A China credit rating agency, Dagong Global, the equivalent of Moody's and Standard & Poors, came out with a blistering critique of the latest US$600bn quantitative easing manoeuvre by the U.S. Federal Reserve announced on 3rd November.
"Though it is likely for the current loose monetary policy to postpone the occurrence of difficulties, yet in the long run, it will be proven to be a practice resembling drinking poison to quench thirst."
Timed for the Seoul G20 meeting, the drumbeat of anti-American economic policy management is building. Germany weighed in this week with their finance minister pronouncing the U.S. Federal Reserve "clueless".
Based in Beijing and founded in 1994, this is the same agency which in July announced credit downgrades to several western nations stripping them of their AAA status (Germany AA+, USA AA, Britain AA-, France AA-).
Watch for further announcements from Dagong...it is demonstrating to be a robust counterweight to the systemic biases embedded within the western ratings agencies who totally failed to anticipate the risks that unfolded leading up to the 2008 financial crisis.
Time will tell whether it proves to be a good leading indicator of the Chinese government's thought processes on western monetary policy management.
Saturday, 13 November 2010
Saturday, 16 October 2010
US Foreclosure-gate: Subprime 2 housing crisis coming?
The news broke this week on foreclosure-gate. It has been evident for a while the U.S. banks are drowning in foreclosures and this current crisis is just going to make things a lot worse. Back in 2005, there were approximately 100,000 home repossessions in the United States. In 2009, there were approximately 1 million home repossessions in the U.S. and RealtyTrac is now projecting that there will be an all-time record of 1.2 million home repossessions in the United States this year.
Vast numbers of foreclosures across the United States could be invalid because the securitization process has muddied the chain of ownership. In fact, an increasing number of judges have ruled that the "owners" of the mortgage have no right to foreclose on a property because they lack clear title. This has giving rise to a "Show me the Doc" (document for tile deed) movement to help householders restrain the banks' actions.
8 Investment Implications:
House Buyers
A healthy property market is pivotal for any economy. It promotes labour mobility, greases social development and drives a steadfast flow of consumer spending.
Shorting the US banking sector (symbol:XLF, Financial Select Sector SPDR) seems a reasonable bet until clarity is achieved with this tangle of legal spaghetti. Imagine the financial equivalent of BP having many many small wells gushing oil out into the Gulf all at once and getting confused as to which ones to plug immediately. We know what happened to BP's share price in the first two months of that saga.
Vast numbers of foreclosures across the United States could be invalid because the securitization process has muddied the chain of ownership. In fact, an increasing number of judges have ruled that the "owners" of the mortgage have no right to foreclose on a property because they lack clear title. This has giving rise to a "Show me the Doc" (document for tile deed) movement to help householders restrain the banks' actions.
8 Investment Implications:
House Buyers
- Foreclosure bargains currently on the market may not be the bargains they appear if legal title is not clear.
- How will this affect the middle-upper of the property market with recent social trends to "trading-up"?
- Americans that have recently purchased foreclosed homes may now be facing some serious problems themselves enduring the uncertainty of where legal title actually resides. Managing household budgets will be thrown awry.
- Millions of Americans may now "own" homes that they do not have clear title for. When it comes times to sell those homes, many Americans may find themselves unable to do so, thereby restricting labour mobility.
- For a typical under-water US householder, there may be an incentive to just stay in one's property until a bank or "someone" turns up with the full and proper paperwork to evict. The "Show-me-the-doc" movement is now gaining traction as survival instincts are triggered with social mores thrown out.
- By not paying the mortgage, a householder may gain a "temporary reprieve" to transfer mortgage spending elsewhere.
- It will make it much more difficult for the banks to sell the massive backlog of foreclosed properties they have accumulated.
- Under current FASB accounting regulations, such loans (assets) should be marked to zero if there is no eligible legal title or in the absence of market validity. Massive write-offs could be looming. It distracts management attention from running the core business.
- How will this affect the ability for banks to sell mortgage-backed-securities (MBS) into the market?
- Will banks continue to hoard money and not lend as they consider all conservative means at their disposal to shore up their capital base?
- Should another raising of capital arise to boost their Tier 1 and 2 reserve ratios, this will cause dilution to existing shareholders.
- Do they have any credibility left? What checks did they do to validate any of the paperwork before they issued their ratings on the mortgage-backed securities (MBS)?
- Warren Buffett has sold down a large proportion of his holdings in Moodys over the last 18 months.
- Another test of the big banks are too big to fail may not be far off depending on the size of write-offs and how market confidence is affected.
- Is there political appetite for another bailout?
- The Federal Reserve is holding US$ trillions of MBS on its balance sheet when it bailed out these banks. One day, it has to divest itself of these. Who will want to buy them and at what yields?
- FDIC reserves may not be enough to absorb a wave of smaller bank failures that result from foreclosure inertia. This may necessitate more federal spending to boost their reserves and so further increase the growing fiscal deficit.
- Attorneys general in 50 states will be working together on a joint investigation into this foreclosure crisis. It is going to become much harder to get a mortgage. It is going to become much harder to buy a home. It is going to become much harder to sell a home.
- For a bank, this must be a nightmare. Loans on the books are backed by inadequate documentation. Employing low paid back-end staff to sign off mortgage approvals and which were subsequently "re-packaged" without thoroughly questioning any of the paperwork or ensuring completeness of due legal process. At best it's carelessness, at worst negligence. Defective documentation has created millions of blighted titles that could plague the nation for the next decade. Lawyers smell blood!
- This probably explains why the recent consumer spending indicators have not been worse in the downturn. Is it possible what some foreclosed householders don't pay in mortgages has been "transferred" to other items eg Walmart, iPads etc
- Over time, if this is not quickly resolved, the U.S. housing industry is likely to suffer a significant downturn due to all of this uncertainty. Consumers consume. Housing expenditures and their flow-through to related support industries (eg furniture and furnishings) transmit to the general economy.
- To assess if consumers hold back, Thanks-giving and christmas spending over the next two months will be key indicators to watch.
A healthy property market is pivotal for any economy. It promotes labour mobility, greases social development and drives a steadfast flow of consumer spending.
Shorting the US banking sector (symbol:XLF, Financial Select Sector SPDR) seems a reasonable bet until clarity is achieved with this tangle of legal spaghetti. Imagine the financial equivalent of BP having many many small wells gushing oil out into the Gulf all at once and getting confused as to which ones to plug immediately. We know what happened to BP's share price in the first two months of that saga.
Saturday, 2 October 2010
An explanation of how bubbles happen...
This is the most simple and straightforward explanation I've come across on how and why asset bubbles occur. It comes from Thomas Woods, the author of Meltdown which digs into the real causes of the 2008 collapse. He had this to say at a recent speech at Indiana University:
… Asset bubbles, like the housing bubble we’ve just lived through, do not occur spontaneously. If people bought lots of houses on the free market, interest rates would rise as the banks’ loanable funds were depleted. That would put an end to speculation in real estate.
But thanks to the Federal Reserve System, which is no part of the free market, large infusions of money created out of thin air kept interest rates low, and thus perpetuated the bubble. During an asset bubble, demand for the asset in question rises, as does its price. Where would people get the money to keep buying an increasingly costly asset if the government’s officially approved money machine weren’t there to flood the economy with cash?
It was this interference with interest rates, pushing them well below where the free market would have set them, that set in motion the classic boom-bust cycle we’ve just witnessed. F.A. Hayek won the Nobel Prize for showing how central banks like the Federal Reserve, by interfering with interest rates and not allowing them to tell entrepreneurs the truth about economic conditions, divert the economy into unsustainable configurations that inevitably come undone in a crash. (Hayek belongs to a tradition of free-market thought called the Austrian School of economics.)
Adding fuel to the fire was the so-called Greenspan put, the unofficial policy of the Greenspan Fed that promised assistance to private firms in the event of risky investments gone bad. What kind of incentives do you suppose that created?...
Concise, logical and accurate. That's in the USA and they've just learnt a harsh lesson. Let's hope more consumers in China and Hong Kong start paying attention and dispense with the "but this time it's different here" attitude. Nations do not succeed by strenuously defying economic gravity.
… Asset bubbles, like the housing bubble we’ve just lived through, do not occur spontaneously. If people bought lots of houses on the free market, interest rates would rise as the banks’ loanable funds were depleted. That would put an end to speculation in real estate.
But thanks to the Federal Reserve System, which is no part of the free market, large infusions of money created out of thin air kept interest rates low, and thus perpetuated the bubble. During an asset bubble, demand for the asset in question rises, as does its price. Where would people get the money to keep buying an increasingly costly asset if the government’s officially approved money machine weren’t there to flood the economy with cash?
It was this interference with interest rates, pushing them well below where the free market would have set them, that set in motion the classic boom-bust cycle we’ve just witnessed. F.A. Hayek won the Nobel Prize for showing how central banks like the Federal Reserve, by interfering with interest rates and not allowing them to tell entrepreneurs the truth about economic conditions, divert the economy into unsustainable configurations that inevitably come undone in a crash. (Hayek belongs to a tradition of free-market thought called the Austrian School of economics.)
Adding fuel to the fire was the so-called Greenspan put, the unofficial policy of the Greenspan Fed that promised assistance to private firms in the event of risky investments gone bad. What kind of incentives do you suppose that created?...
Concise, logical and accurate. That's in the USA and they've just learnt a harsh lesson. Let's hope more consumers in China and Hong Kong start paying attention and dispense with the "but this time it's different here" attitude. Nations do not succeed by strenuously defying economic gravity.
Sunday, 26 September 2010
A History of 50 Investment Bubbles
With the price of gold and silver scaling new heights recently, how does this performance compare against historical bubbles that formed and burst? Tulipmania in Holland during the 1600's and the South Sea bubble of 1720 spring to mind... the graphic below (Sharelynx.com) shows 50 historic bubbles from days gone by.
In this context, the chart shows that this current bull market in the precious metals is barely off the ground compared to other bubbles.
Double click on the image to enlarge...
In this context, the chart shows that this current bull market in the precious metals is barely off the ground compared to other bubbles.
Double click on the image to enlarge...
Sunday, 20 June 2010
BP disaster is not in the spill...it's with their PR...and long term Russian manouevres
It's a horrible accident but you don't really have to clean up the entire Gulf of Mexico as the mass media would lead you to believe. The Gulf of Mexico is massive, covering 615,000 square miles and containing 660 quadrillion (660 thousand million millions) gallons of water. Looking at the amount of oil the Macondo well drilled by the Deepwater Horizon rig has been leaking, most estimates are in the 12,000-20,000 barrels per day range, so let's take the high end and also assume that this continues until mid-August, meaning four months since the accident.
Assume that the cap captures no oil (the latest reports are that it may be capturing much of the oil but let's be conservative). 20,000 barrels/day x 120 days x 42 gallons/barrel = 100.8 million gallons of oil released. 100.8 million divided by 660 quadrillion is one gallon of oil for every 6.6 billion gallons of water in the Gulf. That's the equivalent of roughly one-millionth of an ounce of oil in a typical bathtub full of water.
Huge oil spills have happened before and they were not the end of the world. The 1979 incident with PeMex's Ixtoc oil well was far worse than the Deepwater Horizon well. 140 million gallons of oil poured out of the Mexican well. After four months, an oil slick had covered about half of Texas's 370-mile gulf shoreline devastating tourism...and they recovered.
This in itself was nothing compared to Kuwait. During the first day off the 1990 Gulf War, 10 times as much oil spilled into the Persian Gulf which is one-sixth the size of the Gulf of Mexico. What were the long-term consequences? Whitney Tilson, a value-oriented New York hedge fund manager cites a 1993 UNESCO study that reported "little" long-term damage was done to the environment. "Half the oil evaporated, a million barrels were recovered and 2 million to 3 million barrels washed ashore mainly in Saudi Arabia," he said...and they recovered.
So, does that make BP a bargain investment today? Not yet. Four factors are unfolding which could serve as a drag to BP's fortunes. Last week, the major ratings agencies, Standard & Poors, Fitch and Moody's downgraded BP's credit ratings to just above "junk" status as financial liabilities escalate. The US$20bn escrow account set aside for compensation is just a starting point. Soon after a meeting at the White House, it eliminated its dividend for the next three quarters. As a result, some mutual funds may have to sell off their BP holdings due to internal rules on having to maintain only dividend-paying companies within their portfolios.
One company's crisis, however, is someone else's opportunity. Russian President Dmitry Medvedev added further pressure on BP stopping short of saying the disaster would prompt a review of Russia's partnership with BP. He warned that the oil giant might face "annihilation" as a result of the fall-out of the oil disaster. In an interview with the Wall Street Journal, he described the spill as a "wake-up call" and said that "hopefully [BP] can afford the losses". In Russia, BP holds a 50% stake in TNK-BP - a joint venture with AAR (Alfa Access-Renova) which is owned by a group of Russian billionaires. BP is the third largest oil producer in Russia accounting for roughly a quarter of BP's global production. According to analysts at Moscow investment bank Troika Dialog, BP's stake in TNK-BP is worth about US$16-18bn. Relations between BP and the Russian authorities have been strained for many years going back to Putin's leadership over taxes and operating control. The weakened company must be wary operating in partnership with business oligarchs who have forged connections to the highest echelons of central government circles where a nationalistic fervour has recently gained momentum and with energy supply high on its agenda.
While this dark cloud looms overhead, BP has stumbled from one PR disaster to another. The CEO, Tony Hayward stated at the end of May he "wanted his life back" having already spent some time in the Gulf in charge of daily operations while many local fishermen and hotel owners have had their earnings potential obliterated this summer as the crisis mounted. Last week their Swedish chairman stated after the White House meeting BP would look after the "small people", an unfortunate slip in translation. It smacked again of an aloof corporate culture. Meantime, he has withdrawn his hapless CEO from the firing line after his weak testimony to Congress for neither being able to articulate anything new over the company's decision-making process in the events leading up to the accident nor any reassurances on the management of the spill. Mr Hayward was subsequently savaged by the US press. After jetting back to the UK, yesterday he was back in the news for taking his 52 foot yacht out to take part in a boating competition attracting yet more biting criticism from the English press. BP accounts for one in six pounds of the FTSE 100 total dividend payout leaving many organisations and individuals out of pocket...and this 53 year old geologist seems to have got his life back...but at what reputational cost to the brand?
The oil community is becoming more concerned with longer term erosion under the seabed within the immediate vicinity of the well spill due to the failure to seal the well head. Why? This is a relatively huge reservoir with an abundance of methane. The oil and gas that are flowing out of the rock are bringing small amounts of that rock (in the form of sand) out with them. Rocks that contain lots of oil are not that strong and are easily worn away by the flow of fluid through them. This leads to cracks in the zone and could be a precursor to more leakages within the area and a worse case scenario could be a gargantuan "volcano-like" eruption as the seafloor collapses due to the unremitting pressure build-up and increasing flow rates. Will this almost certainly lead to the bankruptcy of the company as containment fails at all levels?
Look to see if the relief well being drilled and expected to be completed in August can solve the problem. This will be the first positive fillip to BP's revival.
Assume that the cap captures no oil (the latest reports are that it may be capturing much of the oil but let's be conservative). 20,000 barrels/day x 120 days x 42 gallons/barrel = 100.8 million gallons of oil released. 100.8 million divided by 660 quadrillion is one gallon of oil for every 6.6 billion gallons of water in the Gulf. That's the equivalent of roughly one-millionth of an ounce of oil in a typical bathtub full of water.
Huge oil spills have happened before and they were not the end of the world. The 1979 incident with PeMex's Ixtoc oil well was far worse than the Deepwater Horizon well. 140 million gallons of oil poured out of the Mexican well. After four months, an oil slick had covered about half of Texas's 370-mile gulf shoreline devastating tourism...and they recovered.
This in itself was nothing compared to Kuwait. During the first day off the 1990 Gulf War, 10 times as much oil spilled into the Persian Gulf which is one-sixth the size of the Gulf of Mexico. What were the long-term consequences? Whitney Tilson, a value-oriented New York hedge fund manager cites a 1993 UNESCO study that reported "little" long-term damage was done to the environment. "Half the oil evaporated, a million barrels were recovered and 2 million to 3 million barrels washed ashore mainly in Saudi Arabia," he said...and they recovered.
So, does that make BP a bargain investment today? Not yet. Four factors are unfolding which could serve as a drag to BP's fortunes. Last week, the major ratings agencies, Standard & Poors, Fitch and Moody's downgraded BP's credit ratings to just above "junk" status as financial liabilities escalate. The US$20bn escrow account set aside for compensation is just a starting point. Soon after a meeting at the White House, it eliminated its dividend for the next three quarters. As a result, some mutual funds may have to sell off their BP holdings due to internal rules on having to maintain only dividend-paying companies within their portfolios.
One company's crisis, however, is someone else's opportunity. Russian President Dmitry Medvedev added further pressure on BP stopping short of saying the disaster would prompt a review of Russia's partnership with BP. He warned that the oil giant might face "annihilation" as a result of the fall-out of the oil disaster. In an interview with the Wall Street Journal, he described the spill as a "wake-up call" and said that "hopefully [BP] can afford the losses". In Russia, BP holds a 50% stake in TNK-BP - a joint venture with AAR (Alfa Access-Renova) which is owned by a group of Russian billionaires. BP is the third largest oil producer in Russia accounting for roughly a quarter of BP's global production. According to analysts at Moscow investment bank Troika Dialog, BP's stake in TNK-BP is worth about US$16-18bn. Relations between BP and the Russian authorities have been strained for many years going back to Putin's leadership over taxes and operating control. The weakened company must be wary operating in partnership with business oligarchs who have forged connections to the highest echelons of central government circles where a nationalistic fervour has recently gained momentum and with energy supply high on its agenda.
While this dark cloud looms overhead, BP has stumbled from one PR disaster to another. The CEO, Tony Hayward stated at the end of May he "wanted his life back" having already spent some time in the Gulf in charge of daily operations while many local fishermen and hotel owners have had their earnings potential obliterated this summer as the crisis mounted. Last week their Swedish chairman stated after the White House meeting BP would look after the "small people", an unfortunate slip in translation. It smacked again of an aloof corporate culture. Meantime, he has withdrawn his hapless CEO from the firing line after his weak testimony to Congress for neither being able to articulate anything new over the company's decision-making process in the events leading up to the accident nor any reassurances on the management of the spill. Mr Hayward was subsequently savaged by the US press. After jetting back to the UK, yesterday he was back in the news for taking his 52 foot yacht out to take part in a boating competition attracting yet more biting criticism from the English press. BP accounts for one in six pounds of the FTSE 100 total dividend payout leaving many organisations and individuals out of pocket...and this 53 year old geologist seems to have got his life back...but at what reputational cost to the brand?
The oil community is becoming more concerned with longer term erosion under the seabed within the immediate vicinity of the well spill due to the failure to seal the well head. Why? This is a relatively huge reservoir with an abundance of methane. The oil and gas that are flowing out of the rock are bringing small amounts of that rock (in the form of sand) out with them. Rocks that contain lots of oil are not that strong and are easily worn away by the flow of fluid through them. This leads to cracks in the zone and could be a precursor to more leakages within the area and a worse case scenario could be a gargantuan "volcano-like" eruption as the seafloor collapses due to the unremitting pressure build-up and increasing flow rates. Will this almost certainly lead to the bankruptcy of the company as containment fails at all levels?
Look to see if the relief well being drilled and expected to be completed in August can solve the problem. This will be the first positive fillip to BP's revival.
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