Posted by Michael A. Kamperman on May 26, 2010
Unfortunately our Treasury Secretary has misread our recent financial history’s cause and effect. He believes his bank stress test is the reason confidence was restored to the financial markets. Nothing could be further from the truth. Most people now know, and knew at the time, that the assumptions in the stress test were too weak. Yet few care, or cared at the time. For example, the unemployment rate and the decline in home prices have well exceeded the worst case scenario of the tests. The reason confidence returned to financial institutions is that it was made clear that there would not be either the nationalization of a bank or a chaotic ’Lehman’ style shutdown. It was the policy of TOO-BIG-TO-FAIL that restored confidence in conducting business with and investing in large financial institutions. These companies were endowed with a defacto full faith and credit of the U.S. government. The markets fully accepted the capacity of the U.S. government to backstop all of these institutions. It also helped tremendously that the Federal Reserve stepped up to the plate and purchased over $1 trillion of mortgage paper. The European banks are probably in worse shape than the U.S. banks were. The markets will not accept another smoke and mirrors sleight of hand trick. And there is not a person I know on the planet that believes Greece can backstop its banks no matter how high the losses may be. Hence, if a sham stress test is conducted ala the U.S. version the markets will ignore it. If a real stress test is applied the markets will cough up blood over the inability of most European governments to stand behind these institutions. President Obama needs to fire Geithner, and once again for the record he needs to quit listening to Volcker.
In an austerity mania Geithner is also taking a message to European governments (Germany) that their governments need to spend more to bolster economic growth. While he is right on the priciple of the issue, his proposal will be dead on arrival. Apparently he is tone death and lacks the powers of persuasion. There is a solution to the crisis. The European Central Bank needs to expand its balance sheet and conduct massive purchases of Greek, Italian, Irish, Spanish, and Portuguese debt. Importantly, it needs to not sell any assets to offset the purchases. The ECB has the power to drive down the interest rates all of these governments are paying and it needs to get on with it. What Geithner should tell Europe is if the ECB conducts quantitative easing, then the U.S. will correspondingly purchase in the open market as many German and French government bonds as necessary to push the Euro back above 1.25 to the dollar. This will alleveiate misplaced German fears of a collapsing currency leading potentially to hyper-inflation.
Ultimately the buck stops with President Obama. He now owns the double-dip we are entering. He needs to surround himself with advisers who have the vision to lead us out of the crisis. Instead he clings to the same advisers that assured him the unemployment rate would not rise as high as it has. There is no doubt there is an environmental disaster unfolding in the Gulf of Mexico that demands the President’s immediate attention. Ditto the shenanigans of Iran and the crisis unfolding on the Korean Peninsula. Beyond that there is no reason the economic crisis is not job number one for the President. But he continues to treat it as a nuisance. Our states are being forced into the same austerity mania sweeping European governments. Yet the President remains silent. At this rate it is almost a certainty the historians will talk about the economically failed Hoover/Obama Presidencies.
Posted by Michael A. Kamperman on May 19, 2010
Germany befuddled markets yesterday by acting unilaterally to ban naked short selling of all European Government Bonds and in the stocks and bonds of its 10 largest financial institutions. Angela Merkel has been behind the curve and wrong on most of the decisions she has made so far regarding the credit crisis. Finally, she shocked me and a lot of other people and did something right. Many hedge funds are screaming bloody murder this morning claiming banning naked short selling will solve nothing. They are only talking their book and their wallet. Banning naked short selling prevents people betting against something in quantities greater than the underlying asset itself. If their are 200 billion euros of Greek bonds, then the market can still short 200 billion euros of Greek debt. But it cannot short 500 billion euros of Greek debt creating an artificial market that overwhelms the long side of the traded and pressures it to the downside. Hedge funds will claim banning naked short selling hurts liquidity and increases risk. Then perhaps they should practice diversification and fundamental research if they want less risk in an asset. The bottom line is our societies need our governments to be able to access the bond markets on reasonable terms. Allowing speculators to raise champagne glasses in triumph while riots run wild in the streets is insanity. The German ban should become permanent and it should extend to all asset classes. And it should extend to all markets outside of Germany. The Germans acted unilaterally on their own for two reasons; the French refused to go along, and the Germans have the power to act without getting someone elses permission. This message will not be lost on the rest of Europe. Merkel has made the current crisis much worse than it should have been. It is about time she did something right.
Protecting the debts markets is one thing. Coming up with a strategy to repay the debts in a deflationary world is quite another. The April U.S. CPI just printed a negative .1% overall and a core rate of zero. Since the end of April oil prices have collapsed by 20%. The negative CPI was in spite of higher oil prices. Additionally, the mortgage purchase applications fell by 27% last week. The expiration of the first time home buyers tax credit will lead the housing market down once again. In other words, inflation was negative in April before the impact of these two very deflationary trends in May.
The ultimate solution to solving the sovereign solvency crisis and deflation is the same. The central banks of the world need to start printing money and start buying up their own government bonds in very large quantities. The deflationary environment is giving all of these governments a chance to hit the reset button. Yes, monetizing the debt is the solution to our credit problems and our deflation problem. To really defeat deflation we still may have to mail out money allowing the private sector to reduce its debt levels as well. While Germany has been right about naked short selling, they have been wrong that inflation is a near-term threat and that austerity is the solution to the crisis. As events over the last few weeks have shown the Euro is an ungovernable entity. Therefore, it is up to the Fed to step up in the midst of this new credit crisis and resume its quantitative easing program. Everyday they wait allows confidence to whither further away.
Posted by Michael A. Kamperman on May 12, 2010
As predicted the ECB caved and has started to print money to buy up European Government bonds (Greek, etc.). They never really had a choice and should have acted much sooner to the avert the crisis. However, quantitative easing should be pared with a long term glide path to fiscal sanity. Instead, the Europeans in their clear lack of wisdom have embraced a combination of buying just enough government debt to keep the “Wolves” at bay. Meanwhile, they are trying to combine this strategy with demands for fiscal discipline requiring significant short term cuts in budget deficits. On the surface it sounds great to require people to retire later in life and to cut wages and to cut jobs. In reality this will only deepen the debt-induced depression and delay the inevitable. The Fed, the ECB, the Bank of Japan, and the Bank of England need to coordinate an all out monetization of government debts. This will hit the reset button and buy time for nations and economies to adjust holding societies together. By both cutting jobs and requiring people to work longer we are killing job opportunities for people in their 20′s. Is this what we really want? Younger workers without seniority will take the brunt of the axe to be swung. And, they will be out of luck a long time as retirements are delayed keeping existing jobs closed to newcomers for a long time. The austerity religion sweeping the globe is utter madness. The riots in Greece could be a harbinger of all of our futures. Today Spain announced it will cut another 6 billion euro form its current budget to show solidarity with the austerity mania. This in a country with official unemployment rates already over 20%.
The U.S. shares in the austerity mania as exemplified by the Tea Party. These well intentioned but misguided people believe they are saving society. In fact, they are most likely causing the fabric of our society to disintegrate. In my state of Texas the legislature is facing a projected $11 billion budget shortfall. One solution gaining popularity is to raise the student teacher ration in elementary schools. The current cap is 22 pupils per teacher. They want to save money by cutting teachers and forcing more kids into the classroom. They also are considering shortening the school week from 5 days to 4. Young teachers will be cut loose and elementary education graduates will find no room at the inn. Texas is in the best shape of all the large states in the U.S.
What the peddlers of austerity fail to grasp is many innocent hard working individuals will find themselves out in the cold through no fault of their own. Why? So those who were irresponsible will be punished? So those who are afraid of hyper-inflation will be pacified? Inflation occurs when too much money is chasing too few goods. There is no shortage of almost anything in the world. Furthermore, with global unemployment well above 10% it is doubtful demand will overtake supply even if all federal debt is monetized globally. Yes gold will go up in the short term. Probably a few other commodities too. But it will not lead to shortages. It will however push capital further out on the risk curve which could perhaps lead to global unemployment falling back below 10%. What most people miss is a large portion of global government debt is held by banks and hedge funds. The real money, capital, backing these bonds is not nearly as high as the outstanding amount of the bonds. Most banks and hedge funds are allowed to mark government debt at par and are allowed to leverage this debt with little capital. When they move out on the risk curve the leverage will greatly diminish. In the meantime young teachers could teach and young children could learn.
Posted by Michael A. Kamperman on May 4, 2010
The Chancellor of Germany has misplayed her hand. In a deference to domestic politics she has allowed Greece to twist in the wind demanding tougher and tougher concessions. The markets have figured out under the microscope of daily careful observation that Greece cannot repay its euro denominated debts if it falls into a deflationary depression. Neither can Portugal. Neither ultimately can Italy, Ireland, or Spain. Neither can most other debtor nations that lack the ability to print money. The grand scheme to bring Greece to its knees begging for mercy has back-fired. At this point the European Central Bank (ECB) either starts a quantitative easing program focused on printing money and purchasing the government debt of all member nations, including Greece, or the euro will implode as an unworkable currency. The risks go far beyond economics. A withdrawal from union will push Europe back to nationalism. That hasn’t worked out so well over the last millennium. It will be highly ironic if the ECB is pushed into quantitative easing when they have resisted kicking and screaming up until now. Hopefully we have all learned never say never.
Make no mistake there is no other way out of the global debt-induced deflationary depression but to print money. Tonight the head of the ECB Trichet is staring at the cold hard facts. But we in America should not be smug. Our states are imploding over the same forced austerity that Greece and the other too deep into debt nations are facing. We need to stop worrying about the deficit and we need to start worrying about our children who are being crammed into classrooms where budgets take precedence over learning.
We have reached the point globally where the rubber meets the road. There is no more opportunity to sweep the dust under the rug. The Maginot Line the Europeans set up to stop the Greek debt crisis from advancing has been breached. The only question is does the ECB have the guts to stand up to the failed policy of austerity? I don’t know the answer. But we will find out on Thursday when the ECB meets. When the Fed stopped quantitative easing it was inevitable the dike would spring a leak from the weakest points. It turns out the weakest point is Greece. But once a dike springs a leak the next weakest point usually pops due to enhanced pressure. That point has been Portugal. Unless the leaks are plugged soon the whole dam could burst causing a Lehman style credit crisis. President Bush was forced to back away from his free market ideology when Lehman imploded. The ECB is now faced with the same Faustian bargain. Hopefully President Obama is paying attention and will back away from his ill conceived and contrived Deficit Commission.
Posted by Michael A. Kamperman on May 2, 2010
I am a very optimistic person. It pains me to be such a pessimist on the economy. I look forward to the moment when I can switch from pessimism to optimism. Now is not that time. The preliminary GDP report showed growth of 3.2%. This represents a significant slowdown from the 5.6% growth rate reported in the fourth quarter of 2009. This is the roaring recovery we keep hearing about. The so-called jobless recovery. But the key to remember is this is the best we could do despite the $787 billion stimulus plan, the quantitative easing from the Fed, the home-buyers tax credit, and the stimulus spending from many foreign nations. It looks like rough sledding ahead. The Fed stopped adding cash to the economy at the end of the first quarter. The homebuyers tax credits expired at the end of April. Considering that almost 45% of all home-buyers in March were first time home-buyers, triple the normal rate, it is reasonable to assume another slowdown in home sales started yesterday. Jarringly state and local government spending dropped at an annualized rate of 3.8% in the first quarter. Most of the money from the stimulus plan was aimed at providing cash aid to state and local governments. What will happen to state and local government spending when the stimulus money stops coming at the end of 2010 since their budgets are already plummeting now? Export growth slowed in the first quarter. Not surprisingly the dollar has continued to strengthen all year hindering relative export competitiveness. And of course we are all watching the Greek Tragi/Comedy unfold day by day. Greece has forced all of Europe and many other debtor nations to tighten their belts in the last few weeks. It is impossible to see how exports can lead a U.S. recovery going forward no matter what the rhetoric is from the Whitehouse.
I was at a party last night and I mentioned that Gallup reported the March unemployment/underemployment rate was 20.3% and that in Spain the official unemployment rate is now 20%. A man I met who works in the aerospace industry said unemployment in his industry is 30%. He said he has so many friends living off of their IRA’s and 401(k)’s and that for some the money is starting to run out. A woman I met told me about her daughter in her 30′s having to move back home. The economic pain is spreading and it is not letting up.
The economy definitely needs another major stimulus plan. That looks politically impossible in 2010. The Tea Party movement believes our problems are the result of too much government spending. Their libertarian leanings are pulling the Republican party to the right. The progressive liberal wing of the Democratic party is all that will be left after the 2010 elections. Those politicians who believe in the possible, which means they believe in the art of compromise, are an endangered species. We could well be in a period in 2011 and 2012 when nothing significant is accomplished because compromise by either side will be viewed as surrender by the radicals that increasing are gaining power on both sides of the aisle. The old saying that there is not a dimes worth of difference between the Republicans and the Democrats may well no longer be true. Polarized politics will not solve America’s problems. We need the President and both aisles of Congress to focus on creating jobs for others rather than focusing on saving their own jobs for themselves.
