This post provides links to a number of interesting articles I have read over the past few days that you may also enjoy.

• Ambrose Evans-Pritchard (Telegraph): Is $6,300 fair value for gold? November 19, 2009. The last parabolic spike in gold took off when central banks joined the fray in the 1970s, hoarding bullion with the same enthusiasm as gold bugs. Dylan Grice from Société Générale says it smells much the same today. He sees an eerie similarity between the decision of India’s central bank to buy half the IMF’s entire sale of gold, and the move by France’s central bank to start converting dollars into gold in 1965.

• Gregory Zuckerman (The Wall Street Journal): John Paulson making big new bet on gold, November 19, 2009. John Paulson, who scored about $20 billion of profits between 2007 and early

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“I take the action of the stock and bond markets this week (and particularly today) very seriously. Extreme caution is advised. The primary trend of the market is bearish, and the secondary trend may now be turning down,” said Richard Russell (Dow Theory Letters) on Friday.

After equities’ seven month climb, stock markets certainly look vulnerable for a decline. Two downside reversal days - on Wednesday and Friday - would seem to indicate that stocks could commence a pullback to work off the overbought condition, allowing fundamentals to reassert themselves.

Bill King (The King Report) reported Art Cashin as saying that since June 2007 the Daily Sentiment Index (as published by Trade-Futures.com), which polls futures traders, has reported more than 90% bulls on the S&P only once. “When would you guess that time to be? July 2007? October 2007? Wrong. It was last

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By Morris A. Davis

Today, we're fortunate to have Morris A. Davis, Assistant Professor of Real Estate and Urban Land Economics at University of Wisconsin School of Business, as a guest contributor.

Research by economists inside the Federal Reserve system have shown that two events typically lead homeowners to default on their mortgage (see here). First, the value of the house must be less than the value of the mortgage ("under water"). This is necessary but not sufficient (see here). Second, homeowners must experience a significant disruption and loss of income. The available data suggest there might be a big increase in foreclosures in the immediate future. Zillow estimates that 22 percent of the 50 million homeowners with mortgages are currently under water; unemployment rates are high and are expected to remain high for the next two years.

Why

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By Simon van Norden

Today, we're fortunate to have Simon van Norden, Professor of Finance at HEC Montréal (École des Hautes Études Commerciales), continue as a guest contributor.

In my previous post, I wrote about some of the evidence linking serious banking crises to real estate market collapses. That evidence is far from iron clad; it is simply the observation that many banking crises in mature economies have their origins in a real estate boom and bust cycle. However, the idea is also intuitively appealing.

Remember that at the end of 2008, the Federal Reserve Board estimated that there was $12 Trillion of mortgage debt on residential properties in the US, with the Federal government and its agencies providing about 5% of the total, individuals 9% and the rest coming from the financial sector. The Case-Shiller composite index of housing prices has fallen 1/3 from its peak in

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By Simon van Norden

Today, we're fortunate to have Simon van Norden, Professor of Finance at HEC Montréal (École des Hautes Études Commerciales), as a guest blogger.

"Once you've seen one financial market crisis...you've seen one financial market crisis."

-- Attributed to Federal Reserve Board Governor Kevin Warsh by former US Treasury Assistant Secretary for Economic Policy Phillip Swagel in The Financial Crisis: an Inside View, March 2009, p. 4.

The financial crisis has set a lot of records so far; it's certainly the worst US banking crisis of my lifetime. Some, as suggested by the above quote, see such crises as unique events; each one is singular and there's not much to be learned about how to handle one from looking at past crises. For example, there's no precedent that I know of for a banking crisis involves the failure of the biggest counterparties for credit default swaps.

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This post is a guest contribution by Paul Kasriel* of The Northern Trust Company.

On November 7, 2008, Bloomberg LP sued the Federal Reserve Board under terms of the Freedom of Information Act to obtain the names of borrowers of funds from the Federal Reserve as well as lists of the collateral posted by the borrowers. On August 25, 2009, a U.S. District judge ruled in favor of Bloomberg, ordering the Federal Reserve Board to turn over to Bloomberg the requested information within five days. At this writing, the Fed has yet to comply and has yet made a decision to appeal the ruling. The Fed has been reluctant to reveal the names of its borrowers allegedly out of a concern that such a revelation could have an adverse competitive impact on the borrowers.

The reason I bring this up is that it is similar

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Goldman Sachs Group Inc. (GS) announced that it has received Federal Reserve’s approval on August 14, 2009 to become a financial holding company. Goldman had intended to seek FHC status when it first converted to a Bank Holding Company last year. The designation allows Goldman to continue to participate in non-banking financial activities, including private equity among other businesses. A financial holding company (FHC), as stated in the Gramm-Leach-Bliley Act of 1999, is a financial entity engaged in a broad range of banking-related activities that include insurance underwriting, securities dealing and underwriting, financial and investment advisory services, merchant banking, issuing or selling securitized interests in bank-eligible assets. It can also engage in any non-banking activity authorized by the Bank Holding Company Act. The Federal Reserve Board is responsible for supervising the financial condition and activities of these companies. Morgan Stanley (MS), JPMorgan Chase & ...

The Federal Reserve Board’s Senior Loan Officer Opinion Survey has just been published. This is an important document for assessing to what extent credit markets are thawing and confidence is returning to the financial system. The analysis below is a guest contribution by Asha G Bangalore* of The Northern Trust Company.

The latest Senior Loan Officer Survey reports a small but notable easing of loan underwriting standards but demand for loans was weak with the exception of residential mortgages. The number of banks tightening underwriting standards for commercial and industrial (C&I) loans to large firms was smaller in July (30%) compared with the results of the April survey (40%); the peak was a little over 80% of bankers reporting strict terms for borrowing in the fourth quarter of 2008 (see chart 1).

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As attested to by the large amount of coverage of the recent US-China Strategic and Economic Dialog [0] [1], [2], [3], [4],[5] China looms large in any discussion of the world economy. One of the most important contributors to the informed discussion on this subject was Brad Setser, at the Council on Foreign Affairs and before that at RGE Monitor. Unfortunately, Dr. Setser will be leaving the blogosphere, so his insights will be missed (although fortunately for us, he'll be adding his input at the NEC, where we all wish him well).

So now, there'll be even a greater need for reasoned analysis. One addition to the discussion is a Symposium on China's impact on the global economy just published in Pacific Economic Review (August 2009). From my introductory chapter to the symposium:

Over the past decade, China's presence

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The Federal Reserve Board’s Senior Loan Officer Opinion Survey is due to be published on August 17. This is an important document for assessing to what extent credit markets are thawing and confidence is returning to the financial system.

In the meantime, the European Central Bank’s Euro Area Bank Lending Survey has just been published. The net percentage of banks reporting a tightening of credit standards for loans to firms more than halved to 21% in the second quarter of 2009 from 43% in the first quarter - down from a peak of more than 60% in the third and fourth quarters of 2008.

As one would expect, there is a strong correlation between the lending standards in the US and Europe, as shown in the graph below. Based on the historical relationship it seems likely that the number of US loan officers reporting a tightening of

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