Posts
Friday, October 31, 2008
The Debts of the Spenders: The US Consumer and the Property Tax Bubble
The consumer has clamped down because taxes - property taxes in particular - are killing most homeowners. Property taxes are making the American Dream of homeownership a lost ideal. The property tax bubble is yet another primary problem, and may become the biggest impediment to growth as discretionary income is swallowed up by local bureaucrats who have become addicted to the myth of rising home prices. In the US, most local budgets derive from property taxes. Only in the larger cities are public finances more diversified - business taxes, fees, licenses, and various forms of registration contribute a larger share to budgetary projections than property taxes.
The Debts of the Spenders: Bears Will Engulf Govt Bond Markets
All over the world governments have collectively spent massive amounts of money to support ailing sectors of the economy - exporters, insurance, banks, autos, homeowners, etc. However, nothing is free. This money will have to come from somewhere. The most likely sources of short term funding are the sovereign debt markets.
Government bond buyers rejoice! This is becoming a buyer's market.
While central bankers control short term interest rates - the infamous rate cuts so widely discussed in the media - the market controls longer term issues. Interest rates on 20 and 30 year notes are expected to soar in the future as governments continue to flood the markets with paper and provide aid to everyone except the taxpayer. Government battles against deflationary demons of their own design are even now rousing the inflationary bears from their slumber.
The US lacks a sufficient number of primary dealers to act as intermediaries in bond distribution even as Treasury auction schedules have increased. 4 have already passed on out of 20 - Washington Mutual, Bear Sterns, Countrywide, and Lehman Brothers have all either declared bankruptcy or been absorbed by more politically connected rivals. Moreover, the remaining bond and fixed income desks have been decimated by round after round of layoffs that have also affected the greater financial sector
Western Europe is in even worse shape. While the ECB, the fiscal body of the EU, can set interest rates, it is powerless to affect greater flows of monetary capital. Why?
Because there is no such thing as a "Euro bond". Individual member states continue to issue more and more bonds. Individual states such as France, Germany, and Holland have been the largest instigators of bailouts. Other nations such as Spain and Greece have not followed suit because their banks were too small to attract much investor notice to begin with.
This lack of coherent fiscal and monetary policy is straining the delicate balance upholding the union. Under the Maastricht Treaty, members are supposed to maintain fiscal deficits at no more than 3% of GDP. Even if Brussels were to tinker w/the figures, the structural cracks will eventually overwhelm a fundamentally flawed system.
I find it unlikely that the EU will survive in its present form within 5 years.
Government bond buyers rejoice! This is becoming a buyer's market.
While central bankers control short term interest rates - the infamous rate cuts so widely discussed in the media - the market controls longer term issues. Interest rates on 20 and 30 year notes are expected to soar in the future as governments continue to flood the markets with paper and provide aid to everyone except the taxpayer. Government battles against deflationary demons of their own design are even now rousing the inflationary bears from their slumber.
The US lacks a sufficient number of primary dealers to act as intermediaries in bond distribution even as Treasury auction schedules have increased. 4 have already passed on out of 20 - Washington Mutual, Bear Sterns, Countrywide, and Lehman Brothers have all either declared bankruptcy or been absorbed by more politically connected rivals. Moreover, the remaining bond and fixed income desks have been decimated by round after round of layoffs that have also affected the greater financial sector
Western Europe is in even worse shape. While the ECB, the fiscal body of the EU, can set interest rates, it is powerless to affect greater flows of monetary capital. Why?
Because there is no such thing as a "Euro bond". Individual member states continue to issue more and more bonds. Individual states such as France, Germany, and Holland have been the largest instigators of bailouts. Other nations such as Spain and Greece have not followed suit because their banks were too small to attract much investor notice to begin with.
This lack of coherent fiscal and monetary policy is straining the delicate balance upholding the union. Under the Maastricht Treaty, members are supposed to maintain fiscal deficits at no more than 3% of GDP. Even if Brussels were to tinker w/the figures, the structural cracks will eventually overwhelm a fundamentally flawed system.
I find it unlikely that the EU will survive in its present form within 5 years.
Thursday, October 30, 2008
The Debts of the World: When Is the Bottom Truly The Bottom?
Time to re-visit history! Let's take a look at the build-up to the Great Depression.
http://www.gold-eagle.com/editorials_01/seymour062001.html
http://www.gold-eagle.com/editorials_01/seymour062001.html
Tuesday, October 28, 2008
The Debts of the World: Unlimited Swap Lines - The Future After Rate Cuts Are Exhausted
It's never been done before - especially w/low to zero conditionality based loans. The G7 WILL mess things up in the beginning. Expect to see gigantic gyrations in fx markets w/equally volatile repercussions in equities and bonds.
But eventually the G7 will get what they want: a single OECD currency (not to be confused w/a single world currency). They will be able to use this control to influence events in emerging market nations - or at least try to. Recent events have already shown that complete isolation from negative market effects are impossible to prevent.
But eventually the G7 will get what they want: a single OECD currency (not to be confused w/a single world currency). They will be able to use this control to influence events in emerging market nations - or at least try to. Recent events have already shown that complete isolation from negative market effects are impossible to prevent.
The Debts of the Spenders: The High Cost of Living
The Treasury/Fed is in a race w/foreigners to see if they can print faster than the foreigners can buy govt bonds and swap notes. This is otherwise known as the inflation vs deflation battle. So far deflation is winning.
All those crazy programs Paulson and Bernanke invented to keep the banks on life support are costing a lot of money to say nothing of the daily breadline that forms outside the discount window every day.
Foreigners are only too happy to lend us the money as evidenced by the capital flows from Asia and the Middle East. Just watch the action in the govt bond and spot fx markets if you don't believe me. Take special note of the Treasury auctions that form up every so often.
Unfortunately for the dynamic duo, they don't realize the ultimate cost of their spending. Corporate earnings among exporters are going to get slammed in Q1 because of a stronger dollar.
All those crazy programs Paulson and Bernanke invented to keep the banks on life support are costing a lot of money to say nothing of the daily breadline that forms outside the discount window every day.
Foreigners are only too happy to lend us the money as evidenced by the capital flows from Asia and the Middle East. Just watch the action in the govt bond and spot fx markets if you don't believe me. Take special note of the Treasury auctions that form up every so often.
Unfortunately for the dynamic duo, they don't realize the ultimate cost of their spending. Corporate earnings among exporters are going to get slammed in Q1 because of a stronger dollar.
The Debts of the Spenders: Record Budget Deficits Will Force Higher Muni Bond Yields
Record state and city deficits are forcing local governments to offer higher yields on their bonds. Most local budgets are funded by real estate taxes. In large cities like NYC and Chicago, tax revenues are also funded by financial institutions. I don't need to remind you of the parlous state of those two revenue streams.
Additionally, foreign investors are fleeing to US govt debt which includes both federal (treasuries) and local (munis). Traditionally wealthy individuals also preferred munis because of their tax free status.
Some of the upwards yield pressure will be mitigated by this demand. States will also continue to petition the Federal government for more handouts. However, the near bankrupt state of many local budgets WILL see increased capital flows into the US.
So, what does all this mean? More dollar strength. At the moment, most of the world's money is all pouring into either the USA or Japan.
Additionally, foreign investors are fleeing to US govt debt which includes both federal (treasuries) and local (munis). Traditionally wealthy individuals also preferred munis because of their tax free status.
Some of the upwards yield pressure will be mitigated by this demand. States will also continue to petition the Federal government for more handouts. However, the near bankrupt state of many local budgets WILL see increased capital flows into the US.
So, what does all this mean? More dollar strength. At the moment, most of the world's money is all pouring into either the USA or Japan.
The Debts of the Lenders: The End of the Carry Trade Part 4
As I said in my earlier article, Japan will go to any lengths to debase its currency. One possible method is establishing unlimited or low conditionality swap lines to be immediately implemented between Japan and the emerging markets.
This is one sneaky way for the Japanese to sell yen w/o cutting interest rates. By sending yen to hard hit commodity currency countries (like Australia and S. Africa), the central bankers of these nations are able to buy back their own currencies on the spot markets.
So, watch the JPY/AUD, JPY/Kiwi, and JPY/Rand as they will be the first pairs to reverse.
However, upward pressure remains on the yen from domestic Japanese fund redemptions as well as hedgies unwinding their carry trades. We won't see those dramatic 10% appreciations overnight but a steady appreciation of the yen looks to be in the cards.
This is one sneaky way for the Japanese to sell yen w/o cutting interest rates. By sending yen to hard hit commodity currency countries (like Australia and S. Africa), the central bankers of these nations are able to buy back their own currencies on the spot markets.
So, watch the JPY/AUD, JPY/Kiwi, and JPY/Rand as they will be the first pairs to reverse.
However, upward pressure remains on the yen from domestic Japanese fund redemptions as well as hedgies unwinding their carry trades. We won't see those dramatic 10% appreciations overnight but a steady appreciation of the yen looks to be in the cards.
Monday, October 27, 2008
The Debts of the Lenders: The End of the Carry Trade Part 3
The near zero savings rates offered by Japanese banks forced many households to shift their money abroad in the search for higher yield over the past 15 or so years. They found the greatest yields in the form of emerging market equities and bonds. Lower - but more secure - returns could be found in Western European and American markets.
Unfortunately, the economic turmoil that started in the West is driving many Japanese to repatriate their funds. That's right - they are going through the same kind of fund redemption as the US. Ironically, their spending power is increasing as their equities markets tank - just like ours.
BUT, the story takes a darker turn. Unlike the US, Japan's fundamentals aren't as impaired. The Japanese do NOT have a network of 700 odd foreign military bases, massive foreign aid promises to other countries, and a sea of corrupt bankers to bail out (they already took care of most that back in the 90s).
Translation? Speculators - including US funds - are piling onto the Japanese yen. This possibly includes US pension funds which are MANDATED to seek safe harbor investments.
Finally, the Japanese are also in a demographic crunch - a substantial portion of their population are pensioners. Japan now is the USA 15 years in the future demographically; many seniors with declining birthrates. These seniors are going to have to start dipping into their retirement accounts more steadily.
Nothing goes up or down in a straight line. But the overall trend for the yen is up. And the trend for the Nikkei is down. The spillover effect on the US market is unmistakable - forced unwinding. In the long term, the more damaging effect is the aversion to US financials and most forms of structured finance.
Unfortunately, the economic turmoil that started in the West is driving many Japanese to repatriate their funds. That's right - they are going through the same kind of fund redemption as the US. Ironically, their spending power is increasing as their equities markets tank - just like ours.
BUT, the story takes a darker turn. Unlike the US, Japan's fundamentals aren't as impaired. The Japanese do NOT have a network of 700 odd foreign military bases, massive foreign aid promises to other countries, and a sea of corrupt bankers to bail out (they already took care of most that back in the 90s).
Translation? Speculators - including US funds - are piling onto the Japanese yen. This possibly includes US pension funds which are MANDATED to seek safe harbor investments.
Finally, the Japanese are also in a demographic crunch - a substantial portion of their population are pensioners. Japan now is the USA 15 years in the future demographically; many seniors with declining birthrates. These seniors are going to have to start dipping into their retirement accounts more steadily.
Nothing goes up or down in a straight line. But the overall trend for the yen is up. And the trend for the Nikkei is down. The spillover effect on the US market is unmistakable - forced unwinding. In the long term, the more damaging effect is the aversion to US financials and most forms of structured finance.
Sunday, October 26, 2008
The Debts of the Lenders: The Price of Loyalty ( Bears Engulf Emerging Market Pt 3 )
You might hear the press toss the term "IMF conditionality" around in the next few days. What does that mean?
Simple. In any deal, lenders usually impose some sort of restrictions or parameters on the terms of the loan. Lenders impose these restrictions to increase the chances of their loans being repaid in a timely and efficient manner.
During the 1997-1998 financial crises, the IMF (a cabal of G7 nations) was able to successfully bailout emerging markets...but at a steep price. IMF aid was "conditional" on certain covenants. Social spending was slashed to the bone and public infrastructure privatized to raise the money needed to repay the loans. Rapacious Wall Street bankers and private hedge funds profited from the plundering of public treasuries. S. America, E. Europe, and E. Asia underwent political and economic turmoil. Entire governments collapsed. Riots, food shortages, and poverty spread like wildfire.
Fast forward to 2008. The emerging markets recovered on the backs of export engines: typically high commodity prices (agriculture, energy, or metals depending on the nation in question) and cheap manufactured goods. Now in the space of less than 2 weeks their recovery looks like it is about to reverse.
Leaders in emerging markets are loathe to turn to the IMF for help. They remember the chaos that engulfed their countries in the wake of similar help in the past and would rather remain loyal to their domestic constituency. Remember, most emerging markets are politically fragile to begin with.
Instead of going to the IMF, private, bilateral contracts have been struck between China, Russia, and the Gulf States (lenders with deep pockets). Unfortunately, such help does not seem enough. Besides, China, Russia, and the Arabs have their own problems.
Nor can the IMF afford to holdout for profitable deals that benefit their corporate constituency. The IMF may be forced to offer unconditional aid regardless of any existing ties of loyalty. In other words: No more one sided deals that profit their banking and private side friends. Globabilization itself is at stake.
Simple. In any deal, lenders usually impose some sort of restrictions or parameters on the terms of the loan. Lenders impose these restrictions to increase the chances of their loans being repaid in a timely and efficient manner.
During the 1997-1998 financial crises, the IMF (a cabal of G7 nations) was able to successfully bailout emerging markets...but at a steep price. IMF aid was "conditional" on certain covenants. Social spending was slashed to the bone and public infrastructure privatized to raise the money needed to repay the loans. Rapacious Wall Street bankers and private hedge funds profited from the plundering of public treasuries. S. America, E. Europe, and E. Asia underwent political and economic turmoil. Entire governments collapsed. Riots, food shortages, and poverty spread like wildfire.
Fast forward to 2008. The emerging markets recovered on the backs of export engines: typically high commodity prices (agriculture, energy, or metals depending on the nation in question) and cheap manufactured goods. Now in the space of less than 2 weeks their recovery looks like it is about to reverse.
Leaders in emerging markets are loathe to turn to the IMF for help. They remember the chaos that engulfed their countries in the wake of similar help in the past and would rather remain loyal to their domestic constituency. Remember, most emerging markets are politically fragile to begin with.
Instead of going to the IMF, private, bilateral contracts have been struck between China, Russia, and the Gulf States (lenders with deep pockets). Unfortunately, such help does not seem enough. Besides, China, Russia, and the Arabs have their own problems.
Nor can the IMF afford to holdout for profitable deals that benefit their corporate constituency. The IMF may be forced to offer unconditional aid regardless of any existing ties of loyalty. In other words: No more one sided deals that profit their banking and private side friends. Globabilization itself is at stake.
Friday, October 24, 2008
The Debts of the Lenders: The End of the Carry Trade Part 2
The West is not to blame for the second stage of the credit crisis. No, instead it is the Bank of Japan.
If I gave you a credit card w/ .5% interest on it and guaranteed that rate for 12-14 years...what would you do? I think you know the answer already.
Now instead of being a credit card company, replace the issuer with the Bank of Japan. Japan has had low interest rates for a long time now. These low rates were the result of repeated "fiscal stimulus" attempts to re-invigorate a moribund economy. However, the interest rate cuts did not have the desired effects and instead turned Japan's banking system into a series of zombie banks kept artificially alive through government largess.
Hedge funds took advantage of this situation and went on a global buying spree. I can't tell you exactly what they bought since hedgies are privately owned for the most part and have no disclosure requirements...BUT they evidently bought into emerging markets big time. Why?
Emerging markets were a pot of gold for the last 10 years. After the Asian, Latin American, and Russian markets collapsed in 1997-1998, the IMF forced these guys to raise interest rates to 2x digit levels to pay off their debt. The amazing thing is that the foreign governments were actually successful in servicing their debt on the backs of high commodity prices and cheap labor intensive exports.
BUT... along come the hedgies. Smelling a good profit, they used dollars to borrow yen. Then they used that money to buy high interest bearing debt in places like Turkey, Mexico, and Indonesia. The profits were amazing as long as they rolled in. Turkey for example was offering 17-20% interest rates earlier this year. Imagine getting 20% and only having to repay .5%. Even after inflation costs, these guys were raking in several hundred percent profit every quarter.
Currency traders have been talking about the currency trade implosion for YEARS and speculating on just such an event. Look at the Yen/USD and Yen/Aussie. These are the 2 top floating major currency pairs.
From here arb desks will "flip" the money into more illiquid but higher yielding projects (most developing countries have illiquid trading volume at best so bid/ask spreads are poor). In many cases hedgies did private side deals. Infrastructure projects (aka project finance) were really popular - they financed power plants, roads, ports, sewage plants, and similar projects. High yields at the time. Unfortunately the illiquidity of the self-same projects mean that it's hard to find a buyer in times of crisis.
Fast forward to the Fall. The Fed bans shorting (another hedgie favorite). The sell-off builds and they're unable to profit so they're forced to sell existing long positions. Redemptions increase. Several emerging markets teeter on the brink of default. The sell-off began in earnest.
If I gave you a credit card w/ .5% interest on it and guaranteed that rate for 12-14 years...what would you do? I think you know the answer already.
Now instead of being a credit card company, replace the issuer with the Bank of Japan. Japan has had low interest rates for a long time now. These low rates were the result of repeated "fiscal stimulus" attempts to re-invigorate a moribund economy. However, the interest rate cuts did not have the desired effects and instead turned Japan's banking system into a series of zombie banks kept artificially alive through government largess.
Hedge funds took advantage of this situation and went on a global buying spree. I can't tell you exactly what they bought since hedgies are privately owned for the most part and have no disclosure requirements...BUT they evidently bought into emerging markets big time. Why?
Emerging markets were a pot of gold for the last 10 years. After the Asian, Latin American, and Russian markets collapsed in 1997-1998, the IMF forced these guys to raise interest rates to 2x digit levels to pay off their debt. The amazing thing is that the foreign governments were actually successful in servicing their debt on the backs of high commodity prices and cheap labor intensive exports.
BUT... along come the hedgies. Smelling a good profit, they used dollars to borrow yen. Then they used that money to buy high interest bearing debt in places like Turkey, Mexico, and Indonesia. The profits were amazing as long as they rolled in. Turkey for example was offering 17-20% interest rates earlier this year. Imagine getting 20% and only having to repay .5%. Even after inflation costs, these guys were raking in several hundred percent profit every quarter.
Currency traders have been talking about the currency trade implosion for YEARS and speculating on just such an event. Look at the Yen/USD and Yen/Aussie. These are the 2 top floating major currency pairs.
From here arb desks will "flip" the money into more illiquid but higher yielding projects (most developing countries have illiquid trading volume at best so bid/ask spreads are poor). In many cases hedgies did private side deals. Infrastructure projects (aka project finance) were really popular - they financed power plants, roads, ports, sewage plants, and similar projects. High yields at the time. Unfortunately the illiquidity of the self-same projects mean that it's hard to find a buyer in times of crisis.
Fast forward to the Fall. The Fed bans shorting (another hedgie favorite). The sell-off builds and they're unable to profit so they're forced to sell existing long positions. Redemptions increase. Several emerging markets teeter on the brink of default. The sell-off began in earnest.
Thursday, October 23, 2008
The Debts of the Lenders: The End of the Carry Trade Part 1
The leveraged bets of hedge funds on cheap Yen are self destructing.
A strong dollar is DESTROYING the carry trade, the practice of borrowing low interest bearing currencies and using it to "flip" into higher interest bearing instruments....such as emerging market debt.
There is a chain reaction going on as hedgies and other institutions cascade from the highest bearing junk rated debt to cheaper, lower interest bearing debt. And what can have lower interest rates than the USD?
Answer: Nothing. This is why the dollar is rallying in spite of all the massive debt Uncle Sam is accumulating. The cycle perpetuates itself by encouraging Bernanke and Paulson to keep printing more money. In the end, they are really executing their own friends on the Street.
A strong dollar is DESTROYING the carry trade, the practice of borrowing low interest bearing currencies and using it to "flip" into higher interest bearing instruments....such as emerging market debt.
There is a chain reaction going on as hedgies and other institutions cascade from the highest bearing junk rated debt to cheaper, lower interest bearing debt. And what can have lower interest rates than the USD?
Answer: Nothing. This is why the dollar is rallying in spite of all the massive debt Uncle Sam is accumulating. The cycle perpetuates itself by encouraging Bernanke and Paulson to keep printing more money. In the end, they are really executing their own friends on the Street.
Wednesday, October 22, 2008
The Debts of the Lenders: Emerging Markets Behind The Dollar's Rally
Emerging markets grew on leverage too. Unfortunately for them, they took on debt denominated in dollars, swiss francs, or yen.
So, what does that mean now? They have to spend dollars to defend against a run on their own domestic currencies! Countries like China, Russia, and the Gulf states w/big dollar hoards and strict capital controls don't have to worry that much.
BUT countries w/o dollar reserves and loose controls are on a Treasury spending spree. Countries like Argentina, Turkey, Hungary, ...actually all of Eastern Europe are some of the big culprits behind the dollar's strength.
So, what does that mean now? They have to spend dollars to defend against a run on their own domestic currencies! Countries like China, Russia, and the Gulf states w/big dollar hoards and strict capital controls don't have to worry that much.
BUT countries w/o dollar reserves and loose controls are on a Treasury spending spree. Countries like Argentina, Turkey, Hungary, ...actually all of Eastern Europe are some of the big culprits behind the dollar's strength.
The Debts of the Lenders: Bears Engulf Emerging Markets Part 2
In addition to the barrage of problems I already outlined, emerging markets face additional risk.
Chiefly, emerging markets remain EXTREMELY vulnerable to political risk. Most emerging markets are built on fragile politics. The majority either retain authoritarian governments or infant democracies. The social fabric, thin at the best of times, is becoming stretched to the breaking point. Extremely wide gulfs between poor and rich, rising inflation, and rising unemployment (tied to collapsing commodity prices) lead to increased potential for violent riots. This is the stuff of revolutions.
Additionally, companies in emerging markets are facing margin calls from wrong sided bets on $200/barrel oil, $9/corn, and other stratospherically priced commodities. It seemed like a smart idea back in June when inflation and a weak dollar were the impetus behind commodities' rally. However, in the current deflationary spiral they spell doom.
Finally, emerging markets are burning their foreign exchange reserves of dollars and euros to defend a run on their own currencies. While the wealthiest nations such as Russia and the Muslim petro states have acquired an impressive hoard, others are not so fortunate. Nigeria, Indonesia (no longer an OPEC member), and all of Eastern Europe and South America face a severe cash crunch.
Chiefly, emerging markets remain EXTREMELY vulnerable to political risk. Most emerging markets are built on fragile politics. The majority either retain authoritarian governments or infant democracies. The social fabric, thin at the best of times, is becoming stretched to the breaking point. Extremely wide gulfs between poor and rich, rising inflation, and rising unemployment (tied to collapsing commodity prices) lead to increased potential for violent riots. This is the stuff of revolutions.
Additionally, companies in emerging markets are facing margin calls from wrong sided bets on $200/barrel oil, $9/corn, and other stratospherically priced commodities. It seemed like a smart idea back in June when inflation and a weak dollar were the impetus behind commodities' rally. However, in the current deflationary spiral they spell doom.
Finally, emerging markets are burning their foreign exchange reserves of dollars and euros to defend a run on their own currencies. While the wealthiest nations such as Russia and the Muslim petro states have acquired an impressive hoard, others are not so fortunate. Nigeria, Indonesia (no longer an OPEC member), and all of Eastern Europe and South America face a severe cash crunch.
Tuesday, October 21, 2008
The Debts of the Spenders: FED Issues De Facto Money Market Fund Guarantee
Bernanke's latest scheme to support the credit markets will blow up in his face... again. His plan is to pump more than 1/2 $Trillion into money market funds. Money market funds are buyers of short term commercial paper. They fulfill a critical economic role by ensuring liquidity in short term financing to all aspects of business whether it small, medium, or large.
Sure, he will bring down the TED and OIS-LIBOR spread by flooding the system with even more liquidity.
The unintended consequence? A flight out of equity to money market funds by baby boomers. Once retirees see that money market funds - NOT ACCOUNTS (which are FDIC insured) - are now de facto guaranteed, they will dump their mutual fund stocks in favor of money markets.
http://biz.yahoo.com/ap/081021/fed_credit_crunch.ht
Sure, he will bring down the TED and OIS-LIBOR spread by flooding the system with even more liquidity.
The unintended consequence? A flight out of equity to money market funds by baby boomers. Once retirees see that money market funds - NOT ACCOUNTS (which are FDIC insured) - are now de facto guaranteed, they will dump their mutual fund stocks in favor of money markets.
http://biz.yahoo.com/ap/081021/fed_credit_crunch.ht
Monday, October 20, 2008
The Debts of the Spenders: The State of Disunion
Falling property values have thrown a massive wrench in the gears of state and municipal financing in the US. Local governments that relied on property taxes on ever unrealistic real estate valuations now find themselves in the uncomfortable position of re-evaluating their budgetary projections. Unfortunately for them, political promises are hard to break . . .especially to powerful interest groups such as state employee unions, seniors, and transportation agencies.
For ex: California's revenue shortfall has increased by $3 billion in 2 WEEKS since their budget bill was passed!
Translation: State income taxes will skyrocket in order to cover for a massive shortfall in property tax revenues. Moreover, municipal bonds have started to look attractive to investors again as governments are being forced to hike interest rates. Whether or not they will retain their tax free investment status remains to be seen as cash starved governments continue to look for ways to stretch their budgetary needs.
For ex: California's revenue shortfall has increased by $3 billion in 2 WEEKS since their budget bill was passed!
Translation: State income taxes will skyrocket in order to cover for a massive shortfall in property tax revenues. Moreover, municipal bonds have started to look attractive to investors again as governments are being forced to hike interest rates. Whether or not they will retain their tax free investment status remains to be seen as cash starved governments continue to look for ways to stretch their budgetary needs.
Friday, October 17, 2008
The Debts of the Spenders: Hedge Fund Summary
Hedge Fund Summary
1) The short ban really hurt the hedgies. They were unable to "hedge" against long bets. So, many liquidated their positions and went to cash. This started the sell-off.
2) Hedgie short term financing was destroyed in the past 3 weeks as Fed guarantees of money market accounts led to record hoarding by banks (as reflected in TED spread). Fund redemptions didn't help as investors dumped their positions to favor the now guaranteed money markets. This accelerated the sell-off.
3) CME/CBOT/NYMEX all raised margin requirements. Hedgies now have less leverage and are more liable to sell to cover any positions (long or short). This led to record volatility as hedgies swung from short to long to short again.
4) Conclusion: Hedgies are REALLY hoping for their lottery tickets on CDS contracts to pay off. Otherwise, they will go bankrupt.
Will Paulson bail them out? It depends on how much leverage (pun intended) hedgies have over the markets. I don't know since its all very opaque. I don't think even the hedgies or govt knows the true extent of the damage.
1) The short ban really hurt the hedgies. They were unable to "hedge" against long bets. So, many liquidated their positions and went to cash. This started the sell-off.
2) Hedgie short term financing was destroyed in the past 3 weeks as Fed guarantees of money market accounts led to record hoarding by banks (as reflected in TED spread). Fund redemptions didn't help as investors dumped their positions to favor the now guaranteed money markets. This accelerated the sell-off.
3) CME/CBOT/NYMEX all raised margin requirements. Hedgies now have less leverage and are more liable to sell to cover any positions (long or short). This led to record volatility as hedgies swung from short to long to short again.
4) Conclusion: Hedgies are REALLY hoping for their lottery tickets on CDS contracts to pay off. Otherwise, they will go bankrupt.
Will Paulson bail them out? It depends on how much leverage (pun intended) hedgies have over the markets. I don't know since its all very opaque. I don't think even the hedgies or govt knows the true extent of the damage.
Thursday, October 16, 2008
The Debts of the Lenders: Bears Engulf Emerging Markets
After making a fortune shorting financials, the bears are now targetting entire countries' economies. This is reflected in the CDS costs of US and European banks that have narrowed while sovereign default insurance has ballooned. Of course the possibility of a major European and/or US collapse are distant at this point. The real money is in shorting the emerging market indices.
Brazil, Russia, Mexico, India, Indonesia, and S. Korea have suffered heavily in the past 3 weeks. I am not sure what their CDS costs are but they should be pretty high. In any event, there is more solid evidence of their instability - daily circuit breakers being applied (mkts temporarily shut down), short selling bans, strict capital controls, and other signs of panic.
Although insulated from the worst excesses of the credit bubble storm that has wracked the developed world, developing nations are now facing sharply falling demand for their goods as consumers tighten their belts. Many- if not most - emerging markets are one trick ponies; good only for a particular export or raw material sector.
For ex: Brazil's Bovespa is dominated by agriculture and mining, Russia's by oil and natural gas; and the East Asian economies by cheap manufactured goods. Moreover, credit problems in the West are exacerbating importers' problems in securing short term credit...even in the face of slumping freight costs.
Mutual fund redemptions are hurting the emerging market indices as the flow of funds from account holders reverts back to the US. Fund managers are liquidating the higher priced foreign stocks and triggering further sell-offs in lower trading stocks.
Finally, emerging market economies remain vulnerable due to their debt exposure to foreign currencies. Unlike the EU and the USA, most emerging markets do NOT have the luxury of having their debt denominated in their native currencies. They are unable to adopt the
sweeping corporate welfare programs that the US and EU have adopted due to fears of higher inflation. Government ministers imported inflation through monetary and fiscal ties such as currency pegs to grow their export engines. While inflation was a necessary evil during the expansionary boom times, it has the potential to become a greater demon within the borders of emerging markets. Countries such as Russia, Iran, and Venezuela already have to contend with double digit rates of inflation (15-40% according to which source you believe).
Brazil, Russia, Mexico, India, Indonesia, and S. Korea have suffered heavily in the past 3 weeks. I am not sure what their CDS costs are but they should be pretty high. In any event, there is more solid evidence of their instability - daily circuit breakers being applied (mkts temporarily shut down), short selling bans, strict capital controls, and other signs of panic.
Although insulated from the worst excesses of the credit bubble storm that has wracked the developed world, developing nations are now facing sharply falling demand for their goods as consumers tighten their belts. Many- if not most - emerging markets are one trick ponies; good only for a particular export or raw material sector.
For ex: Brazil's Bovespa is dominated by agriculture and mining, Russia's by oil and natural gas; and the East Asian economies by cheap manufactured goods. Moreover, credit problems in the West are exacerbating importers' problems in securing short term credit...even in the face of slumping freight costs.
Mutual fund redemptions are hurting the emerging market indices as the flow of funds from account holders reverts back to the US. Fund managers are liquidating the higher priced foreign stocks and triggering further sell-offs in lower trading stocks.
Finally, emerging market economies remain vulnerable due to their debt exposure to foreign currencies. Unlike the EU and the USA, most emerging markets do NOT have the luxury of having their debt denominated in their native currencies. They are unable to adopt the
sweeping corporate welfare programs that the US and EU have adopted due to fears of higher inflation. Government ministers imported inflation through monetary and fiscal ties such as currency pegs to grow their export engines. While inflation was a necessary evil during the expansionary boom times, it has the potential to become a greater demon within the borders of emerging markets. Countries such as Russia, Iran, and Venezuela already have to contend with double digit rates of inflation (15-40% according to which source you believe).
The Debts of the Lenders: Shipping Costs Jump From Export Markets
This is what they have not discussed but it is happening. This translates into Food shortages et al.
http://www.ft.com/cms/s/0/0d9c4f7e-9ad2-...
The cost of shipping bulk commodities such as iron ore, coal or grains on Thursday tumbled to its lowest level in more than six years as recession fears intensified and the difficulty of obtaining trade finance left many ships without any cargo.
The Baltic Dry Index, a benchmark for shipping costs and seen as an indicator of global economic activity, fell 6.75 per cent to 1,506 points, its lowest level since November 2002. The index has plunged 53.2 per cent since the end of September.
The average daily cost for the largest dry bulk vessels – known as Capesize and used mostly to ship iron ore from Brazil and Australia to China – on Thursday sunk 11.4 per cent to just $11,580 a day.
The Capesize rate has collapsed 95.1 per cent since it hit an all-time high of $233,988 a day in early June.
Steve Rodley, director of the London-based shipping hedge fund Global Maritime Investments, said some vessels were anchoring, waiting for better times, while some shipping companies were thinking about scrapping their older vessels.
“The whole shipping market has crashed,” Mr Rodley said. “But the biggest ships are suffering particularly,” he added.
The slowdown in Chinese commodities demand was confirmed yesterday by Tom Albanese, Rio Tinto’s chief executive.
“In the near term, the Chinese economy is pausing for breath. China is not completely insulated from an OECD recession and we will see an impact on Chinese exports,” he said.
The index’s latest fall follows several weeks when the short-term spot market on which the index is based has seen very little activity because of the current difficulty in arranging letters of credit, a key trade finance instrument.
Peter Norfolk, director of research and consultancy at London-based Simpson, Spence and Young shipbrokers, said: “You face continued freezing of activity because of the problems with credit in particular.”
Although it is traditionally regarded as one of the safest forms of financial activity, rates for trade credit have risen sharply in recent months as banks have withdrawn facilities to bolster their own liquidity.
Shipowners are suffering from banks’ reluctance to issue letters of credit, normally straightforward instruments used to assure a shipper of payment for a cargo after it is loaded on to a ship, but before the buyer receives it.
There was also a continued stand-off between Brazilian iron ore producers seeking to raise prices and Chinese steel mills now cutting production and using up stockpiles in retaliation.
“All of this means that, in a very short space of time, we have very little chartering activity,” Mr Norfolk said. “There’s even talk of owners laying up tonnage because the market is so weak.”
London-based brokers added that some charterers where defaulting on their contracts and returning the vessels to their owners due to lack of demand.
The Baltic Dry Index has fallen 86 per cent from May’s all-time high of 11,893 points.
The tanker market for crude oil shipment has also been hit by lower prices
http://www.ft.com/cms/s/0/0d9c4f7e-9ad2-...
The cost of shipping bulk commodities such as iron ore, coal or grains on Thursday tumbled to its lowest level in more than six years as recession fears intensified and the difficulty of obtaining trade finance left many ships without any cargo.
The Baltic Dry Index, a benchmark for shipping costs and seen as an indicator of global economic activity, fell 6.75 per cent to 1,506 points, its lowest level since November 2002. The index has plunged 53.2 per cent since the end of September.
The average daily cost for the largest dry bulk vessels – known as Capesize and used mostly to ship iron ore from Brazil and Australia to China – on Thursday sunk 11.4 per cent to just $11,580 a day.
The Capesize rate has collapsed 95.1 per cent since it hit an all-time high of $233,988 a day in early June.
Steve Rodley, director of the London-based shipping hedge fund Global Maritime Investments, said some vessels were anchoring, waiting for better times, while some shipping companies were thinking about scrapping their older vessels.
“The whole shipping market has crashed,” Mr Rodley said. “But the biggest ships are suffering particularly,” he added.
The slowdown in Chinese commodities demand was confirmed yesterday by Tom Albanese, Rio Tinto’s chief executive.
“In the near term, the Chinese economy is pausing for breath. China is not completely insulated from an OECD recession and we will see an impact on Chinese exports,” he said.
The index’s latest fall follows several weeks when the short-term spot market on which the index is based has seen very little activity because of the current difficulty in arranging letters of credit, a key trade finance instrument.
Peter Norfolk, director of research and consultancy at London-based Simpson, Spence and Young shipbrokers, said: “You face continued freezing of activity because of the problems with credit in particular.”
Although it is traditionally regarded as one of the safest forms of financial activity, rates for trade credit have risen sharply in recent months as banks have withdrawn facilities to bolster their own liquidity.
Shipowners are suffering from banks’ reluctance to issue letters of credit, normally straightforward instruments used to assure a shipper of payment for a cargo after it is loaded on to a ship, but before the buyer receives it.
There was also a continued stand-off between Brazilian iron ore producers seeking to raise prices and Chinese steel mills now cutting production and using up stockpiles in retaliation.
“All of this means that, in a very short space of time, we have very little chartering activity,” Mr Norfolk said. “There’s even talk of owners laying up tonnage because the market is so weak.”
London-based brokers added that some charterers where defaulting on their contracts and returning the vessels to their owners due to lack of demand.
The Baltic Dry Index has fallen 86 per cent from May’s all-time high of 11,893 points.
The tanker market for crude oil shipment has also been hit by lower prices
The Debts of the Spenders: 30 Day Commercial Paper Destroys Fed Rate Cuts
The current crisis has effectively erased all the rate cuts Bernanke has made this cycle and even added another 75 basis points.
http://tinyurl.com/4xnm4x
Wednesday, October 15, 2008
The Debts of the Spenders: US Mutual Funds Face Record Redemptions
The stock market sell-off has triggered record redemptions from retail investors. Trimtabs estimates that equity mutual funds had an estimated $8.8 billion outflow on Friday, October 10, alone ($5.6 billion from U.S. Equity Funds and $3.2 billion from Global Equities) while bond funds had a record $10.2 billion one day outflow. For last week as a whole outflows were a whopping $65 billion, $40 billion from equity funds ($25.9 from U.S Equity, $14.1 billion from Global Equity and $25.5 billion from bonds). The $55.8 billion in equity fund redemptions so far in October, which would be the largest outflow since the ICI records started in 1984, easily surpasses the prior record set in July 2002, when $52.6 billion was withdrawn from equity funds.
http://www.trimtabs.com/site/fundFlow.php
http://www.trimtabs.com/site/fundFlow.php
The Debts of the Spenders: Bernanke and Paulson's Legacy of Incompetence
Since August 2007, Paulson and Bernanke have responded aggressively by unleashing monetary policy, cutting interest rates and injecting massive liquidity into capital markets, only to exacerbate food and energy price inflation, undermine financial institutions, and cripple economic growth. In their testimonies before the US Senate banking Committee and the US Congress in February 2008, they reassured lawmakers that the financial system was fully capitalized and interest rate cuts had favorably worked their way through the economy. Combined with a $170 billion stimulus package, this encouraged President George W Bush to anticipate strong recovery of the US economy in the second half of 2008.
http://www.atimes.com/atimes/Global_Economy/JJ16Dj02.html
http://www.atimes.com/atimes/Global_Economy/JJ16Dj02.html
Thursday, October 9, 2008
The Debts of the Spenders: The Governments' Role in Money Creation
In the last post, I wrote about the private sector's role in money creation. Now, I will focus this post on the governments' role.
First, a quick review. The cost of credit is determined by factors such as trust and solvency. Trust and solvency lie at the heart of the TED spread, which is the gap between 3 month Treasuries and 3 Month Eurodollars. I already addressed the 3 month Eurodollar so now I turn our attention on 3 month Treasuries.
Treasury rates are set by regularly scheduled government auctions in the CBOT or Chicago Board of Trade. These are reverse auctions where traders compete against each other by offering HIGHER interest rate bids. Traditionally, the 3 Month treasury rates were at or near the fed funds rate.
The yield on the 3-month Treasury bill, seen by many as the safest place to put money in the short term, slipped to 0.63% from 0.69% late Tuesday, indicating investors are willing to take a very small return on their money. In the past 2 weeks, the 3-month bill skidded to a 68-year low around 0% as panicked investors fled stocks.
However, all that has changed.
The factor in TED now is T bills being very near 0.
Now, in the United States the Fed says it will buy commercial paper; that is, it will buy up loans made to U.S. companies...or even loan the money directly to troubled firms. And not just financial firms. Any companies can apply -industrials, tech, retailers, etc. - just as long as they meet the criteria of "too big to fail". Whatever that means.
In the EU, government ministers have pledged to lend UNLIMITED amounts of money to banks after yesterday's coordinated rate cut failed to have any meaningful effects. Really, they should not be using words like "lend". Those are taxpayer donations to help ailing banks that will in all likelihood disappear down the drain.
In the UK, the government has had a long history of socialist intervention. British taxpayers barely protested when the authorities nationalized Northern Rock and HBOS. Now, they are being forced to subsidize the losses of Icelandic bank depositors after the entire country failed.
And the natural result of all these government interventions? Massive inflation.
http://www.bloomberg.com/apps/cbuilder?ticker1=.TEDSP:IND
First, a quick review. The cost of credit is determined by factors such as trust and solvency. Trust and solvency lie at the heart of the TED spread, which is the gap between 3 month Treasuries and 3 Month Eurodollars. I already addressed the 3 month Eurodollar so now I turn our attention on 3 month Treasuries.
Treasury rates are set by regularly scheduled government auctions in the CBOT or Chicago Board of Trade. These are reverse auctions where traders compete against each other by offering HIGHER interest rate bids. Traditionally, the 3 Month treasury rates were at or near the fed funds rate.
The yield on the 3-month Treasury bill, seen by many as the safest place to put money in the short term, slipped to 0.63% from 0.69% late Tuesday, indicating investors are willing to take a very small return on their money. In the past 2 weeks, the 3-month bill skidded to a 68-year low around 0% as panicked investors fled stocks.
However, all that has changed.
The factor in TED now is T bills being very near 0.
Now, in the United States the Fed says it will buy commercial paper; that is, it will buy up loans made to U.S. companies...or even loan the money directly to troubled firms. And not just financial firms. Any companies can apply -industrials, tech, retailers, etc. - just as long as they meet the criteria of "too big to fail". Whatever that means.
In the EU, government ministers have pledged to lend UNLIMITED amounts of money to banks after yesterday's coordinated rate cut failed to have any meaningful effects. Really, they should not be using words like "lend". Those are taxpayer donations to help ailing banks that will in all likelihood disappear down the drain.
In the UK, the government has had a long history of socialist intervention. British taxpayers barely protested when the authorities nationalized Northern Rock and HBOS. Now, they are being forced to subsidize the losses of Icelandic bank depositors after the entire country failed.
And the natural result of all these government interventions? Massive inflation.
http://www.bloomberg.com/apps/cbuilder?ticker1=.TEDSP:IND
Wednesday, October 8, 2008
The Debts of the Spenders: The LIBOR Cartel
What is the cost of money? Or, to put it another way, what is the cost of debt? There are 2 answers to this question.
1) On the private side -LIBOR is an important interbank lending rate set by the private sector. It is rougly comparable to the US Fed Funds rate.
$USD LIBOR is set by the BBA, or British Banker's Association, a cartel of commercial banks every day. While the BBA has over 200 members and scores of associates, the inner circle which determines the private cost of short term US debt is composed of only the 16 largest members.
JPM, C, and BAC sit on this panel (GS and MS may sit here too since they are now retail banks. Their real status is still up in the air). The average of the middle 8 banks quotes is the daily rate reported by Reuters.
For years, LIBOR tracked the Fed Fund rate....until this year.
Starting in January LIBOR started diverging big time.
Like any cartel, the members inevitably resorted to undercutting and hiding information from each other to gain an advantage. Chief among these problems were members hiding the true extent of their Level 3 Assets.
The reason why LIBOR is so important is because it is the benchmark used as an index for most OTC derivatives....such as the $600 or $800 Trillion in CDS.
Conclusion:
Libor members sit on a panel that determines interest rate swaps...while also being the same counterparties to such swaps.
LIBOR "supposedly" averages the rate by taking the middle 8 and tossing out the top and bottom 4 quotes. However, there is still room for abuse ESPECIALLY when all the cartel members have been hiding Level 3 assets from each other.
2) On the government side - Coming soon.
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