December 21 2010: Stoneleigh and Max Keiser Flatten the Canadian Economy

Arthur Rothstein Let it snow February 1940
"Guests in a Chillicothe, Ohio hotel lobby watching the snowstorm"

Ilargi: Wonder what reactions will come in to this one. Max was getting somewhat tired from all the mails he got from Canada whenever he said anything negative about the country. “Hey, I’m just the guy in the middle"... And so he called us in, the Canadians, so the complaints can now come our way. "Don’t you understand, we're different!" Yeah, right. Well, you can now explain that to a couple of fellow Canadians. Stoneleigh comes in about halfway through the episode.

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Stoneleigh:

Oh, Canada!


When Ilargi and I were in Paris recently, I did a couple of interviews with Max Keiser. The first you have already seen, and the second is being released today. The topic is Canada, and its enormous property bubble. Human beings are notorious for not being able to recognize a bubble when they are in one, and Canadians are no exception. We are a rationalizing species, not a rational one, and there are always rationalizations for why it's different this time - for why this time those outrageous valuations are justified. Well, its never different this time.

Bubbles create virtual wealth through speculation. People simply agree that something should be worth more (and more, and more) than it was before, although the underlying value has not changed at all. They will part with any sum in chasing momentum, because they think there will always be a Greater Fool who will pay more. Often they do this with borrowed money, leveraging their exposure to risk.

Eventually, the Greatest Fool, Biggest Sucker or Most Aggressive Speculator has been found and fleeced. Then there is nothing to support prices at anywhere near the stratospheric levels they have reached on the back of easy credit. People will then simply agree that the asset which has been the focus of speculation should be worth less (and less, and less) than it was before, as the asset bubble bursts. The virtual wealth component will eventually be more than wiped out, as all asset bubbles undershoot when they implode. For those who had been speculating with borrowed money, and for those who had been carrying the risk of that lending, the result is being wiped out. The leverage that seems to magically defy gravity on the way up will magnify the losses on the way down.

Canada is on the cusp of the shift from an extreme of complacency born of easy money to the fear of a sudden realization of being desperately over-stretched ("like butter spread over too much bread", as Bilbo said in The Lord of the Rings). Canadians carry a higher debt load than Americans, as well as using more energy per capita than anyone else in the world (with the worst structural dependency on cheap energy as a result), yet we feel special - insulated from the rest of the world, as if bad things only happen to others. Our bubble is set to implode, as all bubbles eventually do.

We have warned Canadians before at The Automatic Earth that they are living in financial fantasy world:

Bubble Case Studies: Ireland and Canada

In Canada, where I am currently, there is still a sense of invulnerability. We haven't got as far as denial yet. That's hardly surprising when you can't tell a crack-shack from a mansion in places like Vancouver.

Others have agreed with us that bubbles are not only identifiable in hindsight, but are actually clearly identifiable while in progress, if one knows what pattern to look for. When there is ample evidence of the same dynamic unfolding at different rates in so many other places, there really is no excuse for believing oneself immune to the force of financial gravity. 

As Mish points out:

Canadian Borrowing Gone Mad

Porter's statements are exactly the same kind of silliness we heard in the US regarding the central belief "massive debt is OK because it's supported by rising asset prices".

It was bad enough that anyone believed such nonsense a few years ago before the US property bubble blew sky high. That such beliefs still have proponents at the highest level of Canadian banks now seems rather amazing.

It just goes to show just how firm the belief "It's different here" is in Canada.

As always, a bubble is a society-wide phenomenon involving a toxic mix of predators, prey and a complete abdication of regulatory responsibility. Despite a warning from Mark Carney (Govenor of the Bank of Canada) that "Risk reversals when they happen can be fierce: the greater the complacency, the more brutal the reckoning.", no serious attempt is being made by regulators to take the punch bowl away from the party and reign in the debt binge. 

The banks are well aware that trouble is brewing, but are too busy profiting from a public determined to claim their role as the designated empty bag holders to prevent the situation getting even further out of hand.

Banks won't lead way on fixing debt problem

Mr. Clark said that no bank wants to be the first to impose stricter requirements on borrowers out of fear that it will suffer a major loss of customers to rivals. Personal banking "is a highly competitive industry," Mr. Clark said....

....Mr. Clark said it is impossible to expect any bank to crack the whip on borrowers because "market share loss is perceived as a strategic loss, not just a numerical or dollar loss."

This position is a bit rich coming from the CEO of TD Bank, given that TD is quietly giving its borrowers enough rope to hang themselves by offering ever more credit, but with requirements that pile all the risk on to borrowers in ways that people are unlikely to understand. See this gem from Garth Turner:

[TD bank] is registering all its new home loans as collateral mortgages, rather than conventional ones. If you have no idea what that means, you’re normal. A collateral mortgage is a loan which is backed by a promissory note which is in turned backed by security. A conventional mortgage, as you know, is just a loan secured by a house. Normally the only people who are asked to sign collateral mortgages are folks who use their houses to arrange lines of credit with balances that can balloon, not a regular mortgage with a fixed amount owing and a standardized payment.

With a conventional mortgage there are strict rules about how much you can borrow determined by the value of the property when you take the loan. Not so with a collateral mortgage, because it’s actually a loan which is backed by your promissory note. That means you can borrow more than your house is worth.

Yes, just like those old fast-talking Ditech.com TV commercials offering American homeowners mortgages worth 125% of their home’s value – the ones we used to snicker at. Well, giggle no longer. TD is now shopping 125% collateral mortgages.

In fact, bank customers (I’m told) are being encouraged to 'register' for 125% mortgages when they sign up, even if they don’t need all that money. It’s just there, the pitch goes, if you ever need it. Kinda like a built-in line of credit you don’t need to reapply for. (Of course, it should be lost on nobody that the bank just found a way around guidelines on loan-to-value ratios.)

OK, so much for the conservative Canadian bankers part. But it gets better. For the bank.

With a conventional mortgage it’s your house backing the loan, which means transferring a mortgage is simple, and can be done for a couple of hundred bucks. But collateral mortgages cannot be transferred, since they’re more akin to personal loans. That means one must be discharged and a new mortgage arranged elsewhere if you want to move. Since that can cost thousands, not hundreds, it pretty much ensures you won’t.

Stoneleigh: I strongly suggest people read the entire article in order to understand how deep a hole real estate purchasers are unwittingly, yet enthusiastically, digging themselves into in Canada. As always, the public is being set up to take the fall. Yes they are being greedy, but they are also being led up the garden path by those who should know better, and those who should know better are being far greedier in doing so.

Understanding bubble dynamics is vital, and seeing a bubble for what it is while still inside it is even more so. Canadians need to wake up.




Stoneleigh and Max Keiser Flatten the Canadian Economy

This time Max and Stacy talk about the rise of financial activism and about Janet Tavakoli's presentation and repairing the damage of fraud as a business model. In the second half Max talks to Nicole Foss about the unpopped bubble in Canada.

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Happy holidays to you and yours from Stoneleigh and Ilargi!

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Cause for Canadians to worry? You betcha
by Arthur Donner And Doug Peters - Globe And Mail

Canada’s economic rebound out of recession has run out of steam. Canadian real GDP posted a meagre 1 per cent annualized rate of growth in the third quarter, the economy recorded a record high trade and current account deficit of 4.2 per cent of GDP, and job creation virtually ground to a halt in the last quarter. And this despite government efforts to stimulate the economy through infrastructure spending – which is scheduled to soon end.

For a change, the U.S. economy outpaced Canada’s, advancing at a 2.5 per cent annual rate in the third quarter of 2010. Nonetheless, both output and employment in Canada are above their previous peaks in 2008. In many respects, however, the U.S. economy is in worse shape than Canada’s.

Despite growing substantially stronger than Canada’s economy in the third quarter, the U.S. has restored only two-fifths of the jobs it lost during the downturn, the unemployment rate was 9.8 per cent in November, and a broader measure of unemployment, which includes discouraged workers and involuntary part-time work, was 17 per cent.

Moreover, it has required the application of extraordinarily hefty fiscal and monetary policies and corporate bailouts to keep the American economy growing. The U.S. government’s fiscal deficit is enormous, and proportionately as steep as the deficits of Ireland and Greece, countries that are experiencing great difficulty in funding their deficits. As of October, the U.S. government was running a $1.26-trillion budget deficit.

On the monetary policy side, because interest rates were virtually zero, the Federal Reserve has had to turn to new, rather untested policies to keep the U.S. economy growing. Thus, the Fed began a second round of quantitative easing with the intent of purchasing $600-billion of long-term Treasury securities over an eight-month period.
Given the recent slowdown in Canada’s economy and the U.S. economy’s apparent doldrums, is there cause for Canadians to worry? To quote Sarah Palin, “you betcha!”

• While Canada has replaced all of the jobs lost from the recent downturn, we still have some distance to go in terms of lowering the unemployment rate and providing a healthier jobs outlook.

• When the Canadian economy was shedding jobs (October of 2008 through July of 2009), we lost 496,000 full time jobs, while part-time jobs increased. To date, only 74 per cent of the full-time jobs lost before the summer of 2009 have been restored.

• There is a significant disconnect between the job prospects of younger Canadians and older ones. In November, the national unemployment rate was 7.6 per cent, while the unemployment rate for those between 15 and 24 was 13.6 per cent. While roughly half of Canada’s job losses between October of 2008 and July of 2009 were young people, there has been no recovery in youth employment.

• It’s more than a bit surprising that, in an environment of soaring commodity prices, Canada’s current account deficit should escalate as high as 4.2 per cent of GDP, its worst showing since the mid-1970s. Current account deficits of this magnitude make it very difficult for Canada’s economy to grow. With the trade and current account deficit escalating at an alarming pace, Canada’s international debtor status also becomes a concern.

The Bank of Canada, which recently commended our financial system, suggests that most of the risks at this time are external. Nonetheless, it’s correctly concerned that household indebtedness is too high. Such debt, in fact, has increased to 14.5 per cent of disposable income as Canadians have taken advantage of super-low interest rates to purchase homes and other consumer items on credit.

This rather high level of indebtedness would be fine if the economy were expanding at a decent pace and strong jobs growth could be counted on. But there are clear grounds for worry on many tacks, including the future growth rate of the economy and the pace of future job creation.

Indeed, as badly off as U.S. households are as a result of the Great Recession, they have sharply increased their personal savings out of disposable income and have in rather short order reduced their indebtedness back down to Canadian levels.

What’s missing from the Canadian scene is a substantial growth in jobs creating investments in manufacturing and new technologies, as well as growth in exports. The business community has been sitting on cash and not been investing sufficiently in new plant and equipment. Canadian business must also take advantage of export opportunities in those areas of strong economic growth such as China, India, Brazil and Germany.

Only when such opportunities are fully exploited by Canadian business will there be enough jobs for Canadians and for youth to gain their rightful opportunities to participate in our economy.

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Bank of Canada asks: 'Do you feel lucky?'
by Calgary Herald

It may have the ring of an old-time preacher warning parishioners in his congregation about temptations that lead them a fiery destination, but the Bank of Canada was at it again recently about the high level of Canadian consumer debt.

In its December review of the financial system, the Bank of Canada looked abroad and at home to gauge the potential for unpleasant shocks to the financial system. Outside of Canada, the bank spotted global sovereign debt as a potential problem in the months and years ahead.

"A key concern is that the acute fiscal strains in peripheral Europe and weaknesses in the European financial system could reinforce each other and have adverse effects on other countries, including Canada, through several interconnected channels," wrote the bank's economists.

In layman's terms, what the bank is concerned about is the risk of default in some high-risk countries (think Ireland, Spain, Portugal and Greece for starters); that would force losses, perhaps massive ones, on bondholders and banks that hold such sovereign debt. Should such defaults occur, even partly, some banks with too much sovereign debt on their books may need to turn elsewhere to stay afloat. But at that junction, other financial institutions may be reluctant to lend money, even on a short-term basis.

Should such banks be located in countries where the governments are themselves already deeply in debt, then some other country or institutions such Germany or the European Union or the International Monetary Fund may have to step in to provide assistance and liquidity. But that can only happen so many times before either taxpayers in those countries refuse to ante up more money. In that scenario, contagion becomes a problem as some institutions and then countries may fail.

Such scenarios keep central bankers up at night and also have the potential, if they arise, to freeze up the world economy, much as happened in 2008 when credit dried up after the Lehman Bros. collapse, except that next time it might be a country's finances that collapse and send shock waves.

Which might be why the Bank of Canada sent out this other unsubtle hint to Canadians in the same report: Stop taking on so much debt. Canadians are taking on debt faster than their income is growing, noted the bank, and that's a potential problem.

Should international financial stresses indeed come to pass and banks start to pull back lending to preserve capital, a mutually reinforcing and negative downward circle will begin, where economies deteriorate and lenders are cautious; that will slow economies even further.

In the everyday world, that can mean layoffs and households unable to pay their bills. Of course there is good and bad debt, and mortgages -- especially ones for your principal residence and not speculative properties -- are not as troubling as other kinds of debt. Nevertheless, as Canadians consider their finances looking ahead to 2011, it's a good time to heed the central bank's warning and ask yourself this Clint Eastwood question: Do you feel lucky? If not, be careful how much debt you take on.

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Alberta deficit at $5 billion
by Trevor Busch - Vauxhall Advance

The province's push for a balanced bottom line has been stymied in 2010 thanks to increased spending for disaster and emergency relief and continued revenue uncertainty. Last week, government released the second-quarter fiscal results, which indicate Alberta's forecast deficit for 2010-11 has escalated to $5 billion, an increase of $257 million from budget.

“It is not the fact that we’re spending more,” said Little Bow MLA Barry McFarland. “The revenue picture just doesn’t rebound with the quantity of gas being produced, and the low price. Right now, the gas portion of the royalties just aren’t adding up to what was anticipated earlier.”

Revenue is forecast at $34.1 billion, up $127 million from budget, but has been offset by a $384 million increase in expenses, to $39.1 billion. Operating expenses remained relatively flat compared to budget, while expenses for capital grants decreased $190 million. Spending increases were mainly required for disaster and emergency assistance for municipal flooding, wildfires, the agricultural sector and the campaign against mountain pine beetle infestations.

Higher-than-projected land lease sales, corporate income tax revenues and federal transfers are responsible for the increased total revenue of $127 million. However, total revenue also suffered from lower-than-expected personal income tax revenue, investment income and the increased cost of drilling stimulus initiative claims. “That’s what’s being anticipated, most of that (increase) is coming from the bitumen side. The downside is the natural gas — the prices are low and the volumes are taken down much lower,” said McFarland.

Sustainability Fund assets are forecast at $11 billion for year-end, a substantial increase of $2.8 billion from original budget estimations. “We’re bloody lucky we’ve got it there, because you’ve still got the deficit in the operating budget technically for the current year,” said McFarland. “That’s before you take into account that we can transfer money from the Sustainability Fund, which in layman’s language is like your savings account that you have in the bank, to offset it.”

The Heritage Fund earned $391 million in the second quarter due to positive returns in world equity markets, which offsets a first-quarter loss of $164 million, bringing to $227 million the total income earned by the fund in the first six months of the 2010-11 fiscal year. The fund's fair value is currently $14.8 billion.

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Flaherty forges ahead with pooled pension plan scheme
by Stefania Moretti - Canoe.ca

Canada’s finance ministers have agreed to move forward with Finance Minister Jim Flaherty’s idea to develop a pooled private pension system designed for workers without a corporate savings plan. Flaherty was at odds with several provinces over PRPPs heading into Monday’s meetings on pensions and the economy at the Rocky Mountain resort of Kananaskis, Alta.

 The finance ministers of Quebec and Alberta backed the idea but their counterparts in Ontario and British Columbia wanted to see an expansion of the Canada Pension Plan instead. “We’re all agreed we want Canadians to save more,” Flaherty told reporters. “I’m particularly pleased to announce that we reached agreement on a framework for the introduction of a new kind of pension plan.”

Officials will continue to study various CPP options -- including higher regular contributions to the mandatory retirement fund -- before reconvening on the issue in June. “We are all concerned about a fragile economic recovery…so there is concern about not putting more burdens on employers right now,” Flaherty said. Critics have charged the PRPP is just another glorified savings vehicle.

“Of course it’s a savings plan. It’s a really important savings plan,” Flaherty said. “There is a group of people who work for relatively small employers or who are self employed who don’t have the option now of a pension plan and this new initiative will help alleviate that.”

PRPPs are expected to be mandatory for employers to offer, though employers most likely won’t forced to top off funds by making regular contributions on the workers’ behalf. The plans would offer defined contributions administered by a third party, probably a financial institution. The savings vehicle is supposed to be relatively low-cost because of its sheer size and simplicity.

Flaherty also warned provincial governments to trim budget deficits. “It is important to remember that Canada’s economy is recovering well before other nations precisely because we had our fiscal fundamentals in order going into the recession,” he said. “Returning to that position will give our recovery more traction and make us even stronger going forward—supporting jobs and growth and insulating us from these global shocks in the future.

Flaherty expects most governments to return to black by 2015. Canada's 2009-10 deficit totalled $55.6 billion, or 3.6 percent of gross domestic product. Ottawa aims to shrink that to $45.4 billion in 2010-11 before returning to surplus in 2015-16. Most of the provinces expect to have deficits of their own in the 2010-11 fiscal year. Ontario has the biggest shortfall at an estimated $18.7 billion this year.

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UK budget deficit balloons to record high
by Telegraph

Britain's public borrowing unexpectedly hit a record £23.3bn in November, the Office for National Statistics (ONS) said on Tuesday. The figure, which excludes financial interventions by the Government, was a marked increase on the £17.4bn a year earlier and beat the previous highest monthly borrowing record of £21.1bn in December 2009, according to the official figures.



Total public borrowing for the year to date now stands at £104.4bn, the ONS said, creeping closer to the Government's target of £149bn for the financial year. Economists have warned the coalition is in danger of exceeding the target – and overshooting the Office for Budget Responsibility's recently downgraded forecast of £148.5bn for the year.

The bigger-than-expected figure will be seen by Chancellor George Osborne as supporting the need for recent austerity measures, which include an £81bn package of spending cuts and a hike in VAT next year. Economists were braced for a rise in the year-on-year level of public borrowing in November but none predicted a figure so high.

Jonathan Loynes, chief economist at Capital Economics, told PA: "Given that the economy has expanded rather more quickly than anticipated over recent quarters, we might have expected somewhat lower current borrowing, even allowing for the usual lags." The unprecedented £5.9bn leap in borrowing was mainly due to Government spending – up 10.8pc on last year. EU contributions and spending on health and defence were particularly high last month, the ONS said, while VAT receipts dipped by 0.1pc.

Net debt is now £863.1bn, which represents 58pc of gross domestic product (GDP) – another monthly record. A spokesman for the Treasury said the figures backed the Government's fiscal-tightening measures and were in line with the forecasts of the tax and spending watchdog. He said: "November's borrowing figures show why the Government has had to take decisive action to take Britain out of the financial danger zone.

"These outturns are also in line with the Office of Budget Responsibility's latest forecast for borrowing to fall by almost £10bn this year compared to last, and for tax receipts to increase by over 7pc year on year."

While total tax revenues are increasing, economists have warned the Government is battling against ever-increasing interest payments on its mammoth debt levels. Mr Loynes added: "Overall, there is nothing here to weaken the Government's determination to see through its austerity programme. But we continue to doubt that the economy will weather the coming fiscal storm as well as it hopes."

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Fiscal squeeze will squash the poor
by Larry Elliott - Guardian

In many other countries it would be a recipe for civil unrest, perhaps even revolution. Britain, though, is a placid place and it takes quite a lot to get this country's dander up. Sure, we've had protests from students this autumn but the latest forecasts of expected trends in poverty were greeted with a resigned shrug of the shoulders.

Make no mistake, the findings from the Institute for Fiscal Studies (IFS) make depressing reading. Child poverty? Going up over the next three years. Poverty from working-age adults with children? Going up. Poverty for working adults without children? You guessed it. Going up also.

And these – lest you get the wrong end of the stick – are not increases in relative poverty. They are increases in absolute poverty: the number of people living on less than 60% of the national income adjusted for inflation. And they are not nugatory increases either: by 2013-14 an additional 900,000 people will have slipped below the breadline.

There is a stock response to findings of this sort. The first line of defence is to say that there is something wrong with the methodology – this has indeed been the default setting for David Cameron and Nick Clegg. Funnily enough, they found little to complain about when the IFS was using the same approach to question Labour's record on poverty.

A second line of defence is to say that even if the figures are right, an income of 60% of the national median is not real poverty in the sense that it is for someone living on less than $2 a day in sub-Saharan Africa. This, it has to be said, tends to be trotted out by those with little personal experience of rubbing along on benefits or the minimum wage topped up with tax credits.

Finally, it is argued that the UK needs a complete rethink of its approach towards poverty because the approach of the Blair-Brown governments between 1997 and 2010 failed by concentrating on state handouts rather than tackling the root causes of the problem: worklessness and dysfunctional families.

This is a more serious critique, though it ignores a few inconvenient truths. The first is that Labour did try to get the poor into work: employment reached record levels of above 30 million during the boom years. The second is that poverty did come down, if not by nearly as much as Blair and Brown hoped.

If the IFS is right – and, frankly, its record of sticking it to governments on both left and right gives it credibility – the encouraging progress made by Labour in its last couple of years in office is now about to go into reverse. After 2013-14, poverty will need to fall by 1.5 percentage points each year until 2020-21 to meet the legally binding goals in the Child Poverty Act. The IFS notes drily that this has not been accomplished in any period since comparable records began in 1961.

Deprivation
Tackling poverty is tough but it has been done before. The chronicles of Britain between the wars show that deprivation was deep and widespread, prompting the social reformer William Beveridge to identify the giants barring the way to progress: want, disease, ignorance, squalor and idleness.

The subsequent sharp fall in poverty after the second world war was the result of five interlocking policies. Expansionary macro-economic policies and a commitment to full employment meant there was plenty of work. Strong trade unions and a relatively protected economy meant that real wages rose in line with productivity, allowing workers to enjoy rising living standards. High levels of growth allowed governments to increase public spending on the NHS, schools and housing; an investment in the so-called social wage that particularly helped those on lower incomes. Fiscal policy redistributed higher taxes on the rich to the poor.

These four distinct policies combined to create greater social mobility: working families could see that they were better off than their parents and had higher aspirations for their children.

How do recent governments match up to this record? Labour under Blair and Brown had an expansionary macro-economic policy of sorts, albeit one far too dependent on the build-up in personal debt and the financial bubble in the City. They did far less to boost the level of real wages, which, as the International Labour Office showed last week, were falling in the last full year before the election, but they did boost public spending substantially.

Tax and benefit policy involved quiet redistribution from rich to poor and that helped blunt the increase in inequality. There was, as far as can be established, no improvement in social mobility. At best, therefore, Labour scores two and a half out of five.

The coalition government has begun the biggest fiscal squeeze since the second world war – a move that will cut national output by 0.5% in each of the next four years. The freeze in public-sector wages coupled with rising VAT means that real wages are set to fall. Departmental spending is being cut, with the austerity at local government level likely to have a particularly harsh impact on the poor. Tax and spending measures introduced by George Osborne (as opposed to the ones inherited from Alistair Darling) hit the poor harder than the rich. Apparently, though, this – coupled with the scrapping of the educational maintenance allowance and higher tuition fees – adds up to a recipe for greater social mobility. These people must take us for mugs.

Cameron and Clegg have all the right progressive talk about tackling the root causes of poverty but, as the IFS shows, threaten to make the problem worse. These are, of course, early days. Maybe George Osborne will do something in his budget to tackle poverty. Maybe the Universal Credit will be the answer when it is finally introduced. Maybe, though, this is simply a case of what you see is what you get: a deeply conservative government with a 1930s-style social policy to go with its 1930s-style economic policy.

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Doug Kass: Gold will fall 25% in 2011

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Emergency unemployment benefits reauthorized
by Auburn Reporter - Seattlepi

Thousands of Washington’s jobless workers may continue to receive up to 99 weeks of benefits, now that Congress and the president have reauthorized a federal unemployment benefits program that expired last month.

“This is welcome news for unemployed workers who are having a hard time finding a job,” said Joel Sacks, Deputy Commissioner for the Employment Security Department. “We need to keep a safety net in place until the economy gathers more steam.”

For the past year, eligible jobless workers could receive up to 99 weeks of unemployment benefits, collected in this order: up to 26 weeks of regular benefits, up to 53 weeks of emergency unemployment compensation (EUC) and up to 20 weeks of extended benefits. Today’s action extends the EUC program, but does not expand the total weeks available. Therefore, people who have already collected all of their EUC benefits are not eligible for these additional benefits. Depending on where individuals are in their claims cycle, they will fall primarily into two categories – those who are eligible for more benefits and those who are not.

Eligible for more benefits
When the EUC program lapsed at the end of November, individuals in tiers 1, 2 or 3 of the four-tiered EUC program could not advance to the next tier (e.g., could not move from tier 1 to tier 2), thereby losing access to the balance of their EUC benefits. Also, individuals who ran out of regular benefits after November could not enter the EUC program, thus limiting them to up to 46 weeks of benefits.

Under the new EUC extension, unemployed workers approved for regular state benefits or EUC tiers 1, 2 or 3 may claim their full entitlement of EUC benefits. Currently, about 300,000 people in Washington fall into these categories. These people will automatically move to the next tier of benefits and do not need to call Employment Security. Claimants who believe they have EUC benefits remaining but stopped claiming must call the EUC triage unit at 877-558-8509 to reopen their claims.

Not eligible for more benefits
Under the new legislation, the EUC program remains at a maximum of 53 weeks. Therefore, people in tier 4 of the EUC program, as well as those collecting “extended benefits” and those who have used up all of their benefits, are not eligible for additional benefits.

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Weak Get Weaker as Muni Bonds Are Sold Off
by Tom Lauricella and Jeannette Neumann - Wall Street Journal

Amid the recent selloff in the municipal-bond market, investors are increasingly differentiating between state and local governments with strong finances and those facing big fiscal woes. That trend could have significant implications for holders of bonds issued by weaker state and local governments, some of which are already paying higher interest rates and have seen the prices of their bonds decline in value.

Tax changes lag housing prices by about three years Image: Hedgeye

The growing gap between what the strongest and weakest government issuers pay to borrow brings unpleasant echoes of the European debt crisis, where escalating yields paid by countries such as Greece and Ireland made their fiscal situations untenable. For muni investors, the scenario could prove similar—a series of rolling crises as the spotlight goes from one troubled issuer to the next.

Underlying this dynamic are issuers struggling not just with budget woes but with higher borrowing costs that end up inflating budget deficits. That prompts still more borrowing and also can result in ratings downgrades that can further raise borrowing costs. "It's a downward spiral," said George Rusnak, national director of fixed income for Wells Fargo Private Bank.

The news isn't great for investors in the $2.8 trillion municipal market, who include individual investors and property- and casualty-insurance companies, as well as more-recent investors, such as pension funds and foreign investors, attracted by a relatively new type of taxable muni bond. Over the past month and a half, the municipal-bond market has taken it on the chin. The yield on 30-year, triple-A-rated municipal bonds closed at 4.66% on Friday, according to a widely watched index published by Thomson Reuters Municipal Market Data. That is up from 3.86% on Nov. 1.

The hardest-hit borrowers generally have been those seen as in the most dire fiscal shape. The market typically punishes creditors perceived as riskier by demanding higher yields. Some analysts anticipate yields paid by the most troubled municipal borrowers will only continue to widen next year in comparison with the broader market.

For Illinois, rated the worst in the country by Moody's Investors Service at A1-negative, the gap between what the fiscally strapped state pays on its 10-year-maturity bonds is now 1.9 percentage points above that for the broader muni market. Just a month ago, the spread for Illinois stood at 1.6 percentage points, according to data from Municipal Market Data. A year ago, that gap was less than one percentage point. Spreads on Illinois bonds could reach as high as two percentage points next year, says Wells Fargo's Mr. Rusnak.

State-by-State Variations
Nevada, which carries a slightly better credit rating of Aa1-negative from Moody's and is seen as especially hard hit by the housing-market collapse, has seen its borrowing spread rise to 0.80 percentage point from 0.5 point on Nov. 1. In comparison, Pennsylvania, which has the same rating as Nevada but whose fortunes are perceived by the market as relatively brighter, is paying just 0.2 percentage point above that of the broader muni market, about the same as it was both a month ago and in late 2009.

For states with greater perceived risks, "investors are asking to be compensated for it," said Tom Kozlik, municipal credit analyst at Janney Capital Markets. The potential for spreads to widen comes as some analysts expect the level of yields on muni bonds broadly to be on the rise next year. One big reason is the end of the Build America Bonds program, which helped the muni market by diverting some $150 billion in issuance into the taxable-bond market.

Bank of America Merrill Lynch, for example, expects muni yields to rise 0.35 to 0.50 percentage point without the program. In the case of Illinois, which sold $10.9 billion in longer-term debt in 2010, an extra 0.35 percentage point on its debt would have meant an extra $38.2 million in interest payments.

Could Problems Spread?
A key unknown for investors is whether severe financing problems will remain isolated to individual struggling issuers or instead spread to healthier issuers. John Longo, investment strategist at advisory firm MDE Group in Morristown, N.J., thinks that as long as any defaults remain few and far between, the impact will localized to those issuers. However, "if there are many defaults, it could result in a macro, contagion-type risk," Mr. Longo said.

Comparisons to Europe are ill-placed, said John Sinsheimer, director of capital markets for Illinois, because Illinois doesn't roll over its debt in the same way some European countries do. "In Illinois, all our debt is paid off like clockwork every year," Mr. Sinsheimer said. There are other differences between the European government-bond market and munis. For example, local governments can try to turn to their states for support, and there are existing frameworks for municipalities to work through restructurings.

Janney's Mr. Kozlik notes that there also has long been the option to sell so-called deficit-reduction bonds, as Massachusetts did in 1990 to bridge a huge budget deficit. However, he notes, such bonds will still cost an issuer more money in interest. On the flip side, the European bond market has been propped up by bond purchases by the European Central Bank. Analysts say they can't recall a large-scale purchase of muni bonds by the Federal Reserve, and the law limits the Fed's ability to buy muni debt to only certain kinds of very short-term securities. However, some in the market speculate that, should a third round of quantitative easing—injecting cash into the market through bond buying—become needed to boost the economy, the Federal Reserve might buy munis.

The big question is whether the recent muni selloff will continue. Some of its catalysts could prove transitory, such as the rise in U.S. Treasury yields, which long-term munis tend to track. In addition, a burst of heavy selling by mutual-fund investors came close to the year's end, just as Wall Street brokerage firms are trying to keep inventories of bonds on their books as low as possible

But 2011 could see increasing strains on state and local governments' balance sheets. That is partly because of expectations that the job market will remain weak, depressing revenues brought in from payroll taxes and making it politically unpalatable to raise taxes on unemployed residents.

Diminishing Collections
At the same time, property taxes are "poised to decline" in coming years, the Congressional Budget Office said in a report this month. That is because homes aren't reassessed every year, so local property-tax revenue lags behind falling house prices by three years on average. "Even small declines in collections could cause fiscal stress when the cost of providing public services is growing," the report said. Also, state aid to local governments has already declined in many states and is expected to be cut by more states next year.

This is no small issue. Towns and cities rely on property taxes for nearly one-fourth of their revenue and state aid for another third, according to the CBO. "Municipalities are going to be doing belt tightening, but there's only so much belt tightening they can do," said MDE's Mr. Longo. If they are hit with higher borrowing costs and lower property-tax revenues, "that becomes an unsustainable position."

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Ireland's 'bad bank' NAMA becomes one of world's biggest property lenders
by Lisa O'Carroll and Elena Moya - Guardian

Ireland's controversial new "bad bank" has overnight become one of the biggest property banks in the world after it completed the acquisition of developers' loans worth more than €70bn (£59bn). The National Asset Management Agency now controls the loans on hotels, housing estates, shopping centres and development sites across Ireland, the UK, mainland Europe and elsewhere, including part-ownership of landmark sites such as Battersea power station.

The agency, which is charged with clearing Ireland's debt mountain, has the legal right to acquire every single land and development loan from the five main banks in the country. The details from NAMA were released as the euro fell to a record low against the Swiss franc after Moody's downgraded some Irish and Spanish banks, fuelling investors' fears about the capacity of these troubled countries to pay their debts.

The credit agency cut the rating of Allied Irish Banks, Bank of Ireland, EBS Building Society, Irish Life & Permanent, and Irish Nationwide Building Society. The senior debt and bank deposit ratings of Anglo Irish Bank were also downgraded. The move follows last week's cut of Ireland's sovereign debt by the agency. "The banks' debt ratings are affected by the downgrade of the Irish government, as the high degree of systemic support from the government had so far largely mitigated the pressure stemming from a much weaker standalone credit profile of these banks," Moody's said.

The problems for Spanish banks also continue to mount. The agency, which recently warned Spain about a possible sovereign debt downgrade, placed the debt ratings of 30 Spanish banks on review for a possible cut. NAMA also announced that it had wrested €130m from unnamed developers who were trying to escape from its clutches by transferring property assets to their wives. In all, NAMA has acquired some 11,000 loans with a nominal value of €71.5bn from developers at the centre of the property crash in Ireland.

A spokesman said no geographical breakdown would be provided, but details released this year show that at least €10bn relates to property in the UK owned by the top 30 developers in the country. Last night the chairman of NAMA, Frank Daly, said developers had done enormous "damage" to the country and should work for nothing to help the state recoup the money for tax payers.

"A lot of these people have done an awful lot of damage to the country and they really should work for nothing for the country. That's the sort of anger I feel and the degree of upset I feel about this," Daly told RTE television.

Although NAMA has a policy of not naming developers now under its wing or the assets it has just acquired, some of London's best-known landmarks including Battersea power station, Bow Street magistrates court and the Pan Peninsula Ontario Towers in Docklands were bought or built by developers now in the bad bank. NAMA has paid about €30.2bn for the loans, representing an aggregate 58% discount.

One of the biggest developers affected is Real Estate Opportunities, which owns Battersea power station. It is relying on the support of NAMA to stay solvent. Bank of Ireland contributed €100m to the €600m used to acquire Battersea at the peak of the property boom in 2006. It has renegotiated terms of the loans relating to the acquisition with Lloyds and NAMA (which bought the Bank of Ireland loan) with repayment extended to August 2011.

The loans relating to the Maybourne Group, the Irish company that owns the five star Claridges, Connaught and Berkeley hotels have not been transferred to NAMA as they are currently the subject of a Supreme Court action by its owner Paddy McKillen who has argued that his loans are all performing and should not be hoovered up by the bad bank.

Gerry Barrett, who owns Bow Street magistrates court, is also in NAMA, as is the Ballymore Group, which owns several tower blocks and has developments in and around Canary Wharf. Developers are now required to run all their financial plans through NAMA, which said it has concluded its review of business plans from the top 30 developers which include REO, Gerry Barrett and Ballymore.

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How Detroit turns into a prairie

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Hardships of a Nation Push Horses Out to Die
by John F. Burns - New York Times

In this country of lush green landscapes, celebrated for its traditional love of horses and the generations of racing thoroughbreds it has bred to conquer the racetracks of the world, the Dunsink tip on the outskirts of the Irish capital is a place that wounds the heart.

Atop a muddy dome stretching over hundreds of windblown acres, bitingly cold in the bitterest early winter many here can remember, roam some of the tens of thousands of horses and ponies that have been abandoned amid Ireland’s financial nightmare. Only miles from the heart of Dublin, the tip, a former landfill now covered with a thin thatch of grass, is the end of the road for all but the hardiest animals, a place where death awaits from exposure, starvation, untended sickness and injury.

Beside a busy expressway, on one of the tip’s distant corners, mounds of fresh dirt mark the graves of the weakest horses, freed from suffering by animal welfare inspectors with .32-caliber pistol shots to their heads. Overhead, airliners climb out of Dublin’s international airport, where a plush new terminal matches Dublin’s sprawl of gleaming steel-and-glass buildings built for the investment tide of the boom years.

The distress among the country’s horses began showing up more than two years ago, when Ireland’s property boom collapsed. That was a grim marker on the road to the crunch that hit this month, when Ireland accepted a $90 billion international bailout package, pledged on the government’s promise of instituting the harshest austerity measures in Europe.

By rough economic estimates, the $20 billion in spending cuts and tax increases promised over the next four years by Prime Minister Brian Cowen’s government will lead to a 10 percent cut in the disposable income of Ireland’s middle class, and greater hardships still for many of the country’s poor. They will be hit by welfare cuts, public-sector job losses and a sharp reduction in the minimum wage, as well as a wider economic turndown, on top of the 15 percent shrinkage in the economy since 2008, if the emergency measures fail to restore economic growth.

But the horses that are such an enduring part of Irish culture are paying a price, too. For generations, keeping horses has been an Irish passion — for those who like to enter them in flat-racing, steeplechase and show-jumping competitions, for those who keep them for recreational occasions like hunts and equestrian events, and for still others who see horse ownership as a symbol of prosperity, much as other people find pleasure in owning luxury cars.

How many horses and ponies have been abandoned is a matter of informed guesswork. Irish laws require all owners to have their animals registered, and tagged with microchips for identification, but the laws have been only sporadically enforced. What is certain is that the boom years brought a rapid growth in breeding, and that tens of thousands of people who could not previously afford a horse or pony entered the market, many of them keeping their animals in gardens, on fenced-off building sites or on common land like the Dunsink tip.

With the economic downturn, many found that they could no longer afford to feed or stable the animals at costs that can run to $40 a day and more and abandoned them to wander untended around construction sites, through towns and villages and along rural roads. One common estimate, put forward by Joe Collins, president of the Veterinary Council of Ireland, is that there are 10,000 to 20,000 “surplus horses” across the country. Another leading expert on horses, Ted Walsh, the father of one of the country’s most famous steeplechase jockeys, Ruby Walsh, has said that the number could be as high as 100,000.

Another way to measure the scale of the problem is to visit the Dunsink tip. Celebrated in history as the site of one of Europe’s most famous astronomical observatories, established in 1785 at a time when Dunsink lay in open country, it became in more recent times a trysting place for drug dealers, car thieves and desperate people who came to its desolate reaches to hang themselves from the trees sheltering on the lower reaches of the land. The sense of desolation is accentuated by the scatter of concrete venting pipes that draw off lethal methane gas from the generations of decomposing garbage below.

But Dunsink was also traditionally a place to graze horses, common land where those without stables and land of their own could set their animals to roam, then return to recover them later. For some owners, that has not changed, and Dunsink still serves, for them, as a convenient and cost-free range. But for others, it has become a favorite dumping ground for horses and ponies they can no longer afford.

Differentiating between the various kinds of owners is not easy, as became clear in an encounter with Thomas Boyd, one of the few souls besides an animal inspector who had braved the near-arctic cold on a recent afternoon. Mr. Boyd, 33, recently released from Mountjoy Prison in Dublin after the latest in a series of terms for what he described as “law and order offenses,” along with problems with alcohol and drugs, arrived trailing a horse by a length of frayed plastic cord.

His story was an uncertain one, perhaps crafted to suit the encounter with the inspector, Tony McGovern of the Dublin Society for the Prevention of Cruelty to Animals. As Mr. Boyd told it, he had come to the tip with the 3-year-old skewbald mare to find her a “more nutritious” diet than that provided in the stables close to his home in the working-class district of Finglas. He said he would leave the mare for “a couple of weeks,” then recover her.

Mr. McGovern demurred, saying there was little or no nutrition in the tip’s winter grass. In any case, Mr. Boyd bade farewells and, apparently thinking himself beyond the inspector’s reach, released the skewbald and began fruitlessly pursuing two gray ponies scampering across the tip in a herd of 30 or 40 horses.

His account, later, was that he wanted to catch the ponies for his children, but Mr. McGovern said he believed that Mr. Boyd was leaving the skewbald to fend for herself while hoping to capture the ponies for resale in the Smithfield Horse Market, a largely unregulated event that is held once a month on the grounds of an abandoned distillery beside the River Liffey in Dublin.

There, end-of-the-line horses are traded for as little as $15 each, some as pets, some for slaughter. The animal welfare society has limited stabling capacity at its headquarters in the Dublin hills and a budget of only $500,000 for horses and ponies. And the society’s figures suggest that the problem is getting worse. In 2008, it took in 26 sick or injured horses and ponies; in 2009, it took in 106; and so far this year, 115.

On a recent morning, two American veterinarians who work as volunteers at the center, Judy Magowitz of Laurel, Md., and Katie Melick of Los Angeles, spent hours working feverishly to save a black Falabella miniature horse, Napoleon, which they had found collapsed in one of the center’s paddocks. Barely waist high, with a shaggy black coat, Napoleon was judged by nightfall to be beyond further help and put down, joining the dozens of other horses who have been brought to the center too late to be saved.

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Taxes Schmaxes
by Dan Weintraub

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