Investor Speculation and the Housing Bubble

No surprise here!

December 16, 2011
Investor Speculation and the Housing Bubble

The recent financial crisis -- the worst in 80 years -- had its origins in the enormous increase and subsequent collapse in housing prices during the 2000s. The New York Federal Reserve has taken advantage of unique data to suggest that real estate "investors" -- borrowers who use financial leverage in the form of mortgage credit to purchase multiple residential properties -- played a very important role in the housing downturn by defaulting in large numbers.
Investor shares of home purchases roughly doubled between 2000 and 2006.
At the peak of the boom in 2006, over a third of all U.S. home purchase lending was made to people who already owned at least one house.
In 2007-2009, investors were responsible for more than a quarter of seriously delinquent mortgage balances nationwide.
The effects of investors on the housing bubble are even more pronounced in those states that faced the harshest effects of the bubble. Arizona, California, Florida and Nevada had the most severe housing downturns, and they also had some of the highest activity of home investors.
While investors were responsible for one third of all home purchases nationwide in 2006, this number is approximately 45 percent in these four states.
Furthermore, investors with three or more properties constituted 20 percent, which is triple their share from 2000.
In the years following the bubble burst, investors were responsible for more than a third of delinquent balances in Arizona, California, Florida and Nevada.
The impact of investors on the housing market can be understood by taking a closer look at their basic strategy. By "flipping" a house, an investor attempts to buy it and sell it as quickly as possible while maximizing profit.
Because they have little intention of holding onto or living in the house in the long term, they often accepted high interest rates on mortgages in order to minimize down payments. However, when the housing market dried up and investors were no longer able to clear houses, they were left with unforeseen interest payments that were too high to be kept up with. This caused a disproportionate number of investors to become delinquent and for their flipping to contribute strongly to the housing crisis.

Source: Andrew Haughwout et al., "'Flip This House': Investor Speculation and the Housing Bubble," New York Federal Reserve, December 5, 2011.
For text:
http://libertystreeteconomics.newyorkfed.org/2011/12/flip-this-house-investorspeculation-and-the-housing-bubble.html

not the quote one wants to read...

Bank of England Governor Sir Mervyn King summarized the growing sentiment out there yesterday saying, “The world is facing the worst financial crisis since at least the 1930s, if not ever.”

This quote may be 'over the top' but it is worth pondering. The continuing saga of unsustainable leverage will provide us with volatile economic theater over the coming years. And in this age of media hype market volatility should create a never ending source of drama to entertain us.
I was asked a question yesterday about what I thought was the next 'black swan' to effect our economy - my response was the credit stress created by unsustainable levels of leverage. Even though this is an 'ongoing issue' there always comes a time when the train stops (financial crisis) and all those who are still on board end up paying the price.

truly amazing times...

We have a government that creates the problems by its regulatory vigor, doesn't bother to count the cost of their actions on the future, and then blames everyone else but themselves for the mess that we end up with!
What kind of government leads its people in that fashion? Not a very effective one - and now we are seeing more of the bad fruit of their continuing actions.

Taken from "The Market Today Online" -
The treatment of Bank of America by politicians for its decision to raise fees on its deposit accounts has been remarkable. The President lashed into the bank Monday saying, “you don’t have some inherent right just to, you know, get a certain amount of profit – if your customers are being mistreated – that you have to treat them fairly and transparently.” He added that “This is exactly why we need this Consumer Finance Protection Bureau…somebody who’s sole job it is to prevent this kind of stuff from happening.” This was an alarming statement for the President to say that it is inappropriate for a private business to set its own fee schedule based on its costs – and that the CFPB would police that.
Senator Durbin followed suit by calling for a run on the bank from the Senate floor, telling Bank of America customers they should “get the heck out of that bank.” Representative Brad Miller introduced legislation that says banks cannot charge fees to customers who close accounts, implying that he is protecting the tide of people who will want to leave the bank. In a statement, he offered his understanding of economic theory saying that “That is the way things work in a competitive, free market as unrepentant banks are still trying to rake in vulgar profits.” Bank of America’s website has been down for two days. It would not be a surprise if there were a run taking place on the bank, although the bank denies that.
Politicians undermining confidence in a corporation for political purposes would certainly not be an example of a free market.

Two for the road

From: The Market Today Online

1) A Bloomberg report says that banks are increasingly having to consider riskier assets to maintain margins because of the Fed’s activity in their markets. The report says that banks are looking at subprime auto paper, company loans, and commercial mortgages as a way to put assets with yield on the books. Anecdotally, we see more and more bank portfolio managers looking around the fixed income arena to see where they can find yield without creating excessive risk exposure.

Pushing for yield enhancement in this economic climate will most likely provide another level of risk to the financial system. With projections for continued 'lack luster' economic growth - how will this play out over the next year for the banking community: more risk - potentially more reward; or more risk and potentially more stress?

2) Fed Chairman Bernanke, responding to questions after a speech in Cleveland yesterday, said that the U.S. is dealing with a "national crisis" in the jobs market. "We’ve had close to 10 percent unemployment now for a number of years and, of the people who are unemployed, about 45 percent have been unemployed for six months or more. This is unheard of," he said. He urged fiscal discipline at the event.

Bernanke talking about 'fiscal discipline' ! ! ! Now that is a good one! Since when is over zealous leverage a 'fiscal discipline'????

Economist Nouriel Roubini says:

I don't know that I agree with his assessment of the value of fiscal stimulus (especially the growing level of debt - that is one of main the drivers of our current economic woes) but the economic affairs of our world are certainly not on a stable track for growth and strong economic results in the near term...and we do seem to be seeing quite a bit of history repeating itself...but on a much grander scale than in the 1930's...its now totally global.

Roubini: Economic Crises Will Lead To War
Monday, September 26, 2011 08:07 AM
By: Julie Crawshaw

Economist Nouriel Roubini says fiscal austerity could bring economic calamity followed by war.

"I’m not predicting World War III but seriously, if there was a global financial crisis after the first one, then we go into depression: the political and social instability in Europe and other advanced economies is going to become extremely severe," Roubini tells Emerging Markets.

"And that’s something we have to worry about."

"In the 1930s, because we made a major policy mistake, we went through financial instability, defaults, currency devaluations, printing money, capital controls, trade wars, populism, a bunch of radical, populist, aggressive regimes coming to power from Germany to Italy to Spain to Japan, and then we ended up with World War II."

Roubini believes that increasing fiscal austerity at a time when private demand is falling again will lead to another global depression.

"We’re going to make exactly the same mistake like during the Great Depression, when we took away the fiscal stimulus too soon," says Roubini. “That is a huge risk right now."

Nor will China be exempt from economic ills. "China is going to have in two years its own hard landing," Roubini says.

"There’s so much overcapacity, from real estate to infrastructure to manufacturing that unless they change their growth model to rely more on consumption and less on fixed investment, eventually there will be a hard landing in China. So it’s not any more an issue of net exports."

The Wall Street Journal reports China's massive economic-stimulus program has supported near double-digit growth, but also stoked inflation, piled up debt and fueled another unwelcome development: social unrest.

In 2010, China was rocked by 180,000 protests, riots and other mass incidents — more than four times the tally from a decade earlier.

Other experts paint a similar gloomy future.

Pacific Investment Management Co., which runs the world’s biggest bond fund, expects advanced economies to stall over the next year, with Europe sliding into recession, underscoring mounting investor concern about the global economic outlook.

There will be little to no economic growth in industrial nations during the coming 12 months as Europe’s economy shrinks by 1 percent to 2 percent and the U.S. stagnates, said Mohamed El-Erian, chief executive officer of Newport Beach, California-based Pimco. That will leave worldwide expansion at about 2.5 percent, less than the 4 percent forecast by the International Monetary Fund this year and next.

Let's do the twist...

Will the yield curve invert or just flat line while the Fed does the “twist”?
And will this truly be 'accommodative' and 'foster' economic growth? Or will this just realign/restructure the Fed’s already gigantic balance sheet?
And what happens if economic growth is stimulated and the yield curve moves up – won’t that put ‘market’ strain on the Fed’s balance sheet due to their purchase in the 6 to 30 year maturity range? I guess since it is the Fed it doesn’t matter!
I see that the stock market is not too interested in (fond of) retro monetary policy moves or was the amount and timing not enough?

prb

Release Date: September 21, 2011
For immediate release
Information received since the Federal Open Market Committee met in August indicates that economic growth remains slow. Recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated. Household spending has been increasing at only a modest pace in recent months despite some recovery in sales of motor vehicles as supply-chain disruptions eased. Investment in nonresidential structures is still weak, and the housing sector remains depressed. However, business investment in equipment and software continues to expand. Inflation appears to have moderated since earlier in the year as prices of energy and some commodities have declined from their peaks. Longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect some pickup in the pace of recovery over coming quarters but anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate further. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.
To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to extend the average maturity of its holdings of securities. The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.
To help support conditions in mortgage markets, the Committee will now reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. In addition, the Committee will maintain its existing policy of rolling over maturing Treasury securities at auction.
The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.
The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as appropriate.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen.
Voting against the action were Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, who did not support additional policy accommodation at this time.

Cost of Government Day

Every year, Americans for Tax Reform Foundation publishes its Cost of Government Day report, which calculates the day on the calendar year until which the average American must work to pay for the full costs of government spending and regulation. Highlights of the report are as follows:

- This year, Cost of Government Day fell on August 12, meaning Americans labored a full 224 days into the year to pay for local, state and federal government spending and regulations.

- Americans have lost 29 days of the calendar year thanks to Obama's overspending and regulatory zeal -- 2011 marks the third straight year Cost of Government Day has fallen in August. Prior to the Obama administration, it had never fallen later than July 21.

- The effects of the bailouts and failed stimulus plan are still being felt by Americans, who must work a full 103 days to pay for the costs of federal spending.

- Americans spend 44 days working to pay off state and local government spending.

- Americans are forced to labor 77 days to pay for total federal regulations, a workload that will increase exponentially with the implementation of the Dodd-Frank financial regulatory bill and Patient Protection and Affordable Care Act.

The report also measures varying government burdens in each state to calculate their respective state Cost of Government Day. As in past years, taxpayers in Connecticut must work the latest, laboring all the way until September 10 to pay off the full costs of government. Taxpayers in Mississippi worked the shortest amount of time to pay off their burden off government, laboring until July 19.

Source: "2011 Cost of Government Day: August 12," Americans for Tax Reform, August 12, 2011.

For text:
http://www.atr.org/cost-government-august-a6400

For study:
http://www.costofgovernmentday.com/

The Facts about Spending Cuts, the Debt and Gross Domestic Product

Summation: spending is the root of power; the desire for power is what drives free-spending politicians - no matter what else anyone says...

The Facts about Spending Cuts, the Debt and Gross Domestic Product Veronique de Rugy, a senior research fellow at the Mercatus Center at George Mason University, discusses the facts and myths surrounding spending cuts, the debt and gross domestic product (GDP).

Myth 1: You cannot reduce the deficit to an appropriate level without also raising taxes.
Fact 1: Spending cuts are the most effective way to reduce the debt-to-GDP ratio.
Harvard's Alberto Alesina and Silvia Ardagna examined 107 efforts to reduce the debt in 21 Organization for Economic Cooperation and Development nations between 1970 and 2007; their findings suggest that tax cuts are more expansionary than spending increases in the cases of a fiscal stimulus.
Also, they found that spending cuts are a more effective way to reduce the debt-to-GDP ratio.

Myth 2: Lawmakers facing economic catastrophe forget about politics and adopt measures that address genuine fiscal issues.
Fact 2: Politicians rarely put politics aside.
A recent paper by Andrew Biggs, Kevin Hassett and Matthew Jensen of the American Enterprise Institute shows that even in a time of crisis (or especially in a time of crisis), lawmakers tend to adopt policies for the sake of politics.
Countries in fiscal trouble generally got there through years of catering to interest groups and pro-spending constituencies (on both sides of the political aisle), and their fiscal adjustments tend to make too many of the same mistakes

Myth 3: We have had higher debt-to-GDP ratios before so we shouldn't worry now.
Fact 3: We should worry -- the debt-to-GDP ratio actually underestimates the size of the government's real liabilities.
History appears to be reassuring, since several advanced countries have had debt-to-GDP ratios much higher than the one we have now without defaulting, so why should we worry? Two main reasons: First, while our debt is big now, it's only going to get bigger in the coming years. Second, the debt-to-GDP ratio actually underestimates the scale of our debt problem because of intragovernmental debt, unaccounted liabilities and unfunded liabilities.

Source: Veronique de Rugy, "The Facts about Spending Cuts, the Debt and the GDP," Reason Magazine, July 29, 2011.

For text:
http://reason.com/archives/2011/07/29/the-facts-about-spending-cuts

curve movement

A very interesting thing is happening to the yield curve as we move to our 'default with destiny'....
The yield curve has actually 'slid' all the way out the curve and the 10 yr treasury is bouncing on recent new lows...
So, what comes first - the debt debacle's unending story or the economic morass that plagues us?

Interesting economic times that hold a plethora of possibilities…

Interesting economic times that hold a plethora of possibilities…or how quickly does economic history repeat itself?
As we work our way through the struggle between highly leveraged monetary policy and uncontrolled fiscal policy, what shall the results (or lack thereof) of all of these initiatives (over the last several years) yield? Higher interest rates or lower interest rates? Improved economic growth or slower economic growth? Inflation or stagflation? Increasing levels of governmental intrusion or reduced levels of economic interference?
And as we experience ever increasing levels of leverage (national, state, local), the Fed taking on the role of sovereign asset ‘disintermediator’ on a global level, the continuing concentration of financial and economic power in fewer hands, commodity bubbling, and overall economic malaise what should we be doing?
Considering all of the unanswered questions about where we are headed economically community financial institutions are still foundational to their community’s economic well being. And in that light we must continue to focus on our strengths in helping to build stronger communities. Meeting credit and liquidity needs, helping our communities understand financial and economic risk (current and potential), being proactive instead of reactive, providing service levels that exceed customer expectations, dealing with the ever-present ‘tyranny of the urgent’ yet not forgetting about the ‘opportunities of the present’ with hope for the future. In spite of the hindrances and obstacles that have been placed before us let us take a fresh view of how we, as community financial institutions, can positively impact our communities in this time of economic uncertainty.
prb

In the News:
Bloomberg is running an article this morning saying that the Basel requirements for higher capital at SIFIs would give the largest banks a funding advantage because they would be seen as "too big to fail." This is an interesting take on the higher capital requirements that has some merit it would seem. If the regulators view the institutions as so critical that they need to retain more capital to ensure the safety of the financial system, does this also mean that governments would bail them out in the case of an emergency?
Nobel Economist Myron Scholes sounded a warning in the press that higher capital requirements may create more volatility in the financial system.
Separately, a Politico release quotes a senior Fed official as saying that "pushing capital requirements on banks could be very dangerous." According to the official, "The 1929 stock market crash is often regarded as the beginning of the Great Depression. In fact, the economy managed a weak recovery following the Crash, not unlike the one we`ve experienced since the financial crisis. But in September 1931, the [Fed] raised the discount rate sharply in an attempt to stem an outflow of gold reserves ... Within a year, the economy had relapsed dramatically, taking its deepest plunge between November 1932 and March 1933, ushering in the Great Depression and more than a decade of misery ... Capital requirements are an instrument of financial supervision, but also an instrument of monetary policy. Like the discount rate and reserve requirements, they determine the extent to which banks can lend and, therefore, the rate of growth in the money supply and the pace of economic activity. By insisting on higher and higher levels of required capital, regulators risk making precisely the same mistake as their predecessors at a very similar juncture in the current economic recovery -- with potentially disastrous consequences for the nation."
Craig Dismuke, The Market Today ONLINE, June 23, 2011

Bernanke Admits He’s Clueless On Economy’s Soft Patch

Interesting times from both a fiscal and as well as a monetary perspective...With Bernanke doing 'all' that he can do on the monetary front how will our fiscal policy 'monitors' deal with their end of our economic malaise? It all sounds so "Greek" to me!
It shall be very interesting to see what happens when the Fed begins to 'deleverage' their balance sheet and liquidates those 'bought assets' that 'saved' us from deflation.
prb

Bernanke Admits He’s Clueless On Economy’s Soft Patch

Jun. 22 2011 By AGUSTINO FONTEVECCHIA, FORBES

In his second post-FOMC press conference, Fed Chairman Ben Bernanke touched on every topic, admitting that the recovery was weaker than expected and that beyond temporary factors like supply chain disruptions in Japan and high energy prices, he was at a loss as to what was causing the soft patch. In a Q&A session with reporters, Bernanke said a disorderly default in Greece would have significant effects on the U.S. economy, while adding that Fed still had several tools at its disposal the to pump up the economy.

With markets at a crossroads, amid a cooling economic recovery and a dangerous Greek crisis threatening the euro and the global economy, reporters grilled Bernanke and asked many of the right questions.

Brutally honest, Bernanke admitted that he had no clue what was actually causing the current fragility in the U.S. economic recovery. While the FOMC statement assigned blame outside of the U.S., pointing at Japan along with rising food and oil prices, Bernanke was put on the spot by a reporter who noted the inconsistency behind that explanation and a lowering of long term forecasts. Bernanke took the hit, admitting only some of the factors were temporary and that he didn’t know exactly what was causing the slowdown, but that it would persist. “Growth,” said Bernanke, “will return into 2012.”

“Bernanke was just summing up what has happened in the markets, what has been priced in,” explained Nick Kalivas of MF Global. “But the Fed has taken extraordinary measures to support the economy, they have done what they can and monetary policy isn’t a solution for everything,” added Kalivas, pointing at problems with the fiscal situation and the debt ceiling debate.

The Fed chairman was explicit about the situation in Washington, directly slapping Republicans in the face saying “I don’t think sharp immediate cuts in the deficit would bring more jobs.” Having made clear before that Congress should raise the debt ceiling, Bernanke explained budgetary problems are very long run in nature.

Taking his time to address the situation in Europe, and the increased urgency of the crisis in Greece, Bernanke said U.S. bank exposure to Greek was minimal, and only indirect via positions in large, core-nation banks in Germany and France. Raising a red flag, the bearded academic said that money market mutual funds had substantial exposure to those same banks and could take a big hit if push comes to shove in Europe. “A disorderly Greek default would have significant effects on the U.S.” economy, he added.

Patting himself on the back, Bernanke once again defended his controversial programs of long-term asset purchases, dubbed QE1 and 2. “People don’t appreciate how pernicious deflation could be” for the economy, said the chairman, who then said QE2 saved the economy from deflation and was completely justified at the time. “[Back then] we were missing on both sides of our dual mandate, today we are much closer [to fulfilling it].”

Adding that they had made no decision on interest rates and further asset purchases at the moment, Bernanke listed cutting interest rates on excess reserves held at banks, giving guidance on balance sheet changes, as well as further asset purchases as “additional action we are prepared to take if the situation warrants it.”

Humbled by a question on his stark criticism of Japanese policymakers before the “lost decade,” Bernanke said he’s “a little more sympathetic to Central Bankers now than ten years ago.” Still, Bernanke avoided responding on whether the U.S. could be entering its own lost decade by highlighting the success of his QE policies in averting deflation. “A determined central bank can always do something about deflation.”

The second post-FOMC press conference saw sharper reporters asking the right questions, as opposed to their soft-ball pitching last time. Bernanke, as usual, avoided asking the uncomfortable questions and was even humble enough to admit he didn’t have all the answers. The question is, are we better off knowing Bernanke himself doesn’t know?

a confluence of events

As a confluence of events step onto the economic stage in the upcoming months they shall most surely provide us with very interesting fiscal theater. And as we anxiously watch these events unfold I am sure that we will be glued to our seats with anticipation as to how this melodrama will ultimately unfold.
Who wrote this script anyway?
1) The end of the Fed’s QE2 program
2) The US government’s debt ceiling reached
3) Double dip housing stress
4) Unemployment levels
5) The EU’s PIIGs leverage and growth dilemma
6) China’s inflation rate and slowing growth
7) Continuing strife and unsettledness in the middle east
prb

Some interesting economic data bits and pieces:

Leverage - The Fed’s Flow of Funds report found the deleveraging process to be continuing as the debt outstanding in US credit market declined to a three-year low of 336% of GDP. While that is down almost 10% (from 363% of GDP) at its peak in early 2009, it remains well above longer-term levels and there is room for the deleveraging trend to continue.

Federal Budget Deficits Are Structural, and Unsustainable - According to the baseline alternative scenario modeled by the bipartisan Congressional Budget Office (the alternative scenario that current policies continue into the future), federal spending on entitlement programs and debt service, alone, will exceed federal revenues in 14 years. Something must change. Either tax collections will have to in-crease or federal spending will have to be cut. Either way, this will drag on GDP for the foreseeable future. The worst-case scenario is more paralysis in Washington leading to a loss of confidence from global investors.

Market Reaction to Conclusion of QE2 Purchases Remains Uncertain -
While our analysis points to there being little market reaction to the end of QE2, this is still yet-to-be-seen. There is certainly the risk that the lack of buying from the Fed will result in higher yields. However, it looks more likely that the bid from other buyers will remain strong and yields will continue to respond to growth expectations, inflation expectations, and the global flight-to-quality. Our expectations are that yields are al-ready reflecting market sentiment and anything more than a 50 bps increase would be a surprise. There are plenty of analysts arguing that rates remaining flat is the strongest likelihood.
(Source: Weekly Outlook)

The Fed Is the Biggest Holder of US Debt

A fascinating set of circumstances has been created with the Fed’s ballooning of their balance sheet. With the end of QE2 in sight and, if we believe what we hear, the ‘non-probability’ of QE3 materializing, I believe that we shall experience some very interesting times ahead. With our country’s debt level, governmental spending habits, growing level of unfunded liabilities and our apparent proclivity to ignore peril until it is upon us, one could not ask for much better drama – the ultimate question being; how will the final act of this traveling show be resolved and how will that effect our country! Also, what will history have to say about our ‘unique’ times?
prb

June 9, 2011

The Fed Is the Biggest Holder of US Debt

This isn’t new news, but today’s flow of funds report has one nugget that is getting some attention today, so we might as well offer this reminder: The Fed is the world’s biggest holder of US debt.
UniCredit economist Harm Bandholz put together this chart that puts it in perspective.
China is not surprisingly the second-biggest holder of debt. In one hopeful sign, U.S. households are the third-biggest holders. This group includes hedge funds, so we’re not exactly talking the US version of Mrs. Watanabe here.
But you could argue that hedge funds represent wealthy households. And you could more easily argue that US households still hold fewer Treasurys than they did in the past. The hope is that their appetite for Treasurys picks up as they age, helping to make up for some of the demand that will inevitably fade from China and Japan in the years to come.

http://blogs.wsj.com/marketbeat/2011/06/09/the-fed-is-the-biggest-holder-of-us-debt/

Pushing the string

It appears that the yield curve will continue to remain in its current familiar surroundings, notwithstanding a ‘surprise occurrence’ in the financial markets of the world. It would appear that there is not much ‘good news’ around to change the status of ultra low yields on the short end of the curve. One of the key questions moving forward will be – who will buy our debt? With China continuing to ‘unload’, especially in the short end, who will step forward (other than the Fed)? Another interesting item to ponder at this time is: what does an interest rate stress test on the Fed’s currently ballooned balance sheet look like!
prb

Friday's weak jobs report will likely lead to the Fed maintaining the current target for the funds rate through this year and into early 2012. While most market participants had expected Fed policy to remain on hold through this year, the report showing anemic job growth led to those that had been holding out for an increase to start to throw in the towel.
According to the Fed Funds futures market, the probability of a hike in the funds rate to 0.50% by the end of this year has declined from 14.2% one-month ago to 11.4% now. Similarly, Eurodollar futures are projecting 3-month LIBOR to remain exceptionally low through mid-2012. The implied rate for 3-month LIBOR to March 2012 is 0.47% and through June 2012 is 0.61%.

(Stone & Youngberg Portfolio Strategy Group – June 6, 2011)

Cyrenaic Syndrome

According to Weldon Financial founder, “The EU, like the US, suffers from what we might call the ‘Cyrenaic Syndrome,’ a dynamic linked to the ancient Greek philosophers Aristippus and Hegesias of Cyrene, who, in third and fourth centuries BC, hypothesized that the goal of life was the avoidance of pain and suffering.

Addicts accomplish this through substance abuse. The EU [and the US, we would add] is trying to accomplish this thru pure denial, and an outright refusal to accept that austerity, like sobriety, is the ONLY way to actually deal with the problems it faces.”

Craig Dismuke, The Market Today ONLINE

The US government’s budget stalemate

The US government’s budget stalemate – It shall surely be interesting to see what our fearless (fearful) leaders 'accomplish' over the next several months as they attempt to hash out a budget for our federal government. A budget process that has thus far been less than efficient and effective and politics free!

It makes things interesting when you take into context the basic financial issues that our country currently faces –

1) the belief that government spending is always the first answer to any problem…and still more spending, even if it comes at the cost of significantly higher levels of leveraging our future, is always exponentially better!

2) the age of entitlement has been so ingrained in America's psyche over the last 60+ years thus creating a large and growing portion of our populace that truly believes that the government owes them (ie: is obligated to take care of them from birth to death)

3) the notion that the government has ALL the money available that we shall ever need or want and it will cost us nothing because fewer and fewer of our citizens really know, or even want to know, where the money actually comes from!

4) the role that special interest plays in the grand picture – money is power and power means accommodation and accommodation means the continuing sacrifice of freedoms for everyone else

5) iconic, ‘has been’ legislators that no longer know what daily life in America really is about – they have lost touch with the people who do the living and dying and working and raising kids and paying the bills and spending within their means! Many of these ‘long in the tooth’ congress people have been living in a congressional fantasy land for far too long…

6) and finally – who will be willing to relent in their desire, their drive, their addiction to gain power (the power that spending other people’s money and leveraging to the hilt brings) - the never ending struggle to gain more power and control…

Overview summary of the lessons gleaned from the Great Recession

We have been hearing quite a bit lately about what happened in and to our economy that produced the Great Recession. Numerous economic experts, in addition to a government- sponsored commission (which could not agree on a final report that stipulated their findings), have provided their unequivocally ‘unbiased’ findings and accounts of the debacle. Within all of the ‘findings of causation and fault’, I would say that there are bits of truth scattered among the reams of presented opinions. But only bits.

As a response from the peanut gallery (that’s me), after spending quite a bit of time pondering what really happened, I have put together my summary of the root causations and the lessons to be gleaned from this time of economic distress.

Overview summary of the lessons gleaned from the Great Recession:
Leverage ALWAYS has a limit – over-leverage ALWAYS has a price.

Bubbles ALWAYS deflate (pop) – the only question is the rapidity and the breadth of their destructive wake.

Economic cycles come and go – it’s only a matter of the height, depth, time span and finally, the amount of unemployed.

Rapid price appreciation in any asset class cannot exceed fundamentals for an extended period of time – no matter what the experts say – without a proceeding deflationary adjustment (i.e.: economic pain).

Government policy (fiscal and/or monetary) drives market economic decision- making, thus providing the motivation, or might I say, encouraging, asset value manipulation along the way.

Excesses occur when markets, motivated by policy, progress beyond, ahead of, and/or in spite of, fundamentals.

Government policy-making largess ensures bubble formation – past, present, and future.

Government policy-making is usually short-sighted, and in the instances of crises have a preference for topical, symptomatic band-aid fixes – and pledge to worry about the root causes when the next crisis arrives.

When you play the hyperbole of a heated economic lottery, very few end up winning.

Summation: Time, perseverance, minimal governmental intervention, and a return to foundational financial truths are the quickest way back to sound economic health.

2011 P.R. Barriball

What happens when the yield curve begins it's move upward! ! !

The Fed not only has pressure due to the low and slow GDP growth, the high level of unemployment and the high level of unused liquidity in the system but they also have the gargantun task of keeping rates low so that our government's debt load cost (interest expense on our borrowed money that is now over $14T) doesn't skyrocket...and totally 'bust the bank' as they say.....
So, my prognostication is that we will continue to hear that there is NO inflationary pressure - how long the markets buy that will be interesting to see....increasing price pressures for the things of daily living are hitting consumers from all sides (except housing) and that is inflationary. And with commodity bubbles forming all over the 'spill-over' effect will continue to add price pressures to the system.
prb

Never Has U.S. Borrowed So Much for So Little: Chart of the Day (attached)

By Brendan Moynihan - Jan 27, 2011 The U.S. government has been borrowing record amounts of money, though with little effect on interest rates. That may be about to change, according to Nouriel Roubini, the New York University economist who predicted the 2008 financial crisis.

“The fiscal problem is very serious,” Roubini said in a Bloomberg Television interview yesterday with Tom Keene from the World Economic Forum in Davos, Switzerland. “The bond vigilantes have not yet woken up in the U.S. in the way they have in the euro zone. Unless the U.S. addresses this fiscal problem, we’re going to see a train wreck.”

The CHART OF THE DAY shows total U.S. public debt outstanding soaring to record highs and approaching its $14.3 trillion ceiling, while interest rates and debt-service costs as a percent of gross domestic product fall to record lows. The average maturity of U.S. marketable debt outstanding is five years.

Treasury Secretary Timothy F. Geithner said Jan. 6 that lawmakers must raise the federal borrowing ceiling in the first quarter or risk a default on U.S. debt and a loss of access to credit markets. Geithner said it will reach that level between March 31 and May 15.

Economist Ed Yardeni coined the term “bond vigilantes” in 1983 for investors who protest inflationary monetary or fiscal policies by selling bonds and driving up government borrowing costs.

To contact the reporters on this story: Brendan Moynihan in Chicago, Illinois,
at bloomberg.net