The Ostrich Head

Chinese now have more money to invest than Americans

     According to the Chinese government statistics, the average urban Chinese household has about $1,300 in disposable income to invest.  Multiply that by 194 million urban families and you get $253 billion per year!

     Meanwhile, in the US they are saving just 80% more per family, which multiplied by 99 million urban families, takes it to $232 billion.

      Amazing ain't it!

     Two things that REALLY jump out are:

1.  If both populations invested all their available disposable income in US government notes and bonds, a full year's worth of savings would finance the US government for about two months

2.  Given that the average household income in urban China is around $2,200 after tax, the Chinese are saving around 60% of their income.

     Sure, this sounds absurdly unlikely.  But these are official statistics we're talking about.  I can't for the life of me imagine a government massaging it's own statistics!

China disposable income to invest per family: $1.300
China's population:1,338,612,968
China's urban population: 602 million
Average family size: 3.1
Number of families: 194.3 million

Savings available to invest: $253 billion 

Median US family income: $52,233 Savings rate: 4.5% (this year's average to date, up from 1.75% in 2007!)
Disposable income to invest: $2,350
US families: 116 million
US urban families: 98.6 million

Savings available to invest: $232 billion

AIG Lawsuits: The Scammed Trying to Scam the Scammers

    When the financial crisis hit the markets mid last year, a medium-sized ponzi scheme unravelled and Bernie Madoff was sentenced to 150 years prison for his $50 billion scam.

    At the same time a significantly larger ponzi scheme at AIG unravelled as well -- to the tune of around $5 trillion, or 100 Madoffs -- with the result that the CEO got a harsh talking to and a severe reprimand.  Any more, he was told, and his job would be on the line.

    Well damn, if you add up ALL the criminals that have ever been arrested and charged for robbery, the total that they've stolen won't come close to $5 trillion -- that much physical cash doesn't actually exist.

    Still, after ripping off investors, ripping off clients, and conniving with the US government to then rip off tax payers, it's only fair that AIG gets targeted by a few lawyers who are too old to chase ambulances any more.

    So, here's what's happening in the Land of the Free, the Bastion of Liberty, and the Traincrash of Litigation.

    Lawyers representing Robert Horowitz filed case against AIG for not paying up for losses resulting from the Madoff scandal.

    Hmm… Let's read the text of the insurance cover:

This contract for home and contents insurance between Robert Horowitz and American International Group is…

    It's home and contents insurance for Chrissake! 

    And their lawyers reckon it covers losses on the trust fund that they invested with Bernie Madoff!

    Usually, I'd just laugh at cases like this and say, "Only in the USA."  But on this occasion, I really do hope these guys win the law suits.  AIG committed suicide, was resuscitated, killed, and resuscitated again… with the same idiotic management. 

Hopefully (though I'm not all that hopeful), the government will learn that either you let the company go, take the management out the back and shoot them all, or give the whole mess to some other insurance company to run.  Preferably as an insurance company rather than a hedge fund.

    Good luck the scammers -- all of 'em!

What's up with all these "confidence" indices?

    Last week the Consumer Confidence Index fell, sending the stock market down 200 points in a day.  This is absurd.

    I mean, as a consumer, yeah, I feel confident. 

    "Just a minute," you say, "this is a scientifically designed, statistically accurate study." 

    Of what?  How consumers feel?

    "No you idiot, how confident they are."

    Isn't confidence a feeling, or something unscientific? 

    "Not in this study.  We give it a number -- accurate to two decimal places!"

 

I have much to learn.  Let's take a US consumer confidence survey:

Q1: Do you expect to buy a big ticket item in the next three months?

Q2: Do you feel your financial position is improving or getting worse?

Q3: Do you get a warm fuzzy feeling that the economy is improving when you see President Obama giving a speech?

Q4: Do you believe in the existence of Green Shoots?  How about the Easter Bunny?

Q5: Do you feel that it is your patriotic duty to spend at least 99% of your income to help the country's GDP increase?

Q6: Do you feel more confident in Obama than Bush or less?

Q7: What media channels do you use to glean information and form an opinion about the world economy?

Q8: Apart from FOX News.

Q9: Are you likely to ever watch news on CNN, CNBC, ABC, BBC, CBC, NBC, or channel 2?

Q10: Do you feel more confident that you don't need these news sources than last year, or less confident?

 

    Maybe I'm being a bit unfair towards our North American cousins… but I doubt it.

    One reason that I brought this up was that the Building confidence index shot up, just as just building starts fell in July.

Let's have a look at housing:

    The Commerce Department on Tuesday said housing starts fell 1% to an annualized 581,000 units, which was below the market expectation of 600,000 units.

    Let's see, 300 million people growing at an annual rate of about 0.975% means the US needs housing for another 3 million people every year.

    581,000 housing units should be more than enough to cater for about half that.  Wow… I feel confident.

    Except…. There is a housing overhang of about 15 MILLION housing units.  The US will have to grow at the same pace for at least five years to soak up the excess.

    Back in 2007, the rate of housing starts was 2.2 million units -- about 2 for every 3 new Americans.  And these were family units.

    So, one may ask, what on earth caused builder confidence to continue to climb in August, as the headlines screamed.

    Well, the builder confidence index rose two points from 16 to 18.  "Excellent," said the editor, "That's headline material, that is."

    Buried way back in the bottom of some articles you'll find that this is a score not out of 20 or 30, but out of 100!

    Imagine that.  A score of 49 indicates that more builders consider the future "poor" than "good". 

    A score of 25 indicates that most builders consider the industry prospects "piss poor".

    A score of 16 indicates that the industry in way deep in the toilet and that in the building community, 16% of people are stupid -- as in the rest of the population.

    But the rise from 16 to 18 -- wow… that's headline stuff?  More likely the unemployed builders have been watching FOX News and increased the percentage of idiots in the trade.

    With an outlook that isn't worth pissing on, I do hope Obama isn't pinning his hopes on the building industry to recover.

    With the economy shrinking and jobs going, people are moving back into their parents' places and actually increasing the number of empty homes across the US. 

    While the market inventory has fallen to about 4.7 million units, the shadow inventory -- houses that people want to sell but aren’t on the market -- is probably growing faster than the official overhang is shrinking.

    But don’t mention any of this.  Let's just be grateful that the home builders confidence index shot up by 12.5% last month!

The new credit card regulations are precisely what the US needs

    The Credit card Accountability Responsibility and Disclosure (CARD) Act aims to do two things:

1. Help out consumers to make sure they don't get ripped off by banks and ensure they can spend a bunch more money they don't have to help the economy.

2. Increase the borrowing authority of the Federal Deposit Insurance Corporation (FDIC) from $30 billion to $500 billion and the NCUA from $100 million to $18 billion

And here's what it will achieve:

1. Force banks to rip off consumers even more and ensure they have less credit to spend to help out the economy.

2. Make the FDIC and NCUA even more attractive policy tools than they are now.

 

Let's start with the credit cards:

    Some of the most significant changes are:

Issuers can't charge punitive interest rates for late payment until payment is 60 days overdue.

    So, if you are short on money, no hurry to pay off your credit card, because the bank can't create any incentive for you anyway.

Credit card issuer must review the cardholder's account six months after increasing the interest rate, and return the interest rate to the previous lower level if the cardholder has been on-time with payments.

    So, if the bank thinks you are high risk, or interest rates go up, and the issuer increases the interest rate, then just make payments on time and the interest rate goes down again!  Awesome!

A ban on universal default (if one credit card goes into default, all others are considered to be in default)

    So, if you are headed for bankruptcy, just blow the credit limit on one card at a time.  Sure, you'll have to pay punitive interest rates one (after it's two months overdue) but the others will be just fine.  If you have ten credit cards with $15,000 limit on each one, just buy gold bullion with them one at a time until you have 155 ounces of gold, stash it in a safe place, and declare chapter 13.  There's nothing the bank can do about it -- except cancel all your credit cards in a hurry!

 

    The issuers' response to these changes is pretty obvious.  Bank risk management systems will be adjusted to make sure that risky customers get less credit, those with multiple cards get an aggregate credit limit instead of an individual card limit, and interest rates will be set higher on new cards to allow for interest rate rises.

    All this will make credit cards harder to obtain, make expanding credit limits much harder, and will result in issuers drastically reducing credit limits between now and February when it becomes law.

    The net effect of course is that because of the higher risk these provisions imply, banks will extend less credit to fewer consumers at a higher cost, and spending will decrease.

    This is no doubt the opposite of what the bill intended, but hey, this is the government we're talking about!

 

And onto section 603…

    Now, even though this is ostensibly a credit card act, the government did its usual trick of sneaking a few hundred billion bucks into the back of the bill.

    In this case, it was section 603 -- the last section -- just in case some senator decided to actually try reading the bill from page 1.

    The FDIC stuff is pretty obvious.  Since the government increased the amount insured in banks from $100,000 to $250,000 and included money market deposits as well, there has been no increase in FDIC reserves.  However, the 1,567% increase seems a bit on the steep side when the guarantees only covers about 150% more. 

    That's largely because the FDIC -- like nearly every other government financial corporation -- has become a policy tool to offer numerous guarantees as a part of the $26 trillion spending and guarantee orgy of the past year.  Incidentally, this bill subtly widened the FDIC's powers of authority to help it act a bit more like a policy tool and less like a bank deposit guarantor.  I'm sure we'll see the government exploiting this in the months to come.

 

    The NCUA is a lesser known entity, and with just a $100 million in borrowing authority, it's hardly worth mentioning.

    But shooting that up by 18,000% should help it gain a bit of sun and be useful as yet another policy tool.

So wtf is the NCUA??

    National Credit Union Administration

    This body, founded back in 1934, supervises credit unions. 

    Because credit unions don't participate in derivatives and mortgage loans, they haven't needed as much money... until now. 

    The NCUA also administrates the National Credit Union Share Insurance Fund -- the credit union equivalent of the FDIC.  As with the FDIC, the NCUSIF has extended it coverage to $250,000 to December 31 this year.  Then in May, the Helping Families Save Their Homes Act (helping mortgagees remain bankrupt act) extended this by another four years.

    The extra $17.9 billion should be more than enough to tide it over, unless the government knows something about using the NCUA as a policy tool that we don't -- more than likely!

 

    Anyway, well done the government on this boondoggle… getting it half right -- even by accident -- is a big improvement in my books!

Housing -- $486 billion worth of bailouts to come

    Two words that usually fit together in most countries but simply don't work in the US are "mortgage" and "market". 

    The "mortgage market" in the US is slightly closer to a free market than the "postal market", but not by much.

    It's no secret that Alt-A loans (those with an initial low interest period) are beginning to reset to market interest rates over the next few months.  In fact, it's with the full knowledge of this that the government seems to have embarked on the most ambitious scheme in history to reflate the housing market -- or at least sweep the fallout under the tax-payers' carpet. 

    The way the government is preventing the mortgage business functioning like a market is by guaranteeing nearly all new mortgages.

    The three stooges -- Fannie Mae, Freddie Mac, and  Ginnie Mae -- have combined with the Federal Housing Authority to guarantee nearly 90% of all US residential mortgages.

    Fannie and Freddie are now government owned and controlled, and have implicit government (tax payer) guarantees.  Ginnie and the FHA have always been government owned and are explicitly backed by the government.

    To take the heat off Fannie and Freddie -- who have been rightly vilified in the news -- the government has pushed some of these "we'll keep you in your home" type policies into the FHA and Ginnie Mae. 

    One of the policies was aimed at getting the securitization market working again. 

    One way would be to ensure that all mortgages bundled into a security had a maximum loan to value ratio of 70% based on independent valuation, and that none of the loans had been 30 days or more overdue in the past year. 

    A much easier way is to simply do business as usual and slap a government-backed Ginnie Mae guarantee on whatever crappy loans the banks were trying to palm off to unsuspecting local and municipal governments.

    It's pretty obvious which course of action the government would choose. 

    Since 2007 -- the peak of the housing bubble -- Ginnie Mae has increased its guarantees by over 50% to $700 billion and should exceed a trillion by the end of next year.

    Because all of these guarantees have been made in a bear market, the likelihood of a fair chunk going sour is approximately 100%.  As for losses that will get passed onto the taxpayer?  Who knows?  Tens of billions and change by the looks of it. 

    But hey... if spending $3 billion on destroying perfectly good cars is a good idea, then ten times that on NOT destroying anything (except value) is a great deal!

    But that's just Ginnie Mae.  The FHA is in an even worse state -- and headed for bigger trouble with a bit of help from Capitol Hill.

    The FHA is the main tool of the Obama And Friends' policies to keep people in their homes.  This includes great ideas such as letting home owners who are underwater refinance with a 30% loan-forgiveness.  This program -- and the tens of thousands of loans -- has been dropped on the FHA.

    Because the test for refinancing is completely needs-based ("Each according to his need...") the refinancing goes to people who can't afford any sort of mortgage and are most likely to default again. 

    The first 30% loan forgiveness comes straight out of the FHA's reserves, and the second the third defaults will put even more pressure on the reserves.

    Currently, the FHA has reserves of less than 3%.  So if 10% of all its loans were refinanced in this way -- even if the other 90% were perfectly sound and never defaulted -- it would wipe out its reserves in a flash.

    But the other loans aren’t safe.  As of June, the 7% of the FHA's loan portfolio was already in default.  But worse is clearly coming, because unlike other lenders which ask for at least a 10% down payment, the FHA asks for all of 3.5%. 

    That means that not only are the people the FHA is lending to are demonstrably poor savers (they only need $8,750 to buy a $250,000 house) but the property would only have to fall by 5% to put the new home owners underwater and make them eligible to refinance. 

    Clearly, both the FHA and Ginnie will need a huge bailout in the near future -- probably the first of many.

    So far the government has pumped $85.9 billion into the two black holes of Fannie and Freddie -- of the $400 billion so far committed.  As these two have been used by the government for refinancing troubled loans -- for up to 125% of the value of the house -- the government is effectively excavating the bottom of the hole while it pours money into it.    

    The FHA and Ginnie Mae are headed the same way.  While the losses will be lower, they are losses the government hasn't yet budgeted for.  A conservative 10% loss would only be around $172 billion for the two of them -- assuming the government doesn't come up with any great new ideas.  That will bring the total future bailouts for the three stooges and the FHA to $486 billion.

    Heck, what's $486 billion anyway?  Government spending has already topped $3 trillion this financial year -- $27,000 per family -- to make the country richer!

Too Many Indians

    The Swine Flu. 

    Dozens of people have died from it already.

    This has struck like lightening!  I’m serious: around 1,500 people die every year from lightening strikes!  The swine flu could eclipse lightening strikes as one of the most unusual ways to die. 

    Such a terrible outbreak clearly needs to be brought under control with some well thought out policies and procedures. 

    This is precisely what the Mumbai government decided to do: stop the swine flu in its tracks, prevent it from becoming an epidemic, and save the masses from the devastation that could eclipse the number of people in the city that die from motor bike accidents in a single day.

    With only 200,000 people having caught the flu and about a dozen dead, the Mumbai government is taking drastic action:

Schools and universities will be closed for an entire week.

    This should give the flu time to run its course and prevent further contagion.  But the Mumbai government is taking even more drastic action:

Shopping centres and multiplexes will be closed for three days

    Clearly the Mumbai government is pulling out all the stops and leaning heavily on fact-based scientific research on how to stop the flu in its tracks.  And they have thought of everything -- there’s no escaping to the cinema to spread your evil germs:

Cinemas and theatres will also be closed for three days

    And taking it one step further:

Commercial businesses will be closed for three days.

    The next three days are official holidays, which is a happy coincidence -- not that that would have had an impact on the wise decision of the authorities.

    Seriously, I wish I could make this sort of stuff up.  These guys are running around completely directionless and trying to compromise between doing something stupid and doing something useless.  They seem to have met half way on this one.

    It’s simply a case of too many Indians and not enough Chiefs.

UK regulator bows to union pressure on bonus bullshit

    The UK’S Financial Services Authority (FSA) has decided to micromanage banks by specifying new rules for bonuses. 

    Specifically, the FSA has decided that banks that pay their star traders bonuses that are multiples of their salary or guarantee bonuses more than a year out will be considered to have “risky pay structures” and will be forced to hold more capital -- essentially diluting their profit.

    Never mind that sales traders usually get paid a pretty average wage, but make a serious money if they’re any good.  And ignore the fact that door-to-door salesmen get paid many multiples of their salary in bonuses (confusingly called commissions).  Clearly, there’s another risky pay structure in need of regulation.

    But my favorite provision in the new rules applies to how bonuses can be calculated. 

    To avoid being classified as having a “risky pay structure”, banks have to tie incentive bonuses to a group rather than an individual team. 

    Here’s how it works:

Say the equity team is staffed by superstars and rake in millions of commissions for the bank, while the fixed income team is staffed with ex-government goons who somehow make a loss.  The new bonus structure ensures that the huge bonuses the equity team earned will be shared fairly throughout the group, after accounting for losses from the fixed income morons. 

And let’s assume the derivatives team and commodity team -- the other two teams in the group -- just broke even.  Suddenly the equity team is getting less than a quarter of the bonuses they would have gotten under the old risky system when each team got what it earned.

    But at least the pay structure will be less risky, because traders will be less inclined to take risks if they only get a quarter of the incentives… right?

    Hmm… well, let’s say a trader had a great idea for making some short term gains, but knows that he’ll only get a quarter of the profits, but is only sharing a quarter of the risk.  The two logical changes to his behavior will be to either quadruple the size of the bet, or take a riskier bet to increase the risk/reward profile.  After all, his team’s share is only 25%.

    What’s funny (if you look at it that way) about these new rules is that the unintended consequences will be the exact opposite of what they’re supposed to achieve. 

    But not everyone’s happy about the move.  Banks seem to think that the new rules “would have adverse implications for the UK as a financial centre.”  Gee whiz.  You really think that star salesmen being forced to share their commissions with morons is a negative?   Where’s your sense of social responsibility?

    One group that knows all about banking, the General Municipal Boilermakers (GMB), a union that pushed for the new changes, criticized them as being “about as watertight as a string bag.”  This, they claimed, is “individual greed versus social responsibility.”

    No kidding.  Individual greed is precisely what I work for.  But at least the GMB works towards social responsibility, as stated on their webpage:

GMB is a campaigning trade union focused on protecting GMB members in their workplaces and growing the number of GMB members in order to strengthen the Union's power.

    Ok, they’re just power-grubbing chimps, but at least the government is on their side and is dead set on doing away with the risky pay structures.  According to Treasury Minister Paul Myners,

The short-term bonus culture in the global banking industry must end.  The government is pursuing all options to ensure banks can no longer get away with the risky pay and bonus policies that contributed to the financial crisis.

    Ah, so it was risky bonus policies that were behind the financial crisis.  And here I was thinking that it was institutions that didn’t pay incentive bonuses -- such as Fannie Mae, Freddie Mac, the Federal Reserve, and the government -- that were the root cause of the crisis.  Damn, how wrong can you be?

    But at least the government -- which had no more to do with the crisis than the ballooning national debt -- is now on the ball and fixing the problem!

Another $2 billion in money for nothing

    The Cash for Clunkers absurdity has been hailed as a huge success -- because the government got it precisely correct and showed that when it comes to its area of expertise, no organization in the world can beat it: wasting money.

    The first billion bucks ran out just four weeks into the program, and now the government wants to hand out yet another $2 billion -- for no purpose whatsoever other than sending the US trade deficit out of control.  Or rather, even more out of control.    Despite the "huge success" of the cash for clunkers, most of the cars getting bought are rumored to be imports.  I say "rumored" because the government has refused to release the statistics.  Whatever excuses the government comes up with, we all know that this administration in particular is keen to release anything that looks like good news asap.

    But what's particularly stupid about this program is that the "clunkers" that are traded in -- typically 7-10 years old -- are required to be roadworthy vehicles.  Try turning up at a dealer with a 30 year old rust bucket and trading THAT in.  Not a chance.

    Instead, the taxpayer is forking out $4,500 to destroy a perfectly good $4,000 vehicle.  If this were private industry doing the same thing, the cars would be exported to Mexico and South America where it's perfectly acceptable to drive a 6 year old SUV.  The tax payer would save about 2/3rds of his cash AND the US trade deficit would be less out of control.

    Unfortunately for the taxpayer, he doesn't actually have representation on capitol hill.  All he gets is a single vote every few years.  The auto industry of course has a bunch of lobbyists who tell congress how to vote -- every single day.

    And if that wasn't enough, the cash for clunkers program is going to increase third quarter GDP numbers thanks to all the work required to destroy perfectly good cars.  The other number, GDV (gross domestic value) will take a modest his -- around $3 billion worth, or $30 per US family.  But this isn't a published number, so it doesn't actually register with most politicians.

    It doesn't register with most US families either, given that 26 trillion of their wealth -- $87,000 per family -- has been put at risk since the start of the financial crisis.  Heck, what's another $30 anyway?  That's just half an hour's wages for those poor auto workers who own GM!

    Oh, and if you were asking about the budget allocation for this money, it comes from the Department of Energy's loan guarantee program, a $6 billion fund (now $4 billion) to support clean energy projects. 

    See!  Destroying cars is now a clean energy project.  What do you mean a "Waste of money"?