Martin Hutchinson (Money Morning):

U.S. Federal Reserve Chairman Ben Bernanke’s latest thesis is that the home mortgage bubble had little to do with record low interest rates, and was actually much more a problem of regulation.

It sounds plausible – until you give it some real thought. After all, I believe that humanity has already tried a system with tight, vigorously enforced regulations, and no price mechanism.

It was called the Soviet Union.

Okay, that was a bit of a cheap shot – to some extent. Bernanke stated that “borrowers chose and were extended mortgages that they could not be expected to service over the longer term.” That appears to make the problem one of regulation: The types of mortgages that banks should be permitted to offer should be limited to ones that borrowers have a reasonable chance of servicing.

In theory this makes sense. However, it is a prime example of what I in the past have referred to as the “Keynesian Bureaucrat Fallacy,” or KBF.

Under the KBF, wise bureaucrats – who, like economist John Maynard Keynes, were presumably educated at Cambridge and steeped in the traditions of the Bloomsbury Group – will decide the appropriate regulations for every sphere of the economy.

They will then enforce them with draconian rigor, forcing the economy to behave in a way that optimizes economic welfare, measured by whatever means the bureaucrats devise. Irrational market-based signals – such as the price mechanism, will be ignored – unless the bureaucrats decide it is safe to take account of them.  . .

Click here for the rest of Mr. Hutchinson’s commentary on Money Morning.

Solid U.S. and euro zone data and an upbeat assessment on the economy from Federal Reserve Chairman Ben Bernanke over the weekend earlier pushed investors to take on riskier investments at the expense of the the low-yielding yen and dollar.

“Conventional wisdom suggests that major currencies should trade within their recent ranges until liquidity improves after the Labor Day holiday,” said Wells Fargo currency strategist Vassili Serebriakov. “However, there is plenty of data in the U.S. and elsewhere to change that this week, with consumer-related numbers likely to be watched closely.”

Investors are looking ahead to upcoming U.S. and European data to confirm hopes that the world economy is improving.

The dollar was last up 0.1 percent at 94.49 yen while the euro slipped 0.1 percent to $1.4304 . Against the yen, the euro was unchanged at 135.20 yen .

The euro trimmed losses against the greenback after data showing much higher-than-expected euro zone industrial orders in June.

Sterling fell 0.6 percent on the day at $1.6405 .

The euro , meanwhile, hit an 11-week high against sterling at 87.27 pence, according to Reuters data.

Traders said the euro was pushed past a key options barrier at 87 pence, setting up further gains in the pair, while analysts said expectations for persistently low UK interest rates were weighing on the British currency.

The Federal Reserve’s Jackson Hole meeting over the weekend offered a variety of opinions about the global economy, with Fed Chairman Ben Bernanke acting as the cheerleader for growth.

But traders are keen to see how the euro zone economy fares, especially after higher-than-forecast purchasing managers’ index readings last week. Germany’s Ifo survey of business sentiment will be key this week, analysts said.

The U.S. Conference Board will release its August consumer confidence index on Tuesday, followed by the Reuters/University of Michigan consumer sentiment snapshot on Friday.

Nouriel Roubini, professor at New York University’s Stern School of Business and one of the few economists who accurately predicted the magnitude of the current crisis, wrote in The Financial Times on Monday that there’s still a “big risk” of a double-dip recession.

Allan Meltzer, a political economy professor at Carnegie Mellon University, also told Reuters that the flood of money the Fed and Treasury have injected into the banking sector and economy since the crisis began will soon threaten the dollar.

“Will the Chinese continue to buy the trillions of dollars worth of debt that the Treasury intends to put out every year? We don’t know, but if not, the pressure will be on the Fed to keep buying it, and my guess is that’s going to be inflationary over the next couple of years, and the dollar will suffer,” he said.

Aug 24 (Reuters)

NABE said the near-term setback will be a result of a “sharp retrenchment” in business investment, but the billions in government efforts to invigorate the economy will soon offset that.

“While the overall tone remains soft, there are emerging signs that the economy is stabilizing,” said NABE president, Chris Varvares, who is also president of Macroeconomic Advisers. “The survey found that business economists look for the recession to end soon, but that the economic recovery is likely to be considerably more moderate than those typically experienced following steep declines.”

NABE also downgraded its growth forecast for the next few quarters – with the second quarter contracting 1.8%, followed by a meager 1.2% growth in the second half. The end result will be an overall 1.2% contraction for 2009.

However, NABE believes a trio of key factors scaring consumers – job losses, tight credit conditions and declines in home values – are here to stay.

In fact, unemployment will likely reach as high as 9.8% by the end of the year while inflation moderates and oil prices remain “relatively depressed.”

NABE’s outlook is the consensus of a 45-person panel of economists.

Mixed Forecasts

NABE’s report joins a chorus of national and international institutions (both government and private) that have issued their own predictions of when the clouds will part over the global economy.

Earlier this month, U.S. Federal Reserve Chairman Ben Bernanke testified to the congressional Joint Economic Committee that the U.S. economy will begin to “turn up later this year,” Reuters reported.

But such recovery is contingent upon the financial sector’s continued improvement, Bernanke said.

“We continue to expect economic activity to bottom out, then to turn up later this year,” Bernanke told the committee. “An important caveat is that our forecast assumes continuing gradual repair of the financial system; a relapse in financial conditions would be a significant drag on economic activity and could cause the incipient recovery to stall.”

Though Bernanke’s general timeframe for recovery is similar to NABE’s, there are a few differences in their outlooks. Bernanke said the housing market may be bottoming out and pointed to improving consumer spending, two areas NABE said will continue to remain depressed.

More broadly, the International Monetary Fund (IMF) recently slashed the growth forecast for every major country and urged more recovery actions. In its latest global outlook, the IMF said the global economy will likely contract 1.3% this year and post a 1.9% gain next year, Reuters reported.

And while the World Bank sees the global contraction easing and expects a recovery in late 2009, its report, “Swimming Against the Tide: How Developing Countries are Coping with the Global Crisis,” warns that 94 out of 116 developing countries have experienced a slowdown in economic growth. Of those, 43 have high levels of poverty.

Moreover, only one quarter of the most vulnerable countries have the resources to prevent a rise in poverty, the World Bank said.

“We need investments in safety nets, infrastructure, and small and medium size companies to create jobs and to avoid social and political unrest,” World Bank President Robert Zoellick said in the report.

Source: Business Economists Predict Recession Will End in Third Quarter

• U.S. Federal Reserve Chairman Ben Bernanke said the U.S. economy will begin to “turn up later this year,” contingent upon the financial sector’s continued improvement, Reuters reported. Speaking to a congressional committee, Bernanke said the housing market may be bottoming out and pointed to improving consumer spending.

• The Canadian dollar hit its highest point since November. “The market is now willing to embrace risk and move clean of the safety associated with the U.S. dollar,” Stewart Hall, an economist in Toronto at HSBC Securities, told Bloomberg. “The Canadian dollar has the potential to be a high-yielding currency if the commodity story once again gains traction and moves forward.”

• Price increases and cost-cutting measures helped Kraft Foods Inc. (NYSE: KFT) post higher-than-expected first-quarter profit. The food company also reaffirmed its 2009 earnings and revenue forecast, Reuters reported.

• South Africa’s unemployment rate jumped to 23.5% in the first quarter, as Africa’s largest economy likely slipped into recession for the first time in 17 years, Bloomberg reported. “Manufacturing and mining are under strain, and we can expect these numbers to worsen,” Fanie Joubert, an economist at Efficient Group, told Bloomberg. “We’re unlikely to see a recovery until the fourth quarter.”

• The U.S. service sector is beginning to show signs that the worst may be behind it as the Institute for Supply Management’s index of non- manufacturing businesses contracted less than forecast in April.  The index of service businesses, which make up almost 90% of the economy, rose to 43.7 from 40.8 the prior month, according to the Tempe, Arizona-based group. Readings below 50 signal contraction. Separately, a survey of chief executives found the highest level of confidence in three years, as home purchases and retail sales rose, another signal that the economic slump is abating, Bloomberg reported.

• Shares of American International Group Inc. (NYSE: AIG), once the world’s largest insurer, rallied in New York trading yesterday (Tuesday), on speculation the insurer’s first quarter loss narrowed from its record $61.7 billion net loss in the fourth quarter, Reuters reported. AIG, was rescued with a taxpayer lifeline last year after severe mortgage losses left it unable to meet collateral postings with counterparties. It currently needs to pay back about $80 billion in borrowings from the U.S. Treasury and Federal Reserve.

• Several Wall Street traders and mutual funds, including Fidelity Investments and General Electric Co. (NYSE: GE), oppose bringing back the so-called “uptick rule,” which may deter U.S. regulators from resurrecting the provision, Bloomberg reported.  At a public meeting in Washington, several executives from companies that blame short-sellers for driving down share prices said they prefer an alternative to the uptick. The Securities and Exchange Commission scrapped the almost 70-year-old uptick provision in July 2007 after studies determined it wasn’t relevant in markets dominated by fast-paced electronic trading. SEC Chairman Mary Schapiro said any new rules will uphold the benefits of short-selling while restricting market abuses.

• Chile’s peso firmed to a seven-month high yesterday (Tuesday) on dollar weakness and better-than-expected domestic growth data. “The main elements that influenced the peso…were the fall of the dollar against the euro, and also the economic data, which was negative, but better-than-expected,” one currency trader in Santiago told Reuters. The peso is now up 12.2% against the dollar year to date after slumping 22.3% in 2008.

Source: Investment News Briefs Wednesday, May 6, 2009

]]> http://www.contrarianprofits.com/articles/investment-news-briefs-wednesday-may-6-2009/16296/feed 0 http://www.contrarianprofits.com/articles/sec-studies-restoring-uptick-rule-that-could-have-mitigated-bear-market-in-us-stocks/16152 http://www.contrarianprofits.com/articles/sec-studies-restoring-uptick-rule-that-could-have-mitigated-bear-market-in-us-stocks/16152#comments Mon, 04 May 2009 18:32:25 +0000 Money Morning Staff http://www.contrarianprofits.com/?p=16152 At a roundtable discussion tomorrow (Tuesday), the U.S. Securities and Exchange Commission (SEC) will talk about restoring a rule that some believe could have mitigated the bear market in U.S stocks.

Tomorrow’s meeting, which will focus largely on short-selling, follows recent internal discussions in which SEC officials have talked about restoring the so-called “uptick rule,” a fairly straightforward securities regulation that many experts say could have blunted the steep stock-market sell-off that U.S. stocks experienced in late 2008 and early 2009. The uptick rule was abolished in 2007.
U.S. Federal Reserve Chairman Ben S. Bernanke is a proponent of the uptick rule’s restoration.

“If the rule is to be restored, it should apply to all equally, including market makers as well as professional traders…

Transparency has long been a cornerstone of both democracy and the free market, but Lewis’s testimony that implies the CEO of one of America’s largest financial institutions – an institution that received more than $20 billion in taxpayer money – neglected to alert investors and potential shareholders to the full scope of Merrill’s losses prior to his company’s acquisition. It also implicates two prominent government officials in that decision.

Lewis made the comments in testimony given before New York’s attorney general as part of an investigation into bonus payments at Bank of America. The Journal reviewed a transcript of that testimony, the paper reported today.

The merger, originally valued at $50 billion, was announced on Sept. 15, about an hour before Lehman Brothers Holdings Inc (LEHMQ.PK) went bankrupt. Afraid the collapse of Merrill Lynch would cause further deterioration of panic-stricken markets, the government helped facilitate the deal with $25 billion of capital -$15 billion in October and another $10 billion in January – from the U.S. Treasury Department’s $700 billion Troubled Asset Relief Program (TARP).

Shareholders of Merrill Lynch and Bank of America voted to approve the merger on Dec. 5.  Lewis said in his testimony that he first considered backing out of the deal on Dec. 13 when Bank of America Chief Financial Officer Joe Price informed him that projected after-tax losses were “about $12 billion,” the Journal reported.

Merrill Lynch actually lost $15.84 billion in the fourth quarter. BofA posted a fourth-quarter loss of $1.79 billion, but was forced shift more weight to the U.S. taxpayer, as the government agreed to guarantee $118 billion of Bank of America assets, including commercial and real estate holdings and credit default swaps. Bank of America was required to absorb the first $10 billion of losses from its pool of assets.

Nearly 13% of the first $350 billion in TARP funds went to Bank of America.

“As we saw the anticipated loss accelerating, we reevaluated our rights under the deal,” Lewis said in BofA’s fourth-quarter conference call. “The government was under the view that walking away would cause significant concerns and serious systemic harm to the financial markets.”

Lewis elaborated in his testimony, saying that while he was not explicitly instructed to keep quiet about Merrill’s losses but that Paulson and Bernanke suggested his job would be jeopardized if he did.

“I was instructed that ‘We do not want a public disclosure.’” Lewis said.

Lewis went on to describe the conversation he had with Treasury Secretary Paulson in which he expressed his desire to abandon the deal:

“I can’t recall if he said, ‘We would remove the board and management if you called it [off]‘ or if he said ‘we would do it if you intended to.’ I don’t remember which one it was,” Mr. Lewis said. “I said, ‘Hank, let’s de-escalate this for a while. Let me talk to our board.’”

When asked by investigators if Paulson was “really asking Bank of America shareholders to take a good part of the hit of the Merrill losses,” Lewis said “Over the short term, yes.”

BofA shares have lost three-quarters of their value since the Merrill Lynch acquisition was announced.

Bank of America shareholders will vote on whether Lewis will keep his position as chairman and CEO at their annual meeting on April 29.

“I’d rather have this than gold.”

That’s what one well-known fund manager recently told Barrons. Why? This special group of investments is set to pay out $4,201 guaranteed cash next month. And they pay out juicy cash sums all year long. But they’re not income trusts, corporate bonds, or foreign bonds. In fact, only Martin Hutchinson is talking about them. Read his full report here…

Source: Bank of America’s Lewis Says Paulson, Bernanke Forced Merrill Takeover

In this parallel reality, U.S. Federal Reserve Chairman Ben S. Bernanke has just rung the loudest bell ever heard in the foreign-exchange and government-debt markets. Investors who ignore the clanging do so at their own peril. The bell’s reverberations will be felt by everyday Americans, whose lives are about to change in ways few can imagine.

While nearly every facet of America’s economy has been devastated over the past six months, our national currency has thus far skipped through the carnage with nary a scratch. Ironically, the U.S dollar has been the beneficiary of the very global economic crisis that the United States set in motion. As a result, our economy has thus far been spared the full force of the storm.

Following its policymaking meeting last week, the Fed finally made clear what should have been obvious for some time: The only weapon that the U.S. central bank is willing to use to fight the economic downturn is a continuing torrent of pure, undiluted, inflation. The announcement should be seen as a game changer that redirects the fury of the financial storm directly onto our shores.

In its statement, the Fed announced its intention to purchase an additional $1 trillion worth of U.S. Treasury and agency debt. The purchases, of course, will be made with money created out of thin air through the government’s printing presses. Few can doubt that it will persist with these operations until the economy returns to its former health. Whether this can ever be accomplished with a printing press alone has never been seriously considered. Bernanke himself admits that we are in uncharted waters, with no map or compass, just simply a hope that more dollars are the answer.

Rather than solving our problems, more inflation will only add to the crisis. Falling asset prices, the credit crunch, declining consumer spending, bankruptcies, foreclosures, and layoffs are all part of the necessary rebalancing of our economy. These wrenching movements, however painful, are the market’s attempts to resolve the serious problems at the root of our bubble economy. Attempts to literally paper-over these problems will lead to disaster.

Now that the Fed has recklessly shown its hand, the mad dash to get out of U.S. Treasuries and dollars should not be far off. The more the Fed prints to buy bonds the less the dollar is worth. Holders of our debt (read China and Japan) understand this dynamic. We must expect that they will not only refuse to buy new bonds, but they will look to unload those bonds they already own.

Under normal circumstances, if creditors grew concerned that inflation was eating into their returns, the Fed would raise interest rates to entice them to buy. However, the Fed will avoid this course of action as it fears higher rates are too heavy a burden for our debt-laden economy to bear. To maintain artificially low rates, the Fed will be forced to purchase trillions more debt than it expects to as it becomes the only buyer in a seller’s market.

Just last week, Chinese Premier Wen Jiabao voiced concern about his country’s massive investments in U.S. government debt. In the most unequivocal statement yet by the Chinese leadership on this issue, Wen made it plain that he was concerned with depreciation, not default. With his fears now officially confirmed by the Fed statement, we must wonder when the Chinese will finally change course.

There is a growing consensus that if China no longer wants to buy our bonds, we can simply print the money and buy them ourselves. This naïve view fails to consider the consequences implicit in such a change. When the Treasury sells bonds to China, no new dollars are printed. Instead, China prints yuan, which it then uses to buy Treasuries. This effectively allows America to export its inflation to China. However, now that we will be printing the money ourselves, the full inflationary impact will fall directly on us.

With such a policy in place, America has now become a banana republic. It won’t be too long before our living standards reflect our new status. Got Gold?

[Editor's Note: Peter D. Schiff, Euro Pacific Capital Inc.'s president and chief global strategist, is a well-known author and commentator, and is a periodic contributor to Money Morning. Schiff is the author of two New York Times best sellers: "The Little Book of Bull Moves in Bear Markets,"and " Crash Proof: How to Profit from the Coming Economic Collapse"." For a more-detailed analysis of the nation's financial problems, and the inherent dangers that these problems pose for both the U.S. economy and for dollar-denominated investments, click here to download Euro Pacific's new financial-research report, "The Collapsing Dollar: The Powerful Case for Investing in Foreign Securities."

In the midst of an ongoing financial crisis that's eradicated trillions of dollars in shareholder wealth, the profit search facing U.S. investors is tougher than ever. The uncertainty surrounding the economic-stimulus and banking-bailout plans isn't helping.  But a special new offer from Money Morning is a two-way win for investors: A free report provides insights into the threats those plans pose, while our monthly newsletter, The Money Map Report, consistently spotlights some of the hard-to-find but potentially lucrative profit plays that remain. Investors who subscribe to the Money Map Report can obtain a complimentary copy of Schiff's best seller, "Crash Proof," in which he details the causes of the housing bubble and financial-system collapse, and tells investors how to dodge losses from the problems that are still to come. To read our free report, and to find out more about this special offer, please click here .]

Source: Will the Bailouts Transform Us from Global Superpower to Banana Republic?

Bill Bonner elaborates on the definition of a recession:

The old timer’s definition of a recession was ‘when your neighbor loses his job.’ When you lose your own job, it’s a depression. How many people have lost their jobs in this downturn? Well, for the answer to that question we look to the same people who give us the official inflation numbers – the apparatchiks at the U.S. Labor Department. Therein, of course, hangs a tale…and we will let Dana Samuelson of Danagold tell it:

” The average person judges a recession mainly on employment. If jobs are available, then the economy is holding up. If jobs are scarce, the economy is poor. By that standard, the economy is really struggling, with payrolls down in each of the first four months of the year. But the headline figures, again, don’t reflect the lived reality of Americans. At 5.0% in April, down from 5.1% in March, the current BLS unemployment rate is relatively low by historical standards. Yet the number of jobless Americans of prime working age, that is, men aged 24 to 54, is historically high at 13.1%. Most of these people don’t qualify as unemployed but they are nonetheless out of work.

“Why don’t these would-be workers show up in the headline statistics? Mainly because the government’s definition of the unemployed includes only people who do not have a job, have actively looked for work in the four weeks preceding the survey, and are currently available for work. But it excludes the self-employed, 1099 workers who can’t get enough contracts, those working part-time or on commission only, and the under-employed (like real estate agents waiting tables or mortgage brokers bagging groceries). It also doesn’t count those who’ve given up looking for work altogether—a category known as “discouraged workers,” defined as persons not currently looking for work specifically because they believe there aren’t any jobs available for them. Some analysts say this particular group of jobless Americans—who believe their prospects for finding a job are getting ever dimmer, yet who don’t figure in the computation of the unemployment rate—represent the nation’s dire job situation. According to John Williams’ Shadow Government Statistics , the primary source for unbiased economic data, if adjusted for “discouraged workers,” the actual unemployment figure for April rose to 13.1%, up from 13.0% in March. Now that’s recessionary!”

Real inflation at 10%? Real unemployment at 13%? Maybe. But we have not quite seen the fall off in consumer spending that these numbers suggest…

For more information about the definition of a recession and how to profit, also read our Recession Guide: Recession Proof Investing: The Best Investment Strategies to Use During Recession