Archive - Feb 2010

Here is a recent conversation (argument) that I, the not-famous Econophile, had with the famous Martin Wolf, the much lauded and highly awarded dean of economics writers and chief economics correspondent for the Financial Times. This time I take him on for what I thought was a pointless article about Germany and the Greeks. Win, lose, or draw?

"Mr. Volcker has argued for some time that the operations of commercial banks and investment banks should be separated. It was said in the US not so long ago that as long as Mr. Volcker (he is currently 82 years old) is alive, the 1930s-era Glass-Steagall Act—which split up commercial and investment banks—would not be repealed.

But the 1990s saw a gradual rollback of the provisions of Glass-Steagall, and in 1999 the Act was finally repealed. I suspect Mr. Volcker was not happy to see this happen.

In what may or may not have been a coincidence, it was around the time that Glass-Steagall was repealed that the US moved towards a system of financial capitalism and its financial sector began a dramatic expansion. This phase continued until the housing bubble collapsed." - Richard Koo

Late today, the IMF released details of three borrowing agreements signed between the organization and the National Banks of Belgium, Slovakia and Malta. The total amount between the three agreements provides the IMF with additional borrowing power of €5.3 billion. While the incremental capacity is not in itself material, it bears to keep in mind the full recourse the IMF has access to. As the press release notes: "The agreement is part of a commitment made by the European Union in March 2009 to contribute up to €75 billion (then equal to about US$100 billion) to support the IMF’s lending capacity (See Press Release No. 09/82). The European Union has since committed an additional €50 billion to the Fund’s expanded New Arrangements to Borrow (see Press Release No. 09/298)." In summary, with today's expansions, the IMF now has access to just over $500 billion in firm commitments as part of the IMF's April 2 agreement to triple its lending capacity to $750 billion.

As the IMF's bail out role will soon achieve much greater prominence, we present the full listing of countries pledging support to the IMF. The US comprises roughly 20% of total backstop capital. In other words for every dollar the IMF provides to Greece, Portugal, Spain, Italy, Hungary, Bulgaria, Latvia, Ukraine, etc., American taxpayers will be on the hook for 20 cents.

All eyes on the Vancouver games but there is a post-Olympics winter chill headed our way, and you'll be surprised to find out that all is not peachy in good old boring Canada...

Fiat currencies are looking a little ... thorny

My presentation that explains that says: THIS TIME IS NO DIFFERENT – THE OVER-INVESTMENT BUBBLE

A few days ago we posted "The Great Highway Robbery Continues: How the FDIC is Legally Transferring Billions in Taxpayer Money to Hedge Funds" which presented a clip by Think Big Work Small, highlighting what was seemingly a grand scheme to defraud taxpayers with the FDIC's complicity. Today, the FDIC strikes back, issuing a Press Release claiming the video contains "blatantly false claims",  "perpetrates other falsehoods"  and has "no credibility." The counterargument which is supposed to render all allegations of impropriety false: "OneWest must first take more than $2.5 billion in losses before it can make a loss-share claim on owned assets" and that "in order to be paid through loss share, OneWest must have adhered to HAMP." Unfortunately, reading between the lines of the response indicates that not only are the falsehoods actually truehoods, but the video is still, sorry Sheila, quite credible.

You know the official version of how god's bank, aka Goldman, makes money: in the traditional, and not at all mysterious god's way, as a pureplay investment bank, which allocates capital, provides financing, advisory services, etc. Despite what Mr. Blankfein would want you to believe, that's only half the story. This two part PBS Series analyzes the other side of the equation. Who should know the truth better than former Goldmanite, Nomi Prins, author of "It Takes a Pillage." Classical investment banking function is a small portion of their revenues, I think it is about 10% or so. So if he is doing god's work, he is only doing it 10% capacity. The rest is prop trading." But wait, according to Goldman prop trading accounts for only 10% of revenue. Why the discrepancy? Simple - because that 80% "vacuum" is really just the client-facing prop/flow fixed income hybrid model, which after the disappearance of all big fixed income trading houses (Bear, Lehman and soon, RBS) Goldman has now monopolized. Being able to determine how big or small the bid/offer spreads on anything from cash bonds, to CDS to various non-CDS OTC derivatives should be, courtesy of having the largest fixed income inventory in the world at any one time, to which it can add or from which it can sell, makes Goldman not so much a pure play prop trader, as a market monopoly, which has to be dismembered as it now is the market (just like the Fed is the market in MBS and Agency paper) when it comes to all non-Fed dominated Fixed Income and OTC derivative products. This is, and always has been, an FTC issue: remember Ma Bell?

The January Moody's CMBS delinquency rate hit a record at 5.42%, after posting the largest one month increase (50 bps) in history. While the deplorable state of CMBS is not a secret to anyone following RealPoint's monthly delinquency data, getting confirmation from a procyclical firm such as Moody's should be enough to wake up some of the optimists that even thought "everyone is talking about the commercial real estate" collapse, nothing is being done to actually fix the underlying causes. Anyone recall "contained" Dubai and its freshly record CDS spreads?

The latest data released by PIMCO's Total Return Fund indicates that the firm's flagship fund added another $8 billion in AUM, which at January 31 stood at $210 billion. This is a $74 billion increase in AUM compared to January 2009. More importantly, the composition of TRF demonstrated that the recent trend away from MBS and Treasuries and into cash and non-USD denominated foreign bonds persists. Gross has now booked $88 billion in profits in MBS since QE started, which brings his MBS holdings to an all time low of $31 billion. All the extra cash has gone into foreign non-US denom bond holdings, which hit a new high of $38 billion, presumably mostly in Bunds, Brazilian and Russian holdings, and, well, cash, which at $19 billion hit the highest level since June 2008.

It might seem odd that Greece is surfacing questions about European public debt and the sustainability of the European Union. After all, Greece is only 2% of EU GDP. But what’s in play here is an idea: can a region with very different economic and cultural characteristics form a durable monetary union? Bear Stearns was only 2% of broker-dealers and capital markets banks1, but its failure set in motion the end of a different idea: that very highly leveraged entities could own risky, illiquid assets and rely on wholesale funding rather than more stable customer deposits. We must explore as investors whether the end of an idea is dawning in Europe. The point here is not to engage in idle speculation, but to consider the un-thinkable, something that has been very worthwhile to do over the last decade in markets history.

We wrote in December 2009 that we believed that the dollar’s decline vs. the Euro was over; that we are overweight U.S. equities vs. European equities; that we pulled in our OECD bond durations; and that we are generally taking less risk in portfolios than normal at a time of rebounding global corporate profits and manufacturing. None of these positions has changed, and are reinforced by the latest round of uncertainty coming from the European Union." - Michael Cembalest, CIO JPM Private Banking

Even as AMG data was strangely missing late last night according to Prospect News' High Yield Daily, EPFR Global of Cambridge, Massachusetts, which uses a different methodology from AMG (i.e. a working one), indicated a major $1 billion outflow in high yield bond funds. This follows a $335 million inflow and a $137 million outflow in the past two weeks. Subsequently, Dow Jones confirmed the EPFR data, indicating that Lipper FMI recorded $984 million of outflows for the week ending Wednesday. As HY fund flow data is critical when pitching refi deals to junk companies, this key inflection point will likely stall not only the HY new issuance market, but will lead to substantial drops in secondary market prices for junk bonds.

If you respect Austrian economics, you might find this interesting ...

"Let’s place pencil to paper. Public documents point to about $221 billion of UPB loans that are 90+ days delinquent. Assuming an average 6% net coupon, the two GSEs are ultimately forwarding $1.11 billion each month to the holders of Passthrough bonds whose underlying loans are delinquent. If the GSEs were to buy out all of these loans, they could in theory fund it somewhere near 20bps running or roughly $3.7mm a month. As such, by not buying out these loans, the GSEs are overspending by about $12.8 billion annually.

Since the GSEs are under conservatorship with a large credit backstop from the US Treasury, they are for all intents and purposes owned by the taxpayers. And since the average taxpayer is by definition average, he is therefore not “rich” since “rich” tends to be defined as possessing well above average wealth. Furthermore, the mere fact that bondholders have funds to invest in such bonds disqualifies them from being categorized as “poor”. Although not all bondholders are “rich”, those who have such substantial excess funds that they can invest in bonds are probably closer to rich than average. Taken altogether, one could consider the fact that the GSEs are using taxpayer funds to advance a 6% coupon to bondholders when they could be funding this cost in the public markets at 20bps to be in essence a “Reverse Robin Hood” situation." - Harley Bassman, Merrill Lynch

As if anyone needed more reasons to doubt the data coming out of our government. Earlier today the Commerce Department reported that January retail sales data came at a nice and bubbly 0.5% sequential increase, and an even nicer and bubblier 4.7% YoY. This presumably beat expectations which were looking for a sequential beat of 0.3%. Yet here comes the much more reliable Gallup data to throw some salt in yet another economic data fabrication. According to daily Gallup consumer polling, which due to its lack of proximity to the government propaganda complex is vastly more reliable, the January average data showed a decline of 5.8% over January 2009 and a whopping 16.3% decline over December. This is beginning to parallel the ever increasing divergence between the ABC consumer comfort index and the UMichigan index which lately seems to only track the average leve of the S&P over the prior month.