Wednesday, June 29, 2011
The Wall Street Journal raised the specter of another money market fund crisis that could require bailout of money market funds that have unwisely invested too heavily in the short-term debt of European banks caught up in the contagion of sovereign debt problems in Greece and elsewhere.
The WSJ lead editorial excoriated the mutual fund industry for reaching for yield on money market funds by loading up on European bank securities equal to 50% of their $2.7 trillion assets. Forbes also raised this issue by quoting Jim Grant’s Interest Rate Observer on Saturday as to huge position by Fidelity and BlackRock’s money market funds in European securities that may be worth less than the funds’ purchase price.
US money market funds apparently hold far too risky a position in the short-term debt of the European banks because they are the repository of sizable investor money being held on the sidelines until the economic future becomes clearer. However, some 40% of this paper has a maturity of 7 days or less, so that it would require an inability to refund these very short-term obligation for there to be a crisis.
These French, German, Dutch, British banks face potentially troublesome write-downs from the possible debt default of Greece and its ramifications for Ireland, Portugal, Spain and Italy. European banks have loans outstanding to these nations of over $1.5 trillion.
In the wake of Lehman’s bankruptcy in September, 2008, a large money market fund holding an unwise batch of Lehman bonds, and suffered from its net asset valuation falling below the sacrosanct $1.00 a share. This event triggered a panic among holders of money market funds– which are supposed to be almost as safe as short term Treasuries.
The Federal Reserve was forced to guarantee the hundreds of billions ordinary citizens held in these funds, which were basic savings that were thought to be entirely secure. When the crisis quieted down, the guarantee was removed. Let’s hope there is no repeat of the 2008 crisis in the money market fund industry.
Case Shiller Home Price Indices showed a monthly increase in prices for the first time in eight months. This was for the month of April, which is usually the beginning of the best six months of the year for home sales. (See this chart of Non Seasonally adjusted Existing Home Sales)
Davied Blitzer of S&P Indices noted “However, the seasonally adjusted numbers show that much of the improvement reflects the beginning of the Spring-Summer home buying season. It is much too early to tell if this is a turning point or simply due to some warmer weather”
Remember how 4 very long days ago, the 60 million barrel SPR release was vaunted as being the reason for the second consumer renaissance after it was largely expected it would lead to sub $90 crude, and low $3/gallon gas, and result in every Joe Sixpack going out and buying 3 houses at least? Well, so much for that: the IEA's action has now been fully priced in and WTI is back to precisely where it was before the IEA announcement on Thursday. Which means that what some said was a shadow QE (and don't get us started on all the mainstream media "journalists", among which Bloomberg and CNN, who continue to confuse QE Lite with something they call QE 2.5) had a half life of just over 3 days. Expect future intervention half lives to continue declining, as the criminal banking cartel's ammunition is now down to just one thing, the only thing, printing.
Oh, and for those morons predicting a second half economic pick up, here's intraday gasoline. Have fun explaining that to whoever it is that pays your bonus check.
I see headlines like, “Euro Maintains Gain on Greek Debt Optimism” and I am just not sure what everyone else is looking at. As far as the credit default swap market is concerned, Greece has already defaulted, it is just a matter of when and in what form. Ireland and Portugal are basically at levels that share a similar fate. Next question is whether Italy and Spain fall into the hole.
Downturns are normal, Rogers tells IndexUniverse.com.
"If you look at oil, for instance, it has gone down over 50 percent three or four different times since 1998," says Rogers, famous for his bullish stance on commodities.
"That's what markets do, and they will continue to do that."
(Getty Images photo)
"We know that there are huge shortages of agriculture developing," Rogers says.
"I don’t know if you knew this, but the average age of farmers in America is 58 years old. In 10 years, they’re going to be 68, if they’re still alive. Throughout the world, we have serious, maybe even catastrophic developments in agriculture, which is going to hurt us all over the next couple of decades."
Oil supplies will remain tight as well.
Many commodities have rallied over the past few years, and although some have cooled a bit, expect the buying to continue, experts say.
"The long-term perspective is that many commodities have supply constraints," says Walter "Bucky" Hellwig, who helps manage $17 billion of assets at BB&T Wealth Management in Birmingham, Alabama, according to Bloomberg.
Look for gains in gold, which tends to do well amid times of rising inflation rates.
"That’s an environment where you want commodities in your portfolio."
Chinese real estate prices are declining, which has investors asking whether the country’s economy is over-leveraged. Could China’s real-estate bubble burst in coming years-and, if it does, how might that affect other countries? WSJ’s Bob Davis reports.