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REMINDER: All investment, economics, and finance related material now appears at the new IaconoResearch.com. For the time being at least, this has become a personal blog covering a variety of mostly unrelated topics.

Bernanke Speaks, Markets React

On October 15, 2010, in Banks, Economy, by Tim

Federal Reserve Chairman Ben Bernanke eased off of the gas pedal this morning, one that had been pegged to the floorboard in recent weeks with what seemed like nonstop talk about quantitative easing (i.e., money printing) by central bank officials, offering a few thoughts about the U.S. economy and monetary policy in this speech at a conference in Boston.

There were no new details offered up about what might come at the next policymaking committee meeting during the first week of November, this being the most likely cause of financial markets throwing a bit of a fit when the details first became known.

But, upon further reflection, there appear to have been enough mentions of further easy money from the Fed that markets are now recovering, the most direct reference coming in the opening part of the section titled Monetary Policy Tools: Benefits and Costs:

Given the Committee’s objectives, there would appear–all else being equal–to be a case for further action.

In light of soaring stock and commodity prices (something that the Fed surely wants some of, but not too much), there is a good deal of caution expressed regarding unintended side-effects of further printing press operations, the word “cost” being used a total of four times in the last few paragraphs.

(more…)

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Consumer Credit Expands Around the World

On October 14, 2010, in Asia, Banks, Our Culture, by Tim

I’ve long argued that, once people in emerging market countries realize how much fun it is to buy stuff they don’t need with money they don’t have, there will be a multi-decade long economic boom the likes of which the world hasn’t seen since the U.S. set out on its orgy of credit expansion in the 1980s. According to this report at the Wall Street Jounal Real Time Economics blog, that process may have already begun.

In 2009, the year the global recession hit bottom, the aggregate credit-card balances of Chinese consumers rose 17.1% even as those of U.S. consumers fell 8.7%, according to a study by financial consultancy Lafferty Group. Brazilians increased their balances by 28.9%, part of a 9.2% rise throughout Latin America.

Now, don’t get too excited about the numbers highlighted above as this is likely a classic case of how percentage changes can be very misleading. The Chinese are undoubtedly coming up from a low base and we’ve got nowhere else to go but down. Per this item at CreditCards.com, average U.S. credit card debt is currently over $8,000 per person (and heading down) while I’m guessing that it’s still close to zero in China.

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Paul Giamatti as Ben Bernanke?

On October 13, 2010, in Banks, by Tim

In case you hadn’t heard, Paul Giamatti is set to play Fed Chief Ben Bernanke in the new HBO movie “Too Big To Fail” based on the book by Andrew Ross Sorkin. I guess that makes sense if you forget about some of the roles that Giamatti has played in recent years where he invariably seems to get so excited that it looks like his head is about to explode.

William Hurt will play Treasury Secretary Hank Paulson, James Woods will fill the role of Lehman Brothers’ Dick Fuld, Ed Asner is to play Warren Buffet, and, squashing rumors in recent months that Brad Dourif (shown below) of “One Flew Over the Cuckoo’s Nest” fame will play Treasury Secretary Timothy Geithner, that role will be filled by Billy Crudup.

As might be expected, the focus of the movie will be those few weeks in September of 2008 when the wheels temporarily fell of the global financial system, only to be slapped back on with the aid of trillions of dollars in bailout money.

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Investors Hope Fed Props Up the Economy

On September 21, 2010, in Banks, Economy, Stocks, by Tim

Over a bowl of cereal just a few minutes ago, this Associated Press story reprinted in the local newspaper was happened upon and I couldn’t help but think of the sorry state the stock market has come to, what with retail investors shunning equities like the plague and trading now dominated by super fast computers in the little understood world of high frequency trading along with shell-shocked hedge funds and pensions funds that, according to a Wall Street Journal report over the weekend, are still assuming that they can get an eight percent annual return and retirees depending on that happening.

Is that what it’s come to? After freakishly low interest rates and a trillion and a half dollars of money printing by the central bank and after the Federal government intervened in ways never thought possible before to prop up the banking sector, the auto sector, and nearly the entire housing market, it’s now up to the Federal Reserve to deliver more money printing so that the economy and, by extension, the stock market can be similarly propped up?

You have to wonder what someone waking up today from a 15-year coma would think about our current condition, one  that, increasingly seems to be accepted as the status quo, the casual reference in the AP story above being the latest example.

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The Myth of Deleveraging?

On September 20, 2010, in Banks, Debt, Our Culture, by Tim

Well, so much for the idea that Americans are voluntarily shedding their debt and abandoning their spendthrift ways as part of a cultural shift toward a new, more responsible and frugal lifestyle. According to this story at the Wall Street Journal over the weekend, the massive reduction in outstanding credit over the last few years has been due to charge offs, not consumers digging their way out of debt by paying down their balances.

U.S. consumers might not be quite as virtuous as they seem.

The sharp decline in U.S. household debt over the past couple years has conjured up images of people across the country tightening their belts in order to pay down their mortgages and credit-card balances. A closer look, though, suggests a different picture: Some are defaulting, while the rest aren’t making much of a dent in their debts at all.

They note that, for those borrowers who have not defaulted, today’s freakishly low interest rates may have encouraged even more borrowing and even higher levels of debt, to some degree at least, offsetting the reduction in debt that millions of Americans have embarked upon after realizing that, in the wake of the burst housing and credit bubbles, “more prosperity through more debt” doesn’t work so well over the long run.

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Zombies in the News Again

On September 16, 2010, in Banks, by Tim

It seems that, as we venture further into the post-2008 crash financial world, the word “zombie” is popping up more and more, two sightings to be found in just a cursory scan of the news this morning, zombie buildings in Spain as reported by the Wall Street Journal and this commentary about zombie banks by Jonathan Weil at Bloomberg.

Zombie Banks Have Us Right Where They Want Us

…
Here’s the kind of thing that passes for free enterprise now. Last month a fellow named Michael Carpenter, who is the chief executive officer of Ally Financial, got on a conference call with securities analysts and gushed with delight about the $3.5 billion price that General Motors had just agreed to pay for the subprime auto lender AmeriCredit. Based on that transaction, he proclaimed, Ally might be worth $30 billion.

GM, which owns a 6.7 percent stake in Ally, is Ally’s former parent.

“I love the AmeriCredit deal,” said Carpenter, whom some might remember from his days as the head of the securities firm Kidder Peabody. “I don’t have any doubt about our ability to repay the U.S. Treasury. So I think it’s great.”

The federal government so far has spent $17.2 billion to bail out Ally, the lender formerly known as GMAC Inc. Taxpayers hold a 56.3 percent stake in the company, which says it may hold an initial public offering next year if it can’t find a buyer.

What a spectacle. Here you had the CEO of a thrice-bailed- out zombie bank, drooling over how much a government-owned carmaker was going to pay for a publicly traded subprime lender, and using this price as a yardstick for his own bank’s paper worth. In a sane world, Ally would have been liquidated already. Any capital it’s able to raise is money that otherwise might go to more deserving enterprises.

Weil goes on to lament the propping up of the housing market, savers being punished with low interest rates, and  how we need to throw the bums in Washington out.

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