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Stop Manipulating Bank Earnings With Loan-Loss Reserves, Currency Comptroller Warns Submitted by Tyler Durden on 10/30/2012 13:13 -0500 Capital Markets Commercial Real Estate Comptroller of the Currency GAAP Housing Bubble Market Crash non-performing loans None Real estate Reality Readers of Zero Hedge know well that one of the most abhorred (by us) accounting gimmicks employed by banks each and every quarter over the past 3 years to boost their bottom line, is to engage in loan-loss reserve releases: a process which has absolutely no associated cash flow benefit, but merely boosts EPS for GAAP purposes. In some cases, like this quarter's absolutely farcical JPM earnings release, the abuse is beyond the pale, as the offending bank releases reserves even as it reports surging non-performing loans : two processes which in a normal world can not coexist. Yet quarter after quarter banks keep on doing this, and in fact a big part of Q3's to date EPS outperformance is courtesy of financial company "earnings", of which, in turn, loan losses amount to about 50% of the entire blended financials bottom line. Yet while we can rage and warn, nothing usually happens until there is a market crash due to the gross manipulation of reality that such an activity entails. Luckily, this time someone with more clout in the legacy establishment has now stood up to warn about the mounting dangers associated with the relentless abuse of loan-loss reserve releases: none other than the US Comptroller of the Currency. From WSJ : The U.S. could stop banks from boosting their earnings by cutting back on reserves held against future loan losses , a top bank regulator said Monday, arguing that the economy remains too rocky for financial institutions to lower their cushions. Comptroller of the Currency Thomas Curry has been warning for several months about the practice of bank-reserve releases, which occur when banks add less to their loan-loss reserves than they write off for uncollectible loans. The difference has bolstered banking profits in recent quarters. Mr. Curry repeated his criticism in a speech before a group of bank risk managers in Dallas, citing the potential for future losses in residential and commercial real estate. "I remain very concerned that too many institutions are continuing to reduce provisions solely to boost earnings," Mr. Curry said. Yet, sadly, while the US " could " intervene, it won't for the simple reason that everyone in the US is beholden to these same banks whose ongoing fake profitability is critical to the status quo, the government and everyone in it. After all the, everyone has now gone all in on the massive systemic ponzi. And the Currency Comptoller will be the last to dare to pull the plug on what is a black capital hole amounting to trillions and trillions of dollars. " We are ready to take action if and when it is needed ," he said. Regulators are concerned banks will suffer more losses from borrowers who took out home-equity loans from 2004 to 2008 , as the housing bubble grew and then burst, Mr. Curry said. Most of those loans allowed borrowers to make only interest payments for seven to 10 years. When that period ends, some borrowers are unlikely to be able to meet monthly payments that are increased to include principal. And many likely won't be able to refinance. Action is needed. Observe the billions in "profits" JPM alone has made from loan-loss reserve releases (blue bar): Alas, no action will be taken. And it is this hypocrisy that makes a total mockery of all the so-called regulators in the US. Because at least the banks are honest in their ongoing manipulation and fraud: they benefit from it, and why not: after all nobody dares to stop them. It is the regulators whose job is to put an end to this behavior. But they are afraid: for their jobs, for their legacy, for their petty egos. As long as this doesn't change, the US economy, and its capital markets, just continue happily day after day, to the most epic crash every imagined. The good news is that only that terminal event has any hope of changing all these things that we, and even the regulators now, lament. Everything else is hollow rhetoric. Average: 4.882355 Your rating: None Average: 4.9 ( 17 votes) Tweet Login or register to post comments 10580 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: JPM Beats On Loan Loss Reserve Release Despite Drop In Trading Revenues And NIM, Surge In Non-Performing Loans The 'Real-Thing' Biden vs Ryan VeeP Debate - Live Webcast Are 401(k) Loan Defaults Set To Resurge? Spanish Stocks Plunge Most In 12 Months As Egan-Jones Cuts Spain To CCC+ German President Demands Merkel Explain 'Why Germany Needs To Save
Job Creation Under Barack Obama: Less Than Meets The Eye? Submitted by Tyler Durden on 11/03/2012 18:34 -0500 Barack Obama BLS Bureau of Labor Statistics President Obama Recession In the aftermath of yesterday's better than expected jobs number there have been many analyses in the media on both sides of the aisle, either attacking or defending Obama's track record in creating jobs. All have come up with arguments which according to their authors, are solid and defensible. There is one analysis, however, which is missing, and that is a follow up of what we showed yesterday in " Chart Of The Day: America's Geriatric Work F(a)rce ." In it we demonstrated the very much "under the radar" schism of America's workforce since the NBER-defined official end of the recession in June 2009 into the " haves ", or those above 55, who have been able to get a job since the end of the recession, and the " have nots ", or all those in the labor force who have not been able to find a job. So how does this data look when extended to the beginning of Obama's term, or the 46 full months starting with his inauguration in January 2009, and continuing through the latest, October 2012 data point. The chart is presented below; you decide. And for those wanting a more granular breakdown, here it is by all the age categories tracked by the BLS. In summary: while those in the 55-69 age group have gained nearly 4 million jobs under President Obama, everyone else has lost just over 2.5 million. In other words, those aged 55 and over should be scrambling for "4 more years." Everyone esle... perhaps not so much. Average: 4.117645 Your rating: None Average: 4.1 ( 17 votes) Tweet Login or register to post comments 18339 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: Guest Post: Why I Don't Vote Presenting America's Political Apathy: Voter Turnout Rate 50% The CEO Letter Heard Around The World "Vote Obama; Lose Your Job" Guest Post: Want More Tax Revenue? Increase Jobs Not Rates Charles Ferguson: "Standing Behind Every Great Con Artist Is Someone Like Glenn Hubbard "
Lessons In Fiat Reality: "Why I Learned To Trade Less And Love The Farm" Submitted by Tyler Durden on 10/21/2012 13:22 -0400 Demographics Jim Rogers Reality Stephen Diggle is one of the least well known (except to his clients) and yet most successful hedge fund managers over the past decade - having made around two-and-a-half billion dollars during the financial crisis - but in the last few years, he came to a dramatic (and we hope enlightening for many) perspective. This fascinating presentation, in his own words, discusses "how , having made that fortune trading, came to conclude that wanted to preserve the real value of that fiat money windfall, had to get away from trading and buy, own, and operate real assets with real cashflows." - most specifically farms. From being ridiculed as a 'Cassandra' in the mid to late 2000s, Stephen's conviction then that the world was heading for a crisis was as high as his conviction now that in order to ride the wave of global central bank intervention and the implicit macro-economic waves that will crash on every shore in the forthcoming years, that farmland (preferably diversified) is the best risk-reward 'trade' in the coming decade . An intriguing tale of reality and un-greed and everything you need to know about agriculture (from demand to demographics and from fiat-debauchment to interventionist policies) but never knew to ask. An inspiring and insightful brief presentation that offers more depth than any Jim Rogers' mini-clip on CNBC. Inflationary concerns... and macro drivers... The 'real' price of land (in USD)... and in Oz of Gold... Probably the most famous proponent currently of investing in farmland is Jim Rogers , who remains among the most prescient of investors; unfortunately he is offered neither the time or space to detail this view among the mainstream media. We hope Stephen's presentation provides all the color needed to comprehend this global macro view. (h/t Grant Williams) Average: 4.642855 Your rating: None Average: 4.6 ( 14 votes) Tweet Login or register to post comments 17607 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: Rogers: "Volume Is Not Going To Come Back. We've Had A Great 30 Years. That's Finished!" Guest Post: Two No-Brainer Ways To Play Rising Food Prices For Marc Faber The Iron 'Ore' Lady Has Sung Marc Faber Jim Rogers On Our "Clueless, Ignorant, Dangerous" Leaders The Commodity Matrix: What Is The Resource Of Tomorrow, And Who Will Benefit From It?
September Retail Sales: Seasonal vs Non-Seasonal - Spot The Difference Submitted by Tyler Durden on 10/15/2012 09:31 -0400 Great Depression St Louis Fed Just when we thought we may finally get one decent economic data point which even we could get excited about, we decided to look at the Non-Seasonally Adjusted September retail sales data. After all the $4.7 billion seasonal increase in headline retail sales was the second highest ever (in absolute terms, second only to 2004). Turns out our curiosity was an enthusiasm-dowsing mistake, as a number which on the surface looked good, was hardly validated by the Not-Seasonally Adjusted number, which plunged by $31.9 billion . How does this September sequential change compare to previous years? See the chart below and decide for yourselves if the massive NSA plunge in September 2012 merits the second best seasonally adjusted retail sales increase in history. If anything, the 2012 spread of SA vs NSA retail change is most comparable to that from September 2007. As a reminder, this is 2 months before the 2nd Great Depression officially started. Source: St Louis Fed Average: 4.285715 Your rating: None Average: 4.3 ( 7 votes) Tweet Login or register to post comments 9960 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: Is It The Weather, Stupid? David Rosenberg On What "April In January" Means For Seasonal Adjustments Initial Claims In Holiday Shortened Week Drop To 350K From Upward Revised 376K Due To "One-Time Factors" Seasonal Adjustments: Big Swing Factor? Retail Sales Beat Expectations, As Empire Index Misses, Negative For Third Month In A Row The Strangest Number In Today's Jobs Number
Food Inflation To Surge, Goldman Warns Submitted by Tyler Durden on 10/10/2012 22:02 -0400 Brazil Central Banks China CPI Czech fixed Goldman Sachs goldman sachs Gross Domestic Product India Kazakhstan Mexico Ukraine Volatility We have been very active in our discussions of the impact of the pending rise in food prices around the world (from central bank largesse to weather-related chaos ). As Goldman notes, food inflation has been one of the most significant sources of headline inflation variation in emerging markets (EM) over the past few years . Since June, international prices for agricultural commodities have risen almost 30%, increasing the risk of fresh, food-related increases to EM headline inflation. We, like Goldman, expect EM headline inflation to start to reflect the relevant pressures more broadly in the October prints at the latest. While the effects, for now, are expected to be less extreme than the 2010-2011 episode, the timing as the US enters its fiscal-cliff-prone malaise, could mean a further round of easing will reignite this critical inflationary concern . Via Goldman Sachs, Food prices: A key driver of EM inflation Swings in food prices have important implications for overall inflation in emerging markets. Since 2007, we have observed substantial shifts in food inflation, which in turn have triggered significant contemporaneous volatility in EM headline inflation (see Exhibit 1). Food inflation has a strong impact on overall EM inflation for two reasons: In lower per-capita GDP economies, households necessarily dedicate a larger portion of their disposable income to inelastic goods such as food . As such, food makes up a larger share of the consumer basket. The average inflation share for food items in EMs is generally larger than that for the G10 countries (25% vs 15% respectively, on average). In order to capture the joint effect of the weight, the relative variation of food vs non-food inflation and the potential correlation between food and non-food items, we run univariate regressions of food on headline inflation. The R-squareds are typically higher on average for EMs (42%) than for G10 economies (33% respectively, Exhibit 2). Food prices have been highly volatile since 2007 globally . We have observed very large spikes in international prices for agricultural commodities (proxied by the SP GSCI Agricultural Index) in 2008, 2011 and more recently in June 2012. Such global price shifts typically also tend to be reflected in local food inflation. Exhibit 3 shows the co-movement between international food prices and an equally weighted average of food inflation rates across emerging markets. International food prices have tended to lead local food inflation by a few months (approximately four months on average). Following a significant increase in 2010, aggregate EM food inflation peaked in 2011 and has contributed to an overall moderation in EM headline inflation since. But EM food inflation has recently shown tentative signs of a trough and, at the country level, there is variation in the recent path of food inflation. China, Korea and Indonesia have seen the largest falls in food inflation from their 2011 peak. However, in countries such as Taiwan, Mexico and the Czech Republic, yoy food inflation has picked up and is currently hovering at higher levels than in 2011. This bottoming-out of EM food inflation has coincided with a significant spike in international agricultural commodity prices. In June and July this year, the SP GSCI Agricultural Index rose almost 40%, to levels last seen in August 2011, and roughly speaking has remained there since. Should this spike persist, we would expect to see food inflation pick up across EM once again. Here we argue that food price pressures will boost EM headline inflation by October at the latest . However, we do not expect EM CPI to exceed 2011 levels (in yoy terms). This is because we expect the increase in food prices to be smaller and less broad-based, and because non-food inflation is running at a slower pace currently. Moreover, we find evidence that the pass-through from international to local food prices has declined, something that first became visible in 2010. Food price outlook – new highs expected Agricultural commodity prices have exhibited substantial swings in the past few years. On the demand side, rapid income growth in EM economies has supported overall demand for agricultural products . Along with the broader increase in agricultural commodity demand, increased consumption of meat products has led to higher meat production and, in turn, higher demand for livestock feed. Lastly, high energy prices also boost food demand via the substitution process between conventional fuel and biofuel . Given this backdrop of elevated demand for agricultural commodities, the response in food supply conditions becomes the key to analysing price movements. Volatility in weather patterns and crops has helped trigger substantial inventory shortages and price spikes such as those experienced in 2008, 2011 and more recently in June 2012. The current spike has come in response to the summer drought in the US Midwest, which was one of the worst in the past century. In addition, a wide set of agricultural commodity producing countries have experienced adverse weather conditions (such as Brazil and Argentina in the past winter, and Russia, Ukraine, Kazakhstan and India). Damien Courvalin from our Commodities Strategy Team points out that these disruptions have caused substantial losses in global food supply (see Agriculture Update: ‘Severe US Drought to Push Corn and Soybean Prices to New Highs’, July 23, 2012). The supply loss is concentrated in wheat, corn and soybeans, which jointly account for 70% of world agricultural production . In contrast, rice remains largely unaffected. Despite the resulting 40% spike in the SP GSCI Agricultural Index between mid-June and mid-July, demand for agricultural commodities has remained robust. The net result has been a decline in inventories, with the USDA’s September 1 stocks of corn and wheat well below expectations, as Damien highlights in Agriculture Update: ‘Crop prices to recover on tight supplies with corn outperforming’, September 30, 2012. Our Commodities Strategy team expect demand to remain resilient and supply to remain binding , leading soybean and corn prices to new highs in the coming months. Higher prices will eventually be followed by a supply response, and if weather returns to normal, we should expect a large crop in South America (harvested next spring) and in the US (harvested next autumn). In the interim, prices are likely to remain high. However, there is a clear weather dependency to this assessment ; further weather adversity is likely to pose further upside risks to food prices. To address the binary nature of the food price outlook, our Commodities Strategy team provided us with two scenarios: The ‘favourable’ weather scenario , in which larger harvests in South America and the US serve to moderate agricultural prices following the initial increase. In this scenario, a basket of corn, wheat and soybeans sees year-on-year price changes of 46%, 16% and -21% in 3, 6 and 12 months respectively. The ‘moderately adverse’ weather scenario , in which supply tightness intensifies due to less favourable weather in South America, pushing prices to a higher peak over the coming months. In this scenario, the basket of corn, wheat and soybeans increases 65%, 41% and 1% in 3, 6 and 12 months respectively. Exhibit 4 shows the equivalent paths corresponding to each of the two scenarios of price developments in the corn, wheat and soy basket. In both scenarios, the SP GSCI Agricultural Index reaches new highs in the months ahead and declines one year out. The peak is, of course, higher in the adverse scenario, as is the trough 12 months out . The decline following the initial spike is also more gradual in the adverse scenario, while the final levels remain very close to the previous (2011) highs. It is worth pointing out that this scenario analysis is only meant as an illustration of the broader argument, rather than a precise forecasting exercise. Evidence of a moderation in the pass-through to EM inflation To translate our scenarios for international food prices into local food price trends for emerging markets, we need an estimate of the relationship between the two variables. As mentioned earlier, large shifts in global food prices have tended to show up systematically in local food inflation . Moreover, local food prices are typically stickier and slower to respond to shocks in global agricultural prices, which creates a lag between the two. To map international food prices onto local food prices, we follow the framework we introduced in Global Economics Weekly 11/13, June 6, 2011. We regress changes in the SP GSCI Agricultural Index on changes in an equally weighted average of food CPI components from key EMs. To avoid issues of seasonality and excessive near-term volatility, we look at year-over-year percentage changes in the two variables. Lastly, we examine different lags in international food prices to find the type of structure that offers the highest explanatory power. As in our previous analysis, we find a strong correlation between international and local food prices (an R-squared of 40%), with international food prices feeding through to local food prices with the highest explanatory power at a four-month lag (with a five-month lag a very close second). We estimate the historical sensitivity of local to international food prices at around 0.058, which implies that a 10ppt increase in international food prices would tend to raise our proxy of EM local food inflation by 58bp. Interestingly, this is 20% lower than our estimate from one year ago, of 0.073. This is further evidence for our suggestion from last year that EM CPIs appear to be displaying a lower sensitivity to global food price shocks. This could be due to a number of reasons, such as the temporary nature of the shocks, the softening in global demand dynamics leading to less broad-based price pressures, or the larger capacity of EM authorities to respond to food price volatility and smooth such shocks. It will be interesting to observe whether the pass-through declines further this time too. In our previous analysis, we also examined two alternative scenarios for food prices : one that assumed that normal weather conditions persist and one that assumed that adverse weather conditions push food items significantly higher. Based on those scenarios (combined with our pass-through estimates), we projected ranges of outcomes for the forward path of our EM food inflation aggregate. Finally, we translated those paths into EM headline inflation projections by keeping the rate of inflation for non-food CPI in EM economies constant. To check whether this approach is robust using out-of-sample data, we contrast the actual path of EM inflation with the scenarios developed in April 2011. We see that over the last year EM headline inflation has hovered between our moderate and our adverse scenario (see Exhibit 5). This confirms our ex ante assumption that food inflation would remain the most important determinant of EM headline inflation, and also provides a level of comfort that our estimation approach and results are fairly sensible. It broadly confirmed our estimates for a lag of about four months in international food prices feeding through to EM inflation rates on aggregate. EM inflation set to increase more moderately than in 2010-11 With our two scenarios for international food prices, and our updated pass-through coefficient, we can now calculate two potential paths for EM food inflation. Using these, we then turn to estimating the impact of EM food inflation to EM headline inflation. To do this, we use the relevant food weights to split EM headline inflation into a food and an ex-food component. We then assume that EM inflation ex-food continues to grow at the current pace and we add the weighted path of food inflation to project the headline rate. We find: Relative to the latest available inflation data (August), there may be further downside to aggregate EM headline inflation due to food contributions . The impact of base effects and the relevant lags between international and local food prices imply that we may need to wait until the full set of October inflation prints are out to fully confirm the beginning of the systematic pick-up in EM food inflation. From October onwards inflation starts to rise and peaks, on a year-over-year basis, in March 2013 , i.e., 40-60bp above current levels and 80bp-100bp above the projected trough. After March 2013, inflation starts to decline. The pace of the decline will depend on future weather conditions. A moderate weather environment would lead to a quicker and deeper normalisation in EM inflation. Our projections suggest the peak in headline inflation will be lower than the 2011 food price spike episode , at between 4.6% and 4.8%yoy depending on weather conditions, compared with 5.1% in mid 2011. This is mostly because the food price increase itself is projected to be somewhat smaller for international food prices on aggregate and in annual terms, and to be less broad-based (focused on wheat, corn and soy). In addition, non-food inflation rates in the first half of 2011, when EM headline inflation peaked, were slightly higher (about 20bp on average) relative to the current annual pace of non-food inflation. There are three key risks around these conclusions. Timing appears to be more uncertain this time around . As mentioned earlier, there are signs across a number of EMs that food inflation is already picking up. This may mean that the lag estimate of four months in the pass-through from international to local food prices may be too lengthy this time around. In turn, this means that EM food inflation is likely to pick up sooner than October. Relative to the last food price spike in 2011, this analysis may be less applicable to Asian economies. This is chiefly because of the much more stable price developments in rice . To some extent our analysis takes this into account; as mentioned earlier, we map the corresponding shifts in the corn, wheat and soy basket on broader shifts in the SP GSCI Agricultural Index. And this is, in part, the reason why the size of the shock in aggregate international prices is smaller. However, we are conscious that we run our exercise on a high level of aggregation, which does not allow for more precise adjustments along those lines. The uncertainty in non-food inflation may be high in the months ahead . Oil prices are expected to recover from current lows but a lot will depend on the pace of global demand and developments in geopolitical risks. Moreover, there is a degree of co-movement between food inflation and core inflation across several EMs, which may pose upside risks to our stable current non-food inflation assumption. Finally, core inflation may exhibit a high degree of variation across emerging markets. We are coming out of a period of softening growth in EM economies which could dampen headline inflation prospects. That said, many EM economies continue to run at high rates of capacity utilisation and experience persistent inflation inertia. Note that these assessments do not constitute an inflation forecasting exercise but rather an illustration of likely paths for food-driven EM inflation on aggregate. There are, of course, local particularities that may create deviations from such assessments on a regional or country level. Our Asia and CEEMEA Economics research team have also done quantitative work projecting the likely impact of higher food prices on local CPIs. Reassuringly, their findings are broadly consistent with ours; in CEEMEA, our economists expect a 50bp-100bp upside contribution to headline inflation , mostly due to higher food prices but also accounting for the impact of energy prices. In Asia, our economists expect food inflation to add 100bp to local inflation. EM currencies to benefit Given the significance of food inflation for overall headline inflation levels and the linkages between food and non-food inflation recorded in the past, EM central banks are unlikely to fully dismiss food price volatility as a temporary and mean reverting phenomenon. Instead, they are likely to respond by tightening monetary conditions either via guidance (a more hawkish stance) or via currency strength (to curtail price pressures on imported food items), or even via higher policy rates. As international food prices are available in high frequency, markets are likely to anticipate these shifts to some extent. Given, however, that ex ante market assessments are conditioned on a number of underlying macro developments, shifts are likely to be priced only partially. Therefore, it is reasonable to expect market shifts to occur as EM food inflation pushes headline inflation up and EM policy makers react proportionally. Overall, higher headline inflation in EMs is broadly consistent with higher front-end rates (or rate expectations), flatter EM curves and currency strength. To confirm this intuition, we run a simple cross-asset event study of the last three food inflation spikes: 2004, 2007-08 and 2010-11 (Exhibit 7). We examine the average impact of food-driven headline inflation on EM curves and currencies, and also look at equity market behaviour. More specifically, to proxy for shifts in near-term interest rate expectations, we look at the change in 1-year rates 1-year forward relative to the US (to account for global shifts in fixed income markets). We also look at shifts in the spread between 5-year and 2-year EM rates relative to the US to proxy for shifts in the broader shape of the curve. Lastly, we examine average EM FX returns vs the USD and average EM equity performance vs the SPX. Arguably, it is hard to rely on such small sample assessments and cross-EM averages, but it is interesting that our results generally confirm our macro intuition: Typically, 1-year 1-year forwards tend to increase on average , albeit by a small amount, while EM curves flatten significantly in only two of the three episodes. EM currencies appreciated strongly vis à vis the USD during the last two food inflation spike episodes and were flat in the first episode under study. Interestingly, EM equities outperformed the SPX in all three episodes . It is hard to argue that such a negative supply shock can be linked to benign equity market trends. Indeed, in absolute terms, equities fell in two of the three spikes. The relative outperformance may be due to stronger EM growth vs G10 in our sample. Hard as it may be to draw firm conclusions from a limited sample, EM FX vs USD strength appears to be the clearer tradable result of EM food inflation pressures . Forward rate expectations have also tended to pick up, albeit to a small extent, while curve flattening is less obvious. Lastly, it is not clear if we will observe a repeat of the relative EM equity strength we saw in the past given the current mixed cyclical backdrop across different EMs. Source: Goldman Sachs Average: 5 Your rating: None Average: 5 ( 5 votes) Tweet Login or register to post comments 7584 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: Goldman Enters The "Corn Trade" Putting The Corn Harvest In Drought And Flood Context What Every Farmer And Commodity Trader Will Be Glued To Tomorrow at 830ET Food Price Spike Dead Ahead: US Cuts Corn Crop Forecast By 12% As 56% Of America Is Under Drought Conditions Deja Food: Will Social Unrest Surge As Corn Prices Soar?
US Treasury Admits It Conducted A Circular Ponzi Scheme For Years Submitted by Tyler Durden on 08/17/2012 09:29 -0400 Nationalization Tim Geithner While one may wonder about the implications of the just announced "accelerated windown" of the GSEs, predicated in no small part by the surge in animosity between Tim Geithner and the FHFA's Ed DeMarco, there is one aspect of the announcement that is completely and utterly unambigious: as part of its justification to demand faster liquidation of Fannie and Freddie's "investment portfolio" Tim Geithner gave the following argument : This will help achieve several important objectives, including... Ending the circular practice of the Treasury advancing funds to the GSEs simply to pay dividends back to Treasury In other words not some fringe blog, not some "partisan" media outlet, not some morally conflicted whistleblowing former employee seeking immunity, but the US Trasury itself just admitted it had been engaged in circular check kiting scheme, which essentially has all the components of a Ponzi scheme in it, ever since the nationalization (about which there is no now doubt and which means the GSE's $6 trillion in debt is now fully on the Treasury's balance sheet) of Fannie and Freddie in 2008. Transfer one more conspiracy theory into the conspiracy fact bin. Average: 4.875 Your rating: None Average: 4.9 ( 24 votes) Tweet Login or register to post comments 8503 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: Crony Socialism Strikes Back: Geithner Retaliates Against DeMarco; Accelerates Wind Down Of GSE Treasury Backing Geithner To DeMarco: "I Do Not Believe Is The Best Decision For The Country" Bank Of America Has Lost Money Trading On Only Three Days In 2012 Guest Post: TBTF Banks Laughing All The Way Home Thanks To HARP Presenting The Shocking Source Of US Treasury Demand In The Past Year
He Who Deleverages Best: Presenting The 'Credit Intensity' Of Europe's GDP Growth Submitted by Tyler Durden on 07/21/2012 14:06 -0400 Belgium Finland France Germany Global Economy Gross Domestic Product Ireland Italy Neo-Keynesian non-performing loans Portugal Reality Sovereign Debt There exist those pathological Economics 101 acolytes who say that no matter what happens in the global economy, since it is all supposedly a closed system, whether one incurs leverage at the sovereign or private-sector level is largely irrelevant, and that is all translates into economic growth as long as the system is experincing a net leverage increase. Usually these same acolytes come up with economic theories which attempt to validate and justify infinite sovereign debt incurrence, usually to explain why socialism can be funded (if only in various formerly capitalist societies). At the heart of their thinking is the Kalecki profits equation which says that: Profits = Investment – Household Savings – Government Savings – Foreign Savings + Dividends Or in other words, as long as the non-government sector is expanding its savings (reducing leverage), aggregate economic output remains the same as long as the government is doing the opposite. Of course, as we explained before this equality breaks immediately in a real world in which one evaluates the impact of asset age, amortization, depreciation and otherwise the impact of reality on profitability. But does that mean that every economics theory that says corporate deleveraging is offset by sovereign leverage is wrong? Not necessarily. it just says that there is far more to the final outcome than what an Neo-Keynesian Econ 101 textbook alleges. To evaluate the impact of private sector deleveraging on economic growth/GDP in the context of a rapidly releveraging sovereign, we present the following analysis from Citi which observes various European countries and analyzes the "credit intensity" of GDP growth, or in other words which country has preserved, or even grown its GDP even as its private sector has seen substantial deleveraging. The results are interesting and may present a framework for evaluation the winners and losers in Europe in the era of "great sovereign leveraging", permitting a reverse engineering of the success stories, and applying their lessons to the losers. Citi has compiled data analyzing private sector leverage and cross referenced it to countries who have seen massive sovereign debt expansion in the past 5 years, however offset with various degrees of private sector deleveraging. The results are as follows : Given the persistent tensions from the financial sphere and the precarious situation of some banking systems, it is interesting to compare how much leverage has been accumulated in the last ten years in various euro area member states and how much economic activity was generated during the same period (see Figure 4). This allows us to measure the ‘credit-intensity’ of GDP growth. In particular, we concentrate on the last five years to see whether the relationships have evolved. In peripheral countries such as Spain, the last two years (Q4 2009 to Q4 2011) saw a 16-point drop in the real credit outstanding without triggering a contraction in the level of economic activity. Over the same period, Ireland was perhaps the most successful peripheral country, with real credit outstanding shrinking by 57 points while the real GDP level rose by 4 points. In Portugal, while the reduction in real credit outstanding was more limited, worth 12 points in the last two year, the level of real GDP still declined, albeit by a modest 2 points. Italy is the only country within the peripheral group that experienced an increase in the amount of private sector real credit outstanding, with a gain of 5 points. Yet, the corresponding increase in real GDP was limited to just 2 points. Core and soft core countries recorded GDP gains, with Finland (7pt) and Germany (6pt) clearly in the lead, compared to Austria (5pt), Belgium (4pt) and France (3pt). Interestingly, Belgium managed to grow its GDP despite experiencing a clear deleveraging phase. Note that Germany is the only euro area member state to have recorded an increase in its GDP level since 2002 while its level of private sector credit outstanding has declined during the last decade . So while the occasional success story may exist, the danger is as always one of extrapolating into the future too far, especially a future in which private sector growth will very likely be even more constrained in the coming years. The danger is that expanding sovereign leverage will no longer be private sector offset, which it obviously is not in the general case, and will simply become a headwind to growth, at both the macro as well as micro levels. Looking ahead to the next few quarters, there is a clear risk that banks operating in peripheral countries will either maintain tight lending standards or restrict lending even more in the event of further increases in the proportion of non-performing loans. Unless those countries implement sufficiently comprehensive structural reforms to lift potential growth, economic activity is at risk of contracting further in the coming quarters, increasing investors concerns about debt sustainability. 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