some conversations with Heinz
Mish:
The FDIC's red flags came in the wake of the release of other federal data reporting that aggregate mortgage debt now stands at 72 percent of total household debt -- an all-time high -- and that home price appreciation went off the historical charts in select markets last year, ranging as high as 42 percent in Las Vegas.
Message 20861079
Heinz:
mortgages now also comprise over 60% of the assets on bank balance sheets. it's Japan squared almost. IN SPITE of FNM buying up lots of mortgages and selling them off bundled as bonds (all AAA rated of course...regardless of the quality of assets behind them).
once the bubble bursts for good, the banking system will be paralyzed for years imo.
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Mish:
Social Security "Reform"
andrewsullivan.com
Dec 15th...
A BLEG FROM KINSLEY:
My contention: Social Security privatization is not just unlikely to succeed, for various reasons that are subject to discussion. It is mathematically certain to fail. Discussion is pointless.
The usual case against privatization is that (1) millions of inexperienced investors may end up worse off, and (2) stocks don't necessarily do better than bonds over the long-run, as proponents assume.But privatization won't work for a better reason: it can't possibly work, even in theory. The logic is not very complicated. .....
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Heinz:
there's even more to it than that. read Rockwell's take:
" The movement to privatize Social Security (fully or partially) may be the most ideologically duplicitous and fiscally irresponsible I've seen in my lifetime. It was proposed by Clinton and now by Bush. Whether it dies in the next few months or generates some monstrosity of a bill to be voted on, don't believe that there is anything in the works that is going to bring you more freedom." continued:
mises.org
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Mish:
A snip from Bernie Schaeffer
Much has been made of the mystery of the strength in the long end of the curve. Far more often than "quiescent inflation" ,the massive purchases of U.S. debt by Asian central banks (what Bill Gross refers to as "the kindness of strangers")has been the explanation of choice for the refusal of the bond market to tank. And such discussions always include a warning that central bank kindness could morph into central bank
dumping in a heartbeat.
But what if there was a better and more durable explanation for the continued strength at the long end? And what if this explanation was that the bond market is forecasting (as most strongly evidenced by the yield curve implosion) a major weakening in the U.S. economy that is completely off the radar screens of conventional analysts and economists?
I’m not a fundamental analyst. Rather, my goal has always been to examine the various economic scenarios and to divine outlier views that are not widely held and yet are logical and have a reasonable probability of coming to pass. It is from such scenarios that some of the most profitable trades emerge, as these trades are by definition not crowded. And what could be a less crowded trade right now than long the
long end of the yield curve?
Yesterday's Financial Times gives us a clue as to just how lonely such a trade happens to be. According to Merrill Lynch's latest monthly survey of global fund managers interpreted by David Bowers, chief investment
strategist: The call is very simple: buy equities and sell bonds. Or more precisely go underweight U.S. Treasuries and overweight emerging market, Japanese and European equities. Specifically, a net 49 per cent of managers expect equities to be the best performing asset class next year, while a net 38 per cent believe bonds will be the worst.
My contrarian call for 2005 is, not surprisingly, to be long the long end of the yield curve. If the 10-year note is flat for the year, I’ll earn a shade above 4% on my money. And if I’m right about the U.S. stock market, that will be a darned sight more than the return will be on large cap index funds in 2005. And it will be the case in spades if in fact the bond market is correct in its negative assessment of the economic growth prospects for next year. As always, just my thoughts -
not intended as advice.
Heinz:
well, what can i say? i couldn't possibly agree more.
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Mish:
Why can't (or SHOULDN'T to be more precise) treasuries rally and stocks feed off the rally in treasuries.
Heinz:
it COULD happen - otoh, i for one think that while treasuries are almost certain to continue to advance, the corporate bond and junk bond markets could come under pressure relatively soon - and i don't think it'll be gradual either. rather, i expect a '98 , LTCM style, blow-out eventually.
but i admit the precise timing of this is uncertain. certainly the stock market is usually the LAST market to realize that a recession looms.
but looking at sentiment toward these markets, we haven't seen such a PERSISTENT preponderance of stock market bulls since 1987. and the only previous instance was 1972. in both cases the stock market proceeded to punish the bulls. somehow i don't believe the corporate bond markets will give much of an 'early warning'. more likely their and the stock market's fall from grace will happen concurrently.
let's not forget: whan yiled spreads were at their WIDEST the panic lows in the stock market occurred. now spreads are extremely compressed - this is a sign of complacency (one of many in fact). it argues for a top being within hailing distance imo.
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Mish:
WASHINGTON, Dec 16 (Reuters) - U.S. housing starts unexpectedly plummeted 13.1 percent last month, the biggest dive in nearly 11 years, as groundbreaking activity fell sharply across the nation, a government report showed on Thursday. Housing starts slid to a seasonally adjusted annual rate of 1.771 million units in November from an upwardly revised 2.039 million clip a month earlier, the Commerce Department said. Starts have not fallen so precipitously since they tumbled 17 percent in January 1994.
Permits for future groundbreaking, an indicator of builder confidence, also proved disappointing, slipping 1.5 percent to a 1.988 million unit pace. Analysts had looked for a 2.000 million permit-issuing rate.
The department said starts fell 14.2 percent in the Northeast, 19.4 percent in the Midwest, 13.2 percent in the West and 10.4 percent in the South, the region that boasts the lion's share of housing activity.
Heinz:
what's the saying? 'stick a fork in it' or something like that. the housing bubble is OVER.
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Mish:
FANNIE MAE VIOLATED accounting rules and must restate earnings for the past four years, the SEC's chief accountant found. The decision will force Fannie to recognize an estimated $9 billion of losses on derivatives. 10:41 p.m.
If you can hide $400 million why not try to hide $9 billion? ggg
Heinz:
well, LOL. a billion here, a billion there...
you know what i think? this is the SMOKE. we haven't seen any of the fire yet. there's more where this derivatives disaster came from. for years everybody has swiped everything under the rug. as Sinclair has once said: 'the ultimate guarantor of all these outstanding otc derivatives is Tchai-Walla's mud hut in Calcutta'. it sure seems to have been that way with Enron for instance.
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Mish:
Japan's Finance Ministry raised 5 trillion yen ($47.5 billion) at an interest rate of zero when it auctioned three-month finance bills (FBs) on Wednesday, highlighting the excess liquidity flooding the banking system.
Someone tell me who the F would buy these?
Heinz:
because the paper might rally. sure it's crazy...but that's probably the motive.
Mish:
Rally above par at 100?
Is that what you are saying
Isn't that a lot of risk with little chance of reward or am I missing something obvious?
Could it be to minimize risk that Japan starts taxing cash? Does that make any sense?
Would that rally it above par as well?
Heinz:
yes, a rally above par. this has already happened once in ST Japanese debt paper. and yes, it seems a lot of risk with little reward - i wouldn't do it. but i think it's significant that there are investors prepared to do it - it says a lot about the outlook for Japan's economy and its deflationary spiral.
regarding taxation of cash, that would rally this type of paper for sure. and it may well be something they are considering - there's already a Fed paper out that proposed just such a 'solution' to the 'deflation problem' (the quote marks are to indicate that i neither think this is a solution, nor do i think deflation is a problem. i think things getting cheaper is just great. but then, i'm not up to my eyeballs in debt. nor am i a banker profiting from inflation. it's a problem for the system, such as it is, but then it's at its core a fraudulent system).
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Mish:
"Deflation pulsing from China"
China is flooding the globe with supply at a time when global demand is, shall we say, less than vibrant. The juggernaut of the Chinese low-cost manufacturing machine, coupled with a currency that is at rock bottom, is crushing and threatening industry after industry throughout any country in its wake.
This extreme competitive pricing pressure seen as a boon for shoppers is also hollowing out said shoppers' job base. Wal-Mart should be so proud. Oh, sorry. I forgot. It's not the $0.10 an hour labor that makes Wal-Mart so "competitive," it's their technological and logistical prowess; they would have us believe. And Santa should be here any day now.
Message 20863832
Heinz:
at some point China will experience a crisis (its 1929, if you will, or perhaps its '98 would be a better analogy...). considering all we know, it seems obvious that there has been a lot of credit induced malinvestment that will have to be liquidated at some point.
when that happens i'll be buying with both hands...
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Mish:
Arnold already $8B in the hole
SACRAMENTO - The state budget Gov. Arnold Schwarzenegger proposes in January will show that the shortfall has worsened substantially in recent months, administration sources say, and will force him to propose deeper spending cuts than previously expected.
The ballooning gap reflects Schwarzenegger's limited success at reining in spending. State prisons are over budget, Indian casinos are generating less cash than expected and the governor's proposal to raise $460 million by diverting a share of punitive damages from civil lawsuits to the state has fallen flat. And a plan to borrow $800 million to pay the state's contribution into the pension fund for its workers is tied up in court.
In all, the projected shortfall has grown to at least $8 billion, say administration officials who asked not to be named. That's $1.3 billion more than was projected last month by the nonpartisan legislative analyst's office, which lawmakers look to on budget matters.
more... latimes.com
Heinz:
are they broke again, or are they STILL broke? did anyone expect the terminator to perform miracles?
the interesting thing about this is that it shows California's economy remains in a slump - otherwise rising tax revenues would have bailed 'em out.
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