The Flexible Friend.....Some Credit Card Data

Thank god the credit crisis and the recession that never started are already over.....But i assume it´s hard even for a bull trying to explain the already sky high delinquency rate.... Nice to see that the Fed ( just a few weeks ago ) and other central banks are willing to take the securitized credit card debt as collateral. Lets hope the haircut will be big enough and the way too often toxic waste won´t be rolled over indefintely.......... This post ECB Concerned Over Swap-O-Rama Exit Strategy from Mish is showing that there are already schemes in place to "design" securities to limit the haircut & to make them available as collateral . One more reason to be bullish on gold.... Especially when you take a look at this graph Federal Reserve Balance Sheet

Gottseidank ist die Kreditkrise und die nicht eingetroffenen Rezession bereits vorbei....... Dann aber sollten die bereits jetzt astronomischen Rückstandsraten bei den Kreditkarten selbst für die Daueroptimisten aber für noch mehr Beunruhigung sorgen. Immerhin ist es gut zu wissen das zur Not die Fed ( erst seit einigen Wochen ) und andere Zentralbanken auch die verbrieften Kreditkartenforderungen als Sicherheit akzeptieren. Bleibt nur zu hoffen das die angenommenen Risikoabschläge ausreichend sein werden und das diese oft fragwürdigen Papiere nicht auf alle Ewigkeit prolongiert werden ..... Wie dieses Posting ECB Concerned Over Swap-O-Rama Exit Strategy von Mish zeigt hat es nicht lange gedauert bis die Marktteilnehmer Strategien entwickelt haben um dieses System zu Ihren Gunsten zu nutzen. Wenn man das mit einem Blick auf die grafische Darstellung der FED Bilanz kombiniert hat man leicht einen gewichtigen Grund mehr langfristig eine bullishe Meinung zum Gold zu haben....UPDATE: Das paßt wie die Faust auf Auge.....Zentralbanken können auch bankrottgehen FAZ & Sind Verbraucherkredite der nächste Krisenherd? FT Deutschland
Credit-Card Firms May Look Alluring, But Threats Loom WSJ
The quickest way to pay top dollar for something you don't need is to make an impulse buy on your credit card. Investors eyeing shares in credit-card companies as a quick way to profit from an economic recovery should also resist the temptation to buy right now.

A growing feeling that stand-alone credit-card lenders will weather the economic slowdown has started to lift shares in firms like American Express Co., Discover Financial Services and Capital One Financial Corp.

But recent credit-card data indicate that none of the big card companies -- including the large card units at banks like Bank of America Corp., Citigroup Inc. and J.P. Morgan Chase & Co. -- are in the clear. Rising defaults could weigh on earnings for longer than expected.

Since the credit crisis began, investors have expected rising charge-offs -- the term given for losses caused by defaults -- at credit-card companies. Two big negatives were identified: Job losses and, for many borrowers, a sharply reduced ability to use home-equity loans to pay off more expensive card balances.

Credit did deteriorate. Moody's Investors Service reports that, for the card lenders it tracks, the annualized charge-off rate -- which measures defaults as a percentage of loans outstanding -- rose to 6.05% in March from 4.64% a year earlier. The charge-off rate peaked at just over 7% during the 1991 and 2001 recessions, according to Moody's.

Credit-card bulls -- believing that a recession may be avoided -- think charge-offs won't go to recession highs. If so, firms like Capital One could look forward to sharply higher earnings as lower defaults would allow lenders to ease off on the expense of building their loan-loss reserves.

But two key data points indicate defaults climbing higher, not falling fast.

First, card borrowers are starting to pay back less of their outstanding balances each month. Analysts at Oppenheimer & Co. say that a sustained decline in the amount borrowers repay each month, compared with a year-earlier, can be a leading indicator that borrowers will start to fall behind on payments.

Oppenheimer calculates that, for the companies it covers, borrowers paid back 19% of their balance on average in April, down from 19.7% in the year-earlier period. American Express's borrowers paid down 23.8% of their balances in April, down from 25% a year ago, according to Oppenheimer. Conversely, Capital One borrowers paid down 18.5% of their balances last month, up from 17.6% a year earlier.

Also worrisome are data from Moody's suggesting that borrowers are finding it harder to become current on credit-card loans once they fall behind. The ratings firm notes that the amount of loans on which borrowers have skipped three or more payments has started to rise more quickly than loans that have missed one or two. Once borrowers are three payments behind, fewer of them ever catch up.

Federal Reserve data say revolving credit outstanding -- which tracks credit-card balances -- increased 6.7% in the first quarter, compared with the year-earlier period. Borrowers are taking on more debt to support spending through the slowdown.
It's a gamble for card companies to lend more to people who are turning to relatively expensive debt because they're cash strapped.

And it's a bad bet for investors to load up on the card companies taking that gamble.

An Irrelevant Fed: Thimbles of Water in a Forest Fire / Hussman

Always good to start the week with some rational thoughts from Hussman

Immer eine gute Idee die Woche mit erhellendem von Hussman zu starten

An Irrelevant Fed: Thimbles of Water in a Forest Fire
Pop Quiz
How much “liquidity” has the Federal Reserve “pumped” into the $12.7 trillion U.S. banking system since March 2007?

a) $1.2 trillion, which banks have used to firm up their balance sheets

b) $600 billion, which banks can now use to make new loans

c) $16 billion, all of which has been drawn out of the banking system as currency in circulation

If you answered c, move to the head of the class. Investors who answered a or b have not only been misled by analysts and media stories, but have no idea how irrelevant the Fed's actions are likely to be, except on short-term market psychology. More charts and data below. ....

The Fed can certainly penalize savers by pressuring deposit rates lower, but it isn't having a measurable effect on the market-determined interest rates that borrowers actually face. Nor can the Fed significantly affect the solvency of the mortgage market.

As for stocks, I noted a couple of weeks ago (extending Jim Stack's analysis) that in each instance that the market declined materially after successive discount rate cuts, S&P 500 earnings were down sharply a year later. Given that a large portion of S&P 500 profits are from financials, that profit margins in other industries are well above historical norms, and that profit margins have always collapsed during recessions, my impression is that S&P 500 earnings could easily fall by 40% over the next 18 months (investors who view this as impossible haven't examined earnings history). This could become far worse than a 5% decline off the high, which is where the S&P 500 is now.

FT Equity investors: Denial is not a river in Egypt

Suppose three years ago, they said, you had been given the following scenario for November 2007: oil close to $100 a barrel, the dollar at $1.50 to the euro, corporate profit margins at a record high but starting to turn, house prices falling in the US and the UK and the global banking system in chaos. Would you have predicted that European equities would be only 6 per cent off their peak?

It's possible that investors could adopt a fresh willingness to speculate on the hopes and eventuality of a Fed rate cut (the economic news this week will determine the likelihood of 25 vs. 50). Regardless, given the economic backdrop, my impression is that any such speculation would be short-lived - as it has after other Fed cuts this year. For now, we don't have evidence to support any amount of bullish speculation. ..... In any event, historically, investors would have considered themselves lucky to clip off their excess risk so close to all-time highs, even after market action and economic news began to sour.

The Fed – thimbles of water in a forest fire
My greatest concern at present is that investors are being bombarded with empty hope that the Fed will save them by “injecting liquidity” into the banking system. Time spent examining these false perceptions is not time wasted.

Very simply, the impact of Fed actions is sorely exaggerated. The amount of liquidity that the Fed provides is minuscule in relation to the U.S. banking system, and also in relation to the volume of capital inflows (about $2 billion daily) that the U.S. relies on from foreigners, thanks to our massive fiscal deficits and low savings rate.

What strikes me as particularly absurd is that the analysts who wax rhapsodic about “Fed liquidity” speak in a way that makes it obvious that they have no understanding of how these Fed operations work. Then again, it's precisely because we do understand how they work that we're convinced that they're irrelevant (aside from boosting short-term market psychology and accommodating short-term spikes in the demand for currency).

Let's start with a basic fact. There is only one monetary aggregate that the Fed directly controls: the monetary base – consisting of currency in circulation plus bank reserves. Here's the data.

Monetary Base : = Currency in Circulation : + Total Reserves :

In the early 1990's, reserve requirements were abolished on everything but demand deposits (checking accounts). Since then, the quantity of bank reserves has gradually declined, and has no relationship with the volume of bank loans or total bank assets – again look at the data. In recent months, as has been the case since the early 1990's, virtually all of the increase in the U.S. monetary base has represented the gradual and predictable increase of currency in circulation, held outside of the banking system.

So how does the Fed increase the monetary base? There are three sources of “liquidity” managed by the FOMC: permanent open market operations, temporary open market operations, and loans through the discount window. Let's take a look at each. Again, here are the Fed's own statistics:

Permanent Open Market Operations:
Temporary Open Market Operations:
Discount Window Borrowings:

The Fed uses permanent open market operations primarily to finance the gradually increasing stock of U.S. currency in circulation. The Fed buys Treasury securities (which become an asset on the Fed's balance sheet) and pays for them by printing money (a liability of the Fed, as evidenced by the words “Federal Reserve Note” on top of the pieces of paper in your wallet). The Fed has not engaged in any permanent open market operations since May.

Next, the Fed can use temporary open market operations to vary the amount of day-to-day reserves in the banking system, in order achieve the targeted Federal Funds rate (which is the interest rate that banks charge to lend reserves overnight to other banks that are temporarily short). What's important is that these are temporary operations, in the form of “repurchase agreements”: the Fed provides reserves to the banks, usually for periods of 1-14 days. It purchases Treasuries or government-backed mortgage securities from the banks as collateral, and at the end of the period, the banks are obligated to buy them back from the Fed, at the purchase price plus interest.

What's important here is that every time a repo matures, the Fed generally enters a new one for a similar amount. The average maturity of these repos is only about 7 days, so there is a lot of activity. These transactions are constantly reported by the media as if they are “new injections” of liquidity – but they are just rollovers. If the Fed does a $20 billion 7-day repo one day, you can pretty much bet that the Fed will be doing another $20 billion in repos a week later when the outstanding one comes due. What matters is the total amount of repos outstanding. The chart below presents the 30-day average of Fed repos outstanding since March (see the above link for source data - thanks to Brooke Steinau for tying all of these figures out).

Note that the total amount of liquidity added by the Fed since March is only about $16 billion (it turns out that all of this has been drawn out of the banks as currency in circulation, probably for good, so at some point in the coming months, the Fed will undoubtedly do about $10-$15 billion in “permanent” open market operations to recognize this withdrawal, and will simultaneously reduce the outstanding amount of these “temporary” repos).

The third way the Fed can “inject liquidity” is to make loans to banks through the “discount window,” for which it charges interest at the “discount rate.” While market participants behave as if changes in the discount rate are wildly important, the fact is that even at their peak last summer, total loans to banks through the discount window only rose to about $3 billion. Currently, the total amount of “liquidity” being lent by the Fed through the discount window is $55 million. Yes, million.

FT Fed considers steps for money market

The Federal Reserve is considering measures to make liquidity more readily available to financial institutions. Analysts close to the Fed believe it is considering a cut in the discount rate, at which it lends directly to banks, and steps to reduce the stigma associated with such borrowing. The Fed could announce plans to cut the discount rate by 25bp to 4.75%. That would halve the interest penalty on discount window borrowing compared to the main, Fed funds, rate of 4.5%. The reduction of the discount rate penalty could come before the next FOMC meeting on Dec 11 if credit market conditions remain stressed. Alternatively, the Fed may cut the discount rate by an extra 25bp over and above any reduction in the Fed funds rate at that meeting, the analysts said.

> Maybe this could bring the amount back over $ 100 mio...... Watch for the spin if this move happend outside the regular Fed meeting ....I´m pretty sure that almost nobody will mention that the entire discount window borrowing is almost nonexistend despite the latest cuts...

> Evtl. könnte dieser Schritt die Summe ja über 100 Mio hieven..... Sollte dieser Schritt ausserhalb des regulären Fed Meetings stattfinden dürfe das als Anlaß genommen werden die Spinmaschinerie heißlaufen zu lassen..... Ich vermute das die Tatsache das diese Art der Kreditversorgung trotz der bisherigen Senkungen keinerlei Rolle gespielt hat mal wieder "unterschlagen wird"......

Last week, investors made a great deal about an $8 billion 43-day repo that the Fed initiated. While this was reported as an extraordinary measure to stabilize the financial markets, the fact is that the Fed regularly enters a long-dated repo every year, just before the holidays, in order to accommodate a moderate increase in the demand for currency (in 1999, the amount was massive because of year-2000 fears, and was quickly reabsorbed after the new year). The $8 billion repo the Fed entered last week amounts to roughly $25 per American in extra cash to carry around the malls. To frame this as some sort of extraordinary effort to stabilize the banking system is absurd.

Again, the problem with the U.S. financial system here is not liquidity, but the solvency of mortgage loans and securitized debt. The Fed's actions are not likely to have material impact on this. To believe otherwise is mindless sheep-like superstition. Do investors really want to bet their financial security on the hope for “Fed liquidity” promised by uninformed analysts who don't understand monetary policy because they can't be bothered to look at the data?

The Fed: Magical Fairies and Pixie Dust / Hussman

There is almost no better way to start the week to focus on facts and filtering all the spin and hype that is hitting you as soon as you switch on the MSM. One of the best ways to achieve this goal is to read the weekly comment from Hussman. With the Fed decision coming this week this is more important than ever. If you have the guts ( I havn´t...)to view the panel on CNBC please compare this nonsense with what Hussman has to say. On top of this Mish is out with another outstanding post and is asking Is the U.S. printing money like mad? .

Es gibt kaum einen besseren Wochenfang als sich auf die wesentlichen Fakten abseits des ganzen Spin´s und Hype´s zu konzentrieren der einen bei jedweder Form der Berichterstattung durch die gängigen Medien (besonders ausgeprägt bei der Wirtschaftsberichterstattung) begegnet Einer der besten Wege dieses Ziel zu erreichen ist die wöchentliche Dosis von Hussman. Und mit der Fed Entscheidung vor der Brust wird das ganze wichtigen denn je. Wenn Ihr das aushaltet,ich stehe das nicht durch :-), vergleicht die Faktenlage mal mit dem "Expertenpanel" auf CNBC. Zudem möchte ich noch ein weiteres Post von Mish hinweisen indem er auf die immer wieder gestellte Frage
Is the U.S. printing money like mad? eingeht.

“All you need is faith and trust
and just a little bit of pixie dust”

- Peter Pan

Wall Street continues to hold its breath about the upcoming decision by the Federal Reserve. There's no question that the Fed's decision will have a market impact.


This is not because Federal Reserve operations matter, but because investors believe they matter. The total amount of U.S. bank reserves affected by FOMC operations is less than $45 billion, and only the “excess” portion of that – typically about $2 billion dollars – is what determines the overnight Federal Funds Rate. Meanwhile, the total amount of borrowings through the “discount window” – though higher than in recent years – still amounts to only about $3 billion.

There is no well defined “monetary transmission mechanism” by which these minuscule amounts affect bank lending. Yes, during periods of crisis, the Fed has an important role to play in providing day-to-day liquidity so banks can meet depositor withdrawals. But aside from this short-term variation in the monetary base (which we saw, for example, around the “year 2000” turn), there is not even a slight relationship between bank reserves and total bank lending. Indeed, any remnant of that relationship was wiped out in the early 1990's, when reserve requirements were removed on all bank deposits other than checking accounts.

To believe that the Fed operations matter, you have to believe that a $13 trillion economy is controlled by a few billion dollars of reserves and discount window borrowings, none of which vary materially from year to year.

The notion of a powerful Fed is not knowledge born of analysis, but belief born of repetition. Think about it: how did you learn that the Fed is important? Not that interest rates are important (which is certainly true), but specifically, that the Fed is important. Some investors learn it in college, from the “money multiplier” theory that links bank reserves and bank lending (obsolete since the early 1990's when reserve requirements were largely eliminated). ....

> If you want to read more on this topis i highly recommend What (Really) Happened in 1995? / Aaron Krowne

> Wenn Ihr genaueres über die laxen Resrevevorschriften wissen möchsten kann ich Euch diesen Link What (Really) Happened in 1995? / Aaron Krowne empfehlen.

Correlation doesn't imply causation. We need to ask: what is the mechanism by which Fed actions have these effects? If we're convinced that the Fed matters, we can't stop at belief or argument – we need consider reasonable mechanisms, and then actually test them against data. If investors don't do this, they have nothing but superstition. They quietly equate the black cat, or the ladder, or the broken mirror, or Ben Bernanke with an outcome, without looking for any testable relationships that link cause and effect. ....

The Federal Reserve controls one monetary aggregate – the U.S. monetary base, the vast majority of which represents currency in circulation. In a nutshell, the Fed buys U.S. government debt and creates “base money” in the form of either bank reserves or currency. Of the $552.4 billion in securities purchased by the Fed since 1990, $546.3 billion – about 99% – represents currency in circulation (the pieces of paper in your pocket that have “Federal Reserve Note” printed on top).

Total U.S. bank reserves have grown by only $3.1 billion since 1990, to a total of $44.9 billion. Again, it is the day-to-day trading between banks of this amount (and actually, only of “excess reserves” – typically about $2 billion dollars) that determines the Federal Funds rate.

The Federal Reserve lowered the “discount rate” and opened the “discount window” a few weeks ago. Total borrowings from the Fed have increased from about $360 million in July, to $3.2 billion currently. While some analysts have breathlessly noted that “borrowings from the Fed have soared to the highest level in years,” the total amount of this “fresh liquidity” is about the same as the total assets of the Strategic Growth Fund.
Thanks to Wall Street Follies

In contrast to about $2 billion in excess reserves that is the basis for the Federal Funds Rate, and about $3 billion that is currently being lent at the Discount Rate, the U.S. banking system presently carries about $3.4 trillion in real estate loans, and $6.3 trillion in total loans. Gross domestic product is currently about $13.8 trillion.

While the Fed has purchased a total of $240.7 billion in U.S. government securities since 2000, mostly to create currency, foreign investors have purchased $1,185.8 billion in Treasuries alone. Indeed, foreign purchases have absorbed all of the increase in U.S. Treasury debt over the past year (and then some). It makes a great deal of sense to pay attention to foreign capital flows and the U.S. current account. In contrast, except for the psychological effect on investors, it is ridiculous to believe that Federal Reserve operations matter.

The Fed is, at best, a square-dance caller - the guy who by mutual consent gets to holler out when to swing your partner and when to do-si-do. The Fed provides coordination, but it is a mistake to think it has power. When the barn is on fire and people no longer find it in their best interests to follow along, you can bet they'll dance to their own tune (as we're starting to see in the Eurocurrency market, where LIBOR has significantly diverged from thee Fed Funds rate being "called out"). The Fed can provide a modest amount of liquidity to the banking system, but it can't provide solvency to the mortgage market. It's dangerous to believe that a reduction in the Fed Funds rate or the Discount Rate will materially change credit conditions here.

Still, we'll all be gathered there under Ben's helicopter on Tuesday, hoping for a sprinkling of magical pixie dust.

Off to Neverland!

ANGST Backed Securities / Economist

Here we go...... I don´t know how the the Economist got to this number( see new link Asia Times further down). But if this is true it is clearly a form of a bailout......And this would explain in some part why the window is tapped from Citi, JPM & Co.... If this is true I think we will see much more during the next days especially from weaker players......At least they are now channeling the liquidity where it is needed....

Es geht los......Ich habe keine Ahnung wie der the Economist zu dieser Annahme kommt ( siehe neuer Link von der Asia Times weiter unten). Sollte sich das als wahr herausstellen erfüllt das für mich den Tatbestand eines "Bailouts". . Das würde auch zum Teil erklären warum Citi, JPM & Co.... dieses Fenster so intensiv genutzt haben. Sollte das den Tatsachen entsprechen gehe ich jede Wette ein das wir hier in den nächsten Tagen besonders von den schwächeren Marktteilnehmern haufenweise Transaktionen sehen werden..... Immerhin sollte so die Liquidität zielgerichtet erhöht werden....

The Fed has been offering 85% of face value for AAA-rated paper presented at its discount window, even collateralised-debt obligations stuffed with subprime mortgages (as long as they are not—yet—impaired).

Thanks to Solvent Celt !

Hat tip to Professor Bear for provinding this link

Central bank impotence and market liquidity/ Asia Times

‘Chairman Bernanke has now summoned his own clean-up team into action. The Fed hopes that by assuring banks that they can now access cash on less punitive terms from the Fed discount window, collateralized by the full “marked to model” face value of mortgage-backed securities, rather than the true
distressed value as “marked to market”, for which they could find no buyers at any price in recent weeks as the market for such securities has seized up, it can jumpstart market seizure for mortgage-backed commercial paper and securities.’

Here is a another view from iTulip

Bernanke: Talks the Dove, Acts the Hawk / iTulip

Paper losses / Economist

Central banks struggle to restore calm without breeding complacency

....Some commercial paper is easy to understand: a big company sells an IOU, which it repays in, say, 90 days. This stuff got the American financial system into trouble in 1970, when Penn Central Railroad defaulted on $82m-worth. The recent problems stem from a different brand of paper, backed not by the good name of a big company, but by assets, such as mortgages or credit-card receivables. Mostly held off-balance-sheet by bank-sponsored “conduits”, this market has boomed in recent years. It now accounts for roughly half of the more than $2 trillion of commercial paper outstanding. But issuers have been caught out by a cashflow mismatch, says Louise Purtle of CreditSights, a research firm. Funding is short term but the proceeds are invested in longer-term assets, leaving issuers vulnerable when investors start to doubt the quality of those assets and want out.

That is what happened at the start of this week as money-market funds sold these IOUs, causing rates to spike as never before (see chart). This paper suffered from two main layers of mistrust. First investors are worried that the banks won't always be able to support the conduits.
The second worry, about the mortgage collateral, is particularly stark. Rating agencies badly misjudged default rates in subprime mortgages and are now having to downgrade reams of securities linked to them. With the credibility of ratings in tatters (there have even been calls for Warren Buffett to take over Moody's), investors have been left without a compass. For the time being, many would rather pull back than trust in their own analysis of credit risk. They are staying on the sidelines because they can't work out what securities are worth, not because they don't have the money to buy them.

Ratings may be in doubt, but they remain powerful. The Fed has been offering 85% of face value for AAA-rated paper presented at its discount window, even collateralised-debt obligations stuffed with subprime mortgages (as long as they are not—yet—impaired). Josh Rosner, a critic of the rating agencies, thinks it extraordinary that, despite their obvious flaws, they “continue essentially to regulate the behaviour of even the central bank”.

Home truths
Even if stability returns to markets, the repricing of risk is likely to continue. How far it goes will depend largely on the state of the mortgages that serve as collateral for many of the newfangled instruments that were, until recently, hawked with glee on Wall Street. The outlook is not good. Not only do subprime delinquencies continue to rise, but defaults on prime and Alt-A loans (those to good- or middling-quality borrowers) have started to climb too. Figures released this week showed foreclosures in July up by 9% compared with June, and by 93% over the year before. ....

A jam in the flow of credit to homebuyers threatens an already vulnerable economy. If consumers seek to pay down debt in response to falling house prices, spending will suffer, especially with unemployment creeping up. ...

got gold..... ?