Dollar Hits New Lows Vs. Euro, Pound: Financial News.
FWIW, the Canadian Dollar is near parity, $1.0431CDN:USD.
The Fed cannot lower interest rates, it would create a run on the dollar.
Category: Economy
This is How You Apologize if You are Mensch
Brian Caplan offers an apology.
Mea Culpa: How I Succumbed to Anti-Foreign Bias
Bryan CaplanA high fraction of immigrants are young, low-skilled, Hispanic males. Given these demographics, I long assumed that immigrants would have relatively high crime rates. While I kept this problem in perspective, I took it for granted that increased crime was a genuine drawback of immigration.
I was wrong.
A fascinating NBER Working Paper (earlier, free version here) by Kristin Butcher and Anne Piehl shows that, despite their demographics, immigrants are drastically less criminal than native-born Americans. In fact, immigrants have one-fifth the incarceration rate of natives. Yes, natives are incarcerated at five times the rate of the foreign-born:
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Let’s be clear, the error here is minor, as he is pro large scale immigration, he was arguing for this in spite of what he thought were crime issues, which is far more benign than what Lou Dobbs done.
I tend to be closer to Dobbs than I am to Caplan, though for economic issues (I don’t believe that there are jobs Americans won’t do, just jobs they won’t do for pennies.
Another Real Estate Myth Busted
Remember how all these people are saying that the real estate crash will drive rents up, because people will be buying, not renting? Nope.
There’s a lot of softness in the rental markets too.
This will increase, as condo projects that don’t sell are forced to become rental units.
What’s Going On With Subprime Loans
I came across this post at Alea blog, which has a picture worth many thousands of words:
As you can see, the other loan default rates are at or below their levels in the 2001-2002 recession.
The big question is whether the other default rates will follow subprime variable rates.
My guess is yes, for at least 2 of the remaining 3. Notwithstanding the Dow, we are headed for a slow down, and interest rates are going to have to rise. They are still at or near historically, and unsustainably, low levels.
With oil likely to break 90 by year’s end, and trillions in mortgage resets due to hit in the next few years, I see it as getting very, very bad.
And Then There is The Yen Carry Trade
While I have talked about currencies, it has primarily been about the fall of the dollar relative to the Euro. A more significant risk in the short term is a strengthening Yen.
Much of the current investment mania has been driven by the Yen carry trade.
Basically, Japan has the lowest interest rates in the industrialized world, so if one borrows money in Yen, and invests them in another country.
The Japanese interest rates are currently arounc 0.5% (no, I did not misplace a decimal point), so you could invest in the US at around 4-5%, and pocket the difference.
The rates are low because of the long Japanese recession, and deflation, starting in the early 1990s.
The carry trade is not risk free. If the Yen strengthens versus the Dollar, then you have to pay back more dollars, and you can end up losing money.
Japan appears to be finally over its 15 year downturn, it’s economy “grew at a 3.3 percent annual rate in the first quarter”, so it’s likely that the central bank will raise rates, which will bolster the Yen generally.
In any case a rate of 0.5% is simply not sustainable, so it has to go up, and the currency can be expected to go up then too.
So, in addition to the private equity binge, sub prime mortgage securities, exotic mortgages generally, and an IPO boom, we have another potential for a collapse with the Yen strengthening.
An Unbelievably Bad Wall Street Journal Editorial
Even by the standards of the WSJ editorial page, which has a relationship to truth analogous to the relationship that Ebola has to French kissing.
Mark Thoma, an economist, blogs writes about the vicissitudes of the Laffer curve.
What the Laffer curve says is that there is a point where tax increases, through depressing economic activity, and encouraging tax avoidance behavior, will actually depress revenue.
It’s fairly straightforward. the question is where this point.
So Kevin Hasset, comes up with the following graph:
What’s wrong with the graph? He’s plotting through three points out of over a dozen to push a lie.
A least squares regression gets this:
Tax receipts increase as taxes go up, now there’s a shocker.
In fact Laffer himself suggested that the point where tax receipts would drop would be well north of 50%.
There is the additional lie that much of what they are showing by way of Norway’s revenues are as a direct result of revenues generated by it’s massive reserves in fossil fuels.
Deliberately and transparently dishonest editorials are being given legitimacy because of the sterling news operation of the Journal, and is why there is a part of me that hopes that Murdock destroys the WSJ.
Please, Someone Lock These People Up With Leona Helmsley
It appears that Blackstone partners may avoid taxes on their IPO profits completely.
Here is the short form:
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The paper says that of the $4.75 billion raised by the Blackstone IPO, the firm attributed $3.7 billion to good will, an accounting term that estimates the value of the intangible assets rather than tangible assets such as buildings and equipment owned by the firm.That $3.7 billion is taxed at a 15 percent tax rate used for capital gains, meaning that the firms’ partners had to pay taxes of $553 million on their gain.
But by transferring that good will to a new corporate structure, the firm is able to deduct that $3.7 billion as a business expense at a 35 percent tax rate, reducing taxes by $1.3 billion over a 15-year period, according to the report.
The Times reports that under terms of the IPO, the Blackstone partners are entitled to 85 percent of those tax savings, or $1.1 billion. They are also able to account for those savings as a lump sum, when adjusting for the current value of those savings over the next 15 years. That brings current tax savings to $751 million, or $198 more than they had been required to pay in taxes on the $3.7 billion gain seen from the IPO.
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Damn!!! It’s enough to make one a Marxist.
Truth is, I am, but Groucho, Chico, Harpo, Zeppo, and Gummo, not Karl.
Retail Sales Fall.
Retail sales fell 0.9 percent in June.
While one bad month does not a trend make (May was OK), when juxtaposed to rising oil and gas prices, a crashing housing market, and the dollar dropping, I’m concerned.
Dollar Mixed After New Low Vs. Euro: What Does it Mean
Yesterday, the Dollar hit an all time low vs. the Euro.
Additionally, the dollar has weakened to the lowest amount against the pound since 1981.
What does this mean if this trend continues?
Basically, it means that foreign investors will demand greater return because the risk of their losing money from foreign exchange fluctuations increases. This means higher interest rates, since the US trade deficit is being supported by foreign investors.
Of particular note would be an increase in oil prices.
Furthermore, this is inflationary, since there is an awful lot that is not made in the US any more, and as the dollar drops, the price of these items go up, which will force the Fed to further raise interest rates.
The increases in inflation will reduce consumer spending power, and a significant downward pressure on house prices, as people purchase based on monthly payment, not price.
Additionally, if oil suppliers get skittish, they may switch to Euro denomination of oil purchases, Venezuela and Iran already have for political reasons, and there will be pressures on foreign national banks to further diversify out of the dollar in order to preserve their reserves.
You notice that it all feeds itself.
Additionally, when one looks at systems like this, the changes tend to be abrupt, and there is significant overshoot, so this can get very ugly in a matter of weeks.
Sallie Mae Takeover Threatened by Law Changes
Sallie May (SLM Corp) is the 800 pound gorilla in the student loan market. They are also one of the worst offenders in the current spate of student loan scandals.
Well now, a planned private equity deal involving Sallie Mae is at risk because of legislative changes.
Basically, the law will slash the subsidies to student loan providers, and reduce the interest that they can charge, so SLM is a much less attractive takeover target.
This is a good thing. The private players in the student loan market suck. They shaft the students, and they cost the taxpayers money. The direct federal program saves money for the taxpayer.
Private Equity is Not Trying Blackmail Over Tax Code
It appears that the managers of private firms are threatening to stop doing deals if they don’t get to keep their tax loophole.
This is bulls%$#. A private equity firm that does not do deals is shut down. Furthermore, they make a lot of money now.
While I do not support the capital gains tax break, I don’t see why we should favor unearned income over that created by honest work, the theory is that you reward people for risking their own money. Here, their fees are for managing someone else’s money. It’s normal income period.
Two Million Adjustable Mortgages to Reset
You heard right, over the next few months, TWO MILLION mortgates will reset:
Borrowers who took out hybrid ARMs in 2004 and 2005 to secure low “teaser” rates for the first two or three years of the loan may see their monthly mortgage payments climb by 35 percentor more.
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“In October alone more than $50 billion in ARMs will reset,” according to Mark Zandi, chief economist and co-founder of Moody’s Economy.com. That’s a record, according to Zandi.
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I paid 20% down in 2004 for a 30 year fixed.
I fully expect to be under water at some point in the near future, dispite the fact that the value increased by over 40% from 2004-2006.
More Blood in the Hedge Fund/Derivative Water
My commentary is at the end.
Italease blow-up stokes derivatives fears
By Ambrose Evans-Pritchard
Last Updated: 1:47am BST 05/07/2007A derivative blow-up at the Italian bank Italease has sent tremors through Milan’s banking fraternity and exposed the hidden dangers of exotic credit instruments.
The bank has paid off 610 million euros (£419m) in recent days to counter-parties in what amounts to a massive margin call after interest rate rises in Europe caused hedging and derivative losses by clients to mushroom out of control.
The share price has tumbled 9pc so far this week, and is down 64pc since the troubles first began to emerge in April.
“These derivatives were very complex and suddenly turned against us,” said Pierantonio Arrighi, the bank’s spokesman.
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Think about that last statement. They are saying that they do not understand the instruments that that they are investing in.
This is a freaking bank, and they do not understand the instruments that that they are investing in.
Jeebus.
Would someone put adults in charge?
Home Foreclosures: This is Not San Francisco, Florida, or New York.
One of the things that is going on right now is that the bottom of the housing market has stopped selling.
This IS going to work its way up the chain.
Increasing Rate of Foreclosures Upsets Atlanta
By IKAS BAJAJATLANTA — Despite a vibrant local economy, Atlanta homeowners are falling behind on mortgage payments and losing their homes at one of the highest rates in the nation, offering a troubling glimpse of what experts fear may be in store for other parts of the country.
The real estate slump here and elsewhere is likely to worsen, given that most of the adjustable rate mortgages written in the last three years will be reset with higher interest rates, said Christopher F. Thornberg, an economist with Beacon Economics in Los Angeles. As a result, borrowers of an estimated $800 billion in loans will be forced in the next 12 months to 18 months to make bigger monthly payments, refinance or sell their homes.
A big reason the fallout is occurring faster here is a Georgia law that permits lenders to foreclose on properties more quickly than in other states. The problems include not just people losing their homes, but also sharp declines in property values, particularly in lower-income and working-class neighborhoods.
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Subprime Bond Ratings Slashed
Subprime bonds ratings are being dropped.
This means that as they refinance, the interest rates will go up, a lot. There are likely to be a lot of funds who will not be able to afford this, and will have to liquidate, further driving up interest rates as the perceived risk goes up.
PHONY UNEMPLOYMENT NUMBERS
There is an interesting article at the American Prospect, Jobs Report: Sagging Employment Rates.
Short story, workforce participation is dropping at the same time that unemployment is dropping.
Slightly longer story: real unemployment is up, way up.
Longest story: go to article, it’s about 5-6 graphs.
Relative Taxes, Which Country has More Money in Pocket.
Facing South has a a good analysis of how our real earnings compare to those of Europe:
Going back to the previous example of combined employer and employee income and “social security” taxes, here’s the same example with only the employee’s portion, i.e. take-home pay after payroll deductions:
Take-home pay, $50,000 income (USD) US France UK Payroll Tax $3750 $4500 $4352 Income Tax $6945 $7915 $8156 Take-home $39,305 $37,585 $37,492 So the British and the French take home a little less and pay a little more in VAT, but their health care is fully covered (the French employee is still paying the 8% for 100% coverage). The American employee still has to pay for health insurance (anywhere from $600 to $3000 per year in payroll deductions depending on the type of policy and company size), and most also pay additional state and local income taxes (for example, approx. $2500 in Georgia, $3000 in North Carolina, or $3900 in NYC).
Not only is he missing the whole safety net, but also the fact that a car is a luxury in places like the UK and France, where a good mass transit system exists, but a necessity in the US.
Additionally, you have far fewer worker protections here.
We spend more, but that’s because we are in debt up to our eyeballs.
People Cannot Sell Their Hedge Fund Investments at ANY Price.
There is something like 500 trillion in instruments like this. What happens if even 5% of that goes south?
Buyers avoid Bear Stearns’ cut-priced sale
By James Mackintosh and Gillian Tett in LondonPublished: July 4 2007 03:00 | Last updated: July 4 2007 03:00
Investors in the worse-hit of two stricken Bear Stearns hedge funds are offering to sell their holdings for as little as 11 cents on the dollar but still finding no buyers, according to unfilled trades on Hedgebay, a secondary market for funds.
Vulture funds and others have been quick to bid for holdings in the two funds, but the best bid for Bear Stearns High-Grade Structured Credit Strategies Enhanced Leveraged Fund, the more geared of the two, is just 5 cents on the dollar.
Private sales of stakes are the only way investors can exit the two Bear funds, after the bank suspended redemptions in May amid a wave of withdrawals.
“There are buyers but they can’t agree on price,” said Jared Herman, co-founder of Bahamas-based Hedgebay.
The less-geared Bear Stearns High-Grade Structured Credit Strategies Fund, which the bank has rescued with a $1.6bn loan, is being offered at about 70 cents on the dollar. The fund is only attracting bidders at about 30 cents, according to people who use the system.
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The Enhanced Leverage Fund’s net assets of $638m were more than 10 times geared in March, meaning a drop of just 10 per cent in the value of its holdings would wipe out investors.
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drop of half the value is not unrealistic right now if a seller needs to sell
A 50 percent drop means that anyone who has bought or refinanced in the past 15 years would be owing more than they could sell the home for.
This is why short sales, where the bank accepts a loss, are becoming more common.
Seller cuts price of house by $1 million
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Mary Anne Windes, a veteran broker in Destin who has Real Estate Professionals of Destin, said in an e-mail interview, “The trend is that prices are moving to the same level that they were in 2003. As you will recall, 2004 and 2005 saw tremendous and often unrealistic growth. The market has now corrected itself. Many properties doubled in value during that time, so a drop of half the value is not unrealistic right now if a seller needs to sell.”
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United Capital Asset Management hedge funds halt withdrawals – Jul. 3, 2007
This is called a run on the bank, and when investments start to become illiquid this way, people lose everything.
United Capital Asset Management hedge funds halt withdrawals
Embattled hedge fund management group suspends redemptions from four funds following losses in subprime mortgages.
July 3 2007: 3:43 PM EDTNEW YORK (CNNMoney.com) — United Capital Asset Management has temporarily suspended payments from four of its Horizon funds following losses from its investment in subprime mortgage bonds.
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In the past ten days, the firm received an unusually high number of redemption requests, including one from its largest investor which accounts for one-quarter of the firm’s assets under management.