Mortgage Meltdown, More Pain To Come

T2 Partners has a phenomenal series of charts on the housing crisis stating Why There Is More Pain To Come.

The report is 69 pages almost all of them loaded with charts. I took a liberal selection below, adding plenty of comments, but please take a look at the original article for many additional charts. All charts below are from the article. Click on any chart to see a sharper image. Quotes from the article in italics. My comments are in plain text.

Case Shiller vs. Lawler



Nearly everyone is familiar with Case Shiller. I suspect most have not heard of Lawler. Interestingly there is a feud of sorts between the two as noted by the Wall Street Journal article Outlook for Home Prices Clouded by Spat Over Historical Trends.

Yale University economist Robert Shiller has often dazzled audiences with a chart showing home prices from 1890 to present. Someone even used Mr. Shiller's chart to make a YouTube video that puts its viewer on a roller-coaster ride over peaks and valleys in home pricing. It's a bumpy ride.

Now another economist, Thomas Lawler, says Prof. Shiller's chart is "bogus." Mr. Lawler says Mr. Shiller cobbled together data that are inconsistent and sometimes unreliable. Mr. Shiller defends his work and accuses Mr. Lawler of making "wild allegations."

No one has found a precise way to measure changes in house prices. Because no two homes are exactly alike, changes in the price of one won't necessarily be matched even by apparently similar homes nearby, much less those hundreds of miles away.

But that doesn't stop analysts from extrapolating from what may be dubious data. In a March 30 report, T2 Partners LLC, a New York hedge-fund manager, drew on the Shiller chart to conclude that on average U.S. home prices need to drop another 13% to get back in line with the long-term trend.

Mr. Lawler has created an adjusted version of the Shiller chart, backing up his view that house prices already are nearing a bottom in much of the country. A T2 partner called Mr. Lawler's critique "valid."

I guess we need to define "nearing a bottom". We also need to look at concentrations of houses. Does it matter much if home prices are bottoming across vast sections of the farm belt with low density houses if the big cities are still declining rapidly?

Certainly we are closer to a bottom than two years ago but I am betting the bottom is still years away although the rate of decline is slowing.

Mortgage Debt vs. Equity



Americans Have Borrowed Heavily Against Their Homes Such That the Percentage of Equity in Their Homes Has Fallen Below 50% for the First Time on Record Since 1945.

Gorged In Debt




Over the Past 30 Years, We Have Become a Nation Gorged in Debt – To The Benefit of Financial Services Firms.

Think that leverage is coming back? I don't. The Effect of Household Deleveraging on Housing, Consumption and the Stock Market is going to be far greater than most realize. This bubble will not be reblown, just as the Nasdaq bubble was not reblown after the tech crash.

Peak Credit and her twin sister Peak Earnings have arrived.

Surge of Toxic Mortgages



It took a decade to blow the bubble. It is going to take more than a few years to clear it.

Fannie Mae and Freddie Mac Account for 56% of Mortgages



Private Label Mortgages (Those Securitized by Wall St.) Are 15% of All Mortgages, But Are 51% of Seriously Delinquent Mortgages.

Mortgage Delinquencies as Percentage of Loans



Nearly 8% of Mortgages on 1-to-4-Family Homes Were Delinquent or in Foreclosure as of Q4 2008.

This number is bound to get much worse, and/or taxpayer bailouts get much bigger given that job losses are over 500,000 for months on end. Moreover, Fitch estimates 75 percent of the modifications now being done through the administration's Making Home Affordable program will re-default in six months to a year. Please see More Prime Foreclosures; More Re-Defaults for details.

Subprime Resets




Here's the good news:
The Wave of Resets from Subprime Loans Is Mostly Behind Us.

Alt-A Mortgage Resets



Here's the bad news:
There Are $2.4 Trillion of Alt-A Mortgages and Their Resets Are Mostly Ahead of Us.

Option Arm Oiginations



About $750 Billion of Option ARMs Were Written, Nearly All at the Peak of the Bubble.

Option ARMs by State


California accounts for 58% of all Option ARMs. Think Wells Fargo, a big option ARM player is going to come out of this glowing? Warren Buffett does. I don't. Place your bets.

Option Arms Index vs. Fannie Mae 30 yr Index




Beginning in March 2005, High-FICO-Score Borrowers Opted for an Above-Market-Rate Option ARM in Exchange for the Low Teaser Rate

Option ARM Delinquencies



Delinquencies of Securitized Option ARMs Are Soaring

Cal Sales vs. Home Equity Loans



Think new car sales are going to come soaing back with rising unemployment and tightening loan standards? Think again.

Case Shiller vs. NAR Median Sales Price vs. OFHEO Index



Home Prices Are in an Unprecedented Freefall

Bubble Market Declines



The bubble markets (where most people live), have taken a brutal beating.

24% of Homeowners With a Mortgage Owe More Than the Home Is Worth, Making Them Far More Likely to Default

Shiller Lawler Trendlines



Home Prices Need to Fall Another 5-10% to Reach Trend Line

Whether you believe Shiller or Lawler, home prices still need to fall to reach the trendlines. Moreover there has never been a bubble correction in history that stopped right at the trendline.

Change In Nonfarm Payroll Employment



There have been job losses every month since December 2007. Moreover, there is no letup in sight as Continuing Claims Approach 6.8 Million, 17th Consecutive New Record.

The dip in initial claims from the March peak of roughly 650,000 is not accelerating very fast, if indeed at all. Those looking for a recovery in jobs soon are going to be disappointed.

Economists expect to see unemployment by 10% at the end of the year. I expect to see it at 9.8%+- by August and approaching 11% by the end of the year. Bear in mind the "stress-free tests" conducted by the Fed had an adverse scenario of 10.3% at the end of 2010.

Declines in Jobs vs. Past Recessions



The Decline from Peak Employment Now Exceeds the Past Five Recessions.

Total Bank Losses



Total Losses Are Now Estimated at $2.1-$3.8 Trillion – And Less Than Half of This Has Been Realized To Date.

Losses & Writedowns vs. Capital Raised



Institutions Have Been Able to Raise Capital to Mostly Keep Up With Writedowns, But This Will Likely Not Continue.

What can't be paid back will be defaulted on. Consumers with no job have no chance of paying back those debts. Many others who could, won't (because it is in their best interest to walk away). The Alt-A and Option ARM defaults are going to be massive.

Think this leads to inflation? Think again.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Now Playing: Your Water Drop Photos

Here's a quick slideshow of some of the water drop photography already showing up in the Strobist pool since Friday's tutorial post.

(NOTE: If you are reading via RSS or email, you may need to click on the post's title to view the photos.)

-30-

More Prime Foreclosures; More Re-Defaults

John Mauldin has another interesting weekly letter called This Way There Be Dragons. Here's a look at the section on housing. Emphasis mine.

"Yesterday Fitch ratings estimated that up to 75 percent of the modifications now being done through the administration's Making Home Affordable program will re-default in six months to a year. I'm not talking about the old modifications, which were largely repayment plans that could actually raise monthly payments. I'm talking about the new mods, which lower monthly payments to 31 percent of a person's income. I couldn't understand Fitch's reasoning, so I called them.

"Diane Pendley, managing director at Fitch, said the problem is not on that "front-end" ratio, but on the back end, which is all of the borrowers other debt (credit cards, car loans, student loans, etc.). She said that in talking with servicers, she's hearing other debt is so high that most of today's troubled borrowers cannot afford any loan payment at all, even at a very modest debt-to-income ratio. 'Just getting the house payment done doesn't mean their lifestyle is sustainable,' she said.

"Another problem is that with home prices continuing to fall, more and more borrowers, who are essentially just renting their mortgages now because they will never see any home equity, are walking away. Even if the mortgage payment is low, the property taxes and home maintenance costs are padding that payment, and without an upside to the investment, there's simply no reason to pay. Suffice it to say, the foreclosure crisis, on the high and low ends, is not getting any better."

And it gets worse.
More Prime Foreclosures In Our Future

The Mortgage Bankers Association noted that a record 12%, or 1 in 8 homeowners, in the US are now behind on their payments or in foreclosure. 10.6% of the mortgages in Florida are now somewhere in the process of actual foreclosure. (My seatmate here on the flight says the prices on the condos where he lives are now back to 1998 levels. It would be scary, he said, if you had to sell. There are new developments that only have 10% actual occupancy, as the bulk of the condos were bought for speculation. Now those 10% of buyers are having to shoulder all the fees for upkeep. Nobody will buy, because the upkeep costs can be more than the mortgage. It is a vicious cycle.)

In Nevada foreclosures are 7.8%, Arizona 5.6%, and California 5.2%. 25% of subprime loans are now in foreclosure, 14% of FHA (government, taxpayer-guaranteed) loans and a growing 6% of all prime loans are now in foreclosure. (Note: the seasonal adjustments may overstate the actual numbers, as we are in new territory in terms of actual foreclosures.) Quoting from the MBA press release:

"In looking at these numbers, it is important to focus on what has changed as well what continue to be the key drivers of foreclosures. What has changed is the shifting of the problem somewhat away from the subprime and option ARM/Alt-A loans to the prime fixed-rate loans. The foreclosure rate on prime fixed-rate loans has doubled in the last year, and, for the first time since the rapid growth of subprime lending, prime fixed-rate loans now represent the largest share of new foreclosures. In addition, almost half of the overall increase in foreclosure starts we saw in the first quarter was due to the increase in prime fixed-rate loans."

Servicer Incentives

We are refinancing mortgages at attractive rates, with taxpayers picking up the tab via Fannie, Freddie and the FHA. Let's revisit the Home Affordable Modification Program Guidelines to see how ridiculous the program is.

Servicers will receive an up-front Servicer Incentive Payment of $1,000 for each eligible modification meeting guidelines established under this initiative. Servicers will also receive Pay for Success payments –as long as the borrower stays in the program – of up to $1,000 each year for up to three years. Similar incentives will be paid for Hope for Homeowner refinances.

One-time bonus incentive payments of $1,500 to lender/investors and $500 to servicers will be provided for modifications made while a borrower is still current on mortgage payments.

Taxpayers are forking money over to Countrywide and other servicers at $1,000 a pop (or more) for loan mods, of which 75% will re-default in less than a year because "most of today's troubled borrowers cannot afford any loan payment at all".

Is this a great idea or what? No doubt Bank of America supports it 100%. It's all part of Geithner's "Heist America Plan".

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Click It or Ticket Insanity; 10% of Texans Have Arrest Warrants

Cash strapped cities, states, and municipalities are increasingly looking to raise revenue by issuing tickets instead of cutting expenses.

JL writes ...

Hi Mish
I have had 3 different people tell me they got tickets from the CHP or San Francisco Police over the weekend. One ticket was written for having tinted windows. The officer in SF wasn’t even interested in the fact that the windows were tinted by the Audi Company and by regulation.

On one section of 101, where it’s not “really a highway” the CHP were lying in wait behind bushes-in a multicar queue for a rapid rollover of wallets. The motherload, a carpool violation, was enforced en masse on the Bay Bridge on Friday prior to the holiday. That’s 300 bucks a pop and I saw about 6 tickets being written where normally I see about 2 a week being enforced.

Public enforcement of law is fine, but it’s pretty obvious that the authorities have more in mind this year. Click it or TICKET. As if it’s really a big problem these days!

CHP Memorial Day Weekend Maximum Enforcement

Revenue enhancement was in full swing over Memorial day weekend as noted in CHP Memorial Day Weekend Maximum Enforcement.

The three-day holiday is a Maximum Enforcement Period (MEP) for the CHP. All available officers will be patrolling the roadways during the MEP, which begins at 6 p.m. Friday, May 22 and extends until midnight on Monday, May 25.

The CHP’s maximum enforcement effort is also part of the state’s recently launched 2009 Memorial Day Next Generation Click It or Ticket mobilization. The start-of-summer campaign is supported by $3 million in traffic safety grants awarded by the California Office of Traffic Safety through the National Highway Traffic Safety Administration. The CHP’s primary mission is to prevent loss of life and injury to all motorists. That mission parallels the Strategic Highway Safety plan, a roadmap for improving safety on the state’s roadways that all state traffic safety organizations follow. An element of the plan is to improve the use of passenger restraints.

The Memorial Day MEP is also an Operation Combined Accident Reduction Effort (CARE) holiday. Operation CARE is a joint program of the nation’s highway patrols that places special safety emphasis on interstate highways during holiday periods. CARE highways in California include Interstates 80, 40, 15 and 5.

Dallas County Half Its Annual Revenue From Fines And Fees

Inquiring minds are investigating interesting trend regarding fines in Texas. Please consider Dallas County looks to traffic ticket revenue for budget shortfall.

The February issue of Car and Driver includes a story describing how many jurisdictions are giving more traffic tickets as a revenue booster during tough financial times.

In Texas, to my mind, we've already taken this strategy about as far as it can go, to the point that, right now, more than 10% of Texas adults have outstanding arrest warrants - mostly for traffic tickets.

Dallas County represents perhaps the most extreme example of this trend in Texas. According to the Dallas Morning News ("Dallas county to vote on withholding vehicle registrations for those who owe fines," Feb. 9), "Unlike most counties, Dallas County gets slightly more than half of its annual revenue from fines and fees. Other counties rely more heavily on property-tax revenue."

Now Dallas plans to step up the pressure on even more on folks who can't or don't pay traffic fines, denying vehicle registration to drivers with outstanding traffic tickets. Again, we're talking about more than 10% of the adult population!

It seems almost unfathomable to me that a majority of county revenue would come from fines and fees. That's an untenable economic arrangement, but I suppose when more than 10% of adults owe fines, there's a deep well to draw from, though it's still crappy public policy.

More likely, more drivers will simply drive unregistered vehicles, which will cause them to accumulate more tickets they can't pay and creating a vicious cycle that makes the situation more chronic and intractable. And since Texas already holds up vehicle registration for drivers without auto insurance, the plan will almost certainly increase the number of uninsured drivers on the road. Just what we need, huh?

More than 10% of Texans currently wanted by police

Texas State Senator Eliot Shapleigh is talking about Working on the Chain Gang.

A couple of weeks ago, the local paper printed names of El Pasoans with outstanding arrest warrants. 78,000 El Pasoans made the paper! What’s going on here?

Here are the facts. Of the 78,000 almost all are for moving violations. When we compared Austin, same story: 11% of Austin has outstanding arrest warrants.

Nearly one in ten Texans can’t pay: students, single mothers, working families, essentially low and even middle income Texans whose income can’t keep up with gas, insurance, taxes and tickets too.

Our office has interviewed several Texans listed for outstanding warrants to determine the impact to them. Names were changed in order to preserve anonymity.

Jane Smith who works in El Paso has close to $3,500 dollars in outstanding tickets. She is behind on her rent. Under Texas Driver Responsibility laws she will also face over $3,000 in surcharges.

During the early years of Texas, thousands came here from England and the East Coast to escape debt (and debtor’s prisons). Today, our own tax system uses the threat of prison to collect trauma care money.

Working on the chain gang makes it awfully hard to pay for a ticket.

More Tickets in Hard Times

Car and Driver is reporting More Tickets in Hard Times.

Motorists beware: In some communities, police are issuing tickets during these hard times at a rate higher than ever in what critics say is an attempt to raise revenue in order to offset budget shortfalls.

Take, for example, the metropolitan Detroit area, which has been reeling economically much longer than has the rest of the country. The number of moving violations issued has increased by at least 50 percent in 18 communities in the metro area since 2002—and 11 of those municipalities have seen ticketing increases of 90 percent or more.

The president of a state police union isn’t pretending it doesn’t happen. James Tignanelli, president of the Police Officers Association of Michigan union, says, “When elected officials say, ‘We need more money,’ they can’t look to the department of public works to raise revenues, so where do they find it? Police departments.

“A lot of police chiefs will tell you the goal is to have nobody speeding through their community, but heaven forbid if it should actually happen—they’d be out of money,” Tignanelli says.

Police Chief Michael Reaves of Utica, Michigan, says the role of law enforcement has changed over the years. “When I first started in this job 30 years ago, police work was never about revenue enhancement, but if you’re a chief now, you have to look at whether your department produces revenues,” he says. “That’s just the reality nowadays.”

Some police officers, such as Sgt. Richard Lyons of Trenton, Michigan, say they don’t like being pressured to write more tickets.

“That’s not what I got into law enforcement for—to hand out chintzy tickets,” says Lyons, a 21-year veteran. “Things have changed from when I first started in this job. There was a time when you’d come in, do your job, and go home.

But I’ve never felt pressure to bring revenue to the city like we do now.

“It’s a whole different ball game now,” Lyons says. “They’re trying to use police officers to balance the budget on the backs of drivers, and it’s too bad. The people we count on to support us and help us when we’re on the road are the ones who end up paying the bills, and they’re ticked off about it. We might as well just go door to door and tell people, ‘Slide us $100 now since your 16-year-old is going to end up paying us anyway when he starts driving.’ You can’t blame people for getting upset.”

I got a speeding ticket in California earlier this month. I feel fortunate actually since I keep my proof of insurance in my glove compartment (at home in Illinois). I never thought about the need to carry a copy when traveling. I easily could have received two tickets. The officer decided to let it pass. $372 was a big enough fine as it was.

Last week I was stopped a half mile from where I live. I have a tendency to start driving then put on seat belts later. The officer let me go with a verbal warning because I live in the village.

Two days ago I was near Woodfield Mall, a huge shopping center in Schaumburg Illinois. Police were parked near all the entrances and exits. Three police cars and a motorcycle were situated at one key spot. It was the mother of all Click It or Ticket operations. 6 people were pulled over in 30 seconds when I went by. I bet they issued hundreds of tickets that day. 1000 would not surprise me.

Leave the mall without your seat belt on and get a ticket.

In addition, traffic "eyes" are sprouting up everywhere near where I live. Is this making anyone safer? I doubt it. Then again it's not supposed to. Moreover, it's so out of hand that 10% of Texans in some major cities have arrest warrants. How's that for complete insanity?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Rail Traffic Down; Truck Traffic Down; Air Cargo Hoping For A Bottom

Green shoots are not yet showing up in cargo statistics. Let's take a look starting with AAR: Rail freight traffic down from a year ago.

Freight traffic on U.S. railroads during the week ended May 23 remained down in comparison with last year, although it did show an increase from the previous week this year, the Association of American Railroads reported today.

U.S. railroads originated 259,265 cars during the week, down 21.5 percent from the comparison week in 2008, but up 4.9 percent from the previous week this year. In comparison with last year, loadings were down 16.4 percent in the West and 28.0 percent in the East.

All 19 carload commodity groups were down from last year, with declines ranging from 4.8 percent for farm products other than grain to 59.7 percent for metallic ores.

Intermodal volume of 188,885 trailers or containers was off 19.1 percent from last year, with container volume down 14.2 percent and trailer traffic off 37.2 percent. Intermodal volume was up 0.2 percent from the previous week this year.

For the first 20 weeks of 2009, U.S. railroads reported cumulative volume of 5,295,843 carloads, down 19.3 percent from 2008; 3,720,454 trailers or containers, down 16.8 percent; and total volume of an estimated 562.0 billion ton-miles, down 18.2 percent.

Canadian railroads reported volume of 53,316 cars for the week, down 33.5 percent from last year, and 37,052 trailers or containers, down 18.9 percent. For the first 20 weeks of 2009, Canadian railroads reported cumulative volume of 1,193,070 carloads, down 23.4 percent from last year; and 810,785 trailers or containers, down 14.5 percent.

Mexican railroads reported originated volume of 13,102 cars, virtually the same as last year, and 5,188 trailers or containers, down 18.8 percent. Cumulative volume on Mexican railroads for the first 20 weeks of 2009 was reported as 219,541 carloads, down 12.3 percent from last year; and 95,217 trailers or containers, down 19.8 percent.

Combined North American rail volume for the first 20 weeks of 2009 on 14 reporting U.S., Canadian and Mexican railroads totaled 6,708,454 carloads, down 19.9 percent from last year, and 4,626,456 trailers and containers, down 16.4 percent from last year.

Rail Carloading Report

The Weekly Railfax Rail Carloading Report has the hollowing charts of interest.

Total Industry Charts, US, Canada, Mexico



Additional charts show numbers up from earlier in the year. However the charts also show a seasonal dip at the beginning of the year.

Is truck freight bottom close?

Fleet Owner is asking Is truck freight bottom close?

Freight tonnage fell again in April, according to numbers released by the American Trucking Assns. (ATA), indicating that trucking companies are still facing lean times.

The ATA said its seasonally adjusted for-hire truck tonnage index fell 2.2% in April, after plunging 4.5% percent in March. Compared with April 2008, tonnage contracted 13.2%, which was the worst year-over-year decrease of the current cycle and the largest drop in thirteen years, said Bob Costello, ATA chief economist.

“While most key economic indicators are decreasing at a slower rate, the year-over-year contractions in truck tonnage accelerated because businesses are right-sizing their inventories, which means fewer truck shipments,” he explained. “The absolute dollar value of inventories has fallen, but sales have decreased as much or more, which means that inventories are still too high for the current level of sales. Until this correction is complete, freight will be tough for motor carriers.” Costello added that truck freight has yet to hit bottom and it could be a few more months before this occurs.

However, Eric Starks, president of research firm FTR Associates, pointed out that while the freight market might not have bottomed out as of yet, it’s very close to doing so. “We still think we’ll reach that bottom around the middle of summer,” he told FleetOwner.

The “million dollar question” from Stark’s perspective is how long the freight market will stay at the bottom. “Even once we reach the bottom, [trucking companies] are not out of the woods. We could sit with some very depressed freight levels for some time,” he cautioned.

Air cargo at a bottom?

The International Air Transport Association says air cargo market probably hit bottom.

A decline in the air cargo freight market following the international financial crisis seems to have hit bottom, the head of the International Air Transport Association said on Sunday. Air cargo, a key barometer of world trade, has slumped amid the global economic downturn and shortage of financing. Global air freight volumes in January saw a record 23 percent year-on-year dive.

"I would say, looking at the numbers, that it has hit bottom," the global association's Director-General Giovanni Bisignani told Reuters.
Bisignani said the market had at least been stabilising at levels around 20 percent lower than a year ago.

"It's not yet enough to say that the situation is picking up because this is also linked with the level of inventories of the manufacturers. So we have to wait at least another 3 or 4 months in order to see if we start moving."

Rebound Questionable

Shipping may have bottomed, but as long as the economy is losing 500,000 jobs a month and housing is still in a decline, any rebound will be anemic at best.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Dear Mortgage Refinance Applicant, Expect Delays

Mark Hanson at the Field Check Group has an update on the mortgage mess that started Wednesday.

After the Rate Spike -- Mortgage Operations Turmoil…Kick out the Dead Loans Now

As I noted yesterday [see Mortgage Market Locks Up], a rate spike this large results in chaos. Weeks/months of purchase and refi loan applications will be lost. Mortgage operations centers are parsing through thousands of loans focusing only on locked loans and purchases mitigating potential losses. The rest are dead wood.

Rates are all over the map as lenders assess the damage and price cautiously. Now, it is a mad dash to only focus upon the loans that are locked and have a chance of funding. If the locked loans are not funded quickly and the interest rate complex continues to experience this extreme of volatility, serious losses can occur.

The letter below was just sent by a national bank’s wholesale department this afternoon. This is the mortgage operations nightmare I highlighted in Thursday’s report. In a nutshell, they are kicking aside everything that is not locked or not a purchase in contract.

This is the desperation move that overworked, understaffed mortgage divisions have to make in order to salvage what can be salvaged. Kicked aside could be at least half of their past two month’s of unlocked, unfunded originations that may ultimately parish if rates don’t come back quickly…or the borrower can’t be coaxed into an 3/1 or 5/1 intermediate-term hybrid ARM, which are now at about the same interest rate level as a 30-year fixed was at the beginning of the week.



click on letter for sharper image

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Schwarzenegger Vows Drastic Budget Cuts

In the wake of voters overwhelmingly turning down tax hikes to balance the budget, governor Schwarzenegger's Latest proposal eliminates CalWORKs, lets out inmates early.

In California's latest doom-and-gloom announcement, Gov. Arnold Schwarzenegger's Department of Finance on Tuesday proposed closing the state's main welfare program, releasing nonviolent prisoners one year early and shuttering up to 80 percent of state parks to shrink the state's $24.3 billion budget deficit.

Schwarzenegger wants $5.6 billion in new cuts to replace a like amount of borrowing he proposed in his budget plan earlier this month. The Republican governor previously asked for more than $15 billion in other savings by slashing schools and Medi-Cal, laying off 5,000 state workers and borrowing money from local governments.

Several of the latest cuts were eye-openers, but the largest was the wholesale elimination of the California Work Opportunity and Responsibility to Kids Program, which provides grants to parents that people commonly refer to as "welfare."

Nearly 1.3 million Californians received CalWORKs payments in February, almost 1 million of whom were children. The state would save $1.3 billion next year by eliminating CalWORKs but lose three times as much in federal funds.

"It boggles the mind that California would be the only state in the Union without a CalWORKs-type program," said Frank Mecca, executive director of the County Welfare Directors Association. "In fact, we'd be, to our knowledge, the only state in a country in the entire First World not to have subsistence benefits for children."

Schwarzenegger envisions phasing out Cal Grants for low-income college students. He would save $10 million by giving only $7,000 to the University of California's Hastings College of the Law, the bare minimum so as not to upset the state's 19th-century compact with the Hastings family. And he wants to defund state parks, forcing them to rely on user fees.

"It could be upwards of 80 percent of parks not having sufficient fee revenues to continue to operate," Matosantos said.

A Schwarzenegger proposal to close parks last year didn't go anywhere, but the state's fiscal condition has worsened considerably since then.

The governor's plan would release a year early about 19,000 nonviolent, non-serious prisoners not convicted of sex offenses, saving $120 million. He also would seek $790 million in savings by reducing inmate services such as substance abuse counseling and vocational education.

The governor proposes saving $150 million by retaining a two-day furlough for state workers.

Schwarzenegger would cut Medi-Cal services such as dialysis, breast cancer treatment for women over 65 and non-emergency care for undocumented immigrants.

Assemblywoman Noreen Evans, D-Santa Rosa, chairwoman of the Assembly Budget Committee, said it would be more responsible to seek additional taxes. "With this proposal, the governor's made it very clear he'd rather throw women and children out of the lifeboat before he raises taxes," she said.

Voters Chose Wisely

Schwarzenegger did not make these decisions, voters did. Raising taxes is not the answer, spending money wisely is. Evans clearly does not know the difference.

Voters made a wise decision. People like Evans will spend every cent and come back for more. Hopefully voters will show Evans the door.

New 5 percent cut for state workers on the table

Gov. Schwarzenegger, speaking with reporters vowed to make "drastic cuts" to the state budget. As part of his proposal, Schwarzenegger says new 5 percent cut for state workers on the table.

Left: Gov. Schwarzenegger, speaking with reporters last week near the U.S. Capitol in Washington, vowed to make "drastic cuts" to the state budget. Mark Wilson/Getty Images

Gov. Arnold Schwarzenegger plans to propose a 5 percent across-the-board pay cut for state workers to save nearly $500 million in next year's budget and preserve cash, a spokesman said Thursday.

The pay cuts would affect 235,000 state workers under the governor's control, according to Schwarzenegger press secretary Aaron McLear. The state's judicial and legislative branches would be exempt because they are autonomous, but McLear said employees who work for constitutional officers would receive a pay cut.

"Voters gave the leaders of this state a mandate to cut government spending, and that's exactly what we're doing," McLear said.

The move would save $470 million by cutting pay for 100,000 general fund employees, as well as $415 million by reducing salary for special fund workers.

A 5% wage cut hardly seems drastic. 25-30% can be considered drastic. 5% cuts will raise $885 million. The budget hole is $24.3 billion and growing about $2 billion a month for a year.

As noted in California Voters Immediately Rewarded For Voting Down Propositions 1A Thru 1E a state panel slashed the salaries of elected state officials by 18% a day after voters rejected a plan by the governor and Legislature to address the budget crisis.

Before tossing around the word "drastic", let's at least see cuts of 18%.

California cities, counties vow to fight state over budget tactics

Fourth up in a series of budget crisis articles, the Sacramento Bee notes California cities, counties vow to fight state over budget tactics.

Arguing that the state is nickel and diming them to oblivion, leaders of California's financially beleaguered counties and cities say they plan to fight back.

Soon after the May special election, in which voters rejected the state's deficit stopgap measures, the Bay Area Council and several other groups launched a drive for a constitutional overhaul to address the state's governmental dysfunction.

Multiyear labor agreements also are placing a burden on both cities and counties. Local jurisdictions statewide have been negotiating with unions to win labor concessions to reduce cost of personnel, which consumes a major portion of general funds.

But Roger Dickinson, Sacramento County supervisor, cautioned about putting too much emphasis on labor costs.

"Even if we had significant concessions by our employees, we still have a very serious budget gap," Dickinson said. "It's truly an illusion when you consider the reality of the numbers. That is, this is a very deep hole."

Both cities and counties are watching legislation that would require them to get state approval before filing for bankruptcy.

The measure carried by Assemblyman Tony Mendoza, D-Artesia, is backed by state firefighters unions and the nonprofit AARP whose members' benefits could be jeopardized in bankruptcy.

Cities' and counties' associations are strongly opposed.

"It's absurd to me that the state of California believes it's appropriate to provide financial advice to local agencies," said CSAC's Hurst. "The state doesn't have a great track record with managing its own finances."

If you want higher taxes and more waste, by all means vote for Tony Mendoza and any other clowns who want to raise your taxes to support union graft and ridiculous pensions.

Bankruptcy is one of the few means available capable of bringing about much needed pension reform. Tony Mendoza wants to deprive cities and counties of that means.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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How to Photograph Water Drops with One Speedlight

Ever notice those cool water photos that drop into the Strobist Flickr Pool?

Water droplet photography is very easy to get started with, and you can get as complex as you want. There are three tricks to making beautiful, time-scultped water pictures with a single small flash: Light placement, timing and flash duration.

More, plus two videos, inside.
__________


Water Photography Basics

(Very cool water drop photos by Andy W., top, and Steve P., both from the Strobist Flickr Group pool. Click the pic for bigger versions.)

First tip: You are not lighting the water. Since water is a specular object, you are lighting what the water reflects. So you light the area (most likely the backdrop) that you see reflected in the still water from your camera position

As for timing, that one is easy -- just take the junk mail approach. Lots of water drops, lots of repetition, and something cool and unpredictable will come back. This is part of the fun. Just make sure you get your technical stuff down pat first, so when that perfect moment happens, you'll have a winner.

Last, and speaking of technical stuff, you will want shoot in a (relatively) dark environment so the flash pulse can effectively be your shutter speed.

The first video below (a basic how-to) suggests a setting 1/16th power. That's a pretty fast pop -- about 1/11,000th of a second for an SB-800, for instance. But you can get even faster times if you drop the power further. And when freezing a drop of water, microseconds matter.

The tradeoff? Aperture vs. pulse length. You will need enough power to get you enough aperture to carry the depth of field you want. But don't overdo the power to get excess aperture, as that'll needlessly stretch the pulse length of your flash.

In lighting, everything is a tradeoff.

Check out this excellent "how-to" video below, by Gavin Hoey. (RSS and email readers may need to click on the post title to view the videos.)




See? Easy, fun and cheap if you can get that flash off-camera.

And these same techniques can be amped up to yield more amazing photos. Artist Martin Waugh has built a career out of making art from drops of water. If you are into this kind of stuff, make sure to check out his amazing gallery to get a glimpse of just what is possible.

Just below, a video featuring Waugh from a segment of the Discover Channel show, "Time Warp." These guys are filming in 10,000 frames per second, which is Chase Jarvis Kung Fu territory. At the end, they actually have drops colliding with splashes in mid-air.




This is worth the wait for full-screen HD. Especially at about the 5:50 mark. (And I see my same old Nikkor 55/2.8 macro on the high-speed camera.)

Other than the obvious cool factor, the takeaway for me from this video was a look into Waugh's lighting. Background gets one color, and the top light gets another. This way, you get multiple colors in the water depending on the angle of the water surface being reflected.

A very cool project for a rainy afternoon, IMO. Or even better -- offer to take the setup into you kid's science class at school and let them try their hand at stopping time to study how liquids behave.

If you decide to try it and upload to Flickr, be sure to tag your photos with the words, STROBIST, WATER and DROP and upload it to the Strobist group. That way, they will come up in this search and we can all see them. (Check it out -- there are already some killer shots there.)

Or if you would rather blog your water droplet lighting exploits for the whole world to see, make sure to include the intact phrase "strobist water drop" (no quotes) and we can all see it via this Google blog search.

Mortgage Market Locks Up

Yesterday 10 year treasury yields went soaring and the mortgage market literally seized up. Mark Hanson at the Field Check Group has this report that I can share.

As Bad As You Can Imagine

With respect to yesterday’s episode in the mortgage market -- yes, it is as bad as you can imagine. Yesterday, the mortgage market was so volatile that banks and mortgage bankers across the nation issued multiple midday price changes for the worse, leading many to ultimately shut down the ability to lock loans around 1pm PST. This is not uncommon over the past five months, but not that common either. Lenders that maintained the ability to lock loans had rates UP as much as 75bps in a single day.

A good friend in the center of all of the mortgage capital markets turmoil said to me yesterday “feels like they [the Fed] have lost the battle...pretty obvious from the start but kind of scary to live through it ... today felt like LTCM with respect to liquidity”.

The negative consequences of 5.5% rates are enormous. Because of capacity issues and the long timeline to actually fund a loan very few borrowers ever got the 4.25% to 4.75% perceived to be the prevailing rate range for everyone A significant percentage of loan applications (refis particularly) in the pipeline are submitted to the lender without a rate lock. This is because consumers are incented by much better pricing to lock for a short period of time…12-15 day rate locks carry the best rates by a long shot. But to get this short-term rate lock, the loan has to be complete enough to draw loan documents, which has been taking 45-75 days over the past several months depending upon the lender’s timeline. Therefore, millions of refi applications presently in the pipeline, on which lenders already spent a considerably amount of time and money processing, will never fund.

Furthermore, many of these ‘applicants’ with loans in process were awaiting the magical 4.5% rate before they lock -- a large percentage of these suddenly died yesterday. To make matters worse, after 90-days much of the paperwork (much taken at the date of application) within the file becomes stale-dated and has to be re-done with new dates -- if rates don’t come down quickly many will have to be cancelled out of the lender’s system. To add insult to mortal injury, unless this spike in rates corrects quickly, a large percentage of unlocked purchases and refis will have to be denied because at the higher interest rate level, borrowers do not qualify any longer. For the final groin kicker, a 5.5% rate just does not benefit nearly as many people as a 4.5%-5% rate does. Millions already have 5.25% to 5.75% fixed rates left over from 2002-2006.

This is a perfect example of why the weekly Mortgage Applications Index is an unreliable indicator of future loan fundings and has been for a year and a half. As a matter of fact you will see this index crumble over the next few weeks at the same disproportional rate as it increased over the past several months if rates don’t settle lower quickly.

With respect to banks, mortgage banks, servicers etc, under-hedging a potential sell-off with the Fed supposedly having everybody’s back was a common theme. Banks could lose their entire Q2 mortgage banking earnings and middle market mortgage banker may never recover or immediately have to close shop.

Lastly, consider sentiment -- this is a real killer. This massive rate spike may have invalidated hundreds of billions spent to rig the mortgage market literally overnight. This leaves the mortgage and housing market very vulnerable. Mortgage loan officers around the country are having a very bad day today explaining to their clients why their rate was not locked and how rates are going to come right back down. They will not feel like getting too aggressive taking new loan applications at least for the next month unless this corrects quickly.

We have to see where all this settles over the next few days before making a near to mid-term call on the outright damage because at this point, Fed or Treasury shock and awe is almost certain. Another common theme has been ‘if it doesn’t work throw much more money at it’. Obviously they have been following this closely for the past few weeks, as conditions started to deteriorate, and have likely been waiting to see where the upper range was before shocking in order to get maximum benefit…that would be a humongous short squeeze in Bonds. The problem is…if they do shock her and it is sold into with the same fury that we have been seeing, there may not be an act two.

Treasuries Massacred

For more on the 10-year treasuries please see Treasuries Massacred; Yield Curve Steepest On Record.

This morning there was a bit of a treasury rally on a rumor the Fed was going to buy $10 billion in long dated treasuries but treasuries are now back to the lows of the day, with 10-year yields essentially unchanged vs. yesterday.

Yield Curve as of 2009-05-28



click on chart for sharper image

Mortgage banks are going to be flooded with calls from people wanting to lock at 4.75. Sorry folks, those rates are gone.

I called Mark Hanson this morning to see if there was any improvement in the mortgage. Mark said "Rates fell from 5.5 to 5.375 on intervention rumors this morning but are now back to 5.5. If rates stay in the mid 5's, new loan applications will quickly dry up.

By the way, that 5.5% rate is pretty much for the "perfect borrower" with a FICO score of 740 or higher and a 20% down payment. Jumbos are hovering near 8% with 1.5% points.

Mortgage banks that made unhedged commitments at 4.25-4.75% are now in a position to lose substantial sums of money.

Bernanke thought it would be an easy task to keep down mortgage rates. So much for a $1.2 trillion commitment. What's next? A $2.4 trillion commitment? Fannie Mae, Freddie Mac, and the FHA are the lenders of only resort yet the Fed is still struggling to rig the market.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Initial Unemployment Claims Dip Slightly; Continuing Claims Approach 6.8 Million, 17th Consecutive New Record

The peak in initial claims might be in but the peak in unemployment is nowhere close. Continuing claims hit 6.788 million, setting a record for the 17th straight week.

Please consider the Department of Labor Weekly Claims Report.

Seasonally Adjusted Data

In the week ending May 23, the advance figure for seasonally adjusted initial claims was 623,000, a decrease of 13,000 from the previous week's revised figure of 636,000. The 4-week moving average was 626,750, a decrease of 3,000 from the previous week's revised average of 629,750.

The advance seasonally adjusted insured unemployment rate was 5.1 percent for the week ending May 16, an increase of 0.1 percentage point from the prior week's unrevised rate of 5.0 percent.

The advance number for seasonally adjusted insured unemployment during the week ending May 16 was 6,788,000, an increase of 110,000 from the preceding week's revised level of 6,678,000. The 4-week moving average was 6,608,250, an increase of 123,750 from the preceding week's revised average of 6,484,500.

Weekly Claims



click on chart for sharper image

The dip in initial claims from the March peak of roughly 650,000 is not accelerating very fast, if indeed at all. Those looking for a recovery in jobs soon are going to be disappointed.

Economists expect to see unemployment by 10% at the end of the year. I expect to see it at 9.8%+- by August and approaching 11% by the end of the year. Bear in mind the "stress-free tests" conducted by the Fed had an adverse scenario of 10.3% at the end of 2010.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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National Sales Tax (VAT) Gets Fresh Look In Congress

Budget deficits are soaring so the smart thing to do would be to stop wasting money. Instead Once Considered Unthinkable, U.S. Sales Tax Gets Fresh Look.

With budget deficits soaring and President Obama pushing a trillion-dollar-plus expansion of health coverage, some Washington policymakers are taking a fresh look at a money-making idea long considered politically taboo: a national sales tax.

Common around the world, including in Europe, such a tax -- called a value-added tax, or VAT -- has not been seriously considered in the United States. But advocates say few other options can generate the kind of money the nation will need to avert fiscal calamity.

At a White House conference earlier this year on the government's budget problems, a roomful of tax experts pleaded with Treasury Secretary Timothy F. Geithner to consider a VAT. "There is a growing awareness of the need for fundamental tax reform," Sen. Kent Conrad (D-N.D.) said in an interview. "I think a VAT and a high-end income tax have got to be on the table."

A VAT is a tax on the transfer of goods and services that ultimately is borne by the consumer. Highly visible, it would increase the cost of just about everything, from a carton of eggs to a visit with a lawyer. It is also hugely regressive, falling heavily on the poor. But VAT advocates say those negatives could be offset by using the proceeds to pay for health care for every American -- a tangible benefit that would be highly valuable to low-income families.

"Everybody who understands our long-term budget problems understands we're going to need a new source of revenue, and a VAT is an obvious candidate," said Leonard Burman, co-director of the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution, who testified on Capitol Hill this month about his own VAT plan. "It's common to the rest of the world, and we don't have it."

The federal budget deficit is projected to approach $1.3 trillion next year, the highest ever except for this year, when the deficit is forecast to exceed $1.8 trillion. The Treasury is borrowing 46 cents of every dollar it spends, largely from China and other foreign creditors, who are growing increasingly uneasy about the security of their investments. Unless Congress comes up with some serious cash, expanding the nation's health-care system will only add to the problem.

Obama wants to raise income taxes for high earners and impose new levies on business, but those moves would not generate enough cash to cover the cost of health care, much less balance the budget, and they have not been fully embraced by Congress. Obama's plan to tax greenhouse-gas emissions could raise trillions of dollars, but again, Congress is balking.

Enter the VAT, one of the world's most popular taxes, in use in more than 130 countries. Among industrialized nations, rates range from 5 percent in Japan to 25 percent in Hungary and in parts of Scandinavia. A 21 percent VAT has permitted Ireland to attract investment by lowering its corporate tax rate.

The VAT has advantages: Because producers, wholesalers and retailers are each required to record their transactions and pay a portion of the VAT, the tax is hard to dodge. It punishes spending rather than savings, which the administration hopes to encourage. And the threat of a VAT could pull the country out of recession, some economists argue, by hurrying consumers to the mall before the tax hits.

A VAT's Bottom Line

What would it cost? Emanuel argues in his book that a 10 percent VAT would pay for every American not entitled to Medicare or Medicaid to enroll in a health plan with no deductibles and minimal copayments. In his 2008 book, "100 Million Unnecessary Returns," Yale law professor Michael J. Graetz estimates that a VAT of 10 to 14 percent would raise enough money to exempt families earning less than $100,000 -- about 90 percent of households -- from the income tax and would lower rates for everyone else.

And in a paper published last month in the Virginia Tax Review, Burman suggests that a 25 percent VAT could do it all: Pay for health-care reform, balance the federal budget and exempt millions of families from the income tax while slashing the top rate to 25 percent. A gallon of milk would jump from $3.69 to $4.61, and a $5,000 bathroom renovation would suddenly cost $6,250, but the nation's debt would stabilize and everybody could see a doctor.

Most lawmakers are still looking for "a painless source of revenue" to overhaul the health-care system and dig the nation out of debt, Burman said. "Who knows?" he added. "Maybe the tooth fairy will bring that to them."

The Senate Finance Committee refused to consider the VAT to pay for health care. I guess health care is free.

Imagine a 25% hike on the price of everything you buy. Think that would fly? Still, if they would eliminate personal and corporate income taxes and replace them solely with a VAT (excluding food and medicine) I would be in favor of it, IF they would cut unneeded programs which is nearly every Congressional program on the books.

It's time to balance the budget. Public support for wars would drop to zero if taxes had to be raised to pay for them. Same holds true for unneeded military programs, Fannie Mae bailouts, Bank of America bailouts, etc etc.

"I think interest is quietly picking up," Graetz said. "People are beginning to recognize that the mathematics of the current system are just unsustainable. You have to do something. And a VAT has got to be on the table if you want to do something big and serious."

Therein lies the problem. The mathematics are unsustainable for the simple reason we are spending too much money. Rethinking taxes is a good idea, especially substituting taxes that encourage saving. However, the fear (and likelihood) is more taxes will just lead to more stupid spending.

Congress can come up with innumerable ways to waste money if given the chance. Unfortunately a VAT at this point is likely to accomplish nothing other than giving Congress that chance. Taxing people to pay for programs (or wars) that most would opt out of if they could, is not good policy.

The US can no longer afford to be the world's policeman. Before considering a VAT, Why don't we just start there and see what the savings would be?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Treasuries Massacred; Yield Curve Steepest On Record

Bernanke cannot have his cake and eat it too. If the economy is recovering the yield curve should steepen. And steepen it has. The Yield Curve Is Steepest On Record.

The difference in yields between Treasury two and 10-year notes widened to a record on concern surging sales of U.S. debt will overwhelm the Federal Reserve’s efforts to keep borrowing costs low.

The so-called yield curve steepened to 2.75 percentage points, surpassing the previous record of 2.74 percentage points set on Aug. 13, 2003.

Ten-year notes have lost 10.3 percent this year, according to Merrill Lynch & Co. indexes, while 30-year bonds have lost 27.5 percent. Two-year notes have gained 0.2 percent.

Rising 10-year Treasury yields are pushing yields on mortgage bonds higher, prompting holders of the securities to sell government debt used as a hedge to protect portfolios against rising interest rates.

As mortgage rates rise, the expected average lives of mortgage bonds and mortgage-servicing contacts extend as potential refinancing drops, leaving holders with portfolios of longer-than-anticipated durations. Duration is a measure of bond price sensitivity to interest-rate change.

“The back-up is mostly related to convexity selling by mortgage investors,” said Gary Pollack, who helps oversee $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York. “This will be a test for the Fed.”

Yield Curve 1999 - Present



click on chart for sharper image

If the economy is recovering, the Fed should welcome this steepening. However, what if the yield curve is simply reacting at the thought of Bernanke monetizing Obama's massive deficits and the various stimulus plans?

I doubt the economy is recovering but it is may be getting worse at a lesser rate. Moreover, if the curve flattens, it sure will not be because of intervention, it will be because the so-called recovery has stalled. Heaven help Bernanke if the economy worsens and the yield curve continues to steepen.

Regardless why the yield curve is steepening, Bernanke's belief that he can control both the long and short end of the curve is seriously misguided. The fact is he cannot really control either, at least for long.

Twilight Zone Treasuries

Flashback April 23 2009: Twilight Zone Treasuries

The Fed said at its last meeting it intends to buy $300 billion in Treasury securities over six months in a bid to lower long-term borrowing costs and revive economic growth.

$TNX - 10 Year Treasury Note Yield




click on chart for sharper image

Professor Fil Zucchi on Minyanville had this succinct comment:

"Today the Federal Reserve printed $7 billion dollars and used it to buy an equivalent amount of 7 and 10 year Treasury bonds. As I publicly asked before, if Mr. Fed can't rig the price of an asset by buying it with printed money, why should anyone else buy it?"

Those wishing to keep an eye on these price rigging attempts can follow the Federal Reserve Bank Permanent OMOs: Treasury link.

Bernanke's Hubris

It is ridiculous for the Fed to think it can control the vast $trillion treasury market with pea shooting efforts at $7 billion a pea. However, as the charts above show, the Fed announcement hugely distorted the market in smaller timeframes.

As Prof. Zucchi says "If Mr. Fed can't rig the price of an asset by buying it with printed money, why else should anyone else buy it?"

Other than the initial pop, the Fed's silly attempt to game the system may have caused so much mistrust that it is putting upward pressure on yields.

Treasury Yields Where To From Here?

A couple of people wrote me today saying I have been wrong about treasuries.

Let's backtrack for a moment to set the record straight for those who think I have been bullish on treasuries all year. Although the strength of the selloff this year has been surprising, I stepped aside in December.

Prior to that I was hugely bullish, more so than anyone I know.

Mish Treasury Calls

Sunday, January 20, 2008: Time To Short Treasuries?

Kass Says Sell Bonds Short.

Kass: The bond market is in a bubble that is reminiscent of (and quite possibly as extreme as) other bubbles during previous eras. From my perch, the only issue is the timing of this trade.

Mish: Timing is indeed everything and perhaps there is a temporary selloff. But the primary trend is for lower yields. Perhaps much lower yields. There is no bubble in bonds. Not yet.

...

Anyone who wants to short treasuries with impunity on this economic backdrop can be my guest. For the record, I have no grudge against Kass. He puts out a good column that I frequently agree with. However, I take the other side of this debate.

There is no bubble in treasuries if you look closely at the fundamental issues. Those who want to see how low treasury yields can get and stay there, need to look at Japan. Yields in the US are going to go far lower and stay lower longer than nearly everyone thinks.

Thursday, June 26, 2008: Is The Inflation Scare Over Yet?

Those focused on the CPI failed to see any chance of the Fed Fund's Rate at 2.00 again. On the other hand, those focused on the destruction of credit from an Austrian economic perspective got this correct. That is just one reason why it makes more sense to watch the credit markets than the CPI. The second is the CPI is so distorted it is useless.

In my opinion, it is very likely new all time lows in the 10-year treasury yield and 30-year long bond are coming up.

Wednesday, November 19, 2008: Misguided Bets On The Yield Curve

Someone from one of the big brokerage houses emailed me last week saying the yield curve would steepen. My response was "Why should it?"

A bet on the yield curve to steepen is a bet the economy improves. Why should it? An even better question is "How low do 10 year and 30 yields go?" Certainly 3% or lower on the 10 year and even 30 year are in the realm of possibilities. That's how nasty this recession is likely to get.

Tuesday, January 06, 2009: Reflections On 2008, Themes For 2009

It is quite possible the lows in treasury yields are in. Unlike 2008 where I was constantly beating the drums for lower yields, 2009 could be different. Here are the facts: 3 month and 6 month yields hit 0% and the 10 year came close to hitting 2%. Could there be lower yields still? Yes, quite easily. Is it worth playing for other than as a hedge or part of an overall investment strategy? No.

Thursday, March 26, 2009 Quantitative Easing Begins; "Operation Twist" Revisited

Appearance vs. Reality

Yields may drop. If they do it will not be because quantitative easing is working. If yields drop from here, in spite of the massive supply of treasuries stemming from Obama's sky high budget, it will be because the economy is in worse shape than anyone thinks.

Those hoping for a second half economic recovery should be hoping yields rise, not sink.

"Operation Twist" failed. So will "Operation Twist Again" in one way or another, or perhaps multiple ways. For example there is no specific reason mortgage rates will drop even if [treasury] yields do. Default risk is simply too high.

Are Yields Going Up Or Down From Here?

Yes they are. I guarantee it. If you want to know which way short term, I do not know, nor does anyone else.

Monday, April 06, 2009: Fed's Effort To Roll Snowball Uphill Is Failing

Bernanke thinks he can manipulate treasury yields by purchasing long dated treasuries. He can't. The market is simply too big.

The Fed's problem is that it cannot force rates where it wants no matter how many treasuries it buys, short of owning them all. If the Fed is buying treasuries at an unnatural price, supply will be unlimited.

Friday, May 15, 2009: Nonexistent "pre-recovery" in Manufacturing Suggests US Treasuries a Buy

Yield Curve as of 2009-05-15



Treasuries Are A Buy

I went cautious on treasuries in December, but it's now time to become bullish again. Talk of "green shoots" and "pre-recoveries" is way overdone. Let's come back to this chart in September and October. My bet is the yield curve will be flatter and yields on the high end (10 year and 30 year) will be lower than today.

In September and October we will see if I was right or wrong, but looking back I am quite pleased with 2008 calls culminating with taking the treasury chips off the table in December 2008 (via public blog comments) and officially posted January 6, 2009.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Bair Says No to Furthering PPIP Scam

Banks are not content to have bidders rape taxpayers on their behalf. The banks want to rape taxpayers themselves. Please consider Banks Aiming to Play Both Sides of Coin.

Some banks are prodding the government to let them use public money to help buy troubled assets from the banks themselves.

Banking trade groups are lobbying the Federal Deposit Insurance Corp. for permission to bid on the same assets that the banks would put up for sale as part of the government's Public Private Investment Program.

PPIP was hatched by the Obama administration as a way for banks to sell hard-to-value loans and securities to private investors, who would get financial aid as an enticement to help them unclog bank balance sheets. The program, expected to start this summer, will get as much as $100 billion in taxpayer-funded capital. That could increase to more than $500 billion in purchasing power with participation from private investors and FDIC financing.

Allowing banks to have it both ways would give them added incentive to sell assets at low prices, even at a loss, the banks contend. They claim it also would free up capital by moving the assets off balance sheets, spurring more lending.

Bair Says Banks Can’t Buy Own Assets in PPIP Auction

The PPIP is a big enough scam as it is. Fortunately Bair Says Banks Can’t Buy Own Assets in PPIP Auction.

Federal Deposit Insurance Corp. Chairman Sheila Bair said banks involved in the U.S. Public- Private Investment Program won’t be permitted to buy their own impaired assets as a way to cleanse their balance sheets.

“There should be no confusion: Banks will not be able to bid on their own assets,” Bair said today at a Washington news briefing to discuss first-quarter U.S. bank earnings. There is “no structure” for such purchases, she said.

Banking groups and the Clearing House Association LLC, a group of 10 lenders including JPMorgan Chase & Co. and Bank of America Corp., are pressing the FDIC to let them use the program to buy their own troubled assets, the Wall Street Journal reported today.

Bair said other issues could discourage participation in the program including “discomfort” among potential buyers and sellers that Congress might change the rules.

As an example, Bair cited an amendment Congress approved this month after the program was introduced that would require the government to impose conflict-of-interest rules on managers of public-private investment funds to ensure that securities are bought by the funds in “arms-length” transactions.

The measure “created some uncertainty,” Bair said. “The Treasury will need to issue regulations, I think, to clarify those issues before we will have comfort by market participants.”

Either a buyer or a seller be - but not both.

Yesterday in Banks Lobby to Game PPIP Calculated Risk came up with a catchy phrase "Either a buyer or a seller be - but not both."

Unfortunately, as it sits, the PPIP is still a fraudulent system. I do not care who bids or does not bid, what I care about is the public (taxpayers) are putting up 93% of the funds, and taking 93% of the risk. It is amazing how greedy these banks are, asking to bid on their own assets.

The fear now is that Bank of America bids on Citigroup assets (wink wink) if Citigroup bids on Bank of America assets. The whole process is nothing but a massive transfer of bad assets to taxpayers and the purpose is to bail out bondholders. Please see Geithner's Plan Can Succeed for details.

Geithner and Bernanke keep insisting that banks are now well capitalized. I say prove it by halting the PPIP. Alternatively, let anyone and everyone bid on everything as long as the public is not involved. That way we would have a true idea of what those assets are worth.

"Either a buyer or a seller be - but not both." is insufficient to address all the ill's surrounding this fraudulent taxpayer ripoff.

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