Commentaries
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from Rolfe Winkler:
Lunchtime Links 2-2
Homeownership rate falls to 2000 level (CR) At 67.2% it's still way overstated. Home "ownership" is a misnomer in cases when the owner has withdrawn mortgage equity or when the price of the home has fallen below the principal value of the mortgage. A better measure of homeownership, I think, is just to look at total owner's equity as a % of household real estate. The most recent Fed Flow of Funds report (page 104, line 50) puts the figure at just 37.6%...
U.S. could extend bank fee beyond 10 years, Geithner says (Di Leo/Crittenden, WSJ) The proposed tax on non-deposit liabilities should be permanent, and should target ALL liabilities, including repos. Deposits are guaranteed via FDIC. While that insurance is dramatically underpriced (witness the cash-strapped state of the DIF) at least banks pay something for it. Non-deposit liabilities are also effectively guaranteed, for the biggest banks anyway, via the promise that none which is too big will be allowed to fail. To counter moral hazard, this implicit guarantee must be taxed in order to offset any benefit derived from lower funding costs.
Must-Read: What's a college degree really worth? (Pilon, WSJ) A lot less than you think, as argued here before. This piece is well-written with lots of good data!
AIG derivatives staff said to forgo $20 million in retention bonuses (Katz/Son, Bloomberg) They're still well-paid, but this is better than nothing I suppose.
from Rolfe Winkler:
Lunchtime Links 2-1
President's budget (gpoaccess.gov)
Barney Frank: The poor should rent, not own (Indiviglio, Atlantic)
Citigroup said to plan sale of private equity unit (Keoun/Keehner, Bloomberg) Citi cites raising cash to pay down debt as the reason to sell this unit. Of course this would also get Pandit some brownie points with Paul Volcker, who wants commercial banks out of private equity, hedge funds and proprietary trading...
HCA owners get $1.75 billion payout (Lattam, WSJ) Speaking of private equity...a nice payout for investors in one of the biggest LBOs in history.
from Rolfe Winkler:
Obama’s blowout budget
Now that the worst of the financial crisis is behind us, one would think the budget deficit might start to come down. Actually, no. Obama's proposed budget sets a new deficit record -- $1.6 trillion this year compared to $1.4 trillion last year.
The President thinks he can help the economy with more deficit spending. But debt is the reason we have a jobs problem in the first place. We've accumulated more debt than our incomes can support (see chart at bottom) so the economy is trying to pay it down, leading to less spending and higher unemployment. Adding to the debt pile only makes the employment picture uglier in the long-run.
In his blog entry introducing the budget, Office of Management and Budget Chief Peter Orszag tries to argue that the administration is working to close the deficit. Meanwhile the spin from the White House is that this budget marks the beginning of a "new era of responsibility." Of course that's not at all what we're getting. Orszag even trots out the line that we can grow our way out of debt:
Economic recovery – on its own – would take our deficits from 10 percent of GDP to 5 percent of GDP.
The other question worth asking is what assumptions did Orszag’s team use to create the GDP growth projections? Did they assume that the past two decades of levered GDP growth is representative of what to expect going forward in a “recovery”?
from Rolfe Winkler:
Lunchtime Links 1-31
Paulson says Russia urged China to dump Fannie/Freddie holdings (McKee/Nicholson, Bloomberg)
Avatar breaks $2 billion worldwide box office mark (Box Office Mojo) Very impressive of course, though on an inflation-adjusted basis, Avatar ranks just 25th all time. Nothing will ever beat Gone with the Wind.
Volcker Op-Ed: How to reform the financial system (NYT) Unfortunately not a lot of additional detail over his proposed reform plan. But for those not already familiar with it, this does offer a helpful articulation of Volcker's reform philosophy. Yves is happy Volcker has entered the fray, but believes he needs to go beyond his current thinking.
Frank says banks "recognize reality" by throwing support behind wind-down fund (Howell, Reuters) Am I alone in my fear that a wind-down fund will make matters worse? The idea that new "resolution authority" must be accompanied by a pool of funds to bail out systemic failures compounds moral hazard greatly. Even assuming that banks will be charged high enough insurance premiums to give the fund sufficient financial heft -- how well has that worked with the Deposit Insurance Fund? -- the very existence of this fund will provide an implicit guarantee to the creditors of the firms' backed by it. The DIF already creates major moral hazard by removing all depositor incentives to worry about the health of their banks. Now an even larger slice of creditors would be insulated from risk.
To my mind the whole Too Big To Fail issue is way too vague. We need to get specific about particular financial products, and specifically derivatives, that are the source of big danger.
It is tragic that derivatives have lost their biggest critic now that Goldman has purchased Buffett’s silence.
The big catastrophe ahead now involves interest rate swaps. The value of interest rate swaps is orders of magnitude bigger than credit default swaps and they have grown as tender towers to the sky in the gentlest of interest rate environments. Interest rates worldwide are forcibly held down by central banks while governments strain an the edge of the fiscal precipice. What will happen to with these massive towers if there is a real earthquake of upward moving interest rates?
What is worse, this earthquake is quite certainly coming. With the demographic shift across the developed world where aging boomers are followed by a much smaller generation in almost every developed nation, massive sources of the world’s savings will become massive sinks and interest rates will be forced upward. In short, there will be much fiercer claims for much more limited global savings. Interest rates, reflecting the supply and demand dynamics of savings, will be forced upward.
The tens of trillions or hundreds of trillions in interest rate swaps are predicated upon the idea that the inevitable can not happen.
Will we find that 2008 and 2009 were a walk in the park?
from Rolfe Winkler:
Spanish canary in the European coal mine
The quote of the day comes from Marc Chandler, currency strategist at Brown Brothers Harriman, who has graciously offered to let me reprint a note he sent today.
While Greece gets much of the news, Chandler argues that it's in Spain where the policy dilemma is "most stark."
Today Spain reported that its unemployment rate in Q4 rose to 18.8% from 17.9% in Q3. The consensus was for a rise toward 18.5%. The unemployment rate has doubled in the past two years. As seems to be typical in Europe, the unemployment [rate] is especially pronounced for young people. In Spain it's 40%...
Cyclical forces and the €8 billion public works program pushed Spain's deficit to around 11.2% of GDP last year according to the EC. This is almost as large as Greece's. One key difference between the two in this context is that Spain's debt to GDP is considerably lower than Greece, giving it perhaps greater chance to stabilize the debt/GDP ratios before they become ruinous.
“Governments that rely too much on the bond market for funding should expect the market to turn against them eventually.”
If that’s the case, and I have no reason to not believe it is , then the sooner the better the bond vigilantes bring this extraordinary experiment in QE and fiscal stimulus, to say nothing of structural deficits, to an end. Everyday that goes by will make the inevitable financial realignment that much more difficult as the debt mountain grows ever taller.
from Hedge Hub:
Milan’s deserted depots point to double dip
Travelling towards Italy's major financial centre Milan last Sunday on my way back to Zurich, I spotted something out of the window that had little effect on my fellow train passengers but made my blood run cold.
The massive storage depot just outside the city was practically devoid of goods containers.
These containers are usually stacked four high in periods of normal economic activity, although their number fell noticeably during the recession from which we have now supposedly emerged.
But now there was bare space on the ground.
from Rolfe Winkler:
Splitting hairs on the Bernanke vote
In the Bernanke confirmation vote this afternoon, seven senators wanted to be seen opposing Bernanke but didn't actually want to stop his confirmation. In other words, they wanted a campaign talking point, not an actual fight.
Simple maneuver: As with most business in the Senate, Bernanke's confirmation only required 51 votes. But before getting to the final vote, the Senate must first vote to cut off debate. Cloture, it's called.
Seven senators, including six Democrats, voted aye on cloture and then flipped to nay on the motion to confirm:
Six Dems: Barbara Boxer (Calif.), Al Franken (Minn.), Tom Harkin (Iowa), Kaufman (Del.), Sheldon Whitehouse (R.I.), and Byron Dorgan (N.D.)
Why do your posts above appear to have “comments” absent?
from Rolfe Winkler:
Geithner’s faulty apologia
Tim Geithner's appearance in front of Congress today was another embarrassment, perhaps more for the people's representatives than the Treasury Secretary. Still, Geithner offered a clumsy defense for paying out 100¢ on the dollar to AIG's counterparties, which included more than Goldman Sachs.
What they lacked in knowledge and nuance, Congress made up for in volume and OUTRAGE. The worst moment I saw was the utterly bogus comparison by Rep. Stephen Lynch between AIG's payout to Goldman (100¢ on the dollar!) and the bailout offer for Bear Stearns shareholders (only $2 per share). 100 is a bigger number than 2, you see.
Geithner was lucky to be doing battle with such an unprepared, unimpressive group.
His defense, such as it was, amounted to the following:
This is just pure politics, I don’t want to read deep into all these.
from Rolfe Winkler:
Morning Links 1-27
Note: Apologies for no links yesterday. Busy day writing columns!
SEC to vote on new money fund rules (Johnson, WSJ) Unfortunately, the SEC won't do away with $1 NAVs, price fluctuations will be published on a 60 day lag. So investors will continue to treat money funds as cash equivalents, even though they aren't, and the systemic risk they pose won't really go away.
Fed weighs interest on reserves as new benchmark (Lanman, Bloomberg) This will be a key interest rate to watch whether or not the Fed makes it the benchmark. The expansion of the Fed's balance sheet over the past year+ has stuffed banks full of excess reserves, reserves that banks will lend out if the economy -- and loan demand -- picks up. The Fed needs to keep those excess reserves sequestered in order to prevent inflation. To do so, it may have to pay higher rates. For a fuller explanation see this previous column.
Failed Senate vote on budget commission shows difficulty in cutting deficits (Faler, Bloomberg) So much for a fiscal commission based on the base-closing commission...
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The Wall
Regarding running, yeah, you should land (and stay) on your forefeet, not on your heel. However, you’re resting when you land on your heel (it’s like walking), so it’s more energy efficient to heel strike. This ain’t exactly new news…
At any rate, we should all forefoot striking. When I used to heel strike, I broke small bones in my feet several times, and was constantly dealing with shin splints, sore knees, sore hips. I will note, however, that the first time I went from heel strike to forefoot strike, I went from running 12 miles a pop to 1.5 miles a pop before my calves and my feet tired out and I couldn’t run anymore (forefoot striking, that is… I could still heel strike). It took me a long time to build back up, and I run about 1 mph slower forefoot striking because of the energy difference (went from 8.6 mph to 7.5 mph, body temperature limited, not cardio limited). It’s a no brainer as long as you’re not racing competitively.
You need flat running shoes to forefoot strike. Most running shoes have high heels because heel strikers need the extra cushioning, which in turn makes it harder to run on your forefeet unless you set a treadmill to incline. Something like a New Balance 758 is reasonably flat.
If one can’t forefoot strike, then I’d seriously suggest not running and hitting an elliptical machine instead.