Category: Economy

Economic Update

No Comments

The Institute of Supply Management’s manufacturing index had declined for the first time in 11 months. Predictions had placed it at 50.5, rather slow growth, but it came in at 47.7, on drops in orders and production, and we have the same thing happening worldwide, with the Global manufacturing PMI falling to a 4½ year low, which seems to indicate that the rest of the world has not “decoupled” from the US economy.

Singapore’s economy is taking a hit, because Americans are no longer able to buy their stuff.

Then we have the other Mecca of Anglo-Saxon capitalism going through the same real-estate crisis that is hitting in the US

The latest figures indicate that 23 per cent of people – 9.5 million adults – were finding their current level of debt “unmanageable”. Although the Bank of England cut the base rate of interest last month, an estimated 1.4 million people will still have to pay more for their home loans when their fixed-rate deals come to an end this year, costing an extra £150 to £250 a month.

Sounds familiar.

Merrill Lynch has sold itself for some more cash, which seems to indicates taht there are some more losses, probably significant ones, that have not yet found their way to the balance sheets and quarterly reports.

In further banking news, General Electric and the Blackstone Group had to backoff of a buyout of PHH, a mortgage and auto-leasing company, because their financing fell through.

Finally, we have reports that dollar-based assets held by the world’s national banks have fallen to a record low. There is not yet a stampede to the door, but people are definitely standing up and stretching their legs.

The data indicated that of the $3.8 trillion in allocated reserves, about 63.8 percent was held in U.S. dollars, down from 65 percent at the end of the second quarter this year.

Home Prices Sliding

No Comments

This Wall Street Journal article makes a slight increase in home salse its lead, but it misses the bigger picture:

The median price of a previously owned home fell 3.3% to $210,200 in November from $217,300 in November 2006.

Sales up slightly, but prices down…both an artifact of potential house sellers being willing to cut prices. There are a lot of people out there who are waiting to sell homes, and believe that this downturn will be short term, and as more and more people see the falling prices as a longer term trend, they will move to sell sooner.

I’ve never seen a real home price drop that (not month to month, but a real one) that lasted less than 4-5 years. This one has even farther to go.

Economic Update, Housing Crash, Exotic Financial Instruments

No Comments

In real estate, we have new home sales at a 12 year low, and we have the phenomenon returning of people just walking out on their homes. The pertinent quote is, “Lewis’ comments came as a new expression – “jingle mail” – referring to the growing trend where Americans mail the keys to their homes to the lenders before vacating, entered the US lexicon.”

With all the news, the financial press is finally noticing that maybe, just maybe, those predictions of a quick rebound are a bunch of bullsh@$.

All in all, this is not surprising. News gathering is paid for by ad revenue, sales and subscriptions really only pay for ink and paper, not the words and pictures made with the ink and paper. Given the huge role that real estate pays in ad revenues, it’s unavoidable that the news media, notwithstanding the “Chinese Walls” will be the biggest boosters of real estate this side of Remax.

And in the department of the blindingly obvious, the Journal has an article saying that thecomplex financial instruments have magnified the credit crunch.

Well, duh. As much as people want to talk about innovation and the free market, much of that innovation has a seamy side.

The first man to rob a train was an innovator, and in financial markets we have a long (over 200 years just in the US) tradition of both fraud, and complex activities to benefit one entities, and transfer the downside of these activities to another.

At some point, society has to say that certain activities, like dope dealing and unsafe financial practices, are simply too damaging to society and they must be regulated.

Vulture Shopping

No Comments

Well, we just came back from shopping at CompUseless, aka CompUSA.

When we got there, my son Charlie asked, why we were going there, and I replied, “Because they are going out of business because they suck, and no one wants to shop there.”

After a pause, I realized that an 8 year old might not understand the subtext, and I continued, “Since they are going out of business, they are discounting stuff, so we are hoping to find a good deal.”

He expressed wonderment, not at the idea that a business going under would discount, but because I had anticipated his next question. He’s a bright kid, but having Aspergers, sometime there are social jumps like that seem to him to be magic.

My anticipating his next question rather impressed him.

It’s noteworthy because he spends so much time confounding me with things like fairly abstruse questions about microbiology, the nature of black holes and the big bang (I send him in the direction of my elder brother, who has a PhD in high energy physics), and meteorology (he loves the Weather Channel).

We scored a UPS, a color laser printer (about $220 after discount, which will replace my wife’s ruinously expensive ink addiction), a DVD burner, and some blank DVDs.

Blue Bush Dogs: Not Moderate, Just Corrupt

No Comments

Davit Sirota has a very good analysis of the despicable betrayal of the American people by the so called “moderate” Blue Bush Dog Democrats with regards to basic fairness and the economic stability of the United States.

The bill in question, HR 3609, is rather simple: It would allow a bankruptcy judge, “To ameliorate the terms of abusive “subprime” mortgages.” Under the current law, judges can already do this for investment properties, and for vacation homes, but for primary homes? Das ist Verboten.

So the judge could vitiate prepayment penalties to allow for refinance, or change interest rates, or modify fees charged for things like taking a phone call from a customer, though it would not give the judge power to forgive principal, since a mortgage is, after all, a secured loan.

While I favor a more expansive bill, one that would cover all consumers, this could go a long way towards fixing the system. As it currently stands, many loan servicers are legally unable to modify the terms of a loan, because their contracts with the bond holders prohibit it.

Even when they can, there is little incentive for them to negotiate in good faith.

What this means, of course, is more Chapter 7 liquidations, as opposed to Chapter 11 reorgs, more foreclosures, more empty houses blighting more neighborhoods, and more turmoil on wall street. It is The Tragedy of the Commons writ with trillions of dollars to be eventually be baid for by all of us.

Economic update

No Comments

Nouriel Roubini sees the following signs of an upcoming recession (I consider them to be signs of a current recession, but I’m not an economist):

  • Initial unemployment claims at 2001 recession level.
  • Durable and capital goods orders falling.
  • Consumer confidence down.
  • Oil prices closer to $100 than to $90/bbl.
  • Retail sales falling after accounting for inflation.
  • Residential real estate going down, and accellerating.
  • Commercial real estate starting down (more below).
  • Various leading indicators falling, as are corporate earnings.
  • Credit markets not only staying seized up, but getting even more seized up. (Dr. Roubins bullet points this out into about 5-7 items)
  • Unstable world environment.

In terms of more specific news, we have mortgage applications falling off a cliff, despite a rate cut, Fitch saying that it may downgrade residential mortgage backed securities (RMBS) because the insurers for these bonds are basically insolvent, Goldman-Sachs is predicting that Citigroup may be forced to cut its divident (implying that there is more bad news to come), the Chinese Director of the State Administration of Foreign Exchange saying that the US should not cut rates any more because it will “hammer” the dollar, there is increasing evidence that commercial real estate is starting to tank too (It typically lags residential real estate by about ½ year), and residential real estate prices have fall by 6.7% year over year (and at about an 11.7% rate for the past quarter).

Retail Sales Fall During Christmas Season, But Innumerate Reporters Miss It

No Comments

Once again the inestimable Nouriel Roubini catches something that all the major news outlets missed, though in this case, it ain’t rocket science*: since inflation is running now above 4%, an year over year increase in sales of 3.6% is actually a decrease in sales.

Both the New York Times and The Wall Street Journal get this wrong.

*Full Disclosure, in 1999-2000 and 1996-1998, I worked as a mechanical engineer for what is now Lockheed Martin Missiles and Fire Control, and I have some claim to actually being a rocket scientist.

Making 1929 Look Like a Walk in the Park

No Comments

Interesting article in the Daily Telegraph, Crisis may make 1929 look a ‘walk in the park’.

Bullet point summary:

  • Liquidity doesn’t do anything in this situation,” says Anna Schwartz, the doyenne of US monetarism and life-time student (with Milton Friedman) of the Great Depression, “It cannot deal with the underlying fear that lots of firms are going bankrupt. The banks and the hedge funds have not fully acknowledged who is in trouble. That is the critical issue,” she adds.
  • Spreads on three-month Euribor and Libor – the interbank rates used to price contracts – are stuck at 80 basis points even after the latest blitz.
  • That an implosion of the credit markets is months away.
  • The 4% inflation mirrors what happened in Japan just before their meltdown.
  • When the Japanese discount rate was lowered to 0%, it did no good.
  • Not a single junk bond has been issued in Europe since August. Every attempt failed.
  • Increase sentiments for restoring national currencies in the EU. (Interestingly enough, this would provide a potential boost to the dollar, as it would make the Euro less attractive as a reserve currency)

As I’ve said, we are seeing a breakdown of the Ango-Saxon model of capitalism, where minimal regulation is really an excuse for klepto-capitalism.

I do not see a solution to this except through a devaluation of currencies, particularly the $US.

More Troubling Economic News

No Comments

First, the index of leading economic indicators falls for the third time in four months in November, dropping 0.3%, and it turns out that no one wants to buy into the mega-sh$@ pile that was supposed to buy up Structured Investment Vehicles (SIVs) to prevent fire sale prices on these assets.

It turns out that no one was interested in contributing to the fund. I think that “the market” has recognized that this was an attempt to shift to cost of bad decisions from the makers of those decisions to the ordinary investor, and while Wall Street typically likes this setup, they realized that even the most naive investor was already onto the game.

Monetary Policy Driven Inflation on Horizon

No Comments

Barry Ritholtz’s The Big Picture economics blog shows us a rather interesting picture:

The “continuation” bit is there because Federal Reserve under Alan “Bubbles” Greenspan stopped reporting the statistic, saying that it was not a “useful” statistic.

Rolling the Wiki, we get the following:

  • M0: The total of all physical currency, plus accounts at the central bank that can be exchanged for physical currency.
  • M1: M0 + those portions of M0 held as reserves or vault cash + the amount in demand accounts (“checking” or “current” accounts).
  • M2: M1 + most savings accounts, money market accounts, and small denomination time deposits (certificates of deposit of under $100,000).
  • M3: M2 + all other CDs, deposits of eurodollars and repurchase agreements.

So, all the big money transfers and currency injections in the market over the past few months, they are no longer counted by the Fed, but we can see that the overall money supply is increasing at double digit rates over the past year or so.

We’ve already had nearly a trillion dollars dumped into the credit markets over the past month.

Money is being shoveled out the door to attempt to resolve a liquidity crisis. The problem is that it is an insolvency crisis, though hyper inflation may bail that out.

More Trouble for Anglo-Saxon Capitalism: UK Defisit Soars

No Comments

The current account deficit has increased 50% to £20 billion in the 3rd quarter.

That’s double what was expected, and it is largely as a result of the credit crunch.

My take is that there were a lot of revenues generated by phony deals on phony securities, and the time to pay the piper is now coming due.

It should push down the Sterling a bit, which is one reason that my year end predictions now look increasingly unlikely.*

*There is also the fact that I can’t predict my way out of a paper bag.

On the Death of Nataline Sarkisyan

No Comments

My condolences on the Death of 17 year old 19 year old Nataline Sarkisyan.

She died of liver failure resulting from complications of her bone marrow transplant for leukemia, after having a transplant denied (the decision was reversed yesterday) by CIGNA.

That being said, I do not see this indicative of the failure of the health insurance.

Let’s be clear, I do see private health insurance in the US as the primary cause of escalating health care costs, and a reduction in the availability of reasonable health care of a more basic nature.

Unfortunately, the pre and neonatal deaths from lack of prenatal care, and the injuries from things like lack of immunizations do not have faces, but they kill more, and cost us more than this one case.

In any realistic competent healthcare system, she should not have gotten a liver transplant. It was simply too expensive, and the potential to save her life, given that she had leukemia, and her immune system had been largely destroyed by the bone marrow transplant procedure.

Her case actually strikes relatively close to home to me.

From 1982 through 1987, I was actively treated for chronic non-A Non-B hepatitis*, first with steroids, and then with immune suppressants†.

Based on this, I believe that my chance of experiencing liver failure over the course of my life is significantly more than that of the general population.

I do not believe that many of these high tech interventions, and I would include liver transplantation, are an efficient or effective way to spend a limited healthcare dollar.

*I have been regularly tested since, but my numbers have been fine, and so, apart from not giving blood and having annual liver function tests, I am now unaffected by this. I’m allowed to drink.
†Basically, it was treated as an immune system/connective tissue problem, my ANA was at one point 4,000,000:1 (IIRC). It appears that my body was attacking my liver. Except for weight loss, I was asymptomatic, though the steriods (40mg prednisone) was no fun while I was on it.

Banks Starting to Worry About “Jingle Mail”

No Comments

Jingle Mail for those of you who don’t know is what banks get when mortgage holders send the keys back.

Calculated Risk has an interesting post on the subject. Basically, there are a lot of people who are underwater on their mortgages because of home price drops, and even though they can still pay, renting is cheaper, and people might start to walk away from their homes and mortgages.

The folks at CR are estimating that , “somewhere between 10 million and 20 million U.S. homeowners will owe more on their homes, than their homes are worth.”.

I think that the number will be greater, BTW.

Monoliners Heading for a Crash?

No Comments

This post is kind of an extension of my previous post about ACA and MBIA.

First, a definition, care of The Daily Telegraph:

Monoliners are specialist insurers who earn fees by lending their AAA ratings to US states, counties, and cities for bond issues – the safest corner of the credit industry.

The nasty twist is that most have ventured into mortgage debt to spice returns. They now face enough losses to threaten their AAA standing.

A downgrade means that every bond bearing their guarantee must be downgraded pari passu. Pension funds and institutions will be forced to liquidate sub-AAA holdings. A fresh cascade of distress sales will ravage the $2,400bn ‘muni’ market.

The unthinkable now looms. Moody’s said it was “somewhat likely” that top insurer MBIA would fall below the AAA capital requirement: Fitch warns of a “high probability” that CIFG Guaranty and Financial Guaranty will be placed on negative watch.

Does this sound familiar? It does to me.

Remember the people who were renting their credit to people with poor credit so that they could qualify for loans? It got shut down 6-12 months ago by all the major credit report agencies.

This is pretty much the same, only multiplied by about 100 million.

As Nouriel Roubiniputs it:

The forest issues is simple: a business – the monoliners’ insurance of securities and holding of risky ABS securities – that is fundamentally based on having a AAA rating is a business that does not deserve a AAA rating in the first place: it is clear to all that if a monoliner were to lose its AAA rating the essence of its business model would fail and such monoliner would have to close shop. But in any industry you have firms that can do business and thrive with an AA or A or even lower rating, even among major financial institutions. Here we have instead an industry that would go bankrupt as soon as its AAA rating is lost: by definition this is not an industry that can deserve a AAA rating. So the issue is not one of how sound these monoliners are managed or whether they have enough capital or whether they can raise new capital to maintain their AAA status. There is a fundamental and conceptual flaw in a business model that is conditional on a AAA rating and that is in a business that insures assets and firms that do not have a AAA rating. This is analogue to the voodoo finance of taking subprime and BBB mortgage backed securities and turning them into AAA by the black magic of CDO tranching.

This is not as the good Doctor Roubini admits, a painless process. This would involve losses in excess of $200 billion, but it is clear that this is a fraudulent practice, and the fact that the ratings agencies are giving these folks time to raise capital before a downgrade is merely supporting a “rotten business model”.

Bailouts of Bond Insurers

No Comments

Calculated Risk: Banks Studying Bailout of ACA

ACA, which insures $26 billion in bonds is insolvent, and the banks are looking at bailing it out. Bailing out an insolvent company generally makes no sense, but if they don’t then the banks have to record the non-uninsured bonds on their balance sheets.

Then we have MBIA, the largest bond insurer in the world, being threatened with a downgrade by Fitch, if it does not rais $1 billion in cash in the next 4-6 weeks.

While these companies in and of themselves are not very large, the consequences are staggering:

The insurer, ACA Capital Holdings, which lost $1 billion in the most recent quarter, has been warned by Standard & Poor’s that its financial guarantor subsidiary may soon lose its crucial A rating. If it did, the banks that insured securities with the ACA Financial Guaranty Corporation would have to take back billions in losses from the insurer under the terms of the credit protection they bought from the company.

The troubles at ACA could also serve as the first real test for credit default swaps, the tradable insurance contracts used by investors to protect, or hedge, against default on bonds. In June, the value of bonds underlying credit default swaps rose to $42.6 trillion, up from just $6.4 trillion at the end of 2004, according to the Bank for International Settlements.

“The hedge is only as good as the counterparty, or the other party, to the hedge,” said Joseph R. Mason, a finance professor at Drexel University and the Wharton School of the University of Pennsylvania. “This is part and parcel of the financial innovation that has grown very rapidly in recent years.”

In other words, phony money and real debt.

If MBIA loses its AAA ratings, more than $2 TRILLION in securities would lose its AAA ratings too.

We are still on the downslope of this collapse, so it has got a ways to go before we turn a corner.