Is Financial Instability The New Normal?

"The financial world is officially going crazy. Can you believe what is going on out there right now? Financial markets have been jumping up and down like crazy for months and this is creating a lot of fear. Other than during the financial crisis of 2008, in the post-World War II era have we ever experienced as much financial instability as we are seeing right now? Should we just accept that massive financial instability is going to be part of "the new normal" in the financial world? The wild swings that we are witnessing in the global financial marketplace are making a whole lot of people very nervous right at the moment. When markets go up, they tend to do it slowly and steadily. When markets go down, a lot of times it can happen very rapidly. Also, as I have mentioned before, more major stock market crashes happen during the fall than during any other time of the year. The last major financial crisis happened during the fall of 2008, and things are starting to look a little bit more like 2008 with each passing day. The last thing the global economy needs right now is another major financial meltdown, but that may be exactly what we are about to get..."

at http://theeconomiccollapseblog.com/archives/is-financial-instability-the-new-normal

Economists React: ‘Strongest Sign’ of Europe Double Dip

"Financial data company Markit said its preliminary survey of purchasing managers in the 17-nation euro zone fell into contraction territory – a reading below 50 – this month, marking the first reading in contraction territory since the euro zone climbed out of recession in the third quarter of 2009, and raising new fears of a double-dip. Below, economists react.

The fall in the euro-zone composite PMI below the theoretical 50 “no-change” barrier provides the strongest sign yet that the region is on the cusp of recession. … [T]he latest figures support our view that the consensus outlook for growth is far too optimistic – we continue to expect a fall in euro-zone GDP of about 0.5% next year. – Ben May, Capital Economics

The employment sub-indices for manufacturing and services both weakened in September but remained above the 50 level, at 51.3 on both. However, this appears to reflect surprising strength in the German employment sub-indices this month, which we suspect may not last given the deterioration in economic conditions. – Ken Wattret, BNP Paribas

The data imply that the manufacturing sector is set to experience recession, given that the quarterly average of the euro area PMI for Q3 was at 49.2 (vs. 54.9 in Q2) and given the sharp further deterioration in the gap between new orders and finished goods inventories, which we consider to be a leading indicator. – Barclays Capital Economic Research

The marked weakening in euro-zone economic activity since the early months of the year shows no sign of easing, and it is evident that the previously buoyant manufacturing sector is suffering markedly. – Howard Archer, IHS Global Insight

Today’s PMIs will probably increase pressure on the ECB to cut rates soon. However, barring a further significant escalation of market tensions, we still believe that they are unlikely to deliver on the rate front, as their response at this stage will probably consist in stepping-up unconventional measures. – Marco Valli, Unicredit Research"

at http://blogs.wsj.com/economics/2011/09/22/14770/?mod=WSJBlog

SOROS: WE ARE IN A DOUBLE DIP RECESSION

"Few people have nailed the recurring credit crisis better than Soros. Most importantly, his global perspective provides him with a unique outlook for the entire global economy. In an interview with CNBC yesterday Soros made some blunt comments:

• The USA is already in a double dip recession.
• The USA needs more fiscal stimulus.
• Europe could experience TWO or THREE periphery defaults. They would most likely remain in the EMU and default would be controlled. Uncontrolled default could result in defection.
• The Euro currency should remain fairly strong even in the case of defaults.
• The European leaders are way behind the curve here.
• A form of a central Treasury is required in Europe
• This is a “more dangerous” situation than Lehman Bros.
• The EMU will do what it takes to hold it all together..."

at http://pragcap.com/soros-we-are-in-a-double-dip-recession

FEDEX: MORE SIGNS OF SLOWING ECONOMIC GROWTH

"FedEx, an economic bellwether reported earnings this morning. In general, the report was fairly good, but their commentary has taken a much more negative tone than we’ve seen in recent quarters. As one of the world’s largest transportation firms, FedEx is a superb indicator of global economic health. The story, according to them, is deteriorating, but not collapsing:

“Revenue and earnings increased significantly in the quarter due to strong FedEx Ground performance, improved FedEx Freight results and the continued success of the company’s yield management actions,” said Frederick W. Smith, FedEx Corp. chairman, president and chief executive officer. “While the economic environment is challenging, we remain confident FedEx will improve earnings, margins and cash flows this fiscal year.”

…”The U.S. and global economy grew at a slower rate than we anticipated during the quarter,” said Alan B. Graf, Jr., FedEx Corp. executive vice president and chief financial officer. “While FedEx Ground and FedEx Freight achieved improved operating results despite lower than expected growth, the more rapid decline in demand for FedEx Express services, particularly from Asia, outpaced our ability to reduce operating costs. We have slightly reduced our earnings forecast to reflect current business conditions and are aggressively working to adjust our cost structure to match demand levels.”

Over the last few years, we’ve been quick to point out the disparity between domestic and international economic performance. FedEx again nicely summarizes this disparity. Total US package volume/pounds declined at a rate of 3% compared to last year while international volume/pound grew at 11%..."

at http://pragcap.com/fedex-more-signs-of-slowing-economic-growth

WELCOME TO THE CASINO…

"I don’t have much value to add in this story, but I just wanted to point out something that is probably rather obvious, but perhaps not fully appreciated. The last two months have been truly incredible in terms of market action. If you look at just the last 8 weeks we’ve seen a near waterfall 19% decline, followed by a 10% rally, followed by a 7% decline, followed by a 10% rally, followed by an 8% decline, followed by a 7% rally and then the 8% decline of the last two days. Whew.
I still stand by my September 10th comment:

“I would go so far as to say that the risks are so enormous here that the water is simply not worth even dipping a toe into. As investors we have to recognize that we’re in the business of taking calculated risks and not risking capital based on a roll of the dice…”

No one is taking calculated risks at this juncture. The macro picture is in such disarray that anyone betting long/short here is just standing around a spinning wheel hoping they bet on the right color. The speed at which this wheel is spinning though, it might just fly off the table! At least in Vegas they give you free drinks! As Victor Ortiz learned last Saturday night, “protect yourself at all times” – appropriate approach given the incredible market and economic environment we are experiencing…."



at http://pragcap.com/welcome-to-the-casino

This Time is Different, An Update

"The following provides an update on the great research that Carmen Reinhart and Kenneth Rogoff conducted regarding the build-up and subsequent bust of historical financial crises. While their work on crises was largely conducted in the time period leading up to and directly after the financial meltdown in late 2008, there does not appear to be any updates now that the U.S. economy has been in technical recovery for over two years at this point. Some of the facts and figures cited in This Time is Different and the authors’ academic papers were still a work in progress at publication date given that events were ongoing. With the benefit of hindsight, a longer time span and revised economic data (always a luxury), I have recreated and updated some of Ms Reinhart and Mr Rogoff’s work. Specifically, what follows (PDF – full version) is based on their draft paper for an American Economic Association presentation in January 2009 “The Aftermath of Financial Crises.“

In order to not bury the lede, first up is a quick summary of the U.S.’ current experience relative to historical financial crises, followed later by graphs for each individual measure.
All told, the recent U.S. financial crisis looks very similar to the historical crises as detailed by Reinhart and Rogoff – just your “garden variety, severe financial crisis” if you will. Across each of the five measures discussed in the Aftermath paper, the current U.S. experience is of the same magnitude..."

at http://oregoneconomicanalysis.wordpress.com/2011/09/19/this-time-is-different-an-update/

Hello Global Recession

"If you did not know it before, you should know it now: The global economy is in recession..."

US Treasury Yield Curve



Germany Government Bond Yield Curve



at http://globaleconomicanalysis.blogspot.com/2011/09/hello-global-recession.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+MishsGlobalEconomicTrendAnalysis+%28Mish%27s+Global+Economic+Trend+Analysis%29

Is the US Monetary System on the Verge of Collapse?

"David Galland, Casey Research writes: Tune into CNBC or click onto any of the dozens of mainstream financial news sites, and you’ll find an endless array of opinions on the latest wiggle in equity, bond and commodities markets. As often as not, you'll find those opinions nestled side by side with authoritative analysis on the outlook for the economy, complete with the author’s carefully studied judgment on the best way forward.

Lost in all the noise, however, is any recognition that the US monetary system – and by extension, that of much of the developed world – may very well be on the verge of collapse. Falling back on metaphor, while the world’s many financial experts and economists sit around arguing about the direction of the ship of state, most are missing the point that the ship has already hit an iceberg and is taking on water fast.

Yet if you were to raise your hand to ask 99% of the financial intelligentsia whether we might be on the verge of a failure of the dollar-based world monetary system, the response would be thinly veiled derision. Because, as we all know, such a thing is unimaginable!

Think again..."

at  http://www.marketoracle.co.uk/Article30530.html

Italy – bite-sized CDS, taste the volatility

"The Markit iTraxx SovX CEEMEA contains a basket of 15 sovereigns from Central and Eastern Europe as well as the Middle East. Italy’s CDS spread is now wider than all but one of them – Ukraine.
Looking at the Markit CDX.EM, only Argentina, and once again the Ukraine, can offer chunkier spreads. Outer limits, indeed.

It is, of course, not just Italy that has moved significantly wider. As the chart below shows, Spain had been wider than its benchmark index for some time. Italy, meanwhile, punched through the index and then punched through Spain. And of course no such chart would be complete these days without the core EFSF guarantors, France and Germany..."

at http://ftalphaville.ft.com/blog/2011/09/21/682301/italy-bite-sized-cds-taste-the-volatility/

Euro Flight Continues: Lloyd’s of London Pulls Euro Bank Deposits; Dollar Swap Premium Highest in 3 Years

"Major mistrust of European banks continues. Since the ECB will not publish banks needing emergency cash, all banks might be considered suspect. Then again, it's hard to keep stories quiet, and most know which banks have received emergency funding.

Regardless, the run continues as Lloyd’s of London Pulls Euro Bank Deposits

Lloyd’s of London, concerned European governments may be unable to support lenders in a worsening debt crisis, has pulled deposits in some peripheral economies as the European Central Bank provided dollars to one euro-area institution.

“There are a lot of banks who, because of the uncertainty around Europe, the market has stopped using to place deposits with,” Luke Savage, finance director of the world’s oldest insurance market, said today in a phone interview. “If you’re worried the government itself might be at risk, then you’re certainly worried the banks could be taken down with them..."

at  http://globaleconomicanalysis.blogspot.com/2011/09/euro-flight-continues-lloyds-of-london.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+MishsGlobalEconomicTrendAnalysis+%28Mish%27s+Global+Economic+Trend+Analysis%29

Why we’re in the dark about the mortgage market

"We have a severe shortage of information about a $10.5 trillion market.

Jesse Eisinger has a great column at ProPublica about just how inscrutable bank data is — if you haven’t read it, you should. A short summary: even the simplest of big bank statements amount to “guesswork,” Eisinger writes.

Eisinger’s one of a precious few writers who’ve been frank about the banking industry’s black box of data. Read enough of Eisinger or Bloomberg’s Jonathan Weil, you begin to suspect that if analysts, reporters and executives were to be honest, they’d admit there is no reasonable way for even trained investors to make an accurate judgement on the health of a large bank. Here’s Eisinger (and you can almost feel the strain from reading SEC documents):

Day after day, [banks] push out news releases that run to dozens of pages. They prepare reams of special presentations for investors, the most recent of which from Wells ran to 51 pages, on top of a 41-page news release. The SEC filing from the quarter was 162 pages.
The numbers and presentation differ slightly in all of them and often differ from other banks’ presentations, stirring a struggle among outsiders to compare apples and bananas. No professional admits this publicly, but many investors and analysts privately acknowledge that they can’t fully track the data gushing each quarter from the nation’s banks.

And while bank disclosures are intelligible only for those versed in financial arcana, there’s one indicator of banking system’s health that may be even more inscrutable: mortgage servicing.

Bad mortgages and shoddy foreclosures have cost America’s five biggest banks as much as $66 billion, according to a recent estimate by Bloomberg. Assuming we’d be able to put aside concerns about the legality of foreclosures — and that’s a big if — you’d be hard pressed to find recent and reliable specifics about how our banks are actually dealing with bad loans..."

at http://blogs.reuters.com/felix-salmon/2011/09/19/why-were-in-the-dark-about-the-mortgage-market/

10 million more mortgages set to default

"Roughly 10.4 million mortgages, or one in five outstanding home loans in the U.S., will likely default if Congress refuses to implement new policy changes to prevent and sell more foreclosures, according to analyst Laurie Goodman from Amherst Securities Group.

At the end of the second quarter, more than 2.7 million long-delinquent loans, others in foreclosure and REO properties sat in the shadow inventory, more than double what it was in the first quarter of 2010 (Click to expand the chart below). With the market averaging roughly 90,000 loan liquidations per month, it would take 32 months, nearly three years, to move through the overhang..."

at http://www.housingwire.com/2011/09/20/amherst-to-senate-10-million-more-mortgages-set-to-default?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+housingwire%2FuOVI+%28HousingWire%29

Ranieri: Housing could sink economy

"The housing market’s problems aren’t going away, but policy makers and industry officials appear to be running away from them, mortgage-bond pioneer Lewis Ranieri told an audience of financial industry executives on Monday.

Mr. Ranieri, considered by many to be the godfather of the U.S. housing-finance market for his role developing the mortgage-backed security, didn’t pull any punches in an address to the North Carolina Bankers Association in Raleigh. The industry and policy makers are engaged in “self-interested bickering” over who will bear the cost of needed overhauls while the housing market is rotting, he said..."

at http://www.housingwire.com/2011/09/20/ranieri-housing-could-sink-economy?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+housingwire%2FuOVI+%28HousingWire%29

DOLLAR FUNDING COSTS RISE AS CENTRAL BANKS’ PLAN SEEN AS INADEQUATE

"European banks are finding dollars an expensive commodity once again, as the afterglow fades from a coordinated central bank plan to improve liquidity.

Swapping euros for dollars now costs about as much as it did before the European Central Bank said Thursday it would work with counterparts in the U.S., Europe and Japan to provide dollars for banks struggling to access U.S. currency. The three-month euro-dollar swap is quoted at minus 90.5 basis points, from minus 76.5 points on Thursday. The swap was at minus 92 points before the ECB announcement.

When European banks lose access to dollars, they have to issue debt in euros and swap it into US dollars, paying extra for this exchange. This extra amount is measured by the basis swap.
A growing belief that Greece will default on its debt–and uncertainty about the impact on other troubled euro-zone economies and banks–is once again driving up dollar funding costs. A teleconference between Greek officials and the troika of creditors–the European Central Bank, the International Monetary Fund and the European Union–is scheduled for later Monday to ascertain whether the country has done enough to get its finances back on track. At stake is the release of the next instalment of aid–EUR8 billion–without which Greece has said it will run out of cash by the middle of October.

“With more than 90% chance of default by Greece, this is just the yo-yo effect,” said Kedric Dines, head of interest rate derivative sales at Mizuho Corporate Bank in New York. “We’ll see a fickle market reacting to all the news.”

at  http://pragcap.com/dollar-funding-costs-rise-as-central-banks-plan-seen-as-inadequate

CREDIT UPDATE – CONTROLLED DEMOLITION

"Demolition is the tearing-down of buildings and other structures, the opposite of construction. Demolition contrasts with deconstruction, which involves taking a building apart while carefully preserving valuable elements for re-use.”

The respite was short lived in the credit space and the tone, was once again about widening spreads.
Itraxx 5 year crossover index (High Yield, wider by 41 bps to 756 bps:..."

 

at http://pragcap.com/credit-update-controlled-demolition

KILLER WAVES AND DANGEROUS MACD’S

"Albert Edwards has been hard at work in recent weeks studying the technical landscape and the uber bear has found what he claims is more evidence of the peak in the bull market within a secular bear market. In two separate research notes this week he described two popular long-term indicators which appear to be giving an early warning signal. The first signal is the monthly MACD which is giving just its third sell signal in the last 15 years (via Business Insider):

“The chart below shows the monthly S&P together with the MACD.
For those normal people who don’t know what the MACD is or even what it stands for, it is the Moving Average Convergence-Divergence. It is a momentum oscillator closely followed by many market participants. When the faster moving mav breaks the slower moving mav (up or down) we get a key buy or sell signal.
We may be about to break downwards on the monthly S&P chart which would give us a HUGE sell signal as was the case in Nov 2007 and the end of 1999 (also see attached note on The Killer Wave signal). If the S&P cracks we will be at 1.5% 10y US yields within a few days and probably heading to 1%. Watch this space.”

at  http://pragcap.com/killer-waves-and-dangerous-macds

Late Payments at Spanish Banks, Cooperatives, Credit Institutions Hits 7%, Highest Since 1995

"Courtesy of Google Translate and also my friend Bran who lives in Spain, please consider Financial System Late Payments Verge on 7%.

The delinquency rate of the Spanish financial system credit (banks, cooperatives and credit institutions) rose in July to 6.936% against 6.690% in June, according to data released today by the Bank of Spain.

The delinquency rate remains at its highest level in 16 years, since February 1995. When compared with July 2010, the data show a significant increase in bad debts, because in that month was in the 5.483%.

Of the total of 1.79 billion in loans, doubtful loans are 124.618 million, compared with 100.527 million from the same month last year..."

at  http://globaleconomicanalysis.blogspot.com/2011/09/late-payments-at-spanish-banks.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+MishsGlobalEconomicTrendAnalysis+%28Mish%27s+Global+Economic+Trend+Analysis%29

Real Estate Delinquency Rate Hits 17.7% in Spain, Total Delinquencies Approach 7%

"Via Google Translate, Late payment of Real Estate Loans Hits Record 17.7%

More than three years after the bursting of the housing bubble, banking has yet to digest the glut of brick that was in the boom years. In fact, instead of improving, deteriorating assets linked to this sector is growing by leaps and bounds.

As reported today by the Bank of Spain , delinquencies in the housing sector has risen in the second quarter in more than two percentage points to 17.8% of total loans to these activities. Furthermore, as has been happening since the beginning of the crisis , the percentage with which they closed in June represents the highest level of arrears that collect statistics supervisor, which collects data disaggregated by sector since 2000 and, therefore, not reflect the evolution of the crisis of the early 90's..."

at  http://globaleconomicanalysis.blogspot.com/2011/09/real-estate-delinquency-rate-hits-177.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+MishsGlobalEconomicTrendAnalysis+%28Mish%27s+Global+Economic+Trend+Analysis%29

Point of No Return: Will it be Japanization, Monetization, or Crisis 2.0?

"I believe the Eurozone will break apart. Eurobonds are dead, so are fiscal unions. The question is really what path the crisis takes.

Via email, Saxo Bank chief economist Steen Jakobsen outlines several scenarios in a series of three emails that I spliced together.

There are three major ways of dealing with this crisis:

1. Japanization – A Slow Death - Like Japan. Accept deflation, along with slow gradual restructuring, massive fiscal deficits, negative real-rates, housing prices lower than 30 years ago and a stock market valuation at less than 50 per cent of its peak
2. Crisis 2.0 – A Forest Fire of deleveraging, political and economic changes created by necessity and need for moving forward. This scenario features a deep one-to-three year recession followed by better debt to equity, more realistic future expectations, and a public sector under control.
3. Monetization – The extend-and-pretend forever solution, buying time – more of the same, patch work solutions, slowly forcing Europe towards fiscal consolidation not changing the Maastricht but the ECB charter to allow it to be lender-of-last-resort. This is the final phase of ‘Maximum Intervention’ – bigger and bigger direct support on liquidity(as seen today) and no impact on the solvency..."

at  http://globaleconomicanalysis.blogspot.com/2011/09/point-of-no-return-will-it-be.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+MishsGlobalEconomicTrendAnalysis+%28Mish%27s+Global+Economic+Trend+Analysis%29

The Unusual Case of Euroland

"The Non-Sovereign Nature of the Euro and the Problems Raised by the Global Financial Crisis

By L. Randall Wray

In the next series of blog posts, we will look in more detail at fiscal and monetary operations of a nation with a sovereign currency. Before we do that, let us briefly examine the case of the Euro. Let me say that we will not address the unfolding crisis across Euroland in detail. The reason is that events are moving too quickly and we do not know where they will lead. This primer in some sense needs to be “timeless”—anything specific that we discuss will quickly become outdated. The fundamental point to be made here is that the Euro arrangement was flawed from the beginning. Crisis was inevitable—as I have been writing since the mid 1990s. There is no way the system as designed could possibly survive a significant financial crisis. And a crisis began in 2007. Due to flaws in the set-up, it was obvious (at least to those who adopted MMT) that the original arrangement was not sustainable. We could not say for sure how the resolution would turn-out, but a fundamental change would be required.

At one end of the spectrum of outcomes, the European Monetary Union would simply be dissolved and each nation would return to a sovereign currency. At the other end, a “more perfect union” would be created. We always argued that separating fiscal and monetary policy was the basic problem. Almost no one would listen to us. A notable exception was the economist Charles Goodhart. Now, in fall 2011, it has become common to blame the separation of monetary and fiscal policy for the crisis of the EMU. It is finally recognized that an arrangement in which monetary policy is unified under the international ECB, but fiscal policy is left to individual nations, was the primary flaw. Most economists still do not recognize, however, that it comes down to currency sovereignty. It is not just that you need unification of fiscal policy; you need a sovereign currency issuer that will take responsibility for fiscal policy. Extremely slow recognition of that problem has now dragged out the crisis for four years; and as of Fall 2011 it still is not clear that resolution is politically possible..."

at http://www.creditwritedowns.com/2011/09/unusual-case-of-euroland.html