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HomeSaturday Morning News Roundup
Posted by Larry Doyle on May 9th, 2009 5:42 AM |
Articles I have read over the last 24 hours and strongly recommend:
Wall Street Journal: Banks Won Concessions On Tests
The Washington Post: Fannie Loses $23 Billion, Prompting Even Bigger Bailout
Wall Street Journal: Hit By Mortgage Defaults, Fannie Needs $19 Billion
Telegraph: China Fears Bond Crisis As It Slams Quantitative Easing (h/t to MC)
Los Angeles Times: California Could Be Broke By July, State Official Warns
LD
Simon Johnson and Goldilocks
Posted by Larry Doyle on May 8th, 2009 3:56 PM |
Shortly after writing my “Goldilocks Economy” post, I caught an interview that Simon Johnson gave to Carol Massar (no, she is not Goldilocks!!) of BloombergTV. Johnson is formerly the chief economist of the IMF, and currently a Professor at MIT’s Sloan School of Management and a senior fellow at the Peterson Institute for International Economics.
In this 7 minute clip, Johnson covers virtually all the questions I raised in my “Goldilocks” post, including:
1. ongoing financial support of the banking industry
2. the Wall Street-Washington dynamic
3. government guarantees allowing the banking sector to “print” profits
4. the rigor and results of the Bank Stress Tests
5. expectations for inflation and potentially hyperinflation
6. Johnson calls Goldman Sachs a “branch of the government”
7. compares our economy to an emerging market…not too dissimilar
8. can banks earn their way out of this mess? or will it be Japan in the 1990s all over again?
9. implications of an inverted yield curve on bank profits…HINT: it’s not good!!
10. prospects for massive budget deficits with rising taxes
11. need for regulation
Check out 7 minutes of must watch video from Bloomberg, brought to you by Sense on Cents!! (FYI . . . the interview with Simon Johnson starts about 30 seconds into the video clip).
Enjoy!!
LD
Goldilocks Economy
Posted by Larry Doyle on May 8th, 2009 1:15 PM |
Will the wizards in Washington be able to recreate the Goldilocks economy, in which we can generate moderate growth with limited inflation and near full employment? Well, that economic dream is still off in the distance, but the Goldilocks analogy is appropriate. How’s that? Much like the cherished tale, the wizards are faced with three choices in virtually every situation: too much, too little, just right.
Fiscal policy
– too much spending and/or improperly targeted spending will drive interest rates higher via massive deficits and potential hyperinflation.
– too little spending and/or improperly targeted will not properly stimulate the economy and may lead to a bout of deflation.
– just the right amount of spending and properly targeted will support the economy and stabilize prices.
Monetary Policy
– too much gas on this fire will massively grow the money supply and lead to hyperinflation.
– not enough gas or a slow delivery (the concern in Europe) will not stop the economy from sliding into a deeper recession.
– just right will lead to support for the economy. However, our wizards must be prescient and know exactly when to turn the gas line down and then off. If this procedure is not executed with precision, our house may go up in the flames of hyperinflation. Many wise and elderly wizards, including none other than Paul Volcker, have this concern.
Regulatory
– overly restrictive regulations will inhibit an entrepreneurial spirit and drive business overseas.
– ineffective, inappropriate, or insufficient regulations will lead to further moral hazards and an economic foundation akin to a pile of sand. Dare I say, our house is suffering from this problem currently.
– just right would compel new regulators with real teeth to redraft the rules by which we play. Paul Krugman wrote “Stressing The Positive” in yesterday’s New York Time and addressed this topic. Krugman offers:
. . . what worries me most about the way policy is going isn’t any of these things. It’s my sense that the prospects for fundamental financial reform are fading.
Does anyone remember the case of H. Rodgin Cohen, a prominent New York lawyer whom The Times has described as a “Wall Street éminence grise”? He briefly made the news in March when he reportedly withdrew his name after being considered a top pick for deputy Treasury secretary.
Well, earlier this week, Mr. Cohen told an audience that the future of Wall Street won’t be very different from its recent past, declaring, “I am far from convinced there was something inherently wrong with the system.” Hey, that little thing about causing the worst global slump since the Great Depression? Never mind.
Those are frightening words. They suggest that while the Federal Reserve and the Obama administration continue to insist that they’re committed to tighter financial regulation and greater oversight, Wall Street insiders are taking the mildness of bank policy so far as a sign that they’ll soon be able to go back to playing the same games as before.
Uncle Sam’s intervention
– too much involvement means private enterprise will either not play in our markets or charge a higher price in the form of higher interest rates (this is VERY likely to happen given the disregard for property rights and the validity of contracts).
– too little and the economy may take another leg down in the form of a triple dip.
– just right . . . how do we compel Uncle Sam to be a benevolent Old Man and not encroach on the principles of capitalism, free markets, and private enterprise as he tries to push forward with a massive social agenda and enormous spending plans?
The trail on which we are proceeding will be LONG. Will we be able to find that warm home in the woods? Do we have the fortitude and courage to sacrifice as need be or do we have leaders who are blinded by ambition and agendas which will cause us to lose our way?
Bring extra supplies.
LD
May Unemployment Report:
UPDATED as of 9:00AM >>
Posted by Larry Doyle on May 8th, 2009 7:17 AM |
Before this morning’s numbers were released, I published:
The widely anticipated May Unemployment Report covering the month of April is due out this morning at 8:30am (EST). Will this report show signs of improving trends in the pace of layoffs? Aside from the actual report, we need to pay strict attention to the revisions for prior months to assess the overall health of “our patient.” In regard to revisions and the actual report, a month ago I had written in my post April Unemployment Report:
Analysts hit the numbers, as they came in as expected. Wow! Are the analysts that good or are these numbers being “managed” or “massaged” so as not to overly upset the markets? Well, we did have a significant revision to January’s report. Let’s dig deeper!!
Call me paranoid, but when a January Non-Farm Payroll number is revised from a loss of 655k jobs to 741k and no revision is provided for February, I immediately ask why.
Previous month’s data and expectations for the May report are as follows:
**Note: I have now included the actual unemployment statistics (which were released at 8:30AM), along with my post-report commentary:
Unemployment Rate
March: 8.1%
April: 8.5%
Expectation for May: 8.9% (recall how this rate was the base case used for Bank Stress Tests…and here we are hitting it in May!!)
Actual for May: 8.9%
Post-report comment: as expected . . . however, the Underemployment Rate is now 15.8%. This rate consists of those unemployed and looking for work, unemployed and have given up looking, and part-time workers who would prefer full-time. To that end, I wonder how many temporary workers in the Census Bureau would prefer full-time work.
Non-Farm Payroll (click here for definition of this term)
March: loss of 651k
April : loss of 663k
Expectation for May: loss of 600k
Actual May report: loss of 539k
Revisions: February and March combined lost another 66k jobs
Post-report comment: on the face, the report appears better than expected but given the additional job losses in the revised numbers for February (an additional 18k jobs) and March (an additional 48k jobs) we are still in the 600k average job loss for the month. Private sector lost 611k jobs while government added 72k jobs with a lot of those people being temporary workers employed by the Census Bureau. The fact that temporary government workers are factored into overall employment, in my opinion, is stretching the integrity of the report. Health care added 17k jobs, manufacturing lost 149k jobs, construction lost 110k jobs, financial services lost 40k jobs.
As I referenced above, I will be looking for a February revision as well.
Average Hourly Earnings
March: +.2
April : +.2
Expectation for May: +.2
Actual May report: +.1
Post-report comment: businesses are doing everything to manage costs. This number is lower than expected and will not help consumer spending and retail sales going forward. With no wage pressures, this component of inflation will remain in check
Average Hourly Workweek
March : 33.3 hours
April: 33.2 hours
Expectation for May: 33.2 hours
Actual May report: 33.2 hours
Post-report comment: as expected…
Please check back shortly after 8:30am to review the numbers and market reaction!! In pre-market trading, stock futures indicate the market would open higher by approximately 1%. The 10yr U.S. Treasury is quoted at 3.35%.
Post-report comment: the bond market has rallied marginally as the overall report continues to show weakness throughout the private sector. The equity market is a touch lower. Analysts are spinning the report as a slowing in the pace of declines. Does this report portend an improved tone in spending, economic activity, and lessened defaults and foreclosures? Not in a hurry.
If you like what you read and see here, please put Sense on Cents in your favorites, and visit and comment often!! Thanks!!
LD
Navigating the “Murky Waters” of Financial Services
Posted by Larry Doyle on May 7th, 2009 7:57 PM |
I am thrilled to have Rick Johnson as my guest on NoQuarter Radio’s Sense on Cents with Larry Doyle this Sunday evening May 10th. As Forbes recently reported:
JACKSONVILLE, Fla., May 1 /PRNewswire/ — Rick Johnson, author of the book Keep Your Assets. Take My Advice, applauds the Financial Planning Coalition’s effort to establish an oversight board to regulate financial advisers. The Financial Planning Coalition,
according to a recent update emailed to Certified Financial Planners, is proposing an oversight board with fiduciary standards, training and ethics requirements for financial planning advice that favors consumers. FINRA is trying to influence the Securities and Exchange Commission in order to regulate registered investment advisers, as stated in a recent speech by Richard G. Ketchum, Chairman and CEO of FINRA, before the Committee on Banking, Housing and Urban Affairs. The Financial Planning Coalition “wants to preclude FINRA from consideration as the oversight body … ” as stated in their April 27, 2009 email update. “This is a battle between lobbying groups with consumers caught in the crossfire,” according to Johnson.
In an April 27th FINRA News Release, FINRA has proposed closing a glaring gap in their Broker Check system that previously allowed advisers with revoked licenses to have their backgrounds dropped from the FINRA Broker Check system after two years. In his book, Keep Your Assets Take My Advice, Johnson pointed out this exact problem.
The suggestion from Johnson’s book is to close the background check loopholes. As quoted, “We need one disciplinary disclosure system for all insurance agents, FINRA-registered representatives and investment adviser representatives of registered investment advisers.”
In his book, Johnson breaks down why the fiduciary standard of care is what all consumers should demand. “You cannot do what is in the best interest of the consumer and have a sales quota. It is impossible. As long as these sales quotas remain, there is no chance at a fiduciary standard of care,” says Johnson.
Johnson educates his readers about the fiduciary standard of care, how to do annual background checks on financial advisers and he provides unique financial planning ideas typically not found in recently published financial advice books. Readers of his book will be “armed to the teeth,” according to Johnson, to navigate the “murky waters” of financial services.
Who is looking out for you? Sense on Cents and Rick Johnson this Sunday evening on NoQuarter Radio.
LD
Uncle Sam’s Regulatory Double Standard
Posted by Larry Doyle on May 7th, 2009 5:24 PM |
As I have referenced previously, Jonathan Weil of Bloomberg truly distinguishes himself as the finest commentator within the world of financial journalism. Weil takes on the financial regulatory authorities for their selective enforcements. Today he reports, Lehman Bosses Walk, While Small Fry Walk Plank. Why after 2 years haven’t senior executives from mortgage origination firms (Countrywide, Ameriquest, New Century, Long Beach), quasi-government agencies (Freddie and Fannie), commercial and investment banks, and credit rating agencies been more thoroughly investigated, if not arrested and prosecuted?
Is there any doubt these firms and executives effectively purchased their own protection? After writing “How Wall Street Bought Washington,” it became exceedingly clear that money from Wall Street bought protection for the business units and the individuals. It is not likely that Uncle Sam will target executives at firms holding government money. Additionally, if Uncle Sam targets execs at failed firms, those execs would be likely to finger others.
As Uncle Sam is now both investor and regulator in the markets, how do market participants compel him to be an honest broker on both fronts? As Weil writes, quoting former SEC head Chris Cox:
“From the standpoint of the SEC, the most obvious problem with breaking down the arm’s-length relationship between government, as the regulator, and business, as the regulated, is that it threatens to undermine our enforcement and regulatory regime,” Cox said in a Dec. 4 speech.
“When the government becomes both referee and player, the game changes rather dramatically for every other participant. Rules that might be rigorously applied to private-sector competitors will not necessarily be applied in the same way to the sovereign who makes the rules.”
Haven’t we already seen this play? Why is it that public confidence in the markets and those overseeing them is so low? When the security patrol in the casino also has LOTS of chips on the table, how do we know the dealer isn’t also in on the action? If so, is it any wonder why the unsavory activities of other “boys in the club” who have run out of chips aren’t being prosecuted?
I commend Weil for raising this topic. I can only hope other media outlets will pressure the regulators to level the playing field.
LD
Is the Government Bond Bubble Getting Ready to Burst? UPDATE>>
Posted by Larry Doyle on May 7th, 2009 2:59 PM |
I have tried to highlight my concerns on interest rates for the entire year. Despite the Federal Reserve “cutting checks” to buy hundreds of billions in U.S. Treasury bonds and mortgage-backed securities, the global demand for credit (meaning global governments, companies, and municipalities issuing MASSIVE supply of bonds) is driving rates higher.
As I wrote in my post from April 30th, the U.S. Treasury market has been faced with underwriting tens and now hundreds of billions in government debt on a regular basis. The 30yr government bond auction today was not well received and interest rates have moved higher by 10-20 basis points (.10 to .20%).
What are the implications of higher rates?
1. Increased cost of financing the deficit.
2. Upward pressure on other rates, primarily mortgage rates.
3. Longer time for economy to improve given higher interest costs.
4. Given the massive global government deficits, the access to credit for private enterprise is negatively impacted. This is known as crowding out.
As I referenced the other day, “We Still Have To Pay The Bill.”
Bloomberg reports, Treasuries Tumble as Bond Sale Draws Higher Than Forecast Yield.
From my piece at the end of April:
The equity markets have rebounded significantly over the last seven weeks. The Dow and S&P are now down approximately 4-6% on the year. The tech heavy Nasdaq has distinguished itself and is up approximately 10% on the year.
At this juncture, if the equity markets are implying that the economy will not slip into Depression, then the bill for the stability in equities is being transferred to participants in the bond market. Government bonds are facing an almost weekly avalanche of tremendous supply. This week the market is absorbing over $100 billion in 2yr, 5yr, and 7yr Treasury securites. Take a deep breath and next week the market is faced with over $75 billion in 3yr, 10yr, and 30yr government securities. The Treasury is likely going to sell 30yr government debt on a monthly basis!!
The Federal Reserve has been the biggest buyer of Treasury and mortgage-backed securities. The Fed’s balance sheet may be large but it is not endless. What have 10 yr. Treasury securities done on the year? Even in the face of massive buying of these securities by the Fed, the 10yr has backed up almost 1% to a current level of 3.1%. That rise in rates is very significant.
I have maintained and continue to maintain that interest rates will move higher given the overwhelming demand for funds by global governments to pay for deficit spending. Central banks around the world may try to hold the respective bond markets up and interest rates down but investors will continue to demand a higher rate of interest in the process.
As government rates move higher, mortgage rates, and other corporate rates will likely move higher as well. If we get a whiff of early signs of inflation which I believe is coming these rates could ratchet higher and the bubble in the government market would not merely burst but would actually explode.
LD
Does Populism Take Precedence Over Rule of Law?
Posted by Larry Doyle on May 7th, 2009 11:09 AM |
Bill Gross of Pimco recently wrote:
If the government indeed becomes your investment partner, you should keep the big Uncle in clear sight and without back turned.
Will the manner in which Chrysler has been handled up to now and is handled going forward serve as legal precedent for future bankruptcies? We will learn a lot VERY quickly as General Motors is in very much the same predicament. Given the issues raised by Tom Lauria, attorney for some of the non-TARP Chrysler creditors, are our markets witnessing populism taking precedence over the rule of law? Will our courts try to “thread the needle” under the guise of these automotive companies being special situations?
Answers to these questions will likely develop over time. Different justices may read the law in a different manner. I caution investors, though, that costs associated with parsing the rule of law may be postponed but are not foregone.
To that end, I believe it is also wise to take heed from Jeff Matthews of Ram Partners who raises these questions in a recent short interview on TechTicker:
Additionally, for those who have not listened to the ten minute interview Tom Lauria provided Frank Beckmann on WJR Radio, I will provide my recap and link here: Is Barack Obama Going Tony Soprano? This interview is a MUST LISTEN!!
LD
“The Subprime 25”
Posted by Larry Doyle on May 6th, 2009 8:09 PM |
I came across the Center for Public Integrity in my travels today. I commend them and those supporting this initiative.
They produced a very interesting piece today: Who’s Behind The Financial Meltdown?
WASHINGTON, D.C., May 6, 2009 — The top subprime lenders whose loans are largely blamed for triggering the global economic meltdown were owned or backed by giant banks now collecting billions of dollars in bailout money, according to Who’s Behind the Financial Meltdown?, a new investigation by the Center for Public Integrity.
“The mega-banks that funded the subprime industry were not victims of an unforeseen financial collapse, as they have sometimes portrayed themselves,” said Center Executive Director Bill Buzenberg. “These banks were deliberate enablers that bankrolled the type of lending that’s now threatening the financial system.”
These are among the findings that emerged from the Center’s computer analysis of government data on nearly 7.2 million “high-interest” or subprime loans made from 2005 through 2007, a period that marks the peak and collapse of the subprime boom. The analysis also revealed “The Subprime 25“ — the top 25 originators of the high-interest loans, accounting for nearly $1 trillion and about 72 percent of industry — who reported subprime loans during that period.
The Center found that U.S. and European banks poured huge sums into the subprime lending market due to unceasing demand for high-yield, high-risk bonds backed by home mortgages. The banks — including household names like Lehman Brothers, Merrill Lynch, Citigroup, Credit Suisse/First Boston, and Goldman Sachs & Co — made huge profits while their executives collected handsome bonuses until the bottom fell out of the real estate market.
According to the analysis:
• At least 21 of the top 25 subprime lenders were financed by banks that received bailout money — through direct ownership, credit agreements, or huge purchases of loans for securitization.
• Nine of the top 10 lenders were based in California, including all of the top 5 — Countrywide Financial Corp., Ameriquest Mortgage Co., New Century Financial Corp., First Franklin Corp. and, Long Beach Mortgage Co.
• Twenty of the top 25 subprime lenders have closed, stopped lending, or been sold to avoid bankruptcy. Most were non-bank lenders.
• Eleven of the lenders on the list, including four recipients of bank bailout funds, have made payments to settle claims of widespread lending abuses.A second story in the package, “Predatory Lending: A Decade of Warnings,” details the troubling history of congressional oversight involving abusive lending practices. The story traces how obscure laws passed by Congress in the 1980s paved the way for creation of the subprime lending industry, and documents how lawmakers essentially ignored repeated warnings that high-cost loans represented a systemic risk to the American economy.
Included in the Center’s online package are extensive maps and tables detailing the extent of the companies’ subprime lending nationwide, the banking industry’s backing of subprime lenders, and political contributions and lobbying expenditures by the real estate and financial industries.
Although this particular piece does not present any new information, I always appreciate a venture dedicated to bringing increased integrity and transparency into our business and political worlds. I am adding this site to my favorites.
LD
Senate Approves Safe Harbor Mortgage Modification; Property Rights? What’s That?
Posted by Larry Doyle on May 6th, 2009 3:55 PM |
The assault on property rights continues as the Senate just passed the Safe Harbor Mortgage Modification legislation. Recall how I wrote the other day in Mortgage Magic or Mortgage Mayhem that this legislation would protect mortgage servicers from suit by mortgage investors.
Why would investors sue servicers? Servicers are charged with processing monthly principal and interest payments of mortgages and distributing the cash flow to investors. If they do not perform, then to this point they would and should be sued. Investors have the right to those payments for which they committed their funds.
The Safe Harbor Mortgage Modification legislation will protect servicers from lawsuits in the cases where mortgages have been modified and investors’ interests supposedly remain protected. One would think that covers all the bases. As I highlighted, however, the legislation may very well promote self-dealing amongst a number of the larger banks which both service mortgages and hold second mortgages.
From Bloomberg’s article, Senate Defeats TARP Measures To Move Safe-Harbor Bill:
The Mortgage Bankers Association and consumer advocates have endorsed the safe-harbor provision to protect mortgage servicing companies from being sued by mortgage-bond investors if they modify loans in accordance with President Barack Obama’s Making Home Affordable anti-foreclosure program.
“Safe harbor is something that you want as a servicer,” said Ajay Rajadhyaksha, the head of fixed-income strategy at Barclays Capital in New York. “Without the safe harbor, you’re far more skittish about doing anything.”
Corker said in a speech on the floor that the measure is a boon to larger servicers including JPMorgan Chase & Co., Citigroup Inc., Wells Fargo & Co. and Bank of America Corp. An amendment Corker sponsored that would have required borrowers to seek other forms of aid before their loans could be modified failed.
Mortgage bond buyers including Clayton DeGiacinto of Tower Research Capital in New York said allowing the safe harbor provisions removes any accountability servicers have to minimize investor losses and may make the process more susceptible to political pressure and more costly for borrowers.
“It ultimately makes bond investors skeptical and adds an additional layer of risk that will need to be priced into the securities,” said DeGiacinto, who manages a distressed mortgage fund.
I am all for credible and equitable legislation which promotes decreasing foreclosures. In the process, however, the legislation should be airtight in making sure there is no self-dealing and conflicts of interest. That question regarding this legislation remains outstanding.
While this legislation may help limit foreclosures in the near term, the real cost may be borne in the years ahead in the form of higher mortgage rates. Why might that happen? If banks which service mortgages are influenced and incentivized not to protect the investors’ property rights and thus don’t, the investors will sell their holdings, and take their bat and ball to another field.
LD
