Jim Grant Speaks His Mind

Jim Grant speaks.

But will the N.Y. Fed listen?

(March 23, 2012)

[excerpts from "Piece of My Mind":]

"As you prepare to mark the Fed's centenary, may I urge you to reflect on just how far you have wandered from the intentions of the founders? The institution they envisioned would operate passively, through the discount window. It would not create credit but rather liquefy the existing stock of credit by turning good-quality commercial bills into cash— temporarily. This it would do according to the demands of the seasons and the cycle. The Fed would respond to the community, not try to anticipate or lead it. It would not override the price mechanism— as today's Fed seems to do at every available opportunity—but yield to it....


I myself draw more instruction from the depression of 1920-21, a slump as ugly and steep in its way as that of 1929-33, but with the simple and interesting difference that it ended...No TARP, no starving the savers with zero-percent interest rates, no QE, no jimmying up the stock market, no federal 'stimulus' of any kind. Yet—I repeat—the depression ended...[President] Harding's approach worked. The price mechanism is truer and enterprise hardier than the promoters of radical 21st-century intervention seem prepared to acknowledge.


In notable contrast to the Harding method, today's policies seem not to be working. We legislate and regulate and intervene, but still the patient languishes. It's a worldwide failure of the institutions of money and credit."

Full speech here.

Quote for the Week, April 29-May 5, 2012

Those who have knowledge, don't predict. Those who predict, don't have knowledge.

--Lau-Tzu

GDP Print Disappoints

[click to enlarge]

Examine the colors in the chart above [courtesy of ZeroHedge], particularly the bar on the far right, representing the components of GDP growth in the U.S. economy during the January-through-March quarter.  That is not a palette with which perma-bulls like to paint.  They comprise a school of artists preferring lots of red above the dashed zero line, with smaller splashes of green below that line.  Fixed investment (red) portends future production.  Unsold inventories (green), on the other hand, signal a digestive slowing in production.

Stock market investors started to get excited after last year's Q3 numbers were released--red above, green below.  Share prices went on a four-month tear with hardly a pause.  During the past few weeks, though, volatility has returned as equities have suffered from indigestion.  Now we know why.  The Commerce Department released a preliminary estimate this morning that Q1 GDP grew by 2.2%, failing to match the prior quarter's +3%.  Real final sales rose just 1.6%.  The slowdown came despite the early spring weather, which jump-started home construction and consumer spending (check out the dark blue).

The consumer piece may not be sustainable.  We know that consumer expenditures are outstripping personal disposable incomes, and that cannot last.  Much of the "buying" in the first quarter was actually vendor financing in disguise.  Automobiles drove off dealer lots, adding to GDP, but the subprime lending used to move inventory is not the same as cash-for-chrome.

The primary area of concern is the thin red line in the new bar.  Look left to see the last time we had one of those, one year ago.  The following quarter (Q2 2011) saw just 1.3% growth in GDP.  Estimates for the current quarter (ending June 30) will be coming down after today's release.

Quote for the Week, April 22-28, 2012

Politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly and applying the wrong remedies.
--Groucho Marx

Honey, I Shrank the Bank

Proud papa lets some of the kids go.

Less is more, according to Bank of America CEO Brian Moynihan, who is scrambling to return his firm to profitability.  Thanks to the Viagra-laced edifice complex of his predecessors, Ken Lewis and, before that, Hugh McColl, BofA had become Too Big To Succeed.  Moynihan hopes to change that.  During the first three months of 2012, the company closed 51 branches and issued 3,103 pink slips.

This morning's Q1 earnings release has confirmed the shrinkage.  Revenue dropped 17% to $22.3 billion from $26.9 billion in the year-ago quarter.  In particular, the firm is retreating from the home-loan business, where it lost $1.1 billion in the first quarter--tough noogies, but actually less painful than the year-earlier loss of $2.4 billion.  According to a February note from FBR Capital Markets, BofA's share of mortgage originations dropped to 5.6 percent in Q4 2011, down from 10 percent the quarter before and nearly 25 percent in 2007.

BofA cannot exit that business fast enough, as liabilities from its ill-starred acquisition of Countrywide Financial continue to mount.  The firm has already paid out $42 billion to settle Countrywide abuses.  Even so, repurchase claims rose in Q1 from $12.6 billion to $16.1 billion--or to $19.2 billion, depending on which footnotes you follow.  Either way, it was a staggering increase.  A mere $282 million has been reserved for those claims, a sign of surrender.  Bank of America is at the mercy of the courts and, absent that, of the taxpayers.

Pressured by federal regulators, BofA reclassified $1.85 billion worth of home-equity loans as nonperforming.  The feds are concerned that falling home prices (amounting to mark-to-market losses nationwide of almost $7 trillion) have wiped out collateral on many second mortgages (e.g. HELOCs), leaving them as unsecured debt.  Up until now, banks have been carrying some of these high-risk junior mortgages at full value.  But auctions of foreclosed properties rarely leave anything for second-lien holders.  So lenders must now account for the risk of total loss.

Nonperforming second liens surge at Bank of America.

Bank of America had earlier identified $4.7 billion of home-equity loans that stand behind a delinquent first.  So more write-downs may be coming.

If I could redesign Bank of America's website, I would do it like this.  But someone has beaten me to it.




[update, 05-01-12--]


2,000 more pink slips at Bank of America.  WSJ story here.

"We Are White-Knuckle Defensive"

"In short, our concern about market risk persists. Our concern about the risk of an oncoming recession persists. Nothing in the recent data has removed my impression that the period ahead may become an unmanageable Goat Rodeo of market volatility, economic disappointments, sovereign debt concerns, and European banking strains."

--John Hussman, Ph.D.,

weekly market comment

Quote for the Week, Apr. 15-21, 2012

If you set out to be liked, you would be prepared to compromise on anything at any time, and you would achieve nothing.
--Margaret Thatcher, British Prime Minister (1979-1990)

Banks Brag, Investors Flee

Early this morning JP Morgan Chase was the first of Wall Street's mega-banks to report first-quarter earnings. Once again, the firm's highly paid team of accountants came through with a spiffy wax-and-buff job, showing headline numbers that at first glance suggest that business is improving. The shine comes more easily, of course, when the green eye-shades stray from GAAP accounting and invent their own numbers, in this case so-called FTE revenues ("fully taxable-equivalent"), which exploded upward in Q1.

For my money, "FTE" stands for something else: Forget The Explosion. Follow the footnotes instead. Garden-variety revenues rose 6% compared to the depressed year-ago quarter. Modestly positive, but enough to justify the 50% share-price appreciation of the past five months? I don't think so. The company's revenue in Q1 2012, as Peter Atwater at Financial Insyghts observes, "was not much different from Q1 2010--eight quarters of 'recovery' ago!"

Going back down?

Federal incentives and low interest rates have kicked off a refinancing wave in home mortgages, boosting JPM's revenues by $2 billion in the quarter. Don't forget, these new loans replace higher-interest loans, effectively reducing the industry's future cash flows. Whatever business JPM is pulling in by offering refinancing is coming at the expense of competitors, whose legacy loans are being prepaid. Refinancing is a zero-sum game (negative-sum, actually, as rates leak lower). Even after stealing market share in the mortgage industry, Morgan's net income decreased slightly from a year ago.

And it's not like mortgage-lending is suddenly risk-free. JP Morgan Chase reduced its loan-loss reserves by $1.8 billion in Q1, but then added that--and more--right back into a reserve fund to cover future litigation expenses (mortgage-related lawsuits just keep on comin'). The charge: $2.5 billion. According to CEO Jamie Dimon, "we expect to see elevated levels of costs and losses associated with mortgage-related issues for a while longer." Dimon had previously estimated that JPM would be booking an annual profit of $24 billion were it not for all those pesky legal liabilities. Can't a guy make a dishonest profit anymore?

Interestingly, the release of loan-loss reserves came during a quarter when the portfolio value of nonperforming loans increased, reversing a two-year trend. Could be a case of premature evacuation:

Slide from JPM's earnings presentation.

[update, 4 p.m.--]

Another big bank heavily into home loans, Wells Fargo, followed close behind JP Morgan Chase with its own earnings release, which showed a similar increase in revenues (+6.4 % YOY). Wall Street was not impressed. JPM's common stock just closed down for the day, off 3.6%. WFC was right behind, down 3.5%. Look out below.

A skeptical Matt Stoller has more at nakedcapitalism.com: "the status quo of a thinly capitalized servicer model and odd second lien accounting continues."

Quote for the Week, Apr. 8-14, 2012

Facts and truth really don't have much to do with each other.
--William Faulkner

Jobs Update Disappoints

From Calculated Risk:

Today's Nonfarm Payrolls number from the Bureau of Labor Statistics was a miss, with employment in the U.S. expanding in March by 120,000 jobs, just half the increase observed in either January or February and barely enough to cover the increase in the working-age population. The graph above shows just how anemic the job recovery has been. We are still 5 million jobs short of the cycle high reached in December 2007:

This is a recovery?

What's worse, the new jobs on average pay less than the old ones.

And look who is fighting for those new jobs! John Hussman observes:

"If you dig into the payroll data, the picture that emerges is breathtaking. Since the recession 'ended' in June 2009, total non-farm payrolls in the U.S. have grown by 1.84 million jobs. However, if we look at workers 55 years of age and over, we find that employment in that group has increased by 2.96 million jobs. In contrast, employment among workers under age 55 has actually contracted by 1.12 million jobs. Even over the past year, the vast majority of job creation has been in the 55-and-over group, while employment has been sluggish for all other workers, and has already turned down....

In short, what we've observed in the employment figures is not recovery, but desperation. Having starved savers of interest income, and having repeatedly subjected investors to Fed-induced financial bubbles that create volatility without durable returns, the Fed has successfully provoked job growth of the obligatory, low-wage variety. Over the past year, the majority of this growth has been in the 55-and-over cohort, while growth has turned down among other workers. Meanwhile, overall labor force participation continues to fall as discouraged workers leave the labor force entirely, which is the primary reason the unemployment rate has declined. All of this reflects not health, but despair, and explains why real disposable income has grown by only 0.3% over the past year."[Complete comment here.]

Boomers are NOT leaving the job market.

The latest monthly commentary from IceCap Asset Management of Halifax, Nova Scotia, comes with a title that is apropos: "I Need a Job". The report points out that the number of people working part-time in the U.S. "for economic reasons" (i.e. cannot find full-time work) has doubled from 4 to 8 million so far during the Greater Depression. Moreover, the overall labor force participation rate is trending downward:

% of noninstitutionalized Americans with a job

Quote for the Week, Apr. 1-7, 2012

I have been impressed with the urgency of doing. Knowing is not enough; we must apply. Being willing is not enough; we must do.
--Leonardo da Vinci