Monthly Archives: August 2009

Beyond mark to market

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An additional measure was taken a few months ago that just struck me one of the possible reasons for the current economic setback.

This is best illustrated first by an example.

My (very small) bank holds securities in its ‘hold to maturity’ account.

If these securities become ‘impaired,’ as defined by regulation, they are marked to market and capital adjusted for that loss.

But recently an additional measure was taken by the regulators.

If they are downgraded to below ‘investment grade’ they are not only marked to market for net capital calculations,

but also treated as a ‘charge off’ for capital ratio purposes.

For example, if we have $1 million security that is downgraded below investment grade and has a current market value of $500,000,
we reduce our stated capital by $500,000, as had previously been the case.

But now, even that $500,000 remaining value, is, for all practical purposes, counted as 0 for purposes of determining our capital ratios.

The capital ratio is the important calculation as it determines how many assets a bank can carry for a given level of capital.

This means, for example, that if a bank had securities that were below investment grade with a market value equal to all its capital
it could not carry any other assets or deposits.

They call this ‘super risk weighting’ or something like that. More details to follow, and any additional info welcome, thanks!

Meanwhile, this has resulted in a sudden drop in the all important capital ratios,
and with every downgrade below investment grade by the ratings agencies, a much larger capital reduction takes place than under previous rules.

And, equally important, all banks holding any securities are at risk of losing all ‘credit’ for even the fair market value of their securities
for purposes of determining their capital ratio compliance.

Additionally, this can force sales of these securities as the proceeds of a sale at least add that much capital back to the capital ratio determination.

And the forced sales, of course, drive prices down below even today’s depressed market values.

This provides high yielding securities with little or no risk at the now lower prices for unleveraged buyers, at the expense of the banking sector.

Banks are public private partnerships, and it looks like the public partner is shooting itself in the gut contrary to any notion of public purpose.

Regulators have told is there is no chance for this rule to be altered.

And as an aside, we have a security that was simultaneously downgraded by one ratings agency and upgraded by another. Interesting how after all the criticism of
ratings agencies our govt has increased its reliance on them for purposes of public policy.


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Germany – Credit Crunch II

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Yes, interesting to see if the Eurozone national governments are able to run their deficits as high as projections indicate without themselves having liquidity issues, even with the indirect help from the ECB. Looks to me like all the support measures add to the deficits of the national govts.

On Tue, Aug 18, 2009 at 4:57 PM, Russell wrote:

Regardless of your view on the economy, you have to at least consider the possibility that the financial crisis isn’t over, that we may just be in the eye of the storm. There are all the smaller (but still big) banks failing, as well as the lingering concerns over mortgages, commercial real estate and the national debt.

According to The Telegraph’s Ambrose Evans-Pritchard, the German government is laying the groundwork to head off a second coming of the credit crisis:

“The most difficult phase for financing is going to be in the first and second quarter of 2010,” said Hartmut Schauerte, the economic state secretary.

“We are working as a government to create instruments that can offset a feared credit crunch or any credit squeeze in sectors of the economy,” he said.

Mr Schauerte said firms with weak balance sheets may struggle to roll over loans as they come due in coming months. Negotiations with banks could prove “very difficult”.

State support is likely to be concentrated on boosting the capital base of German firms and providing credit insurance for exporters, perhaps to the tune of €250bn to €300bn (£256bn). “If this service fails, we are going to see dozens of credit collapses,” he said.

Articles:

Germany braces for second wave of credit crunch

Germany Prepares For Credit Crunch Part II


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PPI/starts

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Karim writes:

2nd Tier Data – not a view changer:

  • Starts down 1%, but single-family up 1.7%; multi-family down 13.3%
  • Permits down 1.8%, but single-family up 5.8%; multi-family down 25.5%
  • PPI -0.9% headline and -0.1% core
  • Core PPI has fallen 2 of the past 3mths and as a decent leading indicator of core CPI, probably the most notable feature of this report
  • Intermediate stage -0.2% and 0.2%
  • Crude stage -4.5% and +2.9%



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China Money Rates Drop as Central Bank Stops Pushing Up Yields

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Check out the last ‘house hunting’ story.

Looks like they are on to that angle of attack, directing
that form of ‘investment’ as a matter of public purpose,
much like we have done with our public policies over the years.

Also looks like the cut back in lending was to try to moderate
what they deemed to be ‘overheating’ and should only be temporary.

Seems the rate hike was only 26 basis points (not that rates matter very much in any case).

Very interesting note here:

Chinese banks usually “frontload” lending in the first half of each year.

China Money Rates Drop as Central Bank Stops Pushing Up Yields

August 18 (Bloomberg) — China’s money-market rates dropped after the central bank stopped driving up the benchmark bill yield for the first time in six weeks, fanning speculation it will ease availability of funds to stem a slump in stocks.

The People’s Bank of China said it sold 45 billion yuan

($6.6 billion) of one-year bills at a yield of 1.7605 percent, unchanged from last week’s auction. The central bank has let the yield rise 26 basis points since resuming sales of one-year bills on July 9, following an eight-month suspension.

“The authorities may want to ease the market panic after a big slump in stocks,” said Zhang Lei, a fixed-income analyst at Shenyin Wanguo Research & Consulting Co. in Shanghai. “The unchanged yield is a signal that the central bank will stick to its loose monetary policy.”

The seven-day repurchase rate, which measures funding availability on the interbank market, declined 12 basis points, or 0.12 percentage point, to 1.30 percent as of 5:30 p.m. in Shanghai, according to the China Interbank Funding Center. A basis point is 0.01 percentage point.

A government report showed on Aug. 11 that industrial production gained 10.8 percent in July, less than the 12 percent median estimate in a Bloomberg survey of economists. Urban fixed-asset investment for the seven months to July 31 climbed

32.9 percent, which was also short of analyst forecasts.

China’s Investment-Grade Debt Ratings Affirmed by S&P

Aug. 18 (Bloomberg) — China’s investment grade credit rating was affirmed by Standard & Poor’s Ratings Services, which cited the country’s “exceptional” economic growth potential.

S&P maintained China’s A+ long-term sovereign credit rating and its A-1+ short-term rating, according to a statement issued today. The outlook on the long-term credit rating remains stable, S&P said.

“Fiscal flexibility remains significant,” S&P said in the statement. “The Chinese government faces moderate risks of balance sheet damage if there is a steeper and more prolonged economic slowdown than currently expected.”

Banks report fewer new loans

August 17 (China Daily) — China’s new lending in July fell to less than a quarter of June’s level, as banks sought to limit credit risks and the flow of money into stocks and property.

Banks extended 355.9 billion yuan in loans, down from 1.53 trillion yuan in June, the People’s Bank of China reported on its website last week. M2, the broadest measure of money supply, rose 28.4 percent.

China Construction Bank Corp, the nation’s second-largest lender, said recently that it will cut new lending by about 70 percent in the second half to avert a surge in bad debt.

The government wants to avert bubbles in stocks and property without choking off the recovery of the world’s third-biggest economy.

A smaller loan number “is probably a good thing – we’re coming off this ridiculously high level of lending in the first half,” said Paul Cavey, an economist with Macquarie Securities in Hong Kong.

Premier Wen Jiabao reiterated in a statement on Aug 9 that a “moderately loose” monetary policy and “proactive” fiscal policy will remain unchanged because the economy faces problems including sliding export demand and industrial overcapacity.

UBS AG stated in a July 31 note that the scale of China’s new lending in the first half was “neither sustainable nor necessary.” New loans of 300 billion yuan to 400 billion yuan a month in the second half would be “more than enough” to support the nation’s recovery, the report said.

Chinese banks usually “frontload” lending in the first half of each year.

The credit boom and a 4 trillion yuan stimulus package drove 7.9 percent economic growth in the second quarter from a year earlier and helped General Motors Co to report a 78 percent increase in vehicle sales in China in July.

A record $1 trillion yuan in loans through June has also helped to drive this year’s 79 percent gain in the Shanghai Composite Index.

Central bank and finance ministry officials said on Aug 7 that they will scrutinize gains in stock prices without capping new lending. The Financial Times reported the same day that the central bank had told the largest state-controlled lenders to slow growth in new loans, citing unidentified people familiar with the matter.

Credit exploded after the People’s Bank of China scrapped quotas limiting lending in November and told banks to back Wen’s 4 trillion yuan stimulus package.

Zhang Jianguo, the president of China Construction Bank, expressed concern about loan growth last week, saying some industries are growing too rapidly and some money isn’t flowing into the real economy.

Housing prices “are rising too fast and housing sales are growing too fast”, Zhang said.

Property sales climbed 60 percent in value in the first seven months from a year earlier, the statistics bureau said.

China’s banking regulator urged lenders on July 27 to ensure credit for investment projects flows into the real economy.

Three days later, the regulator announced plans to tighten rules on working capital loans.

Stephen Roach, chairman of Morgan Stanley Asia, said on July 29 that surging lending and infrastructure spending worsened imbalances in the Chinese economy and “could sow the seeds for a new wave of non-performing bank loans”.

Instead of pumping up growth, the government should do more to boost private consumption, he said.

China goes house hunting to rev up economy

August 18 (Reuters) — The Chinese government is attempting to pass the baton of growth from State-funded infrastructure investment to the private housing sector, a risky but necessary move to sustain the economic recovery.

Construction cranes sprouting in big cities, busy furniture shops and soaring property sales all show that the transition is going smoothly so far, though officials are wary that house prices may rise too high, too quickly.

China’s biggest listed property developer, Vanke, lifted its housing starts target for this year by 45 percent, while its rival Poly Real Estate said sales in Jan-July rose 143 percent from a year earlier.

On the ground, construction firms, big and small, are trying to meet the demand, last years’ downturn now a distant memory.

“It’s been a long time since we’ve had a day off. Several months, I think, though I can’t remember exactly,” said Zhang Minghui, owner of a small building company in Beijing.

“From late last year to early this year, we basically had nothing to do. Everybody was careful with their money because of the crisis and so projects got delayed.”

Zhang cut his staff to three in November but is now back up to a crew of 14.

The economic importance of the property sector in China is hard to overstate. Investment in residential housing accounted for about 10 percent of gross domestic product before a property boom turned to bust in 2008, roughly the same as the contribution from the country’s vaunted export factories.

The government’s first steps last year to revive the stalling Chinese economy were to offer tax cuts to encourage home purchases, followed by rules to ease access to mortgages.

These are bearing fruit.

With housing investment up an annual 11.6 percent in the first seven months, Chinese growth momentum is broadening out and the central government has been able to slow the pace of its stimulus spending on infrastructure.

Real economy

But Beijing must strike a fine balance in its bid to kick-start the housing market.

On the one hand, it wants rising prices to persuade house hunters to stop putting off purchases and to get developers to invest in new projects. On the other hand, it is wary of prices rising too quickly, luring speculators into the market and turning it into an asset bubble, not an economic driver.

“Because it is closely linked to so many industries, volatility in the real estate market will inevitably lead to macroeconomic volatility,” the government-run China Economic Times warned on Monday.


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Robert Pirsig

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From ‘Lila:’

“Of all the contributions America has made to the history of the world, the idea of freedom from a social hierarchy has been the greatest…”

“And yes, although Jefferson called this doctrine of socially equality ‘self evident,’ it is not at all self evident. Scientific evidence and the social evidence of history indicate the opposite is self-evident. There is no ‘self-evidence’ in European history that all men are created equal. There’s no nation in Europe that doesn’t trace its history back to a time when it was ‘self-evident’ that all men are created unequal. Jean Jacques Rousseau, who is sometimes given credit for this doctrine, certainly didn’t get it from the history of Europe or Asia or Africa. He got it from the impact of the New World upon Europe and from contemplation of one particular kind of individual who lived in the New World, the person he called the ‘Noble Savage.’

The idea that ‘all men are created equal’ is a gift to the world from the American Indian. Europeans who settled here only transmitted it as a doctrine that they sometimes followed and sometimes did not. The real source was someone for whom social equality was no mere doctrine, who had equality built into his bones. To him it was inconceivable that the world could be any other way. For him there was no other way of life.”


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Another from Pirsig

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From ‘Lila:’

“The idea that ‘man is born free but is everywhere in chains’ was never true. There are no chains more vicious than the chains of biological necessity into which every child is born. Society exists primarily to free people from these biological chains. It has done that job so stunningly well intellectuals forget the fact and turn upon society with a shameful ingratitude for what society has done.”


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Robert Pirsig on crime and freedom

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From ‘Lila:’

“What the Metaphysics of Quality indicates is that the 20th century intellectual faith in man’s basic goodness as spontaneous and natural is disastrously naive. The ideal of a harmonious society in which everyone without coercion cooperates happily with everyone else for the mutual good of all is a devastating fiction. It isn’t consistent with scientific fact…Primitive tribes such as the American Indians have no record of sweetness and cooperations with other tribes. They ambushed them, tortured them, dashed their children’s brains out on rocks. If man is basically good, than maybe it’s man’s basic goodness which invented social institutions to repress this kind of biological savagery in the first place…”

…We must understand that when a society undermines intellectual freedom for its own purposes it is absolutely morally bad, but when it represses biological
freedom for its own purposes it is absolutely morally good. The destructive sympathy of intellectuals lawlessness in the sixties and since is derived,
no doubt, from what is perceived to be a common enemy, the social system. But the Metaphysics of Quality that this sympathy was really stupid.”

The idea that biological crimes can be ended by intellect alone, that you can talk crime to death, doesn’t work…Only social patterns can control
biological patterns, and the instrument of conversation between society and biology is not words. The instrument of of conversation between society and
biology has always been a policeman or a soldier and his gun. All the laws of history, all the arguments, all the Constitutions and the Bills of Rights and
Declarations of Independence are nothing more than instructions to the military and the police.”

A culture that supports the dominance of social values over biological values is an absolutely superior culture one that does not, and a culture that supports the dominance of intellectual values over social values is absolutely superior to one that does not.”

Where biological values are undermining social values, intellectuals must identify social behavior, no matter what its ethnic connection, and support it all the way without restraint. Intellectuals must find biological behavior, no matter what its ethical connection, and limit or destroy destructive biological patterns with complete moral ruthlessness, the way a doctor destroys germs, before those biological patterns destroy civilization itself.”


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Comments on Obama by economist Russ Huntley

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We now fact the risk that Obama loses whatever control of Congress he might have had as he loses popular support and the nation goes rudderless, while rising unemployment and faltering financial markets again work to get the deficit where it needs to be via the very, very ugly automatic stabilizers that might have more work to do.

And nothing the right fiscal adjustments (payroll tax holiday/per capita revenue sharing) can’t immediately reverse, but that seems less and less likely with each passing day.

And a national media that continues to have it all wrong.

On Mon, Aug 17, 2009 Russell Huntley wrote:

I would agree and I am an Independent. I know he has lost the progressives.

I have not seen Obama do anything different that what Bush did:

Still doing extraditions and harsh interrogations (possibly torture)

Still fighting wars and wasting tax payer’s money.

Still imprisoning 3% of our population for profit.

Economy is still a mess because the man who stood for change surrounded himself with a Wall Street team, who know nothing different. So the banks keep barely surviving. He should have put the money in the hands of the civilians and business through a payroll tax cut. Business’s would have had more money to retain employees and employees would have more money to buy goods, and if needed to save. Those savings would have gone to banks.

Health care — will give him credit, he is trying to give it a shot, but probably will end up doing nothing new but lining some pockets along the way.

Cap and trade — again whose pockets does that line. Probably GS and JP Morgan.

Stimulus — Where are our great new infrastructure projects. I thought we were going to build a ladder to stars, not a pit to hell.

By the way — Peter Schiff, the doom and gloomer, gold advocate and a person who thinks the FED should be abolished, gets a lot of press coverage. He recently announced that is running for Senator Dodd’s seat as a Republican. In his first month he raised $800,000. Pretty impressive. I think there is a large mass of the population out there who feel 100% unrepresented and who will support someone who says that they will represent them. Obama did it, but it appears he cannot speak honestly and that he is merely a mirage and probably the reason why his poll numbers are going in Bush’s direction.


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Brazil Lula Vetoes Spending Limits for 2010 Budget, Estado Says

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Brazil seems to be catching on?

Brazil Lula Vetoes Spending Limits for 2010 Budget, Estado Says

August 14 (Bloomberg) — Brazil’s President Luiz Inacio Lula da Silva vetoed 20 items in the guidelines for next year’s budget that sought to curtail government spending on public
works, O Estado de S. Paulo said.

Lula also vetoed a measure that would have limited the government’s ability to increase investment under its so-called Growth Acceleration Program, which is comprised of infrastructure spending on ports, roads and energy projects, the Sao Paulo-based newspaper reported, citing the official gazette.


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CPI/IP/Michigan

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Yes, there’s clearly an ‘unidentified demand leakage’ to have all this deficit spending with demand only holding at very low levels.

I keep coming back to the depressing effects of low interest rates and a large Fed portfolio shifting interest income from savers to govt., banks, and corporate borrowers with consumers who borrow getting very little benefit as incomes at best stagnate.

As Bernanke stated in his 2004 paper, the fiscal drag from lower interest rates can be offset by a tax cut or fed spending increase.


Karim writes:

Biggest news this morning was surprising drop in Michigan survey. Despite equity rally, lower gas prices and labor market becoming ‘less bad’, Michigan survey drops 2.8pts to lowest level since March. Consumer still nowhere to be found in current ‘recovery’.

  • Michigan Survey falls from 66 to 63.2
  • 1y Fwd Inflation expex drop from 3.0 to 2.9; 5-10yr fwd from 2.9 to 2.8
  • IP for July up 0.5%; aided by auto production; ex-autos -0.1%
  • CPI unchanged m/m for both headline and core; headline -2.1% y/y and core +1.5%
  • OER (Unch) and lodging away from home (-2.1%) offset apparel (0.6%), vehicles (0.3%) and tobacco (2.2%).
  • Look for quirks in vehicle pricing to resolve in coming months and help drive core below 1% by yr-end.


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