GEO-POLITICAL TENSIONS - ISRAEL / KOREA / IRAN
SOVEREIGN DEBT & CREDIT CRISIS
Forget Debt To GDP, It's Debt To Revenue That Matters--And
The U.S. Is The Worst Business Insider
Morgan Stanley have published a report titled "Ask
Not Whether Governments Will Default, But How"
) and while it makes some interesting points about who is
going to get hit when sovereigns begin to exact "Financial Oppression" on
creditors what we're most interested in is the discussion of debt to GDP ratios.From Morgan Stanley's Arnaud Marès (emphasis ours):
Whatever the size of a government’s
liabilities, what matters ultimately is how they
compare to the resources available to service them.
One benefit of sovereignty is that governments can
unilaterally increase their income by raising taxes,
but they will only ever be able to acquire in this way
a fraction of GDP. Debt/GDP therefore provides a
flattering image of government finances. A better
approach is to scale debt against actual government
revenues (see Exhibit 2). An even better approach
would be to scale debt against the maximum level of
revenues that governments can realistically obtain
from using their tax-raising power to the full.
This is, inter alia, a function of the
people’s tolerance for taxation and government
interference. Seen from this angle, the US
federal debt no longer compares quite so favorably
with that of European governments.
It is, in many ways, no different than looking at a company.
Recall Q2 earnings
. Investors were not that concerned about surging profits,
made through companies cutting spending, but rather the decline in revenues.And while current bond yields or CDS pricing do not reflect that position in
terms of U.S. sovereign debt, maybe there is an implied market assumption that
the U.S. government could take in more revenue relative to its GDP, by either
expanding revenues through economic growth or increasing taxes.And pushing this approach a bit further, even if the U.S. were to see a cut in
government spending, increasing "profits" temporarily, would investors not be
more concerned that revenues, via the taxes paid by those in government work
evaporating, would decline?
Spain May Defer at Least EU200 Million of Tax Revenue
Banks turn to Madrid bonds for collateral
Credit fears ease with backing from counterparties
Balls to warn of economic ‘hurricane’
Most dramatic warning yet by Labour politician
The return of beggar-my-neighbour
Ireland Set To Lose $30.5 Billion On Its Banking Sector Bailout
|Ireland's banking sector bailout is set to result in
massive losses for the state and the NAMA fund it set up
to buy bad bank debt,
according to S&P.
The Irish Independent reports that losses are expected to total €24 billion
($30.5 billion) over a 5-year period for the bailout fund. That would leave the
country getting back €16 billion ($20.3 billion) or 10% of GDP.Ireland's governm
ent expects to get all of their investment back, eventually.
And they've called S&P's recent attacks on Ireland, and the methodology behind
cut the country's credit rating to AA earlier this week.
Some of the
property loans Ireland's NAMA fund has invested in are
starting to blow up.
Japan Presses BOJ as Yen’s Climb Threatens Expansion
“They don’t really know what to do so they’re turning the
heat up on the BOJ...”
|So far the equity market has shrugged off much of the weaker data that abounds,
and has not joined the bond market in a perceptive move. The equity market will
though crumble like the house of cards it is, when the nationwide manufacturing
ISM slides below 50 into recession territory in coming months. Indeed the new
orders data for August, already reported in regional ISM's suggests the equity
market is going to get some sentiment crushing data in the very near term. But
never mind the last standing optimist will tell us it is only a flesh wound!
The full announcement is here
Second-Quarter GDP Growth Revised Downward
|The U.S. economy grew more sluggish than initially estimated in the second
quarter, and corporate profits nearly dried up, further evidence that the
recovery is losing steam.Gross domestic product, the value of all goods and services produced, rose at an
annualized seasonally adjusted rate of 1.6% from April to June, the Commerce
Department said Friday.
In the government's first report of the economy's benchmark indicator a month
ago, the growth rate was estimated to have slowed to 2.4% after a 3.7% expansion
in the first quarter.Still, the revised estimate for the second quarter was above expectations for a
1.3% gain among economists polled by Dow Jones Newswires.
Friday's report also showed that companies barely managed to post profit gains,
following several very profitable quarters. After-tax earnings edged up 0.1%,
well off the previous quarter's gain of 11.4%. First-quarter profits were
revised down from the initial estimate of a 12.1% increase.Year over year, profits remained 37.7% higher, with companies cutting costs by
Without Government Spending, GDP Growth Would Have Been
Less Than Half Of What It Was Business
The latest revision for U.S. Q2 GDP came in at 1.6%, which was higher than the
1.3% reading expected by consensus, but well below the 2.4% value previously
reported by the government. Thing is, the latest GDP report shows just how
dependent the U.S. economy was on government spending during the second quarter. Government spending contributed +0.86% to the 1.6% GDP growth value, which was
one of the highest quarterly government contribution to GDP since at least 2007.
The only quarters to beat it since the beginning fo 2007 were Q3 of 2008 and Q2
of 2009, at +1.04% and +1.24% respectively. Sans the 0.86% government spending boost, U.S. GDP would have grown by just
0.74% during Q2 of this year. This is shown by the right-hand bar below.
Yes the economy is more complex than such straight subtractions, but while the
exact GDP effect by government is debatable, what's clear is that Q2 relied
heavily upon government spending. This sheds light on the challenge for U.S. Q3 GDP, as government spending
support is expected to wane going forward.
UK bank accounting rules 'fatally flawed', warns influential
S&P Says US Should Act to
Protect AAA-Rating: Report Reuters via CNBC
|UNITED STATES: The United States government needs to take steps to
preserve its top AAA-rating, a Standard & Poor's Ratings
(S&P) official told Dow Jones newswire in an interview published on Thursday. The measures taken in response to recommendations
President Barack Obama's commission on fiscal responsibility would be crucial in
the view S&P takes on the U.S. credit rating, he said. "It is very important for the credit standing of the
United States that the Congress considers very carefully what the fiscal
commission proposes," John Chambers, chairman of S&P's sovereign rating
committee, was quoted as saying. "It is very important for Congress to take the
S&P maintains the United States' top AAA rating with a
stable outlook, meaning there is not a significant chance of a change in the
near future. However, it has repeatedly
warned about the
gigantic deficit and the debt burden in
the world's biggest economy, calling it a challenge for the government. David Beers, S&P's global head of sovereign ratings
said in a July report the U.S. does not have unlimited fiscal flexibility and
the best-case scenario for the U.S. would be for its debt-GDP ratio to peak at
around 80 percent, although there was a chance it could exceed 100 percent. "So we don't think these political decisions on
tackling the public finances can be put off forever," Beers said in the report.
IRELAND: Chambers also disagreed with Ireland's criticism of
its downgrade in the Dow Jones interview. Chambers said S&P does not consider the bad loans the
government's asset management agency is buying from banks as liquid assets in
the near term, but added further rating action was unlikely in the near term. On Tuesday,
Ireland's long-term rating by one notch to 'AA-', the fourth
highest investment grade, and assigned the country a negative outlook saying the
cost to the government of supporting the financial sector had increased
significantly.That drew criticism from the National Treasury
Management Agency which said it disagreed with S&P's view that Ireland faced
substantially higher costs to bail out its ailing banking sector. "In terms of the specific analysis by S&P, this is
largely predicated upon an extreme estimate of bank recapitalization costs of up
to 50 billion euros," the NTMA said. "We believe this approach is flawed."
Albert Edwards: "We Are Returning To 450 On The S&P"
& LOCAL GOVERNMENT
CENTRAL & EASTERN EUROPE
Despite Reform, Banks Have Room for Risky Deals NYT
|“You can use client activity as a cover for basically anything
you are doing,” said Janet Tavakoli, who runs her own structured
finance consulting firm. “It’s very problematic that losses like
this are showing up. It’s a prime example of what the financial
reform bill doesn’t address.”
Emergency Bid to Put Bailout Ruling on Hold Reuters via CNBC
SEC vows more actions over crisis FT
US regulator targets banks and insurers
COMMERCIAL REAL ESTATE
Commercial mortgage-backed securities trade above par
An index of CMBS compiled by Bank of America Merrill Lynch has
returned 14.8% this year, including 5% gains in the last month.
Landlords Cut Rents to Lure
Commercial Tenants Reuters via CNBC
|U.S. commercial property landlords cut rent and offered
concessions to lure tenants as vacancies remained high, the National Association
of Realtors reported in a quarterly property survey released Thursday.
An index measuring conditions in the commercial real
estate sector rose 2.8 percentage points to 41.0 in the second quarter, well
below a level of 100 that represents a balanced marketplace. The last time the
commercial market was in equilibrium was in the third quarter of 2007. Although the index remains weak, this marked the
third consecutive quarterly improvement.
"Vacancy rates are beginning to level off in some
sectors, but rent discounts and moderate levels of landlord concessions are
widespread," Lawrence Yun, the NAR's chief economist, said in a statement.
With vacancies still elevated, commercial real estate
development remains "stagnant" in all regions, the NAR said. The weak commercial real estate market has been a
significant drag on economic growth in the past two years, subtracting from
gross domestic product in seven of the past eight quarters. The NAR said it expected the office vacancy rate to
increase to 17.0 percent in the second quarter of 2011 from 16.7 percent in the
latest period. Apartment rental buildings, which have been one of
the few bright spots in the hard-hit commercial real estate sector, will likely
see another decline in the vacancy rate to 5.6 percent next year from 6.0
percent in the most recent quarter.
9-RESIDENTIAL REAL ESTATE - PHASE II
One in 10
Mortgage Holders Face Foreclosure AP via CNBC
|1) One in 10 American households with a mortgage was at
risk of foreclosure this summer.
2) About 9.9 percent of homeowners had missed at least
one mortgage payment as of June 30,
Association said Thursday. That number, which is adjusted for seasonal factors,
was down slightly from a record-high of more than 10 percent as of April 30.
In a worrisome sign, the number of homeowners
starting to have problems with their mortgages rose after trending downward last
year. The number of homes in the foreclosure process fell slightly, the first
drop in four years.
3) More than 2.3 million homes have been repossessed by
lenders since the recession began in December 2007, according to foreclosure
listing service RealtyTrac Inc. Economists expect the number of foreclosures to
grow well into next year.
4) The number of Americans missing payments and falling
into foreclosure has followed the upward trend in unemployment, which has been
near double digits all year and has shown no sign of dropping soon.
5) There was some modestly encouraging news. The
percentage of mortgage borrowers receiving foreclosure notices fell slightly to
4.57 percent in the April-to-June quarter. That's down from 4.63 percent in the
January-to-March period and the first drop in four years.
6) And the percentage of loans receiving their first
notice of foreclosure also dipped. That fell to 1.1 percent in the second
quarter from 1.2 percent in the first quarter.
Besides forcing people from their homes, foreclosures
and distressed home sales have pushed down on home values and crippled the
broader housing industry. They have made it difficult for homebuilders to
compete with the depressed prices and discouraged potential sellers from putting
their homes on the market. Government efforts haven't made much of a difference.
7) Nearly half of the 1.3 million homeowners who have enrolled in the Obama
administration's main mortgage-relief program have been cut loose through July,
the Treasury Department said last week. The program is intended to help those at
risk of foreclosure by lowering their monthly mortgage payments.
8) Roughly 32 percent of those who started the program
have received permanent loan modifications and are making their payments on
10- EXPIRATION FINANCIAL CRISIS PROGRAM
11- PENSION & ENTITLEMENTS CRISIS
U.S. Jobless Claims Decline More Than Forecast BL
|The average number of claims over the past month climbed to
the highest level since November. Jobless claims dropped by
31,000, the first decline in a month, to 473,000 in the week ended
Aug. 21. The number of people receiving unemployment insurance
decreased, while those getting extended benefits climbed.
- o The
four-week moving average of claims increased to 486,750
from 483,500 the prior week.
- o The number of people
continuing to collect unemployment benefits dropped by
62,000 to 4.46 million in the week ended Aug. 14, from
4.52 million the prior week.
- o The continuing claims figure does not include those
receiving extended benefits under federal programs. The number
of Americans who’ve used up traditional benefits and are now
collecting emergency and extended payments rose by about
302,000 to 5.84 million in the week ended Aug. 7.
- o 4.46M + 5.84M = 10.3M
receiving unemployment benefits
- o 26 Year high
Slower U.S. Capital Investment May Reach Job Market BL
A slowdown in U.S. business investment may soon hit the job
market, further hindering a recovery in the world’s largest
economy. Capital spending, one of the few bright spots in the
recovery, declined in July, according to Commerce Department
figures released yesterday in Washington. Sales of new homes fell
lowest level since data began in 1963, another report from the
same agency showed, indicating a lack of jobs is crippling
housing. Employers are reluctant to take on more staff until they
see more evidence of durable growth
Lack of skilled workers threatens recovery- Manpower AP
Workers with specialized skills like electricians, carpenters
and welders are in critically short supply in many large
economies, a shortfall that marks another obstacle to the global
economic recovery, a research paper by Manpower Inc
concludes. "It becomes a real choke-point in future economic
growth," Manpower Chief Executive Jeff Joerres said. "We believe
strongly this is really an issue in the labor market." The
global staffing and employment services company says employers,
governments and trade groups need to collaborate on strategic
migration policies that can alleviate such worker shortages.
Skilled work is usually specific to a given location: the work
cannot move, so the workers have to.
The shortage of skilled workers is the
No. 1 or No. 2 hiring challenge in six of the 10 biggest economies
Manpower found in a recent survey of
35,000 employers. Skilled trades were the top area of shortage in
10 of 17 European countries, according to the survey.
ATTITUDES MUST CHANGE
While the short-term way to address to shortages is to embrace
migration, the long-term solution is to change attitudes toward
skilled trades, Manpower argues. Since the 1970s, parents
have been told that a university degree -- and the entry it
affords into the so-called knowledge economy -- was the only track
to a financially secure profession. But all of the skilled trades
offer a career path with an almost assured income, Joerres said,
and make it possible to open one's own business. In the
United States, recession and persistent high unemployment may lead
parents and young people entering the workforce to reconsider
The skilled trades category also includes jobs like
bricklayers, cabinet makers, plumbers and butchers, jobs that
typically require a specialist's certification. Older,
experienced workers are retiring and their younger replacements
often do not have the right training because their schools are out
of touch with modern business needs. Also contributing to the
shortage is social stigma attached to such work, Manpower argues
in its paper published on Wednesday.
A poll of 15-year-olds by the
Organization for Economic Cooperation and Development found only
one in 10 American teenagers see themselves in a blue-collar job
at age 30. The proportion was even lower in Japan.
Education could address that stigma. Students should be
reminded that blue-collar work can be lucrative: skilled plumbers
can make upwards of $75,000 a year, Manpower argues.
Overall, Manpower's fifth annual
talent shortage survey found 31 percent of employers worldwide are
having difficulty filling positions due to the lack of suitable
workers available in their markets, up one percentage point over
AN EMOTIVE ISSUE
Although the proportion of employers seeing shortages is still
below pre-recession levels, shortages in some countries are more
critical than the global average. Majorities of those surveyed in
Poland, Singapore, Argentina and Brazil reported shortages. In
Japan, 76 percent had trouble finding the right workers, the
highest reading among the 36 countries and territories.
Examples of successful, targeted migration include an Ohio
shipbuilder that brought in experienced workers from Mexico and
Croatia, and a French metal-parts maker that hired Manpower to
find welders in Poland. Obstacles to such migration include
differing standards for certification in skilled trades, as well
as political barriers to immigration, which remains an "emotive"
subject in many countries, Manpower's CEO said. Japanese
employers, for example, have difficulty attracting skilled
workers. Sweden, on the other hand, is innovative and
aggressive about strategic migration, for example by removing
obstacles to workers being recertified in their specialty, Joerres
Strategic Migration - A Short-Term Solution to the Skilled Trades Shortage
Unemployment Data Masked A Huge Jump In Emergency Claims BI
The latest report described a 200,000 jump in people seeking emergency
(Emergency Unemployment Compensation,
), for the week
ending August 7th, which is the latest data. As shown by a chart from Waverly
Advisors below, emergency unemployment claims have shot up markedly as
percentage of the workforce.
The number of claimants under all emergency extensions for
the week ending August 7th expanded by 200k to 4.9 million. In
context, the total receiving benefit extensions is now back
over 3% of the civilian work force and at the highest level
*Emergency Unemployment Compensation is provided as a
temporary Federal extension for the unemployed who have
already used up their regular state benefits.
13- GOVERNMENT BACKSTOP INSURANCE
Mr. Gross Goes to Washington
|I proposed a solution that recognized the necessity,
not the desirability, of using government involvement,
which would take the form of rolling FNMA, FHLMC, and other
housing agencies into one giant agency – call it GNMA or the
Government National Mortgage Association for lack of a more
perfect acronym – and guaranteeing a majority of existing and
future originations. Taxpayers would be protected through tight
regulation, adequate down payments, and an insurance fund
bolstered by a 50–75 basis point fee attached to each and every
- o Americans now know that housing prices don’t
always go up, and that they can in fact go down by 30%–50% in
a few short years.
- o Having grown accustomed to a housing market aided
and abetted by Uncle Sam, the habit cannot be broken by going
cold turkey into the camp of private lending.
- o Private mortgage lenders will demand extraordinary
down payments, impeccable credit histories and significantly
higher yields than what markets grew used to over the past
14- CORPORATE BANKRUPTCIES
OTHER TIPPING POINT CATEGORIES NOT LISTED ABOVE
31-FOOD PRICE PRESSURES
Hyperinflation, Part II: What It Will Look Like ZH
The Great Deleveraging Lie Burning Platform
|Total credit market debt peaked at $52.9 trillion in the
1st quarter of 2009. It is currently at $52.1 trillion. The GREAT
DE-LEVERAGING of the United States has chopped our total debt by
During the Great Depression of the 1930′s Total Credit Market
Debt as a % of GDP peaked at 260% of GDP. As of today, it stands
at 360% of GDP. The Federal Government is adding $4 billion per
day to the National Debt. GDP is stagnant and will likely not grow
for the next year. The storyline about corporate America being
flush with cash is another lie. Corporations have ADDED $482
billion of debt since 2007. Corporate America has the largest
amount of debt on their books in history at $7.2 trillion.
Now we get to the Big Lie about frugal consumers paying off
debts, cutting up those credit cards, and eating Raman noodles 5
nights per week. Household and non-profit debt, which includes
mortgages, credit card debt, auto loans, home equity loans, and
student loans peaked at $13.8 trillion in 2008. After two years of
supposed deleveraging, frugality and mass austerity, the balance
is $13.5 trillion. Consumers have buckled down and have paid off
2.2% of their debts, it seems. Not exactly going cold turkey, but
it is a start.
But wait. Consumer debt outstanding is $300 billion lower. If
you hadn’t noticed, the banks in the United States have been
taking a few losses on their loans over the last couple years. A
simple search of the Federal Reserve website reveals that banks
have charged off 5.66% of all their loans in the last two years.
The charge off rate in the 2nd quarter of 2010 was 6.66%. To
verify for yourself go to the Federal Reserve website:
So, let’s get down to the nitty gritty. If consumer debt was
$13.8 trillion at the end of 2008 and the banks have since written
off 5.66% of that debt, total write-offs were $800 billion. If
total consumer debt now sits at $13.5 trillion, then consumers
have actually taken on $500 billion of additional debt since the
end of 2008. The consumer hasn’t cut back at all. They are still
spending and borrowing. It is beyond my comprehension that no one
on CNBC or in the other mainstream media can do simple math to
figure out that the deleveraging story is just a Big Lie.
The truth is that the debt has simply been shifted
from criminal Wall Street Banks to the American taxpayer. These
consumer debts were created in a private transaction between
individuals and these banks. When the loans went bad, the consumer
should have lost their home, car, etc., and their credit rating
should have been ruined, keeping them out of the credit market for
a number of years. If the banks that made these bad loans made too
many, they should have failed and had their assets liquidated in
bankruptcy. Instead, the Federal Government has inserted the
American taxpayer into the equation by using our tax dollars to
prop up insolvent Wall Street banks and allowing screw-ups who
took on too much debt to live in houses for over two years without
making a mortgage payment.
Intel CEO: U.S. faces looming tech decline CNet
|Intel Chief Executive Officer Paul Otellini offered a depressing set of
observations about the economy and the Obama administration Monday evening,
coupled with a dark commentary on the future of the technology industry if
Otellini's remarks during dinner at the Technology Policy Institute's
Aspen Forum here
amounted to a warning to the administration officials and assorted Capitol Hill
aides in the audience: unless government policies are altered, he predicted,
"the next big thing will not be invented here. Jobs will not be created here." The U.S. legal environment has become so hostile to business, Otellini said,
that there is likely to be "an inevitable erosion and shift of wealth, much like
we're seeing today in Europe--this is the bitter truth." Not long ago, Otellini said, "our research centers were without peer. No country
was more attractive for start-up capital...We seemed a generation ahead of the
rest of the world in information technology. That simply is no longer the case."
FLASH CRASH - HFT - DARK POOLS
Albert Edwards: "We Are Returning To 450 On The S&P" ZH
|"Equity investors are in for a rude
shock. The global economy is sliding back into recession and they
are still not even aware that these events will trigger another
leg down in valuations, the third major bear market since the
equity valuation bubble burst."
Germans, And A Wave Of Swiss Bank Accounts, Are Piling Into Gold As If
It's A New Crisis Business Insider
As the Eurozone crisis made headlines, European retail demand for gold surged in
the second quarter. While this was to be expected, given the concerns which emerged in regards to
the value of the euro and a European financial crisis, the scale of the buying
is a bit shocking, not to mention the concentrated buying from Germany and its
Net retail investment growth in
Europe was again concentrated in the German- speaking
countries (Germany, Switzerland and Austria). Germany (+59%
YoY) and the US (+32% YoY) both recorded gains in excess of
the 23% global total, while Switzerland posted a solid +19%
gain over Q2 2009. In France, purchases of bars and coins just
outweighed profit-taking, with net investment demand scraping
in at 0.4 tonnes, which was marginally below the 0.6 tonnes
from Q2 2009.
The table below shows just how shaken Germany and co were
by the situation. Investors from Switzerland and Germany
bought more gold than they ever have since the 2008 financial
crisis. It's clear Eurozone fears are extremely elevated:
VIDEO TO WATCH
QUOTE OF THE WEEK
|To paraphrase Oscar Wilde
know the price of everything but the value of nothing.