Tuesday, 23 March 2010 04:00

Topics in the News That May Be of Interest to BoomBustBloggers

I will start posting more news topics of interest and welcome readers to forward research and investment ideas at will. Here is the crop from last week. I will post topics from the weekend later on today, and as usual will randomly comment on daily news events.

From Alliance Bernstein:

  • Core Intermediate Producer Prices have taken 6 months to rise 5.2% annualized, recession of 2002 took 2 years to reach same level
  • Operating Rate hit low of 65.4% last year and has only risen to 69.4%, still short of historical threshold causing rise in raw material prices (74%)
  • Increases in foreign operating rates have started to indicate US may now be a price follower instead of price leader
  • The Fed cited lack of resource utilization as reasoning for maintaining record low rates, as these concerns begin to wane Alliance Bernstein sees easing of emergency Fed policy


  • Christina Romer, Peter Orszag, and Tim Geithner have predicted unemployment will settle in 2010 at around 9.7%, citing poor job conditions
  • Federal deficit projections for 2011 & 2015 are $1.5 trillion & $751 billion respectively, White House officials cite Bush's medicare and income tax cuts for allowing deficit insanity


  • Moody's has stated US, UK, Germany, & France, are at risk of
    credit downgrades from AAA (dollar rose on this news)
  • All 4 countries estimate debt costs of 80% of annual GDP


  • Most financial historians look at the SPDRs as first ETF,
    introduced in 1993 to track S&P 500
  • ETFs nearly doubled in AUM over the past year to $1 trillion,
    Mutual Funds have total of $18.7 trillion, but some mutual funds have
    started to structure ETFs
  • ETFs cross various asset classes (FX, Commodities, Bonds),
    leverage (1x, 2x, inverse) and offer better fees than traditional mutual
  • ETFs have developed into an incredibly large and important asset
    class for the retail investor
  • Of course, there is the risk of slippage and tracking error in
    ETFs, particularly the leveraged ones which seem to suffer from time
    decay. This is Reggie's comment, and not necessarily that of the author
    of the article.


  • The $787American Recovery and Reinvestment Act has propped up
    temporary jobs to generate a "pseudo-recovery" [Tell me about it]
  • Obama has talked down risky loans, while back handedly pushing
    banks to take "third and forth looks" at potential debtors, meanwhile,
    FHA will take 3.5% down payments
  • FHA loans continue to increase in default rate, as do readjusted
    HAMP (Home Affordable Modification Program) loans
  • Prime loans have had terrible default rates due to the way prime
    is accessed, primes can include adjustable rate mortgages, low down
    payments, and "debt disguise mechanisms"


  • Under new chapter 11 plan, "LAMCO" would manage all of Lehman's
    assets outside of its core operations that were liquidated in bankruptcy
  • Secured, administrative and priority creditors would be paid in
    full under the proposed plan, while general unsecured claims, direct
    intercompany claims and guarantee claims would in part be satisfied by
    some "pro rata" cash distributions


  • Organization for Economic Co-operation and Development estimates
    that more than 30 percent of Greece's GDP is untaxed [yet Greece
    believes they can fix this in one year, see "Greek
    Crisis Is Over, Region Safe", Prodi Says - I say Liar, Liar, Pants on
  • US Manufacturing produced $1.4 trillion in 2007, even after losing
    1/3 of workforce since 1998 (Greece's economy is based on tourism &
  • Flight from USD for debt reason does not make sense to author
    since Euro nation debt loads are similar or worse, and Japanese debt is
    much greater than the US


IMF Working Paper @ http://www.imf.org/

  • Current US fiscal policy is becoming a long term liability,
    forecasting is very hard with large deviations between projections and
    outcomes (projections are too optimistic) [This is not just a US
    problem. The Eurozone members are champions at this, see
    Once You Catch a Few EU Countries "Stretching the Truth", Why Should
    You Trust the Rest?
  • While bad real GDP forecasts have contributed to error in fiscal
    forecasts, regression analysis of GDP, CPI, and fiscal policy finds only
    a 12% correlation
  • Near-Medium term economic outlook is neutral/skeptical,
    potentially downplaying the importance of reducing deficit for that same
  • The primary balance surplus exceeded expectations throughout most
    of the 1990's, however fell short throughout most of the following
  • According to IMF models, fiscal prudence would stabilize debt/GDP
    at 68%, if policy reaction is slow, reaching 80% is more realistic (IMF
    models are much less optimistic than OMB models)
  • There is a wide range of uncertainty about US fiscal policy, but
    it is clear that without adjusting the primary balance the US will see
    debt levels north of the 77% projection by 2020
  • Incredible/Impossible balancing act of steady stimulus vs. debt
    reduction is almost underway, but a intermediate term fiscal course
    correction is necessary

Imes Discussion Paper @ http://www.imes.boj.or.jp

  • Textbook economic theory regarding sticky prices and low
    nominal inflation may not hold when multiple nations are fighting a
    liquidity trap
  • In a global liquidity trap, the country with the biggest gov't
    expenditures will weaken its currency and worsen its terms of trade
  • Under normalized conditions (normal central bank policies), fiscal
    multipliers are kept under 1.0, but when interest rates push the
    zero boundary, fiscal spillover and government spending increases, terms
    of trade weaken and global trade breaks down [
    Think US-China trade
    beef, Germany & practically the rest of Europe. See Mainland Chinese Express
    Regret, Anger at Google Move
  • Fiscal multipliers >1 usually result in gov't expenditures
    achieving employment growth, but negative results if elasticity of
    consumption is <1

Albert Edwards/ZH Report @

  • Private sectors continue to deleverage, governments continue to
    lever up at all levels (perhaps the only reason financials appear to be
    deleveraging is because gov'ts continue to soak up their bad debts?)
  • Bank lending continues to decline, deleveraging is not nearly
    finished, contradicts mainstream idea of debt based, leveraged recovery
  • Possibility for global debt-deflation crisis continues to grow,
    Edwards & Grice predict the printing presses will heat up
    (hyperdeflationary default followed by hyperinflationary printing to pay
    debts due)

ECB Article @ http://www.ecb.int/

  • ECB forecasts minimal growth (0.4%-1.2% GDP) this year &
    moderate growth (<2.5%) next year, inflation expectations remain low
  • Unsure what the post-crisis "normal" will be, or conditions when
    ECB ends non-standard monetary policy operations
  • ECB recognizes individual fiscal prolificacy and calls for tighter
    fiscal policy to avoid sovereign debt crisis (a little late for this
    isn't it???
  • Stark concludes with typical calls for transparency, when the Fed
    calls for transparency it comes off as a back handed joke and I'm going
    to assume this is not much different. See Smoking
    Swap Guns Are Beginning to Litter EuroLand, Sovereign Debt Buyer

ING Forecast@ http://www.ing.be

  • With weak consumption/confidence, and stagnating labor demand, GDP
    growth forecasts continue to look sluggish
  • Changes in the discount rate are barely a measure of tightening,
    as only $112 billion was borrowed on average per week at the height
    (fall of Lehman) and now is at a mere $14 billion/avg per week
  • Greece continues to haunt markets by keeping safe haven fixed
    income at lower yields
  • Similar consumption/confidence issues are "plaguing" the Eurozone,
    growth outlook still weak, UK is slightly more optimistic but fiscal
    concerns are starting to hold weight
  • Employment conditions in Japan appear to be easing, but deflation
    continues to dominate
  • PBoC continues to have issues with balancing inflation and
    stimulus led asset prices
  • Funds and banks are waiting out potential RMB appreciation
  • Dollar continues to benefit from negative sovereign credit outlook
    in the Eurozone, particularly UK & Greece, no mention of heavy
    hitters Spain & Italy

Flash Economics: Spain@ http://cib.natixis.com

  • Spain is currently seeing -3.7% GDP growth, 19% unemployment,
    annual deficits of ~11% debt/GDP
  • Spanish "growth" was credit driven, bursting of construction
    bubble was incredibly deflationary for income and resulted in defaults
  • Hypothetically, a government default would bankrupt the banks
    because the banks are absorbing most of the fiscal financing as private
    lending has sunk
  • Government estimates to reduce deficit to 3% annual GDP by 2012
    are IMPOSSIBLE without economic growth
  • Subscribers, see Spanish
    Banking Macro Discussion Note

Flash Economics: Greece v. Germany@ http://cib.natixis.com

BBVA Weekly Article @ http://serviciodeestudios.bbva.com

  • EU industrial output grew 1.7% MoM due to Germany, France, and
  • German exports continued to increase, thanks to a weaker Euro,
    even as French confidence fell and Italian GDP was revised negative
  • Lighter trade continues to hold back the UK, private demand in
    Spain continues to be incredibly weak
  • Trichet continues to highlight potential sovereign debt crisis
    while maintaining very low rates to support stimulus measures

State Sreet G7 Weekly @ http://www.ssga.com/

  • US retail sales for February were upbeat thanks to substantial
    downward adjustments from December and January
  • US current account deficit continues to grow while trade
    deficit also widens on "recovery" signs
  • Canadian exports, employment, capacity utilization, and housing
    data continue to look optimistic
    , chance for rate increases looks
    good at first glance, but the BoC rarely acts before the Fed
  • In the UK, industrial output continues to disappoint, but retail
    sales numbers continue to improve
  • German, French, and Italian output continue to rise slightly, but
    are still unimpressive, graphs are generating an "L shaped recession"
  • Japanese data continues to act erratically as the BoJ attempts
    to fight deflation for the seemingly 1,000th time, but
    manufacturers are seeing orders rise in potential signs of export growth
  • Japanese corporate prices are rising due to oil prices,
    deflation still reigns supreme
  • Australian home loan approvals have fallen by 7.9%, this is
    the 4th consecutive decline and could be a leading indicator
    for a decline in construction activity
  • Chinese M2 grew 25% YoY, Indian production is up 16% YoY (India
    raised rates, also something to follow), and Brazil posted its first
    annual GDP gain (4.3%) in a year
  • US household wealth is up $5 trillion over the past 3 quarters,
    but $12 trillion remains in losses

FT Alphaville Article @

  • Santander hemorrhaged cash (and equivalents) at a loss of €10.892
    billion over the past year, meanwhile, competitor BBVA posted cash gains
    of €1.69 billion and operating cash flow of positive €2.567
  • Boosts in operating cash flows at both BBVA and Santander
    potentially line up with alleged assistance from the ECB, which a
    Santander spokesperson took the time to go after the blog post, stating
    if Santander wanted more cash it could get it from the market, not
    resort to the ECB
  • To follow up on the previous bullet, does Santander really want to
    try and raise funds from the market? A terrible bond auction for
    Santander would raise its risk profile as well as Spanish sovereigns,
    which would help unwind the "extend and pretend" policies currently used
  • See The
    Spanish Inquisition is About to Begin...
    and subscriber download Spanish
    Banking Macro Discussion Note
Last modified on Tuesday, 23 March 2010 04:00