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Wednesday, January 30, 2008

Like Everybody Else

I downloaded the Open Source Model posted by Pershing Square on the internet relating to exposures for the monolines. (See Market Ticker for some background.)

You can get it here. I think the hands of the ratings firms and the regulators have just been forced. This is some major kerosene on the flames, kiddos. Because if the firms have these exposures as the model suggests, then a whole bunch of organizations worldwide will have additional large amounts. I am glad that someone is willing to publicly state that losses on a lot of these Alt-A securities have the potential to be worse than for most subprimes. Finally, the truth.

This will be the final event, although it will take a while for the impact to register.

Its a good thing our system is based on fictional money or else we'd be seeing bank runs in every town.

I really would have expected a much larger distrust of the fed, wall street and paper money by now. A printing press is not a wealth machine in my view.

What are your thoughts on future inflation?
The only real type of inflation we have has been globally induced by the ability to consume more.

It seems rather clear to me that price sensitivity is preventing the bulk of even energy-priced based cost increases from rolling through to the end user. Therefore, even though I am unhappy with the situation, I do not think it is one the Fed can affect with monetary policy.
Greetings from a rain swept London!

The only thing brightening up the day is reading your blog and CR which are somewhat compulsive viewing in the building in which I live.

Having downloaded the .xls and run it on my new Dell Poweredge 840 Quad Core Xeon server with 8gb Ram, it occurs to me that all them there zero's add up to serious money. Seem to remember a saying "if you owe your Bank a million you are lost, if you owe your Bank a billion, the Bank is lost" which is very apt, allowing for a little inflation.

We of course have our own little local difficulty in the shape of Northern Rock ($100bn of taxpayers money so far!) but I see the Spanish Banks have been delivering vast quantities of bundled mortgage debt (AAA rated by you know who!) to the ECB in a covert rescue of the Spanish banking system. In the last 3 months the Spanish banks trousered $80bn from the ECB in exchange for their paper, and you think you have problems!!

The reason why I mentioned my new Dell 840 is that I bought it at Christmas as a present to myself, but in my haste to take advantage of Dell's offer, I did wonder just how much money they were losing when I paid $600 for a Poweredge 2.0ghz Quad Core Xeon, 1gb RAM, 2 x 250gb HDD and a 3 year on site warranty.

Probably better to own HP stock!

Do keep that fellow of yours under control!
Should have mentioned that the $600 for my Dell server included $100 delivery charge and 17.5% sales tax (called Value Added Tax for some strange reason, as it adds no "value" only additional cost.)

As an IT Consultant I can reclaim the VAT in full so the Net Value of my server to Dell was $425.
Covey - I am rather fond of HP myself, but Dell certainly was handing out the deals! What their real profit margin is I cannot guess. I have been wondering how on earth Amazon can keep its margins up with shipping costs, and I note that their latest earnings are causing others that concern as well. It is a sad commentary when currency fluctuations contribute more to company profits than profits on sale.

I can't imagine a building all compulsively reading CR. You must be a brainy crew. I will try to imagine you all perusing CR in smoking jackets, with keen looks of civilized intelligence radiating from your rapt faces (although of course now you cannot smoke).

Regarding Spain, the situation there looks so awful that I can't bring myself to write about it. But I did email a buddy quite recently with the comment that their situation made ours look good, which was quite an accomplishment.

I will grant you an honorable mention with Northern Rock, but my suspicion is that a few others are due to follow, and that BofE is really trying to figure out what it can do with three banks instead of one.

Still, we all must concede that we are fighting for second and third place, and that the Laurel Crown of Maximum Financial Disaster will eventually be awarded to some of these EM countries. We simply cannot compete with economies almost entirely founded on mines and massive influxes of excessively venturesome capital.

I am awed by what the forces of human greed and optimism have created.
Regarding price sensitivity:

On the surface, price sensitivity doesn't square with record corporate profits. Unless the profits aren't real that is.

Much of the recent profit growth has been skewed towards energy and financials. For the financials, record profits were clearly an illusion based on bogus asset valuations. Great for bonuses, bad for shareholders.

Energy profits are a different story. To the best I can tell, record energy profits have resulted from increased demand. Same with food prices. Combined with a big spending gov't and an accomodative Fed it doesn't bode well for inflation longer term.

Absent a monopoly like MSFT, tech will never have pricing power.
Neither will domestic wages.

Our inflation will come from abroad, imo.
We are not that brainy, but sadly most of us smoke in the IT tekkie world. (Not yet a capital offence in the UK but heading there)

The look on our faces is concentration at trying to work out how many zero's in a trillion.

To lose under a billion today is a sign of prudent management and rewarded by a large bonus, a million is mere petty cash, hardly worthy of worrying about where the decimal point goes.

Pretty soon we will do what the Italians did with the lira many years ago and knock off the last few zero's to make the maths easier!!

Reading you and CR gives us a far better understanding of the real financial world than listening to those airheads on CNBC who seem to have learned most of their economics from the back of a cereal packet. They do have nice hair though!
MAB - I agree. But the logical result is the conclusion that the Fed can do nothing to prevent that type of inflation. It can prevent it propagating through the economy, but only by enforcing an ever-declining standard of living that will become self-reinforcing.

People are blaming the Fed for not doing what it cannot do, rather than trying to figure out what it can do.

Covey - you've got me laughing, and unfortunately I think you have defined prudence as IBs now understand it. A la Chuck Prince, you keep dancing when the money stops, and if you aren't the biggest loser when that happens, hooray for you!

My main beef with the fed is negative interest rates. These cause distortions and create perverse economic incentives.

The Fed is charged with price stability and maximum sustainable employment. If they can't meet their charge on price stability, then perhaps we should re-institute the gold standard.
I think we can't afford the negative interest rates for more than six months or so.

As for the gold standard, if a commodity becomes scarce worldwide, the price will rise even under a gold standard. There are certain desires that are impossible in reality.
Re: negative rates:

I can't afford them for a NY minute let alone six months.

Makes me want to buy a house. Oh wait, I forgot, I haven't been able to afford a house ever since the last time we had negative interest rates.

Anything for the "economy" though.
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