More Harm Than Good
Readers suggested a topic on the latest central bank move. “Suppose you were one of those hapless retirees who used to count on interest earnings on your CDs for income. Recent declines in interest rates severely crimped your returns. Now Operation Twist promises to crimp them still further. Where should a retiree depending on interest income turn for income to pay living expenses under Operation Twist?”
A reply, “There is hardly anything available for a decent return. CDs are gone for a long time. BB put them to rest. Stock market is a casino now. Gold/metals are in a high bubble. BRICs are falling in their stocks. Where should a person put money? I know one place: The savings bank accounts in India or Brazil. The interest rates are 11% with zero risk.”
Then this, “Zero risk?”
One had this, “It is obvious that we have passed from an era where every ‘investment’ seemed to give a pretty decent return to one in which simply preserving capital is challenging. It is the end of the biggest credit expansion in history. Interest rates are low simply because we are in deflation. If you want to borrow money though, interest rates don’t matter because you can’t get a loan. If you want a loan that by itself makes you a bad risk.”
“What will we do? We will consider the money that we do have very valuable. We will spend it as though it is irreplaceable. We’ll do with less. Life will still be good, unless you’re in debt. Welcome to the world of our grandparents and great grandparents.”
Another said, “This isn’t about saving a hapless retiree or anyone else! This is about where the Government is going to grab another dollar to keep the game going until things turn around. Those in power don’t have a picture of what’s happening. They just want to see a turn in the economy and will deal with the aftermath later. So, come on down retirees and put your money into the stock market so your Uncle Sam can have quick permanent and easy access to your money.”
And finally, “Operation twist….keep housing prices up by giving everyone 4%, no 3%, no 2%, no wait lets do it right 0% interest for 30 years….. that’ll work…”
From Reuters. “The Federal Reserve surprised investors on Wednesday when it said it would help keep mortgage interest rates low by reinvesting proceeds from past purchases of housing debt into government-backed mortgage securities. The program is part of the Fed’s latest easing initiative, which investors dubbed ‘Operation Twist,’ after a similar program in the 1960s.”
“Frustrations are growing in Washington that efforts to revive housing have failed in the face of high unemployment and rampant foreclosures that have ravaged home prices. ‘They are trying to do anything they can to pump up the housing market,’ said Bert Ely, a banking consultant and chief executive officer of the firm Ely & Co. ‘This may have some slight positive impact at the margin, but it’s not salvation.’”
“After more than three years of trying to remedy one of the root causes of the U.S. recession and the slow economic recovery, the administration has largely exhausted efforts involving tax credits, mortgage modification programs, government-backed loans and other tools intended to keep home values up and help delinquent borrowers avoid foreclosure. The prevailing view of the White House economic team has been that any aggressive remedies would cause at least as many problems as they solved.”
“Mortgage rates are at record lows, yet many U.S. homeowners have been unable to refinance because they owe more than their homes are worth or have less-than-perfect credit. The housing sector faces a small hurdle at the end of September when the size of the loans that Fannie and Freddie, as well as the Federal Housing Administration, can purchase are set to fall back to pre-financial crisis levels.”
“Karen Petrou, managing partner of Federal Financial Analytics Inc., in Washington, said the administration’s best hope to support housing would be to ramp up the refinancing initiative. ‘If there was an easy way out of this, then a solution would be done,’ Petrou said. ‘The refinance proposal is the remaining cannon in the arsenal.’”
The Desert Sun. “A fundamental teaching in medical ethics is that sometimes a patient’s situation is either so precarious or so puzzling that hasty intervention by a doctor could cause more harm than good. Hence the dictum: first do no harm. We wish that the Federal Reserve would have the same consideration for our ailing economy.”
“There are many reasons to question the wisdom of this particular intervention. With unprecedented cash reserves on corporate balance sheets, liquidity really doesn’t seem to be the macro issue facing this economy. Long-term interest rates were already near historic lows. Did those rates really require this kind of intervention just so that they could float a few notches lower?”
“And although a major part of the policy seems to be directed to increasing demand for home mortgages, a low-yield on 10-year Treasurys is not automatically linked to cheaper 30-year mortgages. Bernanke and friends seem to have forgotten that there are two sides to the mortgage — borrowers and creditors. The lower yields go, the less likely investors are to finance mortgage-backed securities.”
“Indeed, the lower yields go, the less likely people will want to save. And by intentionally reducing the cost of long-term debt, the Fed has just undermined the profitability of banks — the very institutions that are now under increasing scrutiny from credit agencies.”
‘The refinance proposal is the remaining cannon in the arsenal’
I’ve had two complete strangers tell me about how underwater they are in the past few days. One thought I was an appraiser at a foreclosure and volunteered she had “taken a bath” on her house next door of at least 50%. She said they were “going to have to make a decision”.
The other was telling me about a family member trying a short sale. They owed $260k and similar houses were selling for $90k. Refinancing makes no sense for these people.
Does the latest grand taxpayer-funded refinancing scheme apply to real estate investors who are 50% or more underwater?
Investors who are far under water are likely to have walked already.
Some high earners cannot walk away. F.ex. know a parent who is a guarantor for a condo bought at peak.
I don’t buy it. For instance, one of the largest classes of “investors” are major Wall Street banks hoarding millions of homes in shadow inventory. In many cases, they haven’t even taken possession of or even foreclosed on homes which have long been in default. This group of “investors” is biding their time, assuming they can wait out the worst global economic downturn since the 1930s and eventually sell into a rising market.
It’s going to work out badly for them…
“It is obvious that we have passed from an era where every ‘investment’ seemed to give a pretty decent return to one in which simply preserving capital is challenging.”
A former futures market trader who called himself Hoz used to regularly post and share insights here. One of them was that during a bear market, the greatest challenge an investor faces is to avoid losing money.
Another insight he shared (circa 2007) was that long-term Treasury yields would soon skyrocket to price in an inflation risk premium. He suggested HBB readers should consider purchasing an inverse-yield type boutique fund whose value would go up with Treasury yields.
I was highly skeptical and never followed his suggestion.
“One of them was that during a bear market, the greatest challenge an investor faces is to avoid losing money.”
Hence, go to cash.
So long as you have an eye to the exit door in case the central bank decides it is time to flood the system with sufficient money to reflate, I agree with you.
case the central bank decides it is time to flood the system with sufficient money to reflate,’
they would have to drop it out of helicopters because there are few jobs and banks are reluctant to loan money
“…they would have to drop it out of helicopters because there are few jobs and banks are reluctant to loan money…”
Been done before — $2K per household bailout in 2008 paid for wifey’s new viola bow. This year we have something similar with payroll tax reduction.
the greatest challenge an investor faces is to avoid losing money ??
Listening to a money manager some time ago he had this quote that I had never heard before regarding investing;
“I would rather lose on a opportunity then lose any money…Just takes to long to make it back just to get even”…
How about this bit of arithmetical wisdom:
50% down, then 50% back up = 25% down*.
* (1-0.50)*(1+0.50) = 0.5*1.5 = 0.75 = (1-0.25).
Exactly his point Pbear…
Average after tax return was 4% in 1990s for retired needing safe investment income to live. Assuming Treasuries, CDs or Municipals with 5-7 year maturity for 4% after tax return.
With 600K portfolio in 1990s annual income was $24K plus another 12K a/t in SS giving total net income of 36K.
Today average after tax return for same investments today is 1%. Total annual income on 600K portfolio is $6K plus 12K ss is $18K. Assume some price inflation too since 1990s.
Thank you for these numbers. Sounds like you would need a cool million just to survive. And that’s with a paid-off house.
I think we’re going to see fewer and fewer paid off houses as Granda Greatest Generation sells the house to pay for the nursing home.
“Today average after tax return for same investments today is 1%.”
Put that 1% in your “Rule of 72″ pipe. No buzz?
“sells the house to pay for the nursing home.”
And boy are those expensive. Not to mention, awful.
Muggy
Where is Dr Kevorkin when you need him?
My muni funds are yielding around 6-7% today. They are going to get clobbered when rates go up, but.. If you’re looking for yield today, they are as good a place as any to hide (general obligation only though).
You should always use geometric returns on investments to avoid this problem. Log(value now) minus log(value then). Or, if logerithums throw you, use vlue now minus value then divided by average of now and then.
Didn’t he also say “Buy what China Buys” quite frequently? For the past few years this would have been excellent advice to follow.
Yes. And once their bubble finally pops, somewhat opposite advice would be warranted.
And lest you think I exaggerate the Chinese bubble situation, let me mention to you that I have a neighbor who occasionally travels to Beijing to snap up investment properties for his firm’s clients. And I highly doubt his is the only U.S. money management firm playing this game.
When this mother of all property bubbles blows, watch out below.
Zero risk and 11% yield? Where’s the nearest exit? I’m wanting to run away!
A mixture of cash, T-bills, municipal bonds, precious metals and stock index funds and dollar cost average into each of those areas (except you cannot dollar cost average into cash, of course). Rebalance annually to get to your risk tolerance.
At the same time, keep working. Be very flexible and able to move within a week to a new city so there is less than a week between jobs. Keep the income flowing.
“Zero risk and 11% yield?”
I learned about ‘risk free’ high yield investments in the late 1980s. They are just fine, so long as they are backed by a too-big-to-fail government guarantee.
Yes, and remember something like this in Mexico, mid 70’s.
US $’s into mexican banks. Interest paid in pesos that were inflating. Withdrawals only in pesos too..all in all, they took a bath..!!
“Be very flexible and able to move within a week to a new city so there is less than a week between jobs. Keep the income flowing.”
Good idea. I’m sure people will enjoy yanking their kids from school and throwing the air mattresses in the truck every Friday night.
They could have anticipated a life like that before having the kids. Outsourcing of IT has been going on for over two decades in India. GE has had a big software development site there at least since the early 1990s. Since I’m in software, “IT” hits home and I planned for being a rolling stone.
They could have anticipated a life like that before having the kids.
I’m just going to let this hang here, without comment, for the lurkers to read and think about.
I bet ‘ol Bill knows every rest stop on I-75/10 between Tampa & Phoenix!
Bill is the example of “being the income producing investment”.
“At the same time, keep working. Be very flexible and able to move within a week to a new city so there is less than a week between jobs. Keep the income flowing.”
The average family’s kids wouldn’t have time to turn-in their homework under this plan unless it is only addressing the breadwinner.
“After more than three years of trying to remedy one of the root causes of the U.S. recession and the slow economic recovery, the administration has largely exhausted efforts involving tax credits, mortgage modification programs, government-backed loans and other tools intended to keep home values up and help delinquent borrowers avoid foreclosure. The prevailing view of the White House economic team has been that any aggressive remedies would cause at least as many problems as they solved.”
“Indeed, the lower yields go, the less likely people will want to save. And by intentionally reducing the cost of long-term debt, the Fed has just undermined the profitability of banks — the very institutions that are now under increasing scrutiny from credit agencies.”
How many conundrums can the Fed bear?
“Indeed, the lower yields go, the less likely people will want to save.”
This is inflationary-economy-type-thinking. It’s the wrong kind of thinking in a deflationary economy.
“…in a deflationary economy.”
What does that term even mean, given the Fed’ Chair’s standing commitment to never allow deflation to occur.
“What does this term even mean, given the Fed’ Chair’s standing commitment to never allow deflation to occur.”
So how’s the Fed chair’s “commitment” doing thus far?
Not a whole lot of Fed magic going on from what I can see.
Perhaps you see something different?
I see a moribund economy stranded in the purgatory between the frost of deflationary market forces and the inferno of inflationary policy interventions.
Does that sound about right?
‘How many conundrums can the Fed bear?’
One thing it’s easy to miss is how the Fed interventions have escalated over the years. Way back, it would have been shocking that the Fed was buying US Treasuries. Now they do that and a lot more. It was revealed that the Fed loaned out $12 trillion all over the world and the media sort of said, “wow that’s a big number” and dropped it.
These actions distort the economy. We’ve been through uncountable crisis points and “we gotta save the economy from a recession” moments, to where I don’t think we realize what parts of the economy are real anymore. It could be argued that the stock and housing bubbles were part of these distortions. More easy money, price manipulation, house hoarding, whatever, can’t possibly help.
This is just what we shouldn’t be doing, not what we should be doing! We live in the shadow of the largest bubble in history, and we better start figuring out how to earn a living here.
‘It was revealed that the Fed loaned out $12 trillion all over the world and the media sort of said, “wow that’s a big number” and dropped it.‘
Whatever happened to the journalists of yore?
Whatever happened to the $12 trillion?
Pooooof, maybe?
Easy money = easy come, easy go.
Prooof, preferably…. (the dispersed $12T)
Never, ever made prime time.
Why the hell not?
Who, or which observers failed in their fiduciary duty to us taxpayers??
Media, elected officials??
My existence is getting pounded every day, while those with less are getting slaughtered.
I hope to remain in the middle class until my wife and I die.
However, I now think that proposition is tenuous, at best.
“Whatever happened to the $12 trillion?”
Lots of investment bankers al over the world have had some of their biggest bonus-years ever. Look it up.
Whatever happened to the journalists of yore ??
Their Blogging…..
Here I thought bloggers had stepped up because journalists have collectively abdicated their duties. Thanks for the correction.
They were hated too. But at least they didn’t identify with the powerful people they were reporting on.
One thing that disappoints me is that, to my knowledge, not one political figure has spoken to savers or those on fixed incomes, who have been punished brutally by this sequence of policies. Somebody should start writing and issuing an “anti-statement” everytime the Federal Reserve releases a missive.
The Fed’s increasing impotence is destroying the perception that the institution’s decisions are capable of shaping events. What if Bernanke spoke, and nobody listened? The next move may be something truly radical, so that the bank can continue to present itself as powerful. Can the Fed bail out Europe?
“What if Bernanke spoke, and nobody listened?”
Maybe that would be the first useful step along the path to ending the Greenspan-inspired era of Fed Chair as rock star.
Whatever happened to the journalists of yore?
You mean the ones who comforted the afflicted and afflicted the comfortable rather than putting all their efforts into manipulating their audience to hate whoever they hate?
The journalists of yore went to PBS.
Why do you think the R’s try to kill PBS funding every time they take over a part of Congress?
NPR as well (i.e. they have good journalists and Republicans coincidentally are always trying to cut their funding).
NPR Slams Perry on Abortion with Objections of ‘Family Planning Advocates’
By Matthew Balan | September 21, 2011 | 19:41
On Tuesday’s Morning Edition, NPR’s Wade Goodwyn carried water for pro-abortion activists who are targeting Governor Rick Perry and the Texas legislature for cutting the state funding of “women’s health clinics.” Goodwyn didn’t give an ideological label for the activists, referring to them merely as “family planning advocates,” and highlighted their objection that some of the cut funds were now going to crisis pregnancy centers.
Hosts Steve Inskeep and David Greene pushed a liberal talking point against the Republican presidential contender in his introduction for the correspondent’s report:
Greene continued that
Goodwyn led his segment with a human interest story of sorts about one such clinic in the state capital of Austin, where a young woman gets her quarterly contraceptive shots (NPR correspondent Julie Rovner did something similar in a biased, pro-federal funding of birth control report in April 2011). He spotlighted how a doctor at the People’s Clinic inspired the woman to go
The NPR journalist then played up that
He followed this by playing a sound bite from the director of the People’s Clinic, who tore a page out of the playbook of Planned Parenthood:
…
He followed the second talking point by playing up the concerns of the liberal birth control/abortion proponents:
…
“These actions distort the economy.”
Some times I take the impression that the Fed is completely unaware there is a market-based economy outside the beltway. They seem to think the economy lives, eats and breathes solely due to their interventions, never seeming to realize that too many heavy-handed, distortionary policy maneuvers have a paralyzing effect on private markets.
“These actions distort the economy.”
yes bank of america is still in business and raising fees
I wonder what new and better banks we would have by now if this pig was allowed to fail ?
“the Fed loaned out $12 trillion all over the world”
It is inconcievable. The crumbling foundations of the credit empire are so vast we cannot couple with the size of the problem. The Fed can loan into existence as much as it wants, they’ve convinced us.
Forced lubrication is necessary to keep high speed machinery going. If all the Fed can do is lubricate, it will not cause the machinery to turn. It can’t speed things up or fix the gears. It can’t generate sustainable income streams, anywhere. It can’t bring into being anything that is productive. That would be up to us.
“Forced lubrication…”
Sounds highly unpleasant, and potentially illegal…
It does not sound consensual eh?
Seriously though, this whole notion that a debt based economy can function is absurd and akin to standing in a bucket while pulling the handle. It is true that you can jump and pull (twist and shout?) at the same time and get off the ground for a bit, but then you are a few feet in the air with your feet stuck in a bucket which cannot end well…
The simple fact is that at least 1.25x the debt in currency should have been created for each dollar loaned into existence. As the dollars are repaid some of the currency could then be removed from circulation, but the idea that debt can be created but not currency has led us to a very dark place…
@ Ben-
“These actions distort the economy. We’ve been through uncountable crisis points and “we gotta save the economy from a recession” moments, to where I don’t think we realize what parts of the economy are real anymore.”
Too damned right, Jefe. Like when the Treasury/Fed pressured FASB to suspended Mark-to Market rules, gaming the whole system, distorting reality, obfuscating the truth and stifling an economic recovery. Bernanke and Geithner want “transparency” my @ss.
http://online.wsj.com/article/SB123867739560682309.html
These @ssh@ts (including politicians from both parties) have crippled the middle class and prolonged this misery for at least another decade, all to save/benefit their masters on Wall Street. Its not difficult- follow the money. Throughout the last 5 years, who has benefitted economically from government actions and who has suffered? See? Its not that hard. People think that riots like Greece could never happen here? We just haven’t reached that level of unemployment yet.
There is always a tendency towards central planning and consolidation of power.
People who are natural leaders can’t help themselves. They have to believe they know best in order to run these gargantuan organizations.
The founders knew this, and tried to create a system to stifle that power creep. It’s bending though, severely.
“There are many reasons to question the wisdom of this particular intervention. With unprecedented cash reserves on corporate balance sheets, liquidity really doesn’t seem to be the macro issue facing this economy.”
Can anyone who thinks they understand kindly enlighten me on the advantage of pretending there is a liquidity problem when the actual problem is one of solvency?
That, kind sir, is the question of the year. Solvency is the one
word NO ONE wants to say or hear for fear of the house of
cards collapsing.
SOLVENCY CRISIS
SOLVENCY CRISIS
SOLVENCY CRISIS
SOLVENCY CRISIS
….
Neener neener neener…
I absolve you of your debt son…
Cash reserves are multi national corporate numbers in banks around the world. Banks fail, cash lost. Those fly by night countries with almost no taxes - won’t gaurantee their banks. Guess where most of this cash reposes?
Banks (ponzi) same thing. Housing dives, gaurantees sprung, insurers fail, banks sued for deficiencies - this mess continues.
Manufacturing is now slowing down - badly - and will probably use a lot of their cash reserves up trying to hold their line ! Instead of pouring money into R&D. I liked that tractor post of a few days ago.
Europe tanks Greece, Italy totters, USA covers (Europe won’t be able to), Spain totters - then interest rates sky rocket. Around the world. Only one country can print it’s way out - but would destroy itself in doing so and a lot of other countries as well.
There are all sorts of risks, from bond issuers going BK to inflation risk. What kind of risk scares you the most?
I still don’t see deflation. Basic goods cost more than 3 years ago. A 5 quart jug of 5W-20 at WalMart cost around $11 then, and now it’s $17. I bought one last year for $14 to keep in stock so that “investment” has done better than the stock market or the bond market.
Buying coffee out is long gone. Three years ago you could buy beans for $5 a pound, now it’s more like $7 or $8 a pound. And you can’t buy coffee ahead like you can motor oil.
Levis brand jeans are long gone. I bought my last pair of jeans down at the feed store http://mydbsupply.com/ for $16: a pair of Dickies work jeans. A little rough in finish but sturdy none the less.
Cooking with olive oil is gone. I’ve moved to canola for much less.
You have to read the local paper to find “promotional” CD rates. About 6 months ago a local CU ran a 1.72% APY 13 month CD rate so I waltzed in with a check for $100K and bought one. These rates never show up on places like bankrate dot com.
Junk bonds have higher default risk but much lower interest rate risk. I have a good chunk of money in a junk bond ETF with the wonderful ticker of JNK. Yield is between 8% and 9%. Unfortunately the past few months the share price has dropped so that I’ve just broken even this year.
Muni bonds were viewed as tax-free havens of safety, but if you income has been cut drastically who cares about the tax-free part? Especially when muni default looms on the horizon. Paradoxically junk bonds may have a lower default rate going forward than muni bonds - all the really bad stuff got flushed out of the system in 2008/2009.
Applebees menu prices just went up again. You can’t get their main dishes for under $10 now.
Lol.
First you say: “I still don’t see deflation.”
Then you say: “Muni bonds were viewed as tax-free havens of safety, but if you income has been cut drastically who cares about the tax-free part?”
This “income has been cut drastically” is part of what deflation is all about.
“Especially when muni default looms on the horizon.” This is another part of deflation looks like.
Income goes down but prices keep going up? That doesn’t sound like any classical definition of “deflation” that I’ve heard of.
If we had classic deflation - both income and prices go down - then I wouldn’t be so concerned about interest rates. My money would be worth more in the future.
General obligation muni defaults are exceedingly rare. It does happen, but it’s not something I stay up at night worrying about (especially with a diversified portfolio). The much bigger (and it will happen eventually) risk, IMHO, is interest rate risk. When the Fed raises rates, muni funds are going to get hammered. But, if you’re happy with 5-7%, you can get it today.
Specific recommendations aren’t really my thing. I own individual bonds, and PIA and BFK as my diversified funds. Do with that what you will.
There is no shortage of any of the consumer items you mention. There is surplus production capacity everywhere, lots of it. Income is going down and people are buying less of all these things.
You can’t see deflation anywhere. People who saw the number of house listings go way up while prices were still rising couldn’t see the collapse of the Real Estate market either. It will come close enough for you to see before too long. Be patient.
BTW, what is the shelf life of vacuum sealed coffee?
If there’s no shortage of those things, why are the prices increasing? None of this makes sense to me.
I recently took advantage of the odd circumstance that used car prices are up while new car prices are down. I never “traded in” a car before, always selling privately, but bought a new car and traded in my 2004 Miata. I gave the dealer my old Miata and $8,500 and drove off in a new car. That’s just odd IMHO. The new car is a Suzuki SX4 Crossover AWD, which is more suitable to Idaho roads (many unpaved) than the Miata. The dealer sells both Mazda and Suzuki here, and I think he thought he could flip my old Miata quickly for a profit. However it’s still on his lot two months later.
“None of this makes sense to me.”
I only have my ideas, most of them involve predatory speculation or monopoly building. We did learn right there on the HBB that prices can continue to rise while sales are falling. Later prices collapse. We’ll see if that holds true for food and fuel.
How’s Goldman Sachs doing with all that oil and aluminum it held off the market to drive prices up while demand was falling?
“How’s Goldman Sachs doing with all that oil and aluminum it held off the market to drive prices up while demand was falling?”
I hope they’re collectively shitting their pants as they watch billions go up in smoke.
Right, but they still have the aluminum. This is currently the situation with FBs that have title to zombie houses — that’s the problem with the current poof. It goes POOF!, but it is still there when the smoke clears.
We need real, good, old-fashioned, POOF! As in, it REALLY goes away and not into purgatory.
L I Q U I D A T I O N
What is it that PM traders hate so much about Operation Twist that makes them want to dump their gold?
Or am I just making a spurious inference by attributing the PM selloff to Operation Twist when it is more about the confounding effect of recent gloomy I.M.F. and Fed announcements on the global economic outlook?
MARKETS
SEPTEMBER 24, 2011
Market Rout Claims New Victim
Investors Dump Gold, Silver to Pay for Losses; All Eyes on IMF This Weekend
By LIAM PLEVEN, JONATHAN CHENG and TOM LAURICELLA
The wave of selling that has washed over financial markets in recent weeks swamped precious metals on Friday, sending gold and silver prices plummeting and raising the stakes for key weekend meetings of global finance officials.
Gold and silver prices have seen sharp declines lately, but Barron’s economics editor Gene Epstein says the long-term value of the commodities still shines.
In the past week, the Dow Jones Industrial Average plunged 6.4%, its worst week since October 2008. Currencies, too, have had a wild ride. The dollar this month has soared against its rivals. The euro has tumbled 6% in September, while emerging currencies like Brazil’s real have been punished.
Gold futures dropped 5.8% Friday, the biggest one-day loss in five years, as investors rushed to cash out of some of their most profitable investments in the hopes of making up for losses elsewhere. The decline capped gold’s worst week since 1983. Silver was even harder hit, plunging 18% for its largest single-day decline since 1987.
Precious metals posted deep losses as investors continued to leave the market in favor of cash. Comex silver for September delivery dropped $6.4870, the worst dollar-decline since 1980. Liam Denning has details on The News Hub.
The week highlighted a growing sense of despondency among investors concerned that policy makers have neither the will nor power to juice their economies.
The broad market declines have added pressure on finance ministers and central bankers as they gather for the International Monetary Fund’s annual meeting in Washington this weekend.
“We are in a red zone,” said World Trade Organization chief Pascal Lamy, one of many officials attending the meeting. “We are at risk of repeating what happened in 2008″—when market upheaval shook the global economy—”occurring again for different reasons but through the same channel, the financial system.”
…
“Precious metals posted deep losses as investors continued to leave the market in favor of cash.”
Investors are exchanging the only true money for worthless, unbacked fiats?
My, what a surprise.
(snort)
Don’t whisper of such a thing to the gold bugs. They GO OFF.
But isn’t the goal to get gold bugs to GO OFF?
Got popcorn?
I’ve long been a fan (not fanatic) of the little shiny pieces of distilled earth. One thing that I’ve found amusing during the geometric run up of gold and silver prices is the boastfull comments of how much the hardcore goldbugs have profited. In terms of dollars, of course. It’s the dollars they want.
Isn’t that entirely the wrong message?
“…boastfull comments of how much the hardcore goldbugs have profited…”
Come to think of it, that “only true money” business was only a myth propagated by gold investors who needed to either find or mint greater fools to catch falling 24-carat knives.
I suspect Italy is quietly dumping some of their massive stockpile of gold to keep the lights on…
Ideas create investment opportunities. In hundreds of labs around the world there are great discoveries being made. This is independent of economics. Great discoveries and technologies were developed during the GD.
The psychology of gloom and doom is contagious and will close your mind to opportunities as well, so that you spend time fretting instead of creating. The few people who won’t fret will create enormous wealth - and they will end up being hated for becoming wealthy - hated by the very same gloom and doomers who sat on their hands.
Bill –
I totally agree. But this also gets to why I find the Fed’s never-ending series of market manipulations highly counterproductive. When everyone is busily trying to second-guess the Fed’s next wild-assed rescue plan instead of seeking fundamental value, fundamental value shrivels along with real wealth.
Ideas create investment opportunities. In hundreds of labs around the world there are great discoveries being made. This is independent of economics. Great discoveries and technologies were developed during the GD. ”
thats exactly right
Sept. 23, 2011, 2:05 p.m. EDT
Sovereign-debt ‘spiral’ seen imperiling Europe
Investors, economists look for leveraged EFSF, other steps
By William L. Watts, MarketWatch
FRANKFURT (MarketWatch) — Financial markets delivered a clear thumbs-down verdict Friday morning on the Group of 20’s attempt to soothe worries about Europe, triggering speculation the world’s top economic policy makers will take more aggressive steps this weekend to contain an increasingly malignant euro-zone debt crisis.
“They’ve got to stop the self-fulfilling spiral between sovereign risk and bank risk. They need to break that feedback loop,” said Nick Stamenkovic, fixed-income economist at RIA Capital in Edinburgh.
Fears that Europe’s long-running debt crisis could spark a global financial catastrophe, potentially on par with the collapse of Lehman Brothers threee years ago, have mounted, contributing to a massive global equity rout that sent shares skidding around the world on Thursday.
Concerns that European banks’ exposure to debt issued by Greece, Italy and other troubled sovereigns could lead to a bank failure have made for increasing tensions in money markets.
The spread between three-month euribor and overnight interest rate swaps, a key measure of stress in the European banking system, hit a new high for the year at 89 basis points on Friday, analysts said, but it remains well below the 195-point peak scored in 2008. A basis point is one one-hundredth of a percentage point.
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The lazy MSM journalists ought to invest more effort on examining how central banks’ standing too-big-to-fail bailout offers set the stage for the current financial crisis by encouraging lending that any reasonable person could see would never be repaid. Way too much attention is paid to the tired and ineffective remedies the worlds’ central banker community serves up in the wake of a financial crisis, and far too little attention is paid to what might be done to avoid similar situations in the future.
The picture of Timothy Geithner which accompanies the linked article is clearly worth more than 1000 words.
Europe aims to beef up crisis fund
By David Lawder and Daniel Flynn
WASHINGTON | Sat Sep 24, 2011 3:40pm EDT
(Reuters) - Europe is working on ways to boost the firepower of its bailout fund, a top European official said as the United States, China and other countries turned up pressure on the euro zone to contain its debt crisis.
Signs are growing that Europe is readying new measures to prevent fallout from Greece’s near-bankruptcy from spreading to other euro zone countries, threatening the region’s banks and hurting the world economy.
The European official said on Saturday the euro zone countries cannot boost the size of the 440 billion-euro fund, known as the EFSF, because Germany would not agree to such an increase.
“We need to find a mechanism where we can turn one euro in the EFSF into five, but there is no decision on how we could do that yet” the official said, speaking on condition of anonymity.
The United States and other countries have urged Europe to leverage up the European Financial Stability Facility, possibly by using funds from the European Central Bank.
In a statement, the International Monetary Fund’s steering committee said the euro zone would do whatever was necessary to resolve the single currency bloc’s sovereign debt crisis.
Treasury chief Timothy Geithner, in his most explicit warnings to date, said the ECB should take a more central role in fighting the crisis.
“The threat of cascading default, bank runs, and catastrophic risk must be taken off the table, as otherwise it will undermine all other efforts, both within Europe and globally,” Geithner told the IMF.
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Clearly the stupid markets are wrong again, and only the finance ministers know what is really going on.
The overall sentiment among finance ministers and central bankers seems to lean towards a generous willingness to provide bailouts as needed. Too-big-to-fail lives as the de facto policy governing the world financial system. It’s turtles all the way down.
Highlights from G20, IMF/World Bank meetings in Washington
WASHINGTON | Sat Sep 24, 2011 3:16pm EDT
(Reuters) - The following are highlights of comments by finance ministers and central bankers in Washington this week for meetings of the Group of 20 and the semiannual meetings of the International Monetary Fund and World Bank.
IMF MANAGING DIRECTOR CHRISTINE LAGARDE:
“There was a common recognition, a common diagnosis of what is happening at the moment and of shared sense of common purpose.”
“As far as the IMF is concerned, it is ready and it will deliver on any type of resources necessary and available to all its members. It is not just a euro area focused issue at the moment. There are other countries that are affected. It is a global occurrence. It just happens that the epicenter is in the euro area.”
SINGAPOREAN FINANCE MINISTER AND IMFC CHAIRMAN THARMAN SHANMUGARATNAM
“What we all felt was critical was the implementation of the euro zone July 21 agreement, which is going through a process of ratification. This was critical, in enhancing the size of the EFSF and increasing the flexibility so as to maximize its impact.”
“There was a willingness to see the IMF play a key role in handling the crisis and rekindling growth over the medium term. The IMF stands ready to provide stronger support where necessary.”
“There was very strong resolve that we will do what it takes to prevent an escalation of the financial crisis that we face in the weeks and months to come and that we will also do what it takes to avoid the prospect of a prolonged period of stagnation in the advanced economies and therefore a prolonged period of weakness in the global economy.
IMFC COMMUNIQUE ON GLOBAL ECONOMY, CRISIS
“The global economy has entered a dangerous phase, calling for exceptional vigilance, coordination and readiness to take bold action from members and the IMF alike. We are encouraged by the determination of our euro-area colleagues to do what is needed to resolve the euro-area crisis.”
IMFC COMMUNIQUE ON EURO ZONE, BANKS:
“Euro-area countries will do whatever is necessary to resolve the euro area sovereign debt crisis and ensure the financial stability of the euro area as a whole and its member states.
“…Advanced economies will ensure that banks have strong capital positions and access to adequate funding; maintain accommodative monetary policies as long as this is consistent with price stability, bearing in mind international spillovers; revive weak housing markets and repair household balance sheets; and undertake structural reforms to boost jobs and the medium-term growth potential of their economies.”
IMFC COMMUNIQUE ON EMERGING MARKETS:
“Emerging market and developing economies, which have displayed remarkable stability and growth, are also key to an effective global response….Surplus economies will continue to implement structural reforms to strengthen domestic demand, supported by continued efforts that achieve greater exchange rate flexibility.”
GREEK FINANCE MINISTER EVANGELOS VENIZELOS
“Greece is determined to honor all its obligations. No Greek paper will ever go uncovered.”
ECB GOVERNING COUNCIL MEMBER ATHANASIOS ORPHANIDES ON POSSIBILITY OF GREEK DEFAULT
“It is surreal that markets do expect a default. This cannot be, this cannot be! Such an event will only be forced by political forces, a political accident… This will actually be a catastrophic event and the Greek government is also realizing that. So if all the players involved want to avoid it, it is weird (that markets are expecting it).”
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This thread seems like a perfectly appropriate one for a walk down memory lane, to a time (supposedly) before the crisis even began.
And by the way, any negative comments I occasionally make here about journalism do not pertain to the writers at The Economist, The Wall Street Journal or The Financial Times. These three newspapers have generally seen it coming and have reported it to anyone who reads their articles.
Fannie Mae and Freddie Mac
End of illusions
A series of articles on the crisis gripping the world economy and global markets starts where it all began—with America’s deeply flawed system of housing finance
Jul 17th 2008 | from the print edition
THERE is a story about a science professor giving a public lecture on the solar system. An elderly lady interrupts to claim that, contrary to his assertions about gravity, the world travels through the universe on the back of a giant turtle. “But what supports the turtle?” retorts the professor. “You can’t trick me,” says the woman. “It’s turtles all the way down.”
The American financial system has started to look as logical as “turtles all the way down” this week. Only six months ago, politicians were counting on Fannie Mae and Freddie Mac, the country’s mortgage giants, to bolster the housing market by buying more mortgages. Now the rescuers themselves have needed rescuing.
After a headlong plunge in the two firms’ share prices (see chart 1), Hank Paulson, the treasury secretary, felt obliged to make an emergency announcement on July 13th. He will seek Congress’s approval for extending the Treasury’s credit lines to the pair and even buying their shares if necessary. Separately, the Federal Reserve said Fannie and Freddie could get financing at its discount window, a privilege previously available only to banks.
The absurdity of this situation was highlighted by the way the discount window works. The Fed does not just accept any old assets as collateral; it wants assets that are “safe”. As well as Treasury bonds, it is willing to accept paper issued by “government-sponsored enterprises” (GSEs). But the two most prominent GSEs are Fannie Mae and Freddie Mac. In theory, therefore, the two companies could issue their own debt and exchange it for loans from the government—the equivalent of having access to the printing press.
Absurd or not, the rescue package notched up one immediate success. Freddie Mac was able to raise $3 billion in short-term finance on July 14th. But the deal did little to help the share price of either company or indeed of banks, where sentiment was dented by the collapse of IndyMac, a mortgage lender (see article). The next day Moody’s, a rating agency, downgraded both the financial strength and the preferred stock of Fannie and Freddie, making a capital-raising exercise look even more difficult. As a sign of its concern, the Securities and Exchange Commission, America’s leading financial regulator, weighed in with rules restricting the short-selling of shares in Fannie and Freddie.
The whole affair has raised questions about the giant twins. They were set up (see article) to provide liquidity for the housing market by buying mortgages from the banks. They repackaged these loans and used them as collateral for bonds called mortgage-backed securities; they guaranteed buyers of those securities against default.
This model was based on the ability of investors to see through one illusion and boosted by their willingness to believe in another. The illusion that investors saw through was the official line that debt issued by Fannie and Freddie was not backed by the government. No one believed this. Investors felt that the government would not let Fannie and Freddie fail; they have just been proved right.
The belief in the implicit government guarantee allowed the pair to borrow cheaply. This made their model work. They could earn more on the mortgages they bought than they paid to raise money in the markets. Had Fannie and Freddie been hedge funds, this strategy would have been known as a “carry trade”.
It also allowed Fannie and Freddie to operate with tiny amounts of capital. The two groups had core capital (as defined by their regulator) of $83.2 billion at the end of 2007 (see chart 2); this supported around $5.2 trillion of debt and guarantees, a gearing ratio of 65 to one. According to CreditSights, a research group, Fannie and Freddie were counterparties in $2.3 trillion-worth of derivative transactions, related to their hedging activities.
There is no way a private bank would be allowed to have such a highly geared balance sheet, nor would it qualify for the highest AAA credit rating. In a speech to Congress in 2004, Alan Greenspan, then the chairman of the Fed, said: “Without the expectation of government support in a crisis, such leverage would not be possible without a significantly higher cost of debt.” The likelihood of “extraordinary support” from the government is cited by Standard & Poor’s (S&P), a rating agency, in explaining its rating of the firms’ debt.
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“Absurd or not, the rescue package notched up one immediate success. Freddie Mac was able to raise $3 billion in short-term finance on July 14th.”
Wasn’t that only about two months before they collapsed into a heap of soon-to-be-zombified financial dust?
September 23, 2011 6:10 pm
Investors wrestle with the bear facts
By Richard Milne
It wasn’t meant to work out like this. The US Federal Reserve’s launch this week of “Operation Twist” succeeded in forcing down long-term Treasury yields. But if it was meant to push investors into riskier assets, it failed abysmally as they focused instead on the rising chance of an imminent recession.
Global equities slipped into a bear market in the aftermath of the Fed move while US and UK shares are only one bad day away from being down the requisite 20 per cent from their highs of earlier this year.
For all the gloom, particularly on Thursday when many markets fell 4-5 per cent, strategists argue that equities would have further to fall if a double-dip recession materialised.
“This is a survival issue … These are dangerous, dangerous times,” says Ben Funnell, fund manager and chief equity strategist at GLG, the UK-based hedge fund. “All you want is very high conviction positions.”
Mr Funnell argues that if western economies do fall back into recession, equities have a minimum of 15 per cent, and probably more, still to fall.
European markets trade on about eight times forward earnings but those earnings imply a return on equity of about 14 per cent, he notes. Normally a return of 8-10 per cent would be more likely, meaning that markets would be trading on 11.5 times trough earnings. In a “normal” cycle 10 times would be more likely, hence the 15 per cent likely fall.
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