Friday, October 23, 2009

The Debts of the Lenders: Eurodollar Futures and Commitment of Traders Turn Bearish

I haven't covered the Eurodollar futures in a while but it is a topic I discussed earlier in the year as a potent tool of discovering which way the market is headed.

Ms. Nicole Elliot of Mizuho is cautiously bearish on the Eurodollar contract "Possibly attempt the tiniest of shorts " but believes the longer term trend on the contract is up for the foreseeable future. Her track record is quite good by the way.

The persistently overbought Eurodollar contract has contributed to lower interest rates and greater liquidity sloshing among institutions. Greater liquidity = more risk taking. More risk taking = higher commodity prices and corresponding commodity currencies like the Aussie and Real. So, it goes to reason that a lower Eurodollar contract means higher interest rates (increased borrowing costs) that hamper risky business.

Other market sentiment timers like Mr. Alex Roslin who uses Commitment of Traders analysis are more bearish and note the accelerated outflow of fund buying by big institutions.

Thursday, October 22, 2009

The Debts of the Lenders: Container Shipping Bailout

Container shipping is ready for a bailout courtesy of the German, French, Israeli, and Chilean taxpayers. Companies include Hapag-Lloyd (Germany), CMA CGM (France), Zim (Israel), CSAV (Chile) and CCNI (Chile).

But attention is being targetted on the two European firms since Hapag-Lloyd is the world's 6th largest firm and CMA CGM is the world's 3rd largest by size. Shipping executives and trade officials in other countries are vigorously protesting what they (rightly) see as unfair competition. The protests are being lodged at the highest levels of the EU but commissioners have so far been nonchalant about the whole affair and dismissive of what they consider a local matter.

The Debts of the Lenders: China Plans to Launch REITs

Much has been said here about the speculative bubble like nature of the Chinese equity and property markets. In this latest news, Reuters reports that Chinese fund managers plan to launch publicly traded REITs that will be listed on native exchanges. REITs typically invest in residential and commercial real estate. Since this is China a large number of commercial properties will be industrial in nature.

The addition of REITs will ease the access of institutions to retail money by allowing nearly anyone to gamble in an already overheated property and equity market. That might even include foreigners which have been pretty much restricted in their financial activities.

Further details are pending final review by the China Securities Regulatory Commission (CSRC), the financial regulatory body.

Wednesday, October 21, 2009

The Debts of the Spenders: Is Corporate M+A Poised For a Comeback?

CFO magazine ( a great read by the way for those interested in knowing what's going on among corporate finance departments - warning wonk alert! ) reports that mergers and acquisitions, or M+A for short, may be poised for a return. But uncertainty about the macro level situation - especially credit - has dampened potential hopes of a sustainable recovery.

The author interviewed a Corning executive (manufacturer of industrial glassware) who was cautiously optimistic about the future but voiced concerns about extreme valuations. Such thoughts are directly connected to the months long run up in the equities market that have pushed many underlying stocks well above book value and historical valuations.

Corning's cash position makes the company less dependent on the credit markets for midsize deals. It also learned valuable lessons from the previous downturn in 2002, when the telecom bubble burst. "We decided then that we wanted to be prepared for the next downturn, whenever it came, by building up a significant amount of cash," Flaws explains. "We've done that, and have almost no debt coming due short-term. We're prepared to do deals now and we have the money to do them."

So what is he waiting for? "The valuations are higher than we think they should be," he says. "There were some companies we were interested in acquiring a few months ago, but the valuations were more than what we thought appropriate. Now they're lower and likely to get lower still."

This article was published before earnings season. Let's put his comments into context. The trend for the market has been a run UP into earnings only to be followed by an equally swift exit by profit takers (sellers) eager to cash out. . . . even though guidance has been for the most part positive. CFOs and other corporate finance personnel are patiently waiting for a return to more realistic levels.

The credit markets need to get revived as well. Despite the equity and bond rally (another source of financing for companies besides traditional bank loans), financing for deals is still hard to acquire - particularly for the debt fueled private equity market, including the sub-set of LBOs or leveraged buy outs (the "L" in leverage should tell you right away that there is a heavy reliance on financing).

The Debts of the Spenders: UK Property Prices Almost Back To Mid-2008 levels

Almost. Prices are almost back to where they were during last year's property bubble. The catalyst of course is quantitative easing, the controversial policy tool that debases the underlying currency so as to increase liquidity flows and maintain artificially low interest rates.

In particular, COMMERCIAL property prices have experienced the strongest surges.
The Financial Times reports that London is the center of a demand led recovery. Rental growth remains strained and is the key to any sort of sustainable recovery.

A lot of foreign money is returning - not necessarily from Eastern Europe/Russia which saw outsized bids last year - but mostly from the cash rich Middle East Gulf states. London has long been the second home of the Arab diaspora. Savvy fund managers saw the writing on the wall and capitalized on this concentration of wealth to open Sharia or Islamic law compliant funds. Some of the recent property acquisitions are no doubt part and parcel of the recent uptick in Islamic finance again.

All is not well however as the structured finance component of the deal flows are still experiencing problems. Fitch ratings analysts believe that the UK government's ABS scheme will not be extended past tomorrow's deadline. The ABS program was notable because NO ONE used it.

The government designed the scheme to reopen the UK RMBS market by offering guarantees covering credit or extension risks at a cost of about 25 basis points over Libor plus the median five-year credit default swap spread on the issuer.

There has been no take-up, 'primarily because CDS swaps for banks have widened significantly since the start of the banking crisis, making the scheme's economic unworkable for more originators', Fitch said.

Widening spreads are a bad sign despite Fitch's attempt to put a positive spin on the story by saying there are market led solutions developing. It indicates a fundamental disconnect between buyers and sellers over valuations. In healthy times, the spreads would be narrower but now the wide spreads are telling me that sellers continue to hold onto a higher price for other reasons besides valuation, including the fear of taking a large write - off on their books. So, they just continue to sit on the asset and hope that the government's liquidity schemes will eventually lift all boats higher.

In the meantime, here is a nifty tool that will allow readers to see if a RESIDENTIAL property is underwater as measured by the loan to value (LTV)ratio. Numbers over 100 indicate negative equity.

Tuesday, October 20, 2009

The Debts of the Spenders: Obama To Help HFAs

This post is meant to provide more clarity to yesterday's article about the latest Treasury bailout.

I would like to report more details of the plan but neither Treasury or Obama Administration officials have provided further details. However, for what it's worth, the brunt of the program is to be borne by the HFAs.

Monday, October 19, 2009

The Debts of the Spenders: Treasury To Buy Fannie and Freddie Loans

I must be getting deja vu because I thought this already happened.

One year ago, then Treasury Secretary Paulson promised these would only be temporary measures. Back then, it was the equity and the bonds. Now, this time. . . .

Well, at least they are cutting out the middlemen this time. When the Fed bought (they never sold) Treasuries and agency backed securities from the Treasury, they were forced to go through the primary dealers, a network of investment banks that profited from their personal connections with government officials.

Actually, you can make the argument that in the prior instance, the Fed prints money through quantitative easing. Here the Treasury is only printing money directly w/the printing press.

Both methods are forms of money printing but the first method is more "efficient" since it benefits fixd income desks at large banking firms like Goldman Sachs.

Some more additional context. Earlier in the same day, the Federal Reserve began testing a series of repo operations. Repos, or reverse purchase agreements, are methods by which the Federal Reserve attempts to withdraw liquidity from the system. Bond traders were temporarily frightened by the prospect of the largest - in some cases - only buyer withdrawing its presence. Bernanke was quick to reassure traders in a public statement that all was well.

Now, he is backing up his words with action from the Fed's sister agency, the Treasury Department.

Here are some more additional sources:

The Debts of the Spenders: A Funny Thing Happened on the Way to the Market

Remember March when everyone said the banks were going to be nationalized and had huge debts on their balance sheets? Well, those losses helped push profits UP. Several months later, the same gains are recognized as losses.

The important thing to take away is that there are implications here for the other financials which are NOT the chosen of Wall Street (e.g. everyone else besides GS, JPM, and MS).

Matt Phillips of The Wall Street Journal discusses the double edged blade of mark to market changes to US bank balance sheets. This article is basically a look at the effects of FAS 166.

Under this accounting rule, banks can set a market value based on the debt they owe instead of the promised repayment amount. But ironically, when a company's finances improve, so does the value of its own underlying debt that others hold. Thus, the company's CFO has to register an actual or higher loss!

Prof. Duffie of the Stanford Business School summarizes these bizarre effects of accounting.
"Isn't that a little bit weird?" said Darrell Duffie, a professor of finance at Stanford Graduate School of Business. "The better you are, the more you've lost. But that's the way that it works." There are some advantages to these accounting rules, Duffie said, as they do seem to offer a clearer picture as to the actual value of a company's liabilities. However, these rules are "not useful for checking whether the bank is solvent or not."

The Debts of the Spenders: Iceland's Lost Generation

This tiny country in the middle of the storm wracked North Atlantic has enjoyed decades of steady growth. However, the economic rockets really took off only in the past decade - and returned back to earth just as quickly. The culprit? Overlevered borrowing.

Icelanders are used to obscurity but their country was suddenly catapulted into the limelight last year when the UK, Germany, the Netherlands, and other European nations cut off its central bank from access to much needed funding. Ministerial ire was focused on a tiny clique of people - the so called "Viking Raiders" - a close knit bunch of hedge fund managers, central bankers, lax regulators, and institutional speculators that managed to gamble away their entire country's fortunes several times over. The government was forced to nationalize ALL of the country's banks and assume their debts.

A deal was finally reached between Iceland's embattled Prime Minister (the prior government had collapsed) and European regulators over Icesave, the most notorious of the clique of banks that promised to pay out more than it collected in funds. Unfortunately, the deal came at the price of Icelanders' economic freedom as it basically enslaved the next 10 generations to debt repayment.

So, how are things one year later?

The Financial Times reports:

It is estimated that 65 per cent of Icelandic businesses and 25 per cent of households are on the brink of bankruptcy. Inflation is at 12 per cent, unemployment close to 10 per cent. House prices have plunged. Burglaries have doubled in the past six months

A recent poll revealed that almost a third of all adults and a disturbing 50 per cent of 18- to 24-year-olds were considering emigration. . . . One young Icelander put it more emphatically: “I don’t really have any great interest in spending my earnings to be paying down some daft debts my government is obtaining ... I’ll scrape some money together for a one-way ticket far away and take it from there. Maybe we’ll see each other in 15 years or so, who knows?”

Now, Icelanders seem like quite nice people. I've never actually met one but my sympathies go out to them. As an American, I am all too familiar w/being cheated by inept government officials and scheming bankers. We too have been burdened by decades of debt repayment. There are startling similarities between the last Icelander's comments about emmigration and many Americans' thoughts. Not necessarily emmigration OUT of the country but emmigration between states is becoming a more common trend - particularly as taxes continue to rise in certain areas (California and New York I am looking at you).

Now, if anything in this post is wrong, I welcome the opportunity to exchange thoughts w/an Icelander in order to set the record straight. On a more personal note, I've been meaning to visit the country for some time - it's only 5 hours away from where I live and I can appreciate a good bargain when I see one (the exchange rate is very favorable even after dollar debasement).

Sunday, October 18, 2009

The Debts of the Lenders: Chinese Real Estate Market Frenzy (Again)

Just like its largest trading partners in the UK, US, and (to a more limited extent) the EU, Chinese bureaucrats have flooded the system with liquidity in a bid to boost asset prices. These measures were enacted to stave off the very real threat of a global deflationary bust. Cynics also noted that the policy effect was really aimed at protecting the interests of the wealthy.

Well, look no further than this latest Stratfor report on the Chinese real estate bubble.

Paradoxically, as the global financial crisis continues, China sees little choice but to loosen its monetary policy even further, fearing the opposite would curtail economic growth and result in massive unemployment, which could lead to social instability. Beijing knows that one of the country’s underlying economic problems continues to be an overheated real estate market, but it also knows that the real long-term solution - limiting the flow of cash and credit - could have dire socio-economic ramifications. Meanwhile, real estate developers, government officials and investors continue to speculate on real estate, raising land and housing prices.

Given the current global economy and the economic balancing act it must maintain domestically, Beijing has few good choices. It must keep enough cash flowing to maintain economic growth and social stability in the short term while tightening credit to avoid a tsunami of bad loans and a market collapse over the long term. Certainly, Beijing does not want to face the kind of collapse in the housing market that Japan experienced in the 1990s, which triggered a financial crisis and more than a decade of economic malaise.


After all, let's not get too concerned about exports - China's #1 growth driver.

Why not just give a loan to anybody with a pulse? Especially those recently graduated from college with poor job prospects?

They can put that cash to good use speculating in other things besides real estate.

Of course, Chinese officials may want to revise earlier statements about inflation in light of what is happening:

For more news on China, please visit:

Friday, October 16, 2009

The Debts of the Lenders: Putin Says Russia Ready to Leave the Dollar

Before all the goldbugs come out consider this story in context.

Russian Prime Minister Vladimir Putin said that any such deal would be for BILATERAL DEALS only. Moreover, the Chinese will resist any persistent international abandonment of the dollar because of the way their political economy is tied to the US. China has run a persistent trade surplus against the US trade deficit that some critics (including me) have called a form of modern mercantilism. The commissars in charge (of both countries) consider the maintenance of public order to be paramount to their security. As such, there will probably be public downplay in the days to come of any international dollar abandonment.

Still, the fact that such words were issued during a public press conference indicate Russian-Chinese unhappiness over the deteriorating state of the US dollar. After all, a stronger yuan hurts their exporter dominated economy.

Indeed, it is probably a reaction to yesterday's accusations by US officials of Chinese "yuan manipulation." These diplomatic games are the new form of international brinksmanship - except instead of ICBMs, the "missiles" are actually formed of dollar rockets ready to be fired into the international atmosphere at the slightest hint of US provocation. In the latest such exchange of words, US officials stopped short of accusing the Chinese of currency manipulation and instead used the term, "undervalued." Apparently, they did not reckon on the magnitude of the Chinese response.

"Yesterday, energy companies, in particular Gazprom, raised the question of using the national currency. We are ready to examine the possibility of selling energy resources for rubles, but our Chinese partners need rubles for that. We are also ready to sell for yuans," Putin said.

He stressed that "there should be a balance here."

The Debts of the Spenders: Military Recruiting An Inverse Indicator of Unemployment

Don't be fooled by the stock and bond market rallies. Despite large nominal gains (or real losses as measured in gold or even the dollar index from 10 years ago), the macro situation continues to deteriorate. So much so that the generation that has to shoulder the burden of paying for elderly boomers' social service costs are now finding that the brightest job prospects are in war.

Here, the Washington Post describes how military recruiters were able to meet their goals for the first time in 35 years (the draft was abandoned shortly after the Vietnam War and an all voluntary system implemented). Recruitment levels are at an all time high despite the fact that many face imminent risks of permanent dismemberment and death.

Thursday, October 15, 2009

The Debts of the Lenders: Is Dubai Recovering?

Earlier this year I discussed the economic woes afflicting Dubai.

Well, how are things a few months later? Months of coordinated government liquidity sloshing have improved the macro situation but things are not back to normal. Indeed, employers are still viciously slashing jobs.

There has also been much talk about turning Dubai into a logistics center. Industry analysts love to talk up the benefits of a central location between Europe, Africa, and Asia. However, their figures tend to emphasize the addition of warehouses instead of dedicated port facilities and hard figures from the Jebel Ali free trade zone. Jebel Ali's growth really picked up with the deterioration of the security situation in Lebanon, the former logistics hub of the Middle East.

I am cautiously optimistic about Dubai's prospects for growth - particularly that fueled by the entrance of large, foreign NON-WESTERN players such as the Chinese. Here is more information on an upcoming industry event that may shed more light on the situation.

Wednesday, October 14, 2009

The Debts of the World: The Pound Sterling Carry Trade

Industrial metals continue to lift the Chinese, Brazilian, and Russian Stock exchanges - already at 52 week highs for the year. Yes, the BRIC nations are on fire.

Brought to you courtesy of the Pound Sterling.

Base metals surge on Chinese structural spending plan.

Iron ore is catalyst for record Brazilian growth.

Chinese-Russian Cooperation on Stock Exchanges

But dark clouds gather. Potential trade war?

The Debts of the Lenders: Indian Minister Denies Need to Import Food

Speculators hoping to make quick money on hoarding rice, wheat, and other staple grains were disappointed by word from Indian authorities that there would be no need to import foodgrains despite a horrendous harvest season. Farmers depend on seasonal monsoon rains to deliver much needed water to their fields. Unfortunately, this year the rains came too little and too late resulting in widespread drought. Sparse growing conditions contributed to price appreciations in other agricultural sectors like sugar, which reached 30 year highs earlier this September.

Instead of India, speculators should be eyeing another country to sell their products too: the Philippines. Typhoon Pepeng didn't really hit the country but earlier storm systems drenched Manila, the capital, as well as other parts of the country with torrential rains just a few days ago.
Crops are affected and there are talks going on about food shortages/rationing.

India Min: No Need To Import Foodgrains Despite Erratic Rains

India does not need to import foodgrains, as it has sufficient stocks to meet domestic requirements despite erratic monsoon rains that caused drought and then flooding during the
summer, Junior Agriculture Minister K.V. Thomas said Wednesday on the sidelines of a conference.

India’s current stocks of wheat stand around 32.6 million metric tons, while those of rice are at 25.3 million tons. Scanty rains in the first two months of the monsoon season that began June 1 hit summer-sown crops such as rice and oilseeds. Floods in parts of the country during the end of the season in September further affected standing crops.

Source: CME News for Tomorrow

Tuesday, October 13, 2009

The Debts of the World: Colombia Offers Dollar Denominated Bonds

All aboard the dollar carry trade train! Weeks after the German government decided to issue dollar denominated bonds, a slew of European nations also decided to follow on board. Even countries like Venezuela have followed.

Now, Colombia is the latest country to join this global arbitrage game of selling dollars. As I said before, the issuance of dollar denominated bonds is a very attractive factor for US fund managers seeking to gain foreign exposure whil e retaining currency risk at a minimum.

BOGOTA (Dow Jones)--Colombia is offering as much as $1 billion in dollar-denominated global sovereign bond maturing in 2041, according to investors familiar with the offering. Felipe Munoz, who manages a fund of dollar-denominated bonds with Colombian brokerage Corredores Asociados, said, "Demand for the bonds will be heavy."

The government will use the proceeds to finance its 2010 budget, according to a term sheet sent to investors. Banc of America Securities and Goldman Sachs (GS) are underwriting the sale. The bonds will be listed on the Luxembourg Stock Exchange.

By Inti Landauro, Dow Jones Newswires; 57-1-610-70-44

Monday, October 12, 2009

The Debts of the Lenders: Japanese Forex Traders Make Record Bets on a Stronger Dollar

From the land of the rising sun. Does the last bastion of the carry trade know something that those in the West don't?

Japanese forex traders stocked up on the dollar last week by betting on a stronger USDJPY cross as the yen approaches the psychologically critical Y87.10 level.

The article does not mention the type of traders that accumulated dollars but notes that online forex trading has increased remarkably in popularity among retail traders - so much so that Japanese regulatory authorities have taken measures to cap the amount of leverage that traders can use. So, we can assume that a large segment - maybe a majority, maybe not - of these traders are new to the gladiatorial style combat of forex trading.

They also stand a higher chance of blowing out their accounts and causing further weakening of the dollar.

The Debts of the World: International Shippers Raise Rates for 2010

Carriers in the Transpacific Stabilization Agreement (TSA) adopted voluntary guidelines in an effort to combat widespread losses that ravaged the sector for much of 2009. These are carriers serving the critical East Asia - US West Coast trade with big name members such as Evergreen, China Shipping, and Nippon Yusen Kaisha.

Specific elements of the TSA revenue program, to take effect with renewal of current contracts – most of those over May and June 2010 – include:

-- A general rate increase (GRI) of US$800 per 40-foot container (FEU) for local West Coast and Group 4 Western coastal states cargo, and US$1,000 per FEU for intermodal and U.S. East and Gulf Coast all-water cargo, with per formula increases for other equipment sizes.

-- A $400 peak season surcharge (PSS), effective from August 1, 2010, to address higher cargo handling, equipment positioning and contingency planning costs during periods of peak cargo volume.

-- Full collection of fuel and other accessorial charges.

Will this lead to a recovery in the shipping sector? Sector leaders are cautiously optimistic.

Friday, October 9, 2009

The Debts of the Spenders: SPY, Money Flow, and On Balance Volume

*Credit Inlet

Readers of older posts will recognize that I am a fan of using money flow indicators. Recently a colleague of mine suggested throwing in On Balance Volume for a closer look.

Here are 2 charts of the SPY as of today's close, a weekly and a daily:

Look at where the Chaikin Money Flow indicator is today on the DAILY CHART. Then look to see where it was at the end of June. Bearish? Potentially.

But also take a look at the larger picture on the WEEKLY CHART. Flows are actually ticking up!

Please note that these are technical analyses (T/A) tools. As w/all T/A, a margin of error is built in. Reading the tea leaves is more a science than an art.

*Disclosure: No position in SPY.

For more information on the 3 indicators:

The Debts of the Spenders: UK Policymakers Defend Quantitative Easing

UK gilts (government bonds) have rallied significantly since the Bank of England intervened in the markets.

David Cameron, a UK conservative leader that is widely believed by political pundits to become the next Prime Minister, attacked the policy of quantitative easing on ideological grounds earlier this week. But critics responded vociferously in defense of the policy that has lowered borrowing costs for refinancing of big ticket items like housing. They called his comments bizarre and dangerous.

Here are Cameron's original comments:

"The longer we wait for a credible plan, the bigger the bill for our children to pay. The longer we wait, the greater the risk to the recovery . . . U.K.'s debt is a "massive risk" to its economy."

He also added that a Conservative government wouldn't seek to inflate the country back into solvency and warned that allowing inflation to take off would be not just an economic disaster - it's a social disaster too because it erodes people's savings. [Paraphrasing here].

Also, here is an old video featuring Jim Rogers on the pound:


Jim Rogers made the rounds earlier this year by calling the pound a worthless currency and that the UK had nothing to sell. Well, his ultra-bearish comments have to be taken into consideration. While the FTSE and gilts have both rallied, they have done so largely at the expense of the pound.

Of course, the main benefits of the gilt government buying program is that intermediary dealers are involved in order to keep the financial community fed through commissions and guaranteed spreads (just like the US). But UK readers just have to look at what happened in the 1950s-1960s when the UK downshifted from an empire and the pound suffered accordingly.
Those astute or well connected enough to take advantage of this massive carry trade made a fortune on the FTSE and other markets. Not coincidentally, the rich got richer and the poor got poorer.

*Keep the speaker from the Arab-European Bank's comments in mind here regarding these points. Both men are right but it depends on which perspective you are on.

The Debts of the Spenders: US Rewards Whistleblower W/Jail Time

The lesson is that coming forward to speak about fraud, insider trading, and tax evasion from your employer will get you a conviction by the authorities.

"This sends a terrible message to potential whistle-blowers," said Jesselyn Radack, a former Justice Department lawyer who now works with the Government Accountability Project, a Washington-based whistle-blower advocacy group.

"The only person going to jail in this case is the whistle-blower," Radack added, saying "the major bad actors" in the UBS case had all gone free.

"The fact that they would grant someone from Switzerland immunity and not a U.S. citizen who brought them the entire case on a silver platter, tied up with a bow with a cherry on top ... I just don't get it," Radack said.;_ylt=AkS89phSvykSwMKCReefE.G7YWsA;_ylu=X3oDMTE1M3JvMHQzBHBvcwM3BHNlYwN0b3BTdG9yaWVzBHNsawNwcm9zZWN1dGlvbm8-?x=0&sec=topStories&pos=5&asset=&ccode=

Tuesday, October 6, 2009

The Debts of the Lenders: South Korea Eyes Interest Rate Raise

Australia was the first G20 state to raise interest rates. It was also the first developed nation to do so. Now, South Korean officials are hinting at a possible rate hike as well . . . by as early as November if possible. The reason?

A booming property market that officials noted,
"'In contrast to advanced countries where real estate prices have collapsed, South Korea's real estate prices have been rising since April, even after undergoing only a small correction."


'We are closely watching details on loans by non-bank financial companies. If their lending is found to reduce the effect of recent measures on banks as concerned, we are preparing more steps.'

So, what does this mean for the US, UK, and other Western nations?

1) Inflation fears are more prevalent among emerging markets than the West. (Australia, despite being classified as a Western nation, has closer proximity to the dynamic economies of East Asia and as such is exposed to the same potential strengths and weaknesses that confront other policymakers there).

2) Commodities as well as emerging market valuations for stocks and bonds are rallying the hardest ahead of similarly placed Western institutions.

Bailout Ben is facing pressure to raise rates too. But such talk is very premature for the US.

To put this into context:

Let’s put this into perspective.

The US savings rate 1 year ago was -1 to -.5% Now it is 5 to 5.5% (depending on who you ask).

That is an increase of over 1000%.

At least 10 years of Greenspan’s monetary excesses need to be worked out. More if you take a longer term view to include the de-linking of gold from the dollar under Nixon.

We have all the necessary tools for inflation (e.g. increase in monetary reserves). But until that money is lent out to the greater economy, then there will be little or no inflation.

The rise in equities, credit, and bond valuations is more a function of institutional fund flows reacting to 9 months of 0% Fed Funds rate and Eurodollar futures >97.

You can read an interesting exchange on the inflation-deflation take here:

Even though I don't necessarily agree w/the poster, I believe it is important that readers have exposure to all viewpoints.

Keep in mind that most Asian states have a savings SURPLUS - not a deficit. Their problem is excess savings, not consumption. Here in the USA the opposite is true.

Friday, October 2, 2009

The Debts of the Spenders: US Senators Slash Farming Pork From Bill and Anger Agra Lobby

Translation: Big agra lobbyists are angry over proposed cuts to the carbon offset program, a lucrative trading scheme that would open a new can of worms for the CFTC to handle.

Senate’s Climate Change Bill Adds To Farmers’ Concerns

The newly unveiled Senate version of legislation designed to cut U.S. emissions of greenhouse gases has none of the financial protections for farmers that are present in the House version, and that has U.S. farm groups concerned.

At the National Corn Growers Association there’s an all-out effort to work with senators to add protection for farmers’ livelihoods in the Senate bill, but the group’s leaders say they remain wary of even the friendlier House version.

Obama administration officials have promised farmers that the revenue protections for them in the House bill - essentially allowing farmers to cash in on their efforts to reduce greenhouse gas emissions by selling “offsets” - will be more than enough to help them cope with rising energy prices.

However, Darrin Ihnen, NCGA president, and Bart Schott, vice president, said they aren’t so sure. They supported the farm protections in the House bill and are working to get similar provisions in the Senate version, they said, but it’s not clear if that will be enough.

To that end, the group is funding a study to see how corn farmers will fare under the House bill, with results expected in a couple weeks, Ihnen said. “That will give us an idea of how we can make the bill better...or if we can support it at all.”

When Senators John Kerry, D-Mass., and Barbara Boxer, D-Calif., this week
introduced the Senate’s version of the climate change bill, the negative reactions came quickly from farm groups and farm-state senators.
The National Farmers Union, which had signed on to support the House bill, was critical of the Senate version.

“It is important the U.S. Senate begin the process of developing climate change and renewable energy legislation,” NFU President Roger Johnson said. “However, the language unveiled fails to address the unique role agriculture can play.”

Sen. Saxby Chambliss, R-Ga., said the Senate bill “would only hurt farmers,
ranchers and forest landowners and provide them no opportunity to recoup the higher costs they will pay for energy and the other inputs necessary to work the land. I cannot support this bill.”

The criticism from Sen. Mike Johanns, R-Neb., was just as sharp: “This bill is an assault on agriculture. For agriculture, the costs are real and the benefits are theoretical - our country’s heartland is in the crosshairs of this national energy tax.”

Source CME News For Tomorrow

The Debts of the Lenders: PIMCO Meets w/Homeowner Advocacy Group

Talk about opposing views! PIMCO representatives recently met w/a homeowner advocacy group clamoring for principal reductions and loan forgiveness. Mohamed El Arian, PIMCO co-CEO, sat down with the group after they threatened to bus 500 protesters to demonstrate outside the corporate office.

"Homeowner" is really a misnomer here as the term implies 100% equity ownership. Instead, "LTV, HELOC ARM borrowers" clamoring for bailouts sounds more appropriate.

Still, the two sides managed to lay blame on a 3rd party - loan servicers.

Thursday, October 1, 2009

The Debts of the Spenders: Putting a Floor on the Fed's Mortgage Bond Purchases

I promised to write an update on the RMBS story last week. B/c of personal developments I didn't have time. In retrospect that turned out to be actually a good thing since there have been a lot of major developments this week that will add to a more fleshed out post.

Here are the original stories for those searching for perspective:


Let's start w/the basics.

The NYFRB (New York Federal Reserve Bank) is the designated branch in charge of buying and selling securities in order to effect monetary policy. Specifically, the NYFRB is in charge of the POMO (Permanent Open Market Operations) and TOMO (Temporary Open Market Operations) that handles the buying and selling of Treasuries, Agencies, and Agency MBS (mortgage backed securities).

The Fed's quantitative easing mandate calls for it to buy MBS, treasuries, and bonds issued by certain federal agencies in order to keep interest rates low. In the securitization process, banks originate loans before pooling them into a MBS. This means that the interest rate banks can sell the instrument determines the rate at which they can offer a loan (minus a spread of course, someone's got to make a profit right?).

The NYFRB has been targetting the 4-5.5% interest rates during its operations:


B/c this is the rate that is closest to origination value and closest to the par value. If you click on the Fed's web site "Purchase archive" at the bottom of the page, you can pull up a history of all its operations. Note how for most of 2009, Fed managers were targetting 6 and 6.5% interest rates as opposed to the 5 and 5.5% rates of the two most recent operations. This means the Fed's goal of reducing or at least stabilizing low rates for 15 and 30 year mortgages has largely been successful. Read another way, it also means the Fed could be winding down its purchases.

Note in the accompanying graph that this reduction in lower interest rates coincides with a nice rally in the ABX market (chart from Markit's Series 7 ABX.HE AAA bond; series is a reference to the most recent tranche).

However, the end result of this massive government intervention in the markets has been dislocation of prices. RMBS have been artificially elevated in value. And private fund managers that were initially bullish on the market (due to the Fed's interventionist policies) have turned somewhat bearish.

Accrued Interest notes that Vanguard's creation of a separate index devoid of Fed interventions is the trigger that will start a spread dislocation. Other funds will start to follow and begin to separate themselves from the market. Volatility might actually increase b/c many sellers have grown accustomed to the Fed being the main (sometimes only) buyer.

In other words, there might be a potential fall in prices.

Even Bill Gross thinks RMBS are overpriced while the 5-10 year Tsy are not. Note that he is not bullish on the longer term notes (>20 years).

But it doesn't necessarily have to be that way. Most of the appreciation factor has already been factored in. Yet, the notes will still deliver a steady yield. The Fed's POMO Agency MBS program ends in roughly 6 months or the end of March 2010. However, the Fed has repeatedly stated that it is open to unconventional measures to keep interest rates low.

The WSJ also published an article on the Obama Administration's promises for another $35 billion in ADDITIONAL housing loans. This is a straight bailout of Freddie and Fannie again to the tune of $20 billion in bond purchases plus an extra $15 billion in funding.

Most of it is scheduled to hit the low and middle income sectors but maybe there will be some splashover effect on higher end housing.

Finally, my original point stands. B/c of higher capital reserve requirements, many financials will be required to convert their bonds (debt) to equity when the time comes in order to satisfy regulators. Unfortunately, I cannot give more specifics on this since even the regulators have yet to come to an agreement on what constitutes adequate measures.

The Debts of the Lenders: China - Dragon or Panda?

Which image most accurately depicts China's image of itself and how others see it around the world? Most importantly, what are Chinese perceptions of the United States? Peaceful panda, royal dragon, or . . well, see the third image's caption for yourself.

Today marks the 60th anniversary of the Communist Party's victory over Nationalist China and many observers are closely watching developments.

The article below discusses China's emergence as a global power and its relations vis a vis the G20, the United States, and the rest of the modern world order.

The Debts of the Spenders: September REIT Short Interest Falls

Is real estate - particularly commercial - recovering? Or are the bears simply getting tired of fighting a government subsidized sector? Average REIT interest declined in the first half of September.

Here is a sector by sector breakdown:

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