by ilene - October 15th, 2010 3:36 pm
Courtesy of Mish
Lower interest rates are not typically synonymous with rising inflation, but Bernanke foolishly thinks he can get that magic pair with the power of persuasion in conjunction with Quantitative Easing.
Please consider Fed Considers Raising Inflation Expectations to Boost Economy
Federal Reserve policy makers may want Americans to expect inflation to accelerate in the future so they spend more of their money now.
Central bankers, seeking ways to boost flagging growth after lowering interest rates almost to zero and buying $1.7 trillion of securities, are weighing strategies for raising inflation expectations as well as expanding the balance sheet by purchasing Treasuries, according to minutes of the Fed’s Sept. 21 meeting released yesterday.
Some Fed officials are concerned that expectations of lower inflation will become self-fulfilling, damping demand by increasing borrowing costs in real terms, the minutes said. By encouraging Americans to believe prices will start rising at a faster pace, the Fed would reduce inflation-adjusted interest rates and stimulate the economy. Chairman Ben S. Bernanke said in 2003 that Japan could beat deflation by using a “publicly announced, gradually rising price-level target.”
“The Fed is on the verge of actively targeting a higher inflation rate,” said Dan Greenhaus, chief economic strategist at Miller Tabak & Co. in New York. U.S. stocks advanced, sending benchmark indexes to five-month highs, the dollar fell and gold declined for the first time in three days after the minutes were released.
Trying to raise inflation expectations is untested in the U.S. The policy may backfire if actual inflation drifts higher than the Fed would like, potentially eroding gains won in the early 1980s by former Fed Chairman Paul Volcker, who raised interest rates as high as 20 percent to subdue prices.
Jim O’Sullivan, global chief economist at MF Global Ltd. in New York, said in a Bloomberg Television interview that the biggest risk is “boosting long-term inflation expectations more than they lower real interest rates.”
The FOMC could adopt a combination of inflation targeting and price-level targeting to get inflation expectations up, said Mark Gertler, a New York University economist and research co-author with Bernanke.
The Fed could restate its commitment to keep inflation rising annually at around 1.7 percent to 2 percent. At the same time, the FOMC could announce some
by ilene - September 19th, 2010 2:25 pm
Courtesy of Gordon T. Long of Tipping Points
The United States is facing both a structural and demand problem – it is not the cyclical recessionary business cycle or the fallout of a credit supply crisis which the Washington spin would have you believe.
It is my opinion that the Washington political machine is being forced to take this position, because it simply does not know what to do about the real dilemma associated with the implications of the massive structural debt and deficits facing the US. This is a politically dangerous predicament because the reality is we are on the cusp of an imminent and significant collapse in the standard of living for most Americans.
The politicos’ proven tool of stimulus spending, which has been the silver bullet solution for decades to everything that has even hinted of being a problem, is clearly no longer working. Monetary and Fiscal policy are presently no match for the collapse of the Shadow Banking System. A $2.1 Trillion YTD drop in Shadow Banking Liabilities has become an insurmountable problem for the Federal Reserve without a further and dramatic increase in Quantitative Easing. The fallout from this action will be an intractable problem which we will face for the next five to eight years, resulting in the ‘Jaws of Death’ for the American public.
The ‘Jaws of Death’ is the crushing squeeze of a shrinking gap between incomes and a rising burden of the real cost of debt burdens. Many may say there is nothing new in this, but I would respectfully disagree. There is a widespread misperception of what is actually evolving that stops voters from forcing politicians to address America’s substantial underlying dilemma. It also stops investors from positioning themselves correctly.
Any solutions of real substance are presently considered political suicide. It is wiser to wait for a crisis event to unfold. As White House Chief of Staff and a primary Obama political strategist, Rahm Emanuel has said on numerous occasions: “You never want a serious crisis to go to waste”. It doesn’t take much intelligence to understand this also implies looking for a crisis as a political shield, for example from an almost insurmountable political problem such as a generational reduction in the US standard of living.
by ilene - September 7th, 2010 5:15 pm
Courtesy of The Pragmatic Capitalist
Whitney Tilson of T2 Partners says the global economy is set to “muddle through” as the excesses of the last few decades are worked off. Tilson detailed his macro outlook in his most recent investor letter for August. Tilson believes the worst of the credit crisis is behind us, however, the heavy lifting is not over yet. Tilson is very concerned about the macro risks, particularly the sovereign debt crisis in Europe and US housing. Tilson says the US housing
“We think we have gone through the most difficult economic period in the United States and the world since the Great Depression. We think the worldwide debt bubble — this was not just a US housing crisis or bubble, but a worldwide debt bubble — was unprecedented in the degree of depravity that took place, in the amount of leverage that built up in the system all over the world, and we’re very skeptical that we have somehow successfully managed our way through the aftermath of that bubble and that everything is rosy now.
We think the aftermath of this bubble will be with us for many years and that will continue to cause disruptions and turmoil in various markets. The sovereign debt crisis in Europe is a good example of that just in the past few months; we think the US housing market is already in a double dip right now, though because there is a lag in the data, most people haven’t yet realized it. We don’t think it’s going to be anything like the first dip, which really took world economy over a cliff, but there are 7 million people not paying their mortgages right now and we have not resolved that problem and that’s going to continue to be a headwind for our financial system. There are probably six or eight major risk factors, two of which are the sovereign debt issues and the US housing market. These make us very nervous and we don’t know how it’s going to play out (and we’re skeptical that anyone knows how it’s going to play out), so in light of these major problems, we think it’s wise to be prudent.”
by ilene - September 2nd, 2010 12:46 am
Courtesy of The Pragmatic Capitalist
My position over the last 2 years has been as follows: this is a Main Street debt crisis. I have been highly critical of the government’s incessant interventionist policies over the last few years largely because they ignore the actual problems at hand. First it was Mr. Bernanke saving the banks because he believed the credit crisis started with the banking sector. The great monetarist gaffe ensued. Tim Geithner piled on with the PPIP. FASB jumped on board the bank rescue plan by altering the accounting rules. And then the icing on the cake was the Recovery Act, which, in my opinion, just shoveled money into the hole that had become the output gap, without actually trying to target the real cause of the crisis – those burdened by the debt. In essence, the various bailouts primarily targeted everyone except the people who really needed it.
A year ago I posted a story citing the many reasons why we were sinking into the deflationary Japanese trap. The primary flaw with the US response to the crisis was that we never actually confronted the problem at hand. I have often cited Japanese economists such as Richard Koo who appear to have a good grasp on the problems in Japan and now in the USA. In this case, I cited Keiichiro Kobayashi who is now looking most prescient:
We continue to ignore our past and the warnings from those who have dealt with similar financial crises. Keiichiro Kobayashi, Senior Fellow at the Research Institute of Economy, Trade and Industry is the latest economist with an in-depth understanding of Japan, who says the U.S. and U.K. are making all the same mistakes:
debtis the root of the crisis. Fiscal stimulus may help economies for a couple of years but once the “painkilling” effect wears off, US and European economies will plunge back into crisis. The crisis won’t be over until the nonperforming assets are off the balance sheets of US and European banks.”
Read that last paragraph again. These are scarily accurate comments. While the USA claims to have many economists who understand the Japan disease and/or the Great Depression the policy actions we’ve undertaken do not appear to be in line with any understanding of this history.
by ilene - August 28th, 2010 6:30 pm
Courtesy of John Mauldin at Thoughts from the Frontline
Secular Bull and Bear Markets
It’s Not the (Stupid) Economy
The Consequences of a Credit Crisis
The Dark Side of Deficits
LA, Europe, Kansas City, and Houston
In the pre-crisis days, I used to write about things like P/E ratios, secular bull and bear markets, valuations, and all of the things we used to think about in the Old Normal. But what about those topics as we begin our trip through the New Normal? It’s time to reconvene class and think through what might change and what will remain the same. I think this will be a fun read – and let me tip my hand. I come out on the side of a new secular bull that gets us back to trend – but not just yet. The New Normal has to have its turn first. (Note: this will print out longer than usual, as there are a lot of charts.)
And speaking of first, I once again need some help from readers. I will be in "jail" next week for the Muscular Dystrophy Society. I need you to help bail me out. You can go to https://www.joinmda.org/downtowndallas2010/johnm and make a donation to help kids and families who really need help in these difficult times, and also help sponsor research that will eventually cure this disease. If you follow the link, you can see a cute video – and then make your donation!
I thank you and I am sure Jerry’s kids thank you too!
Secular Bull and Bear Markets
Market analysts (of which I am a minor variety) talk all the time about secular bull and bear cycles. I argued in this column in 2002 (and later in Bull’s Eye Investing) that most market analysts use the wrong metric for analyzing bull and bear cycles.
(For the record, even though I am talking about the US
"Cycles" are defined as events that repeat in a sequence. For there to be a cycle, some condition or situation must recur over a period of time. We are able to observe a wide variety of cycles in our lives: patterns in the weather, the moon, radio waves, etc.…
by ilene - August 6th, 2010 12:02 pm
Courtesy of The Pragmatic Capitalist
It’s becoming more and more clear that the government has failed in its efforts to create a sustainable private sector recovery. The monetarist bank bailout has failed to create the economic
“Private employers added new workers at a weak pace for the third straight month, making it more likely economic growth will slow in the coming months.The Labor Department says companies added a net total of 71,000 jobs in July, far below the roughly 200,000 needed each month to reduce the unemployment
rate.The jobless rate was unchanged at 9.5 percent.
Overall, the economy lost a net total of 131,000 jobs last month, as 143,000 temporary census jobs ended.
The department also says businesses hired fewer workers in June than it previously estimated. July’s private sector job gains were revised down to 31,000 from 83,000. May was revised up slightly to show 51,000 net new jobs, from 33,000.”
It would be unwise to overreact to this news, but it’s certainly disheartening for those who are looking for a job or those who are looking for an economic recovery to actually materialize. The duration of this recession in the labor market is truly depressing.
(image via chart of the day)
by ilene - August 1st, 2010 7:49 pm
Courtesy of JESSE’S CAFÉ AMÉRICAIN
The losses from the mortgage securities frauds and the subsequent bubble collapse continue to debilitate the US financial system, particularly the regional banks, in a slow bleed costing the US government additional millions each week. The public relations campaign promoting the idea that the bank bailouts are done and successful, and that the US made money on this egregious abuse of public monies is patently false, and probably can be described as corporatist propaganda.
The banks continue to mount a campaign to resist reform and regulation. They are taking advantage of the weakness of the Obama administration in failing to reform the banking system through liquidations and managed bankruptcies, including indictments and investigations as was seen in the Savings and Loan scandal.
It is difficult to continue to assume good intentions in this administration, or even mere incompetence. The objections put up by Geithner and Summers to the appointment of Elizabeth Warren as the head of the new consumer protection agency shows how reactionary they continue to be, and resistant to fundamental reforms.
Failures on Two Coasts Stretch Toll for Year to 108
By Joe Adler
Friday, July 30, 2010
Five bank closures in four states Friday cost the federal government an additional $334 million in losses.
Regulators shuttered the $373 million-asset Coastal Community Bank in Panama City Beach, Fla., the $66 million-asset Bayside Savings Bank in Port Saint Joe, Fla., the $168 million-asset NorthWest Bank and Trust in Acworth, Ga., the $529 million-asset The Cowlitz Bank in Longview, Wash., and the $768-asset LibertyBank in Eugene, Ore. The failures brought the year’s total to 108.
The hammered Southeast bore the brunt of the failure activity, as it has for so many Fridays since the financial crisis began. Twenty banks have been seized in Florida in 2010, while 11 have failed in Georgia so far this year.
The two Florida institutions that failed Friday went to one buyer: Centennial Bank in Conway, Ark. The acquirer agreed to take over Coastal Community’s $363 million in deposits, Bayside Savings’ $52 million in deposits and roughly all of the assets of both institutions.
The Federal Deposit Insurance Corp. agreed to share losses with Centennial on $303 million of Coastal Community’s assets, and $48
by ilene - June 9th, 2010 1:30 pm
Courtesy of The Pragmatic Capitalist
One of the glaring trends over the course of the last 18 months has been the market’s unrelenting love affair with Ben Bernanke. Just about every time Ben opens his mouth stocks roar higher as they praise his mantras of “low rates for an extended period” and “accommodactive Fed policy”. The funny thing, however, is that Ben doesn’t get it. Bernanke entirely misdiagnosed our current problems and he continues to apply the wrong solution.
Bernanke couldn’t have missed the credit crisis by a wider mark if he had tried. He continued to deny a housing bubble until it blew up in his face. In 2005 he called house price declines a “pretty unlikely scenario”. He was also “confident that the bank regulators will pay close attention to the types of loans that are being made and ensure that underwriting will be done right”. In late 2007 Bernanke said the housing crisis was “contained”, that economic growth was returning and that the sub-prime problems were also “contained”. In July 2007 he said employment “is likely to accelerate” in the coming years. Of course, it’s absurd to expect him to be able to predict these massive long-term macroeconomic trends, but the lack of risk management on display here borders on gross negligence.
His response to the credit crisis was just as bad. He thought he could inject excess reserves into the banking system and juice the lending
His testimony this morning is a confounding one. If you just looked at the market’s response to his speech you might think that this man was right about everything over the last few years and that he really truly knows what is…
by ilene - June 3rd, 2010 5:53 am
Courtesy of The Pragmatic Capitalist
Whitney Tilson’s T2 Partners continues to outperform the
“So if last month was analogous to late 2007, is the situation today like early 2008 (in which case, we should still be battening down the hatches)? We don’t know for sure, but probably not. We think the most likely scenario is more years of the choppy, range-bound market that we’ve been in for more than a decade – and that’s fine with us, as it rewards good bottoms-up stock picking, which is our forte.”
Tilson has been buying the weakness and using the opportunity to purchase more of some of his favorite positions:
“During the month, we did what we normally do when the market has violent swings: the precise opposite of the herd. On weakness, we initiated a few new long positions, added to some existing holdings like General Growth Properties, and trimmed certain shorts like Simon Properties Group, which we owned primarily as an industry hedge against GGP and felt was no longer necessary with GGP falling into the $12 range. “
Tilson’s fund isn’t positioned for sunny skies, however. He continues to maintain a substantial short book and feels extremely confident in the continued outlook for hedging strategies over the coming years:
“As you might expect, our long book dropped significantly (though not as much as the market), while our shorts offset much of these losses. Losers of note on the long side were Liberty Acquisition Corp. warrants (-52.2%), Resource America (-33.7%), Borders Group (which we have mostly exited) (-22.4%), American Express (-13.6%), General Growth Properties (-10.7%) and Berkshire Hathaway (-8.2%). In the plus column were Iridium, with the stock up 12.4% and the warrants up 21.9%, and EchoStar, up 9.5%.
On the short side, our largest position, InterOil, tumbled 26.5% (in addition, the puts we own jumped 70.2%), MBIA fell 22.2%, DineEquity dropped 17.9%, and the homebuilder ETF (ITB) declined 11.5%. “
Source: T2 Partners
by ilene - April 9th, 2010 8:16 pm
This is an incredible story. I recommend you find the time this weekend to read the entire article (Pro Publica) about how hedge fund Magnetar figured out a way to invest in and even help create some of the most horrid debt bombs of the credit bubble era.
Like Broadway’s scheming Bialystock & Bloom (The Producers), Magnetar figured out a way to ensure the collapse of their own product – and to profit immensely from these failures in a self-funded, diabolical way.
The slant of the article is that had they been stopped, the bubble/ crisis would’ve been over and done with earlier and easier – but that’s debatable.
Have at it and prepare to lose a bit more of your innocence…
In late 2005, the booming U.S. housing market seemed to be slowing. The Federal Reserve had begun raising interest rates. Subprime mortgage company shares were falling. Investors began to balk at buying complex mortgage securities. The housing bubble, which had propelled a historic growth in home prices, seemed poised to deflate. And if it had, the great financial crisis of 2008, which produced the Great Recession of 2008-09, might have come sooner and been less severe.
At just that moment, a few savvy financial engineers at a suburban Chicago hedge fund helped revive the Wall Street money machine, spawning billions of dollars of securities ultimately backed by home mortgages.
Read on below: