A couple of stories are of interest today, both advanced by two of the top 10 economic bloggers. The first was covered by Mike (MISH) Shedlock, who wrote about the new accounting rules change aimed at forestalling the ongoing commercial real estate collapse. In effect, the FDIC and regulators have dicided to "extend and pretend" that the crisis isn't happening. Wall Street Journal reported: "Federal bank regulators issued guidelines allowing banks to keep loans on their books as "performing" even if the value of the underlying properties have fallen below the loan amount." So underwater loans that are still squeaking by in generating enough rental income to service the debt will not have to be written down as losses or restructured to current market values.
MISH comments: "2,600 banks and thrifts have commercial real-estate-loan portfolios that exceed 300% of total risk-based capital and regulators ignored it every step of the way. Now that loan losses are soaring, regulators came up with new rules so that banks can pretend the losses are not real."
Doug Hoerning, Senior Editor of Casey Research writes: "What do you do if, 85-90% of the entire commercial real estate market is under water relative to its financing? What happens to a property when its value drops way below the loan, a seller can’t get enough money to get out, a buyer can’t raise enough money to get in, and the bank can’t afford to foreclose? Simple. It just sits there, carried along on the bank’s books at some inflated “mark to fantasy” price that makes the institution’s balance sheet look passable. The industry even has a catchphrase for the situation: “A rolling loan gathers no moss.” See how gentleman's agreements work?
Next comes Karl Denninger, who's been watching what he calls "the Dollar Carry Trade" the last few days. Basically, with the Fed setting interest rates at zero, banks can get money for nothing and "carry" it elsewhere to lend at higher rates of interest. They can also use it to buy assets like commodities, gold, oil futures, and all this activity drives up the price of these things. This has been moving more dollars around and, as a consequence, the dollar has lost value against other currencies, particularly the Euro. Our old greenback has, in fact, lost 20% of its value since March of 2009! What this also means is that stocks, commodities, oil, gold, all take more dollars to buy than it took last March. Hence we see stock prices bid up, and presto! We get an apparent market rally. Denninger puts up charts that show the current rise in the S&P 500 exactly correlates to the line of the diminishing dollar. This is something any trained statistician could not fail to see. He writes of the chart presented here: "Notice the near-perfect inverse correlation. The Dollar goes up, the market goes down. The Dollar goes down, the market goes up."
Denninger's comment: "The collapsing dollar is a policy. It is the means by which the stock market has been propped up in an insane attempt to "instill confidence" in "economic recovery" that, on balance, is clearly not occurring. As a consumption-based economy we cannot recover until and unless employment recovers and we replace debt-based consumption with earnings-based consumption." The intrepid Mr. D. predicts that this dollar carry trade will soon begin to manifest in much higher energy prices for oil, gasoline, natural gas, heating oil, repeating the post Katrina woes those $4 / gallon days brought us a few years back. This time, try $6/ gallon.
The problem with a deliberately weakened dollar? Most people's income cannot keep pace with the slide. Has your income increased 20% since March? That's what it would have to do to give you the same buying power today that you had just 9 months ago. As the dollar weakens we will no longer enjoy cheap prices for imports, and prices will rise here. What has saved us thus far from a 20% price inflation? Simple. The Chinese make most everything we buy, and the value of the Yuan is pegged to that of the dollar.
The point of these two stories? It is clear that current policy simply refuses to admit losses that have already occured and is engineering or manipulating a false stock market rally. Neither policy corresponds to anything real happening in the economy. The bad loans remain bad, even if gentlemen's agreements pretend they are not. The sagging dollar is what makes stocks go higher, not the underlying value of the companies based on healthy economic growth. The "recovery" is therefore a blend of one part denial, and one part trick accounting. Lather, rinse, repeat.
It's all a deliberate hocus pocus magic trick. Yet these gentlemen's agreements can also unwind with terrible results. What happens if China, with vast reserves of dollars, doesn't like the fact that their dollar holdings have also lost 20% of their value in the last 9 months? Many analysts now predict that there will eventually be a move to "dump dollar assets," which will come home to roost in a near worthless US dollar. What they don't clearly predict is when this might happen, most hedging their bet by saying 2 to 5 years.
MISH comments: "2,600 banks and thrifts have commercial real-estate-loan portfolios that exceed 300% of total risk-based capital and regulators ignored it every step of the way. Now that loan losses are soaring, regulators came up with new rules so that banks can pretend the losses are not real."
Doug Hoerning, Senior Editor of Casey Research writes: "What do you do if, 85-90% of the entire commercial real estate market is under water relative to its financing? What happens to a property when its value drops way below the loan, a seller can’t get enough money to get out, a buyer can’t raise enough money to get in, and the bank can’t afford to foreclose? Simple. It just sits there, carried along on the bank’s books at some inflated “mark to fantasy” price that makes the institution’s balance sheet look passable. The industry even has a catchphrase for the situation: “A rolling loan gathers no moss.” See how gentleman's agreements work?
Next comes Karl Denninger, who's been watching what he calls "the Dollar Carry Trade" the last few days. Basically, with the Fed setting interest rates at zero, banks can get money for nothing and "carry" it elsewhere to lend at higher rates of interest. They can also use it to buy assets like commodities, gold, oil futures, and all this activity drives up the price of these things. This has been moving more dollars around and, as a consequence, the dollar has lost value against other currencies, particularly the Euro. Our old greenback has, in fact, lost 20% of its value since March of 2009! What this also means is that stocks, commodities, oil, gold, all take more dollars to buy than it took last March. Hence we see stock prices bid up, and presto! We get an apparent market rally. Denninger puts up charts that show the current rise in the S&P 500 exactly correlates to the line of the diminishing dollar. This is something any trained statistician could not fail to see. He writes of the chart presented here: "Notice the near-perfect inverse correlation. The Dollar goes up, the market goes down. The Dollar goes down, the market goes up."
Denninger's comment: "The collapsing dollar is a policy. It is the means by which the stock market has been propped up in an insane attempt to "instill confidence" in "economic recovery" that, on balance, is clearly not occurring. As a consumption-based economy we cannot recover until and unless employment recovers and we replace debt-based consumption with earnings-based consumption." The intrepid Mr. D. predicts that this dollar carry trade will soon begin to manifest in much higher energy prices for oil, gasoline, natural gas, heating oil, repeating the post Katrina woes those $4 / gallon days brought us a few years back. This time, try $6/ gallon.
The problem with a deliberately weakened dollar? Most people's income cannot keep pace with the slide. Has your income increased 20% since March? That's what it would have to do to give you the same buying power today that you had just 9 months ago. As the dollar weakens we will no longer enjoy cheap prices for imports, and prices will rise here. What has saved us thus far from a 20% price inflation? Simple. The Chinese make most everything we buy, and the value of the Yuan is pegged to that of the dollar.
The point of these two stories? It is clear that current policy simply refuses to admit losses that have already occured and is engineering or manipulating a false stock market rally. Neither policy corresponds to anything real happening in the economy. The bad loans remain bad, even if gentlemen's agreements pretend they are not. The sagging dollar is what makes stocks go higher, not the underlying value of the companies based on healthy economic growth. The "recovery" is therefore a blend of one part denial, and one part trick accounting. Lather, rinse, repeat.
It's all a deliberate hocus pocus magic trick. Yet these gentlemen's agreements can also unwind with terrible results. What happens if China, with vast reserves of dollars, doesn't like the fact that their dollar holdings have also lost 20% of their value in the last 9 months? Many analysts now predict that there will eventually be a move to "dump dollar assets," which will come home to roost in a near worthless US dollar. What they don't clearly predict is when this might happen, most hedging their bet by saying 2 to 5 years.
