Obama's Next Stimulus

The Obama Administration needs the economy to pickup steam if they want to get reelected. A new stimulus isn't in the cards.. the House Republicans won't go for it. QE3 might happen, but all the Fed can do is loan money; it can't simply mail checks to people, and most Americans either don't qualify for loans or don't need them. The housing market is also in the dumps; housing prices continue to fall, and because of this people simply give up and mail the keys back to the mortgage company shortly before the sheriff arrives. Mortgage rates are at historic lows.. but most people won't qualify to refinance or buy because their home is under water and/or their credit score is not up to snuff.

What to do ? The NY Times gave us a hint.. it's essentially a massive government backed house refinance program. The details are still being worked out, but here's how it might work... it would allow people to refinance at the current 4% rate, which would reduce their monthly payments.. in some cases substantially. It could allow people who are under water to participate if their LTV {loan amount to value of the house} is under 125%. They could reduce the credit score needed from the low 600s to the late 500s, say 575.

In addition to this, there is another plan which is looking into a way to begin renting foreclosed homes and getting them off the market, thus helping stabilize housing price declines and letting people upgrade from apartments to houses. The NY Times suggests that such a plan would save homeowners nationwide about $85 billion a year.

There would be no addition to the deficit. Home prices would begin to stabilize; the foreclosure rate would decline, and people would have more money in their pockets. In truth.. it's far from the worst plan I've heard. It would help us working serfs out for once at the expense of the banks.

The downside ? The first would be for Freddie and Fannie, who would bear the brunt of the losses on the reduction in principle (if this is part of the plan). When word of this idea came to light on Thursday, Fannie & Freddie Bonds tanked. These are ultimately backed by the US taxpayer, so in a weird way it's really us doing ourselves a favor. But for those who invested in them there is a good risk they're going to see their investment sink, perhaps drastically. This is also a slippery slope-- giving government guaranteed loans to * those who don't really qualify for a loan, and *loans for more than the home is worth. This is how we got here in the first place.

The details of it are still being worked out; I imagine this is part of the reason Big O is vacationing and waiting to announce his plan until September. Who will administer this ? Who will service these loans ? Who will administer the foreclosed house rental program ? Here's the Times article:
http://www.nytimes.com/2011/08/25/business/economy/us-may-back-mortgage-refinancing-for-millions.html?_r=2&nl=todaysheadlines&emc=tha25&pagewanted=all

I also believe that Obama will further reduce the payroll tax reduction from 2% to 4%.. another boost to the wallets of working serfs as well as employers. This will increase the deficit.. but it might well pass as Republicans always love a tax cut.

Onto my pet peeve, EUtopia. The markets have stabilized thanks to ECB purchases of debt and The Fed's USD swap lines. Still there are signs in the money and credit markets.. the LIBORs-- that all is not well and not getting better. The last time the ECB stepped in like this was in May and June of last year, when they began purchases of Greek and Irish debt in an attempt to hold off default. We all know how that story ended, and this current story of Italy and Spain will have a similar ending-- bad. The only real question is when and how it ends. My guess is that the EuroBond will not happen. But make no mistake.. the European crisis is just getting started. Two weeks ago France and it's banks in particular began to feel the markets' wrath.. and this, I believe, had a big effect on Sarkozy, who finally saw that his own nation might be taken down. My make is that it ends with either the expulsion of Greece, Ireland, Spain etc from the Euro or the ECB goes all in Bernank Style and monetizes the debt. So far the signs seem to suggest that expulsion is whats coming. Here's an article on the {very serious} problems in the EU's interbanking system: http://globaleconomicanalysis.blogspot.com/2011/08/capital-flight-proves-confidence-in.html


As for our own economy, Bernanke said "not yet" to QE3-- and {finally} fired a broadside at US political leaders, in effect telling them that they need to quit bickering and make the hard decisions we all know need to be made. If we get a strong deflationary headwind and/or the job numbers begin going negative again, Big Ben will have the excuse he needs for QE3. We're not there as yet. 

A Wild Week and What Comes Next

This last week was a wild one; volatility skyrocketed mostly because of the concerns in Europe, with French banks and the possibility of a French downgrade the big concerns-- and rightly so. But the week ended with no downgrade and no French bank failures, and by Friday the markets had calmed down and were in a nifty little upswing pattern.

But are the problems that caused this mess solved ? No they are not, with the problems of Italy and Spain still in the forefront. Most European banks are massively over leveraged; most European governments are hopelessly indebted. There has been several of these little mini crises, with each one getting worse-- rather like a series of mini strokes-- and each one attacking a bigger country. I myself was surprised that Italy and France had been attacked when Spain was in most ways much worse off. There is calm again for now; there is an important meeting later this month about fine tuning the EFSF or doing something more. Those poor EUrocrats have gotta be getting bailout fatigue by now. The problem with the EFSF is that the number of nations becoming part of the problem instead of part of the solution is growing; at this point, it's likely that both Spain and Italy cannot reasonably be expected to help in any more bailouts, leaving France, Germany and a handful of small Nordic nations-- and after this week even France is looking a little shaky. And this is how the Euro will end.. when France becomes unable to bail out other nations, Germany will be left alone and would be unable to bailout everyone by itself.. and so Germany would likely leave the Euro along with their Nordic neighbors and return to the Deutche Mark. This week's crisis has passed.. but each of these mini strokes gets worse and worse. My guess is this implosion happens in 2013 at the latest, with a strong possibility next year. As I looked at Mish's site {probably my favorite site} this morning, he's detailing some of Spain's problems-- their Defense Dept can't pay for the new weapons systems they've acquired amongst them: http://globaleconomicanalysis.blogspot.com/2011/08/spain-cannot-pay-26-billion-defense.html

I actually expect the stock markets to have a nice run for the next few weeks from here. Not that it matters for those of us serfs toiling in the fields... for us, the Depression-lite continues unabated. Very often a company returns to profitability by slashing employees and/or their benefits. It's set to get worse for a large number of people as over the next couple of months their unemployment benefits are set to run out and for many of them, the only places hiring are fast food joints and Walmart. Barack Obama and his re-election will be the one of their targets of anger. One of the next things coming up on the calender is that at the end of September, the US Government, which cannot pass a budget, will have to pass what's called a "continuing resolution" to fund itself. After the debt ceiling debacle, lets hope we can all come to some sort of solution beforehand.

Update Monday 7pm:
I'm now having doubts as to whether the Germans leaving will be the final outcome. IMHO, Europe's financial system is having a series of mini strokes: first the Greek crisis of last year, then Ireland, then Portugal, and this month comes Italy. Yet the E-Bond has not been introduced in any Parliament. At some point in the near future, Italy and Spain will become unable to hold up their end of the EFSF. Even France looked a little shaky last week. When the number of countries needing a bailout exceeds the number of countries doing the bailing, the markets will demand an answer TODAY. It's at this point that---

1. The French and Germans can begin a bailout so big it would likely threaten France's solvency.

2. The ECB {with an assist from The Fed, the PBoC and with Germany's backing} vastly expands the SMP and begins purchasing failing sovereign bonds and bank stock, and waive the rule on "sterilization".. this is flat out monetization, and since The Fed and PBoC also participate, the Euro does'nt crash too badly in relation to most other fiat currencies... with the Swissy and Yen soaring. Germany, who has been resisting this, finally agrees when faced with financial Armageddon. As the Yen appreciates, Japan is strangled by deflation and a new phase begins.

3. Germany and it's Nordic cousins bolt the Euro.

My bet--- The Catastrophe behind Door #2


Update Tuesday 6pm: The Merkel/Sarkozy meeting produced something even worse than hot air.. there will be no EuroBond. No expansion of the EFSF. They went on to suggest other member states enact a balanced budget amendment. In effect, Merkel just gave troubled countries the middle finger.  Either the Euro somehow survives (probably through some sort of ECB QE program - see its recent purchase of Italy/Spain bonds) or we will see a return of the old nation-state currencies, with a European-wide policy of 'beggar-thy-neighbour'. 

Manic Monday

Well another ugly day.. especially here in the US, with the Dow down over 630 points. Why ?

Interestingly enough, the day began with news that the ECB had stepped in and purchased both Italian and Spanish bonds.. and the interest rates on both of these, which had climbed above 6% in recent weeks, cratered back down to the 5.25% area on both. While I'm on the subject, let me say here that while this is impressive, we've been here before. The ECB tried the same thing with Greece, Ireland and Portugal.. and look what happened there. If the ECB has the faintest hope of being successful with Italian and Spanish bonds, they'd better do it in very large amounts. The markets, like a hungry wolf who got kicked in the teeth, will be back, meaner than ever. Ambrose's article today is an excellent read on this subject: http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/8689824/European-Central-Bank-must-go-nuclear-to-save-Europe.html

Here in the US, the markets tanked badly, supposedly over the S&P's downgrading of US debt. President Obama scheduled a news conference at 11am to speak about the markets.. but he was 45 minutes late. There was hope among many in the pits that he would announce some sort of stimulus. But no-- he was just late, and treated us to nothing but hot air and calls for tax hikes. Thats when the markets really shit themselves, ending the day down over 630 points.

Why ? My guess is that many on Wall St are not liking the bigger picture. Think about it.. since the Lehman disaster in 2008, we've had TARP, QE1, QE2, QE 2.5, the Obama stimulus, cuts in payroll taxes, extension of the Bush tax cuts, record deficit spending... all told, these programs amounted to nearly $8 trillion thrown at the US economy to get it jump started. What have we got for our efforts ? 9.2% unemployment and a crashing stock market. With the S&P downgrade, things like more stimulus packages and other things that would expand the deficit are'nt going to happen. Inflation is also becoming a problem as gas and food prices rise.. and so QE3 is also unlikely in the short term. In short, the money has stopped flowing from Wash DC. That is what scares the hell out of Wall St. Frankly, there is very little Obama can do. Bernanke can do a QE3, but it's becoming more and more clear that QE2 and QE2.5 were not successful. In fact The Fed meets again today.. my wager is that we'll get nothing but hot air. Only when there is serious threat of deflation and rising unemployment will they consider it.. my guess is we'll see it by year's end. But not today.

Where do we go from here ? By week's end the markets will calm down. This is not 2008 again.. at this point, its not that bad. The VIX index, which measures volatility, went up from single digits to 40 yesterday. During the 2008 crisis, it was in the 90's. Its not The End... It's rather the beginning of it. From here, as the money spigots are squeezed shut, we've left the Age of Printing and have now begun the Age of Austerity. I'm going to reference my favorite Ambrose article of all time.. this article describes the Depression and what happened during these times {how many of you knew that then Colonel George Patton charged starving war veterans with sabres in front of the US Capitol ?}.. but it also describes what happened the last time we reached this point.. the Depression: Remember that this article was written two years ago so the news he's describing is rather old: http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/4339501/Bad-news-were-back-to-1931.-Good-news-its-not-1933-yet.html

Black Thursday

Today's mayhem was about one thing: Italian and Spanish debt. At one point in the day, as Italian bank stocks and bond yields {again} began tanking, the European Central Bank's {ECB} Chief Jean Claude Trichet, really wanted to intervene on Italy and Spain's behalf. But before he could act, he had to hold a meeting with the ECB's governing council and get their approval. It's here that something went wrong. Inside sources say that it was Germany's Central Bank {The Bundesbank} Chief Jens Weidmann who veto'd the proposal to aid Italy and Spain. The EFSF, which is a fund set up by Europe's leaders to deal with just such an emergency, has not been fully funded and has also not been approved to intervene in the secondary bond markets to help fellow EU members. The ECB actually did try and help Greece and Ireland today, but even then it was fairly meek-- and the problem was Italy anyways. It was this intervention in the secondary bond markets (as well as other markets) that needed a helping hand today. Neither the ECB or the EFSF was there when it was most needed. The markets, sensing blood, moved in for the kill. By late afternoon in Italy, the rout was so bad that the Italian stock market was shut down-- an act of true desperation. In short, Italy and Spain were essentially left outside with the wolves, who promptly torched them. Later in the afternoon, the Spanish government decided to announce that it was going to abandon a bond auction later this month due to market conditions... in the midst of a meltdown. This is rather like noticing that your roof is on fire and throwing a molotov coctail thru the kid's bedroom window.

In New York, the markets were spooked by this apparent abandonment. They realized how dangerous an Italian or Spanish full on meltdown could be... and the markets here then began a sell off. By day's end the Dow Jones had lost 512 points-- the biggest loss since the Lehman disaster. In after hours markets, there was a huge sell off of the Euro currency and purchasing of the Swiss Franc, which is {mistakenly} seen as a safe haven of sorts, as is the Japanese Yen. Today the Bank of Japan {BOJ}, in an attempt to stop people from swapping their Euros for Yen, began a very large (some estimates were $50 billion) intervention.. but the reversal engineered by the BOJ only lasted a few hours before the markets came right back to erase the BOJ's gains. 

Tomorrow will be a key day. If the ECB and/or EFSF {or someone else} don't step up and do something before the European markets open, there is a fair chance that all hell will break loose at the open. If this is the case, I look for The Fed to step in {in some fashion} to help calm the markets. I also believe that when push comes to shove, the ECB might also step in.. but only if there is a serious rout in progress. Make no mistake.. this is a dangerous moment.

Update Friday 430pm: Well the ECB finally caved this morning and reinstituted a Lehman era program called the SMP, which allows them to go into the secondary markets and purchase government bonds. This is essentially monetization of this debt, something that is specifically against the Maastricht Treaty. It also means that because of the size of the problem, the ECB, should these bonds go belly up, will need to find a way to balance the books.. and this will mean some substantial German contributions. Needless to say, Germany and Finland are far from thrilled with this. They gave no amount, essentially meaning that the ECB Council has pretty much endless authority. The ECB's intervention had the desired effect, and the markets went on to have a good day. It looks like the problem is solved-- for today anyways. I thought this last week, too.

Update Saturday Morning: ZH reporting that Germany might be backing out of any bailouts for Italy. If this turns out to be as bad as it sounds on the surface, EUtopia might be in some very serious trouble. Also, there appears to be a meeting of G7 finance ministers this weekend about coordinating central bank intervention. The ratings agency S&P also downgraded the United States-- for the first time in history. This will be another negative come Monday morning, but the downgrade was not totally unexpected. Looks like we're not out of the woods yet.