Category Archives: Finance

Market Up and Dollar Down

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The dollar is at the low end of its trading zone (roughly 81-82 on the low end and 84 on the high) and likely to be under pressure this week.

The general idea is that risk appetite has returned, following some supposedly good data.

One is an improvement in sentiment among builders.

Another is the news that apparently banks have raised about $48 billion out of  the $78 billion needed to get through the downturn.

But it’s my view that the dollar holding up was not about risk aversion as such, although it probably included a component of it.  (Actually, recently,  you can’t really say it has shown any strength – it’s been struggling bravely).  The dollar’s rally was about deleveraging – which is not the same thing at all. Investors might think that sentiment is getting better but that doesn’t mean that positions don’t still have to be unwound and debts paid back.

But right now, it’s a giddy party again. The Indian Sensex went up 17% in one minute on May 18 on the unexpected news that the incumbent Congress party and the liberalizing PM Manmohan Singh had been reelected. But notice that the spike also involved some hasty short-covering. And it was helped by Sri Lanka declaring that the 25 year war with the rebel (or terrorist, depending on your persepctive) Tamil Tigers was officially over. The Sensex led the world financial bounce with an upsurge of 48%.

We’ll see how that goes.

Meanwhile, injecting some unseemly gloom into the festivities, Jim Rogers tells us that the next meltdown will be in currencies.

I notice that the COT (Commitment of Traders) report shows net long positions in the dollar are at their lowest since 2008. That usually signals a reversal of trend, but expect further pressure in the short-term.

Financial Follies: Condo Builders Under Water

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In the news today, AP reports:

“Multifamily construction plunged 46.1 percent to an annual rate of 90,000 units after a 23 percent fall in March. Permits for multifamily construction dropped 19.9 percent to 121,000 units. Analysts said apartment construction is being hurt by a glut of condominiums on the market and by tightening credit conditions for commercial real estate.”

My Comment

Oh, my. This made my day. Condo flippers and developers are in big trouble.

Overlook the opening of this article, with that plaintive reference to a ” modest rebound in single-family home construction in April” that  “raised hopes.”

Hopes should not be raised. That’s pretty clear by now. Not unless you’re being paid to pump houses for some rash developer who ran out of buyers for his pet eye-sore. We can think of a number of things that should be raised  – black flags, eyebrows, interest rates…..but not hopes.

I’ve been checking condo prices all over the world and it’s the same news. From Panama to Kuala Lumpur, from Miami to  Baltimore. Commercial developers are in trouble.

If that doesn’t warm the cockles of your heart and put a smile on your face, I don’t know what will. These wretched companies drove up housing by 100-300% (and more) in some cities and literally chased people on small or fixed incomes out of places they’d been living for years.

And don’t tell me they added any real value.

In New York. construction in one building was so shoddy, the Buildings Department had to intervene.  I personally inspected a condo where, when the owner kicked the wall, her foot went right through.  Many of them were aesthetic monstrosities that ruined the skyline,  polluted the air, and destroyed the architectural beauty of the places where they metastasized.

Now there’s a glut and the developers are losing their shirts.

Miami’s condo king, Jorge Perez, is sitting on top of a market with the biggest glut in the country. Since 2003, nearly 23000 condos were added to downtown Miami, and 33% of them remain unsold. The financial hurricane hit just when Perez, the “tropical Trump,” had opened his newest project, Icon Brickell, a boutique hotel combined with over 1,640 luxury apartments and squeezed into three towers. Only 18 units have sold so far. Perez (once estimated to have a net worth of $1.3 billion) is in big money trouble. His company, Related Group, lost $1 billion in 2008 and ran up debt of $2 billion, $700 million from Icon Brickell alone.

It just doesn’t get better than that….

Award Winning Research Proves that Fed Fiddled Us Into Disaster

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A Distinguished Academic Research Award went to researchers who showed that Bernanke’s tinkering with the interest rate converted a minor recession in 2004 into a full-fledged implosion of the credit markets in 2008:

“In a correlative movement with the rise in the price of oil, the Federal Reserve moved from a low accommodative interest rate policy to one of a steady and consistent increase in interest rates between 2004 and 2007. The switch in policy, to higher interest rates, combined with the financially corrosive effects of low initial variable interest rates, between 2001 to 2004, converting to much higher indexed variable interest rates, between 2005-2008, became a prime cause of the financial services mortgage crisis of 2008. The study suggests that the Federal Reserve’s sustained manipulation of interest rates between 2000-2008 had a deleterious effect on financial lenders and individual borrowers.”

— “Federal Reserve Interest Rate Manipulation between 2000-2007 and the Housing Mortgage Crisis of 2008,” by Dr, Fred M. Carr and Dr. Jane A. Beese, August 8, 2008, of the University of Akron’s .K. Barker Center for Economic Education.

My Comment

(later)

Bail-Out for Insurers

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In the news:

“The Hartford Financial Services Group Inc. was the first to disclose Thursday that it had been notified by the Treasury Department that it was eligible for $3.4 billion from the Troubled Asset Relief Program, or TARP. Lincoln National Corp., which commonly goes by the name Lincoln Financial Group, said it has been initially approved for a $2.5 billion injection from TARP’s Capital Purchase Program.

Allstate Corp., Ameriprise Financial Inc., Principal Financial Group Inc. and Prudential Financial Inc. also are among insurers receiving preliminary investment approval, Treasury spokesman Andrew Williams confirmed. He declined to disclose the amount of investment each company will receive.

The total capital injection into the six companies will be less than $22 billion, The Wall Street Journal reported, citing a person familiar with the situation…”

My Comment

22 billion might not seem like a lot, but insurers’ holdings have taken a big hit in recent months, it seems, and a cut in their ratings would have been likely once their assets fell below a certain level.

So you have government ownership of large parts of the housing market (which itself covers, in all its aspects some 30% of the economy), extensive government intervention in banking and insurance, government run trade, government run schools and colleges, government run social security and medicaid and medicare, and what does the left think the problem is? The free market!

Record Prices for Rarities at Auction Sales

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High prices at auctions are an indication that investors are avidly interested in high quality tangible assets which will hold onto their value and are ready to pay extraordinary prices for them even in this market. Two illustrations from the auctions houses:

In Namure in southern Belgium, on Sunday, demand for Tintin, the cartoon reporter, broke national and world sales records, AFP reports. Five hand-drawn pages by Herge raised 1, 172,000 euros (1.57 million dollars) a world record for Herge as well as a national record for cartoon strips books. Buyers came from all over Europe, the United States, Lebanon and China.

Meanwhile, Reuters reports that at Sotheby’s semi-annual sale at Geneva, a virgin blue diamond straight from South Africa, weighing 7.03 carats, sold to any anonymous buyer on May 12, Tuesday, for a record 10.5 million Swiss francs ($9.49 million), including commission, the highest price paid per carat for any gemstone at auction and a new world record price for blue diamonds. The sale price without commission, a record, was $1,349,752, Sotheby’s said.

Insiders Selling the Rally

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Insiders are selling this rally like crazy, so says The Pragmatic Capitalist:

“I recently wrote about reports that insider selling was at record highs and buying was practically non-existent.  The selling has become even more alarming in the last week and the buying has slowed to an absolute trickle. Below you’ll find the list of latest insider buys and sells.  The sells are staggering with the amounts ranging from $3MM to $63MM (and I was only able to copy one page).  The buys, on the other hand, are meager and range from $100K to $635K (the $800K purchase is a few months old and shouldn’t be in the data).   You’ll also notice that the screen came up with just 18 total purchases vs 170 total sales (the lowest of sell screen data were sales of over $400K which is not shown here due to the large size of the results…”

My Comment

Wall Street, as well as the administration, both want to boost the market for reasons that partially overlap. The administration wants to be able to justify the bail-outs and retain some of the shine of of the pre-election rhetoric of “change”.  But too much optimism will work against legislation/reforms that need a certain amount of panic to be passed.

Wall Street, on the other hand, doesn’t want panic at any price. It wants stability and optimism. And is eager to jump at any positive news it gets.

Mike Martin at MartinKronicle has a long and interesting interview with Victor Sperandeo (of “Trader Vic”), who calls it – as most informed commentators do – a bear market rally.  Sperandeo’s voice is a bit hard to follow but Martin’s questions are searching and cover a lot of ground.

Two points:

Sperandeo (like nearly everyone else) thinks currency depreciation is inevitable and massive inflation around the corner.

He’s pessimistic about the Middle East situation and anticipates more friction with Iran.

Pete Peterson’s Not-So-Clean Crusade Against Entitlements

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Peter G. Peterson, the co-chairman of the private equity firm, The Blackstone Group, is also president of the  Concord Coalition , a bi-partisan group devoted to what it calls “fiscal responsibility,” which seems to be largely given to public advocacy of social security and medicare (entitlements) cuts.

I’m interested in Peterson, because of the way he keeps popping up into things.

First, as I noted in a blog post a couple of months back, he’s become the backer of the film, I.O.U.S.A., directed by Patrick Creadon, which is loosely based on the book, “Empire of Debt,” (Bonner & Wiggin, 2005).  I noted at the time the difference between the libertarian arguments of the book (which critiques the Federal Reserve) and the film’s noticeable silence on the Federal Reserve. In fact, the film spends a great deal of time on some of the very people who enabled the current debt crisis, including Alan Greenspan.

Second, I notice that Peterson has been using the film to argue that entitlement spending is out of control and needs to be cut back, etc. etc., an argument that progressive economist Dean Baker correctly calls morally bankrupt, given that this administration just bailed out some of the most irresponsible gamblers in the banking industry.

Third, I notice that Tim Geithner has given BlackRock three no-bid contracts to manage the Fed’s portfolio of troubled securities, according to a NY Times piece yesterday (April 27). BlackRock has close connections to Blackstone (where it was once the asset management division) and to the NY Fed.

That prompted me to do some digging around and I came across this interesting piece on Peterson, “A Crusader in Clover,” by John Hess at FAIR (Fairness and Accuracy in Reporting).

“While he is reticent about his [Peterson’s] income, Vanity Fair put his take-home in 1992 at $7 million, not an excessive sum for an investment banker of his rank. His partner Stephen Schwartzman, who is regarded in the financial press as the sparkplug of their firm, the Blackstone Group, said that year that investors in its venture fund should expect returns of 25 to 30 percent during the 1990s—again, not unreasonable, since the Dow Jones average rose more than 26 percent last year.

Such rates of return are, again, piquant, because Peterson has described the indexation of Social Security, which lately has raised benefits by roughly 3 percent a year, as “one of the greatest fiscal tragedies of American history.” Piquant? Wait. Peterson was at President Nixon’s side as his economic adviser and secretary of commerce when that “tragedy” was enacted in 1972. (Conservatives thought making the cost-of-living adjustment automatic would deter Congress from voting more generous benefits.)

Peterson denounces the “mad, drunken bash” of the Reagan years. That would be the time when the top income-tax rate was cut from 70 percent to 28 percent, military spending went sky-high, and trillions were made (and lost) on savings and loans and takeovers financed by junk bonds. He was himself, of course, making out like a bandit, hustling for his share of the action, and contributing his bit to Republican campaign funds. He also led a chorus of corporate executives who keened about the exploding federal deficit. His contribution was a key series of articles in the New York Review of Books in 1982 (12/2/82, 12/16/82) that prepared the intellectual climate for the 1983 Social Security “rescue,” which raised payroll taxes and lowered benefits.

The series purported to prove with mathematical certainty that the entitlements of the elderly were snatching food from babies and driving the nation toward bankruptcy. George Will called it “the most important journalism of 1982.” (Washington Post, 12/19/82). Its charts persuaded such liberals as Tom Wicker and Anthony Lewis. Leslie Stahl of ABC said Peterson “really began to educate me.” (She has since repaid the favor with appearances by her mentor on 60 Minutes.)

All the journalists he met seemed impressed by his expertise, and by his generosity in offering to surrender his own entitlements. It does not seem to have occurred to any of his interviewers that a rise of 1 percentage point in his income tax rate would cost him perhaps twice as much as his Social Security and Medicare benefits combined. Nor have any observed how policies he has supported have transferred the tax burden from the wealthy to the wage earner.

Indeed, in Facing Up, Peterson remarks with pleased surprise that nobody had clamored for a cut in the Social Security payroll tax to match cuts in benefits….”

Dollar Surprise

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From Chris Gaffney, Vice-President of Everbank:

“As most would predict, the Mexican peso (MXN) has dropped significantly, moving down almost 3% versus the U.S. dollar overnight. Fears of a global pandemic have driven investors out of the high yielding currencies of New Zealand (NZD), Australia (AUD), and Brazil (BRL). Risk aversion seems to be back in vogue, with investors moving funds back into U.S. Treasuries and the Japanese yen (JPY).

I read a story over the weekend that suggested the U.S. dollar would continue to strengthen no matter what happens in the global economy. The story said that the U.S. dollar would increase if the administration’s efforts to stimulate our economy worked, and that we would lead the rest of the globe into the recovery phase. On the other hand, it said that the U.S. dollar would also strengthen if the global economy continued to weaken, as investors would purchase U.S. Treasuries as a safe haven.”

My Comment:

This insight about the performance of the US dollar has also been mine.

De-leveraging (which is the collapse of asset values as they’re sold to pay off debt)  is going on now all over the world in different asset classes. And de-leveraging mostly needs the US dollar.

In spite of a few sharp corrections downward, that’s what has held the dollar index (DX) up for a bit longer than dollar bears had anticipated.

Holding up, of course, is not the same as “bull market”.

The dollar’s fundamentals are still bad.

I  don’t have hopes for any currency tied to a government behaving so recklessly. I hesitate to write this, but some of the high-level corruption we’ve seen is actually beyond third-world.

I say this with no schadenfreude. It’s deeply, traumatically, disturbing to find so much rot at the heart of the global financial system. At the very core of the “international community, ” if you will.

The worst criticism of imperialism, or of statism, or of financial corruption didn’t prepare me for this.

And it makes me very afraid.

What example does such behavior set? What message does it send to a world which takes its cue from the West, and from the US in particular. Can we really expect better from other governments?

NY Times Wises Up to Banking Cartel (Update)

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Finally. The New York Times is on the case.

(About a decade too late. But we’ll take an awakening whenever it comes and wherever, as we’ve said before).

At The Times, criticism of Tim Geithner’s insider status:

“A revolving door has long connected Wall Street and the New York Fed. Mr. Geithner’s predecessors, E. Gerald Corrigan and William J. McDonough, wound up as investment-bank executives. The current president, William C. Dudley, came from Goldman Sachs.

Mr. Geithner followed a different route. An expert in international finance, he served under both Clinton-era Treasury secretaries, Mr. Rubin and Lawrence H. Summers. He impressed them with his handling of foreign financial crises in the late 1990s before landing a top job at the International Monetary Fund.

When the New York Fed was looking for a new president, both former secretaries were advisers to the bank’s search committee and supported Mr. Geithner’s candidacy. Mr. Rubin’s seal of approval carried particular weight because he was by then a senior official at Citigroup.”

More at “Geithner, Member and Overseer of Finance Club,” Joe Becker and Gretchen Morgenson.

My Comment:

Here at The Mind-Body Politic, your diligent commentator makes it a point to cite people, even  if they don’t reciprocate, so we will note appreciatively that Ms. Morgenson did the leg work that outed Goldman Sachs for its presence at the AIG bail-out  (September 30, 2008). She deserves every credit for it.**

But that said, it still remains true that mainstream journalists today are moved less by the need to keep the public informed at the critical time than to bolster their reputations. That is really too bad and it’s why, increasingly, so many people disdain the press. Imagine doctors who watched the patient bleed and didn’t share information about his condition so they could “break” the case for themselves? What sort of professional ethic would that be?

Blogging and writing down intuitions as they occur is the only way of putting valuable information out into the public realm as fast as possible, so as many people can push back from as many angles as possible. That’s the only way to keep up the pressure on public officials.  I could not ethically hold back on my insights, just to avoid having other people take them without acknowledgment. You’d think better positioned journalists would act with equal public spirit, especially as they – unlike bloggers – are paid rather well to do so.

Writing critically about Tim Geithner in 2009, after the milk’s been spilled, and when it’s public knowledge is one thing. Much better for the Times to have written about Geithner a few years ago, when it counted.

This is precisely why the reputation  of the mainstream media among people who follow such things is a little below that of a loan officer at Fannie Mae.

Update:

Apparently, this piece provoked reaction elsewhere in the blogosphere, with Yves Smith at Naked Capitalism claiming that the piece is too kind to Geithner and Paul Kedrosky finding no smoking gun in all of it. Over at Portfolio.com, Ryan Avent sees it as evidence of  Geithner being much less of an establishment figure, much less timid, than people think.

My own sense is that Geithner is more of a scape-goat, a convenient prop to beat up on. It’s the figures behind him, Rubin, Summers, Volker, (and a few others whom I’ll post on later), who are the important players.

As a further aside:

Note this sidebar from The Times (September 28, 2008):

The Reckoning: A Spreading Virus: Articles in the series are exploring the causes of the financial crisis

In the last two years, NRR , The New York Times , and a few other places, have repeatedly used the word “reckoning” for the financial crisis, as well as a a few other terms. They sound strangely reminiscent of my co-author’s very popular newsletter, The Daily Reckoning – well known to DC and NY financial circles.  I’ve seen arguments from said missive (as well as from “Mobs”) lifted wholesale….

No one owns words or phrases or ideas. Or leads. There is no monopoly on them. And all writers are only too happy to have people read them, no matter what.

But political journalism is not simply any journalism. It plays a vital part in the creation and preservation of public memory. And that memory, that record, is essential to monitoring the state – which is the role of the fourth estate.  Journalistic ethics, which cannot be enforced in the courts alone, demands a degree of personal integrity to function as it should in creating and preserving that record.

With notable exceptions, this integrity is not much in supply any longer.

So, while stoning the banking cartel for its sins, let’s keep a few chunky pebbles for the media cartel.

Footnote:

**[I wrote a piece on AIG and Goldman Sachs the week before Morgenson’s piece. My piece was widely disseminated in the blogosphere (and to members of Congress, I learn from readers) and since Morgenson had never written critically about Goldman’s insider ties with AIG before, I have more than a suspicion she took the lead from that piece —  “Lipstick On An AIG” (Counterpunch, September 18-19, 2008)].

PS. I wrote both Morgenson and Jim Pinkerton (who mentioned Morgenson’s story on TV the following weekend), requesting correct attribution. There was no reply.

To the reader who writes to me that such imitation is a form of flattery, I wish….

It has nothing to do with flattery. It’s an attempt to co-opt language. It’s a way of muddying the waters. It’s revisionism. And its goal is to steer your mind the way that opinion-makers (who only voice choices within a carefully vetted spectrum) would have it go. Don’t be misled by the apparent opposition between the left and the corporate class. Communists and capitalists have always colluded when necessary. Certain kinds of capitalists (corporatists) love the state and they love communism — for you.

They know they’re always going to get the perks and privileges of the ruling class, while equality for everyone else makes for a pliable, governable body politic…