Sunday, July 25, 2010

EU stress tests

Another public relations disaster for the EU. Of course, they tread on thin ice given more rigorous tests would not provide the answers wanted. You will not be bothered with frightening answers if your questions are weak.

Tuesday, July 20, 2010


Finally the popular press and media catch up with one of the overriding themes of this blog for the past two years: the credit cycle is the most important factor when determining inflationary and deflationary secular periods.

Krugman has already caught on, and now we see Grantham and a host of others experience this epiphany.

Economists often have a pedantic bent. It is good to see them taking a more holistic, panoramic view of the real economic landscape.

Wednesday, July 07, 2010

Its the QE2!!

Once again, we hear rumblings about the next possible round of Quantitative Easing, and once again, I will remind everyone that such an operation is a simple asset swap between interest bearing instruments and will not achieve the desired effect.

In the Falkland Island conflict, the QE2 was used as a troop transport, that is, it as used as an ancillary frigate in order to bring real forces to bear. Quantitative Easing is similar in the respect it needs other measures to have any hope of being effective.

The Paper Dragon...

Getting closer and closer to open flames...

Kenneth Rogoff, ex-chief economist for the IMF, told Bloomberg Television in Hong Kong that the denouement could prove abrupt after such a torrid boom. "You're starting to see that collapse in property and it's going to hit the banking system," he said.

The government is trying to deflate the housing market gently, mostly using tools known as "financial repression" rather than Western style rate rises. Xu Shaoshi, land minister, said sales are already dropping. "In another quarter's time or so, the property market will probably come to a full correction and prices will fall. It's hard to say to what extent they will fall," he said.

At the same time, China is shifting its foreign reserve strategy, rotating out of Europe and into Japanese government bonds (JGBs). Japan's finance ministry said China bought $6bn (£3.9bn) of bonds from January to April, a record pace of accumulation.

Analysts say Beijing is hunting for fresh places to park its reserves after losing confidence in eurozone debt. It already holds around 70pc in dollars, a level deemed too high by many in Beijing. China's move helps explain the fall in yields on 10-year JGBs to just 1.06 pc last week, and why the yen has appreciated to ¥87 to the dollar -- nearing levels last seen in 1995.

China views soaring house prices as a threat to social stability, since workers are shut out of the market. The price-to-earnings ratio is 13 in Beijing and Shanghai, four times Western levels.

Charles Dumas from Lombard Street Research said China's boom had been driven by its fiscal stimulus of 13pc of GDP, the largest ever by major country in such a short period. The boost was concentrated in 2009, with credit growth running at 25pc of GDP.

"The Chinese had nowhere to put their savings since real interest rates were negative and capital controls stopped them investing abroad, so they bought apartments," he said.

Tuesday, July 06, 2010

As Housing goes... goes the Economy. With the FHLB, Fannie, Freddie, and every other governmental GSE experiencing large loan to value losses and inventory expansion, talks of the "V" recovery are a bit panglossian.

“For over a year now we have been saying that the GSEs and other Federal agencies will play a critical role in the success or failure of the housing recovery due to their huge holdings of foreclosed homes,” said Michael Feder, Radar Logic’s president and CEO. “Now their role is more critical than ever before. The potential cost to taxpayers resulting from the government’s current policies is enormous. We can’t help but wonder if there isn’t a better approach.”

Assuming an average mortgage balance of $200,000, the book value of these homes could ultimately reach $614 billion, according to Radar Logic’s report. In most cases, the government will have to sell its REO inventory at a significant discount, on average 40 percent less than book value, which Radar Logic says means taxpayers stand to lose $246 billion.

In addition, assuming a similar discount relative to loan value in short sales, if 25 percent of the government’s foreclosure pipeline is liquidated as a pre-foreclosure sale, taxpayers will lose another $88 billion, based on Radar Logic’s calculations.

Taking both short sales and REO sales into account, that puts total losses from the government’s holdings of distressed properties in the neighborhood of $333 billion.

Sunday, July 04, 2010

Temporal preferences

In other news, Mr. Trichet also demanded that the atmosphere be reduced to combat dangerously high amounts of carbon dioxide...

July 4 (Bloomberg) -- European Central Bank President Jean- Claude Trichet pressed governments to trim their budget deficits, saying such action would boost economic growth by improving confidence of consumers and investors.

“We are in a period where we have to manage budgets very tightly,” Trichet told journalists in Aix-en-Provence, France. “I have no problem with austerity, rigor. I call this good budgetary management.”

The comments reinforce plans set out by Group of 20 leaders last month in Toronto, where the countries representing 85 percent of the world economy responded to plans by European governments to tackle the region’s sovereign debt crisis by slashing budget deficits.