QE2 in the EMU – Not Likely

The Wall of Junk Bonds Grows Taller – The Federal Reserve’s data dump of more than 21,000 loan documents from the financial crisis provides a vivid reminder of how ugly it can get when the credit markets freeze up. In order to get crucial overnight loans, hundreds of banks had nothing else to give the Fed as collateral except junk-rated loans and bonds — valued at $1.3 trillion. Securities rated that low are risky because no one wants to buy them when the markets freeze up. As a result, many banks could not push these junk securities off their balance sheets by selling them. Could this happen again? Perhaps not on the same scale, but it would be a mistake to believe that the overhang of junk is lifting. New research from Moody’s Investors Service suggests that low-rated American companies have about $100 billion more in debt to refinance than analysts previously thought. This year has seen a boom in higher-yield leveraged loans — risky corporate loans with low credit ratings — and in their cousins, junk bonds. In fact, there has never been a bigger year than 2010 for junk bonds and leveraged loans, the high-risk debt that help companies with low credit ratings sustain their businesses.

Indonesia’s growing allure – Indonesia is rarely mentioned in the same breath as the so-called BRIC economies that investors and exporters eye with envy.  Yet the country is home to the world’s fourth-largest population, at 237 million, trailing only two of the BRIC countries, China and India, and the United States. Its economy grew 4.5% last year, the third-highest among the Group of 20 economies, and the momentum carried over into 2010, with first-quarter growth of 5.1% annualized followed by a 6.5% expansion for the April-to-June period.  And, according to the International Monetary Fund, Indonesia was the only G20 country to lower its ratio of debt to gross domestic product during the financial crisis. "It certainly has the size that you would think it should be among the BRICs," said Robert Simmons, chief representative for Export Development Canada in southeast Asia. "But it has never quite lived up to its potential."

The corporate takeover of American schools – The top positions in state education across the US – for example, Secretary of Education Arne Duncan, recent chancellors Joel Klein (New York) and Michelle Rhee (Washington, DC), and incoming Chancellor Cathleen P Black (New York) – reflect a trust in CEO-style leadership for education management and reform. Along with these new leaders in education, billionaire entrepreneurs have also assumed roles as education saviours: Bill and Melinda Gates, and Geoffrey Canada.  What do all these professional managers and entrepreneurs have in common? Little or no experience or expertise in education. Further, they all represent and promote a cultural faith in the power of leadership above the importance of experience or expertise. When Klein quit his post as chancellor in New York – soon after Michelle Rhee left DC – the fact that he was leaving for a senior position at News Corp and that his replacement would be a magazine executive sent a strong message. The implication was that the American public distrusts not only schools, but also teachers and education experts.

China- A Profiteers Bagunca (Mess)– For those of you who don’t remember the Hunt Brothers, here is the background.  Fast forward to today, and we see a “mystery holder” of copper stocks at the LME. Let’s see a massive manipulation at the same time China is blowing up, could get very interesting.  Just a thought, but does anybody care to wager that this is Chinese or a Chinese stooge?  Anyone in these markets should start reading so called obscure stories in the China Daily.  In the first the refiners are pointing finger at crony state oil aparatcheks for in effect profiteering. In the next China surveys the shortage landscape and decide to “crack down on profiteers”. I would surmise that a profiteer in China is anybody not paying large bribes or a who is not a well connected aparatchek. The third story shows how if you aren’t an exporter being crushed by input costs, the Gumnut will step in a slap prohibitive export tariffs on.  The idea here is to keep the product domestic where you can be looted  and prosecuted by aparatcheks as a profiteer. I am sure the regulation and exemption book is perfectly clear as well, just bring your bribe money. Here another bureau defends price increases and blames it on the end of a special Gumnut subsidy

More Thoughts on ECB Decision – European officials must have known they were going to disappoint the market with the decision to simply postpone draining liquidity.  The firewall around Greece failed.  The firewall around Ireland has failed.  The politicians have dropped the ball and the left Trichet holding the bag.  Many from the periphery appeared to lobby the ECB to help out.  Trichet in essence says there is little it can do and that it is really up to the governments.  That said, little is really resolved.  The amount of refinancing needed next year by peripheral countries and their banks is staggering.  There is some thought that the Fed’s purchases of Treasuries will free up funds and that just like the earlier Fed programs had helped foreign institutions, so do will its asset purchases.  But this is insufficient really given the magnitude of the problems. If the problem is in part that some banks, like in Portugal, have become dependent on ECB liquidity as they have been locked out of the wholesale funding market, it is not clear how extending ECB liquidity provisions address this.  Kicking the can until end of Q1 2011 is hardly a sustainable solution.  We do note that Spanish, Italian and Belgian sovereign refinancing needs next year are front loaded in Q1 11.

QE2 in the EMU – Not Likely – The market expects the ECB to announce additional liquidity provisions to attempt to quell the fears emanating from Europe’s liquidity/solvency crisis, though we suspect that the ECB is unlikely to announce a massive extension of bond purchases.  We feel, however, the ECB will continue to provide liquidity through its MFI operation, which may leave the market disappointed and stoke a rise in volatility in the sovereign market, unraveling some of the euro’s recent gains.  Yet the euro continues to maintain yesterday’s trading range and will need to get above the August 62% retracement level of $1.3235 to garner further support. Meanwhile, sterling rallied on the back of the positive European news and continued to rally, moving into $1.566 highs, following the strong construction PMI numbers yesterday.  And the combination of strong global PMI’s and the rise in risk appetite eased demand for safe haven currencies, thus weakening the yen. 

Debunking the Myth That Bigger Banks are More Efficient and Necessary  – Yves Smith – A very good op ed by Thomas Hoenig in the New York Times, “Too Big to Succeed” provides a solid recap of why the business of reining in the too big too fail banks is crucial. It isn’t simply that this is yet another version of “Mission Accomplished”; the bailouts actually made industry concentration worse, as Hoenig indicates.  Mike Konczal sheds more light on how the rescues helped the biggest banks at the expense of their smaller bretheren. However, what astonishes me is this drive by ad hominem by Matt Yglesias that Konczal links to in his post.  While Yglesias often has sound observations, I believe in not going beyond the limits of one’s knowledge, and Yglesias is out of his depth here. Yglesias is effectively saying smaller banks are less competitive, which is bunk. Every study ever done of banking efficiency in the US over the last 20 years shows that once a certain size threshold is reached banks show an increasing cost curve, meaning they are less, not more, competitive. So why has there been consolidation in the banking industry? Why would banks get bigger to become less efficient? Simple. Big banks don’t out-compete smaller banks; they simply buy them up. The acquiring bank managers get a pay increase; the managers of the purchased banks get a windfall.

 

GM Confirms, Yes, We’re Losing Money on Every Volt We Build – Doug Parks, vehicle line executive for the 2011 Chevrolet Volt, GM’s range-extended electric vehicle, confirmed Tuesday that the company loses money on every Volt it sells. This should hardly be a surprise.  It’s called R&D, folks. Every major automaker spends billions of dollars a year on research and development costs. And they know that when they launch certain new technologies, they will lose money for some years before costs fall and volumes rise to let economies of scale make a particular new feature or technology profitable. Toyota’s investments in its hybrid program, which has given it roughly two-thirds of the global market for hybrid-electric cars, are estimated to have cost it upwards of $10 billion over 15 years.

Freezing Out Hope – Krugman – After the Democratic “shellacking” in the midterm elections, everyone wondered how President Obama would respond. Would he show what he was made of? Would he stand firm for the values he believes in, even in the face of political adversity? On Monday, we got the answer: he announced a pay freeze for federal workers. This was an announcement that had it all. It was transparently cynical; it was trivial in scale, but misguided in direction; and by making the announcement, Mr. Obama effectively conceded the policy argument to the very people who are seeking — successfully, it seems — to destroy him. So I guess we are, in fact, seeing what Mr. Obama is made of.  The truth is that America’s long-run deficit problem has nothing at all to do with overpaid federal workers. For one thing, those workers aren’t overpaid. Federal salaries are, on average, somewhat less than those of private-sector workers with equivalent qualifications. And, anyway, employee pay is only a small fraction of federal expenses; even cutting the payroll in half would reduce total spending less than 3 percent.

Fed Thumbs Its Nose at Audit the Fed; Withholds Data Required on $885 Billion of Collateral – Yves Smith – Well, even under the compulsion of law, the Fed chooses not to comply. Should we be surprised that it continues to refuse to make mandated disclosures? In this case, as reported by Bloomberg, the Fed has withheld information that was of the collateral posted by borrowers to secure $885 billion of loans. Without this information, it is impossible to ascertain the risks undertaken in various emergency facilities. Dodd Frank specifically requires this detail be released: In other words, there is no way to pretend that this information was not part of the stipulated disclosure. The terms of the various types of support extended are to be revealed by borrower, in particular the details of the various types of support extended, including the collateral posted. Instead, the Fed provided the data on an aggregated basis, by asset type and rating and then only for three of six facilities.So what is the Fed trying to hide? A number of experts correctly pointed out that this is inadequate: One expert argued that the data needed to be withheld because it might spur bank runs. This is simply barmy. These loans took place during the crisis; this exercise is about past, not current exposures.  There’s no risk here, save to the Fed’s reputation and its secrecy.

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