Archive - Sep 2010

Some entertaining observations from BofA's Ethan Harris, who describes in detail why there are 500 billion reasons why gridlock would cripple the economy, and asks whether Obama is (or should be) more like Clinton or Bush in dealing with the approaching deadlines that will result in the first openly negative GDP print as soon as Q3 (good luck justifying thoat 10% EPS growth when the economy is about to decline). And just to confirm how bad it is, Jan Hatzius chimes in to explain why the economy will face a nearly 2% point headwind from inventory liquidation and negative fiscal catch up (think Cash For Clunkers gone viral) nearly every quarter in the coming year.

Bonus question? What's the prize?

Takefuji Corp., the third largest Japanese consumer lender, was limit down on the Nikkei, and was subsequently halted, on reports the company is preparing to file bankruptcy as reported by Nikkei newspaper earlier. The news was also confirmed by the Jiji and Kyodo news agencies. According to Reuters, "Takefuji had 430 billion yen ($5.11 billion) in liabilities as of the end of June, the Nikkei business daily reported, adding that president Akira Kiyokawa would step down." Apparently the reason is that according to Japanese "consumer protection" banks are limited to the paltry 20% they can charge for interest: "Japanese consumer lenders have been struggling to cope with regulations lowering the rates they can charge on loans as well as claims for reimbursement for past interest deemed illegally high by a court ruling in 2006. In June a new set of regulations cemented the interest rate ceiling at 20 percent, down from 29.2 percent, and limited the amount an individual can borrow." Nonetheless, the filing will likely not be a major surprise as even Moody's appears to have been on the case.

The U.S. SEC denied the application by China's Dagong credit rating firm of NRSRO status citing concern with cross boarder supervision. Dagong immediately issued an angry rebuff calling the SEC’s decision discriminatory, and that Dagong aims to enter the U.S. market to protect China's interests as the largest creditor there.

Ever wonder how China can endlessly generate goal-seeked GDP of precisely 8.00001% year after year? Or how it can constantly find use for the massive and ever-larger surplus of warehoused commodities? Simple - never stop building. Which, apparently means blowing up empty building before they are even finished and rebuilding them. Rinse. Repeat. After all gotta keep all those construction workers from rioting, and all those USD reserves redirected into Brazilian and OZ commodities, now that China is not really buying US debt anymore. China Hush has some stunning pictures confirming that in its search of the great home bubble perpetual engine, the politbureau comrades may have stumbled onto the bricks and mortar equivalent of Shangri La.

My last post "Correlation of mortgage rates with real housing prices: how increasing inflation could affect housing prices", raised some questions. I didn't have the chance to respond to them. But before I do, let me go back to the original purpose of the article. I asked the question, "What could happen to real estate in the event of higher inflation?" If inflation shot up from 1% to 7%, what would happen to the real value of your home. My thesis was: you're screwed. You will lose what little equity you have and real housing prices could drop by as high as 50%. - Taylor Cottam

A busy economic week awaits, full of completely irrelevant data, as the market will ramp on any news. Among the completely irrelevant highlights are the prelim September ISM, PCE Core inflation, Case Shiller, Consumer Confidence, China and global PMI, BOJ's Tankan, a whole lot of central bank meetings which will lead to even more central bank interventions, and, thus, even more completely irrelevant future economic data, now that nobody but the CBs are left trading.

In the Eurozone, sovereign debt issues resurfaced with concerns about Irish and Portuguese debt. The weaker-than-expected Irish GDP data heightened fears that bank restructuring added further crippling weight to the government’s debt. Irish real GDP is currently 13% less than it was at its peak in the fourth quarter of 2007.

Oops...

Simply said, nobody is trading... and it is causing massive pain for parasite volume-churning traders and HFT firms.

It is time for the United States to embark on a serious effort to develop a synthetic fuels program. In 1979, Americans imported 30% of our oil. Now that figure is 60% and growing. This raises a national security crisis that we have blissfully ignored, as the price of crude continues to inflate and our enemies grow stronger, financed by our own petrodollars. There has never been an example of a nation so powerful being willing to place its economic life in the hands of so many hostile powers, while denying itself the natural resources within its own borders. To wit: The U.S. has more energy in coal than all of Saudi Arabia has in oil. We float on a lake of natural gas and swim in a sea of agriculture: grain, corn, switchgrass — the three main substances from which we can create all the synthetic fuels our country needs.

With FRBNY Brian Sack's Permanent Open Market Operations (POMO) now firmly back on the scene, and by all appearances about to grow orders of magnitude larger than the prevailing $10 billion a week levels following implementation of QE2, we have been bombarded by requests to explain the methodology behind what the 10:15 am - 11:00 am liquidity intervention by the Fed means in terms of asset prices. We recently presented Nic Lenoir's observations on how POMO impacts rates on an intraday basis. However, the most comprehensive report on the issue comes courtesy of Bob English as the Precision Report. His analysis titled A Grand Unified Theory on Market Manipulation is a must read for everyone who dares to trade ahead of the Fed on POMO days (which, incidentally, this week will be on Tuesday and Thursday). While the report is as of August 2009, the logic behind it is as relevant and applicable today as it was when first written.

Just as everyone was expecting things between China and Japan to moderate quickly following the fishing trawler incident, things just got heated again. Early Sunday, Japanese PM Naoto Kan violently rejected China's demand that Tokyo apologize and compensate for detaining a Chinese fisherman. The PM has already suffered stinging critique at home for relenting to release the boat captain after Chinese pressure, demonstrating just how tight tensions between the two countries remain to be, especially when it comes to how weak they believe they are perceived by the international community. "Senkaku is a Japanese territory. From that point of view, apology or compensation is unthinkable," Kan told reporters. "I have no intention at all of meeting (the demand). Both sides should first become calm and (then) deepen mutually beneficial strategic ties. What is necessary is for both to calm down and act based on a broad perspective."And while the boating incident occurred near islands in the South China Sea where the waters are believed to be rich in oil and natural gas, the last thing this spat is about is commodity access: it is all about the historical animosity between the two cultures, and with China's economy on the ascent, and owning more American IOUs than Japan, one can see why the Japanese sense of sovereign pride may have been challenged.

Was Japan’s massive $21 billion intervention in the foreign exchange markets the opening shot in a global attempt at quantitative easy in the run up to the November elections? The silver move suggests that the economy may be stronger than the “double dippers” realize. The asset class that has been trouncing all comers since 2000. (GLD), (SLV).