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Friday, November 30, 2007

Economic Data

Personal Income for October was released. The chatter is about a -0.1 fall in personal income, but what matters to the economy at large is the drop in proprietors' incomes:
Proprietors' income decreased $1.7 billion in October, compared with a decrease of $6.9 billion in September. Farm proprietors' income increased $1.6 billion, compared with an increase of $1.8 billion. Nonfarm proprietors' income decreased $3.3 billion, compared with a decrease of $8.7 billion.
You can't take too many months of that without strong pullbacks in business spending. Wages weren't so hot either:
Private wage and salary disbursements increased $1.5 billion in October, compared with an increase of $35.3 billion in September. Goods-producing industries' payrolls decreased $2.7 billion, in contrast to an increase of $3.0 billion; manufacturing payrolls decreased $1.2 billion, in contrast to an increase of $0.4 billion. Services-producing industries' payrolls increased $4.2 billion, compared with an increase of $32.3 billion.
What we mean by the credit crisis from the Fed's Commercial Paper release:

The injection of all that money recently didn't settle anyone's stomachs. This is a major wrong-way sign on the financial highway. It is keeping AA financial rates from going stratospheric:

The split between high-rated and low-rated debt is becoming less responsive to easy money. Sad thing is, a whole lot more companies are going to end up in the low-rated bucket soon.

Bizarre proposals to fix things are rocketing around:
Last week, John M. Reich, director of the Office of Thrift Supervision, the federal regulator of the nation's savings and loans, came up with a more modest proposal in which borrowers would get a three-year extension of low initial "teaser" mortgage rates. That plan would be funded from surpluses in mortgage-backed securities.
See Calculated Risk. See Tanta's Ubernerd series. Those "surpluses" are what protect the top tranche holders, and as prepayment rates crash, so do the surpluses. If you wanna devalue all the debt at the same time.... This is the strangest thing I have ever read, even including the descriptions of what constituted "A" debt for New Century, which were strange beyond the comprehension of mere mortal M_O_M.

Philly Fed November (pdf). Look at the drop off on the six month expectations index on the graph:
The future general activity index decreased from 41.5 in October to 11.6 this month, its lowest reading this year (see Chart). The indexes of future new orders and shipments followed suit: The two indexes declined 23 points and 20 points, respectively.

Industrial Production
was recently released, showing weakness in October as in -0.5. These numbers are supposed to be seasonally adjusted. There were no positive major market groups, which accentuated the negativity. I almost emailed the Fed to tell them they forgot the seasonal adjustment, but then I took another look at rail figures and figured it was in there. Fourth quarter GDP isn't looking too hot, as in 1% or so even with a hefty helping of deflating imports/inflating exports to make the net export number look better.

Third quarter GDP was hot, but when you look at the details they are disappointing. Private domestic investment would have been negative except for an inventory build, which of course will come off future quarters of GDP. (When you stockpile it it is counted as a positive, when you sell it it is counted as a negative. In terms of actual growth, it's the other way around. In theory your manufacturers could be sitting on a boatload of inventory they couldn't sell and facing bankruptcy while GDP could be reported as a riproaring 10%.)

Corporate profits are slumping. Look at Table 11. The most meaningful number in that table is net cash flow, and here are the last five quarters:
So YoY a decisive negative (-4.2%), and here is the trajectory of quarter by quarter changes:
Second quarter looked a whole lot better, didn't it?

Where does the economy get impetus if not from profits or private domestic investment? Ah, exports, and the preliminary release showed better real net export figures. However when you look at current dollar net exports for the last three quarters, the picture looks quite different.
Through the magic of changing those numbers into real dollars, the change in net exports for the last two quarters of GDP was reported as:
Lemme put it this way - you can't spend about 20 billion of them thar "real" dollars, even to buy new imports. So we are moving in the right direction, but at a glacial pace that's disappointing. See Table 3 for these numbers.

For a final look at the situation, and a clue as to why private domestic investment was really negative, we go to Table 12 which breaks down corporate profits by financial and nonfinancial companies, and by domestic and rest of the world. We're going to use the figures without inventory valuation adjustments. Here are the last four quarterly changes for domestic industries:
Here are the same figures for corporate profits from the rest of the world:
28.0 20.1 16.7 21.9
Much better. We need the rest of the world to keep growing. Because so much of our manufacturing base has been eroded, we want them suckers to get fat like us, so we can ship them doritos in large ships. The problem is that we are not generating the profits to keep building and expanding within the domestic economy.

The relationship between private domestic fixed investment and economic growth is very strong. Private domestic investment drives the economy. Below is a graph generated from the BEA's tables (use the Java option). It should expand when you click on it.

When it dips, so doth GDP follow.

Pigs Fly, Hell Freezes Over

Or maybe that should be something about frying pans and fires.

The sorrowful tale of soaring inflation in the Eurozone:
European inflation accelerated in November to the fastest in more than six years, adding pressure on the European Central Bank to raise interest rates even as economic expansion cools.

The inflation rate in the 13-nation euro area rose to 3 percent this month from 2.6 percent in October, the European Union's statistics office in Luxembourg said today. An index of executive and consumer sentiment fell to a 20-month low of 104.8 from 106 in October, according to a separate report.

A 75 percent surge in oil prices since mid-January and rising food prices are driving inflation further above the ECB's 2 percent ceiling.
Hmm. Sounds just like the US, doesn't it. However this sorrowful tale takes place against a backdrop of agonized calls for rate cuts:
A clutch of Europe's top economists have called on the European Central Bank to cut interest rates at its policy meeting next week, warning of severe downturn unless confidence is restored quickly to the banking system.

The concerns came as one-month Euribor spiked violently by 60 basis points to 4.87pc today, the sharpest move ever recorded. Italy's financial daily Il Sole splashed on its website that the Euribor had "gone mad".
Thomas Mayer, Europe economist for Deutsche Bank, said the authorities should take pre-emptive action to unfreeze the debt markets and reduce the danger that events could spiral out of control.

"If they don't do anything, this could go beyond just a normal recession. With this credit crisis it could turn into a very uncomfortable situation, with a real economy-wide crunch that we cannot stop," he said.
Pigs just flew and hell just froze over. A German banker is advocating ignoring inflation and pumping money into the economy. The last paragraph is the way a German banker describes depression without speaking the word, which must, of course, not be spoken.

Needless to say, the ECB is between a rock and a hard place. Whatever they do will cause pain. Mervyn, the King of BofE, has been making worried noises as well, while one of his colleagues, Blanchflower, is fueling up the Royal Helicopters. Interbank lending is breaking down, and something has to be done to stop that.

Meanwhile, back at the ranch, Americans are being treated to the Fed's "Fed be nimble, Fed be quick" dramatic puppet show. For some time it's been working this way: Periodically one of the Fed governors draws the little slip that says "You are the Inflation Hawk for this month". That guv gets to put on the Red and Yellow cape with the mask of the falcon and soar around speaking engagements announcing the Fed's inalterable determination to quash inflation forever, or at least for our time. But other guvs draw the slips that say "Money dropping helicopters standing by", and thus are assigned to don the pilot's goggles and carry a big bag with a dollar sign on it over their backs, while making kindly appearances at banquets like some Wall Street version of St. Nick. No reindeer, but instead they dandle investors on their knees and explain that the Fed has a veritable army of deflation-fighting money dropping choppers in the waiting.

Guess who drew which assignment. Bernanke:
Economic forecasting is always difficult, but the current stresses in financial markets make the uncertainty surrounding the outlook even greater than usual. We at the Federal Reserve will have to remain exceptionally alert and flexible as we continue to assess how best to promote sustainable economic growth and price stability in the United States.
To be sure, lowering interest rates to keep the economy on an even keel when adverse financial market developments occur will reduce the penalty incurred by some people who exercised poor judgment. But these people are still bearing the costs of their decisions and we should not hold the economy hostage to teach a small segment of the population a lesson.
As the Federal Open Market Committee noted at its last meeting, uncertainties about the economic outlook are unusually high right now. In my view, these uncertainties require flexible and pragmatic policymaking--nimble is the adjective I used a few weeks ago. In the conduct of monetary policy, as Chairman Bernanke has emphasized, we will act as needed to foster both price stability and full employment.
As I discussed in a speech in early November, the heightened uncertainty flows from an increase in risk, which can be broken down into two components: valuation risk, which arises when the market realizes that the complexity of a security or the opaqueness of its underlying creditworthiness prevents it from accurately assessing the value of the security; and macroeconomic risk--that is, the risk that a financial disruption will cause significant deterioration in the real economy, which can, in turn, worsen the financial disruption (Mishkin, 2007d). The Federal Reserve's recent policy actions are intended to help lower macroeconomic risk and thereby improve the functioning of financial markets. In addition, our enhanced communications will help reduce macroeconomic risk by providing additional information regarding our policy strategy and our assessment of the economic outlook.
I'm almost sure that Mishkin is saying in this speech that the Fed is counting on controlling inflation by telling us very firmly that it will do so, which is supposed to control expectations.

The last appearance of the Fed Inflation Hawk occurred on November 16th when Kroszner spoke:
Looking forward, one feature of monetary policy to keep in mind is that, all else equal, each successive action in the same direction tends to lower the incremental benefits and to raise the incremental costs of additional actions. For example, unless underlying economic conditions or risks change substantially, reductions in the target federal funds rate tend to be associated with decreasing incremental benefits in terms of further mitigating tail risks and with increasing incremental costs in terms of the potential for inflation to increase. In the current context, I would be especially concerned if inflation expectations were to become unmoored and will watch both market-based and survey-based measures of inflation expectations closely.
The Hawk appears to be hooded at this time.

There is no alternative to continuing to pump enough gas into to keep the financial engines at least sputtering along, because the alternative is deflation and the approach to depression. The decoupling hypothesis has died an ignominious death, and we are slowly realizing that we are all in this together. You can't control commodity inflation (metals, fuel and food) without reducing demand, but you can't afford to let demand fall very much during a credit crunch. The credit crunch takes over if you do.

The only real way to control inflation at all while avoiding a severe recession or depression when so much of the globe has been playing the easy credit game, is to creatively destroy existing debt while infusing enough liquidity into the system to make it profitable to make new loans. This is a tricky tightrope to walk, and my guess is that the Central Banks are practicing to take this joint show on the tightrope. The increasing calls from the Treasury for debt writedowns are an implicit promise to bankers that if they accept the destruction of their value involved in cutting debts and/or interest rates, the better among them will be permitted to drink deep of the wells of government money. Or perhaps even the worst.

We'll see. The question in my mind is whether the Fed realizes how far they will have to go. The problem that shows up in my calculations is that the housing bubble created by easy underwriting is going to cause epic losses in Alt-A debt because of geographic correlations. The spec loans will all crash within two years. They can be written off now (or could be if anyone had bothered to figure out which of these were spec loans at underwriting). Prime, Alt-A or subprime doesn't matter for spec loans.

If the remaining bad loans were just subprime, compensating with low rates would be easier. The relatively high interest rates for subprime actually give a lot of negotiation room while still in theory maintaining a decent NIM with much lower primary borrowing rates. But the very low teaser rates and face rates involved in many of the recent Alt-A vintages leave almost no room for negotiation unless prime is cut to around 2.00%. Does the Fed intend to go that low? Does it realize that it will have to? And how will we pay the servicers? It costs a lot to do your underwriting just before expected default.

If these loans were not securitized it would be much easier to maximize the flow on the whole pool. But when you have interest tranches, and equity tranches, and tranches in theory protected from major losses to the pool as a whole, it's a different story. No one has yet answered the question of how the servicers get paid and get legal cover.

Countrywide's brilliant theory of refinancing all of its loans for free through Fannie is going to come to an end, because Fannie is tightening in December and March, and Fannie is running out of money anyway.

Now the Baton of Bad Loans gets passed to the regional banks as the commercial portfolios go bad. After that, a cohort of much smaller institutions get sentenced to Death by Home Equity.

Thursday, November 29, 2007

Unemployment - A Psychological Milestone

Today SA unemployment initial claims came in at 352,000. Because initial claims at 350,000 or above are considered to be a marker of degeneration in the employment marker, it might have a psychological effect on the markets. If the 4 week rolling average were to go over 350,000, most economists would concede that unemployment was approaching a recessionary level.

Actually what matters far more (to me) are continuing claims. The economy is always changing, and what matters far more than layoffs are how quickly laid off workers can find other employment. Continuing claims have been slowly rising this fall. Before they had been fixed in the 90,000 to 95,000 range above last year's, but they have broken out and are currently running well over that mark. The four week rolling average for continuing claims is now about 150,000 above last year's level. So although I don't see today's initial claims as significant in and of itself, it does look disappointing against that backdrop.

SA insured unemployment for 11/17 increased 112,000 from the week before, bringing the SA total to 2,665,000. Contrast that to last year's 2,464,000. NSA (actual) insured unemployment actually dropped, and is 2,222,940, contrasted to last year's 2,074,608.

Unemployment claims only monitor the universe of covered employment. Therefore they are very insensitive to changes in construction employment, which is largely handled by contractors that are paid by the job. We have certainly lost the equivalent of over 800,000 construction jobs this year, and probably well over a million.

If you go to this page and choose the weekly claims option, you can pull historical sequences of the unemployment claims, total universe of covered employment, and continuing claims. Initial claims are always choppy at this time of the year, and what is truly different this year are the continuing claims:
11/11/2006 286,151 90.7 315,000 2,269,427 93.5 2,427,000 1.7 1.9 130,605,286
11/18/2006 367,690 114.2 322,000 2,074,608 84.2 2,464,000 1.6 1.9 130,605,286
11/25/2006 323,509 92.8 349,000 2,620,460 105.5 2,484,000 2.0 1.9 130,605,286
12/02/2006 448,898 138.8 323,000 2,436,936 98.8 2,467,000 1.9 1.9 130,605,286

Wednesday, November 28, 2007

Bad Banker Report

FDIC publishes the Quarterly Banking Profile report (pdf), aka the Bad Banker report. Skimming this will make you want to find a banker and whap him with a rolled-up newspaper. Be gentle, they're emotionally fragile at the moment:
Rising levels of troubled loans in all major loan categories, but most notably in residential mortgage portfolios, led to a steep jump in expenses for bad loans in the third quarter. These higher costs, combined with sharply lower trading revenue, caused industry earnings to fall 24.7 percent from a year ago to $28.7 billion — the lowest level for industry earnings since the fourth quarter of 2002. This is the first time since 2003 that quarterly earnings have been below $30 billion. The industry’s return on assets (ROA) for the quarter was 0.92 percent, the lowest ROA since the fourth quarter of 1992.
However, most of the decline was attributable to results at a relatively few large institutions. Ten institutions accounted for more than half of the decline in industry earnings.
My life has not been wasted. Bank presidents who hated me a few years ago now evince a warm friendship. On the other hand, those ten institutions must be in truly wretched shape, right? Unfortunately, more are destined to join them. The collapse in commercial (see CR) and construction & development loans is now going to move on to beat up quite a few regionals. So do pay attention to that FDIC logo and the insurance limitations. I successfully forced my brilliant physicist brother to redistribute his money. Please do the same.

A Dose Of Political And Financial Reality

I have added several new blogs to the sidebar links. Calculated Risk, The Housing Bubble Blog and the UK Housing Bubble. Bloggers have done a superb job in chronicling and analyzing the mess - a much better job than even the financial press.

I know it's hard for Americans to believe that other countries did the same thing, so I think you'll find the UK blog very enlightening. For starters, a post with this graph:

As in the US, the UK housing bubble was fueled by low interest rates, short term adjustable rate loans, and a big rise in "buy to let", which is Brit for N/O/O, or specuvestor purchases.

In a prior post, this blogger looked at the rise in demand for rentals:
Will the rental sector save the bubble?

Of course not. However, we are detecting an increasing number of stories pointing to higher demand for rental properties. According to the Association of Residential Letting Agents (Arla), the level of tenants seeking to rent property privately has hit a five year high in the UK. "This peak demand should come as no surprise" said Ian Potter, head of operations at Arla. "Softening in the sales market is always a driver of further demand in the rental market," he added.

However, is it a good time to go out and invest in a buy to let property? Unfortunately for BTLers, rental values are very closely linked to incomes. So far, banks and building societies haven't found a way of providing loans to pay for bloated and overvalued rental properties. As we all know, you can't have a speculative bubble without masses of credit. So there will be no bubble in rental values.

When rents go up, tenants tend to move out and seek cheaper properties. Thanks to the BTL Brigade, there are plenty of choices out there, even in London. This keeps rental inflation very close to wage growth.
That rise in demand for rentals is a dead giveaway that the UK bubble is ending. Our UK bubble blogger contemplates the situation across the pond and notes that it forecasts the UK future. True. Nor is it just the UK. The situation in Spain is really bad, and a lot of UK buyers were buying homes in France and Spain. There were numerous bubbles in Europe, especially in the ex-Soviet bloc countries.

There was a grumpy yet accurate comment at CR yesterday:
I think American economists are saying, "Hell, not too much chance of recession because the weak dollar means we'll be exporting like crazy." The only problem with this reasoning is that the rest of the world is about to enter the same housing-induced recession. Europe (except for Germany and a few other parts) has seen a greater increase in housing prices than the U.S. That's about to end, and European consumers are going to start spending less, and those American exports will have one fewer place to go.
And then yet another commenter from Spain:
You, lucky americans, will soon touch the bottom and recover from this mess. Finantial and housing markets will be repaired cause you have the ability to identify the problems and act accordingly.

We, stupid spaniards (from Spain), will struggle with the inflated housing markets for decades because we are not able to react so quickly. We deny the reality. There's not such subprime issue in Spain, we say. Our lenders almost always ask for relatives that guarantee up to 80% of LTV, making default much more difficult, Many of us are poised to spend more than 40% of our personal income in debt servicing for many years.
The grass always looks greener on the other side. Rather than indulge in this "our bubble is bigger than your bubble" stuff (heh, size does matter, I suppose), we should all sit down and ask ourselves how this happened?

The imprecations against Bush and Greenspan don't explain why the same thing has happened in Asia, in Europe, in Australia and even in some places in Africa.

The way this happened is that banks had insufficient regulation. In the US, we followed the trend rather than having started it by repealing Glass-Steagall during the Clinton administration. One of the arguments for doing so is that the US was becoming uncompetitive because of outmoded Depression era restrictions that just didn't (harharhar oops!!!) apply in the modern era.

We must now pause to quote Albert Einstein:
Insanity: doing the same thing over and over again and expecting different results.
The truth is that any time you let the banks run wild, the risk takers will create so much short term profit that everyone will be pulled along to match them, the bad money chases out the good, and eventually the crash will come. This will happen in any country during any era. I have linked to the FDIC Summer 2006 Outlook so many times, because that was the issue in which the FDIC gently tried to hint that we were in for a rough ride:
Nineteenth-century economic downturns tended to be sudden and were often attributed to a lack of investor and creditor confidence, as opposed to downturns since the Great Depression, which have usually been preceded by other types of shocks, such as rising interest rates. Hence these earlier downturns, with their roots in financial markets, were usually called “panics,” whereas modern downturns are more often called “recessions” (see Table).

A great deal of blame for these financial panics was placed on banks contracting credit, as “the banks were … accused of aggravating the panic [of 1857] by their policy of calling in loans both precipitately and indiscriminately.” 7 The Great Depression, wrote a contemporary economist, was precipitated by excessive credit creation, particularly by selling goods on installment plans, a popular financial innovation of the time.8
The FDIC started the article with a bit of Greek history:
Since ancient times, credit markets have undergone periodic booms and busts. In 594 BC, for example, the Greek state of Attica found itself under severe economic stress because of the massive debt incurred by many of its citizens. The ensuing civil disorder resulted in a handover of power to Solon, one of the “seven wise men” of Greece. Solon took radical steps to restore balance to the economy, such as canceling debts, freeing those enslaved for failing to repay their loans, and devaluing the currency by 25 percent.
So this is where financial innovation got us 2,500 years later. Henry Ford may have believed that history was bunk, but Henry Ford didn't know squat about credit cycles. When you forget your economic history you are doomed to repeat it! Greenspan and Rubin were very instrumental in repealing many of the Depression-era Glass-Steagall restrictions, thus proving that they didn't know their financial history either.

When you create a debt bubble, you have two options to deal with the inevitable consequences. Depression, during which time the overloaded debtors struggle to pay their debts and consumption plummets, thus reducing incomes even more and increasing relative debt loads, or restoring consumption by devaluing your currency and wiping out some debts. There are no other alternatives. There is always a deflationary element when debts crash, because money is destroyed and credit is withdrawn to cover the destroyed money.

The ECB and the Fed are trying to dump enough money into the economy to offset the destruction of money, but we have a long way to go in redressing the situation. If it were only the US, the situation would be quite different - as happened during Japan's bubble and bust, the rest of the world would be able to escape our suffering. But when most of the major economies have indulged, we are facing an intimidating situation.

Blaming the Bush administration is like taking a placebo for cancer. It may give you a temporary warm glow and sense of well-being, but that's all it can do, and in the meantime you are just getting sicker and sicker. The Bush administration couldn't do squat about this, because you need the regulations which were dismantled to provide a framework for controlling risks. If Congress will not act to bring mortgages and credit in non-banking companies under a unified and strong system of regulation, NO president can do anything. Under our Constitution, presidents have limited power. This is wise, because they would almost certainly bubble if they could. However when Congress throws caution to the winds and jumps on the speculative bandwagon, there is no alternative force that can prevent the race toward financial destruction from beginning.

Ron Paul, by the way, is largely insane in his financial prescriptions. Really. Destroying the Fed would give politicians the license to create instant prosperity, and politicians are infinitely less responsible than the Fed. The democratic countries evolved the institution of central banks to deal with the reality that in each generation, voters and politicians will always choose to create instant prosperity at the cost of a nasty downturn later. I do blame the Fed and Greenspan for a lot, but the US has actually been one of the more restrained countries in this regard. You don't want to know about banking history in China and India, really you don't.

As for Japan, it has a far more massive public debt in ratio than the US does. Everyone should stop and think about that ugly fact.

One of the healthy elements of American culture is that we are quite self-critical, and admire greatly what works in other countries. However, admiring what works will only translate to benefits in our culture if we figure out how to implement it in ours, which means that we also have to look at the tradeoffs.

Monday, November 26, 2007

Fed Year-End Repo

A lousy 8 billion? Needs more than that:
The New York Federal Reserve will arrange $8 billion of long-term repurchase agreements, or repos, in a bid to hold down banks' borrowing costs through year-end.
The New York Fed said in a statement that it will arrange the first of the long-term repo operations on Nov. 28 ``in response to heightened pressures in money markets for funding through the year-end.'' The repos will mature on Jan. 10. The Fed also said that it plans to ``provide sufficient reserves to resist upward pressures'' on the overnight rate in coming weeks.
So as we lurch into the yearend, the Fed stands ready to help to try to keep overnight rates close to the official Fed funds rate. Fed funds rate cut apparently will be deferred until January. The lending guidelines for borrowing on Treasuries are also being eased:
In a separate statement, the Fed said it will raise the limits on the amount of Treasury securities dealers can borrow from its System Open Market Account. Through the account, dealers can borrow Treasury notes and bills that are scarce in the repo market.

Primary dealers will be able to borrow 25 percent of the amount available, with a maximum of $750 million per Treasury security, up from the previous limit of 20 percent with a maximum of $500 million per issue, according to the Fed's statement.

The Fed said it has also increased the amount available for borrowing each day to 90 percent of an issue from 65 percent. Dealers can also borrow securities maturing in six days or longer. The Fed had previously limited the borrowing only to issues maturing in at least 13 days.

The Market Has Moved

The UK and Europe are getting hit. The epic saga of Northern Rock (it turns out that a lot of its mortgages may really be owned by offshore investors) continues, the reality that other UK mortgage banks have major problems is beginning to sink in, and the losses in commercial real estate in the UK are mounting, causing at least one fund to warn investors:
The commercial property market is trading at up to 15pc below its peak, one of Britain's biggest property fund managers has warned.

Schroders said investors redeeming their investments from its £2bn flagship exempt property unit trust fund may now have to wait longer than the normal three months to receive their money, allowing the fund manager "flexibility to make disposals at fair value".
William Hill, head of property at Schroders, said: "Our view, supported by the independent valuer, is that there is clear evidence that the market is now trading at some 10pc to 15pc less than its peak and we have therefore set the redemption price at 12.5pc below the September valuation. The market has moved and there is nothing to be gained by us putting our heads in the sand and pretending otherwise."
HSBC's problems continue:
HSBC Holdings Plc, Europe's largest bank, will bail out two structured investment vehicles, taking on $45 billion of assets to avoid a fire sale of bond holdings.

Investors in Cullinan Finance Ltd. and Asscher Finance Ltd. will be allowed to exchange their holdings for debt issued by a new company backed by loans from HSBC, the London-based bank said in a statement today. HSBC said it doesn't expect any ``material impact'' on its earnings or capital strength.
Plus they still are taking losses on their on-balance sheet RE portfolio. According to the article, HSBC's SIV holdings are the largest after Citibank's. In the meantime, the Super-SIV effort led by Citi is still flailing along. For some reason, investors aren't thrilled at taking someone else's bad paper.

Both of these SIV problems are the result of the breakdown in the ABCP market.

This is the day the suspension in mortgage trading in Europe was supposed to be lifted. We will see the results. The European Central Bank announced on Saturday that it would throw tons of money into the market this week, just like it did this summer.

Right now all of the players are talking about "liquidity", and holding out the hope that things will be different in a few months. I think they will be different. They'll be worse.

Bad loans are going to default all over, and the resulting decline in property values leaves all these debt obligations worth less and less on the market as valuations slowly drop. The alternative is to hold the paper until maturity if it performs. That will not be possible for many players, and if it were, the sudden drop in money circulation would have a dire effect on the economies involved.

No one knows how to fix this. The way to compensate for what is essentially the wholesale destruction of money is to lower rates, but everyone's afraid to do that for fear of being carry-traded. The battle now is to keep money flowing into economies from the outside.

The ECB is hoping that it can throw this money out there, and banks will take the cheap funding and use it to buy questionable assets without demanding that the price of those assets be marked down too much, or take the money and use it to bail out their own leaky balance sheets without selling the paper. Why? Well, the reason they would do so is to prevent having to further mark down their own assets. This means that the banks who would buy would be taking on questionable investments in order to cover questionable investments. This is exactly the strategy that Japan used when its real estate bubble burst, and the result was two decades of economic stagnation.

This is a grim situation and there are no signs of improvement. Holes are now developing in the Asian markets as well.

Sales tax receipt data in the US seems to confirm that consumer spending is flagging considerably. The recession word is getting considerably more usage.

Saturday, November 24, 2007

Saturday Notables

This will be a random grabbag.

First, a personal anecdote that I feel proves the glass ceiling for women. Following our usual tradition, last night was the third poker night of the holidays. The parties involved were my physicist brother, the Chief and myself plus two canine kibitzers. I had just barely been holding my own, and last night appeared doomed to follow the same course. Therefore I decided to apply strategic psychological pressure by mentioning (at carefully chosen intervals) boob power and the dire fate of the patriarchal power structure once Hillary succeeded to the throne.

For a while, it appeared that the patriarchal power structure was remaining ascendant, but then I ended up with a ROYAL STRAIGHT FLUSH. I drew for it, mind you. Leaping to my feet as the patriarchal power structure refused to see my discreet sucker bait two penny bet, I slammed it down on the table. While the patriarchal power structure was staring at it with bulging eyeballs, and the Chief was muttering thanks to some patriarchal G_d that he hadn't gotten his full house, I leaped to my feet, raised my arms to the sky, and proclaimed the virtues of our great Leadress The Hillary the female representative of Womyn Power on this our Gaia.

You'll hardly credit this, but the patriarchal power structure left the table. My brother suddenly experienced a pressing need to read some article about physicists claiming that merely studying dark matter would hasten the death of the universe, and the Chief was seized by an uncontrollable urge to do laundry. They eventually came back, and in short succession I got two straights, three aces and a full house. They were folding a lot, thus depriving me of my rightful winnings in a clear demonstration of patriarchal wussiness.

Now on to other matters. This article details the worries over subprime adjustables in the UK. Sales and property values there are already slumping, prompting a credit tightening. The dominant loans there have been these two-year adjustables which reset to a much higher rate. The standard has been to refi after the two-year fixed period at the initial lower rate, and now a lot of buyers won't be able to do that. Ireland, the land of the IO mortgage, has growing supply and falling sales. The Spanish market is also slumping severely, and construction there has recently accounted for about 18% of GDP growth, so the results of a slump will be accentuated.

There is a truly excellent post at Calculated Risk regarding the decoupling theory (that the US will slump but the rest of the world will go on rapidly expanding). I have been writing about the declining YoY freight figures most of this year. Here is CR's graph on Chinese exports to the US:

This graph goes through September, and exports peak in October. They can not do more than barely exceed the previous peak, and this last happened in 2001, the year of the previous recession. If you go by freight figures, we appear to be in a consumer-led spending recession already. Dollar-denominated retail sales figures show increases, but this is because of the high cost of food, fuel and other necessities. YoY sales tax receipts are really beginning to slow now. The Chinese are worried, and who can blame them?

Moving on to non-economic matters, this article about an incident in Britain in which disabled veterans were jeered out of a public pool they were using for rehab disturbed me:
The men, injured during tours in Iraq and Afghanistan, were taking part in a rehabilitation session at a leisure centre, when two women demanded they be removed from the pool. They claimed that the soldiers "hadn't paid" and might scare the children.
It is not the first time that Headley Court neighbours have been accused of poor behaviour.

There was uproar earlier this year after residents objected to planning permission to convert a home into a six-suite hostel for injured soldiers' families to stay in. The local council later approved the building work.
David of Photon Courier has written about past incidents of this sort of thing. As for "scaring the children", what do these bimbos want disabled people to do? Hide themselves from sight? If you are not willing to have your children around disabled adults, the treatment of disabled children in public schools is going to be dire indeed. Sane women would use this as a teaching opportunity. There's more than one mental problem displayed here.

And last, a humorous note. In the wake of the various problems in the Episcopalian church, multiple bishops in Canada and the US are now fleeing either to the Southern Cone, African Anglican provinces, or the Catholic church. Ruth Gledhill seems to be displaying an odd attitude in this somewhat hysterically entitled article Pope prepares to pounce as Anglican haemorrhage begins:
Given the attentiveness Rome is showing to the requests from three US episcopal bishops to be received, plus the open letter requesting reception from one entire traditionalist breakaway Anglican church, the Traditional Anglican Communion, a good source tells me: ‘Rowan will be chewing the carpet. I would go as far as to say he is wondering where he actually stands.’

My headline is perhaps a little unfair to Benedict. The same source says: ‘Not just in the UK, but also in Europe, there is an enormous constituency, for the lack of a better word, of the spiritually disinherited. And this is not just about Catholics - it is also about believers in Russia who were cheated out of the practice of their religion by the Communists, in Europe by relativising thelogians and in the UK by clergy so desperate to please that they emptied the Christian faith of any content. Pope Benedict speaks in the name of these Christians and this is what makes his Pontificate so very exciting.’
In other words, a church with a coherent theology has attractions for serious believers. I don't see this as being the fault of Pope Benedict, so I would say the title is more than a "little unfair". The problem is not pouncing popes, but wussy, vague theology in the Anglican churches of the northern west. The joke is that the vast majority of all Anglicans worldwide live in the more orthodox communities of the Global South. Those communities are biblically based and growing rapidly in spots as far afield as Indonesia, Africa and South America (the Southern Cone). The huge majority of Anglicans are black or brown people who believe in the Creeds, and the feeble churches of the UK, Canada and the US are the itty-bitty tail of Anglicanism pretending to be the head while trying to wag the dog. Needless to say this produces a ridiculous spectacle of hubristic nonsense.

Friday, November 23, 2007

Not Just Subprime, And Not Just American

While it's true that the Fannie/Freddie guaranty losses are causing digestive problems for investors everywhere, other RE companies in Europe are having similar problems. This week French banks had to bail out CIFG Guaranty, a firm owned by French banks. These bailouts will continue. Another UK property fund (mostly commercial) is limiting redemptions:
The change in policy at M&G’s offshore UK property fund – which affects only institutional investors – is the latest sign of a growing crisis gripping the real estate sector.

Mark Dampier, of financial adviser Hargreaves Lansdown, warned last night that the move could herald a more widespread panic. With listed property shares in freefall, many investors have been withdrawing money from unlisted vehicles.
Most of the figures given for losses at banks involve direct losses from subprime residential mortgages, but ignore the knock-on effects of guarantees, swaps, insurance and the inevitable rollover to prime or Alt-A. For the largest financials, there is additional exposure in the form of directly owned investments in residential and commercial mortgage-related companies, as well as in the various types of insurers.

Because many of the same companies wrote insurance for municipal bonds, there is a further ripple effect. Many investors are now seeking insurance from another company, which is causing the derivative market as a whole to grow very rapidly.
The market for derivatives grew at the fastest pace in at least nine years to $516 trillion in the first half of 2007, the Bank for International Settlements said.

Credit-default swaps, contracts designed to protect investors against default and used to speculate on credit quality, led the increase, expanding 49 percent to cover a notional $43 trillion of debt in the six months ended June 30, the BIS said in a report published late yesterday.
516 trillion dollars. For comparison, US GDP is under 14 trillion. Minor problems in just the credit swaps portion of this market are capable of inflicting unimaginable financial losses.

Europe has problems with its own real estate bubbles in quite a few countries, but investors in Europe have also gone hog-wild on junk corporate bonds and speculative trading in credit default swaps. Some Euro companies were doing very well with infrastructure and capital investments in various EM (which include the escapees from the Soviet bloc) countries. However, the bulk of the financing for the investment in those countries came externally, from financial companies and investment funds in Europe, the US and elsewhere. And much of that financing was sold off to investors with the theoretical underpinning of dubious guarantees.

It's very doubtful whether many of these EM countries have reached the self-sustaining point that would allow payments on these debts to be funded from their own internally-generated profits. Instead, these countries are dependent on a continued flow of external investment capital.

The breakdown of many of the currency carry trades, as well as the problems with risky debt, are a huge threat to these continued flows of capital. The plight of EADS (Airbus) is just one example of the problem.

That is the global story.

The problems with the credit system in the US evolved from combining insurance with banking and poor credit-granting practices. The repeal of Glass-Steagal in the 1990s allowed banks to get into these lines of business and produced a level of correlated risk not present in the banking system since the Great Depression. But it's critical for everyone to understand that the same thing was being done by financial companies globally, and has created the same risks.

To bring the story back to the shores of the US, let us use Goldman Sachs as an example. Goldman, like other companies in the securitization business, has direct investments in companies involved in the business. There was an incestuous nature to the development of widespread prime and no/low doc Alt-A that is going to cause major losses in the underlying companies, which will eventually show up in the balance sheets of the holding companies.
Go to Edgar's full text search. Choose the advanced option. Enter GSAMP in the text block, and select FWP as form type. You will get a list of FWPs for Goldman's trusts (under Goldman Sachs Mortgage Company). Only by reading these things can you get an accurate understanding of the risks and correlations. Let's look at the FWP dated 1/26/2007 for GSAMP 2007-NC1.

At S-42 we see that the loans came from New Century (a new breed of blue chip, now bankrupt). After an episode of hearty laughter generated by reading New Century's underwriting guidelines on S-44 and S-45, we proceed onward reading information about servicing, which is handled by New Century and Avelo:
Avelo, a Delaware limited liability company, is a wholly-owned subsidiary of
Archon Group, L.P., which is a subsidiary of The Goldman Sachs Group, Inc., a
publicly traded Delaware Corporation (NYSE: GS). Avelo is an affiliate of the
depositor, the sponsor, the swap provider under the interest rate swap agreement
and the cap provider under the interest rate cap agreement. Avelo began mortgage
loan servicing operations by boarding loans in December 2005, and activated its
first mortgage loans in January 2006.
The FWP filed 2/08/2007 will give you more information about Avelo, and I think anyone who knows anything about mortgage servicing will get another hearty laugh out of stuff like this:

Transferred servicing of seasoned high delinquency rate assets from             GMAC Mortgage to Avelo              o     797 assets transferred in June                   ------------------------------                    GWAC                       10.22                   Avg. UPB                 $47,244                   Age                           89                   LTV                           81                   FICO                         580                   % v = 30 days delinq       23.50%              18 in foreclosures and 34 bankruptcy assets
It turns out that Avelo seems to have started its operations by buying junk mortgages cheap and trying to make money off of them. More on Archon here.

Going back to our original FWP, in case you are wondering about the identities of the swap and cap provider, on page S-55 you discover:
The interest rate cap agreement and the swap agreement will be provided by Goldman Sachs Mitsui Marine Derivative Products, L.P., a Delaware limited partnership ("GSMMDP," the "Swap Provider" or the "Cap Provider"). GSMMDP is primarily engaged in the business of dealing in derivative instruments. GSMMDP has a counterparty rating of "Aaa" from Moody's Investors Service, Inc. and a credit rating of "AAA" from Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. GSMMDP is an affiliate of the sponsor, the depositor and the underwriter.
In other words, GS Mitsui Marine is also a subsidiary of Goldman Sachs. They aren't insuring the credit here, though, so they aren't going to take a big loss.

Deutsche Bank (S-54) is the custodian of the mortgages. Recently there has been much wild yammering about a case in which DB tried to foreclose on some mortgages without actually having taken assignment of the underlying mortgages at the time it filed the action. (See Tanta.)But DB is a pretty good outfit and it will correct that and refile. The custodian is the party that has the actual mortgages physically in its possession. We certainly hope that DB's custodian operation is strong, because let's face it:
This concludes today's rendition of stupid things you can do with credit. Remember, it's not the fall that hurts, but the landing.

Thursday, November 22, 2007

Happy Thanksgiving!

I hope you all have a great day with friends or family. My brother came, and the Chief and I are very happy.

It's my favorite holiday.

Giving Thanks, and especially giving Thanks in service, is one of the experiences that most transforms human life.

A couple of quotes from Winston Churchill:
Attitude is a little thing that makes a big difference.

A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.

We are stripped bare by the curse of plenty.

We make a living by what we get, but we make a life by what we give.
The cure for the curse of plenty is to share it, and to recognize your good fortune and your happiness. You can't figure out your opportunities until you know your assets, and our best assets are often our friends and family.

My best to you all.

There are some great Thanksgiving links at Dr. M's. (I'm lazy today.)

Wednesday, November 21, 2007

If You Dig A Hole Deep Enough, You'll Get To China

Hat tip Anthony, who posted this one over at CR in the comments. I realize that most people have other things to do than follow what India and China banks are doing, but what happens there does matter:
Yields on three-month deposits in China and Korea have plummeted to near 1pc in a spectacular fall over recent days, caused by panic withdrawls from money market funds and credit derivatives.

"This is a severe warning sign," said Hans Redeker, currency chief at BNP Paribas. "Asia ignored the credit crunch in August but now we're seeing the poison beginning to paralyse the whole global economy," he said.
It is unclear what prompted this latest "heart attack" in the credit system, though rumours abound that Asian banks have yet to own up to their share of the expected $400bn to $500bn losses from the US mortgage debacle.
India's banks and major money holders are not resting easily either. The somewhat dire tone of the article is warranted.

Meanwhile, Back At The Ranch

OTS press release:
Continued weakness in the housing and credit markets caused earnings in the thrift industry to decline by 84 percent during the third quarter of 2007, compared with the comparable quarter a year ago, the Office of Thrift Supervision (OTS) reported today.

“Despite the difficult environment, I am encouraged that the managers of OTS-regulated institutions are taking the appropriate steps to provide a cushion for the future,” OTS Director John Reich said. “Strong capital and higher loan loss allowances will serve thrifts well if housing markets weaken further.”

The Director also highlighted the fact that thrifts originated a significantly higher percentage of the nation’s 1-4 family mortgages during the quarter, evidence that the thrift industry stands ready to serve the home mortgage needs of American families during challenging times.
A whole lot of passive voice in this one! I am not sure that it is a good thing to have your profits drop 84% as you are getting a larger chunk of the mortgage business.

Insanity V Sanity

The European banks are shutting down trading in mortgage backed securities for a week. Obviously, this is to prevent a meltdown:
The European Covered Bond Council, an industry group that represents securities firms and borrowers, recommended banks withdraw from trades for the first time in its three-year history until Nov. 26. Banks are still obliged to provide prices to investors, according to the statement today.

Banks including Barclays Capital, HSBC Holdings Plc and UniCredit SpA took the step as investors shun bank debt on concern lenders face more mortgage-related losses. Abbey National Plc, the U.K. home lender owned by Banco Santander SA, became the third financial company to cancel an offering of covered bonds within a week today as investors demanded banks pay the highest interest premiums to sell bonds in the 12 years since Merrill Lynch & Co. began collecting the data.

``We are in a deteriorating situation,'' Patrick Amat, chairman of the Brussels-based ECBC, said in a telephone interview. ``A single sale can be like a hot potato. If repeated, this can lead to an unacceptable spread widening and you end up with an absurd situation.''
In other words, the prices would have to go too low.... Naturally no one wants that, because Euro credit default swaps on banks are moving ever higher:
The risk of banks defaulting on their debt rose to the highest on record as losses by mortgage finance company Freddie Mac fueled concern that lenders will add to more than $50 billion of writedowns worldwide.

Credit-default swaps on the Markit iTraxx Financial Index, a benchmark for the cost of protecting the bonds of European banks and insurers, rose 6 basis points to 63.5, the highest since its start in 2004. Contracts on Merrill Lynch & Co., the world's biggest brokerage firm, increased 25 basis points to 170, and Citigroup Inc. climbed 5 to 101.5, according to Phoenix Partners.
``Everything is signaling that the market may switch to panic mode,'' Philip Gisdakis, a credit analyst at UniCredit SpA in Munich, said in an interview today. ``The news flow is so bad and there is no relief in sight.''
Ah, come on. This is panic mode. Anyway, no one can afford those beyootiful bond thingamabobs to get marked down even further, because that would just make the cost of insuring bank debt higher due to the fact bank capitalization would be lower. And it sure sucks trying to raise capital as the cost of raising capital keeps going higher.

In the mean time, Hank Paulson, erstwhile of Goldman Sachs, came up with a brilliantly insane idea of just doing wholesale modifications on junk loans. Tanta at CR can explain all of that very well.

The era of funny money loans is being succeeded by the era of dimwitted high finance, right on schedule. And yes, ACA is the canary in the gold mine. So we go from insanity > another type of insanity > sanity. The sanity stage carries big losses.

Last night the Nikkei managed to work itself out of the 15s and into the 14s. Now we wait to see if it can stabilize there. Several UK banks are looking "troubled". Naturally our stocks are being hit.

Tuesday, November 20, 2007

Another "Enhanced" Cash Fund Bites The Dust

GE covered its outside investors at 96 cents, BofA covered theirs, I believe, and Federated Investors is bailing out this fund, but how long can this go on?
Federated Investors Inc., the third- largest manager of money-market accounts in the U.S., bailed out its Enhanced Reserve cash fund as declines in mortgage-backed securities caused the credit markets to seize up.

Federated allowed clients to withdraw their money without losses, spokeswoman Lindsy Kollar said. She wouldn't disclose the size of the fund or the amount or cause of the losses. The Pittsburgh-based company wrote down $4.9 million of its $5 million investment in Enhanced Reserve, a partnership open only to accredited investors, according to a regulatory filing.
According to the article there is about 850 billion in similar funds. The losses are coming from the short-term mortgage backed debt, it seems.

Anyway, this is why I wouldn't recommend selling solid stocks with viable businesses, unless you are going to plunk the money in CDs in banks where it is insured. There's not much safe to invest in these days that's relatively liquid!

Hell's Bells Ringing On Wall Street

Oh, ho, ho, there is no joy in Mudville today.

The rumor is that ACA is trying to renegotiate its credit swaps. ACA filed a 10Q saying that its auditors say it cannot post the required collateral if its credit rating is downgraded:

As discussed in Note 16 to the condensed consolidated interim financial statements, on November 9, 2007 Standard & Poor’s Rating Services (“S&P”) placed its financial strength rating of ACA Financial Guaranty Corporation (“ACA FG”), a wholly owned subsidiary of the Company, on “CreditWatch with negative implications”. Should S&P ultimately downgrade ACA FG’s financial strength rating below “A-”, under the existing terms of the Company’s insured credit swap transactions, the company would be required to post collateral based on the fair value of the insured credit swaps as of the


date of posting. The failure to post collateral would be an event of default, resulting in a termination payment in an amount approximately equal to the collateral call. This termination payment would give rise to a claim under the related ACA FG insurance policy. Based on current fair values, neither the Company nor ACA Financial Guaranty would have the ability to post such collateral or make such termination payments.

Contrast its Q3 2007 call on November 16th! Here's an earlier article about the implications. This is total fear territory. It's hard to see how ACA could raise capital with a share price under $1.50. A Barron's article:
ACA has long been a convenient dumping ground in which major subprime securitizers like Bear Stearns (BSC), Citigroup (C), Merrill Lynch (MER) and some 25 other prominent dealers could pitch billions of dollars of risky obligations for modest premiums. That let them gussy up their balance sheets and shift any potential mark-to-market hits to ACA.

If ACA Capital were to founder, more than $69 billion worth of CDOs, including the $25 billion in subprime paper, would come rumbling back to the Wall Street banks, and likely with heavy attendant losses.

That's why Wall Street has continued to do a brisk business with the beleaguered firm. In the third quarter, ACA insured some $7 billion of subprime collateralized-debt obligations. Even if the company survives for only another couple of quarters, that would stave off the recognition of billions of dollars of losses.
ACA's GAAP loss in the third quarter was something like $29.00 a share.

Freddie Mac took major losses on its guarantees (as of course Fannie did), and Freddie announced its losses along with an intention to raise capital. How can the securitization business survive without drastic changes? The answer is that it can't (auto debt losses and CC debt losses are rising as well), and the matter is so dire that (gasp) Street lawyers are losing their jobs, which of course follows layoff announcements in fixed income groups of financials. That is when the Street begins to panic - when it strikes home.

Of course, the UK banking problems aren't helping any. At this point, it's good to have cash on hand. You won't necessarily be able to clear many holdings for a while. Lord only knows what BofE is going to do, but it has its own problems with the same sorts of debt that are ripping up the pavement on Wall Street.

Update: Calculated Risk has a comment thread on ACA. From reading it I realized that many don't understand the significance, for which I apologize.

Securities are given a rating at the time they are first sold. No one would buy them without that rating, and for many investors, regulations require that securities must have a certain rating in order to be held. In some cases, the rating is boosted by insurance, a guarantee or a swap. If ACA cannot in fact meet its obligations, then those guarantees are worthless. This would cause a further ratings downgrade of those securities, which would cause investors and bagholders to have to mark their fair market value down or sell the darn things. Of course, if anyone sells that is going to push the fair market value even further down. Also, in the event the securities started to default, there would be no one to cover the losses.

ACA is currently rated A, which should tell you something right there. What the heck was anyone doing relying on an A-rated entity to provide insurance? Even the AAA rated ones are in severe difficulty.

The next step for a downgrade is A-. If ACA is downgraded below that, then all of this comes into play.

The really funny thing is that ACA probably has decent leverage. If it gets a renegotiation on the terms of its swap deals, the loss will be less to those who are holding those securities and CDOs. This fact alone points out the insanity of this form of "insurance". When your insurance company can basically make you renegotiate by posing the possibility of default, you don't have any insurance. Quite a problem for the fourth quarter financials, eh? Remember, those are the ones that have to be signed off on under the threat of criminal penalties.

I have a hard time believing that one can renegotiate these terms and continue to pretend that much real insurance exists on these juicy AB instruments. So frankly, I would think the game is up for these companies.

If you think this all sounds completely insane, you are a normal person. It is and it was.

Monday, November 19, 2007

As The Dow Heads South

I wish people would stop talking about "subprime". The problem is precisely that the credit problems were widespread. They cross the commercial/consumer boundaries, and are not limited to real-estate secured debt at all.

Sometimes the words we use constrict our thinking. Probably much of our erstwhile complacency is founded on the improper and imprecise use of labeling.

One example is this article which looks at the alarming fact that higher-end spending is beginning to slow:
Affluent consumers, pinched by shrinking stock portfolios, falling property values and smaller bonuses, are behaving like their less-well-off peers: They're reining in spending.

That portends a steeper slowdown than originally forecast for the U.S. economy, or even a recession, because the richest fifth of American households accounts for almost 40 percent of consumer spending, the main engine of economic growth.

``Upper-income consumers are the bellwether,'' says Joseph Brusuelas, chief U.S. economist at IDEAglobal Inc., a Singapore- based research firm that advises central banks. ``When they begin to capitulate, that's when we all head down.''
So how is this some sudden, shocking revelation? Many of the persons pulling in the big money in recent years have been doing on credit-related business. Builders, mortgage brokers, real estate brokers, and those involved in the securitized credit business are all among those who have been pulling in the big bucks. It's not exactly surprising or unpredictable that this cohort would be hit, is it?

As for the top 20, they still only account for 40% of consumer spending, and if most of the rest of the consumers involved in 60% of consumer spending pull back, you will get a recession regardless. There are countless car dealers, restaurant owners and store owners who pull in big money off that 80% of consumers who account for 60% of consumer spending. Put that way, it looks a little different, doesn't it? If the lower 80% of consumers start to pull back, you are pretty much guaranteed to see a pullback in that top 20%. They don't make their money in a vacuum.

The idea that the small top percentage is what matters, and that the top percentage is somehow immune to the entire market environment also translated into the credit insurance business.

I think the worst factor puncturing the aura of invincible complacency is the slow realization that the insurance companies who guaranteed a lot of the bad credit are in trouble (Fannie is taking large guarantee losses, and the ratings firms are threatening to downgrade other insurers), and thus the real problem is bigger than the talking heads ever conceded. Because once those insurers get into trouble, the protection that they offered to lift all sorts of securitizations into the top ratings categories is gone.

So Swiss RE takes a whack on credit swaps, and everyone twitches. Everyone's freaking over ACA, MBIA and the like. Pretending that these linkages didn't exist can only last for so long. The translation of funny-money debt obligation losses into the public sector is not going to help matters. This time around, a lot of non-federal spending will have to be cut. Far too much of growth in local government spending was derived from property-related revenues which are doomed to fall with property values.

I hope we don't end this week with the Dow in the 12,000s, but I think it is likely. We have created a self-sustaining downturn.

Sunday, November 18, 2007

Just Thinking

No, I'm not dead. It was a tough week, though. I'm in the middle of holiday cleaning.

For something completely different, I found this topic and the comments on "The Feminization of the Church" extremely interesting. This is from an Episcopal/Anglican discussion site, and it started as a commentary on the fact that the Church of England ordained more women than men last year, but the topic is really much broader. The comments came from men, women, at least one ordained female orthodox minister, and covered practices in multiple Christian denominations. There is even a link to a study on Jewish converts.

Some of the comments are fascinating just because of their honesty:
Can a Christian denomination survive women’s ordination? It would be incumbent on the innovationists to prove that. Evidence for: The Assembly of God church. Evidence against: Sweden. My inclination is that the Anglican church will go the way of the Lutheran church in Sweden where 1/2% of Swedes attend church on a given Sunday (most of those being immigrants). Liberal feminized theology has effectively killed Christianity in that country.
So it is back to - children, kitchen, bedroom - is it? How striking that conservative religious thinking which fairly demands that women be mothers, at the same time disses them for being womanly, motherly, and accuses them so heartlessly of some creepy sounding but quite vague crime, like that of feminizing religion?

Are we to believe that true religion is an innately masculine endeavor which has been now been violated and invaded by outsiders?
This tracks with a claim made by military strategist Martin van Creveld in his book The Transformation of War, that wherever a profession is broadly opened to women, men will find it unattractive and will cease to pursue it as much as they had before.
In the 400 year period of the Judges in Israel there was only one female judge, Deborah. She was well quialified and a good judge and God used her. One woman, in 400 years! In order to have an exception to a rule there was be a rule. I’ve known two clregy women in my 71 years who, by their ministry, attested to their being Called by God to minister as ordained clregy. I’ve known a score of men whose minisrty attested to their being Called by God to minister as ordained clergy. One the other hand, I’ve known a couple of man and scores of women who, by their inability to articulate the Gospel and by their lives the inability to live in obedience to Jesus, have clearly attested that they had not been Called by God and ought never to have been ordained. To not serve when is Called is a temporary problem; God wins in the end as He did with Jonah. To attempt to serve when not Called is a very dangerous thing to do.
God has not Called me to be an ordained clergy person, for which I am very thankful, but if He should do that, He will provide a way for me.
I would like it to be that women could be priests and not have an adverse effect on male participation in church. I would like to be a proponent of women’s ordination.
But my walk through this world tells me it doesn’t work. I think the Bible got it right the first time.
Perhaps I can speak for young men, being 24. I know that the last time I attended an Episcopal Church with a priestess (I was 22), there were stuffed animals on all the pews, but no families, and no young men my age there.

I’m not sure why, yet I know that when a female priest is running church, I just simply don’t want to be there very badly.

Perhaps we young men in western societies already have active mothers in our lives, and frankly, not enough father figures.
I really have no great desire to be in touch with my feelings. To be a man is to know that if you really expressed your feelings, you’d be locked up for some of the more salacious criminal articles.

I have no desire to lectured to by someone who knows less than I do. I stopped going to a particular church because the rector persisted in discussing economics. Her theory of economics might have best been described as Seussian-Marxist ("I have none and you have two/ Let’s share everything, skippy-do” and “Tell you what, just for a laugh/ Let’s break everything in half").

It’s bad enough when the ignorant discuss theology, but I’ve been lectured on law, history, business and politics by total idiots from the pulpit. The conservative clergy generally restrict themselves to Scripture, about which they generally know something.

This is part of my favorite comment:
Personally, I think that a church led by women will be overly concerned with interpersonal relationship, and insufficiently concerned with truth. Women are by nature much more averse to conflict, and much more willing to value peace and harmony. But this inverts the natural order of the Church. It’s first function is not to concern itself with the temporal needs of its members, but with preaching and teaching Truth. The Apostles created deacons so that they could focus on prayer and teaching. This inversion is I think an accurate definition of the feminization of the church. It elevates the responsibilities of deacons above the responsibilities of elders.

Truth angers people. Doctrine divides. Women as a rule do not like these outcomes. Men are more willing to value Truth over harmony.
The thing is, I believe the above to be true. And if it is true, it has major implications about the ability to preserve a standard theology over time by means of a largely female priesthood. There is a saying about hard cases making bad law, and I think that addresses the heart of this problem. Women have a major gift for ministry on the individual level, but I am not sure that this translates to maintaining the body of a theology (which is basically a rules system) which will be viable over time.

Probably one of the reasons I found this topic and the comments so intriguing is that I have been reading tons of credit-related quarterlies and remittance reports. In less than ten years, the rules system for granting credit broke down so hugely that it looks like a credit implosion of unprecedented magnitude is looming. Systems of rules based on longer term experience are a very important part of maintaining a viable society.

Monday, November 12, 2007

Just Pure UGLY!

Wow. That is ugly all the way through. I noticed Legg Mason when I was searching Edgar on some of those funny-money MBS, so I'm not surprised it's having to inject capital.

All the major indices were down. Dow below 13,000, S&P 500 below 1500. Oil sold off, gold sold off, and most commodities sold off. S&P Energy Index lost 3.76%. Google off 4.8%. Cry me a river.

When your top gainer is a construction company that filed for bankruptcy, you can safely say that it was a bad day. Look at that list. Look at ACA. Will it default? It seems more than possible. Ah, the sweet smell of equity burning in the fall....

So now we come into a joyous evening, hoping that the Nikkei, which flirted with 15,000 last night, doesn't tonight drop the 200 needed to take it below 15,000. It looks like the carry trades are unwinding.

At this point, it's not some PPT that's needed. It's Paul Bunyan.

Dollar gained, though.

Update: Nikkei lost a bit, but held above 15,000. This article on money markets is very good. We are at the point where multiple institutions are having to backstop some of their investments to prevent overt losses. As the downgrades continue, I assume the number of institutions will grow.

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