The Risks to the Global Financial System in 2012

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.   
As 2012 begins, markets are rallying as they did at the beginning of 2011 -- a year when the S&P 500 closed flat after many huge moves up and down. The problems in Europe that rattled markets in 2011 have not been resolved and new problems are or will be emerging in China and Japan. At the very least, investors should expect another rocky ride in the upcoming year.

The debt crisis in the EU is far from over. It is simply being momentarily contained by another short-term solution that will hold things together for a while until the crisis erupts again. The mid-December LTRO (long term purchase operations) announced by the ECB excited the markets as any money-printing scheme would. This new "solution" to the debt crisis is essentially an attempt to handle a problem of too much debt with more debt. Already close-to-insolvent EU banks are able to hold fewer assets for collateral in exchange for cheap funding from the ECB, which can in turn be used to buy questionable sovereign debt from the PIIGS. While this will keep Italy, Spain, Portugal and Ireland financially afloat for a longer period of time, it may collapse troubled EU banks sooner (the real epicenter of the debt crisis). 

Half way across the globe, problems are emerging in China. It is estimated that there are between 10 and 65 million empty housing units in the country that investors have purchased with the hope of selling at higher prices. There are in fact entire "ghost districts" there that are filled with new buildings and no residents. Prices have become so high that by last spring the typical Beijing resident would have to have worked 36 years to pay for an average-priced home. The pressure appears to be coming off though with new home prices dropping 35% in November. Beijing builders still have 22 months of unsold inventory and Shanghai builders 21 months. In the peripheral areas, existing home sales have plummeted -- down 50% year on year in Shenzhen, 57% in Tianjin, and 79% in Changsha. Investors should take note that the Chinese real estate bubble is far worse than the U.S. one that brought the global financial system to its knees at the end of 2008.

Twenty years ago, Japan had a massive real estate bubble and it is possible that prices have finally bottomed there, but that doesn't mean that they are ready to go up. Japan has had two decades of economic stagnation (and is heading toward a third, if it is lucky) because of the collapse of its real estate and stock market bubbles. Massive borrowing by the government has prevented the situation from getting worse. The debt to GDP ratio in Japan is now estimated to be 229% (well above the just over 100% in the U.S.).  More people are leaving the workforce there than entering it and this bodes ill for tax receipts. The aging population is using up its savings instead of adding to them. This is a potentially serious problem because the massive debt the Japanese government has incurred has been funded mostly internally by the savings of the Japanese people. A lot of old debt has to be rolled over in 2012 and additional debt is still being incurred. Where the money will come from is not clear.

None of the problems that could strain the global financial system originated in 2011. They have been building up for years and even decades. The first major blow up was the Credit Crisis in 2008. In every case, that problem was "solved" by more debt and money printing. This approach has of course only postponed the inevitable since taking on more debt only creates a bigger debt problem down the road and you can't create something of value out of thin air by printing money (although you will ultimately create a lot of inflation). The markets have already spent most of 2011 in an unstable state. It looks like continuing and even bigger crises await investors in 2012.
Disclosure: None
Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security

Inconsistencies of the Economic 'Recovery'

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

What created the Credit Crisis and the current 20 month recession (the longest since World War II) was the collapse in price of all the worthless real estate paper the was issued during the bubble years. As this blog mentioned yesterday, this problem has recently gotten 'better' because the accounting rules that determine the value this paper were changed. While playing make-believe is appropriate for five year old children, it's not a good idea for running financial system and just leads to bigger disasters later on.

The support for the real estate 'recovery' is thin to say the least. U.S. house prices supposedly went up during the last three months. This occurred even though home loans are hard to get and U.S. wages and salaries were down 4.7% year over year in June. This was the largest drop since records began in 1960. Employment is also down. As was mentioned last Friday, the unemployment rate dropped by 0.1% because a large number of people left the labor force. No matter how you look at it fewer people have a job. So who are these people who are paying higher prices for houses and what banks are lending them the money? All in all is seems highly unlikely that house prices could actually be going up given such conditions. If not, this set of numbers wouldn't be the only ones that have been altered recently to make them look better.

The other inconsistency in the real estate is getting better is that this was a drag on the big banks and brokers earnings in the second quarter. Many of them were increasing loan loss provisions. Fannie Mae, whose business is purely real estate related, illustrates the current state of affairs quite clearly. Fannie Mae lost $14.8 billion in the second quarter. Provisions for credit losses were $18.8 billion. The company stated in its earnings "We are experiencing increases in delinquency and default rates for our entire guaranty book of business, including on loans with fewer risk layers."In other words, all types of loans are going down the tubes including the prime ones. Total non-performing loans increased to $171 billion in the second quarter. They were up from $149.9 billion in the first quarter of this year and that was up from $119.2 billion in the last quarter of 2008. Well, that certainly looks like a recovery pattern, doesn't it?

Fannie Mae has requested an additional $10.7 billion from the U.S. Treasury to keep afloat. That it can get by this quarter with only an additional $10.7 billion cash infusion from the government seems optimistic. The company is essentially a bottomless pit for bailout funds. Both Fannie Mae and Freddie Mac's criteria for non-performing loans were changed around the beginning of the Credit Crisis to make it more difficult for a loan to be considered non-performing. Even with this fantasy, things still are getting worse. Somehow reality always seems to always get in the way of the government's best plans.

NEXT: More on the Real Estate 'Recovery'

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Durable Damaged Goods

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

The June Durable Goods Report was released this morning and the number fell 2.5%. The Bloomberg headline for the report was "U.S. Durable Goods Orders, Excluding Cars and Planes, Unexpectedly Advance". There you have it, once you remove the bad components of some report, it's actually bullish! Unfortunately, things are only bullish in Never Never Land and not in Reality Land where those of us who don't work in government agencies or for the mainstream media have to live. Attempts to mute the stock market reaction to the report obviously came directly from the Federal Reserve. Media articles stated that an unnamed top official (now who could that be) said the U.S. economy is likely to see moderate growth in the second half of 2009, as signs grow that the recent severe contraction is waning. If this happens, it will be one of the Fed's first accurate predictions in over two years.

Too much attention shouldn't be paid to one Durable Goods Report, the numbers are highly volatile and the government has little idea what they really are as is. A fall of 12.8% in transportation damaged the numbers. Surprisingly, car sales were down very little (you should be suspicious of that number). The star component was orders for primary metals, which rose 8.9%. The most important number was shipments, which fell 0.2% for a record eleventh straight monthly decline. Yeah, that certainly looks bullish.

There are still some shoes to drop for the economy with commercial real estate being at the top of the list. Fed Governor Janet Yellen admitted to this in a talk yesterday. She also said, "Concern that the massive federal budget deficit will cause inflation is misplaced, deficits don't cause inflation". But she did admit that they can cause higher interest rates, with the implication that this is somehow not related to higher inflation (it was not reported if the audience was doubled over with laughter by that point). Of course, the U.S. is printing money to pay for the deficits and this unquestionably causes inflation. Yellen didn't discuss that rather unpleasant topic and may have even denied that that was the case as well. She did mention she thought core inflation would under 2% for years to come. Yellen is quite possibly the dullest member of the Fed (the competition is strong, so this would be some honor).

News that just crossed the wires indicates that the Fed bought 2.99 billion in treasuries so far this morning. This is with printed money. By the end of the week, the amount is likely to be a lot higher. But, don't worry, this is not going to cause inflation - in Never Never Land that is, in Reality Land there's going to be a lot of problems.

NEXT: Oil Update - EIA, CFTC, and USD

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Bailouts: It's Not Just Banks, It's Not Just the U.S.

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Videos Related to this Blog:
http://www.youtube.com/watch?v=h2f4XUpVINs
http://www.youtube.com/watch?v=UQieE8Ryvk0

While Ireland had to inject more capital into its major banks this morning to keep their financial system afloat (Ireland has a bigger subprime mortgage problem than the U.S.), today's bailout news concerns mostly non-financial institutions. Mega memory chip maker Infineon's mostly owned subsidiary Qimonda received government assistance so it could keep operating. Tata Motors had to inject money into its Jaguar Land Rover unit and is looking for bailout money from the UK. On our side of the pond, commercial property developers are requesting bailout money from the federal government. As for the bailout money that the U.S. has already provided to failing financial institutions, a just released AP survey finds many banks don't know where the money went.

The need for a bailout of a memory chip maker in Europe should come as no surprise. This industry has suffered from chronic overcapacity for years. Started in the U.S., the Japanese then dominated the business and they were followed by the South Koreans (and you should assume that China will be the major player sometime in the future). The German state of Saxony, a Portuguese bank and Infineon itself injected money into Qimonda. This is an attempt to save jobs in Saxony and Portugal of course. More money will be needed to keep this uneconomical operation going.

Uneconomical operation would be a good watchword for Jaguar Land Rover as well. Indian car company, Tata Motors, acquired Jaguar from Ford in March (what a brilliant purchase that was) and according to reports has pumped hundreds of millions of working capital into the company. It is now injecting 'tens of millions' to keep Jaguar operating and is looking to the U.K. government for bailout money to save the jobs of British auto workers. President Bush after all has just grudgingly provided U.S. auto makers with minimal bailout money to tide them over to the beginning of next year (when another bailout will be needed). How the inefficient auto producers can survive when even the best operations are struggling - Toyota announced its first loss since World War II last night - is a good question.

Trying to get in on the bailout gravy train, U.S. commercial property developers have sent a letter to Henry Paulson requesting assistance. The industry wants to be included in the government loan program created to prop up the the market for student loans, car loans, and credit card debt. The letter warns of a dire collapse in the commercial real estate market. Indeed this is likely to happen. Why the developers should be saved from their own greed and stupidity is not clear however. Perhaps the need to cancel their country club memberships and sell their private jets would just be too burdensome.

As for the money that has been spent so far in the 700 billion Wall Street welfare program known as TARP, the AP sent out a request to the banks that were recipients of the funds so far and asked them what they did with them. Some banks didn't know, none provided any answers. Should we be surprised? Congress attached nearly no strings on the $700 billion bailout in October and the Treasury Department, which doles out the money, never asked banks how it would be spent. Our stalwart representatives on Capitol Hill did summon bank executives last month and implored them to lend the money — not to hoard it or spend it on corporate bonuses, junkets or to buy other banks. But AP admits that there is no process in place to make sure that's happening and there are no consequences for banks who don't comply. New York Investing said all of this would happen before the bailout bill passed. Please see the videos listed at the top of this blog.

NEXT: East Meets West, The Trimuph of Communo-Capitalism

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.