From Holman Jenkins at the WSJ. Trenchant and succinct, with interesting stuff at the end.
Recently in Noteworthy News Items Category
None. No one paid any attention. The substance of the speech was "Look
at meeeeeeeeeee! I'm BEAUTIFUL!" (Darn, what show is that from?
Candide? Now it's going to bug me all morning.)
Bonds this morning are virtually unchanged. Stocks will struggle, but sentiment is slowly turning positive. What flashed through my mind yesterday morning was "400 point rally." We got 230 of that yesterday, so if my spider-sense is still accurate, we've got a few more to go.
As I've said before, there could be the basis of a rally if corporate earnings aren't worse than expected. People have been pricing stocks as if they're all going out of business.
Bonds this morning are virtually unchanged. Stocks will struggle, but sentiment is slowly turning positive. What flashed through my mind yesterday morning was "400 point rally." We got 230 of that yesterday, so if my spider-sense is still accurate, we've got a few more to go.
As I've said before, there could be the basis of a rally if corporate earnings aren't worse than expected. People have been pricing stocks as if they're all going out of business.
The government is floating the idea of taking up to a 40% share in the
common equity of Citigroup, which is about as close as you come to
admitting the bank is insolvent.
How are the markets reacting? Government coupon-debt is sharply lower on the news. It's being taken as a positive, reducing the need to hold Treasury paper as a safe haven. Stock markets will climb on the open.
Here's a canary in the coal mine: Canada's CPI has fallen four months in a row, which hasn't happened since the early Thirties. Our CPI is under pressure (it's being held up by slightly higher gasoline prices, as supply ratchets down to meet lower demand), but producer and wholesale prices so far are holding steady. That news is mixed and unconclusive.
How are the markets reacting? Government coupon-debt is sharply lower on the news. It's being taken as a positive, reducing the need to hold Treasury paper as a safe haven. Stock markets will climb on the open.
Here's a canary in the coal mine: Canada's CPI has fallen four months in a row, which hasn't happened since the early Thirties. Our CPI is under pressure (it's being held up by slightly higher gasoline prices, as supply ratchets down to meet lower demand), but producer and wholesale prices so far are holding steady. That news is mixed and unconclusive.
I'm trying to interpret all the stories floating around about foreign investors starting to demand that US agency paper be converted to an explicit full-faith-and-credit guarantee.
Between Fannie and Freddie, we're talking about $5 trillion in assets. Since the nationalization of the GSEs in September, their periodic debt auctions haven't gone all that badly, all things considered. The spread between agency paper and Treasuries is now in the 70-basis point range across parts of the curve. Far more than what it was pre-crisis, but far tighter than a few months ago.
And yet, foreigners are noting US officials' pointedly stopping short of calling the Federal guarantee of agency debt "explicit." (FHFA Administrator James Lockhart calls the guarantee an "effective" one.)
That's turning out not to be good enough for seriously risk-averse foreign investors, who appear to have shifted at least $100 billion from agencies to straight Treasury paper in the second half of 2008.
In effect, what they're trying to do is to exit their exposure to US housing finance, and change it to exposure to the US dollar itself. In a way, this converts credit risk to market risk.
But is it really that simple?
Between Fannie and Freddie, we're talking about $5 trillion in assets. Since the nationalization of the GSEs in September, their periodic debt auctions haven't gone all that badly, all things considered. The spread between agency paper and Treasuries is now in the 70-basis point range across parts of the curve. Far more than what it was pre-crisis, but far tighter than a few months ago.
And yet, foreigners are noting US officials' pointedly stopping short of calling the Federal guarantee of agency debt "explicit." (FHFA Administrator James Lockhart calls the guarantee an "effective" one.)
That's turning out not to be good enough for seriously risk-averse foreign investors, who appear to have shifted at least $100 billion from agencies to straight Treasury paper in the second half of 2008.
In effect, what they're trying to do is to exit their exposure to US housing finance, and change it to exposure to the US dollar itself. In a way, this converts credit risk to market risk.
But is it really that simple?
Continue reading Agency Debt: How a Financial Market Meltdown Could Happen.
I just noticed this news story. This is very important. Large employers are now starting to impose large and widespread cuts in wages and salaries.
This is a classic sign of a deflationary spiral, and it's going to be deeply frightening to a lot of people. Especially people in the Administration.
Why? Because sustained deflation is exactly what Obama is talking about when he says that we face the potential for an economic decline that we can't recover from. But there are good reasons to be encouraged by this news.
This is a classic sign of a deflationary spiral, and it's going to be deeply frightening to a lot of people. Especially people in the Administration.
Why? Because sustained deflation is exactly what Obama is talking about when he says that we face the potential for an economic decline that we can't recover from. But there are good reasons to be encouraged by this news.
Continue reading Cutting Paychecks: This Is Important.
See this news story.
The Federal Reserve is about to start up a $200 billion program to directly support credit markets for auto loans and other kinds of consumer credit. This of course is unprecedented, as I've said, and we'll see what happens.
The automakers, for their part, are repeating one of the two ways to interpret the current low-demand environment: they're out there saying that people aren't buying cars because they can't get credit.
What if it turns out that people aren't buying cars because they'd rather save their money instead? That's the other interpretation, and it's the one I'm voting for.
The Federal Reserve is about to start up a $200 billion program to directly support credit markets for auto loans and other kinds of consumer credit. This of course is unprecedented, as I've said, and we'll see what happens.
The automakers, for their part, are repeating one of the two ways to interpret the current low-demand environment: they're out there saying that people aren't buying cars because they can't get credit.
What if it turns out that people aren't buying cars because they'd rather save their money instead? That's the other interpretation, and it's the one I'm voting for.
Responding to the political scandal du jour, executive pay and outrageous Wall Street bonuses, Obama will announce today that anyone who works for a bailed-out company can't make any more than $500,000 in cash compensation.
As always, there's far less here than meets the eye. And as always, there will be unintended consequences.
According to the reporting on the issue, Obama isn't going to make this retroactive. So it doesn't apply to companies that have already been bailed out, like AIG and Citigroup (which have each received over $100 billion in taxpayer support) or Fannie Mae and Freddie Mac. Or even GM and Chrysler LLC, the original poster children for taking the corporate jet to ask for handouts.
But this is less than it seems, because companies are still free to issue any amount of restricted stock to their executives. It will just be subordinated to any claim that the taxpayers may have on the assets of the affected companies.
And given that the whole ad hoc bailout policy has called for taking as small a claim as possible on the assets of the affected companies, the whole thing seems like a lot of PR to me.
As always, there's far less here than meets the eye. And as always, there will be unintended consequences.
According to the reporting on the issue, Obama isn't going to make this retroactive. So it doesn't apply to companies that have already been bailed out, like AIG and Citigroup (which have each received over $100 billion in taxpayer support) or Fannie Mae and Freddie Mac. Or even GM and Chrysler LLC, the original poster children for taking the corporate jet to ask for handouts.
But this is less than it seems, because companies are still free to issue any amount of restricted stock to their executives. It will just be subordinated to any claim that the taxpayers may have on the assets of the affected companies.
And given that the whole ad hoc bailout policy has called for taking as small a claim as possible on the assets of the affected companies, the whole thing seems like a lot of PR to me.
Continue reading Pay Caps For Executives At Assisted Companies.
The landline provider in my neighborhood in New York City is Verizon. I'm in the middle of a support incident with Verizon that I'll describe in a bit of detail, for a couple of reasons. First, because it happens on an infrequent but regular basis. Second, because it vividly illustrates how a government-protected industry deals with its customers.
Why does this matter? Because we're now talking about taking vast chunks of American industry into that happy zone where they have little to fear from market competition, or even from their shareholders and debtholders. Today, Verizon is in that place. Almost immediately, they'll be joined by the Detroit automakers, and by America's largest and most powerful banks. Sometime before Obama's first term ends, America's healthcare delivery system will also be there.
I was in the middle of a phone call yesterday morning, when the line went dead. Fair enough, this happens all the time. I live in New York City, where our infrastructure was once the most advanced in the world. And today, we still have exactly the same infrastructure. The central office that handles my phone service is now more than 100 years old. A lot has changed: Ernestine the telephone operator no longer works there, and they've painted over the windows.
Why does this matter? Because we're now talking about taking vast chunks of American industry into that happy zone where they have little to fear from market competition, or even from their shareholders and debtholders. Today, Verizon is in that place. Almost immediately, they'll be joined by the Detroit automakers, and by America's largest and most powerful banks. Sometime before Obama's first term ends, America's healthcare delivery system will also be there.
I was in the middle of a phone call yesterday morning, when the line went dead. Fair enough, this happens all the time. I live in New York City, where our infrastructure was once the most advanced in the world. And today, we still have exactly the same infrastructure. The central office that handles my phone service is now more than 100 years old. A lot has changed: Ernestine the telephone operator no longer works there, and they've painted over the windows.
There are reports out that bond yields in certain European nations are starting to rise well above the norms for the stronger nations, Germany in particular.
Countries at risk of becoming unable to borrow large amounts of euros include Spain, Italy and Greece, as well as some of the EU-wannabe states.
The deep global recession is putting the worst strains on Europe's monetary union that it has experienced to date.
One of the theories behind the euro was that the financial credibility of Germany would create a halo-effect that would benefit countries with much weaker fiscal histories. (Italy, I'm looking at you.)
But in this time of recession, Germany is being true to its nature and protecting its money. They can do this because they're a surplus nation. But investors, annoyingly rational creatures that they are, are bidding down debt issued by the weaker countries.
In effect, currency union is making it much harder for the deficit countries to bring in capital just when it's most needed.
And you have to start asking, when are the finance ministers of Spain, Greece and others going to start whispering that they can no longer afford the euro?
Countries at risk of becoming unable to borrow large amounts of euros include Spain, Italy and Greece, as well as some of the EU-wannabe states.
The deep global recession is putting the worst strains on Europe's monetary union that it has experienced to date.
One of the theories behind the euro was that the financial credibility of Germany would create a halo-effect that would benefit countries with much weaker fiscal histories. (Italy, I'm looking at you.)
But in this time of recession, Germany is being true to its nature and protecting its money. They can do this because they're a surplus nation. But investors, annoyingly rational creatures that they are, are bidding down debt issued by the weaker countries.
In effect, currency union is making it much harder for the deficit countries to bring in capital just when it's most needed.
And you have to start asking, when are the finance ministers of Spain, Greece and others going to start whispering that they can no longer afford the euro?
Yesterday, Obama asked President Bush to formally request Congress to approve the second $350 billion tranche of the TARP fund. Bush complied, and sent his letter to Congress last night.
This little dance is necessary because Congress split up the $700 billion TARP fund into two halves. The first $350 billion has all been committed or spent now, with the last of it serving as a downpayment on the coming, still-indeterminate Detroit Three bailout.
The two-step process was a fig-leaf added to the original TARP back in October, so that Congress could claim they were overseeing the program in the uniquely tough, objective, fair-minded and knowledgeable way that we've come to expect from them. Now that the President has requested the second tranche, Congress has fifteen days in which to grandstand, cluck over how poorly the money has been spent, haul Paulson et al in for a tongue-lashing, and wring their hands over how much the American people hate the idea. Their work of oversight done, they will then approve and release the second tranche.
Partly this is nice for Obama because Congress can have their media circus before he takes office. And partly he can start the 15-day clock now, so the rest of the TARP fund is available sooner.
But Obama made several statements in his remarks that indicate a very big problem we need to be concerned with. He's rewriting the objectives of the TARP in an evil way. And he's getting away with it because most people who aren't finance experts don't really understand what TARP was intended to achieve in the first place.
This little dance is necessary because Congress split up the $700 billion TARP fund into two halves. The first $350 billion has all been committed or spent now, with the last of it serving as a downpayment on the coming, still-indeterminate Detroit Three bailout.
The two-step process was a fig-leaf added to the original TARP back in October, so that Congress could claim they were overseeing the program in the uniquely tough, objective, fair-minded and knowledgeable way that we've come to expect from them. Now that the President has requested the second tranche, Congress has fifteen days in which to grandstand, cluck over how poorly the money has been spent, haul Paulson et al in for a tongue-lashing, and wring their hands over how much the American people hate the idea. Their work of oversight done, they will then approve and release the second tranche.
Partly this is nice for Obama because Congress can have their media circus before he takes office. And partly he can start the 15-day clock now, so the rest of the TARP fund is available sooner.
But Obama made several statements in his remarks that indicate a very big problem we need to be concerned with. He's rewriting the objectives of the TARP in an evil way. And he's getting away with it because most people who aren't finance experts don't really understand what TARP was intended to achieve in the first place.
Continue reading Obama Reinterprets the TARP. Don't Be Fooled..
