Daily Digest

Daily Digest - June 19

Friday, June 19, 2009, 10:52 AM
  • The fallacy of sidelines cash
  • Durbin cashed out during big stock collapse
  • R E A L I T Y ? ? ? "The state of things as they actually exist"
  • Medvedev calls for new reserve currencies
  • Supply chains and financial shocks: Real transmission channels in globalised production networks
  • Oil prices and the economic recession of 2007-08
  • Credit Card Debt: "A line has been crossed"
  • Russia's Medvedev: Supranational currency will be created
  • Paul Volcker: More Science, Less Finance
  • Market chatter over green shoots and rising prices has fueled a bear market rally that won't last, despite policymaker 'noise.'

Economy

 The fallacy of sidelines cash

Via clusterstock, Henry Blodget citing John Hussman.

So what really happens when all that money gets up out of cash accounts and comes "into" the market? It goes into someone else's cash account. And maybe they put it back "into the market" (into someone else's cash account). And so on.

So beware morons talking about "all that cash on the sidelines." Really what they're talking about is bearish investors who may one day become bulls and be more eager to buy stocks than their current owners are to keep them (which will drive the prices up).

Very true -- and a very widespread misconception of how the stock market actually changes prices.

There is a market, however, which is currently seeing massive amounts of sidelines cash being sucked into it -- and that is the treasury debt market, which is selling large tranches in primary offerings almost weekly. [emphasis mine]

Durbin cashed out during big stock collapse

As U.S. stock markets plummeted last September, the Senate's No. 2 Democrat, Dick Durbin, sold more than $115,000 worth of stocks and mutual-fund shares and used much of the money to invest in Warren Buffett's Berkshire Hathaway Inc.

The Illinois senator's 2008 financial disclosure statement shows he sold mutual-fund shares worth $42,696 on Sept. 19, the day after then-Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke urged congressional leaders in a closed meeting to craft legislation to help financially troubled banks. The same day, he bought $43,562 worth of Berkshire Hathaway's Class B stock, the disclosure shows.

R E A L I T Y ? ? ? "The state of things as they actually exist"

Medvedev calls for new reserve currencies

YEKATERINBURG, Russia – Russian President Dmitry Medvedev says the world needs new reserve currencies.

Supply chains and financial shocks: Real transmission channels in globalised production networks

How do firm linkages transmit shocks? This column discusses the real and financial transmission mechanisms in the supply chain and financial system that can create troublesome cascades. It applies its logic to the Asia Pacific production chain.

Oil prices and the economic recession of 2007-08

The answer is given in Figure 1. The green dotted line is the forecast if we ignored the information about oil prices, while the red dashed line is the forecast conditional on the huge run-up in oil prices that subsequently occurred. The black line is the actual observed path for real GDP. Somewhat astonishingly, that model would have predicted the course of US GDP over 2008 pretty accurately and would attribute a substantial fraction of the significant drop in 2008:Q4 real GDP to the oil price increases.

Credit Card Debt: "A line has been crossed"

From David Streitfeld at the NY Times: Credit Bailout: Issuers Slashing Card Balances

... Mr. McClelland’s credit card company was calling yet again, wondering when it could expect the next installment on his delinquent account. He proposed paying half of his $5,486 balance and calling the matter even.

It’s a deal, the account representative immediately said, not even bothering to check with a supervisor.

As they confront unprecedented numbers of troubled customers, credit card companies are increasingly doing something they have historically scorned: settling delinquent accounts for substantially less than the amount owed.

... many credit card issuers have revised internal guidelines to give front-line employees the power to cut deals with consumers. The workers do not even have to wait for customers to call and ask for a break.
...
An example of how quickly the card companies are shifting their approach is in the behavior of HSBC, a major issuer, toward Mr. McClelland.

He was paying fitfully on his card, which was canceled for delinquency. In April, HSBC offered him full settlement at 20 percent off. He declined. A few weeks later, it agreed to let him pay half.

...a line has been crossed, credit experts say.

“Even in the early stages of delinquency, settlements can be dramatic,” said Carmine Dorio, a longtime industry executive who ran collection departments for Citibank, Bank of America and Washington Mutual.

The story notes that these settlements still damage the borrowers credit. But this appears to be a significant shift.

As an aside: My personal view is that in a financially literate world, almost all borrowers would pay off their credit card balances monthly (there are exceptions).

Russia's Medvedev: Supranational currency will be created

YEKATERINBURG, June 16 (Reuters) - Russian President Dmitry Medvedev said on Tuesday existing reserve currencies, including the dollar, have not performed their function, and a new supranational currency was in the making. "We are likely to witness the creation of a supranational reserve currency ... which will be used for international settlements," Medvedev told a new conference. "Although volumes will be limited.

"The existing currency system is not ideal. There is a range of risks, including inflation risks," Medvedev said. (Reporting by Gleb Bryanski)

Paul Volcker: More Science, Less Finance

The past couple of decades have been seen as a triumph of finance - new and more complex financial instruments, a huge growth of financial institutions, enormous compensation for traders, speculators, and finance executives out of line with all previous experience. At one point, profits of financial institutions accounted for 40 percent of all the profits of American corporations, way above any previous relationships.

I think we know now it has been a hollow victory. The real income of average workers barely rose. Chronic deficits in our foreign trade have been the order of the day as our manufacturing became less competitive. In some industries our technological lead has been threatened. Professional analysis bears out what we feel in our daily life: our roads and bridges are decaying; our airports and air control are challenged; our water supply and waste management is threatened.

It seems to me that the current big recession is one big wake up call. It can be and it must be the start of a corrective process. We are forced to reorient our economic priorities, national and personal, reorient them for the better. Right now the priority is to get our private debt under control. Happily, the infrastructure is beginning to get attention.

In the broadest terms, I think we have to move, we are moving, for an emphasis on finance toward science, toward technology, toward engineering - real engineering not the financial engineering that has failed to live up to its promise.

Market chatter over green shoots and rising prices has fueled a bear market rally that won't last, despite policymaker 'noise.'

The world is setting up for a big crash, again.

16 Comments

gh6gh6's picture
gh6gh6
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Re: Daily Digest - June 19

What is the significance of two Japanese men detained in Italy attempting to take $134 billion worth of U.S. bonds over the border into Switzerland. These two guys were carrying the gross domestic product of New Zealand hidden in a suitcase.

Bloomberg article found here:

http://www.bloomberg.com:80/apps/news?pid=newsarchive&sid=a62_boqkurbI

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Re: Daily Digest - June 19 re- credit cards

what a terrible, terrible lesson to be learned from this. 

I am a hard working, honest person, but I am sorely tempted to take the easy way out as well, since I am just at the beginning of trying to build up good credit history, I don't have as much to lose.  I wonder if others might feel this way also?

 

EndGamePlayer's picture
EndGamePlayer
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Re: Daily Digest - June 19

Well - what happens if you just don't pay them?  Its an unsecured debt so what do they do?

EGP

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alcatwize
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Re: Daily Digest - June 19

I don't think there is much they can do but threaten to destroy your credit.  But remember the reason that people are in trouble with their cards is because they don't know how to manage their credit (they buy it even if they can't afford it).  So how are they now going to live with no credit because their score is so low.  

Also, there are other things that are tied to your credit score that I was completely unaware of a few years ago.  Did you know your auto insurance is also tied to your credit score?  Trash your credit score and you could pay more for insurance.

 

 

LifeisGood's picture
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Re: Daily Digest - June 19

 For a long time, I've thought about doing this with my Moms credit card from Chase. She owes about 7K in debt but she is 62 and on Medicaid and no job (I support her) so for her, what can she possibly lose?? F-them!

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Re: Daily Digest - June 19

Peter Schiff 6-18-09

alcatwize's picture
alcatwize
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Re: Daily Digest - June 19

 Unfortunately, somebody has to pay and it isn't the banks.  Guess where the banks get their money... that's right, taxpayer bailouts.  So some poor dumb bastard of the next generation has to pick up the slack.  Obviously, it's not the moral thing to do.

 

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Re: Daily Digest - June 19


What is the significance of two Japanese men detained in Italy attempting to take $134 billion worth of U.S. bonds over the border into Switzerland. These two guys were carrying the gross domestic product of New Zealand hidden in a suitcase.

Bloomberg article found here:

http://www.bloomberg.com:80/apps/news?pid=newsarchive&sid=a62_boqkurbI

Hello gh6gh6

I posted this becuase of something I read on Nate's site. It said, to the effect that other countries that held a lot of bonds could secretly put them in a briefcase and sell them quietly to diversify.

That said, the latest I read on the above story is that they bonds were counterfiet and that this is not the case.

Still, I'd advocate, food for thought. I once flew with a guy who had physical stock certificates, I didn't know this at the time, but he took them to a bank and sold them there for cash?!?!?

Here is the article that I read on the bonds being bogus.

Take care!

Those $134 Billion in Fake Bearer Bonds

Some mid-day amusement ...

This was funny ... I never posted on this, because it was pretty clear there wasn't any real story. Maybe the post should be titled: "How some blogs were snookered!"

But a false bottom in a suitcase?

From Dow Jones: US Says Seized 'Treasury Bonds' Are Not The Real Thing

A cache of what appeared to be around $135 billion of U.S. bonds seized at the Italian-Swiss border is, in fact, worthless, a Treasury Department spokesman said.

Two alleged Japanese citizens were stopped by Italian authorities June 4 trying to cross into Switzerland with the supposed bonds, hidden in the false bottom of a suitcase, the authorities said.
  

 

 

 

crash_watcher's picture
crash_watcher
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Re: Daily Digest - June 19

Perhaps not surprisingly, the two "Japanese travelers" have been released, the US spokesman says these bonds are "clearly fakes," and all of the evidence has been, or will be, destroyed:

"Under Italian law when law enforcement agencies seize fake bonds or counterfeit money they are under the obligation to arrest the bearers. And in order to avoid misappropriation, the agency seizing the material, in this case the financial police, must quickly proceed to its destruction (i.e. incineration).

However, in case of real securities, after the securities holders are identified, the financial police must release them immediately after issuing a statement of confiscation and imposing a fine valued in this case at € 38 billion (US$ 53.4 billion). In this case, why were the two men released right away without any fine imposed?" (see: http://www.asianews.it/index.php?l=en&art=15556&geo=&theme=&size=A )

"Meyerhardt said Treasury records show an estimated $105.4 million in bearer bonds have yet to be surrendered. Most matured more than five years ago, he said. The Treasury stopped issuing bearer bonds in 1982, Meyerhardt said. .....  Nowadays, Treasury securities are issued electronically. The U.S. started converting all of its marketable debt from paper to electronic form in the 1980s." (see: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=adc1HD7mWY4A

—so nothing to be concerned about here at all, right?  In fact, let's just pretend it never happened.

Farmer Brown's picture
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Re: Daily Digest - June 19

 Earth to Moody's:  Tell us something we don't know!!!

From Zerohedge: http://zerohedge.blogspot.com/2009/06/california-to-get-multi-notch-down...

Quote:

California Soon To Get Junked By Moody's

In what is sure to blow Barney Frank's lid wide open, Moody's (never one too far behind competitor S&P, except when it comes to TALF ratings) announced earlier it was preparing a major, multi-notch rating downgrade of the state if it does not produce a budget any time soon. As the latter is a pipe dream, California better prepare for its CDS to hit its recent all time wides.

[California's] A2 rating is just five notches above speculative status and Moody's raised the potential for the rating to tumble toward "junk" status if lawmakers fail to quickly produce a budget for Governor Arnold Schwarzenegger to sign.

"If the legislature does not take action quickly, the state's cash situation will deteriorate to the point where the controller will have to delay most non-priority payments in July," Moody's said in a statement.

"Lack of action could result in a multi-notch downgrade," Moody's added.

A downgrade could push California's borrowing costs up at time when state officials expect to issue up to $9 billion in revenue anticipation notes as soon as possible after a budget agreement is notched -- a deal whose timing is in doubt.

Moody's said California's leasing debt and other state-related debt are also on review, affecting a total of $72 billion of debt.

Moody's cited California's expected massive budget gap for fiscal 2010 of more than 20 percent of its general fund budget; warnings by the state controller that without budget solutions the state will not be able to meet all its financial obligations in July; continued political stalemate, and the limited options.

All in all, a complete disaster, and as Obama made clear recently, the Governator can not rely on bailout funding. Do you see what happens Arnie, when you don't have one million UAW pensioners living in your state, ordering Viagra, and never issuing recall notices on gas guzzling (stainless?) steel tinderboxes.

A downgrade of Cali would set off a chain of events, that will not only trash the ratings of virtually all other states, resulting in a skyrocketing of the MCDX, and major pain for associated index arbs, but also impair insurance companies directly and indirectly, with a final outcome likely being comparable to the Lehman blow up, however more protracted and, ultimately, more pronounced. And instead of confronting the problem head on and possibly finding way to resolve the state funding crisis before it is too late, the administration, day in and day out, keeps its head in the sand, pretending that things are getting better when in fact the economy is collapsing. In three months, when California "pays" all its vendors with IOUs and state refunds are indefinitely delayed into the next decade, any mention of 'green shoots' with just come from Dick Bove, who will likely issue a Strong Buy rating on Sacramento despite "horrific" mass hysteria and bands of roving Mad Max copycats coasting along I-5 at 120 mph in nitrous-retrofitted China-made Hummers. Sphere: Related Content

 
Farmer Brown's picture
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Re: Daily Digest - June 19

 Interesting observation from zerohedge: http://zerohedge.blogspot.com/2009/06/federal-reserve-balance-sheet-update_18.html#links

Go to the link for the chart.  I wonder if the decrease is due to less buying, or due to less selling (not many bonds were auctioned this week)

Quote:

THURSDAY, JUNE 18, 2009

Federal Reserve Balance Sheet Update: Week Of June 17

Total Federal Reserve balance sheet assets for the week of June 17 of $2,053 billion consisting of:
  • Securities held outright: $1,176 billion (an increase of $42.8 billion, resulting from $10.9 billion in new Treasury purchases while Fed Agency debt had it single biggest weekly move in over a month, increasing by $30 billion: not surprising seeing how mortgage have been pummeled lately)
  • Net borrowings: $458 billion (a decrease of $40 billion from two weeks ago)
  • Float, liquidity swaps, Maiden Lane and other assets: $416 billion (decrease of $17 billion due to a continued reduction in Central Bank Liquidity Swaps ($16 billion) and $5 billion in CPFF outstandings)

Foreign holdings of USTs and Agencies increased by $2.1 billion to $2,751 billion from $2,749 billion in the prior week. This was the slowest rate of foreign holding increases in over 3 months.

JAG's picture
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Re: Daily Digest - June 19
Patrick Brown wrote:
 
Too hilarious!.
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Re: Daily Digest - June 19
LifeisGood wrote:

 For a long time, I've thought about doing this with my Moms credit card from Chase. She owes about 7K in debt but she is 62 and on Medicaid and no job (I support her) so for her, what can she possibly lose?? F-them!

Somebody would pay the debt, open credit accounts in as many banks as possible, load all of them up and only then call it a day. Whatever you do wont make any difference for our economy is going to collapse anyway.

 

 

fujisan's picture
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Re: Daily Digest - June 19

FDIC: Federal Deposit Insurance Corporation

Bank Closing Information - June 19, 2009
These links contain useful information for the customers and vendors of these closed banks.

First National Bank of Anthony, Anthony, KS 
Cooperative Bank, Wilmington, NC 
Southern Community Bank, Fayetteville, GA 

They were two weeks (friday) of "vacation". Now back to "work"...

fujisan's picture
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Re: Daily Digest - June 19

 Obama’s Mortgage Refinancing Program May Be Expanded (Update1) - Bloomberg.com

June 19 (Bloomberg) -- Fannie Mae and Freddie Mac may get permission to begin refinancing mortgages with loan-to-value ratios above 105 percent as the Obama administration seeks to boost participation in its anti-foreclosure programs.

“We’re actively considering how to structure a program that makes sense over 105 percent,” Federal Housing Finance Agency Director James Lockhart said yesterday. He said a ratio of 125 percent “is a number” that’s on the table, though “not necessarily the number we’re going to end up with.”

...

Underwater Borrowers

Expanding the program to a 125 percent loan-to-value level may benefit about 10 percent of borrowers that have loans backed by Fannie Mae or Freddie Mac, according to Mahesh Swaminathan, a mortgage strategist for Credit Suisse in New York. He said an additional 4 percent of borrowers with Fannie Mae or Freddie Mac loans are further underwater.

“If home prices decline further, this bucket” of underwater borrowers could expand, he said.

A drop in values has left about 20.4 million of the U.S.’s 93 million houses, condos and co-ops with mortgages higher than the properties are worth as of March 31, Seattle-based real estate data service Zillow.com said in a report May 6.

...

Warehouse Lending

While Fannie Mae and Freddie Mac are prohibited by law from lending directly to other firms, Lockhart said they may be able to provide the market some liquidity by committing to purchase multifamily and other loans.

(emphasis mine)


 The Dumbest Thing I've Seen Yet - The Market Ticker

by Karl Denninger

President Obama and James Lockhart have decided to (financially) rape Americans.

...

 

We have since discovered that the majority of "refinanced" workout loans default again, because the underlying problem is that the buyer used exotic financing to get around their inability to actually cover the fully-amortizing payment of a conventional mortgage.  When faced with a fully-amortizing payment, even when restructured, they re-default because they bought through a fraudulent device - they were never able to afford the house in the first place.

This plan will not change that. 

Only one thing will change that: lower house prices.

 

 

fujisan's picture
fujisan
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Re: Daily Digest - June 19

 New, Hard Evidence of Continuing Debt Collapse! | Money and Markets: Free Investment Email Newsletter

While most pundits are still grasping at anecdotal “green shoots” to celebrate the beginning of a “recovery,” the hard data just released by the Federal Reserve reveals a continuing collapse of unprecedented dimensions.

It’s all in the Fed’s Flow of Funds Report for the first quarter of 2009, which I’ve posted on our website with the key numbers in a red box for all those who would like to see the evidence.

Here are the highlights:

...

Can Mr. Bernanke take even MORE radical steps? Can he trek where no other modern-day central banker has ever gone before?

Not without shooting himself in the foot! It still won’t be enough to avert a continuation of the debt crisis. Indeed, all it can accomplish is to kindle inflation fears, drive interest rates even higher, and actually sabotage any revival in the credit markets.

Look. The nearly $14 trillion in financial losses suffered by U.S. households has inevitable consequences. And massive, nonstop borrowings by the U.S. Treasury in the months ahead — driving interest rates still higher — can only make them worse.

My urgent warning: If you fall for Wall Street’s siren song that “the crisis is over,” you could be in for a fatal surprise.

Don’t believe them. Follow the numbers I have highlighted here. Then, reach your own, independent conclusions.

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