QE 2.0 and the Insta-Refi

Another week, another slew of bad reports:

* The ECRI Leading Indicator hit -10.7 for the most recent week (the previous revised number is -10.5). (The ECRI is a measure of leading indicators, and both of these numbers were indeed ugly)

* Q2 GDP plunges from revised Q1 number: GDP comes in at a below consensus 2.4%, which a huge drop from the revised Q1 number which came in at 3.7% (from 2.7%), and well below the consensus. Per the revised GDP numbers, the US economy has now shrunk by 4.1% from Q4 2007 to Q2 2009, compared with the 3.7% previous estimate. The Gov't continues to "massage the numbers", quietly adding "revisions" later to cover the ugliness on announcement day.

* Durable Goods came at -1.0%, a major disappointment to consensus which had been hoping to a nice boost from the previous -1.1% number .

* Major plunge in Consumer Confidence, which came at 50.4, below expectations of 51.0, and down almost 10% from the prior 54.3 reading.

The St. Louis Fed's James Bullard issued a paper titled "Seven Faces of The Peril" in which the Fed president pledges that the Fed should immediately recommence purchasing Treasurys if the deflation scenario picks up, which he notes is an increasingly likely probability. Additionally, this week three more Fed governors were approved, all of whom are on board with money printing as the solution to all problems near and far. After eyeballing all of this, a major investment firm today.. the first.. came out with this:

"We think there will be something in the (FOMC) language that maybe reverts back to the language of 2009, around the first time they made this statement, that the Federal Reserve needs to maintain an expanded balance sheet" David Resler, chief North American economist for Normura Securities, told Market News International. Nomura Friday became the first major firm to formally anticipate a change in Fed policy as soon as August 10 to alter course toward some renewed quantitative easing, arguing that without the change, Fed policy is becoming less accommodative week by week.

But the most interesting idea being floated is what's called the "Insta-Refi":

MS and ML's Harley Bassman said that the GSEs (Freddie, Fannie & FHA) should provide some form of autorefi program to take borrowers to market rates. As this would impact a vast majority of the 37 million of mortgages outstanding backed by the government, not only would this housing stimulus have a huge impact on consumption appetites, but it would be a political coup as all of a sudden the administration would find tens of millions of giddy homeowners who are paying far less monthly

My thoughts on these are that first, any more purchases by the Fed of US Bonds would have little effect; bond interest rates are near historic lows as it is, and so the problem isn't an inability to fund the Gov't. The problem is evaporating liquidity on Main Street; fewer and fewer loans are available to both consumers and businesses, constricting economic growth. Bond purchases simply hands money from the Fed to the US Gov't. What Bernanke would love to do is simply begin mailing checks to the American people, but this is not within the ability of the Fed to do so. There would be some immediate results: the equities markets would shoot up and the rates on Bonds would possibly hit all time lows. But this does nothing to solve the major problem facing the US economy.. too much debt at every level.. personal, government and corporate. Until the overall debt level in the US goes down substancially, there will be no recovery.

As for the insta-refi's, given government's ineptitude in other mortgage programs, I simply see a major boondoggle here. While true it would help tens of millions lower their monthly mortgage payments some, it would'nt help too much.. most mortgage holders already have low interest rates as it is. Who would lose in this scenario ? Fannie, Freddie and FHA, which would see their monthly returns diminish as a result, possibly resulting in these entities needing yet more Gov't money to prop them up.

Never in the history of any nation has anything like this even been suggested. The level of government interference in the mortgage markets is stunning. In the 1980s, very few mortgages were guaranteed directly or indirectly by the Gov't. This year, above 90% of all mortgages are US Gov't guaranteed. Then comes this. In my humble opinion, this is yet another brick on the Road to Ruin.

Vision {Guest Post}

I have only been on this planet for 54 years, but at no time have I been so acutely aware that things are not as they seem. Hard work and saving your money was an ideal to be revered. You worked for a company 20-30 years and they provided a living wage and a pension with healthcare in your retirement. To supplement that was something the government came up with call Social Security and Medicare.

Now what they didn’t mention what that this was nothing more than a redistribution of wealth from the earners to the elderly. At the time very few people lived beyond the age of 65. Now with modern medicine Medicare has unfunded liabilities in the billions as there are many aged people with Alzheimer’s are sitting in nursing homes and live to the age of 95.

Ergo the system is destined for collapse for the Fed will have to print money to keep the checks coming by 2042 and by some estimates as shown in the graph above even less.
Working hard for a company is not the norm any more. I worked for 20 years for my first company then 3.5 years before the next on closed and 3.5 before the next one drove all the good people out. I was saving all this time and as a result I am not and will never be homeless. I have no mortgage, no car payment and no installment debt as all. I pay off my credit card in full every month.

However, I cannot say that for many other Americans who thought that spending was a way of life. New cars, big boats, fancy vacations and McMansions that they could not afford. Also sending there children to high dollar universities or the children borrowing 50-100k for that diploma.

So what the hell does all that have to do with investing? It isn’t about investing it is about people and how we were money dumb and spending foolish.
Well the problem is they didn’t learn about money. They didn’t know where it came from or who controlled it. To them investing was leaving it all up to the company pension manager (if they were lucky enough to have one) or dumping money in a mutual funds in a 401k plan that they did not understand. So as everyone was tapping their home equity as if an ATM machine was attached to their home they never imagined the frightful reality that would soon hit them like a 2x4 to the head.
　
　

Soon they found that they had lost nearly half of their 401k money, the company they worked for was sold and gutted and the pensions they so took for granted were reduced or paid out in a lump sum. Then the IRS would take its 40% for early withdrawal and all of a sudden the "Golden Years" were not as attainable.

They now owed more than they could sell their house for and home prices plummeted and still are. Those ignorant enough to be in adjustable or interest only homes were faced with bankruptcy, foreclosure or simply walking away. Many chose the latter.
The whole mess went worldwide so Americans weren’t the only sheep that were sheered.
Now let’s get to investing. I started investing in precious metals in 2008 and have since done well. I cut my teeth on investing at the wrong time January 2009. I was gun-shy from the early losses as I really didn’t understand how to invest. I wasted hundreds in brokerage fees getting in and out of positions based on emotion. Then when the market changed direction in March, I got it all back. I bought a variety of companies, but I was focused on the mining industry. I learned how to do rudimentary charting and mostly did quick trades taking profits.

I started a little blog on June of 2009 and it has flourished with 150-200 readers per day and about 10-15 active commentators. All of whom have great insight into the market.
http://queenbee-insidethehive.blogspot.com/
　
What have I learned from all this? That the markets are fickle and many manipulations go on behind the scenes and this I cannot control. When you decide to invest have a plan. One to get in and one to get out. Patience is a virtue, but don’t marry your investment. Keep an eye on the tape and get when the getting is good. Don’t worry about the high frequency traders with their fancy algorithms that make up most of the market. You don’t even come on their radar. They are looking to take down millions and are mostly competing against each other.
Don’t worry about the government officials as they are bought and paid for. The President is nothing more than a figurehead and has very little real power. He is kept in a cocoon and fed numbers that I am sure he does not understand any more than the previous one did. So I am not angry at the politicians. I just don’t see them as the real threat.
The real power is the To Big To Fail Banks. JP Morgan is at the top of the food chain. There are no sovereign countries, there are just peoples who are indebted to the banking cartels.

My advice to you dear reader is this. Get out of debt in any way you can. Save money and learn to invest as 1% on a CD at the bank will not cut it. Maybe buy a farm and live a simpler life. Learn to fix things, grow things and barter with neighbors. As it says in my email signature "The only free man is a debt free man."

Thank you for listening Queenbee

{This is a guest post from Queenbee @ the the fabulous http://queenbee-insidethehive.blogspot.com/ blog.. and many thanks to Queen !}

Spain & the EURibor

A few days ago I put in the order to sell the euro; the drastic move the other way prompted me to take a closer look at what happened, and I think I've found out why. In our own economic crisis of September 2008, the one thing that prompted our leaders to act ($700 billion bailout) was the freezing up of the credit markets. The LIBOR (London Interbank Offer Rate) is the interest rate at which banks will lend to each other; when this skyrockets, it's a sign that banks are not trusting each other and for the most part won't lend to one another unless it's at extremely high rates.. it's a very good measure of banking stress. Europe has their own such market.. it's called the EURibor, and it does the same thing. When the LIBOR's go up, since there are fewer and fewer loans, there is less and less currency circulating in the system, and the value of the currency goes up relative to the amount of goods. Remember $1.99 gas in October 2008 anyone ? This is called deflation.. and while most of us would cheer for $1.99 gas again, the flip side of deflation is that consumers can't get loans to consume and businesses can't get loans to produce.. ie.. a slow constriction of the economy. Without further adieu.. I present to you the EURibor chart: http://www.zerohedge.com/sites/default/files/images/user5/imageroot/trichet/Euribor%207.16.jpg

In doing a little bit more digging, I came up with what I think is a reason why: "Spanish banks borrowed a record 126.3 billion euros ($161 billion) from the European Central Bank in June. This represents a 48 percent increase from the €85.6 billion borrowed in May": http://www.bloomberg.com/news/2010-07-14/spanish-banks-boost-ecb-borrowing-48-to-record-126-billion-euros-in-june.html . In other words, absolutely nobody is loaning anything to Spanish banks except for the European Central Bank. As I understand it, Greek and Portuguese banks are in roughly the same shape. It's just this sort of distrust that froze up our own credit markets in the Lehman era and led to our own $700 billion bailout.

Of late, European government bonds have seen their rates stabilize and their CDS rates come down.. a very welcome sign. But not all is well yet; this little tidbit came in last Wednesday: "The just completed auction of Spanish 2025 Obligacions for just under €3 billion, came at a 5.116% yield, a substantially worse level than the last auction as of April 22, which was placed at 4.434%" http://www.zerohedge.com/article/spain-auctions-%E2%82%AC2999-billion-15-year-issue-above-5-yield . This means that while people are willing to the Spanish Gov't money, they want a serious premium to do so. The US does not issue 15 year bonds; but we do have a ten year bond; the rate on it was 2.92%, thus giving you some idea as to where Spain stands in the international bond markets.. and it's about half way between the woodshed and the outhouse. An encouraging note here however: China seems to have stepped in and bought an abnormally large share of Spanish bonds.

These two things speak to the fact that Spain is very far from out of the woods.. and this is a nation who's unemployment rate is already 20%. The Socialist government has tightened the belt some, but any more budget and wage cuts will begin to test the patience of the people. While we are not at the Rubicon as yet, we are approaching it slowly. I would not be surprised to see Ben Bernanke step in and help in one fashion or another; outright purchases of Spanish and other government bonds would ease rates and would help the deflation that is gaining momentum here. Spain's step by step slide is going to have to be addressed. The ECB, EU and IMF all saw it coming.. here's my from last month on this: "The last time the IMF sent a delegation to a country was on April 15th when the IMF together with representatives from the EU and ECB took a jaunt over to Athens. A month later the country was insolvent" : http://themeanoldinvestor.blogspot.com/2010/06/spanish-inquisition.html