Sunday, February 28, 2010

Why We Don't Have Hyperinflation Even Though The Fed Has Printed $1 Trillion

Voltron says: bottom line is the "money multiplier" has gone below 1.0, i.e., when the government spends a dollar into the economy, it creates LESS THAN one dollar of stimulus. It's a complete breakdown of the government's crackpot Keynesian stimulus policies.

Head of IMF Proposes New Reserve Currency

Voltron says: The impending failure of the Euro should prove that monetary union cannot work without fiscal and political union (it's hard enough when you have all three: substitute California and the U.S. for Greece and Europe). So why would they think a global monetary union would work any better. Strange how it comes right on the heels of massive IMF gold sales. So it will be another fiat currency, which will could extend the system for another decade or so, before inevitable collapse.

Top story on drudgereport.

How long can the U.S. dollar defy gravity?


Some argue the dollar's recent rally against the euro and yen ... is less a vote of confidence than a realization that it's simply the best of a bad bunch.... a retired currency trader who worked at Chase in the late 1970s in London, called it a "reverse beauty pageant" in which investors pick the "least ugly" contestant.

... History suggests that a currency is supplanted the same way Ernest Hemingway said a man goes broke: gradually, then suddenly.

Thursday, February 25, 2010

Economists blame "unexpected" bad news on the weather

Voltron says: Takin' a page out of the old Soviet Union playbook. Pathetic.


I have a few simple questions for all the dim-bulb economists now blaming the weather:

  • "Did you not know there was a snowstorm on the East coast?"
  • "If you did, then why didn't you factor it in to your estimates?"
  • "How can you be surprised by something you knew?"

Wednesday, February 24, 2010

How quickly collapse can happen

June 7, 1873:
"The Approaching Spanish Repudiation"

July 5, 1873:
"[Spain] Making Arrangements for the Payment of Current Coupon"

August 2, 1873:
"Spanish Interest Will Not Be Paid"

August 30, 1873:
"Anarchy in Spain"

July 18, 2001:
"Markets Laud Argentine Debt Accord - Calms Fears of Default"

August 3, 2001:
"Flurry of International Contacts to Prevent [Argentina] Default"

December 14-20, 2001:
"Angry Argentines Take Their Displeasure to the Streets"

"State of Siege"

"Looters Ravage Cities"

January 21, 2010:
"Investors are concerned that Greece won't be able to finance its budget deficit."

February 14, 2010:
"Years of unrestrained spending, cheap lending and failure to implement reform."

February 17, 2010:
"Greek Tragedy Averted, For Now"

February 24, 2010:
"Greek Police, Protesters Clash"

11.3 million homeowners underwater on mortgage


More than 10% of people with mortgages owe 25% more than their home is worth.

...In Nevada, 70% of mortgages were underwater. In California, more than a third of mortgages were underwater.

..."The rise in negative equity is closely tied to increases in pre-foreclosure activity," CoreLogic said. Once a homeowner owes 25% more than the house is worth, foreclosure rates rise sharply.

Negative equity exceeded 25% in six states and topped 20% in six others.

Tuesday, February 23, 2010

Housing may have bottomed

Voltron says: The price vs rent ratio has been pretty close to even for about a year, but that does not mean that Wells Fargo has recognized all of their losses. It is likely the ratio will go below 1.0 due to the overhang of foreclosures, in which case it would be a good time to buy a house or invest in rental property on a cash flow basis.

Tim wins

Voltron says: Former Fed Chairman Paul Volker, the only sensible person on the president's economic team, has been completely marginalized.

The "Volker Plan" is officially dead:

The White House PR machine is working overtime to rehabilitate Treasury Secretary Tim Geithner's image including an interview in Vogue and cheesy photo ops with the first lady.

"It's like saying we're going to make some improvements in the Titanic after it's hit the iceberg"


Former Federal Reserve Chairman Paul Volcker said the nation's home mortgage market is in trouble and will have to be "reconstructed."

"It's totally dependent, heavily dependent on government participation," Volcker said Friday in an interview with Bloomberg Television. "It shouldn't be that way. That's going to have to be reconstructed."

The federal government was responsible for up to 95 percent of all new home mortgages in the fourth quarter of 2009, said Guy Cecala, publisher of Inside Mortgage Finance, a leading industry publication.

"Anyone who looks at the numbers says, 'My God, look what it's come to,'" Cecala said in an interview Friday.

While Volcker hopes the nation's home mortgage finance system lessens its dependence on taxpayers, Cecala said it's going to be nearly impossible for a significant change to take place over the next year.

"We can't," Cecala said. "It certainly can't change in 2010. It's like saying we're going to make some improvements in the Titanic after it's hit the iceberg."

Voltron says: As I pointed out in the previous blog entry, there is no way anyone is going to lend money for houses at these low interest rates.

Mortgage Crunch Coming

Voltron says: Great article explains why mortgage rates are too low

Sunday, February 21, 2010

Saturday, February 20, 2010

Interest rate cycles

Voltron says: Banks make money by borrowing cheaply short term (from the Fed) and lending at a higher rate long term (to you). The larger the difference between the short term interest rate (2 year treasuries, for example) and the longer term interest rates (10 year), the more money banks make. This difference ("the spread") seems to run in cycles and may be approaching a peak.

July is D-day for Spain

Voltron says: Greece is imploding (because Goldman Sachs helped them hide their debt). Spain may be next.

Tuesday, February 16, 2010

Humor: Money is an illusion

The Onion: U.S. Economy Grinds To Halt As Nation Realizes Money Just A Symbolic, Mutually Shared Illusion

Monday, February 15, 2010

Gold Stopped Being A Hedge In 2009


The correlation between SPY and GLD has been nearly 0.95, compared to nearly zero historically. As shown in the chart below, GLD and SPY have moved in lock step through the first six weeks of 2010

Moreover, gold started to correlate with stocks sometime during 2009:

Sunday, February 14, 2010

Saturday, February 13, 2010

No bailout for commercial real estate

Voltron says: Apparently everyone is assuming that commercial real estate will get bailed out, but there is very little reason for the government to do that. If a mall owner goes bust, the mall will not close . . . the bank will continue to operate the mall, so unlike a home foreclosure, there is zero impact to the community.–-why-is-the-market-ignoring-the-3-5-trillion-commercial-real-estate-market-implosion-pricing-in-another-bailout/


Voltron says: It isn't an album by "The Who", it's the next Wall St scandal.

The WSJ reports today on a study that confirms what everyone has known for years: That many firms manage their earnings, pulling all manner of shenanigans to beat the street.

The way this form of fraud was detected was rather ingenious: The lower than mathematically expected incidences of the digit "4″ in corporate earnings releases. ("X.4″ to be precise) This simple statistical insight was due to an analysis of normal random distribution. "When the authors ran the earnings-per-share numbers down to a 10th of a cent, they found that the number "4″ appeared less often in the 10ths place than any other digit, and significantly less often than would be expected by chance."


By finagling the 0.4 to a 0.5, accountants then get to round up to the next higher number. Hence, 12.4 cents is "managed" to 12.5, which then becomes rounded to 13 cents per share.

They dub the effect "quadrophobia" — fear of fours.

Friday, February 12, 2010

Serious pain in Commercial Real Estate just starting


Between 2010 and 2014, about $1.4 trillion in commercial real estate loans will reach the end of their terms. Nearly half are at presently "underwater" that is, the borrower owes more than the underlying property is currently worth. Commercial property values have fallen more than 40 percent since the beginning of 2007. Increased vacancy rates, which now range from eight percent for multifamily housing to 18 percent for office buildings, and falling rents, which have declined 40 percent for office space and 33 percent for retail space, have exerted a powerful downward pressure on the value of commercial properties.

The largest commercial real estate loan losses are projected for 2011 and beyond; losses at banks alone could range as high as $200-$300 billion. The stress tests conducted last year for 19 major financial institutions examined their capital reserves only through the end of 2010. Even more significantly, small and mid-sized banks were never subjected to any exercise comparable to the stress tests, despite the fact that small and mid-sized banks are proportionately even more exposed than their larger counterparts to commercial real estate loan losses.

A significant wave of commercial mortgage defaults would trigger economic damage that could touch the lives of nearly every American. Empty office complexes, hotels, and retail stores could lead directly to lost jobs. Foreclosures on apartment complexes could push families out of their residences, even if they had never missed a rent payment. Banks that suffer, or are afraid of suffering, commercial mortgage losses could grow even more reluctant to lend, which could in turn further reduce access to credit for more businesses and families and accelerate a negative economic cycle.

It is difficult to predict either the number of foreclosures to come or who will be most immediately affected. In the worst case scenario, hundreds more community and mid-sized banks could face insolvency. Because these banks play a critical role in financing the small businesses that could help the American economy create new jobs, their widespread failure could disrupt local communities, undermine the economic recovery, and extend an already painful recession.

There are no easy solutions to these problems.

Banks' sweetheart deals with FDIC are encouraging foreclosures

UPDATE: The FDIC has made a press release regarding this story:


IndyMac was taken over by the FDIC and sold to OneWest Bank in March/2009. Guess who the investors are behind OneWest? George Soros, Michael Dell, Steve Mnuchin (former Goldman Sachs executive), and John Paulson (hedge-fund billionaire).

Now, listen to the deal they got from the FDIC....

Basically, they purchased all current residential mortgages at 70% of par value (70% of the outstanding loan amounts). They purchased all current HELOCS at 58% of Par Value!!!

Next, in order to "sweeten the pot", the FDIC stepped in and guaranteed the following: For any residential mortgages where OneWest experiences a loss, the FDIC will step in and cover anywhere from 80%-95% of the loss. The loss is calculated using the ORIGINAL LOAN BALANCE, not the amount that OneWest paid for the loan.

Peter Schiff: Why the Meltdown Should Have Surprised No One

Audio Version:


Treasury Selloff

Youth against the banks party

Voltron says: again, how come I never get invited to these parties?

A "youth against the banks" Facebook party at a Mayfair mansion in London was broken up by officers in riot gear last night after revellers pelted police with bricks and bottles. The teenage organisers of the party conceded that the event "got out of hand" when thousands more people than expected attended the five-storey squat in Park Lane.
The [organizers] started a Facebook group last Sunday urging people to "come and live the high life in a mansion on Park Lane". The party was billed as a "youth against the banks" event as the organisers believed the home was partly owned by HSBC. The bank has yet to confirm this.

"We wanted to shake things up because the banks are kind of running the worldwhich isn't fair," said Fox, a sixth-former from north London.

"We didn't break in, we got in through an open window. It's not illegal, that's just how squatting works," he said.

Members of the Facebook group, which has since been deleted, grew rapidly. "The idea was to invite a large number of friends not the whole of London youth . . . we personally only invited about 200 each. We then watched the group grow, it didn't seem real."
...The police estimated that "in excess of 2,000 people" attended the party.

Tuesday, February 9, 2010

Home Price Rally Fading

Schadenfreude and Hypocrisy

S&P Rejects 'Too Big to Fail'

Standard and Poor's revised their credit outlook on Citigroup and Bank of America to Negative from Stable.

Traders noting that Standard and Poor's is attempting to remove the Too Big To Fail premium that has been enjoyed by these large banks, which has been a major help to their credit ratings.

They are concerned the government may not step in should another crisis occur

Chinese Generals propose selling US Bonds

The strategy is straight from "Unrestricted Warfare"

Monday, February 8, 2010

How Goldman Sachs Helped Greece to Mask its True Debt,1518,676634,00.html

Branson warns that oil crunch is coming within five years

Trillion-Dollar Tab Awaits Debtors


$1.4 trillion in [corporate debt] needs to be repaid or refinanced by 2014.

Companies with the weakest credit and the heaviest debts will have to pick up $800 billion of that tab. The rating agency Moody's calls the maturing debt an "avalanche."

Sunday, February 7, 2010

Is it currently illegal to regulate wall street?

The U.S. signed the World Trade Organization’s Financial Services Agreement which severely restricts financial regulation; however, it has not been ratified by congress.

It Is Now Mathematically Impossible To Pay Off The U.S. National Debt

Voltron says: If you don't believe it, watch "money as debt":

CourtTV program on Crazy Eddie

Voltron says: The documentary skips over how they skimmed sales tax (this is common practice) and how they used the money they skimmed when they were privately held to inflate their profits after they sold shares in the company to the public.

My previous post goes over all that, if you are interested:

Saturday, February 6, 2010

Peter Schiff explains the business cycle:

The Classical and Correct View of Business Cycles

According to the classical economists, like Ludwig von Mises and Friedrich A. von Hayek of the Austrian school, recessions should not be resisted but embraced. Not that recessions are any fun, but they are necessary to correct conditions caused by the real problem, which is the artificial booms that precede them.

Such booms, created by inflation, send false signals to the capital markets that there are additional savings in the economy to support higher levels of investment. These higher levels of investment, however, are not authentically funded because there has been no actual increase in savings. Ultimately, when the mistakes are revealed, the malinvestments, as Mises called them, are liquidated, creating the bust. Legitimate economic expansions, financed by actual savings, do not need busts. It is only the inflation-induced varieties that sow the seeds of their own destruction.

This flies in the face of modern economic thinking that regards the business cycle as the inevitable result of some flaw in the capitalist system and sees the government’s role as mitigating or preventing recessions. Nothing could be further from the truth. Boom/bust cycles are not inevitable and would not occur were it not for the inflationary monetary policies that always precede recessions.

Economists today view the apparent overinvestment occurring during booms as mistakes made by businesses, but they don’t examine why those mistakes were made. As Mises saw it, businesses were not recklessly overinvesting, but were simply responding to false economic signals being sent as a result of inflation. For that reason Mises called such mistakes malinvestments rather than overinvestments. One of my pet anecdotes makes the point clearly.

The Circus Comes to Town: How Inflation Causes Business Cycles

Let’s suppose a circus comes to a small town, temporarily increasing the population and bringing a surge of business to local merchants. One restaurant owner, however, mistakes the upturn in his business for a permanent increase in demand and proceeds to hire more workers and add a new wing. This is the boom.

All is well until the circus pulls up stakes and moves to another town, leaving our restaurant owner with surplus staff and capacity and exposing a malinvestment that must now be unwound. This is the bust.

So the bust had to occur to correct for the malinvestments of the false boom that preceded it. Had the increased patronage been the result of a real increase in the town’s population, the expansion would have been economically justified and the bust unnecessary. It is only because the owner misinterpreted the economic signals that there had to be a false boom and a corrective bust. Had the owner tried to prevent the recession by keeping the additional workers on and the new wing open, he would have been looking at bankruptcy. The recession was necessary to restore balance and maintain the viability of the business.

This analogy describes perfectly the false boom of the 1990s; just put the circus in place of the dot-com bubble. As a result of the inflation of the 1990s, start-ups flush with cash from their initial public offerings (IPOs) spent money without regard to profitability. This sent false economic signals to technology and telecommunications companies with respect to demand for their products. A wave of malinvestments ensued, which needed to be liquidated once the dot-com boom went bust.

Absent inflation, it is still possible for individual entrepreneurs to misread economic signals and make bad investments that need subsequently to be liquidated. But it is only with inflation that malinvestments are made on a national scale and result in economy-wide recessions. That is why inflation is such a destructive force in a market economy, even if its effects are not immediately reflected in rising consumer prices.

Why $15,000 Gold is Possible

Friday, February 5, 2010


Even the pros are taking a beating. The Mortgage Bankers Association, its membership expert in real estate, sold its $90 million headquarters in downtown Washington on Friday for $41 million.

Voltron says: Bwa ha ha ha ha!!

The second lien sticking-point


When mortgage modifications like Hamp come into play, that traditional priority order is reversed. The borrower is paying the Hamp-modified (i.e. lower) first lien amount, and the full second lien amount, so the second lien effectively becomes senior to the first.

When principal reduction comes into play, the problem becomes even starker. Current rules say that first lien mortgages can't be written down before the second.

Wednesday, February 3, 2010

Vacant Houses hit record

Bailout of second liens


If you thought all the bank bailouts were over, take a look at what is happening with lenders' large holdings of junior, or "second-lien," mortgages.

These loans stand behind the first mortgage and, in theory, should take a loss before first mortgages in any workout aimed at keeping a borrower in a house. However, government programs aimed at making first mortgages less burdensome have left the junior loans largely unmodified, meaning in some cases the junior lender is basically getting bailed out for free.

Zombie bank party gets interesting

"The wave of loan repurchase demands on securitization sponsors is the next area of fun in the zombie dance party, namely the part where different zombies start to eat each other," Whalen wrote in a note to clients Tuesday.

824,000 jobs will vanish of 5 Feb

Voltron says: because they never existed.

SEC asks Paulson & Co for fund information

Voltron says: John Paulson basically invented synthetic CDOs so he could short them. My hat is off to him. They even wrote a whole book about it called: "the greatest trade"


Voltron says: Countrywide: bankrupt, Washington Mutual: bankrupt, who's next?–-the-california-real-estate-foreclosure-machine-countrywide-f/

Tuesday, February 2, 2010

Interest payments = production?!? can U.S. GDP be up by a robust 5% when oil imports and rail traffic are down and unemployment is still rising? The answer, in a nutshell, is that once again we're being conned. Get this: Washington defines interest on credit card debt as "consumer spending" and adds it to GDP. So as debt soars, the gap between what we spend and what we actually receive grows, but the economy appears to improve. Eliminate that accounting trick and the numbers look like most people feel, very bad and getting worse.

Voltron says: up is down, black is white, good is bad . . .

More Homeowners Walk Away


“We’re now at the point of maximum vulnerability,” said Sam Khater, a senior economist with First American CoreLogic, the firm that conducted the recent research. “People’s emotional attachment to their property is melting into the air.”

Suggestions that people would be wise to renege on their home loans are at least a couple of years old, but they are turning into a full-throated barrage. Bloggers were quick to note recently that landlords of an 11,000-unit residential complex in Manhattan showed no hesitation, or shame, in walking away from their deeply underwater investment.

The Deficit

Monday, February 1, 2010

Tim is back in

President Obama literally embraced the (failed, tax dodging) Treasury Secretary before last week's State of the Union address (and did not kiss him on both cheeks - "Godfather" style)

Treasury Department Is Already Saying "Volcker Rule" Won't Change Goldman Sachs