September 30

FASB to fold on mark-to-market. Bruce Krasting.

And does FASB have one more reason to fold?
Seems so, as Mortgage-Gate could be getting serious --- so far, GMAC and JPMorgan have been implicated in foreclosing on mortgages without titles, but quite likely this is endemic, and so will affect the entire mortgage origination industry as more and more of those foreclosed upon begin to challenge the process

Are The 250,000 Foreclosure Sales From Q2 About To Be Reversed, As Fitch Prepares To Downgrade Foreclosure Fraud Companies. zerohedge.

Chris Whalen on banks and mortgages. King World News.

September 23

legendary investor Seth Klarman calls market a "Hostess Twinkie". via Pragmatic Capitalist.

John Hussman explains why the economy is weak and deteriorating
the whole thing is worth reading, as always, but what I'd most like to excerpt is:

My view remains that the underlying condition of the U.S. housing market is one of deep insolvency. The Treasury, Fed and the FASB have effectively made a policy out of opaque disclosure, so that at least the deterioration in the housing market is slow to appear on the balance sheets of major banks and financials. At present, the FASB allows "substantial discretion" in the valuation of mortgage-backed securities, which I suspect are being carried at a higher level than the value that the underlying cash flows (mortgage repayments) can actually support. Given that there is little pressure to disclose losses, and that mechanisms are in place (at least until the end of 2012) for the Treasury to bail out the entire flow of bad mortgages that funnel through Fannie Mae and Freddie Mac, it's not clear whether the growing mountain of delinquent and unforeclosed mortgages will provoke an abrupt crisis. My own expectation is that fresh economic pressure would provoke contagious pressure on the housing market to an extent that would be difficult to obscure.

Uniqueness or similarity? Japan’s post-bubble experience in monetary policy studies. Masaaki Shirakawa, BIS.

The lastest Z.1 Flow of Funds report was released last Friday; total credit market debt expanded slightly to $52.1Trillion. this is worth watching due to how debt growth has historically been a leading indicator of GDP growth, as shown by Annaly Capital:

September 20

Its over! The recession, that is; in fact, it ended June 2009.
A trough in business activity occurred in the U.S. economy in June 2009. NBER.

The committee decided that any future downturn of the economy would be a new recession and not a continuation of the recession that began in December 2007. The basis for this decision was the length and strength of the recovery to date.

so, now that the U.S. is not still in recession, Gary Shilling evaluates The chances of a double-dip, via Credit Writedowns.

this is both worth a laugh, and has some material worth some thought:
Postal at the bank. Bruce Krasting.

Flow of funds data came out recently, showing aggregate private debt to GDP ratio has fallen to 267%, which is still very very high, but down significantly from peak of 298%

But in Defaults account for most of pared down debt, the WSJ shows how the U.S. consumer is "delevering" --- virtually all debt reduction is due to loan charge-offs

Retirement on hold: American workers $6 trillion short. Scott Cohn, CNBC.

other data:

not much data today, just NAHB, which was a bit weaker than expected, staying at 13; and Canadian wholesale sales for July, which was down for the 4th straight month and 5 of last 6

tomorrow we get Canadian CPI, expected to blip up to 1.9% from 1.8% YoY, while core CPI is expected to stay steady at 1.6%; in the U.S., we'll get housing starts and building permits and the (probably uneventful) FOMC decision

on Wednesday we'll see how Canadian retail sales did in July; on Thursday we'll get U.S existing home sales and on Friday we'll see how new home sales and durable goods orders fared in the U.S. in August

contrary indicators: Chinese stocks have been a pretty good leading indicator of global equities, and the Shanghai Composite index has gone nowhere for two months; but the CRB has been steadily heading higher (up 11%) over the last 2 months, and is at its highest level since May 2008, while copper (the commodity with a PhD in economics) has also been trending higher (though less steadily), up 27% since early June; meanshile, PIGS spreads are out, but the VIX is down

September 17

data today: more disinflation (chart from Calculated Risk):


to see how much energy prices are contributing to CPI, see EconomicpicData, here.

another chart, this time on how Canada's housing market measures up:

from trendlines.ca

Taxing my patience. Dan Gross, Slate.

5 points to keep in mind as Congress debates the Bush tax cuts.

all the points are good, but the 4th is my favourite, followed by the first half of the 3rd point

for more on the "debate" about the Bush tax cuts, see The tax-cut racket. Paul Krugman, NYT.

America the poor. Robert de Neufville, BigThink.

according to the Census Bureau, a shocking 20.7% of all children in America lived below the poverty line in 2009

quote of the day:

I am not a Democrat, because I have no idea what their economic policies are; And I am not a Republican, because I know precisely what their economic policies are.

Barry Ritholtz.

September 15

"In theory there is no difference between theory and practice. In practice, there is." Yogi Berra.

The fair. Tim Duy, Fed Watch.

A man takes his son to the county fair; the lights and sounds of the amusement rides are like a magnet to the boy. The boy, however, is penniless. His father, seeing the longing in his son's eyes, hands the boy a dollar for the rides, but quizzically adds "if it looks like you are about to have any fun with that dollar, I will take it back from you." The boy is puzzled. First, a dollar only buys three tickets, and the least expensive ride is four tickets. Plus, Dad said he would take the dollar back if he went to buy tickets. So what is the point of even trying to buy any tickets?

Consequently, the father and son stand at the edge of the midway, the father wondering why his son simply stands there while the son wonders why his dad doesn't want him to have any fun. They are soon joined by the boy's grandfather, who, assessing the situation, says that the father should never have given the son a dollar in the first place. "He will just buy candy, which will cost you more later when you have to take him to the doctor to treat diabetes." The father neither agrees or disagrees. Along comes a trusted uncle, who says to give the boy another dime, but "then if he looks like he will have any fun, take back a quarter."

The grandfather and uncle start bickering, loudly, in public, about what to do with the boy and his dollar. Soon another uncle rushes into the fray, proclaiming it is pointless to give the boy a dollar because all the workers are already busy helping other fairgoers. "He can't buy anything anyway, and if he tries, he will just drive up prices for all his cousins." The discussion becomes increasingly heated, drawing the boy's cousins away from the rides. The lights and noise of the fair fade as lines dwindle and the rides grow silent.

All the while, the confused boy is wondering why his father just stands there, refusing to criticize the grandfathers and uncles even as the argue increasingly silly positions. Finally, the father, realizing the boy's confusion, turns to him and says "Reaching consensus in the family is always more important than the fair." The arguing continues as employees begin to turn off the rides, one by one.

This, I believe, is an apt analogy of the current state of monetary policy. A policy that is supporting disinflationary expectations simply because it lacks a credible commitment to any other outcome.

more at the link

Debating the flat earth society about hyperinflation. Mish.

with the new Basel III rules the talk of the week, here's some amusement:

What is a capital standard? Deus ex Macchiato.

note: not that we're concerned here in Canada about the capital ratios, given that our banks are all in good shape, but, more generally, any changes in capital ratios are totally irrelevant if assets are over-valued; if you're not sure the assets are valued properly, what good are any ratios?

for much more, see Capital can't be measured, by Steve Waldman, in which he says:

For any large complex financial institution levered at the House-proposed limit of 15×, a reasonable confidence interval surrounding its estimate of bank capital would be greater than 100% of the reported value. In English, we cannot distinguish “well capitalized” from insolvent banks, even in good times, and regardless of their formal statements.

what's more, what if you can't trust not just the accounting but the accountants? remember LEH, which (i), as noted in Waldman's article, reported 11% tier one capital ratio just 5 days before it went BK; and which (ii) said it had a $32.5 billion liquidity pool, which, it turns out, they overstated by just a measly $30 billion; and which (iii) was window-dressing its books by shifting $50 billion of assets off and back on with "Repo 105" (BoA also manipulated its quarter-end books; & GE admitted in 2009 to cooking its books; and its now being sued again)

and, with FASB letting companies do whatever they want, has there been any evidence of improvement in accounting practices?

speaking of bank rules:

William White says getting tough on banks may not hurt economy. naked capitalism

Will the Basel III bank regulations change anything? Washington's Blog.

The Empire strikes back. Avinash Persaud, voxeu.

I haven't read this yet, so don't know for sure that its worth recommending, but, like Hussman and Grantham and Hoisington, etc., Howard Marks' musings are usually worth the time.

other fare:

How much is left? The limits of earth's resources, made interactive. Scientific American.

who are the terrorists? American military practice has been to indiscriminately kill Iraqi civilians by randomly firing bullets in a 360 degree circle anytime that an I.E.D. hits a U.S. soldier

If, Rudyard Kipling (hat tip to Rosie who quoted the first few lines in one of his recent market musings)

September 12

CMHC - the enabler to Canada's housing addiction and Is there a housing bubble? both by Ben Rabidoux, via zerohedge.

interesting chart on PE ratios in market cycles

from Crestmont Research.

I don't agree with this weak analysis at all: A Japanese lecture for bond investors. Edward Chancellor, FT.

I don't disagree just as a matter of principle; rather, I find his arguments flimsy and unsound --- there are a number of points he makes I take issue with.

Japan is unique relative to other instances of banking crises; okay, sure, maybe so; but does this somehow imply that the U.S. is more likely to follow the path of the other examples rather than that of Japan; if so, why? in what ways are the US' similarities to those other experiences more compelling than to the Japanese situation? we don't know b/c he doesn't say

if deleveraging tails off, that will stimulate demand? sure; of course; but he seems to be implying that that is a fair accompli; really?

Japan suffered from a political imperative to avoid inflation; okay; doesn't the U.S. too continue to insist that low and stable inflation must be maintained? is there any more appetite apparent in the U.S. than in Japan to encourage high inflation to eat away at the debt burden? Ive seen no evidence of that, and he certainly doesn't provide any.

Japan's ability to raise prices was constrained by competition from China; this is said as if it differentiates the US experience from that of Japan; really? the U.S. doesn't face competition from China and other nations?

the banking system has been recapitalized? yes, of course, there were capital injections; but are they truly solvent? have not accounting rules been changed to avoid recognition of losses? is this really that different than the zombie bank situation in Japan? one of Japan's problems identified by Chancellor is the hiding of bad loans that happened there --- but not in the U.S.? really?

the demographic situation in the US is certainly not as difficult today as it is in Japan today, but is it really that much better today in the US than it was in Japan in the early 90s? is the baby-boomer situation not a problem in the US? really? baby boomers realizing that their nest eggs have been seriously compromised by a stock market down 50% from its peak and house prices still falling and now with low interest rates to boot, thats not a disinflationary force in the US?

the US WAS a spendthrift nation; is Chancellor saying that because it did spend beyond its means for most of the last 2 decades it must therefore continue to dissave going forward? really?

the credit impulse has turned positive? really? based on what evidence?

his question "how large is the output gap, really?" is really just the icing on the cake of this very weak piece; what a load of hooey!

Searching for yield. Morgan Stanley Interest Rate Research report, via zerohedge.

Albert Edwards, via zerohedge.

The current situation reminds me of mid 2007. Investors then were content to stick their heads into very deep sand and ignore the fact that The Great Unwind had clearly begun. But in August and September 2007, even though the wheels were clearly falling off the global economy, the S&P still managed to rally 15%! The recent reaction to data suggests the market is in a similar deluded state of mind. Yet again, equity investors refuse to accept they are now locked in a Vulcan death grip and are about to fall unconscious.

The slump goes on: why? Robin Wells and Paul Krugman, NYRB.

I was going to comment about the WSJ economic symposium piece What should the Federal Reserve do next?, commenting that the range of opinion sought is hardly a range (only 1 of the 6, Vincent Reinhart, advocates continued Fed stimulus; i.e. he's the only one who recognizes the current trend of disinflation, the large output gap and the continuing decline in inflation expectations). But I don't need to rant any further, as I found someone who has done so already, in What should the Fed do next? Niklas Blanchard, Modeled Behaviour.

On the value of Treasuries. Jake, EconompicData.

In recent weeks, a number of investors I respect have commented that Treasuries are rich and should be avoided (or even outright shorted). Recent examples include Doug Kass and James Montier, both of whom claim current yields put too much weight on expectations of a double dip. I simply don't agree...While I am not a Treasury bull, it is my view that at a 2.7% yield Treasury bonds are fairly valued when one takes into account the low growth / low inflation outlook, the Fed's extended easing policy, and the potential for capital appreciation rolling down the steep yield curve. Below we'll take a look at these three points in more detail....

a couple of short pieces from David Beckworth: In case you were wondering & What a mess.

It's a depression. Rosenberg, via The Big Picture.

Rome is burning. Karl Smith, Modeled Behaviour. nice rant, including:

There are machines waiting to be worked and people waiting to work them but they are not getting together. The labor market is failing to clear. This is a fucking disaster.... We have people who would be working but are instead watching Judge Judy.

2 anecdotal reminders that credit bubbles aren't just Anglo-Saxon affairs:

Empty flats spell trouble. Andy Xie, China International Business. and Hello from Sao Paolo. Planet Money, NPR.

Quantifying top 10 China risks. Morgan Stanley, via zerohedge.

Unfortunately, I can't disagree with Gonzalo Lira on this one: Why Paul Krugman is an imbecile -- or a fraud. As Lira says, I don't always agree with Krugman, but I have always found reading him worthwhile and have generally respected his views. But now, not so much.

Globalisation. Stephen King (HSBC), FiveBooks.

trailer: Inside Job. via youtube.


recent data:
Cdn jobs about as expected, US jobless claims better (though data questionable, given that 9 states didn't file), but the consumer credit contraction continues, there are more and more people on food stamps, and the Beige Book said there was "continued growth in national economic activity during the reporting period of mid-July through the end of August, but with widespread signs of a deceleration compared with preceding periods"



other fare:

bring on global warming: How Canada will become a superpower, making the Northern Rim the envy of the world. Laurence Smith, via io9.

I was wrong about veganism. Let them eat meat – but farm it properly. George Monbiot, Guardian.

this is what education is coming to??? A class to die for. NYT.