More Empty Posturing Out Of Moody’s - Rating Agency Once Again Threatens With US Downgrade
by Zero Hedge - March 15th, 2010 1:40 am
Courtesy of Tyler Durden
The rating agency, whose “objectivity” was recently fully exposed after it has been persistently the one rater who refuses to downgrade Greece, even after its peers S&P and Fitch have made Greek bond eligibility for ECB collateral contingent purely on Moody’s lack of conscience, is pretending that it has some credibility after all, by doing a little extra posturing, and grumbling that if things get much worse, it may, just may, consider dropping the US AAA rating. This, of course, despite Tim Geithner’s promise that the US would only be downgraded over his dead body, or something like that. Furthermore, as we have recently learned, the FRBNY has a “proactive” influence in rating agency decisions. To assume that Mr. Brian Peters of the New York Fed would return a Moody’s call and say “yes, we agree with your assumption that the US is not really AAA-worthy, please go ahead and downgrade us” requires copious amount of prior consumption of LSD and other hallucinogenics. Yet for those who still care about what output Moody’s produces, here is the full relevant text discussing the outlook for the United States.
GDP Growth: One Quarter of Strength, But…?
Real GDP increased at a relatively strong annual rate of 5.9% in the fourth quarter of last year, following a rate of 2.2% in the third quarter. However, well over half of the rise in Q4 was the result of inventory accumulation, and personal consumption expenditures rose only 1.7%, a deceleration from the 2.8% rise in the previous quarter. The household savings rate for the year as a whole was 4.3%, more than double the rate of 2007 - as deleveraging affected spending patterns. Another factor that prevented consumption from growing more strongly is the unemployment rate, which averaged 10% during the last quarter before falling to 9.7% in January and February.
The pattern of growth and the high rate of unemployment raise the question of how strong the recovery will be going forward. The federal government budget assumes a 2.7% real growth rate in 2010, with private forecasts slightly higher. This figure is less than the average growth rate during the ten years up until 2007, which included a mild recession following the bursting of the “high-tech bubble.” During the same ten years, personal consumption rose at an average annual rate of 3.6%, and it appears unlikely to match that rate in the near…
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Why is the President’s Working Group Oppossing the FDIC Reform Proposals on Residential Mortgage Securitization by Banks?
by Zero Hedge - March 14th, 2010 9:42 pm
Courtesy of rc whalen
This week in The IRA we feature a conversation with Bill King, who along with his wife and business partner Mary works in the world of derivatives broadly defined via their Chicago-based firm, M. Ramsey King Securities. We first started taking with Bill in the 1980s, during the political wrangle - we won’t call it a battle - over free trade with and democracy in Mexico. That was about the time of the first appearance of “Too Big to Fail” for the large banks following the Mexican peso meltdown. Un fuerte abrazo a nuestros amigos en Mexico!
But before we go to our feature, a few comments on current events. First and foremost we remind one and all about the impending start of the FDIC’s rule make effort regarding the reform of bank securitizations. Last week, the FDIC approved an extension through September 30, 2010 of the Safe Harbor Protection for Treatment by the FDIC as Conservator or Receiver of Financial Assets Transferred by an Insured Depository Institution in Connection With a Securitization or Participation.
We hear that the FDIC rule making process could start as soon as next month, but more likely will wait till the FDIC’s board meeting in May. We also hear that the President’s Working Group (PWG) on Financial Services is preparing a “white paper,” in cooperation with the Federal Reserve Board and the Office of the Comptroller, to block the FDIC reform effort. This campaign, which apparently was orchestrated by the largest dealer banks, is intended to derail the new rules proposed by the FDIC mandating greater transparency and disclosure for bank sponsored residential mortgage securitization deals.
The PWG, in case you don’t know, is an informal group created in 1988 by President Ronald Reagan that allows the executives of the biggest banks to influence public policy in Washington, but without going through the trouble of registering as lobbyists or other public disclosure. Sometimes referred to the “plunge protection team,” the PWG is part of the invisible government of Washington,” an agency which operates within the government, but at the behest of private interests.
Barry Ritholtz has a nice summary on the PWG in his book, Bailout Nation, and also in his Blog, “The Big Picture.” As Barry notes, the PWG is every bit as incompetent as most other people in Washington, but they do have one special skill: pushing the banking industry’s agenda in…
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Behind the Sentiment Disparity: Main Street vs. Wall Street
by Zero Hedge - March 14th, 2010 9:23 pm
Courtesy of asiablues
By Economic Forecasts & Opinions
According to a gauge derived from data compiled by The American Association of Individual Investors (AAII), bullishness on U.S. stocks is beginning to emerge after the market’s rally in the past year.
The latest AAII Sentiment Survey reading shows optimists outweighed pessimists for the first time since January 2008, three months after the previous bull market ended. (See Chart from Bloomberg)
A Disparity in Sentiment
In contrast to the cheery mood of the markets, the latest readings from consumers and small business owners indicate economic sentiment isn’t improving, despite signs of a factory rebound and less gloom on the labor front.
The National Federation of Independent Business said its optimism index for small business owners fell back in February to its December reading. The IBD/TIPP Economic Optimism Index dropped 3% in March, well below its average of the past year.
Meanwhile, The U.S. consumer sentiment also dipped in early March, according to the University of Michigan Consumer Sentiment Index.
‘Never Seen Anything Like It’
This divergence has got the Wall Street scratching its collective head. In a recent MarketWatch article, Mr. Mark Hulbert cited a Wall Street advisor as saying:
“The disparity between hope on Wall Street and malaise on Main Street continues. I have never seen anything like it.”
In short, the disparity may be deciphered in one word – liquidity – which Wall Street has plenty of from government handouts, while main street remains strapped from the bleak prospects in both the job and housing markets.
Behind The Productivity and Profit Gain
Corporations are now seeing higher profits mainly through cost, inventory, and workforce reductions. It is not a coincidence that the U.S. productivity rose by an outsized 6.9% last quarter, while the cash U.S. corporations have on hand equals about one-tenth of the annualized gross domestic product (GDP) over the past twelve months — near a record high, according to an IHS analysis of Commerce Department data.
This type of “growth” is not real and entirely unsustainable, and at some point, companies won’t be able to get their employees to keep producing more.
For Middle America, the stagnant housing market and the lack of positive job growth are two factors hindering a more robust reading for consumer sentiment. An analysis of these two factors will offer some clues to Wall Street as to what Main Street is concerned about regarding the economy.
Home Not So Sweet Home
In the fourth quarter,…
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Investor Sentiment: Few Words Needed
by Zero Hedge - March 14th, 2010 7:11 pm
Courtesy of thetechnicaltake
With 3 out of 4 of our measures registering extreme readings, few words are needed to describe investor sentiment this week.
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GATA Present New Evidence Of The Fed’s Gold Price Supression Scheme, Combing Through Oddly Unredacted FOMC Minutes
by Zero Hedge - March 14th, 2010 6:36 pm
Courtesy of Tyler Durden
GATA’s Adrian Douglas has done a tremendous job of combing through dozens of hundred-plus page FOMC transcripts, and has compiled numerous quotes by assorted FOMC-related personnel, including former Chairman Greenspan, which provides yet another piece of evidence, demonstrating the persistence of the Fed’s gold price suppression scheme. As Douglas puts it: “My thinking was that if an organization is so inept at covering up that detailed transcripts were retained, then perhaps it is also inept at completely redacting sensitive and incriminating information. What I found is quite astounding and serves as documented evidence by the Federal Reserve itself that it manipulates the gold market.” We present the relevant quotes dug up by Douglas, whom we applaud for his effort, together with his very relevant commentary, which once again exposes the Fed’s covert gold price suppression intentions.
In the March 21, 1978, FOMC meeting —
http://www.federalreserve.gov/monetarypolicy/files/FOMC19780321meeting.p…
– the following exchange took place.
* * *
CHAIRMAN MILLER. The Treasury has severe reservations about it. Originally, two weeks ago, they were taking the position that they would not be in favor of it — that it raised too many problems for them. Since then I think they have become a little more open-minded about it. However, I think the first avenue is apt to be the sale of gold. Sales of gold were under consideration and were deferred partly because of the French elections, which are now over. So I think it’s likely that the Treasury will start a program of selling gold, which I personally would favor. There are a lot of advantages in using gold because at least then we don’t end up with debt and the currency risks that go with it. So I think that’s an avenue that should be pursued. There has been a discussion about the level of gold sales that are possible — what the market can absorb and that sort of thing. Henry can correct me, but I believe the Treasury feels that they could sell about 300,000 ounces a month.
MR. WALLICH. That would be a very moderate amount — something like less than 60 million. And bear in mind that unless they can develop a means of selling the gold for foreign currency in a way that doesn’t cause holders of dollars to buy that foreign currency in order to buy the gold, it could be completely counterproductive. Then there isn’t going to…
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GATA Presents New Evidence Of The Fed’s Gold Price Supression Scheme, Combing Through Oddly Unredacted FOMC Minutes
by Zero Hedge - March 14th, 2010 6:36 pm
Courtesy of Tyler Durden
GATA’s Adrian Douglas has done a tremendous job of combing through dozens of hundred-plus page FOMC transcripts, and has compiled numerous quotes by assorted FOMC-related personnel, including former Chairman Greenspan, which provides yet another piece of evidence, demonstrating the persistence of the Fed’s gold price suppression scheme. As Douglas puts it: “My thinking was that if an organization is so inept at covering up that detailed transcripts were retained, then perhaps it is also inept at completely redacting sensitive and incriminating information. What I found is quite astounding and serves as documented evidence by the Federal Reserve itself that it manipulates the gold market.” We present the relevant quotes dug up by Douglas, whom we applaud for his effort, together with his very relevant commentary, which once again exposes the Fed’s covert gold price suppression intentions.
In the March 21, 1978, FOMC meeting —
http://www.federalreserve.gov/monetarypolicy/files/FOMC19780321meeting.p…
– the following exchange took place.
* * *
CHAIRMAN MILLER. The Treasury has severe reservations about it. Originally, two weeks ago, they were taking the position that they would not be in favor of it — that it raised too many problems for them. Since then I think they have become a little more open-minded about it. However, I think the first avenue is apt to be the sale of gold. Sales of gold were under consideration and were deferred partly because of the French elections, which are now over. So I think it’s likely that the Treasury will start a program of selling gold, which I personally would favor. There are a lot of advantages in using gold because at least then we don’t end up with debt and the currency risks that go with it. So I think that’s an avenue that should be pursued. There has been a discussion about the level of gold sales that are possible — what the market can absorb and that sort of thing. Henry can correct me, but I believe the Treasury feels that they could sell about 300,000 ounces a month.
MR. WALLICH. That would be a very moderate amount — something like less than 60 million. And bear in mind that unless they can develop a means of selling the gold for foreign currency in a way that doesn’t cause holders of dollars to buy that foreign currency in order to buy the gold, it could be completely counterproductive. Then there isn’t going to…
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7 Questions About Public Banking
by ilene - March 14th, 2010 6:21 pm
7 Questions About Public Banking
Courtesy of Washington’s Blog
This is an open letter to the economics, finance and banking communities. I don’t have any dog in the fight, other than to figure out and then publicize what is best for the greatest number of people. People I greatly respect advocate for federal-level public banking, state public banks or a return to the gold standard. I am simply attempting to start a high-level debate about what the best option is. I will update this essay with the best responses as I receive them.
How Is Credit Created?
I pointed out in September:
As PhD economist Steve Keen pointed out recently, 2 Nobel-prize winning economists have shown that the assumption that reserves are created from excess deposits is not true:
The model of money creation that Obama’s economic advisers have sold him was shown to be empirically false over three decades ago.
The first economist to establish this was the American Post Keynesian economist Basil Moore, but similar results were found by two of the staunchest neoclassical economists, Nobel Prize winners Kydland and Prescott in a 1990 paper Real Facts and a Monetary Myth.
Looking at the timing of economic variables, they found that credit money was created about 4 periods before government money. However, the “money multiplier” model argues that government money is created first to bolster bank reserves, and then credit money is created afterwards by the process of banks lending out their increased reserves.
Kydland and Prescott observed at the end of their paper that:
Introducing money and credit into growth theory in a way that accounts for the cyclical behavior of monetary as well as real aggregates is an important open problem in economics.
In other words, if the conventional view that excess reserves (stemming either from customer deposits or government infusions of money) lead to increased lending were correct, then Kydland and Prescott would have found that credit is extended by the banks (i.e. loaned out to customers) after the banks received infusions of money from the government. Instead, they found that the extension of credit preceded the receipt of government monies.
Keen explained in an interview Friday that 25 years of research shows that creation of debt by banks precedes creation of government money, and that debt money is created first and precedes creation of credit money.
As Mish has previously noted:
Conventional wisdom regarding the money multiplier is wrong. Australian economist Steve Keen notes that in a debt based society, expansion…
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Presenting Empirical Evidence Of The Existence Of “Greater Fools”
by Zero Hedge - March 14th, 2010 5:19 pm
Courtesy of Tyler Durden
With Geoffrey Batt
This weekend the New York Times has published an interesting observation of gender differences when quanitfying the intangible concept of “overconfidence” as it relates to stock trading. While the article throws a relatively minor wrench at the spoke of “efficient markets”, we are following it up with a scientific paper by Wei Xiong and Jialin Yu, discussing the Chinese Warrant Bubble, in which speculative mania gripped the trading of warrants so deep out of the money that they were certifiably worthless, yet trading at an increasing turnover rate, and substantially inflated prices. With numerous unequivocal examples of bubbles in the history of capital markets, starting with Dutch tulip mania (1634-37), progressing through the Mississippi bubble (1719-20) the South Sea bubble (1720), the Internet bubble in the late 1990s, and the housing bubbles of the mid 2000s, it appears that human traders never learn from history as the speculative element overpowers rationality each and every time. The underlying premise: the hope that another greater fool will emerge. And emerge they do, until they don’t, and markets collapse bidless. It is certainly easy to draw a parallel between the Chinese Warrant Bubble, and the trading of AIG, C, FNM, FRE and a whole slew of otherwise worthless companies, which on occasion make up over 30% of of the volume of the US stock market, which in turn drives the momentum that pushes the balance of all stocks. Another parallel: the entire US stock market is now one big “greater fool” trap waiting to spring once the greater fools have their fill of gambling fever.
As the authors point out:
In 2005-08, over a dozen put warrants traded in China went so deep out of the money that they were certain to expire worthless. Nonetheless, each warrant was traded nearly three times each day at substantially inflated prices. This bubble is unique, because the underlying stock prices make the zero warrant fundamentals publicly observable. We find evidence supporting the resale option theory of bubbles: investors overpay for a warrant hoping to resell it at an even higher price to a greater fool. Our study confirms key findings of the experimental bubble literature and provides useful implications for market development.
The explanation: overconfident, under-informed “speculators” i.e., the bulk of traders in US stock markets, who get the bulk of their finance education from CNBC, who do no homework, yet hope the a…
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On Banning CDS
by Zero Hedge - March 14th, 2010 4:55 pm
Courtesy of Bruce Krasting
A lot has been written and said in the past few weeks about CDS. Almost all of it has been bad press for the poor boys who write and trade this stuff for a living. Heads of State, leading academicians and economists, the MSM and even some of the financial blogs have all been pounding the table on this issue. The message has been pretty clear. “Something has to get done, or we are really really going to blow up next time”.
The catalyst for the recent uproar has been Greece and to a lesser extent the other PIIGS. The perception has been created that somehow the existence of a CDS market for Greek Government Bonds has caused a crisis. Nothing could be farther from the truth. We now know that CDS had very little to do with the yield spike in GGB’s. It was the movement by the low rent bond traders (AKA global investors) that caused this hiccup. Greek CDS was the tail that got wagged. Not the other way around. But the vitriol continued. Wolfgang Munchau wrote on this topic last week. The following quote summed up his thinking:
“The case for banning CDS is about as strong for banning bank robberies.”
Some of the arguments against CDS include:
(I) They are unregulated.
(II) They create the opportunity for excessive leverage.
(III) They are used for and encourage speculation.
(IV) They may be written by under capitalized firms. Depending on the outcome this could create an excessive financial risk for the writer and thereafter cause a systemic risk. (The AIG story)
(V) They can, by their very existence, precipitate or fuel a financial crisis.
CDS is functionally an insurance policy one can buy to protect against default of payments from a borrower. While it is different in a number of respects from payment default insurance, it really is the same thing. If you accept that CDS = MI then you have to look at what is happening in that market. Mortgage CDS is the big casino; Greece and all the others are just a sideshow by comparison.
First consider the private sector side of this. The mortgage insurance industry (MI) is represented by an outfit called MICA. The current and recent members of this group include:
S&P updated its views on the Mi providers in November 2009. Does this sound like a group that is adequately capitalized? Their comments:
Overview
• The mortgage insurance…
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YTD and MTD CDS Heatmaps
by Zero Hedge - March 14th, 2010 4:40 pm
Courtesy of Tyler Durden
Presenting an update of North American Investment Grade CDS. While Month To Date the credit market has ripped in line with equities, with just CTL and AA marginally wider for the period, Year to Date the vast number of names is still wider than at January 1, or at beast unchanged, demonstrating that credit is certainly not as enthused about the equity market activity over the past two and a half months.
Month To Date:
And Year To Date:
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
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