March 30

QOTD:

Won't it be cool if subsequent versions of QE are referenced with Roman numerals like the Super Bowl?
John Roque, WSJ.

The unbelievable truth about Ireland and its banks. BBC.

To prevent Irish banks toppling over one after another, the European Central Bank has lent 117bn euros to them and the Central Bank of Ireland has lent them a further 71bn euros. So that's 188bn euros of loans from the eurozone's taxpayers to Ireland's banks - which makes the 67.5bn euros lent directly by the eurozone and IMF to the Irish government look like peanuts. And a further 20bn euros of bank bonds - another form of bank debt - is still guaranteed by the Irish state through the Eligible Guarantee Scheme. So that is 208bn euros of taxpayer loans to Ireland's banks - equivalent to a remarkable 154% of GDP.

[Irish] Bank bailout cost (so far). Corner Turned.

The 'grand bargain' is just a start. Martin Wolf, FT.

It would be helpful – and honest – for the German government and the governments of other creditor countries to tell their people that they are rescuing their own savings in the guise of rescuing peripheral countries. The alternative is to write off loans and recapitalise their banks directly. To admit this would be to admit their policies have been at fault. That would surely be helpful.

Europe needs debt relief, not decades of austerity. The Guardian.

From Donegal to the Algarve, to the streets of Athens, voters on Europe's "periphery", as economists dismissively call it, are slowly waking up to a sobering truth – they face years of austerity, yet wage cuts, job losses and crumbling public services will not extricate them from financial crisis. In fact, by driving their economies into an ever deeper slump, it may even make things worse. The pain could just bring more pain....

Markets and voters across the eurozone have grown wearily accustomed to watching the cycle of a looming fiscal crisis as bond yields rocket, followed by just enough action from Brussels to jolt investors out of panic mode, followed by another bout of the jitters as they realise the rhetoric from euro leaders isn't matched by reality.

As Steen Jakobsen, chief economist at Saxo Bank, put it in a note on Friday: "It's clear that the electorates are beginning to realise that all solutions offered by the policymakers are based on the promise to do something in the future, and never right here, right now."

But time is running out, and Europe has two choices. It can continue hammering the economies of Greece, Ireland and soon Portugal deeper into crisis, while their already furious voters become increasingly resentful about the pain being imposed by their European "partners"; or it can accept that the scale of debts has simply become unsustainable, and open negotiations now about an orderly default.

As Obama and Congress fiddle, America liquidates housing sector. Chris Whalen.

the current national policy mix of more regulation, decreased government subsidies and, to add further urgency, a shrinking banking system, is the perfect storm for the housing, which is now down six months in a row. Despite my long-held desire to see market-based reform in the US housing sector, I think all parties need to be aware of the precarious situation facing the American economy and banks as home prices collapse for lack of credit....

The net, net here is that the available pool of credit available for the housing sector is shrinking and thus prices must also decline to adjust for that supply of credit. This fact of continued decline in home prices is going to have a chilling effect...

I estimate that Fannie and Freddie alone are hiding $200 billion worth of bad loans on their books simply because there is no market for these foreclosed homes. Ditto for the largest servicer banks such as Wells Fargo, Bank of America, JPMorgan Chase and Citigroup. To clean up this mess with finality is going to cost $1 trillion or so in round numbers. But nobody in Washington wants to go there.

Where the bailout went wrong. Neil Barofsky, NY Times Op-Ed.
As per James Kwak:

Back in late 2008 and early 2009, there was a lot of talk about how a true solution for the problems of the banking system would require a solution for the problems of homeowners, since the banks’ losses were largely the result of mortgage defaults. One of the major technical achievements of the administration was showing that it was possible to stabilize the financial system and restore the banks to short-term profitability without doing much for homeowners.

The Federal Open Mouth Committee is back in action. Pater Tenebrarum.

Hawks (relatively speaking) and doves within the Fed are busy trading slightly contradictory statements in public again, in a performance that is eerily reminiscent of the 'exit talk' (exit from unusual monetary accommodation measures that is) that proliferated about one year ago.....

led to this campaign of advance burying of 'QE3' by means of 'QE2' funeral eulogies. Surely 'QE3' won't be talked about so much anymore if even 'QE2' comes under official scrutiny. Since the current QE program is slated to end in June, market participants are given fair warning not to expect more 'coups de whiskey' for the stock and commodity markets immediately thereafter. This in turn means that the times are set to become slightly more interesting. Given that there is not the slightest evidence yet that private sector deleveraging has run its course, a cessation of excessive monetary pumping may end up stopping various bubble activities in their track in very short order. This is to say, both financial markets as well as the economy may slump again fairly quickly....

Helicopter pilot Ben Bernanke has been rather quiet, letting the rest of the board spread the message. Alas, we suspect he's personally still firmly in the pro easy money camp. At least this is what we would have to conclude considering his well known views on the Great Depression as well as Japan's post bubble era. His usual refrain was that policy makers were 'too timid' in these instances, but as it were, the BoJ is a veteran of two (now 2.5) QE programs as well, so if one wants to be 'less timid', then 'QE1' and 'QE2' alone obviously won't cut it. In that sense we would be inclined to discount the advance funeral rites for 'QE3' as just more hot air. Nevertheless, there will be a pause, and should the economy's momentum not falter again immediately, then we'd expect the 'exit' palaver to increase in both volume and frequency.

Surpluses, debt and depressions.... Randall Wray via Pragmatic Capitalism.

China's 5-year plan and global interest rates. Martin Feldstein.

Visualizing the food and energy crunch. Pragmatic Capitalism.

Debt: The first five thousand years. David Graeber.

The biggest urban legend in finance. Rob Arnott.

Fannie and Freddie hiding over $100 billion of losses? naked capitalism.


other fare:
Exceptional And Unexceptional America. Andrew Sullivan, The Atlantic.

March 22

It's not structural unemployment, its the corporate savings glut. Rebecca Wilder.

Mega-Banks and the Next Financial Crisis. WSJ interview of Paul Singer.


Libya, the West and the Narrative of Democracy. George Friedman, Stratfor.

March 21

QOTD:

"The President does not have power under the Constitution to unilaterally authorize a military attack in a situation that does not involve stopping an actual or imminent threat to the nation."
Barack Obama

uhhmm, I guess that was then and this is now:

The Libyan War of 2011. George Friedman, Stratfor.

Yemen in crisis. Stratfor.

What's happening in Bahrain explained. Mother Jones.

Iran calls on Saudi Arabia, UAE to leave Bahrain "immediately"



Japan's financial position is better than you think. Prag Cap.

QEII fails - sell US equities. Russell Napier, CLSA.

March 11

How QE works. Ed Harrison.

QE and the term structure of rates. Warren Mosler.
summary: if the market thinks QE will work, then the economy will heat up over time and inflationary pressure will build so the Fed will need to hike rates, and the term structure of rates reflects more Fed hikes down the road; if the Fed ends QE, the market place will deem that as the Fed removing support from the economy, and this less stimulative policy will mean a relatively weaker economy and less inflationary pressure so fewer future interest rates hike --- and the curve will respond appropriately

March 10

Bank of America says nearly half its mortgages are bad. WBJ Morning Call.

Saudi foreign minister warns against protests. The Independent.

Saudi Arabia's foreign minister said today that dialogue — not protests — is the way to bring reform and warned that the oil-rich nation will take strong action if activists take to the streets..... Prince Saud al-Faisal... said his regime would cut off any finger raised against the regime

Saudi Arabia is losing its fear. Guardian UK.

It's very difficult to predict what will happen on Friday. My guess is that there will be protests. The larger protests will be in the eastern region and mostly by Shia Muslims. I also expect smaller protests in Riyadh and Jeddah. What tactics the security forces use will greatly influence not only the demonstrators but also the people watching from their homes. If undue violence is used against the demonstrators, it could possibly ignite the same fuse that led to full-blown revolutions in Tunisia, Egypt and Libya.

Erste Oil Special Report: "Force Majeure - Middle East". zerohedge.

Exclusive: Ex-CIA Chief Says Saudi Arabia Is Vulnerable. Plug-in Cars.

Could the political unrest spread to Saudi Arabia?

It’s quite possible. Yemen is in flames. Bahrain is at least seriously shaken. And they’re both right on the borders. And the Saudis in the eastern province have a huge population of Shia that they’ve treated very badly. And Iran is almost certainly using Hezbollah and Al-Quds [Iran’s revolutionary guard] to stir things up in the Gulf, in Bahrain, in Yemen, and quite possibly soon in Saudi Arabia. We just don’t know.

Will the U.S. work to quell those movements in Saudi Arabia, considering what would happen to oil markets?

If we will not even criticize Ahmadinejad in the mildest terms when a year and half ago he stole the election and there were millions of Iranians in streets risking their lives, and the most we could say is “Hmm,” then how in the world does anybody think that we can affect something in that part of the world? How are we going to keep Iran from funding Hezbollah and the Al-Quds force from creating disruptions and problems in much of the Gulf, when we won’t even criticize them?

IEA confirms peak oil was in 2006. (according to Energy Watch Group).

For Big Oil, Libya is just another fix it's in. Foreign Policy.

No end to the Tunisian contagion and $100-plus oil prices. Foreign Policy.

There's a presumption out there that things look tough in the Middle East, but that soon enough -- maybe by summer -- they will sort themselves out, and becalm the volatile prices of oil and gasoline. Not so, says veteran oil analyst Edward Morse, a student of history who correctly called the 2008 oil bubble while everyone else was still throwing money into the pot. "This is not a one-off disruption," Morse says. Instead, we're in a new age of geopolitical risk that threatens to disrupt the region for a decade or even longer.

Lurching toward the peak. Marc Brodine.

The old American dream is a nightmare. interview with James Howard Kunstler, Grist.

The end of growth. Richard Heinberg, Post Carbon Institute.

6 energy experts address the economic impact of Middle East unrest. Post Carbon Institute.

The coming misery that Big Oil discusses behind closed doors. Foreign Policy.

Demanding cheaper oil is disastrous. Johann Hari, The Independent.

What would the world be like today Jimmy Carter had been listened to by the Western world, instead of being demonized by Big Oil and booted out of office as a "whiner"? With the U.S. no longer backing Arab petro-tyrannies and occupying Arab territories, there would probably have been no 9/11. There would have been no Iraq War. There would have been no BP oil spill. We would not be facing an oil price shock today that could cripple our economies and leave backing some of the worst dictators in the world. The Copenhagen climate summit could well have established a path to dealing with global warming, rather than burying it. If we pursue Drilling As Usual, what unnecessary disasters will they curse us for 30 years from now?

Joseph Tainter: talking about collapse. Cassandra's legacy.

Former Goldman Sachs analyst Charles Nenner joins Marc Faber and Gerald Celente in predicting major war. Washington's blog.

March 9

What does QE2's end mean for various asset classes? Part I & The end of QE: Part II. Barry Ritholtz. Part III to come.

Richard Koo: the strange world of a balance sheet recession. interview posted on Economist's View.

The seven immutable laws of investing. James Montier, GMO.

Slowing China. Barry Eichengreen.

It's pretty obvious how China can achieve its top economic priority of price stability. Rebecca Wilder.

More on China. Mish.

What will Saudi Arabia do? Jim Hamilton.

If all of Libyan production gets knocked out, we'd need 1.8 mb/d to replace it. If the Saudis weren't able or willing to go above those production levels in 2008 when oil was selling for over $140 a barrel, why would you expect them to do so now with West Texas only at $106? My answer is, I don't.

other fare:
What scientists believe. The New Atlantis.

March 8

Un-American Revolutions. Niall Ferguson, Newsweek.




Are Middle East Revolutions a Prelude to Armageddon?

America had best prepare itself for a long haul and reorganization of our hold in the oil-producing world. The Middle East and North Africa revolution has only begun.

Oman riots increase fears for Saudi Arabia. UPI.

Arab unrest and the 'End of the Oil Age'. UPI.

Libyan Ides of March? UPI.

Both the Spanish civil war (1 million killed 1936-39), which divided both Europe and America between pro-Nazi and pro-Soviet camps, and the 1992-95 Bosnia war that killed about 100,000 civilians and displaced 2.2 million, found the United States on the side of the Muslims. Both are models of how quickly such conflicts can escalate into global crises.

Bahrain key to Persian Gulf power struggle. UPI.
Bahrain and the battle between Iran and Saudi Arabia. Stratfor.

Iran has another, more challenging strategic interest, one it has had since Biblical times. That goal is to be the dominant power in the Persian Gulf.


For Tehran, this is both reasonable and attainable. Iran has the largest and most ideologically committed military of any state in the Persian Gulf region. Despite the apparent technological sophistication of the Gulf states’ militaries, they are shells. Iran’s is not. In addition to being the leading military force in the Persian Gulf, Iran has 75 million people, giving it a larger population than all other Persian Gulf states combined.

Outside powers have prevented Iran from dominating the region since the fall of the Ottoman Empire, first the United Kingdom and then the United States, which consistently have supported the countries of the Arabian Peninsula. It was in the outsiders’ interests to maintain a divided region, and therefore in their interests to block the most powerful country in the region from dominating even when the outsiders were allied with Iran.

With the U.S. withdrawal from Iraq, this strategy is being abandoned in the sense that the force needed to contain Iran is being withdrawn. The forces left in Kuwait and U.S air power might be able to limit a conventional Iranian attack. Still, the U.S. withdrawal leaves the Iranians with the most powerful military force in the region regardless of whether they acquire nuclear weapons. Indeed, in my view, the nuclear issue largely has been an Iranian diversion from the more fundamental issue, namely, the regional balance after the departure of the United States. By focusing on the nuclear issue, these other issues appeared subsidiary and have been largely ignored.

March 7

Saudis mobilise thousands of troops to quell growing revolt. The Independent.

SocGen's Three Scenarios For Oil See Crude Price Between $110 And $200. zerohedge.




Growth and renewal in the U.S.: retooling America's economic engine. McKinsey.

for an executive summary, see: Why the American economy will stay slow. Big Think.

Royal Bank of Scotland investigation: the full story of how the 'world's biggest bank' went bust. Telegraph.



Is Canadian housing the next domino? Business Spectator.

March 4

A long way to go. FRBSF.

How to kill a recovery. Paul Krugman, NYT.

The madness of Jean Claude Trichet. Krugman.

Dead nation walking. Richard Russell.

Why the maven is morose. interview of Stephanie Pomboy in Barron's.

Why real estate will hold the economy back. The Daily Capitalist.

Commercial real estate loans and residential housing will continue to be a significant drag on economic performance. Until the mass of over-built homes and commercial properties are liquidated credit will remain tight and unemployment will remain high.


The unfortunate fact remains that credit for most of America is still tight, banks are still trying to repair their balance sheets, and the overlying problem is real estate, the detritus of the Fed’s reckless monetary policy. Credit expansion fueled by the Fed’s easy money policy of the early 2000′s drove private debt to fuel housing over-production, and drove commercial debt to fuel commercial real estate (CRE) over-production. It was the greatest such expansion of money and credit the world has ever seen and it went primarily into real estate. We are now facing the consequences of that expansion and boom: the bust.

includes much more on the FDIC Q4 banking report

Banks face more loan write-downs. WSJ.


Game changers? Tim Duy's Fed Watch.

Saudi Arabia contagion triggers Gulf rout. Ambrose Evans-Pritchard, Telegraph.

latest sell-off was triggered by the arrest of a Shi’ite cleric in the Kingdom’s Eastern Province after he called for democratic reforms and a constitutional monarchy. The province is home to Saudi Arabia’s aggrieved Shi’ite minority and also holds the country’s vast Ghawar oilfield, placing it at the epicentre of global crude supply. "Unrest in this region can have fatal consequences for the world," said JBC Energy. "The plunge on the Saudi stock exchange can be interpreted as a sign of waning trust."

re: Bahrain

protesters have "the right to appeal for help from Iran" if Saudi military units interfere in the struggle. Tanks were seen crossing the 17-mile causeway from Saudi Arabia to Bahrain on Tuesday

Religious tensions in Bahrain on edge. zerohedge.
concludes:

And once religion is involved, which of course means Iran, then all bets are off especially if Saudi sends reinforcements to support the Bahraini status quo.

German-Irish brinkmanship raises EMU stakes. Evans-Pritchard, Telegraph.

The EU's band-aid on a bullet hole. Daniel Gros, Project Syndicate.

March 3

Some Prices Are Up, but Is That Inflation? FRB of Cleveland.

The flexible CPI is intriguing in that, by design, it is likely to show evidence of pricing pressure ahead of the sticky CPI. However, the series is very volatile relative to its sticky-price counterpart and likely dominated by relative price changes. As a result, inflation forecasts based on the flexible CPI perform rather poorly.

While rapid price increases in a few categories seem to have pushed up the headline CPI lately, underlying measures of inflation are relatively low and have only ticked up slightly in the past few months.

Perspective on the copper/oil divergence. Pragmatic Capitalism.

Excerpts from Seth Klarman's 2010 Letter. My investing notebook.

Revisiting the Shiller P/E. Pragmatic Capitalism.

The complexity of Persian Gulf unrest. Stratfor.

Energy Talking Points Series, #1: Three Signs the end of oil exports is coming. American Society of Mechanical Engineers.

Australian debt update. Steve Keen.

Extend and pretend practices attracting SEC scrutiny. Barry Ritholtz.

Budget forecasts, compared with reality. NYT interactive graphic.

What happens if there is no QE3? David Rosenberg responds. zerohedge.

Cash and credit; implications for the markets. John Hussman.

the gap is still too wide between the credit that has been extended and the productive capacity that we have accumulated. Much of that gap has emerged because we continue to punish saving by depressing the rate of return available to investors, while at the same time pursuing policies aimed at consumption rather than real investment, research & development, and other activity that would add to the productive capacity of the nation. Stimulating consumption and speculation have been the life-blood of government policy interventions over the past two years, yet they are exactly the approaches that got us into trouble, and are likely to fare no better in producing better outcomes in this instance. Our problem is not with debt itself (much of which represents productive past investment), it is with imbalances, misallocated resources, distorted financial markets, bad debt held on the books as if it is good, and the quiet reliance on the public to bail out losses that should be borne by the private sector.


I strongly believe that part of the gap between total credit market debt and cumulative gross investment is literally thin air, in the sense that assets are being held on the books of banks and other financials that are not worth the sharpened pencils that are needed to perpetuate the illusion of value. On that subject, we've received a number of notes from observant shareholders pointing out that the Chief Financial Officer of Wells Fargo has inexplicably resigned. I observed several quarters ago that we could observe a wave of fresh risk aversion "at the point where the first bank CFO resigns out of refusal to sharpen his pencil any further," but as I've noted below, the FASB appears intent on preserving the existing set of accounting rules allowing financial institutions to value their assets with "substantial discretion," with no necessary link to market values. So it remains unclear what the true state of the banking system is, and the extent to which further bailouts will ultimately become necessary down the road. It will be important to keep watch on how this develops.