China Posts a Trade Deficit

China posted a $7.3 billion trade deficit in February, surprising those who expected them to continue their usual habit of flooding the world with their manufactured goods without reciprocity. Analysts are blaming this anomaly on the Lunar New Year holidays, when apparently even the Chinese get lazy and party too hard to make stuff to export. Better to believe that, of course, then the alternative; that world economic growth might actually be slowing. If this continued, it would be extremely inconvenient for the Fed, who was probably hoping that somebody else would step in to buy a few Treasuries after it is done with QE2. I mean, somebody has to help keep US interest rates in check so our debt fueled recovery won't be crushed by the slightest uptick in rates. If it's not going to be the Chinese, who's it gonna be? Maybe everybody who is puking Spainish government bonds on Moody's downgrade this morning? All of those investors who are surprised, yes SHOCKED, that it's gonna cost Spain more to recapitalize its banks than the government's previous official estimates? They actually needed Moody's to tell them to sell. Anyway, the more havoc elsewhere in the world, the better the US looks in comparison.

China Raises Rates, US Yawns

Last I checked, our fearless Fed Chairman, Ben Bernanke, was busying himself with ZIRP + QE + QE2, oblivious to all signs of brewing inflation or bubbles. I mean, who cares about spiking food prices? And oil prices. And copper prices. Or the return of covenant-lite bonds? Or money pouring into emerging markets? Or record bonuses at US banks? None of these things have anything to do with US monetary policy. Because buying trillions in Treasuries and mortgages directly from broker dealers at any price is the best and most direct way to bring the unemployment rate down from over 9% to 5%. And it's not liable to leak out and cause distortions in other markets. Right. So that's working really well so far.

Anyhoo, at least the Chinese are paying attention. China raised its interest rates for the third time since mid-October. Admittedly, China's growth rates are a tad higher than ours and the chance of getting runaway inflation is more likely when your economy is experiencing explosive growth of 10%, rather than the anemic 3% or so we're getting in the US. Nevertheless, global markets actually respond to this kind of thing. Oil, copper, and emerging-market stocks fell across the board in response to China's interest rate move. Please make of note of that, Mr. Bernanke.

Financial Headlines 4/15/2010

Some Tax Day Must-Reads:

• Calculated Risk has a great post on second mortgages from housing economist Tom Lawler. The largest mortgage loan servicers provided some statistics meant to dispute the claim that second mortgages have "virtually no value" because borrowers with seconds have total mortgage balances that exceed the value of the home collateralizing the mortgages. For example, although 50% of Chase's second lien portfolio is underwater, 95% is performing. Even more shocking, 30% of its second lien mortgages have combined loan-to-value ratios over 125% and 94% of this portfolio is still performing. People are just incredibly optimistic about future home values or they just like paying their bills. Much more in the post, I urge you to read the whole thing here.
• The administration released its March HAMP report. As of March 2010, the program has performed just over 1 million in total modifications, with 227,922 of those permanent so far. Clearly, alot of folks still in mod limbo. Interestingly, debt-to-income ratios for those who received permanent mods were 45% on the front-end (this includes principal, taxes, insurance and homeowners associate fees) and 78% on the back-end (includes other stuff like payments on installment debt, junior liens, alimony, car lease payments and investment property payments,) before the modification. Clearly, people got overextended in every which way, not just on their mortgages. Why we're helping people service all of this other debt by reducing their mortgage payments is kind of a mystery to me. I mean really, if you're making payments on investment property, you should be forced to sell it before taxpayers pick up the tab on your mortgage. I'll cut you some slack on the child support. I'm not totally heartless. Just something to ponder as you walk to the mailbox with your tax returns.

Piles of domestic economic data released today including:

• Jobless claims rose to 484,000, much higher than estimated. Bad news for employment.
• But both industrial production (up 0.1%) and capacity utilization (up 0.2% to 73.2) showed gains in manufacturing. Good news for manufacturing.
• Meanwhile, foreclosure filings were up 7% in the first quarter, according to RealtyTrac. Obviously, housing numbers still weak.

A few choice international headlines:

• Everyone in a panic about Greece again as there was "no strong interest in the US for Greek debt." Don't worry, this will likely change tomorrow as the Greek rally/Greek sell-off/Greek rally/Greek sell-off ping-pong match will continue until the entire European Union experiment collapses in a heap (maybe George Soros is exaggerating, but he's been known to be right before.)
• China GDP is exploding at a 11.9% annual rate. Don't worry, I'm sure that kind of growth is entirely sustainable without creating a bubble in something.

Dueling Fed interest rate policy speculation:

• From the FT we get"Fed Funds Rate Rise Points to Policy Shift"
• From Bloomberg, there is "Fed May Keep Low-Rate Vow as Bernanke Sees Recovery Restraints."

Don't forget to pay your taxes.

Worldwide Inflation Fears Intensify as China Raises Iron Ore Prices By 96%

Chinese steelmakers agreed to pay Rio Tinto up to 96.5% more for their iron ore supplies this year.  This was on the heels of China's unexpected increase in gasoline and diesel prices by 17% on Friday.  Although these drastic measures will drive up costs for cars and machinery, they should reign in demand for energy use.  Proving once again that our government officials fail to read the paper, Congress believes that speculators are responsible for high energy prices and is contemplating putting strict limits on trading in energy futures by investment banks, pension funds and other financial investors.  How regulating energy speculation is going to curb China's demand for energy as its economy continues to fire on all cylinders mystifies me.  More useful legislation would be to force the Chinese to buy all of GM and Ford's surplus SUV's, Hummers, and F-150's.  After all, GM is so flummoxed by its inability to sell Hummers that it has actually stooped to hiring Citigroup to advise it on what to do with the failing division.  While Citigroup could certainly use the investment banking fees for the simple job of telling GM to shutter or sell the division, perhaps it can also convince GM to buy a leveraged loan or two in the deal.

Forcing the Chinese to buy US cars would help fulfill their insatiable demand while assisting GM and Ford to unload their bloated inventories of gas guzzlers that US consumers no longer desire.  Although my suggestion to Congress may seem absurd, it makes about as much sense as suing OPEC and banning speculation, which were their ideas, not mine.

In domestic inflation news, Dow Chemical is raising prices by 25% to pass through its surging costs for energy and raw materials.  This follows a 20% price hike that began June 1st.  Dow's price increase were caused by "the continuing relentless rise in the cost of energy and hydrocarbon feedstocks."  Now that one of the largest chemical manufacturers in the world is raising prices as if it were a Vietnamese rice importer, can the Fed continue to avoid the "volatile" food and energy component of the CPI report?  Unfortunately, I think they will, but it is a dangerous economic proposition.