Currency Consternation

Does anyone know a good way to get rid of literally a ton of acorns on a lawn? That is my mission, and I have no choice but to accept it, this weekend. I am going to try and use a leaf blower to concentrate them, then scoop them up. If that fails, I will dry a big dry vac. If that fails, I may have to pick them up by hand, in which case I will not be posting due to hand cramps. Any ideas? They have never been this bad before! I will be doing the usual Friday Night festivities, so please leave a request should you like to see something, anything on the blog tomorrow. Most anything goes that is appropriate (as in no nudity and no Beatles).

Economic Disconnect Mention
On the blogroll, you may know the site Some Assembly Required. This site is a daily stop for me and I really enjoy the authors work. I was very surprised and excited than an article of mine found it's way onto a post over there today. My entry is the 7th one down under "The Question". A real treat for this author!

Currency Consternation
This week I had discussed how this blog's readership was down. From what I could gather it seems many are just tired of the games and tired of the same old, same old in the markets (or maybe my writing!). Well there may be something very different in the works that is worth some attention.

The discussion about the future of the dollar is still raging full force after a big kickoff this week. The dollar of course does not exist alone, and currencies are entwined in ways I really cannot comprehend.

To start, currency debacles tend to have outsized effects, even if their relative scale is not such that one would think so. Consider:
1994 Mexican Peso Crisis
While swiftly addressed, it had all the markings of a serious problem.

1997 Asian Financial Crisis
The floating of the Thai baht (butt?) caused widespread damage across the globe

1998 Russian financial crisis
The Russian debt default not only sealed the doom of Long Term Capital Management, but almost caused the first "systemic risk" meltdown which was delayed until 2008.

From these three examples I take away that currency problems can be the cause of serious market dislocations across the globe. With an eye towards that angle, lets take a look at this weeks developments.

This nonchalant piece really dismisses the news as something not going to happen soon. I wonder what the headlines about the Thai baht were like the day before:

Latvia on the brink
LONDON (MarketWatch) -- It's never good news when a government bond auction fails. It's particularly bad news when an auction fails for a note maturing in just six months. And it's really bad news when there isn't any bid at all.
Were Latvia to devalue, that would hit economies in neighboring countries like Lithuania, and Swedish banks would rack up additional losses on the loans they have made throughout the region. The real nightmare scenario would be the Swedish banks then pulling down other European banks, and then triggering Credit Crunch: Part 2.
There is, of course, a long way before that unwieldy scenario comes to pass. Latvia hasn't devalued -- yet - and, even if it does, that doesn't mean it would drag the Swedish banks under.

Fair enough I guess, but of course we have no idea what exposure these banks have.

Adding to this is another subtle wrinkle that I think has importance on a much grander scale (FT, via Naked Capitalism):

Latvia denies plan to devalue currency
...Riga announced tentative plans on Tuesday to cap the amount that banks would be allowed to collect from mortgage holders in a move that analysts said would make it easier for Latvia to devalue....
...The Latvian proposals would allow banks to collect only the current value of a property rather than the original value of the mortgage, insulating homeowners from the 70 per cent drop in property prices since their peak.

And so a ripple near a coast spreads across the world.

To me, this is huge. One of the most vexing issues on the table right now is the "Delay and Pretend they will Pay" game being played by the banks. Banks hold many mortgage backed assets (both residential and commercial) at near par values. They refuse to take marks against them. They will willingly roll over commercial debt or allow residents to remain in a home indefinitely rather than force a foreclosure and take a hit to the value of the loan.

We have seen that mortgage "cramdowns" have not become viable yet, due mainly to the push back of the banks. They fall back on the delay plan.

If the lower tranche holder is 100% sure by government (think US state to extrapolate) proclamation that they will never see their money, then this game is up. The banks can pretend all they want, but they will be out of time and out of new money investors.

I am not saying this WILL happen, only that in desperation I would not be shocked to see entities resort to such a thing. Just like mortgage holders just "walking away", the banking system is arrogant beyond belief that people will pay their debts no matter what. Ivory tower and all that. Try living in a poor city and then get back to me.

Sticking to the currency theme, the falling dollar is causing many countries to try and protect their competitive edge. This is draining reserves of those countries and again, we know currency problems can go a long way. Consider (via Zero Hedge):
Asian tigers roar back at US Dollar
I advise reading the whole thing, but take away point:

Overnight, we witnessed intervention by various Asian central banks to suppress their own currencies against the Dollar. The banks of South Korea, Taiwan, the Philippines and Thailand all intervened to prevent appreciation of their currencies. The Bank of Korea bought $1billion. The Bank of Indonesia bought $350 million. The Phillipines' central bank bought $100 million. The Hong Kong monetary authority sold $3.88 billion Hong Kong Dollars to support its dollar-peg. The Yen is at 88.24, but there was no intervention by the BOJ, at least none that we could confirm.
These are serious moves. Why is this not front page news? It is difficult to tell whether these are simply more dramatic fluctuations on the world markets, or the start of a new phase in the crisis. What will be imperative is to pay close attention to the actions of global central banks in the days ahead. Currency is key. The next four weeks should be quite interesting indeed.

Scrambling to keep pace with the US dollar fall is sure to cause some kind of imbalance as those funds (large on a relative scale) are committed to currency moves.

From Clusterstock, another angle:

Asia Will Ambush Dollar Shorts Over And Over
Thursday's coordinated currency intervention by South Korea, Taiwan, the Philippines, and Thailand is just the start of what will happen should the dollar keep sliding.
Most export-heavy countries around the world are far from ready to address the hard changes at home required to deal with a weak-dollar world.
Their economies are growing fast. Yet for many leaders, this speedy growth is the only real legitimacy they have with their citizens, without which they could be in deep trouble.
Thus they'll fight tooth and nail to forestall any change from the status quo whereby Americans consume, while they produce and grow...
...While dollar shorts probably have long-term trends in their favor, many will be made into unfortunate examples by aggressive central banks along the way. Traders beware.

Another "the dollar will never fall" call.

I would submit that if the dollar keeps declining, the export countries (China excluded) simply do not have enough ammo to fight back. This is how a currency crisis happens. History shows us how serious this can be.

In closing (warning, more of the same old, same old) the one drawback of fiat currencies is that they are built entirely on confidence. Fiat currency can do all the "stupid pet tricks" the central banks want as long as confidence that the pet will perform holds.

Why is devaluation so disruptive? The same reason mortgage defaults are so disruptive, lenders/creditors just cannot believe you are going to stiff them. In their mind they are doing YOU a favor by loaning you more money than you can pay back, and at onerous terms, so you should do what you have to do for full payment.

When this does not happen by revolt (through devaluation or default) the system loses confidence because their bluff was called.

The world has seen devaluation many times in the last 100 years (US in the 30's still on the gold standard, US in the 70's walking away from the gold standard, Argentina 2 times, the three examples above, and Latvia maybe in the next month) so why the shock and awe? This is because it attacks the very premise of fiat currency.

I am moving to a stance that world money moves bear watching, and as the US markets seem as boring and predictable as can be for months, maybe you will watch too.

P.S.
With all the discussion of Latvia, I could not help but think about "The Wizard of Riga", former world chess champion Mikhail Tal. A true genius, I have studied his games many times and am still blown away by his brilliance and inventiveness.

Have a good night.

Bailouts are Now Option One

The muggy air has arrived here in Massachusetts. Muggy is the hardest sleeping weather as the heavy air makes you warm , but the air temp gets cool at night. It is a "conundrum" to borrow a FED phrase.

A Word About Health Care
Up front, I work for a pharmaceutical company and my mother is a nurse so whatever bias comes from that you should know up front.

That said I have a few thoughts regarding the all out rush to radically change the health care system. I share them here for discussion, but not in any political sense. This issue has become too politicised and that is why no one can see straight about it.

My take:
-In my admittedly small sphere of "people I know" nobody is without health care and all have always had the best care available at a minimum wait.
-There is NO WAY to expand "free" health care to 50 million people without it 1) costing you more and 2) devaluing service. I cannot be more clear on this.
-Once in place, the costs will be 2-3 times higher than anticipated, as all government programs become. Add to this that when the private insurers are gone and outlawed there will be NO WAY to take down the government system, even if it is a total failure.
-There is no "free" here either, no matter what is said tonight. You will pay, oh you will pay. Higher taxes, higher fees, and plenty of "one time charges".
-Health care is not a right, it is a choice. While some prefer plasma TV's, full cable channel menu, and dining out 4 times a week on a minimum wage salary, others pay their premiums and budget out extra cash for the unknown. Once again the prudent must pay for the imprudent.
-Once started, the discussion on "who gets the care" will be nasty and it will be heavily on the political. We all know smokers must pay higher rates. We know old people will pay higher rates. Who next? A soda tax is already been discussed, but I drink diet soda which has no obesity correlation. Will fat people pay more? How about rock climbers and joggers who fill the orthopedic units across the country with breaks, sprains, and joint damage? Who decides? What are the criteria?

Clearly the system we have is not the best possible, but I would argue it works for me and I want it as is. There are just too many issues to overcome and giving the government more control over our lives, in light of their spectacular failure across the spectrum in the last year, is not a good idea. My 2 cents.

Dollar Discussion
On Monday I posted some dollar weakness related ideas. Tonight The Housing Time Bomb fleshes out some more thoughts on dollar weakness:
It's Dollar Day!

...the dollar has pretty much collapsed since the market started rallying in March. I find this to be an interesting phenomenon.

Traditional thinking would tell you that this makes no sense:

Back when the world made sense, a strong currency was the base of any country with a strong economy. This makes the recent rise in equities even more suspect in terms of fundamentals in my view. If things are so rosy then why isn't the dollar strengthening?

Supposedly Europe is in much worse shape then we are. If this is the case then why the COLLAPSE in the dollar versus the Euro?

The note about the Euro strength was a point I had missed. An interesting observation. More:

The only thing that's saved the dollar thus far is the FCB's have continued to store the majority of their reserves into treasury holdings . They essentially blow themselves up if they bail on the dollar because of their treasury exposure.

What we need to start realizing is this doesn't HAVE to be the case. China appears to be gobbling up hard assets all over the place. Other FCB's continue to demand alternatives to the US dollar. I am not sure we will ever find one, but that doesn't mean the dollar can't collapse as the world diversifies its assets.

You need to ask yourself the following:

Why is oil rallying when there are tankers upon tankers filled with oil with nowhere to go as a result of no demand? Why is gold not collapsing in price like other hard assets like housing?

Lets take it a little further: Why is the DOW rallying like mad as the economy continues to struggle?

Great additions to the discussion.

Read the entire piece for some additional conclusions.

I would only add to the "just because something has never happened, does not mean it cannot happen" meme. Everyone expects the dollar to stay great even in the face of wild spending and collapsing revenue. The world always seeks out the dollar for safety is the argument. Ok, I would agree. But that implies the US will always and forever be worthy of such a safety flight. Well, that may not always be the case. We see China making a real efforts to settle in Yuan as well as acquire hard assets in bulk.

Bailouts are Now Option One
There has been extensive coverage of the impending commercial real estate problems. Well, there has been great coverage if you do not read the mainstream media or listen to CNBC. If you read this blog and others like it (try Zero Intelligence, they are pretty good!) then you are well aware that there is a sea of commercial structures to match the flood of residential empty homes across the nation.

This is of course, bad. Add to this that the concentration of bad CRE loans resides in many smaller regional banks (not "to big to fail" allegedly) because those small fish could not compete with the big boys in residential loans and you have a real mess on the way.

Never fear my dear readers. The FED is well aware of the issue and has already put their number one option on the table. Care to guess what it is going to be?

If you guessed managed loan defaults, bank closures, bondholder haircuts, and a reduction in mini malls across the American Southwest (hello Phoenix metro!) you are asked to limit your thinking to more simple terms.

If you guessed government bailouts and backstops, you win a lolly pop. The really cool kind with gum in the middle! Lucky you!

Sadly, I am not kidding. Ben Bernanke in the course of his testimony today made the coming CRE bust sound easy to fix. So easy in fact I would like to show you the FED's newest tool in the war against mortgage defaults which was on display today:

The FED bought an Easy Button!

In a strange twist, the congressional panel had relevant questions about the CRE issue today and asked Bernanke about them. Of course so soon after the FED head penned an opinion piece about how he will "exit" all the fiscal support programs a soon as possible, Mr. Bernanke was probably thinking this was not a good time for this discussion:

Bernanke Says Commercial Property May Pose Risk for Economy
July 22 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said a potential wave of defaults in commercial real estate may present a “difficult” challenge for the economy, without committing to additional steps to aid the market.

I highlight the "without committing" part because the next passage shows that to be untrue:

The Term Asset-Backed Securities Loan Facility, a Fed emergency program that lends to investors to purchase securities backed by consumer and business loans, began accepting commercial mortgage-backed securities as collateral last month.

Fed policy makers will extend the TALF, currently scheduled to expire Dec. 31, should they judge financial markets are still “some distance from normal operation,” Bernanke said today.

“We will certainly be monitoring the situation, and if markets continue to need support, we will be extending the final date of that program,” Bernanke said.

That does not sound like a non commitment. Just like that 24 Trillion in promises will never, ever be called in. Nice! Finally:

It “may be appropriate” for the government and Congress to consider “fiscal” steps to support the industry, Bernanke said today. Ideas for fresh support for the market could include government guarantees for commercial mortgages, Bernanke also said today, while noting no proposal on the subject has emerged.

If you believe there are no plans in place already, then you write for Bloomberg.

Mish makes the day's top observation with this nugget:

Given the commercial mortgages have "completely shut down", does anyone buy Bernanke's line that he is "somewhat concerned"?
Here is the real deal: Bernanke is terrified and so is the rest of the Fed.

If the FED is even saying they are "concerned" it means they are as scared as possible.

A follow up to the Bernanke discussion was located by Economic Disconnect and I publish it here for the enrichment of the readers. Please note these lines were garbled and only my "Sarcasm ON" device was able to translate the mumbling:

Bernanke: "I cannot believe I just told them that we will have to bailout the commercial real estate market, and nobody asked my how we are going to pay for it! This EASY Button is the real deal! As long as they keep Ron Paul out of here, I should be able to get out of here soon. Bailouts get easier the more you do them. We should get a burrito, lets hit Anna's Taqueria!"

I have read plenty of articles written by some writers I have great respect for that are very complacent that the FED will magically exit all the support programs should things start to get ugly on the inflation/dollar debasement front. They base this on the evidence that the FED says they will be able to do it. I find that line of reasoning to be lacking at best, and outright ridiculous at worst. The FED will not be exiting anything anytime soon. The sooner commentators see that, the sooner they may figure out the rally in the indices.

The markets may be pricing in low cost loans, a sea of liquidity, and a government explicit guarantees for a time frame measured in years, not months. Once this realization comes to the front of the discussion, I would like to see how the dollar is doing then. I look forward to seeing how the FED supporters square reality with their faith in the FED's words.

Have a good night.

Fascinating, Shocking, and Totally Expected

Brutal cold here for the next three days. This is going to be a long winter indeed. Tonight's post will cover three different reactions I had to some information I came across. I hope you find all the topics worthwhile.

Fascinating
Today over at Jesse's Cafe Americain there was a truly fascinating post that covers the time period when the US government seized privately held gold in 1933 and then revalued gold (and thus devalued the dollar) in 1934. There are tons of great charts and analysis and I point you to the entire post here.

The entire post is a great read, but I took home the final summation as a great point:

"It would have been much more equitable to devalue the dollar and to change the basis for dollar/gold first, before requiring private citizens to surrender their holdings. But of course, this would have lessened the liquidity available for direct infusion into the Federal Reserve banks."

It is clear from the article that the government took away gold and revalued the dollar in a slight of hand way of providing phantom capital to banks. While such manipulations are far easier today due to the lack of a gold standard and available printing presses, it strikes one with how powerful a government can be. I would surmise the serious times of the Great Depression rendered much of the populace pretty willing to allow anything.

And today, faced with almost the same kind of impaired banks, how far is the government willing to go? If you read Ben Bernanke's speech from yesterday (Mish has a great wrap up) then I would say as far as they think they have to. Just how far that is is any one's guess at this point. Including the FED and Treasury.

Shocking
I came across this news item over at Housing Doom today (via CNBC) and I instantly was both shocked and angry. In the above section I wondered just how far the government would go to try and "fix" things. It seems almost anything is on the table as the National Community Reinvestment Coalition (NCRC) has a great idea about abusing the eminent domain law:

"Taylor and the NCRC are proposing a new government program, using TARP money, whereby the government would “use its power of eminent domain to take troubled properties/loans from mortgage servicers and lenders, so large numbers of loans could be modified, writing down principal and interest rates. The loans would then be re-sold to the private market.”

That second half of TARP had better come soon as the plans for that money continue to grow like pondweed.

The Housing Doom author has 4 major concerns that I would also have:

My concerns are as follows:
1.)That rather than re-establishing a secondary market, this would kill it. Would investors really believe "Hey, we know that former purchasers of mortgages were turned into fish bait, but now it’s safe to go back in the water?" As long as the government keeps changing the rules and putting investors at a disadvantage, there will be no stability in mortgage markets.
2.)The moral hazard issue is huge here. Why buy a house you can afford when you can buy a home beyond your means and have the price adjusted to your budget? This punishes those who were more conservative in their purchases or chose to rent. This rewards the wrong people.
3.)Investors as well as homeowners would benefit from this plan on the pretext that this helps renters. Should flippers and speculators be bailed out in the name of "helping" their renters? Just how much irresponsible behavior should be financed at the expense of the responsible?
4.)Lastly, I am concerned about the fact that this would be seizing mortgages, not real property, and that this is stretching the definition of "public use".

It should serve a reminder how far and how fast the US has lost it's collective soul in the face of an economic downturn that this kind of plan has even seen the light of day. Further, that this plan has not garnered howls of opposition is further proof that things may be too far gone to be worth saving.

Totally Expected
The last 6 days have been a rough time for the markets. Mounting job losses, poor retail sales, and even more trouble at the banks have taken about half of the rally points away from December. Again if you read Ben Bernanke's speech, you know that the FED and the Treasury are ready, willing and will pretend to be able to come to the rescue.

From the department of "totally expected" we get this report from CNBC that details the Treasury promising more TARP money that has not been approved yet to Bank of America so they can take over Merrill Lynch. You see, Merrill's balance sheet is getting so bad that not even bank of America after cash infusions from TARP I can cover the losses without going bust. From CNBC:

US Close to Giving BofA Billions More in Aid
The U.S. government is close to pledging billions of dollars of additional aid to Bank of America, the Wall Street Journal reported on Wednesday, making the bank the second to require a second round of emergency government assistance.
Bank of America is struggling to digest its January 1 acquisition of Merrill Lynch, the newspaper said, citing people familiar with the situation. The bank's shares dropped more than 5 percent after hours, reaching their lowest level since 1991.
Merrill Lynch's losses in the fourth quarter were larger than expected, which spurred Bank of America to start talking to the U.S. Treasury in mid-December, the newspaper said. The terms of the government aid are still being finalized, and details are expected to be announced with Bank of America's fourth-quarter earnings, due out January 20.
A possible deal would involve protecting Bank of America from Merrill's bad assets by capping the bank's potential losses from them.
The talks were driven by Treasury Secretary Hank Paulson, who was concerned that Bank of America would be unable to close the deal, possibly leaving Merrill Lynch without a partner.

If you need a translation of the phrase "capping losses" it means that the taxpayer will eat almost 95% of any losses that BAC may incur from this deal.

It warms the heart to see the Treasury in constant contact with banks about their inner workings. TARP II now looms large as it has already been promised all over the place. Will 350 Billion get it done? Who knows, and that is the problem.

Instead of playing this game of lending facilities, TARP cash infusions, "Bad Bank" creation, etc we need to get all the dirt out on the table and get a fair idea just how far don the rabbit hole this all goes.

What the FED and Treasury need to do is require all banks to compile a list of ALL their illiquid and troubled assets. Then the banks must submit a description of where they would stand if their holdings were valued at
1. 90% on the dollar
2. 70% on the dollar
3. 50% on the dollar
4. Worse than 30% on the dollar
At these levels we may be able to flesh out a final infusion number instead of making crap up as we go.

The FED/Treasury? and the banks are under the illusion that all of the seriously impaired assets they hold are just victims of some kind of mispricing by the markets. they think that if enough time can be bought, things will recapture some semblance of their former values. They are hoping for a miracle. Hope is a poor investment philosophy.

The US public has a right to a ballpark estimate of just how much money will have to be created to paper over this mess. I am sure that foreign creditors would like to know as well. The Wall Street types are great at making financial models so they should have no problem creating an excel spreadsheet with the breakdowns I have listed above.

The time is coming when we are going to have to get some brutal honesty out of the crooks and shysters on Wall Street and their enablers in government. I think that the money numbers that are going to be required will be astonishing. Good thing those treasury bills are selling like hotcakes, we are going to need the money!

Have a good night.