The Mess That Greenspan Made

Like selling apples in the Great Depression

2009-11-07T16:15:00.000-08:00

Anyone who has lived in the southwestern part of the U.S. for any length of time over the past few decades will surely appreciate how grave the situation has become for some Americans when considering that the ranks of day laborers standing on street corners in the morning are no longer restricted to recent immigrants and illegal aliens.

It should be clear to even the most casual observer that the biggest busts have occurred in parts of the country where the biggest booms once flourished - that would be California, Nevada, and Arizona - where tales of woe are now spreading as fast as home prices rose back in the first half of the decade.

The poll to the right from a recent story in the Las Vegas Sun (hat tip EU) reflects the current state of affairs for 551 people in and around Sin City where many are now hoping that the wave of foreclosure sales - homes that once sold for $300,000 now flying off the shelf at around $100,000 - will somehow revive the city's economy to its mid-decade glory.

At this point, they'd probably be happy with simply getting back to a slightly larger fraction of the activity that was seen in the Nevada desert four or five years ago, economic statistics produced during those halcyon days likely to be seen only in history books for many, many years to come.

Anyway, it seems that the Smiths and the Joneses are joining the Rodriguezes and the Hernandezes outside of Home Depots.

To wit:

The new faces of day labor
U.S. citizens are joining immigrants in store parking lots

It sounds like a George Lopez joke.

“Times are so bad that I saw an Anglo day laborer standing outside Home Depot the other day.”

Except it’s true.

In the latest sign of the Las Vegas Valley’s economic free fall, U.S. citizens are starting to show up in the early mornings outside home improvement stores and plant nurseries across the Las Vegas Valley, jostling with illegal immigrants for a shot at a few hours of work.
Experts say the slow-starting but seemingly inexorable trend is occurring nationwide.

“It’s the equivalent of selling apples in the Great Depression,” said Harley Shaiken, chairman of the Center for Latin American studies at the University of California, Berkeley.

But it is not only a sign of the times, they add. If the numbers of citizens among the day laborers in cities across the country continue to grow, it’s likely to increase the ire of followers of TV host Lou Dobbs and others who will see illegal immigrants as stealing food off the tables of the nation’s native-born or naturalized poor.

The whole thing is worth a look, the plight of "americanos" such as 50-year old Ken Buchanan (pictured above) doesn't appear to be all that uncommon around the country with the trend expected to continue for some time.

Will the $50 "limit up" for gold hold?

2009-11-07T06:50:00.001-08:00

The crystal ball was in fine form earlier in the week when, in this item from Monday, the question of another $50 surge for the price of gold early in the month was in store.
Of course, the Reserve Bank of India had a lot to do with rising prices over the last few days, the first week of November seeing a move up of ... about $50 an ounce.

The question now becomes, "Will the $50 limit hold or will sellers suddenly show up?"

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Consumer credit shrinkage

2009-11-06T14:02:00.000-08:00

Econoday reports that consumer credit contracted for a record eighth straight month in September as consumers tightened their belts and lenders tightened credit.

Between consumers sticking their money into savings and banks cutting back on loans, consumer credit continues to tighten and dramatically. Consumer credit outstanding fell $14.8 billion in September to extend a long run of declines.
Revolving credit, mostly credit cards, fell $9.9 billion with non-revolving, mostly car loans, down $4.9 billion. What little good news there may be is that the rate of contraction is easing as consumer credit contracted at a 6.1 percent pace in the third quarter vs. 6.6 percent in the second quarter.

If people have taken on too much debt and are now undergoing the painful corrective process of getting out of debt, how could an easing of the rate of contraction be good news?

What's going on with the GLD inventory?

2009-11-06T12:06:00.000-08:00

One of the surprising developments related to the recent move up in the gold price (that is, aside from India beating China to half the IMF's stash) is that there has been nary an addition to the SPDR Gold Shares ETF (NYSEArca:GLD), the world's most popular gold ETF.
After a huge run-up early in the year, a move that was widely believed to have supported the price increase at the time, inventory is now actually below the level seen in April when the yellow metal sold for some $200 or more less.

Jobless recoveries - a recent development

2009-11-06T09:04:00.001-08:00

Writing in this morning's WSJ Ahead of the Tape column($), Mark Gongloff observes that "jobless recoveries" are a relatively new development.

The time-worn Wall Street gospel is that employment is a lagging indicator, but that isn't always so. It has only lagged significantly in the recoveries that followed the past two recessions.

In the eight recessions between World War II and 1982, payrolls bottomed and unemployment peaked, on average, less than one and two months, respectively, after the recessions ended.

Assuming, as most economists do, that the latest recession technically ended in June 2009, this recovery already is looking jobless.
...
Economists, on average, expect unemployment to peak in February 2010 -- eight months after the recession's assumed end. Even that forecast might be optimistic.

Yes, that's a typo in the graphic above (something that seems to happen quite a bit these days). It should say "Nov. 2001" as the end date for the last recession.

In chart form, the situation is as shown below via the Kansas City Federal Reserve.

Those sharp declines in unemployment following all recessions right up through the 1982 downturn represent an economy that is quite different than the one we have today.

Naturally, the differences were viewed as a good thing during the last two recessions when unemployment peaked at relatively low levels.
Now that we're challenging the early-1980s peak in unemployment with a return trip to lower levels of joblessness likely to come at a sluggish pace, these differences are taking on a whole new connotation.

Jobless rate hits 26-year high at 10.2 percent

2009-11-06T07:11:00.000-08:00

The Labor Department reported that the unemployment rate in the U.S. hit its highest level since March of 1983, rising from 9.8 percent in September to 10.2 percent in October, as nonfarm payrolls saw a net decline of 190,000.
During the early 1980s recessions, the jobless rate peaked at 10.8 percent, a level that looks increasingly likely to be attained again sometime in the months ahead given the continuing reluctance of employers to hire.

The U-6 under-employment rate, which includes discouraged workers and those settling for part-time work instead of full-time work, rose to 17.5 percent, the highest level since this data series began 15 years ago.

Nonfarm payrolls saw declines in the usual areas - the construction, manufacturing, and trade categories all with net losses of over 60,000 in October.

Often considered a good barometer of the health of the economy because it provides an indication of how willing consumers are to spend, the leisure and hospitality category posted a net decline of 37,000 jobs, its third straight monthly decline after a small improvement in July.
Professional and business services payrolls increased by 18,000 due to a surge of 35,000 new temporary workers as other subcategories such as architecture and engineering showed job losses. While hiring of temporary help is a good sign for the economy, it is only a modest gain compared to the other declines.

Naturally, hiring continued in education and health services, what has been the only consistent source of job creation for many years now, as educational services had a net gain of 11,000 positions and health services added 34,000.

While it is clear that the worst of the job losses are now behind us, the fact that layoffs are still occurring at a much faster pace than workers are being hired back (i.e., pushing the unemployment rate higher) should be disconcerting to any of those thinking that the economic "recovery" is gaining significant traction.

Friday morning links

2009-11-06T05:59:00.000-08:00

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Meet your new landlord

2009-11-05T17:54:00.000-08:00

After posting its ninth consecutive quarterly loss - some $19 billion that, somehow, doesn't seem like all that much money any more - ward of the state Fannie Mae is now seeking another $15 billion in federal aid in order to square its books (for the next three months).

The bad news is that things are only getting worse.

Despite efforts to modify existing home loans, delinquencies have nearly tripled from a year ago as unemployment has continued to rise, almost five percent of all Fannie Mae's mortgages now 90-days or more past due.

The company announced a new program that would allow homeowners who are about to lose their home to foreclosure to rent back their home for a year at the prevailing market rate.

To some, this could represent a monthly savings of $1,000 or more relative to their mortgage payment, but then, considering that many homeowners who are about to lose their homes to foreclosure have been paying nothing at all for the last six, nine, or twelve months, this could also be a sharp increase.

Jay Ryan, a Fannie Mae vice president, said the program helps "eliminate some of the uncertainty of foreclosure, keeps families and tenants in their homes during a transitional period, and helps to stabilize neighborhoods and communities".

It also makes for a much more pleasant holiday season...

In this AP report, Peter Schiff quipped, "Taxpayers are now going to own all these houses that (Fannie Mae) should have unloaded. It's going to cost a fortune."

Fight Over Blog Comments Hits High Court

2009-11-05T12:59:00.000-08:00

Aaron Krowne and the crew over at the Mortgage Lender Implode-O-Meter are in court once again, defending their right to disseminate news about mortgage lenders after being sued by New Hampshire-based The Mortgage Specialist who took affront to leaked company data showing up on the Implode-O-Meter website and some anonymous comments that reflected poorly on the company president.

Oral arguments in the New Hampshire Supreme Court were heard yesterday and no determination has yet been made as to whether a lower court ruling would be overturned.

Last year, The Mortgage Specialists won a temporary injunction requesting that a "2007 Loan Chart" document be removed from their website (ml-implode.com) and that the source of the data be revealed along with the name of the anonymous commenter.

While both the loan chart and the offending comments were removed, neither of the sources were provided and so The Mortgage Specialists filed for and won a permanent injunction earlier this year which is now being appealed.

Additional details can be found here and here.

A central point of disagreement between the two parties is whether the Implode-O-Meter is entitled to the same rights as journalists and newspapers, groups that routinely publish news based on anonymous sources and leaked confidential documents.

More fodder for the inflation-deflation debate

2009-11-05T10:02:00.000-08:00

Those thinking that we've seen the last of inflation for a while might want to have a look at what gasoline prices have been doing lately, that is, relative to a year ago. For the second straight week, the national average for the price at the pump was higher than a year ago.
It may not look like much now, but, next month the comparisons will be done against gasoline that sold for as little as $1.61 a gallon last December. Some quick math indicates that the most recent national average of $2.69 a gallon would represent an increase of 68 percent.

This will show up in the inflation data before long, however, at the moment it looks like the year-over-year increases in energy prices may be offset, at least in part, by falling rents.

Bank of England guns the printing press

2009-11-05T08:31:00.000-08:00

It's probably fair to say that they're making a much bigger deal about "quantitative easing" (better known as "money printing") in the U.K. than in the U.S. and for good reason. As a percent of GDP, the amount of money "created out of thin air" in an effort to aid the economy is comparable, however, the U.S. has succeeded in producing at least one quarter of economic growth since the recession began almost two years ago while the Brits have nil.

The tone of the coverage, however, is much different, the latest example being this story at the Telegraph after word that the Bank of England plans to buy even more government bonds.

Bank of England expands money-printing programme to £200bn to fight downturn
The Bank of England has expanded its radical programme of printing money by a further £25bn today as the fight against the deepest downturn for decades is stepped up.

The unconventional plan, which is known as quantitative easing (QE) and was first adopted by the MPC in March, will now see the Bank buy a total of £200bn of UK government bonds, or gilts, and other assets from from financial institutions in the hope the money spent will be invested in the wider economy. Some economists expected the programme to be increased to £225bn.

The paper is full of related stories and has been for months now, the criticism coming fast and furious from the Telegraph and elsewhere.

In contrast, in the U.S., it seems as though you're considered some kind of a nutball or "teabagger" if you complain about the Fed's printing press running overtime.

As best I can tell, that's not so on the other side of the Atlantic. The fact that Prime Minister Gordon Brown is widely viewed as being responsible for the current mess the British find themselves in probably has a lot to do with that.

Anyway, back to the BOE decision and the appearance of yet another colorful equivalent to an American expression as highlighted below.

Experts admit that it's hard to judge whether the policy is working, but with the economy still languishing in recession last quarter, most reckon it's worth expanding.

"The UK economy is still in the High Dependency Unit, but without QE it might have been in Intensive Care, or worse," said Stephen Boyle, head of economics at Royal Bank of Scotland. "The extension of the Bank's asset purchase scheme today reminds us that the risks of doing too little considerably outweigh the risks of doing too much."

The MPC also kept interest rates at the record low level of 0.5pc in an effort to keep money as cheap as possible.

They note that the BOE will soon hold government debt equal to 15 percent of the country's GDP. In the U.S., that would work out to be about 2.1 trillion, about the size of the Federal Reserve's balance sheet that contains less than a trillion dollars in U.S. Treasuries, most of the balance consisting of mortgage backed securities and GSE debt, which, for all intents and purposes are also government liabilities.

Well, at least the British press is maintaining a sense of humor about it all - here's the Bank of England doing some "hoovering".
Yes, "hoovering". We learned that one years ago while visiting. When asked if our room was ready yet, the kind lady at the front desk replied, "They're just finishing up the hoovering".

Of course, we chuckled.

Bob Prechter calls the top

2009-11-05T06:14:00.000-08:00

Head Elliot Waver Bob Prechter was on CNBC with Maria Bartiromo yesterday. Although he lost me many years ago when he said gold would never go over $400, you've got to give the guy credit for calling the bottom in March, an idea that sat quite well with the folks at CNBC.

Calling the top today doesn't seem to be nearly as agreeable.

As they're wrapping up, Maria says: "... and when you see that buying opportunity, I want you in this seat telling us where it is and how to profit from it."

Historians will have a field day with the CNBC archives - Maria, Jim Cramer, Larry Kudlow, Fast Money, etc - when they set about documenting how we got from here to there.

Thursday morning links

2009-11-05T05:33:00.000-08:00

Get these links delivered to your inbox every day.

MARKETS/INVESTING
Oil falls below $80 on firmer dollar, weak equities - Reuters
Gold Declines After Rally to Record Prompts Sales - Bloomberg
Bullion: Investment mania grips gold and silver - Commodity Online
Jim Rogers v. Nouriel Roubini - Globe Investor
Are amateurs running your 401k? - MSN Money
World's 100 hottest gold stocks - Mineweb

ECONOMY
Retailers post better-than-expected October sales - MarketWatch
Fed Signals Return to Growth Alone Won’t Warrant Rate Increase - Bloomberg
Reports Show Conflicting Number of Jobs Attributed to Stimulus Money - NY Times
Is 'cash-for-clunkers' to blame for the dramatic rise in used car prices? - USA Today
Arrogance, Ignorance Recurring in Economic History - PBS

INTERNATIONAL
Bank of England Adds to Stimulus - NY Times
ECB holds rates, clues on withdrawal steps sought - Reuters
Chinese Official Yao Warns of Threat From Inflation - Bloomberg
India Shows Hedge-Fund Savvy With Huge Gold Buy - Pesek, Bloomberg
Rates cut on savings account despite Bank rate being kept on hold - Telegraph
Spain Stocks Top Europe With 40% Latin America Profit - Bloomberg
Dubai Shares Fall on Moody’s Cuts, Oil Decline - Bloomberg
Japan Air Cutting 16 Routes - NY Times

REAL ESTATE
Q&A: The Outlook for Home Foreclosures - Time
Commercial property market to hit bottom in 2010, report says - LA Times
FHA delays the release of disputed audit of its finances - Washington Post
6 signs your home will increase in value - MSN Money

FED/TREASURY/BANKING
Show us the jobs, the Fed says - MarketWatch
Fed stands by rock-bottom interest rates for near future - Washington Post
Banking Break-Up Is Template for Obama’s Zombies - Lynn, Bloomberg
Programs help 'unbanked' avoid high fees - USA Today

INTERESTING
Feeling grumpy 'is good for you' - BBC
L.A.-area real estate agents are holding open mansions - LA Times
JPMorgan Arranging Alabama Swaps Provided Payoffs, SEC Shows - Bloomberg
Goldman Sachs Received H1N1 Vaccine Before Hospitals - ClusterStock

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The last two Fed rate cutting cycles

2009-11-04T19:50:00.000-08:00

Today's decision to keep short-term interest rates unchanged marks month 26 of the current interest rate cutting campaign, Fed chief Ben Bernanke outdoing his predecessor Alan Greenspan in almost every way.
Is there any reason to think that the current cycle will see interest rates rise sooner than they did last time when it took a full 42 months from the first cut to the first baby-step hike?

More importantly, what does the chart above portend for next time, or, do we now share the same future as 1990s Japan where there is no next time - it's ZIRP from here on out?

The significance of the IMF-RBI gold sales

2009-11-04T13:14:00.000-08:00

Much has been written in the last two days about the surprising purchase by the RBI (Reserve Bank of India) of some 200 tonnes of gold bullion, valued at about $6.7 billion, from the IMF (International Monetary Fund).

Is this really a significant event?

Judging by the price of gold since the announcement was made - up about $50 an ounce and showing no signs of stopping anytime soon - it certainly must have been significant.

But why?

The folks at the IMF, who, having long sought to rid themselves of some of their huge stash of gold bars in order to (purportedly) help balance their books and provide aid to underdeveloped countries, made a rather glib announcement about having put their financial house back in order, apparently unaware of how markets might react.

Being a fly-on-the-wall at IMF headquarters over the last few days would surely have provided some insight into this particular matter, however, it could well be that none of the economists and resident experts at the IMF even look at the price of gold, this metal having long ago lost its relevance in the minds of most bankers in a world full of paper money, fast computers, and sophisticated economic models that all failed so spectacularly over the last year.

Of course, the way the yellow metal is viewed by bankers and economists varies greatly depending upon what part of the world you are in. Surely, the Reserve Bank of India employs at least a few economists and they must have weighed in on the purchase.

Like the Chinese, they found the idea of more gold holdings to be irresistible.

We'll probably never know the many details that went into this decision, however, it certainly appears to be much more significant than the IMF conveyed in their press release.

A few thoughts as to why this is so are offered here.

The Delicious Timing of the Transaction

Had this deal been done, say, in March of next year or even during the last month or two of this year, markets would probably not have reacted as they did. As it was, within a few weeks of the IMF gold sale agreement being finalized in September, the gold sales began, wiping out an impressive half of the total authorized sale in very short order.

Since the IMF gold sales come under the umbrella of the recently renewed five-year European central bank gold sales agreement with a reduced cap of 400 tonnes per year (down from 500 tonnes per year in the prior agreement due to a dearth of sellers), the sale to India accounts for half of the entire 2009-2010 sales.

This is shown below in chart form, the IMF sales appended to the right of the graphic that appeared in the latest Gold Investment Digest from the World Gold Council.
After steady declines in recent years as European banks have reduced their gold sales, in comes the IMF to fill the void and - surprise! - the gold price skyrockets.

Prior to the sale, there was much speculation that China would be the first buyer but, obviously, the RBI beat them to the punch and, while the IMF may not have realized it, this was one of the key reasons why markets are now in a tizzy.

This is a clear demonstration of how anxious at least one central bank is to exchange their paper money for something more tangible and the RBI neatly side-stepped the problem that any large buyer always has - driving up the market price while making their purchases.

To their credit, the RBI ended up driving prices higher after they were done buying.

India Purchased the Gold at Market Prices

A back-of-the-envelope calculation shows that the Indian central bank is now already up more than $300 million since buying their 200 tonnes of gold.

This is probably not what the IMF folks thought would happen and you can imagine the raised eyebrows of the staff when working out the deal where they probably figured they had hit the exact top of the gold price surge and what suckers the Indians were.

Press reports indicate that the RBI made their purchases between October 19th and 30th at an average price of $1,045 an ounce and, though it looks like they paid too much based on the chart below, they're still way ahead.

The relatively simple math is as follows: A gain of $50 an ounce is about a five percent rise in the gold price and a five percent rise in the RBI's $6.7 billion is a gain of about $335 million.
Of course, the gold price could go up or down from here, but any smirks that appeared on the faces of IMF staff as they were signing the paperwork were, obviously, premature.

But, more importantly, what does this transaction say about the "value" of paper money and gold if a major central bank is so anxious to spend billions of dollars of the former to buy the latter at over $1,000 an ounce?

If the RBI felt strongly about boosting their gold reserves, why didn't they do it when gold traded at $400 or $500 an ounce a few years back, or even last year when it could be bought for between $800 and $900 an ounce?

European central banks have been selling the stuff for years at much lower prices and surely the Indian central bank could have boosted their reserves then. Why, they could even have bought some of the U.K.'s gold back in 1999 that was dumped on the market at $275 an ounce. Recall that Gordon Brown sold about half of England's 600 tonnes of gold at what is now known as the "Brown Bottom".

Removing the Sword of Damocles

Probably more important than any other factor in the IMF-RBI gold sale is the fact that the proverbial "Sword of Damocles" has been removed from the gold market after hanging there for years, suspended in mid-air, waiting to drop on any buyer of gold who was dumb enough to buy dumb 'ol gold coins when the IMF was about to flood the market with the stuff.

For years, Jim Rogers has been pointing to the looming IMF gold sales as the reason he thought the metal would underperform other commodities.

Well, it's still early, but initial indications are that, not only did the IMF gold sales not cause the gold price to plunge, these gold sales actually caused the price to soar.
Who would have known that, when the IMF gold was finally offered up for sale that half of it would be gone within weeks and, more importantly, the buyer turned out to be someone other than the party that most market analysts were expecting.

For years, the prospect of European central banks and the IMF selling off their huge stockpiles of gold in the open market has been a big reason why buyers were understandably cautious. Analysts have been saying, "Even if the central banks stop selling, the IMF gold will be there to sate the appetite of buyers and that should keep a lid on prices."

So, the central banks have essentially stopped selling and now half the IMF gold is gone within weeks and China is probably already signing paperwork to buy the other half.

The Sword of Damocles is now gone, if it ever really was there.

A Sea Change in Central Bank Thinking

Perhaps the most provocative question that this gold sale has raised in the minds of other central bankers around the world is, "If India's buying, maybe we should be buying too".

As shown below, there are many countries that have woefully small gold reserves and, for better or worse, these same countries are also loaded to the gills with U.S. dollar denominated assets, some of which they'd now be more willing to exchange for gold bars after India has.

China, Japan, Russia, Taiwan and many other countries - mostly in Asia - are now sitting up in their chairs looking around at the other central banks in the world wondering who's going to be next to buy gold after India scored a cool $6.7 billion that quickly turned into a stash that is now worth $7.0 billion.
Surely, even the most dimwitted economists in Asian central banks are now tuned in to the rapidly changing landscape of global gold supply and demand.

While economists in the West may cling to their "money is just a unit of account and gold is nothing special" way of thinking, central bank staff half way around the world are now starting to look at things very differently after the events of this week.

If inflation begins to heat up in the months ahead, then we might just see central banks scramble to buy gold along with the rest of the world.

In a pure fiat money system, there is nothing to back a national currency other than faith in the government that issues it and confidence in the central bank that prints it.

Oh yes, and the central bank's gold.

Even the IMF noted in a recent statement that its (still) massive gold reserves give its balance sheet a "fundamental strength".

Clearly, other central banks around the world, along with millions of investors, feel the need for this "fundamental strength" too.

No change from the Fed

2009-11-04T11:36:00.000-08:00

Aside from a reduction in the purchase of GSE debt from $200 billion to $175 billion, there were no substantive changes to the Federal Reserve's policy statement today after the central bank concluded two days of deliberation.

Naturally, the "freakishly low" short-term lending rate of between 0.0 and 0.25 percent will be maintained and, more importantly, the key phrase "for an extended period" was left intact.

For those of you not wearing a Fed decoder ring, this means, "Continue to speculate with borrowed money on any asset class that you think might go up in price because you've got nothing to fear from the central bank".

Of course, markets reacted as you might have expected - the dollar went down and just about everything else went up. Gold moved up about $6 an ounce within minutes

This is shaping up to be a "recovery" in asset prices that looks a lot like the last one. The only thing is, if history is a guide, asset prices don't really start to move until they start raising interest rates - that seems to be many, many months away.

For those of you who might be interested in this sort of thing, the last two policy statements are shown side-by-side below.

Just a little light typing was required this month.

I'm probably not alone in thinking that this is going to end badly ... again.

More bubble talk from the Financial Times

2009-11-04T07:30:00.000-08:00

Here's some more food for thought from the Financial Times for the many bubble-deniers in the world today, such as Jim Rogers as seen in this item earlier today. The British business daily seems to be full of "bubble stories" in recent weeks, just a few days ago publishing Nouriel Roubini's Mother of all carry trades faces an inevitable bust.

China rushes towards a Japan-style bubble
By Peter Tasker

Emerging markets, it seems, have had a good crisis. In contrast to the debt-ridden G7 economies, they have quickly resumed their growth trajectory. No surprise, then, that US emerging market mutual funds are experiencing record inflows. The stellar performance of the Brics markets - Brazil, Russia, Indian and China - is due to continue into the distant future.

Such is the narrative now forming among investors. To anyone who has lived through the rise and fall of the Japanese bubble economy, it should set off alarm bells.

Remember that it was in the years following the 1987 "Black Monday" crash that Japanese assets went from being expensive to absurdly overvalued and the Nikkei's dizzy rise to 39,000 forced the bears to throw in the towel.

Then, as now, the logic seemed unassailable. While the western world was stuck in the post-crash doldrums, the Japanese economy had got back on track with apparent ease. Japanese corporations were using their high market capitalisations to finance acquisitions of foreign trophy assets. Japanese banks boasted the world's strongest credit ratings.

But what you saw was decidedly not what you got.

Just the fact that government sponsored bank lending in China this year has grown to staggering proportions should set off alarm bells for most people, but, human nature being what it is, many look past that development all too easily.

The Wall Street Journal joined in with their own bubble warning of sorts with the lead story in the Money & Investing section today - Fears of a New Bubble As Cash Pours In.

Pretty straightforward stuff - zero percent interest rates, a large and growing carry trade, government profligacy in the name of economic recovery.

Back to the Financial Times and the parallels between 1980s Japan and 2000s China...

The crisis, far from leaving Japan unscathed, exacerbated its structural problems and laid the groundwork for a far greater disaster. And it was the weak western economies, not Japan, that produced healthy investment returns over the next decade.

In reality, 1980s Japan was never going to be terminally damaged by weakness in export markets. Its current account surplus and strong fiscal position provided the macro policy leeway to make any slowdown strictly temporary. The Bank of Japan duly put the pedal to the metal and the recently deregulated banks went on a patriotic lending spree. High-end consumption boomed but the real action was in the asset markets and capital investment, which soared as a proportion of gross domestic product.

Sound familiar? It should, because the same dynamic is evident today in China and some other emerging economies.

Interest rates have been far too low for far too long. If the natural interest rate is, as the Swedish economist Knut Wicksell posited, around the level of nominal GDP growth, then China's interest rates should have been close to 10 per cent for most of this decade. Alan Greenspan, former chief of the US Federal Reserve, has been criticised for holding interest rates too low and setting off a housing and credit bubble in the US. But if US monetary policy was wrong for the US, it was even more wrong for the high-growth countries that "imported" it. The result could only be a massive misallocation of capital.

At the 2008 peak, the price-to-book ratio of the Shanghai stock exchange was over seven times, well above the five times achieved by Japanese stocks in 1989. After the turbulence of the past 18 months, the ratio has fallen to 3.3 times, still the world's second highest after India, and residential real estate trades at multiples of income that make the US housing boom look tame. Bulls justify such lofty valuations by plugging high growth numbers into their models. Historically, however, the linkage between high GDP growth and investment returns is tenuous. The years of the Japanese economic miracle saw poor stock market performance, and the market indices of high-growth economies such as Korea, Taiwan, and Thailand have made little progress for 20 years in dollar terms.

What is scary is that the current frothiness of emerging markets, centred on China, may be only a taste of what is to come.

For most of the 1980s, Japan, like China today, used government direction of bank credit ("window guidance") to overlay monetary policy. It was the combination of banking deregulation and the G7-sanctioned surge in the yen that ushered in the final manic stage of the Japanese bubble.

At its peak, the grounds of the Imperial Palace in Tokyo had a greater theoretical value than the entire state of California. By then there was no way out - asset market collapse and financial system wipe-out were baked in the cake.

If China continues to follow the Japanese template, the end of the dollar peg will be the trigger event, setting off a Godzilla-sized credit binge. Why would China's rulers embark on a such a disastrous course? Because the alternative - unleashing deflationary forces stored up over years of mercantilist policies - would be too painful to contemplate. That was the choice made by Japanese policymakers, who had 100 years' experience of managing a quasi-capitalist economy.

This time the denouement would be one of the biggest bubbles in history, probably in scale and certainly in number of people involved. Could China weather the subsequent financial turmoil as stoically as Japan? It seems unlikely; at the least its ascent to global hegemony would suffer an interruption.

If China does end the dollar peg, then it will be, "Katie bar the door" - we'll see things that will make even the 1980s Japan bubble look tame.

It's hard to imagine that the Chinese government will allow that to happen, but, currency crises (something that we may be barreling toward at the moment) have a way of forcing leaders to do things they might not otherwise do.

Jim Rogers on Nouriel Roubini

2009-11-04T06:06:00.000-08:00

Billionaire Jim Rogers was on Bloomberg this morning and he sounded a little bit more cranky than usual, particularly when talking about current market conditions as they relate to the growing chorus of bubble callers, the most prominent of whom is Nouriel Roubini.
Click to play in a new window
There's a related report at Bloomberg.com with a few more details, including another demonstration of Rogers' fixation with "homework".

Asked if he agreed with Roubini's recent bubble characterization for many asset markets, Rogers replied, "The only bubble I see forming in the Western world is the United States government bond market. ... It’s clear Mr. Roubini hasn’t done his homework, yet again."

Wednesday morning links

2009-11-04T05:27:00.000-08:00

TOP STORIES
Fears of a New Bubble as Cash Pours In - WSJ
Currency minters put shine on gold - Globe Investor
Wall Street Has a Gambling Problem - Huffington Post
Congress Poised to Keep Homebuyers’ Tax Credit - NY Times
Gasparino: Here's The Real Reason Wall Street Imploded - ClusterStock
Goldman closes gap on rival with two M&A deals - MarketWatch
The coming explosion at Chrysler - CNN/Money
CIT's long goodbye - CNN/Money

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MARKETS/INVESTING
Gold hits record above $1,095/oz - Globe Investor
Oil up above $80 on weak dollar, lower inventories - AP
The gold market may have too many believers - MarketWatch
Rogers Says Roubini Is Wrong on Bubbles as Gold, Stocks Rally - Bloomberg
The Top Ten Reasons You Sold Stocks on March 9th, 2009 - Howard Lindzon
Former Bears' Take on the Market’s Future - MoneyShow
Money Managers Are Still Bullish - Barron's

ECONOMY
Private-sector jobs fall 203,000, ADP says - MarketWatch
Auto sales flat overall, but some have big gains - USA Today
White House warns that job creation will lag U.S. recovery - MarketWatch
Johnson & Johnson to cut up to 8,000 jobs - CNN/Money

INTERNATIONAL
China rushes towards a Japan-style bubble - FT
World Bank sees no property bubble in China - MarketWatch
Germans Frustrated Over G.M. Decision to Keep Ope - NY Times
IMF sees East Asia economies surpassing euro zone: report - MarketWatch
Asset bubble warnings, international monetary institution edition - FT AlphaVille
Macau's casino revenue 'whispered' at record in October - MarketWatch
UK service sector growth buoys recovery hopes - Telegraph
China Should Drop Yuan's Dollar Peg: Merrill Lynch - CNBC

REAL ESTATE
Almost $300B in housing aid (and only $60B of it for renters) - Time
Real Estate Price Plunge Makes U.S. Homeownership Perilous Path - Bloomberg
A Tale of Four Trial Modifications at IndyMac Bank - Mandelman Matters
No Money Down Mortgages Continue - FalkenBlog

FED/TREASURY/BANKING
Why Bernanke And Geithner's Gambit Fails - Market Ticker
Ben Bernanke's Secret Plan: Raise Rates Too Late - Business Insider
Give the Power to Create Credit Back to the People - Washington's Blog
Good times may be gone for Treasury funds - MarketWatch
Bank of America Reneges on Card Costs - TheStreet.com

INTERESTING
Man made up knife attack to miss work - AP
Bite Marks Show T. Rex Teens Fought Viciously - LiveScience
China Approves Disney Theme Park in Shanghai - NY Times
To Breed or Not to Breed? - h+

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Santelli on the U.S. dollar

2009-11-03T18:40:00.000-08:00

Another Rick Santelli / Steve Liesman shoutfest ... Santelli wins again.

Liesman: "The tree's falling down on you Rick. That's the problem."

How long can public pensions continue?

2009-11-03T12:49:00.000-08:00

Combine a burst housing bubble (and all the attendant vanishing tax revenues) with poor investment returns and a system that was unsustainable to begin with and you have the public pension system in California as reported by Bruce Bialosky at Town Hall.

The law gives the employee pension benefits of 3.0% of their final income for each year of service. It also made the 3.0% amount retroactive to the beginning of their employment period. That means if you work 20 years you receive a pension benefit equal to 60% of your final income. The problem was compounded by how they calculated the income on which to base the pension.

Everything including the kitchen sink adds to the final income level. Things such as auto allowance and bonuses boost the final number. If the employee did not use vacation pay or holiday pay for the prior 10 years that adds to the base salary to determine the income. Understanding that in most private sector jobs when you do not use your vacation, you lose your vacation, the ability to accumulate vacation time opens up the system for vast manipulation. Peter Nowicki, the Moraga Orinda fire chief, retired at age 50. His final salary was a whopping $185,000, but small compared to his annual pension benefit of $241,000. Making that matter worse, Nowicki was hired as a consultant to the fire department for an additional $176,000 per year -- on top of his retirement benefit.

Caution would probably be advised here as we have friends and relatives in both California and Pennsylvania who are retired from the state educational system, now benefiting from this sort of government largess (though not to the same degree as the fire chief above).

It's probably no coincidence that both states had big problems balancing their budget this year and would have had to let thousands of workers go if not for the many billions of dollars that came pouring in from Washington D.C.

Last I heard, there were more than 4,000 retired public sector employees pulling down more than a hundred grand a year in California with Illinois apparently not far behind as reported here. Over the years, cities such as San Diego have been rife with double-dipping like Chief Nowicki above, what does not appear to be an isolated case.

In Los Angeles County there are over 3,000 people receiving greater than $100,000 per year in pension benefits. In San Francisco, it was found that 25% of employees’ income spiked up over 10% in the final year of their work. The San Francisco grand jury found that amount cost the city $132 million.

Some would argue why not game the system? Let’s say you start working for the government when you are 30 years old and work for 25 years. Your final income with all the fancy calculations ends up at $120,000. That means you would receive $90,000 plus full health care benefits. You can either live on that very nice retirement or you are free to get another position. After all, being 55 years old, you are still in your prime earnings years. Where in the private sector are there comparative opportunities?
...
Private sector employees now receive less annual income than their public counterparts. Private sector employees will have to work well into their seventies to pay for these public sector employees’ retirement benefits which far exceed what the private sector offers. The public will, little by little, become aware of this upside-down arrangement.

The voters in California sent a strong message earlier in the year when they rejected the budget changes proposed by Sacramento and that's probably just the beginning (of course, lots of people are now voting with their feet in the Golden State).

It's funny that those who work in the public sector (at least the ones that I've spoken to on subjects such as this) have absolutely no appreciation for balancing budgets and making ends meet given the realities on the ground.

On the topic of "fixing" the public schools, one recent conversation went like this:

Retired teacher: "Doubling the number of teachers and cutting the classroom sizes in half is the only surefire way to provide consistently better education. You can't have 35 kids in a classroom and expect a quality education."

Me: "Where does the money come from to pay all these teachers?"

Retired teacher: "The taxpayers!"

Number 11 with a bullet

2009-11-03T10:22:00.000-08:00

Here's what the most recent World Official Gold Holdings from the World Gold Council look like with the transfer of 200 tonnes of the yellow metal from the IMF to India.
Hopefully, they're taking delivery of the stuff rather than trusting that gold held in New York vaults will be transferred to their account or somesuch.

Gold! India! Gold!

2009-11-03T09:21:00.000-08:00

Yesterday's theory of a "limit up" of $50 a month for gold gained more credibility during Day 2 of November, the price of the yellow metal given a shot in the arm by the announcement from the IMF that they had sold 200 tonnes of gold to the Reserve Bank of India - about half of its entire planned sales that have been talked about for years, but only recently approved.

Commodity Online, which originates in India, provided the following commentary in an effort to explain why India acted first - before China - to grab this metal.

Dubai-based bullion analyst Mark Robison says everyone expected China to buy the IMF gold in the first phase. “It is a surprise that India has jumped in the first place to purchase the IMF gold. India is the largest marketplace for gold in the world. I think by buying IMF gold, India has shown increased interest in diversifying out of US assets as the dollar loses value against other currencies,” Robison told Commodity Online.
...
"I strongly welcome this transaction with the Reserve Bank of India," the IMF's managing director, Dominique Strauss-Kahn, said in a statement.

"This transaction is an important step toward achieving the objectives of the IMF's limited gold sales programme, which are to help put the fund's finances on a sound long-term footing and enable us to step up much-needed concessional lending to the poorest countries"

Yeah, right.

Had Strauss-Kahn known that this sale would make the gold price shoot up $20 an ounce, now looking like it's bent on hitting $1,100, maybe he'd have kept the news to himself.

Central banks around the world that are sooooo anxious to exchange their paper money for dumb old gold bars must make other central banks around the world wonder about the paper money that they hold.

While some economists (mostly in the West) still think of the yellow metal as a "barbarous relic", others (mostly in Asia) certainly do not.

Commodity Online also filed this report about China perhaps being next to belly-up to the IMF gold bar (pun intended).

With India and China emerging as the leading economies to beat recession in the world, Indian central bank’s decision to buy 200 tonnes of International Monetary Fund’s gold at $6.7 billion has added to the country’s power to impact the global market.

And, if Reserve Bank of India bagged the 200 tonnes now speculation is rife over which bank will pick up the remaining 200 tonnes the IMF wants to sell in the market.

The first contender now is China, which has been stockpiling gold for quite sometime now. China is slowly shifting its focus from dollar to gold and it now wants more gold reserves in place of its foreign reserves in dollars.

It wouldn't be surprising to hear that central bankers in China are now fuming at India having beaten them to the punch.

Now, there are only 203.3 tonnes of IMF gold left and the price has just risen by a couple percent - if China does snap up the balance quickly, all parties would be well advised to keep that news to themselves for a while, lest the gold price quickly get out of hand.

Here's an update to yesterday's "limit up" graphic:
We're already about two-thirds of the way there after just two days...

Failed banks are popping up all over...

2009-11-03T06:50:00.000-08:00

They've got another neat interactive graphic over at the Wall Street Journal (hat tip Patrick) where you can see the timing, size, and location of all 140 banks that have failed since 2008 along with a handy sortable table with important statistics. For maximum enjoyment, click on the first link above and then hit the Play button.
The 140 failed banks still don't compare to the 747 savings & loans that went belly-up in the late-1980s and early-1990s (that's according to Wikipedia, the FDIC puts the total at almost 3,000), but we're still a long ways away from "normal" conditions in the U.S. banking sector.

Tuesday morning links

2009-11-03T05:20:00.000-08:00

TOP STORIES
Lloyds and RBS cut down to size - BBC
India buys 200 tonnes of IMF gold - Mineweb
Government Statistics and Lies - Texas Straight Talk
Berkshire Buys Burlington in Buffett’s Biggest Deal - Bloomberg
He earned $53 million opening doors to CalPERS money - LA Times
The Real Pending Crisis: Public Pensions - TownHall
The story so far, in one picture - Krugman, NY Times
Thinking the Unthinkable - Kunstler, CFN
How Big Banks Fleece You - Daily Beast

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MARKETS/INVESTING
Oil down to near $77 as stocks fall, dollar gains - AP
Gold returns to near record high as dollar drops - Reuters
Einhorn up almost 4% in October - MarketWatch
Schwab rolls out free-trade ETFs - CNN/Money
Dow Theory Sell Signal? - Saut, Raymond James
I Thought I Wanted An ETF? - Safe Haven
Boom and Gloom - NewsWeek

ECONOMY
Three strong economic reports lift recovery hopes - USA Today
The Austrians versus the Mainstream Potter and His Wheel - Mises
Obama urges bold action to create jobs as economy gains strength - LA Times
Pending Sales of Existing Homes in U.S. Rise 6.1% - Bloomberg
Why stimulus jobs aren't built to last - CNN/Money
Nobody Said "Stimulus 2" - Reason.com

INTERNATIONAL
E.U. Lifts Growth Forecast for 2010 - NY Times
China's economic growth to exceed 10% in Q4 - CHINADaily
How and why China will flood the gold market - StockHouse
China property sales may get boost before year end - MarketWatch
Australian central bank hikes policy rate for second month - MarketWatch
Spain’s Jobless Claims Extend Climb - WSJ Economics
Carmakers keen on auto finance arms - CHINADaily
BOJ: Recovery to moderate into 2010 - MarketWatch

REAL ESTATE
More walk away from homes, mortgages - USA Today
30 mortgage modification companies being forced to close their doors - KTNV
How That $8,000 Tax Credit Subsidizes Housing Deterioration - Seeking Alpha
Five Reasons the U.S. Doesn't Need More Home-Buyer Perks - WSJ
Boise And Provo Are The New Foreclosure Hot Spots - The Money Game
Foreclosures just 4% of homes for sale - O.C. Register

FED/TREASURY/BANKING
Why Keep Geithner? - The Big Picture
No hints, winks, nods from Fed about rate hikes - MarketWatch
Bank of America Joins China as Buyer of Treasuries - Bloomberg
IMF chief: Banks haven't learned - USA Today

INTERESTING
Why a high IQ doesn't mean you're smart - New Scientist
Republican adviser faces health care's costly bite - Washington Post
Yankees World Series Victories Boost Economic Growth - WSJ Economics
Palinoia - Taiblog

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