tag:blogger.com,1999:blog-67263810824278347792024-03-19T20:40:57.493-07:00mase: economics and financeJohn Masonhttp://www.blogger.com/profile/01451924722549191154noreply@blogger.comBlogger90125tag:blogger.com,1999:blog-6726381082427834779.post-23791562536792453242012-08-23T16:37:00.000-07:002012-08-23T16:37:36.098-07:00Money Market Mutual Funds and Shadow Banking
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--></style>Wednesday, the Securities and
Exchange Commission cancelled a plan to vote on imposing new regulations on
money market mutual funds.<span style="mso-spacerun: yes;"> </span>Although SEC
Chairwoman Mary Schapiro, with the backing of the Federal Reserve chairman and
the Treasury secretary, supported new measures, she backed off from actually
holding the meeting when the swing vote stated that he could not, at this time,
support the new regulations. <br />
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;"><span style="mso-spacerun: yes;"></span></span>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Money market mutual funds are
not banks, but account holders can write checks against their accounts.<span style="mso-spacerun: yes;"> </span>Account holders are promised that they will
get $1 back for each $1 share that they own.<span style="mso-spacerun: yes;">
</span>However, there is no deposit insurance connected with the accounts. </span></div>
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<br /></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Money market mutual funds can
invest in risky securities and need hold no capital on their balance sheets to
absorb any losses that the fund may experience.<span style="mso-spacerun: yes;">
</span>In 2010 the SEC introduced new rules to achieve more stability in the
industry, the most important one being a rule that required fund managers to
hold more assets that could be easily sold so as to be more liquid in the case
there was a significant increase in withdrawals from the funds.<span style="mso-spacerun: yes;"> </span></span></div>
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<br /></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Money market mutual funds
evolved from the 1970s and are part of the shadow banking system. </span></div>
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<br /></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The attempt to increase
regulations on money market mutual funds is just one effort being made to
regulate the shadow banking system.<span style="mso-spacerun: yes;"> </span>The
Dodd-Frank bill is, of course, the driving force behind most of these efforts.</span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The industry fought a hard
battle against Schapiro, and, for the time being, has stemmed the tide of new regulation.
</span></div>
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<br /></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">On the industry side, the
argument is that the rules introduced in 2010 have proved sufficient and are
enough to protect the industry from future problems.</span></div>
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<br /></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The other side argues that
since most money market mutual funds lend to the same borrowers, the industry
is subject to <a href="http://professional.wsj.com/article/SB10000872396390444082904577605253441257604.html?mod=ITP_pageone_1&mg=reno64-wsjConcerns">systemic
risk because of the failure of one or more borrowers.</a><span style="mso-spacerun: yes;"> </span>The concern over the possibility that
something like this could happen increases the probability that in a time of
financial stress, account holders could get “spooked” and this would cause a
run on these institutions. </span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Ms. Schapiro had suggested
that the SEC impose one of two possible options.<span style="mso-spacerun: yes;"> </span>First, let the value of the accounts vary
with the market value of the funds’ holdings.<span style="mso-spacerun: yes;">
</span>Or, two, require the funds to hold capital to absorb losses.<span style="mso-spacerun: yes;"> </span>In other words, she wanted to make these
institutions into something out of the past. <span style="mso-spacerun: yes;"> </span></span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The private-side backup to
the problem of capital is that the “sponsors” of these money market mutual
funds will provide money to the funds should the assets of the funds be
threatened.<span style="mso-spacerun: yes;"> </span>In fact this is what
happened in the recent financial crisis where, according to the article
referenced above, companies that sponsored money funds had to help the money funds
out: “At least $4.4 billion was provided between 2007 and 2011 to at least 78
funds.” </span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The question then becomes:
will the sponsors always be there?</span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Although helping the funds
out would seem to be in the interest of the sponsors over time…no one can
really claim to know the answer to this question.</span></div>
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<span style="font-family: Arial; font-size: 10.0pt;">But, the discussion surrounding this
issue for the money market mutual funds can be extended to almost any area of
the banking industry as well as to the shadow banking industry.<span style="mso-spacerun: yes;"> </span>Let me just take up another subject for a
minute, <a href="http://www.ft.com/intl/cms/s/0/dd5c64ec-ebc3-11e1-985a-00144feab49a.html#axzz24P6M478e">the
trading of swaps.</a><span style="mso-spacerun: yes;"> </span>We are told that:
“When US regulators, (thanks to the Dodd-Frank Act) led by the Commodity
Futures Trading Commission, move to vote on swap execution rules later this
year, the industry fears an overly prescriptive approach that could push
trading towards that of listed futures or equities. In these largely electronic
markets, trading is more frequent and the size of trades is much smaller than
the notional hundreds of millions transacted in OTC derivatives.” </span></div>
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<span style="font-family: Arial; font-size: 10.0pt;">“</span><span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">In anticipation,
the banks that act as big swap dealers are tackling their cost base, investing
in more technology and adjusting to the prospect of using less leverage, taking
less risk and by extension harvesting smaller bonuses.”<span style="mso-spacerun: yes;"> </span>These changes will tend to raise costs,
reduce revenues, and change the way that business is done. </span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">However,
the technology in this area is already changing with the leaders being Goldman
Sachs, Morgan Stanley, and UBS.<span style="mso-spacerun: yes;"> </span>The
resulting model will be more like an exchange-traded model.<span style="mso-spacerun: yes;"> </span>The instruments traded will be more
homogeneous and, as one analyst stated, “we’ll employ our equity tools and
slice and dice orders, so they’ll become smaller” and traded more rapidly and
will spread to more firms and smaller firms.<span style="mso-spacerun: yes;">
</span>That is, financial innovation will adapt to the situation.</span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">This
kind of world, as we have seen, becomes more complex, more interactive, and
moves at faster and faster speeds.<span style="mso-spacerun: yes;"> </span></span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">As
I have written many times before, the regulators cannot keep up with this
world, the regulators cannot fully understand what they are dealing with, and
the regulators will not be able to prevent the next…or, any future…financial
crisis. </span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">The
world we are in…and the world we are moving into…cannot be comprehended at this
stage because we cannot predict what the evolution of electronics and
information technology will bring.<span style="mso-spacerun: yes;"> </span>What
we can say about this future is that the private sector institutions will find
the incentives and invent the ways to get around just about anything that the
regulators want to place in their path.<span style="mso-spacerun: yes;"> </span></span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">I
believe that in the case of money market mutual funds, causing these
institutions to either allow their accounts to vary with the market value of
their assets or to impose capital requirements on the institutions will result
in customers moving elsewhere in large numbers to institutions that will
guarantee them the value of their initial deposits or will cause firms to find
another way to do their business because the capital requirements raise the
cost of doing business too much. </span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">If
rules like these are imposed on the industry, then another kind of financial
institution will evolve to provide customers with the account guarantee they
want as homogenously as possible.<span style="mso-spacerun: yes;"> </span>That
is, as with the potential future of the swap market, financial institutions
will evolve that will employ equity tools to “slice and dice orders” into any
form the customer wants...at the cheapest cost.<span style="mso-spacerun: yes;">
</span></span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">The
regulators, in my mind, still don’t understand the environment they are working
within.<span style="mso-spacerun: yes;"> </span>The modern credit engine can
turn a cash flow into almost anything imaginable.<span style="mso-spacerun: yes;"> </span>After all, finance is just information.<span style="mso-spacerun: yes;"> </span>Applying alchemy to the finance system to
make it into something the regulators want, will not work.<span style="mso-spacerun: yes;"> </span>The regulators must “get real” and accept the
world for what it is.<span style="mso-spacerun: yes;"> </span>The regulators
must attempt to build processes that help the system adjust and focus less on
outcomes, which cannot be achieved.<span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal" style="background: white; margin-bottom: 12.0pt;">
<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">The
financial world is changing.<span style="mso-spacerun: yes;"> </span>Electronics
and information technology is going to allow finance to do things we can’t even
imagine.<span style="mso-spacerun: yes;"> </span>Efforts by the regulators to
force people and institutions into something that used to exist will not work,
yet, they will keep on trying.<span style="mso-spacerun: yes;"> </span>Since the
regulators will not change, what we need to do is to look for opportunities
that take advantage of the dislocations that the regulators create and take
advantage of them!<span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span></span><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;"><span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span></span><span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
John Masonhttp://www.blogger.com/profile/01451924722549191154noreply@blogger.com0tag:blogger.com,1999:blog-6726381082427834779.post-88187088034938569342012-08-22T16:56:00.000-07:002012-08-22T16:56:01.442-07:00Treasury Discounting TARP Advances to Small Banks
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">On May 4, I posted a blog
that discussed the fact that the United States government…us…will </span><span style="font-family: Arial; font-size: 10.0pt;">probably have problems getting TARP
money back from <a href="http://seekingalpha.com/article/562421-small-banks-unlikely-to-be-able-to-repay-tarp-funds">smaller
commercial banks.</a><span style="mso-spacerun: yes;"> </span>In that post I
reported the following: </span></div>
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<span style="font-family: Arial; font-size: 10.0pt;">“’Most
small banks bailed out by US taxpayers during the financial crisis are unlikely
to be able to repay the Treasury department, the Obama administration says.’ (<a href="http://www.ft.com/intl/cms/s/0/bc09f03c-9562-11e1-8faf-00144feab49a.html%23axzz1tp5ngu6K">FT.com</a>)</span></div>
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<span style="font-family: Arial;">This came out in a blog post on the
Treasury’s website yesterday. See “<a href="http://www.treasury.gov/connect/blog/Pages/Winding-Down-TARPs-Bank-Programs.aspx">Winding
<span style="mso-spacerun: yes;"> </span>Down TARP’s Bank Program</a>,” by
Timothy Massad, assistant Treasury secretary for financial stability. The
Treasury does not expect “the majority of the nearly 350 lenders still
partially owned by US taxpayers to repurchase in the next 12-18 months the
preferred stock that Treasury received in exchange for bailing them out.”</span><br />
<span style="font-family: Arial;">The “smaller” banks are defined as those
with less that $10 billion in assets.”</span><br />
<br />
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Well, currently the Treasury
Department is trying to speed things up in an attempt to bring the TARP to an
end for the commercial banking system. <span style="mso-spacerun: yes;"> </span>The word on the “street” is “The current
administration is very motivated to unwind its crisis-related
investments.”<span style="mso-spacerun: yes;"> </span>This from <a href="http://dealbook.nytimes.com/2012/08/22/a-quick-end-to-tarp-means-a-smaller-payoff-for-taxpayers/?emc=eta1">Compass
Point Research and Trading</a>, a broker dealer that has been analyzing recent TARP
auctions. </span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The translation of this from
Jesse Eisinger of the New York Times is: “The world has moved on, and the Obama
administration seems to be counting on being able to run down the program as
quickly as possible without too much scrutiny.”</span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">But, this is nothing
new.<span style="mso-spacerun: yes;"> </span>As reported in <a href="http://seekingalpha.com/article/821521-does-warren-buffett-have-an-ally">my
last post</a>, when the government gets involved in the private sector, the
list of objectives on the government’s “to-do” list is not always the same as
the list of objectives of a private institution…or of taxpayers.<span style="mso-spacerun: yes;"> </span></span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">In this post I discussed the
bailout of the General Motors Corporation, which resulted in the US government
becoming roughly 75 percent owners of Ally Financial, formerly known as General
Motors Acceptance </span><span style="font-family: Arial; font-size: 10.0pt;">Corporation
(GMAC).<span style="mso-spacerun: yes;"> </span>For more on this case go to my
blog, because the only important point from that blog for today’s discussion is
the quote that, “The government apparently believes that it cannot wait because
the outcome…is uncertain and working out’ the (problem) would take an extended
period of time. ‘When the government is your lender, paying back the money is
your first goal.’”</span></div>
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<span style="font-family: Arial; font-size: 10.0pt;">In other
words, the Obama administration wants to get the financial crisis behind it as
soon as it can regardless of what the cost of an early exit might be.</span></div>
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<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt;">The
outcomes discussed in the article relating to the commercial banking situation
and in the article relating to Ally Financial are that the government is
leaving cash on the table as it seeks the exit door. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt;">In the case
of the commercial banks, the Treasury Department is not getting back 100
percent of each dollar advanced to the banks.<span style="mso-spacerun: yes;">
</span>And, this includes banks that have “strong profits and strong capital
positions.”<span style="mso-spacerun: yes;"> </span>That is, even healthy banks
are not paying back 100 cents on the dollar. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt;">The New
York Times article cites four specific cases: “When the government sold its
holdings in MetroCorp Bancshares of Houston this month, the bank itself bought
back most of it—at 98 cents on the dollar.<span style="mso-spacerun: yes;">
</span>Wilshire Bankcorp of Los Angeles bought back its paper at 94 cents on
the dollar.<span style="mso-spacerun: yes;"> </span>The Treasury Department sold
preferred shares of Ohio-based First Defiance at 96 cents, and Peoples Bancorp
of North Carolina at 93 cents.<span style="mso-spacerun: yes;"> </span>All of
these are regarded as healthy.”</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt;">The big
banks paid back 100 cents on the dollar. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt;">But, the
question still outstanding is the discount the government will have to take on
the banks that are less than healthy. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt;">The issue
is not so much that the bank bailout program is going to cost the government
money.<span style="mso-spacerun: yes;"> </span>So far the bank portion of TARP
has been profitable with the Treasury estimating that it will make almost $22
billion from the bank support programs.<span style="mso-spacerun: yes;">
</span>Even if the money coming back into the Treasury is not 100 cents on the
dollar, the shortfall will not use up all that has been already received.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt;">The primary
issue is that the discounts are going to reduce the final amount that will have
been returned to the Treasury and the faster officials try and bring this part
of the program to a close, the less taxpayers will have to show for the
government’s effort.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt;">But, as my
previous post discussed, this is one of the problems with many government
programs.<span style="mso-spacerun: yes;"> </span>The ultimate objectives of the
programs run by the government are not the same as the objectives that a
private organization would seek.<span style="mso-spacerun: yes;"> </span>As a
consequence, these government programs tend to leave something “on the table”
for the well positioned, the well informed, and those with the resources to
walk away with. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt;">Nothing
illegal here…it is just the way governments work. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt;">And, who
seems to be “walking away from the table” with icing in this case?</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt;">Note that
the examples given above all relate to “healthy” banks…those that have “strong
profits and strong capital positions.”<span style="mso-spacerun: yes;">
</span>But, time is money and the government apparently is willing to give up
money in order to get paid back sooner rather than later. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt;">Still, this
leaves a big question open.<span style="mso-spacerun: yes;"> </span>What about
the banks that are not healthy?</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt;">In the
earlier Treasury report, the author stated that there were 350 banks that
remained “partially owned” by the federal government.<span style="mso-spacerun: yes;"> </span>In the current New York Times article, Mr.
Eisinger states that the discounts that may have to be taken could result in
further taxpayer losses “in the hundreds of millions.”<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt;">But, take
off a dozen or so healthy banks from the 350 number and you still have a
substantial number of banks partially owned by the government that are in
various stages of “not very good health.”<span style="mso-spacerun: yes;">
</span>What is our problem here?<span style="mso-spacerun: yes;"> </span>How
many of these banks are seriously impaired?<span style="mso-spacerun: yes;">
</span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt;">There are
still a lot of commercial banks in the banking system that are not in very good
health.<span style="mso-spacerun: yes;"> </span>As of March 31 there were 772
FDIC insured banks on the list of problem banks. (We will get the number for
June 30 this week as the FDIC releases these numbers 55 days after June
30.)<span style="mso-spacerun: yes;"> </span>How many of the banks that owe the
government TARP money are on the problem list? </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt;">There have
only been 40 banks closed this year through last Friday.<span style="mso-spacerun: yes;"> </span>It appears that many more banks are merging
out of existence than are closing outright.<span style="mso-spacerun: yes;">
</span>In the first quarter alone the number of banks in the country dropped by
50 units even though there were only 16 bank closures.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt;">The point
is, the banking system is still not back to “good health” yet and the TARP
numbers, the bank closure numbers, the fact that the Fed still has injected
over $1.5 trillion in excess reserves into the banking system just confirm this
fact.<span style="mso-spacerun: yes;"> </span>Things continue to get better, but
I believe that the system is still somewhat fragile.<span style="mso-spacerun: yes;"> </span>This is one reason why many banks are not
growing their loan portfolios.<span style="mso-spacerun: yes;"> </span>We just
continue to hold on and hope things will continue to improve.<span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span></span></div>
John Masonhttp://www.blogger.com/profile/01451924722549191154noreply@blogger.com0tag:blogger.com,1999:blog-6726381082427834779.post-45873286552536941772012-08-22T03:44:00.000-07:002012-08-22T03:44:22.472-07:00Does Warren Buffett have an Ally?<style>
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<br />
<span style="font-family: Arial; font-size: 10.0pt;"><a href="http://seekingalpha.com/article/816481-the-setting-for-ben-bernanke-s-speech-at-jackson-hole">My
post of Monday August 20</a> closed with the following comment: “as </span><span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">one
reads a book like ‘More Money Than God’ by Sebastian Mallaby, one observes that
lots and lots of money is made off of government mistakes. The problem is that
generally the people that make the money off of these mistakes are people that
have the information, the access, and the scale to take advantage of the
mistakes. However, these "tools" are not available to most people.
Maybe that is why the distribution of wealth in the United States has become so
skewed.”</span><span style="font-family: Arial; font-size: 10.0pt;"></span>
<br />
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Well, <a href="http://dealbook.nytimes.com/2012/08/21/profits-in-g-m-a-c-bailout-to-benefit-financiers-not-u-s/?emc=eta1&pagewanted=print">Steven
Davidoff</a> of the New York Times gives us a perfect example of this type of
situation as he discusses the evolving consequences of the government bailout
of General Motors.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Let me just say before we get
started that “government mistakes” can be split into two categories.<span style="mso-spacerun: yes;"> </span>The first relates to overt government
mistakes like the British government trying to maintain an un-maintainable price
for the British Pound in the 1990s.<span style="mso-spacerun: yes;"> </span>The
result was the classic case of George Soros laughing all the way to the bank
with billions of dollars. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt;">The other
type of mistake has to do with “unintended consequences,” the result of
government action that may occur because the government either does not have
the incentive to totally examine the results of what it is doing or the
government does not have the same goals and objectives of the private
investor.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt;">An
“unintended consequence” gets this story started.<span style="mso-spacerun: yes;"> </span>Davidoff sets the scene. “</span><span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">G.M.A.C
(General Motors Acceptance Corporation) was the financial arm of General
Motors. <span style="mso-spacerun: yes;"> </span>In the years leading up to the
financial crisis, it was also G.M.'s most profitable unit, which tells you
something about the auto industry at the time. The company earned more profit
from lending money to customers than in selling cars.”</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">Why did G. M. A. C. become “G. M.’s most profitable unit”?</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">Well, in the 1960s, the US government was very concerned
with rising unemployment.<span style="mso-spacerun: yes;"> </span>In an attempt
to keep unemployment as low as possible, the government established a policy of
credit inflation to keep workers employed.<span style="mso-spacerun: yes;">
</span>The justification was something economists called “the Phillips Curve.”<span style="mso-spacerun: yes;"> </span>The Phillips Curve encouraged the government
to inflate the economy because there was a tradeoff between inflation and
unemployment.<span style="mso-spacerun: yes;"> </span>A little more inflation
could buy the government a little more employment thereby keeping the
unemployment rate down. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">Milton Friedman showed this argument to be a fallacy because
a little more inflation got built into inflationary expectations and this
worked in the opposite direction of lowering unemployment.<span style="mso-spacerun: yes;"> </span>However, politicians got stuck on the first
point and, in order to get elected or get re-elected, they (both Republicans
and Democrats) they continued on with a policy of credit inflation into the 21<sup>st</sup>
century. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">Inflation, however, changes incentives.<span style="mso-spacerun: yes;"> </span>As I have written many times before,
inflation results in people and businesses taking on more risk, taking on more
financial leverage, mismatching the maturities of assets and liabilities, and
introducing more and more financial innovation. And, people make lots and lots of money off of betting with inflation! </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">General Motors did this through G. M. A. C. and the
subsidiary became “G. M.’s most profitable unit.”<span style="mso-spacerun: yes;"> </span>But, General Electric also did this and more
than half the profits GE earned came from its financial wing.<span style="mso-spacerun: yes;"> </span>And, this was true of other “major” US
corporation. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">Yes, people were kept employed but General Motors did not
have to focus on productivity or labor skills or “selling” cars, could focus on
keeping its labor unions happy with “good” labor contracts, and, as an
unintended consequence GM became uncompetitive.<span style="mso-spacerun: yes;">
</span>But, GM executives benefitted greatly from the profits now coming from
the financial side of the business. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">I won’t go deeply into the situation described by Mr.
Davidoff because he does an very good job at explaining what is going on.<span style="mso-spacerun: yes;"> </span>What is important is that what is going on is
a result of another “unintended consequence.”<span style="mso-spacerun: yes;">
</span>The government’s objective in resolving the bailout as the Treasury
Department stated was “to exit in in a manner that balances speed of recovery
with maximizing returns for taxpayers.”</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">And, as Mr. Davidoff goes on to explain, “That’s the problem
with companies being bailed out.<span style="mso-spacerun: yes;"> </span>They’re
no longer as entrepreneurial or risk-taking as they might be, and instead have
to balance gains against a need to pay back the government.”<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">The situation: G. M. A. C. became Ally Financial.<span style="mso-spacerun: yes;"> </span>But G. M. A. C. was not just about financing
automobiles<span style="mso-spacerun: yes;"> </span>“The company was also one of
the largest subprime housing lenders through its ResCap subsidiary.”<span style="mso-spacerun: yes;"> </span>ResCap is the fifth-largest mortgaging
service and origination unit in the nation. Thank you, credit inflation!</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">ResCap has lost billions during the Great Recession and Ally
has subsidized this loss lending ResCap $1.2 billion and also infusing $10.2
billion into the subsidiary since January 1, 2007.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">That is, until recently.<span style="mso-spacerun: yes;">
</span>Ally Financial put ResCap into bankruptcy.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">And, here we get to Mr. Buffett.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">In the bankruptcy of ResCap, the company was to split up
into two parts, one part consisted of the mortgage servicing and the other part
was a legacy portfolio of mortgages with $5.2 billion in loan principal.<span style="mso-spacerun: yes;"> </span>Ally initially “announced its intention to
serve as a stalking horse bid for the legacy portfolio, bidding from $1.4 to
$1.6 billion.”<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">Ally has now dropped out.<span style="mso-spacerun: yes;">
</span>Guess who showed up?<span style="mso-spacerun: yes;"> </span>Berkshire
Hathaway…which, by-the-way is one of Ally’s biggest creditors.<span style="mso-spacerun: yes;"> </span>Berkshire has now replaced Ally as the
“stalking bidder” for the loan portfolio.<span style="mso-spacerun: yes;">
</span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">Although the outcome of this bidding will come in bankruptcy
court auction, Ally will not be a part of the bidding: Ally, which has lost
billions of dollars in the portfolio.<span style="mso-spacerun: yes;">
</span>And, they leave just at a time when there is some indication that the
housing market might be getting stronger so that there seems to be a growing
possibility of getting something more back from the loans. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">And, the government apparently believes that it cannot wait
because the outcome of acquiring the loans is uncertain and “working out” the
loans would take an extended period of time.<span style="mso-spacerun: yes;">
</span>“When the government is your lender, paying back the money is your first
goal.”</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">So someone in the private sector stands to gain a lot of
money from this transaction.<span style="mso-spacerun: yes;"> </span>And, that
“someone” is not the “small person”. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">As I stated in the August 20 post, “generally the people
that make the money off of these (government) mistakes are people that have the
information, the access, and the scale to take advantage of the mistakes.
However, these ‘tools’ are not available to most people.”</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">As Mallaby suggests in his book, these returns are “alpha”
returns, returns that are not dependent upon the movement of the whole
market.<span style="mso-spacerun: yes;"> </span>Governments, acting on the best
of intentions, seem to create a relatively large number of these “alpha”
opportunities.<span style="mso-spacerun: yes;"> </span>And, they are not kept a
secret and they are legal.<span style="mso-spacerun: yes;"> </span>Our job is to
look at what the government is doing and determine what are the “unintended
consequences” of the government’s action and then take advantage of it.<span style="mso-spacerun: yes;"> </span> </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">Mr. Buffet and Mr. Soros seem to be good role
models for us to follow. <span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span></span><span style="font-family: Arial; font-size: 10.0pt;"><span style="mso-spacerun: yes;"> </span></span><span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
John Masonhttp://www.blogger.com/profile/01451924722549191154noreply@blogger.com0tag:blogger.com,1999:blog-6726381082427834779.post-22708498994697357142012-08-20T13:32:00.000-07:002012-08-20T13:32:50.722-07:00Is the Bond Market Showing Confidence These Days?
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<br />
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Barron’s publishes a ratio
that it calls a “Confidence Index.”<span style="mso-spacerun: yes;"> </span>The
Confidence Index is derived by dividing Barron’s index of Best Grade
(corporate) Bonds by Barron’s index of Intermediate Grade (corporate) Bonds. </span>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">According to this paper, if
the intermediate grade index falls relative to the best grade index it
represents a sign of market confidence because the intermediate grade bonds are
not requiring as much of a yield spread as in the past and this means that
investors are more confident.<span style="mso-spacerun: yes;"> </span>The paper
suggests that this “generally indicates rising confidence, pointing to higher
stocks.”</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Well, Barron’s Confidence
Index hit a near term low in the week ending July 27 and has been rising
since.<span style="mso-spacerun: yes;"> </span>The implication of this movement
is that, potentially, the stock market should rise.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Note: One can use the yields
on Moody’s Aaa- and-Baa rated industrial bonds published in Federal Reserve
release H.15 and get a similar result. <span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Since August 3 the Standard
& Poor’s 500 Index has risen about 2 percent from 1390 to 1418. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Defining the confidence index
in this way makes some sense since when financial market conditions are
improving the yield on intermediate grade bonds tend to fall faster than does
the yield on the best grade bonds causing the confidence index to rise.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Conversely, when confidence
is being lost in the bond markets, yields on intermediate grade bonds rise
faster than do the yields on the best grade bonds.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">This is what happens in a
“normal” cyclical situation. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">However, the past several
months have not been normal. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Barron’s Confidence Index has
been rising because the yield on the Best Grade Bonds has been rising
relatively more rapidly than the yield on Intermediate Grade Bonds. This is
also true of the movement in the yields on Moody’s Aaa- and Baa-rated bonds. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">This is not the way it is
supposed to be.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The difference is the fact
that the United States bond markets have been a “safe haven” for funds from
around the world.<span style="mso-spacerun: yes;"> </span>The flow of funds into
United States markets have distorted interest rate relationships.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The question is…does this
distort the interpretation one gives to Barron’s Confidence Index?</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The international money
really started pouring into the United States in early May.<span style="mso-spacerun: yes;"> </span>The yield on the 10-year Treasury issue broke
1.90 percent on May 8.<span style="mso-spacerun: yes;"> </span>Barron’s
confidence index reached a near term high in the week ending May 25.<span style="mso-spacerun: yes;"> </span>Moody’s numbers actually achieved the near
term high in the week ending May 5.<span style="mso-spacerun: yes;"> </span>Both
measures of “confidence” fell until the week ending July 27 as mentioned above.
</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">In this case, the confidence
index fell because of all the foreign money flowing into the United States to
seek the “safe haven”.<span style="mso-spacerun: yes;"> </span>Yields on US
Treasury securities fell very rapidly, but also the best grade of corporate
bonds also gathered in some of these funds and the yields on the best grade of
bonds fell relative to the yields on intermediate grade bonds.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Confidence in the United
States bond market was increasing while Barron’s Confidence Index was showing a
loss in market confidence.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The stock market dropped off
soon after this “fall in confidence” with the S&P 500 index dropping off
from about 1360 on May 8 and reaching a trough of approximately 1280 at the end
of May.<span style="mso-spacerun: yes;"> </span>However, as related earlier, the
S&P 500 was around 1390 by the first part of August, a rise of slightly
more than 8.5 percent. <span style="mso-spacerun: yes;"> </span>The rise from May
8 to August 3 was a little more than 2 percent.<span style="mso-spacerun: yes;">
</span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The argument for the
immediate decline in the stock market in May was the fear connected with the
deteriorating situation in Europe.<span style="mso-spacerun: yes;"> </span>After
the initial decline in the stock market, “confidence” in the US stock market
seemingly came back…although the variation in stock market movements seemed to
be rather high indicating the uncertainty connected with what was happening in
Europe. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">So, when Barron’s Confidence
Index dropped off in May the stock market also fell.<span style="mso-spacerun: yes;"> </span>From the end of May through the end of July,
Barron’s Confidence Index continued to fall while the stock market rose.<span style="mso-spacerun: yes;"> </span>So, we have some conflict here. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Another ratio using similar
data can also be used in situations like this.<span style="mso-spacerun: yes;">
</span>It is called the “Liquidity Ratio” calculated by dividing the yield on
10-year US Treasury bonds by the yield on Moody’s Aaa industrial bonds.<span style="mso-spacerun: yes;"> </span>A higher ratio is shows that the financial
markets are “more liquid” since the ratio of yields is narrower…funds are
getting into the Aaa market as well as into the government market.<span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The “liquidity ratio” peaked
out this year in the same week as did the “confidence index” using Moody’s
numbers. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">However, the “liquidity
ratio” hit a bottom around the same time that the S&P 500 index was hitting
the near term bottom in late May.<span style="mso-spacerun: yes;"> </span>This
would indicate that some of the “safe haven” funds coming into the Treasury
market began to spill over into the high grade corporate bond market…the
financial markets were becoming “more liquid” due to the funds attempting to
achieve higher yields without much loss of quality.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Thus, the stock market began
to rise again in June as confidence rose on the “liquidity” of the financial
markets, even though the liquidity had not flowed as far as the intermediate
grade instruments.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">It was not until late July
that more and more funds moved into Baa or intermediated grade bonds and
Barron’s Confidence Index started to rise again…along with Moody’s
numbers.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The “liquidity ratio
continued to rise through to the present so that for the last several weeks we
have had both the “confidence index” and the “liquidity index” giving off
similar signs.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Note, however, that the yield
on the 10-year Treasury yield has been rising over the same time period,
reaching its lowest level on July 25…1.43 percent.<span style="mso-spacerun: yes;"> </span>Currently, the 10-year Treasury is yielding over
1.80 percent.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The last several months,
therefore, have been an interesting time period.<span style="mso-spacerun: yes;"> </span>The movement of international funds into the
United States has caused some financial market relationships to be distorted.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Still, it is important to
work with the data and see if events can be explained by including more
information in one’s analysis.<span style="mso-spacerun: yes;">
</span>Historically, the “confidence index” information has moved in the same
direction as the “liquidity index” information.<span style="mso-spacerun: yes;">
</span>When they differ it is important to try and reconcile why they might be
moving in different directions.<span style="mso-spacerun: yes;"> </span>In the
current situation, I believe that looking at the two ratios helps us to
understand a little bit better what has been going on.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;"><span style="mso-spacerun: yes;">Right now, the bond markets are reflecting market confidence and market liquidity, both of which are positive signs for a rising stock market. </span></span></div>
John Masonhttp://www.blogger.com/profile/01451924722549191154noreply@blogger.com0tag:blogger.com,1999:blog-6726381082427834779.post-53036592216569682572012-08-19T11:55:00.000-07:002012-08-19T11:55:46.109-07:00The Setting for Ben Bernanke's Speech at Jackson Hole
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<br />
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Anticipation is rising for
the annual late summer speech given by the Chairman of the Board of Governors
of the Federal Reserve System, Ben Bernanke.<span style="mso-spacerun: yes;">
</span>The basic economic environment surrounding this speech is what I would
like to touch on in this post. </span>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">This environment along with
what the Federal Reserve does…or doesn’t do…is crucial to the possible “macro”
position a person could in their investments and in their business decisions. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">For example, John Paulson,
the hedge fund investor, has apparently started placing his bets with respect
to current economic and financial conditions and with respect to what the Fed
can…or can’t do.<span style="mso-spacerun: yes;"> </span>Mr. Paulson, according to
recent regulatory fillings, has been re-arranging his portfolio…increasing his
position in gold and reducing other positions…in anticipation of higher future
levels of inflation.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Future inflation is certainly
a concern and I will discuss this a little later, but there are also other
issues that need to be discussed as well. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">For example, dominating
discussions about the current environment is the rate at which the economy is
growing.<span style="mso-spacerun: yes;"> </span>In the second quarter of 2012,
real GDP grew at a 2.2 percent year-over-year rate.<span style="mso-spacerun: yes;"> </span>I am expecting this growth rate to remain
around 2 percent for the next year or so.<span style="mso-spacerun: yes;">
</span>This expectation is backed up by other numbers, like that for <a href="http://seekingalpha.com/article/811081-u-s-economy-modest-growth-continues">industrial
production.</a><span style="mso-spacerun: yes;"> </span>Economic growth has been
tepid, is tepid right now, and is expected to remain tepid for the near
term.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">There are numerous reasons
why economic growth is likely to remain slow.<span style="mso-spacerun: yes;">
</span>I have reported on these in many recent posts.<span style="mso-spacerun: yes;"> </span>A short list of reasons include continued
deleveraging of the private sector; under-employment of eligible labor;
residential mortgages being underwater; bankruptcies and foreclosures; commercial
real estate losses; health of a large portion of the banking system; the
financial condition of state and municipal governments; the uncertainty that
exists with respect to government policy and regulation; the European recession
and sovereign debt crisis; and the slowdown in other countries like China,
Brazil, and India. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">I believe the American economy
will continue to grow but only at or below a 2 percent year-over-year
rate.<span style="mso-spacerun: yes;"> </span>This is an environment of
stagnation with unemployment and under-employment staying high and capacity
utilization of industry remaining historically low.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Given this basic scenario,
interest rates will rise over the next year or so.<span style="mso-spacerun: yes;"> </span>There are, I believe, three reasons for
this.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">First, interest rates in the
United States are as low as they are because of the “haven” nature of US
government debt.<span style="mso-spacerun: yes;"> </span>Large quantities of
“risk averse” funds have flown into American security markets escaping the mess
in Europe.<span style="mso-spacerun: yes;"> </span>As a consequence, the yield
on 10-year US Treasury securities closed at 1.82 percent on August 17.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">If one subtracts an “expected
rate” of inflation from this figure, let’s use 2.00 percent (which is about
what the inflation rate is in the United States using the year-over-year rate
of increase in the GDP implicit price deflator).<span style="mso-spacerun: yes;"> </span>Then an estimate for the “real” rate of
interest is a negative 18 basis points.<span style="mso-spacerun: yes;">
</span>This is not too far off the yield on the 10-year TIPS bond, which was a
negative 45 basis points on August 17.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">And, what “should” this real
rate of interest be?<span style="mso-spacerun: yes;"> </span>I have always
argued that “the” real rate of interest should be somewhere around the level of
the “expected” real rate of growth of the economy.<span style="mso-spacerun: yes;"> </span>Thus, from the 1960s through the end of the
century a 3.0 percent rate worked out to be a good working estimate of the real
rate.<span style="mso-spacerun: yes;"> </span>If we use my current “expected”
rate of growth of the economy, 2.0 percent, then the “real” rate of interest in
the United States should be in the 1.50 percent to 2.00 percent range.<span style="mso-spacerun: yes;"> </span></span></div>
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<br /></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Therefore, as the “risk
averse” money leaves United States shores, the yield on TIPS should rise fairly
steeply.<span style="mso-spacerun: yes;"> </span>Whether or not this rise will
be resisted by the Federal Reserve is a question that remains unanswered at
this time.<span style="mso-spacerun: yes;"> </span>Resisting the rise will just
cause to Fed to flood the banking system with more excess reserves, which may
cause other problems.<span style="mso-spacerun: yes;"> </span>But, this is something
that the monetary authorities are going to have to face. </span></div>
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<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The second reason for a rise
in interest rates is that there should be, sooner or later, demand pressure on
interest rates due to a pick up in economic activity…or,<span style="mso-spacerun: yes;"> </span>Right now, commercial banks are awash with
funds while at the same time loan demand seems to be <a href="http://seekingalpha.com/article/797341-no-pressure-on-interest-rates">particularly
weak.</a><span style="mso-spacerun: yes;"> </span>Thus, there is little or no
pressure for interest rates to rise.<span style="mso-spacerun: yes;">
</span>This is certainly something we need to watch out for.<span style="mso-spacerun: yes;"> </span></span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">However, we could see
interest rates rise for a third reason…a rise in the expectation of future
inflation.<span style="mso-spacerun: yes;"> </span>This is something many
people…like John Paulson…are worried about.<span style="mso-spacerun: yes;">
</span>Never before has the commercial banking system had so many excess
reserves “hanging around.”<span style="mso-spacerun: yes;"> </span>In August
2008, before things fell apart, the excess reserves of the whole banking system
amounted to less than $2.0 billion.<span style="mso-spacerun: yes;"> </span>In
the two banking weeks ending August 8, 2012, excess reserves in the banking
system averaged $1.5 trillion.<span style="mso-spacerun: yes;"> </span></span></div>
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<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The monetary base, the
foundation of credit expansion in the United States, was around $2.7 trillion
in the banking weeks ending August 8: it was at $842 billion in August 2008!</span></div>
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<br /></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Few people believe that the
Fed can withdraw a major part of these funds from the banking system once banks
start lending again…and inflation starts to increase.<span style="mso-spacerun: yes;"> </span>Inflation and credit expansion go
hand-in-hand.<span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span>And, the lending could pick up even if real
economic growth does not pick up. </span></div>
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<br /></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">A further question exists:
how can the Federal Reserve withdraw funds while the federal government is
still running annual budget deficits of $1.0 trillion or more? </span></div>
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<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">So the third reason for interest
rates to rise is that as inflation accelerates in the United States, the
expectation of future inflation will also rise.<span style="mso-spacerun: yes;">
</span>When this will begin and how fast will it take place is, of course, the
big question. </span></div>
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<br /></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">There are other possible
“macro” effects surrounding this picture.<span style="mso-spacerun: yes;">
</span>For example, what will happen to the value of the dollar given this view
of the world?<span style="mso-spacerun: yes;"> </span>These will be addressed in
future posts.</span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Does one get a sense of
potential “stagflation” in what is written above?<span style="mso-spacerun: yes;"> </span>Slow economic growth, rising inflation, and
rising interest rates.<span style="mso-spacerun: yes;"> </span>How does a
central bank combat such a situation? </span></div>
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<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The situation that Mr.
Bernanke and the Fed face is a very challenging one.<span style="mso-spacerun: yes;"> </span>It is a situation that they have helped to
create.<span style="mso-spacerun: yes;"> </span>But, getting out of it will not
be much fun for them. </span></div>
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<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">As far as the private
investor is concerned…a situation like this presents a ton of possible
“investment” opportunities.<span style="mso-spacerun: yes;"> </span>And, one
should always ask, “How can I make money from a situation like the ones
described above?”<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">As one reads a book like
“More Money than God” by Sebastian Mallaby, one observes that lots and lots of
money is made off of government mistakes.<span style="mso-spacerun: yes;">
</span>The problem is that generally the people that make the money off of
these mistakes are people that have the information, the access, and the scale
to take advantage of the mistakes.<span style="mso-spacerun: yes;">
</span>However, these “tools” are not available to most people.<span style="mso-spacerun: yes;"> </span>Maybe that is why the distribution of wealth
in the United States has become so skewed. <span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span></span></div>
John Masonhttp://www.blogger.com/profile/01451924722549191154noreply@blogger.com0tag:blogger.com,1999:blog-6726381082427834779.post-88457950038975305802012-08-16T08:25:00.000-07:002012-08-16T08:26:25.362-07:00Municipal Governments: Default Rates Higher Than Thought<style>
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<br />
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">“Moody’s Investment Service
has reported that from 1970 to 2011, there were only 71 municipal bond
defaults.<span style="mso-spacerun: yes;"> </span>But (a Federal Reserve Bank of
New York) report counted 2,521 defaults.”</span>
<br />
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">“The report found a similarly
vast gap in the raw numbers of defaults when it looked at data from Standard
& Poor’s.<span style="mso-spacerun: yes;"> </span>The Fed’s combined
database indicated 2,366 defaults from 1986 to 2011, compared with S & P’s
47 defaults during this same period.”</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">These quotes are taken from
the New York Times article, <a href="http://www.nytimes.com/2012/08/16/business/municipal-bonds-default-more-than-advertised.html?_r=1&ref=business">"Muni
Bonds Not as Safe As Thought".</a></span></div>
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<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The difference in the figures
is that Moody’s and Standard & Poor’s just report on rated bonds whereas
the report of the Federal Reserve Bank of New York considers both rated and
nonrated bonds. </span></div>
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<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Now most investors and
investment funds just invest in rated bonds so that the report of the rating
agencies represents what most of these investors face.<span style="mso-spacerun: yes;"> </span>And, the default rate of the rated municipal
bonds rests slightly below one percent. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">However, if we are looking at
the state of the economy and the state of municipal finances we need to look at
all defaults and not just the defaults of the rated issues.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">But, we need to look deeper
into the whole municipal financial to really understand what it going on in the
municipal area.<span style="mso-spacerun: yes;"> </span>“The Fed researchers
said that debt backed by a city’s own general obligation pledge seldom
defaults, while debts backed by revenues generated by individual projects were
more uncertain.”</span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Bonds related to housing
projects contributed 17 percent of the defaults; nursing homes accounted for 12
percent; and health care projects provided 11 percent.<span style="mso-spacerun: yes;"> </span>But, the largest contributor was industrial
development bonds, which made up 28 percent of the defaults. </span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">And, it seems that
municipalities are taking more and more risks on bonds, some of them related to
educational efforts.<span style="mso-spacerun: yes;"> </span>See the reference
to the issue by the San Diego educational authorities mentioned in my August 11
blogpost, <a href="http://masefinance.blogspot.com/">"Sour Time for
Cities".</a><span style="mso-spacerun: yes;"> </span>In this case,</span><span style="font-family: Arial; font-size: 10.0pt;"> </span><span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">Poway Unified, one
San Diego educational district, issued 7 percent “capital appreciation”
bonds.<span style="mso-spacerun: yes;"> </span>There is no need for Poway
Unified to pay back interest or capital until 2033, and when the bond is repaid
in 2051, the district will have paid back to investors 10 times the amount
initially borrowed. </span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">The total default rate on municipal bonds, both rated and
non-rated appears to be about 4.5 percent.<span style="mso-spacerun: yes;">
</span>This in not a huge number, but it is certainly not as low as most of us
perceived the default rate on municipal bonds to be.<span style="mso-spacerun: yes;"> </span></span></div>
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<br /></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">Also, the Fed researchers noted that municipal defaults are
not as closely tied to economic downturns, as are corporate issues. </span></div>
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<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">The trend in municipal defaults seem to be tied to longer,
more secular movements in the economy and not just business activity. </span></div>
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<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">For example, at the start of the period covered by the
research, 1970, public labor union membership was a very small of the labor
union movement and not particularly strong.<span style="mso-spacerun: yes;">
</span>Currently, public labor unions make up over 50 percent of the membership
of labor unions in the United States.</span></div>
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<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">Furthermore, in 1970, homes in the United States had not
become the “piggy bank” of the middle class.<span style="mso-spacerun: yes;">
</span>The inflation of home prices really began in the late 1960s and early
1970s and the almost continuous rise in the price of housing became the “go to”
source of revenue for governments to raise the salaries, pensions, and other
benefits of rapidly growing municipal employment roles.</span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">According to the Federal Reserve figures, only 155 municipal
defaults took place between 1970 and 1986…sixteen years.<span style="mso-spacerun: yes;"> </span>This meant that about 10 defaults took place
every year during this time period.<span style="mso-spacerun: yes;"> </span></span></div>
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<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">From 1986 through 2011, 2,366 defaults took place.<span style="mso-spacerun: yes;"> </span>Over this latter 25 years, the country
averaged almost 95 defaults per year.<span style="mso-spacerun: yes;"> </span></span></div>
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<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">And, the number of defaults was much greater during the
latter part of the period than it was in the late 1980s and early 1990s.</span></div>
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<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">Bottom line: municipal bond defaults are much more of a
problem than many people have believed to be the case.<span style="mso-spacerun: yes;"> </span>And, from all indications we are not out of
the woods yet in terms of turning this situation around!</span></div>
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<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">I have written a lot over the past year or so about the
problems facing state and local governments.<span style="mso-spacerun: yes;">
</span>Unfortunately, many state and local governments are not unlike the Greek
government in under-reporting their fiscal situations.<span style="mso-spacerun: yes;"> </span>And, in many cases we are just learning about
them now. </span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">I believe that we are still facing many problems in the
state and local government realm due to unreliable accounting practices, declining
tax base, promises to constituents relating to social services and education,
and militant public labor unions.<span style="mso-spacerun: yes;">
</span>Working out these problems is not going to be pretty…but, state and local
governments cannot return to a prudent operating condition until they are
worked out. </span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">As a consequence, there will be many more bond defaults in
the future, especially municipal bond defaults.<span style="mso-spacerun: yes;">
</span>They may be non-rated bonds, but they are municipal bonds, but they are
municipal bonds none-the-less.<span style="mso-spacerun: yes;"> </span>These
defaults will continue until these institutions get their act together and
their budgets and accounting by in line.<span style="mso-spacerun: yes;">
</span></span></div>
John Masonhttp://www.blogger.com/profile/01451924722549191154noreply@blogger.com0tag:blogger.com,1999:blog-6726381082427834779.post-60064850969383887302012-08-15T09:41:00.001-07:002012-08-15T09:41:37.972-07:00The US Economy: Modest Growth Continues<style>
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<br />
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The July numbers for
industrial production have just been released and all one can say about them is
that the economy is just showing “more of the same.”<span style="mso-spacerun: yes;"> </span>The year-over-year rate of increase of industrial
production for July was 4.4 percent.<span style="mso-spacerun: yes;"> </span>The
average rate of increase for the first six months of 2012 was 4.8 percent.<span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span></span>
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<a href="http://research.stlouisfed.org/fredgraph.png?g=9vT" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="192" src="http://research.stlouisfed.org/fredgraph.png?g=9vT" width="320" /></a></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Economic growth, as captured
by the rate of increase in industrial production, has not been strong and
economic growth remains weak.<span style="mso-spacerun: yes;"> </span>This
growth is not inconsistent with the rate of growth of real GDP, which has been
around 2 percent, year-over-year, through the second quarter of 2012.</span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">This rate of growth is not
sufficient to reduce the amount of unemployment in the United States and is
specifically not sufficient to reduce the amount of underemployment in the
nation, which remains in the 15 percent to 20 percent range.<span style="mso-spacerun: yes;"> </span></span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">It is also not sufficient to
raise the rate at which manufacturing capacity is used in the United
States.<span style="mso-spacerun: yes;"> </span>Although the rate of capacity
utilization has moved up modestly in recent months, it still remains below the
level it was at just before the recent recession set in. </span></div>
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<a href="http://research.stlouisfed.org/fredgraph.png?g=9vQ" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="192" src="http://research.stlouisfed.org/fredgraph.png?g=9vQ" width="320" /></a></div>
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">There is much unused economic
capacity in the United States these days and the economy is not growing
sufficiently to cause this unused capacity to shrink much at this time.<span style="mso-spacerun: yes;"> </span>For one, there are just too many problems
that people have to deal with before full blown economic growth can continue
again. <span style="mso-spacerun: yes;"> </span></span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Some of these problems have
to do with the amount of debt still outstanding in the United States; one out
of four residential mortgages are still “underwater”; the are substantial
problems in the area of commercial real estate; state and local governments
still have massive problems in the area of pensions and debt outstanding (see
my recent post titled </span><a href="http://masefinance.blogspot.com/"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">"Sour Times for Cities"</span></a><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">); and there remain many problems in the
banking sector…among other things. </span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Many of these problems need
to be “worked out” before people, businesses, and governments can start
spending again.<span style="mso-spacerun: yes;"> </span>And, this spending must
be stepped up if the economy is to return to a level of economic growth more consistent
with the last half of the twentieth century. </span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">In addition, people and
businesses still need some indication of where government policy is going to
go.<span style="mso-spacerun: yes;"> </span>This is perhaps the ultimate
need.<span style="mso-spacerun: yes;"> </span>Right now there is little or no
indication of what future government economic policy is going to be.<span style="mso-spacerun: yes;"> </span>People and businesses find it very difficult
to commit in such an environment.<span style="mso-spacerun: yes;"> </span>I am
afraid that we are just not going to get much pick up in the commitment people
and businesses until they get some idea about what kind of environment the
government is going to create for the future.<span style="mso-spacerun: yes;">
</span>Right now all they can focus in on is more deficits of one trillion
dollars or more and more and more debt.<span style="mso-spacerun: yes;">
</span>And, this provides little or no help to them in making decisions about
how to spend their funds.<span style="mso-spacerun: yes;"> </span></span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">So, economic growth is going
nowhere.<span style="mso-spacerun: yes;"> </span>As a consequence, a substantial
amount of economic resources are going to remain unused.<span style="mso-spacerun: yes;"> </span></span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">This scenario is not going to
change before the presidential election in November.<span style="mso-spacerun: yes;"> </span>It is highly unlikely that it will change
much over the next year or so. And, this will be the environment we all are
going to face in making spending and investment decisions during this
time.<span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span></span></div>
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John Masonhttp://www.blogger.com/profile/01451924722549191154noreply@blogger.com0tag:blogger.com,1999:blog-6726381082427834779.post-1048303281347188982012-08-11T11:27:00.000-07:002012-08-11T11:27:55.870-07:00Sour Times for Cities<style>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Two things concerning cities
we learn more about almost every day…the sad state municipal finances…and the
efforts some cities or educational systems have used to keep the spending going.
</span>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">A real shocker is the <a href="http://www.ft.com/intl/cms/s/0/cfa60704-e236-11e1-8e9d-00144feab49a.html#axzz23GCez7GJ">piece
by Gillian Tett</a> in the Financial Times on Friday. <span style="mso-spacerun: yes;"> </span></span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">“The issue at stake revolves
around some exotic bonds issued by San Diego educational authorities in recent </span><span style="font-family: Arial; font-size: 10.0pt;">years…as the fiscal situation in
California has deteriorated, voters have become so upset they have imposed
various fiscal straitjackets on educational boards. Worse, property tax
revenues, which have been used to fund schools, have declined as the housing
market has crashed.</span></div>
<br />
<span style="font-family: Arial;">That has left schools in a bind. So, local
financial advisers have offered some “innovative” solutions. Last year, Poway
Unified, one San Diego educational district, issued some $105m worth of
“capital appreciation” bonds to finance previously planned investment projects.</span><br />
<br />
<span style="font-family: Arial;">These are similar to zero-coupon bonds,
meaning the district does not need to start repaying interest or capital until
2033. </span><br />
<br />
<span style="font-family: Arial;">As a result, Poway’s local authority has
been able to promise to keep local taxes unchanged while completing previously
promised investments (building projects, computers and so on).</span><br />
<br />
<span style="font-family: Arial;">But, there is a big catch: to compensate for
this payment deferral, these bonds are paying highish (7 per cent) interest
rates and cannot be redeemed early. When the bond is repaid in 2051, the total
bill will be more than 10 times the initial loan.” </span><br />
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Furthermore, we read on the
front page of the Wall Street Journal that <a href="http://professional.wsj.com/article/SB10000872396390444900304577581162498135058.html?mod=ITP_pageone_0&mg=reno64-wsj">"Hard
Times Spread for Cities".</a></span></div>
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<span style="font-family: Arial; font-size: 10.0pt;">“Fiscal
woes that have caused high-profile bankruptcies in California are surfacing
across the country as municipalities struggle with uneven growth and escalating
health and pension costs following the worst recession since the 1930s. </span></div>
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<br /></div>
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;">
<span style="font-family: Arial; font-size: 10.0pt;">Budget crunches already have
prompted Michigan lawmakers to authorize emergency fiscal managers, and led the
mayor of Scranton, Pa., to temporarily cut the pay of all city workers to the
minimum wage. </span></div>
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;">
<span style="font-family: Arial; font-size: 10.0pt;">In a majority of the nation's 19,000
municipalities—urban and rural, big and small—stagnant property tax revenues,
less aid from states and rising costs are forcing less dramatic but still
difficult steps.</span></div>
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<br /></div>
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;">
<span style="font-family: Arial; font-size: 10.0pt;">Moody's Investors Service recently
said that while municipal bankruptcies are likely to remain rare, it warned of
a "a small but growing trend in fiscally troubled cities unwilling to pay
their debt obligations.’"</span></div>
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<br /></div>
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;">
<span style="font-family: Arial; font-size: 10.0pt;">In fact, <a href="http://www.ft.com/intl/cms/s/0/490e6022-e25b-11e1-be25-00144feab49a.html#axzz23GCez7GJ">Moody's
just downgraded</a> nearly 300 US municipal issuers in the second quarter.<span style="mso-spacerun: yes;"> </span>Moody’s analyst Dan Steed stated that “With
potential federal fiscal cuts looming and state cost pressures in the areas of
healthcare and underfunded pensions, the credit outlook for the state sector
remains negative.” </span></div>
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<br /></div>
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;">
<span style="font-family: Arial; font-size: 10.0pt;">Cities…and states…have a long way to
go to get out of their financial straits.<span style="mso-spacerun: yes;">
</span>I have<span style="mso-spacerun: yes;"> </span>written over and over in
this blog that the United States economy has to go through a substantial amount
of restructuring in order to return to<span style="mso-spacerun: yes;">
</span>condition in which more normal growth patterns can be achieved.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;">
<br /></div>
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;">
<span style="font-family: Arial; font-size: 10.0pt;">The list goes on and on…local
governments have unfunded pension liabilities that total around $3 trillion…unfunded
health benefit liabilities total in excess of $1 trillion…state and local
spending fell by an annual rate of more the 2 percent in the second quarter…and
local governments have cut more that 66,000 jobs in the past year, mostly
teachers and other school employees.<span style="mso-spacerun: yes;"> </span></span></div>
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<br /></div>
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;">
<span style="font-family: Arial; font-size: 10.0pt;">And, this restructuring will
continue into the future.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;">
<br /></div>
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;">
<span style="font-family: Arial; font-size: 10.0pt;">Furthermore, universities and
colleges, a big part of state and local budgets, are not immune from the
restructuring that is going on.<span style="mso-spacerun: yes;"> </span>One can
also add to this the role that information technology will play in this <a href="http://www.ft.com/intl/cms/s/0/7f44c028-e229-11e1-b3ff-00144feab49a.html#axzz23GCez7GJ">restructuring
of education.</a></span></div>
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<br /></div>
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;">
<span style="font-family: Arial; font-size: 10.0pt;">The economy is growing…my forecast
for the near future is around a 2 percent year-over-year rate of growth in real
GDP.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;">
<br /></div>
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;">
<span style="font-family: Arial; font-size: 10.0pt;">I do not see how the growth rate can
be much higher than this over the next couple of years given the huge
structural dislocations that exist within our economy.<span style="mso-spacerun: yes;"> </span>Before our economy can resume a more normal
growth rate of around 3.2 percent, the economy is going to have to do a lot of
restructuring. </span></div>
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;">
<br /></div>
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;">
<span style="font-family: Arial; font-size: 10.0pt;">A lot of the problems in the realm
of state and local governments come from one source that is going to have to be
dealt with in the future and that is the strength of public unions.<span style="mso-spacerun: yes;"> </span>Right now, public unions make up more than 50
percent of the unionized workers in the United States.<span style="mso-spacerun: yes;"> </span>The non-public unions having been declining
for many years as the economy has shifted from manufacturing-based industry to
service-based.<span style="mso-spacerun: yes;"> </span>Their day is past.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;">
<br /></div>
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;">
<span style="font-family: Arial; font-size: 10.0pt;">Now, this is happening for the
public unions.<span style="mso-spacerun: yes;"> </span>The “piggy bank” of the
public unions, property taxes, have plummeted in recent years and are not seen
as returning to the lush years of the 1990s and 2000s for quite some time…if at
all. </span></div>
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;">
<br /></div>
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;">
<span style="font-family: Arial; font-size: 10.0pt;">In essence the old “war” between
labor and capital is waning…but there is something new coming to replace
it.<span style="mso-spacerun: yes;"> </span>This something “new” is the
bifurcation of American society…not between employer and employee…but </span></div>
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;">
<span style="font-family: Arial; font-size: 10.0pt;">between
those that are grow up in the world of the 21<sup>st</sup> century and those
that are not prepared either in lifestyle or education to succeed in the
current work environment.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;">
<br /></div>
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;">
<span style="font-family: Arial; font-size: 10.0pt;">Recent figures show that there are
just under 4 million jobs that are going unfilled because employers can’t find
people with the appropriate skills to fill these jobs.<span style="mso-spacerun: yes;"> </span>The under-employment rate I estimate to be
about 20 percent of the eligible workforce.<span style="mso-spacerun: yes;">
</span></span></div>
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;">
<br /></div>
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;">
<span style="font-family: Arial; font-size: 10.0pt;">And, there is more and more research
highlighting the severe separation along these lines that is growing in the
United States. </span></div>
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;">
<br /></div>
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;">
<span style="font-family: Arial; font-size: 10.0pt;">These problems are not going to be solved overnight.<span style="mso-spacerun: yes;"> </span>These problems take years…and into decades…to
resolve.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;">
<br /></div>
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;">
<span style="font-family: Arial; font-size: 10.0pt;">State and local governments must
adapt.<span style="mso-spacerun: yes;"> </span>Now that their “piggy bank” has
been taken away from them they must change.<span style="mso-spacerun: yes;">
</span>But, this will be slow…and will be very painful.<span style="mso-spacerun: yes;"> </span>This, however, is the future.<span style="mso-spacerun: yes;"> </span>Don’t get too excited about the recovering
economy without considering these facts.<span style="mso-spacerun: yes;">
</span></span></div>John Masonhttp://www.blogger.com/profile/01451924722549191154noreply@blogger.com0tag:blogger.com,1999:blog-6726381082427834779.post-18812441080308557322012-08-09T12:21:00.002-07:002012-08-09T12:21:48.605-07:00No Pressure on Interst Rates<style>
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<br />
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">When are interest rates going
to rise?<span style="mso-spacerun: yes;"> </span>Risk-free interest rates that
is?<span style="mso-spacerun: yes;"> </span>Short-term interest rates?</span>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Interest rates have risen…and
fallen…on government debt that was once considered risk-free because these
governments have faced solvency problems.<span style="mso-spacerun: yes;">
</span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">But, what about interest
rates on United States Treasury debt?<span style="mso-spacerun: yes;">
</span>And, what about money market interest rates?<span style="mso-spacerun: yes;"> </span>And, what about the Federal Funds rate?</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The Federal Reserve has
indicated that the target Federal Funds rate will remain where it is now until
the end of 20--, you put in the last two numbers.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The upper limit of the target
Federal Funds rate has been at 25 basis points since December 16, 2008. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The upper limit of the target
range will only be challenged if the Federal Reserve decides to tighten up on
monetary policy…something that is out-of-the-question at this time…or if
business activity picks up and the demand for funds increases, thereby putting
pressure on short-term interest rates to rise. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Certainly, QE1 and QE2
impacted the supply side of the market and helped to keep the Federal Funds
rate below 25 basis points.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Over the past year, however,
there has been next to no demand pressure on the Federal Funds rate to
rise.<span style="mso-spacerun: yes;"> </span>Over the past year, the effective
Federal Funds rate, on a daily basis, has varied between six basis points and
eighteen basis points.<span style="mso-spacerun: yes;"> </span>Although the rate
has been toward the upper end of this range in the past three months, the
Federal Reserve has actually seen its portfolio of securities decline over this
time period indicating that there has been little or no pressure on the Federal
Funds rate to rise. (See my August 7 post about <a href="http://masefinance.blogspot.com/">recent Fed activity.)</a></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">This lack of pressure on
short-term interest rates is a sign of two things at this time.<span style="mso-spacerun: yes;"> </span>First, it is a sign of the weakness in
economic growth in the United States economy and the consequent lack of
pressure on the banking system to lend.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">This lack of weakness is also
seen in the financial instruments with a longer term.<span style="mso-spacerun: yes;"> </span>Mortgage interest rates are at historically
low levels, yet analysts claim that they could be even lower than they are now.<span style="mso-spacerun: yes;"> </span>A <a href="http://dealbook.nytimes.com/2012/08/08/with-rate-twist-banks-increase-mortgage-profit/?ref=business">New
York Times article</a> points up the fact that mortgage interest rates could
even be lower than they are now but commercial banks have not let them fall as
much as they could.<span style="mso-spacerun: yes;"> </span>The demand for
mortgages is just not that strong.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">One argument given for why
the banks are keeping rates as high as they are in the current market is that
their costs have risen due to the new regulations that the banks are facing. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Still, the indication is that
there is no demand side pressure on interest rates in the current market. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">There is a second argument
for the lack of pressure on United States interest rates and this has to do
with the fact that the United States Treasury market is receiving a substantial
amount of funds seeking a “safe haven” in a world of great uncertainty.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The United States is not the
only beneficiary of this “move to safety”.<span style="mso-spacerun: yes;">
</span>David Wessel, in the <a href="http://professional.wsj.com/article/SB10000872396390444900304577577192417116440.html?mod=ITP_pageone_1&mg=reno-wsj">Wall
Street Journal,</a> writes about the “subzero” interest rates that now are
being “paid” on the two-year government bonds of Switzerland, Denmark, Germany,
among others.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">And, we have seen a negative
yield on the ten-year inflation-adjusted Treasury bond (TIPS) since August of
2011.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The point is, that the demand
for funds is close to non-existent and this is not a good sign.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Sure, some firms are
borrowing but these are generally the larger companies who are taking advantage
of the very low interest rates.<span style="mso-spacerun: yes;"> </span>But,
these funds are not being used to expand plant and equipment.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">But, with the demand for
funds being so low and with little or no indication that a pickup in demand
will appear anytime soon, other problems exist.<span style="mso-spacerun: yes;">
</span>Savers are earning next to nothing on their money and the many of the
elderly are finding it hard to make ends meet.<span style="mso-spacerun: yes;">
</span>And, as Wessel points out in the Journal article, “banks and insurance
companies start to run into trouble.<span style="mso-spacerun: yes;">
</span>They make much of their money by borrowing at short-term rates and
lending at higher long-term rates, or effectively, guaranteeing higher rates to
their customers.<span style="mso-spacerun: yes;"> </span>That doesn’t work so
well when yields on two- or three-year securities are negative.”</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">To me, this is a place we
must look to pick up signs of an improving economy.<span style="mso-spacerun: yes;"> </span>Demand pressure must start to build in the
financial markets indicating that the economy is growing stronger.<span style="mso-spacerun: yes;"> </span>The must be some indication that demand
pressure is being felt in the Federal Funds market forcing the Federal Reserve
to react in an effort to keep the effective Fed Funds rate from rising.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">This is a reason, in my mind,
for opposing any kind of further quantitative easing (QE3) in the near
term.<span style="mso-spacerun: yes;"> </span>If there is no demand side pressure
on the money markets, shoving more money into the banking system will not
create more demand given where interest rates currently are.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;"><a href="http://seekingalpha.com/article/739041-the-banking-system-through-the-first-half-of-2012">Business
loan demand</a> has been increasing slightly but there is no indication that
what we have seen is significant to put any pressure on the banking
system.<span style="mso-spacerun: yes;"> </span>And, <a href="http://seekingalpha.com/article/738211-little-m-a-activity-another-sign-of-a-weak-economy">merger
and acquisition activity</a> remains week thereby providing us with another
sign that the demand for financial resources is remaining tepid.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Right now the Federal Reserve
has stated that it can see the Federal Funds rate target remaining in place to
the end of 2014.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">If they really believe that
this will be the case then they are indicating that they expect the economy to
stay extremely week until that time.<span style="mso-spacerun: yes;">
</span>This would mean that the economic recovery would be in its sixth year.<span style="mso-spacerun: yes;"> </span>And for there to be no demand pressure on
short-term interest rates during this time, economic growth would still need to
be around two percent and unemployment would have to hover around eight
percent. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The fact that there is little
pressure on interest rates to rise is not a good sign! <span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>John Masonhttp://www.blogger.com/profile/01451924722549191154noreply@blogger.com0tag:blogger.com,1999:blog-6726381082427834779.post-81650886718934072482012-08-07T07:38:00.000-07:002012-08-07T07:41:19.497-07:00Fed Sees No Pressure on Interest Rates<style>
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<br />
The Federal Reserve has seen little or no demand pressure in the money markets over the past six months or so. Consequently, the Fed has not had to add securities to its portfolio during this time to combat any pressure for interest rates to rise. <br />
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt;">The Board
of Governors of the Federal Reserve System met last week and decided not to
change the current stance of monetary policy, although the Board felt that it
needed to be alert to any possible needs for additional monetary stimulus if
the economic growth appears to be decelerating or if the unemployment situation
seems to be deteriorating.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt;">My read on
this is that the Federal Reserve believes that it can do little more than what
it has already done to try and stimulate further economic growth or lower
unemployment.<span style="mso-spacerun: yes;"> </span>However, it says that it
needs to stand ready in case the situation gets worse.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt;">This is
basically the same policy the Federal Reserve has been following for the past
year.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt;">To me the
most important monetary variable to watch at this time is the excess reserves
held by the banking system.<span style="mso-spacerun: yes;"> </span>This is very
important for two reasons.<span style="mso-spacerun: yes;"> </span>The first is
that I believe that the excess reserves statistics tells us something about what
is going on in the banking system and the money markets.<span style="mso-spacerun: yes;"> </span>To understand what is going in the banking
system and the money markets is important because the primary target the
Federal Reserve is focusing on at this time is the Federal Funds rate and what
is going on with respect to excess reserves tells us something about what is
happening to the supply and demand for funds in the Fed Funds market. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt;">Federal
Reserve policy right now is to keep the Federal Funds rate between zero and 25
basis points.<span style="mso-spacerun: yes;"> </span>It has been focusing on
this range since late 2008.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt;">In
attempting to keep the Federal Funds rate within this range, the Fed has been
very successful.<span style="mso-spacerun: yes;"> </span>The effective Federal
Funds rate, the actual funds rate times the quantity of funds lent at the each
rate, gives us a weighted average of where the funds rate was trading each
day.<span style="mso-spacerun: yes;"> </span>Over the past year the effective
Federal Funds rate has traded between a low of 6 basis points and a high of 19
basis points.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt;">The demand
side of the market represents the need of the commercial banking system for
additional reserves.<span style="mso-spacerun: yes;"> </span>The supply side of
the market is dependent upon the Federal Reserve System supplying funds or
withdrawing funds from the market to keep the Federal Funds rate from within
the range it is aiming for. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<div class="separator" style="clear: both; text-align: center;">
<a href="http://research.stlouisfed.org/fredgraph.png?g=9jx" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="192" src="http://research.stlouisfed.org/fredgraph.png?g=9jx" width="320" /></a></div>
<span style="font-family: Times; mso-bidi-font-family: Times; mso-no-proof: yes;"></span><span style="font-family: Arial; font-size: 10.0pt;"></span></div>
<div class="MsoNormal">
<br />
<span style="font-family: Arial; font-size: 10.0pt;">My reading
of the movement in the effective Federal Funds rate for the past year is this:
the effective Federal Funds rate was relatively level, around 8 basis points,
during from August 2011 into January 2012, roughly the first six months of the
year.<span style="mso-spacerun: yes;"> </span>After January the rate increased
up to the middle of July when it reached 19 basis points and then dropped off
to about 14 basis points where it now resides. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt;">The
important question, especially for this past six months is the reason for the
rise in the effective rate…was it because of demand pressures coming from the
banking system…or, was it because of supply conditions created by Federal
Reserve actions.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt;">In terms of
overt actions during this six-month period, the Federal Reserve did little or
nothing.<span style="mso-spacerun: yes;"> </span>In fact, the securities
portfolio of the Fed actually declined by about $16 billion from May 2, 2012 to
August 1, 2012.<span style="mso-spacerun: yes;"> </span></span></div>
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<span style="font-family: Arial; font-size: 10.0pt;">What did
put reserves into the banking system, however, was general operating factors,
in this case the Treasury, writing checks on its Federal Reserve account, and
these checks were then deposited in the banks.<span style="mso-spacerun: yes;">
</span>At tax time, April, taxes are paid into government accounts at
commercial banks and then drawn into the Treasury’s General Account when the Treasury
is going to write checks.<span style="mso-spacerun: yes;"> </span>In order to
minimize the disruptions in the banking system, the Treasury attempts to keep
its deposits there as constant as possible.<span style="mso-spacerun: yes;">
</span>Thus, its General Account at the Federal Reserve can experience wide swings
during tax time and afterwards. </span></div>
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<span style="font-family: Arial; font-size: 10.0pt;">The
Treasury’s General Account at the Federal Reserve fell by $84 billion between
May 2 and August 1.Thus, the reserve balances of commercial banks at the
Federal Reserve rose by about $60 billion during this time period and excess
reserves in the banking system rose by about $37 billion.<span style="mso-spacerun: yes;"> </span>So the Federal Reserve acted in a relatively
passive way during this time period although the banking system gained in
excess reserves during the time period.<span style="mso-spacerun: yes;">
</span>The Effective Federal Funds rate did rise over this same time period,
but was the rise demand driven?<span style="mso-spacerun: yes;"> </span></span></div>
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<span style="font-family: Arial; font-size: 10.0pt;">My belief
is that there might have been a little demand pressure during this time period
but I don’t think that the pressure was substantial.<span style="mso-spacerun: yes;"> </span>Certainly there has been some pickup in bank
lending over the past six months, but the</span><a href="http://seekingalpha.com/article/739041-the-banking-system-through-the-first-half-of-2012"><span style="font-family: Arial; font-size: 10.0pt;"> bank loan demand remains relatively
tepid.</span></a><span style="font-family: Arial; font-size: 10.0pt;"><span style="mso-spacerun: yes;"> </span>Most of the loan demand was in business loans
at the 25 largest banks in the United States and these banks are highly
liquid.<span style="mso-spacerun: yes;"> </span>There would little need for them
to go to the money markets to finance the loans.</span></div>
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<br /></div>
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<span style="font-family: Arial; font-size: 10.0pt;">Evidence
that there was not much demand side pressure over this time period is that the
Fed actually reduced its holdings of market securities.<span style="mso-spacerun: yes;"> </span>The little pressure that might have been felt
in the Fed Funds market was probably due to the where government checks were
paid and the consequent slight dislocation of short-terms funds within the
banking system.<span style="mso-spacerun: yes;"> </span>The back off in the
effective Fed Funds rate this past week is evidence that these funds are well
distributed and the banking system is comfortable with how reserves are
distributed throughout the industry. </span></div>
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<span style="font-family: Arial; font-size: 10.0pt;">One further
note on the excess reserves situation: total reserves in the banking system
actually declined by about 7 percent over the past year.<span style="mso-spacerun: yes;"> </span>At the same time, required reserves in the
banking system rose by just under 28 percent.<span style="mso-spacerun: yes;">
</span>These figures capture the huge movement of funds in the financial system
from money market funds and other short-term assets back into the banking
system, primarily into transactions balances.<span style="mso-spacerun: yes;">
</span>This movement has resulted in the M1 money stock increasing at very high,
historical, rates of growth, but this increase is coming from individuals and
businesses moving assets around and not from loan growth that is underwriting
economic activity.<span style="mso-spacerun: yes;"> </span>Monetary policy is
just not doing much these days except keeping the banking system liquid and
helping the FDIC continue to close banks without disrupting financial
markets.<span style="mso-spacerun: yes;"> </span>I believe very strongly that
the Federal Reserve could achieve very little more in this economy if it opened
up the monetary spigots much further.<span style="mso-spacerun: yes;">
</span>The Open Market Committee was right in keeping monetary policy
unchanged.<span style="mso-spacerun: yes;"> </span></span></div>John Masonhttp://www.blogger.com/profile/01451924722549191154noreply@blogger.com0tag:blogger.com,1999:blog-6726381082427834779.post-86602125769118466602012-08-06T11:25:00.000-07:002012-08-06T11:25:34.492-07:00Risks Associated with Investing in Commercial Banks<style>
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<br />
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">If I thought I was a “value
investor” and that my investments should be held, at a minimum, for four or
five years, I would not want to put any of my investment money in commercial
banks at this time. </span>
<br />
<div class="MsoNormal">
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The primary reason for this
is the uncertainty that envelops the banking industry at this time. </span></div>
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<br /></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">First, there is still, I
believe, a great deal of uncertainty about the value of many of the assets
banks are carrying on their balance sheets.<span style="mso-spacerun: yes;">
</span>Let me just mention three areas of concern: commercial real estate
loans; residential real estate loans; and anything connected with state and
local governments.<span style="mso-spacerun: yes;"> </span></span></div>
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<br /></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Commercial real estate loans have
generally been granted with a five to seven year maturity with the principal of
the loan coming due when the loan matures.<span style="mso-spacerun: yes;">
</span>Many of these loans are coming due or will come due in the next 12 to 18
months.<span style="mso-spacerun: yes;"> </span>Most of these loans will need to
be refinanced.<span style="mso-spacerun: yes;"> </span>A large number of the projects
connected with these loans are not doing well.<span style="mso-spacerun: yes;">
</span>It is uncertain what will happen here. </span></div>
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<br /></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Current statistics on
residential real estate loans indicate that about one in four of these loans
have a mortgage value that is in excess of the market value of the underlying
property.<span style="mso-spacerun: yes;"> </span>The government would like to
see many of these loans refinanced with the principle amount of the loan being
reduced to a value below current market values.<span style="mso-spacerun: yes;">
</span>This may help the borrower but it would require substantial asset write-downs
for the financial institution holding them. </span></div>
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<br /></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">In terms of state and local
governments very little needs to be said these days.<span style="mso-spacerun: yes;"> </span>Every week it seems we learn more about the
financial tricks these governments used and the unfunded pensions that exist, which
cannot easily be covered.<span style="mso-spacerun: yes;"> </span>No one seems
to have an idea about how much these problems will impact our commercial banks.
</span></div>
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<span style="font-family: Arial; font-size: 10.0pt;">Second,
there is the uncertainty hanging over the banking system about the new rules
system that is going to be imposed.<span style="mso-spacerun: yes;"> </span></span><span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">President
Barack Obama signed the Dodd–Frank Wall Street Reform and Consumer Protection
Act into law<span style="mso-bidi-font-weight: bold;"> on July 21, 2010.<span style="mso-spacerun: yes;"> </span>That was two years ago!</span></span></div>
<div class="MsoNormal">
<br /></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";">And, banks still don’t know what
some of the laws are and how they will be implemented.<span style="mso-spacerun: yes;"> </span>One reason for this is that there are still a
number of the provisions of the law that have not been fully written yet.<span style="mso-spacerun: yes;"> </span>Dates still get postponed for when various
provisions will actually be implemented. </span></div>
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<br /></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";">Then we have the Basel III rules, imposed
by international agreement, that remain to be implemented.<span style="mso-spacerun: yes;"> </span></span></div>
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<br /></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";">I don’t know one banker that is
happy with this situation.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";">Third, there is the uncertainty
with respect to the state of the economy.<span style="mso-spacerun: yes;">
</span>Very little is happening in the economy.<span style="mso-spacerun: yes;">
</span>Economic growth, year-over-year, remains around 2 percent and is not
expected to get better in the near future.<span style="mso-spacerun: yes;">
</span>The reports are growing about <a href="http://www.nytimes.com/2012/08/06/business/fear-of-fiscal-cliff-has-industry-pulling-back.html?_r=1&ref=todayspaper">companies
that are cutting back spending</a> because of the uncertainty created by the
“fiscal cliff” coming up. And, there is uncertainty about how the economic
crisis in Europe is going to play out in America. </span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";">Finally, there is the uncertainty
surrounding the future structure of the banking system.<span style="mso-spacerun: yes;"> </span>Although there has been so much noise about
banks that are “too big to fail”, the larger banks continue to dominate the
banking scene and will continue to do so in the future.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";">The largest 25 banks in the United
States plus foreign-related financial institutions hold more than 70 percent of
the banking assets in the country.<span style="mso-spacerun: yes;"> </span>This
number is only going to increase.<span style="mso-spacerun: yes;"> </span></span></div>
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<br /></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";">Domestically chartered banks that
are larger than $1 billion in asset size (there are 525 of them) hold more than
90 percent of the assets held by domestically chartered banks.<span style="mso-spacerun: yes;"> </span>This means that there are about 5,700 banks
in the United States that hold less than 10 percent of the banking assets in
the country. </span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";">And, we hear and read about the
pressure that the bad bank assets, the poor economic conditions, and the
growing regulatory burden are putting on the smaller banks.<span style="mso-spacerun: yes;"> </span>Take for example the Wall Street Journal
article, <a href="http://professional.wsj.com/article/SB10000872396390443545504577563352622533704.html?mod=ITP_moneyandinvesting_0&mg=reno64-wsj">"Small
Banks Are Blunt In Dislike of New Rules"</a>.<span style="mso-spacerun: yes;"> </span>This is an article about how these bankers
are reacting to the proposed rules on capital levels related to Basel III.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";">The most important, to me,
paragraph in the whole piece is the last one.<span style="mso-spacerun: yes;">
</span>“C. R. “Rusty” Cloutier, president and CEO of MidSouth Bancorp, Inc., of
Lafayette, La., said the Basel rules won’t affect him as harshly as some
smaller banks since he is on the big end of small—about $1.5 billion in
assets—and publicly traded.<span style="mso-spacerun: yes;"> </span>But his
phone is ‘ringing off the hook’ for smaller lenders looking for an exit.”<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";">Everything today points to larger
banks and fewer smaller banks.<span style="mso-spacerun: yes;"> </span>And, it
is not just the economics that is pointing this way but the actions of the
politicians and regulators are also driving things in this direction as well.</span></div>
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<br /></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";">But, there are two other major
players that have to be contended with in the restructuring going on:<span style="mso-spacerun: yes;"> </span>credit unions and “shadow” banks. The roles
these two categories of financial organizations are going to play in the new
structure are uncertain now, but they will be important players, I am sure of
it. </span></div>
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<br /></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";">For one, people needing “banking
services” are going to divide into two sub-groups.<span style="mso-spacerun: yes;"> </span>Those that don’t need “traditional”
banks…like myself…who can do all they need electronically and interact with all
their assets within the same institution.<span style="mso-spacerun: yes;">
</span>And, those that basically only need a checking account, a safe deposit
box, and maybe a savings account.<span style="mso-spacerun: yes;"> </span>This
latter group needs a “no frills”, low cost provider of basic banking
services.<span style="mso-spacerun: yes;"> </span>The credit unions may
eventually satisfy this need.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";">And, lending is going to change
for small business.<span style="mso-spacerun: yes;"> </span>Angel financing is
going to grow.<span style="mso-spacerun: yes;"> </span>Private equity is going
to play more of a role in business lending and then there are other innovations
like “peer-to-peer” lending and so forth.<span style="mso-spacerun: yes;">
</span>No telling what is going to evolve from the Internet.<span style="mso-spacerun: yes;"> </span>No telling what will come from the shadow
banking system.<span style="mso-spacerun: yes;"> </span>Depository institutions
need not apply.</span></div>
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<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";">In five years, banking finance
will be structured in a very different way.<span style="mso-spacerun: yes;">
</span>Getting there will be the problem.<span style="mso-spacerun: yes;">
</span>Because of the uncertainties mentioned above, investing in commercial
banks will make it very difficult to pick winners. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";">At the start of the year, who
would have picked out JPMorgan Chase as the institution that would “shock” the
banking industry with trading losses?<span style="mso-spacerun: yes;"> </span>Myself,
I am not confident that any bank in the present environment is immune from such
surprises.<span style="mso-spacerun: yes;"> </span>Banks may have bad assets on
their books that have not been recognized.<span style="mso-spacerun: yes;">
</span>Banks may be unprepared for exactly how the banking regulations are
going to work out.<span style="mso-spacerun: yes;"> </span>Banks may not whether
this period of slow economic growth well.<span style="mso-spacerun: yes;">
</span>And, banks may not be fully prepared for the changes taking place in
information technology and the new competition from shadow banking and beyond.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
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<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";">These are new times.<span style="mso-spacerun: yes;"> </span>There will be new “winners.”<span style="mso-spacerun: yes;"> </span>And, there will be lots of losers.<span style="mso-spacerun: yes;"> </span>Welcome to banking in the early twenty-first
century! </span></div>John Masonhttp://www.blogger.com/profile/01451924722549191154noreply@blogger.com0tag:blogger.com,1999:blog-6726381082427834779.post-57402913642587599032012-08-05T12:58:00.000-07:002012-08-05T12:58:42.268-07:00Federal Reserve Review as of August 1, 2012<style>
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<br />
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The Board of Governors of the
Federal Reserve System met last week and decided not to change the current
stance of monetary policy, although the Board felt that it needed to be alert
to any possible needs for additional monetary stimulus if the economic growth
appears to be decelerating or if the unemployment situation seems to be
deteriorating.<span style="mso-spacerun: yes;"> </span></span>
<br />
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The European Central Bank met
last week and produced an outcome that was very similar to the one chosen by
the Fed. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">My read on this is that the
Federal Reserve believes that it can do little more than what it has already
done to try and stimulate further economic growth or lower unemployment.<span style="mso-spacerun: yes;"> </span>However, it says that it needs to stand ready
in case the situation gets worse.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">This is basically the same
policy the Federal Reserve has been following for the past year.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">To me the most important
monetary variable to watch at this time is the excess reserves held by the
banking system.<span style="mso-spacerun: yes;"> </span>This is very important
for two reasons.<span style="mso-spacerun: yes;"> </span>The first is that I
believe that the excess reserves statistics tells us something about what is
going on in the banking system and the money markets.<span style="mso-spacerun: yes;"> </span>To understand what is going in the banking
system and the money markets is important because the primary target the
Federal Reserve is focusing on at this time is the Federal Funds rate and what
is going on with respect to excess reserves tells us something about what is
happening to the supply and demand for funds in the Fed Funds market. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Federal Reserve policy right
now is to keep the Federal Funds rate between zero and 25 basis points.<span style="mso-spacerun: yes;"> </span>It has been focusing on this range since late
2008.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">In attempting to keep the
Federal Funds rate within this range, the Fed has been very successful.<span style="mso-spacerun: yes;"> </span>The effective Federal Funds rate, the actual
funds rate times the quantity of funds lent at the each rate, gives us a
weighted average of where the funds rate was trading each day.<span style="mso-spacerun: yes;"> </span>Over the past year the effective Federal
Funds rate has traded between a low of 6 basis points and a high of 19 basis
points.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The demand side of the market
represents the need of the commercial banking system for additional
reserves ofter driven by loan demand.<span style="mso-spacerun: yes;"> </span>The supply side of the market
is dependent upon the Federal Reserve System supplying funds or withdrawing
funds from the market to keep the Federal Funds rate from within the range it
is aiming for. </span></div>
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<br /></div>
<div class="MsoNormal">
<span style="font-family: Times; mso-bidi-font-family: Times; mso-no-proof: yes;"><br /></span><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;"></span></div>
<div class="MsoNormal">
<div class="separator" style="clear: both; text-align: center;">
<a href="http://research.stlouisfed.org/fredgraph.png?g=9gd" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="192" src="http://research.stlouisfed.org/fredgraph.png?g=9gd" width="320" /></a></div>
<br />
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">My reading of the movement in
the effective Federal Funds rate for the past year is this: the effective
Federal Funds rate was relatively constant, around 8 basis points, from
August 2011 into January 2012, roughly the first six months of the past year.<span style="mso-spacerun: yes;"> </span>After January the rate increased up until the
middle of July when it reached 19 basis points and then dropped off to about 14
basis points where it now resides. </span></div>
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<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The important question,
especially for this past six months is the reason for the rise in the effective
rate…was it because of demand pressures coming from the banking system…or, was
it because of supply conditions created by Federal Reserve actions.</span></div>
<div class="MsoNormal">
<br /></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">In terms of overt actions
during this six-month period, the Federal Reserve did little or nothing.<span style="mso-spacerun: yes;"> </span>In fact, the securities portfolio of the Fed
actually declined by about $16 billion from May 2, 2012 to August 1, 2012.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">General operating factors actually put reserves into the banking system: in this case the
Treasury, writing checks on its Federal Reserve account, and these checks were
then deposited in the banks.<span style="mso-spacerun: yes;"> </span>At tax
time, April, taxes are paid into government accounts at commercial banks and
then drawn into the Treasury’s General Account when the Treasury is going to
write checks.<span style="mso-spacerun: yes;"> </span>In order to minimize the
disruptions in the banking system, the Treasury attempts to keep its deposits
there as constant as possible. <span style="mso-spacerun: yes;"> </span>Thus, its
General Account at the Federal Reserve can experience wide swings during tax
time and afterwards. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The Treasury’s General
Account at the Federal Reserve fell by $84 billion between May 2 and August 1 as the Treasury spent tax money that had been collected earlier.</span><br />
<br />
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Thus,
the reserve balances of commercial banks at the Federal Reserve rose by about
$60 billion during this time period and excess reserves in the banking system
rose by about $37 billion.<span style="mso-spacerun: yes;"> </span> </span><br />
<br />
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">So the
Federal Reserve acted in a relatively passive way during this time period
although the banking system gained in excess reserves.<span style="mso-spacerun: yes;"> </span> </span><br />
<br />
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The Effective Federal Funds rate
did rise over this same time period, but was the rise demand driven?<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">My belief is that there might
have been a little demand pressure during this time period but I don’t think
that the pressure was substantial.<span style="mso-spacerun: yes;">
</span>Certainly there has been some pickup in bank lending over the past six
months, but the<a href="http://seekingalpha.com/article/739041-the-banking-system-through-the-first-half-of-2012">
bank loan demand remains relatively tepid.</a><span style="mso-spacerun: yes;">
</span>Most of the loan demand was in business loans at the 25 largest banks in
the United States and these banks are highly liquid.<span style="mso-spacerun: yes;"> </span>There would little need for them to go to the
money markets to finance the loans.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Evidence that there was not
much demand side pressure over this time period is that the Fed actually
reduced its holdings of market securities.<span style="mso-spacerun: yes;">
</span>The little pressure that might have been felt in the Fed Funds market
was probably due to the where government checks were paid and the consequent
slight dislocation of short-terms funds within the banking system.<span style="mso-spacerun: yes;"> </span>The back off in the effective Fed Funds rate
this past week is evidence that these funds are well distributed and the
banking system is comfortable with how reserves are distributed throughout the
industry. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">One further note on the
excess reserves situation: total reserves in the banking system actually
declined by about 7 percent over the past year.<span style="mso-spacerun: yes;">
</span>At the same time, required reserves in the banking system rose by just
under 28 percent.<span style="mso-spacerun: yes;"> </span>These figures capture
the huge movement of funds in the financial system from money market funds and
other short-term assets back into the banking system, primarily into
transactions balances.<span style="mso-spacerun: yes;"> </span>This movement has
resulted in the M1 money stock increasing at very high, historical, rates of
growth, but this increase is coming from individuals and businesses moving
assets around and not from loan growth that is underwriting economic
activity.<span style="mso-spacerun: yes;"> </span> </span><br />
<br />
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Monetary policy is just not
doing much these days except keeping the banking system liquid and helping the
FDIC continue to close banks without disrupting financial markets.<span style="mso-spacerun: yes;"> </span></span><br />
<br />
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;"><span style="mso-spacerun: yes;"> </span>I believe very strongly that the Federal
Reserve could achieve very little more in this economy if it opened up the
monetary spigots any further.<span style="mso-spacerun: yes;"> </span>In this respect, I believe that the Open
Market Committee was right in keeping monetary policy unchanged.<span style="mso-spacerun: yes;"> </span></span></div>John Masonhttp://www.blogger.com/profile/01451924722549191154noreply@blogger.com0tag:blogger.com,1999:blog-6726381082427834779.post-12769842067662714142012-08-01T12:56:00.000-07:002012-08-01T12:56:05.683-07:00The Fed Disappoints the Stock Market<style>
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market had been up most of Wednesday morning…the Dow-Jones average was up 30
points or more almost from the start. <br />
<span style="font-family: Arial; font-size: 10.0pt;"></span>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt;">Somewhere
around 2:00 PM, Eastern Standard Time, the Open Market Committee of the Federal
Reserve System produced a statement summarizing the results of its two-day
meeting.<span style="mso-spacerun: yes;"> </span>The gist of the meeting is
captured in this sentence: </span><span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">“The committee will closely
monitor incoming information on economic and financial developments and will
provide additional accommodation as needed to promote a stronger economic
recovery and sustained improvement in labor market conditions in a context of
price stability.” </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">The stock market immediately went down.<span style="mso-spacerun: yes;"> </span>The Dow moved into negative territory.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">Disappointment…</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">Investors in stocks are looking all over for positive news
so that they can justify higher stock prices.<span style="mso-spacerun: yes;">
</span>Last week they rallied as “Super Mario” Draghi, President of the
European Central Bank, promised unconditional support to the Euro.<span style="mso-spacerun: yes;"> </span>They rallied the week before on something
else…and they rallied earlier on another thing…</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">Investors were putting their hopes on the Federal Reserve
that it would come up with a QE3…or another Operation Twist…or something
else…that would possibly help spur the economy on and rationalize buying into a
rising stock market. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">This, in spite of the fact that the earlier actions of the
Fed…QE1…or QE2…or whatever…had done little or nothing to spur on economic
growth…bring down unemployment…or anything else.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">This is the state that investors…business
people…families…find themselves in these days…hoping and hoping that something
positive will take place. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">In the extreme, it shows us just where everyone is
concerning the leadership in the United States…and the leadership in Europe…and
the leadership elsewhere in the world. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">Two words keep coming up to capture the essence of the
situation…uncertainty and risk.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">No one seems to know what is going on…and no one seems to be
presenting any ideas about how we can move into a better future.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">The only positive spin that analysts could put on the Fed’s
statement: “The Fed signaled more strongly it will take action as needed to
boost the economy…”</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">Big whoops!</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">Man, I learned a lot from this…</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">But, let’s look at the situation.</span></div>
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<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">For one, there is very little that the Federal Reserve can
do to “goose up” the economy at this time.<span style="mso-spacerun: yes;">
</span>The Fed acted to stop the liquidity crisis that plunged the financial
system into a crisis.<span style="mso-spacerun: yes;"> </span>The Fed has done
about all it can to calm down the solvency crisis.<span style="mso-spacerun: yes;"> </span>The Fed has poured more than a trillion
dollars into the banking system to provide time for the banking system to
shrink in numbers and the FDIC to close problem banks.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">The Fed cannot make businesses and families borrow.<span style="mso-spacerun: yes;"> </span>The Fed cannot hire people and put them back
to work.<span style="mso-spacerun: yes;"> </span>The Fed cannot eliminate the
foreclosures and bankruptcies that are still looming in families, small
business, and in local governments.<span style="mso-spacerun: yes;"> </span>The
Fed can do only so much…</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">And, to use economic terms, over time a central bank can
only impact “nominal” variables, like the monetary base and the money stock and
prices, and not “real” variables, like real economic growth and the
unemployment rate. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">Still, investors were looking for some sign that a
(somewhat) trusted institution was going to provide some kind of leadership
that would help. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">Where there is a vacuum…people keep looking for someone or
some thing that will fill in the void.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">In this case, to me, investors were looking for too
much.<span style="mso-spacerun: yes;"> </span>There is very little that the
Federal Reserve can do now.<span style="mso-spacerun: yes;"> </span>This is
especially true since so many of our economic problems are coming from
structural dislocations and not from cyclical movements.<span style="mso-spacerun: yes;"> </span>These structural problems that exist within
the economy are not going to be overcome, over night.<span style="mso-spacerun: yes;"> </span>I have tried to express this repeatedly in my
blog.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">The good news is that the United States economy is
recovering.<span style="mso-spacerun: yes;"> </span>Not as quickly as we would
like but it is recovering.<span style="mso-spacerun: yes;"> </span>There are
many potential bumps-in-the-road ahead…like the recession in Europe and the
slowdown in the rest of the world…like the “fiscal cliff” facing Congress and
the President…along with several other impending problems.<span style="mso-spacerun: yes;"> </span>But, the economy is growing. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">The bad news is that there seems to be an almost total
absence of confidence in our elected officials and their appointees…and in the
institutions we used to have so much faith in.<span style="mso-spacerun: yes;">
</span>And, until this confidence begins to rise, the structural problems that
are the essence of any real future economic recovery will just tend to languish.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">Whether or not the Federal Reserve comes up with any more
“stimulus” to combat further economic slowdown is irrelevant to me.<span style="mso-spacerun: yes;"> </span>I believe that the financial markets should
stop looking for their “savior” to come from the halls of the Fed…although, unfortunately,
it looks like it might be the only show in the town of Washington, D. C. <span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span></span></div>John Masonhttp://www.blogger.com/profile/01451924722549191154noreply@blogger.com0tag:blogger.com,1999:blog-6726381082427834779.post-27241569464996195732012-07-31T16:54:00.000-07:002012-07-31T16:54:48.602-07:00Sandy Weill Says, "Break Up the Big Banks"!<style>
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<br />
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;"></span><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Sanford (Sandy) Weill, former
empire builder and former Chairman and Chief Executive Officer of Citigroup,
has gotten religion.<span style="mso-spacerun: yes;"> </span></span>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">“Break up the big banks,”
Sandy cries from the rooftops!</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">“The big banks do not make
economic sense and are subject to systemic collapse.”</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">“Re-instate Glass-Steagall.”</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">My question is “What job is
Sandy Weill shooting for now?<span style="mso-spacerun: yes;"> </span>My
goodness, the man is 79 years old.<span style="mso-spacerun: yes;"> </span>Does
he want to take over for Tim Geithner when Geithner ceases to be Treasury
Secretary?<span style="mso-spacerun: yes;"> </span>Or, maybe he wants to be the
Chairman of the Board of Governors of the Federal Reserve System when Bernanke
goes.”</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">There must be something
behind this latest outburst for this man taught the world how to build a
“big”…no, a huge…financial institution.<span style="mso-spacerun: yes;">
</span>This man did all he could to remove Glass-Steagall and wrote the
textbook on how to construct banks that were too big to fail.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Has he seen the light?<span style="mso-spacerun: yes;"> </span>What form did his revelation come in?<span style="mso-spacerun: yes;"> </span>He must be trying to trick us to get
something he wants.<span style="mso-spacerun: yes;"> </span>Be careful…the man
is a tiger!</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Or, is he just too old?</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The banking system is not
what it was when Sandy Weill was running things.<span style="mso-spacerun: yes;"> </span>Even as he remained Chairman of Citigroup
into the 2000s, Citi grew out of his understanding and control. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Finance is different
now.<span style="mso-spacerun: yes;"> </span>Finance is just about information
and how information is used.<span style="mso-spacerun: yes;"> </span>Electronics
is taking over.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">In one sense, who needs a
bank?<span style="mso-spacerun: yes;"> </span>I do not “bank” at a commercial
bank.<span style="mso-spacerun: yes;"> </span>I don’t need to. <span style="mso-spacerun: yes;"> </span>My children don’t use a bank.<span style="mso-spacerun: yes;"> </span>They don’t need to.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Today, “banking” can be
integrated with a person’s financial portfolio in a non-bank and that person
can transfer funds from anything they own into cash, or, transaction accounts,
or, money market accounts, or, stocks, or commodities, or, foreign exchange,
or, whatever…in real time.<span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">All these things are just
information and modern information technology allows people the opportunity to
operate in this sophisticated world of modern finance if they so desire.<span style="mso-spacerun: yes;"> </span>And, these systems will become ubiquitous in
the near future, all available on a handheld device.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Obviously, if individuals
have the ability to act in this way, the institutions that provide these
services also have the ability to act in this way.<span style="mso-spacerun: yes;"> </span>And, guess what?<span style="mso-spacerun: yes;"> </span>These institutions are going to act at the
edges of where the technology allows them to act.<span style="mso-spacerun: yes;"> </span>And, guess what?<span style="mso-spacerun: yes;"> </span>The regulators are going to have very little
ultimate control over this.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">In fact, it is my belief that
the regulators don’t really know exactly what the banks…excuse me…the big banks
do.<span style="mso-spacerun: yes;"> </span>As usual, the banking system is out
in front of the regulators and, as usual, the regulators are scrambling as hard
as they can to catch up with where the banks are.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">But, what does the banking
system in the United States look like?<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The FDIC tells us that as of
March 31, 2012 there were 6263 commercial banks in the banking system, of
which, 525 held assets in excess of $1 billion.<span style="mso-spacerun: yes;">
</span>Please note that these 525 banks held 91 percent of the assets in the
whole banking system.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The Federal Reserve gives us
a little finer breakout.<span style="mso-spacerun: yes;"> </span>The largest
twenty-five domestically chartered banks in the United States hold 57 percent
of the total bank assets of the country, but they hold 66 percent of the assets
held by all domestically chartered banks. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Thus, in terms of
domestically chartered banks, one can argue that the largest 25 domestically
chartered banks in the country hold 66 percent of the assets in domestically
chartered banks; 500 domestically chartered banks in the country hold 25
percent of these assets, and 5,738 domestically chartered banks in the country
hold 9 percent of the assets.<span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Foreign-related financial
institutions hold 14 percent of all the bank assets in the United States.<span style="mso-spacerun: yes;"> </span>This means that the assets of the largest 25
domestically chartered banks in the United States plus the assets of
foreign-related financial institutions total up to 71 percent of all the
banking assets in the country!</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Where do you draw the line in
defining what banks are too big to fail?<span style="mso-spacerun: yes;">
</span>And, where do you draw the line in defining what banks are too small to
survive?<span style="mso-spacerun: yes;"> </span>How can you make judgments like
these is a fair and just manner? </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">And, information technology
operates on scale and this means that the future is going to belong, even more,
to the larger banks…not the smaller ones. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Right now, however, it is the
6,200 or so, smaller domestically chartered banks that I have the greatest
concern for.<span style="mso-spacerun: yes;"> </span>The United States still has
more than 800 banks that reside on the FDIC’s list of problem banks.<span style="mso-spacerun: yes;"> </span>And, this list does not include those banks
that are in enough trouble that the FDIC and the OCC are looking for other
organizations to acquire them.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Furthermore, we still have
311 banks that the U. S. Treasury has an <a href="http://professional.wsj.com/article/SB10000872396390443931404577552982920178086.html?mod=ITP_moneyandinvesting_1&mg=reno64-wsj">ownership
position</a> in.<span style="mso-spacerun: yes;"> </span>This is down 32 banks
from the total in April 2012. This ownership position was achieved during the
Troubled Asset Relief Program (TARP) that was launched in 2009.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Most of these banks are
smaller banks…the larger ones have paid back the fund in full.<span style="mso-spacerun: yes;"> </span>The bank shares owned by the Treasury are now
being auctioned off to investors who would like to own part of a bank.<span style="mso-spacerun: yes;"> </span>In April, 20 banks were auctioned off and the
Treasury received back 90 percent of what it was owed.<span style="mso-spacerun: yes;"> </span>In the latest auction of 12 banks, the
Treasury took a 14 percent haircut on 10 of the banks and could only partially
sell shares in the two other banks. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The attractiveness of the
remaining 311 banks is expected to be substantially less than those that were
involved in the latest auction.<span style="mso-spacerun: yes;"> </span>The
Treasury has several ideas about how the shares of these banks might be made
more attractive. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">To me, the issue is not about
breaking up the larger banks.<span style="mso-spacerun: yes;"> </span>These
banks are going to all be technologically advanced and very difficult to
breakup, let alone regulate.<span style="mso-spacerun: yes;"> </span>The issue
is about the 6,200 banks that cannot compete electronically and the subsection
of these banks that are still facing issues of solvency.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">I remain confident that the
number of banks in the banking system will drop below 4,000 in the next couple
of years and the trend will continue downwards. <span style="mso-spacerun: yes;"> </span>I also remain confident that, in the near
future, the largest 25 domestically chartered banks in the country plus
foreign-related financial institutions will see their share of assets in the U.
S. banking system rise from 71 percent to 80 percent and more.<span style="mso-spacerun: yes;"> </span>So let’s see, that leaves the remaining 3,950
or so “smaller” banks less than 20 percent of bank assets in the U. S.<span style="mso-spacerun: yes;"> </span>And, it is my belief that of this number, the
ones with any chance of survival will not be less than $1 billion in asset
size.<span style="mso-spacerun: yes;"> </span>What do you think, Sandy?</span></div>John Masonhttp://www.blogger.com/profile/01451924722549191154noreply@blogger.com0tag:blogger.com,1999:blog-6726381082427834779.post-45564073115186507342012-07-30T13:28:00.000-07:002012-07-30T13:31:15.451-07:00United States Profits and the United States Dollar<style>
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<br />
<span style="font-family: Arial; font-size: 10pt;">I recently discussed the <a href="http://seekingalpha.com/article/760581-recession-in-europe-and-beyond-the-impact-on-the-united-states">recession
in Europe</a> and the impact this recession is starting to have on the United
States economy.</span>
<br />
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10pt;">In addition to this impact,
we are now observing how the decline in the value of the Euro is impacting the <a href="http://professional.wsj.com/article/SB10000872396390444840104577551501811221794.html?mod=ITP_pageone_1&mg=reno64-wsj">profits
of United States companies.</a></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10pt;">The Euro took a nosedive
against the United States dollar in May and has remained weak against the U.S.
currency ever since. This can be seen in
the accompanying chart.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10pt;">It is not so much that the
United States economy is that strong. It
isn’t. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10pt;">But, foreign exchange rates
are relative and the current story is that the United States economy may not be
that strong…it is just that the economies of the eurozone are that weak…and the
leadership in the eurozone is seemingly subject to a similar shortcoming.</span><br />
<br />
</div>
<div class="MsoNormal">
<div class="separator" style="clear: both; text-align: center;">
<a href="http://research.stlouisfed.org/fredgraph.png?g=96y" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="192" src="http://research.stlouisfed.org/fredgraph.png?g=96y" width="320" /></a></div>
<span style="font-family: Arial; font-size: 10pt;"> </span></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10pt;">For much of the first quarter
of 2012, the value of the Euro averaged around $1.32 to $1.34. <br style="mso-special-character: line-break;" />
<br style="mso-special-character: line-break;" />
</span></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10pt;">In late April, but especially
in May, the value of one Euro against the dollar dropped quite
dramatically. On May 11 the value of the
Euro was still above $1.30. By May 25,
the value of the Euro dropped below $1.25. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10pt;">The “fun” thing about this
drop was that I was in Italy during this time and experienced the fall, first
hand. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10pt;">The more important factor is
that the decline in the dollar value of the Euro has hurt United States
companies as they converted the profits they earned in the second quarter of
this year in Europe back into U. S. dollars.
</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10pt;">Interestingly, United States
companies did not seem to be hit too hard by the drop in the Euro’s value in
the latter half of 2011, probably due to the fact that the Euro moved much more
slowly at this time and, coupled with a rise in value during the first half of
the year, things seemed to “even out” for all of the year. Also, eurozone countries had not gone into a
recession until the last quarter of the year so the sales of U. S. companies in
Europe remained relatively strong. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10pt;">But, in the second quarter of
2012, the profits U. S. companies earned in Europe were hit pretty hard by the
changing value of the Euro. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10pt;">For example,
Colgate-Palmolive Co, and Dow Chemical presented evidence that the rise in the
value of the dollar hurt their second quarter profits. Colgate, for example, claimed that its bottom
line was down by 9 percent due to currency issues. Dow’s profits also were substantially lower. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10pt;">Thomas Freyman, chief
financial officer of Abbott Laboratories indicated impacted sales figures of
his company by about 5 percent. Yum
Brands, Inc. owner of KFC, Pizza Hut, and Taco Bell, claimed that the exchange
rate situation lowered profits by about $13 million in the first two quarters
of 2012. And, Snap-on Inc., stated that
currency movements in the second quarter reduced sales growth by more than
three percentage points. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10pt;">Why didn’t these companies
establish hedges against such movements?</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10pt;">“The reason why you can’t
offset the kind of significant foreign-exchange swings that we had in the
second quarter was the speed of the change,” states Ian Cook, chief executive
officer of Colgate-Palmolive. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10pt;">The thing everyone seems to
agree on, however, is that if the value of the Euro remains where it is now,
there will be continued losses in the third quarter of this year and possibly
the fourth. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10pt;">Given the political situation
that exists in Europe right now, I can’t see the European economy getting much
better through the end of the year. As a
consequence, I can’t see the value of the Euro against the dollar appreciating
at all through by the close of 2012. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10pt;">Therefore, I can only suggest
that the profits of United States companies will continue to be hurt through
the rest of 2012 due to the strength of the U. S. dollar against the Euro. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10pt;">Hence, we add one more reason
to the list of things impacting the American economy and one more reason why
the economic growth in the United States will remain weak in 2012. </span></div>John Masonhttp://www.blogger.com/profile/01451924722549191154noreply@blogger.com0tag:blogger.com,1999:blog-6726381082427834779.post-23552435051327090642012-07-29T13:37:00.002-07:002012-07-29T13:37:19.153-07:00Recession in Europe and Beyond: the Impact on the United States<style>
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<br />
<span style="font-family: Arial; font-size: 10pt;">Early this year, January 4 to
be exact, I posted a blog stating that <a href="http://seekingalpha.com/article/317268-issue-number-1-for-2012-recession-in-europe">the
number 1 issue</a> for 2012 would be recession in Europe. </span>
<br />
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10pt;">Well, Europe has done its
part…most of the eurozone is experiencing a recession. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10pt;">But, economic growth in other
parts of the world…like China…is experiencing slower growth as well.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10pt;">And, what about the United
States? Certainly the figures on real
economic growth released last Friday do not provide any support that the United
States is doing much better. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10pt;">Year-over-year, the United
States grew at a 2.2 percent rate of growth, down from 2.4 percent in the first
quarter of the year. </span></div>
<div class="MsoNormal">
<div class="separator" style="clear: both; text-align: center;">
<a href="http://research.stlouisfed.org/fredgraph.png?g=95j" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="192" src="http://research.stlouisfed.org/fredgraph.png?g=95j" width="320" /></a></div>
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10pt;">The most interesting part
about the release of data, however, was the fact that real GDP growth for early
on in the recovery was revised making the whole economic recovery weaker than
previously thought. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10pt;">Here we see in the
accompanying chart that the growth of real GDP never actually reached 3.0
percent at any time. That is, once the
recovery took place, economic growth stayed in the 1.6 percent to 2.8 percent
band…highly unusual. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10pt;">I have discussed how this
pattern has also been followed closely by <a href="http://seekingalpha.com/article/728241-u-s-industrial-production-continues-to-expand">industrial
production</a> and that the weakness in the whole economy is reflecting major
long run issues that must be dealt with if a more robust level of economic
growth is to be attained. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10pt;">But, the situation in Europe
is worsening and economic growth in the rest of the world is facing major
challenges. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10pt;">The concern here is how the
economic malaise being felt in different parts of the world are beginning to
play off one another. This is, of
course, the concern that I expressed in the January 4 blogpost.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10pt;">I have just been talking with
several friends, people who own their own businesses. The general comment is that their businesses
have either turned south or are moving even faster in a southern
direction. The common thread to their
story: orders from Europe and from Asia are drying up! The trend throughout the world seems to be
downward. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10pt;">Everyday we are hearing more
and more stories about how the soft conditions in other parts of the world are
being reflected more and more in current sales.
The impacts are becoming cumulative.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10pt;">Thus, on top of the
dislocations that now exist within each economy (topics I spend more time on in
the post about the movement of industrial production) the interconnections of
world trade are now experiencing evidence of reciprocal impacts. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10pt;">I see eurozone forecasts that
show economic growth becomes positive for countries in the eurozone in the
fourth quarter of 2012, with slow growth expected for all of 2013. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10pt;">The question is, are these
forecasts realistic? Are they too
optimistic?</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10pt;">The problem is that the
situations these countries face are a result of longer-term factors, things
that the European Central Bank and the individual countries, cannot just
correct through short-term governmental stimulus. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10pt;">Youth unemployment of 24.6
percent in Spain! This is not a cyclical
problem! It is not going to be overcome
by short-term Keynesian efforts to “get the economy going again.”</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10pt;">And, the same is true of
Italy…and Greece…and Portugal…and so on and so on. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10pt;">The problems being
experienced in these countries are structural and must be resolved through
reform efforts that are going to seriously challenge each individual country as
well as the whole. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10pt;">Europe hasn’t owned up to
this <a href="http://seekingalpha.com/article/741971-europe-on-the-edge-again">yet</a>
and there is no indication that it will anytime soon. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10pt;">Herein lies the further
problem. Europe’s mess is now having a
greater and greater impact on other countries in the world…like the United
States. The “mess” has spread beyond the
bond markets where “cash” has flown to “safe havens” like the United States Treasury
bond market.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10pt;">I believe that we are now
going to see more and more of this “spread” being reflected in the economic
growth of the United States. And, the
monetary policy of the involved central banks is not going to be able to stop
the spread. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10pt;">Earlier this year I reduced
my forecast for the growth of real GDP into 2014 to the 2.0 to 2.5 percent
year-over-year range. I am beginning to
think that this forecast may be a little high as the problems of Europe spread
to the United States. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10pt;">And, of course, this will
have implications for the labor market. If
my friends are seeing orders from Europe and Asia dropping, what incentive do
they have to add anyone else to their current payrolls? What incentive do they have to purchase
capital equipment? And, what incentive
do they and their employees have to spend all of their income? </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10pt;">I believe that the United
States economy will continue to expand in the next year or so, but nowhere near
the pace needed to reduce unemployment, let alone under-employment. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10pt;">In my view, the third quarter
of 2012 is not going to be a very good one for a sitting president to get
re-elected on. And, at this time, there
is really next to nothing of substance that the president can do in order to
get better economic statistics before November 6. </span></div>John Masonhttp://www.blogger.com/profile/01451924722549191154noreply@blogger.com0tag:blogger.com,1999:blog-6726381082427834779.post-90258982235767708972012-07-23T08:36:00.000-07:002012-07-23T08:36:59.515-07:00Europe on the Edge Again<style>
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</style>The yield on the Spanish 10-year government
bond was trading around 7.50 percent on Monday.<span style="mso-spacerun: yes;">
</span>(A rate of 7.00 percent has been declared “unsustainable.”)<span style="mso-spacerun: yes;"> </span>The Italian bond was getting into the
neighborhood of 6.50 percent, trading close to 540 basis points over the
similar 10-year German bond, not too far from its euro-ear spread high.<span style="mso-spacerun: yes;"> </span>Greek bonds were over 27.0 percent, more than
2,600 basis points over the yield on the German bond. <br />
<span style="font-family: Arial;"><span style="mso-spacerun: yes;"></span></span>
<br />
<span style="font-family: Arial;">Investors were moving toward 10-year German
bonds, with a yield of about 1.10 percent, and, US Treasury bonds and UK bonds,
both saw yields of around 1.40 percent.<span style="mso-spacerun: yes;">
</span>The “flight to quality” continues.</span><br />
<br />
<span style="font-family: Arial;">Are we moving toward the “endgame”?</span><br />
<br />
<span style="font-family: Arial;">I don’t think we can afford to be too
optimistic because we have taken the path of optimism too many times in the
past only to be disappointed again…and, again…and, again. </span><br />
<br />
<span style="font-family: Arial;">But, the endgame we might be facing now is
not the nice diplomatically negotiated fiscal union that has been talked about…or
the banking union that has gained more and more attention in recent days. </span><br />
<br />
<span style="font-family: Arial;">No the endgame I am talking about here is
the endgame that Germany is playing for.<span style="mso-spacerun: yes;">
</span>My <a href="http://seekingalpha.com/article/685731-no-confidence-in-europe">June 26
post</a> contained the following analysis:</span><br />
<br />
<span style="font-family: Arial;">“Some believe that…Germany and its
Chancellor Angela Merkel have not fully let on what path they ultimately want
to follow. <a href="http://www.ft.com/intl/cms/s/0/cd62b636-bee1-11e1-8ccd-00144feabdc0.html#axzz1yuAWVHC2">Germany,</a>
the creditor nation, ‘is acting as creditors always do. It wants to be paid
back or put debtors through default proceeding to extract maximum benefits.’</span><br />
<br />
<span style="font-family: Arial;">Germany, it is argued, can ultimately
achieve its goals by one of three paths: deflation, inflation, and writing
checks.</span><br />
<br />
<span style="font-family: Arial;">‘Deflation in the periphery would eventually
make it competitive, and is Germany’s favored option. But, as we are seeing, it
naturally leads to default by weaker banks and governments.’</span><br />
<br />
<span style="font-family: Arial;">With inflation, Germany loses because it
gets paid back in cheaper euros. By writing checks, Germany would pay off the
periphery for leading an undisciplined life. <span style="mso-spacerun: yes;"> </span>Another case of moral hazard.</span><br />
<br />
<span style="font-family: Arial;">To others, Germany has made a decision. They
have opted for the first of the three: European deflation. The idea here is
that the deflation would become so painful to the periphery nations that they
would finally move to correct their situation.</span><br />
<br />
<span style="font-family: Arial;">But, as the quote above mentions, this would
lead these nations to recognize their insolvency and the insolvency of their
banking systems in any solution they arrive at.”</span><br />
<br />
<span style="font-family: Arial;">The difficulty in forming a fiscal union…or
in forming a banking union…is that the 17 countries must agree on the terms and
conditions of the union, whichever one, and in doing so the individual
countries would have to give up substantial authority which they now possess. </span><br />
<br />
<span style="font-family: Arial;">This is a Herculean task given the 17 proud,
independent countries that now make up the eurozone, 17 proud countries that
have a long history of battles and conflicts and disagreements.<span style="mso-spacerun: yes;"> </span></span><br />
<br />
<span style="font-family: Arial;">In this scenario, forming a fiscal union…or
a banking union…is not going to happen unless things get pretty ugly.<span style="mso-spacerun: yes;"> </span></span><br />
<br />
<span style="font-family: Arial;">The German path…if it is the path that
Germany is truly following…will be ugly.<span style="mso-spacerun: yes;">
</span>It is not a pretty thing to see sovereign nations declare themselves and
many of their institutions insolvent.<span style="mso-spacerun: yes;"> </span></span><br />
<br />
<span style="font-family: Arial;">Yet, as events progress, this looks to be
the path that Germany has taken.<span style="mso-spacerun: yes;"> </span>And,
one must be careful in assuming any victories over this German focus:<span style="mso-spacerun: yes;"> </span>“</span><span style="font-family: Arial; mso-fareast-font-family: "Times New Roman";">It is always dangerous to claim a victory
against Angela Merkel.<span style="mso-spacerun: yes;"> </span>After the last
eurozone summit, Mario Monti and Mariano Rajoy emerged triumphalist.”<span style="mso-spacerun: yes;"> </span>This from Ferdinando Giugliano the <a href="http://www.ft.com/intl/cms/s/0/2696758c-d27c-11e1-8700-00144feabdc0.html#axzz21SVi6YU1">Financial
Times</a>.</span><br />
<br />
<span style="font-family: Arial; mso-fareast-font-family: "Times New Roman";">In
the longer run…both Mr. Monti of Italy and Mr. Rajoy of Spain have had to
retreat.<span style="mso-spacerun: yes;"> </span>And, Ms. Merkel continues to
plug along. </span><br />
<br />
<span style="font-family: Arial; mso-fareast-font-family: "Times New Roman";">Germany
has the chips.<span style="mso-spacerun: yes;"> </span>In my mind, Germany is
not going to retreat from the path they have chosen because they perceive that
this is the only way to save the euro…create a European banking union…and, at
the same time, create a European fiscal union.</span><br />
<br />
<span style="font-family: Arial; mso-fareast-font-family: "Times New Roman";">I
truly believe that the Germans want to see the euro continue.<span style="mso-spacerun: yes;"> </span></span><br />
<br />
<span style="font-family: Arial; mso-fareast-font-family: "Times New Roman";">It
is risky…but, 17 proud, independent countries need to be brought together and
the times are not such that the eurozone can wait for 10 years…or 15 years…to
achieve such a union.<span style="mso-spacerun: yes;"> </span>The world is
moving too fast, and several of the emerging nations…China, Brazil, and India,
for example…are beefing up to directly challenge the nations of the
eurozone.<span style="mso-spacerun: yes;"> </span></span><br />
<br />
<span style="font-family: Arial; mso-fareast-font-family: "Times New Roman";">Of
course, having the chips and taking such a strong stand can create some bad
blood and resentments within other nations.<span style="mso-spacerun: yes;">
</span></span><br />
<br />
<span style="font-family: Arial; mso-fareast-font-family: "Times New Roman";">So
be it.<span style="mso-spacerun: yes;"> </span>Let the games continue. </span><br />
<br />
<span style="font-family: Arial; mso-fareast-font-family: "Times New Roman";">My
bet is on the Germans, on the creation of a banking union…and a fiscal union…and
on the future existence of the euro.</span><br />
<br />
<span style="font-family: Arial; mso-fareast-font-family: "Times New Roman";">Exactly
how we get there is still a mystery.<span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span></span><br />John Masonhttp://www.blogger.com/profile/01451924722549191154noreply@blogger.com0tag:blogger.com,1999:blog-6726381082427834779.post-76449972542532042222012-07-22T13:27:00.000-07:002012-07-22T13:27:58.424-07:00The Banking System Through the First Half of 2012<style>
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<br />
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Total reserves in the banking
system have actually dropped from June 2011 to June 2012 by about 6.6 percent
or about $110 billion.<span style="mso-spacerun: yes;"> </span>These are
according to the latest figures released by the Federal Reserve. </span>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Yet, required reserves in the
banking system have increased by a little over $21 billion during this time
period representing a rise of almost 28 percent. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The reason why these numbers
are moving in opposite direction is that individuals and businesses are
continuing to move their assets from short-term interest bearing instruments
into currency or into transaction accounts at financial institutions. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Coin and currency in the
hands of the public rose by 8.5 percent, from June 2011 to June 2012.<span style="mso-spacerun: yes;"> </span>Cash holdings are continuing to run at
relatively high annual rates because a lot of people are keeping their funds in
currency these days because of the bad economic times.<span style="mso-spacerun: yes;"> </span>This high of a rate of increase in currency
holdings is a sign of weakness in the economy and the bad financial condition
so many people find themselves in.<span style="mso-spacerun: yes;"> </span>It is
not a sign of economic health.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The M1 money stock measure
increased by 16.0 percent over the past 12 month period.<span style="mso-spacerun: yes;"> </span>One can note right off that this figure is
down from the March 2011 to March 2012 period which was 17.4 percent and also
down from the December 2010 to December 2011 period which was 18.4
percent.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Since the rate of increase in
currency outstanding has not changed much from the end of the year, this means
that the other components of the M1 measure of the money stock have
declined.<span style="mso-spacerun: yes;"> </span>And, this is true.<span style="mso-spacerun: yes;"> </span>The June-over-June rate of growth for the
non-currency component of the M1 measure of the money stock now rests at 16.0
percent.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The M2 measure of the money
stock was growing by a little more than 9.0 percent in June, down since the end
of last year, but this decline has not been caused by a drop in the non-M1
component of M2 which has remained relatively constant through the first half
of 2012.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The movements of funds are
very clear:<span style="mso-spacerun: yes;"> </span>small-denomination time
accounts at financial institutions are down by 17.0 percent, June-over-June;
retail money funds are down by almost 3.0 percent; and institutional money market
funds are down by almost 8.0 percent.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Individuals are moving funds
from short-term interest bearing assets to currency holdings and transaction
accounts either because of their economic situation or because of the low interest rates. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">As a consequence, the
required reserves at commercial banks have grown quite rapidly.<span style="mso-spacerun: yes;"> </span>Since, there are so many excess reserves in
the banking system, the total reserves in the banking system can decline while
the required reserves in the banking system can increase. This is not the case in more "normal" times. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">And, the transaction accounts
at financial institutions can also increase at historically high rates, at
almost 28.0 percent, year-over-year, and yet this rise is not looked on as inflationary because of the massive movement of funds around the
financial system.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">It can be seen, however, that
loans and leases within the banking system are now increasing at a faster
pace.<span style="mso-spacerun: yes;"> </span>Total loans and leases increased
at a 5.3 percent year-over-year rate in June, the highest rate of increase in a
long time.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">More specifically, commercial and industrial
loans (business loans) expanded at a 14.0 percent annual rate in June, with C&I
loans at the largest 25 domestically chartered banks in the United States
rising by almost 17.0 percent.<span style="mso-spacerun: yes;"> </span>This is
the strongest showing since the economic recovery began. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The questions one must ask
here are about the type of business loan the banks are making and what kind of
impact are these loans having on the various measures of the money stock?<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">At the present there is no
indication that these business loans are going for productive uses, for
purchasing physical capital goods…investment goods.<span style="mso-spacerun: yes;"> </span>They may be going into the financing of
inventories…physical goods that are not getting sold…or information technology.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Furthermore, if these loans
are having any impact on the money stock measures it is small relative to the huge flows of funds coming into the transaction-type accounts from short-term
interest bearing assets.<span style="mso-spacerun: yes;"> </span>Hence, they
cannot be seen as “inflationary” at the present time.<span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Commercial real estate loans
continue to decline, both at the largest banks and in the rest of the banking
system.<span style="mso-spacerun: yes;"> </span>As I have discussed many times,
this decline will continue well into next year because of the condition of the
commercial real estate market.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Interestingly, consumer-type
loans at the largest banks, consumer credit and home equity loans, declined
over the past year while these types of loans did increase modestly at the
smaller banks.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">I still have a great deal of
concern for the health of the “smaller” banks in the banking system.<span style="mso-spacerun: yes;"> </span>Five more depository institutions were closed
this past week bringing the total number of banks closed this year to 38.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">But, this is not the only
number we should be looking at.<span style="mso-spacerun: yes;"> </span>From
March 31, 2011 to March 31, 2012 82 banks were closed in the United
States.<span style="mso-spacerun: yes;"> </span>But, over the same time period,
the number of banks in the banking system dropped by 190.<span style="mso-spacerun: yes;"> </span>Obviously, quite a number of banks left the
banking system during this time period through merger or acquisition.<span style="mso-spacerun: yes;"> </span>It is my view that the banking system will
continue to lose individual institutions from its numbers, maybe not at the
almost 4 per week rate of the period ending March 31, 2012, but at a similarly
rapid rate for the next twelve months are so.<span style="mso-spacerun: yes;">
</span>This is what the Federal Reserve and the FDIC are attempting to achieve
as smoothly as possible.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The pressure may be lessening
in this area.<span style="mso-spacerun: yes;"> </span>Over the past three
months, the cash assets at both the largest 25 domestically chartered banks in
the United States have declined, as have the cash assets at the rest of the
domestically chartered banks.<span style="mso-spacerun: yes;"> </span>And,
excess reserves in the banking system have also declined modestly.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">My interpretation of the
stance of the Federal Reserve right now is to accept the high rates of growth
of the M1 and M2 measures of the money stock as these rates are due to
individuals and businesses re-arranging their assets and not due to the Fed’s
monetary stimulus.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Business lending may be
getting stronger, but, as of this point in time, there is little or no
indication that this lending is going into constructive physical assets.<span style="mso-spacerun: yes;"> </span>This area, however, needs to be watched.<span style="mso-spacerun: yes;"> </span>On the other side, one also needs to continue
to watch what happens to the commercial real estate area.<span style="mso-spacerun: yes;"> </span>As discussed before, many of these loans are
loans that are paid off at maturity and these maturity dates are coming due
over the next 12-to-36 months.<span style="mso-spacerun: yes;"> </span>Many of
these loans may not get refinanced.<span style="mso-spacerun: yes;"> </span>This
could be very difficult on the banks…especially the “smaller” ones. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Finally, the Federal Reserve…and
the FDIC…are still keeping a close eye on the health of the banking
system.<span style="mso-spacerun: yes;"> </span>Especially the Fed does not want
to do anything silly at this time…like it did in 1937…and prematurely remove
excess reserves from the banking system before the system is ready to “let them
go.”<span style="mso-spacerun: yes;"> </span>I still believe that there are a
lot of banks in the system that are technically insolvent and that the Fed and
the FDIC are being extra careful to “not rock the boat” while these institutions
need to be closed or merged out of business.<span style="mso-spacerun: yes;">
</span>This remains a major concern at the Fed.<span style="mso-spacerun: yes;">
</span><span style="mso-spacerun: yes;"> </span></span></div>John Masonhttp://www.blogger.com/profile/01451924722549191154noreply@blogger.com0tag:blogger.com,1999:blog-6726381082427834779.post-18935162281637492952012-07-20T12:56:00.000-07:002012-07-20T12:56:01.203-07:00Little M&A Activity: Another Sign of a Weak Economy<style>
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<br />
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">“The stock market is weak,
IPOs are hard, there’s no M&A market to speak of.”<span style="mso-spacerun: yes;"> </span><a href="http://professional.wsj.com/article/SB10000872396390444873204577536622676580432.html?mod=ITP_moneyandinvesting_2&mg=reno64-wsj">This</a>
quotation from Blackstone President Hamilton “Tony” James on a call to discuss
the firm’s second-quarter earnings.</span>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">This weakness is another sign
that the economic recovery is not moving along very well. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Earlier this year, many of us
believed that 2012 was going to be a “gang buster” year for the merger and
acquisition business.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">One reason for this was the
huge buildup on cash on the balance sheets of many potential buyers who were
progressing well through the economic morass.<span style="mso-spacerun: yes;">
</span>Another reason for thinking this would be a big year in M&A was the
exceedingly low interest rates.<span style="mso-spacerun: yes;"> </span>Some
corporations, over the past year, like Microsoft, for example, went to the
capital markets and borrowed money where they had never even thought about
issuing debt before.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Furthermore, many corporate
valuations seemed depressed, making these organizations very attractive targets
for those looking to expand their horizon.<span style="mso-spacerun: yes;">
</span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">As a consequence, things
looked good on the “deal” front.<span style="mso-spacerun: yes;"> </span>I tried
to capture this in a <a href="http://seekingalpha.com/article/321037-the-outlook-for-mergers-and-acquisitions-in-2012">January
post.</a></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">However, things have not
worked out that way.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">For one, the economic
recovery has been anemic.<span style="mso-spacerun: yes;"> </span>Although we
were not expecting United States economic growth to achieve the average level
of economic growth over the last forty years of the last century—around 3.0 to
3.2 percent—we still expected it…as did almost everyone…to average more than
the 2.0 percent or so actually posted. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Thus, potential acquirers did
not experience an ebullient environment in which to obtain additional assets. </span></div>
<div class="MsoNormal">
<br /></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Second, the regulatory
situation has not been the most favorable.<span style="mso-spacerun: yes;">
</span>The year began with the reality of the AT&T/T-Mobile breakup.<span style="mso-spacerun: yes;"> </span>I believe that this set a cloud over the
whole M&A scene and created the specter of an administration in Washington,
D. C. that looked on this form of activity with great suspicion.<span style="mso-spacerun: yes;"> </span>Thus, the potential cost of merger transactions
rose substantially…the implicit costs as well as the expected explicit costs. </span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Third, the newly passed
regulatory laws were not understood and not completely written.<span style="mso-spacerun: yes;"> </span>The role of financial institutions was
cloaked in mounds of uncertainty.<span style="mso-spacerun: yes;"> </span>People
just did not know where they stood.</span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Finally, there is the general
uncertainty as to what is the economic policy of the administration.<span style="mso-spacerun: yes;"> </span>As of this time, the Obama administration
seems to have no economic policy and this is adding even more uncertainty to what
potential acquirers might expect in the future.<span style="mso-spacerun: yes;">
</span></span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Blackstone’s results for the
first half of the year were not that good, they posted a $75 million loss,
although this beat analysts expectations.<span style="mso-spacerun: yes;">
</span></span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Blackstone joins other
financial firms, like Goldman Sachs Group, Inc. and Morgan Stanley, in
reporting lower results for the first half of the year. </span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">And, analysts are not
expecting a significant improvement in the M&A business in the second half
of the year.<span style="mso-spacerun: yes;"> </span>Not only is there the
continued weakness in the United States economy but the spread or recession in
Europe and weakness in many of the world’s large emerging economies.<span style="mso-spacerun: yes;"> </span></span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">So looking at what is taking
place in the area of mergers and acquisitions, we add one more sector to those
that are exhibiting problems and are confirming the basic weakness in the economy.<span style="mso-spacerun: yes;"> </span>I have discussed several of these other areas
of weakness in blogposts over the past week or so.<span style="mso-spacerun: yes;"> </span>Some of these problems directly flow from the
difficulties of the recent recession.<span style="mso-spacerun: yes;">
</span>However, quite a few of them are structural in nature and will require
quite a bit of reform before they regain their strength and contribute to a
more robust expansion of the economy.<span style="mso-spacerun: yes;"> </span></span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Taken together, these
problems help explain why the economic recovery is so anemic but also they help
to explain why the recovery is taking such a long time to get things back to
something more normal.<span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span></span></div>John Masonhttp://www.blogger.com/profile/01451924722549191154noreply@blogger.com0tag:blogger.com,1999:blog-6726381082427834779.post-61550372334052193752012-07-19T13:03:00.000-07:002012-07-19T13:03:13.620-07:00Structural Economic Problems Connected with State and Local Governments<style>
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</style><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Many things are contributing to the</span><a href="http://seekingalpha.com/article/728241-u-s-industrial-production-continues-to-expand"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;"></span></a> slow economic recovery
taking place and fiscal or monetary stimulus is not going to overcome them. One reason for this is that some of the things that must be overcome are structural and will require time and patience to correct.<br />
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;"></span>
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<span style="font-family: Arial; font-size: 10pt;">More specifically, one of the
economic sectors in need of a major restructuring is the state and local
government sector.<span style="mso-spacerun: yes;"> </span>The need for such restructuring has been written up in <span style="mso-spacerun: yes;"></span>the New York Times, which had a </span><a href="http://www.nytimes.com/2012/07/18/us/in-report-on-states-finances-a-grim-long-term-forecast.html?_r=1&hpw"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">front page article</span></a><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;"> on the subject Wednesday morning, while the Financial Times
also contained a </span><a href="http://www.ft.com/intl/cms/s/0/048bd7fa-d021-11e1-99a8-00144feabdc0.html#axzz20zEKhUAH"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">similar report.</span></a><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;"><span style="mso-spacerun: yes;"> </span></span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The Financial Times summed up
the news: “US state governments are in desperate need of reform to solve
structural challenges that extend well beyond the cyclical woes of the
financial crisis and the recession, including $4 trillion in unfunded pension
and healthcare liabilities.”</span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The difficulties of state
governments have grown as the economy slowed and failed to strongly rebound
although some states have recently experienced rising revenues.<span style="mso-spacerun: yes;"> </span>However, people are being cautioned about
becoming too optimistic that the worst is over. </span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">In addition, local
governments, as we know given the recent municipal bankruptcies, are also
facing continued dark times.<span style="mso-spacerun: yes;"> </span>Local governments
depend upon property taxes for about </span><a href="http://professional.wsj.com/article/SB10001424052702303612804577532931228391856.html?mod=ITP_moneyandinvesting_6&mg=reno64-wsj"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">74 percent</span></a><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;"> of their revenue.<span style="mso-spacerun: yes;"> </span>These
governments have been starving over the past couple of years as the “middle
class piggybank”…home prices…have fallen.<span style="mso-spacerun: yes;">
</span>And, although there appears to be some leveling out of housing prices,
any major recovery of property prices seems somewhere out in the future.<span style="mso-spacerun: yes;"> </span></span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Furthermore, Washington, D. C. is also contributing to the concern over the state and local government budget situation. Given the fiscal
problems in Washington, D. C., there has been talk of removing the tax
exemption of municipal bonds.<span style="mso-spacerun: yes;"> </span>This
possibility of this occurring could certainly cause uncertainty to rise about
what yields investors might receive on their investments in “munis”.<span style="mso-spacerun: yes;"> </span></span></div>
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<span style="font-family: Arial; font-size: 10pt;"><span>The basic problem has been that </span>the residents of these areas have
demanded more and more services, like education, health, prisons, courts, and other
agencies, and the governments have been able to supply these wishes by tapping more and more into the middle class “piggy
bank”…home prices…and have been able to underwrite the increases.<span style="mso-spacerun: yes;"> </span></span>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">But, another factor has been at work as well, helping state and local government
to swell their budgets.<span style="mso-spacerun: yes;"> </span>Public unions have grown from a
relatively insignificant part of the labor movement to the point where, at
present, more than 50 percent of all unionized workers are employed by the
government.<span style="mso-spacerun: yes;"> </span>State and local governments
have been able to pad their payrolls, increase salaries and wages, raise health
and pension benefits, and create better and better working conditions during
the past fifty years as credit inflation and housing price bubbles have
inflated the revenues of these governments.</span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">However, most state and local governments have some kind of “balanced budget” constraint placed
upon them. Yet, in truth, many of these organizations have run "deficits" for years and years. The revenue increases
have not kept up with all of these expenses.<span style="mso-spacerun: yes;">
</span>As a consequence, state and local governments went to the well…they
found out how to use “create accounting” techniques.<span style="mso-spacerun: yes;"> </span>This is why these state governments find
themselves with $3 trillion of unfunded pension plans and $1 trillion of
unfunded health care plans. </span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">And these states must take
care of building the new infrastructure of America, of providing a new health
care program for America, and of dealing with cries for better schools, a
better social net, and a fully staffed organization.<span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span></span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">In addition, this whole state
and local government mess is going to get caught up in the next “big” fight
about the existence of labor unions!</span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The health of the labor
unions in the Unites States is tenuous, at best. <span style="mso-spacerun: yes;"> </span>“The number of workers
who belong to a union has plummeted about 20 percent over the last decade.<span style="mso-spacerun: yes;"> </span>Only 8 percent of all workers are unionized.”<span style="mso-spacerun: yes;"> </span>This from a recent </span><a href="http://www.nytimes.com/2012/07/18/business/economy/unions-past-may-hold-key-to-their-future.html?ref=business"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">New York Times</span></a><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;"> article, which discusses the future of
unions.<span style="mso-spacerun: yes;"> </span></span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Unions in the private sector
have declined dramatically over the past forty years, and, the only real source
of strength in the union movement has been in the public sector.<span style="mso-spacerun: yes;"> </span>But, now with the sour economy and with a
depressed housing market, state and local government budgets are being stretched to the limit
and the “creative accounting” is coming back to haunt them.<span style="mso-spacerun: yes;"> </span>The resolution of these budget
difficulties is not going to take place in the near term and this will lead to
more and more fights between governments and public labor unions. </span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Evidence of this was seen in
the tussle that recently went on in Wisconsin between pro-union supporters and Wisconsin
Governor Scott Walker. Furthermore, as the New York Times article states
“nonunion workers tend to resent rather than applaud the better pay and
benefits of their unionized brethren,” adding to the pressure against unions
trying to achieve their goals. </span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">But, there will be a fight in
the public sector because public sector unions grew up on little resistance
from public sector officials.<span style="mso-spacerun: yes;"> </span>This was
because the public sector officials could always tap into, without much
complaint, the rising value of property values and pass-off these rising costs.<span style="mso-spacerun: yes;"> </span>If not that, then there was always the deep
pockets found in Washington, D. C.<span style="mso-spacerun: yes;"> </span>Now,
however, the “free lunch” is over. </span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">So, expect a lot of turmoil
in state and local government sector over the next five years or so.<span style="mso-spacerun: yes;"> </span>Budget realities are setting in at all
levels. Pensions cannot go unfunded indefinitely.<span style="mso-spacerun: yes;"> </span>Health care costs cannot go unfunded
indefinitely.<span style="mso-spacerun: yes;"> </span>And, public sector jobs
need to be filed in order to cover ordinary, day-by-day operation. </span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Moreover, the federal
government is looking for ways to tap into more revenues, like the taxe on
municipal bonds interest mentioned above, or more cuts in expenses, like less funding of state prisons
along with their call for more state and local participation in health care and
law enforcement.<span style="mso-spacerun: yes;"> </span></span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;"><span style="mso-spacerun: yes;"> </span></span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">There are massive structural
problems that must be dealt with in the United States before economic growth can really pick up more speed.<span style="mso-spacerun: yes;"> </span>Correcting these structural problems is a
part of what must be done to help get the US economy growing again at a more rapid
pace. However, structural change takes time and patience. <span style="mso-spacerun: yes;">
</span></span></div>John Masonhttp://www.blogger.com/profile/01451924722549191154noreply@blogger.com0tag:blogger.com,1999:blog-6726381082427834779.post-69407909684410746492012-07-18T12:08:00.000-07:002012-07-18T12:08:49.340-07:00Problems to Economic Recovery: State and Local Governments
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">In my </span><a href="http://seekingalpha.com/article/728241-u-s-industrial-production-continues-to-expand"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">post yesterday</span></a><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">, I wrote about the slow economic recovery
taking place and the need for the economy to achieve some structural reforms
for economic growth to return to a level more consistent with that achieved
over the past fifty years or so: a 3.2 percent year-over-year rate of growth.</span>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">I argued that one of the
economic sectors in need of a major restructuring was the state and local
government sector.<span style="mso-spacerun: yes;"> </span>Well, this post has
been followed by several reports in major newspapers concerning the problems
that specifically plague the states.<span style="mso-spacerun: yes;"> </span>For
example, the New York Times had a </span><a href="http://www.nytimes.com/2012/07/18/us/in-report-on-states-finances-a-grim-long-term-forecast.html?_r=1&hpw"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">front page article</span></a><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;"> on Wednesday morning while the Financial Times
contained a </span><a href="http://www.ft.com/intl/cms/s/0/048bd7fa-d021-11e1-99a8-00144feabdc0.html#axzz20zEKhUAH"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">similar report.</span></a><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;"><span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The Financial Times summed up
the news: “US state governments are in desperate need of reform to solve
structural challenges that extend well beyond the cyclical woes of the
financial crisis and the recession, including $4 trillion in unfunded pension
and healthcare liabilities.”</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The difficulties of state
governments have grown as the economy slowed and failed to strongly rebound
although some states have recently experienced rising revenues.<span style="mso-spacerun: yes;"> </span>However, people are being cautioned about
becoming too optimistic that the worst is over. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">In addition, local
governments, as we know given the recent municipal bankruptcies, are also
facing continued dark times.<span style="mso-spacerun: yes;"> </span>Local
governments depend upon property taxes for about </span><a href="http://professional.wsj.com/article/SB10001424052702303612804577532931228391856.html?mod=ITP_moneyandinvesting_6&mg=reno64-wsj"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">74 percent</span></a><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;"> of their revenue.<span style="mso-spacerun: yes;"> </span>These
governments have been starving over the past couple of years as the “middle
class piggybank”…home prices…have fallen.<span style="mso-spacerun: yes;">
</span>And, although there appears to be some leveling out of housing prices,
any major recovery of property prices seems somewhere out in the future.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Furthermore, given the fiscal
problems in Washington, D. C., there has been talk of removing the tax
exemption of municipal bonds.<span style="mso-spacerun: yes;"> </span>This
possibility of this occurring could certainly cause uncertainty to rise about
what yields investors might receive on their investments in “munis”.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">States and local governments,
although most of them have some kind of “balanced budget” constraint placed
upon them, have run deficits for years and years.<span style="mso-spacerun: yes;"> </span>Residents of these areas have constantly
demanded more and more services, education, health, prisons, courts, and other
agencies as the middle class has grown and as the middle class “piggy
bank”…home prices…have been able to underwrite the increases.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Furthermore, there has been
another factor at work as well, swelling state and local government budgets.<span style="mso-spacerun: yes;"> </span>Public unions have grown from a relatively
insignificant part of the labor movement to the point where, at present, more
than 50 percent of all unionized workers are employed by the government.<span style="mso-spacerun: yes;"> </span>State and local governments have been able to
pad their payrolls, increase salaries and wages, raise health and pension
benefits, and create better and better working conditions during the past fifty
years as credit inflation and housing price bubbles have inflated the revenues
of these governments.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Still, the revenue increases
have not kept up with all of these expenses.<span style="mso-spacerun: yes;">
</span>As a consequence, state and local governments went to the well…they
found out how to use “create accounting” techniques.<span style="mso-spacerun: yes;"> </span>This is why these state governments find
themselves with $3 trillion of unfunded pension plans and $1 trillion of
unfunded health care plans. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">And these states must take
care of building the new infrastructure of America, of providing a new health
care program for America, and of dealing with cries for better schools, a better
social net, and a fully staffed organization.<span style="mso-spacerun: yes;">
</span><span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">In addition, this whole state
and local government mess is going to get caught up in the next “big” fight
about the existence of labor unions!</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The health of the labor
unions is tenuous.<span style="mso-spacerun: yes;"> </span>“The number of workers
who belong to a union has plummeted about 20 percent over the last decade.<span style="mso-spacerun: yes;"> </span>Only 8 percent of all workers are unionized.”<span style="mso-spacerun: yes;"> </span>This from a recent <a href="http://www.nytimes.com/2012/07/18/business/economy/unions-past-may-hold-key-to-their-future.html?ref=business">New
York Times</a> article, which discusses the future of unions.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Unions in the private sector
have declined dramatically over the past forty years, and, the only real source
of strength in the union movement has been in the public sector.<span style="mso-spacerun: yes;"> </span>But, now with the sour economy and with a
depressed housing market, government budgets are being stretched to the limit
and the “creative accounting” is coming back to haunt the state and local
governments.<span style="mso-spacerun: yes;"> </span>The resolution of these
difficulties is not going to take place in the near term and this will lead to
more and more fights between governments and public labor unions. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Evidence of this was seen in
the tussle that recently went on in Wisconsin between pro-union supporters and Wisconsin
Governor Scott Walker. Furthermore, as the New York Times article states
“nonunion workers tend to resent rather than applaud the better pay and
benefits of their unionized brethren,” adding to the pressure against unions
trying to achieve their goals. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">But, there will be a fight in
the public sector because public sector unions grew up on little resistance
from public sector officials.<span style="mso-spacerun: yes;"> </span>This was
because the public sector officials could always tap into, without much complaint,
the rising value of property values and pass-off these rising costs.<span style="mso-spacerun: yes;"> </span>If not that, then there was always the deep
pockets found in Washington, D. C.<span style="mso-spacerun: yes;"> </span>Now,
however, the “free lunch” is over. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">So, expect a lot of turmoil
in state and local governments over the next five years or so.<span style="mso-spacerun: yes;"> </span>Budget realities are setting in at all
levels. Pensions cannot go unfunded indefinitely.<span style="mso-spacerun: yes;"> </span>Health care costs cannot go unfunded
indefinitely.<span style="mso-spacerun: yes;"> </span>And, public sector jobs
need to be filed in order to cover ordinary, day-by-day operation. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Moreover, the federal
government is looking for ways to tap into more revenues, like taxes on
municipal bonds, or more cuts in expenses, like less funding of state prisons
along with their call for more state and local participation in health care and
law enforcement.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;"><span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">There are massive structural
problems that must be dealt with in the United States.<span style="mso-spacerun: yes;"> </span>Correcting these structural problems is a
part of what must be done to help get the US economy growing at a more rapid
pace. At the end of this time, it is likely that labor unions in general, and
more, specifically, public labor unions, will be an even weaker part of the
United States economic scene than they are now.<span style="mso-spacerun: yes;">
</span></span></div>
John Masonhttp://www.blogger.com/profile/01451924722549191154noreply@blogger.com0tag:blogger.com,1999:blog-6726381082427834779.post-76487019190405751422012-07-17T11:14:00.000-07:002012-07-17T11:14:46.654-07:00US Industrial Production Continues to Expand<style>
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</style>The US economy continues to
grow but the pace of expansion is still modest.
Industrial production expanded in June at a 4.7 year-over-year
pace. This put the average rate of
expansion for the quarter at 4.7 percent, year-over-year, up slightly from a
4.4 pace of the first quarter. <br />
<span style="font-family: Arial; font-size: 10pt;"></span>
<br />
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10pt;">Since the current economic
recovery began in July 2009, the highest quarterly increase in industrial
production came in the third quarter of 2010.
At that time industrial production was increasing at a 7.1 percent,
year-over-year rate. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10pt;">As can be seen in the
accompanying chart, the rate of increase dropped off from that date and seems
to have settled in the three-to-five percent range, a rate that is rather
anemic for this time in the business cycle, but a rate that is consistent with
other current measures of economic growth. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<div class="separator" style="clear: both; text-align: center;">
<a href="http://research.stlouisfed.org/fredgraph.png?g=8P3" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="192" src="http://research.stlouisfed.org/fredgraph.png?g=8P3" width="320" /></a></div>
<br /></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10pt;">Real GDP, for example, grew
at a 2.0 percent year-over-year rate of growth in the first quarter of 2012,
and has only average in the 1.5 percent to 2.0 percent range for the past year.
</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10pt;">As reflected in almost all of
the data, economic growth is taking place but not at a very rapid pace. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10pt;">There are three reasons for
this slow pace of economic growth in my mind.
The first reason is the huge debt overload that exists within the US
economy. I have written on this in </span><a href="http://seekingalpha.com/article/719031-the-debt-crisis-goes-on-and-on"><span style="font-family: Arial; font-size: 10pt;">"The Debt Crisis Goes On and On."</span></a><span style="font-family: Arial; font-size: 10pt;">
Individuals, businesses, and state and local governments, overloaded
with debt at not able to spend as abundantly as in the past because they are
attempting to get their balance sheets back in line. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10pt;">Second, there is a great deal
of uncertainty in the world these days.
Washington, D. C. is in a mess and there seems to be no leadership
around, especially in the White House.
As Larry Summers stated during his recent term in Washington, “the
parents are not at home.” This lack of
leadership in the US, combined with the economic crisis in Europe and the lack
of leadership there, leaves us all wondering what is in store for us in the
future. And, unfortunately, what we
contemplate for the future is not very optimistic.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10pt;">Third, there are some serious
structural matters in the economy that still need to be resolved. For example, I believe that underemployment in
the United States is still around 20 percent.
That is, one out of every four individuals of working age are either
unemployed, employed in a part-time job but would like to work full time, or,
have left the work force. The workforce participation
numbers are now back where they were in the 1960s.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10pt;">And, we
continue to get stories about how the American society is bifurcating. David Brooks writes of <a href="http://www.nytimes.com/2012/07/10/opinion/brooks-the-opportunity-gap.html?ref=davidbrooks">"The
Opportunity Gap"</a> emerging in our country, a gap in which “</span><span style="font-family: Arial; font-size: 10pt;">the
children of the more affluent and less affluent are raised in starkly different
ways and have different opportunities.”
The ramifications of this split has been researched and discussed by
numerous people now and it indicates that we need more than just economic
stimulus and good intentions to solve the structural problems that are growing
worse every day. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10pt;">This structural problem is also seen in the data on the
capacity utilization of American manufacturing.
The data just released indicate that industry is using just under 79
percent of its capacity. Thus, capacity
utilization continues to increase in the current recovery.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10pt;">However, note in the accompanying graph that capacity
utilization was around 90 percent in the mid-1960s and has trended downward
every since. In fact, this trend
matches, to a high degree, the increase in the underemployed in the United States.
</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<div class="separator" style="clear: both; text-align: center;">
<a href="http://research.stlouisfed.org/fredgraph.png?g=8P1" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="192" src="http://research.stlouisfed.org/fredgraph.png?g=8P1" width="320" /></a></div>
<br /></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10pt;">Most obvious in the trend is that the peak utilization in
every cycle seems to be lower than that achieved in the previous cycle. Capacity utilization continues to increase in
the current recovery but is still below the peak achieved in the 2003-2007
period…which was below the peak of the cycle in the mid-1990s. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10pt;">There are significant structural dislocations in the United
States economy and a policy of government intervention and economic stimulus is
not going to correct the situation. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10pt;">Mr. Bernanke, in <a href="http://www.nytimes.com/2012/07/18/business/economy/bernanke-testifies-before-senate-panel.html?hp">testimony</a>
before Congress today, seemed to be cognizant of the problems the US economy is
facing. “Mr. Bernanke’s cautious
testimony underscored the Fed’s reluctance to ride once again to the aid of a
plodding economy. The central bank has intervened repeatedly when the economy
appears at risk of sliding back into recession, and Mr. Bernanke’s testimony
Tuesday included his standard promise to maintain that vigilance. But the Fed
has not acted with similar urgency to reduce the persistently high rate of
unemployment when growth is merely lackluster.”</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10pt;">To me, this is about all the Federal Reserve can do right
now. (See my post on <a href="http://seekingalpha.com/article/722301-the-fed-is-doing-enough-for-now">"The
Fed is Doing Enough For Now."</a>) The economy is recovering but not at
the speed we would like. However,
sometimes there is only just so much that can be done in terms of aggregate
economic policy. </span></div>John Masonhttp://www.blogger.com/profile/01451924722549191154noreply@blogger.com0tag:blogger.com,1999:blog-6726381082427834779.post-55481871576786289612012-07-15T13:12:00.000-07:002012-07-15T13:12:39.394-07:00The Federal Reserve is Doing Enough...For Now<style>
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<br />
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The economy is
recovering.<span style="mso-spacerun: yes;"> </span>It is not recovering as fast
as we would like, but it is recovering. </span>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Within this recovery there
may be only so much that government can do to speed on this recovery.<span style="mso-spacerun: yes;"> </span>In my mind, we need to keep this thought in
mind when considering what else the Federal Reserve can do at the present time.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Fed Chairman Ben Bernanke
takes pride in the fact that he has increased he openness of the Fed and has
helped to provide greater transparency into the understanding of what the
Federal Reserve is doing with regards to monetary policy. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Right now, however, I believe
that he is not saying much because he has said enough for the time being.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The market is concerned about
whether or not the Federal Reserve is going to engage in another round of
quantitative easing…QE3.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">I believe that Mr. Bernanke
is staying quiet at this point because he believes that the Fed is doing enough…for
now!<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">One part of the Fed’s dilemma
right now is that if jumps into an overt position on implementing QE3 it will
be accused of acting for political reasons. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The Republicans will jump all
over a Federal Reserve that seems to be “pumping up” the economy right before
the election.<span style="mso-spacerun: yes;"> </span>Should the Federal Reserve
begin a QE3 before the November election, it…the Fed…will be accused of
supporting a desperate president in his bid for re-election.<span style="mso-spacerun: yes;"> </span>How political can this be?</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">But, some members of the
Federal Reserve’s Open Market Committee are concerned about the weakness that
still exists in the economy. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The Fed has published the
minutes of its last Open Market Committee meeting and the discussions within
the committee showed mixed feelings about starting up a QE3.<span style="mso-spacerun: yes;"> </span>But, even the weak economic information
released in the last week or so have not been severe enough to change the minds
of the decision makers…and, especially Bernanke. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The minutes do reflect that
the Fed is keeping a watchful eye on the economy.<span style="mso-spacerun: yes;"> </span>The Fed has promised to act strongly if the
economic situation gets much worse.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">There are other concerns at
work, however. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">There is real concern over
just how much monetary policy can do at this particular time.<span style="mso-spacerun: yes;"> </span>First, there is the concern that it can do
little to impact the unemployment rate.<span style="mso-spacerun: yes;">
</span>The unemployment rate is a “real” economic variable and is determined by
“real” economic variables.<span style="mso-spacerun: yes;"> </span>Monetary
polity does not work with “real” economic variables. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Second, there is the time lag
in the effect that monetary policy has on the economy.<span style="mso-spacerun: yes;"> </span>One can argue that the Fed has done all it
can do to impact the economy over the next six- to nine-months and that
anything else done now would have next to no effect on the economy before the
November election. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">This presents the question to
Open Market Committee members: “Why start out now on a major monetary
initiative like QE3 which would bring about tremendous political criticism when
this initiative would have next to no impact on the economy before the
election?”</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The most the Federal Reserve
can do at this time to generate confidence is to assure the financial markets
that “if the economy gets worse” that it would take appropriate actions to
combat a worsening situation.<span style="mso-spacerun: yes;"> </span>And, Fed
officials must continually provide evidence that it is “on the watch” and ready
to move.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The release of the minutes of
the Open Market Committee serves this purpose. <span style="mso-spacerun: yes;"> </span>The essence of the minutes was the split
between committee members over whether or not the Fed should engage in further
easing. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The other major issue besides
the state of the economy, which will not go away is the condition of the
banking industry.<span style="mso-spacerun: yes;"> </span>Readers of this blog
know my position on this:<span style="mso-spacerun: yes;"> </span>the banking
system is still quite fragile with many banks still unsure about the value of
their assets, especially in the areas of residential real estate and commercial
real estate.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">I believe that the Federal
Reserve feels comfortable that it has done what it can to keep the banking
system functioning and that the injection of $1.5 trillion in excess reserves
into the banks allows the banking system to continue to function smoothly so
that the FDIC can continue to close banks without creating significant
disruptions to the industry.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Through the first half of
2012, more than one bank is still being closed every week at least one other
bank per week is acquired and hence is merged out of existence.<span style="mso-spacerun: yes;"> </span>The banking system continues to shrink!</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">There is little else the
Federal Reserve can do at this time with respect to the health of the banking
system. <span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">My belief is that Mr.
Bernanke has already told us all that he is going to tell us at this time.<span style="mso-spacerun: yes;"> </span>Mr. Bernanke has told us that the Federal
Reserve is not going to act in a political way.<span style="mso-spacerun: yes;">
</span>In other words, for the near term, the Fed is going to do pretty much
what it has been doing in the recent past.<span style="mso-spacerun: yes;">
</span>It will continue to try and “twist” interest rates, but no new excess
reserves will be created in this effort.<span style="mso-spacerun: yes;">
</span>And, the Federal Reserve will continue to watch the economy closely and
stands ready to act if it appears as if the economy is sinking into another recession.<span style="mso-spacerun: yes;"> </span>But, don’t expect anything more. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">In terms of the economy, the
Fed has done about all it can do right now.<span style="mso-spacerun: yes;">
</span>The major thing it has done…at least for the time being…is to stop any
cumulative movement in the economy to a period of price deflation.<span style="mso-spacerun: yes;"> </span>This is the big theoretical concern that exists
in a period like this, the possibility that the economy will decline into a
period of debt-deflation. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">However, protecting the
economy from a period of deflation does not eliminate the problem I discussed
earlier this week, the problem of the extensive <a href="http://seekingalpha.com/article/719031-the-debt-crisis-goes-on-and-on">debt
buildup</a> in the economy.<span style="mso-spacerun: yes;"> </span>The
deleveraging of the economy is still something that needs to take place.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The deleveraging of the
economy will still take some time.<span style="mso-spacerun: yes;"> </span>For
now, I would argue that the Federal Reserve has done and is doing about all it
can to keep the expansion going.<span style="mso-spacerun: yes;"> </span>The
economy is recovering.<span style="mso-spacerun: yes;"> </span>It certainly is
not recovering as rapidly as we would like it to recover, but it is recovering.<span style="mso-spacerun: yes;"> </span>Sometimes only so much can be done to assist
a recovery and the rest must be accomplished by letting the system do its own
part.<span style="mso-spacerun: yes;"> </span>In the current situation, reducing
the debt load is what the economy needs to do and it takes time for an economy
to achieve this.<span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span></span></div>John Masonhttp://www.blogger.com/profile/01451924722549191154noreply@blogger.com0tag:blogger.com,1999:blog-6726381082427834779.post-35935861262726495382012-07-13T05:03:00.000-07:002012-07-13T05:03:17.289-07:00Mr. Bernanke Needs to Speak Out About QE3...or, Has He?<style>
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</style>Fed Chairman Ben Bernanke
takes pride in the fact that he has increased he openness of the Fed and has
helped to provide greater transparency into the understanding of what the
Federal Reserve is doing with regards to monetary policy. <br />
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;"></span>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Right now, however, he is
staying pretty silent.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The market concern is about
whether or not the Federal Reserve is going to engage in another round of
quantitative easing…QE3.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">I believe that Mr. Bernanke
is staying quiet at this point for political reasons.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">He stated just the other day
that the Federal Reserve is not swayed by political factors. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">We can save the further
discussion about the political nature of the Fed for another day. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The Fed’s dilemma right now
is that if jumps into an overt position on implementing QE3 it will be accused
of acting for political reasons. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The Republicans will jump all
over a Federal Reserve that seems to be “pumping up” the economy right before
the election.<span style="mso-spacerun: yes;"> </span>Should the Federal Reserve
begin a QE3 before the November election, it…the Fed…will be accused of
supporting a desperate president in his bid for re-election.<span style="mso-spacerun: yes;"> </span>How political can this be?</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The Fed has published the
minutes of its last Open Market Committee meeting and the discussions within
the committee showed mixed feelings about starting up a QE3.<span style="mso-spacerun: yes;"> </span>But, even the weak economic information
released in the last week or so have not been severe enough to change the minds
of the decision makers…and, especially Bernanke. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The minutes do reflect that
the Fed is keeping a watchful eye on the economy.<span style="mso-spacerun: yes;"> </span>The Fed has promised to act strongly if the
economic situation gets much worse. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">There is real concern,
however, over just how much monetary policy can do at this particular
time.<span style="mso-spacerun: yes;"> </span>First, there is the concern that
it can do little to impact the unemployment rate.<span style="mso-spacerun: yes;"> </span>The unemployment rate is a “real” economic
variable and is determined by “real” economic variables.<span style="mso-spacerun: yes;"> </span>Monetary polity does not work with “real”
economic variables. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Second, there is the time lag
in the effect that monetary policy has on the economy.<span style="mso-spacerun: yes;"> </span>One can argue that the Fed has done all it
can do to impact the economy over the next six- to nine-months and that
anything else done now would have next to no effect on the economy before the
November election. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">This presents the question to
Open Market Committee members: “Why start out now on a major monetary
initiative like QE3 which would bring about tremendous political criticism when
this initiative would have next to no impact on the economy before the
election?”</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The most the Federal Reserve
can do at this time to generate confidence is to assure the financial markets
that “if the economy gets worse” that it would take appropriate actions to
combat a worsening situation.<span style="mso-spacerun: yes;"> </span>And, Fed
officials must continually provide evidence that it is “on the watch” and ready
to move.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The release of the minutes of
the Open Market Committee serves this purpose. <span style="mso-spacerun: yes;"> </span>The essence of the minutes was the split
between committee members over whether or not the Fed should engage in further
easing. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The other major issue besides
the state of the economy, which will not go away is the condition of the
banking industry.<span style="mso-spacerun: yes;"> </span>Readers of this blog
know my position on this:<span style="mso-spacerun: yes;"> </span>the banking
system is still quite fragile with many banks still unsure about the value of
their assets, especially in the areas of residential real estate and commercial
real estate.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">I believe that the Federal
Reserve feels comfortable that it has done what it can to keep the banking
system functioning and that the injection of $1.5 trillion in excess reserves
into the banks allows the banking system to continue to function smoothly so
that the FDIC can continue to close banks without creating significant
disruptions to the industry.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Through the first half of
2012, more than one bank is still being closed every week at least one other
bank per week is acquired and hence is merged out of existence.<span style="mso-spacerun: yes;"> </span>The banking system continues to shrink!</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">There is little else the
Federal Reserve can do at this time with respect to the health of the banking
system. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Can Mr. Bernanke tell us all
of this in a way that will convince us?<span style="mso-spacerun: yes;">
</span>Should Mr. Bernanke tell us all of this in an attempt to convince us? </span></div>
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<br /></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">My belief is that Mr.
Bernanke has already told us all that he is going to tell us at this time.<span style="mso-spacerun: yes;"> </span>Mr. Bernanke has told us that the Federal
Reserve is not going to act in a political way.<span style="mso-spacerun: yes;">
</span>In other words, for the near term, the Fed is going to do pretty much
what it has been doing in the recent past.<span style="mso-spacerun: yes;">
</span>It will continue to try and “twist” interest rates, but no new excess
reserves will be created in this effort.<span style="mso-spacerun: yes;">
</span>And, the Federal Reserve will continue to watch the economy closely and
stands ready to act if it appears as if the economy is sinking into another
recession.<span style="mso-spacerun: yes;"> </span>But, don’t expect anything
more. </span></div>
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<br /></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Other than the fact that I
don’t believe that “operation twist” can really be effective, I believe that
Mr. Bernanke and the Fed are “spot on” concerning what monetary policy should
be at this time.<span style="mso-spacerun: yes;"> </span>To me, the primary
thing that is currently impacting US Treasury rates is the “flight to quality” in
financial markets that is taking place internationally and this is dominating
what the Fed is doing and everything else.<span style="mso-spacerun: yes;">
</span><span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span></span></div>John Masonhttp://www.blogger.com/profile/01451924722549191154noreply@blogger.com0tag:blogger.com,1999:blog-6726381082427834779.post-56769646917860164662012-07-12T11:15:00.000-07:002012-07-12T11:15:23.923-07:00The Debt Crisis Goes On and On<style>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">When it comes to a debt
crisis almost everyone seems to quote from the book “This Time Is Different” by
Carmen Reinhart and Kenneth Rogoff.<span style="mso-spacerun: yes;"> </span>A
debt crisis takes a long time to create and it takes a long time for a debt
crisis to unwind. </span>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Yet, no one seems to heed
this conclusion. </span></div>
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<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Instead we hear that we need
more monetary stimulus, a QE3, before the upcoming presidential election in the
United States.<span style="mso-spacerun: yes;"> </span>We need immediate tax
cuts.<span style="mso-spacerun: yes;"> </span>We need fiscal stimulus.<span style="mso-spacerun: yes;"> </span>We need an export policy to spur on the
economy. </span></div>
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<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Let me repeat the conclusion
written above: it takes a long time to create a debt crisis. </span></div>
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<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">In my mind it took the United
States approximately fifty years to create its debt crisis.<span style="mso-spacerun: yes;"> </span></span></div>
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<br /></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Now, the second part of the
equation: it takes a long time to unwind a debt crisis.</span></div>
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<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">How long?</span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;"><a href="http://www.ft.com/intl/cms/s/0/418ceb14-c45d-11e1-9c1e-00144feabdc0.html#axzz20Qm1vtsN">Jamil
Baz</a>, chief investment strategist at GLG Partners, a part of the Man Group,
suggested that the current debt crisis “will take a minimum of 15 years for the
economy to reach escape velocity and attain a level consistent with healthy
growth.<span style="mso-spacerun: yes;"> </span>This is because debt levels need
to come down by at least 150 percent of GDP in most countries.<span style="mso-spacerun: yes;"> </span>History suggests that you cannot reduce debt
by more than 10 percentage points a year without social and political
dislocation.”</span></div>
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<br /></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Fifteen years!</span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Geeeeeeeeeee!!!!!!</span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Over the past five years, the
debt situation has gotten worse.<span style="mso-spacerun: yes;">
</span>According to Mr. Baz, for eleven the eleven developed countries most
mentioned when it comes to the debt crisis, the weighted average of government
debt to GDP has risen from 381 percent in June 2007 to 417 percent at the
present time. </span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Deleveraging, at least in the
public sector, has not taken place during these sad economic times…in fact,
just the opposite has occurred. </span></div>
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<br /></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">And, when you add on the
private debt the situation has deteriorated even more amongst these developed
nations. </span></div>
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<div class="MsoNormal">
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Why aren’t businesses
hiring?<span style="mso-spacerun: yes;"> </span>Why aren’t people spending?<span style="mso-spacerun: yes;"> </span>Why aren’t government policies working?<span style="mso-spacerun: yes;"> </span></span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Because, Mr. Baz argues,
deleveraging has not even started yet!<span style="mso-spacerun: yes;"> </span></span></div>
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<br /></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">All we have heard is a lot of
hot air escaping from the balloon.<span style="mso-spacerun: yes;"> </span>But,
the balloon is not taking off and will not take off as long as there is still
substantial deleveraging left…in the United States…and in most of the rest of
the developed world. </span></div>
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<br /></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">And, when the debt begins to
be reduced…watch out for economic growth.<span style="mso-spacerun: yes;">
</span>The International Monetary Fund has estimated that, under current
circumstances, every dollar cut from government deficits will lead to a
two-dollar reduction in GDP.<span style="mso-spacerun: yes;"> </span>This multiplier
effect is higher now, the IMF states, than it was before 2008…four times
higher!</span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The policy tools that people
are turning to are not effective.<span style="mso-spacerun: yes;">
</span>Additional government stimulus, or even the talk of it, points to even
more debt being created which, in a cumulative way, just adds to the problem.<span style="mso-spacerun: yes;"> </span>Monetary stimulus that creates inflation to
reduce the real value of the debt will just result in higher bond yields that
would raise the costs of servicing the debt and this just will exacerbate the
problem.<span style="mso-spacerun: yes;"> </span>And, policies to cause exchange
rates to fall to jump-start an export-driven recovery are being tried by just
about everyone with no one winning the game.</span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Fifty years of credit
inflation…here in the United States…and in Europe…have created the debt
crisis.<span style="mso-spacerun: yes;"> </span>More of the same policy will
only add to the crisis…not solve it.<span style="mso-spacerun: yes;"> </span></span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">But, for fifty years, public
officials would not listen to warnings that more and more credit inflation
would result in a situation like the one we are now in. </span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Another five…or, ten…years of
credit inflation will not heal the situation!</span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Unfortunately, there are no
good, painless solutions.<span style="mso-spacerun: yes;"> </span></span></div>
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<br /></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The ironic thing is that
interest rates are so low in this situation!<span style="mso-spacerun: yes;">
</span>The ten-year United States Treasury issue is trading just under 1.50
percent.<span style="mso-spacerun: yes;"> </span>The ten-year German government
bond is trading around 1.25 percent.<span style="mso-spacerun: yes;"> </span></span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The investment community is
so spooked by the debt crisis that the “safe” bet today is in either US
Treasury securities or German Bunds.<span style="mso-spacerun: yes;"> </span>And,
some US Treasury indexed bonds are trading at more than a NEGATIVE one percent
rate of interest.<span style="mso-spacerun: yes;"> </span>The ten-year indexed bond
is trading around a NEGATIVE 0.60 percent.</span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">In economics, everything is
relative. </span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">However, officials don’t
acknowledge the problem.<span style="mso-spacerun: yes;"> </span>Debt is subject
that is best not discussed.<span style="mso-spacerun: yes;"> </span>For most of
the past fifty years, debt has not been present in aggregate models of the
economy…academic, private, or government models.<span style="mso-spacerun: yes;"> </span></span></div>
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<br /></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Still, it takes a long time
for a debt crisis to become the dominant factor of an economy. </span></div>
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<br /></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Unfortunately, it takes a
long time for the debt crisis to subside.<span style="mso-spacerun: yes;">
</span>This debt crisis will not be over when the next president of the United
States is elected.<span style="mso-spacerun: yes;"> </span>In all likelihood,
the debt crisis will not be over when a president of the United States is
elected in 2015.<span style="mso-spacerun: yes;"> </span></span></div>
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<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Maybe it is time to
acknowledge this problem and really start to deal with it.<span style="mso-spacerun: yes;"> </span>We have seen what continuing to ignore it does.<span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span></span></div>John Masonhttp://www.blogger.com/profile/01451924722549191154noreply@blogger.com0