A Senate panel approved new restrictions on credit-card interest rates that are broader than those adopted by the Federal Reserve in December, brushing aside objections from Republicans and the banking industry.
Senate Banking Committee Chairman Christopher Dodd said the measure was needed to protect consumers from having their interest rates raised on previous balances, unless certain conditions are met. The legislation would prevent credit-card companies from unilateral changes to the terms of an agreement.
The bill, known as the Credit Card Accountability, Responsibility and Disclosure Act, also would require the signature of a parent for a borrower under age 21, unless there�s proof of independent income or completion of a financial education course. Universities that forge marketing deals with card companies would be subject to the rule.
�The list of troubling credit-card practices is as lengthy as it is disturbing,� said Dodd, a Connecticut Democrat. The measure passed on a 12-11 vote, with all the panel�s Republicans opposing it.
The legislation also would require card companies to disclose how long it would take to pay off a balance when making a minimum monthly payment and require statements to be mailed at least 21 days before the payment due date, up from 14 days.
It would also prohibit banks from charging interest on fees, such as those imposed for late payments or exceeding credit limits.
Consumers are falling behind on credit-card payments as U.S. unemployment reached 8.1 percent in February, the highest level in more than a quarter century.
Almost all of the cards studied -- 93 percent -- allowed the lending company to raise any interest rate at any time. Also, 87 percent of the cards allowed automatic penalty interest averaging 27.99 percent on all balances even if the account was less than 30 days past due, Pew said in a statement today.
When it comes to over limit fees, there should not be any. Banks approve the transaction so should be comfortable with it. If they do not want to authorize the amount it is simple enough to reject the transaction.
I also object to self-modifying contracts. Sadly 93% of cards issued allow rate hikes at any time for any reason upon notice. Moreover, sending a notice to someone in fine print that no one can understand even if they manage to read it hardly constitutes "notice" in my book.
Also irritating is the practice of banks mailing out statements a mere 14 days before payment is due such that anyone on two week's vacation is bound to be late, triggering late fees and interest. Another thing banks do is require payment by 10:00AM when the mail for the day does not come in until Noon. This effectively cheats customers out of one of the days.
The credit card industry is getting what it deserves for their practices, even though a case can be made that such things ought to be left to the "free market" to solve. Then again self-modifying contracts under such terms hardly seems to be a "free market construct".
Moreover, the reason people can get credit lines way bigger than they deserve stems from the Bankruptcy Reform Act of 2005 whose sole purpose was to make people debt slaves forever. That act is now blowing up, just as I predicted it would.
Geithner's Heist America Plan
In a galling move that has nothing to do with credit card reform at all, the Senate slipped in a provision to allow the "FDIC to borrow up to $100 billion from the U.S. Treasury, an increase from $30 billion now. The FDIC has said the additional borrowing authority may reduce a special one-time fee imposed on banks to replenish the deposit insurance program."
This tactic has nothing to do with replenishing deposit insurance, but rather is a move to cater to more bank implosions and to provide a cushion for Geithner's Heist America Plan (GHAP). Please see Geithner's Plan Can Succeed for details about Heist America.
As IBM was firing thousands of American workers last week, the U.S. Patent and Trademark Office published Big Blue's application to copyright a computerized system that calculates how to offshore jobs while maximizing government tax breaks.
In their application to patent a "method and system for strategic global resource sourcing," five Hudson Valley IBMers describe how it weighs such plans as "50 percent of resources in China by 2010," against such factors as labor costs, infrastructure and the "minimum head count to qualify for incentives."
Lee Conrad, national coordinator for Alliance@IBM, a group trying to unionize Big Blue, was stunned to learn of the application.
"This is obviously outrageous � a patent on how to offshore U.S. jobs," Conrad said. "IBM is obviously doing all it can to decimate the U.S. work force, and it is all the more reason why IBM should not get any tax breaks or stimulus money. They clearly are abandoning the U.S. work force."
The application says the system weighs moving into or out of a particular country against criteria such as wages, political systems, "incentive contracts" and the economic impact of "violating and/or satisfying those incentives."
What Makes IBM Special?
IBM CEO Sam Palmisano speaks at an IBM event in 2006 in Bangalore, India. IBM workers invented a system that calculates how to offshore jobs while maximizing government tax breaks.
Q: What Makes IBM Special? A: Filing for an outsourcing strategy patent twice in 17 months only to withdraw the application when it was publicized.
California's poor economy has led to surprisingly low bids on transportation projects across the Bay Area and state, as construction companies fight for their business lives to capture whatever work they can. In an industry where unemployment is at 18.5 percent and more than 30,900 jobs were lost last month, according to the Bureau of Labor Statistics, dozens of firms are vying for work that in the past might draw interest from a handful.
From major highway construction to small sidewalk improvements, bids are sometimes close to half as much as public works officials had projected.
When the Santa Clara County Roads & Airports Department recently sought a contractor to do bicycle and pedestrian improvements along three streets, it expected the cost to be about $975,000. The winning offering was just $543,533.
"Twenty bidders, with the low bid 44 percent under," said Dan Collen, a deputy director with the agency. "Six bidders would have been considered a good turnout, but things have moved beyond competitive. They are desperate."
On the carpool lane project on Interstate 680 from Fremont to Milpitas, the three contracts awarded last month totaled about $88 million � compared with the $136 million Caltrans anticipated.
Repairing bridge decks on Highway 237, Highway 84 and El Camino Real will cost $982,000 � $529,000 less than forecast. Repaving four streets in Cupertino will cost $3.6 million, nearly $1 million under what the city figured it would have to pay. And making the northeast corner of the Virginia-Budd street intersection accessible to the disabled will cost $2,090 instead of $3,000.
No one is certain how much agencies across the state are saving. But it could run into hundreds of millions, maybe even into the billions of dollars.
"I've never seen better bidding in my 35 years in transportation," said Dennis Fay, head of the Alameda County Congestion Management Agency.
Lower costs and better bidding are just what the doctor ordered.
Mercy James thought she had lost her rental property here to foreclosure. A date for a sheriff�s sale had been set, and notices about the foreclosure process were piling up in her mailbox.
Ms. James had the tenants move out, and soon her white house at the corner of Thomas and Maple Streets fell into the hands of looters and vandals, and then, into disrepair. Dejected and broke, Ms. James said she salvaged but a lesson from her loss.
So imagine her surprise when the City of South Bend contacted her recently, demanding that she resume maintenance on the property. The sheriff�s sale had been canceled at the last minute, leaving the property title � and a world of trouble � in her name.
�I thought, �What kind of game is this?� � Ms. James, 41, said while picking at trash at the house, now so worthless the city plans to demolish it � another bill for which she will be liable.
City officials and housing advocates here and in cities as varied as Buffalo, Kansas City, Mo., and Jacksonville, Fla., say they are seeing an unsettling development: Banks are quietly declining to take possession of properties at the end of the foreclosure process, most often because the cost of the ordeal � from legal fees to maintenance � exceeds the diminishing value of the real estate.
In Ms. James�s case, the company that was most recently servicing her loan is now defunct. Its parent company filed for bankruptcy and dissolved. And the original bank that sold her the loan said it could not find a record of it.
In Buffalo, where officials said the problem had reached �epidemic� proportions in recent months, the city sued 37 banks last year, claiming they were responsible for the deterioration of at least 57 abandoned homes; the city chose a sampling of houses to include in the lawsuit, even though the banks had walked away from many more foreclosures. So far, five banks have settled.
In Kansas City, Rachel Foley, a lawyer who handles housing cases, said bank walkaways were �a rare occurrence two to three years ago.�
�We�re seeing them dumped more and more at the moment,� she said.
In Ms. James�s case, it has been impossible to determine who canceled the sheriff�s sale, since her last mortgage holder went out of business. Even the city clerk�s records did not provide an answer.
�Nobody has any idea who owns what or who�s responsible,� said Judy Fox, Ms. James�s lawyer at the Notre Dame Legal Aid Clinic. �It�s a very common story.�
Property abandonment is getting so bad in Flint that some in government are talking about an extreme measure that was once unthinkable -- shutting down portions of the city, officially abandoning them and cutting off police and fire service.
Homes in Flint and other such areas, have indeed fallen to their true value (less than zero). No one wants them at any price. Moreover there's little incentive for anyone to do anything about this. Thus the discussion involves "shutting down portions of Flint, officially abandoning them and cutting off police and fire service."
Our throw-away society has effectively reached a new level of efficiency: the throw-away city.
Walk Away Recap
I have talked about Walking Away on many occasions. Here is a sampling.
Everyone is looking for a way out. Some are angry that home owners are waking away from houses sticking banks with properties. What about banks walking away from houses? What about cities abandoning sections of cities?
Imagine praying to be foreclosed on then having the bank walk away from the foreclosure sale because your home is no longer an asset to anyone. You don't have to imagine it, it's happening.
I am changing my tune. Geithner's plan can succeed. Before anyone collapses on the floor or starts screaming that I have lost my mind, it's important to define what success means and what the plan is.
What Success Is Not
Getting banks to lend.
Having a fair bidding process.
Arriving at a fair market value of bank assets.
The first is not going to happen and it would be a bad thing if it did, even though Geithner is foolish enough to actually want that. Rather the idea is to make it appear as if there is a fair bidding process so that a fair market value of bank assets can be determined.
The key word in the above sentence is appear.
Geithner does not want a fair bidding process, nor does he want to arrive at a fair market value of assets. Rather, Geithner does want to avoid a hit to bondholders, at seemingly any taxpayer cost.
From early reports regarding the toxic assets plan, it appears that the Treasury envisions allowing private investors to bid for toxic mortgage securities, but only to put up about 7% of the purchase price, with the TARP matching that amount - the remainder being "non-recourse" financing from the Fed and FDIC. This essentially implies that the government would grant bidders a put option against 86% of whatever price is bid. This is not only an invitation for rampant moral hazard, as it would allow the financing of largely speculative and inefficiently priced bids with the public bearing the cost of losses, but of much greater concern, it is a likely recipe for the insolvency of the Federal Deposit Insurance Corporation, and represents a major end-run around Congress by unelected bureaucrats.
Make no mistake - we are selling off our future and the future of our children to prevent the bondholders of U.S. financial corporations from taking losses. We are using public funds to protect the bondholders of some of the most mismanaged companies in the history of capitalism, instead of allowing them to take losses that should have been their own. All our policy makers have done to date has been to squander public funds to protect the full interests of corporate bondholders. Even Bear Stearns' bondholders can expect to get 100% of their money back, thanks to the generosity of Bernanke, Geithner and other bureaucrats eager to hand out the money of ordinary Americans.
I do not agree with Hussman's views on inflation, but he is always a great read. Please read the above article because protecting bondholders at any expense is indeed part of the plan.
Gross private debt currently stands at about 350% of GDP, about double the historical norm. Meanwhile, many of the assets underlying this debt are being marked down in value by 20-30% or more. Given that GDP itself is about $14 trillion, a continued policy of bailouts will eventually require a commitment of public funds amounting to a significant fraction of $14 trillion.
The Treasury's proposal to address insolvency is to finance the purchase of impaired assets from the banks, primarily using taxpayer funds. But note that if the questionable assets are taken off of the bank's books at their actual value, there is absolutely no change on the liability side of the balance sheet. The bank's capital position does not improve. The �toxic asset sale� simply replaces the bad assets with cash. While this might improve the �quality� of the bank's balance sheet, it does not make the institution solvent.
Indeed, the only way for the toxic asset sale to increase shareholder equity is if the buyer overpays for the asset. To accomplish this, the Geithner plan creates a speculative incentive for private investors, by effectively offering them a �put option,� whereby taxpayers would absorb all losses in excess of 3-7% of the purchase amount. This is essentially a recipe for the insolvency of the Federal Deposit Insurance Corporation itself, which would provide the bulk of the �6-to-1 leverage.� To the extent that it is not acceptable for the FDIC to fail, the Geithner plan implies an end-run around Congress, and would ultimately force the provision of funds to cover probable losses.
An equal concern is that there is no link between removing �toxic assets� from bank balance sheets and avoiding large-scale home foreclosures and loan defaults. All the transaction accomplishes is to take the assets out of the bank's hands, to offer half of any speculative gains to private �investors,� and to leave the public at risk for 93-97% of the probable losses. What the plan emphatically does not do is to affect the payment obligations of homeowners in a way that would reduce the likelihood of foreclosure. Moreover, the last thing that a bank would do with the proceeds would be to refinance such mortgages, because that would provide full repayment to the original lenders while taking on the risk of the newly refinanced loans.
The Real Plan
Here is the real plan that now seems odds on to succeed.
The Plan: Dump $500 billion of toxic assets on to unsuspecting taxpayers via a public-private partnership in which 93% of the losses are born by the taxpayer.
This is not a new revelation, there have been many articles on that theme over the past week. However, most missed the corporate bond connection.
Interfluidity
Steve Waldman is another one who caught the corporate bond connection in Dark Musings.
I am filled with despair, not because what we are doing cannot "work", but because it is too unjust. This is not my country.
I think that critics of the Geithner plan are missing some of its tactical brilliance. My guess is that behind the scenes, Geithner has arranged a kind of J.P. Morgan moment.
I don't think the scandal of the Geithner plan is going to turn out to be the subsidy to well-connected investors embedded in the non-recourse loan put option. On the contrary, I think that Treasury has already lined up participants for the "Legacy Loans Public-Private Investment Fund" and persuaded them to offer prices so high that despite the put, investors will expect to take a major loss. My little conspiracy theory is that the Blackrocks and PIMCOs of the world, the asset managers who do well by "shaking hands with the government", will agree to take a hit on relatively small investments in order first to help make banks smell solvent, and then to compel and provide "good optics" for a maximal transfer from government to key financial institutions.
Why would PIMROCK go along with this? Because they feel it is their patriotic duty to work with the government for the good of the financial system, even if that involves accepting some sacrifices. And because they hold $100B in J.P. Citi of America bonds, and they've received assurances that if we can get the nation out of the financial pickle it's in, there will be no haircuts on those bonds. "Shaking hands with the government" means that nothing ever has to be put in writing.
Welcome to America, 2009. Change we can believe in.
The theoretical foundations of Geithner�s plan are provided by Lucian Bebchuk from Harvard University among others. He explains that �if the underlying market failure is at least partly one of liquidity, an effective plan for a public-private partnership in buying troubled assets can be designed. The key is to have competition at two levels.
Geithner�s plan seems to follow these guidelines to a large degree. In particular, on the one hand the government subsidy allows private investors to bid a higher price than otherwise warranted (i.e. the government gives investors the equivalent of a call option.) On the other hand, the fact that the private investor is bound to lose its entire equity stake if the asset value deteriorates from artificially high valuations provides an incentive to bid conservatively. Both effects together may contribute to a reasonable level of price discovery.
We can quickly dismiss the idea of a "reasonable level of price discovery".
Corporate Bond Prices
Inquiring Minds are investigating corporate bond prices vs. the S&P 500.
Chris Puplava at Financial Sense was kind enough to select some bond issues from a Bloomberg terminal last weekend to test an idea I had.
The following bonds were selected at random from hundreds of pages of bonds. These issues may or may not be representative, but the price action appears to be leading (or at least coincident with) the stock market in direction although not magnitude.
Click on any chart below for a sharper image.
Citigroup 2018 Bond C 6 1/8 - 05/15/18 - CUSIP 172967ES6
Bank of America 2017 Bond BAC 5 3/4 - 12/01/17 - CUSIP 060505DP6
Citi 2018 Bond Yield Less 10-Yr Treasury Rate vs. S&P 500
BAC 2017 Bond Yield Less 10-Yr Treasury Rate vs. S&P 500 S&P 500 Daily Chart
The S&P 500 bottomed on March 9, the same day that the Bank of America bond bottomed. Also note that the stock market made a new low with the Bank of America bond even though Citigroup and Wells Fargo bonds bottomed last year.
Bank of America (and Bank of America bonds), have arguably taken over from Citigroup as the most important financial stock and bonds to watch.
$500 Billion Just The First Round
Unfortunately we can be certain that $500 billion is just the first round. We know this from Hussman's analysis. We also know this from what Geithner is saying.
�Some banks are going to need some large amounts of assistance,� Geithner said yesterday on the ABC News program �This Week.� The terms of a $500 billion public-private program to aid banks �cannot change� for investors or they�ll lose confidence in the plan, he said on NBC�s �Meet the Press.�
After allocating about 80 percent of $700 billion in aid approved by Congress, administration officials want to keep open the option of seeking more.
Geithner said the Treasury has about $135 billion left in a financial-stability fund while declining to say whether he will request additional money.
�If we get to that point, we�ll go to the Congress and make the strongest case possible and help them understand why this will be cheaper over the long run to move aggressively,� he told ABC News.
Geithner announced this month a plan shore up the nation�s banks with a public-private partnership to finance the purchase of illiquid real-estate assets. The program will ensure banks emerge from the crisis �cleaner� and �stronger,� Geithner told ABC News.
�The great risk is that we do too little rather than too much� to revive credit and stem what economists say may be the worst recession in seven decades, he said.
Banks need to show more willingness to take risks and restore lending to businesses in order for the U.S. economy to recover from the recession, Geithner said.
�To get out of this we need banks to take a chance on businesses, to take risks again,� he said.
�The investors are taking risk, their money is at risk and at stake,� he said. Allowing investors to leverage their money with government contributions and guarantees �is a relatively conservative structure,� similar to when an individual obtains a mortgage to buy a house, he said.
Risk Taking Insanity
We are in this mess because banks and financial institutions took insane levels of risk. It is virtually impossible that risk taking can take us out of this mess. This is the part of Geithner's plan that is going to fail spectacularly.
Blatant Lies From Geithner
Geithner's two statements below are blatant lies.
1) �The investors are taking risk, their money is at risk and at stake�
1R) The reality is the investors at "PIMROCK" who participate in this plan will be reducing risk. They are willing to take a 7% hit by overbidding on toxic assets in order to guarantee payout on $trillions of bonds.
2) Allowing investors to leverage their money with government contributions and guarantees �is a relatively conservative structure,� similar to when an individual obtains a mortgage to buy a house.
2R) The reality is that Geithner's plan is NOT a "relatively conservative structure". Geithner's plan is a purposeful attempt to dump trillions of dollars worth of toxic assets right into taxpayers' laps, just to bail out the banks that got us into this mess.
Rep Gresham Barrett: "The last question I have guys, which is the $64 million question or I guess I should say $64 trillion question is: What's the backup plan? If everything fails what do we do? Where do we go from here?"
Treasury Secretary Geithner: "Congressman this plan will work. This plan because of the authority provided not just by Congress but the treasury and the Fed gives us broad ability to do what you need to do to get through a financial crisis like this. It just requires will; It's not about ability. We just need to keep at it. We just need to work with Congress to make sure we do this on a scale that will make it work."
Returning to the original thesis, Geithner's statement about "will" now makes sense.
The "will" Geithner is referring to is the "will" of Congress to allow the Treasury and the Fed to sell off our future and the future of our children to prevent the bondholders of U.S. financial corporations from taking losses.
Unfortunately, as it sits right now, that part of Geithner's plan can succeed. However, Geithner's plan sure as hell will not revitalize our economy.
[Mish Note: In the 15 minutes or so it took me to write this, the link title above was changed from "Obama denies bailout funds for automakers" to "Obama conditions bailout funds for automakers". A sub-headline reads as follows, "White House: GM, Chrysler fail to submit restructuring plan that will get them more money." As best as I can tell, the body of the article was not changed.]
The White House says neither GM nor Chrysler submitted acceptable plans to receive more bailout money, setting the stage for a crisis in Detroit and putting in motion what could be the final two months of two American auto giants.
President Barack Obama and his top advisers have determined that neither company is viable and that taxpayers will not spend untold billions more to keep the pair of automakers open forever. In a last-ditch effort, the administration gave each company a brief deadline to try one last time to convince Washington it is worth saving, said senior administration officials who spoke on the condition of anonymity to more bluntly discuss the decision.
Obama was set to make the announcement at 11 a.m. Monday in the White House's foyer.
Frustrated administration officials said Chrysler cannot function as an independent company under its current plan. They have given Chrysler a 30-day window to complete a proposed partnership with Italian automaker Fiat SpA, and will offer up to $6 billion to the companies if they can negotiate a deal before time runs out.
If a Chrysler-Fiat union cannot be completed, Washington plans to walk away, leave Chrysler destined for a complete sell-off. No other money is available.
For GM, the administration offered 60 days of operating money to restructure.
Fritz Henderson, GM's president and chief operating officer, became the new CEO, a Treasury Department source said. Board member Kent Kresa, the former chairman and CEO of defense contractor Northrop Grumman Corp., will be interim chairman of the GM board.
One official said a majority of the GM board was expected to step down.
Obama advisers saw public outrage come to an ugly head in recent weeks, as populist anger escalated over bonuses paid to American International Group executives. They realized Americans are frustrated with the economy and its business leaders; they also said they would not invest one dollar more than was necessary to keep the companies alive and would walk away if it looked impossible.
Officials said GM had not made good on promises made in exchange for $13.4 billion in government loans, although there are no plans to call in those loans.
Administration officials still believe GM's chances are good, given its global brand and its research potential. Officials say they are confident GM can put together a plan that will keep production lines moving in the coming years. They planned to send a team to Detroit to help with that restructuring.
In progress reports filed with the government in February, GM asked for $16.6 billion more and Chrysler wanted $5 billion more. The White House balked and instead started a countdown clock.
GM owes roughly $28 billion to bondholders. Chrysler owes about $7 billion in first- and second-term debt, mainly to banks. GM owes about $20 billion to its retiree health care trust, while Chrysler owes $10.6 billion.
An exasperated administration official noted that the companies had not done enough to reduce debt; in some cases, it actually increased during this restructuring and review process.
In February, GM said it intended to cut 47,000 jobs around the globe, or almost 20 percent of its work force, close hundreds of dealerships and focus on four core brands -- Chevrolet, Cadillac, GMC and Buick.
In an effort to bolster consumer confidence, Obama planned to announce government backing of warranties for GM and Chrysler vehicles. An administration official said there is no price tag yet associated with that promise.
Unless GM pulls a rabbit out of its hat by Tuesday, it is headed for restructuring, with 60 days financing provided by taxpayers. Moreover, You can kiss Chrysler goodbye completely unless Fiat is dumb enough to take it over. Many Chrysler dealers are likely to blow up on this news. However, given there is too much auto capacity, Chrysler going under is an overall good thing. Those directly involved will not see it that way.
It will be interesting to see what kind of auto discounts are available after this announcement.
Credit Event Triggered
One last point: This will be a "credit event" triggering payouts on credit default swap bets.
I have reported before that GM has a $trillion or so in credit default swaps written on it (but my information on this is well over a year old). If banks stocks rally tomorrow (or even if they simply do not collapse), you will know that banks are fully hedged or on the right side of those swaps.
However, given the swaps dwarf GM bonds, it is virtually guaranteed that someone is on the wrong side of them.
Addendum:
Instead of the "denies bailout funds" headline story later changed to "Obama conditions bailout funds for automakers", The New York Times presents a story that can be interpreted differently: U.S. Moves to Overhaul Ailing Carmakers.
The administration is giving G.M. 60 days to present a cost-cutting plan and will provide taxpayer assistance to keep it afloat during that time.
Representative Thaddeus G. McCotter, Republican of Michigan, whose district is just outside Detroit, expressed frustration over the ousting of Mr. Wagoner and with administration officials for not being clearer about the potential job losses that lie ahead.
�Why would you ask Rick Wagoner to resign when you are giving G.M. 60 days to meet a new target, but you aren�t saying what the new goal is yet,� Mr. McCotter said in an interview.
Is there 60 days to meet a new target or 60 days to restructure having missed targets?
The first article says "For GM, the administration offered 60 days of operating money to restructure."
60 days to meet a new target may not be a "credit event". 60 days of funding to restructure should be.
Ignoring global trade, monetary issues, the role of the Fed and Central bankers in the crisis, US dollar hegemony, and nearly everything else that makes sense to discuss, the G-20 Targets Hedge Funds as Leaders Near Consensus.
Leaders of advanced and emerging economies are closing ranks behind plans for tougher rules on financial markets to prevent another collapse like the one that wiped out much of Wall Street.
A global approach to regulation has been gaining momentum ahead of the Group of 20 summit April 2 in London. U.S. President Barack Obama, U.K. Prime Minister Gordon Brown and their G-20 counterparts aim to merge their national blueprints for strengthened regulation into a united front to rein in hedge funds, derivatives trading, executive pay and excessive risk-taking by financial firms.
Agreement on a shared regulatory agenda would provide the G-20 summit with a measure of success even as leaders remain at odds over trade policy, fiscal stimulus and the status of the dollar. A joint regulatory approach is crucial to prevent investors from seeking out markets with the most permissive rules, setting off a race to the bottom as countries vie to attract capital.
�Having the U.S. and Chinese on board makes it a whole lot more likely� that an international framework will eventually emerge, says Harvard University�s Kenneth Rogoff, former chief economist of the International Monetary Fund.
Rogoff says that �it seems virtually certain that four to five years from now, the world will have either a global financial regulator or, more likely, a treaty on global financial regulation with a secretariat, akin to the World Trade Organization.� Still, he adds, �nothing is going to happen quickly.�
G-20 Meetings a Complete Waste of Time, Money, Energy
Given that the World Trade Organization is essentially useless, it makes little difference if we get something "akin to the WTO", now, five years from now, or never.
"The G-20 leaders, representing 90 percent of the world economy, blamed the crisis on investors who "sought higher yields without an adequate appreciation of the risks."
Banks and brokerage packages sold poison apples. The G-20 is blaming those who bought poison apples not those who knowingly sold poison apples.
Blaming Hedge Funds for this crisis is an extension to the placing blame on buyers of poison apples theory.
General Motors Corp. Chief Executive Officer Rick Wagoner will step down after more than eight years running the largest U.S. automaker, people familiar with the situation said.
The Obama administration asked Wagoner, 56, to leave the company and he agreed, an administration official said. Wagoner said March 19 that he didn�t plan to resign. The likely replacement, unless the government hires from outside the company, would be Chief Operating Officer Fritz Henderson, said John Casesa, managing partner at New York-based consulting firm Casesa Shapiro Group.
�If they go to someone inside, Fritz is the obvious choice,� Casesa said. �He�s run every region, he�s been number two and he knows where all the bodies are buried.�
The departure of Wagoner comes as President Barack Obama prepares an address tomorrow morning on his plans for the future of the U.S. auto industry. GM is surviving on $13.4 billion in U.S. loans and is asking for as much as $16.6 billion in additional aid to survive. Wagoner was asked to step down as part of the company�s restructuring, the official said.
�It�s very hard for the government to write a big check without giving some evidence of change,� Casesa said. �This will also give the government moral authority with the other stakeholders to make them sacrifice.�
Wagoner has repeatedly argued he knows the company better than most who could take his job. He joined GM in 1977, as U.S. automakers were fending off Japanese competitors who recognized the need a decade earlier to build fuel-efficient vehicles.
As CEO, the former Duke University freshman basketball player and Harvard University MBA early on bet against gasoline-electric hybrid vehicles, focusing research on hydrogen technology. GM offered its first full-scale hybrids in 2007, a decade after Toyota introduced the Prius.
Wagoner kept GM focused on trucks and sport-utility vehicles, only to press for development of the Volt plug-in electric car when gasoline prices soared.
Wagoner a Visionless Dinosaur
Wagoner is an aging dinosaur with no vision. He made bad bets on the wrong technology. He bet on Hummer, an ugly gas-guzzling behemoth right as gas prices were poised to soar. He failed to sell Hummer and all of GMAC when he easily could have unloaded them for good prices. He backed hydrogen technology rather than hybrids. He clung to too many brands.
Ironically Wagoner argues he knows the company better than most who could take his job. Unfortunately, someone who knew nothing about the company or the industry would likely have done a far better job.
The Wall Street Journal explains, "Industry observers have been anticipating March 31 as a sort of D-Day for the industry, with the government releasing its findings on GM and Chrysler, including whether the companies should receive more aid or be pushed into bankruptcy court." However, "A task force member, briefing reporters on condition of anonymity this week because he wasn't authorized to speak on the record, attempted to tamp down the expectation of a wholesale, one-shot bailout, instead suggesting a longer, more drawn-out process."
The task force also faces an enormous political hurdle - public opinion. In a separate story, the Detroit Free Press reports, "More than three in five Americans -- 61% -- oppose more government loans to General Motors Corp. and Chrysler LLC, according to a R.L. Polk survey released Monday that is consistent with other recent opinion research." Further aid isn't even popular in areas heavily dependent on auto industry jobs
Public opinion aside, smart money is betting Obama will throw more money down the auto bailout sinkhole.
'Prime Minister, I see you've already mastered the essential craft of the European politician: namely the ability to say one thing in this chamber and a very different thing to your home electorate.
Perhaps you would have more moral authority in this House if your actions matched your words, and perhaps more legitimacy in the councils of the world if the United Kingdom were not sailing into this recession in the worst condition of any G20 country.
We are now running a deficit that touches 10 per cent of GDP, an almost unbelievable figure - more than Pakistan, more than Hungary; countries where the IMF has already been called in.
You cannot spend your way out of a recession or borrow your way out of debt. And when you repeat, in that wooden and perfunctory way, that our situation is better than others, that we are well placed to weather the storm, I have to tell you, you sound like a Brezhnev era apparatchik giving the party line.
You know and we know and you know that we know that it's nonsense. Everyone knows that Britain is worse off than any other country as we go into these hard times.
The IMF has said so. The European Commission has said so. The markets say so, which is why the pound has lost a third of its value.
In a few months, the voters will have their chance to say so, too.
They can see what the markets have seen: that you are the devalued Prime Minister of a devalued Government.'
Please play the video. It's well worth a listen.
Moreover, that is exactly what someone in Congress needs to say to Geithner, Bernanke, and to Obama for their fiscal recklessness and bank bailouts at taxpayer expense.
The following chart is from my friend "TC" who has been monitoring California Association of Realtors (C.A.R.) and DQNews data. C.A.R. data contains resale single family residences and new homes. DQNews data contains resale single family residences and new homes.
click on chart for sharper image
Median nominal prices in CA are now down 59% according to CAR and 54% according to DQNews - and those declines are in 21-22 months!
"TC" writes:
The Feb 2009 CAR data continues to show increasing price declines. I want to once again remind your readers that this data does not use the Repeated Sales Methodology (as Case-Shiller does) and consequently can be biased based upon the sales pool. Also of note, the DQNews data includes the sale of new homes and resales; whereas the CAR data only includes resales. Lastly, readers should keep in mind that Feb 2009 data reflects Feb 2009 closings and consequently many of these sales entered into escrow in Dec '08 and Jan '09 (some 90 days ago).
Taking these factors into mind, the statewide median price declines of resold homes per CAR is now over $350,000 or 55.6% in less than 2 years! These lower prices came despite mid-month data that indicated that Feb 2009 would maybe show slight price increases compared to Jan 2009 (which would be typical due to seasonality), however, instead we moved even lower. One bit of good news to report is that CA price declines are at least half way through their decline (mathematical humor as prices can't move down by more than 100%). Of note, Santa Barbara South Coast is now probably just 1 month away from experiencing a $1 million median price decline from peak to trough - AMAZING!
Also of minor note, CA home prices in most cities have now experienced real price declines within 10% of my forecasted bottom three years ago. However, those three year old Bubble Buster Housing Forecasts were based upon higher median incomes than is now actually the case. On the bright side, they also assumed a higher mortgage rate than today's current record lows.
TC
Thanks "TC"
My take remains the same. Unemployment is going to soar in 2009 along with foreclosures, credit card writeoffs, and bankruptcies. That will add to the inventory problems. Thus it is extremely unlikely that housing bottoms soon. I am still looking for housing prices to bottom in 2012.
The village of Schaumburg, Ill., installed a camera at Woodfield Mall last November to film cars that were running red lights, then used the footage to issue citations. Results were astonishing. The town issued $1 million in fines in just three months.
But drivers caught by the unforgiving enforcement -- which mainly snared those who didn't come to a full stop before turning right on red -- exploded in anger. Many vowed to stop shopping at the mall unless the camera was turned off. The village stopped monitoring right turns at the intersection in January.
Once a rarity, traffic cameras are filming away across the country. And they're not just focusing their sights on red-light runners. The latest technology includes cameras that keep tabs on highways to catch speeders in the act and infrared license-plate readers that nab ticket and tax scofflaws.
Drivers -- many accusing law enforcement of using spy tactics to trap unsuspecting citizens -- are fighting back with everything from pick axes to camera-blocking Santa Clauses. They're moving beyond radar detectors and CB radios to wage their own tech war against detection, using sprays that promise to blur license numbers and Web sites that plot the cameras' locations and offer tips to beat them.
Cities and states say the devices can improve safety. They also have the added bonus of bringing in revenue in tight times. But critics point to research showing cameras can actually lead to more rear-end accidents because drivers often slam their brakes when they see signs warning them of cameras in the area. Others are angry that the cameras are operated by for-profit companies that typically make around $5,000 per camera each month.
State police started placing the cameras on highways around Phoenix in November. In December, a trooper arrested a man in Glendale while he was attacking a camera with a pick ax. In another incident, a troupe of men dressed as Santa Claus toured around the city of Tempe in December and placed gaily wrapped boxes over several traffic cameras, blocking their views. Their exploits have been viewed more than 222,000 times on YouTube.
Republican state representative Sam Crump has introduced a bill in the legislature to remove the cameras, which he says were approved "in the dead of night...as a budget gimmick."
Some entrepreneurs are trying to help camera opponents fight back. Phantom Plate Inc., a Harrisburg, Pa., company, sells Photoblocker spray at $29.99 a can and Photoshield, a plastic skin for a license plate. Both promise to reflect a traffic-camera flash, making the license plate unreadable. California passed a law banning use of the spray and the plate covers, which became effective at the beginning of this year.
A free iPhone application available on Trapster.com lets drivers use their cellphones to mark a traffic cam or speed trap on a Google map. The information on new locales is sent to Trapster's central computer, and then added to the map.
Studies are mixed on whether traffic cameras improve safety. Some research indicates they may increase rear-end collisions as drivers slam on their brakes when they see posted camera notices. A 2005 Federal Highway Administration study of six cities' red-light cameras concluded there was a "modest" economic benefit because a reduction in side crashes due to less red-light running offset the higher costs of more rear-end crashes.
About a week ago, right after a coworker told my wife that more of these devices being installed in our area, my wife decided not to run a yellow light. The result was a rear-end experience and $3000 damage to her car.
I have been without a car all week (she has mine), and will be without one until April 1. There was more damage done to the other car than ours.
There is no economic benefit to these devices. Cities are using these devices to rob taxpayers to pay for needless projects. If this was about safety they would be installing these devices only where there is a high incidents of traffic accidents (or better yet figuring out the root cause of the accidents and correcting that problem rather than hoping big brother to fix it).
Schaumburg, Illinois collecting $1 million in fines in just three months, mainly snaring those who didn't come to a full stop before turning right on red is simply ridiculous. Traffic laws ought to help the flow of traffic not impede it. If no pedestrians are present there is no need for a full stop. Can we have a little common sense please?
When it comes to speeding on highways, a common sense rule would be to go with the speed of traffic plus of minus 5-10MPH. Someone driving 55 when traffic is flowing at 75 is far more likely to cause an accident than the pack at 75. Traffic in Chicago often flows at 75-80 in 55MPH zones. This is an indication that speed limits are set ridiculously low.
Consider this Eyes In The Sky image of Phoenix from the article.
Anyone who think this is about safety as opposed to revenue collection, is not thinking clearly.
Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click HereTo Scroll Thru My Recent Post List
A total of seven states have passed the 10% unemployment rate as the Jobless Slump Spreads.
The number of U.S. states with a jobless rate exceeding 10 percent almost doubled in February as the worst employment slump in the postwar era spread.
Nevada, North Carolina and Oregon last month joined the four other states that had previously climbed above 10 percent, according to Labor Department data released today in Washington. Michigan, at 12 percent, remained the state with the highest unemployment rate, followed by South Carolina at 11 percent and Oregon at 10.8. California and Rhode Island bring the total number of states to seven.
Forty-nine states and the District of Columbia registered increases in the unemployment rate last month, led by Oregon, North Carolina and New Jersey, the Labor Department said. Nebraska was the only state to post a decrease after the rate jumped the prior month.
�It�s something we�re not accustomed to seeing in this country,� said Mark Vitner, a senior economist at Wachovia. �Double-digit unemployment rates are simply un-American.�
Expect The Situation To Get Worse
Un-American or not, expect the situation to get much worse. The "official" unemployment rate is currently 8.1% and poised to head higher.
Table A-12 is where one can find a better approximation of what the unemployment rate really is. Let's take a look
click on chart for sharper image
Grim Statistics
The official unemployment rate is 8.1%. However, if you start counting all the people that want a job but gave up, all the people with part-time jobs that want a full-time job, all the people who dropped off the unemployment rolls because their unemployment benefits ran out, etc., you get a closer picture of what the unemployment rate is. That number is in the last row labeled U-6.
The government is reporting 8.1% but a far better approximation is 14.8%. Many economists expect the "official" number to hit 10%. If and when that happens where will U-6 be?
U-6 minus U-3
The pattern is pretty unmistakable. In one year the official unemployment rate rose from 4.8 to 8.1 (3.3) while U6 rose from 9.0 to 14.8 (5.8).
Assuming U3 hits 10%, U6 is likely to be approaching 20%. How bad Michigan, California, Nevada, North Carolina, Oregon, South Carolina, and Rhode Island are by then is anyone's guess.
These are depression level statistics.
Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click HereTo Scroll Thru My Recent Post List
Facing a steep drop in revenue, The New York Times Company plans to cut the pay of most employees by 5 percent for nine months, in return for 10 days� leave, and will lay off 100 people and make other budget cuts, executives said on Thursday.
The company will make the pay cuts unilaterally for most nonunion employees, including top executives, in its corporate division, at the flagship Times newspaper and at The Boston Globe. The reductions will be in effect from April through December.
At The Times newspaper, the company will ask the Guild, which represents most newsroom employees, to accept the 5 percent cut and 10 days off voluntarily, and avoid possible layoffs. It is not clear how the moves will affect unionized employees at The Globe.
Struggling newspaper publisher McClatchy, parent company of Charlotte's Observer, said Monday that it would cut 1,600 jobs and lower salaries across the company.
McClatchy (MNI), based in Sacramento, Calif., said the job cuts amount to about 15 percent of its work force. The company plans to begin laying off workers and restructuring operations by the end of the first quarter. The reductions will result from a combination of layoffs, attrition and outsourcing, the company said.
McClatchy said that its salary reductions would include a 15 percent cut in Pruitt�s base salary. In addition, other executive salaries will be hit with a 10 percent reduction, while board members will see a 13 percent decline in cash compensation, including retainers and meeting fees. Also, McClatchy will pay no bonuses to executive officers this year.
The Indianapolis News Guild is sad to inform you that Gannett is now seeking to cut the pay of newsroom and building services employees by 15 percent. The lawyer for the company provided us with a one-page �supplemental� proposal this afternoon that he said would implement this uniform salary reduction either 1) at the time we reach a new contract with the company, or 2) at the time both sides reach an impasse and cease talks.
This was a disappointing move, given that we thought the company�s bargaining team was starting to embrace the concept of negotiating instead of dictating. In fact, we believe the company�s actions at the table today raise the specter of regressive and bad-faith bargaining.
The thousands of contractors who work at Microsoft through third-party agencies are facing pay cuts beginning Monday, as Microsoft continues to look for ways to cut costs.
Microsoft and its contracting agencies agreed to a 10 percent cut in the bill rate, impacting all temporary worker assignments. Several contract employees have said the reduction is being passed on to them in the form of a pay cut. One person said some agencies are seeking to pass deeper pay cuts onto their workers. Several contractors contacted The Seattle Times, asking for anonymity for fear that speaking out would jeopardize their jobs.
The 10 percent cut is for existing contracts. New contracts will have a 15 percent reduction in the rate.
The Rocky Mountain Paper closed recently after 150 years in print. The Seattle Post Intelligencer can only be found on-line now. And Portland�s Willamette Week has instituted an 8 percent pay cut.
So the staff at The Oregonian knew cuts were coming.
Nobody from the Oregonian's management responded to a request for an interview. But in a letter to employees Publisher Fred Stickel said that the Oregonian lost �several million dollars� last year -- and doesn�t have enough income to cover expenses this year. Stickel says quote:
"The economic crisis has dramatically worsened the precarious financial situation facing the media industry, our Company, and many of our advertising customers."
To fix the problem he announced a 15 percent pay cut for himself and other top staff, and a five or 10 percent cut for other employees. Some part-time workers are also being laid-off, while other staff will be required to take four furlough days over the next few months.
SPOKANE, Wash. The Spokesman-Review newspaper will freeze wages in 2009, and seek a 5 percent salary cut for all managers, non-union employees who earn more than $11 an hour, and, with their voluntary consent, all union employees.
Morris Communications Co. announced today it will reduce employee wages by 5 to 10 percent effective April 1. The reductions will affect hourly and salaried employees.
Mr. Morris said the pay cuts are designed to preserve jobs in a difficult economic environment.
"The newspaper business is facing unprecedented challenges," Mr. Morris said in a news release. "Just yesterday, after 126 continuous years of publishing, the Seattle Post-Intelligencer printed its last edition. Other newspapers have sought protection from creditors in bankruptcy court, severely cut back on their publishing schedules or abandoned the business entirely.
The Daily News will cut its work force and reduce wages as part of a major nationwide effort by its owner, the McClatchy Co., to cut $110 million in expenses to offset declining advertising revenue, Patrick Doyle, the newspaper's publisher, told employees in a letter Thursday.
This will be the third round of staff reductions at the newspaper in 10 months and is symptomatic of an industry-wide crisis threatening to sink newspapers across the country.
Staffing at the Daily News will drop by 45 people, or about 17 percent, through a combination of buyouts, layoffs and the elimination of vacant positions, Doyle said. Seven of the jobs eliminated were the result of new, more efficient production equipment.
The cuts will affect every department, from circulation to advertising, production and news.
The paper will also impose pay cuts ranging from 2.5 percent for lower-paid employees to 10 percent for the highest paid, Doyle said. Those making less than $25,000 a year will not see a reduction.
Shinchang Electrics Co. offered union leaders a proposal that would reduce wages at the auto-parts company by 20% in exchange for no layoffs among its 810 workers this year. Eight days later, the union agreed.
The deal is one sign of the unusual way South Korea is grappling with the global economic crisis. Across the country, executives, salaried employees and hourly workers at companies from banks to shipbuilders are joining to slash wages and other costs with the goal of avoiding layoffs.
March 12 (Bloomberg) -- Singapore Press Holdings Ltd., the city-state�s largest newspaper publisher, will cut wages and bonuses of 3,000 employees and freeze hiring to reduce costs amid the island�s deepest recession.
The lower salaries will result in a 20 percent drop in the overall wage bill, the company said today in a statement to the Singapore exchange, without giving a figure for savings. Hiring has been halted and profit-related bonuses will drop, it said.
Singapore�s government has said the economy may contract as much as 10 percent this year, prompting companies to fire staff, cut pay and conserve cash. Singapore Airlines Ltd. has offered more than 14,000 workers the option of as much as two years of unpaid leave, the Straits Times reported on March 11.
�We need to bring our costs down in the face of a weaker advertising market and uncertain business environment,� SPH Chief Executive Officer Alan Chan said in the statement, which was released after the close of trade. �It is imperative that we prepare for a longer-than-expected downturn.�
23 February 2009 HP has said it is to slash most of its employees' wages by 5% in a bid to combat declining revenues and reportedly save around 20,000 positions worldwide.
The cuts come as revenue within HP's Imaging and Printing Group dropped 19% to $6.0bn (�4.19bn) in the first quarter to 31 January 2009.
Supplies revenue in the group was down 7%, and commercial hardware revenue and consumer hardware revenue dropped 34% and 37%, respectively.
The manufacturer recorded a 33% dip in printer unit shipments and commercial printer hardware units were down 39%. Operating profit for the group was $1.1bn � equivalent to 18.5% of revenue.
Con-way Inc. (CNW) said late Monday that it will cut base wages and salaries of executives and employees of Con-way Freight and Con-way Inc. by 5% and suspend certain 401(k) contributions in an effort to further reduce costs. The trucking company will also reduce the salaries of Chief Executive Douglas Stotlar and certain members of the senior leadership team by 10%. The measures, which are scheduled to be completed early in the second quarter, are expected to save the company between $100 million to $130 million in 2009. Con-Way had already cut 2,500 positions, suspended bonuses and reduced capital expenditure during the fourth quarter.
Newspaper Guild members at The Sacramento Bee agreed Friday to take pay cuts of up to 6 percent to save jobs at the 152-year-old paper.
Members voted 65 percent to 35 percent to accept the deal, said Ed Fletcher, a reporter who heads the Guild's local at the Bee.
Even with the pay cuts, Bee managers plan to cut 34 of the 268 Guild-covered positions in the editorial and advertising departments. Another 19 jobs would have been in jeopardy if the union had rejected the pay cuts.
Reports of deep job cuts at International Business Machines (IBM) come at a potentially delicate time for the company�just as it is hoping to secure money from the federal stimulus package. The company will lay off as many as 5,000 U.S. workers in its Global Business Services unit, transferring some of the work they performed to India, according to media reports.
Any job transfers IBM may make to India would occur at a sensitive time, as the recession deepens and as the U.S. unemployment rate climbs. Moreover, the company would be cutting high-skill positions domestically as it and others jockey for new business from the $787 billion stimulus package Congress enacted in February�primarily to help create U.S. jobs.
Currently, 29% of IBM's workforce is in the U.S., down from 35% in 2006. The fact that IBM has built up large workforces in such low-cost countries as India allows it to shift work abroad more easily, says Ron Hira, assistant professor of public policy at the Rochester Institute of Technology. He says the current economic climate allows IBM to position itself as one of many firms squeezed by the recession and forced into layoffs. IBM "can now blame the layoffs on the economy, masking the reality that it is offshoring high-wage, high-tech jobs to low-cost countries," says Hira.
But while offshoring has been on the rise for decades, the economics of the recession are creating a new political climate that makes such moves more controversial. That's because, as IBM and others continue global restructuring, they're working to secure pieces of the $787 billion stimulus measure enacted in February.
IBM is seeking a share of the $8 billion the U.S. plans to spend on high-speed rail and part of the $20 billion in the stimulus plan to digitize the U.S. health-care system. Palmisano was one of 13 executives who met with President Barack Obama in January in an appearance aimed at pressuring the House of Representatives to pass the economic stimulus bill. He joined the CEOs of Xerox (XRX), Motorola (MOT), and Google (GOOG).
Wage Deflation Tally
9 Publishers
IBM
Hewlett-Packard
Microsoft
Con-way Freight
Shinchang Electrics
Wage deflation is setting in like wildfire in the publishing industry. Technology and trucking are affected as well. Budget cuts in California and other states are affecting teachers. Rest assured this is not inflationary news.
Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click HereTo Scroll Thru My Recent Post List
For a 10th straight week, the number of people who are continuing to claim jobless benefits increased, fresh evidence that the labor market remains weak despite other hopeful signs that the recession may have bottomed out.
New claims for unemployment benefits last week rose to a seasonally adjusted 652,000 from the previous week's revised figure of 644,000, the Labor Department said Thursday. The total number of people claiming benefits jumped to 5.56 million, worse than economists' projections of 5.48 million, a ninth straight record and the highest total on records dating back to 1967.
The dismal job news is one indicator of the overall economic pain Americans have endured early in the new year. The Commerce Department said Thursday that the economy shrank at a 6.3 percent annual pace at the end of 2008, the worst showing in a quarter-century, and a bit faster than the 6.2 percent drop estimated a month ago.
The number of people claiming unemployment insurance for more than a week has increased by more than 100,000 four times in the past five weeks, an indication that workers are remaining on the rolls longer as they struggle to land a new job after being laid off.
As a proportion of the work force, the number of people receiving benefits is at its highest level since May 1983, when the economy was recovering from a steep recession. The total of nearly 5.6 million is almost double that of a year ago, when about 2.8 million people were continuing to receive unemployment checks.
And that number doesn't include an additional 1.47 million people receiving benefits under an extended unemployment compensation program approved by Congress last year. That tally was as of March 7, the latest data available.
Jobless benefits typically last 26 weeks, but Congress approved federal extensions twice last year that added an extra 20 to 33 weeks, depending on each state's unemployment rate.
Both the new and old fourth-quarter GDP readings were the worst since the first quarter of 1982, when the economy, hit by a severe recession, contracted at a 6.4 percent pace.
Weekly Claims Data
Inquiring minds are investigating the latest Weekly Unemployment Claims statistics. Here are the grim details.
The table shows the 4-week moving average on new claims is essentially the same as last week. However, the insured unemployment 4-week Seasonally Adjusted moving average was 5,331,250, an increase of 123,750 from the preceding week's revised average of 5,207,500.
These are grim numbers.
Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click HereTo Scroll Thru My Recent Post List
Many seem to be in disbelief of this rally given the poor economic backdrop. However, technically the rally needs to be respected until proven otherwise. Let's take a look.
click on chart for sharper image
There is enormous technical resistance in the area between the two thin lines. Moreover, there is still a possibility of a headfake above the 50 day Exponential Moving Average as we saw in January.
Yet, as long as the 50EMA holds, this rally should be respected.
The implied target is the 200EMA and as you can see that would be a substantial move up from here. Will we get there? I have my doubts. However, equity bears need to be aware of the possibility. Also note that the 200EMA is downward sloping, so perhaps the 200EMA is tagged at an area closer to 900 than where it is now.
Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click HereTo Scroll Thru My Recent Post List
The Federal Reserve bought $7.5 billion of Treasuries in the first outright purchase of U.S. government debt by the central bank to keep consumer borrowing costs low since the 1960s. It is the first step in a six-month program to buy up to $300 billion in Treasuries.
The Fed joins central banks in the U.K. and Japan in extraordinary purchases of government debt, broadening efforts to unfreeze credit and end the recession after cutting the benchmark interest rate close to zero. Policy makers announced the decision to buy the debt last week along with a plan to more than double purchases of housing debt to $1.45 trillion, hoping to reduce rates on home loans.
The largest purchase today was $2.8 billion of the so-called on-the-run seven-year note, or the 2.625 percent coupon note maturing on Feb. 29, 2016.
The central bank�s latest efforts may help swell its balance sheet to more than $4 trillion this year. The last time the Fed had a targeted program of purchasing longer-dated Treasuries was in the 1960s, in a joint initiative with the Treasury called Operation Twist, which attempted to narrow the gap in yields between short- and long-term debt.
Central bankers and the Treasury haven�t been able to meet Fed Chairman Ben S. Bernanke�s goal of reducing consumer interest rates along with the borrowing costs paid by banks. The difference between rates on 30-year fixed mortgages and 10-year Treasuries was 2.24 percentage points, according to data compiled by Bloomberg. That�s up from an average of 1.75 percentage points in the decade before the subprime mortgage market collapsed.
�If the Fed is to accomplish $300 billon of purchases over the next 6 months, it will need to buy approximately $12 billion per week -- with $4 to $6 billion per coupon pass,� George Goncalves, Treasury and agency strategist in New York at Morgan Stanley, wrote in a note to clients yesterday.
The Fed will target Treasuries maturing from August 2026 to February 2039 on March 30, longer maturities than traders expected. Fed�s Open Market Committee announced on March 18 that Treasury purchases would be concentrated in the two- to 10-year maturity area as well as including Treasury Inflation Protected Securities, or so-called TIPS.
The Federal Reserve on Wednesday flashed back almost 50 years to a campaign code-named "Operation Twist", as it announced the purchase of longer-dated Treasury securities to help end a deepening U.S. recession.
The move to purchase longer-dated U.S. government debt, on top of regular purchases of short-term Treasury bills, marked the first time it has done so since Operation Twist, which ran from 1961 until 1965. But that is where the similarities end.
In the 1960s, in an effort to flatten the yield curve to simultaneously tackle a recession and a lingering trade deficit, the Fed bought long-term bonds and sold short-term bills.
As a result, the operation was sterilized in terms of its impact on the money supply and was not an expansion of monetary policy. This time, the intervention will not be sterilized and should help ease monetary conditions.
"We see this as equivalent to a 75 basis point cut in the (fed) funds rate," said Ethan Harris, co chief U.S. economist at Barclays Capital in New York. A basis point is one one-hundredth of a percentage point.
"A combination of monetary, credit and fiscal easing will slow the recession in the second quarter and spark a modest recovery by year-end," he said.
Volker On Operation Twist
Inquiring minds are no doubt asking "Was Operation Twist Successful?"
"Well, to the extent that Operation Twist worked at all � and I must confess I was a little skeptical about it, given the fluidity of the markets even then � it too depended on some degree of market imperfection. And I think it became apparent fairly quickly that the market imperfection was not as great as had been assumed."
That sounds to me like a resounding "No".
$TNX 10-Year Treasury Daily Chart
click on chart for sharper image
Bernanke got an oversized reaction on his option expiry announcement, but the market's reaction has been a big yawn since then. Treasuries even sold off the first day the bazooka was actually fired. But let's put this all in perspective by looking at longer time frames.
$TNX 10-Year Treasury Weekly Chart
click on chart for sharper image
Are Yields Going Up Or Down From Here?
Yes they are. I guarantee it. If you want to know which way short term, I do not know, nor does anyone else.
One thing I am quite certain of is that Ethan Harris' statement "We see this as equivalent to a 75 basis point cut in the (fed) funds rate" is complete nonsense. This is not the equivalent of interest rates at negative .5%, something that has never happened before in history.
Technically, the extremely pervasive "bottom in yields is in" sentiment seems a bit misguided. Yes there was a big treasury selloff (rising yields), but the chart has not even hit the 38% retrace level yet. It's quite possible the bottom is in, but that does not mean yields are blasting sky high. Look at how long yields stayed low in Japan. It can happen here.
Treasury Counterforces
Seasonality is negative through May (think tax season and refunds).
There are few signs of economic recovery. A downward spiral or economic collapse is not out of the question.
Notice I do not even have quantitative easing on the list. Other than producing "one day wonder" candles as in the first chart above, the odds that quantitative easing works as planned are nonexistent. Please see Krugman's $200 Billion Lunch for details.
Here is one pertinent snip.
For starters the Fed cannot force long term interest rates down without committing an unlimited amount of purchases, and perhaps not even then. Simply put, the Fed cannot change the primary trend. If long-term interest rates are headed higher there is little the Fed can do about it.
Japan proved that currency manipulation does not work, and I see little reason for open intervention in the treasury market to work either.
Yes, there was a huge treasury rally on the announcement. Was this because of the news or was the market ready to rally anyway? I think the latter. The long bond rallied as did the 10-year treasury, the latter right at a 50% retrace of the move down from mid-October. It was an oversized move but treasuries have sold off three consecutive days since the announcement.
Appearance vs. Reality
Yields may drop. If they do it will not be because quantitative easing is working. If yields drop from here, in spite of the massive supply of treasuries stemming from Obama's sky high budget, it will be because the economy is in worse shape than anyone thinks.
Those hoping for a second half economic recovery should be hoping yields rise, not sink.
"Operation Twist" failed. So will "Operation Twist Again" in one way or another, or perhaps multiple ways. For example there is no specific reason mortgage rates will drop even if yields do. Default risk is simply too high.
Clap Your Hands And Sing Along
Come on everybody! Clap your hands! All you looking good!
I'm goona sing my song It won't take long! We're gonna do the twist and it goes like this:
Come on let's twist again, like we did last summer! Yeaaah, let's twist again, like we did last year!
Do you remember when, things were really hummin', Yeaaaah, let's twist again, twistin' time is here!
Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click HereTo Scroll Thru My Recent Post List
