Daily Digest

Daily Digest - Apr 20

Monday, April 20, 2009, 9:59 AM
  • The End Is Near! (Yay!) (H/T Suzie)
  • Volcker Knows - Kohn is Conning Inflation
  • The Trend May Not Be Your Friend
  • Stress Test: Debating How and What to Release
  • On Good and Bad Financial Innovation
  • Citi losing foreign deposits
  • US to put conditions on Tarp repayment
  • Bank bailout plan's 'stress tests' already causing stress
  • Economic Cliff Diving - By the Charts...NO Bungee Cord
  • Sunday Funnies (Humor, YouTube Video at bottom makes me happy I'm not a Congressman)
  • Larry Summers: "Substantial risks; issues in the global economy, commercial real estate"

Economy

The End Is Near! (Yay!) (H/T Suzie)

The Transition movement was started four years ago by Rob Hopkins, a young British instructor of ecological design. Transition shares certain principles with environmentalism, but its vision is deeper - and more radical - than mere greenness or sustainability. "Sustainability," Hopkins recently told me, "is about reducing the impacts of what comes out of the tailpipe of industrial society." But that assumes our industrial society will keep running. By contrast, Hopkins said, Transition is about "building resiliency" - putting new systems in place to make a given community as self-sufficient as possible, bracing it to withstand the shocks that will come as oil grows astronomically expensive, climate change intensifies and, maybe sooner than we think, industrial society frays or collapses entirely. For a generation, the environmental movement has told us to change our lifestyles to avoid catastrophic consequences. Transition tells us those consequences are now irreversibly switching on; we need to revolutionize our lives if we want to survive.

Volcker Knows Kohn is Conning Inflation

From Dow Jones: Heavyweights Kohn,Volcker Spar Over Inflation Goal

Paul Volcker grilled [Federal Reserve Vice Chairman Donald Kohn] over the Fed's apparent effort to convey that it considers a roughly 2% inflation rate to be appropriate for the economy in the long term.

Former Fed Chairman Volcker ... questioned how the Fed can talk about both 2% inflation and price stability...

In the minutes of its January policy meeting, the Fed said ... 2% inflation would be ... price stability.

"I don't get it," Volcker said ... By setting 2% as an inflation objective, the Fed is "telling people in a generation they're going to be losing half their purchasing power," Volcker said. ...

Kohn responded that by aiming at 2%, "you have a little more room in nominal interest rates ... to react to an adverse shock to the economy."

"Your problem is 2[%] becomes 3 becomes 4," Kohn told Volcker. But other central banks with a roughly 2% target haven't had that problem, Kohn said.

Fed officials, he added, "need to be clear about why we're choosing the number we're choosing."

And Volcker on Congressional oversight of the Federal Reserve, from Bloomberg: Volcker Says Fed's Authority Probably to Be Reviewed

"I don't think the political system will tolerate the degree of activity that the Federal Reserve, in conjunction with the Treasury, has taken," Volcker [said] ...

U.S. lawmakers from both political parties have expressed concern in recent months that the central bank has overstepped its authority by creating several emergency credit programs aimed at reviving lending and ending the recession.

"I think for better or for worse we are at a point where the Federal Reserve Act, after all that has been happening in the last year or more, is going to be reviewed," Volcker said.

The Trend May Not Be Your Friend

Government and the Fed just did a lot of wrong things.

So at the height of the Depression, in 1933, as Roosevelt was coming into his first term, we had 25% total unemployment; 37% (!) of non-farm workers were unemployed; 4004 banks had failed; $3.6 billion in deposits was lost. That's like trillions in dog years, okay? At least in 2009 dog years. You end up with bread lines, and the stock market just keeps going down, down, down (with a few marvelous bear-market rallies - maybe like what we are seeing today?).

Roosevelt comes along and we get the New Deal. He applied massive stimulus. By the way, his stimulus hired people. He put them to work building parks and the Tennessee Valley Authority. They were building a lot of infrastructure. He didn't put it into Democratic wish lists and permanent wealth transfers and welfare and special-interest agendas to increase the overall budget beyond what we could ever hope to actually pay for (without even more radical tax increases), which the Obama Administration is clearly doing. We'll get to the effectiveness of current policies in a moment.

Then let's look at what he did in 1937. With the economy somewhat on the mend, he tried to balance the budget, raise taxes, reduce deficit spending. And what happened? We had another deep recession and unemployment jumped back up to 20%. It was hard to pull that stimulus back out. And it's particularly dangerous to raise taxes in a weak economy.

Most of the people in this room are old enough to remember the Blue Screen of Death. Remember, you would be typing along on your computer and all of a sudden you would get this screen, saying, "You have an impossible error." (Okay, what's an "impossible" error? Clearly something happened that was possible.)

And the only thing you could do was just unplug the thing. You couldn't even turn it off - you just had to unplug the computer. It was the Blue Screen of Death. Well, that is kind of what World War II was for the world. We unplugged the world economy, and then we started from a new base. We hit the reset button. We were at lows everywhere in the world; places were in a mess. So we began to grow from there. The bebt supercycle started. For all the recessions and bear markets, a new stability ensued, and debt and leverage began to grow.

We'll revisit that point in a moment. We are doing just what I do in my regular e-letter: I'm going to take three or four ideas, and at the end I'm going to try and tie them all together. Let's see how successful I am.

Stress Test: Debating How and What to Release

From Bloomberg: Bank Regulators Clash Over Endgame of U.S. Bank Stress Tests.

The U.S. Treasury and financial regulators are clashing with each other over how to disclose results from the stress tests ... with some officials concerned at potential damage to weaker institutions.

With a May 4 deadline approaching, there is no set plan for how much information to release, how to categorize the results or who should make the announcements ... If all the banks pass, the tests' credibility will be questioned, and if some banks get failing grades and are forced to accept more government capital and oversight, they may be punished by investors and customers.

A statement on the methods is scheduled for release April 24.

While weaker banks deemed to need additional capital will be given six months to raise it, financial markets may have little more than six minutes of patience before punishing them if the information is publicly released, one official said.

Maybe we can help Geithner and put together a list of what we think should be released.

On Good and Bad Financial Innovation

When does the frictional cost of having these all these savvy and highly paid risk professionals (who may overengineer matters to justify their own existence) become counterproductive relative to the real performance gains? Funny that that the cutting edge quants haven't turned their modeling skills loose on that question.

Citi losing foreign deposits

Via econompic -- interesting disclosures from citigroup in light of recent fed foreign currency swap arrangements. nearly a fifth of foreign deposits have left the balance sheet of the bank.

US to put conditions on TARP repayment

Strong banks will be allowed to repay bail-out funds they received from the US government but only if such a move passes a test to determine whether it is in the national economic interest, a senior administration official has told the Financial Times.

"Our general objective is going to be what is good for the system," the senior official said. "We want the system to have enough capital."

Bank bailout plan's 'stress tests' already causing stress

"They've gotten themselves in a pickle on this thing," said Bert Ely, an independent banking analyst. "It's clear they didn't think through how this was going to play out."

Economic Cliff Diving - By the Charts...NO Bungee Cord 

Sunday Funnies (Humor, YouTube Video at bottom makes me happy I'm not a Congressman)

Larry Summers: "Substantial risks; issues in the global economy, commercial real estate"

Here is the transcript of Larry Summers on NBC's ‘Meet the Press'

A few excerpts:

GREGORY: Let me ask -- the president has talked about glimmers of hope in the economy. And obviously, what the government has done, through a stimulus package; what the Fed has done through buying up debt is try to create demand in the economy.

My question is, if you're seeing any easing in the economy or an easing of the recession, is that because the government is propping the economy up?

Or do you see elements of recovery that are self-sustaining?

SUMMERS: Well, I think you've got to give the government credit, some credit for what's happened, but these have the potential to build into something that's self-sustaining. That's certainly not something that's been established to this point, and that's why we're going to need to maintain strong policies for quite some time to come.

But I think we can take some satisfaction that, after a period when there was literally no positive indicator to be found, when it seemed like our economy was in a -- a vertical, it's a more mixed picture today. And you've got to give public policies a significant part of the credit for that.

But as the engine turns over, you know, at some point, it will become something that's much more -- much more self-sustaining. But right now, we've got a long way to go in terms of supporting this economy.

GREGORY: Let me have you respond to some criticism. New York Times columnist and economist, and opponent on these matters of the administration, Paul Krugman wrote this week that the administration should be careful not to -- to count a recovery a before it's hatched.

He wrote this, specifically, about whether a full-blown depression is still possible. This is what he said: "Can a depression happen again? Well, commercial real estate is coming apart at the seams. Credit card losses are surging. And nobody knows just how bad things will get in Japan or Eastern Europe. We probably won't repeat the disaster of 1931, but it's far from certain that the worst is over."

What do you say?

SUMMERS: You know, I disagree with Paul about a lot of things, but he is right to be raising cautions. That's why, when I just spoke about the economy, I said that, after a period when it -- when everything was negative, there were now some mixture in the indicators. We don't know what -- we don't know; we can't know with certainty what's going to happen next, and there certainly are real risks ahead.

That's why the president's approach to the banking system involves looking at a stress test that contemplates an adverse outcome and thinks about how the financial system will function in an adverse scenario. That's why we're very focused on maintaining the pressure.

No one is in any position to declare any kind of victory here. But the fact that no one can declare victory doesn't mean that we shouldn't take note of developments as they unfold. And the developments, as I say, are more -- are more mixed now.

But cautions that we've got a long way to go; that there are still substantial risks; that there are downside contingencies that we've got to prepare for; that there are issues in the global economy; that there are issues in commercial real estate, that's right.

20 Comments

Davos's picture
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Re: Daily Digest - Apr 20

Today's news starts out with a guy who gets exponential math - and a guy that doesn't. I suppose since Kohn works for the Fed that I can't call him a moron, like freedom of speech permits me to call Summers and Geithner.

Too bad.

I can only wonder if Kohn knows better. He must. Speaking of musts, there must be a way to calculate the debt bubble. In other words, when all that debt out there is simply out of reach of repayment - lacking inflated salaries anyway. Probably a waste of time since I'm sure that day is here.

Take care

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Congressman Barrett video

Love this site!  Great information.

Watched the Gresham Barrett video from YouTube.  Kinda makes one wonder if this is the way Paris was in 1789 just before the French Revolution, ya know!

 

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Re: Daily Digest - Apr 20

I love your daily posts Davos. Its nice to have some real info peeking through all the noise.

I want to say in response to the last article where Summers says their are still "substantial risks", and "downside contingencies", we must prepare for. I wonder if Gov is going to warn of those risks and contingencies before hand, so people have time to prepare? I'm curious if everything will be after the fact, with no time for the average man to prepare, as things have been thus far.

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Re: Daily Digest - Apr 20

Hello SPM:

I think they (Summers et al) will do about as well with this mess as the govt. (local and federal) did with Katrina. I'm personally surprised Summers said what he did, from a guy who I don't think could find his rear with both hands and the lights on that was more than even I expected. The 3rd hour of FSN this weekend pretty much, at least in my mind, summarized Summers - a guy that failed his way to the top.

He is right up there with Cramer.

Take care

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Debt Bubble

@Davos "there must be a way to calculate the debt bubble. In other words, when all that debt out there is simply out of reach of repayment - lacking inflated salaries anyway. Probably a waste of time since I'm sure that day is here"

Already been done Davos, the point was reaced in late 2006 according to Antal E. Fekete.

"The year 2006 was the watershed. Late in that year the marginal productivity of debt dropped below zero for the first time ever, switching on the red alert sign to warn of an imminent economic catastrophe".  http://www.financialsense.com/editorials/fekete/2009/0413.html

This is a superb article and a fresh approach that explains a lot - for example the reason Japans attempt to re-inflate failed. Reccommended!

Cheers,

David.

 

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Re: Debt Bubble
Quote:

"The year 2006 was the watershed. Late in that year the marginal productivity of debt dropped below zero for the first time ever, switching on the red alert sign to warn of an imminent economic catastrophe".  http://www.financialsense.com/editorials/fekete/2009/0413.html

This is a superb article and a fresh approach that explains a lot - for example the reason Japans attempt to re-inflate failed. Reccommended!

Cheers,

David.

 

Hey David,

that Financialsense article makes some bad assumptions about the order in which the money supply is created.

Have a read of this newsletter from Prof Steven Keen on the topic.

http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/

- Ernie.

 

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Re: Daily Digest - Apr 20

Wall Street dives 3.5pc

http://www.abc.net.au/news/stories/2009/04/21/2548030.htm?section=justin

A trader works on the floor of the New York Stock Exchange

Steep fall: Wall Street lost 3.5 per cent overnight (Reuters)

Wall Street ended a six-week winning streak this morning as the market lost 3.5 per cent after the Bank of America reported a rise in troubled loans.

The comments have renewed fears about the health of the broader banking sector.

Bank of America lost more than 20 per cent with news its credit quality had deteriorated substantially, far outweighing the bank's better-than-expected rise in profits.

A report in The New York Times has also put pressure on banking stocks.

The newspaper says US Government officials have found they can avoid asking Congress for more bank bailout funds by converting the existing loans to some US banks into common stock - a move which would dilute stockholders' stakes.

The Dow Jones Industrial Average closed down 289 points to 7,841 and the Nasdaq Composite Index closed 64 points lower to 1,608.

Last night's falls follow a solid six weeks of trading which saw the Dow post its biggest gain over that time frame since 1938.

Shares in Britain closed 2.5 per cent lower overnight, with the Bank of America results weighing on financial stocks across the Atlantic.

Mining shares were also down due to weaker base metal prices and oil producers lost ground on a slide in the price of crude.

But the stronger gold price has helped to boost gold mining shares, including Randgold Resources, which gained almost 8.5 per cent.

In economic news, the Confederation of British Industry said Britain had been through the worst of the recession and would return to modest growth in the second half of next year.

At the close, London's FT100 Index was down 102 points to 3,990.

In local futures trade, the Share Price Index 200 was down 64 points to 3,701.

At 7:00am AEST the Australian dollar was down more than 2 cents from yesterday's close, buying 69.59 US cents.

On the cross-rates it was at 0.5386 euros, 68.15 Japanese yen, 47.89 pence sterling and against the New Zealand dollar, it was at $NZ1.262.

Spot gold gained $14 to $US885.42 an ounce and West Texas Crude lost more than $4 to $45.82 a barrel.

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Re: Daily Digest - Apr 20

Big Bank Profits Are Bogus (I thought the chart showing BOA had the least derivative exposure was interesting, especially after reading the above post).

I'm reading this now, and it is getting really interesting...

Smaller banks: On its "Problem List," the FDIC reports only 252 institutions with assets of $159 billion. In contrast, our list of at-risk institutions includes 1,816 banks and thrifts with $4.67 trillion in assets. That's seven times the number of institutions and 29 times more assets at risk than the FDIC admits.

What Explains the Huge Gap Between
Official Declarations and Our Analysis?

We all use essentially the same data. And conceptually, the analytical approach is also similar.

The primary difference is that the regulators have an agenda: Instead of protecting the people from bank failures, they're trying harder than ever to protect failed banks from the people. Specifically ...

• They have forever hidden the names of the banks on the FDIC's "Problem List," making it almost impossible for average consumers to get prior warnings of troubles.

• They have never disclosed their own official ratings of the banks — the CAMELS ratings — making it difficult for the public to find safe institutions they can trust.

• They have religiously underestimated — or understated — the depth and breadth of the debt crisis.

• And as I explained a moment ago, they have rigged their recent stress tests to give passing grades to all of the nation's 14 largest banks, sending the false signal that even the most dangerous among them are somehow "safe."

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Re: Daily Digest - Apr 20
SPM wrote:

I love your daily posts Davos. Its nice to have some real info peeking through all the noise.

+1 to that comment.

Davos has the ability to pluck out the essence from a lot of information - the summaries are much appreciated

:-)

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Re: Daily Digest - Apr 20

Hello SPM and Maveri, It is a pleasure to contribute to this fine site Chris has created. I learn a lot after I create the Daily Diges blog from everyones insite and posts, take care

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Re: Daily Digest - Apr 20

http://turnerradionetwork.blogspot.com/

 

the reason why? leaked risk acessment on your banks. yes, they are broke.

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Re: Daily Digest - Apr 20

"In economic news, the Confederation of British Industry said Britain had been through the worst of the recession and would return to modest growth in the second half of next year"

 

Huh? I thought they were on the verge of bankruptcy so where does that good news come from?

 

In regards to the banks, isn't really dangerous? Right now my understating is that there could be a sudden and huge economic collapse if these banks start to fail. I keep reading this stuff that says things are a lot worse than they look (and it looks bad) and what their hiding has gotten so big it could suddenly explode.

If the US banks start failing what would follow? Would they shut down the markets, bank holiday, would capital suddenly start disappearing. Just how bad is it. I like to think myself as a realist and I don't want to start worrying about unrealistic scenarios.

 

 

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Re: Daily Digest - Apr 20

http://www.ritholtz.com/blog/wp-content/uploads/2009/04/corporate-earnings-decline.png

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Re: Daily Digest - Apr 20

Fortune 500 companies' profits plunge 85pc

http://www.abc.net.au/news/stories/2009/04/20/2547703.htm?section=justin

American financial magazine Fortune says the profits of the top 500 companies in
the United States plunged 85 per cent last year.

It was their worst performance in the magazine's 55-year history.

Fortune says the combined profits of the big companies dropped from just over
$900 billion to $140 billion.

- BBC

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Re: Congressman Barrett video

"Watched the Gresham Barrett video from YouTube.  Kinda makes one wonder if this is the way Paris was in 1789 just before the French Revolution, ya know!"

I was thinking the same thing!  Wow!  And he was parroting all the "right" talking points.  Actions speak louder than words, Congressman!

 

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Re: Daily Digest - Apr 20

This is the leaked report on your banks

 

The Turner Radio Network has obtained the stress test results. They are very bad. The most salient points from the stress tests appear below.

1) Of the top nineteen (19) banks in the nation, sixteen (16) are already technically insolvent. (Based upon the “alternative more adverse” scenario which had a 3.3 percent contraction of the U.S. Economy in 2009, accompanied by 8.9 percent unemployment, followed by 0.5 percent growth of the U.S. Economy but a 10.3 percent jobless in 2010.)2) Of the 16 banks that are already technically insolvent, not even one can withstand any disruption of cash flow at all or any further deterioration in non-paying loans. (Without further government injections of cash)

3) If any two of the 16 insolvent banks go under, they will totally wipe out all remaining FDIC insurance funding.

4) Of the top 19 banks in the nation, the top five (5) largest banks are under capitalized so dangerously, there is serious doubt about their ability to continue as ongoing businesses.

5) Five large U.S. banks have credit exposure related to their derivatives trading that exceeds their capital, with four in particular - JPMorgan Chase, Goldman Sachs, HSBC Bank America and Citibank - taking especially large risks.

6) Bank of America`s total credit exposure to derivatives was 179 percent of its risk-based capital; Citibank`s was 278 percent; JPMorgan Chase`s, 382 percent; and HSBC America`s, 550 percent. It gets even worse: Goldman Sachs began reporting as a commercial bank, revealing an alarming total credit exposure of 1,056 percent, or more than ten times its capital! (HSBC is NOT in the top 19 banks undergoing a stress test, but is mentioned in the report as an aside because of its risk capital exposure to derivatives)

7) Not only are there serious questions about whether or not JPMorgan Chase, Goldman Sachs,Citibank, Wells Fargo, Sun Trust Bank, HSBC Bank USA, can continue in business, more than 1,800 regional and smaller institutions are at risk of failure despite government bailouts!

The Turner Radio Network has obtained the stress test results. They are very bad. The most salient points from the stress tests appear below.

http://turnerradionetwork.blogspot.com/

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Re: Daily Digest - Apr 20

AndrewJ

That seems a lot like official confirmation of whats been known here for some considerable time. My interest is the consquences this news becoming public might have for banks and the world for that matter. 

Is it likely to start a run on the banks?

Don

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Re: Daily Digest - Apr 20

Bit late for a run on the bank,the execs cleaned them out a few years back. Its up to the taxpayer now. It was my belief that this report caused the sell of of bank stocks. i would expect that this will force Obama to nationalise your banking industry. Its a dead duck and I think that we can stop kidding ourselves that any kind of CPR is going to get them to breath again.

They went on to say;

The debt crisis is much greater than the government has reported. The FDIC`s "Problem List" of troubled banks includes 252 institutions with assets of $159 billion. 1,816 banks and thrifts are at risk of failure, with total assets of $4.67 trillion, compared to 1,568 institutions, with $2.32 trillion in total assets in prior quarter.

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Re: Daily Digest - Apr 20

Love your daily news Davos. Thanks.

It's a one stop superstore for doom and gloom. Unfortunately it's the truth, warts and all.

I'd rather know the truth and prepare then fiddle while Rome burns.

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Re: Daily Digest - Apr 20

I know you will all find comfort in this:

C Citigroup CEO Pandit says expects bank to rebound, adds: "I intend to see this through" - Reuters

 

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