Category: Economy

China’s central bank raises interest rates

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China’s central bank has raised interest rates by 27 basis points.

As I have mentioned earlier, food prices are skyrocketing there, but the higher interest rates available in china is one more factor in making the dollar less attractive.

The dollar may float downward for a bit, but given the nature of currency markets, eventually, it will crash, and probably overshoot it’s normal equilibrium price, and rising Chinese interest rates, and falling US interest rates within a few days of each other is a double whammy that the dollar can ill afford.

Good Proposal by Chris Dodd on the Subprime Mess

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Chris Dodd, chairman of the U.S. Senate Committee on Banking, Housing, and Urban Affairs, has put forth interesting proposals on the current housing/mortgatge* mess.

  • Require lenders to assess borrowers’ ability to pay the mortgage even after a rate reset if they’re signing up for an adjustable-rate loan.
  • Require lenders to verify subprime borrowers’ income with documentation. Earlier this year, the Federal Reserve
  • Prohibit pre-payment penalties and yield spread premiums (YSP) in subprime loans. A pre-payment penalty is the fee some lenders charge if you end up paying off your mortgage early, including if you choose to refinance. It sometimes can be as high as six months’ worth of mortgage payments. A YSP is the difference between the the lowest interest rate a borrower qualifies for, and the actual rate he gets. A broker’s fee may be based on it.
  • Prohibit steering borrowers to more expensive loans when they qualify for lower cost ones.
  • Hold lenders liable for appraisals and for brokers’ actions when the broker is paid based on yield spread premiums.

These are good policies, and they would have been much better had they been implemented, or at least proposed, 2 or 3 years ago. to the degree that these can be made retroactive, they should be (you could make prepayment penalties immediately illegal, for example).

More importantly, it places much of the onus upon those who profited through their highly leveraged, and ruinous, financial products.

It’s taken him up a notch in my view of the presidential candidates.

*To all but the blind, this horse has left the subprime stables, and is roaming the prairie.

U.S. Retail Sales Rise Less Than Forecast in August

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There is more to this story than what you might read in this Bloomberg article.

Specifically, a number of states, including Florida, have pushed their back-to-school sales tax holidays into August this year, and a number of other states, Oklahoma comes to mind, have introduced ack-to-school sales tax holidays in August, and the retail was still sluggish.

The recession has started, and we are like the headless chicken, still running around.

Oil Above $80

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It’s record high, and the basic reason is supply and demand, but it is also that oil is being denominated in a depreciating asset, the US dollar.

Oil exporting countries buy things denominated in Euros, Yen, Sterling, etc., and they can buy less of this when the dollar falls.

If the Fed cuts rates tomorrow, and all signs point to this, I would expect to see a new record low vs the Euro in the next 5-10 business days.

Subprime meltdown finally affects beer drinkers

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It’s a wonderful headline for this Asia Times article, but there is some real meat and potatoes if you scroll down a bit.

…

He relates, “In 1983, the Bureau of Labor Statistics [BLS] was faced with an awkward dilemma. If it continued to include the cost of housing in the Consumer Price Index, the CPI would reflect an inflation rate of 15%, thereby making the country’s economy look like a banana republic. Worse, since investors and bond traders have historically demanded a 2% real return after inflation, that would mean that bond and money market yields could climb as high as 17%.”

Yikes! What to do, what to do, what to do whattodowhattodo? “The BLS’s solution was as simple as it was shocking: exclude the cost of housing as a component in the CPI, and substitute a so-called ‘Owner Equivalent Rent’ component based on what a homeowner might ‘rent’ his house for.” Hahaha! The government resorts to lying! “Wow! Why didn’t we think of this before?” they are heard to ask among themselves.

Fortunately for the government, it worked. “The result of this statistical sleight of hand was immediate and gratifying,” Mr Hardaway writes, “for the reported inflation index quickly dropped to 2%”, down from the real, and horrifying, 15% which was due “in part” to the drop in rents caused by speculators wanting to “offset their holding costs by renting out their homes while their prices skyrocketed, thereby flooding the market with rentals that pushed down the cost of renting a house or apartment.” Hahaha!

You can almost hear the contempt in his voice when he says, “While the BLS was correct in assuming that this statistical ruse would fool the average citizen into believing that inflation was only 2% (and therefore be willing to accept a meager 4% return on his bank savings), what is remarkable is that the ruse also fooled the bond traders, and apparently continues to do so, leading analyst Peter Schiff to describe these supposed savvy bond traders as the ‘hormonal teenagers of the capital markets’.”

Putting it all together, he concludes, “The present subprime credit crisis can be directly traced back to the BLS decision to exclude the price of housing from the CPI. It is now clear that the ‘benign’ inflation figures reported over the last 10 years” were, (using my awesome editorial powers to insert my own words for special emphasis), “A big stinking load of lying crap by the corrupt Federal Reserve and the despicable government (except Ron Paul).”

…

This subterfuge has not just been about housing. It’s everywhere in the BLS statistics, and it’s used to shortchange pensioners and to mask the real decline in standard of living for the median worker in the US since the early 1970s.

How the Credit Crunch Has Wider Consequences

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It just 86ed a deal to Carlyle Group to sell a cable company.

The bidders could not raise the necessary money.

The Washington Post reported the problems in the sale of Insight Communications, which Carlyle Group purchased for about $2.1 billion in 2005. Bidders including Time Warner Cable, had difficulty getting enough bank financing, according to the report.

Seriously, owning a cable company is about as near as you can come to legalized theft in this country, and Time F&^%ing Warner could not find financing?

Merger and acquisition activity in the US is very close to collapsing.

Dollar Drops

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Because of the widespread expectation that the Fed will cut rates, the Dollar has hit a 15-year low.*

This is the conundrum that I’ve mentioned earlier. If the Fed cuts rates, it pushes the dollar down, driving up the cost of imported goods, and hence inflation, and if it doesn’t we see the economy tank.

The dollar is unsustainable high. It’s probably still got at least 15% to fall against the Pound and Euro, and likely 30-50% against the Yuan.†

*Basically, low interest rates send foreign money looking for places with higher return on investment.
†This is just my wild assed guess, based on nothing by my gut.

A Good View of the Coming Downturn

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Nouriel Roubini has a very bleak picture of where the US economy is going. He is predicting a 15% drop in house prices in the nest two years (I predict at least that much), and there is downward pressure on auto sales and other consumer spending.

And then there is this:

Unfortunately, financial globalization together with securitization and mushrooming of complex credit instruments has lead to greater opacity and less transparency in the financial system. And this lack of transparency breeds unmeasurable uncertainty rather than priceable risk. Risk can be priced as you have a distribution of probabilities on various events. But unmeasurable uncertainty causes higher risk aversion under conditions of market distress. This generalized uncertainty is now coming from two sources: first, we do not know the size of the overall losses in credit markets: sub-prime alone could lead to losses of $100 billion or much higher depending on how much home prices will fall. And other losses from other illiquid financial instruments remain unmeasured in a world where institutions were marking to model rather than marking to market and where credit rating agencies were mis-rating complex credit instruments. Second, as securitization implies that financial risks have been spread out of banks and to the corners of the global financial system we do not know which firms are holding the toxic waste and thus which firms will go belly up next. It is like walking blind in a minefield where you have no idea of where the mines are. This uncertainty breeds large fear – after the massive greed of the previous credit and asset bubble has now burst – and lack of trust of financial counterparties, even otherwise respected ones: everyone want to hoard liquidity and hold the safest assets as even large financial institutions do not trust each other and are unwilling to lend to each other. This greater opacity of financial globalization and securitization implies that the re-pricing of risk that we have observed in the last few weeks is a permanent rather than a transitory phenomenon. And the sharp spike in the cost of credit will further weaken an already weakened economy. This is thus the first real crisis of the new world of financial globalization and securitization.

Translated into ordinary English, he’s saying that the global finance system has become so opaque and so byzantine that risks cannot be evaluated and assets cannot be valued. The world financial system is no better than a game of 3 card Monte.

I Have Become Incapable of Perceiving Sarcasm

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Michael Lewis, the author of , has an essay, A Wall Street Trader Draws Some Subprime Lessons.

His treatise? This is what happens when you lend money to poor people.

For the life of me, I can’t figure out if he’s joking or not.

I read it, and I was incensed, and then I thought, “What wonderful snark”, and then I thought, “I hear Republican talking points like this all the time.”

Either he’s got one of the blackest hearts on wall street*, or a marvelous sense of snark, in which case I am completely pwn3d†.

I just can’t tell which.

For the sake of the world I hope that it’s pwnage.

*Which is saying something.
†Owned

Remember What I Said About Currency?

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I said that an downturn would force the Fed to push interest rates down, and that this would hose the dollar, leading to a falling dollar, and from there import driven inflation, as the cheap crap we buy from Chins becomes more expensive. Well, Richard X. Bove, a respected analast for Punk Ziegel & Co.has just written the same thing.

He’s saying that cutting interest rates to help salvage mortgage lenders will not save them because, “Lower interest rates will send the dollar into a tailspin and wreak havoc in the job market.”

Nice catch 22, but it gets worse, Chinese inflation is surging, it just hit 6.5%, the highest rate in 11 years.

This means that their central bank is going to have to boost interest rates, which will strengthen the Yuan.

Of note, food was a primary component, 18.2% year over year (Pork 49, cooking oil 34.6 %, eggs 23.6 %, fresh vegetables 22.5 %), and this will lead to civil unrest, probably to coincide with the Olympics, unless they reign this in aggressively.

This is going to get ugly.

McMansions Become ‘McApartments,’

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It should be noted that this phenomenon happened with Brownstones too.

These days, they are 3-4 apartments.

McMansions don’t seem as readily adaptable to dividing into apartments, but a lot of them are going to end up as such, because there is no market for them.

It will have the effect of “urbanizing” those neighborhoods though, exactly the opposite of what was intended by the folks who bought and live in such homes.

A Sensible Fix for the Mortgage Mess

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David Laibson has a good start, outlawing the prepayment penalty.

The prepayment penalty allows for “loss leader” loans, because it it offers an incentive to provide “loss leader” loans, because it makes it prohibitively expensive to get out of those abusive loans.

I would add outlawing, or severely limiting, points, which provide a similar incentive.

Congress could do this tomorrow, and it would help a lot of people now and in the future, while not bailing out bad actor lenders.

Bush to Offer Proposals To Ease Mortgage Crisis – washingtonpost.com

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Bush has proposals for mortgage crisis.

The question is who is he paying off with this? Is it poll driven or contributor driven?

Dean Baker has some good analysis.

Basically, his plan is to allow poor people to get even further over their heads by waiving the 3% FHA equity requirement, and to forgive the taxes on the forgiven debts that are foreclosure, which benefits the richest families (higher tax bracket) more than the poor ones.

There is also the inevitable jawboning about going after bad players in the market.

Bush and His Evil Minions™ have a good record on going after evil doers. Where’s Osama bin Laden again?

So, it will make things worse, and benefit the rich….Any Questions?