The Big Picture

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• Rate hikes by year end?
• Forget Nationalizing: An Irish Renege on Bailouts?
• Online Publishing: Big vs Small
• Calvin & Hobbes Explains Corporate America To You . . .
• What is Consciousness ?
• Dent: Crash Coming
• How Would Japan Respond To Rising JGB Yields?
• Chicago PMI solid in light of macro news
• US/UK: Separated by a Common Financial Crisis
• Housing Quality, Real Median Values

Rate hikes by year end? Posted: 31 Mar 2011 05:31 PM PDT Voting Fed member Kocherlakota in an interview with the WSJ said the fed funds rate could go up by at least 50 bps by year end. He said its “possible” if the economy hits his present estimates. Now anything of course is possible, especially when dealing with the most dovish Fed in its history, but its noteworthy because it comes in the context of other Fed members that want QE2 to end (others of course still don’t) and the fed funds futures market that is only pricing in a 30% chance of just a 25 bps hike by year end. The Fed must be now paying attention to the growing worries of inflation and hopefully read today’s USA Today and saw the comment from Wal Mart, the biggest retailer in the US.

Forget Nationalizing: An Irish Renege on Bailouts? Posted: 31 Mar 2011 02:47 PM PDT Call it The Big Renege: Last month, I discussed what a horrific decision the Irish made when it came to their bank bailouts. They foolishly placed the entire liability for reckless bankers onto the taxpayers. Well, the Irish voters tossed out the entire lot, and the new government has been looking for an excuse to renege on that deal. It looks like they got it after their most recent stress tests, when the government uncovered a €24 billion ($33.9 billion) capital shortfall: In a bid to end a 30-month banking crisis that forced Ireland to accept a €67.5 billion international bailout package and contributed to the ousting of its government, Finance Minister Michael Noonan said Thursday that he will reorganize the sector around two heavily capitalized “pillar banks,” Bank of Ireland and Allied Irish Banks PLC. At least three other lenders will be shut down or merged into other banks, he said. The government already has pumped €46.3 billion into its banks since 2009, meaning the tab could swell to €70 billion if the government has to foot the entire bill. That would represent more than €15,000 for each of Ireland’s 4.5 million residents. Some of the new cost will ultimately be covered by the €67.5 billion bailout, but some funds may also come from either private investors or capital-raising actions by the banks. Understand that this is about more than merely temporarily nationalizing the banking sector. The absurdity of the panic decision to rescue bankers by screwing taxpayers was simply untenable. The bailouts are pushing Ireland to the brink of insolvency. Hence, we may be seeing an early look at not only these banks getting nationalized, but a near future reboot: A pre-packaged bankruptcy reorg for every Irish bank. The alternative is liquidation — of either the banks, or Ireland itself. Good for the Irish to have finally figured this out! (Too bad we Americans have not) > Source: Irish Banks Move Toward Nationalization DAVID ENRICH WSJ, March 31, 2011, 4:28 P.M. ET http://online.wsj.com/article/SB10001424052748703806304576234180828120692.html

Online Publishing: Big vs Small Posted: 31 Mar 2011 12:15 PM PDT Interesting time line from socialmediagraphics: > click for bigger version

Calvin & Hobbes Explains Corporate America To You . . . Posted: 31 Mar 2011 09:51 AM PDT The irony is this is about 10 years old . . . > click for larger image

What is Consciousness ? Posted: 31 Mar 2011 09:37 AM PDT Cool stuff from Information is Beautiful: > click for interactive version

Dent: Crash Coming Posted: 31 Mar 2011 08:54 AM PDT We have been due for a correction (20-25%) for some time now –I dont by the 3000-3800 stuff . . . ~~ Source: Harry Dent: "Major Crash" Coming for Stocks, Commodities Already Topping Out Aaron Task Daily Ticker March 31, 2011 http://finance.yahoo.com/blogs/daily-ticker/harry-dent-major-crash-coming-stocks-commodities-already-20110331-080715-415.html

How Would Japan Respond To Rising JGB Yields? Posted: 31 Mar 2011 07:54 AM PDT Japan could use a dose of rising bond yields (The Financial Times) Japan's recent twin disasters have prompted questions about the country's ability to issue new debt to raise money to rebuild its ruined towns and infrastructure. Japan already has an enormous fiscal deficit – what would happen if it issued even more government bonds (JGBs)? I would argue that by tapping domestic demand this would be accomplished with relative ease. Indeed, given the distribution of household savings, it might be in Japan's long-term interest for bond yields to go up, rather than down. Right now, Japan, the largest creditor in the world, has a current account surplus. So when its budget deficit rises, private sector savings (those of households and companies) go up too. In other words, while rising bond yields add to the budget deficit, they also boost household interest income. Shifting yields simply transfer income between debtors and creditors (foreigners hold negligible amounts of JGBs). Overall wealth does not change in Japan, which is why the primary balance, the bit that is unaffected by interest payments, is important. As a result, deficit financing is relatively unaffected by interest rates. > Comment: We argued quite the opposite recently in regards to the BOJ's recent balance sheet expansion: While this is positive for the markets for now, a rise in either real or expected inflation could change the story. However, our sense is that most portfolio managers do not see this as a real danger at the moment. The JGB chart below underscores this belief. One would expect rates to be rising as a result of this latest liquidity injection if inflation was a real fear. Without any inflationary fears, Japan's expansion of its balance sheet is extraordinarily bullish. If these fears ever do pop up, Japan will find that no amount of liquidity will help its economy/stock market. Furthermore, as we argued on March 16, if JGB yields rise by an appreciable amount the BOJ would be that much more likely to sell some of their holdings of U.S. Treasuries as opposed to issuing their own debt. >

Chicago PMI solid in light of macro news Posted: 31 Mar 2011 07:49 AM PDT Encompassing the late Feb spike in oil prices and the Japanese earthquake, the March Chicago mfr’g PMI was still better than expected at 70.6 vs the estimate of 69.9, though down a touch from Feb when it hit 71.2. New Orders fell slightly but Backlogs rose by 8 pts to the highest since 1974 and the Employment component saw an almost 6 pt jump to the best since 1983. Inventories were little changed. Inflation pressures were evident again as Prices Paid rose 2.2 pts to 83.4, the highest since July ’08. Some of the company comments given in the release were certainly positive on the economy but with the caveats of “commodity inflation hurting profits” and there is “a lot of skittishness up and down the supply chain concerning the effects of fallout from Japan.” We will hear more specifics on these two key issues when earnings season starts a week from Monday. Tomorrow’s ISM will reconcile the regional surveys where the NY and Philly #’s were good but Dallas and Richmond came in below expectations.

US/UK: Separated by a Common Financial Crisis Posted: 31 Mar 2011 07:15 AM PDT Want to understand how utterly corrupted the US has become by its own banks? Consider the regulatory difference between the United States and Britain — whom Jesse Eisinger describes as “two countries separated by a common financial crisis.” “[In the UK], major government figures speak openly about requiring substantially higher bank capital. The governor of the Bank of England, the head of the Financial Services Authority (the equivalent of the Securities and Exchange Commission) and even the conservative chancellor of the Exchequer have backed a bigger crackdown on the banking sector. While the international banking rules, called Basel III, settled on 7 percent as the minimum standard for a certain kind of capital, it's acceptable in Britain to talk about having significantly higher standards. A recent Bank of England paper contemplated capital on the order of 15 to 20 percent. Here, that thought is restricted to cranks and university professors . . .” My shorter version of what Jesse is saying: -The banks own Congress -Regulators have long been captured -7% capital reserves = 14 to 1 leverage is unacceptable to banks (pre-crisis levels used to be 12 to 1 before waivers were granted) -The Obama White House, tainted by Robert Rubin pro-bank staffing recommendations, missed their window to really fix what is broken on Wall Street. -Another major financial crisis is inevitable Go read the full article . . . > Source: In Debate Over Bank Capital Regulation, a Trans-Atlantic Gulf JESSE EISINGER, ProPublica March 30, 2011, 4:24 pm The Trade   http://dealbook.nytimes.com/2011/03/30/in-debate-over-bank-capital-regulation-a-trans-atlantic-gulf/

Housing Quality, Real Median Values Posted: 31 Mar 2011 06:15 AM PDT Visualizing Economics looks at what happens to the classic Case Shiller housing graph when you adjust for size, quality, etc. My longstanding view has been that the bubble was in credit, and the credit bubble caused the overall housing boom and bust, as well as select regional bubbles. > click for ginormous version Source: Visualizing Economics

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