Sunday, August 31, 2008

Profit is a synonym of Productivity.

Socialism seeks to remove profits, socialism only succeeds in removing productivity.

Monday, August 25, 2008

2 + 1 Rules (please discuss).

1. Money Represents the economy, inflation and deflation represent the gap between money and the economy.
2. The government cannot raise the rate of economic growth, only lower it own hindrance.

3. The government is solely a transfer agency. It does not create.

Friday, August 22, 2008

Bank borrowing from ECB is out of control

By Ambrose Evans-Pritchard
Last Updated: 3:06pm BST 21/08/2008

The European Central Bank has issued the clearest warning to date that it cannot serve as a perpetual crutch for lenders caught off-guard by the severity of the credit crunch.

Not Wellink, the Dutch central bank chief and a major figure on the ECB council, said that banks were becoming addicted to the liquidity window in Frankfurt and were putting the authorities in an invidious position.

"There is a limit how long you can do this. There is a point where you take over the market," he told Het Finacieele Dagblad, the Dutch financial daily.

"If we see banks becoming very dependent on central banks, then we must push them to tap other sources of funding," he said.

While he did not name the chief culprits, there are growing concerns about the scale of ECB borrowing by small Spanish lenders and 'cajas' with heavy exposed to the country's property crash. Dutch banks have also been hungry clients at the ECB window.

One ECB source told The Daily Telegraph that over-reliance on the ECB funds has become an increasingly bitter issue at the bank because the policy amounts to a covert bail-out of lenders in southern Europe.

"Nobody dares pinpoint the country involved because as soon as we do it will cause a market reaction and lead to a meltdown for the banks," said the source.

This "soft bail-out" is largely underwritten by German and North European taxpayers, though it is occurring in a surreptitious way. It has become a neuralgic issue for the increasingly tense politics of EMU.

The latest data from the Bank of Spain shows that the country's banks have increased their ECB borrowing to a record €49.6bn (£39bn). A number have been issuing mortgage securities for the sole purpose of drawing funds from Frankfurt.

These banks are heavily reliant on short-term and medium funding from the capital markets. This spigot of credit is now almost entirely closed, making it very hard to roll over loans as they expire.

The ECB has accepted a very wide range of mortgage collateral from the start of the credit crunch. This is a key reason why the eurozone has so far avoided a major crisis along the lines of Bear Stearns or Northern Rock.

While this policy buys time, it leaves the ECB holding large amounts of questionable debt and may be storing up problems for later.

The practice is also skirts legality and risks setting off a political storm. The Maastricht treaty prohibits long-term taxpayer support of this kind for the EMU banking system.

Few officials thought this problem would arise. It was widely presumed that the capital markets would recover quickly, allowing distressed lenders to return to normal sources of funding. Instead, the credit crunch has worsened in Europe.

Not to miss out, Nationwide recently announced that it was setting up operations in Ireland, partly in order to be able to take advantage of ECB liquidity if necessary. Any bank can tap ECB funds if they have a registered branch in the eurozone, although collateral must be denominated in euros.

Jean-Pierre Roth, head of the Swiss National Bank, complained this week that lenders were getting into the habit of shopping for funds from those authorities that offer the best terms. The practice is playing havoc monetary policy.

"What we should avoid is some kind of arbitrage by banks, which say they are going to go to central bank X, instead of central bank Y, because conditions are more attractive," he said.

UK homes for rent exceed demand

By Sharlene Goff

Published: August 18 2008 20:44 | Last updated: August 18 2008 20:44

Supply of rental accommodation rose at its quickest pace on record in the three months to July, outstripping the increase in demand from tenants, according to the latest data from the Royal Institution of Chartered Surveyors.

Rics’ latest lettings survey showed that many potential homebuyers had been forced into rental accommodation because they were unable to obtain a mortgage. Meanwhile, record numbers of homeowners were unable to sell their properties and were having to let them out.

“The wider housing market stagnation has compelled increasing numbers of would-be housebuyers and sellers to seek refuge in the rental market,” Rics said. “As a result, activity in the residential lettings market is booming.”

The increase in rental accommodation had not yet tempered growth in rental prices. Rics said rents had continued to rise at the same rapid pace as in the previous quarter.

But oversupply was expected to have an impact on rents in coming months. Rics’ survey showed that a smaller proportion of surveyors expected rents to keep rising over the next quarter.

“Established investors have been reaping the benefits of the housing downturn for some time and will continue to do so in the short term,” said James Scott-Lee, a Rics spokesman. “However, ever-increasing supply could have an impact on rental growth as tenant options increase.”

The survey showed that 37 per cent more surveyors reported a rise in new tenant lettings than a fall in the three months to July, compared with 30 per cent in the previous quarter. Meanwhile, 43 per cent more surveyors reported a rise in the number of new lettings instructions than a fall, also up from 30 per cent in April.

Rics said rents in London had flattened out, while around the country they were still rising. Only 3 per cent more surveyors in London reported a rise in rents than a fall in the three months to July.

Estate agents in London and the south-east have already started to see rents come under pressure as competition between new landlords becomes fierce.

Agents such as Savills and Knight Frank have reported sharp price falls for some rental accommodation, particularly in prime areas of London.

“We feel rents have come down as supply has come through from the sales market,” said Jane Ingram, head of lettings at Savills. “It has been much more of a tenants’ market.”

She said the reduction in rents – which had been as much as 10 per cent in some areas of London and the south-east – had meant landlords were not obtaining the high yields they might have been hoping for.

“Yields have edged up a bit but not as dramatically as people had expected,” she added.

Rics said that rising rents coupled with falling house prices had driven up gross rental yields for landlords in the three months to July, and meant that fewer than ever had opted to sell their properties in the three-month period.

Only 2.1 per cent of landlords sold their properties at the expiry of the tenant lease, the lowest on record.

Copyright The Financial Times Limited 2008

Tuesday, August 19, 2008

I wonder what the increased supply of properties to rent will do to rental yields?

Isnt price = Demand/Supply?

The number of properties up for rent has jumped as people who cannot sell their homes decide to let them instead.

More Deflation news...

Sharp money supply contraction points to Wall Street crunch ahead

By Ambrose Evans-Pritchard
Last Updated: 12:09am BST 19/08/2008

The US money supply has experienced the sharpest contraction in modern history, heightening the risk of a Wall Street crunch and a severe economic slowdown in coming months.

Data compiled by Lombard Street Research shows that the M3 ''broad money" aggregates fell by almost $50bn (£26.8bn) in July, the biggest one-month fall since modern records began in 1959.

"Monthly data for July show that the broad money growth has almost collapsed," said Gabriel Stein, the group's leading monetary economist.

On a three-month basis, the M3 growth rate has fallen from almost 19pc earlier this year to just 2.1pc (annualised) for the period from May to July. This is below the rate of inflation, implying a shrinkage in real terms.

The growth in bank loans has turned negative to a halt since March.

"It's obviously worrying. People either can't borrow, or don't want to borrow even if they can," said Mr Stein.

Monetarists say it is the sharpness of the drop that is most disturbing, rather than the absolute level. Moves of this speed are extremely rare.

The overall debt burden in the US economy is currently at record levels, raising concerns that a recession - if it occurs - could set off a sharp downward spiral.

US Broad Money Percentage change

Household income is now 131pc of disposable income, compared with 93pc at the top the dotcom bubble, 79pc in the property boom of the late-1980s, and 62pc at the end of the 1970s.

The M3 data measures both cash and a wide range of bank instruments. It tends to provide an early warning signal of major shifts in the economy, although the US Federal Reserve took the controversial decision to stop reporting the statistics in 2005 on the grounds that the modern financial system had rendered the data obsolete.

Monetarists insist that shifts in M3 are a lead indicator of asset prices moves, typically six months or so ahead. If so, the latest collapse points to a grim autumn for Wall Street and for the American property market. As a rule of thumb, the data gives a one-year advance signal on economic growth, and a two-year signal on future inflation.

"There are always short-term blips but over the long run M3 has repeatedly shown itself good leading indicator," said Mr Stein.

He cautioned that the three-month shifts in M3 can be highly volatile.

M3 surged after the onset of the credit crunch, but this was chiefly a distortion caused by the near total paralysis in parts of the American commercial paper market. Borrowers were forced to take out bank loans instead. The commercial paper market has yet to recover.

The University of Michigan's index of consumer sentiment has fallen to the lowest level since the 1980s recession.

The US economy is without doubt facing severe headwinds going into the autumn.

Richard Fisher, the ultra-hawkish head of the Dallas Federal Reserve, warned over the weekend that growth would be near "zero" in the second half of the year.

Tuesday, August 12, 2008

Strong sign of deflation.

Dramatic cut seen in mortgage lending

By Norma Cohen and Jane Croft

Published: August 11 2008 03:00 | Last updated: August 11 2008 03:00

Building societies have so dramatically slashed their mortgage lending that repayments outstripped new loans by almost £700m in June, according to the latest data from the Building Societies Association.

The June data follow a more modest net outflow of £110m in May on a seasonally adjusted basis and offer a bird's eye view of the credit crunch caused by a drought of available cash.

According to data from the Bank of England, the net withdrawal of mortgage lending by building societies is unprecedented; not even in the darkest days of the last property recession did net lending become negative.

Adrian Coles, director-general of the BSA, said the net withdrawal of capital reflected extreme conservatism on the part of societies. "They are keen to make sure they are only lending to those who are able to repay their mortgage," he said.

But the spectre of Northern Rock has hung over the sector and there is a sense among lenders that they would rather bolster their own cash reserves than make new home loans.

"Of the money coming in from retail savers, more of that is going into liquidity rather than into new mortgages," Mr Coles said. He said that the Financial Services Authority, which regulates the sector, is placing informal pressure on societies to increase reserves above 20 per cent of liabilities, which historically has been the long-term average ratio in the sector.

Although there were no new rules, "it is more nudges and winks from the FSA", he said.

Stephen Kingsley, head of the financial services practice at consultants LECG, said there was no question that a combination of regulatory pressure and common sense by management were forcing societies to pare back lending. "The drop is not surprising," he said. "They are conserving cash."

In the aftermath of the run on deposits at Northern Rock, regulators and lenders have been taking a hard look at liquidity, that is cash on hand to meet a sudden demand for cash withdrawals. Because building societies do not have shareholders from whom they can raise capital, they require a different regulator approach.

In May, Hector Sants, chief executive of the Financial Services Authority, gave a speech to the BSA underscoring its concerns about adequate liquidity and noted that some instruments that might once have been used to meet liquidity requirements might no longer be considered liquid themselves because the market for them had dried up.

He also warned that the FSA was considering liquidity policies that would not only allow societies to meet a sudden round of cash withdrawals but also longer-term policies that would "show inflows against worst case outflows".

But Mr Coles noted that building society lending was also constrained by the very high cost of fierce competition for retail deposits.

With wholesale lending markets in chaos, banks and others have strayed into territory where building societies have traditionally been strong. The rise in mortgage interest rates has made home loans more profitable than they were a year ago but not enough to offset the cost of competing fiercely for retail customers.

"Many societies will conclude that the increase in [mortgage] margins is nevertheless being wiped out by the cost of deposits," Mr Coles said.

Indeed, the June BSA data show that net receipts - new deposits minus withdrawals - in June were just £446m, less than half the level of May and less than a quarter of that in April. But even with that shrinkage, interest credited to depositors rose.

In its 2007-08 annual report, Nationwide, the UK's largest building society, made little secret of its intention to shrink its loan book. It said a "prudent approach" had led to a "controlled reduction" in lending to £6.7bn the year before.

Building societies were once the mainstay of the home mortgage market. And while banks and specialist lenders have taken significant market share, the societies remain active providers of housing finance.

By law, they must make at least 50 per cent of their loans to owner-occupiers and take at least 50 per cent of their funding from depositors, not the wholesale markets.

Gary Styles, chief economist at Hometrack, a residential property research company, noted that specialist lenders, many of whom rely on the wholesale markets for funding, had also had a sharp reduction in net lending.

Ironically, societies are likely to have an edge in keeping customers who have come to the end of a fixed-rate period because they are able to offer a default rate - known as the standard variable rate - which is lower than that of banks. For example, the SVR of Nationwide, is 6.75 per cent against 7-7.25 per cent at HBOS.

In the longer term, Mr Styles said, there were worrying implications for homeowners because the societies had provided rigorous competition to banks and helped to keep rates down. "It can only be that [societies] are losing market share to the banks," he said.

Monday, August 11, 2008

Scariest Article I've read in weeks.

Asset-Backed Sales May Drop to 10-Year Low in Europe (Update1)

By Neil Unmack

Aug. 11 (Bloomberg) -- Sales of asset-backed bonds, which finance everything from home loans to offices, water companies and pubs, may fall 83 percent in Europe this year to 65 billion euros ($98 billion), the lowest since 1998, Deutsche Bank AG said.

A year after the start of the credit crisis, the asset- backed debt market remains stagnant as investors stung by subprime losses demand record-high yields, damping sales. The European Central Bank took the unprecedented step Aug. 9 last year of offering banks unlimited cash to ease a liquidity squeeze and lenders are increasingly using asset-backed bonds as collateral to borrow.

Banks created about 253 billion euros of asset-backed bonds so far this year, compared with 378 billion in all of last year and a peak of 470 billion euros in 2006, according to Deutsche Bank data. Of the securities issued in 2008, less than 30 billion euros were sold to investors, Deutsche Bank said.

``The overwhelming bulk of securitizations have been designed solely for the purposes of accessing central bank liquidity,'' analysts led by London-based Ganesh Rajendra wrote in a report published on Aug. 8. Creating and keeping bonds to borrow from central banks ``has become a de facto substitute for capital market funding for many banks,'' the analysts wrote.

Subprime Losses

Mounting losses resulting from the collapse of the U.S. subprime-mortgage market have caused money-market funds to stop buying asset-backed commercial paper and forced funds such as structured investment vehicles to unwind holdings, driving up yields. The U.S. market for commercial paper, or short-term IOUs, backed by assets such as mortgages shrunk 40 percent from its peak in July 2007. A basis point is 0.01 percentage point.

Investors demand about 163 basis points more than benchmark rates to buy the highest-rated bonds backed by U.K. mortgages, according to Lehman Brothers Holdings Inc., more than 10 times the spread of a year ago.

This year should mark ``the very trough'' of asset-backed bond sales, the Deutsche Bank analysts wrote. About 45 billion euros of the securities were sold in 1998, the report said.