FedUpUSA

Archive for November, 2009

In light of a weakening Case Shiller housing index, fears rise that Home Prices May Be Nearing a New Dip.

Two price indexes released Tuesday indicated that the momentum the housing market showed over the late spring and summer is faltering, even as the government said the economy grew at a slower pace in the third quarter than previously reported.

The Standard & Poor’s/Case-Shiller home price index, a closely watched measure of the housing markets in 20 metropolitan areas, barely rose in September, rising 0.3 percent from August on a seasonally adjusted basis. Prices fell for the month in nine cities in the index, including Boston, New York, Seattle and Charlotte, N.C.

A report from the Federal Housing Financing Agency showed that prices were flat in September from August.

The housing market is confronting an abundance of inventory, high unemployment, fearful consumers and devastated family balance sheets.

“There is no clear, easy way out for housing,” said John Silvia, chief economist at Wells Fargo. “Contrary to my hopes, housing prices and the housing market in general will weaken again.”

He forecast a new decline in prices of as much as 10 percent, which he expected to shave a half-point off the nation’s economic output just as it emerges from the recession.

The Case-Shiller index, which covers about 45 percent of the United States housing market, is a three-month moving average. Since July and August were relatively strong, the weak September report could indicate a plunge in prices.

The 20-city composite index is off nearly 10 percent in the last year and 29.1 percent since its 2006 peak.

Pay Option Arm Time Bomb

If there is no clear, easy way out for housing, then there is no clear, easy way out for Wells Fargo. Wells is sitting in a huge pile of Pay Option Arms in bubble states like California, where prices still have a long way to correct.

iStockAnalyst comes to a different conclusion and states Wells Fargo’s Option ARM Problem Is Not That Bad.

I’ve been trying to make the point for some time that the Wells’ Option ARMs that it inherited in the purchase of Wachovia (Wachovia came by them via its purchase of World Savings) are not an immediate threat to the bank. The terms of the mortgages were more lenient in the amount of negative equity that would cause an automatic recast of payments and the recast feature does not automatically trigger until the ten-year anniversary as opposed to the five-year featured in most other Option ARMs.

Wells Fargo, who holds more Option-ARMs on its books than any other institution, states in their last 10-Q filing:

Based on assumptions of a flat rate environment, if all eligible customers elect the minimum payment option 100% of the time and no balances prepay, we would expect the following balance of loans to recast based on reaching the principal cap: $4 million in the remaining three quarters of 2009, $9 million in 2010, $11 million in 2011 and $32 million in 2012…

In addition, we would expect the following balance of ARM loans having a payment change based on the contractual terms of the loan to recast: $20 million in the remaining three quarters of 2009, $51 million in 2010, $70 million in 2011 and $128 million in 2012.

Given that we’re talking about a portfolio of over $100 BILLION of these loans, this means ESSENTIALLY NO LOANS WILL RECAST due to the negative amortization limits or contractual terms before 2012.

Both assumptions seemed suspect, yet, they are in fact true. Looking at page 55 of the Golden West 10-K from 2005 we read:

…most of our loans are scheduled to have a payment change without respect to any annual limit in order to reamortize the loan over its remaining life at the end of the tenth year or when the loan balance reaches 125% of the original amount. We term this reamortization a “recast.” Historically, most loans in our portfolio have paid off before the loan’s payment is recast.

11% Decrease Forecast For 2010

Inquiring minds might be interested in noting Fiserv Case-Shiller Home Price Insights: U.S. Housing Prices Forecast to Decrease 11 Percent over the Next Year.

The Fiserv Case-Shiller Home Price Index forecasts that average single-family home prices will fall another 11 percent over the next twelve months, with declines expected in about 90 percent of the more than 350 metro areas tracked by Fiserv. Steep home price declines are expected to continue in markets that have been hurt most by the housing crisis, including metro areas in California, Nevada, Arizona and Florida.

“Large supplies of foreclosed properties and extremely weak job markets will continue to put downward pressure on home prices,” said David Stiff, chief economist, Fiserv. “Many temporary factors that were partly responsible for strong spring and summer real estate markets, including the first-time homebuyer tax credit and Federal Reserve actions to drive down mortgage interest rates, will no longer be bolstering demand. Consequently, home prices will resume falling again before they stabilize in 2010.”

One-time bubble markets in Florida, California and Arizona, which have already seen home values fall 40 percent to 60 percent since prices peaked in 2006, are showing no sign of moderation in declining prices.

Cumulative Declines

Calculated Risk has this chart that nicely shows cumulative declines.

click on chart for sharper image

Extend And Pretend

Los Angeles, San Francisco, and San Diego are all down over 38% from the peak. The Wells Fargo Chief Economist expects a further 10% decline in prices, essentially the same as Case-Shiller.

Yet out of a portfolio of $100 billion in Option ARMs, Wells Fargo assumes that virtually none of those will recast at 125% of the original mortgage balance. That is a preposterous amount of mark-to-fantasy pricing.

Wells Fargo is simply refusing to recast problem loans, putting off today’s problem hoping it will not be as big a problem later. I have news for Wells Fargo. This problem can only get worse with age. There is no good reason to assume home prices will rebound before 2012, and in fact prices might fall for much longer.

In the meantime, most Option-ARM holders are only making the minimum payment with negative amortization increasing monthly. When those loans do recast, anyone in their right mind will hand over the keys. Given that buyers of high-priced homes are more apt to be in a right mind than buyers of low-priced homes, expect to see Wells Fargo the proud owner of a huge number of homes when those loans do recast.

In the meantime, Wells Fargo is collecting insufficient rent on properties it will own in due time. How long the market let’s Wells get away with this extend and pretend fantasy remains to be seen, but eventually it is guaran

teed to sink Wells in due time.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Mike “Mish” Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

By now, you’ve probably heard all about the “Let Wall Street Pay for the Restoration of Main Street Act of 2009,” a trading tax of 0.25% on all trades you make in a given year, with the first $100K exempt (and as most of us know, to hit that level, you don’t have to be a fatcat, just a middle class investor or day trader — e.g., you could buy/sell $10K worth of stock 10 times). It’s not likely to go anywhere, so we mostly just ignored it until Jim Cramer got some panties in bunches by coming out as, well, at least not vehemently against it:

“Look, I take an unpopular stance, but you know I think the deficit’s bad and someone has to do something,” the 54-year-old former hedge fund manager told CNBC host Erin Burnett on Tuesday. “If it comes down on us we probably. . . deserve it.”

This, of course, inspired a full round of “I didn’t do it” as individual traders threw fits at the idea of being lumped by Cramer into a ‘royal we’ of sorts:

The cable TV star’s support for the so-called “trader tax” outraged Wall Street and Cramer followers, who argued that they weren’t responsible for the financial meltdown.

“I don’t see why if banks made bad loans and created all these problems why I have to pay for this rescue,” one trader told The Post.

“I don’t know exactly who ‘we’ might be but individual traders who make a living in the market sure did nothing to deserve it,” wrote one Florida-based investment manager and contributor to Cramer’s Web site, The-Street.com.

Cramer did respond, pretty much saying he’d back any tax that would help create jobs, a nice idea in theory, but one that requires you to believe giving the government more money to spend is actually going to create jobs, and I think a lot of people are having problems with that piece of logic right now:

Traders are of course more likely to say it’s going to erode small profit margins than it is to generate any kind of real economic growth. And, as we said, the general wisdom is that it isn’t going to go anywhere in Congress. But it got some press because it fits into that “Hit Wall Street to help Main Street” paradigm, and then Cramer opened his mouth, so I figured might as well write about it.

And besides, it gives me an excuse to use this picture of a cute kid on the floor of the NYSE, yanked from today’s WSJ/photos of the week. She’s probably charting support/resistance levels for $XOM or something too, we just know it.

Add to:

By now, most people that read the new media have been informed that the infamous “hockey stick” graph supposedly proving man-made global warming is a scientific hoax of historical proportions. The data was cherry-picked and manipulated to show something that simply isn’t there. But there is a hockey stick-type graph that is very real, and it doesn’t bide well for the D. Last week, the liberal Utopia we know as Detroit, run by a Democrat hegemonic domination for 50 years now that was supposed to usher in an ago of rainbows and unicorns, was ranked dead last as the most difficult city to find a job (Liberal Utopia Detroit ranks dead last of 50 major cities as the most difficult place to find work). But that was only part of the story, as it turns out. Perhaps the bigger story is how bad things really were relative to the other 49. This graph tells that story:

2008 General Election results-DEM: 96.93% GOP: 2.65%
2006 General Election results-DEM: 95.05% GOP: 4.33%
2004 General Election results-DEM: 93.61% GOP: 5.93%

Thus, why are Detroiters not living with unicorns under rainbows running on pixie dust?

This is exactly how the central bankers are now ACTIVELY ENGAGED IN THEIR PLAN. No, they are not going to get on the world stage and make the following announcement, “Ah hem…. We, the Central Bankers of the planet Earth, are hereby enacting our plan to control the people, nations, and natural resources of the planet, so that WE can CONTROL the globe and PROFIT from every transaction!”

No, no, that press conference won’t be held until AFTER it is complete. It’s now in progress, here’s how it works… start by infesting the globe with money that can only come into being when it’s backed by debt. Then add in a massive heaping of skanky derivatives and shaky debts, stir up the pot and begin creating one crisis after the other. Then step in like this:

IMF Gets $600 Billion Credit Line to Help in Financial Crises

By Sandrine Rastello

Nov. 25 (Bloomberg) — The International Monetary Fund said it will have access to a credit line of up to $600 billion to make loans during financial crises after contributing countries agreed to fold commitments into one pool.

The agreement, yet to be approved by the IMF board, adds as many as 13 members from the current 26 to the so-called New Arrangements to Borrow, including emerging nations China, Russia, Brazil and India, the IMF said in an e-mailed statement.

The decision “marks an important moment for multilateralism and the fund, which will help the IMF’s effectiveness in its response to crises,” Managing Director Dominique Strauss-Kahn said in yesterday’s statement.

The deal goes beyond a pledge by leaders of the Group of 20 nations to contribute up to $500 billion to a credit arrangement that’s currently worth $54 billion, the IMF said. The worst financial crisis since the Great Depression prompted more nations to seek aid from the fund, created after World War II to help ensure the stability of the global monetary system.

The agreement, which merges existing commitments into one facility, makes it easier for the IMF to tap into its supplemental resources. The credit line will be “an effective tool of crisis management as a backstop for the international monetary system,” the IMF statement said.

While a general agreement on the NAB was reached at the G- 20 meeting in Pittsburgh in September, talks on the specifics stalled over divisions between some emerging and developed nations over voting rights relating to the credit facility.

Borrowed From Members
The IMF has estimated that its current credit line was insufficient when the financial crisis boosted demand for loans. It then started to borrow from individual members, such as Japan, to continue lending to countries in difficulty.

To ensure the institution would continue shoring up economies around the world, G-20 leaders in April pledged to add $500 billion to the IMF’s resources.

Some of these contributions were bilateral loans, while China agreed to participate by buying the first IMF notes. Some countries, like the U.S., made theirs directly to the NAB.

When the new credit-line agreement is activated, all the bilateral loans will fall into it, Andrew Tweedie, who heads the IMF Finance Department, said in a Nov. 20 interview. It won’t come into effect before next year, he said.

So, the IMF who comprise the world’s central bankers go the individual central bankers and get money… of course this is just for show and to confuse the world… they could just as easily just create their own IMF money, and I’m sure will, but instead they pretend that they are “borrowing” money from countries around the world. Well, were did that money come from? The same central bankers!

Then, they take the money at the IMF level and do this with it…

Serbia Gets 3 Billion Euros From IMF to Counter Global Crisis

By Aleksandra Nenadovic

March 25 (Bloomberg) — Serbia and the International Monetary Fund agreed on a 3 billion-euro ($4.1 billion) bailout to help the country repair the damage to its economy by the global financial crisis, Economy Minister Mladjan Dinkic said.

The accord will last two years, he told reporters in Belgrade today.

Last year, Serbia opened a $516 million credit line with the IMF, joining countries including Hungary, Ukraine and Latvia in seeking outside help to cope with the effects of the crisis. Like other emerging markets, Serbia is grappling with a lack of credit and a plunging currency as the economy contracts for the first time in a decade.

Serbia is also hoping for additional commercial loans from the World Bank and the European Union that will be negotiated on March 27 in Vienna. Serbia already has received a $600 million aid package from the World Bank.

On March 24 central bank Governor Radovan Jelasic said Serbia’s economy may contract 2 percent this year. There is a “downside risk” to this forecast because the government doesn’t have enough funds to spur the economy through spending, he added.

Finance Ministry spokeswoman Kristina Radovic said on March 17 that Serbia didn’t draw any funds from the original credit signed in November.

BINGO! Ding, Ding… Johnny, we have a sucker on the line! And in this way Serbia now must conform to the conditions of the loan or they will be cut off. What did the central bankers do to “earn” this money? What and who gave them the right to mint money on the global stage and to indebt entire nations? I think you know the answer to that… they gave themselves the power to do so, no one would stop them as the politicians and the judges are bought off along the way.

And because all their “money” is debt, this is the end result…

Dubai Debt Delay Rattles Confidence in Gulf Borrowers

By Laura Cochrane and Tal Barak Harif

Nov. 26 (Bloomberg) — Dubai shook investor confidence across the Persian Gulf after its proposal to delay debt payments risked triggering the biggest sovereign default since Argentina in 2001.

The cost of protecting government notes from Abu Dhabi to Bahrain rose, extending the steepest increase since Feb

ruary as Dubai World, with $59 billion of liabilities, sought a “standstill” agreement from creditors. Its debt includes $3.52 billion of bonds due Dec. 14 from property unit Nakheel PJSC. Dubai credit-default swaps climbed 90 basis points to 530 after yesterday increasing the most since they began trading in January, CMA Datavision prices showed.

“There is nothing investors dislike more than this kind of event,” said Norval Loftus, the head of convertible bonds and Islamic debt at Matrix Group Ltd. in London, which manages $2.5 billion of assets including Dubai credits. “The worst-case scenario will, of course, be involuntary restructuring on the Nakheel security that brings into question the entire nature of the sovereign support for various borrowers in the region.”

Dubai World’s assets range from stakes in Las Vegas casino company MGM Mirage to London-traded bank Standard Chartered Plc and luxury retailer Barneys New York through asset-management firm Istithmar PJSC. The Dubai government’s attempt to reschedule debt triggered declines in stocks worldwide that had been rebounding from the worst financial crisis since the Great Depression.

‘Debt Burden’
“We understand the concerns of the market and the creditors in particular,” said Sheikh Ahmed Bin Saeed Al- Maktoum, who chairs the Supreme Fiscal Committee in charge of apportioning financial support to ailing companies, in the first statement to come out of the Dubai government since the announcement about debt rescheduling. “However, we have had to intervene because of the need to take decisive action to address its particular debt burden.”

The MSCI Emerging Markets Index of stocks had the biggest decline in four weeks, falling 2.2 percent, led by Russia and China. Europe’s Dow Jones Stoxx 600 Index lost 3.3 percent in London, the biggest decline since April 20. South Africa’s rand and the Turkish lira weakened 2.1 percent against the dollar. Hungary’s forint lost 1.7 percent per euro. Credit-default swaps on Russia increased to 205 basis points from 192.
The MSCI World Index of 23 developed markets has risen 26 percent this year after banks worldwide recorded more than $1.7 trillion in writedowns and losses and governments committed about $12 trillion to shore up economies.

‘Shock’ Announcement
“The announcement was a shock,” said Beat Siegenthaler, chief emerging-market strategist at TD Securities Ltd. in London. “It is strongly affecting European markets.”

Dubai, ruled by Sheikh Mohammed Bin Rashid Al Maktoum, borrowed $80 billion in a four-year construction boom to transform the economy into a regional tourism and financial hub. The emirate suffered the world’s steepest property slump in the global recession, with home prices dropping 50 percent from their 2008 peak, according to Deutsche Bank AG.

Moody’s Investors Service and Standard & Poor’s cut the ratings on Dubai state companies yesterday, saying they may consider Dubai World’s plan to delay debt payments a default.

Gulf region default swaps jumped, with contracts linked to Bahrain adding 29 basis points today to 223.5, the biggest increase since Feb. 18. Contracts linked to Abu Dhabi added the most since February yesterday, climbing 36 basis points to 136.5 and were another 23 basis points higher at 159.5 today, according to London-based CMA. Qatar default swaps rose 13 basis points to 117, adding to yesterday’s 11 basis-point increase.

‘Further Defaults’
“Dubai is the most indicative of the huge global liquidity boom and now in the aftermath there will be further defaults to come in emerging markets and globally,” said Nick Chamie, head of emerging-market research at Toronto-based RBC Capital Markets.

Saudi Arabia default swaps climbed the most since February, adding 18 basis points to 108. The British Bankers’ Association asked the U.K. government to intervene with Saudi authorities over debts of at least $20 billion owed to as many as 100 banks by Saad Group and Ahmad Hamad Algosaibi & Brothers Co., two family holding companies based in the oil city of Al-Khobar, according to a letter dated Nov. 20.

Default swaps on Dubai World unit DP World Ltd., the Middle East’s biggest port operator, jumped by a record 181 basis points to 540.5 yesterday and were priced another 72 basis points higher today at 612, according to CMA data.

Manmade islands and gleaming new cities in the middle of the desert all devoid of people and real commerce. Of course the people who provided the financing deserve to lose their money and this will ripple around the globe, just one of several problems interrupting our markets (DOW futures are down more than 200 points this Thanksgiving even though the markets are closed). Amazing how news like this occurs when the U.S. markets are closed.

The people of the world need to wake up. Their futures and their natural resources are being robbed. There is a much, much better way, details coming soon. Meanwhile the Central bankers are already enacting their plan as they sing to Serbia, “Got you where I want you…”

The Fly’s – Got you where I want you:

Outstanding artwork done by AZRainman

Last night after a 10 hour drive I was up at 5:00AM watching the futures plunge but not knowing why. Now we know: Dubai default fears spook investors

Global stock markets endured heavy selling on Thursday as investors were spooked by the spectre of a default by Dubai and after a febrile foreign exchange market saw the yen surge to a 14-year high against the dollar.

The turmoil caused a flight to less risky assets. Gold, which had challenged $1,200 in Asian trading, fell back from its highs and money flowed into havens such as German government bonds.

US markets are closed for the Thanksgiving holiday, but electronic trading of the benchmark S&P 500 equity futures contract showed a potential drop on Wall Street of 2.2 per cent.

As the European trading day progressed it became clear it was Dubai World’s difficulties that had hit a particular nerve, reminding investors of the lingering damage wrought by the financial crisis.

Banking stocks tumbled on concern about their potential exposure to Dubai. Indeed, the cost of insuring against default by the emirate jumped, with Reuters reporting the Dubai five-year credit default swap being quoted as high as 500-550 basis points. This means it would cost about $500,000 a year to insure $10m of Dubai’s debt. On Tuesday it would have cost about $360,000.

Greek and Irish government five-year credit default swaps also moved higher as nations with supposedly precarious fiscal positions were punished. In contrast, investors sought out comparative haven assets, pushing the yield on the German Bund down by 8 basis points to 3.16 per cent.

Dubai Debt Delay Rattles Confidence in Gulf Borrowers

Please consider Dubai Debt Delay Rattles Confidence in Gulf Borrowers

Dubai shook investor confidence across the Persian Gulf after its proposal to delay debt payments risked triggering the biggest sovereign default since Argentina in 2001.

The cost of protecting government notes from Abu Dhabi to Bahrain rose, extending the steepest increase since February as Dubai World, with $59 billion of liabilities, sought a “standstill” agreement from creditors.

Dubai World’s assets range from stakes in Las Vegas casino company MGM Mirage to London-traded bank Standard Chartered Plc and luxury retailer Barneys New York through asset-management firm Istithmar PJSC. The Dubai government’s attempt to reschedule debt triggered declines in stocks worldwide that had been rebounding from the worst financial crisis since the Great Depression.

Unlike Argentina, which stopped payments on $95 billion of debt eight years ago after yields on benchmark bonds more than doubled in four months to more than 40 percent, Dubai’s announcement yesterday “was a surprise,” said Alia Moubayed, a London-based economist at Barclays Plc.

Gold And The Watched Pot Theory

While some were spouting US government debt default theories or dollar devaluation theories others were looking for the “unwatched pot”.

Inquiring minds are taking another look at Gold And The Watched Pot Theory written October 07, 2009.

Message Of Gold

The reason for the strength in gold is not US inflation. As I have pointed out many times, gold fell from 850 to 250 over the course of 20 years, with inflation every step of the way. Thus, the inflation story just does not fit.

However, it should be clear that a major financial crisis is in store following a long period of competitive currency devaluation and massive debt and derivatives expansion by nearly every major country on the planet.

Might the US dollar blow up? Yes it might. But so could the RMB if China floated it, and so could the British pound. No one seems to see the crisis brewing in Japan with a huge demographic problem, a shrinking population, falling exports, and no way to pay back its national debt.

There is seldom a mention of the problems in European banks who foolishly lent money to the Baltic States in Euros or Swiss Francs and now those Baltic country currencies have collapsed and the loans cannot be paid back. European banks also lent to Latin America and those loans are also suspect. Arguably, European banks are in worse shape than US banks, but no one talks about it, at least in the US.

Spain has unemployment approaching 20% yet must suffer through the same interest rate policy as Germany. Seldom does one hear about this either.

Certainly the UK is a complete basket case with its banks on government life support. Iceland has already blown up, who is next?

Most are not aware of the problems in China, Japan, or Europe. However, the problems in the US are universally well understood. Indeed all eyes are on the dollar and everyone is talking about deficits, monetary printing, and especially unfunded liabilities even though the latter is tomorrow’s problem, not today’s.

Watched Pot Theory Revisited

A watched pot may boil, but it’s not likely to explode, especially when everyone watching the pot expects an explosion any second.

Indeed, it would be fitting if the Ridiculous Hype Over Secret Oil Meetings, helped form a bottom on the US dollar.

Yet, it’s easy to see that a financial crisis is brewing.

Somewhere, something is going to blow sky high, but from where I sit, it’s as likely to be in the Yen, the Swiss Franc, the British Pound, or something no one is watching at all as opposed to the US dollar specifically.

Hyperinflation?!

Amazingly some see this as hyperinflationary.

Nadeem Walayat writing for the Market Oracle says Deflationists Are WRONG, Prepare for the INFLATION Mega-Trend

Nov 18, 2009 – 12:58 AM

The jist of the deflationists argument is that debt deleveraging MUST trigger huge consumer and asset price deflation. Whilst we have all witnessed huge asset price deflation and some consumer price deflation during 2008 and into 2009. However we have also witnessed unprecedented government and central bank actions of this year, which have ignited asset price inflation with more to come that is now starting to feed into consumer price inflation.

Why do deflationists have it wrong ?

It is that focusing on the deleveraging of the the debt mountain is a red herring, taken on its own then yes it DOES imply deflation as the debt bubble ‘should’ contract. But given the asset price reaction of 2009 that is NOT what is actually taking place! the Debt bubble is NOT deleveraging, the bad debts are being dumped onto the tax payers! The huge derivatives positions that act as the icebergs under the ocean as compared to the asset price tips that we see above water are not contracting but expanding!

The DEFLATIONISTS ARE DEAD WRONG !

The last 8 months have proven it to be so ! But STILL they cling on as though they have blinkered visions as a function of presumably not having to put their own money on their deflation calls. What will there position be in another 8 months – it will be to REINVENT HISTORY TO IMPLY THEY SAW IT COMING ALL ALONG!

What’s amazing is how hyperinfl

ationists who have blown the call for 10 years running now accuse deflationists in advance of rewriting history.

Here’s the deal. Deflation happened, the only debate is how long it lasts. It is more than premature to proclaim the end of it on the basis of an 8 month period. Things do not progress in a straight line and a rebound after a 51% plunge in the S&P 500 and 10 year treasury yields close to 2% was expected.

That rebound is a much proof of the end of deflation as any of half a dozen 50-100% rebounds in the Nikkei over the last two decades, or the massive rebound in the DOW in 1931 before it plunged to new lows.

Many of those pointing to 8 month timelines as if that is what matters ignore an even bigger timeline in which stocks fell that 51%. If this rally is proof of inflation the the plunge must be proof of deflation.

The reality is neither is true. What is true is that in a credit based fiat economy, what matters is ability of the Fed and Central Banks in general to foster bank lending. And that is not happening.

Total Bank Credit

click on chart for sharper image

More Deflationary Writeoffs Coming

click on chart for sharper image

Allowances for loan losses will decrease as charge offs increase. However, the above charts are in relation to non-performing loans.

Because allowances for loan losses are a direct hit to earnings, and because allowances are at ridiculously low levels, bank earnings have been wildly over-stated.

The $trillions poured into the economy got a measly 2.8% rise in GDP.

Now what? Jobs are still contracting, businesses are not borrowing, banks are reducing credit card limits, etc, etc.

Those are not conditions of inflation, let alone hyperinflation. Now concerns are rising in Congress and the administration over the national debt. Meanwhile, more defaults loom: on housing, on commercial real estate, and on credit cards.

Two year treasury yields are at a record lows of .74 and five year treasuries are at 2.11.

If hyperinflation is coming, buy houses. Nowhere else can you get the leverage you can get in houses. It’s a sure thing. Meanwhile I suggest gold has been rising for another reason: credit stress and fears of deflationary economic collapse.

Dubai just stepped up to the plate out of the blue, defaulting on debt. Defaults are part of the deflationary process. Prepare for more of them because they are coming.

I see no reason to change my stance that the US is in for a long slug of hopping in and out of deflation for quite some time. Ironically it is the hyperinflationsts who are rewriting history. The hyperinflationists had it wrong, deflation happened first.

Deflation is here, the only debate is how long it lasts. Some of us saw it coming, the rest still scream about the massive inflation that is supposedly coming. They may be correct eventually, but when?

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Mike “Mish” Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Tim Duy, my favorite Fedwatcher, has a very good post up which combines a general reading on the state of the consumer and then segues to the Fed’s take on matters. The section I found particularly telling:

As has already been widely noted, the minutes of the most recent FOMC meeting reiterated the Fed’s eagerness to reverse, not extend, policy:

…Overall, many participants viewed the risks to their inflation outlooks over the next few quarters as being roughly balanced. Some saw the risks as tilted to the downside in the near term, reflecting the quite elevated level of economic slack and the possibility that inflation expectations could begin to decline in response to the low level of actual inflation. But others felt that risks were tilted to the upside over a longer horizon, because of the possibility that inflation expectations could rise as a result of the public’s concerns about extraordinary monetary policy stimulus and large federal budget deficits. Moreover, these participants noted that banks might seek to reduce appreciably their excess reserves as the economy improves by purchasing securities or by easing credit standards and expanding their lending substantially. Such a development, if not offset by Federal Reserve actions, could give additional impetus to spending and, potentially, to actual and expected inflation. To keep inflation expectations anchored, all participants agreed that it was important for policy to be responsive to changes in the economic outlook and for the Federal Reserve to continue to clearly communicate its ability and intent to begin withdrawing monetary policy accommodation at the appropriate time and pace.

Read that carefully and realize this: An apparently not insignificant portion of the FOMC believes that there is a terrible risk that banks loosen their credit standards and increase lending at a time when, even if the economy posts expected gain, unemployment remains at unacceptably high levels. Silly me, I thought increased lending was the whole point of the exercise to lower interest and expand the balance sheet. That whole credit channel thing. If not to expand lending during a credit crunch, then what else are they expecting?

I am in shock that this sentence made it into the minutes. One can only conclude that a significant portion of policymakers are simply clueless. Or, more disconcerting, they have lost all faith in the ability of financial institutions to channel capital into activities with any hope of financial returns. Has the Fed now embraced the view that they manage the economy through little else then fueling and extinguishing bubbles?

Yves here. If at all possible, it’s even worse than Duy’s horrified take suggests. Inflation? In an economy with slack capacity, high unemployment, consumers duly cautious about spending, and labor utterly lacking in bargaining power even when times were better? What planet is this inflation talk from? Bond market yields rising over supply fears are not the same as inflation worries. Are there any signs of consumer hoarding in anticipation of price increases, of spending their paychecks ASAP because they fear their money will be worse in a few month’s time? No. Consumers are trying to cut debt and build up their cash buffers, the polar opposite of the behavior you’d expect if any were worried about inflation.

The Fed is shockingly seeing the US as an economic island, when pretty much all investors can seek other currencies as stores of value. And the consensus is that the dollar is a really bad bet, and a dollar bear posture is not very kind to long-dated Treasury yields. How hard is that to understand?

Japan, despite massive pump-priming, still had deflation because it was unable to get its broken bank plumbing fixed. The authorities like to pat themselves on the back and say how good our emergency responses have been, but Japan-type outcomes are real possibility. We have better demographics and a less severe debt hangover, but the Fed’s refusal to see that the banking system is still a mess is breathtaking.

These statement is an indication of intellectual bankruptcy at the Fed, that they have learned nothing from the crisis. But that isn’t surprising. CEOs usually need to be fired after they have presided over a disaster. They are incapable of seeing and remedying their errors. Why should senior bureaucrats be any different?