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Wednesday, February 28, 2007

Putting Out Fires

I'm on the road. Didn't get Chief No-Nag last night, and just got to him today. The house nearly burned down!!! There was a wildfire that came right up to the farm and onto it. Chief No-Nag says the swampland (very close) is still on fire although there's water in a lot of it. They cut breaks through it. It will burn for days if we're lucky - weeks if we're not. Sometimes the peat in swampland catches and it can smolder for years.

It sounds like the house has smoke damage. The woods on one side (part of which we owned) are gone. The farm is pretty chopped up what with all the breaks and the equipment. The fire crews used it as a staging area to try to save the local houses. Sounds like they did a good job, because they did save all the close neighbors. I'm sure somebody took a loss, though. Now I'm feeling pretty glad that I always, always gave when the firemen were collecting.

Naturally, Chief No-Nag is feeling pretty chipper. He got worried recently and burned all the brush out of the woods close up to the house. He got in trouble for it too, but if he hadn't the house would be gone for sure.

This is going to be an amazing sight when I get back. No domestic animals got hurt - he got home in time. I wonder if the gopher turtoises survived? They are endangered, and we had a breeding population. I didn't ask, but it might take years and years to recover the environment. We kind of ran this as a refuge area. It was cut in microenvironments, and now they're gone. All those years of work....

I'm up north dealing with my mother's estate and other troubles. I had my suspicions early on about the accident, but along about the time the police story was that my mother was roaring past the local police station screaming "Allahu Akbar" and giving them the finger while dying from a heart attack caused by diabetic shock when the other guy hit her while just putting along, I developed deep doubt. It seemed an unlikely chain of events to say the least. Then we saw her car, and we knew, because it is blindingly obvious that the car was not moving very fast when hit. Then we had troubles getting the car. Then we didn't get the police report.....

So we are discussing hiring a crash investigator. These police, are, how shall I put it, known for being somewhat partisan. The thing about Georgia sheriffs is that yes, shooting at each other is often their preferred method of settling disputed elections, but they do not prey upon the general populace. Probably that is because the general populace is armed and dangerous when provoked.

We have discussed it and we do not want the guy charged, after all, it was an accident. "Forgive us our trespasses as we forgive those who trespass against us." But it seems rather dangerous to let this slide without having some proof of what did happen, just in case.

Life is trying to drive me nuts, but I'm determined not to participate. I keep reading the news from Iraq, and then the realization sinks in that all this may be bad, but it's not nearly as bad as stuff other people face. And they survive.

PS: This is not a metaphorical post, but it might as well be, considering the economic news. More on that tomorrow.

Sunday, February 25, 2007

Giving Credit Cards To Illegals

The average individual has the sneaking suspicion that somehow he or she is going to end up paying for that credit card given to an illegal, because the illegal can just skip. The average individual is right. Why would a bank do something like that?

FDIC Stats
Quarterly profitability percentages by asset concentrations - fourth quarter (loans):
2005: 91.2
2006: 89.8
2005: 91.5
2006: 88.6
2005: 89.1
2006: 85.5
2005: 85.6
2006: 84.0
Credit Cards:
2005: 81.8
2006: 96.2
It's amazing what the inability to refi out of credit card debt can do to increase profitability on that credit card debt, especially when you slam those 30% default rates on for a late payment of a utility bill, etc. Think about what I am trying to tell you here. I realize that a lot of people don't want to read the writing on the wall, but incomes have not kept pace with inflation over five years. Last year they started rising, but the accumulated damage has not been made up in comparison to inflation. The consumer made up the deficit by using home equity loans, so having a home became having the ability to borrow. It's all coming to an end now.

CR posted about a Denver article, and these are the telling quotes:
Hector Garcia figured he was doing everything right.
Garcia took out a 30-year, fixed-rate mortgage at 6.5 percent interest, bought a three-bedroom home for $207,000, and began fixing it up.
Bank-owned properties now represent more than 80 percent of all homes on the market there, putting even seemingly stable homeowners like Garcia up against a financial wall.

"I just can't take it anymore," he says of his street's overgrown yards, abandoned houses, and declining property values. "I put so much into this house and this community, but I don't have no equity."
He's trying to sell:
Garcia's house two years ago "would have gone for $210,000, maybe more," says David Cabrera, the real-estate agent whom Garcia hired last fall to sell the home, now priced at $195,500. "But nobody's buying now with all the foreclosures."
...Garcia (...) has yet to receive an offer. "I feel bad," he says. "Everyone thinks they want to get a house to get money for the family. But I need to have a life, too."
He's not in trouble on paying the loan - it's just that it's not worth it to him, because the more he pays down the more the house drops in value, and he can't save otherwise because he's using all his spare cash to pay the mortgage. The neighborhood is unlikely to get better and provide a safe environment for his family. The entire housing bubble was created by the idea that paying a high percentage of your income for a home would create a financial cushion for your future.

This is how the little guys get hurt. His income is probably around $50,000, and even though he's reaching the point where his principal paydown rate is rising, on that income he really can't save AND pay an amortized mortgage of around $207,000 originally. There is a reason for the old ratios - violating them causes insecurity and financial instability. His PITI to Gross Monthly Income ratio is about at 35-36%, when it should be no higher than 30%. So he's locked into working 50-60 hours a week, not getting ahead in any way, and feeling extremely financially insecure - and he is. He's been in the house for 4-1/2 years, and by now by all usual economic rules his payments in comparison to his earned income should have have dropped enough to provide him some margin even if the house value didn't increase - but that hasn't happened either.

Not that's he's an illegal, but the same dynamic holds. When people such as these cannot prosper, in the end the nation cannot prosper. Jeremiah:
Like cages full of birds,
their houses are full of deceit;
they have become rich and powerful

28 and have grown fat and sleek.
Their evil deeds have no limit;
they do not plead the case of the fatherless to win it,
they do not defend the rights of the poor.


Saturday, February 24, 2007


Daylight gone and I wan' go home....

FDIC PR-15-2007:
Residential mortgage loans that were noncurrent (90 days or more past due or in nonaccrual status) increased by $3.1 billion (15.6 percent) during the fourth quarter. This increase followed a $974 million (5.2 percent) increase in the third quarter. Net charge-offs of residential mortgage loans totaled $888 million in the fourth quarter, a three-year high.
The other highly significant item:
...total deposits grew by $247.2 billion during the quarter, the largest quarterly increase ever reported. The surge in deposit growth was aided by a record $90.2 billion increase in deposits in foreign offices, as well as by a $70.4 billion increase in savings and interest-bearing checking deposits, and a $56.6 billion increase in noninterest-bearing deposits.
Git the whole thing here. Say a fond farewell to MEW, and let's have a big greeting to savings! In general, banks are being squeezed. Return on assets is dropping, and net interest margin is at an 18 year low. Deposits are up but lending is down.... Looks like payments into the FDIC insurance fund might have to increase soon.

Canst thou say "recession", Sebastian?


Friday, February 23, 2007

Not A Rosy Friday

I'm beginning to get nervous. Oil is way too high, another round of bad news continues to shove subprime lenders down, sooner or later people are going to tumble to the idea that there are more Coast Banks out there, commercial credit is dicey, see the comments on this Calculated Risk post that related to the servicer downgrades, and then I read this:
Margin debt on all stocks owned by clients of New York Stock Exchange member firms reached an all-time high of $285.6 billion in January, topping the previous record of $278.5 billion in March 2000, which was the month the Nasdaq Composite Index (.IXIC: Quote, Profile, Research) hit its all time high.

As Peter Dunay, investment strategist at Leeb Capital Management in New York, puts it: "It looks like people are borrowing to buy everything on margin."
Iran has absolutely no incentive to act sane, because it's going to cost Iran too much money. If they reduce the fear level, they lose money. Russia has a huge stake in keeping oil prices high. There are too many economic interests here militating against sanity.

My feeling is that the US economy is still far more relatively stable than most others. In other news, Japan's currency is dropping against the Euro.

Forget gold - watch the art auctions and sales. They are more telling.

Thursday, February 22, 2007

A House Of Cards

Over at Calculated Risk they have been arguing about whether Yellen of the Fed understands what she is talking about when she discusses the impact of the housing market and troubles in the mortgage market going forward.

She probably doesn't, and that is because absolutely no one not involved at the ground level of this market seems to have any understanding of what is happening. Subprime lending has gone splat, Alt-A is now going splat, and housing demand is going to take a hit because of tightening lending standards, which will prevent many borrowers who were essentially in short-term loans from refinancing.

To get an intuitive understanding of the reality disconnect, try this Voice of San Diego article (hat tip The Housing Bubble Blog). The article juxtaposes a RealtyTrac person's view with the Jay Brinkmann's view. Jay Brinkmann is the vice president in charge of research for the MBA.
The problem:
New data for San Diego County reveals that 67 percent of loans made in the first 11 months of 2006 were interest-only or negatively amortized. That means borrowers pay low introductory payments until a reset period comes a few years later, significantly increasing their monthly mortgage payment. Of that 67 percent, 30 percent were negative-amortization loans, a threefold increase since January 2004 and 30-fold jump since January 2003, according to FirstAmerican Loan Performance.
Current CW is that the problem is limited to subprime loans (not true):
Subprime loans are made to borrowers with damaged or weak credit who wouldn't have otherwise qualified for a mortgage. About 14 percent of the loans outstanding in California as of September are subprime, according to the Mortgage Bankers Association.

Unexpected levels of delinquencies on this type of loan have worried investors who back subprime lenders. Earnings losses have sent some such lenders into bankruptcy, while others are starting to tighten standards and more strictly enforce underwriting guidelines.
Mr. RealtyTrac guy voices reality:
Rick Sharga of RealtyTrac said he's noticed the link between the lenders' stricter regulations and the rate of foreclosure activity. "I think the two go hand-in-hand," Sharga said.
Any time you have a lot of mortgages that are written with terms that essentially force a refinance within a few years, you have an unstable credit market. Such loans can only be written in large numbers while prices are escalating rapidly. As soon as conditions worsen, Mr. Sharga is right - defaults escalate. And when they do, lenders find that they can't sell off their risk, so they tighten their guidelines, which prevents some borrowers from refinancing, which increases defaults, which causes credit tightening.... Now note Mr. Major Mortgage:
Mortgage analysts don't have enough evidence that the risk associated with these loans warrants such dramatic responses, said Jay Brinkmann, vice president of research and economics at the Mortgage Bankers Association. He said the subprime lenders' moves are anticipatory, responding to concerns from their investors, who fear that defaults will increase dramatically.
This is complete nonsense. There is nothing "anticipatory" about these moves - they are related to last year's sharp escalation in defaults and forced repurchases from investors by the originators. If the originators can't get those forced repurchases down, every one of them is going to fall into bankruptcy. They are pretty much all now claiming to be writing Alt-A instead of subprime - and that isn't going to work either.

Alt-A loans can still currently be sold to investors at a profit. But not for long. Knocking out the lowest quality 7 or 9% of purchasers rated by credit quality will reduce demand by that much, which will pull prices down more in 2007. Any Alt-A loans that are interest-only and/or negative amortization will start to default at reset unless the borrowers can pay down the loan to collateral ratio enough to meet refinancing requirements. Worse yet, if every originator out there is chasing the Alt-A borrowers to survive, they will start writing Alt-A loans with increasingly reckless terms. They are still writing these as stateds. Unless and until Alt-A are written with more verification of ability to repay other than by sale of the home, these Alt-A loans will continue to become more risky as well. Believe it or not, the insanity hasn't ended. It has only shifted, since a good FICO score will now get you an option ARM with an initial payment as low as 1/4 of 1% of the loan principal. The Ponzi scheme is still running on borrowers with higher credit scores.

The single dynamic controlling this market is not FICO scores but the failure to qualify borrowers for long-term mortgage loans at amortizing rates. A FICO score of 812 doesn't protect a borrower with $100,000 yearly income from defaulting on a 100% LTV loan in the amount of $750,000 with a two year reset. (At 6% for an I-O loan, which is below market, this borrower would be left with around $1,500 in monthly income for all other expenses other than PITI, no matter how good a tax accountant he or she has.) Appreciation does. These loans were all made on the assumption that price appreciation would allow the borrowers to refinance or sell without defaulting, and now, for at least half of them, that's not going to happen.

The amount of such loans in each geographic area is strongly related to the income/price ratios in that area. Where home price appreciation vastly outstripped the payment ability of borrowers, we will see escalating defaults for years. What will correct this cycle is when the loss the lienholder will be forced to take on foreclosure will force the lienholder to rework loans so that the borrowers can pay them, even if the lienholder is taking a real year-by-year loss on the resulting payment schedule compared to T-bills. We're quite far from that right now, but it is coming.

The world isn't going to end. California and Florida aren't going to fall into the sea. But the extent of this credit problem has yet to be felt in the economy, and it will be a pretty intense shock. The last thing you want to do right now is to buy all these "bargains" in finance companies and home builders. Everyone who has listened to CW over the last year is taking a bath now, and it will get worse for some time.

There is no way Fed governors can probably wrap their minds around the kind of insanity that has predominated in mortgage lending for the last few years. They get to their positions by being rational, data-dependent individuals, not psychiatrists. Only psychiatrists could really explain the type of loans that were written over the last few years in such large numbers. This has been a collective delusion which will go down in history.

Tuesday, February 20, 2007

Betsy Hit A Nerve

Betsy Newmark posted about Chapter 9028 of the "We must return to the Fairness Doctrine":
I don't think that such a law could ever get through both houses of Congress. I can't see the Senate Republicans being so stupid as to let such a bill come up for a vote there or, if they did, a Republican president signing it.

But it is a clear indication of how liberals think. If they don't like what is being said, they want to regulate it out of existence.
The comments seem to prove her point - here's a sample:
It is not that liberals want to regulate what they do not like out of existence.
It is that when liberals see injustice, they choose to correct it.
When Saint Ronald Reagan stopped enforcing the fairness doctrine, we saw the rise of right wing partisan (lying) slanted talk radio.
Rush Limbaugh could not spout out his torrent of lies if someone was allowed to correct him with actual facts.
What are you wingnuts afraid of?
Oh yeah, the truth.
Kind of amazing, isn't it? Note that word "allowed". Here's another:
The airwaves were ruled to belong to the people of the united states shortly after radio was invented. Broadcast media exist, and are liscensed, solely in the public interest. Reagan frogot about that when he did away with the fairness doctrine and it's time to remind all of the owners of these stations who they really work for.
But let's be frank. The real reason that the right is against this doctrine is that their positions cannot be supported in an intellectually honest environment. The big lie only works when nobody is allowed to call bullshit.
They do not explain how no one is allowed to contradict Rush Limbaugh, and I'm pretty certain that people do. Even on the radio. Eeyore sounds a grim note of reality:
And so you agree with me that the Fairness Doctrine is a bad idea since it lets politicians and bureaucrats and whoever gets into office are the ones who decides what is fair and truthful.

Thanks for clearing that up.
Needless to say, Eeyore does not convince the Fairness Doctrine supporters. Of course we all know that it would be used to file endless claims against radio and TV stations that carry programs people find offensive and some would be liberal programs!

I think this is a relatively small branch of the leftwards half, but it sure does have a lot of passion. I started this with a question in mind, though. Hasn't the rise of blogging and message forums overtaken the worry about a few vested interests taking over the public forum? Haven't new and even more flexible methods of public discussion and dialogue evolved? Isn't this a sort of ante-bellum debate about a problem that doesn't really exist and can't?

Sunday, February 18, 2007

You Deserve A Laugh

First, Iowahawk's excellent Marcotte series.

No one can take umbrage at "Vagina Day" quite like the Anchoress, but Fausta and Kathleen Parker gave it a good try. Men will not enjoy this topic, but for women, there are only two ways to deal with vaginal feminism (which sounds like a disease, and is, but one of the mind). You can either get outraged or you can laugh at them.

Since I have wandered into such topics, please let me offer a DU'r worrying about thought crimes:
A man who was fired by IBM for visiting an adult chat room at work is suing the company for $5 million, claiming he is an Internet addict who deserves treatment and sympathy rather than dismissal.
The original poster comments on the story
So, what kind of world are we living in? One where you can just kick a guy out on his ass because he broke some rule created by a some simpleton?
Several replies follow expressing skepticism of the lawsuit's validity. The original poster tries again:
8. Seems similar to a "thought crime" to me...

Come on, you already know my opinion from the OP, but think about it. WTF does this have to do with his job performance?!?!?

If his heart and soul is into benefiting the IBM corporation, then why fire him just because he likes sex?

Sex is necessary for humanity to exist!!!!

This, plain and simple, is a thought crime. It is very likely people will surf cyberspace in the future via thought alone. In 20 years do you want to get fired for THINKING about sex?

To me this issue is clear. Humans are sucking the humanity from one another.
Does anyone else get the feeling the OP spends a lot of time at work on such sites?

Now that I have done my part to lighten your mood, you might want to read this DU thread about Chavez threatening to nationalize the food stores and grocery distributors in Venezuela. What's going on is that they put on price controls, so now goods are disappearing from the stores. Anyone who remembers Jimmy Carter's epic presidency can get a feel for it.

I have a hunch that things are going to get ugly fast there. Once you get to this point you have to start either beating up or imprisoning large numbers of people to shut down the black market. Fausta follows the Venezuelan news quite closely; she calls this Cubazuela. Also see Publius Pundit, and read the comments.

Thursday, February 15, 2007

Stall Speed?

A generally negative pattern to recent releases has me wondering. There are potential perturbations and shocks (such as a move to hold big investment firms more accountable, the subprime meltdown demonstrated by ABX-HE, and questions about corporate credit going forward) in the system, but the effect of those is indefinite.

The economic releases are definite.

January's manufacturing ISM showed mild negativity, which is supported by today's industrial production and capacity. For January, the index dropped .5, which leaves the four month result for Oct, Nov, Dec and Jan at -.3. The only category which increased was utilities, ie, the effect of the colder weather. Today's Empire State survey is up very strongly, but it is unclear what that means overall. The Philadelphia Fed survey didn't confirm it, and the Philly CEI didn't confirm it. Dallas leading looks somewhat flattish (see overall).

Unemployment is showing an early negative trend. Initial non-adjusted claims for the last three weeks have been somewhat consistent (Jan 27 - Feb 10): 359,959; 338,980; 361,198, and Feb 10 exceeds prior year's of 310,078. The effect of seasonal adjustments are waning, and the four-week moving average is up to 326,25. Total insured unemployment, both SA and unadusted is also up and up over a year ago, which suggests that unemployed workers are having a harder time finding jobs. The four week SA average for total insured unemployment has not yet exceeded year ago figures, though. Finally, the insured unemployment rates have increased to SA 2.0 and NSA 2.4. SA 2.0 matches the year prior period and NSA exceeds the year prior period.

There are a lot of illegals employed as construction workers, so the slowdown in residential building may be producing more actual unemployment than we know of.

Advance Retail sales for January:
1) Look at the cap-out effect.
Dec 2005: 350,494
Jan 2006: 362,135 MoM strong gain
Dec 2006: 370,447
Jan 2007: 370,418 MoM decline, but may be adjusted up?

2) Total increase from Jan 2006 was less than 2.3%, which of course places it below inflation.

3) There was such a huge drop in gas sales compared to Jan 2006 (34,095/ 35,106) that one would have expected more discretionary spending. But the same cap effect shows up in restaurants, and hobby/book/sports, etc. Consumers spent mostly for personal needs, as the electronics sales show. Clothing and once again the personal care/health number are the big gainers. Personal care/health is probably demographic plus lower prescription costs leading to good add on sales.

4) I'd say the consumer is indeed tapped out and blew the consumer's last wad on Christmas. Gas sales can be affected by less economic activity/switch to more efficient vehicles, but the category numbers show a shift in allocation from wants to needs. Unless there is a substantial revision the MEW theorists are having the last laugh.
5) The best lines to watch on this release for recessionary indicators are
722 (Bars and Restaurants)
Jan 2006: 35,302 - Jan 2007: 37,166
Dec 2005: 34,227 - Dec 2006: 37,441
If that goes negative YoY I take it as a recession confirmation under most circumstances. Note also that from Dec/Jan a year ago the spending rose, whereas for Dec/Jan this year spending dropped. That's a red flag and unlikely to have been produced by bad weather, so....

and 451 (hobby, music, books, sports)
Jan 2006: 7,359 - Jan 2007: 7,133
Dec 2005: 6,923 - Dec 2006: 7,096
451 is a good indicator of pressure because it is highly discretionary spending. In good times consumers buy presents for others in Nov/Dec, but buy themselves presents in Jan. The negative YoY and the very small MoM increase are pretty good indicators that the pain is being felt by more than illegals.

Please remember, these statistics are not adjusted for inflation! If prices rise, which they have over the past year for most categories, then an increase in sales may actually represent lower sales of items - and both fourth quarter PCE and the above show us that precisely that is likely to be occurring.

So this survey of CEO's should not surprise anyone, and it is notable that when asked about their own expectations they were more negative than when asked about their expectations for the economy as a whole:
Out of the 76 CEOs polled in January by the Business Council in collaboration with the Conference Board, 76.3 percent said they expected slower profit growth, with 19.7 percent predicting it would remain steady and just 1.3 percent expecting an acceleration.

In a preface to the study, Business Council Vice Chairman Kenneth Chenault wrote that while council members still expect moderate economic growth, their profit expectations have diminished since the last such survey in October.
GDP for the fourth quarter and productivity are widely expected to be revised downward later this year, with bickering on GDP settling somewhere in the 2.0-2.75 range. In short, what looked like a confusing range of numbers is generally settling down to relative consistency showing, at a minimum, very slow growth. That leaves us with the potential of self-reinforcing negative factors, i.e.
This places the housing slowdown in a very different context, because everyone expected employment weakness from that sector, but the argument made by the Fed and others was that other strong sectors of the economy would pick up the slack. Right now, it's hard to find that too convincing. Both unemployment rates and leading negative indicators are escalating.

Positive indicators: The Empire state survey. Growth in government employment (which, IMO, is both a positive and negative indicator).

If crude oil were to drop significantly and stay down, causing a real, consistent drop in gas prices, the effect on the economy would be a widespread stimulation which would support consumer sales and employment. Crude oil has risen since January but may drop now that economic expectations are being cut down. The Dallas big rig (scroll down) shows a flattening Big Rig, which might indicate that most of the internal stimulus from high oil prices is over.

I don't know where Bernanke got his optimism today from, because I don't see it in the data. Instead I see an emerging pattern of low or negative relative growth fundamentals.

Wednesday, February 14, 2007

I agree with Bernanke's testimony - mostly.

Stripping away all the fluff, what he said was that the outlook for inflation demands upon oil prices, and he is correct. Increases in crude prices are by far and away the biggest source of inflation, and decreases in crude prices are by far and away the biggest economic stimulators. And he said that the outlook for growth depends upon consumer spending, and he's correct about that.

Fourth quarter GDP is going to be revised downward, anyway. Problems in rural areas are escalating. But right now, the Fed knows nothing because the Fed can't predict crude prices, and the Fed can't predict what's going to happen in housing demand, because it depends on unknown factors.

This note ought to give everyone pause, though:
With fewer jobseekers entering the labor force, the rate of job creation associated with the maintenance of stable conditions in the labor market will decline.
What he means is that job creation is subpar and likely to remain so, but that retirements will prevent the unemployment rate from escalating proportionately. Now when larger companies feel strain, the first thing they do is restructure older workers out (higher wages, higher medical and benefit costs), so my guess is that we are going to see a net, unfavorable swap effect in 2007, in which high-income workers lose their jobs at disproportionately large rates, both in the blue-collar (construction, construction related) and in the professional segment. Any company which relies upon broad consumer sales is feeling pressure and will experience a disproportionate discount by the Street if its profitability lags, so there will be a broader restraint on employment this year, but the net is likely to be a disproportionate decline in consumer spending. However, there is some offset in the works related to departure/enforcement for illegals. This boosts wages at a time when we need higher wages. It also cuts public expenditures.

And this:
All told, consumer expenditures appear likely to expand solidly in coming quarters, albeit a little less rapidly than the growth in personal incomes..."
The debt stimulus is probably over, and consumer spending will become more dependent on actual earnings - this should give everyone pause. This statement matches well with state experience on sales tax proceeds (the debt effect seems to be waning). Income inequalities have now become a real issue for the health of our economy. The much-maligned Medicare drug coverage may be the single thing that boosts spendable income for most retirees and moderates the effects of economic irrationality, thus giving us some more margin for the rest of 2007.

FWIW, I think Bernanke will be an excellent chair. When Greenspan talked about virtuous cycles that cut the economic prospects and overall stability for over 50% of our workforce, I never could figure out whether it was senility or putting his best face forward. Lord knows the old man did his level best to get economic reality across to Congress, so it was probably the best face tactic. The Fed would be fools to try to talk this market down, but they are signaling that they won't bail out irrational behavior. Anyway, as you can see, the Street is in the mood to keep the party going. Positive expectations only last for so long, though.

The truth is that retail gas prices now control whether we experience a rural recession/mild financial expansion on deal-making or an unqualified recession. Regardless there will be a lot of pain this year. At no time since WWII have the 55 plus cohort had so little in combined savings/pensions, so much debt and such high insurance costs. The numbers are horrific. Furthermore, the local/state public pension problem is likely to overbalance in the next two years. Granted, NJ is the worst in the nation at this, but once these things tip they move rapidly. NJ is faced with a difficult problem. It cannot support its public debt without economic growth, and its economic growth is being destroyed by high taxation caused by public debt. The only way out for them is to flat tax and attract rich people from the tri-state area, but somehow I don't think one of the least functional state legislators in the nation is gonna tumble to that solution.

On the other hand, Joe Six-Pack has been beaten up for 20 years now, and for the most part Joe Six-Pack has become a canny survivor. There's a lot of initiative out there. But Joe Six-Pack on a low retirement income and high personal expenses has no option but to flee high taxes, so....

The reason I thought the Fed would have to cut rates by 50 basis points at the end of the third quarter is that this is the only margin they can extend to cushion those dire second liens, especially HELOCs. That's where the trouble is. They may have decided to let the chips fall and force massive reworks on those suckers instead, but if that is their decision, it is a very, very risky one that may well cause considerable problems.

On growth, Bernanke described a nice moderate growth scenario for the next two years, but then added this proviso:
To the downside, the ultimate extent of the housing market correction is difficult to forecast and may prove greater than we anticipate. Similarly, spillover effects from developments in the housing market onto consumer spending and employment in housing-related industries may be more pronounced than expected. To the upside, output may expand more quickly than expected if consumer spending continues to increase at the brisk pace seen in the second half of 2006.
In other words, if it doesn't start improving it will spill over to the broader economy. On inflation:
Recent declines in overall inflation have primarily reflected lower prices for crude oil, which have fed through to the prices of gasoline, heating oil, and other energy products used by consumers. After moving higher in the first half of 2006, core consumer price inflation has also edged lower recently, reflecting a relatively broad-based deceleration in the prices of core goods. That deceleration is probably also due to some extent to lower energy prices, which have reduced costs of production and thereby lessened one source of pressure on the prices of final goods and services.
The reality is that an energy policy is the fix. Generating more energy domestically gives us a fix for the trade deficit, an increase in domestic investment, generates excellent paying jobs related to that fixed investment, and controls energy costs which boosts manufacturing even more. The joke's on us - it is only bad public policy which is causing a lot of our pain.

Tuesday, February 13, 2007

What Happened Yesterday

Yesterday in mortgages we saw the "break" that constituted the transmission of the near-depression in housing in many areas to the financial markets that lend to consumers for housing. There are a number of break-point markers.
Tightening underwriting standards (largely focused on first time home buyers) mean that rosy projections for home sales in 2007 are unrealistic. You cannot cut into the supply of credit without cutting into the supply of home buyers. This is a needed correction, but it will cause problems - especially in the west.

A symposium of sorts on the developments in housing and housing-related finance is taking place at Calculated Risk. There is no other place on the web that I know of that provides such a wide-ranging and balanced discussion. There are knowledgeable participants in a wide range of fields providing input and data. It's a remarkable resource.

Monday, February 12, 2007

One Of My Favorites

The Reference Frame is a blog written by a Harvard physicist. This week he's covering Harvard's Faustian bargain, recommends a quantam field theory textbook which I think I will buy, and takes a glance at some of the cosmic ray flux climate theory.

I realize that a lot of very intelligent people almost reflexively flinch away from certain types of quantative thinking, but even if you hate numbers and hate equations, this blog is for you. The reason is that Motl is a true scientist, as evidenced by his discussion of Professor Jahn's comments about the closing of the Princeton ESP lab. Real science, and real scientists, think this way. People who are non-technical but who concede that science is important need to reconnect with how real scientists think.

Real scientists are constrained by evidence and uncertainty. They also share a common trait of relative humility with respect to other people's quantative argument, whether the argument is made by someone credentialed or not. The question for a genuine scientist is not whether you are entitled to call yourself a Herr Professor Doktor Doktor in Hamburg, but whether your theory and your evidence offered in support of your theory are reproducible and self-consistent, and whether they contradict other evidence. Failure and confusion are a given in science, but they are never an eternal given.

There is a type of intellectual humility before reality that becomes a habit of mind in real scientists. This trait seems to be on a wane in our wider society, and I think that ebb is a severe cultural danger. The psychological effects of shifting all arguments from the objective (is this true? how could we figure out if it is?) to the subjective (do you support me or are you against me?) is the eternal subjective argumentation of the cause-haunted public figures of our day produces endless, irresolvable conflict.

David of Photon Courier has frequently referenced his suspicion that part of our cultural breakdown is rooted in the lack of objective education and training of the majority of people in our society. I think David's right.

More on the Faust brat from Motl, and here's what Howard had to say. If you read the Motl links you'll see why he didn't pull his punches. It is nice to see two men willing to tell the truth about this sort of thing.

Friday, February 09, 2007

Let The Games Begin A NEW

New Century five day chart, hey, a billion here or there - it will all come out in the wash. Who's counting?

Oops, they are:
Roy Jacobs & Associates announces that it has filed a class action lawsuit in the United States District Court for the Central District of California on behalf of purchasers of the common stock and other securities of New Century Financial Corp. (``New Century'' or the ``Company'') (NYSE:NEW - News) who purchased during the period from May 4, 2006 through February 7, 2007, inclusive (the ``Class Period'').
ABX indices yesterday.

Fear Of Failure

Coast Bank (Coast Financial) is allowing its holders of jumbo CD's ($100,000 plus) to re-title, i.e. make partial withdrawals without paying early withdrawal penalties. FDIC insurance covers up to $100,000 of regular accounts for each depositor, and now goes to $250,000 for IRAs. So the jumbo depositors, who get a higher rate, are pulling money out because they are afraid of losing it. Of course, if Coast fails, they'll only get access to part of their money initially even if it is FDIC-covered.

Coast Bank/Herald Herald/Tribune links. There is excellent information here which proves out my own, private, Super-Double Top Secret Early Retirement Program Index for banking. MOM-SDTSERP Index(TM).

I wonder if these indemnification agreements will be enforceable? Provisions such as this one would raise major questions about a sale, wouldn't they?
In the event of a Change in Control or a Potential Change in Control, the Corporation shall, upon written request by the Indemnitee, create a trust for the benefit of Indemnitee and from time to time upon written request of the Indemnitee shall fund the trust in an amount sufficient to satisfy any and all Expenses reasonably anticipated at the time of each such request to be incurred in connection with investigating, preparing for participating in, and defending any Proceeding which is subject to indemnification under this Agreement. The amount or amounts to be deposited in the trust pursuant to the foregoing funding obligation shall be determined by the parties making the determination under Section 5(b) hereof. The terms of the trust shall provide that upon a Change in Control: (a) the trust shall not be revoked, or the principal thereof invaded, without the written consent of the Indemnitee; (b) the trustee shall advance, within ten business days of a request by the Indemnitee, any and all Expenses to the Indemnitee (and the Indemnitee hereby agrees to reimburse the trust under the same circumstances for which the Indemnitee would be required to reimburse the Corporation under Section 4(c) of this Agreement); (c) the trust shall continue to be funded by the Corporation in accordance with the funding obligation set forth above; (d) the trustee shall promptly pay to the Indemnitee all amounts for which the Indemnitee shall be entitled to indemnification pursuant to this Agreement or otherwise, and (e) all unexpended funds in the trust shall revert to the Corporation upon a final determination by the parties making the determination provided under Section 5(b) hereof, or a final determination by a court of competent jurisdiction (as to which all rights of appeal therefrom have been exhausted or have lapsed), as the case may be, that the Indemnitee has been fully indemnified under the terms of this Agreement. The trustee shall be chosen by the Indemnitee.
The (erstwhile) Chairman of the Board, James K Toomey, who was hospitalized with chest pains is something like 40 years old. All Filings. I think these guys are going to have to get in all the way or get out. Banking is a tough business these days.

Thursday, February 08, 2007

Think You Had A Bad Day?

Brazilian grandpa had to wrestle with an anaconda for half an hour to prevent his grandson from being lunch. People laugh at me when I get all excited about the anacondas in the Everglades, but when you meet a 16-foot hungry snake, it gets serious quickly. If PETA ever gets all sentimental about them, it's over for those city folks.

Wednesday, February 07, 2007

A Very Short Progressive Political Romance

Many have written well of the star-crossed Edwards/Marcotte affair, but I think Iowahawk has captured the winsome essence of this relationship.

In the meantime, Nancy Pelosi wants a bigger jet (airbus 380?). If a white male politician were caught expressing this desire, Marcotte would be ranting and raving about phallic symbology, wouldn't she? Admit it - even CBS couldn't resist a snickering "Does size matter?" headline. The problem with Marcotte is that she's often silly, and the Edwards campaign hired (and maybe fired) a silly person, which naturally leads to the suspicion that it is a silly campaign. CBS is silly too.

A pack of silly elitists, how inspiring.

We have people like Anne Applebaum pontificating upon carbon taxes so that people barely scraping by can pay even more to keep the lights on and get to work, and Nancy Pelosi wants a jet that will seat 50 to commute to California. Words fail me. Neither the Dems or the GOP is capable of connecting with the American public at this point. They need to escape the cocoon.

Supercooled Lending

Ah, yes, everything that's old is NEW again. New Century (self-billed as a new type of blue-chip, aka a subprime lender) announced after the bell today that it would delay the filing of its fourth quarter financials, that it would not make a profit for the fourth quarter, and that it would have to restate its financials for 2006, which would result in lower reported profits. NEW also said that it expected its loan volume to drop 20% in 2007.

HSBC announced that it is setting aside an additional 1.76 billion in loan loss provisions.

I haven't included links in this because you should follow this and other housing stories on Calculated Risk. It's a superb economic blog with posts from very knowledgeable people in different industries, and it has a mix of perspectives and fact-filled posts and commentary that cannot be beaten.

I cannot overstress the importance of what is happening. The entire housing industry and related financing is now acting like supercooled water.


Background Reading

UVA has an American Studies page with links to online texts. They are well worth your time.

You might find "Only Yesterday" by Frederick Lewis Allen especially interesting and timely; it's about the 1920's. Chapters 11 and 13 might remind us all of some realities about how quickly liquidity can dissipate.

In terms of today's politics, the writings of Emma Goldman are particularly apposite, especially her essay "Anarchism, What It Really Stands For". It is hard to understand the confluence of aims of today's hard right and today's hard left until you read some of the early documents.
Anarchism has declared war on the pernicious influences which have so far prevented the harmonious blending of individual and social instincts, the individual and society.
Religion, the dominion of the human mind; Property, the dominion of human needs; and Government, the dominion of human conduct, represent the stronghold of man's enslavement and all the horrors it entails.

Anarchism does not stand for military drill and uniformity; it does, however, stand for the spirit of revolt, in whatever form, against everything that hinders human growth. All Anarchists agree in that, as they also agree in their opposition to the political machinery as a means of bringing about the great social change.
...the true lovers of liberty will have no more to do with it. Instead, they believe with Stirner that man has as much liberty as he is willing to take. Anarchism therefore stands for direct action, the open defiance of, and resistance to, all laws and restrictions, economic, social, and moral.
Everything illegal necessitates integrity, self-reliance, and courage.
Yeah, that's why bombing and murder are so wonderful and liberating. Idealism that refuses to deal with reality always becomes murderous in the extreme.

You cannot truly understand Chesterton until you understand Emma Goldman. We live in a golden age of free access to knowledge, and you might as well profit from it. A page with many of Chesterton's works is here.

The first and most glaring contrast between a Goldman and a Chesterton (examples of the idealistically destructive and the idealistically constructive) is that the Goldmans are devastatingly devoid of humor, whereas the Chestertons exude it. See the first paragraph of Orthodoxy:
THE only possible excuse for this book is that it is an answer to a challenge. Even a bad shot is dignified when he accepts a duel. When some time ago I published a series of hasty but sincere papers, under the name of "Heretics," several critics for whose intellect I have a warm respect (I may mention specially Mr. G. S. Street) said that it was all very well for me to tell everybody to affirm his cosmic theory, but that I had carefully avoided supporting my precepts with example. "I will begin to worry about my philosophy," said Mr. Street, "when Mr. Chesterton has given us his." It was perhaps an incautious suggestion to make to a person only too ready to write books upon the feeblest provocation. But after all, though Mr. Street has inspired and created this book, he need not read it. If he does read it, he will find that in its pages I have attempted in a vague and personal way, in a set of mental pictures rather than in a series of deductions, to state the philosophy in which I have come to believe. I will not call it my philosophy; for I did not make it. God and humanity made it; and it made me.

Tuesday, February 06, 2007

Hackers Mount Major Attack

Hmm. I was startled to read this report about a major hack attack on the internet:
Hackers briefly overwhelmed at least three of the 13 computers that help manage global computer traffic Tuesday in one of the most significant attacks against the Internet since 2002.

Experts said the unusually powerful attacks lasted as long as 12 hours but passed largely unnoticed by most computer users, a testament to the resiliency of the Internet. Behind the scenes, computer scientists worldwide raced to cope with enormous volumes of data that threatened to saturate some of the Internet's most vital pipelines.

The motive for the attacks was unclear, said Duane Wessels, a researcher at the Cooperative Association for Internet Data Analysis at the San Diego Supercomputing Center. "Maybe to show off or just be disruptive; it doesn't seem to be extortion or anything like that," Wessels said.
On Monday, I got reports of attacks against banks. It seems like these critters pile on and were experimenting. It's an example of why network security at banks is such a priority - the attacks were blocked, but they might not have been if the banks were not properly set up and monitoring. I don't think this is over yet either. I believe it started on Sunday.

Popular Delusions

George Monbiot beats yet another 9/11 conspiracy flick to pieces and decries the madness which is supporting these theories:
Counterpunch, the radical leftwing magazine, commissioned its own expert - an aerospace and mechanical engineer - to test the official findings. He shows that the institute must have been right. He also demonstrates how Building 7 collapsed. Burning debris falling from the twin towers ruptured the oil pipes feeding its emergency generators. The reduction in pressure triggered the automatic pumping system, which poured thousands of gallons of diesel on to the fire. The support trusses weakened and buckled, and the building imploded. Popular Mechanics magazine polled 300 experts and came to the same conclusions.

So the critics - even Counterpunch - are labelled co-conspirators, and the plot expands until it comes to involve a substantial part of the world's population. There is no reasoning with this madness.
The definition of psychosis includes a genuine divorce from reality, and cultures do buy into psychotic delusions, often with horrific results. That's an observation more in SC&A's line of work, but it's true:
...it is clear for all to see that modern day Arab world political and religious expression is authoritarian by nature. “Our way is best. Our interpretation is correct. You must accept that God sees things our way only,” and so on.

It because of thinking like that there has been so much death, destruction and mayhem in the Arab world. It is because of that kind of thinking that political and religious disagreements end with calls to violence and cries of ‘DEATH TO…’ All the while, the average Muslim wants to go to work, take care of his family and do right by his kids. Tragically, neither the political or religious leadership in the Arab world give a damn about him, his family or his dreams.
Take away free societies and democracies, and our world would look exactly like much of the Islamic world today.
This story about the NASA astronaut attacking a woman who she considered to be a rival for a man (not her husband's) affections left me gaping. At the bottom there's a link to the arrest affidavit. Technical or scientific training don't make a person act rationally once that person loses pyschological stability, and our technical and scientific knowledge won't guarantee that our society remains stable or productive. SC&A's post is long but very important.

The Kyoto Treaty is beginning to lose its magical aura as those pushing the CO2-caused global warming hypothesis have scared people enough to cause the realization that Kyoto itself will accomplish absolutely nothing. Not that the carbon tax plan Ann Applebaum advances will do any better, in fact it will do worse, but at least she's willing to take the issue seriously, whereas the Kyoto Treaty is a pretense at a solution for a problem that's not understood and may not exist, which problem is now being defended by the tactic of revising scientific finding to support a politically determined conclusion. This now reminds me of Soviet Lamarckism and Nazi medical authorities supporting the ideas of the Untermensch. When science becomes political it not only becomes deeply irrational, but often turns lethal.

Here's a nice economic delusion for you. Most people have read a constant stream of commentary about the US housing market stabilizing in the press. Instead, it's doing anything but. Vacancies are at an all-time high of 2.7% (and given that the historical average is for about 5-6% of all housing to turn over each year, that means that about half of the annual sales inventory is vacant!!!), homebuilders are reporting worse and worse results and bigger and bigger writedowns of assets, the pending sales report for December shows a market still worsening year over year, and costs of credit are rising rapidly for the the most marginal borrowers (who made up about a fifth of the market last year). Foreclosures and defaults have gone above normal and are rising at an astonishing rate (last spring they were still way below normal). This is a "stabilization" which bears an astonishing resemblance to the hours on the Titanic when everyone was being assured that the collision with the iceberg was no problem.

Anyone who reads the builders' financials will see what is going on for themselves. Anyone who bothers to read the Jan 2007 Fed Funds statistical supplement can understand the scope of the problem:
This happened during a period in which real incomes stagnated, and nominal household incomes increased very minimally. Is it a surprise that we have negative national savings rate, which has not happened since the Great Depression? We simply don't have the resources within our population to repay all of this debt.

Delusional societies are impaired societies, and the link between these stories is that westerners are buying into delusions across all class and national lines, which indicates that we have developed a deficit of critical thinking. We have tons of information, but either we don't know how to use that information or we lack the psychological stability to use that information. When we recover the ability to use the information we have we'll recover the ability to deal with our problems, but we will make no progress until then. Both the left and right are pushing delusions upon the public, so neither is a political refuge at the current time.

The US is still a land of incredible opportunity, and the moment we begin to deal with reality we'll surge ahead. We are, however, going to have to deal with scientific, social, political and economic reality in order to make progress again.

Saturday, February 03, 2007

The Bigger They Are....

Never mess with a tabby.

We All Have Obsessions

First, some humor:
Dr. Phil was conducting a group therapy session with four young mothers and their small children.
"You all have obsessions," he observed.
To the first mother, he said, "You are obsessed with eating. You've even named your daughter Candy."
He turned to the second mom. "Your obsession is with money. Again, it manifests itself in your child's name, Penny."
He turns to the third mom. "Your obsession is alcohol. This, too, manifests itself in your child's name, Brandy."
At this point, the fourth mother gets up, takes her little boy by the hand and whispers, "Come on Dick, we're leaving."
Now, on to my obsession.... From Broker's Universe:
Just received the new guideline changes to CW and it is leaning toward Countrywide getting out of Subprime Biz.
Anything that is over 90% is almost impossible to do Stated or Full Doc ,and for the lower score borrower they are now asking for tradeline requirments that are almost impossible to get. I know that they had huge losses on the high LTV's and with Broker/Borrower fraud.
The decline in the housing market last year was caused by specuvestors getting out. The decline this year will be because of tighter lending qualifications, which will put a constraint on the pool of available first-time homebuyers, therefore dropping demand. This will affect areas in which home prices are extremely high in comparison to median incomes. In order to offset this, further price declines will be necessary.

Those lenders who continue to serve the extremely high LTV (loan to value ratio) and subprime market will have to charge much higher interest rates, which will cut down the number of these loans. The spread between the rates offered to those seeking more traditional amortizing mortgages and those seeking the more risky financing that has come into vogue in recent years has widened and will continue to widen somewhat for months to come.

Right now we are in a slight intermediate pause. Prices have dropped enough in many areas to make housing more affordable to many borrowers with good credit, steady jobs and savings for a reasonable downpayment. With interest rates still being low, life and homebuying is good for these people.

Another result will be that many people who bought using loans that had high resets will not be able to refi out of them, causing higher levels of default in these areas. However, there is some good news. Areas with good jobs and better affordability do look to be steady at the moment, although appreciation will be somewhat constrained across the country.

Whatever you do, you don't want to be invested in the sloppy seconds of the mortgage debacle. People will be selling second and third lien notes cheap, but there is a reason for that. Avoid these investments like a plague. Avoid them in bonds, mutual funds, banks, and in any other form, including company holders. Experts will get the good stuff, and you will end up holding the bag.

Friday, February 02, 2007

Back, Just Reading

Oil's over $58! Not good, combined with the ISM report. Copper's headed lower. JP Morgan's global ISM (pdf) forecasts weaker global manufacturing. There are some weird anomalies to fourth quarter GDP I'll get to later.

Pipe bombs in KC and Chicago. Mover Mike has the coverage on talking dogs and singing politicians. Nifong in the wrong; this time they're serious. Florida Cracker has a gripping tale of terrorized reporters scattering like quail before BusHitler. The movie should be a big horror hit in Hollywood. If only Bush had had Cheney riding shotgun....

The Anchoress is sticking to opera, because it's ugly out there. Are we having a late fin de siècle event? SC&A takes a stab at analyzing the problem. The Sanity Squad is trying to "wend its way through a minefield of deconstructed logic.

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