Yes, the Bulls (all five of them) continue to push the market higher on abysmal volume. The market remains in a state of denial, (what could possibly go wrong) and complacency based on the VIX is nearing a comatose reading. Comstock Partners provides a non-CNBC recap of real life, fundamental risks facing the market. Last grandpa checked, HOPE is not an investment strategy and unless one is hoping for a new bicycle, this is yet another 4 letter word that should be banned from the financial news network airways.
Thank you Comstock Partners for a dose of reality as reality has become as rare a commodity as common sense.
Market Still Facing Major Risks
by Comstock Partners
The deal between President Obama and the Republican congressional leadership is not likely to have a significant positive effect on an economy facing severe headwinds pulling in a negative direction. The key fact to remember is that we are in an economic recovery that will remain restrained by the after-effects of a major credit crisis and the need to deleverage the enormous household debt built up during the boom.
As was true for the original stimulus package, any additional spending occurring as a result of the compromise will be temporary with no sustainable follow-through once the stimulus wears off. And while the possible blip in growth is temporary, the addition to the deficit created by the package will remain with us for a long time. In the following paragraphs we cite the severe headwinds creating a drag on economic growth.
1) First and foremost is the explosion of household debt over the last 45 years, particularly the last ten. As a percentage of GDP, household debt went from 45% to 68% in the 35 years between 1965 and 2000, and then soared to 98% over the next nine years to its peak in 2009. Since the deleveraging process started the percentage dropped to 91% by September 30th. In our view the deleveraging has a long way to go. Just to get back to the level reached in 2000 (which itself was historically high), household debt would have to decline by $3.4 trillion. Since this amounts to a full 32% of personal consumer expenditures, it’s easy to see why the debt has been and will continue to be such a drag on the consumer.
2) No sustainable economic expansion has ever taken place without a strong boost from the housing sector, and this is not likely to happen anytime soon. Sales of both new and existing homes are slogging along at the bottom and prices are dropping. Inventories remain exceedingly high while the backlog of coming foreclosures is huge. If anything the new compromise package has caused mortgage interest rates to rise, putting even more of a burden on the beleaguered industry. Furthermore the mess regarding the unconstitutional (due process anyone?) legal shortcuts taken in efforts to foreclose on delinquent mortgages will be difficult to untangle and could end up getting banks in a lot of legal and financial trouble.
3) States and local governments remain in bad shape with large budget deficits leading to spending cutbacks, layoff and higher taxes. This is another potential crisis in the making in the period ahead.
4) Monetary policy is essentially impotent in the current crisis. The Fed has used all of their conventional weapons and is left with untried and untested weapons with potential unintended and unknown consequences.
5) Banks went into the 2008 credit crisis loaded with toxic assets, and, to a large extent, they still have them. While TARP was originally proposed by Treasury Secretary Paulson as a buyout of toxic assets, the program was almost immediately changed to generalized bailout. The accounting rule-makers were then pressured to do away with mark-to-market accounting, thereby papering over the problem and leaving most of the toxic assets the banks’ books, where they remain today. This is one of the reasons banks are hoarding cash and are so reluctant to lend. They know what they have.
6) Sovereign debt is another problem that has not been dealt with, and therefore doesn’t go away. While the Ireland and Portugal situations may temporarily be papered over, a number of weaker EU nations are essentially insolvent and will eventually need to have their debts restructured with severe damage to the European banks that hold their debt. This will continue to be a drag on economic growth in the EU.
7) With inflation threatening to get out of control Chinese authorities are trying to tighten monetary policy gradually to engender a soft landing. With the leading economies of the U.S. the Eurozone and Japan in such weak condition, China has been a major catalyst for global growth. Any substantial slowdown in China would therefore have a serious impact on global growth.
The stock market has recently gotten everything it wanted—-QE2, no expiration of tax cuts, additional stimulus and strong earnings reports. Still the S and P 500 is about where it was in April and has made no progress in over a month. Although the market can still break to the upside, the move off the March 2009 bottom has discounted a lot of good news while ignoring all the real pitfalls that may be ahead. In addition the market is substantially overvalued at 18 times smoothed trendline S and P 500 earnings. At this point we believe the downside risks far outweigh the potential upside rewards
Showing posts with label Sovereign Debt. Show all posts
Showing posts with label Sovereign Debt. Show all posts
Sunday, December 12, 2010
Wednesday, August 25, 2010
Michael Pento: The Fed's Biggest Bubble
By: Michael Pento
Tuesday, August 24, 2010
(thanks to Euro Pacific Capital)
I’ve made a living out of exposing economic fallacies, but there’s one whale that I can’t seem to harpoon. Even top-flight Wall Street analysts seem to believe that the Fed’s doubling of the monetary base after the credit crunch has not had an inflationary impact on our economy. Their logic can be summed up like so: “The money the Fed created and dropped from helicopters has all been caught in the trees.” In other words, the Fed is creating money, but it is just being held as excess reserves by the banking system instead of being loaned to the public. Therefore, the money supply hasn’t truly increased, there is no money multiplier effect, and aggregate price levels are behaving themselves.
But this is only a half-truth. Yes, most of the money created by the Fed has been kept by commercial banks as excess reserves. However, the Fed doesn’t conjure reserves by magic. It first creates an electronic credit by fiat, then purchases an asset held by a financial institution. Those primary dealers then deposit that Federal Reserve check into a bank, thus creating excess reserves for the banking system. The act of creating money from nothing and buying an asset — be it a Treasury bond or Mortgage Backed Security (MBS) — drives up the price of that asset in the open market. Those price distortions send erroneous signals to private buyers and sellers, eventually creating gross economic imbalances.
Therefore, the inflation created by the Fed first gets concentrated in whatever asset it has chosen to purchase – before spreading throughout the economy.
In the latest example of the Fed’s monetary manipulations, Bernanke & Co. purchased $1.25 trillion in MBS. The prices of MBS were therefore driven up (and yields down). Before that, the Fed forced the entire yield curve lower by purchasing not only Treasury bills but also $300 billion in notes and bonds. The Fed has also recently indicated that it will be swapping maturing MBS for longer-dated Treasury securities in an effort to keep its balance sheet from shrinking.
While it is true that — for now at least — we have been spared from the imminent curse of skyrocketing consumer prices, thanks to the falling money multiplier, it is blatantly untrue that the trillion-plus dollars the Fed created have been rendered inconsequential.
Not only has the huge buildup in the monetary base put pressure on the US dollar and caused gold to soar, but it has also broadcast an egregious and distortive price signal for US debt securities. The 10-year note is now trading just above 2.5%. That yield is near its all time record low, nearly 5 percentage points below its 40-year average, and 13 percentage points below its record high of September 1981.
US sovereign debt should only enjoy such historically low yields due to an overabundance of savings, low inflation, and low debt. None of those preferable conditions currently exist. Hence, US Treasuries are the most over-supplied, over-owned, and over-priced asset in the history of the planet! Once the debt dam breaks, it will send the dollar and bond prices cascading lower, and consumer prices and bond yields through the roof.
While Wall Street and Washington are petrified of the deflation boogieman, the real menace lurking in the shadows is the Fed’s bond bubble – and it’s going to eat small investors alive.
Michael Pento, Senior Economist at Euro Pacific Capital is a well-established specialist in the “Austrian School” of economics. He is a regular guest on CNBC, Bloomberg, Fox Business, and other national media outlets and his market analysis can be read in most major financial publications, including the Wall Street Journal. Prior to joining Euro Pacific, Michael worked for a boutique investment advisory firm to create ETFs and UITs that were sold throughout Wall Street. Earlier in his career, he worked on the floor of the NYSE.
Tuesday, August 24, 2010
(thanks to Euro Pacific Capital)
I’ve made a living out of exposing economic fallacies, but there’s one whale that I can’t seem to harpoon. Even top-flight Wall Street analysts seem to believe that the Fed’s doubling of the monetary base after the credit crunch has not had an inflationary impact on our economy. Their logic can be summed up like so: “The money the Fed created and dropped from helicopters has all been caught in the trees.” In other words, the Fed is creating money, but it is just being held as excess reserves by the banking system instead of being loaned to the public. Therefore, the money supply hasn’t truly increased, there is no money multiplier effect, and aggregate price levels are behaving themselves.
But this is only a half-truth. Yes, most of the money created by the Fed has been kept by commercial banks as excess reserves. However, the Fed doesn’t conjure reserves by magic. It first creates an electronic credit by fiat, then purchases an asset held by a financial institution. Those primary dealers then deposit that Federal Reserve check into a bank, thus creating excess reserves for the banking system. The act of creating money from nothing and buying an asset — be it a Treasury bond or Mortgage Backed Security (MBS) — drives up the price of that asset in the open market. Those price distortions send erroneous signals to private buyers and sellers, eventually creating gross economic imbalances.
Therefore, the inflation created by the Fed first gets concentrated in whatever asset it has chosen to purchase – before spreading throughout the economy.
In the latest example of the Fed’s monetary manipulations, Bernanke & Co. purchased $1.25 trillion in MBS. The prices of MBS were therefore driven up (and yields down). Before that, the Fed forced the entire yield curve lower by purchasing not only Treasury bills but also $300 billion in notes and bonds. The Fed has also recently indicated that it will be swapping maturing MBS for longer-dated Treasury securities in an effort to keep its balance sheet from shrinking.
While it is true that — for now at least — we have been spared from the imminent curse of skyrocketing consumer prices, thanks to the falling money multiplier, it is blatantly untrue that the trillion-plus dollars the Fed created have been rendered inconsequential.
Not only has the huge buildup in the monetary base put pressure on the US dollar and caused gold to soar, but it has also broadcast an egregious and distortive price signal for US debt securities. The 10-year note is now trading just above 2.5%. That yield is near its all time record low, nearly 5 percentage points below its 40-year average, and 13 percentage points below its record high of September 1981.
US sovereign debt should only enjoy such historically low yields due to an overabundance of savings, low inflation, and low debt. None of those preferable conditions currently exist. Hence, US Treasuries are the most over-supplied, over-owned, and over-priced asset in the history of the planet! Once the debt dam breaks, it will send the dollar and bond prices cascading lower, and consumer prices and bond yields through the roof.
While Wall Street and Washington are petrified of the deflation boogieman, the real menace lurking in the shadows is the Fed’s bond bubble – and it’s going to eat small investors alive.
Michael Pento, Senior Economist at Euro Pacific Capital is a well-established specialist in the “Austrian School” of economics. He is a regular guest on CNBC, Bloomberg, Fox Business, and other national media outlets and his market analysis can be read in most major financial publications, including the Wall Street Journal. Prior to joining Euro Pacific, Michael worked for a boutique investment advisory firm to create ETFs and UITs that were sold throughout Wall Street. Earlier in his career, he worked on the floor of the NYSE.
Morgan Stanley Says Government Defaults Inevitable
By Matthew Brown
Aug. 25 (Bloomberg) -- Investors will face defaults on government bonds given the burden of aging populations and the difficulty of securing more tax revenue, according to Morgan Stanley.
“Governments will impose a loss on some of their stakeholders,” Arnaud Mares, an executive director at Morgan Stanley in London, wrote in a research report today. “The question is not whether they will renege on their promises, but rather upon which of their promises they will renege, and what form this default will take.” The sovereign-debt crisis is global “and it is not over,” the report said.
Borrowing costs for so-called peripheral euro-region nations such as Greece and Ireland surged today, resuming their ascent on concern that governments won’t be able to narrow their budget deficits. Standard and Poor’s downgraded Ireland’s credit rating yesterday on concern about the rising costs to support nationalized banks.
Mares said debt as a percentage of gross domestic product is a false indicator of an economy’s health given it doesn’t reflect governments’ available revenue and is “backward- looking.” While the U.S. government’s debt is 53 percent of GDP, one of the lowest ratios among developed nations, its debt as a percentage of revenue is 358 percent, one of the highest, the report said. Conversely, Italy has one of the highest debt- to-GDP ratios, at 116 percent, yet has a debt-to-revenue ratio of 188, Mares said.
Mares once worked at the U.K.’s Debt Management Office and is a former senior vice-president at credit-rating company Moody’s Investors Service.
“Note that a double-dip recession would not invalidate this conclusion,” Mares’ report said. “It would cause yet further damage to the governments’ power to tax, pushing them further in negative equity and therefore increasing the risks that debt holders suffer a larger loss eventually.”
Investors’ concern that the U.S. may fall back into recession has grown in recent weeks as U.S. economic data missed economists’ estimates. A Citigroup Inc. index of U.S. economic data surprises fell to minus 59 last week, the least since January 2009.
Dec. 17 (Bloomberg) -- Morgan Stanley, the securities firm that spent more than $8 billion on commercial property in 2007, plans to relinquish five San Francisco office buildings to its lender two years after purchasing them from Blackstone Group LP near the top of the market.
The bank has been negotiating an “orderly transfer” of the towers since earlier this year, Alyson Barnes, a Morgan Stanley spokeswoman, said yesterday in a telephone interview. AREA Property Partners will take over the buildings. Barnes declined to say when the transfer will occur.
“This isn’t a default or foreclosure situation,” Barnes said. “We are going to give them the properties to get out of the loan obligation.” Link to Bloomberg Article
Aug. 25 (Bloomberg) -- Investors will face defaults on government bonds given the burden of aging populations and the difficulty of securing more tax revenue, according to Morgan Stanley.
“Governments will impose a loss on some of their stakeholders,” Arnaud Mares, an executive director at Morgan Stanley in London, wrote in a research report today. “The question is not whether they will renege on their promises, but rather upon which of their promises they will renege, and what form this default will take.” The sovereign-debt crisis is global “and it is not over,” the report said.
Borrowing costs for so-called peripheral euro-region nations such as Greece and Ireland surged today, resuming their ascent on concern that governments won’t be able to narrow their budget deficits. Standard and Poor’s downgraded Ireland’s credit rating yesterday on concern about the rising costs to support nationalized banks.
Mares said debt as a percentage of gross domestic product is a false indicator of an economy’s health given it doesn’t reflect governments’ available revenue and is “backward- looking.” While the U.S. government’s debt is 53 percent of GDP, one of the lowest ratios among developed nations, its debt as a percentage of revenue is 358 percent, one of the highest, the report said. Conversely, Italy has one of the highest debt- to-GDP ratios, at 116 percent, yet has a debt-to-revenue ratio of 188, Mares said.
Double Dip
“Outright sovereign default in large advanced economies remains an extremely unlikely outcome, in our view,” the report said. “But current yields and break-even inflation rates provide very little protection against the credible threat of financial oppression in any form it might take.”Mares once worked at the U.K.’s Debt Management Office and is a former senior vice-president at credit-rating company Moody’s Investors Service.
“Note that a double-dip recession would not invalidate this conclusion,” Mares’ report said. “It would cause yet further damage to the governments’ power to tax, pushing them further in negative equity and therefore increasing the risks that debt holders suffer a larger loss eventually.”
Investors’ concern that the U.S. may fall back into recession has grown in recent weeks as U.S. economic data missed economists’ estimates. A Citigroup Inc. index of U.S. economic data surprises fell to minus 59 last week, the least since January 2009.
Grandpa
Morgan Stanley knows a thing or two about walking away from an obligation.Dec. 17 (Bloomberg) -- Morgan Stanley, the securities firm that spent more than $8 billion on commercial property in 2007, plans to relinquish five San Francisco office buildings to its lender two years after purchasing them from Blackstone Group LP near the top of the market.
The bank has been negotiating an “orderly transfer” of the towers since earlier this year, Alyson Barnes, a Morgan Stanley spokeswoman, said yesterday in a telephone interview. AREA Property Partners will take over the buildings. Barnes declined to say when the transfer will occur.
“This isn’t a default or foreclosure situation,” Barnes said. “We are going to give them the properties to get out of the loan obligation.” Link to Bloomberg Article
Tuesday, July 13, 2010
China agency 'downgrades' US Treasuries (try to find this on CNBC or a U.S. publication)
Clancy Yeates
Sydney Morning Herald
CHINA is trying to turn the world of credit ratings on its head, by unveiling rival sovereign debt ratings that question the creditworthiness of major developed economies.
In its first report on sovereign debt, Dagong Global Credit Rating gave US Treasury bonds a AA rating with negative outlook, several rungs below the top AAA that it gave to just seven economies, including Australia.
In contrast, the major Western ratings agencies Standard & Poor's, Moody's and Fitch regard US government bonds as the world's safest asset - a view shared by markets.
Accusing the Western agencies of bias, Dagong also issued relatively low AA- ratings to Japan, Britain and France because of their large debt loads and poor growth prospects.
It warned that these countries could face higher funding costs if they failed to cut their deficits - a situation recently faced by the governments in Greece and Portugal.
China received a AA+ rating because of its ''sustainable fiscal strength'' and more optimistic economic outlook.
S&P, on the other hand, has given the world's most populous economy an A+ rating.
Dagong says its advice is independent and impartial, but the report was launched at the headquarters of Xinhua News Agency, the ruling Communist Party's main propaganda outlet.
The report covered 50 countries which Dagong said accounted for 90 per cent of the world's economic output.
Australia was one of a select group - which included New Zealand and Singapore - to receive the top rating from Dagong.
It said these governments had the strongest levels of solvency and were well placed to enjoy a recovery in the world economy.
In explaining its ratings, Dagong suggested its Western rivals were affected by ''ideology,'' and their ratings did not accurately reflect a government's ability to repay debt.
The report comes after the Chinese President, Hu Jintao, said in April that the world needs ''an objective, fair, and reasonable standard'' for rating sovereign debt.
The ratings could also have implications for the Chinese government's huge holdings of US government bonds, although the country ruled out dumping them earlier this month.
Grandpa: those crazy communists, Chinese President, Hu Jintao, said that the world needs ''an objective, fair, and reasonable standard'' for rating sovereign debt. Objective, fair and reasonable! This is the United States, home to Tim Geithner, Ben Bernanke, Larry Summers, Moody's, Fitch and Wall Street Banks. Fair and reasonable is so "old school". Keep in mind Mr. President, we are a democracy and as such the majority rules and that includes defining fair and reasonable.
With all due respect Mr. Hu Jintao, we have the best and brightest on Wall Street and in Congress. We are coming up on 2 years since the AIG bailout and our crack team of "representatives" are close to voting on a watered down, diluted and polluted financial reform bill to assure that Wall Street will once again peddle toxic financially engineered products around the globe.
Even Timmy Giethner stated our debt would never be downgraded and Ben Bernanke still references positive signs in our economy and neither would intentionally mislead the American people...would they?
Sydney Morning Herald
CHINA is trying to turn the world of credit ratings on its head, by unveiling rival sovereign debt ratings that question the creditworthiness of major developed economies.
In its first report on sovereign debt, Dagong Global Credit Rating gave US Treasury bonds a AA rating with negative outlook, several rungs below the top AAA that it gave to just seven economies, including Australia.
In contrast, the major Western ratings agencies Standard & Poor's, Moody's and Fitch regard US government bonds as the world's safest asset - a view shared by markets.
Accusing the Western agencies of bias, Dagong also issued relatively low AA- ratings to Japan, Britain and France because of their large debt loads and poor growth prospects.
It warned that these countries could face higher funding costs if they failed to cut their deficits - a situation recently faced by the governments in Greece and Portugal.
China received a AA+ rating because of its ''sustainable fiscal strength'' and more optimistic economic outlook.
S&P, on the other hand, has given the world's most populous economy an A+ rating.
Dagong says its advice is independent and impartial, but the report was launched at the headquarters of Xinhua News Agency, the ruling Communist Party's main propaganda outlet.
The report covered 50 countries which Dagong said accounted for 90 per cent of the world's economic output.
Australia was one of a select group - which included New Zealand and Singapore - to receive the top rating from Dagong.
It said these governments had the strongest levels of solvency and were well placed to enjoy a recovery in the world economy.
In explaining its ratings, Dagong suggested its Western rivals were affected by ''ideology,'' and their ratings did not accurately reflect a government's ability to repay debt.
The report comes after the Chinese President, Hu Jintao, said in April that the world needs ''an objective, fair, and reasonable standard'' for rating sovereign debt.
The ratings could also have implications for the Chinese government's huge holdings of US government bonds, although the country ruled out dumping them earlier this month.
Grandpa: those crazy communists, Chinese President, Hu Jintao, said that the world needs ''an objective, fair, and reasonable standard'' for rating sovereign debt. Objective, fair and reasonable! This is the United States, home to Tim Geithner, Ben Bernanke, Larry Summers, Moody's, Fitch and Wall Street Banks. Fair and reasonable is so "old school". Keep in mind Mr. President, we are a democracy and as such the majority rules and that includes defining fair and reasonable.
With all due respect Mr. Hu Jintao, we have the best and brightest on Wall Street and in Congress. We are coming up on 2 years since the AIG bailout and our crack team of "representatives" are close to voting on a watered down, diluted and polluted financial reform bill to assure that Wall Street will once again peddle toxic financially engineered products around the globe.
Even Timmy Giethner stated our debt would never be downgraded and Ben Bernanke still references positive signs in our economy and neither would intentionally mislead the American people...would they?
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