The labor day period ended and the markets returned to risk-off profile as the media was awash with stories about the European stress tests being flawed. It seems that some analysts have awoken to the fact that the European tests were curved so as not to be overly bogged down by sovereign debt issues. There is nothing new to this as we talked about the flaws in the tests when they were administered, but the market ran with the “story” anyway and so we had a day of risk off. In addition to the Euro stress tests there was some softer German manufacturing data, which aided the equity selloff and, of course, put downward pressure on the EURO and other non-dollar currencies. The YEN, SWISS FRANC and GOLD were the biggest beneficiaries along with the long end of the global DEBT markets.
The Japanese are certainly not happy with the YEN strength but at this time it seems like there is not a great deal that the BOJ or MOF plan to do. In a Wall Street Journal opinion piece by Naomi Fink, who we consider to be a first-rate analyst, argues that the appreciating YEN may well be a blessing for the Japanese. We don’t agree with her analysis at the present time, but we think she raises many interesting points and is certainly worth reading and considering.
In Australia, we heard that Julia Gillard has cobbled together a Labor-led coalition in Australia. If the outcome means that the resource extraction gets watered down, we would view this as a positive for the AUSSIE. The Labor program has yet to be finalized so we are still cautious in our Aussie bullishness. The RBA stood pat on rates and offered a somewhat hawkish statement, but global growth uncertainty tempered any Aussie growth prospects.
Tomorrow morning we will hear from the Bank of Canada. The market is mixed about the probability of a rate rise–overnight rates are currently 75 basis points and it’s 50/50 that they will raised to 100 basis points. As with Australia, we will read the statement carefully. The latest data in Canada has been mixed but the BOC has been desirous of getting ahead of the curve but we want to see if the lack of U.S. growth causes the Canadians to hold rates since they remain cautious because of slowness in the other developed countries.
A reader of ours raised a question about the reason Larry Summers is in China during recent economic policy headlines from the OBAMA administration. The point raised was that Summers may be there to inform the Chinese that there are plans to refinance MBS mortgages and because China holds a great deal of that paper they want to let them know what the plans are and the potential impact the REFINANCE will have on the Chinese. Maybe a mark down of MBS is a far less painful path than to have tariffs and surcharges imposed on Chines imports. Senator Schumer is banging the drums louder for Chinese revaluation, which will benefit no one but send fears of an impending trade war. We stress again that the biggest bang the Obama administration can get would be a massive refinance plan, which would result in much lower monthly mortgage payments and aid millions of people who are currently underwater on their homes but would stay current with a much lower monthly payment.
Renowned investor Wilbur Ross added more support to this argument. Ross, who has invested heavily in the finance business in the last two years believes that the government should aid homeowners to avoid “negative equity rat holes.” In an interview, Ross said “holders of MBS securities should get tax benefits for giving borrowers better terms.” Yes, we know that ROSS and his companies will come out to the good but we only care if the policy makers latch on to this concept. Mortgage relief is what is needed to halt the rise in foreclosures, which is putting even more pressure on bank balance sheets and thus tying up the securitization market. Credit will not flow until banks have some sense of certainty that the downward pressure on residential real estate is abating. The effort to stem the balance sheet recession has to begin somewhere. Why not mortgage relief? Drips and drabs of tax relief will not prevent further write downs or get credit flowing, for as the market asked today: Is that all there is?
Tags: Aussie, Australia, BOC, BOJ, Debt, elections, Euro, Fannie Mae, Freddie Mac, Gold, Julia Guillard, Larry Summers, MBS, MOF, Naomi Fink, Obama, RBA, refinance, Swiss Franc, Wilbur Ross, Yen
September 8, 2010 at 5:45 am |
YRA, I’m surprised to see you stating that credit will not flow until the banks see abatement of downward pressure on real estate. There is so much packed into that sentence. Too much for me. Banks don’t make mortgage loans any more. The government agencies buy what the banks originate, as you know. So long as the agencies are buying, credit can flow. Perhaps you mean to say that so long as real property values are uncertain, nobody can trust a business forecast as a basis for making a loan. Now you are talking about aggregate demand, I suppose, and a host of other things. Stable home prices and some level of turnover would be a good indicator of a degree of economic health, perhaps something like a normal blood pressure. One would have thought that high pressure in home prices would have been treated appropriately before the bubble burst. Put it simply, Summers is in China to tell them they have to take a debt haircut if they don’t want their currency to appreciate and if they want to keep selling stuff to the US. Somebody ought to tell Schumer to read up on what happened to WWI and after war debts of the allies to the US, then more or less in the position China occupies today. They were rescheduled on 62 year maturities at 3% interest and paid off at a substantial NPV discount. The problem with any kind of debt forgiveness is the inherent unfairness in it for those who can and do pay. It then becomes impossible to distinguish those that can and wont to the detriment of those who cant and somehow do. The damage to the social fabric necessary to survive in a complex economy is incalculable and enlightened self interest becomes indistinguishable from fraud.
September 8, 2010 at 7:17 am |
The only way to aid millions of people who are currently underwater on their homes is to give them access to a decent paying job. But it is too late.
This statement is by Michael Haverty, CEO of the Kansas City Southern railroad, whose railroad lines go to Mexico, on why his railroad is doing so well :
“Automobiles are produced in Mexico, as is steel, appliances, and so on. That’s part of the reason that we’ve invested in Mexico is because so much of the manufacturing of North America is now moving down into Mexico.”
http://www.cnbc.com/id/15840232?video=1585759896&play=1
September 8, 2010 at 7:44 am |
Jill–first you have to stop the bleeding and then thru credit expansion the jobs will follow—I merely try to see how the government can utilize the money it is “spending” in a much more efficient manner.Yes I know all about the effects of NAFTA,which led the the Chinese devaluing the YUAN 50% on January 1,1994—that is the starting point of the discussion.If jobs moved from asia to north america that would be a good thing ,a very good thing but how do you get there?
September 8, 2010 at 3:24 pm |
Return to the FTA agreement that we had with Canada and remove Mexico from NAFTA.
http://en.wikipedia.org/wiki/Canada_%E2%80%93_United_States_Free_Trade_Agreement
Then stop this kind of nonsense:
(CNSNews.com) – The U.S. Export-Import Bank, an independent federal agency, loaned more than $1 billion to the Mexican state oil company PEMEX in 2009 to support the company’s oil drilling in the southern Gulf of Mexico. The bank has another $1 billion in loans in the pipeline for 2010, unless Congress objects…
WSJ-The U.S. is going to lend billions of dollars to Brazil’s state-owned oil company, Petrobras, to finance exploration of the huge offshore discovery in Brazil’s Tupi oil field in the Santos Basin near Rio de Janeiro. Brazil’s planning minister confirmed that White House National Security Adviser James Jones met this month with Brazilian officials to talk about the loan.
The U.S. Export-Import Bank tells us it has issued a “preliminary commitment” letter to Petrobras in the amount of $2 billion and has discussed with Brazil the possibility of increasing that amount. Ex-Im Bank says it has not decided
whether the money will come in the form of a direct loan or loan guarantees. Either way, this corporate foreign aid may strike some readers as odd, given that the U.S. Treasury seems desperate for cash and Petrobras is one of the largest corporations in the Americas.
Information Week-Federally-backed program aims to help outsourcers in South Asia become more fluent in areas like Java programming—and the English language.
Despite President Obama’s pledge to retain more hi-tech jobs in the U.S., a federal agency run by a hand-picked Obama appointee has launched a $36 million program to train workers, including 3,000 specialists in IT and related functions, in South Asia.
Following their training, the tech workers will be placed with outsourcing vendors in the region that provide offshore IT and business services to American companies looking to take advantage of the Asian subcontinent’s low labor costs.
Under director Rajiv Shah, the United States Agency for International Development will partner with private outsourcers in Sri Lanka to teach workers there advanced IT skills like Enterprise Java (Java EE) programming, as well as skills in business process outsourcing and call center support. USAID will also help the trainees brush up on their English language proficiency.
Businessinsider recently reported … “The cost of the food stamp program is on schedule to exceed $60 billion in fiscal 2010. For comparison purposes, there was just over 11 million on food stamps in 2005.”
“…there are 14.6 million unemployed, but of them 4.5 million of them are receiving regular unemployment benefits and another 4.7 million are receiving extended benefits. Thus 63% of those unemployed are receiving benefits.
“…there is massive underemployment with 8.5 million working “part time for economic reasons” and another 2.6 million “marginally attached” workers who want a job but are not considered unemployed because they have not looked for 4 weeks. This is “containment” of sorts, as the official numbers mask the depth of the unemployment problem.”
This is just unacceptable. Americans needs decent paying jobs. If they had a decent job they would not need a mortgage modification.
Why would America allow it’s manufacturing base to be looted? Who really benefits?
Can you name me one politician who is doing anything about this issue?
September 10, 2010 at 11:11 am
A single politician can’t be named because none of them truly understand what’s going on from a global economic perspective…furthermore, they don’t even try to understand long-term implications of their policies…moreover, their policies are nothing more than adaptations of their campaign slogans and talking points!! A truly sad state of affairs.
September 8, 2010 at 9:26 am |
drfrank–responses such as yours make this blog endeavor worthwhile.There is a great deal packed in there but let us deal with Summers in China.As you correctly state rescheduling and haircuts have been with us for all of economic history.We only have to look at brady bonds and the other mechanisms to reschedule and reprice third world debt,that is why i part company with those who claim that bond covenants are sacrosanct.It may be unfair to the creditors but so be it —that is why the U.S. Dollar is really suspect here and the Chinese are trying to reallocate away from too much U.S. debt.The Japanese YEN has been baring a great deal of the load as China scours for dollar based alternatives.The other choice for China is to purchase hard U.S. assets but CIFIUS keeps getting in the way.