nothing on the dollar. Nothing on the dollar. This is the worst thing that has happened to Wall Street in a long time," Grant says.
Asked how many of these securities are out there, Grant says, "A trillion with a T-plus."
"Alan Greenspan and his successor, Ben Bernanke, would say over and over that it's contained. The problem's contained. It turns out, it is contained only on planet Earth," Grant says, laughing. "That's it."
The federal government, eager to boost the flagging economy, will start distributing special stimulus payments Monday—four days earlier than expected.
"Beginning Monday, the effects of the stimulus will begin to reach households," President Bush said Friday. "This money is going to help Americans offset the high prices we're seeing at the gas pump and at the grocery store."
Interesting coincidence that the FOMC rate-setting meeting is Wednesday, a day before people were originally supposed to start seeing their direct deposits/checks.
By the way, for direct deposit filers, the stimulus money is obviously initially deposited into a bank. People receiving paper checks will get money later. It would be interesting to know the statistics on how many people deposit those paper checks into a bank or if they request cash immediately for spending. I suspect more people these days use electronic means of spending, so I'm guessing most of the stimulus money will first be on a bank's balance sheet before taxpayers use it. That makes it even more interesting that this stimulus package was moved up a whopping 4 days, which just happened to move the distribution ahead of the FOMC meeting.
It is also comical to think that more money will ease prices at the gas pump and grocery store. It must be understood that this stimulus money is essential money borrowed from taxpayers to be given to taxpayers. Why not just have a national "spend $600 on your credit card holiday". It is no different. And the effect will be even higher prices, not lower. Make no mistake, this is just another money printing exercise.
Silvio Berlusconi, Italy's newly elected premier, has called for a change in the ECB's mandate, proposing a dual mission akin to the US Federal Reserve's mandate to promote growth as well as fighting inflation. He has the support of France's Nicolas Sarkozy.
Seems like someone wants to adopt the failing policies of the U.S. I suspect this would really usher in the demise of all paper currencies.
"...In an effort to deal with the problems highlighted by the current severe credit crisis, the new plan would give major new powers to the Federal Reserve, according to a 26-page executive summary obtained Friday by The Associated Press..."
A sad day for the notion of the Free Market - something that has made the U.S. shine for decades.
March 18 (Bloomberg) -- The Federal Reserve cut its main lending rate by three quarters of a percentage point to 2.25 percent as officials try to prop up the faltering economy and restore faith in the U.S. financial system.
The Fed Board of Governors also voted to lower the discount rate, the cost of direct loans from the central bank, to 2.5 percent. Officials reduced the normal 1-point spread over the federal funds rate in August to a half point to ease liquidity constraints. They further narrowed the difference on March 16, in the first weekend emergency move since 1979.
NEW YORK (AP) -- Just four days after Bear Stearns Chief Executive Alan Schwartz assured Wall Street that his company was not in trouble, he was forced on Sunday to sell the investment bank to competitor JPMorgan Chase for a bargain-basement price of $2 a share, or $236.2 million.
Stunning. BSC closed at $30 on Friday and was as high as $159 in the past year. Ouch. 2 bucks.
...Bernanke is risking a disastrous replay of the 1970s, when high oil prices fueled double-digit inflation. Every time the Fed started to tighten and unemployment jumped, chairmen G. William Miller and Arthur Burns lost their nerve. They lowered rates to boost job growth, and inflation inevitably revived, causing a vicious price spiral. The Fed let the disease rage for so long that it took draconian action by chairman Paul Volcker in the early 1980s to finally defeat inflation. The price was a deep recession, with unemployment hitting 11% in 1982...
...So if inflation is really expected to rage, why aren't interest rates far higher? The explanation is twofold. First, government bonds are hardly a foolproof forecaster. For example, five years ago Treasury yields were predicting 2% inflation over the next five years, and the actual figure was 3%, or 50% higher. Second, investors are so skittish about most stocks and corporate bonds that they're paying a huge premium for safe investments, chiefly U.S. Treasuries...
Simply put, the media and the short-sellers on Wall Street are trying to scare us into having a recession. Since the nice people who read this have some interest in facts and figures, here are a few reasons why things aren't so bad.
My impression is that the media and Wall Street are perennially optimistic. The spin is generally positive, so what fear-mongers are Mr. Stein talking about? Peter Schiff? He's just one guy, and the media have been beating him over the head with a stick for years. Am I now to believe that the media are aligned with Peter Schiff?
Mr. Stein goes on to say how housing, credit, and weak dollar aren't so bad and we shouldn't worry about them. I don't buy it.
The road may be bumpy for a year or two, but we'll come up roses in a short time and will be ready to smile -- sadder but wiser.
I agree with Mr. Stein's final statement that the road may be bumpy and we will be sadder. But, if Mr. Stein believes the credit crisis, etc aren't a problem, then why will we be sadder in a couple of years?
The housing/credit/weak dollar problem will likely turn out to be a much bumpier ride that Mr. Stein is expecting. But, one thing is for sure, we will eventually reach smooth pavement again. In the meantime, prepare for the worst and hope for the best.
As Benjamin Anderson writes in "Economics and the Public Welfare", the end of a real estate boom and crash is, partly for this reason [lack of short selling in the market], a prolonged period of stagnation, while the end of the stock market boom and crash is simply lower prices with activity still going on.
I think we will find the late Mr. Anderson to be more accurate in his forecast than Mr. Stein.
One in five American realtors has sold a home to a foreign investor in the past year, according to the National Association of Realtors.
The National Association of Realtors found that 7.3 percent of the houses sold last year in Florida were sold to foreign buyers. Miami in particular is a magnet for buyers from throughout Latin America and Europe, helping to mitigate the fallout from the area's housing slump.
This article initially leads one to believe that foreign buyers are "snapping up" properties as an indication that the worries are over in the US housing market. At the end, finally:
Hammersmith Group's Valhouli stressed that the fact that international investors are helping to prop up some troubled housing markets only emphasizes the level of stress in residential real estate.
My take is that foreign buyers are simply the last to the party as is typical with a speculative mania. Sure, with the weak dollar and lower overall prices since 2005, US real estate looks attractive to outsiders. However, that will not prevent prices from falling back to fundamentals as the final paragraph states:
"Relying on foreign real estate investors is fundamentally as risky as relying on subprime mortgages," he said, noting that both phenomena distort demand and can conceal the depths of the problem U.S. home buyers and sellers face. "Foreign buyers aren't going to save the U.S. housing market. They're just a temporary fix like a finger in the dike. Fundamentals matter."
Exactly. Fundamentals matter. But how many people read to the last paragraph when the entire article is so optimistic?
One more thing. Is it just me, or is anyone else getting really tired of the phrase "snapping up" as if people are buying houses (or stocks) like children picking up candy?
After the close of the market on Tuesday, Hovnanian reported a net loss of $469 million, or $7.42 per share, for its fiscal fourth quarter, ended October 31. Analysts on average had forecast a loss of $1.63 per share, according to Reuters Estimates.
Herb Greenberg posts an insider's point of view on the mortgage mess. Read the whole thing at the link below. A real eye-opener. I posted an excerpt below. Pay special attention to the final two sentences.
In Northern California, a household income of $90,000 per year could legitimately pay the minimum monthly payment on an Option ARM on a million home for the past several years. Most Option ARMs allowed zero to 5% down. Therefore, given the average income of the Bay Area, most families could buy that million dollar home. A home seller had a vast pool of available buyers.
Now, with all the exotic programs gone, a household income of $175,000 is needed to buy that same home, which is about 10% of the Bay Area households. And, inventories are up 500%. So, in a nutshell we have 90% fewer qualified buyers for five-times the number of homes. To get housing moving again in Northern California, either all the exotic programs must come back, everyone must get a 100% raise or home prices have to fall 50%. None, except the last sound remotely possible.
NEW YORK (Reuters) - There is a "substantial" risk that U.S. home prices will slide for the next three years or more, in a downturn that could be unlike anything seen before on a national level, Morgan Stanley said on Thursday in a report.
Yes, I'd like to point out that it says three years or more. I will choose the "or more". Three years is not long enough given that the government is likely to be far from finished meddling with the market. More government meddling means that prices will take longer to correct to fair value. It would, of course, take less time than that if interventions designed to put a floor under home prices were not taken.
Just remember this:
...unlike anything seen before on a national level...
Why? Because of loans issued that are unlike anything seen before.
"We should not bail out lenders, real estate speculators or those who made the reckless decision to buy a home they knew they could not afford," he said.
Then, who ARE the people he is supposed to be helping? In my estimation, anyone who took an ARM should be defined as "reckless" since they obviously didn't have enough income at the time of signing the loan docs to afford a fixed rate mortgage. Where were those folks magically supposed to get more income a few years after signing an ARM loan? ANSWER: Those people believed their home would appreciate, allowing them to refinance. If that isn't "reckless", I don't know what is.
Nobody should be helped.
Foreclosures are NEEDED to bring home prices down to reality so they are actually AFFORDABLE. Of course, since it isn't widely understood that AFFORDABLE homes are CHEAPER homes, the crisis will be worse than without government intervention. So-called AFFORDABLE home initiatives do nothing but INCREASE the PRICE of homes. Amazing that it still isn't obvious to everyone that higher home prices do not increase real wealth. If it were true that higher home prices increased wealth, we wouldn't have to orchestrate a bailout. The free market was not allowed to function when these high risk loans were pawned off to investors and now it will not be allowed to function when we really need it to clean up the mess.
In short, Mozilo proposes a plan to bail his firm out of the current mess by providing a quick fix to re-grease the wheels of his broken loan machine, while posturing as a spokesman for the American homeowner.
Nov. 30 (Bloomberg) -- U.S. Treasury Secretary Henry Paulson is negotiating an agreement with banks to stem a surge in foreclosures by fixing interest rates on loans to subprime borrowers, according to people familiar with a meeting he led yesterday.
And here is the reason why any "fix" is a bad idea:
Rewriting contracts also risks moral hazard -- encouraging borrowers to take on more debt in the expectation of being bailed out if needed later.
Exactly the thing that got us to this point in the first place: encouraging borrowers to take on more debt than they can actually afford to pay back (at any interest rate, including 0%).
A total of 728,000 new houses were purchased at annual rate, compared with a median forecast of 750,000 of economists surveyed by Bloomberg News. The figure was up from a revised 716,000 pace in September that was the lowest in almost 12 years, the Commerce Department reported today in Washington.
The median price of a new home dropped 13 percent, the most since 1970, to $217,800 in October from a year earlier.
Nov. 28 (Bloomberg) -- Florida local governments and school districts pulled $8 billion out of a state-run investment pool, or 30 percent of its assets, after learning that the money- market fund contained more than $700 million of defaulted debt.
Thousands of school, fire, water and other local districts across the U.S. keep their cash in state- and county-run pools. These public accounts, modeled after private money market funds, are supposed to invest in safe, liquid, short-term debt such as U.S. Treasuries and certificates of deposit from highly rated banks.
The Florida pool, which was the largest of its kind in the U.S. at $27 billion before the recent spate of withdrawals, has invested $2 billion in SIVs and other subprime-tainted debt, state records show. Connecticut, Maine, Montana and King County, Washington, are among other governments holding similar investments, in smaller quantities.
Investors are being lured to commodities, which have outperformed stocks and bonds this year. Commodity hedge funds manage about $55 billion, up from $30 billion last year and $14 billion two years ago, according to Chicago-based Cole Partners Asset Management, which invests in such funds.
Nowhere in the article is mentioned the most likely reason for the hoarding resulting in a shortage, which is that paper bills have no intrinsic value while coins do. Metal wins over paper when there is monetary expansion.
The four-month trial centered around the family businesses of Robert Kahre who paid numerous workers for their labor with circulating gold and silver U.S. coins, and did not report the wages. The payments took place over several years, allegedly totaling at least $114 million dollars.
In short, this failed prosecution has coalesced and exposed truths our Government desperately needs to hide from the People: the truth about our money, the truth about our (privately-owned) central bank, and the truth about the fraudulent nature of the operation and enforcement of the federal income tax system.
...if a worker is paid with such coins, his taxable "income" (if any) can only be the face value indicated upon the coin money paid -- i.e., $1.00 for a circulating silver dollar or $50 for a circulating gold U.S. coin.
Thompson v. Butler, 95 US 694 (1877), establishes that the law makes no legal distinction between the values of coin and paper money used as legal tender:
"A coin dollar is worth no more for the purposes of tender in payment of an ordinary debt than a note dollar. The law has not made the note a standard of value any more than coin. It is true that in the market, as an article of merchandise, one is of greater value than the other; but as money, that is to say, as a medium of exchange, the law knows no difference between them."
SAN FRANCISCO (Reuters) - Apple Inc (AAPL.O) Chief Executive Steve Jobs on Thursday offered a $100 store credit to early buyers of the iPhone, seeking to calm customers angry over an unexpected and steep price cut.
Why should anyone be angry when they freely overpaid for something to have it first? Most discussion I have had about the iPhone eventually concluded that it was too much money for something that is, afterall, a phone. And since it is a tech gadget, the price is know to drop drastically with time. These irate customers just had to have it first and no one twisted their arm to buy it, so why are they upset? Could it be that the iPhone is just another phone that didn't live up to expectations? Unbelievable that Jobs is giving back $100.
I suppose the same will happen in the housing market, too. People over the past few years who 'just had to have' a new house were willing to overpay while probably deep down realizing that it was too much money. Now that it is obvious that they overpaid, they are also asking for a bailout. Maybe Jobs can help them out, too, since I as a taxpayer do not want to be paying for someone else's decision via tax relief or any other government organized bailout. People need to learn to live with their decisions rather than crying to mommy (or the government) when those decisions don't work out as hoped.
Aug. 21 (Bloomberg) -- Ottimo Funding LLC, whose name is Italian for ``excellent,'' has the highest possible credit rating and doesn't own subprime mortgage bonds. That made no difference to investors who refused to buy Ottimo's $3 billion of short-term debt this month as losses on home loans to risky borrowers infect the global credit markets.
The $1.1 trillion market for commercial paper used to buy assets from mortgages to car loans has seized up just as more than half of that amount comes due in the next 90 days, according to the Federal Reserve.
Some notable quotes:
``We're dumping all this collateral into the market and it becomes a death spiral for the assets,''
``This has moved beyond temporary. It's gotten beyond bailing out some hedge fund and into the broad economy.''
We had recently become concerned about the current liquidity crisis negatively affecting the commodities sector. Today's rout was a confirmation of this worry, apparently the result of investors liquidating commodities holdings to raise cash. As we are not traders, but investors, we continue to hold our position because we still believe the next several years will be favorable toward the precious metals and oil. There is no reason to let a few days or weeks of market action alter a much longer term plan.
Furthermore, an economic slowdown does not necessarily imply lower prices for these specific commodities. The reason we believe these holdings will perform well over the next few years is because the credit expansion leading up to the current state of the economy will likely result in the Fed acting to feed inflation further. Also, demand for oil will not just go away even if there is a global slowdown. If one recalls the 1970's, we had an economic slowdown with gold, silver, and oil rising in price, and not without some sharp corrections along the way. There is no reason to expect that this time an economic slowdown automatically means lower prices in these specific commodities. That is not to say that gold, silver, and oil are guaranteed to rise in price, but we think this is the more likely scenario and these positions provide safety from a likely weaker US dollar going forward.
“One of the things that’s happening out there with the turmoil in the financial markets is that hedge funds are clearing out their energy positions in order to free up cash and unwind their leverage positions in other markets.”
Arthur Hogan, chief market analyst with Jeffries, said the commodities market was sliding because of the assumption that there will be a global economic slowdown. “If that happens it would be intuitive to see a sell-off in commodities,” Hogan said. “Now it’s important to realize that doesn’t have to happen.”
The commodities markets are trading as if there will be a precipitous slowdown in global demand in India, China, and the U.S., but Hogan believes the slowdown will be more modest.
Doug Kass nicely sums up what I think about Ben Stein's opinion of the situation with mortgage lenders:
In the past, I have admired the common sense and logic of argument in Stein's writings. Maybe Stein was acting this week, as he did in the role of the economics teacher in the classic movie Ferris Bueller's Day Off. After all, on Sir Larry Kudlow's show, Stein suggested that the mortgage lenders will "end up fine," and he concluded that the subprime mess is a media hoax in an attempt to "talk America into a panic." Excuse me?
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