Author: Matthew G. Saroff

Economics Update

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Yawn, another day, another all time low for the Dollar vs. the Euro, breaking the $1.53:€1.00 barrier.

The expectation of a major fall in the dollar is one of the major causes of oil prices rising again today, though the fact that OPEC his telegraphing that there will be no production increase, contributes to this.

The job market is looking increasingly grim, with
nonfarm employment declining by 23,000, and, in a good indication of an incoming recession, productivity growth is declining.

We do have some good news, the appraisal standards for Fannie Mae and Freddie Mac are not officially implemented.

It would have been better news a year, or 5 years, ago.

I have this rule of thumb when looking at the economy, which is when something happens in high finance that is truly bizarre, start by assuming that it is bad news.

That’s the case with yields falling below 0% on Treasury Inflation-Protected Securities (TIPS).

TIPS are government bonds in which the principal appreciates along with the consumer price index. They are sort of inflation proofed as a result.

They are less riskier, because if inflation shoots up, you will get that back in the end, so the interest rate, which are set by auction, is lower.

Only for the past three days, the interest rate has been bid to less than zero, meaning that the bidders expect significant increases in inflation.

Paulson Sees New Capital Markets Proposals in ‘Weeks’

Bush’s Treasury Secretary is, after months of prodding by Democrats, coming up with a plan to close the barn door after the cow is gone, saying that, “We’re looking at the mortgage-origination process, we’re looking at the securitization process, we’re looking at rating agencies, we’re looking at disclosure issues, we’re looking at capital issues and regulatory issues in the weeks ahead.”

If it were done by honest decent and competent people, it would still be too late, but in this case it’s being done by Bush and His Evil Minions™, which means that it’s primary goal will be two fold, preventing meaningful regulation, and benefitting Bush, His Evil Minions™, and his campaign contributors.

The auction bond failure rate is nearly 70%, and appears to be getting worse, which means that at this critical time, with revenues falling, cities and states will find raising money for projects much more difficult.

In real estate, we now have mainstream press using phrases like, “Housing in ‘deepest, most rapid’ decline since Great Depression“, the alt-A crash is well and truly starter (Alt-A are not quite prime, typically credit scores over 700), and we have Ben Bernanke saying that housing woes could persist for years.

Additionally, we are about to see the revenge of the 2005 bankruptcy law, with filings up 18% from January, and 28% from the year before.

We are about to see the negative effects of the law, which were predicted when it was initially proposed.

BTW, all is not quiet in the ever entertaining world of the monoliner bond insurers. Ambac has announced a reorganization, where it will exit the mortgage securities market and raise $1.5 billion in new capital.

Defense Procurement Humor Down in Oz

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It’s a rare thing when you can put the term together the term defense* procurement with humor in a coherent manner, but this press release from the Australian Department of Defence regarding the cancellation of the Seasprite Helicopter program, which was 5 years late, well over budget, and simply did not work:

SEASPRITE HELICOPTERS TO BE CANCELLED

In late 2007 the Rudd Labor Government initiated a review of the Seasprite helicopter project, in line with the promises made prior to the election.

After careful consideration of all the issues involved, the Government has decided that it intends to cancel the project. Discussions will be commenced immediately with the contractor in relation to the legal and financial arrangements to facilitate this.

The Government will announce the details of arrangements with the contractor once mutual agreement on these matters has been reached, subject to any confidentiality issues.

Minister for Defence Joel Fitzgibbon said the decision was not one taken easily, but the Government was left with little option.

“Today’s announcement demonstrates our determination to make tough decisions whenever required for the security of the nation and the safety and capability of our Defence Force,” Mr Fitzgibbon said.

“The decision taken by the Rudd Labor Government is one that should have been taken by the Leader of the Opposition, Brendan Nelson, when he had the opportunity last year, but his Government decided to put its own political interests ahead of the national interest. Consequently, the responsibility of cleaning up the mess they created falls to us,” Mr Fitzgibbon said.

To ensure the Navy maintains an effective naval aviation capability, the Government has decided on two measures. First, our interim approach will focus on improving the operational availability of the current Seahawk fleet. Second, the Government will investigate the planned replacement of the Seahawk during its White Paper deliberations.

“The new Government will continue to work through the long list of Defence capability nightmares it has inherited from the former government. We are determined to ensure that the Defence Force receives the capability it needs, and Australian taxpayers receive value for their money,” Mr Fitzgibbon said.

(Emphasis mine)

*DefenCe for those down in Oz.

Note to Self: Don’t Do Business in the United States

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The New York Times reports on the case of a British Travel Agent living in Spain, who had his domain names seized by his US domain registrar at the request of the Treasury Department.

They felt that he, “helped Americans evade restrictions on travel to Cuba”, so they seized the sites, including one about Earnest Hemingway, and two in Italian and French.

A whois shows that the Pirate Bay uses Key-Systems GmbH?

Perhaps they are in a country of laws, and not men.

What About Ayn Rand’s Buddy Alan Greenspan?

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Members of the Senate Banking committee just grilled regulators and accused them of being, “Asleep at the switch” on the housing debacle.

One wonders why it appears that Alan Greenspan’s name never came up. He was aggressively working towards dismantling financial protections and ignoring basic regulations during his tenure at the Fed, pausing only to bail out fat cat investors when they got into trouble.

My Condolences to the People of Pennsylvania

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With her victories in Ohio and Texas, Hillary Clinton is in through Pennsylvania, which means that he national political press is descending on your state like flies on……bad analogy, I do not mean to insult the great commonwealth of Pennsylvania. I used to live there.

How about Piranhas on a swimming cow…Better.

That being said, I have two thoughts, first that this is good, not bad, for the Democrats, the only major news that McCain can get from now until the Democratic nominee is decided is going to be bad news (the lobbyist thing and the bigot Hagee), while the Dems have a platform to put forward their ideas to an engaged publid.

My second thought is that I agree with Terry McCauliffe: Mark Penn should STFU. With every success, it’s Penn’s campaign, with every failure, he’s just an adviser.

I have to argue that his $10 million in fees has been money poorly spent.

GM to Use LiIon Batteries in Hybrid Car Models

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I think that it’s clear that the lithium-ion batteries chosen by GM are superior to the standard NiMH, they are more efficient and lighter, but there are problems.

The article mentions overheating, but they actually heat up less in use.

The real problem is what is euphemistically called “rapid disassembly” in battery manufacturing*, which occurs when batteries overheat or are overcharged.

Basically because of the chemistry of a LiIon battery, these can cause dendrites, basically metal whiskers, to form between anode and cathode, shorting out the battery and discharging all of its energy in a matter of seconds.

Think about the Dell exploding laptops on crack. It looks a lot like a flare going off.

Of course, this would not be a problem with a properly designed system, but we are talking about General Motors, the folks who used the same aluminum alloy as Mercedes Benz for its Vega engine, but but chose a coolant that corroded aluminum.

I’d wait for at least the 3rd model year before buying.

*I worked for a battery manufacturer for a while.†
†And now my regular readers, both of them, are wondering if there is any field of endeavor where I haven’t worked. Well, yes. High finance. If I had worked on that, I’d have the money to spare for a domain name.

GAO is on Juncket to Caymans

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They are actually going to the Cayman islands on legitimate business…no…really…I mean it.

Congress had decided to go after tax havens, and they have sent GAO investigators, and they will be visiting the infamous Ugland House, corporate headquarters for 12,748 companies.

Good for Congress, and good for GAO, it’s investigative arm.

If the Republicans were in charge, this would never have happened, because they believe that, “only little people pay taxes.”

FWIW, offering bounties for tax cheats, as German investigators did with records of trusts in Lichtenstein, would be a very good thing.

SAS Saying Old Fuel Guzzler Auircraft are Cheaper to Operate

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The Scandinavian airline SAS: is saying that its MD-80s would still be cheaper to operate, even if the cost of fuel doubled.

It doesn’t make a whole bunch of sense, given that the cost of oil is at an all time high, until you look at this quote:

n its newly-released annual report SAS Group says the effect of capital costs means the MD-80 is SKr5-10 million ($0.8-1.6 million) more profitable to the carrier than newer aircraft.

Capital costs for the type are SKr20 million lower, more than offsetting the SKr10-15 million in higher fuel and maintenance costs.

…

n its newly-released annual report SAS Group says the effect of capital costs means the MD-80 is SKr5-10 million ($0.8-1.6 million) more profitable to the carrier than newer aircraft.

Capital costs for the type are SKr20 million lower, more than offsetting the SKr10-15 million in higher fuel and maintenance costs.

(emphasis mine)

This is interesting not from an aviation perspective, but from a larger economic one.

It implies one of two things:

  1. That airlines going for the latest and greatest hardware are slitting their own throats, and that capital costs completely blow away operating costs.
  2. That the cost of capital today is high enough that upgradeing even with the historically high fuel prices, simply does not make economic sense.
  3. That they expect these planes to be used for surges in demand for seasonal and other reasons, and won’t the full utilization, and capital costs dominate.

The first reason is simply not credible. If it were, we’d all still be flying DC-3s, or at least upgrades 707s and DC-8s, since they take people to the same places just as fast.

That leaves reasons two or three, or reasons two and three.

From a macroeconomic standpoint, however, it’s reason 2, the cost of capital, that is most interesting.

This may very well be a major capital purchase that is being delayed because the capital markets have frozen up. That the increased risk premium that has resulted from the credit crunch simply make it too expensive to upgrade to better equipment.

That is how a credit crunch creates a recession, which makes the credit crunch worse.

It’s Getting Ugly Over Tanker Decision

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I do not doubt that the A330 was technically superior.

The airframe and avionics are newer, the manufacturing techniques are more advanced, and the airframe is larger.

The reason I did not expect it to win was because of the USAF generals who wanted sweet retirement packages with Boeing, and the inevitable outrage from Congress.

Well, the sh%$ storm is here, care of Eisenhower’s military-industrial complex.

You can get a good Cliff Notes version of what is going on here.

Basically, a few years back, Boeing offered a lease deal which was really pretty awful. This deal was negotiated by a Pentagon official who was also negotiating with Boeing for a job as a VP.

John McCain looked at the deal, and smelled a rat, and for once, and it’s rare for him, he was right, so the contract was canceled, and a new one was put out for bid.

And now EADS has won with a clearly better plane, one that is already on order from a number of countries.

This won’t stop the poo from flying.

Economics Update

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first, let’s start off by saying that Tom Toles is a bloody genius:

We have Citi on a path to cutting 30,000 jobs, and we have Dubai International Capital LLC, a sovereign wealth fund saying that losses will get worse, and they will need another infusion of capital.

FWIW, it was Abu Dhabi investors who just bailed them out a month or so ago, not Dubai.

In real estate, they’ve just discovered that
the real estate collapse is making first-time buyers less likely to buy.

In related news, water is wet, and the sky is blue.

In truth this is hardly surprising when even people like Ben Bernanke, who has done his best to avoid panicking the markets is saying that foreclosures will increase, and house prices will fall for a while yet.

Ratio of home ownership to rental costs are near a historic high, so why would someone want to buy into a depreciating asset?

Meanwhile, we are finding that the, “extra yields investors demand on bonds backed by assets from commercial mortgages to credit cards rose to records”, recently, despite the fed rate cuts, leading a senior managing director at an investment firm to quip, “People are calling it financial Ebola“.

Translated into language for ordinary people, this means that people are requiring a much higher markup on either the prime rate, or the Fed funds rate, before they make loans.

Yields on three-year, AAA rated credit-card bonds with floating rates rose to 75 basis points over the London interbank offered rate, up from 40 basis points at the start of the year, according to Deutsche Bank AG data. Spreads over three-year swap rates for three-year, AAA rated fixed-rate auto-loan securities rose to 140 basis points, up from 75 basis points. The average spread over U.S. Treasuries on AAA rated commercial-mortgage securities climbed to 364 basis points, from 167 basis points on Dec. 31, according to Lehman Brothers Holdings Inc.

A basis point is 0.01 percentage point.

People are increasingly unwilling to lend money, and demanding higher returns, because they have no faith that it will be paid back.

Speaking of being paid back, Fremont General just defaulted on $3.15 billion in subprime mortgage loans that it sold a year ago.

The creditors are demanding immediate repayment, because Fremont’s “tangible net worth” (assets minus liabilities) have dropped below $250 million, meaning that they have violated the terms of the original sale.

Finally, we have Jon Moulton, the head of private equity firm Alchemy Partners, pretty much guaranteeing that, “There will be large private equity failures this year“. From the context he means both deals and firms.

Consequences of the Supreme Court’s Redefintion of “Obvious”

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The people just won one, where the Federal District Court just struck down Bayer’s patent on Yasmin, a contraceptive.

The patent, which expires in 2020, is on a formula for the compound drospirenone in which the particle size was reduced so it could be absorbed by the body more quickly before it is exposed to stomach acid. U.S. District Judge Peter Sheridan agreed with Barr that the decision to reduce the particle size would have been obvious to any researcher.

Hell, it’s obvious to any cook too.

Why else would they sell powdered sugar. Smaller particles dissolve more quickly.