MOODY'S BLUES MAYBE

 
t.man hatter

Who says it doesn't pay to have friends in high places?

A new study on Moody's, one of the well-known rating agencies, reveals what study researchers call a "tangible bias," to quote their term.

That's a softer, kinder way, it seems, of saying a conflict of interest. Set to be presented this week at the American Association of Accounting meeting, the work compares Moody's ratings between 2001 and 2010 against those of  Standard and Poor's, its largest competitor.

According to these researchers, Moody's ratings showed a more favorable results for two of the rating firm's largest clients, Berkshire Hathaway and Davis Selected Advisors, a large New York based money management firm.

It turns out Berkshire and Davis are the two biggest shareholders in Moody's and Moody's for it part ranked bonds owned by Berkshire and Davis higher than Standard and Poor for the same bonds. How much higher, "a half notch," according to the researchers.

So what's the catch? Well, it equals about half a million dollars annual savings for the issuers of those bonds. Interest rates on bonds are determined at least in part by the quality of  their rating. Triple A-rated bonds will have to pay less interest because of their perceived quality. So half a notch here and half a notch there and pretty soon we're be talking about some serious savings.

Moody's, of course, denied any improper doings saying "...ratings are based on thorough, independent analysis of credit quality by our ratings committees, conducted according to publicly available methodologies."

Moody's went public in 2000 and Berkshire and Davis took large positions in the stock at the time. Another finding of the study showed that Moody's was slower--71 days slower to be exact--in down grading bonds "related to its long term large shareholders." 

Still another finding, per the Financial Times, showed a similar "pattern in the ratings awarded to commercial mortgaged-backed securities, which bundle together loans secured by shopping malls, office buildings..." 

Maybe this is just a flicker trying to become a flame. But then again maybe with all the corruption uncovered in the financial world these days, just maybe a deeper look will turn Moody's whole world misty blue.

WHO'S CRYING NOW?

Three times in 28 years. Even by our math that on average is once every nine years, about the time we are told many social scientists believe many marriages start to go snap, crackle and pop.

The debt issued during the 1990s took place in an Argentina that had already defaulted on its debt six times since its independence from Spain in 1816 (arguably, one-third of Argentine history has taken place in a state of default), while Argentina also exhibited questionable institutional protection of contracts and property right.

Why investors would want to hook up with a country like this except to make some quick trading profits, which is what some of these folks did, is anyone's guess. Argentina's track record goes way beyond any benefit of doubt.  

And the current administration there wheedled and weaseled and threatened and bullied to no avail. Their arrogance and obvious contempt for institutions and legal decorum shouldn't make anyone cry for them, but it should make safety-minded folks want to avoid them for a long, long time. 

The people deserve much, much better.

For an excellent summary see: http://www.zerohedge.com/news/2014-07-30/how-argentina-became-bad-debtor.

IS THERE A CHEERLEADER IN THE HOUSE?

Read this opening paragraph from today's MarketWatch story on the economy snapping back to grow 4% in the 2Q


 WASHINGTON (MarketWatch) — The U.S. economy sprang back to life in second quarter and expanded at the fastest pace since last fall, fueled by a upturn in consumer spending on big-ticket items such as cars and trucks as well as a sharp rebound in business investment.

Big ticket items like cars and light trucks financed with sub prime mortgages? Here's more.

The rebound in growth offers further proof that a plunge in first-quarter GDP was an outlier. The economy contracted sharply in the first three months of the year mainly because of an unusually harsh winter and a decline in health-care spending tied to the introduction of Obamacare.

The second-quarter rebound “provides evidence that the economy is healthy and will continue to grow at an above-average rate in the second half of this year and into 2015,” asserted Douglas Handler, chief U.S. economist at IHS Global Insight. 

Further down in the story the writer states:
Consumers mostly shelled out for major items such as cars and trucks. Spending on goods designed to last three years or more shot up 14%, the largest gain since 2009.

All this may be true, but it doesn't mitigate that as an investor one needs to be aware of the cheerleaders out there. See our recent post, "Clunker Dunkers."

Wouldn't all of us like to get two revisions per quarter of our paychecks. Most of us most likely would revise it up or down?

GDP is revised twice after its initial release. The second estimate will come out next month, and sometimes the revisions are quite large. The drop in first-quarter GDP, for instance, was initially reported as 0.1% before eventually being lowered to show a much larger decline. 

So here's a simple question:  How solid do you think these numbers are?

 http://www.marketwatch.com/story/economy-snaps-back-grows-4-in-spring-2014-07

FROM THE TOP DOWN

 
Here's a quote from Pete Atwater's, "America's Unprecedented Confidence Gap," on today's Minyanville.

Over the past twenty-five years, the confidence gap between the top and the bottom has never been greater. Given the nature of the post-banking crisis recovery, that record is hardly surprising. As Ruchir Sharma of Morgan Stanley Investment Management points out in an op-ed in this morning's Wall Street Journal, loose monetary policy has benefited owners of financial and commodity assets far more than Main Street. While the stock market is up by more than 135% from its lows, "prices for commodities from oil to coffee to eggs are up 40% since 2009, double the typical commodity-price rebound in post-war recoveries. Though rising prices for staples such as these are inconsequential expenses to the rich, they are burdens for the poor, who spend 10% of their income on energy and a third of it on food."

Even more, the post-banking crisis recovery has been notable for its lack of wage inflation. Between excess labor capacity globally and corporations need to extract more and more from their expense base in a revenue-anemic recovery, most lower and many middle class Americans have found themselves squeezed by weak wage growth and rising food, energy and rental costs. Not surprisingly this financial pressure is showing up in weak economic confidence measures like the one that the Conference Board reported this week.

Though we would take exception with Atwater's premise these are "inconsequential expenses to the rich." This is a knee-jerk, blatant assumption that people of his caliber shouldn't fall prey to. He needs to define inconsequential and rich. 

Rich is in the eye of the definer. Being middle class today, if there is even such a category, is rich in the eyes of the poor. That's what makes this whole argument so knotty. Politicians in their missionary 
zeal to vilify the wealthy as if they're all dishonest and corrupt and stole their wealth ensnares many in the middle class. See AMT tax for just one of numerous examples.

By the time these elected Neanderthals get around to correcting this travesty, if they ever do, they will have impoverished tons more. Stupidity hurts everyone, rich, middle class or poor. Stupidity is like health; it's difficult to put a price on it. 

See our recent post about "Clunker Dunkers" if you want to see another example of stupidity and its effects on confidence. We only mentioned two former Fed members, the author of the MarketWatch mentions another. That might want to tell you something about bureaucrats, academics and politicians alike.

Just whom did Atwater expect loose monetary policy to impact? One of the big reasons for the logjam of illegals at the southern border of this nation has to do with the hope for a better way of life. It has to do with middle class not gold-paved roads.

There is always collateral damage. It's a fact not an artifact of governments everywhere who stupidly punish the many in their pathetic clumsiness to capture the few.

Confidence starts at the top not the bottom. The whole message of the Fed since 2008 has been to restore confidence. Are you feeling confident yet?

BEWARE OF CLUNKER DUNKERS

There is an old saying about the more things change the more they stay unchanged.

Recently we mentioned water filled balloons and how when pushed on in one spot they bulge somewhere else. For those who didn't see the article that's just another way of saying water seeks its own level. And so does big money. Crap games float and so do investment bankers.

On Market Watch today there's a story, "How much did sub prime loans fuel GDP boom?" It's really a story about subprime auto loans, not altogether a new topic in the financial press, and how much car and light truck sales contributed to whatever recovery we're currently enjoying.

In the second quarter, motor vehicle and parts spending grew an annual 17.5%. Put another way, cars made up 3.7% of all consumer spending, the highest rate since the first quarter of 2008. 

Subprime loans make up about a third of new car-sales and two-thirds of used cars, according to data from Experian Automotive, at the end of last year. The New York Times, in a story about the subprime loan sector , pointed out that growth has climbed more than 130% in the five years since the crisis.

No prizes, by the way, for guessing which sector was cut out of regulation by the Consumer Financial Protection Bureau in an amendment tacked onto the Dodd-Frank bank reform law. 

If we all aren't' careful this administration may be getting set to foist another clunker dunker program on American taxpayers. You remember that gem. Officially known as the Car Allowance Rebate System, another one of those silly acronyms bureaucrats love, this time CARS, it was supposed to create 70,000 new jobs and stimulate the economy.

According to a post-program study by Joe Biden's alma mater, the University of Delaware, it created exactly 3,676 jobs at a cost of $1.4 million per job. 

A well known economist who is still around tossing out advice, Alan Blinder, the former vice chairman of the Federal Reserve under Sir Alan Greenspan (Are we in trouble yet?), helped promote CARS, calling it a tripartite winner that would stimulate growth, help the environment and reduce economic inequality.

Later, a University of Michigan study revealed it did help the environment by boosting fuel per gallon from 0.6 mpg to the whopping 0.7 mpg. Here's another way it helped America. According to Wikipedia, "It led to a gain in market share for Japanese and Korean manufacturers at the expense of American car makers, with only Ford not taking a significant hit.^[13]

In case you don't get it, in this administration that's called out-sourcing in-sourcing jobs. We'll close by quoting the writer's, Steve Goldstein, last two paragraphs. They'll do wonders for your confidence.

There may well be a good argument that the risks from subprime car loans, to use the memorable word from former Federal Reserve Chairman Ben Bernanke to describe subprime mortgage loans, are “contained.” There’s no evidence that the current financial system is built on leverage to the auto market in the way it was to the housing market before that bubble burst. 

But it’s also worrying the U.S. economy so quickly shifts from one area propped up by loose lending to another. 

 
In the interest of full disclosure we do not know Mr. Goldstein, have never met the gentleman and have no connection to MarketWatch.

http://www.marketwatch.com/story/how-much-did-subprime-loans-fuel-the-gdp-boom-2014-07-30 

MONETARY FUDGING

If the unemployment rate--due to be announced this Friday--falls to 5.9%, it'll be the lowest that figure has been in six years.

This is the number that the Yellen-led Fed stated it's following not GDP. Besides fighting just inflation somewhere along the line the Fed took up the task of providing stable employment. The consensus guess, and that's the operative word, guess, is for 225,000-250,000, depending on whom does the guessing.

With all the fines and money many of these quasi-government agencies have been raking in one would think these bureaucrats would want more bubbles to burst. Some observers even go so far as to claim the Fed not only wants these bubbles but purposely makes them.

For these folks the Fed by focusing on things they don't have a clue about--job creation and income growth, etc.-- resort to blowing bubbles via the now well-known so-called "wealth effect."  "Hey, man, my stock portfolio is skying, my house resale value is out of sight. We're all feeling good. Let's go spend some money."

And for those who don't recall Mr. Greenspan during his infamous tenure talked much about the wealth effect. Here's a quote from a Wall Street Journal article May 8, 2000, entitled "How Greenspan Finally Came to Terms with  the Market."

In August 1999, Mr. Greenspan formally announced his abandonment of "irrational exuberance" at the Fed's annual retreat in Jackson Hole, Wyo. He said the market reflected the "judgments of millions of investors, many of whom are highly knowledgeable about the prospects for the specific companies that make up our broad stock price indexes." The Fed had no business contradicting those investors, he concluded.

That didn't mean, however, that his concern with the market had gone away. He remained as preoccupied as ever, especially when the Nasdaq soared nearly 50% in the three months after Jackson Hole. But his line of his inquiry shifted from trying to understand why stocks were rising to the impact of rising stocks on the economy at large.

The buzzword inside the Fed became the "wealth effect" -- how riches generated by stocks and real estate were changing the psychology of consumers, leading them to spend more of their wages and salaries and putting a smaller portion into savings. 

In a presentation for the Fed chairman, forecaster Joel Prakken flashed a picture from his local paper, the St. Louis Post-Dispatch, with a dog in a spacious room under the headline, "Luxury boarding kennels are only one indication that people ... are spending more freely." Mr. Prakken inserted a caption that had the dog proclaim, "I sure enjoy consuming master's recent stock-market gains!"

Mr. Greenspan mixed and matched statistics to discern wealth effect patterns. His research indicated to him that, even if it were wholly rational, the bull market was hauling the U.S. economy into warp speed by generating greater spending.

Indeed, the more he and his colleagues believed that the New Economy and the stock market made sense, the more they worried that the economy was veering out of control. 

At policy making sessions through late 1999 and early 2000, intense debates broke out as officials grappled with the ways that changing productivity affects the economy. It was a question the central bank hadn't confronted for four decades. Fed Vice Chairman Roger Ferguson literally dusted off his old macroeconomics textbook from college


Now it shouldn't surprise that there is little agreement in the economic profession about the wealth effect, home values or stock values. Some claims equities have little or no affect. Others claim the opposite. Still others believe higher homes prices do and some believe both do.

Fudging is what it is. It's not against the law. But maybe when it comes to Wall Street and the government it ought to be. There are at least two places where we know fudging routinely takes place, economic predictions and earnings reports. Both are prominently the news this week.

Sure the numbers are coming this Friday and there will be some reaction. But keep in mind these folks are academics in the main. And numbers get revised. Which brings to mind an old saying about never send a kid to do a man's job. 

Maybe investors would be well informed to tweak that a bit: Never let a bunch of academics run your monetary policy. If you do you deserve all the fudging you're going to get.
t. man hatter

GOLD

We like to bring you other views from time to time. This one is about gold. We've cited the reference below. And as always you can read it and decide for yourself.

IMF Warns Pound Overvalued; What About Other Currencies?

Is the British pound overvalued? What about the Euro? The US Dollar? The Yen?

Curiously, economists make that case for all of those currencies.

And today, the IMF is pounding the drums with this proclamation "Overvalued" Pound Prevents Rebalancing. 

 The International Monetary Fund warned on Monday that the pound was “overvalued” and preventing the rebalancing of the economy away from a reliance on spending and imports.

In its annual assessment of the UK economy, the fund said sterling was between 5 and 10 per cent overvalued because of a “lack of competitiveness and limited export diversification”.

“Staff estimates that the current account balance is 2.6 per cent weaker than its equilibrium level, and that the real exchange rate is overvalued by about 5–10 per cent,” the IMF said.

Equilibrium Level Madness

Apparently the IMF is the arbiter of the "equilibrium level" of any and every currency. A few examples will prove the point.

New Zealand Dollar Overvalued by 20%

On April 10, 2014 the IMF warned New Zealand Dollar May Be Overvalued.

Canadian Dollar Overvalued by 10%

On March 2, 2014 the IMF Warned Canadian Dollar Overvalued by 10%" despite recent depreciation, thus the Bank of Canada should wait before hiking rates..

Australian Dollar Overvalued by 10%

On November 21, 2013 the IMF Stated Australian Dollar Overvalued by 10%.

US Dollar Overvalued

This dates back a while but on October 28, 2010 the IMF said US Dollar 'Overvalued' On Currency Markets.

Swiss Franc Overvalued

Returning to this year, on March 24, 2014, IMF Suggests SNB Use Negative Rates if Franc Pressured because the "franc remains moderately overvalued."

Euro Overvalued

As shocking as this may seem, I cannot find a recent IMF opinion on the Euro, but on May 8, 2014, Mario Draghi, president of the ECB discussed the Pernicious Effects of an Overvalued Euro.

I am pretty sure the IMF would agree.

Yen and US Dollar Overvalued 

On October 12, 2012, the Wall Street Journal proclaimed If Yen Overvalued in IMF View, So May Be Dollar. 

 Japan's finance minister may have breathed a sigh of relief Thursday when the International Monetary Fund chief reaffirmed the yen is "moderately overvalued," a phrase traders believe is supportive of potential market intervention to weaken the currency against the dollar.

Not so well-known in the market, however, is that the 188-member international lender also sees the dollar as "moderately overvalued," a view that makes it harder to conclude the IMF would endorse future intervention by Tokyo in the dollar-yen market.

Yuan "Moderately" Undervalued

On May 29, 2013, and contrary to sentiment in Washington DC that says the Yuan is massively undervalued, The IMF Seeks Flexible Chinese Yuan, Says "Moderately Undervalued".

US Dollar Index



click on chart for sharper image

Summary

Note that the US dollar is about where it has been since the beginning of 2012, but higher than it was in October of 2012 when it was judged to be "overvalued".

Is it more overvalued today?

Apparently the British pound, New Zealand dollar, Australian Dollar, the US dollar, the euro, and the yen are all overvalued.

The yuan is the one major currency that is allegedly undervalued, but only "modestly".

Mathematics

IMF overvalued-undervalued judgments are generally on a basket of currencies basis.

However, it is not mathematically possible for all those currencies to be 5-20% overvalued against all the other currencies in the same basket.

Even if it was possible, based on precise timings and currency fluctuations, the idea that the IMF can fine tune currency valuations to the nth degree as it has done is absurd.

All Currencies Overvalued

Nonetheless, the IMF appears to be on target with all those "overvalued" assessments, not against  other currencies in the basket or against each other individually, but against gold, and by far greater percentages.

If you agree with my assessment, and perhaps even if you don't, please consider How Much Gold Should Someone Own? Where and How To Own It?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Disclaimer:The content on this site is provided as general information only and should not be taken as investment advice. All site content, including advertisements, shall not be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of sponsors or firms affiliated with the author(s). The author may or may not have a position in any company or advertiser referenced above. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

Read more at http://globaleconomicanalysis.blogspot.com/2014/07/imf-warns-pound-overvalued-what-about.html#eIJQ7kcyekVWKPe1.99

AROUND THE WEB

Owing to the shortage of bank bond trading the game has changed.

If corporate bonds don’t trade frequently enough for you, one solution is to turn elsewhere.
More and more investors are betting on whether the notes will go up or down in value without owning the securities, using derivatives. This has been attractive for asset managers looking to be nimble in markets or make big bets, especially as corporate-debt trading volumes wane.
Pacific Investment Management Co.’s Bill Gross, manager of the world’s biggest bond fund, is one who’s using credit-default swaps for bullish wagers on company debt. He accelerated his use of the contracts in the three months ended June 30 by selling protection against credit losses, according to a quarterly report. 

Gross isn’t alone: Outstanding bets on a credit-swaps index tied to North American high-yield bonds have soared to the highest level since at least 2011. Net wagers on the latest Markit CDX North America High Yield Index rose to $31.5 billion as of July 18, compared with a peak of $29.1 billion on the last series in March, according to data compiled by Bloomberg.
Investors are looking for faster ways to express views on investment-grade and high-yield bonds, which are trading less as a proportion of the overall debt outstanding as Wall Street banks use less of their own money to make markets.Bloomberg
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If you like chocolate you better like higher prices too.

Hersey, the big Pennsylvania candy maker, recently announced it was hiking prices 8% owing to higher prices for chocolate, dairy and nuts. Note here the announcement names not just chocolate but dairy and nuts.

Hit hard this year by an on-going drought, California, which grows almost half of the nation's nuts, fruits and veggies, not to mention its role as leading the nation in producing milk and dairy, in 2012 produced nearly 19% of all dairy products.

Last week chocolate prices closed around $3,200 a metric ton, after hitting a three-year of $3,284 earlier in the week.  Mars Candy Company, the privately owned firm noted for its Mars Bars among others, raised prices 7% last week also.

As is usually the case several factors are being blamed for the high coca prices from smuggling in Ghana to 
the Ebola virus.http://247wallst.com/
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Someone once said denial is not just a river in Egypt.

The United States Federal Reserve System is one of the most powerful governmental organizations in the history of the world. America's central bank has control over the supply of dollars, and currently exerts great influence over interest rates, both for short-term and long-term borrowing. And, though the Fed was partly responsible for the regulatory failures that led to the global economy's near-meltdown in 2008-2009, post-crisis reform has left it with even greater authority and more responsibility for overseeing the financial system.

In many countries, people on the right of the political spectrum provide a bastion of support for the central bank. In northern Europe, for example, the European Central Bank's independence is seen as essential for price stability — and politicians on the right typically attach a higher priority to this goal.###



The situation is quite different in the US. Here, the right, represented by the Republican Party, has long been suspicious of the Fed, reflecting its opposition to a powerful federal government, as well as nostalgia for the days of the gold standard (particularly the version that operated before the Fed was created in 1913). The Fed as it currently operates is being protected by the left (the Democratic Party).


For example, I recently testified at a hearing of the House Financial Services Committee on Republican-proposed legislation that would impose on the Fed greater limitations on both monetary policy and regulation. House Democrats oppose the bill and invited me to the hearing, where I explained that the proposed constraints would, in my view, greatly hamper the Fed's effectiveness — including its ability to help the economy return to full employment and to prevent the financial system from spinning out of control again. 

Note: The key paragraph is highlighted ### in this academic's story.

This is academic BS tossed at you from the banks of the Charles River. Dodd-Frank will turn into one of the worst pieces of legislation since 1913 when the IRS and The Federal Reserve Bank were both created in a twofer against the American public.
http://www.cnbc.com/id/101872556

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