Unheeded Warnings

I checked the ratings website for economic blogs after their latest report, and Economic Disconnect still sits at #105. I will continue to try and break the top 100!

Corrupt US Officials Give Away Our Money While They Pad Their Pockets
The disgusting news out today concerns the Governor of Illinois and highlights how far gone the US Government is. Governor Rod Blagojevich has been nailed trying to sell the Senate seat held by Barrack Obama for all kinds of payments and kickbacks. What is both funny and sad, Mr. Blagojevich won the office by replacing his predecessor who is now serving jail time for the same kind of corruption. Quite the state good old Illinois! Do not worry Mr. Blagojevich does not intend to resign until he is being walked out of court on the way to jail. Hang in there buddy!

What this puts into my mind is the sickness that is the US Congress voting on things like the TARP bill and an automaker bailout. While our elected officials decide whether to hand over countless billions to Citi, AIG, Fannie/Freddie, Bank of America etc they are at the same time taking some off the table for themselves. Very disturbing. It does matter who you vote for and we missed another chance to send a bunch of clowns packing in the last election. Keep the same people in Washington and we will get more of the same.

Unheeded Warnings
There are some danger signs flashing bright red concerning things economic. While the markets are getting ready for a year end monster move up (up 20% from the lows=technical BULL MARKET) other indicators are screaming warnings.

From the always fun site LOLFed, I found this story on General Growth Properties which shows the coming commercial real estate bust is both here and very big indeed. Full story here.

GGP was a $40 stock and is now in the 40 cent range. Too many acquisitions and too many loans made on "future rent estimates" ie liar loans were the killers when the retail side of things went bust. Banks have enormous exposure to commercial real estate and now that worm is turning. This fits well into the treasury yield debacle that is going on right now.

The latest Treasury auction went off great on the demand side as record numbers of bidders gobbled up US debt with the awesome yield rate of, ZERO PERCENT! (from Bloomberg)

Treasury Bills Trade at Negative Rates as Haven Demand SurgesDec. 9 (Bloomberg) -- Treasuries rose, pushing rates on the three-month bill negative for the first time, as investors gravitate toward the safety of U.S. government debt amid the worst financial crisis since the Great Depression.
The Treasury sold $27 billion of three-month bills yesterday at a discount rate of 0.005 percent, the lowest since it starting auctioning the securities in 1929. The U.S. also sold $30 billion of four-week bills today at zero percent for the first time since it began selling the debt in 2001.

The short term 1 and 3 month T-bills are going yield negative or already are there. Why would any player want to park money in a vehicle that will even lose a bit of it for them? This question has many possible answers and makes commentary on some of the major issues going on today.

Banks Will Not Lend Money
There has been tons of talk about how "banks will not lend money", even the TARP cash that was supposed to be for that very purpose. This has caused consternation among the Congress and the FED/Treasury. The ultra low yield on T-bills gives us a glimpse of an answer.

Suppose you were a bank (perish the thought) and you were able to swap with the FED 50 Billion dollars in garbage MBS paper and get cash in return. You then roll that money into short term T-bills getting little or even negative yield. Why would you do that?
1. Any lending vehicle available cannot beat that zero return, be it residential or commercial real estate loans, consumer credit card debt, or any other debt. There exists no reasonable alternative for that cash. Why this is possible is that the models that the banks use must be telling them bad things as far as loan losses go. Which leads to number.....
2. This cash will be required to meet reserve limits when more loan losses are realized going forward. Remember that GGP story above? Do you think that company made all those acquisitions and issued that many loans with cash it had on hand? Nope. It was all borrowed and leveraged up money and it has gone poof. If you are a bank on the other end you will need the FED money to cover that loss and many more like it.

So here we are. The disastrous losses on mortgages and consumer credit has hamstrung the banks into hoarding cash. They are doing this either because there is no profitable use for the money and/or they need to cover losses going forward. The bond market says things are on the edge of disaster, the stock market says things are on the edge of recovery.

Bernanke's conundrum is going to be how to get this resolved. He is faced with a two front problem. The first is that if the banks communicate that the loan environment is too risky to put money to work in Bernanke looks like a fool for shoveling cash to nowhere. If the banks come clean about how poor their balance sheets are, there will be risk of a panic. I mean it is one thing to be insolvent and another to admit it on all levels.

Also wrapped up in this mess is why on earth any foreign country would be piling into Treasuries right now. While we in the US appreciate foreign funding of our never ending debt pile, the motivation to do so is lost on me. Some argue that the fortunes of many countries (Japan and China especially) are tied to the US too much to allow any calamity to occur. I can see that, but all things have limits. Where is the limit here? (see US Debt Chandrasekhar Limit for more on this topic)

There are warning bells ringing loudly. The Treasury and the FED need to stop playing games and address the real underlying issues. All their meddling has accomplished nothing but extended the duration of uncertainty. The treasury bill problem demands an answer. We deserve to get one.

Have a good night.