Daily Digest

Daily Digest - July 7

Tuesday, July 7, 2009, 10:29 AM
  • The Solution...Is The Problem (H/T TrueNorth)
  • Paul Krugman: Heading Right Back To The 1930's, But With More Stimulus?
  • Report: Subprime and Alt-A Loss Severity Hits 64.7% in June
  • Inflation: Multipart Video
  • The Collapse of Government: It's No Longer Coming, It's Here
  • Fractional Reserve Banking Gets a Bad Rap? Patrick Brown on Two Beers With Steve
  • Majority of Americans Say Focus on Deficits
  • ISM Non-Manufacturing Index Shows Contraction in June
  • Failing Upwards: The Wall Street White House
  • They're At It Again - Securitization

Economy

The Solution...is the Problem (H/T TrueNorth)

(Super charts and tables in PDF)

"As we hope the breakdown above has revealed, the future solvency of the United States as a
nation state is currently in jeopardy. It is in far deeper trouble than the mainstream press cares
to admit. There are simply not enough new buyers of debt on this planet to support the
spending programs of the United States government - and it appears that current holders of
debt are beginning to sell. Because it is impossible to balance the budget from outside sources
of capital, the only source of funds left for the US, in all reality, is continued money printing."

Paul Krugman: Heading Right Back To The 1930's, But With More Stimulus?

Krugman's answer, not surprisingly, is more stimulus ...

Report: Subprime and Alt-A Loss Severity Hits 64.7% in June

Here are the numbers: the average loan balance began at almost $223,000. But in the liquidation sale, the property sold for $144,000 less, on average. ...

Loss severities, like foreclosures, are rising. In November, losses averaged 56.1 percent of the original loan balance; in February, 63.3 percent.

Inflation, Multipart Video

The Collapse of Government: It's No Longer Coming, It's Here

Oh, we still pretend but the collapse is in full progress at this time. As a nation we have already begun to default on our debts – that’s what “Quantitative Easing” is all about – a bankrupt nation who can no longer finance her debts and resorts to printing money using it in a circle of currency devaluing all the while talking up our “strong dollar policy.” It’s so ridiculous that a 4th grader could see through that scam. Yet we pretend, but we won’t be able to much longer as the collapse has already begun.

Fractional Reserve Banking Gets a Bad Rap? Patrick Brown on Two Beers With Steve

Our conversation centers around a forum posting he put up on the 'bad rap that Fractional Reserve Banking gets'. A somewhat contrarian viewpoint to what I believed to be a flawed system.

 Majority of Americans Say Focus on Deficits

The latest New York Times/CBS News Poll finds a majority of Americans supporting deficit reductions rather than increased spending. When asked if the government "should spend money to stimulate the economy, even if it means increasing the deficit," 41 percent agreed, compared to 52 percent who said the government "should not spend money to stimulate the economy and should focus instead on reducing the deficit." Seven percent of those polled had no opinion.

ISM Non-Manufacturing Index Shows Contraction in June

"The NMI (Non-Manufacturing Index) registered 47 percent in June, 3 percentage points higher than the 44 percent registered in May, indicating contraction in the non-manufacturing sector for the ninth consecutive month, but at a slower rate.

Failing Upwards: The Wall Street White House

• Robert Hormats, Vice Chairman of Goldman Sachs, is to be installed as Under Secretary of Economics, Business, and Agricultural Affairs.

• Jacob Lew, Chief Financial Officer of Citigroup Alternative Investments Group, as Deputy Secretary of State
(Lew’s dept. lost $509 million in the Q1 2008)

• Michael Froman, Citigroup, Deputy National Security Adviser for International Economic Affairs. Froman was formerly Chief of Staff to Robert Rubin at Treasury, before following him to Citi.

• Froman’s deputy, David Lipton, ran Citi’s global country risk management effort.

• Lewis Alexander, Citigroup’s chief economist and now Counselor to Treasury Secretary Timothy Geithner

• Neal Wolin, President and COO, Hartford Insurance Company, Property and Casualty Group now Deputy Treasury Secretary (Hartford received $3.4 billion in TARP funds).

• Gary Gensler, Goldman Sachs partner, now Chairman of the Commodity Futures Trading Commission Note: It was Gensler who was a key proponent (as Clinton’s Assistant Secretary of Treasury) in pushing the Commodity Futures Modernization Act of 2000.

• Mark Patterson, Goldman Sach’s lobbyist, now Treasury Chief of Staff

• Linda Robertson, Enron lobbyist, Chief PR Federal Reserve

Defenders of the Status Quo!

They're At It Again - Securitization

Investment banks, including Goldman Sachs and Barclays Capital, are inventing schemes to reduce the capital cost of risky assets on banks’ balance sheets, in the latest sign that financial market innovation is far from dead.

The schemes, which Goldman insiders refer to as “insurance” and BarCap calls “smart securitisation”, use different mechanisms to achieve the same goal: cutting capital costs by up to half in some cases, at the same time as regulators are threatening to force banks to increase their capital requirements.

 

20 Comments

idoctor's picture
idoctor
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Re: Daily Digest - July 7

OK at least this looks positive.

http://www.cnbc.com/id/31771798

Hum? IOU...s

http://www.cnbc.com/id/31775864

nickbert's picture
nickbert
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Re: Daily Digest - July 7

More on the commercial real estate situation regarding vacancies, and also mentions fast dropping rent prices. Kind of surprising to see such an acknowledgement of the real economic situation on MSM...

Office vacancies hit 4-year high

http://articles.moneycentral.msn.com/Investing/Dispatch/market-dispatches.aspx?post=1185044

- Nickbert

green_achers's picture
green_achers
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Re: Daily Digest - July 7

I can't describe how mad that Failing Upward report makes me.

FireJack's picture
FireJack
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Re: Daily Digest - July 7

It's become pretty obvious now that rather than trying to prepare for a new future governements are going to do everything to keep the past going. Doing everything they can to re-inflate that popped bubble while destroying any chance of a peaceful transition. The speed of the collapse has been rather alarming lately and I expect it to accelerate faster as the effects of the debt bubble wear out.

idoctor's picture
idoctor
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Re: Daily Digest - July 7

Glenn Beck & Thomas Sole (couldn't design a better collapse)

07-07-09 Tom Woods- GM Bankruptcy Done with No Debate, No Testimony

 

Farmer Brown's picture
Farmer Brown
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Re: Daily Digest - July 7

 The Sprott piece was great - thanks Davos.  This may sound rediculous, but a good piece of writing and analysis like that makes me feel the same way I feel after a great meal - full and pleased.  

Davos's picture
Davos
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Re: Daily Digest - July 7

Hi Patrick:

Thanks, I'm gratefull to TrueNorth, quite the hat tip, really anwered a lot of nagging questions. Hope all is well, take care

Davos's picture
Davos
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Re: Daily Digest - July 7

BEYOND profound and scarey! 

JAG's picture
JAG
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Sprott Article

Just read the Sprott article, and besides indigestion, it left me with the following impressions:

  • It looks like the rest of the world is no longer playing the "game" of buying our debt.
  • Our debt is so ridiculously out of control now that there really is no chance it could ever be funded.
  • There is absolutely no way the dollar could do anything but drop to zero.
  • No trader in his or her right mind would ever bet on a rising dollar.

So you guessed it, I'm going "all-in" on a rising dollar. Just me and the bookie (Goldman Sachs) on this side of the trade, common sense, good judgement, and the rest of the world on that side of the trade. Lets roll the dice.

BTW, where has machinehead been lately?

JAG's picture
JAG
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Re: Daily Digest - July 7

 Holy Cow Davos, thanks for the Hugh Hendry interviews. I love this guy's perspective. Thanks again...Jeff

Davos's picture
Davos
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Re: Daily Digest - July 7

Hello Jeff: I like Hendry, his 'only monkeys pick bottoms' comment of months ago makes me laugh everytime I see a financial talking head pick the bottom of some market....

He is wicked smart. Smarter then he lets on. I don't agree with all of what he says but poking holes in it is hard and that scares the heck out of me. He, IMHO is a huge contrarian.

Take care

Farmer Brown's picture
Farmer Brown
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Re: Daily Digest - July 7

Jeff,

Since clicking on Davos's link to Hendry, I've spent at least the last hour watching his videos on youtube.  I think I am "getting it" now and am strongly leaning towards his and Mish's views on deflation.  So add me in with you and Goldman on this.  Maybe we can play a game of Chinese checkers. 

As much money as the Fed is printing, it doesn't make a dent in the asset destruction going on.  And as the Crash Course shows, assets can down, but debt stays.  That means, as Hendry puts it, that dollars are becoming more and more scarce.  All that dollar printing is only going to shore up bank balance sheets (i.e., it's not entering the economy and won't anytime soon).  But, if they've lost $12 trillion in loan assets and have only been able to sell $2 trillion of these to the Fed, that leaves a $10 trillion dollar hole to fill in what Hendry cited as a $52 trillion pile of liabilities. 

That kind of pressure squashes all lending and interest paid on deposits.  That means bond yields will stay low and probably go even lower, while all sorts of bank fees and deposit requirements are going to go up.  They have to find a way to squeeze $10 trillion out of the rest of us that haven't lost our jobs or are in anyway still functioning in the economy.

As for the US Treasury, I think I know how they are going to fund government spending, at least for this year that requires $2 trillion.  My gut suspicion is that banks that have received TALF, TARP, or other monies - Fed monies paid to them in exchange for what has been termed "toxic" assets, which "coincidentally" are $2 trillion (the same as what the government needs to sell this year), have an implicit quid pro quo to use those funds to buy US bonds.  The net effect for the bank is a great deal.  They dispose of worthless garbage in exchange for real cash.  They then use that to buy US Treasuries.  On their books, cash and Treasuries are essentially the same thing on the assett collumn, and since they wouldn't dream of lending that money out into the real economy anyway, it makes perfect sense.  The Fed gets a way to inject money into the economy, and the Treasury gets the bond buyers it needs.  Remember that as of a week or two ago, the Treasury changed the rules governing the definitions of direct vs. indirrect bidders for auctions.  Seeing that time is running out in fiscal year 2009 to finish raising those $2 trillion, I suspect it's because they plan on ramping up the direct bids quite a bit and don't want it to be so obvious.  The direct bidders in this case would be the banks having received Fed monies. 

Just a crazy conspiracy theory of my own.  Heck, everyone else has one, why not me!?

Davos's picture
Davos
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Re: Daily Digest - July 7

This is an intersting watch......

And just for the record, I don't agree with Hugh Hendry, I just post all views....but I have to admint, it scares me because who the heck really knows what could happen.

Anyway, in my simple world:

  1. There has always been debt
  2. The debt can is now un-kickable
  3. The deficit is now a serious issue
  4. 2 trillion may not seem like much to the trillions wiped out in the market BUT it may be all it takes to tank the dollar----I think inflation hinges on dear old Uncle Buck and also on just how much the s&p and the djia tank

Who knows....

Take care

Farmer Brown's picture
Farmer Brown
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Re: Daily Digest - July 7

Davos,

I agree with your perspective long-tern, but long-term could be 5-10 years or who-knows what.  Right now, everything seems to point to deflation - massive deflation.  With commercial real estate about take its turn down the vertical slide, and residential real estate about to take its turn down leg #2, there is definitely one heck of a lot more asset destruction coming.  We could add another $12 trillion on top of that original $12 trillion.  What will be incredibly screwed up will be the economy, especially with the huge tax hikes and government cuts that will have to take place, but the dollar itself may hang on for a few more laps if only because it will be so scarce. Again, just my 2 cents.  

Thanks for everything you post, especially when it's stuff you don't necessarilly agree with!

Davos's picture
Davos
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Re: Daily Digest - July 7

Hello Patrick:

You raise some very, very, very valid merits.

I try to read everything, at first I thought this was going to be another GD1 and now, while I'm still convinced it will be another depression (and that it has already begun) I am realizing that its structure is quite different from the last.

The one thing I am firmly convinced is that Minsky's views are playing out. I am, admittedly, the worst timer, and I am fascinated at how much is still standing. Your timing may be right on.

I feel for the commercial real estate bunch, I have some friends vested nearly 100% in it.

Take care

JAG's picture
JAG
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Re: Daily Digest - July 7

 Hi Davos,

I have to clarify something, I'm more of a contrarian than a "deflationist". If deflation does indeed take the front-seat in the next few years and this forces "everyone" to abandon even the thought of inflation, then I will surely be onboard the inflation bandwagon at that point.

By all means, your point of view makes the most logical sense, I'm just not sure that the markets have anything to do with common sense, because if they did, no one would ever make or lose any money participating in them.

Thanks again for the work that you do, I really value it.

JAG's picture
JAG
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Re: Daily Digest - July 7
Patrick Brown wrote:

As for the US Treasury, I think I know how they are going to fund government spending, at least for this year that requires $2 trillion.  My gut suspicion is that banks that have received TALF, TARP, or other monies - Fed monies paid to them in exchange for what has been termed "toxic" assets, which "coincidentally" are $2 trillion (the same as what the government needs to sell this year), have an implicit quid pro quo to use those funds to buy US bonds.  The net effect for the bank is a great deal.  They dispose of worthless garbage in exchange for real cash.  They then use that to buy US Treasuries.  On their books, cash and Treasuries are essentially the same thing on the assett collumn, and since they wouldn't dream of lending that money out into the real economy anyway, it makes perfect sense.  The Fed gets a way to inject money into the economy, and the Treasury gets the bond buyers it needs.  Remember that as of a week or two ago, the Treasury changed the rules governing the definitions of direct vs. indirrect bidders for auctions.  Seeing that time is running out in fiscal year 2009 to finish raising those $2 trillion, I suspect it's because they plan on ramping up the direct bids quite a bit and don't want it to be so obvious.  The direct bidders in this case would be the banks having received Fed monies. 

Great insight Patrick, and Denninger's post a few weeks back titled: 

SEVERELY Bearish Treasury Development

might just fit nicely with your theory.

Jasenica's picture
Jasenica
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Re: Daily Digest - July 7

http://online.wsj.com/article/BT-CO-20090708-704764.html

Is this good or bad news?

mpelchat's picture
mpelchat
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Re: Daily Digest - July 7

Hello,

Dollar falling: bad news but expected.

idoctor's picture
idoctor
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Re: Daily Digest - July 7

Toxic Asset Program May Be Too Late for Banks

http://www.cnbc.com/id/31798415

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