krogias

Over the last several days, the Fed has trotted out multiple spokesmen to suggest there might not be another round of trash credit creation (quantitative easing). The Dallas Fed's Fisher came out on Tuesday and suggested the program should not be extended when it ends in June and that things may already have gone too far. Lockhart of Atlanta stated "it's a high bar" in response to questions about QE3. Minneapolis' Korcherlakota stated the economy would have to "worsen materially" to extend the bond market manipulation. Finally, Plosser of the Philadelphia Fed recommended not merely stopping or even reversing the bond buying but also raising interest rates. The central bank should set a pace for selling its mortgage and Treasury holdings in conjunction with raising interest rates, Plosser said today in a speech in New York. He suggested selling $125 billion for every 0.25 percentage-point rise in the benchmark rate to almost eliminate $1.5 trillion in...

Milton Friedman once said that "Nothing is so permanent as a temporary government program." The central banks, as rogue private bodies exercising governmental powers a proving that axiom true yet again. The Federal Reserve claimed yesterday that we are in a recovery but none of their emergency programs can be rolled back. ... the Committee decided today to continue expanding its holdings of securities as announced in November. In particular, the Committee is maintaining its existing policy of reinvesting principal payments from its securities holdings and intends to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011. Meanwhile, over in Europe, there is growing recognition that the bailouts have failed and that the money isn't going to be paid back. Instead of actually admitting anything of the sort, the ECB is now talking about effectively making the loans permanent. Sure, they SAY it's going to be a 30 year loan instea...

Here at Financial Jenga we have hoped, even prayed for the law to be enforced for the last couple of years. Yet the fraud has raged unchecked and if anything grown worse. Banks have mass filed false affidavits to fraudulently seize houses through the foreclosure process and then said " oopps , we made a technical paperwork error" when caught. At first they got away with it. They HAVE seized houses through this procedure when there was no mortgage and no lien at all. The Fed has gone and done things far beyond the scope of authority given to it by Congress - like using our money to prop up the investment banks and the stock fraud they are running. They are given the power to buy exactly two thing - bonds carrying the full guarantee of the US government and short-term loans for planting of crops. Buying junk bonds containing mortgages violates both the letter and the spirit of their charter. Buying stocks is so far beyond their legal powers that someone should be in prison and...

Today's topic is Shadow Inventory - the foreclosed or soon to be foreclosed properties that banks are stuck with and which are not listed for sale. As a result, they are not found in any formal listing of housing inventory when existing home sales are reported. This has been a problem for a long time, as we mentioned many months ago in Household De-formation . The media's silence on this issue has been almost total. Probably because any reasonable discussion of the topic would severely undermine the illusion of stability they are trying to project. This weekend, the Wall Street Journal took a stab at estimating the damage. Their conclusion is that it would take 107 MONTHS to clear the shadow inventory at current sales rates. Obviously not a number that the bankers and their apologists in government and media are anxious to publicize. Over the summer, banks appeared to be making some headway. The government’s mortgage-modification program helped some people get current on thei...

The zero interest rate policy (ZIRP) will kill the banks. Falling interest rates help banks by increasing the value of their bond and loan portfolios. This is the well understood inverse relationship between discount rate and present value of a future sum. But you see keeping interest rates at zero does virtually nothing for the banks as rates cannot fall further. There is a short window where ZIRP is a positive but an "extended period" (in Fedspeak) is just slow death for the banks. During that short period, the banks are still collecting on portfolios constructed when rates were higher but as those higher-yielding assets mature, there is nothing comparable to replace them. We hear constantly how banks can just borrow at zero and invest in Treasuries - pocketing the difference. That would be fine if yields on Treasury debt were not low and falling along with everything else. The other problem is that this simplistic formula assumes that banks' operating expenses are negl...

It seems quite popular in these days of crisis for certain commentators to compare struggling individual states within the USA to the troubled Eurozone PIIGS (Portugal, Ireland, Italy, Greece and Spain). ECB President and Apologist in Chief for the Euro Jean-Claude Trichet (and boy isn't that a bunch of Capitalized Words strung together) is a prime example. A couple of weeks ago in a speech about the Greek Financial Crisis his remarks were summarized by Business Week : He [ Trichet ] also played down the importance of Greece's economy on the euro region, which he said represents less than 3 percent of the bloc's GDP, especially when compared with the size of a U.S. state such as California. A number of news outlets and blogger have echoed these sentiments so it behooves us to examine the validity of the comparison. On the pure surface level, Trichet is correct: California had a GSP of $1,850 billion in 2008, whereas Greece's GDP was less than one fifth as large at...

The heads of the global banking cartel are currently gathered for their annual meeting in Davos, Switzerland. They have received enormous subsidies and bailouts at the expense of taxpayers in many nations all around the world. Those nations that possess representative governments are now beginning to respond to the outrage of their citizens at this gross injustice. In Britain, this has taken the form of a proposal to tax financial transactions. In the US, President Obama recently proposed regulations to limit the risk-taking activities of banks and to force the "too big to fail" institutions to shrink. The bankers' response is a proposal to take regulatory power away from national governments according to a British Press outlet . This of course would be precisely the WRONG action. National governments in representative systems are forced to respond to the concerns of their citizens. The bankers' proposal would push the power even further away from the people an...

Over the last two weeks we have seen a series of indications that some of the key elements supporting manipulation of market pricing mechanisms are beginning to tremble. We have seen equity prices rise despite the lack of any significant increase in profits. We have seen commodity prices spike without much increase in real demand. In our opinion the key institutions behind this mess are the major Wall Street (TARP) banks, government agencies and the Fed. They have all played a major role in creating credit inflation, with subsequent asset bubbles and debasement of our currency. But understand this: if you 'look through' each of those institutions you will find the US government backstopping each and every one of them. Each of those has come under increasing attack and as the supports have begun to shake, the fraudulent pricing they have promoted has also begun to unwind. As politics has supported bubble dynamics, so it can destroy them - live by the sword, die by the swo...

Every dollar-denominated loan can be viewed functionally as a partial naked short position in FRNs (Federal Reserve Notes, 1.e. cash). The extent of the naked short is the inverse of the reserve ratio, so at 10% reserve, the position is written as 90% naked short. The entry is created where the bank shorts notional dollars into existence where none existed before. The Fed is a mechanism for supporting those naked shorts against margin calls that would otherwise happen in the real world - that's what a bank run really is, a margin call by lenders (depositors). The continued existence of this naked shorting depends utterly on the willingness of the lenders to accept repayment in virtual instead of real dollars. Wire transfers, checks and book entries are all dollar substitutes, not actual dollars. An entire massive infrastructure has been erected to push people towards the conclusion that these are actually identical to FRNs . Banks will freely exchange your book entry with th...

Much is made of the rebound in China's 2nd quarter GDP and the drivers certainly merit a closer look. We are going to focus on just one key metric today - credit. In an effort to reach escape velocity from the global collapse, China has ordered its banks to make lots of loans and the banks have complied. So just how much lending has occurred and what is the scale of the likely impact. Let's look at the numbers, shall we? Various sources have reported the lending numbers and this article from the Globe and Mail is typical: Chinese banks lent 1.5 trillion yuan ($220-billion U.S.) in June, the central bank reported on its Web site Wednesday. That exceeded forecasts and was up from May's 665 billion yuan ($97-billion) in lending and April's 590 billion yuan ($86-billion). Keep in mind that the entire Chinese economy was approximately 30 trillion yuan in 2008. Another way to look at things is that China's economic output is roughly 2.5 trillion yuan per month and in Jun...

An update by Karl Denninger at Market Ticker today got the old synapses firing. Denninger points out that pension plans are in trouble and cites a Wall Street Journal article strongly suggesting accounting fraud in public pension plans. The WSJ says: Based on their preferred accounting methods -- which discount future liabilities based on high but uncertain returns projected for investments -- these plans are underfunded nationally by around $310 billion. The numbers are worse using market valuation methods (the methods private-sector plans must use), which discount benefit liabilities at lower interest rates to reflect the chance that the expected returns won't be realized. Last year we warned about the same phenomenon in private sector pensions in Some Key Questions and The Limits of Optimism . In every case the culprit was the same - overly optimistic assumptions about investment returns allowed a financially deficient structure to be sold to key constituencies as safe and sou...

The commercial paper market certainly appears to be critically wounded. The seasonally-adjusted amount of CP has fallen dramatically since mid-September. Per the Federal Reserve the declines over the last three weeks: September 17: -$52.1 billion September 24: - $61.0 billion October 1: -$94.9 billion Headlines emphasizing funding cutoffs to companies in the real economy, like Caterpillar and A&T are highly misleading. Non-financial CP took a single hit of $18 billion ($217 billion to $199 billion) two weeks ago and has hardly budged since. The REAL story is the collapse of CP issued by banks and other financial companies. Domestic financial paper is down by $93 billion ($590 billion to $497 billion); foreign financial paper fell $40 billion ($225 billion to $185 billion, down 20%!); asset-backed paper is off $55 billion ($780 billion to $725 billion). We have seen record withdrawals from money market recently, which has led to falling demand for commercial paper - which is usuall...

According to various sources, the GSEs Fannie Mae and Freddie Mac have been buying somewhere between eighty and ninety percent of all mortgages recently. This has led to very rapid growth of their mortgage portfolios. Just a few weeks ago, this report appeared in Newsday : Fannie Mae, the largest provider of funding for U.S. residential mortgages, on Wednesday said it grew its investment portfolio in June at the fastest annualized rate in nearly five years. Fannie Mae's mortgage portfolio increased at a 22.8 percent annualized rate to $749.6 billion in June, from $736.9 billion in May, the Washington-based company said in a statement. The government-sponsored enterprise (GSE) has been boosting growth in its investments since its regulator earlier this year began easing requirements on capital it must hold against the assets. Lawmakers consider such purchases by Fannie Mae and rival Freddie Mac as playing a key role in supporting the U.S. housing market that is going through a ...

We turn to Europe in this commentary as important events are occurring there behind the scenes and Asia has gotten the lion's share of the attention recently. The mariner's distress call actually comes from French, where "m'aidez" simply means "help me." We thought that would be a particularly appropriate title as Europe's financial system is starting to show signs of severe distress. From the actions of the CBs over there, we can infer that the problems there may be significantly worse than here in the US. Current open market operations show that the ECB has 451 billion Euros (about $640 billion) outstanding. This dwarfs the Fed total of just over $300 billion - including all liquidity facilities. It's pretty clear that there are many European banks in deep, deep trouble. Starving for Dollars It is also becoming increasingly clear that the European financial system has a desperate shortage of dollars. Since much of the debt outstanding i...

Well friends it's time to talk about bank failures and wealth preservation. We have talked about insolvent banks on multiple occasions before but the threat of large banks failing is now imminent. Countrywide was saved from such a fate by Bank of America. Now IndyMac is right on the edge. They're not officially dead yet - only mostly dead but there's no Miracle Max in sight. Their recent letter to stakeholders reads like a death certificate: regulators involved prohibited from getting brokered deposits can't sell stock (no buyers) asset sales would deplete capital (tacit admission of mis-valuation) ===> must stop making loans The FDIC has been bulking up for months now, anticipating a wave of bank failures. So far it's been a few small banks but now it's the big boy's turn. So how secure are bank deposits and and how much can the insurance fund really cover? For now, it looks like the answers are pretty safe (as long as you're under the $100,000 lim...

It appears that the abused average American has finally had enough. Target reported that Christmas sales were very weak and lowered their revenue growth numbers for December quite a bit. Add in the margin pressure from discounting and earnings in that sector should be a mess. The problems seem to be widespread and for once, stocks actually seem to be reacting to obvious fundamental problems. This should really be no surprise at all but sadly, equities have ignored fundamentals for so long that it's a shock when reality intrudes on the feeding frenzy. Here at Financial Jenga, we've been documenting the many pressures facing consumers for some time now. Housing and mortgage debt were covered in Where to Start? We wrote about the deteriorating employment situation and failure of government statistics to reflect it in Behind the Numbers . The collapse of personal savings and explosion of total household debt was the theme of First Principles . Why is anyone surprised that a cons...

One of the key problems with valuation in the stock market today is the difficulty of determining actual profits are trying to compare the numbers that are reported to previous years where different standards were used. Many bulls have tried to tell me that I should buy because the S&P 500 is selling at a P/E of only 16x 2008 earnings. Well, there are a ton of problems with that statement so let's just cover the fatal flaws. First, I don't know what 2008 earnings are going to be and neither do they. They are using a guess as the denominator to get that multiple. The number we do have is the historical reported numbers and based on that the multiple is 18x, significantly higher. Second, 18x is very expensive and even 16x is far from cheap. 16x would be a normal peak multiple over the business cycle. 18x would be extreme territory normally. During the 20th century, the P/E for the S&P 500 has exceeded 18x on a sustained basis 3 times: the late 1920s, the mid 1960s and the...