Daily Digest

Daily Digest - May 31

Sunday, May 31, 2009, 10:00 AM
  • Manipulation, Anyone?
  • 1 in 8 homeowners in foreclosure or late
  • Mortgage Delinquencies, Foreclosures, Rates Increase
  • World's Eighth-Largest Economy wants federal government to back its loans
  • 30-Year Treasury Bond Collapses
  • New Home Sales: The Distressing Gap (Chart)
  • Existing Home Sales
  • What goes UP 3 times faster than GOLD?
  • Why Diss Economic Forecastors ?
  • Green homeowner hit with noise abatement order because 40ft wind turbine is driving his neighbours mad
  • Roubini says U.S. economy may dip again next year
  • Is a National Sales Tax in Our Future? (H/T CM (Possible repost)
  • IEA: Global upstream budgets already down 21% in 2009 (H/T DamnTheMatrix)
  • The Currency Race to the Bottom
  • Federal Reserve holding over $2 trillion in the Darkest Balance Sheet in Financial History

 

Economy

Manipulation, Anyone? (Chart on page)

Coming as it did on the last day of the week at the end of a month, some might find the action that took place near today's close to be rather interesting.

From 3:54:28 pm to 4:00:02 pm, S&P 500 e-mini futures rallied 17.25 points on approximate volume of 356,300 contracts, or 19.3% of the total turnover from 9:30 a.m. until futures finished trading at 4:15 p.m.

Hmmm. Manipulation, anyone?

1 in 8 homeowners in foreclosure or late

One of eight U.S. households with a mortgage ended the first quarter late on loan payments or in the foreclosure process in a crisis that will persist for at least another year until unemployment peaks, the Mortgage Bankers Association said on Thursday.

Mortgage Delinquencies, Foreclosures, Rates Increase 

 

(Bloomberg) -- Mortgage delinquencies and foreclosures rose to records in the first quarter and home-loan rates jumped to the highest since March this week as the government’s effort to fix the housing slump lost momentum.

World's Eighth Largest Economy wants federal government to back its loans

, Calif. (AP) - If AIG was too big to fail, how about the world's eighth-largest economy?
In a move with only one modern-day precedent, California Gov. Arnold Schwarzenegger and Democratic lawmakers are pressing the Obama administration and members of Congress for federal loan guarantees to help the state out of a desperate, multibillion-dollar jam.
California is not asking for cash, like the tens of billions given to AIG, General Motors or Morgan Stanley. (MS) Instead, the state with the worst credit rating in the nation is asking that Washington act as a sort of co-signer on the state's borrowing, to be backed up with money from the Troubled Asset Relief Program.

30-Year Treasury Bond Collapses

Horrific auction results sent the long bond down more than 2 points, last yielding 4.27, highest since november.
This will be a monthly event, fasten your seat belts. Odds on, on a fail some time this year.

New Home Sales: The Distressing Gap (Chart)

Existing Home Sales

Yun, NAR chief economist, said ... "[D]istressed sales accounted for 40 to 45 percent of transactions in February.”
This is another reminder that the only reason existing home sales appear to have "stabilized" is because of the high number of REO sales. Sales excluding REOs have plummeted.

What goes UP 3 times faster than GOLD?

Gold Climbs, Silver Soars

Why Diss Economic Forecastors ?

Bottom line: Not only are they not very good, they are consistently too bullish . . .

Green homeowner hit with noise abatement order because 40ft wind turbine is driving his neighbours mad

WhenStephen Munday spent £20,000 on a wind turbine to generate electricity for his home, he was proud to be doing his bit for the environment.

He got planning permission and put up the 40ft device two years ago, making sure he stuck to strict noise level limits.

But neighbours still complained that the sound was annoying - and now the local council has ordered him to switch it off.

Roubini says U.S. economy may dip again next year

(Reuters) - Nouriel Roubini, the famously glum economist who predicted the financial crisis, said that while the recession in the United States may well be over at the end of the year, another dip was still possible next year.

"I still expect that economic growth in the U.S. is going to be negative through Q4, and that we'll see positive growth in Q1," Roubini told Reuters in an interview on the sidelines of the Seoul Digital Forum.

"The U.S. recession is going to be U-shaped, lasting roughly 24 months," he added. "Compared to the current consensus that says we are practically at the end of the recession ... my view is: no, it's going to last another six to nine months before it's over."

Is a National Sales Tax in Our Future? (H/T CM (Possible repost)

A debate in Washington could lead to you paying more for everything.

The possible tradeoff? Better health care for all.

Policymakers are debating a value-added tax, or VAT. Put simply, it’s a national sales tax. The concept was dismissed as a nonstarter among policymakers in the past, but is now wiggling its way into political conversation, according to the Washington Post.

From the WaPo:

A VAT is a tax on the transfer of goods and services that ultimately is borne by the consumer. Highly visible, it would increase the cost of just about everything, from a carton of eggs to a visit with a lawyer. It is also hugely regressive, falling heavily on the poor. But VAT advocates say those negatives could be offset by using the proceeds to pay for health care for every American — a tangible benefit that would be highly valuable to low-income families.

Some debate that end result, the article says, and argue that the details could work out differently in practice in the U.S. One argument claims that those who are wealthier tend to consume more, and therefore would pay more VAT.

Although the VAT is only an idea at this point and unlikely to hit taxpayers anytime soon, it’s interesting to note that it’s now part of the conversation and that top VAT advocates are now represented in discussions. Especially now as the federal government looks for new ways to create revenue.

Europeans are no strangers to the VAT. It started in France in the 1950s and has spread to other European countries as well as Australia and India. Europeans even have to pay the VAT on U.S.-based things such as memberships on Second Life. The VAT has experienced success in countries where collecting taxes based on income is difficult, such as developing nations.

Fortune offers an example of how the VAT could figure into the purchase of a car:

Take, for instance, a car with a sticker price of $30,000 and a value-added rate of 10%. Ford might buy its steel and other materials for $8,000 plus $800 in a VAT tax. A dealer then pays $25,000 plus a $2,500 tax for the finished vehicle. Ford takes an $800 credit for the tax it already paid and sends $1,700 to the government. A buyer then pays $30,000 for the SUV and $3,000 in taxes. The dealer collects the $3,000, takes a credit for the $2,500 worth of taxes already paid, and sends $500 to tax authorities. Ultimately, the government pockets $3,000, or 10% of the retail price of the car, in taxes.

Wallet readers: What do you think about the idea of the value-added tax?

 IEA: Global upstream budgets already down 21% in 2009 (H/T DamnTheMatrix)

 

, May 27 -- Global upstream oil and gas budgets for 2009 have already been cut 21% compared with 2008, according to a report by Paris-based International Energy Agency.

This is almost $100 billion, said IEA in a report on the impact of the financial crisis on energy investments worldwide, prepared for the G8 Energy Ministers Meeting in Rome May 24-25.

The investment drop will continue into 2009, especially in the Organization for Economic Cooperation and Development region and will impact both supply and demand, IEA reported.

From October through April, more than 20 planned large upstream oil and gas projects were either postponed indefinitely or scrapped. The projects were valued at more than $170 billion and involved 2 million b/d of oil capacity and 1 bcfd of gas capacity. A further 35 projects amounting to 4.2 million b/d oil capacity and 2.3 bcfd gas capacity were delayed by at least 18 months.

Oil projects in Canada account for the bulk of the postponed oil capacity. Investments in non-OPEC countries are expected to drop the most as upstream spending has fallen mainly in high-development-cost regions and in areas where small players and projects dominate investments. On the other hand the super-majors plan to cut spending by only 5%.

The report said spending cuts on existing fields could accelerate decline rates. It said exploration spending will be reduced sharply in 2009 as investments are diverted to complete development projects launched before prices slumped.

 The Currency Race to the Bottom

Looking at this chart, we realize how much the dollar has really declined. Since the start of the decade, the dollar has fallen a stunning 33 percent. Keep in mind with currencies these kind of large fluctuations are not a sign of health. Major market volatility is never the sign of a healthy market. As I have stated before the U.S. Treasury and Federal Reserve are actively trying to crush the value of the dollar. There weapon of choice is inflation. Why would the central bankers aim for inflation? For one, our country is a debtor nation to the ultimate degree. There is simply no way we are ever going to pay back our obligations. Inflation is an excellent way to make current debts less costly in the long run (at least in the view of the Federal Reserve). Yet inflation is rarely an easy target to set especially when we are dealing with the prospect of deflation. Deflation is kryptonite for debtors because the debt does not decrease over time. Think of a home that has lost 50 percent of its value. The home is now worth $200,000 while the mortgage stays at $400,000. In a simple theoretical world, a weak dollar would make our products more desirable around the world thus boosting domestic production. The only problem is we have outsourced a large part of our manufacturing base. There is no amount of lowering that is going to compete with wages put out by China and India for example.

Federal Reserve holding over $2 trillion in the Darkest Balance Sheet in Financial History

U.S. Treasury and the Federal Reserve have arguably two of the least transparent balance sheets known to humankind. This wouldn’t be such a big issue if the amount of money funneled into these organizations was small. That is not the case. The Federal Reserve since October of 2008 has held on its balance sheet over $2 trillion in reserve bank credit and also, Federal Reserve Holdings of U.S. Treasuries. This of course is the biggest bait and switch in history because in exchange for U.S. Treasuries, banks can offload practically any collateral (i.e., mortgages, auto loans, credit card loans, etc). The U.S. Treasury and Federal Reserve are creating the biggest put option in the history of the world and the American taxpayer stands to lose big.
Let us take a look at the Fed’s balance

 

11 Comments

wdstk46's picture
wdstk46
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Re: Daily Digest - May 31

 Re S&P:  On the other hand, the range was narrower than Tuesday's and the price closed well off the highs.    Somebody obviously threw in a pile of orders on the close that was met with furious selling at the bell.  If you look at a daily chart of the actual index, nothing shows up at all.  I'm going to give it another day before calling in the anti-manipulation squad.

Farmer Brown's picture
Farmer Brown
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Re: Daily Digest - May 31

Geitner's trip should be interesting.  Just how would the conversation start?  Geitner: "Will you pretty pretty pretty pretty please keep buying our bonds and pretty pretty pretty pretty please not dump your dollars?" 

http://news.yahoo.com/s/afp/20090530/pl_afp/uschinaeconomyfinance

After stumble, US Treasury reaches out to China

 
 

WASHINGTON (AFP) – US Treasury Secretary Timothy Geithner, who makes his first trip to Beijing Sunday, will exploit his early links with China to steer relations with the Asian giant under President Barack Obama's watch.

Having started on the wrong foot by criticizing China for currency manipulation, Geithner will now have to grapple with issues ranging from key Chinese holdings of dollar based assets to the global economic turmoil when he meets President Hu Jintao, Premier Wen Jiabao and others during his visit.

But analysts are confident that his previous Chinese connections will come a long way to establishing links with the leadership in Beijing as the Obama administration banks on China's credit to bankroll the recession-struck US economy and its growing influence to help ease the global economic crisis.

This despite the fact that he lacks the firm business background of his predecessor, Henry Paulson, reputedly the most well-connected post-war Treasury Secretary, having travelled extensively to Beijing as a private banker.

"Yes, he doesn't quite have the same business background as that of Mr. Paulson but I think Mr Geithner will turn that to his advantage," said Nicholas Lardy, a China expert at the Peterson Institute for International Economics in Washington.

"I think quite frankly that Mr. Geithner will be a better listener with the Chinese," he said, citing Paulson's sometimes "very strong advice" to the Chinese on reforming the financial system.

"Now they recognize that what Paulson was advocating did not turn up so well," Lardy added.

China has not introduced any of the risk-carrying exotic derivative products, such as the unregulated credit default swap contracts, which are at the center of the current American financial chaos that erupted during the Bush administration.

Geithner, an ex-governor of the Federal Reserve Bank of New York, is a China hand. He studied and taught Mandarin during his college days and later also learned Chinese at the influential Peking University in Beijing.

He also helped former globe trotting US diplomat Henry Kissinger, who was instrumental in the landmark opening of diplomatic ties with Beijing, write the China and Japan chapters in one of his books.

His father Peter Geithner was also the first representative in Beijing for the Ford Foundation, possibly the oldest US non-government organization in China.

Obama administration officials took pains to emphasize the Treasury chief's Chinese connections at a media briefing before his departure from Washington Saturday for his two day Beijing visit beginning Monday.

Geithner would deliver a speech at Peking university, his alma mater, during the trip and "will meet with students and with professors and we hope with some former professors of his," one official said.

He would also visit the offices of the Ford Foundation, which has funded economics education in the United States of a large group of Chinese who are now senior officials, academics and members of the economic establishment in Beijing.

"Coincidentally, the Ford Foundation was established by secretary Geithner's father," the official said.

Despite his history with China, Geithner created a stir at his confirmation hearing in January when he said in a written reply to a senator that Obama "believes that China is manipulating its currency."

It triggered a storm in China and signaled that Obama will take the Chinese head on over the currency manipulation charges.

But Obama administration officials swiftly moved to contain the damage, saying the reply was written by midlevel staff helping Geithner answer the plethora of questions from senators.

On taking office, Geithner also rapidly reached out to the Chinese.

"I have talked to my counterparts in China over the past few months much more than I?ve talked to my counterparts from any other country," he told the New York Times in a recent interview.

In Beijing however Geithner faces the tough task of convincing the Chinese to maintain their massive US bond holdings under threat by burgeoning US debt and prodding them to make their their currency more flexible.

Being the top holder of the bonds, China is the largest creditor to the United States aside from being the world's largest holder of US dollars as a reserve currency, at nearly two trillion dollars.

A. M.'s picture
A. M.
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Re: Daily Digest - May 31

So, just soliciting thoughts and comments;

Has this avalanche been stilled, slowed or stopped?
Quite honestly, the noise to signal ratio is making it hard to suss out what's really going on for guys like me who have thick skulls, and limited mathematical comprehension.

I still believe this is a mismanagement of resources, and the long term implications are bad; but what about the short term? Are we Argentina or Japan?

Cheers, and thanks - great reads as usual Davos,

Aaron

Farmer Brown's picture
Farmer Brown
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Re: Daily Digest - May 31

Aaron,

My view of it is that gasoline (printed funny money) has been poured on the fire, but like sometimes happens in a real fire, there is not enough oxygen (liquidity) to allow that new gasoline to ignite.  As soon as that oxygen comes into contact with that fire, we're going to have an Argentine-style collapse.  I'm no fire-engineer, but that's my analogy and I'm sticking to it.

I move to re-name Geithner's post "The Secretary of Borrowing".  How can we have a "Treasury Secretary" when we do not have any treasure?

joemanc's picture
joemanc
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Re: Daily Digest - May 31
Quote:

"The Secretary of Borrowing"

I love it!!!

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kiwidave
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Geithner off to China

The fact that it's the US officials (Turbo Tim, Hillary, Hank et al) going to China rather than the other way round tells you all you need to know on who's calling the shots these days!

fujisan's picture
fujisan
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Re: Daily Digest - May 31

 Re VAT

A VAT is a tax on the transfer of goods and services that ultimately is borne by the consumer. Highly visible, it would increase the cost of just about everything, from a carton of eggs to a visit with a lawyer. It is also hugely regressive, falling heavily on the poor.

As a european, I can testify this is plain correct.

Don't get fooled by the name, it's just a sales tax on everything.

FYI, in Belgium we have 3 different VAT: 6% (food...) 12% (not much used) and 21% (almost every good and service: phone, TV, car...)

The "Value Added" only concerns the companies, professionals... which are indeed turned into tax collectors. They deduct the VAT they pay on what they buy from the VAT they collect on what they sell, the difference is the added value, hence the name. Even worse, they have to pay the VAT even if some customer didn't yet paid his invoice. If the customer goes bankrupt, one must wait for official banruptcy note from the lawyer before having a chance to deduct the VAT and get paid back. This works the other way too, if some company buy something but does not pay it, it still can deduct the VAT, possibly beeing paid back by administration. BTW This is prone to fraud, as you can guess.

 

Davos's picture
Davos
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Re: Daily Digest - May 31

 Patrick Brown writes:

 

Gold production is going down and dollar production is going up... isn't there only one thing that can happen? Gold is money.

 

Thought you might want to peek at this.

philv's picture
philv
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Re: Daily Digest - May 31

A comment about VAT and silver :

Here in europe we have a VAT on silver wich is seen as a commodity (not on gold seen as monetary instrument).

This is why it is not very interesting for a private investor to buy physical silver and pay 21 % VAT (in Belgium) on it and lose that VAT when you sell it back to a dealer.

Ken C's picture
Ken C
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Re: Daily Digest - May 31
Patrick Brown wrote:

I move to re-name Geithner's post "The Secretary of Borrowing".  How can we have a "Treasury Secretary" when we do not have any treasure?

 

Secretary of Borrowing    Now that's funny -

Well not really funny- I guess we can laugh all the way to the soup kitchen.

 

Ken

 

fujisan's picture
fujisan
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Re: Daily Digest - May 31
philv wrote:

A comment about VAT and silver :

Here in europe we have a VAT on silver wich is seen as a commodity (not on gold seen as monetary instrument).

This is why it is not very interesting for a private investor to buy physical silver and pay 21 % VAT (in Belgium) on it and lose that VAT when you sell it back to a dealer.

 

In Belgium, VAT is 6% for coins (any metal, except investment gold, bars & plates legal tender coins). AFAIK it's a specific belgian tax regime which does not apply to other european countries. See belgian VAT code in French at 2.3, English translation by Google.

 

Imports of coins (including gold) that are not normally used in their function as legal tender or have a numismatic interest (other than gold coins which are of investment gold within the meaning of the Article 1 § 8 of the Code of VAT V. 2.4 below): 6 pc

In Europe (an most countries), investment gold is exempt from VAT: gold bars & plates >= .995, gold coins >= .900 (see list of investment gold coins)

In Belgium, VAT is 6% for numismatic coins & medals, antiques (> 100 years old)

In Belgium, except for the above, VAT is 21% for any metal (incl. gold & silver) in any other form: silver bars & plates, jewelry (incl. coins mounted as jewels), industrial, raw, manufactured...

That said, Govt do change laws in case of "force majeure" for the so-called "best instrest of the state". Remember, gold was seized on many occations in various countries.

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