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Friday, November 11, 2011

The Big Picture

The Big Picture

Link to The Big Picture

Big Lie: Still Most Popular Column on WaPo

Posted: 11 Nov 2011 02:19 PM PST

This is freakin madness:

My column from Sunday, The Big Lie, is still the most popular piece still in the Washington Post, and the most popular in the Business section. Its garnered 1,700 comments.

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Source: Washington Post

Niall Ferguson: China Masters the ‘Killer Apps’

Posted: 11 Nov 2011 02:00 PM PST

The U.S. has lost its position as the best place to do business, and China and the rest of the East have so mastered the ways of the West that they’re charting a whole new economic paradigm, Harvard historian Niall Ferguson says in an interview with WSJ’s John Bussey.

WSJ 11/3/2011


Succinct summation of week’s events (11/11/11)

Posted: 11 Nov 2011 12:30 PM PST

Succinct summation of week’s events:

Positives:

1) Berlusconi goes and Italian Senate passes budget (awaits lower House)
2) EFSF sells bonds to fund Irish bailout after last week’s failure
3) ECB members stick to guns and say money printing not going to happen. They implicitly say to Italy, ‘you figure it out,’
4) Initial Jobless Claims fall to 390k, 10k less than expected and 4 week average falls to lowest since April
5) Sept Exports rise to record high but can it last?
6) MBA said refi’s rose 12.1% and purchases were up 4.8% as mortgage rates fell
7) US import prices unexpectedly fall by .6% m/o/m led by food and energy prices
8) China’s CPI moderates to five month low but remains still high at 5.5%

Negatives:

1) Italian bond yields move higher again but close well off week’s intraday highs. 3rd largest bond market in the world staring over the edge. French rising bond yields becoming big focus too
2) Will the ECB be left with no choice but to be like Ben?
3) US 10 yr and 30 yr Treasury auctions were weak, finally push back on historically low yields with inflation elevated and concerns with Super Duper Undercover Secret Committee?
4) Import prices from China rise .4% m/o/m, the most since April
5) India’s IP in Sept rise at the slowest pace in 2 yrs
6) German IP in Sept fall a greater than expected 2.7%

Government Blameless in Bubble/Bust/Bailouts?

Posted: 11 Nov 2011 10:00 AM PST

Reason has a critique of The Big Lie column. It was so disingenuous, I did something I rarely do: I sent an email to the author and editors at Reason. It went something like this:

I was disappointed to read your comments about my "Big Lie" column. You seem to have completely misread who I was blaming and what the Big Lie actually is.

Only one of two explanations suffice: Either I did a poor job communicating what the issue was, or you purposefully mischaracterized what I wrote.

On the possibility it's the former and not the latter, allow me this further explanation.

The quote that I critiqued was Mayor Bloomberg’s whopper that the crisis was caused by Congress forcing banks to make ill advised loans to unqualified people. That statement is demonstrably false, and it is what I wrote in the WP. Not, as you described, that government was blameless.

Indeed, beyond the Post column, I have pointed a finger at Washington DC repeatedly. From the very early stages of the collapse, I have stated DC was a significant contributor. Indeed, early in the crisis, I described the government as “Uncle Sam the enabler.” (A Memo Found in the Street, Barron's September 29 2008).

In the Big Picture blog, I made a list of the top blamees (Who is to Blame, 1-25, June 2009) It is dominated by government players, including the Fed, Congress, SEC, various Senators and Presidents, two FOMC chairs, the OCC, OTS, Treasury Secretaries, as well as private bankers and organizations.

And in Bailout Nation, I clearly detail how Congress did the bidding of Wall Street to allow special exemptions, waivers, and new legislation that contributed to the credit crisis, housing boom and bust, and Great Recession.

Your cartoonish argument is reductio ad absurdum – nowhere in the WP article do I remotely suggest the "big lie" was that Washington, DC played no role. But I do call out the nonsense Bloomberg was peddling, and you are pushing, that banks and Wall Street were merely innocent bystanders in all of this, and somehow were forced into these bad loans.

I would love to see any evidence you can muster that government forced banks to stop verifying employment and income, mandated no credit checks, eliminated debt servicing review, forced 120% LTV lending, or somehow pushed 2/28 ARM mortgages.

Less silly, please.

P.S. The print edition of the article, as well as my online edition, has 12 points numbered, not bulleted. That's either a font or a browser issue on your end.

As William James noted, “a great many people think they are thinking when they are merely rearranging their prejudices.”

UPDATE: November 11, 2011, 11: 45

Tim prints my response, and adds to the discussion here.


Earnings Season Update

Posted: 11 Nov 2011 08:30 AM PST

With earnings season wrapping up, is high time to take a look at how this quarter stacks up against prior Qs:

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Click to enlarge:

˜˜˜

Source: Bianco Research L.L.C. November 10, 2011

11/11/11 11:11:11

Posted: 11 Nov 2011 08:11 AM PST

Today has been called a one-derful day. At eleven seconds past 11:11 am, on this, the 11th day of the 11th month of the 11th year, we have an unusual date and time:

11/11/11 11:11:11

This is not going to happen again for a while.

And 1000 900 years ago, in the year 1111, we had two extra digits in the run.

Meanwhile, enjoy your one-derful day.

And Now, A Short Break From EuroZone Dominated News

Posted: 11 Nov 2011 08:00 AM PST

Kiron Sarkar is an investor and advisorin London. Formerly in the M&A dept of N M Rothschild in London, he was head of M&A of Rothschild (Hong Kong) and worked on their international privatisation team. He worked as privatisation adviser to the UK Governments Know How Fund. Most recently, he was European Head of Media, Tech and Telecoms at CIBC World markets. Kiron has acted as a lead adviser in respect of over US$150bn of deals and has worked globally in both developed and emerging markets.

~~~

What an amazing few weeks. Volatility remains extreme, with relatively low volumes in markets – basically, the same old, same old.

In Europe, the pesky Greeks have FINALLY been told to get their act together and I suspect now understand that their normal antics (particularly their propensity to LIE) will no longer be tolerated. A Technocrat Unity Government, under the former ECB Deputy, Mr Papademos has been formed, with a mandate to push through much needed structural and austerity measures, which were totally ignored previously.
Elections are scheduled for February. However, Greece remains a basketcase and further (significant) Sovereign haircuts are a CERTAINTY – much more than the recent 50%. Banks are writing off larger %’s of Greek debt (still not enough) – French banks recently reported w/offs of 60%, for example. However, when banks do (which will happen) the Euro Zone will (finally) get fed up of Greece – it will be able to afford to do so, as long as it ensures that contagion does not spread to other Euro Zone countries. Expect, the Greeks to remain reluctant to comply with the structural/austerity measures, irrespective of the Technocrat Government, as usual but I, for one, am getting really fed up of them, as I suspect, most in Europe is as well.

In Italy, Berlusconi continues to try and remain in power, but his days are numbered. Will Italy follow Greece and appoint a Technocrat Government, lead by Mario Monti – still not a shoe in, but remains the most likely scenario. However, never underestimate Berlusconi’s attempts to screw this up/interfere – after all, if he loses power, he will have far less influence to impact the 4 (if I recall) criminal charges that he faces. Good news however, Italy’s Senate has today passed debt reduction measures – more will be needed and, indeed, a number of measures will need to be brought forward. That should mean that Berlusconi exits imminently, making 2 out of the 3 PM’s to go – the next one to exit (not before time) will be Zapatero – the Spanish PM – this month. Mr Berlusconi’s description of Mrs Merkel was truly
amazing – I send it to you if you wish.

The market certainly targeted Italy, with 10 year bond yields rising to 7.4%. However, it is obvious that the ECB has been intervening heavily and 10 year BTP yields are down to 6.60% (down 29bps today and well below the 7.40%+ recently). Phew, it was a hairy ride, but my long Italian bond position (which I bought on expectations of ECB
intervention, now that Draghi is in place) is looking pretty healthy now. I appreciate that Italy needs to raise E330bn+ next year as have Italian banks (near E70bn, according to Bloomberg), but I reiterate the Italian problem is one of liquidity and not solvency. Yes, debt (E1.9tr) to GDP (a dreadful measure but as the market uses it, I have to as well) is high (approaching 120%, though with an average maturity of 7 years), but Italy remains a rich country (by a number of measures greater than virtually all European countries), its GDP is higher than officially reported (due to the huge black economy – perhaps 30%+ of the overall economy), its people are relatively unleveraged (the leverage is really due to Government debt), it has and has had a primary surplus and has bumbled along for decades with this level of debt. FYI, last years Italian budget deficit was 4.6%, roughly similar to the 4.3% reported by Germany. Italy’s problem has been a lack of political credibility, no surprise given Berlusconi. Sure, structural reforms are vital – they will be painful and difficult to implement, but Italy will come through this. Competitiveness is also a serious
problem, particularly given the, far too high, Euro – a common problem for the vast majority of Euro Zone countries. However, if they stupidly entered into the Euro, well…..


By contrast, I remain of the view that Spain is in a far worse
position than Italy. Yes, its debt to GDP (60%) is much lower than
Italy’s, but its economy is in much, much worse shape. Today, Spain
announced that its GDP was flat for the 3rd Q. In addition, Spain will
NOT meet its target of 6.0% for its 2011 budget deficit (more likely
nearer 7.0%), its semi autonomous regions are in deep trouble, its
population is highly leveraged (due to mortgage debt incurred on
grossly overvalued housing – which has yet to be written down by
Spanish banks, who have assumed that the reduction in residential
prices is only around 15%. In reality it should be closer to Ireland’s
50%. However, the Spanish valuation companies are controlled by
Spanish banks !!!!! – need I say more – you want to buy a Spanish bank
- no, I thought not), its industry is uncompetitive, it has a large
current account deficit, unemployment is over 21% (over 40% for the
under 25′s), its banks simply have not accounted for anywhere near the
amount of bad loans in the system etc, etc.

Furthermore, the Spanish Government is not paying its bills to help
“reduce” it’s budget deficit – great strategy, I think not. Mrs
Salgado (the Spanish Finance Minister) has been LYING through her back
teeth – the evidence will be apparent, when the current ruling
Socialist party loses the impending elections this month. In my view,
Spain will be in RECESSION, quite likely starting in the 4th Q of this
year. Currently, 10 year Spanish bonds are trading at 5.80% (over 400
bps over equivalent German bunds – at 450 bps, LCH Clearnet will
require margin requirements to be increased, based on past history -
oops). Personally (ex ECB intervention), I expect yields on Spanish
bonds to rise, when the true extent of its fiscal problems surface,
following the imminent change of their Government. Confirmation of
Spain’s problems are evident – its largest telco (Telefonica) reported
a loss in the last Q, the first for 9 years, in spite of its domestic
market being just around a third of its business (it has a significant
Latin American business, which has been doing well – though, for how
much longer?).

Euro Zone 2012 GDP continues to be DOWNGRADED – even Germany’s numbers
have been slashed. Essentially, Europe will be in RECESSION next year
and, in my humble opinion, worse than the “mild recession” forecast by
the ECB. This will affect Portugal (2012 GDP forecast lowered further
to -3.0% today) and will make its current debt load unsustainable. A
haircut of up to 40% is INEVITABLE. Portugal has struggled to produce
positive growth, even in good times – what chance do they have now.
However, the Portuguese have been trying, unlike the awful Greeks.

Next we have France. Well consumption, defence and auto’s are the
major drivers of the economy – oops. France, will suffer and yields
are rising as compared with equivalent German bunds. French banks are
grossly over leveraged. Yesterday’s mistake by S&P relating to a
French downgrade was amazing, though it is inevitable that France is
downgraded – the only issue is whether it is downgraded before next
years Presidential elections (in which case Sarkozy is french toast)
or after. Clearly, he is praying it will be after. Yes, France is
implementing further austerity measures, but these measures will not
be enough and the French population are liable to take to the streets
- thank God, we are entering winter – fewer riots when the weather
turns cold and nasty.

Belgium, well another problem country, though apart from being the HQ
of the ghastly EU, is insignificant you could argue, I suppose.

OK, so whats the future. It’s clear to me that the new ECB President
has ramped up ECB purchases of peripheral Euro Zone debt – something
that that dreadful Trichet should have done – the announcement as to
last weeks purchases (to Wednesday) will be released next Monday. Yes,
the German’s and their allies (Austria and Finland, possibly Holland,
though the Dutch are practical and, indeed, the only sensible country
in the Euro Zone) will continue to object, but they remain a minority
and will be overruled – remember, Germany has only 2 voting members,
out of the 23 who decide on policy at the ECB. At present, the ECB
sterilises its bond purchases though the issue of short term (around 7
day) debt instruments. Will they go the whole hog and implement QE -
still a difficult issue, but INEVITABLE in my view. Finally, it was
announced today that Bini Smaghi is to be replaced by a Frenchman at
the ECB, who will be voting for QE.

Another inevitability will be the issue of EURO BONDS, irrespective of
(German lead) opposition. It will require an European debt management
agency, (as you cannot have Euro Zone countries issuing debt which is
jointly and severally guaranteed by all 17 countries unilaterally),
combined with strict fiscal measures, which will be verified on a
regular basis. Essentially, Germany will “control” the Euro Zone,
without a shot being fired. Whilst out of the Euro Zone, I believe
there will be closer cooperation between the UK and Germany (natural
allies, in spite of 2 world wars), in due course and that France’s
position will reduce in importance, by the way. Indeed, relations
between Merkel and Sarkozy remain tense, to say the least.
Furthermore, there have been a number of disagreements recently -
aired publicly.

German control of the Euro Zone (at present they are including France
in the decision making process, to ensure that they are not seen as
the sole leader of the Euro Zone, which clearly they are) leads me to,
in my humble opinion, believe that whilst I am bearish on the Euro
Zone (in the short term), I’m actually BULLISH in the medium and, in
particular, in the LONGER TERM. Essentially, the creation of Euro
bonds will create a liquid debt capital market, which will rival the
US. Believe you me, there will be huge demand for Euro bonds and at
much better rates than people expect, as investors seek to diversify
away from the US$ (I remain bearish on the US$ in the medium/long
term, though the opposite short term). As a result, the Euro will
become the second RESERVE CURRENCY. This will result in US interest
rates rising in due course and, as a result, force the US (at long
last) to address its addiction to debt – painful.

However, in the short term, the EFSF is a nonsense – I simply cannot
understand how it can possibly work and, in addition, the numbers just
don’t add up. The other day, the EFSF had to raise E3bn (for the next
tranche of the Irish bail out) at a rate of over 100bps over mid swap
rates – bloody expensive money. Thankfully, I have no doubt that the
IMF will intervene (constructively) in Europe – thank God as the EU
cannot sort out this mess – their involvement just makes it worse.

Whilst US commentators continue to criticise the Euro Zone (as I do,
though hopefully on the basis that I’m somewhat better informed), Euro
Zone aggregate economic data is BETTER than the US, something the
market (particularly US based) seems to ignore and/or does not know
(more likely). With a German controlled fiscal and monetary Union in
due course, (the only way the Euro will work, as was obvious to all of
us at the outset – though not to the goons at the EU), it is
dangerous, in my humble opinion, for the US (particularly a number of
very silly and uninformed commentators in the US media and the
financial services industry) to gloat over the Euro Zone woes. All you
have to do, is to remember how much (in efficiency gains) US companies
have extracted from their businesses, particularly recently. Europe
has not even started (they will have to, to survive and, in addition,
to gain much needed competitiveness), which suggests to me that
profitability in Europe will rise materially in the next few years -
just look at Germany over the last decade. Furthermore, the current
crisis will force structural reforms, which will reduce Europe’s
welfare and dependency culture – very much necessary.

Reports continue to circulate that Germany will push for changes to
the EU Treaty (likely). These changes should improve fiscal disciple
by Euro Zone members – very much needed.

If I am right, I believe that investors, in due course, will allocate
a far greater weighting to Europe than is currently the case, which
will be bad news for EM’s and the US. Essentially, never UNDERESTIMATE
the German ability to GET IT RIGHT, irrespective of the numerous
political, social and other obvious problems that Europe currently
faces.

The UK is, off course, having its problems. However, we do have our
own currency, which makes all the difference. In addition, we also
have a Central Bank (which has learnt from its mistakes in 2008, when
it raised interest rates, following a headline rise in inflation – as
was the case with the ECB. The difference is that under Trichet, the
ECB recently REPEATED the same mistake earlier this year) which is
not lead by a moron – as was the case (Trichet) with the ECB.
Personally, I believe, that Mr Draghi, whilst being far less
communicative is far, far better – a refreshing and much needed
change. I (I suppose by luck) got last weeks ECB 25bps cut right and
I’ll stick my neck out further and suggest that a further 25bps cut is
on for December. Most importantly, Mr Draghi is clearly forward
looking and, most importantly, market savvy (he was vice chairman of
Goldman’s Europe previously), something that that idiot Trichet could
not understand. Finally, I believe there is a good chance that the ECB
will cut rates BELOW 1.0%, something that they have not done in the
past, though I accept that there are technical issues involved.

I have no doubt that the BoE will increase the size of its current QE
programme – currently £275bn, to close to £500bn – the UK economy is
struggling and the BoE will act, in spite of a headline inflation rate
of 5.0%, though inflation will decline fast in coming months, even if
just due to base effects. This should have and should continue to have
a major negative impact on Sterling, though the UK is seen as a flight
to safety country (particularly as the Swiss are trying to depreciate
the Swissy), which is remarkable to me. The UK’s AAA credit rating
must come under pressure; however, the current administration in the
UK is by far the best in Europe (particularly from an economic point
of view) and I would argue amongst the best worldwide, particularly
given what they inherited from the disastrous policies of the former
UK Prime Minister, Mr Gordon Brown.

As an aside, having lost my 2 bete noir’s, Brown and Trichet, I
really am at a loss – I will have to find some others so I can
continue with my rants.

I had a great trip to the US. It is clear that US economic data (by
contrast to the Europe) is better than most (including myself, I must
admit) had expected. I accept that some of it is fiscally driven,
which changes next year – indeed, there will be a net fiscal drag in
2012. The recovery of the US is, in my humble view, finally dependent
on the recovery of the US residential market. Here, and I accept its
anecdotal, I believe there is some positive news. Indeed, I am playing
a recovery in the US residential market – I have bought a significant
weighting in 2 building stocks with a large exposure to the US -
namely the Irish company CRH (ticker CRH) and Wolseley (ticker WOS).
Both have performed well and I believe have a lot further to go. In
addition, my friend Toby (one of the best in terms of the European
market – he works for Jefferies) has promoted these stocks extensively
and, in addition, today reminds me that CRH may even get into the UK’s
FTSE 100, which will require investors to buy the stock – great news
if it happens. I am aware that a number of investors are buying US
housing stocks though, for the moment (until I complete my research),
will stick to my way of playing this theme.

A digression for the moment. A gentleman called Sean Egan alleged that
Jefferies had a problem relating to Euro Zone Sovereign exposure – in
particular, that its hedges were illiquid – I accept that there is a
real conversation to be had as to the value of Sovereign CDS’s,
particularly as the ISDA has deemed that the “voluntary” haircut of
50% on Greek Sovereign debt does not trigger a payment. The unintended
impact of this decision and the Euro Zone’s hatred of CDS’s is that
investors will be reluctant to buy Sovereign debt as they cant, in
effect, obtain insurance. However, counter party and lack of
transparency risk remains in the CDS market and, I for one, will not
even think about playing this market until this changes.

As Mr Egan’s Jefferies call came shortly after the problems associated
with MF Global (which he got right), the market reaction to Jefferies
was significant – the stock was down over 20% initially, but recovered
rapidly as more sane views prevailed. A few days later, Jefferies
closed the vast majority of it exposure to European debt, making the
allegation that Jefferies hedges were illiquid (allegedly CDS’s) a
complete nonsense. I have followed Mr Egan and whilst he is right on
some views, he does have an unfortunate habit of sensationalising.
Sure, I understand that he is seeking publicity for his credit rating
firm and I fully acknowledge that his business model (he charges
investors and not issuers) is ABSOLUTELY RIGHT. However, a number of
his calls are, how can I put it, somewhat aggressive, in my humble
view – dangerous in these markets. Indeed, I always would always seek
a second opinion.

An American friend of mine Barry Ritholtz (he produces a great daily
blog on line which you should subscribe to – its free as well !!!),
reminded me that US unemployment (9.0%) or around 17% if you look at
the U6 data, is focused on unskilled workers to a very large extent.
In addition, he also wrote a superb piece on the non sensical
assertion that US regulators were to blame for the US sub prime crisis
- something which a number of crazies are promoting in the US.
Absolute nonsense – as he points out, it was the banks who produced
this stuff and then (some of them) SHORTED it. Come on, lets get real.
Furthermore Mr Ritholtz has an endearing and particularly common sense
approach – very much lacking in most players.

Another misguided view (in my humble opinion) is of the FED. In my
view, Bernanke/FED/the US SAVED the world. If they had not acted, we
would all be living in caves. I accept that you can now have a genuine
discussion as to whether the FED can and/or should do more, but I for
one am not prepared to criticize them. However, further QE next year
remains likely.

I spent some time in Washington and, as usual, spoke to a number of
politico’s. It is clear that the Republican strategy is to pray that
unemployment remains high and that the US economy does not recover.
Furthermore, they are DEPRESSED as to the poor quality of their
candidates – I can fully understand that. The Democrats – well, I did
not get any idea as to their strategy – is it possible that they have
none – certainly seems like it. All rather alarming, given the US’s
position in the global economy. However, it looks as if it is a
shootout out at the OK corral (or not so OK, as may be the case)
between Romney and Obama. Personally, I would not write off Obama, as
many have, though he really needs to get his act together and,
furthermore, to have some kind of POLICY – isn’t that what’s its all
about. For example some kind of energy policy would help – don’t you
think.

Focus could well shift to the US and, in particularly, to the Super
Committee. Will it agree or will it not not. God only knows given the
political gridlock in the US. All I can say, is that without revenue
increases, in addition to spending cuts, this whole exercise is just a
complete waste of time.

I remain (short term) BULLISH – have not changed. My biggest fear is
the Middle East and the Iranian nuclear situation. We all accept that
the Iranian leadership are clinically insane. However, it is clear
that the Israeli PM is not listening to the US and may well react
unilaterally. That will certainly draw in the US, as the Iranians will
almost certainly attack US interests. Given the impending US
Presidential elections, it is difficult for Obama to constrain
Netanyahu. The situation is DANGEROUS and I remain amazed that
investors have not focused on it more. I have no doubt that the recent
hike in Oil prices is mainly due to the threat in the Middle East.

I met Mr Robert Hardy in the States. He writes an excellent
political/Global Macro piece called GEOSTRAT. I found his views
particularly informative and indeed, essential reading. Most
surprisingly, he advised me that demand for his product is mainly ex
US. If there’s 1 thing you need to do right now, its to follow Global
Macro/Political/Policy issues. Indeed, as you know, my theme is that
POLICY/POLITICS WILL HAVE A SIGNIFICANT AND INCREASING INFLUENCE ON
MARKET PERFORMANCE.

I am virtually certain of this and I am also certain it will be the
case for quite some time to come – many, many years indeed – way, way
after my retirement date and hopefully, I have quite a few years to
go. However, like Mr Hardy, I am amazed as to lack of understanding
(indeed knowledge) that the vast majority of both sell side and buy
side US participants have in Macro/policy/political issues -
completely crazy in my view and a deficiency which will lead to, I
have no doubt, UNDER PERFORMANCE. In Europe, I would argue
participants are better, (though still way below what’s needed) clued
up. The other issue, I found in the States is the propensity of
people, who it is abundantly clear are woefully uninformed, to express
a view on global matters on the basis that they are experts. Better to
shut up, I would have thought.

Finally, China. Interestingly, China is better known by US based
participants, though their depth of knowledge, in my humble view, is
limited. Generally, there is still a love affair with the country,
without understanding the politics, economics etc – very dangerous.
Personally, in the short term, I believe that China will ease its
tight monetary policy and increase lending – there has been a credit
squeeze recently, which has had a severe impact on their economy.
Reserve ratio requirements will be lowered, which should increase
(much needed) lending. In addition “official” inflation and PPI has
declined, which will help to ease tight monetary policy. However,
recent data reveals that Chinese exports (especially to it largest
trading partner, Europe) have declined significantly, particularly if
you exclude the impact of price rises. There is a hue and cry about
the undervalued Yuan in the US. However, a number of informed analysts
argue that the yuan may actually be OVERVALUED – indeed, I am fast
becoming a proponent of this view. The key point, as far as I’m
concerned is that the rate of CAPITAL FLIGHT from China is
accelerating, particularly ahead of the impending (major) change in
leadership. The really alarming issue, is that a lot of this capital
flight is coming from people “connected” to the senior policy markets
- oops. However, short term, a relaxation of monetary policy will be
market positive – good for the A$, but medium/longer term, I remain
bearish on basic materials and the A$.

The FT had an interesting article the other day – it reported that
European banks were cutting back on lending to Asia (they represented
21% of lending). Asia depends on capital inflows. Whilst US and
Japanese banks may cover some of this, they wont totally, which
suggests to me that interest rates in the region will RISE.

The deleveraging by European banks (especially as they know that they
have to meet much tougher capital ratios) is also bad news for Europe
- it’s madness to reduce lending, when the economy is heading for
recession. However, a number of Euro Zone countries cannot afford to
recapitalise European banks, who are grossly over leveraged. The ECB
is providing a massive amount of liquidity, against collateral, which
in a number of cases (Greek) is effectively toilet paper. Given the
ECB is thinly capitalised, this issue is going to come back to bite
them, though I accept that the ECB can print its way out of their
(very likely) impending problem.

A further problem is that with European banks reducing their Sovereign
debt exposure, who will be buyers of subsequent debt issues, I ask
!!!.

In any event, I’ve droned on for far too long. Markets look health
today – great news, but I remain convinced that a buy and hold
strategy (unless you are looking at a long term play) is as dead as as
dodo. Personally, I believe that I will be lucky to be able to
forecast even 1 or possibly a few more months ahead. Good luck to
those who think they can.

UoM confidence better than expected ahead of BF

Posted: 11 Nov 2011 07:21 AM PST

The 1st look at Nov UoM confidence at 64.2 was well above estimates of 61.5, up from 60.9 in Oct and the best since June when it was 71.5. The 11 month average ytd is now 67.2. The main catalyst of improvement was in the Outlook component which rose 4.4 pts while Current Conditions were up 1.5 pts. One year inflation expectations were unchanged at 3.2% which compares to the 20 year average of 3.0%. Five year inflation expectations fell to 2.6% from 2.7% which matches the lowest since Mar ’09. Helping to keep inflation expectations relatively muted are gasoline prices which continue to lag 14% below the highs reached in May, although remain elevated at $3.44 per gallon on avg according to AAA. With crude though approaching $100 again, gasoline prices will likely start heading higher again. Bottom line, while still at sluggish levels, confidence has stabilized for now and we’ll soon see what that means for holiday sales as we’re just weeks away from Black Friday.

TDS: Indecision 2012 – Mercy Rule Edition

Posted: 11 Nov 2011 07:15 AM PST

A comedian can spend his whole life digging through the comedy mines for sound bites to sustain his family, and then Rick Perry gives him 53 seconds that can change his life.

Review: Black Box Casino: How Wall Street’s Risky Shadow Banking Crashed Global Finance

Posted: 11 Nov 2011 07:00 AM PST

Today I am pleased to announce a new series at TBP, book reviews by Chris Whalen. Longtime readers of TBP are quite familiar with Chris Whalen. From his perch at Institutional Risk Analyst to his appearances on Bloomberg and CNBC, the former NY Fed and bear Stearns analyst is an astute observer of banking foibles.

Chris and I partly disagree about how the fault for the collapse. But unlike Mayor Bloomberg or Mitt Romney, he is not a mere politico rationalizing an unsupportable position. We can  have an intelligent discussion as to the factors that contributed to the collapse — and collegially disagree.

Here is Chris’ first review:

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In his new book Black Box Casino: How Wall Street's Risky Shadow Banking Crashed Global Finance, Robert Stowe England provides some compelling data and analysis that adds to the collective understanding of the subprime crisis.  Leading analysts such as Barry Ritholtz, Josh Rosner, Gretchen Morgenson and Joe Nocera have been debating whether Washington or Wall Street owns the blame for "causation" in the subprime mess.  England approaches the crisis instead from a functional perspective that begins from the key central fact:  The housing GSEs and the Wall Street banks are one and the same.

One of the many reasons that I am grateful to my friend Alex Pollock at American Enterprise Institute is his reminders regarding the nature of reality when it comes to finance and analysis.  Accounting, he inveighs, is just one perspective on the elephant.  Where you stand determines your view of the pachyderm.

Instead of treating Washington & Wall Street as separate factors, England instead describes the interaction of Fannie Mae, Freddie Mac and the large Wall Street banks as part of a single market.  By focusing on the new bank capital standards put in place in 2001, the subsequent increase in subprime lending by Fannie Mae and Freddie Mac after 2004 and the amazing explosion of cash and derivative private label RMBS, Black Box Casino describes the affordable housing partnership as a true collaboration between the Wall Street banks, national realtors, home builders, politicians and community activists.

In Chapter 3, for example, appropriately entitled "Seeds of the Disaster," England describes how the culture of affordable housing in Washington was enforced by federal bank regulators such as Boston Fed President Richard Syron.  Under his leadership, the Boston Fed published a series of scathing research reports detailing the "racist motives" behind bank lending patterns in New England – a message that was also being delivered by Fed examiners working in that region.

The point here is that a series of positive and negative incentives emanating from Washington and driven by politics did alter bank lending behavior during the past decade and more.  Badly underwritten loans were then sold to investors.  You know the rest of the story.  When it comes to credit availability, were we are today is closer to normal.

The role of the GSEs going back to Fannie Mae Chairman David Maxwell is likewise treated in detail, especially the symbiotic relationship between Maxwell and  the Lehman Brothers rain maker Jim Johnson, who eventually came to run Fannie Mae.  The author also reminds us how deep and far back in time go the roots of the subprime mess.

"What is forgotten today is that the purpose of the GSE legislation in 1992 was not to inaugurate an era of credit allocation and affordable lending," England writes, "but to provide Fannie and Freddie from suffering the fate of the failed savings and loan industry."  England rightly identifies the GSEs as the funding fall back to the S&Ls of the 1980s for the housing industrial complex in the 1990s and thereafter.

England goes on to explain that the capital standards set by Congress for the GSEs were so small that the effective leverage was over 200:1: "This Congress basically created the framework for what would become the world's two largest hedge funds."  And England describes very nicely how the politicians of that era, from Henry Cisneros to Bill Clinton and George W. Bush, all focused on access to affordable housing as a political cash cow.

When Barry said on Bloomberg Radio this past Thursday that Fannie and Freddie were just two more messed up banks, he really does them a great service.  In fact, the GSEs were the highly leverage guarantors of Wall Street's total mortgage production, subprime and conforming.  The largest lenders of the time, from Countrywide to WaMu to Wells Fargo and Bank America, controlled the entire secondary mortgage market, as they do today. Bank America, Wells Fargo, Citigroup and JPM are today a cartel operating in the secondary market for home loans in concert with the GSEs and the private mortgage insurers, which are effectively appendages of the banks and GSEs.

The fact that most of the insurance exposure taken by the GSEs was conforming, as Barry and many others rightly argue, misses the point.  Wall Street banks were using the underpriced GSE insurance to move supposedly "prime" loan production that would otherwise have never been done.  The supposedly high quality conforming, 80% debt, 20% cash down loans now are starting to go bad in growing proportions due to the fact that one third of all mortgages are now under water.

The gaming of the GSE guarantees for collateral in RMBS trusts created by Countrywide, WaMu and other lenders is well documented.  This short-changing on RMBS investors in conforming deals was a direct factor in the decision to force a merger with Bank America, which was Angelo Mozilo's conduit lender.

The GSEs and private MIs, whose pricing was forced down by the GSE's artificially low risk pricing,  were equally enablers in the sense that the pricing of their guarantees was an order of magnitude too low to cover the true economic risk.  The fact of Washington's subsidy of the prime mortgage market and the political protection offered to Fannie and Freddie by politicos like former CT Senator Christopher Dodd is described nicely in Black Box Casino, particularly the refusal of Dodd, Rep Barney Frank (D-MA) and other key Democrats to move on GSE reform.

England recalls Frank telling the Washington Post that the reason for the collapse of the GSEs was market psychology, not "fundamentals."  But the fundamental fact is that the government sponsorship for the US housing market going back to WWII has run its course, tracking demographic and social trends perfectly.  We should recall that it was only after WWII that Wall Street began creating structured securities following the financial boom of the Roaring Twenties.  The landmark Supreme Court decision by Luis Brandeis in Benedict v. Ratner in 1925, which created the standard for collateralized borrowing, also shut down the Wall Street sausage machine and arguably caused the Great Crash of 1929.  With the subprime crisis we now have come full circle.

Barney Frank, Chris Dodd and many other politicians of both parties leveraged the housing market with the full faith and credit of the US Treasury.  The tab for Fannie, Freddie and FHA is north of $170 billion and climbing.  After the 2012 election, we'll get the bad news on embedded losses inside the GSEs from defaults on those supposedly "prime" conforming loans that were guaranteed by the US taxpayer for scant consideration.  Black Box Casino tells this story in a well written and sourced perspective on our shared misery.
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