What few media pundits seem to grasp is that when our trade deficits transfer hundreds of billions of dollars to other nations, those dollars have to end up in dollar-denominated assets like bonds, stocks or real estate. Many people have missed the difference between dollars used to settle accounts and dollars held as a result of trade deficits. Many of those emotionally wedded to the belief that the U.S. dollar is doomed gleefully grabbed onto the news that China and Japan will swap currencies directly (yen and yuan) rather than intermediate the trade with U.S. dollars. This was mistakenly seen as a nail in the coffin of the USD. If I am in Japan and I have yuan due to trade with China, and I want to exchange those yuan for yen, I only need USD for about 10 seconds to intermediate the exchange. Cutting out the USD simply cut the exchange costs and lowered the daily trading volume of the USD. This reduction in the transactions needed to exchange yuan for yen did nothing to change the dollars held by China or Japan as a result of their trade surpluses with the U.S. This also didn't lower the amount of assets or credit (debt) denominated in USD. In other words, the effect on the value of the dollar is trivial. No matter how many exchanges the USD sitting in overseas accounts are pushed through, they still end up in dollar-denominated assets somewhere.
It takes a lot of talent to do so much with so little.
Darker days ahead from the long deleveraging process that just got started in Europe.
- France to Lift Minimum Wage in Bid to Rev Up Economy (WSJ)... weeks after it cut the retirement age
- Merkel Urged to Back Euro Crisis Measures (FT)
- Monti lashes out at Germany ahead of summit (FT)
- Italy Official Seeks Culture Shift in New Law (WSJ)
- Migrant workers and locals clash in China town (BBC)
- Romney Would Get Tough on China (Reuters)
- Bank downgrades trigger billions in collateral calls (IFRE)
- Gold Drops as US Data, China Speculation Temper Europe (Bloomberg)
In light of the zombification that now exists in Japan and also America (and coming soon to every single QE and bailout-heavy Western economy) — zombie companies, poorly managed, making all the same mistakes as before, rudderless, and yet still in business thanks to government intervention — it is clear that the liquidationists grasped something that Keynesians are still missing. Markets are largely no longer trading fundamentals; they are just trading state intervention and money printing. Why debate earnings when instead you can debate the prospects of QE3? Why invest in profitable companies and ventures when instead you can pay yourself a fat bonus cheque out of monetary stimulus? Why exercise caution and consideration when you can just gamble and get a bailout? Unfortunately, Mellon and his counterparts at the 30s Fed were the wrong kind of liquidationists — they could not heed their own advice and leave the market be. Ironically, the 30s Fed in raising interest rates and failing to act as lender-of-last resort drove the market into a deeper depression than was necessary (and certainly a deeper one than happened in 1907) and crushed any incipient recovery.
Liquidation is not merely some abstract policy directive, or government function. It is an organic function of the market.
There are roughly 19 million vacant dwellings in the U.S., of which around 4 million are second homes and a million or two are on the market. Let's stipulate that several million more are in areas with very low demand (i.e. few want to live there year-round). Let's also stipulate that several million more are in the "shadow inventory" of homes that are neither on the market nor even officially in the foreclosure pipeline, i.e. zombie homes. Even if you account for 9 million of these homes, that still leaves 10 million vacant dwellings in the U.S. which could be occupied. That means 1 in 12 of all dwellings are vacant. Even if you discount this by half, that still leaves 5 million vacant dwellings that could be occupied. Given that the total rental market is 40 million households, that constitutes a very large inventory of supply that remains untapped. Lastly, it is important to note that the ratio of residents to dwellings is rather low in the U.S., with millions of single-person households and large homes occupied by one or two people. The potential pool of existing homeowners who could enter the "informal" rental market by offering bedrooms, basements and even enclosed garages for rent is extremely large, and that is a difficult-to-count "shadow" inventory of potential rentals.
There are those that wait and hope and pray that there will be Divine Intervention. They cling to the belief that Germany, in the end, will back down and retreat and agree to bail everyone out. Germany’s GDP is only $3.2 trillion and this expectation, believed in by more than a few, is not only ridiculous in my opinion but a mathematical impossibility. If you consider the current EFSF program and that $300 billion has already been used for Greece, Ireland and Portugal and that this new assistance program for Spain will take it up to $425 billion you begin to get some sense of the enormity of the problem. The U.S. equivalent then for the total EFSF would be $4.318 trillion or 30.4% of America’s total GDP which would swamp our nation. This is why when I listen to Frau Merkel say “Nein;” I believe her! It is the twentieth Summit. I predict it will be the twentieth time that almost nothing is accomplished. The beggars want to be the choosers and Germany and the richer nations will hardly allow for that.
Vampire Squid Downgrades Margin Stanley From Conviction Buy To Netural, Warns On Counterparty Risk, Lowers PT From $20 To $16Submitted by Tyler Durden on 06/26/2012 08:16 -0400
GS just did what it does best: pulled the rug from under its most troubled peer: "We are downgrading MS to Neutral and removing shares from the America’s Conviction List. Since being added to the Americas Conviction List on January 29, 2012, MS shares are down 27% vs. flat for the S&P 500. Over the past 12 months, MS shares are down 39% vs. the S&P 500 up 4%. When we added shares to the Conviction List, we noted that MS had addressed a number of legacy issues including (1) the conversion of the MUFG preferred stock to common to bolster common equity capital ratios, (2) elimination of the CIC preferred dividend, (3) removal of the MBIA relationship//hedge overhang, (4) write-down of legacy real estate assets, (5) elimination of non-core asset management businesses, and (6) near-completion of the integration of Smith Barney and Morgan Stanley Wealth Management. While that all still holds true today and should be beneficial towards long-term “normalized” returns, we believe several capital market overhangs will reduce out-year earnings visibility and cap near-term outperformance. While too soon to tell how counterparties will react to a new capital market ratings distribution post-Moody’s, this cycle has proven that banks with the largest increase in funding spreads have generally lost fixed income trading market share. In addition, with a number of global macro uncertainties likely to weigh on capital markets activity for the foreseeable future, MS has outsized exposure here as well....we are lowering our 12-month price target for MS to $16 (from $20) based on 0.6X TBV (from 0.7x) to reflect challenged near-term earnings power."
Capitalism at its best: kick 'em while they're down.
The long anticipated downgrade of the recently bailed out Spanish banking sector has arrived. Moody's just brought the hammer down on 28 Spanish banks. Also apparently in Spain banks are now more stable than the country: "The ratings of both Banco Santander and Santander Consumer Finance are one notch higher than the sovereign's rating, due to the high degree of geographical diversification of their balance sheet and income sources, and a manageable level of direct exposure to Spanish sovereign debt relative to their Tier 1 capital, including under stress scenarios. All the rest of the affected banks' standalone ratings are now at or below Spain's Baa3 rating." Can Spain borrow from Santander then? They don't need the ECB.
For how much longer can they try to hide it?
"I could go on and on with other examples, but let’s just get to the point: one cannot operate a capitalist system if the state can borrow at a negative cost. Years of irresponsibly loose monetary policy in the US has led to cheap funding for the US (and other) governments, but difficult credit conditions for the private sector all around the world. As I underlined in How The World Works, negative real rates leads to misallocation of capital which ends in asset deflation, while simultaneously limiting the capacity for recovery by driving out the private sector.... The Fed has been managed by a bunch of Keynesians who care nothing about the role of the dollar as a reserve currency and who probably believed they were managing the central bank of Belorussia or Zimbabwe!"
One week to solve all problems, or else....
Here We Go: Moody's Downgrade Is Out - Morgan Stanley Cut Only 2 Notches, To Face $6.8 Billion In Collateral CallsSubmitted by Tyler Durden on 06/21/2012 17:26 -0400
Here we come:
- MOODY'S CUTS 4 FIRMS BY 1 NOTCH
- MOODY'S CUTS 10 FIRMS' RATINGS BY 2 NOTCHES
- MOODY'S CUTS 1 FIRM BY 3 NOTCHES
- MORGAN STANLEY L-T SR DEBT CUT TO Baa1 FROM A2 BY MOODY'S
- MOODY'S CUTS MORGAN STANLEY 2 LEVELS, HAD SEEN UP TO 3
- MORGAN STANLEY OUTLOOK NEGATIVE BY MOODY'S
- MORGAN STANLEY S-T RATING CUT TO P-2 FROM P-1 BY MOODY'S
- BANK OF AMERICA L-T SR DEBT CUT TO Baa2 BY MOODY'S;OUTLOOK NEG
So the reason for the delay were last minute negotiations, most certainly involving extensive monetary explanations, by Morgan Stanley's Gorman (potentially with Moody's investor Warren Buffett on the call) to get only a two notch downgrade. And Wall Street wins again.
Looks like the long-anticipated E-bay auction for Santorini may be closer than expected: in the aftermath of Greece's now absolutely bankrupt status, whereby the comatose patient is kept alive only thanks to a Made in Germany ventilator, it was only a matter of time before the country started with the Blue light special firesales. Sure enough from Bloomberg: "National Bank of Greece SA is preparing to sell an Athenian Riviera resort, visited by world leaders and movie stars for more than half a century, in a test of the country’s ability to sell assets amid concern that it will leave the euro. The 3.3 million-square-foot Astir Palace complex has already drawn investors’ interest, according to Aristotelis Karytinos, general manager of real estate at the lender. The Athens-based bank and Greece’s privatization fund, which owns part of the property, will put out a public tender in coming months, he said." Why is the Astir Palace unique? "Since its opening in 1960, the resort’s guests have included Jackie Onassis, Nelson Mandela, Tony Blair, Jane Fonda and Frank Sinatra, according to the resort’s website. Astir Palace in 1993 and 2009 hosted the Bilderberg conference." Something tells us we know just where the winning bid for the last remaining Greek assets may come from.