Virginia is robbing Peter to pay Paul because it is plain flat out broke. Bankrupt is probably a better word. To pay unemployment benefits, Virginia will borrow $1.26 billion and pay it back plus interest by jacking up unemployment taxes.
As Virginia wrestles with ways to replenish its depleted fund for unemployment benefits, Hampton Roads employers expressed concern about the impact that higher unemployment taxes could have on the health of their businesses.
The sorts of tax increases described by the Virginia Employment Commission earlier this fall may be difficult for some small businesses to absorb without job cuts, said Jim Shirley, owner of Bennett's Creek Farm Market in Suffolk.
The state's average unemployment tax per employee will jump from $95 this year to $171 in 2010 and to $263 by 2012, the VEC said in a Sept. 29 presentation to the Commission on Unemployment Compensation.
For small retailers, the financial pressure from weak sales and higher unemployment taxes could be intense, Miller said. "You've got to have someone in the store, and if you're down to one person in the store, you can't cut any more."
In addition to boosting unemployment taxes on employers, Virginia will have to borrow more than $1.26 billion from the federal government in coming years to continue paying jobless benefits, the VEC said in its forecast.
That's because the deficit in its unemployment-benefits fund will hit $194 million by the end of this year and balloon to $561 million by the end of 2010, the VEC said.
Two dozen states, including North Carolina, South Carolina, New York and Texas, have already borrowed about $21 billion from the federal government to pay jobless benefits, according to the Labor Department.
One problem with borrowing to pay jobless benefits, the VEC noted, is that interest payments on this debt cannot come from the unemployment trust fund or from federal money. The interest payments on its $1.26 billion of projected borrowing are likely to total $36.7 million and come from general state funds, the VEC said in its September report.
Yet Another Reason To Not Hire
Borrowing money while jacking up taxes does nothing but give small businesses yet another reason not to hire anyone.
Local governments fork over billions in fees on investments gone bad
Detroit Mayor Dave Bing is struggling to save his city from fiscal calamity. Unemployment is at a record 28 percent and rising, while home prices have plunged 39 percent since 2007.
Against that bleak backdrop, Wall Street is squeezing one of America's weakest cities for every penny it can. A few years ago, Detroit struck a derivatives deal with UBS and other banks that allowed it to save more than $2 million a year in interest on $800 million worth of bonds. But the fine print carried a potentially devastating condition. If the city's credit rating dropped, the banks could opt out of the deal and demand a sizable breakup fee. That's precisely what happened in January: After years of fiscal trouble, Detroit saw its credit rating slashed to junk. Suddenly the sputtering Motor City was on the hook for a $400 million tab.
During late-night strategy sessions, Joseph L. Harris, Detroit's then-chief financial officer, scoured the budget for spare dollars, going so far as to cut expenditures on water and electricity. "I figured the [utility] wouldn't turn out our lights," says Harris. But there wasn't enough cash, and in June the city set up a payment plan with the banks.
Detroit Mayor Dave Bing is struggling to save his city from fiscal calamity. Unemployment is at a record 28 percent and rising, while home prices have plunged 39 percent since 2007. The 66-year-old Bing, a former NBA all-star with the Detroit Pistons who took office 10 months ago, faces a $300 million budget deficit — and few ways to make up the difference.
Against that bleak backdrop, Wall Street is squeezing one of America's weakest cities for every penny it can. A few years ago, Detroit struck a derivatives deal with UBS and other banks that allowed it to save more than $2 million a year in interest on $800 million worth of bonds. But the fine print carried a potentially devastating condition. If the city's credit rating dropped, the banks could opt out of the deal and demand a sizable breakup fee. That's precisely what happened in January: After years of fiscal trouble, Detroit saw its credit rating slashed to junk. Suddenly the sputtering Motor City was on the hook for a $400 million tab.
During late-night strategy sessions, Joseph L. Harris, Detroit's then-chief financial officer, scoured the budget for spare dollars, going so far as to cut expenditures on water and electricity. "I figured the [utility] wouldn't turn out our lights," says Harris. But there wasn't enough cash, and in June the city set up a payment plan with the banks.
Now Detroit must use the revenues from its three casinos — MGM Grand Detroit, Greektown Casino, and MotorCity Casino — to cover a $4.2 million monthly payment to the banks before a single cent can go to schools, transportation, and other critical services. "The economic crisis has forced us to move quickly and redefine what services a city can and should provide," says Bing. "While we face a tough road ahead, I believe we're on the right path." UBS declined to comment.
Detroit isn't suffering alone. Across the nation, local governments and related public entities, already reeling from the recession, face another fiscal crisis: billions of dollars in fees owed to UBS, Goldman Sachs and other financial giants on investment deals gone wrong.
Now, as many of those deals sour, Wall Street is ramping up its efforts to collect from Main Street.
"The banks stuffed customers with [questionable investments] and then extorted money from the customers to get rid of them," says Christopher Whalen, managing director at research firm Institutional Risk Analytics.
The New Jersey Transportation Trust Fund Authority, for instance, must pay nearly $1 million a month at least until December 2011 to Goldman Sachs on derivatives deals tied to municipal debt—even though the state retired the debt last year.
The Chicago Transit Authority, having entered into complex arrangements to lease its equipment to outside investors and then lease it back, could face termination fees of $30 million. The investors could collect penalties because American International Group, which backed the arrangement, has seen its credit rating tumble.
Detroit's Easy Solution
If Detroit Mayor Dave Bing pays UBS one dime over this, he is a complete fool.
The solution is easy. Detroit should declare bankruptcy. In fact, I recommend Houston and any other city in trouble to declare bankruptcy. If they do, they may not be able to go back to the bond markets for a while to raise funds, but so what?
Cities living within their means would be a good thing. Moreover, declaring bankruptcy will allow cities to rework pension benefits and union contracts.
I really do not understand this aversion to bankruptcy by cities.
Cash was king for consumers who shopped over the Thanksgiving weekend, according to survey results released on Sunday, and that factor could have cost retailers additional sales.
Only 26 percent of people who shopped over the weekend said they used credit cards for their purchases, according to a poll conducted for Reuters by America's Research Group.
"That's an amazing shift in consumers' habits," said Britt Beemer, founder of America's Research Group.
A total of 39 percent said they used cash, while the remaining shoppers used debit cards, the survey showed.
Consumers shunning credit cards is a bad sign for retailers, since people who buy gifts with a credit card tend to spend anywhere from 20 to 40 percent more on the gift, Beemer said.
As the closely-watched Black Friday weekend winds down, a National Retail Federation survey conducted over the weekend confirms the expected: more people spent less. According to NRF’s Black Friday shopping survey, conducted by BIGresearch, 195 million shoppers visited stores and websites over Black Friday weekend*, up from 172 million last year. However, the average spending over the weekend dropped to $343.31 per person from $372.57 a year ago. Total spending reached an estimated $41.2 billion.
Shoppers’ destination of choice over the past weekend seemed to be department stores, with nearly half (49.4%) of holiday shoppers visiting at least one, a 12.9 percent increase from last year. Discount retailers took an uncharacteristic back seat, with 43.2 percent of holiday shoppers heading to discount stores over the weekend and another 7.8 percent heading to outlet stores.** Shoppers also visited electronics stores (29.0%), clothing stores (22.9%), and grocery stores (19.6%). As millions of shoppers gear up for Cyber Monday, one-fourth of Americans shopping over the weekend (28.5%) were shopping online.
“In an economy like this one, every retailer wants to be a discounter,” said Tracy Mullin, NRF President and CEO. “Department stores have done an admirable job touting both low prices and good quality, which are important requirements for holiday shoppers on a budget.”
Changing Attitudes Towards Debt
That shift away from Credit Cards usage comes from several primary sources:
1) consumers shunning credit cards over higher interest rates 2) Job losses 3) Boomers headed into retirement scared half to death about a lack of savings 4) Banks curtailing credit and lowering card limits in response to rising defaults
Those four points represent changing consumer attitudes towards debt and borrowing, and banks' attitudes to credit and landing. Changing attitudes is the key idea.
Now, after the shift is well underway .....
Self-Serving Fed Infomercials
True to form with regulators, they are always too little too late. In an effort to boost its sagging image, you can look forward to Fed Infomercials, playing soon at movie theaters near you.
5 Tips for Getting the Most from Getting the Most from Your Credit Card
1. Pay on Time 2. Stay below your credit limit 3. Avoid unnecessary fees 4. Pay more than the minimum amount 5. Watch for Changes in your account
The Fed is on a publicity campaign to boost its image. "Get Information You Can Trust"
The above clip is at the end of the Fed's infomercial on credit card usage.
If you think the Fed is concerned about you, you are sadly mistaken. Although, the Fed is concerned about excessive credit card defaults, that concern is for the banks, not for you.
Moreover, credit card tips is not the real message of the Fed's infomercial. The no-so-hidden message "Get Information You Can Trust" (from the Fed) is what the Fed really wants to get across.
One thing you can trust is that any infomercial from the Fed will be self-serving propaganda.
Bernanke: The Fed played a major part in arresting the crisis, and we should be seeking to preserve, not degrade, the institution's ability to foster financial stability and to promote economic recovery without inflation.
Mish: Ben, you sound like an arsonist taking credit for helping put out a fire, before the fire is even out, after you lit the match and tossed on the gas in the first place. For all the problems you have caused, don't you at least have the decency to show a little humility?
Ben Bernanke is on yet another self-serving mission to save his job. Please consider The right reform for the Fed an op-ed by Ben Bernanke in the Washington Post.
Here is Bernanke's entire article (in italics) with my comments interspersed in plain type. Most of my comments are made straight to Ben Bernanke, but they apply in general to all central bankers.
Bernanke: For many Americans, the financial crisis, and the recession it spawned, have been devastating -- jobs, homes, savings lost. Understandably, many people are calling for change.
Mish: Ben, the reason people are calling for a change is that you and the Fed wrecked the economy. You did not see a housing bubble, nor did you foresee a recession. I would also like to point out your selective memory loss about your role in bailouts. To refresh your memory, please refer to Bernanke Suffers From Selective Memory Loss; Paulson Calls Bank of America "Turd in the Punchbowl" for details.
Bernanke: Yet change needs to be about creating a system that works better, not just differently. As a nation, our challenge is to design a system of financial oversight that will embody the lessons of the past two years and provide a robust framework for preventing future crises and the economic damage they cause.
Mish: No Ben, we need a system that works differently. You have proven beyond a shadow of a doubt that you and the Fed are incompetent and cannot be trusted.
Ben here is a compilation of your own statements made from 2005-2007 proving you have no idea what you are talking about.
Bernanke: These matters are complex, and Congress is still in the midst of considering how best to reform financial regulation. I am concerned, however, that a number of the legislative proposals being circulated would significantly reduce the capacity of the Federal Reserve to perform its core functions.
Mish: Hello Ben, exactly what is that core function? Is it a dual mandate of price stability and full employment by any chance? Pray tell exactly how badly did you blow that? Did you succeed at either? Is it mission impossible in the first place?
Bernanke: Notably, some leading proposals in the Senate would strip the Fed of all its bank regulatory powers. And a House committee recently voted to repeal a 1978 provision that was intended to protect monetary policy from short-term political influence. These measures are very much out of step with the global consensus on the appropriate role of central banks, and they would seriously impair the prospects for economic and financial stability in the United States.
Mish: What Global consensus? Other Central bankers? What about the consensus of those who saw this coming? Pray tell why should anyone listen to those who were wrong every step of the way?
John Hussman has the right idea in Bernanke Sees A Recovery - How Would He Know? "We continue to expect a fresh acceleration of credit losses as we enter 2010. It would be best if we faced these challenges with more thoughtful leadership."
Bernanke: The Fed played a major part in arresting the crisis, and we should be seeking to preserve, not degrade, the institution's ability to foster financial stability and to promote economic recovery without inflation.
Mish: Ben, you sound like an arsonist taking credit for helping put out a fire, before the fire is even out, after you lit the match and tossed on the gas in the first place. For all the problems you have caused, don't you at least have the decency to show a little humility?
Bernanke: The proposed measures are at least in part the product of public anger over the financial crisis and the government's response, particularly the rescues of some individual financial firms. The government's actions to avoid financial collapse last fall -- as distasteful and unfair as some undoubtedly were -- were unfortunately necessary to prevent a global economic catastrophe that could have rivaled the Great Depression in length and severity, with profound consequences for our economy and society. (I know something about this, having spent my career prior to public service studying these issues.) My colleagues at the Federal Reserve and I were determined not to allow that to happen.
Mish: Ben, that is your self-serving assertion that you saved the world. Care to debate the subject?
Bernanke: Moreover, looking to the future, we strongly support measures -- including the development of a special bankruptcy regime for financial firms whose disorderly failure would threaten the integrity of the financial system -- to ensure that ad hoc interventions of the type we were forced to use last fall never happen again.
Mish: Ben, it takes a lot of gall to say that while you are doing nothing to dismantle too big to fail enterprises such as Goldman Sachs, JPMorgan, Citigroup, etc. Moreover, given that you could not see the housing bubble come or the internet bubble coming, and given that you still believe that bubbles are best dealt with after they blow up, your words are meaningless.
Bernanke: The Federal Reserve, like other regulators around the world, did not do all that it could have to constrain excessive risk-taking in the financial sector in the period leading up to the crisis. We have extensively reviewed our performance and moved aggressively to fix the problems.
Mish: Ben you acted the way all regulators act: Doing nothing while Rome burns, then attempting to prevent Rome from burning after it has already burnt to the ground.
Ben, in case you did not notice, the market already shut down subprime mortgages, pay option ARMS, HELOCs, and excessive credit card debt. Your feeble cries are too little, too late. At best your efforts would prevent the last problem, but not the next one. The market has already prevented the last problem privately, even as Fannie and Freddie are once again taking on excessive risk as government entities.
The first thing any regulator in his right mind would do would be to shut down Fannie and Freddie, yet you and the Fed feed the beast, bloating your balance sheet with garbage in the process.
Bernanke: Working with other agencies, we have toughened our rules and oversight. We will be requiring banks to hold more capital and liquidity and to structure compensation packages in ways that limit excessive risk-taking. We are taking more explicit account of risks to the financial system as a whole.
Mish: Ben, wake me up when you decide to eliminate Fractional Reserve Lending because until you do, you can never eliminate the problem.
Bernanke: We are also supplementing bank examination staffs with teams of economists, financial market specialists and other experts. This combination of expertise, a unique strength of the Fed, helped bring credibility and clarity to the "stress tests" of the banking system conducted in the spring. These tests were led by the Fed and marked a turning point in public confidence in the banking system. There is a strong case for a continued role for the Federal Reserve in bank supervision. Because of our role in making monetary policy, the Fed brings unparalleled economic and financial expertise to its oversight of banks, as demonstrated by the success of the stress tests.
Mish: Stress tests?! You are actually bragging about stress tests?! Those stress tests that predicted a worst case scenario of unemployment of 9.8% in 2010 when I called for that in August of 2009?! How many times have you had to revise your stress test estimates? 3 times and counting by any chance?
Bernanke: This expertise is essential for supervising highly complex financial firms and for analyzing the interactions among key firms and markets. Our supervision is also informed by the grass-roots perspective derived from the Fed's unique regional structure and our experience in supervising community banks.
Mish: Your expertise is needed to supervise community banks?! Oh really? Let's consult the latest FDIC Quarterly Banking.
"The number of insured institutions on the FDIC’s 'Problem List' rose from 416 to 552 during the quarter, and total assets of “problem” institutions increased from $299.8 billion to $345.9 billion. Both the number and assets of 'problem' institutions are now at the highest level since the end of 1993."
Pray tell how bad would that have been if you were not an expert in such matters?
Bernanke: At the same time, our ability to make effective monetary policy and to promote financial stability depends vitally on the information, expertise and authorities we gain as bank supervisors, as demonstrated in episodes such as the 1987 stock market crash and the financial disruptions of Sept. 11, 2001, as well as by the crisis of the past two years.
Mish: Ben, did it ever occur to you that your handling of this crash is a repeat of the Fed's mishandling of the 2001 recession?
I guess not, but it is. The Greenspan Fed, of which you were a part, blew an enormous housing/credit bubble to bail out banks from stupid loans made to dotcom companies and Latin America.
You are back at it once again, only bigger.
Your policy is and always has been to blow repetitive bubbles of increasing amplitude, each bigger than the last, hoping to bail out the system. You have learned nothing from 2001, from, Japan, or from the Great Depression.
You are a complete disgrace in your inability to learn anything from history, and unfortunately the US is held hostage to your foolish policies. Bernanke: Of course, the ultimate goal of all our efforts is to restore and sustain economic prosperity. To support economic growth, the Fed has cut interest rates aggressively and provided further stimulus through lending and asset-purchase programs.
Mish: Cutting interest rates aggressively helped create the housing bubble, something Bernanke still has not figured out.
Bernanke: Our ability to take such actions without engendering sharp increases in inflation depends heavily on our credibility and independence from short-term political pressures. Many studies have shown that countries whose central banks make monetary policy independently of such political influence have better economic performance, including lower inflation and interest rates.
Mish: Ben, you are at your most disingenuous self when you harp about inflation. The ONLY source of inflation is the Fed and fractional reserve lending. To eliminate inflation, all that is required is to get rid of both. But you don't want that do you?
No! You want a target of 2% inflation while ignoring asset bubbles because that is what the banks wants. You know and I know that inflation is a tax on the middle class for the direct benefit of the government and those with first access to money (banks and the already wealthy).
Ben, have you ever looked at a chart of two percent inflation over time? Here it is:
Inflation Targeting at 2% a Year
click on chart for sharper image.
Ben, Inflation targeting "works" until the ponzi scheme blows up when interest on the debt is no longer payable, the pool of greater fools runs out, attitudes towards debt and credit change, or some other stress such as global wage arbitrage and job losses interferes with the ability of consumers and businesses to take on more debt. In this case, all of the above happened.
Ben, you remain in Academic Wonderland with formulas that long ago stopped working.
Bernanke: Independent does not mean unaccountable. In its making of monetary policy, the Fed is highly transparent, providing detailed minutes of policy meetings and regular testimony before Congress, among other information. Our financial statements are public and audited by an outside accounting firm; we publish our balance sheet weekly; and we provide monthly reports with extensive information on all the temporary lending facilities developed during the crisis. Congress, through the Government Accountability Office, can and does audit all parts of our operations except for the monetary policy deliberations and actions covered by the 1978 exemption. The general repeal of that exemption would serve only to increase the perceived influence of Congress on monetary policy decisions, which would undermine the confidence the public and the markets have in the Fed to act in the long-term economic interest of the nation.
Mish: Ben, please stop lying through your teeth. If the Fed is as transparent as you say, you should not be fearing an audit. Furthermore, Ron Paul's amendment specifically bars Congress from intervening in any aspect of monetary policy.
Your mission, is to make sure no one can ever hold you accountable for your illegal actions or to find out exactly what junk is on your balance sheet (and what it is really worth).
There is a difference between "independence" and "secrecy". The Fed is not accountable to anyone right now and you know it.
Bernanke: We have come a long way in our battle against the financial and economic crisis, but there is a long way to go. Now more than ever, America needs a strong, nonpolitical and independent central bank with the tools to promote financial stability and to help steer our economy to recovery without inflation.
Mish: Indeed, we have come a long way thanks to Ron Paul's Audit the Fed bill. There still is a long way to go. It is time to put in a plan to phase out fractional reserve lending and phase in a dollar backed by something rather than nothing before the Fed can do any more damage to the economy.
The book covers many topics including Why Fractional Reserve Lending is Fraudulent, The Genesis of Money, The Optimum Quantity of Money, FDIC, and What Can be Done.
From the Introduction ...
Money And Politics
By far the most secret and least accountable operation of the federal government is not, as one might expect, the CIA, DIA, or some other super-secret intelligence agency.
The CIA and other intelligence operations are under control of the Congress. They are accountable: a Congressional committee supervises these operations, controls their budgets, and is informed of their covert activities. It is true that the committee hearings and activities are closed to the public; but at least the people's representatives in Congress insure some accountability for these secret agencies.
It is little known, however, that there is a federal agency that tops the others in secrecy by a country mile. The Federal Reserve System is accountable to no one; it has no budget; it is subject to no audit; and no Congressional committee knows of, or can truly supervise, its operations. The Federal Reserve, virtually in total control of the nation's vital monetary system, is accountable to nobody—and this strange situation, if acknowledged at all, is invariably trumpeted as a virtue. ...
Stop The Power Grab
It is imperative to stop the Fed's power grab. The Fed bailed out banks and the bondholders of banks, illegally, at taxpayer expense. Moreover, the Fed would do it again in a flash. While the bondholders were made whole (the same applies to Fannie and Freddie), taxpayers are footing the bill.
Moreover the Fed has expanded its balance sheet by $trillions and no one really knows exactly what is in it, how much it is worth, or how much taxpayers might be on the hook for it.
While making claims of transparency, the Fed has fought to kill mark to market accounting at banks and the Fed certainly does not mark its own books to market. The whole thing is a huge shell game. The FDIC and the entire banking system is insolvent.
Bernanke's self-serving mission is to make sure the Fed is not accountable for its actions and my uphill battle mission is to help move along Ron Paul's bill so that Bernanke does not succeed.
Please contact your legislative representative once again, and let them know you want a complete accounting of the Fed, what is on the Fed's balance sheet, and exactly what that garbage is worth, marked to market.
The U.S. Treasury Department will step up public pressure on lenders to finish modifying more home loans to troubled borrowers under a $75 billion campaign against the record tide of foreclosures.
More than 650,994 loan revisions had been started through the Obama administration’s Home Affordable Modification Program as of last month, from about 487,081 as of September, according to the Treasury. None of the trial modifications through October had been converted to permanent repayment plans, the Treasury data showed. That failure is getting the administration’s attention.
“We are taking additional steps to enhance servicer transparency and accountability as part of a broader focus on maximizing conversion rates to permanent modifications,” Treasury spokeswoman Meg Reilly said in an e-mail yesterday. The Obama administration plans to announce additional steps tomorrow, including new private-public partnerships and resources for borrowers.
Bank of America Corp. was among the worst performers in the program, with 14 percent of loans in modification in October, according to the Treasury. The bank, the largest in the U.S. and the biggest mortgage servicer, has 990,628 eligible loans, a greater total than any other company on the Treasury’s list. A spokesman for the Charlotte, North Carolina-based bank, Dan Frahm, has said the eligibility data may be overstated.
“As many as one-in-three of those borrowers listed as eligible for the program will not actually qualify for HAMP because the home is vacant, the customer has a debt-to-income ratio below 31 percent or is unemployed,” Frahm said in a Nov. 10 interview.
Citigroup, the third-largest U.S. bank by assets, began 88,968 trial modifications, or 40 percent of its eligible mortgages. JPMorgan, the second-largest U.S. bank, has started 133,988 modifications, or 32 percent of those eligible, the Treasury said.
The administration’s $75 billion Making Home Affordable program includes the mortgage modification initiative and loan refinancing through Fannie Mae and Freddie Mac.
Problem Loans at Bank of America
Bank of America has 990,628 eligible loans except for a few details like 1/3 of the portfolios consists of vacant homes, the homeowner is unemployed, or the customer has a debt-to-income ratio below 31 percent. Anyone care to assign probabilities to each of those three categories?
Spectacular Failure
Forget about Bank of America, note the spectacular failure of the plan in general. 650,994 loan revisions have been made and 0% of them have been converted to permanent repayment plans.
Taxpayer Risk
Notice how the plan operates. It takes mortgages and dumps them on the taxpayer via a passthrough of Fannie Mae and Freddie Mac.
If you get the idea that Fannies and Freddie are going to need another bailout you have the right idea.
The LA Times is reporting Brent T. White, a University of Arizona law school professor, says that it's in the homeowners' best financial interest to stiff their lenders and that it's not immoral to do so. I commented on this story twice before but it's worth another recap.
Go ahead. Break the chains. Stop paying on your mortgage if you owe more than the house is worth. And most important: Don't feel guilty about it. Don't think you're doing something morally wrong.
That's the incendiary core message of a new academic paper by Brent T. White, a University of Arizona law school professor, titled "Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis."
"Homeowners should be walking away in droves," White said. "But they aren't. And it's not because the financial costs of foreclosure outweigh the benefits."
Sure, credit scores get whacked when you walk away, he acknowledges. But as long as you stay current with other creditors, "one can have a good credit rating again -- meaning above 660 -- within two years after a foreclosure."
Better yet, homeowners can default "strategically": Buy all the major items they'll need for the next couple of years -- a new car, even a new house -- just before they pull the plug on their current mortgage lender.
"Most individuals should be able to plan in advance for a few years of limited credit," White said, with minimal disruptions to their lifestyles.
What kind of law school professorial advice is this? Aren't mortgages legal contracts? In so-called anti-deficiency states such as California and Arizona, mortgage lenders have limited or no legal rights to pursue defaulting homeowners' assets beyond the house itself, White said. In other states, lenders may decide that it is not worth the legal expense to pursue walkaways, or consumers may be able to find flaws in the mortgage documents, disclosures or underwriting to challenge the original contract.
The main point, he said, is that too often people's emotions get in the way of clear financial thinking about mortgages, turning them into what he calls "woodheads" -- "individuals who choose not to act in their own self-interest." Most owners are too worried about feelings of shame and embarrassment after a foreclosure, and ignore the powerful financial reasons for doing so.
I saw you linked to an istockanalyst article that quotes extensively from a piece I wrote on Wells Fargo Option ARMs. In his piece, and subsequently in your post, it is hard to tell where his analysis ends and mine begins (due to lack of blockquotes).
For the record the istockanalyst opinion that Option ARMs don't pose a threat to Wells is not one I agree with, despite the fact he relies on my data to get to this conclusion.
You hit the nail on the head. This is a version of extend and pretend, granted one that was written into the terms of the loans from the start. RECASTS won't automatically happen until 2014/15.
But the point of my article was simply to point out that that the widely used reset chart by Credit Suisse had a major error by assuming contractual 5 year recasts (when the Golden West 10Ks clearly state 10 year recasts) and most people were not paying attention to how this played out on Wells' balance sheet.
In fact, I made a point of saying "Of course, none of this is to say that Wells Fargo is out of the woods. They are essentially stashing away on their balance sheet tens of billions of neg-am loans that will recast into 20-year fixed rate mortgages in 2014 and 2015."
If you click through, I also put together a chart showing that while recasts won't technically occur until 2014, people will definitely be walking away long beforehand as those yearly 7.5% increases start to stack up. It's a mess for Wells and they know it.
They are trying to outrun the problem racking up earnings now while short rates are near zero, hoping they'll be able to absorb these losses down the road. We'll see how it turns out.
Again, good analysis of the problem. I just wanted to clarify my opinion from the istockanalyst article given you both quoted me at length.
Keep it up the good work...
-HHB
Thanks HHB.
One of the limitations of blogger is that one cannot put a blockquote in a blockquote and layers of referbacks are not easy to represent. I handle it with italics as best I can.
In this case however, I never made it back to the original post because it was clear that istockanalyst missed the boat. Inquiring minds may want to take a look at HHB's post for a couple nice charts and graphs on the situation with Pay Option ARMs.
In 2003 Donald Rumsfeld estimated a war with Iraq would cost $60 billion. Five years later, the cost of Iraq war operations is over 10 times that figure.
So what's behind the ballooning dollar signs? Joseph E. Stiglitz and Linda J. Bilme's exhaustedly researched book, "The Three Trillion Dollar War: The True Cost of the Iraq Conflict," breaks down the price tag, from current debts to the unseen costs we'll pay for years to come.
President Obama said Tuesday that he was determined to “finish the job” in Afghanistan, and his aides signaled to allies that he would send as many as 25,000 to 30,000 additional American troops there even as they cautioned that the final number remained in flux.
The White House said Mr. Obama had completed his consultations with his war council on Monday night and would formally announce his decision in a national address in the next week, probably on Tuesday.
At a news conference in the East Room with Prime Minister Manmohan Singh of India, Mr. Obama suggested that his approach would break from the policies he had inherited from the Bush administration and said that the goals would be to keep Al Qaeda from using the region to launch more attacks against the United States and to bring more stability to Afghanistan.
“After eight years — some of those years in which we did not have, I think, either the resources or the strategy to get the job done — it is my intention to finish the job,” he said.
Ms. Pelosi said she did not want to sacrifice the party’s domestic agenda to the cost of the troop buildup. “The American people believe that if something is in our national security interest, we have to be able to afford it,” she said. “That doesn’t mean that we hold everything else” hostage to that.
While President Obama’s decision about sending more troops to Afghanistan is primarily a military one, it also has substantial budget implications that are adding pressure to limit the commitment, senior administration officials say.
The latest internal government estimates place the cost of adding 40,000 American troops and sharply expanding the Afghan security forces, as favored by Gen. Stanley A. McChrystal, the top American and allied commander in Afghanistan, at $40 billion to $54 billion a year, the officials said.
Even if fewer troops are sent, or their mission is modified, the rough formula used by the White House, of about $1 million per soldier a year, appears almost constant.
The estimated $1 million a year it costs per soldier is higher than the $390,000 congressional researchers estimated in 2006.
Military analysts said the increase reflects a surge in costs for mine-resistant troop carriers and surveillance equipment that would apply to troops in both Iraq and Afghanistan. But some costs are unique to Afghanistan, where it can cost as much as $400 a gallon to deliver fuel to the troops through mountainous terrain.
Some administration estimates suggest it could also cost up to $50 billion over five years to more than double the size of the Afghan army and police force, to a total of 400,000. That includes recruiting, training and equipment.
At a stop at a military base in Alaska on Thursday, Mr. Obama told a gathering of soldiers that he would not risk more lives “unless it is necessary to America’s vital interests.”
Double The Idiocy
Any expectations that Obama would show some sense of restraint about military spending have long ago vanished.
"It is my intention to finish the job” translates to "I will blow another $3 trillion war mongering if that is what it takes". And of course Pelosi does not think war idiocy should be at the expense of domestic idiocy.
War mongers want war but they do not want to pay for it. Sadly, Obama, Bush, Pelosi are all alike. Thus, Congress and the Administration is committed to having military idiocy and domestic idiocy at the same time.
God do we ever need a balanced budget amendment and a sound currency. We should not fund a damn thing unless we are willing to raise taxes to pay for it. Virtually no one but the war mongers and the military beneficiaries would be in support of raising taxes to pay for this monstrosity.
Two price indexes released Tuesday indicated that the momentum the housing market showed over the late spring and summer is faltering, even as the government said the economy grew at a slower pace in the third quarter than previously reported.
The Standard & Poor’s/Case-Shiller home price index, a closely watched measure of the housing markets in 20 metropolitan areas, barely rose in September, rising 0.3 percent from August on a seasonally adjusted basis. Prices fell for the month in nine cities in the index, including Boston, New York, Seattle and Charlotte, N.C.
A report from the Federal Housing Financing Agency showed that prices were flat in September from August.
The housing market is confronting an abundance of inventory, high unemployment, fearful consumers and devastated family balance sheets.
“There is no clear, easy way out for housing,” said John Silvia, chief economist at Wells Fargo. “Contrary to my hopes, housing prices and the housing market in general will weaken again.”
He forecast a new decline in prices of as much as 10 percent, which he expected to shave a half-point off the nation’s economic output just as it emerges from the recession.
The Case-Shiller index, which covers about 45 percent of the United States housing market, is a three-month moving average. Since July and August were relatively strong, the weak September report could indicate a plunge in prices.
The 20-city composite index is off nearly 10 percent in the last year and 29.1 percent since its 2006 peak.
Pay Option Arm Time Bomb
If there is no clear, easy way out for housing, then there is no clear, easy way out for Wells Fargo. Wells is sitting in a huge pile of Pay Option Arms in bubble states like California, where prices still have a long way to correct.
I’ve been trying to make the point for some time that the Wells’ Option ARMs that it inherited in the purchase of Wachovia (Wachovia came by them via its purchase of World Savings) are not an immediate threat to the bank. The terms of the mortgages were more lenient in the amount of negative equity that would cause an automatic recast of payments and the recast feature does not automatically trigger until the ten-year anniversary as opposed to the five-year featured in most other Option ARMs.
Wells Fargo, who holds more Option-ARMs on its books than any other institution, states in their last 10-Q filing:
Based on assumptions of a flat rate environment, if all eligible customers elect the minimum payment option 100% of the time and no balances prepay, we would expect the following balance of loans to recast based on reaching the principal cap: $4 million in the remaining three quarters of 2009, $9 million in 2010, $11 million in 2011 and $32 million in 2012…
In addition, we would expect the following balance of ARM loans having a payment change based on the contractual terms of the loan to recast: $20 million in the remaining three quarters of 2009, $51 million in 2010, $70 million in 2011 and $128 million in 2012.
Given that we’re talking about a portfolio of over $100 BILLION of these loans, this means ESSENTIALLY NO LOANS WILL RECAST due to the negative amortization limits or contractual terms before 2012.
Both assumptions seemed suspect, yet, they are in fact true. Looking at page 55 of the Golden West 10-K from 2005 we read:
…most of our loans are scheduled to have a payment change without respect to any annual limit in order to reamortize the loan over its remaining life at the end of the tenth year or when the loan balance reaches 125% of the original amount. We term this reamortization a “recast.” Historically, most loans in our portfolio have paid off before the loan’s payment is recast.
The Fiserv Case-Shiller Home Price Index forecasts that average single-family home prices will fall another 11 percent over the next twelve months, with declines expected in about 90 percent of the more than 350 metro areas tracked by Fiserv. Steep home price declines are expected to continue in markets that have been hurt most by the housing crisis, including metro areas in California, Nevada, Arizona and Florida.
“Large supplies of foreclosed properties and extremely weak job markets will continue to put downward pressure on home prices,” said David Stiff, chief economist, Fiserv. “Many temporary factors that were partly responsible for strong spring and summer real estate markets, including the first-time homebuyer tax credit and Federal Reserve actions to drive down mortgage interest rates, will no longer be bolstering demand. Consequently, home prices will resume falling again before they stabilize in 2010.”
One-time bubble markets in Florida, California and Arizona, which have already seen home values fall 40 percent to 60 percent since prices peaked in 2006, are showing no sign of moderation in declining prices.
Cumulative Declines
Calculated Risk has this chart that nicely shows cumulative declines.
click on chart for sharper image
Extend And Pretend
Los Angeles, San Francisco, and San Diego are all down over 38% from the peak. The Wells Fargo Chief Economist expects a further 10% decline in prices, essentially the same as Case-Shiller.
Yet out of a portfolio of $100 billion in Option ARMs, Wells Fargo assumes that virtually none of those will recast at 125% of the original mortgage balance. That is a preposterous amount of mark-to-fantasy pricing.
Wells Fargo is simply refusing to recast problem loans, putting off today's problem hoping it will not be as big a problem later. I have news for Wells Fargo. This problem can only get worse with age. There is no good reason to assume home prices will rebound before 2012, and in fact prices might fall for much longer.
In the meantime, most Option-ARM holders are only making the minimum payment with negative amortization increasing monthly. When those loans do recast, anyone in their right mind will hand over the keys. Given that buyers of high-priced homes are more apt to be in a right mind than buyers of low-priced homes, expect to see Wells Fargo the proud owner of a huge number of homes when those loans do recast.
In the meantime, Wells Fargo is collecting insufficient rent on properties it will own in due time. How long the market let's Wells get away with this extend and pretend fantasy remains to be seen, but eventually it is guaranteed to sink Wells in due time.
Aggressive Bargains Lure Hordes of Shoppers, but They're Still Slow to Open Wallets says the Wall Street Journal in 'Black Friday' Tests Economy
Retailers succeeded in enticing deal-hungry shoppers into their stores on Friday, but at the checkout lines many people were sticking to the most deeply discounted items. That may prove to be a disappointment to executives at the nation's major chain stores, which have been battered by the recession. Many have been hoping that, once in the stores, consumers would spend a little more freely than they did a year ago.
Brian Dunn, chief executive of Best Buy Co., said Friday that consumers were snapping up lower-priced electronics such as netbook computers, digital cameras and smaller flat-screen televisions. "But this is not a year where wallets are expanding," Mr. Dunn said. "There will be winners and losers this season in retail, and the differences will be pronounced."
One bright spot in the retail picture has been online sales -- but even there much of the traffic has been driven by deep discounts at mass merchants' sites and at giant Amazon.com Inc.
The frantic Black Friday promotions, which began well beforehand this year, were driven by a troubling reality for retailers: many shoppers say they plan to spend less this season. "I don't think there's a lot of impulse shopping going on," said James Fielding, president of Walt Disney Co.'s Disney Stores. "People are just being realistic about their personal situation and the economy."
Frugality Hits Videogames
Game makers are finding that the once insatiable demand for videogames has hit the brick wall of consumer frugality, at least according to pre-event sales.
Videogame sales—the bright spot in last year's dismal end-of-year shopping quarter—are showing signs of weakness, foreshadowing a tough holiday. Sales of some of the most anticipated titles have already disappointed and, others won't be on store shelves in time.
Early sales of what were expected to be big holiday games—specifically Activision Blizzard Inc.'s "Guitar Hero 5" and MTV Games' "The Beatles: Rock Band"—have so far been relatively modest. Both games, released in early September, dropped out of the top 10 best-selling games after a month, selling fewer than 100,000 copies each in October, according to NPD Group.
Overall, videogame sales including consoles fell 19% in October to $1.07 billion from a year ago, according to NPD. Software sales alone fell 23%. "October unfortunately is a good predictor of what's going to happen in November and December," said Jesse Divnich, a videogame analyst with research firm Electronic Entertainment Design & Research.
Deep Discounts
Best Buy is offering Electronics Arts Inc.'s "Dragon Age" for $34.99, a $25 discount.
Wal-Mart is throwing in two free games and a Blu-ray movie disc, a $139 value, on purchases of the $299 Sony Playstation 3 game console.
Sony Corp. and Microsoft Corp. recently cut the prices on models of their Playstation 3 and Xbox 360 gaming consoles by $100 to $299.99.
Nintendo cut the price on its Wii console by $50 to $199.99.
Fewer game console sales is good news. Kids need more exercise, more outdoor activities, and when indoors play more educational games instead of videogames. Moreover parents need to stop wasting money they do not have.
Instead of videogames, how about a nice board game like Risk or an educational game such as Scrabble? And if you really want to save money, just get a deck of cards and play Euchre. It's much more sociable and the cost of a deck of cards is just a couple bucks.
By the way, stores may have lured shoppers with bargains, but the big question is "Did they make any money?"
Fresh off an election victory, Phoenix Councilman Sal DiCiccio is laying out a plan to rein in employee costs, which have ballooned in recent years even as the city cut tens of millions of dollars from its budget.
Across all departments, the cost of estimated employee salary and benefits grew by $285 million, or 23 percent, between fiscal years 2006 and 2009. The number of full-time-equivalent employees in fiscal 2009 was 16,956, up 8 percent during that same period, though that figure fell below 2007 levels for the current fiscal year which began July 1. Employee costs were not available for this fiscal year.
"When I saw these numbers I was shocked, and the public is going to be shocked, too," DiCiccio said during an interview in his City Hall office. "We don't have a budget problem. We have an expense problem. The taxpayers have been paying more and getting less."
DiCiccio, who defeated Dana Marie Kennedy in a run-off election this month, said Phoenix can't afford to continue down that path. He is proposing a three-pronged approach to restructure and curb employee costs:
• Outsource or privatize more city jobs and functions, such as automobile repairs, custodial work, parks maintenance and cleanup, human resources and printing. "A brake job is a brake job," said Hal DeKeyser, DiCiccio's chief of staff.
• Cut layers of bureaucracy for certain business processes and cross-train remaining employees to perform multiple tasks. For example, if it takes three employees to process a building permit, eliminate two of them and train the third to do the others' jobs.
• "Redeploy" or shift resources and funding to police officers, firefighters and other front-line employees at City Hall.
While lacking specific details and numbers, DiCiccio's plan comes just as Phoenix's seven labor unions are preparing to begin negotiations with the city for new two-year contracts.
7 Labor Unions is 7 Labor Unions Too Many
Where DiCiccio misses the boat (and badly) is in regards to police and fire. They are a huge portion of the budget and neither should be sacred cows.
Getting rid of the police union would be the hardest of the lot but the rest should easily be doable. All it takes is a bit of resolve and willingness to send the unions packing by privatizing services.
To achieve maximum benefit, the bidding process for privatized services must be open, competitive, and non-politicized. That is all it takes.
The mayor and council members need to pay hardball with the unions and especially with the police and fire unions before they bankrupt the city (assuming of course Phoenix is not already bankrupt from pension promises that can never be paid).
Despite Challenging Economy, Black Friday Traffic To Online Shopping Sites Grows 10 Percent Year Over Year
Nielsen Online, a service of the Nielsen Company, reported today that Web traffic from home and work to the Holiday eShopping Index increased 10 percent year over year on Black Friday, growing from 28.8 million unique visitors in 2007 to 31.7 million unique visitors in 2008 across more than 120 representative online retailers.
Holiday eShopping Index Category Growth
Consumer Electronics was the fastest growing product category on Friday, increasing 219 percent from the previous Friday, November 21st. Shopping Comparison/Portals and Toys/Videogames took the No. 2 and No. 3 spots, with 83 and 73 percent Web traffic growth, respectively.
“Even with the weakening economy, an unstable stock market and a rising unemployment rate, Black Friday traffic to online retail sites grew at a double digit rate this year,” said Ken Cassar, vice president, industry insights, Nielsen Online. “Consumers are continuing to shift their holiday shopping to the Web for the convenience of not having to fight the crowds and to further stretch shrinking budgets. The fact that the Shopping Comparison/Portals category was the second fastest growing segment indicates that consumers continue to see the Web as the source for determining the best deals and prices of the season, which we expect to be top of mind for holiday shoppers this year.” Cassar continued, “With the season underway and consumers back at work, it will be interesting to compare activity for Cyber Monday and to see if the initial growth rate we saw on Black Friday holds up throughout the holiday shopping season.”
Black Friday Top 10 Online Retail Destinations
eBay was the top online retail destination on Black Friday with 9.8 million unique visitors, while Amazon and Wal-Mart followed with 8.4 million and 6.0 million unique visitors, respectively. Among the top ten online retail destinations, Circuit City was the fastest growing on Friday, increasing 352 percent over the previous Friday. Best Buy ranked No. 2 with a 196 percent increase in Web traffic and Target rounded out the top three with a 136 percent week over week growth.
Shoppers took advantage of Black Friday discounts to snap up televisions, laptop computers and robot hamsters at Best Buy Co., Target Corp. and Toys “R” Us Inc. stores from New Jersey to Texas.
Wal-Mart Stores Inc., the world’s largest retailer, drew crowds with $298 Hewlett-Packard laptop computers and other doorbuster specials that went on sale at 5 a.m. Best Buy Inc., the biggest electronics chain, had bigger early-morning crowds than last year, Chief Executive Officer Brian Dunn said. The lines in front of the stores were longer, and the company’s Web site attracted more visitors, Dunn said.
“Those are both directionally important indicators for us,” Dunn said in a Bloomberg Television interview.
“I do this because of my family,” Eihab Elzubier, a truck driver, said as he stood at the head of the line outside a Best Buy in Greensboro, North Carolina, before the store opened this morning. He arrived at 9 a.m. yesterday and kept his place in line with help of his wife, mother and sister.
$1,000 Savings
Elzubier, 41, figured the 20-hour wait will save him as much as $1,000. He planned to buy a 42-inch Samsung flat-panel TV for $547.99, a Sony laptop computer for $399.99, a Compaq laptop for $179.99, software and accessories.
The 12,000-car parking lot at Taubman Centers Inc.’s Woodfield Mall in Chicago was 35 percent full by 6 a.m., compared with 28 percent last year, Bill Taubman, chief operating officer of Taubman Centers, a U.S. real estate investment trust with 24 malls, said in a telephone interview.
“There’s a little more traffic than last year across the board, maybe 10 percent,” he said.
Feelin' Guilty?
Note the sentiment "I'm doing this for the family" or "doing this for the kids". That actually is a direct lie. They are doing it because it would make them feel guilty to not buy toys for the kids.
In other words they are doing it for themselves, so they feel good.
If someone wants to do something for the family they would buy a freezer and stock it with food items on sale, not flat-panel TVs and other junk that will likely be discounted even more after Christmas.
Buying stuff you cannot afford and do not need can never truly be "for the kids". And if it's not for the kids, who is it for?
The Next Guilt Trip
The next guilt trip comes when shoppers have to pay the bills or when they lose their job wishing they had that money back to live on.
The Treasury sold $44 billion of two-year notes at a yield of 0.802 percent, the lowest on record, as demand for the safety of U.S. government securities surges going into year-end.
The last auction, a $44 billion offering on Oct. 27, drew a yield of 1.02 percent. Indirect bidders, a class of investors that includes foreign central banks, purchased 44.5 percent of the notes today, the same as at the October sale.
The previous low was 0.922 percent on the auction held. Dec. 26, 2008.
For the first time in seven decades, Treasury bills are paying no interest while stocks continue to appreciate -- a divergence that might be perilous if Federal Reserve Chairman Ben S. Bernanke didn’t know all about 1938.
Notice the misguided faith the author has in Bernanke's ability to do something intelligent. The fact of the matter is we would not be in this mess if the Fed had been acting intelligently instead of openly promoting housing and credit bubbles that have now crashed.
So here we are with two year treasuries down from Tuesday's record low yield of 0.802 percent to a mere .65 percent this morning. Also note that five year treasuries are at 2.01 percent, and three month treasuries yield zero percent.
This must be a symptom of the hyperinflation everyone seems to be predicting.... except in reverse.
Thanksgiving morning at about 5:00 AM (before any news reports were out on Dubai) I was trying to figure out what was going on with the futures and I penned in Yen Hits 14 Year High vs US Dollar; Nikkei Sinks ...
Dollar Sinks S&P Futures Down
One thing of note is that S&P 500 futures are down 14 points and commodities are down as well even though the dollar is sinking. This is a dramatically different change from the norm.
Of course this is a holiday and we must see if there is follow through. This could be a one day wonder.
The important point is that if this sticks, or if equities sink while the Yen and/or Dollar rally, the reflation trade is finally over.
Can it be that the much despised treasuries are the only thing that will rally while everything else sinks? Yes, that is entirely possible given how lopsided anti-dollar sentiment is vs. everything else.
It may or may not play out that way. After all, Friday has barely begun. We have seen these kind of starts to the day actually close up. However, at this hour, commodities are getting whacked while the dollar has reversed hard to the upside.
Given the US markets were closed yesterday, I have the same question floating in my mind as a day ago, wondering if this is another one day wonder rally in the dollar (and another one day wonder selloff in equities) or if this is the start of a long awaited correction in both the dollar and equities.
Time will tell, but it will not be pretty for dollar bears or equity bulls if it is.
Retailers traditionally borrow money to buy holiday inventory. But credit for small businesses has dried up this year, and with the recession slowing sales, few merchants have cash on hand. The crunch is forcing business owners to find new ways to keep running.
For a handful of New York City retailers in one hard-hit stretch of Brooklyn, a small community lender is playing the role of Santa Claus. Lesia Bates Moss, president of Seedco Financial Services, noticed an ever-increasing number of vacant storefronts along Atlantic Avenue. In response, she hosted a meeting with a dozen area retailers to find out how her organization could help.
One common problem the merchants cited was getting enough credit to buy sufficient holiday inventory. So Seedco Financial, a nonprofit that specializes in financing for underserved communities, launched a streamlined holiday program: Retailers who could provide a marketing plan for spending the money and driving foot traffic would get fast loans.
On Monday, Seedco staffers started delivering checks. A typical loan request is for around $20,000, to be repaid over the next year at interest rates of 6% to 10%.
Toys and beer glasses: Karen Zebulon, the owner of toy and clothing retailer Gumbo on Atlantic Ave., is one of Seedco Financial's borrowers.
"Especially this year, because we have had such hard times, we really need a boost," she said. "If I can really strategize and plan and buy the right merchandise, I think it can be a turning point for me.
Artez'n Gift and Gallery, which sells products made by local Brooklyn artisans, also got a loan from Seedco. Owner Jessica Furst got her check on Monday and "ran to the bank." She plans to use the cash to stock up on one of her best-selling items: pint glasses with illustrations of Brooklyn landmarks on them. They're a proven customer lure, drawing in tourists and others who make a special trip to Artez'n for the glasses.
With sales slow this year, Furst wouldn't have been able to afford to produce the Brooklyn beer glasses without the last-minute loan.
The big challenge for merchants will come over the next month. The National Retail Federation forecasts that this year's holiday sales will decline 1%, to $437.6 billion.
"The real concern is, can you sell stuff?" said Bill Dunkelberg, chief economist of the National Federation of Independent Businesses. "I am sure inventory accumulation has been cautious. It doesn't look like it is going to be much better than last year, which was terrible."
Misguided Hope
Karen Zebulon, the owner of toy and clothing retailer said "We have had such hard times, we really need a boost. If I can really strategize and plan and buy the right merchandise, I think it can be a turning point for me."
Good luck with that because consumers have dramatically slowed down buying junk.
There are many more individual stories in the article. They all have one thing in common: misguided hope.
Here is one prime example
Clark Kepler's dad opened Kepler's Books in 1955. Like so many other independent bookstores, Kepler's Books is fighting for sales in an industry now dominated by Big Box discount retailers and Internet book sellers. Four years ago, with the shop on the brink of closure, 25 members of the Silicon Valley community voluntarily donated $1 million to save the neighborhood bookstore.
The recession has further ravaged the business, which saw a double-digit sales decline. "We had the most difficult time this last several months with the cash-flow issues," Kepler said. "We managed to get through it, but we were robbing Peter to pay Paul every step of the way."
Shoveling $1 million to keep a small bookstore alive that probably employs a half-dozen employees at most is insane. Even after getting $1 million the store is still struggling. What an amazing sinkhole, and what a waste of money.
Then there is the remarkable story of the owner of the Montana Fish Company restaurant wanting money to expand to a larger facility while not replacing workers who left and not doing any extra hiring for the holidays. This guy wants to expand?
Well Tomorrow is Black Friday. Let's see what shakes. I suspect retailers will try and put a positive spin on things no matter how bad it really is. But even if sales are strong, one weekend does not a season make. Nor do strong sales mean strong profits if everyone is buying deep discounts and loss leaders.
Last night after a 10 hour drive I was up at 5:00AM watching the futures plunge but not knowing why. Now we know: Dubai default fears spook investors
Global stock markets endured heavy selling on Thursday as investors were spooked by the spectre of a default by Dubai and after a febrile foreign exchange market saw the yen surge to a 14-year high against the dollar.
The turmoil caused a flight to less risky assets. Gold, which had challenged $1,200 in Asian trading, fell back from its highs and money flowed into havens such as German government bonds.
US markets are closed for the Thanksgiving holiday, but electronic trading of the benchmark S&P 500 equity futures contract showed a potential drop on Wall Street of 2.2 per cent.
As the European trading day progressed it became clear it was Dubai World’s difficulties that had hit a particular nerve, reminding investors of the lingering damage wrought by the financial crisis.
Banking stocks tumbled on concern about their potential exposure to Dubai. Indeed, the cost of insuring against default by the emirate jumped, with Reuters reporting the Dubai five-year credit default swap being quoted as high as 500-550 basis points. This means it would cost about $500,000 a year to insure $10m of Dubai’s debt. On Tuesday it would have cost about $360,000.
Greek and Irish government five-year credit default swaps also moved higher as nations with supposedly precarious fiscal positions were punished. In contrast, investors sought out comparative haven assets, pushing the yield on the German Bund down by 8 basis points to 3.16 per cent.
Dubai Debt Delay Rattles Confidence in Gulf Borrowers
Dubai shook investor confidence across the Persian Gulf after its proposal to delay debt payments risked triggering the biggest sovereign default since Argentina in 2001.
The cost of protecting government notes from Abu Dhabi to Bahrain rose, extending the steepest increase since February as Dubai World, with $59 billion of liabilities, sought a “standstill” agreement from creditors.
Dubai World’s assets range from stakes in Las Vegas casino company MGM Mirage to London-traded bank Standard Chartered Plc and luxury retailer Barneys New York through asset-management firm Istithmar PJSC. The Dubai government’s attempt to reschedule debt triggered declines in stocks worldwide that had been rebounding from the worst financial crisis since the Great Depression.
Unlike Argentina, which stopped payments on $95 billion of debt eight years ago after yields on benchmark bonds more than doubled in four months to more than 40 percent, Dubai’s announcement yesterday “was a surprise,” said Alia Moubayed, a London-based economist at Barclays Plc.
Gold And The Watched Pot Theory
While some were spouting US government debt default theories or dollar devaluation theories others were looking for the "unwatched pot".
The reason for the strength in gold is not US inflation. As I have pointed out many times, gold fell from 850 to 250 over the course of 20 years, with inflation every step of the way. Thus, the inflation story just does not fit.
However, it should be clear that a major financial crisis is in store following a long period of competitive currency devaluation and massive debt and derivatives expansion by nearly every major country on the planet.
Might the US dollar blow up? Yes it might. But so could the RMB if China floated it, and so could the British pound. No one seems to see the crisis brewing in Japan with a huge demographic problem, a shrinking population, falling exports, and no way to pay back its national debt.
There is seldom a mention of the problems in European banks who foolishly lent money to the Baltic States in Euros or Swiss Francs and now those Baltic country currencies have collapsed and the loans cannot be paid back. European banks also lent to Latin America and those loans are also suspect. Arguably, European banks are in worse shape than US banks, but no one talks about it, at least in the US.
Spain has unemployment approaching 20% yet must suffer through the same interest rate policy as Germany. Seldom does one hear about this either.
Certainly the UK is a complete basket case with its banks on government life support. Iceland has already blown up, who is next?
Most are not aware of the problems in China, Japan, or Europe. However, the problems in the US are universally well understood. Indeed all eyes are on the dollar and everyone is talking about deficits, monetary printing, and especially unfunded liabilities even though the latter is tomorrow's problem, not today's.
Watched Pot Theory Revisited
A watched pot may boil, but it's not likely to explode, especially when everyone watching the pot expects an explosion any second.
Yet, it's easy to see that a financial crisis is brewing.
Somewhere, something is going to blow sky high, but from where I sit, it's as likely to be in the Yen, the Swiss Franc, the British Pound, or something no one is watching at all as opposed to the US dollar specifically.
The jist of the deflationists argument is that debt deleveraging MUST trigger huge consumer and asset price deflation. Whilst we have all witnessed huge asset price deflation and some consumer price deflation during 2008 and into 2009. However we have also witnessed unprecedented government and central bank actions of this year, which have ignited asset price inflation with more to come that is now starting to feed into consumer price inflation.
Why do deflationists have it wrong ?
It is that focusing on the deleveraging of the the debt mountain is a red herring, taken on its own then yes it DOES imply deflation as the debt bubble 'should' contract. But given the asset price reaction of 2009 that is NOT what is actually taking place! the Debt bubble is NOT deleveraging, the bad debts are being dumped onto the tax payers! The huge derivatives positions that act as the icebergs under the ocean as compared to the asset price tips that we see above water are not contracting but expanding!
The DEFLATIONISTS ARE DEAD WRONG !
The last 8 months have proven it to be so ! But STILL they cling on as though they have blinkered visions as a function of presumably not having to put their own money on their deflation calls. What will there position be in another 8 months - it will be to REINVENT HISTORY TO IMPLY THEY SAW IT COMING ALL ALONG!
What's amazing is how hyperinflationists who have blown the call for 10 years running now accuse deflationists in advance of rewriting history.
Here's the deal. Deflation happened, the only debate is how long it lasts. It is more than premature to proclaim the end of it on the basis of an 8 month period. Things do not progress in a straight line and a rebound after a 51% plunge in the S&P 500 and 10 year treasury yields close to 2% was expected.
That rebound is a much proof of the end of deflation as any of half a dozen 50-100% rebounds in the Nikkei over the last two decades, or the massive rebound in the DOW in 1931 before it plunged to new lows.
Many of those pointing to 8 month timelines as if that is what matters ignore an even bigger timeline in which stocks fell that 51%. If this rally is proof of inflation the the plunge must be proof of deflation.
The reality is neither is true. What is true is that in a credit based fiat economy, what matters is ability of the Fed and Central Banks in general to foster bank lending. And that is not happening.
Total Bank Credit
click on chart for sharper image
More Deflationary Writeoffs Coming
click on chart for sharper image
Allowances for loan losses will decrease as charge offs increase. However, the above charts are in relation to non-performing loans.
Because allowances for loan losses are a direct hit to earnings, and because allowances are at ridiculously low levels, bank earnings have been wildly over-stated.
The $trillions poured into the economy got a measly 2.8% rise in GDP.
Now what? Jobs are still contracting, businesses are not borrowing, banks are reducing credit card limits, etc, etc.
Those are not conditions of inflation, let alone hyperinflation. Now concerns are rising in Congress and the administration over the national debt. Meanwhile, more defaults loom: on housing, on commercial real estate, and on credit cards.
Two year treasury yields are at a record lows of .74 and five year treasuries are at 2.11.
If hyperinflation is coming, buy houses. Nowhere else can you get the leverage you can get in houses. It's a sure thing. Meanwhile I suggest gold has been rising for another reason: credit stress and fears of deflationary economic collapse.
Dubai just stepped up to the plate out of the blue, defaulting on debt. Defaults are part of the deflationary process. Prepare for more of them because they are coming.
I see no reason to change my stance that the US is in for a long slug of hopping in and out of deflation for quite some time. Ironically it is the hyperinflationsts who are rewriting history. The hyperinflationists had it wrong, deflation happened first.
Deflation is here, the only debate is how long it lasts. Some of us saw it coming, the rest still scream about the massive inflation that is supposedly coming. They may be correct eventually, but when?
