Archive - Aug 11, 2010 - Story

• U.S. Is Bankrupt and We Don't Even Know: Laurence Kotlikoff (Bloomberg)

Some doctrinaire Keynesian economists would say any stimulus over the next few years won’t affect our ability to deal with deficits in the long run. This is wrong as a simple matter of arithmetic. The fiscal gap is the government’s credit-card bill and each year’s 14 percent of GDP is the interest on that bill. If it doesn’t pay this year’s interest, it will be added to the balance. Demand-siders say forgoing this year’s 14 percent fiscal tightening, and spending even more, will pay for itself, in present value, by expanding the economy and tax revenue. My reaction? Get real, or go hang out with equally deluded supply-siders. Our country is broke and can no longer afford no- pain, all-gain “solutions.”

• So much for that whole "austerity" thing: Zapatero considers easing austerity (FT):
  so let's recap - fake financial stability, fake austerity, fake bond
  auction results, fake (and delayed) accounting standards (Basel III) - Europe sure has gotten the hang of Keynesianism
• Is tide turning for realizing CMBS losses? MBIA Says It Will Have C.M.B.S. Losses (NYT)
• Bank of England warns UK recovery will be weaker than hoped (Telegraph); Bank of England Cuts Growth Outlook, Sees Inflation Undershoot (Bloomberg)
• The latest bailout for public unions and spendthrift states (WSJ)
• China Output Growth Weakens; Inflation Accelerates (Bloomberg)
• Unemployment Drives More US Home Sellers to Cut Price (Reuters)

• Asia stocks fall to two-week low, Yen gains on concern at pace of recovery.
• China banks told to account for loans; Rmb 2,300B lending gone off balance sheet.
• China industrial output growth weakens on curbs; Inflation rises to 3.3%.
• Economists reduce US growth estimates as lack of jobs hinders consumers.
• FDIC is seeking alternatives to credit ratings in bank-capital guidelines.
• Fed downgrades recovery outlook; Monetary policy bias shifts toward easing.
• Fed reverses exit plans, sets floor of $2 trillion for securities holdings.
• Fed to reinvest principal on mortgage proceeds to counter slowing economy.
• Oil trades near a seven-day low on signs of faltering economic recovery.
• Tropical depression forms in Gulf of Mexico, disrupts drilling of BP well.
• US stock futures point to sharply lower open.

The Mortgage Bankers Association released its weekly numbers and the Market Composite Index, a measure of mortgage loan application volume, was up 0.6% from a week before. Yet despite mortgage rates hitting all time record lows, this number was a reduction from the previous mortgage application change of +1.3%. As the press release announced: "The average contract interest rate for 30-year fixed-rate mortgages decreased to 4.57 percent from 4.60 percent, with points decreasing to 0.89 from 0.93 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans. This was the lowest 30-year contract rate ever recorded in the survey. The effective rate also decreased from last week." In other words, the Fed's ongoing push to lower the 10 Year rate, and this the 30 Year fixed cash mortgage, will be an abysmal failure as we have reached the point where no matter what the actual rate on the mortgage is, marginal refinancing activity is now nearly flat, and soon likely to actually be negative. The Fed has fired its last bullet in an attempt to stimulate home price appreciation and failed.

Yes, that's right - the good old ECB, which had not used the Fed's swap lines in over a month, has come back with a thud, thanking US taxpayers for their generosity. The ECB just announced that it allotted $430 million in its 7-Day USD operation to two banks, for whom the dollar shortage is once again all too real and coupled with the scarcity in EUR we have been discussing over the past month: one wonders just how positioned these banks are if they have allegedly neither USD nor EUR capital in hand. This also means that when the Fed announces its H.4.1 update this Thursday it will show an increase in swap lines with the ECB (and possibly other banks) by $430 million.

Goldman's European strategist, Francesco Garzarelli explains how he interprets the market impact from the Fed's QE lite announcement: First "the Fed’s actions will act to push real rates out to 5-yrs deeper in negative territory (currently -8bp). We forecast that nominal 5-yr yields could reach 1%. Factoring in positive foreign macro influences, and accounting for an already very depressed bond premium, we believe 10-yr government yields could rally to 2.5%, but are unlikely to break below this level on a sustained basis." Second:" we remain of the view that the pro-active stance of policymaking, in the US and overseas (see Monday’s note on China by Yu Song and Helen Qiao), should continue to support moderate returns on risky assets, as cash balances become increasingly expensive to hold, and cyclical volatility declines." In other words, buy stocks. It's good to see the leopard never really does change its spots.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 11/08/10