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"Today’s market was neither orderly nor efficient nor trustworthy. It was just a bunch of computers making ugly, messy love with each other"

From the WSJ.

Posted on: May 7, 2010 06:25 AM | Link: Yeah? | Comments: (0)

Like I needed to start another blog - but - I did. Since the looming recession has taken over the bulk of my news reading (sadly replacing the war in Iraq - which I feel is the case for many people) and self education time (CDO, monoline insurer, credit default swaps - it takes time to learn about this stuff) I started a blogger blog to post random thoughts and links to stories that I don't want to lose, etc. Anyway - if you are looking for economy and recession related news, check it out: http://recessionblog.blogspot.com/

Posted on: February 18, 2008 08:32 AM | Link: Something new | Comments: (0)

It is the morning of January 22nd - world wide stock markets have been collapsing for 2 days. People are starting to realize that there is "no there there" - as in - there is nothing but paper and promises propping up billions of dollars of construction projects, investments, stocks, bonds, derivatives, etc. The US market was closed for the Martin Luther King holiday on Monday the 21st - so this morning in America should be very interesting.

Quote of the moment:

"The United States is so broke, its people at every level from the Federal Reserve on down don't know whether to shit or go blind. The homeowners cringing in the media rooms of their 5000-square-foot personal family resorts don't know how long they can stay put microwaving pepperoni hot pockets with the default clock ticking." Jim Kunstler

Posted on: January 22, 2008 04:24 AM | Link: And then it all came undone... | Comments: (0)

Paul Krugman this week asked "How will it all end?"

Here is his latest:

On Wednesday, the Federal Reserve announced plans to lend $40 billion to banks. By my count, it’s the fourth high-profile attempt to rescue the financial system since things started falling apart about five months ago. Maybe this one will do the trick, but I wouldn’t count on it.

In past financial crises — the stock market crash of 1987, the aftermath of Russia’s default in 1998 — the Fed has been able to wave its magic wand and make market turmoil disappear. But this time the magic isn’t working.

Why not? Because the problem with the markets isn’t just a lack of liquidity — there’s also a fundamental problem of solvency.

Let me explain the difference with a hypothetical example.

Suppose that there’s a nasty rumor about the First Bank of Pottersville: people say that the bank made a huge loan to the president’s brother-in-law, who squandered the money on a failed business venture.

Even if the rumor is false, it can break the bank. If everyone, believing that the bank is about to go bust, demands their money out at the same time, the bank would have to raise cash by selling off assets at fire-sale prices — and it may indeed go bust even though it didn’t really make that bum loan.

And because loss of confidence can be a self-fulfilling prophecy, even depositors who don’t believe the rumor would join in the bank run, trying to get their money out while they can.

But the Fed can come to the rescue. If the rumor is false, the bank has enough assets to cover its debts; all it lacks is liquidity — the ability to raise cash on short notice. And the Fed can solve that problem by giving the bank a temporary loan, tiding it over until things calm down.

Matters are very different, however, if the rumor is true: the bank really did make a big bad loan. Then the problem isn’t how to restore confidence; it’s how to deal with the fact that the bank is really, truly insolvent, that is, busted.

My story about a basically sound bank beset by a crisis of confidence, which can be rescued with a temporary loan from the Fed, is more or less what happened to the financial system as a whole in 1998. Russia’s default led to the collapse of the giant hedge fund Long Term Capital Management, and for a few weeks there was panic in the markets.

But when all was said and done, not that much money had been lost; a temporary expansion of credit by the Fed gave everyone time to regain their nerve, and the crisis soon passed.

In August, the Fed tried again to do what it did in 1998, and at first it seemed to work. But then the crisis of confidence came back, worse than ever. And the reason is that this time the financial system — both banks and, probably even more important, nonbank financial institutions — made a lot of loans that are likely to go very, very bad.

It’s easy to get lost in the details of subprime mortgages, resets, collateralized debt obligations, and so on. But there are two important facts that may give you a sense of just how big the problem is.

First, we had an enormous housing bubble in the middle of this decade. To restore a historically normal ratio of housing prices to rents or incomes, average home prices would have to fall about 30 percent from their current levels.

Second, there was a tremendous amount of borrowing into the bubble, as new home buyers purchased houses with little or no money down, and as people who already owned houses refinanced their mortgages as a way of converting rising home prices into cash.

As home prices come back down to earth, many of these borrowers will find themselves with negative equity — owing more than their houses are worth. Negative equity, in turn, often leads to foreclosures and big losses for lenders.

And the numbers are huge. The financial blog Calculated Risk, using data from First American CoreLogic, estimates that if home prices fall 20 percent there will be 13.7 million homeowners with negative equity. If prices fall 30 percent, that number would rise to more than 20 million.

That translates into a lot of losses, and explains why liquidity has dried up. What’s going on in the markets isn’t an irrational panic. It’s a wholly rational panic, because there’s a lot of bad debt out there, and you don’t know how much of that bad debt is held by the guy who wants to borrow your money.

How will it all end? Markets won’t start functioning normally until investors are reasonably sure that they know where the bodies — I mean, the bad debts — are buried. And that probably won’t happen until house prices have finished falling and financial institutions have come clean about all their losses. All of this will probably take years.

Meanwhile, anyone who expects the Fed or anyone else to come up with a plan that makes this financial crisis just go away will be sorely disappointed.

Posted on: December 16, 2007 09:43 AM | Link: How will it all end? | Comments: (0)

I have been reading Stephen S. Roach for a couple of years now and I think he is a guy who takes what he does seriously and is pretty good at it. Rumors I have read on the web say he was farmed out to Asia by Morgan Stanley because he was increasingly bearish. I don't know if there is any truth in that, but here is his take on the future:

THE American economy is slipping into its second post-bubble recession in seven years. Just as the bursting of the dot-com bubble led to a downturn in 2001 and ’02, the simultaneous popping of the housing and credit bubbles is doing the same right now.

This recession will be deeper than the shallow contraction earlier in this decade. The dot-com-led downturn was set off by a collapse in business capital spending, which at its peak in 2000 accounted for only 13 percent of the country’s gross domestic product. The current recession is all about the coming capitulation of the American consumer — whose spending now accounts for a record 72 percent of G.D.P.

Consumers have no choice other than to retrench. Home prices are likely to fall for the nation as a whole in 2008, the first such occurrence since 1933. And access to home equity credit lines and mortgage refinancing — the means by which consumers have borrowed against their homes — is likely to be impaired by the aftershocks of the subprime crisis.

Consumers will have to resort to spending and saving the old-fashioned way, relying on income rather than assets even as mounting layoffs will make income growth increasingly sluggish.

For the rest of the world, this will come as a rude awakening. America’s recession is likely to shift from homebuilding activity, its least global sector, to consumer demand, its most global.

There is hope that young consumers from rapidly growing developing economies can fill the void left by weakness in American consumers. Don’t count on it. American consumers spent close to $9.5 trillion over the last year. Chinese consumers spent around $1 trillion and Indians spent $650 billion. It is almost mathematically impossible for China and India to offset a pullback in American consumption.

America’s central bank has mismanaged the biggest risk of our times. Ever since the equity bubble began forming in the late 1990s, the Federal Reserve has been ignoring, if not condoning, excesses in asset markets. That negligence has allowed the United States to lurch from bubble to bubble.

Fixated on the narrow “core inflation” rate, which excludes the necessities of food and energy, the Fed has ignored new and powerful linkages that have developed between economic activity and increasingly risky financial markets.

Over time, America’s bubbles have gotten bigger, as have the segments of the real economy they have infected. The Fed needs to rethink its reckless, bubble-prone policy. Once the current crisis subsides, the economy will require the tight money of higher interest rates — the only hope America has for breaking the lethal chain of endless asset bubbles.

Posted on: December 16, 2007 09:36 AM | Link: And there you have it. | Comments: (0)

Lennar unloads 8,300 residential lots

Noted without comment...

Posted on: December 6, 2007 12:25 PM | Link: Lennar unloads 8,300 residential lots | Comments: (0)

This is a must read - "MBIA Shares Drop After Moody's Says Capital in Doubt".

Some of the richer passages:

"The loss of MBIA's top ranking would cast doubt over the ratings of $652 billion of state, municipal and structured finance bonds that the company guarantees.

"It's Moody's firing a warning shot saying 'you have two weeks, so do something,''' said Paul Berliner, a trader at Schottenfeld Group, which manages $100 million in New York. "The drama behind MBIA and Ambac should be the most important focus for the entire financial sector right now. Everyone should be on the edge of their seats wondering how this plays out.''"

$653 billion at risk! That is more than anyone has owned up to so far, combined, if my memory isn't shot. Shit, meet fan. Of course the market is rallying hard today... ho hum.

Posted on: December 5, 2007 04:09 PM | Link: MBIA Shares Drop After Moody's Says Capital in Doubt | Comments: (0)

Then maybe you shouldn't read this.

A high(low?)light:

"While it is still open for debate as to whether the overall economy will tip into a contractionary state in the coming year, it became more evident this week that the housing recession is morphing into an outright depression. Over the past year, existing home sales have collapsed 21% and at the same time the unsold inventory has risen over 15%. That is a brew for sustained deflation in residential real estate as the supply curve continuously shifts to the right and the demand curve to the left. To think that over the past year we have seen the inventory backlog soar from around 7 months' supply to 10.8 months now — it's unfathomable. Prices on average are off 5% YoY and the inventory situation has worsened materially — to their highest level nationwide in 22 years, having already broken above the worst levels of the 1991 meltdown. We believe another 10% downward move in real estate valuation is now a conservative estimate, and to think of the instability in the credit markets that the first 5% down created; more to come, that's all we can say."

We are in the beginning stages of a kind of thing that only happens 4 or 5 times in a persons life span, if that. This is Merrill Lynch - the guys dying to sell you some stocks - not some left-wing economics professor. Couple the exhaustive Merrill report with this nugget:

"Much has been made of E*Trade Financial’s recent fire sale, in which it sold a basket of asset-backed securities with a book value of $3 billion to Citadel Investment Group for just $800 million. Many have debated whether or not this deal — nominally priced at 27 cents on the dollar — sets a price floor for collateralized debt obligations and other securities tied to subprime mortgages, whose value has been notoriously hard to pin down.

The case has been made, often persuasively, that E*Trade was getting rid of particularly toxic assets while under duress, so the deal is hardly a bellwether for other banks and securities firms.

But here is a point worth considering: Only about $450 million of E*Trade’s $3 billion portfolio was made up of the riskiest kinds of securities — C.D.O.’s and second-lien mortgages — that have made headlines recently.

What was the other $2.6 billion or so? In E*Trade’s own words, it was “other asset-backed securities, mainly securities backed by prime residential first-lien mortgages.”

In other words, E*Trade’s enormous haircut went far beyond subprime.

A large part of E*Trade’s basket of assets was securities backed by high-quality mortgages — loans to homeowners with strong credit ratings and reasonably large equity cushions. That could raise troubling questions on Wall Street about the true value of “prime” mortgage assets, especially when they need to be liquidated in a hurry."

So - I was a tad early in my recession call - but I am going to blame that on the zeitgeist. If you didn't feel this coming you weren't alive.

More foolish predictions - in the face of another rate cut from the fed the dollar stabilizes around this level and actually begins to rebound as the ECB and the UK start to cut their interest rates in the face of the coming global slowdown.

Posted on: December 4, 2007 06:49 PM | Link: If you were worried about the economy... | Comments: (0)

How bad is it? Well, I’ve never seen financial insiders this spooked — not even during the Asian crisis of 1997-98, when economic dominoes seemed to be falling all around the world.

This time, market players seem truly horrified — because they’ve suddenly realized that they don’t understand the complex financial system they created...

“What we are witnessing,” says Bill Gross of the bond manager Pimco, “is essentially the breakdown of our modern-day banking system, a complex of leveraged lending so hard to understand that Federal Reserve Chairman Ben Bernanke required a face-to-face refresher course from hedge fund managers in mid-August.”

I want to know what people saying this kind of stuff are investing in right now. More here.

Posted on: December 3, 2007 12:10 PM | Link: Krugman | Comments: (0)

I don't get any joy out of these stories - I just think you have to know what is out there though so you can plan accordingly. Tonight, as I was in my evening rant about just what the hell is happening around the globe financially and wondering what we might have to do to make a living, possibly in the very near future, my wife asked me how bad did I think it could get. My reply was that nobody knows - but that it would have to be at the least as bad as the S&L mess - and probably much worse. Then I read this:

"The developers of Downtown Dadeland are walking away from the massive mixed-use project in Kendall and handing over the unfinished complex to construction lender Goldman Sachs Commercial Mortgage.

Gulfside Development principals Jackson Ward and Stefan Johansson say they can no longer afford to make payments on the $224 million construction loan and won’t fight a foreclosure suit filed two weeks ago in Miami-Dade Circuit Court.

The project’s failure is the largest yet in the current real estate downturn, which has hit the overdeveloped condo market especially hard.

The development across the street from Dadeland Mall was planned to have 416 condos and 125,000 square feet of retail space in seven mid-rise buildings. Four of the towers were completed this year, but three still need some minor construction work before closings can start. The project was the centerpiece of redevelopment along Southwest 88th Street near U.S. 1.

“If not the largest one, it is one of the largest defaults in all time in Miami-Dade County,” said David Dabby, president of Coral Gables-based real estate research firm Dabby Group.

Defaults during the savings and loan crisis in the late 1980s and early 1990s were generally under $50 million, he said."

I was never good at math - but $224 million is a lot more that $50 million. How many of these projects are out there? At the least hundreds - maybe thousands? Maybe tens of thousands? It would be interesting to see the numbers on these kinds of projects - not just in the US but world wide.

Posted on: November 26, 2007 07:28 PM | Link: One of Miami-Dade’s Largest Defaults Of All Time | Comments: (0)

“Our entire banking system is a complete disaster,” he wrote. “In my opinion, nearly every major bank would be insolvent if they marked their assets to market.” He also said he would be putting some of his own profits into gold and other precious metals."

You've got to listen to someone who got it right.

Posted on: November 26, 2007 04:36 AM | Link: "a complete disaster" | Comments: (0)

I really am not a gloom and doomer - but sometimes things just don't seem to make much sense. We get this from the NY Times today:

This year, only about $80 billion, or 1 percent, of mortgage debt will switch to an adjustable rate based largely on prevailing interest rates, according to an analysis by Deutsche Bank in New York. Next year, some $300 billion of mortgage debt will be similarly adjusted.

But in 2007, the portion will soar, with $1 trillion of the nation's mortgage debt - or about 12 percent of it - switching to adjustable payments, according to the analysis.

The 2007 adjustments will almost certainly be the largest such turnover that has ever occurred.

The impact is not likely to derail the economy on its own, economists predict, but it will probably slow growth. For individual families, the problems could be significant.

"I'm not sure that people are being counseled on really how big of a risk they are taking," said Amy Crews Cutts, deputy chief economist at Freddie Mac, the mortgage company.

Consider a typical $300,000 interest-only mortgage with fixed payments for the first five years.

The homeowner would start by paying about $1,250 a month. If interest rates rise modestly over the next few years, as many forecasters expect, the payment will jump to almost $2,100 in 2010, according to Stephen Barrett, the owner of Redmond Financial, a mortgage business near Seattle.

With the help of new computer models, lenders have brought out newer and riskier mortgages to attract borrowers and increase their buying power during the long housing boom. The traditional 30-year mortgage with guaranteed payments is increasingly a loan of the past.

The hot loan of 2004 - the interest-only mortgage - allowed home buyers to pay no principal for the first few years of the loan, substantially lowering their initial payments.

It has remained popular this year, accounting for at least 40 percent of purchase loans over $360,000 in areas with fast-rising home prices, like San Diego, Washington, Seattle, Reno, Atlanta and much of Northern California, according to LoanPerformance, a mortgage data firm.

This year's fashionable model, known as an "option ARM," allows borrowers to make payments with monthly rates starting as low as 1.25 percent for the first five years of the loan; the average rate on a 30-year, fixed-rate loan is about 5.6 percent.

During the first quarter of 2005, 40 percent of mortgages over $360,000 issued to people with good credit were option ARM's, said David Liu, a mortgage strategy analyst with UBS in New York. Very few borrowers used option ARM's before 2003.

I don't know about you, but that doesn't sound good to me.

Posted on: June 16, 2005 01:25 PM | Link: Home Loans |

I used to like Jim Cramer but he becomes more of a tool every day. This quote referring to Buffet and Gates betting against the dollar from RealMoney.com (sub. only) is the end of Cramer for me:

"Frankly, I think this trade is the financial equivalent of the contempt that the press -- and Hollywood -- feel about President Bush. Just as that anti-Bush cohort couldn't believe that Iraq could amount to anything good like democracy, the anti-Bush financial cohort thought that Bush's fiscal policies had to lead to a devastating dollar downturn.

So Iraq is a "good democracy""? Jim your descent into ass-clown hood is now complete. Go have some coffee with Kudlow.

Posted on: May 16, 2005 03:11 PM | Link: Jim Cramer Whores for Bush | Comments: (0)

So, the Euro continues to zoom against the dollar, or the dollar continues to fall, depending on which way you look at it. For some time I have been speculating (in my own mind) that a part of this whole weak dollar story was a strategic slap in the face to the EU from Bush and Co. for not supporting the illegal invasion of a sovereign nation. This quote from our Treasury Sec. this week confirms my suspicions:

""The euro zone is growing below its potential," Mr. Snow told British Broadcasting Corp. on Monday. "When a major part of the global economy is below potential, there are negative consequences...for their trading partners." He said inflexibility in the German labor market and the French pension system, not exchange rates, are Europe's main barriers to economic growth."

Can't you hear Rove or Norquist in the President's ear on this one? "We don't care about the strong Euro, more tourism for the U.S.", or, "We don't care about the strong Euro, so what if they can't sell their expensive luxury products", but mainly I think, "Fuck them - if they don't want their currency to be so strong then they will have to dismantle their modern welfare state where people put life before work, have universal health coverage, live longer, have more healthy babies, and are better educated. FUCK THEM!". I really think that is what I hear when John Snow says "The euro zone is growing below its potential,".

Posted on: November 20, 2004 12:08 AM | Link: Euro bitch slap |