FedUpUSA

Archive for May 11th, 2010

CNBC’s Rick Santelli Rips Key Democrat For Ignoring Fannie/Freddie Reform

Dems’ Financial “Reform” Leaves Taxpayers on the Hook for Government Mortgage Giants

Democrats still don’t get it, and they refuse to reform Fannie Mae and Freddie Mac, the government mortgage companies that sparked the meltdown by giving high-risk loans to people who couldn’t afford it.   Standing up for American taxpayers, CNBC’s on-air editor, Rick Santelli teed off on Rep. Paul Kanjorski’s (D-PA) claim that Democrats’ couldn’t reform Fannie & Freddie in their financial regulation bill because it was “too complicated,” asking: “It’s too complicated?  You think taxpayers that go to work to pay the money you are subsidizing, it will end up a half a trillion, do you think they think complicated is an excuse?”

The exchange couldn’t have come at a worse time for Rep. Kanjorski and Congressional Democrats, because Fannie and Freddie simply won’t go away.  As the  Financial Times reported today:

“Fannie Mae said on Monday it would need an additional $8.4bn in aid, as the US government-controlled mortgage finance company continued to suffer heavy losses on its bad loans…Fannie Mae’s appeal for help comes on the heels of a similar plea last week by smaller rival Freddie Mac, which asked for an additional $10.6bn cash infusion.  The latest requests for aid bring the total amount of taxpayer dollars drawn down by these companies to $148bn since the 2008 government-led bail-out.

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But the unlimited bailout that the Administration has bestowed on Fannie and Freddie doesn’t seem to bother Democrats, though the latest giveaway may come at an “inconvenient time,” as the New York Times noted today:

“Fannie Mae’s request on Monday for another $8.4 billion in federal aid comes at a politically inconvenient time for the Obama administration, which is pressing to pass sweeping financial legislation without resolving the company’s future…. Democrats want to defer an overhaul of federal housing policy until next year, after the midterm elections. But Republicans have seized on the continuing losses to argue that a plan for the two companies should be a priority of the current legislation.”

Republicans have been pressing for an end to bailouts that would get the government out of the mortgage business once and for all.  But Democrats are not only unwilling to reform Fannie and Freddie, they are doubling down on the failed government mortgage companies – burning through hundreds of billions of taxpayer dollars in the process.  As the Washington Post noted in a report today: “Under the terms of the government’s 2008 emergency takeover of Fannie and Freddie, the Treasury must pump money into either firm whenever its worth, as measured by assets minus liabilities, goes into the red. Late last year, the Obama administration pledged unlimited backing.”  

For years, Republicans raised red flags about Fannie and Freddie’s financial condition and proposed responsible reforms only to be thwarted by Democrats who have deep political ties to the worst offenders.  These same powerful Democrats are now pushing for a financial reform bill that doesn’t even address the need to fix these government mortgage companies.  As the Wall Street Journal wrote last week, “reforming the financial system without fixing Fannie and Freddie is like declaring a war on terror and ignoring al Qaeda.”  

House Republicans’ plan would phase out taxpayer subsidies of Fannie Mae and Freddie Mac over a number of years and end the current model of privatized profits and taxpayer losses.  Find out more by clicking HERE.

Scrape Away the Noise and Hype, and What Remains?

By Charles Hugh Smith

Market fluctuations are mostly noise. To understand the trends beneath the surface noise, we need to establish an integrated context.

The Mainstream Financial Media (MFM) is famously (or infamously) deficient in any context other than the day’s swirl of data, rumor and response. Markets have been swinging wildly as players (and manipulators) attempt to predict the market’s response to “news” and the emotions that the “news” may spark.

Rather than play the pointless game of parsing what amounts to signal noise, we would be better served to establish a longer-term context within which “news” can be properly placed and understood.

1. The Eurozone is doomed. Regardless of “investor relief” triggered by various bailouts, rescue plans and “fixes,” as I explained yesterday in Why the Eurozone Is Doomed, there is no way that any rescue plan, loan or bailout can paper over the structural abyss separating merchantilist Germany and its export-dependent neighbors from the import-and-credit-dependent, consumerist, deficit-spending nations within the Eurozone (Greece, Portugal, Spain, et al.) and Britain.

The euro will drop to parity with the U.S. dollar (USD), with dire consequences for U.S. multinationals which have been feeding off the “cheap” dollar, reaping record profits when they transfer their sales in euros into dollars.

That foreign exchange arbitrage will reverse, and Euro-based global corporations will benefit on sales made in USD. But those corporate profits will not be enough to bail out the eurozone’s profligate deficit spending or crushing debt burdens.

The “fear trade,” that is, risk aversion, will devastate all global trades which were based on low-perceived-risk and high valuations.

2. U.S. corporate profits will stall. As their overseas sales lose the foreign exchange advantages of a cheap dollar, U.S. global companies will face the consequences of their slowing sales.

For the past six quarters, U.S. global corporations reaped vast profits by slashing headcount, inventories and expenses across the enterprise. Even better from the view of a financial media desperate to generate the shameless propaganda of “good news,” the low level of profits in Q1 2009 have enabled apparently fantastic “growth” in profits via the “year over year” (YOY) comparisons favored by financial propagandists.

Meanwhile, behind the smoke screen of bogus “profit growth,” global sales are still falling when compared to 2005-2007. Indeed, even YOY comparisons have shown that global giants such as Caterpiller saw 11% declines in sales even as their profits (in U.S. dollars) rose handsomely.

The obvious but rarely mentioned reality is that all these corporations have already plucked all the low-hanging fruit in terms of cost savings and reduced payroll. From here on, they will have to grow earnings via growing revenues.

As the eurozone stumbles and China’s real estate/credit bubble finally implodes, that will become essentially impossible for global companies.

3. China’s real estate/credit bubble implodes. You cannot inflate credit and real estate bubble forever. China’s leadership knows this and as a result it is attempting to pop the bubble with a few modest pinpricks. Alas, balloons inflated to high pressure do not develop slow leaks; they pop with glorious violence.

While it is always possible the unprecedented diversion of resources and credit into empty malls, sports arenas, cities and highrises will somehow end without affecting the Chinese and global economies, the odds are not very good if you consider the history of bubbles and the success rate of central government management/manipulation of credit bubbles.

4. The jobless “recovery” will slip back into a job-shedding recession. If we subtract the bogus phantom jobs created by the “birth-death model” and the temporary Census Bureau jobs, the U.S. economy is staggering along the zero line, neither creating jobs nor losing them. If that is the best that stupendous stimulation via Federal spending and zero-interest rates can do to “stimulate” organic (non-government created) growth in employment, it certainly suggests that any reduction in Federal stimulus-spending and flagrant pumping of money via the Federal Reserve “monetary easing” will result in a renewed decline in employment.

It doesn’t take much of a crystal ball to foresee massive layoffs as state and local governments are finally forced to face the music of reduced tax revenues and higher employee pension costs. As usual, the media is touting a 3% rise in tax revenues as “proof” the recession is over–yet few note that tax revenues have dropped by 20% or 30% in many locales. A 3% rise is not enough to repair the damage done by two years of recession, and all the accounting tricks and gimmicks which the California Legislature and other states’ leaders have deployed to mask the true depth of their deficits are wearing thin.

An eerie silence has descended over Sacramento, as if the politicos and their media lackeys are hoping that keeping quiet will allow a $20 billion deficit to magically vanish without the public (and voters) becoming alarmed before the November elections. Good luck, politicos; sadly, you cannot print money nor force the Federal government to bail you out.

With costs of employment rising by the day–healthcare, employment taxes, etc.–very few private businesses have high enough gross margins to justify hiring anyone permanently. Contract/temp workers are the solution, and any increase in free-lance headcounts does not presage a surge in permanent hiring. If there is an army of unemployed willing to work for far less than a permanent employee costs, why bother increasing permanent headcount?

Global companies are still pursuing the savings of global wage arbitrage, and every increase in structural costs here in the U.S. (healthcare goes up 7-15% every year, taxes are going up, etc.) only increases the attractiveness of overseas employees and contract/free-lance workers in the U.S.

The recent past is no longer a model for the near future. The more the MSM and government leaders tout “a return to growth” (hey, if you borrow and spend $3 trillion in two years and nationalize the mortgage industry, you should get some kind of pulse in the comatose patient), the more tenuous and threadbare their shrill claims sound to an increasingly skeptical public.

Borrowing another $5 or $10 trillion to bail out weak Eurozone nations and “stimulate” a deflationary global economy may keep the patient alive a few months or years longer, but the past model of basing “growth” on serial credit bubbles and bailouts is no longer sustainable.

Giving Greece another $10 billion will not magically enable it to make it interest payments or roll over old debt. That game is over, though the players are hoping we’ll buy into the charade one more time.

Nothing structural has been fixed, much less addressed. The charade of “recovery” may run a few more months, but if we scrape away the noise, the underlying trends are not sustainable.

Is Shock and Awe a Blazing Bluff?

Edmund Conway writing for the Telegraph says Shock and awe may not be enough to save Europe.

This is a big moment for Europe and for the single currency. The events of the past 24 hours are quite likely to sound the starting gun either towards a more federal Europe or, just as feasibly, to the break-up of the euro – so high are the stakes. We’ve covered the full run-down of what has been decided elsewhere, so here are a few thoughts:

The European finance ministers are attempting to emulate the G20 summit in London back in April 2009, and to give the impression of throwing a massive amount of cash at the problem.

The provenance of the actual money is questionable. There are two plans under consideration here: 1. An extension of an already existing fund which was already used to help Latvia, Hungary and others by Eur60bn. 2. A far bigger plan to pledge around Eur 440bn of bilateral loans from eurozone members to support each. However, there is very little detail at all on where the money would come from, and the detail we do have is slightly suspicious (for instance, the fact that the euro members need to set up Special Purpose Vehicle to do this is not at all encouraging). The IMF has also apparently pledged to provide a further slug of cash – up to Eur250bn – and this money, should it actually arrive, is more solid. The first segment will affect the UK, but Britain, as a non-member of the euro, can opt out of the second.

This (bigger) plan is nowhere near approved by euro area governments. It involves significant further integration, so is very unlikely legally to be able to be pushed through without the approval of EU members. Given the no votes to the EU constitution from France and the Netherlands (and Angela Merkel’s defeat in the Bundesrat elections), can we really be assured of getting this approval? Moreover, there is big potential for legal challenges to the plan. The IMF will also have to approve the disimbursement, and one should not take that for granted either.

The ECB has started its QE journey on the worst footing imaginable, appearing to be forced into taking the decision, rather than doing it off its own back. This is distressing, since the decision to actually engage in QE is the right one. But then there are also doubts about precisely how the scheme will work: we don’t know anything about the total amount; we are told that the scheme will be sterilised (meaning it won’t actually be true QE (printing money)) but not how.

My impression is that there are likely to be severe challenges – both legally, constitutionally and politically – to the eur440bn European Stabilization Fund in the coming days as lawyers and investors tease it apart.

Finally, the most amusing thing, to me, is the idea that these measures will help clamp down on the “wolfpack” of speculators baying around the wreckage of the euro area. If anything, they are rather likely to make billions for the speculators, who will have made a killing on the big increases in equity prices today, and will make another killing when (as I suspect will happen before too long) there is another dip as the questions above start to become discussed more widely.

Is QE the Correct Policy?

I disagree with Edmund Conway when he says “the decision to actually engage in QE is the right one”.

For starters, I think it is a bad decision because it fails to address any structural problems. Of course QE never addresses structural problems. Japan is a prime example. In regards to the US, it is far too early to give the Fed any credit for achieving any lasting results with its QE policy. The US banking system and bank lending are both still in shambles.

Secondly, if Conway is correct in that there are severe challenges to getting funding for the eur440bn European Stabilization Fund, the market will call the ECB’s bluff, sooner rather than later.

Finally, throwing Euros around like toilet paper is hardly a way to get a rise in the Euro.

Is the Bazooka Loaded?

The important question at the moment is not the debate as to whether or not QE is a good idea, but whether or not the ECB can round up the votes to do it.

I have a friend, Richard who lives part-time in Europe and part-time in the US.

Before I read Conway’s opinion regarding severe challenges, I received this Email from Richard.

What do you think the Brits, with their headless government, are going to do about tossing in $90 billion to the Euro bailout pot? More importantly, even with the total corruption of the U.S. Congress, look at the efforts that it took to get TARP approved.

Does anyone actually think that 26 (or even 16) European Parliaments are going to approve this? The Germans have already voted their disapproval. Yes, maybe all the Parliamentarians can be strong-armed by the European banking lobby, but my sense is that it will be harder than it was in the U.S. to pull this together.

A bazooka is only useful when it is loaded with real ammo, not blanks (or hot air). The hot air will be adequate for now, to drive out the shorts, but my sense is that the bailout will come apart in the next few days as the details (and difficulties) emerge.

Already the Euro has given up 100% of its gains. Round trip currency moves of 3% each way, from 1.27 to 1.31 and back, in just over a day are not the norm to say the least. This could get very interesting soon enough.

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

Canaries in Coalmine: China, Asia, not Participating in Euro Bailout Lovefest; Beginnings of China Credit, Real Estate Bust

Is China a canary in the coalmine of an impending global slowdown, or is China simply overloved as a beacon of growth as it was in 2008? I think it’s both.

China’s property and infrastructure bubbles are massive; that is for certain. Moreover, China’s biggest export trading partner is Europe, just as Europe is headed for numerous austerity programs.

While it’s doubtful the European austerity programs bring deficits down to where they are supposed to be, those programs will for a while cause a decline in European spending along with much social unrest.

Can China take a double whammy like this without overheating? I think not. And China will have to show things down, whether it wants to or not.

China Overheating, Tightening Coming

Please consider Hong Kong Stocks Fall as China Prices Prompt Tightening Concern

Hong Kong stocks fell as rising consumer inflation and housing prices in China stoked concern the country will act further to rein in its economy. The city’s developers pared losses after a government land sale.

“Domestic concerns are more important in terms of the policy measures coming out in China to cool things down,” said Binay Chandgothia, who oversees about $2.2 billion as chief investment officer at Principal Global Investors (Hong Kong). For Europe, “the question is the credibility of the billions of dollars of government debt that resides with European banks.”

“Domestic concerns are more important in terms of the policy measures coming out in China to cool things down,” said Binay Chandgothia, who oversees about $2.2 billion as chief investment officer at Principal Global Investors (Hong Kong). For Europe, “the question is the credibility of the billions of dollars of government debt that resides with European banks.”

“Price pressures have been building throughout the economy, strengthening the case for higher interest rates and a stronger yuan,” said Brian Jackson, a Hong Kong-based strategist at Royal Bank of Canada. “China is at risk of overheating, with spot fires breaking out in various parts of the economy.”

Chinese policy makers should focus on preventing excessive gains in asset prices and liquidity as Europe’s rescue package makes another global slump less likely, central bank adviser Li Daokui said in an interview yesterday. The increase in property prices across 70 cities was the most since data began in 2005, defying a government crackdown on speculation that intensified last month.

Cockamamie Theory

Pray tell how is China supposed to “focus on preventing excessive gains in asset prices”?

The idea is ludicrous. In general, Central banks can provide liquidity, they cannot dictate where that money goes, or if indeed it goes anywhere at all.

It is slightly different in China in that when the Central Banks says “Lend”, that is a command, not a suggestion and thus banks lend. However, the only realistic place that money can be lent is more housing, more infrastructure, or more manufacturing, none of which China remotely needs at the moment.

China’s Subprime Real Estate Lending

Meanwhile bad loans are piling up, just as they did in the US with subprime.

The moment China’s property bubble collapses (and it will), the bad loans on the books of China’s banks will be exposed for what they are, in spite of the widespread fallacious belief China’s banks are protected because China’s borrowers are putting more money down.

Europe’s Move Makes Global Slump More Likely

Also note Li Daokui’s statement “Europe’s rescue package makes another global slump less likely”. Once again I beg to differ. The bailout imposes some fiscal restraints on many countries. More importantly, the loans come at the expense of productive portions of the European economy for the misguided notion that the unproductive European countries can be bailed out.

Such policies are never good for long-term growth. All they provide is an short-term illusion that something good is happening. As soon as the stimulus is taken away, more debt remains than before.

Beginnings of China Credit Bust

Please consider China analyst sees beginnings of unfolding credit bust

China’s economy is teetering on the edge of a major slowdown, though it’s not a shakeout in the property market that’s about to spark the distress, according to a noted China strategist.

David Roche, an economic and political analyst who manages the Hong Kong-based hedge fund Independent Strategy, says the world’s third-largest economy is now on the brink, faced with the inevitable reckoning that follows an extended bank-lending binge.

“We’ve got the beginnings of a credit-bubble collapse in China,” said Roche, predicting the economy will likely cool from its stellar double-digit growth rate to a 6% annual expansion as a result.

The emerging picture is one of a substantial contraction in credit growth and infrastructure expenditure, he says.

The shrinkage is grim news for an economy heavily dependent on such outlays. China managed to escape recession during the global crisis mainly because of bridges, railways and other infrastructure-project spending, estimated to have accounted for about 90% of economic growth last year, according to Roche.

About 85% of the funding for these projects was arranged by local government financing vehicles “borrowing money they can never repay” from state-owned banks, says Roche. Nearly 3 trillion yuan ($440 billion) of the 11 trillion yuan extended to these entities has been wasted or stolen, he estimated.

“What do you think a bunch of ex-Communist Party officials in Chinese banks … know about growing credit at 30% a year?” he said.

China’s Local Government Borrowing Problem

Hugo Restall at WSJ Interviews Victor Shih of Northwestern University regarding China’s Local Government Borrowing Problem

China’s Economy May Crash in Next 12 Months

Please consider Marc Faber on Bloomberg: China’s Economy May Crash in Next 12 Months

$SSEC – Shanghai Weekly

Finally, I leave you with the following charts I consider to be a canary in the coalmine.

Shanghai Daily

China did not participate in the Euro bailout at all.

Shanghai Weekly

Note that the Shanghai Index is down for the year, and the above chart is technically very bearish. The SSEC may have a date once again with 2,000 if not lower.

The “China Story” that most of the world is in love with is nothing more than excess credit finding a home in malinvestments just as happened in the US.

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

See, The Gun Is Loaded!

Posted by Karl Denninger

No, no, not the ECB’s.

The “currency speculators” – cough – BANKS that were shorting the hell out of the Euro.

Let’s see if I can figure out what’s happened here.

1. Banks shorted the Euro, (correctly) surmising that Greece, Portugal, Spain and others can’t possibly cover their debts.
2. The ECB freaks out as the Euro heads toward PAR and calls “emergency meetings” (forgetting, I might add, that the Euro traded under PAR not that long ago.)
3. The ECB and Eurozone decides to “defend” the Euro with €1t in “defensive measures”, including buying bonds of bankrupt sovereigns (gee, that’s nice – monetization by another name.)  Since the ECB and EuroZone cognescenti is of course connected to the large banks in Europe (including France, where Sarkozy is located) these banks know to back off on Friday (notice the nice little uptick?) to lock in their bonuses from these insanely-profitable trades against their own currency.
4. The very same banks, including the ones in Sarkozy’s back yard, see the very nice spike and short the Euro even harder, (correctly) surmising that they have successfully stuck the gun up the nose of the ECB!

Rinse and repeat until you have all the money.

Naw, it wouldn’t be that simple, would it?  Why of course it would.

See, lending someone money when they’re bankrupt can’t possibly make them not-bankrupt.  It can only make them more-bankrupt.  As a consequence the ECB’s action is self-destructive and doomed to fail, and as a consequence there is no reason for these banks to back off at all!  Indeed, quite to the contrary – they have (correctly) deduced that they can make billion in bonuses by shorting their own currency to destruction, forcing ever-larger “interventions” by the ECB!

If you’ve ever seen a meth addict goose himself with his drug of choice to the point where his teeth literally fall out, you know how this story ends. 

The only winning play is to refuse to play at all, and force the bankrupt to recognize their insolvency and reorganize their debts.  That’s it.  Attempting to paper over insolvency never works, and the market has now deduced this, as I expected – although I didn’t think it would happen quite this quickly.

“All in” by the ECB drew not a “ok, ok your pot!” response, but rather one loud voice in response: CALL!

Bonne chance Nicolas.

What Are The Odds? (GS)

Posted by Karl Denninger