Ordos -- Time to double down

Nearly two years ago I highlighted the city of Ordos, China and how it appeared local municipalities and investors were building an empty city with no hope of a positive return on investment.

Fast forward to present day and the same reporter made a return visit to see what has changed. While there have been a few people moving in, residential construction continues at the usual Chinese breakneck pace.  The new video show the same empty boulevards but with more skyscrapers being built in the background.

(direct link to Youtube video)


Melissa Chan provides more details in here blog entry

She interviewed the same person, Mr. Chovanec, as last time and he provides the reasons why supposedly rational people would invest in an empty city and expect a positive return.  Mr. Chovanec provides more examples of bubble behavior in China in a recent blog entry titled This is What a Bubble Looks Like

China's response to the Great Financial Crisis of 2008 was to tell the banks to lend, and they did. The resulting excessive credit growth just exacerbated the already imbalanced situation brewing in their country.  When the next monetary event comes with Greece's default I will not be around (metaphorically) to see if they will be able to 'fix' the problem again.

Google maps link to Ordos

Money Money + Money -- Money supply update

The broadest money supply figures available (M2 + institutional money market funds) continues to trend higher.  


A note to all of you who are fearful of hyperinflation, this figure would be skyrocketing upwards instead of being in the ~+6% year over year range if we were entering a phase of very high inflation.  Yes, the narrower measures of money supply are growing but they aren't being transmitted to the rest of the economy (see Japan, deleveraging) as there is still a reluctance to borrow by the US consumer.  See my recent previous posts on mortgage rates and  total mortgage loans outstanding for examples of how the Fed's pumping money into the financial system is not being transmitted into higher lending (and thus higher prices)

Verleger on high oil prices and demand destruction

I don't quite agree with the prediction towards a hydrogen economy but it is interesting to hear about the demand destruction of gasoline usage.  Mind you this conversation is about US demand. Add in emerging demand and you may see a different picture in total

Video of Verleger on gasoline consumption, heavy versus sweet crude, diesel versus gas costs --
(I would embed the video but it autoplays)
September 7 on Bloomberg

End Date Bond ETF's followup -- More options on the menu

More than a year ago I highlighted a new twist on bond etfs called the end date bond etf.  Since then Ishare's end date muni etfs have grown to manage over 185 million in total through the 2012-2017 maturity spectrum.  Not bad.

Guggenheim also rolled out both a corporate bond and high yield end date etf series, providing a wider menu of risk. Guggenheim's corp etf's run from 2011 to 2017 while the high yield field provides a 2012 to 2015 maturity spectrum.   While the high yield etf's have gathered 144 million, the corporate funds have pulled in over 430 million with one fund, the 2013 Corporates (symbol BCSD) about to break 100 million.

Hopefully someone will introduce an end date bond etf series on US Treasuries and US Tips (Inflation protected) to round out the risk profiles available. (hint hint, nudge nudge)

A few caveats are needed regarding buying and selling these etfs

• They are still illiquid and the price can vary dramatically from the NAV of the underlying assets.  Check the fund description page and make sure you are not overpaying.
• Diversification does not eliminate risk.  The 2017 Guggenheim Corp fund contains a large slug of financial bonds. If we have another credit event like 2008 due to a European sovereign default you could see losses on these corporate bonds (and possibly junk bonds and muni bonds)  The price the market will give you will also fluctuate.
• Check when the bond etf actually 'matures'. Each fund complex has their own procedures and nuances as to when the funds will be distributed to shareholders.

While there are disadvantages to these (currently) illiquid etfs I find their introduction into the investing universe promising. Building a bond ladder will be much easier and cheaper with greater liquidity for smaller dollar amounts versus finding, researching and purchasing individual bonds.

End date etfs will also allow one to take advantage of rolldown in the bond market. With short rates at zero, as the maturity date approaches for a bond the yield will drop (setting credit risk aside) and thus the price rises and yield drops. Econompic explains the dynamics in greater detail.

Ishares highlights a few of these advantages in a video:

Additional reading:
Seeking Alpha guide to end date etfs
Ishares muni bond end date etf
Guggenheim menu of corp and junk end date etfs - (scroll down to bottom)

Disclsosure: The author does not own any end date etf's but is examining the muni bond etfs for purchase shortly.

The Swiss choose inflation, but the Chinese do not?

The Swiss central bank recently announced it would print any amount of francs required to maintain a peg of 1.20 Swiss francs to one euro.  The response was... massive

Euro / Swiss Franc

A multi percent move in currency markets is exceedingly rare. I'm not going to spill many electrons going over why the Swiss decided it was time to fix their currency as it has been a hot topic over the last 48 hours.  The WSJ and Economist have already written about it at length.  

So why bring up the topic? Because the Chinese have been doing it for years and the dots need to be connected.  I recently commented on the threat of China 'dumping' US Treasuries and how this was not the problem everyone thought it would be.

In both the Swiss and Chinese case you have a country forcibly keeping their currency away from the market clearing price for differing reasons; the Swiss exporters are getting killed while the Chinese desire to keep their workshops fully staffed by forcibly underpricing their currency.

Whatever the reason the result will be the same -- an explosion of  domestic currency and loan demand eventually forcing up demand and inflation.  The WSJ's title on the Franc peg is The Swiss Choose Inflation  Why does one not think the same will happen in China? Chovanec has highlighted the constant struggle to contain inflation in China from both a massive increase in lending and an artificially underpriced currency. 

In both cases the Swiss Franc and the Chinese Yuan will eventually find their market clearing prices regardless of central bank manipulation, either by currency price appreciation or by domestic inflation.

edit: FT links China and Switzerland as well:
http://ftalphaville.ft.com/blog/2011/09/07/671121/what-will-switzerland-do-with-all-those-euros/

Time to refinance your home (again?)

One year ago I stated it would be a good time to refinance your home.  Once again the opportunity presents itself. The 30 year conventional home loan rate is near historic lows.

Conventional 30 year home loan rates

Theoretically the vast majority of home loans out there could be refinanced but there are a few unfortunate facts which may prevent many from refinancing: Negative equity, conservative valuations and high unemployment.  

CNN Money has a good article detailing the these 3 challenges.  

If you are wondering how monetary policy can have limits this is a good example of how and why.  In an effort to continually re-stimulated the economy and encourage society to take on more debt over time we have reached a point where historic low interest rates will just not do much for the US consumer. They are already too tapped out and low interest rates will not encourage them to borrow more let alone take advantage of the lower interest rates and buy a home; they just can't.  People 'trapped' in their homes due to negative equity also hinders future home sales as it inhibits consumers from being able to move or trade up.

Consumer home debt / GDP

The ratio of consumer mortgage debt to gdp (both nominal) was at data series highs at the beginning of the great financial crisis. Yes I know I'm comparing home debt to national GDP and not home prices but it's yet another reminder of how much debt our society has taken on.

If you are in the position to refinance and have questions give me a ring and we can talk about some of the options / pitfalls when looking for a new mortgage.

Thanks: David Merkel

Long term treasury rates in a bubble? Maybe not?

Talk of a bubble in long term treasury rates has been careening around the financial markets for a while now and considering the rate on the 10 year T note is approximately 2.22% right now I went looking for some perspective.

10 year versus nominal GDP:

Econompic has a great series relating nominal GDP growth versus the 10 year and the long term patterns are impressive. 

Note how during the rise in nominal gdp growth rates from the 60's to the 80's interest rates were below nominal gdp and this pattern flipped as nominal gdp growth rates declined.

90 day tbill rates versus 10 year:

Rarely does the spread between the 90 day tbill and 10 year rates go beyond 4% and with short rates at zero this puts a cap on interest rates further out the curve.  With 10 year rates at 2.22 this does provide some upside to the range of interest rates, but those recently calling for 10 year rates higher than 4% were calling for something truly exceptional.

Until we see nominal GDP growth really perk up and/or the Fed start raising interest rates I find the possibility of the 10 year going above 4% unlikely. 

Disclosure: I own long term treasuries in personal and client accounts.

Risk: As described by Chanos, Hendry and Gundlach

Some videos new and old which may provide some perspective on the recent downgrade of America by Standard and Poors and the current market thrashing.
I could attempt to write something eloquent but I'm busy right now. Instead I'll refer you to some successful investors voicing their opinions.

Chanos talking about credit ratings versus CDS rates
http://youtu.be/kRxAMM7UU_k

Gundlach on how the US will never not pay its debt, it just may pay its debt back with devalued currency
http://video.cnbc.com/gallery/?video=3000037858

A series by Hugh Hendry from late last year which I don't believe I have published before.  Considering the current market thrashing I think the discussion is important.
part 1: http://youtu.be/zvzKgjaVnlE
part 2: http://youtu.be/MJSO3H4GLqw

ht: HistorySquared

Home prices going up? Not until you show me the money.

Are home prices going up in a sustained manner anytime soon? No

A recent presentation by Australian Professor Steve Keen inspired me to search for a similar American data series. One exists and it does not predict any sort of sustained bounce in American home prices. (I am simplifying Mr. Keen's presentation as he looks primarily at the 2nd derivative of loan levels but the level of destruction in American mortgages outstanding is epic)

As Mr. Keen states, it is not people who buy homes, it's people with money who buy homes.  Just to show you the magnitude of the home devastation we are experiencing here's the entire home loan series:

For the entire data series, going back to the mid 50's we've never seen a year over year decline in the total value of home loans outstanding.  Yes, some of this decline is due to homes being foreclosed and the loans vaporizing as a result, but that also eliminates yet another person who cannot trade up from their current home to something larger as their equity and credit score head towards zero.

Until we see year over year growth in mortgages outstanding we will not see a sustained nationwide rise in home prices. We will of course see localized variation in this with some pockets of growth but nothings happening until You show me the money.



Disclosure: The author is short some housing related stocks.

Italian and Spanish yields keep climbing

I recently highlighted the rise in Spanish and Italian government bonds yields. Today they are shooting higher yet again and I'm certain this is a contributing factor to the equity market's weakness, US budgetary problems notwithstanding.

I usually don't mention my trading activity but I sold off an equity ETF position Friday due to this European contagion situation.

The challenge of Google+ and entering my circle of trust

I recently signed up for Google+ and in typical Google style its somewhat spartan in style and instruction on how to use it.  I'm slowly stumbling around trying to figure the system out.

There are some improvements over Facebook in my opinion, most specifically the 'circle' system where you can place individuals in multiple different groups so as to filter and direct your comments, pictures and information to specific groups.

Even if Google+ is 'superior', will it eventually exceed Facebook in popularity?  Not necessarily.  Part of the challenge Google+ faces is the size of their network is MUCH smaller than Facebook's (which is currently over 750 million people!) Network size is very critical as a social network with very few 'nodes' provides a much lower utility even if it's 'better'  [See Metcalfe's law]  Google+'s strategy of slowly rolling out the system via invites from current members mitigates this problem as people are automatically creating more connected 'nodes' in the network instead of random additions you don't personally know.

Right now my plan is to use Google+ as a social media outpost/gateway for my twitter and virtual friends versus Facebook for my 'in the flesh'  friends.  It will be curious to see how the two competing social media platforms evolve.

Many thanks to downtown Josh Brown for being the first person to put me in one of his circles.  Hopefully I'm not in the deranged fanboy category but in the circle of trust...

Club Med Hangover -- Bond yields climbing in Spain and Italy

Nearly a month ago I mentioned rising yields in Spain possibly causing problems.  I underestimated the number of countries. Both Italy and Spain's treasury yields have spiked higher.

Italy 10 year

Spain 10 year

Spain 10 year versus German 10 year

 

None of the charts are pretty.  While Italy was getting most of the headlines for the rate of yield increase please note how Spain's yields are higher.  Any EU country bordering the Mediterranean is having serious problems right now.

North Korea watch -- look out for some sabre rattling?

North Korea is rumored to have recently closed all universities and put the students to work:

From North Korea Econ Watch

The reports said the students would be put to work on construction projects in major cities and on other works in a bid to rebuild the economy. This could indicate that the country’s food crisis and economic problems are worse than previously thought.

Combined with reports of additional EU aid it appears the speculation of severe stress in the Hermit Kingdom appear to be correct.

From the Guardian

The European commission is to give €10m (£9m) in urgent food aid to North Koreans on the brink of starvation, after negotiating for "unprecedented access" to ensure that the food goes straight to those most in need.

With North Korea on the ropes I wouldn't be surprised to see some sabre rattling and more than your usual number of threats and provocations in the near future.  South Korea recently winning the 2018 Winter Olympics bid provides North Korean a new 'delicate' target to threaten as well. 

Economics for the post MTV Generation -- It's the debt stupid

I previously mentioned an entertaining video regarding the competing economic theories of Keynes and Hayek.  Here is round two, and while its a few months old it deserves attention.

When watching the video pay close attention to the assistants to each boxer, you may recognize some other names as well as what appears to be Chairman Ben Bernanke in the first row of the meeting.





While the debate over monetary and fiscal stimulus continues (most recently as the wrangling over the federal debt limit) I'd like to repeat a graph I've shown before.

Total US debt (private, corp, government) to GDP rose for this entire data series until the great financial crisis of 2008.  Since then its been dropping and this is one reason our recovery has felt so sluggish as corporations and individuals continue to delever.

I have mentioned before how even with a very steep yield curve we are not seeing a rebounding economy and others have noticed this as well; the steep yield curve mechanism appears broken.

From Bonddad:

for virtually the entire period beginning in late 1929 and continuing right through the Great Depression and into the 1950s, the yield curve was resolutely positive. And yet that period coincided with the two worst downturns in the last 100 years, as well as three other recessions.

Until the private sector deleverages monetary policy levers will be less effective. I have suspicions as to how Mr. Bernanke will 'fix' this problem but I'll leave that to a later post with evidence.

So what explains the current crisis and malaise? I think Steve Keen is on to something.  I strongly suggest you watch this video and examine his theories.

edit: sorry about the autoplay. Hit the pause button to stop it.



http://www.ritholtz.com/blog/2010/01/steve-keen-on-the-modern-economy-and-the-outlook/
http://www.debtdeflation.com/blogs/2010/07/07/naked-capitalism-and-my-scary-minsky-model/
http://www.debtdeflation.com/blogs/2009/12/01/debtwatch-no-41-december-2009-4-years-of-calling-the-gfc/

Hedge fund watch - Hugh Hendry and Jim Chanos

Here's some recent news from a few hedge fund managers:

A short video from Hugh Hendry (thanks Creditwritedowns)



Some notes from Jim Chanos' presentation at the Vail value conference. (thanks Katsenelson) Provides more detail on Chanos' bearish position in China.  Note Chanos is a short seller so he is always bearish on something.

Sino Forest even ripped off the scam

As more information comes to light regarding accusations of Sino-Forest fraud it appears even their technique was stolen from someone else:

From IndiaExpress -- March 2003


Dream plantations that never bore fruit

The brochure said the company would develop the land for agro-forestry farms and after expiry of the plan period, trees and cash crops would be cut and money from the sale would be guaranteed by post-dated cheques.... The Income Tax Department sniffed out a trail of bribes the company had paid buying real estate. The department says it has evidence that the palms of the registering authorities were greased while purchasing land at Jharmari for Chandigarh Extension 22 Project.

I should do a forensic study to see if the income statement and balance sheet could have alerted people to the possible fraud. A rogues gallery of failures / frauds could me most instructive.

Greece and Ireland are not the only European problems.

While Greece is dominating the news (again) there are other rumblings in Euroland you should be watching.  Below is the spread between German and Spanish 10 year yields.  The trend is not going the right way.

Furthermore yesterday Spanish 10 year yields went up on a 'risk off' day.  No longer does the market consider the government debt of Spain a safe haven when the equity and other risk markets go down.  I'm closely watching the relative and absolute levels of  Spanish debt  As the Greece situation develops keep an eye on this to see if the panic spreads to Spain.

Housing update -- Build it and they will come?

Does supply lead demand or the other way round?

Attached is the year over year change in the Case-Shiller home price index and new housing permits.  The year over year rise in 2010 was most likely due to the one time tax credit provided by the Federal Government.  

One may notice it appears new home permits lead the rise and fall of home prices.  Regardless both prices and new home permits are negative on a year over year basis which does not bode well for future employment or home price appreciation. 

Linkage roundup

Some stuff I've been reading:

Saudi's ready to pump more oil after OPEC disagreements.  Could get interesting if Saudi Arabia decides to burn the other OPEC nations and pump all out.  They have done this before to let everyone know who's boss.
If you are looking for a good historical book regarding oil and politics I'd suggest
The Prize: The Epic Quest for Oil, Money & Power

Central banks are culpable for cycle of boom / bust --  I have been meaning to write a longish entry regarding how specifically emerging market central banks have contributed to the cycle of boom and bust but this will have to do until then

US structural problems remain -- We are not out of the woods. It is going to take a while.

One reason for high yield falloff ? -- The Fed is selling into an illiquid market it appears, driving down prices.

I know, cheery stuff! Here's some good news:
Industrial jobs coming back to America? -- China's inflation and a declining dollar may help induce an improvement in domestic production. This macro idea has been something I've been considering for a while.

Hugh Hendry April commentary

The April monthly report for the Ecletica Fund managed by Hugh Hendry recently escaped to the internet and as usual Mr. Hendry weaves disparate topics into his commentary.

Accepting absurdity?

I was reading something recently about the Nobel Prize winner Richard Feynman that made me think that money management was perhaps similar to physics in that you advance by accepting absurdities. The history of physics, he claimed, is one of unbelievable ideas proving to be true. "Our imagination is stretched to the utmost not, as in fiction, to imagine things which are not really there, but just to comprehend those which are".

This one comment really struck me as I have a scientific degree and the idea of the absurd eventually becoming accepted wisdom rings true with me.  While studying various bodies of scientific knowledge it's always interesting to see how sometimes the observational data was not yet supported by theory (and thus absurd) while at other times it was the chalkboard crowd who's absurd theories were dismissed as impossible until observational data caught up to the theory.

Unfortunately the intellectual framework of truth is truth, I just can't prove it yet can get you into serious trouble in the markets.  There's your opinion, the truth, and the market.   I have had to struggle at times with the experience of my opinion of a securities' worth varying from the market's opinion, and even worse diverging in opposite directions.  Remember, you can be right and still lose money.

edit: Sorry but my source for this had his Scribd account closed.  I'm looking for another copy out there in internetland.

edit 2: Found another copy of the report, here it is:
http://www.offshore-rebates.com/pdf/TEF.pdf


ht TheTailchaser

Weekend linkage

Here's some weekend reading/listening for you.  I really should do this more often so you can see what I'm looking at:

Saudi Arabia going ahead with building 16 nukes:  Even after Fukushima they have decided to go ahead.

Why didn't Fukushima #2 (Daini) meltdown as well?  Very interesting ideas as to why the second power plant complex did not have the problems #1 (Daiichi) experienced.  It may be merely luck and location or it may be the newer powerplant designs.

Nuclear regulatory issues.  Obviously a very large problem as a 'captured' regulator can allow serious problems to develop.

Carmen Reinhart discusses financial repression in developed economies.  If you think short term rates will rise shortly I think you are wrong.  Financial repression is a broad term but a clear example is keeping short term interest rates below inflation (a negative real rate) This slowly inflates away the debt problem.  Will America and Western Europe be able to pull it off?

China's empty cities, again -- A more recent article on Ordos' empty new city

China's debt writeoffs are just the beginning -- The opera of excessive credit growth and very lax underwriting standards is starting to get to the good part.

Goodbye mega huge conglomerate bank

My current mega huge conglomerate bank finally pissed me for the last time. I just got back from setting up my own personal checking account at a local credit union and I am shedding no tears for leaving US Bank.  I will not regale you with my list of annoyances designed to extract the maximum amount of money from my banking 'relationship' with them.

A typical mega huge bank manager? Perhaps.

Lest you think I'm just harping on US Bank for this rant I previously banked at Bank of America until they annoyed me too many times.  Long ago when getting my first home loan Washington Mutual backed out of a locked and approved home loan via a technicality.  I'm not playing favorites in my ever increasing disdain for the mega-huge-conglomerate banks here.

My wife has been a member of a local credit union for several years and after the Bank of America separation I opened our joint account there. What a difference.  The credit union people go out of their way to actually help you solve your problem instead of directing you to the courtesy phone for support somewhere in the world. No activity fees, no minimum balance requirements, no waiting for you to screw up to hit you with a massive fine fee.  I'm not against being charged for items but it appears the current trend in large publicly traded banks is to extract as much as possible from their customers without having them leave in frustration. I'm sure getting the fee/annoyance balance just right occupies the time of several legions of up and coming bank executives.

If your current mega bank pisses you off, take a look at your local credit union. I'm pretty sure the ethos of treating your customers fairly and in a respectful manner is much more common at your local credit union than at the very large banks.

For those of you training for a bank manager position here's the Ferengi rules of acquisition.

Muni bond redux

Late last year I mentioned the relative thrashing muni bonds had experienced.  Fast forward to today and the mass defaults as predicted by Meredith Whitney are not occurring and muni bonds have experienced a nice rebound.  Let's look at some charts:

The ETF's MUB and IEF are great for comparing the two sectors as they have almost the same duration of 7.43 vs. 7.24. While they are not precisely the same (MUB's bonds are more smeared out along the maturity curve while IEF's are very compact) it is good enough for this discussion.

As you can see MUB is now outperforming IEF on a relative basis and the yield one receives from MUB remains higher than IEF with an estimated yield to maturity of 3.30% versus 2.86% Usually municipals bonds yield less than treasuries due to their tax free income but not right now.  Assuming a return to 'normal' with muni bonds yielding 80% of treasuries you'd need MUB to increase by approximately 7.5%

[The math:  80% of IEF's ytm = 2.29%
MUB yield change (3.30 - 2.29) * duration of 7.43 = 7.50 ]

This does not include the tax free coupon one would receive while you wait for the trade to complete and also assumes treasury rates remain stable.  I'm of the opinion treasury rates will also drop in the near future so you'd gain there as well.  All in all a relatively low risk / low reward trade but considering the equity markets have been going nowhere for a couple months I'll take it.  MUB is also starting to outperform SPY on a relative basis as well, go figure...

Reminder: I don't manage your money and this is not a complete part of my investment portfolio. I may not tell you when I close out the position.  This should not be construed as investment advice as I do not know your tolerance for risk, tax situation, need for income, etc. 


Disclosure: Long MUB in both personal and client accounts.

Additional reading:
Ishares MUB etf detail
Ishares IEF etf detail
Business Insider
JPMorgan's comments


Note: Another possible reason why MUB is outperforming is the light issuance schedule for muni bonds right now. This may be due to the previous rush to market while Build America Bonds were still possible before the 12/31/10 deadline or the current high relative yield environment for muni bonds.
Bond Buyer article #1  & Article #2  (ht MuniLass)

Initial unemployment claims are going the wrong way

Initial unemployment claims are starting to creep back upwards on an absolute and year over year basis.  The standard seasonally adjusted 4 week moving average of initial claims (that's a mouthful!) has recently bounced back up to 440k from 400k.

While this does not look so bad if one looks at the data on an absolute level, one can see the trend clearly deteriorating on a year over basis [2nd chart]

Now this is only a few weeks but the trend is not going in the 'right' direction.  My previous post on initial claims data  provided two different theoretical outcomes merely by torturing the data via different means.

Some have posited the rise in initial clams is due to automotive factories laying off people because of supply chain problems stemming from the earthquake in Japan a few months back.  Another possibility is the increase in oil prices is finally starting to really bite into the consumers pocketbook and layoffs are ensuing in consumer sensitive sectors of the economy.  Regardless we will know soon if this is a short term blip in unemployment claims or a longer term trend.

The politics of oil

Yesterday President Obama announced new measures to increase drilling.  From Reuters

 U.S. President Barack Obama, under pressure from Republicans and the public to bring down gasoline prices, announced new measures on Saturday to expand domestic oil production in Alaska and the Gulf of Mexico.

Elections are hard to win with high gas prices:

High fuel prices have dented Obama's ratings in opinion polls and threaten to dampen the economic recovery that is critical to his re-election in 2012.

Considering the lead time required to get oil to market from a new find this will ironically help whomever is in office after the elections of 2012.

I seriously doubt the President would have increased leases available to oil companies if gasoline prices were $2.00 a gallon versus the current $4.00.

There's a reason alternative energies are called alternative and its because they are much more expensive per unit of energy than gasoline.  Until new forms of portable energy become cheaper than gasoline a President's politics will bend to the reality of high gas prices.

edit: if you are wondering why we are attacking Libya and not Syria, this is one reason.

Bank lending update

It's been a few months since I last highlighted total bank lending but not much has changed since late October. Just to make sure you don't think I forgot here's an update.

Total bank loans and leases as per the Fed continues its steady decline economic recovery notwithstanding.  As you can see there was a large recent spike but this was due to an accounting change in bank's loans and not a sudden increase in lending.  This lack of new lending may be one reason broad money supply is so sluggish of late.

Like last update the banks are buying US Treasuries instead of lending. If you wondering who is buying those hated T bonds look to your corner mega-huge bank.   Considering their funding costs and capital requirements are pretty much zero you could say banks would rather just play golf and clip Treasury coupons.

Money Money + Money -- Money supply update

The broadest money supply figures available (M2 + institutional money market funds) turned positive a few months ago but is only growing slowly.  Furthermore this money measure has not exceeded its pre crisis peaks.

Looking back in the mid 2000's you can see broad money supply was also very sluggish. With QE 2 ending in June we'll see if this data series can keep expanding.

Inflation expectations in the bond market

Here's an update on inflation expectations as expressed by the bond market.   While much is being said right now about inflation expectations becoming unglued the 10 year [Treasury - TIP] difference is not showing anything exceptional yet.   As you can see from the chart inflation expectations (as expressed by nominal yields - 'real' TIPS yields) are getting back to their 'normal' range of around 2.5 percent.

10 year TIP yields are near the low end of the range but some of that is due to nominal yields slowly dropping over time, pushing the TIPS yields down so the difference remains relatively constant.  With QE2 slated to end and oil prices (as well as other base commodities) rising it will be interesting to see if the implied breakeven inflation rate rises above long term resistance of ~2.6 percent.

Japan Nuclear Update: Fear and Loathing about Fukushima

It hasn't taken very long for the charlatans and plain fear mongers to try to capitalize on the situation in Japan. I recently saw a banner ad on my web site for a company shilling a supplement to prevent radiation injury to Americans. I am not going to link to the company and give them free publicity.

To be very clear:
YOU ARE IN NO DANGER IF YOU LIVE IN ALASKA, HAWAII OR THE CONTINENTAL US.
The EPA agrees with me without using all caps.
A professor from Berkeley agrees with me.

Those who have a memory longer than a year may recall two nuclear weapons detonated OVER Japan a few decades ago. The amount of nuclear radiation emitted from those events were several orders of magnitude higher than the current situation yet we didn't have anyone dying in America did we?

This chart from http://xkcd.com/radiation/ has been floating about showing the relative levels of radiation and I think one should really take a look at it to put some of the news reports in context.  One problem is our instruments are so sensitive that its very possible in America to detect the slightly elevated levels of radiation that have made it to our shores.  Then again, getting on an airplane would provide a much higher dose but that doesn't seem to be mentioned at the same time the TV breathlessly tells you the clouds of nuclear radiation are coming this way.

Plutonium:
There's been reports plutonium has been found on the grounds of the Fukushima power plants and we should all hit the panic button  Plutonium is a natural by product of the normal fission cycle which occurs in a power plant. What they didn't mention in the first reports is the scale of the plutonium concentration and that matters a lot. For some sanity I suggest you listen to this interview:
http://georneys.blogspot.com/2011/03/14th-interview-with-my-dad-nuclear.html

Tepco came out with some clarification of the Plutonium and it's not something to worry about
http://www.tepco.co.jp/en/press/corp-com/release/11032812-e.html


Finding people in Japan:
The red cross has another site for finding people in Japan here:
http://www.familylinks.icrc.org/web/doc/siterfl0.nsf/htmlall/familylinks-japon-eng
I mentioned another site run by Google a couple days ago.

Predictions for cleanup taking 30 years:
I ran across a Bloomberg article predicting it will take 30 years and billions to clean this mess up. I link to it so we can see how accurate they are. I find it odd to make such predictions when the smoke hasn't even settled.

There's an interesting presentation by Arevea floating around which appears to give a good timeline of what has happened. Of course this is a theory regarding the damage of the cooling torus but it does look like a possible reason for the elevated radiation readings in the water.
https://docs.google.com/present/view?id=dg4hcz37_289dr9g62f6

I'm not trying to sugar coat the issue in Japan which is still volatile and dangerous but please respond to any positive or negative news reports with a healthy dose of skepticism.

More on China's empty cities

One problem with satellite photos is you don't know what has happened since taken. One may legitimately posit an apartment complex that looks empty in the image may now be filled to capacity and teeming with life.  A recent expose by a journalist on the ground demolishes those theories.

http://www.sbs.com.au/dateline/story/about/id/601007/n/China-s-Ghost-Cities
Watch the video and see the numerous empty towers of apartments. It's a pre-made ghost town.

Here's one insta-city I found a few weeks ago: Chenggong aka Kunming

What is most impressive about the apartment complex shown is how they built the entire place without adding any roads yet.  Hopefully they'll get around to it. Zoom out and look around (both north and east) and you can see the scale of this new city.  Like the video above almost all of this new Chenggong appears unused.

Take a look at the photos from this area. (Panoramio link) and see all the buildings going up and completely empty roads.  There's just too many completely empty homes and roads devoid of life.

ht:  Also Sprach Analyst

An amazing rescue story from Japan

The tragic stories coming from Japan keep piling up and the death toll climbs every day as the Japanese try to dig themselves out of the rubble.   The humanitarian challenge of caring for a couple hundred thousand homeless is straining even the organized Japanese.

Amongst the despair and rubble there are amazing stories of bravery and determination emerging.

Here is one of them.
Hideaki Akaiwa escaped the earthquake and tsunami, but after being unable to find his wife, scrounged up some SCUBA gear and went back into the waters to find his wife! He succeeded and later pulled the same technique to find his mother.  A somewhat embellished but great read of the story goes something like this (from Badassoftheweek 03/18/11)

Regardless of how he came across this equipment (borrowing, stealing, buying, beating up a Yakuza SCUBA diving demolitions expert, etc.) Hideaki threw on his underwater survival gear, rushed into the goddamned tsunami, and dove beneath the rushing waves, determined to rescue his wife or die trying. I'm not exactly sure whether or not the dude even knew how to operate SCUBA equipment, but according to one version of his story he met his wife while he was surfing (which is awesome, by the way), so it doesn't seem like that much of a stretch to say that he already had a little experience SCUBA diving under a more controlled situation. Of course, even if this dude didn't know how to work the gear I'm certain that wouldn't have stopped him either – Hideaki wasn't going to let a pair of soul-crushing natural disasters deter him from doing awesome shit and saving his family. He dove down into the water, completely submerged in the freezing cold, pitch black rushing current on all sides, and started swimming through the underwater ruins of his former hometown.
Surrounded by incredible hazards on all sides, ranging from obscene currents capable of dislodging houses from their moorings, sharp twisted metal that could easily have punctured his oxygen line (at best) or impaled him (at worst), and with giant fucking cars careening through the water like toys, he pressed on. Past broken glass, past destroyed houses, past downed power lines arcing with electrical current, through undertow that could have dragged him out to sea never to be heard from again, he searched.
Hideaki maintained his composure and navigated his way through the submerged city, finally tracking down his old house. He quickly swam through to find his totally-freaked-out wife, alone and stranded on the upper level of their house, barely keeping her head above water. He grabbed her tight, and presumably sharing his rebreather with her, dragged her out of the wreckage to safety. She survived.

Read the whole article.

Tool for finding people in Japan via Google

Google has a service for people looking those lost or missing in Japan. The url is:
http://japan.person-finder.appspot.com/?lang=en
They currently have over 250 thousand records. One word of caution however, some cruel people are posting entries stating some people have died and these entries are entirely false so while I don't want to encourage false hope be cautious of such entries.
From metro.uk

One family were crushed when a message posted on the Google people finder by Lucas. A said that Brian Hickebottom had died in the disaster. However, it emerged that the information was wrong, and he had found refuge in the school where he and his wife work, much to his relatives' relief . . . Responding to a post about US marine Justan Browning, which said he had died when a building collapsed, someone going by the name Canadian Friend wrote: 'I have seen several false reports that people are deceased. It is disgusting. Do not give up hope. Call your government to verify the above report.'

Real time radiation data?

Internet trolling pays off again.  I think I've found some (semi real time) radiation data sites.  My Japanese is limited to the auto translate function in Google Chrome but it appears there are some locations still publishing radiation data. I'm not quite certain of the units due to the translator but you can see peaks and valleys in the data and the peaks are not too much worse than the valleys. It also appears they liken 50,000 to a chest xray, or at least that's how Google Chrome is translating it....

Google map with locations  (The locations near the plant are offline it appears)
Ibaraki Prefecture page  (southwest of powerplants)
Recent Data

Japanese nuclear situation interviews

Again the power of social media reveals itself.  There is a multi part interview series here
http://georneys.blogspot.com/2011/03/third-follow-up-interview-with-my-dad.html
of a retired Navy and civilian nuclear engineer which I highly recommend you listen to.  He does an excellent job laying out the facts of what we know and don't know as time has progressed through this emergency.

I'm not going to comment/report/speculate on the current news of the moment regarding the nuclear situation in Japan as its changing so often and right now the news flow from Japan is sparse as it is night time over there.  In a few hours we'll have another update on what is going on.  If you listen to the interviews above you can get a sense of the unfolding situation and how Mr. Mervine predicted the fuel rod storage problem.  Hopefully the 3 active plants will be successfully cooled down and the fuel rod storage situation in the 3 (#4,#5,#6) non active plants will be contained.

You can follow the blog's author on Twitter at:
http://twitter.com/#!/GeoEvelyn

Real time Geiger counter in Tokyo

While trolling around the internet attempting to find hard data on what sort of radiation levels we are seeing in Japan I found this site where someone is graphing radiation levels in real time in Tokyo.
 http://park18.wakwak.com/~weather/geiger_index.html

The site is in Japanese but you can translate it using google translate or other services available on the web.   While the graph shown does show an increase in radiation levels it is only ~4 times the background level which is very minimal.  This is good news compared to the other reports coming out of Japan regarding the radiation leaking from the stricken nuclear plants.  It is important to get factual data about what sort of radiation levels are being detected and where and unfortunately it has been hard to find so far.

 If you can pass along any quantitative data I'd appreciate it.


ht: http://bravenewclimate.com/2011/03/15/fukushima-15-march-summary/#comment-115804

News and Photos of Japanese destruction

The news and photos out of Japan are incredibly powerful.  Here's a bit of what I've found:

http://totallycoolpix.com/2011/03/japan-hit-by-massive-earthquake-and-tsunami/
http://totallycoolpix.com/2011/03/the-japan-earthquake-and-tsunami-aftermath/

The site fades in and out and I'm guessing it is due to massive traffic to the site. The photos are stunning. Here's a few samples:

While I have not heard anyone separate the damage between the two events it appears the tsunami did more damage. I was watching CNN a few minutes ago and the official body count is approximately 1,600 but they have just found another 2,000 bodies so I'm certain the toll will rise as the days progress.

Video:

Keeping up to date:  There are some English based news sources in Japan

http://www3.nhk.or.jp/daily/english/index.html

On Twitter:

https://twitter.com/W7VOA - Voice of America reporter on the ground.

Nuclear power plant situation:  This is an ongoing event and so separating the facts from rumor or speculation is a challenge.  What we know right now is there have been explosions at  Fukushima Daiichi plants #1 & #3.  Before you panic it appears this was due to the venting of hydrogen from the inner core which mixed with oxygen and exploded.   When the earthquake hit the nuclear power plants immediately shut down by dropping their control rods.  The problems started when the backup generators failed due to the tsunami and could no longer run the pumps cooling the reactor cores.  (Even after a shutdown there is a massive amount of residual heat which must be shunted away from the core)  In an attempt to prevent the central core from breaching they vented gas to bring the pressure down and release heat which then released the hydrogen and it blew off the exterior structure.  

 So far it appears the main central core which actually holds the fissable material is still intact.  Fortunately the prevailing winds are blowing any radioactive gas east offshore and into the ocean.  Right now they are flooding #1 reactor with seawater and boric acid to cool the reactor.

I have simplified this description a bit but if you want the technical details I suggest you go to:

http://bravenewclimate.com/2011/03/12/japan-nuclear-earthquake

which has quite a bit of technical information and a continuing discussion of the ramifications.

I'm not making any predictions as to what happens but the central core appears to be still intact and considering what is has been through is actually pretty impressive.  They still need to cool both cores and keep them from breaching. I'll be watching this closely over the next few days.

Update: Here's a video of plant #3 exploding

Copper roundup

To follow up on my previous copper post here is some additional articles:

One trader (suspected to be JP Morgan) held nearly 90% of the outstanding copper on the LME in late 2010
WSJ December 21, 2010

As commodity prices soar to new records, the ability of a few traders to hold huge swaths of the world's stockpiles is coming under scrutiny.
The latest example is in the copper market, where a single trader has reported it owns 80%-90% of the copper sitting in London Metal Exchange warehouses, equal to about half of the world's exchange-registered copper stockpile and worth about $3 billion.

As is implied in the article, having just one party hold such a huge portion of the outstanding asset is just an invitation for manipulation. For some reason the LME states controls are in place to prevent abuse but I'm a bit skeptical.

I am not the first one to comment on China and their bonded warehouses' providing a convenient 'hiding spot' for excess copper.  Ft.com December 21,2010

As Reuters noted, the London/China arbitrage window was after all firmly shut during the period:

The November inflow was a surprise to many market watchers  given that the arbitrage window — buying from the London Metal Exchange and selling to Shanghai — was shut for much of  last month, Beijing Capital Futures analyst Xiao Jing said.

And, as they also noted:

But trade and warehousing sources in China said the London Metal Exchange and Shanghai arbitrage had stayed closed last month and thatshould have prompted importers to store some arrivals of refined copper in bonded warehouses.

Bonded material can be shipped out to the international  market easily or imported into China after the 17 percent  value added tax is paid.

Finally, something I suspected but had no 'proof''.  Chinese traders may be using copper and other base metals as a cheap funding source as well as a currency play.
From Ft.com March 9,2011

To reiterate: that’s Chinese companies using copper as collateral for financing deals — also known as a somewhat ingenious nationwide inflation hedge (in the event copper prices continue to rise).Let’s just say it’s a bit like living off a loan taken out against your house. The loan won’t be a problem because you believe the price of your house will only go up.
And while that remains your view, there’s no reason not to double up. Buy even morehouses for the sole purpose of transforming cold hard cash — not inflation proof — into an asset which can continue to be monetised via ever depreciating bank loans.
Magic.
That is, of course, until copper prices stop rising.

It's all fun and games until the party stops and the margin calls start.  Just think about how much chicanery occurred during the US housing boom.  You don't think games like that are being played in China?

Some news on Libya

Here's a video on the Libyan situation.    France also officially recognized the Libyan rebels which could set up a situation where the frozen Libyan assets are released to the rebels.  This would allows the rebels to arm themselves and get on with winning the civil war.

From UPI

France recognized the Libyan opposition movement Thursday as the representative of the Libyan people, a former Libyan envoy said from Paris.Ali al-Issawi, the former Libyan envoy to India, announced in Paris that France recognized "the (Interim Transitional) National Council as the legitimate representative of the Libyan people," reports French news agency France 24.