AXA CEO Complains Of Unfair Competition

These days, we get to hear criticisms of ever-increasing government intervention from unlikely (if I may say so) places.

About two weeks ago it was a Russian (Russia was a former Communist country, remember?) appalled at the ease with which Americans seem to accept the "new" way of life (my post here).

Today I ran into this article on Nikkei (May 31 Sunday their time). A French businessman, graduated from The École Nationale d'Administration (one of the elite grandes écoles) and a former government bureaucrat, criticizes the government intervention as distorting the market competition. The following is the rough translation from Japanese.

"Henri de Castries, CEO of AXA, a French global insurance companies group, criticized AIG and other insurance companies who have received public fund that "it is highly inappropriate that these companies are lowering the price to maintain their customers", and that the government intervention is distorting the market, according to the interview he gave to Japan's Nihon Keizai Shinbun (Nikkei newspaper).

"Among the four largest insurance groups in the world, AIG (US), Allianz (Germany) and ING (Netherlands) have all received public fund.

"Mr. de Castries also said, "AXA hasn't asked for any support from the government. The institutions that have received public assistance should undergo comprehensive restructuring, and should not be allowed to use the public fund they received to expand their business.""

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OT: Weekend Reading - The Bilderberg Group

The Bilderberg Group? What's that? You will either get an exasperated look from so-called "conspiracy theorists" for having been so ignorant, or get a scornful look from everyone else for being a "conspiracy theorist".

Here's how Wikipedia explains.

And here's the experience of a reporter for the UK paper Guardian, who tried to crash this year's meeting at a resort hotel in Athens, Greece.

And this from Politico. The US attendees apparently included:

• James Steinberg (Deputy Secretary of State)
• Richard Holbrooke (Special Envoy for Afghanistan and Pakistan)
• Paul Volcker (chairman of President Obama’s Economic Recovery Advisory Board)
• Keith Alexander (National Security Agency Director)
• Robert Zoellick (World Bank President)
• Richard Perle
• Paul Wolfowitz
• David Rockefeller

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Opel Goes to Magna, Not Fiat

The plot thickens and gets twisted yet again in the ever-evolving saga of GM-Chrysler-(plug whoever you like) auto triage operation. The last I heard, it was Fiat who was pursuing Opel with the intent of combining it with Chrysler to create a super auto company.

Fiat pulled out on Friday over GM's short-term financing needs (300 million Euros), and in comes a consortium led by Magna International Inc., Canada's largest auto parts maker who already has a major presence in Europe.

Deal reached for Magna International to rescue GM's Opel unit: (AP)

"BERLIN - Germany's finance minister announced a high-level meeting in Berlin has approved a plan for Canadian auto parts maker Magna International Inc. to move ahead with a rescue of General Motor Corp's Opel unit.

"Peer Steinbrueck says the agreement was reached early Saturday morning. The agreement will see Opel put under the care of a trustee Saturday.

"The German government will provide a euro1.5 billion (US$2.1 billion) bridge loan which will be available immediately.

"Germany was looking for an agreement that will shield Opel - which employs 25,000 people in Germany, nearly half GM Europe's work force - from a looming GM bankruptcy court filing in the U.S. and extensive restructuring.

"The government wants to make it legally independent under a trustee so that any taxpayer assistance does not go to the U.S., then would provide bridge financing while Opel looks for a new, permanent owner.

"The consortium bid led by Aurora, Ont.-based Magna International includes Russian lender Sberbank."

The reason for the German government to support the Magna deal seems to be job preservation.

"...German Foreign Minister Frank-Walter Steinmeier called it a "responsible solution" that would preserve the highest number of jobs."

Opel employs 25,000 people in Germany, about half of GM's total employees in Europe. Also,

So what exactly is this deal?

German government backs Opel rescue deal (CNN):

Under the deal,

• Magna will own 20% stake in GM Europe that owns Opel brand.
• Russia's Sberbank will own 35% stake.
• GM will retain 35% stake.
• Opel employees will own 10% stake.

What's with the Russian bank? Then I remembered that GM opened a brand-new factory in Russia, one of the fastest growing market for automobiles, just last year. (Read it here.) Magna has been pursuing the Russian market, so far unsuccessfully. The deal will perhaps change that. (Read more about it here.)

Sberbank looks like it represents Russia the country, with a quarter of the Russian banking assets and a third of banking capital (see here).

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Week 3 of Mercury Retrograde: Much Ado About Nothing

For all the roller coaster ride, the week ended as a sizeable up-week for the stock market indices. After last week's potentially very bearish reversal pattern (hammer), I personally gave up on this week as a down-week.

The market turned out that it didn't know where it wanted to go, after much running up and down. So today all 3 major indices ended just about where they had started at the beginning of Mercury Retrograde, as you can see in the table below.

This week's action was in the bond market, but here again the action was much ado about nothing. Yields on 10-year note and 30-year note skyrocketed, then they both came back down to where they started the week.

Everyone is scratching the head: "What keeps the market up?" as it is hard to find many fundamental reasons why the stock market should go up (except for "green shoots" people). An answer may be at Goldman Sachs quant desk, as frequently reported here.

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Bond Vigilantes Are Back With Vengeance

Bond Vigilantes Confront Obama as Housing Falters (Bloomberg)

"For the first time since another Democrat occupied the White House, investors from Beijing to Zurich are challenging a president’s attempts to revive the economy with record deficit spending. Fifteen years after forcing Bill Clinton to abandon his own stimulus plans, the so-called bond vigilantes are punishing Barack Obama for quadrupling the budget shortfall to $1.85 trillion. By driving up yields on U.S. debt, they are also threatening to derail Federal Reserve Chairman Ben S. Bernanke’s efforts to cut borrowing costs for businesses and consumers. "

Who are these "bond vigilantes"?

"The bond vigilantes are being led by international investors, who own about 51 percent of the $6.36 trillion in marketable Treasuries outstanding, up from 35 percent in 2000, according to data compiled by the Treasury. "

"“The vigilante group is different this time around,” said Mark MacQueen, a partner and money manager at Austin, Texas- based Sage Advisory Services Ltd., which oversees $7.5 billion. “It’s major foreign creditors. This whole idea that we need to spend our way out of our problems is being questioned.”"

And what are they doing?

They've been selling the US Treasury notes and bonds, driving the yields up significantly. Compared to the levels in 1990's and early 2000's they are still very low, but 1990's and early 2000's the economy was expanding (last true bull market in stocks, measured by inflation-adjusted S&P500 Index - you can see it in here, and there are lots of other sites).

The charts show the yields of 5-year note, 10-year note, and 30-year bond in the past 9 months. 30-year bond yield is already back to pre-October stock market crash level.

The president of the US doesn't seem to care.

"Obama spokesman Robert Gibbs said the president is confident that his budget and economic plans will cut the deficit and bring down the nation’s debt.

“The president feels very comfortable with the steps that the administration is taking to get our fiscal house in order and understands how important it is for our long-term growth,” Gibbs said."

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Government Debt Burden Is Half A Million Per Household

Never mind that 1Q GDP (-5.7% annualized) was "less bad" than the last month's first estimate (it was actually worse than the second consensus by the economists). The US household is straddled with so much debt that makes you wonder how we can even afford a government.

In the article titled: "Leap in U.S. debt hits taxpayers with 12% more red ink", USA Today tells us that: [emphasis by me]

"Taxpayers are on the hook for an extra $55,000 a household to cover rising federal commitments made just in the past year for retirement benefits, the national debt and other government promises, a USA TODAY analysis shows.

"The 12% rise in red ink in 2008 stems from an explosion of federal borrowing during the recession, plus an aging population driving up the costs of Medicare and Social Security.

"That's the biggest leap in the long-term burden on taxpayers since a Medicare prescription drug benefit was added in 2003.

"The latest increase raises federal obligations to a record $546,668 per household in 2008, according to the USA TODAY analysis. That's quadruple what the average U.S. household owes for all mortgages, car loans, credit cards and other debt combined. "

Of household liabilities, the personal debt average is $121,953, according to USA Today. On top of that comes the government debt of $546,668, which includes ALL government liabilities - Treasury bonds, Medicare (52% of the government debt), Social Security, military pensions, civil servant retirement, and others.

Total: Each household owes $668,621. There are 111 million households in the US. Total national debt computes to $74 trillion, of which the government debt is over $60 trillion.

The article, however, may be underestimating the Medicare obligation. This analysis in 2005 for Senate Budget Committee shows the Medicare total obligation ALONE at $61 trillion.

The government portion of the debt is guaranteed to increase (already declared by the administration) this year, next year, and year after, with new programs and packages coming online. Red ink as far as eyes can see. No wonder the government doesn't do GAAP accounting.

The US GDP is $14 trillion.

The stock market is slightly down despite the "less bad" GDP number. At 11:54 am EST, Dow is down 22 points to 8,381, Nasdaq down 5 points to 1,746, S&P500 down a fraction to 906 (commodity stocks are very strong). US dollar Index is below 80 (long-term support). Gold spot price is $978, up $19. Crude oil is $66.26, up $1.18.

The market is also on a death watch of one of the America's iconic companies (GM).

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GM's Bondholders Support Sweetened Deal

According to various news sources, GM's bondholders have agreed to a sweetened deal to exchange their debt holdings with equities in a new "good" GM.

GM says bondholder panel supports sweetened offer (AP):

"DETROIT – General Motors Corp. said Thursday a committee of bondholders has agreed to a sweetened deal proposed by the U.S. government to erase the automaker's unsecured debt in exchange for company stock."

"The revised offer to the holders of $27 billion in unsecured GM bonds amounted to a take-it-or-leave-it ultimatum: Go along with what the government auto task force's proposal or be left holding the assets a new GM doesn't want — ones with presumably little value at all."

Under this sweetened (but take-it-or-leave-it) offer,

• Unsecured bondholders will receive 10% equity of "good" GM, plus warrants to buy up to 15%, in exchange for their $27.2 billion debt holdings. They also effectively hold old "bad" GM.
• The US government will receive 72.5% equity for $19.4 billion it already lent plus $30 billion more in additional financing.
• UAW will receive 17.5% equity.
• Total wipe-out for the current common stock holders.

This committee of bondholders represent about 20% of GM's unsecured debt holders. 15% already approved the 1st deal that the government offered. So the government has 35% of unsecured debt holders' approval.

What about SECURED debt holders? The above article doesn't say. GM has $6 billion secured debt. According to this report,

"The source, who was not cleared to speak with the media and would not be identified, said the U.S. government would pay for the assets by assuming the automaker's $6 billion of secured debt ..."

So the government may assume the secured debt, and it may be negotiating right now at what price the government will assume the debt.

Chrysler's senior debt holders will get 29 cents on a dollar for their $6.9 billion 1st-lien secured debt. I wonder how much better off GM's secured debt holders will fare.

(What's "good" GM made up of, anyway? Anything good left?)

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OT: White House Lashes Out At British Papers

from Politico.com "Gibbs vs UK press". [emphasis mine]

Yesterday was Mr. Gibbs warning against critics of the Supreme Court nominee. Today he is railing against British newspapers.

"Robert Gibbs swatted down reports in British newspapers that suppressed photos of prisoner abuse included graphic ...
... images of torture and rape – and took a hard shot at the overseas media.

"“I want to speak generally about some reports I’ve witnessed over the past few years in the British media. And in some ways, I’m surprised it filtered down,” Gibbs began. “Let’s just say if I wanted to look up – if I wanted to read a writeup today of how Manchester United fared last night in the Champion’s League cup, I might open up a British newspaper. If I was looking for something that bordered on truthful news, I’m not entirely sure it’d be in the first pack of clips I’d pick up.”

"“You're not going to find very many of these newspapers and truth within 25 words of each other,” Gibbs continued."

Well that's a bit harsh, wouldn't you say? So where would you go for something bordering on truthful news, Mr. Gibbs?

At least British newspapers are reporting the corruption of massive scale in their Parliament (see my post). Oh Manchester United lost to Barcelona, 2-0, by the way.

Earlier this year, he was mocking Rush Limbaugh and Jim Cramer. (I'd suggest the White House to grow thicker facial skin and stop huffing and puffing all the time.)

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If We Build (Yield Curve), Will They (Economic Expansion) Come?

A steeper yield curve is supposed to indicate a beginning of economic expansion. But after all the Fed intervention in Treasuries which is by the way set to further increase, is the shape of the yield curve still an indicator of anything at all?

Here's the Treasury yield curves from three different time period. Data was taken from the US Treasury Department website. The red line is yesterday's yield curve. The blue line is the yield curve from December 2008, after the Fed announced quantitative easing. The orange line hovering above is from April 2007, when the stock market, having recovered from a dip in February, was merrily going up on its way to October 07 top.


The current yield curve is indeed steep. Does that mean the economy will expand? (What part of the economy? Government?) Or does it simply mean that there is just too much supply of Treasuries across the curve, and the Treasuries that the buyers (domestic or foreign) are willing to buy are shorter-term Treasuries only (and they are basically rolling over)? The Fed is buying longer-term Treasuries to keep the rates down, but the sheer size of the market doesn't quite match the Fed's pledged amount ($300 billion). So what happens? There are more sellers than buyers for longer-term Treasuries, prices go down, yields go up.

It is, however, the Fed's stated policy to support the lower long-term rates to help the economy. They are increasingly losing control and the yields are going up. Hence the spin: higher yields indicate things are improving.

Perception is everything in this time of great difficulty. To me, it is more like "If you contort your face into a smile, you will feel happy."

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Thursday's Treasury Auction Result

The result of 7-year note auction is in, from Treasurydirect.gov.

7-year note: $26 billion

• Primary Dealer: $16.50 billion
• Direct Bidder: $905 million
• Indirect Bidder (foreign): $8.56 billion (33%)
• Bid to cover ratio: 2.26

The stock market dipped into negative territory, probably in anticipation of the bad result of the auction. The result, clearly, was not as bad as they had feared. Or at least the Treasury note buyers haven't turned around and started selling yet, like they did yesterday.

Dow is up 60 points, Nasdaz up 11 points, and S&P500 up 11 points at 1:15pm EST.

The yield on the 5-year Treasury note is up, 10-year's yield is up slightly and 30-year's yield is down slightly. (Looks like the Fed may be frantically buying the long end, into which bond investors are selling... It could be long-dated mortgage securities the Fed is buying.)

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OT: North Korea Tears Up 50-Year Armistice

The US financial markets pretty much ignored this news amid constant attacks on all fronts (Treasury auction and immediate sell-off, GM bankruptcy all but certain, rumor of national sales tax, controversy over the supreme court nominee, among other 100 things), but North Korea may be really going over the edge this time.

Times London reports "North Korea threatens war as it tears up 50-year armistice".

"North Korea announced yesterday that it was abandoning the armistice that ended the Korean War 56 years ago, and threatened war if there were any attempts to search its ships for weapons of mass destruction."

It has a news video clip, in which the reporter comments that this action by North Korea is more about their internal politics, e.g. leadership change, although "accidents" can happen.

I'm not so sure it's more of the same saber rattling. They "threatened war if there were any attempts to search its ships". I think it is an act of war if the US, South Korea, China, Japan, or anybody, tries to search North Korean ships on open water. North Korea is saying they will respond to this act of war.

South Korea and Japan don't seem to be showing any heightened concern so far. Both Nikkei and KOSPI ended up for the day. I hope that everything is just a simple miscommunication because of Mercury Retrograde.

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GM's All But Certain Bankruptcy Because of Bondholders Refusal

Here we go again! A favorite topic of this blog: The US auto industry restructuring (a.k.a. dismemberment) Part II.

GM all but certain to file for bankruptcy (AP, via Yahoo Finance)

"General Motors, the company that put tail fins on a Cadillac and was once America's largest employer, moved to the edge of bankruptcy Wednesday as debt holders refused a last-ditch deal."

That last ditch deal seems like an effort, rather, to bring about bankruptcy. Who in the right mind would agree to such a raw deal, taking the 10% stake in exchange for $27 billion secured debt, while the union would be getting 39% stake for $10 billion, and the government getting 50% for $15.4 billion?

We'll see how Mr. Steve Rattner the car czar will do this time around in the bankruptcy court.

However, unlike Chrysler's secured debt holders who didn't have CDS protection, GM's debt holders apparently do. Also, there are CDS written on a basket of companies that include GM. (Mr. Rattner has some, by the way, according to Zero Hedge.)

(Data is from DTCC.com)

I would assume CDS transaction is outside the bankruptcy court, but I am very curious as to who wrote these CDS, and who hold them, especially people who hold GM-related CDS without the underlying bonds.

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OT: White House Warns Against Criticism

of the Supreme Court nominee Sotomayor, according to the article on Politico.com.

Things don't really change.

Just recently, the White House's car czar scolded the Chrysler's senior bond holders into submission.

Also, as the article points out: In 2001, after 9-11 attack, then-White House press secretary Ari Fleischer got into trouble for telling Americans to watch their words.

Here's Wall Street Journal's take:
The 'Empathy' Nominee: Is Sonia Sotomayor judically superior to 'a white male'?

(No, Mr. Press Secretary, I'm not criticizing. I'm just linkin'.)

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Today's Bond Market Action: It's Supply, Stupid!

a la Yahoo Finance Bond Ticker [emphasis mine]:

"3:03 pm - SWAT: The bonds fell apart on a wide array of things but the key drivers, outside of the big, chunky, drop-offs attributed to mortgage players, include supply (key culprit). On top of the supply games, notes one long time player, the Chinese games (that they are going to leave our market), the Fed games. You got the yield curve dancing around like Little Richard. There is trouble, when even Fed buying doesn't support prices and good auctions go bad. Which is a good example of what happened, another great auction goes through, and yet prices get clobbered, and as one lifelong market watcher noted So if we have a really bad 7-yr [auction] tomorrow do we rally hard? The best however. This is what happens when you don't have a 7-10-or a long bond rates are just too low."

That says all about today's and maybe tomorrow's action.

As to the reference to mortgage players, they apparently sold the long-end bonds to hedge against rising yields. The corner that the Fed got hedged in seems to get tighter and tighter every single day.

Whoever writes the ticker, he always writes with good information and with dry humor. He covers currencies too. Worth checking at: http://finance.yahoo.com/bonds/market_summary

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Wednesday's Treasury Auction Results

From TreasuryDirect.gov.

4-week bill: $35 billion

• Primary Dealer: $23.04 billion
• Direct Bidder: $2.53 billion
• Indirect Bidder: 8.35 billion
• Bid to cover ratio: 3.24

5-year note: $35 billion

• Primary Dealer: $18.47 billion
• Direct Bidder: $977 million
• Indirect Bidder: $15.44 billion
• Bid to cover ratio: 2.32

The result of 5-year note auction seems to have triggered a sudden downturn in the stock market. Dow Jones Industrial Average went from 8,449 (1:33pm EST) to 8,358 (2:09pm EST). It is also causing the yields on 10-year note and 30-year bond to rise significantly.

Bid to cover ratio was above average (the average is 2.27), indirect bidder was 44% (the average is 27.9%). So what didn't they like? Maybe these?

• Interest Rate: 2-1/4%
• High Yield: 2.310%
• Allotted at High: 44.97%

Maybe all foreign buyers (indirect bidder) wanted higher yield.

Gold went down on the news. That's peculiar. (Gold bullion dealers happen to be Treasury primary dealers.)

Mr. Treasury Secretary, are you still standing by your word that the rising Treasury yields are the sign that things are improving?

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National Sales Tax???!!!

Just when I thought things couldn't go any worse, they do, and these days that happens almost every single day. Today, it is this headline from Washington Post.

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."

Fiscal calamity of their own making, and what does the government do? Come up with a new, equitable tax, of course. For what purpose? For the latest plug from the White House and lawmakers: health care.

"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." "

It's common and we don't have it, so we'd better have it? Mr. Burman also thinks 25% VAT "should do it all..."

"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. "

And here's a kicker for me in the article:

"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 value added tax will pull the US out of recession! Please tell me then why Europe, with high VAT, has stagnated economically all these years.

The article also tells us that Obama's budget director at the White House has hired the brother of Obama's Chief of Staff, Rahn Emanuel. He is a VAT advocate, and he will advice the budget director on "health care" issues.


In my area (a county in California) we already have state/county sales tax that amounts to almost 10%. Does that mean the total sales tax would double overnight with the introduction of national VAT? (I don't see how the state can let go of this steady revenue source.) So that the federal government can provide health care for all Americans? Whether Americans like it or not? This is too unreal for the morning.

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What's on the Fed's Balance Sheet?

One of my long weekend's readings was the Federal Reserve's latest balance sheets (May 20, 2009). (I'm probably semi-autistic and) I just like to absent-mindedly look at the numbers. So the following is just my leisurely observation and not a rigorous balance sheet analysis, which I will leave it to Representative Paul and his co-sponsors (his "Audit the Fed" bill, by the way, now has 179 co-sponsors.) Besides, my knowledge of financial accounting was almost all cleared from my cache as soon as the final exam at B-school was over...

The Fed's balance sheet is over $2 trillion. The following spreadsheet simply shows major line items in their consolidated balance sheet. (As such, they are not supposed to balance.) The Fed does seem to be between a rock and a hard place.

First, take a look at a Liability item, "Federal Reserve notes". That's our currency. According to the Fed's consolidated statements, Federal Reserve notes are backed by Treasury securities, federal agency debt (Fannie and Freddie), and mortgage-backed securities (guaranteed by Fannie and Freddie), which are accordingly on the Assets side. The latter two are held at face value.


I hope you are all comfortable with "face value" of the debts issued and/or guaranteed by Fannie Mae and Freddie Mac, because they are part of collateral held against Federal Reserve Notes. Even with the recent purchase of Treasuries by the Fed, Treasuries alone are not enough to cover the entire currency circulated. No wonder US dollar is declining.

Then, take a look at another Liability item, "Deposits from Depository institutions". That's the bank reserves, including huge excess reserves (actually almost all of it). Right now, the Fed is paying interest to the banks for keeping the reserves at the Fed. Sooner or later, once inflation hits, these reserves will be withdrawn and put to work to earn higher returns. The Fed will have to reduce the Asset side of the balance sheet to compensate for the decline in the liabilities. That means they have to sell either Treasuries, agency debts (that no one will want), or mortgage-backed securities (will anyone want those?). Treasuries may get a decent price still, but the other two won't get sold at face value. That will put further downward pressure on the US dollar.

Or how about those term auction stuff and other LLCs that they created (most of LLCs are managed by the New York Fed)? If they gets unwound, what will happen to the liabilities side? Which items will get unwound? And what are the consequences? We don't even know what's in these LLCs.

On top of all that, the Fed wants to issue its own debt.

What a mess.

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Skyscraper, Anyone?

Now the consumers are supposedly in a much cheerful and positive mood, how about some skyscraper shopping?

"Have I got an office tower for you" on MSNBC.com says skyscrapers across the US are being sold at firesale prices. How "firesale"?

How about $100,000 for a 40-storey office building at 1330 Avenue of the Americas, New York?
"The 1330 Avenue of the Americas building — which sold for close to $500 million three years ago — was auctioned last month for the minimum to a Canadian pension fund unit after owner Harry Macklowe defaulted on a $130 million loan.

"Loan defaults in the worst commercial real estate market in decades have created tens of billions worth of distressed properties across the nation, sometimes forcing cut-rate auctions of landmark skyscrapers. Developers are falling behind on mortgages as tenants leave and can find no financing to cover payments, analysts say.

"So they are selling skyscrapers at a drastic discount, with the condition that the new buyer take on the enormous amounts of debt connected to the properties."

(Hmmm, so that's the hitch...) But analysts think this is just the beginning.

""This is a train wreck that's coming in the large office towers," said Matthew Haines, chairman of the Propertyshark.com real estate Web site.

"Real Capital Analytics, which tracks commercial real estate transactions, counted over $86 billion worth of distressed properties in the country as of April, over $6 billion in Manhattan.

"Many of the towers that are likely to go up for sale were bought at inflated prices during the boom three to five years ago and could lose over half their value at sale, analysts said."

"The only major property sales that are likely in the next several months, analysts say, are distressed properties with delinquent loans.

""No healthy owner in their right mind would try to sell a property in this environment," said Fasulo. He said devalued sales of skyscrapers represent "a trickle right now. It will turn into a flood over the next 12 months.""

SRS (real estate (commercial) double short ETF) anyone? (Of course IYR - real estate long ETF - would be the obvious contrarian trade, if you are so inclined.)

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Tuesday's Treasury Auction Results

From TreasuryDirect.gov. Looks like a successful auction, judging by the bid to cover ratios and foreign participation.

13-week bill: $31 billion sold

• Primary dealer: $20 billion
• Direct bidder: $760 million
• Indirect bidder (foreign): $7.6 billion
• Bid to cover ratio: 3.42

26-week bill: $30 billion sold

• Primary dealer: $15.9 billion
• Direct bidder: $1.4 billion
• Indirect bidder: $10.9 billion
• Bid to cover ratio: 3.09

2-Year notes: sold $40 billion

• Primary Dealer: $17 billion
• Direct bidder: $894 million
• Indirect bidder: $21 billion
• Bid to cover ratio: 2.94

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British Parliamentary Crisis Over Expense Scandal

This hasn't been reported much in the US, but it seems something unprecedented is happening in Great Britain.

Telegraph was the first newspaper to report on the ever-growing expense scandal 2 weeks ago, and it has the dedicated section on their website.

British Members of Parliament (MPs) were revealed to have taken the taxpayers money to:

• clean the moats
• pay the mortgage on their second house
• hire tax accountants for their personal tax returns
• decorate their Christmas tree
• buy lavatory seats.
• repave the driveway
• buy a plasma television
• collect half-million British Pounds (Sinn Fein MPs) while refusing to attend the Parliament
• reupholster the sofa
• buy ginger crinkle biscuits

The list goes on and on.

It has been their custom, to give MPs expense accounts as perks, since their salary is considered low (currently it is 64,766 British Pound, which is about US$103,256) . However, with the UK's economy down the toilet, the taxpayers there are saying "Enough is enough".

6 days ago, the Speaker of the UK House of Commons was forced out of job under pressure over the scandal. (BBC Radio's report is here.) The first time that it happened in over 3 centuries. After noting that 9 Speakers met violent deaths including 7 who were beheaded, that's understandable.

Times online reports that 325 MPs will be swept away in the general election, which Prime Minister Gordon Brown will likely be forced to call. That's HALF of the Parliament.

"As many as 30 will be forced to resign directly because of the expenses scandal, while whips expect more than 200 to quit because they are unable to cope with continued public anger. Up to 90 MPs will be voted out in the election."

The scandal, which started as seemingly minor one, seems to have evolved into a full-blown taxpayers' revolt. William Rees-Mogg (of "The Sovereign Individual" and "Blood in the Street") calls it "a revolution" (his article is here).

I hope the British taxpayers have longer memory than the US counterpart.

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Consumer Confidence Surge in May

The Conference Board's Consumer Confidence surged to 54.9 from 40.8 last month. Economists surveyed by Thomson Reuters were expecting 42.3. The May number is the highest in more than 6 months.

The market opened in negative territory after the news of North Korea's nuke and missle tests. However, the market reacted immediately on the release of the consumer confidence number, with Dow Jones Industrial Average jumping 60 points in a split second. (That was awesome to watch on an intraday chart.) Currently (8:40am PST), DJI is up 162 points (1.9%) at 8,440, S&P 500 up 17 points (1.9%) at 904. Nasdaq is outperforming the two, up 45 points (2.6%) at 1,737.

Consumer discretionary sector is trading very strong. The rationale is that if consumers are more confident they will spend more on clothes (Macy's up, so is Men's Warehouse, which I recently featured in my other blog), iphones (Apple is up, see my post), buy houses (homebuilders are all up huge despite an abismal house price index reading).

The improving stock market, and extensive media coverage on "Let's spot a 'green shoot'!" must have worked wonders. It's all about psychology now, until it isn't.

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OT: What Could North Korea Want?

North Korea is acting up yet again. It's hard for me to believe that North Korea actually wants to attack South Korea, Japan, or the US. So what is it that they want to achieve?

Whenever I think of North Korea, I think of the movie "The Mouse That Roared". Based on the novel of the same title, the movie is about a small duchy somewhere in the Alps who decides to declare war against the United States - not to win, but to lose, and lose badly and quickly so that the duchy can be rebuilt with the generous recovery plan from the US (much like the Marshall plan).

I have a feeling that I'm not far off the mark... They want to be militarily defeated so that they get rebuilt with outside money and resources.

Tokyo's Nikkei is having a delayed reaction to the N. Korea nuke and missle tests; it is currently down 83 points to 9,263. Korea's KOSPI Composite is down 20 points to 1,380.

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Electricity Use to Fall for the First Time Since 1945

This is not your ordinary recession. The Financial Times article says [emphasis by me]:

"Global electricity consumption will fall this year for the first time since 1945, according to the International Energy Agency.

"The watchdog for developed energy consuming countries will tell energy ministers from the Group of Eight leading economies on Sunday that electricity demand will fall 3.5 per cent in 2009.

"In China, where power use is seen as a more reliable barometer of economic activity than official economic measures, consumption will be more than 2 per cent lower than 2008. Russia will see a fall of almost 10 per cent, while countries in the Organisation for Economic Co-operation and Development will see a fall of almost 5 per cent.

"Three-quarters of the global decline in consumption is accounted for by industrial rather than household demand, reflecting the fall in demand from China’s manufacturing-heavy economy. Consumption in India, by contrast, is expected to increase 1 per cent."

Still, IEA says that G20 nations are not doing enough stimulus spending on renewable energy.

"The agency will also tell ministers that its calculation of the stimulus spending required from G20 nations on renewable energy was inadequate and should rise by a factor of six if greenhouse gas emissions targets set by the United Nations were to be met."

???? This doesn't make any sense to my short-term thinking. This is probably the most severe recession since the 1930s. Governments run huge deficit, tax revenue down everywhere. IEA comes and tells the governments to spend 6-times more stimulus money on renewable energy. Where does the money come from? Thin air?

It's good to remember who IEA is. It was set up as intergovernmental organization for OECD member countries. It is not an outside, disinterested party advising the governments of developed nations, although news media likes to treat it as such. (My suspicious mind would say if the member governments want to promote renewable energy at all cost, IEA will produce recommendations to that extent.)

Don't confuse IEA with IAEA, International Atomic Energy Agency, which is an autonomous, independent entity under its own international treaty.

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Unintended Consequences Part II

(For Part I, click here.)

Every action has reaction, and that reaction is often not what the action was supposed to cause, not at least by the people who planned/executed the action. There are people, however, interested in the action and or its resultant reaction but having no say in its planning nor execution: a third party, you might say. These third party people often see the unintended, negative consequence before the action is to take place and warn the ancion implementers. They often get totally ignored, or worse, ridiculed. And when that unintended consequence actually happens instead of intended consequence, they are often still ignored, ridiculed, or worse, attacked as agents of bad outcome as if they are the ones who caused it. All the cool-headed third party could do is to say "I told you so".

Spanish experience shows so-called "green jobs" cause more job and money losses:

The March 2009 Study of the effects on employment of public aid to renewable energy sources says

• Every job created in renewable energy sector that the State (Spain) managed to finance, 2.2 jobs were lost from the non-subsidized sectors.
• Spain spent 571K Euro per each green job since 2000; 1 million Euro per wind power job.
• Only 1 in 10 green jobs resulted in permanent position.
• Spanish citizens should expect to pay higher utility rate (31% higher) or pay higher taxes in order to cover the cost of subsidizing the inefficient renewable energy generation.
• Spain runs the risk of being straddled with obsolete, inefficient legacy assets (particularly in wind and photovoltaic).
• The executive summary is titled "Lessons from the Spanish renewables bubble". It's a green bubble.
• Spanish experience is what President Obama cited as model.

Government and cutting-edge technology usually don't go together. But I was encouraged to see the word "bubble". Here we go! We need a new bubble so that we can re-inflate the economy, right?

To be fair, Germany says green job will shorten recession. I lived in Germany for a brief period (6 months or so). I rented an apartment. What I still remember is several huge dumpsters in the apartment courtyard, where the residents were supposed to sort out 5 or 6 different types of garbage. Most residents didn't have that kind of time - they were busy making a living. So what seemed to have happened was they brought down the garbage, in paper or plastic bags and just left the bags outside the bins. Every week I saw piles of these bags in the courtyard, outside the dumpsters. The only thing that was sorted out was newspaper. I'm sure they had a surge of employment at garbage sorting facilities.

Britain's wind farms stopped working during this January's cold spell, though it was blamed on UFO. Seriously.

Proposed crackdown on offshore tax havens and the so-called "tax cheaters" upset the British bankers.

And they are threatening to throw out the US clients because it will be too expensive to service US clients if the new international tax proposal by the Obama administration (it's in the budget proposal) gets enacted.

If I remember right, the Brits, from the prime minister on down, were openly and enthusiastically supporting the candidate Obama. They now have to be prepared to take the whole package, I'm afraid, and that may include a US invasion of the UK territory (Cayman Islands), as expressed by a US journalist (see my post, 2nd half).

Standard and Poor threatened the UK with downgrade.

And they ended up scaring the US financial markets and threatening the US dollar. The stock market lost interest in going up, the yields on longer-dated Treasuries skyrocketed, and the US dollar index sank to a multi-month low, to a 20-year support level.

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IMF to Get $108 Billion from the US Government

One of the news links I have goes to "The International Forecaster" by Bob Chapman. Mr. Chapman makes part of his subscription newsletters available for browsing on his site, and I've been reading them for some time. You can say he may be way over the top; compared to him, so-called Dr. Doom (I don't know who holds the title now - Roubini? Marc Faber?) sounds like an unbridled "green shoot" optinist.

However, he's been right on on the deterioration of the US economy and where it's heading, and I often see snippets of information which I don't see (or remember seeing, I should say) anywhere else. Here's one of several from his May 20 letter:

"The Treasury is going to try to get $108 billion for the IMF by sneaking it through as a supplement to funding for Afghanistan, Iraq, and Pakistan."

WHAT IS HE TALKING ABOUT? So I googled the sentence and came up with this:

Senate Approves $91 Billion for Iraq, Afghan Wars - Bloomberg, Thursday May 21:

"The U.S. Senate approved a $91 billion spending bill that includes funding for President Barack Obama’s troop buildup in Afghanistan after endorsing his request to boost aid to the International Monetary Fund.

"The chamber voted 86-3 today to approve the legislation, setting up negotiations with the House over a compromise plan. Democrats aim to send Obama a final bill early next month after returning from a week-long Memorial Day recess. "

But this $91 billion bill indeed had a supplemental bill. (emphasis mine)

"The Senate earlier today rejected, 64-30, an attempt to strip provisions for the U.S. to provide $108 billion in aid to the IMF. Critics of the request said it was unaffordable at a time of spiraling budget deficits.

"The administration’s request, which for accounting reasons amounted to $5 billion in the legislation, came after leaders of the world’s advanced and emerging economies agreed last month to boost the bank’s resources to $750 billion in order to fight the global financial crisis. "

So the attempt to block it was failed. Now the government will give the IMF $8 billion (or $5 billion for whatever accounting reasons), and give $100 billion line of credit that the IMF can draw on.

When we are talking about $1.7 trillion budget deficit, $100 billion feels like a chump change.

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