Debating the Recession with Larry Kudlow on CNBC..and the Risk of a Systemic Financial Crisis…
Here is the link to the video of my debate last nite with Larry Kudlow on his CNBC show on whether we will have a recession.
As readers of this Global EconoMonitor are already aware it is my view that we are already in a recession and this recession will be uglier and more protracted than the previous two with significant risks of a financial meltdown.
Indeed, the financial market problems have now spread from subprime mortgages to most other credit markets and financial markets. We have a subprime financial system, not just a subprime mortgage problem.
Let me flesh out next the details of this massive financial contagion that is leading to a serious risk of a systemic financial crisis…
First of all, losses and delinquencies are rapidly spreading from subprime to near prime and prime mortgages. And with an expected fall of 20% to 30% in home prices up to 10 million households will be in negative equity territory and thus having a huge incentive to default on their mortgages. This is the biggest surprise and potential source of losses for the financial system that no one had expected: homeowners voluntarily leaving their homes in mass as the value of their homes falls below the value of their mortgage debt. This phenomenon alone has the potential – as i will discuss in more detail in another article – to bankrupt most of the banking system as a 30% in home prices – now likely – will wipe out $6 trillion of household wealth.
The losses are nowspreading from residential real estate to commercial real estate (CRE) with CMBX index now spiking through the roof and new financing for CRE loans frozen.
They are spreading to the sick monolines that will not be able to avoid a downgrade that will lead to a further writedown of another $150 billion toxic ABS securities covered by the pseudo insurance of these monolines; and the downgrade will lead to a massive seizure of credit in the muni market as the most recent debacle on TOB and auction-rate securities (ARS) shows.
The financial problems and losses are also sharply rising in consumer credit with rapidly rising default rates on credit cards, student loans and auto loans; and expect massive loss on the ABS products related to these unsecured forms of consumer debt.
They are now spilling over to the LBO market where new deals are posponed, restructured or cancelled; and where some actual LBO will go bust as the burden of debt and low profit will lead to defaults among firms taken private; and the massive losses in market value on leveraged loans and the related CLOs (another source of losses for financial firms) and in the LevX and LCDX markets suggests that the risks of defaults on these leveraged loans are sharply rising.
On top of this, the recession will lead to a sharp increase in corporate defaults, which had been very low over the last two years, averaging 0.6% per year, compared to an historic average of 3.8%. During a typical recession, the default rate among corporations may rise to 10-15%, threatening massive losses for those holding risky corporate bonds.
As a result of these rising defaults, the market for credit default swaps (CDS) – where protection against corporate defaults is bought and sold – may also experience massive losses. In that case, there will also be a serious risk that some firms that sold protection will go bankrupt, triggering further losses for buyers of protection when their counterparties cannot pay.
By now most of credit markets (CDOs, RMBS, CRE, TOB, ARS, Muni market, ABS markets, CLOs) are mostly frozen with news issuance of securities comatose. This is the worst credit crunch in financial markets in the last 30 years and it is getting worse by the day.
Finally there is now a broader risk that many leveraged investors in both equity and credit markets will be forced to sell illiquid assets in illiquid markets, leading to a cascading fall in asset prices to below their fundamental values. The ensuing losses will aggravate the financial turmoil and economic contraction.
Indeed, adding up all these losses in financial markets, the sum hits a staggering $1 trillion. Tighter credit rationing will then further hamper the ability of households and firms to borrow, spend, invest, and sustain economic growth. The risk that a systemic financial crisis will drive a more pronounced US and global near recession has quickly increased.
179 Responses to “Debating the Recession with Larry Kudlow on CNBC..and the Risk of a Systemic Financial Crisis…”
From my perspective. 10-15 years ago, my GenX had bartenders serve us drinks. We got married, had kids, bought houses, and now get our own bottles from the fridge. In the last few months, all of my guy friends have now switched from bottled beer to cans! OH the hangover will be bad! Miss America p.s. The Fed Doctor said: Take 2 rate cuts, and call me in the morning
“… homeowners voluntarily leaving their homes in mass as the value of their homes falls below the value of their mortgage debt. ..” 10 Million homeowners doing “jingle mail” … hmmm … this part seems a bit unclear to me. Where will they go to if they voluntarily leave their homes? Move in with in-laws, elderly parents … out on the streets? Or is there that much rental space available?
Where will the 10 million go? To the same homes vacated by the same people. They will just rent them rather than own them….solution to the massive default and foreclosure problem that minimizes the cost: every foreclosed home owner moves to the home next door and rents it…or to reduce the costs to a very minimum every home owner stays in his/her home and pays rent to the bank that foreclosed him/her rather than own the home.
Repost… @K in TX: “And the Fed it draining money out of the system (see above) which is deflationary by definition. Is this a reaction to foreign held dollars swamping the U.S.? How does the draining of dollars correlate to the TAF auctions and claims that the Fed is “injecting liquidity” by taking IOUs…” Read “ Fed Eunuchs Reveal Selves in Technicolor” by Lee Adler of The Wall Street Examiner: http://wallstreetexaminer.com/?p=2280#more-2280 ”There was one paragraph which got to the point in a roundabout way suggesting that the writer had been taking lessons from Alan Greenspan: ”‘In late-August, developments influencing reserve supply grew more uncertain, including the possibility of heavy use of the discount window under its altered terms. In response, the Desk adjusted the composition of its portfolio to include a somewhat higher level of RPs and lower level of outright holdings, by arranging two redemptions of bill holdings at weekly auctions. In December, further redemptions were made and adjustments to outstanding RPs made as needed, to accommodate the impact of TAF loans and swap drawings on reserve supplies. These adjustments were designed to maintain an overall level of reserves consistent with achieving the operating objective for the overnight federal funds rate while still meeting the objectives of the TAF and swap programs.’” ”Here’s what they meant: ”We thought in August that there would be a run on the discount window, so we began to cut the size of the permanent System Open Market Account (SOMA) to allow more reserves to go out the Window. Oops nobody showed up. So we started the TAF, and cut the size of the SOMA even more. But the effective Fed Funds rate in the market kept dropping faster than we could lower the official rate. So we had to cut the size of the SOMA even faster so that the effective Fed Funds rate wouldn’t collapse too far below our targets and reveal us to be the powerless Eunuchs that we are. ”We didn’t think about the fact that removing reserves from the Primary Dealer accounts would trigger a mass liquidation in stocks. ”Next time we’ll know better.”
“This is the biggest surprise and potential source of losses for the financial system that no one had expected: homeowners voluntarily leaving their homes in mass as the value of their homes falls below the value of their mortgage debt. “ We had the Greenspan put and the Bernanke put, but the best one of all is the underwater homeowner put (suggestions for a better name are welcomed!) which caught all by surprise!
Nouriel, you’ve called the macro forces correctly in my view. However, what about an unexpected uplift from productivity and technology? Demand for broadband, IT, telecom services will continue to grow and provide infrastructure to emerging markets such as East Europe and BRIC, no? Consumer spending has not yet fallen off a cliff as you forecasted months ago, even though HEW has been declining. You must be thinking that eventually consumers will be tapped out, but plenty of people I know have not taken HEW, have been in their homes for a decade or so and have plenty of equity, are still employed and follow a household budget. Maybe this is why retail sales can still show a small increase from time to time.
I can’t help but compare the Bernanke/Paulson spin to Mervyn King’s blunt forthrightness. Bernanke says US bank reserves are healthy. King calls on banks to “urgently” bolster reserves “even thought this will hurt shareholders.” Bernanke indicates banks have come forward with disclosing their problem assets. King says the sooner banks strengthen their balance sheets, the better they can serve borrowers. Paulson says the economy is slowing but sound. King says to expect a lower standard of living as higher food and fuel prices cut into disposible income for most families. Bernanke says the economy will turn up by the end of the year. King says Britons should expect house prices to continue to fall for another three or four years. You can keep Bernanke and Paulson. I’d rather have the unvarnished truth and a clear sighted central banker at the helm in these times.
Dr. Roubini, You speak of a risk of systemic financial crisis. Has it already started?
London, I agree!!! The cloak-n-dagger act by US leaders in out of controll. If I sat in front of US leaders and lied like Bernanke/Paulson did today, I would be in jail for life +200 years! Every model, EVRERY ONE, I run is pointing at recesssion. You watch over the next 8 weeks, you will see an explosion in jobless cliams and overall job growth…you heard it here first.
So the equity markets are back to the “mommy I want my ice-cream” wait mode. They must have their fix soon or they throw another tantrum. IMO, the news coming in the next couple of weeks will be so bad that the next cut will come before March 18.
In response to an earlier comment about where homeowners who walk away from their mortgages may go, let me pose this: Only 2 generations ago, extended familes lived in 1 home. The individual family home (the so called nuclear family) has not been around for a long time. In the 1930′s, many multi-generational families lived under a single roof. It can be that way again. In fact, only recently in a local paper, I read about adult children moving back in with their parents in increasing numbers. There are fewer jobs, opportunities and options for many people and they are going back to an option that saves money for all. I think generations will come together again with the current crisis putting the squeeze on income and alternatives. Young adults will move back in with parents and (more likely with the boomers retiring soon) new retirees will move in with their adult childeren to conserve and protect wealth and resources. Not today, but soon.
Oh and London Banker – I couldn’t agree more. If only I could convince my wife that moving to Europe was a good idea! Bernanke and Paulson will not ever come clean – too many political ramifications.
The CMI (Credit Managers Index) fell for the 5th consec. month in January to a new record low. Oh, yeah, Bernanke ignors that kind of stuff… http://www.nacm.org/resource/press_release/CMI_current.shtml
WOW!! Selling th ehell out of bonds and stocks at the same time!!
@ Medic I agree that hardship is going to force more families to live together, but remember that hardship also breaks families up too. Divorce rates climb with unemployment and financial loss as money trouble puts strains on otherwise satisfactory marriages. Ironically, the surest return you can get financially is investment in your primary relationship, as divorce proves costly and damaging financially for all sides. No one wins. So give your sweetheart a valentine today, and make sure that investment continues to perform in years ahead. I would guess a lot of those 10 million homes were second, third or fourth homes. I’ve noted many Americans over the past decade buying up properties in several places, regarding the additional homes as part of their pension planning – holiday homes and retirement villas, etc. These are the easiest homes to walk away from when they hit negative equity. Many couples married, keeping both homes, thinking property was a good investment. They only need one to live in, especially when money gets tight.
@OR How about Scuba Put?
…the underwater homeowner put (suggestions for a better name are welcomed!)… Written by Octavio Richetta on 2008-02-14 12:27:50 Jingle put? Nay, ‘underwater homeowner put’ rocks just fine!
In 1971, the U.S. was also in the process of leaving the gold standard, which was intended to allow the value of the U.S. dollar to fall. Compounding the situation were such events as Fed Chairman Arthur Burns and the Committee on Interest and Dividends (part of the controls apparatus) strenuously opposing banks attempting to raise the U.S. prime rate from 6% to 6.25% in February 1973. Inflation rates were below 4% at the start of 1973, but reached 9% by the start of 1974, which would have made the real prime rate a negative 3%. At the same time, interest rates were going up in foreign countries, putting enormous pressure on the dollar. The wage and price controls were mostly dismantled by April, 1974. By that time, the U.S. inflation rate had reached double digits. While there were skeptics in August, 1971, there were a great many who thought “temporary” wage and price controls could cure inflation. By 1974, this notion was thoroughly discredited, and attention gradually turned toward a monetary approach to inflation. In a complete reversal, the policy to curb inflation in now thought to be an increase in interest rates rather than an attempt to hold them down. 1941 canada 1941 – Wage and Price Controls: Managing a Wartime Economy The Second World War created an almost artificial economy in Canada. When war broke out in 1941, the economy had not yet recovered from the Great Depression. (See 1929 – 1939 —Great Depression.) Unemployment had been high. The war effort required massive government spending and called on hundreds of thousands of workers to make airplanes, ships, tanks and guns. Consumer spending was on the rise. Employment was rising, but because factories gave priority to making war materials, production of certain household goods was low. These conditions were a recipe for inflation. In 1941, the Canadian government anticipated steep price increases and created the Wartime Prices and Trade Board. In 1941, the Board imposed a general ceiling on prices, wages and rents. The board also rationed and controlled the production of certain necessary goods such as sugar and gasoline, to ensure that they were distributed fairly. Exports of wool, fish oil and other Canadian goods were controlled. No one in Canada was untouched by the wage and price controls. Consumers were forced to ration necessary items. Workers had to accept wage freezes—something their unions reacted to angrily by calling for strikes. Employers, on the other hand, benefited from wage freezes but had to deal with the threat of strikes and a labour shortage. Businesses were not happy with price controls but co-operated with government. Entrepreneurs profited from the black market by selling unused ration coupons. Suppliers, merchants and farmers could not set their prices or production according to supply and demand. Landlords had lower incomes because of rent controls. After the war ended in 1945, the wage and price ceilings were gradually eliminated and, in 1951, the Wartime Prices and Trade Board was dissolved. Though the controls seemed drastic, they apparently worked. The annual rate of inflation was 6% in 1941, when wage and price controls were imposed. Between October 1941 and April 1945, prices rose in Canada by a total of only 3.8%. so freezes work sometimes?
Repost from previous thread @Gloomy, If the banks are taken into receivership by Governments, they will have no stock market value. However, I don’t see that happening. In the worst case scenario, FF will go to zero and the banks will have no or minimal cost of funds, meanwhile earning juicy returns on govt bills, notes and bonds. I am not happy with that because I would like to see many of our “brilliant” bankers take their lumps and be thrown out by their shareholders. However, the potential catastrophe of a major bank failure will be avoided at all costs, making the latter scenario unlikely. Perhaps we can get LB in here. I understand Northern Rock has been absorbed by the U.K. government. I do not know where they ranked in terms of size of deposit taking institutions, how they compared with a Barclays, Lloyds TSB, RB of Scotland, etc. I don’t see such things happening in the U.S. The “absorbtion” will be behind the scene, with a favoured bank being “encouraged” and indemnified to absorb a weaker rival. I don’t disagree with you that financials in general have a lot of downside here. To bet on their extinction is a whole different matter.
we appear to have passsed another milepost on the way to financial crisis. the fed lowers rates but the lending institutions are either frozen or issuing loans at higher rates. thus begins the liquidity trap. here is a small, but by example, significant solution to the liquidity trap and “pushing on a string” the fed, thru an appropriate agency should lend money, directly to students who need a loan to attend a trade school, community or 4 year college. why should students and their families pay the arbitrage from which the student loan companies profit virtually risk free? that’s right, they have recourse to default thru government guarantees AND get a percentage if collection takes place there after. this might be a good investment for social security surplus money since social security is an inter-generational commitment. after all if we are going to let foreign sovereign wealth funds buy into banks etc why shouldn’t our government invest a little of the taxpayers money in the future of our children and in the process ensure older folks retirement!
Octavio Richetta: “We had the Greenspan put and the Bernanke put, but the best one of all is the underwater homeowner put (suggestions for a better name are welcomed!) which caught all by surprise!” I’d call it the “subprime put”: if you can’t pay, you walk away.
@LB Swervin’ Mervyn has been reappointed for another (5 year?) term as Governor of the BoE. In your recent post you sing his praises in comparison with BB and HP. But is he not at least partially responsible for the inflation, and now deflation, in British housing prices? I don’t have hard data at hand but my sense is that U.K. house price inflation far, far exceeded U.S. house price inflation over pretty much whatever period you want to measure over the last forty years. Re the bank capital thing, the U.S. banks have been aggressive replenishing capital while, to the best of my knowledge, the U.K banks have been quiet. True, the U.K. banks have not been taking the investment banking lumps of their U.S. counterparts and have not needed the capital infusions. Yet!
Seems like oil wants its part of the stimulus checks, 95.60$ and mounting…
dear mr. responsible, Stimulus hum…up in canada we call this a claw back!
Please help! I’m looking to get the transcripts from governement hearings… Today, the “House budget subcommittee of capital markets oversight” having hearings on Bond insurers role with today’s credit market problems. WE ALL MIGHT GET INSIGHT INTO WHAT GOVT IS GOING TO DO with Bond insurers. Thanks in advance! Also — big news, Watching bloomberg today — NY Port Auth, had to come up with a 20% coupon today, and there were no muni bond issues yesterday… Unbelievable. To ease market probems… NY State Banking Eric Denalo has suggested splitting bond insurers into two business…. Will this work? I don’t think so because they still need to write down the junk — right? Then a down-grade from Moodies would result anyway? Then Cities end up paying increasing coupons on bonds…. If cities cannot borrow money at reasonable rates… OMG… We will see muni projects come to a grinding halt. It’s such a pitty — all this greed. I think the government will step in — I think there will be a voter backlash, if this happens. Wall St is so two faced — they want a hand out when greed goes astray, but are pure capitalist when things go so write and assets are always going up in price…. Ugh….
PPT is working feverishly right now!!!!
I found the web site about the hearings on AMBEC and MBIA… I made a mistake because the babe on Bloomberg messed up.. The committee is the House Committee on Financial Services… Anyway… Hope this helps others in their reasearch… See link below. http://financialservices.house.gov/ Bill Ackman is there
@ Giraf Some years ago the responsibility for prudential supervision and regulation of banks was transferred from the Bank of England to the Financial Services Authority. This left the Bank with the lender of last resort function, but no power to constrain banks against needing said last resort by encouraging responsible conduct. The FSA has failed miserably at enforcing prudential supervision or regulation on the banks, being mostly cronies of the banks on the board of the FSA and having a revolving door arrangement with the banks at senior executive levels. Northern Rock, for example, had not been audited by the FSA for the past three years, despite being an outlier in the mortgage industry for its business model of raising vast sums in the commercial paper markets to lend against subprime credits. The FSA then turned around and publicly blamed the Bank of England for not bailing out Northern Rock quick enough when the liquidity crisis destroyed its business model last August. The Bank needs to have supervision back if it is to control the risk of being lender of the last resort. Sadly this is among many misguided regulatory reforms of the past 20 years which are unlikely to be unpicked. Yes, the UK has a long history of boom/bust cycles, and our housing market is even further over-extended than the US market. We are going to have a crash. We are going to have negative equity and repossessions. Mervyn King has said it will last 3 to 4 years – the average for a housing bust. Could he have prevented it? Not with the authority to constrain the banks and enforce capital requirements housed at the FSA.
Looks like 12400 on the Dow is do or die
@JLarkin ”Demand for broadband, IT, telecom services will continue to grow and provide infrastructure to emerging markets such as East Europe and BRIC, no?” Hungary’s economy seen slipping into stagflation Hungary’s situation might point to regional weakness in eastern Europe http://www.marketwatch.com/news/story/emerging-markets-report-hungarys-economy/story.aspx?guid=%7BA8F80605%2D2ED0%2D4F1E%2D835B%2DDF23F8F3D66C%7D&dist=hplatest @London Banker A houseprice crash in the UK? No, no, no ,no, nohoho…!(LOL) http://www.youtube.com/watch?v=oZFt46aQyQ8
http://www.cato.org/pubs/pas/pa-283.html September 11, 1997 For the most part, however, policymakers should leave derivatives alone. Derivatives have become important tools that help organizations manage risk exposures. The development of derivatives was brought about by a need to isolate and hedge against specific risks. Derivatives offer a proven method of breaking risk into component pieces and managing those components independently. Almost every organization–whether a corporation, a municipality, or an insured commercial bank–has inherent in its business and marketplace a unique risk profile that can be better managed through derivatives trading. The freedom to manage risks effectively must not be taken away.” ok wall street derivative rockets – where will the space junk land?
so far we have: Underwater homeowner put Jingle put Scuba put Subprime put The funny thing is that all the “rescue” plans out there are not aimed at helping the little guy but forcing him pay the mortgage for the good of the economy (i.e., the banks. The new American motto should be what is good for GS is good for the country). They just want to fool people once more: i.e., make them pay for the house even though, unlike the original promise, home prices are falling like a rock. So lets “brainstorm” some more so as to Arrive at (a) name(s) that makes it to the MSM: The you can screw me once but not twice put The American Dream put The Ponzi put The McMansion Put The foreclosure put The I rather rent put The sell it again put The I can buy it cheaper put The I rather walk put The I rather be homeless put The I am buying in Tijuana put The I like Tijuana better than San Diego put The I am moving into gold put The need the money for cereal put The let’s kickoff another bear market put The credit crunch put The house of cards put The I can NOT take it anymore put The I don’t need a second home put The house flipping is not for me put The eat your cake put The eat your house put The I don’t like this house no more put The I rather [pay my] plastic put The I like my wheels better put The blame it on China put The send the bill to Greenspan put The I don’t wanna be the last one out of the neighborhood put The ghost town put The California Dreamer put The I am sick of Home Depot put The I never liked the kitchen put The dog ate my house put The house is too far no money for gas put The send the bill to Ambac put The I should not have listened to Greenspan put … I ama tired:-) your turn
@ Rich H I’d be interested to know whether you think TPTB are playing the same game they did last month for the MLK weekend. Then they took the markets down a bit on Thurday, a lot on Friday, and on Monday when US was closed the rest of the world crashed hugely. Tuesday before US opened Benny announced the 75bps emergency cut and US went green. Today we see markets heading south on no real news, with possible continued sell off tomorrow on the FGIC downgrade by Moody’s. US markets are closed on Monday. Spitzer has said that the monolines have only 4 or 5 days before intervention will be required, meaning that the monoline bailout could be announced early next week to prevent a US plunge following global cues from Monday.
@Octavio LOL You forgot the stop loss put I think I might have found the place where a lot of the stimulus money will be going MOVERS and Rental Trucks If those companies are smart they advertise with “Move today, government pays in May!”
Tutterfrut, nice article on East Europe, thanks.
@Giraf Sounds reasonable. Severe stock price declines inevitable in financials. End of world will not follow. Thanks.
Just ran across this: LEGENDARY FUNDS MANAGER PREDICTS UTTER GLOBAL COLLAPSE http://carolynbaker.net/site/content/view/327/ Can anyone comment on the credibility of this? This is some pretty serious stuff… Mark (the original? one)
@London Banker The periphery will be squeezed by same propietary trading programs with the same corrolated assumptions that always punish the productive periphery to feed the parasitic center. Nothing has changed! It is no longer a theory, but a verifiable fact derived from empirical evidence. I call it the Groundhog Day return of wayward capital. What business does capital have in migrating to productive foreign locales!
Written by tutterfrut on 2008-02-14 15:01:54 Some more… The U-Haul put The U-sell it put The I like pickles but not my house put The Rolaids put I like my house but it does not like me put The I buy the dips put The I buy high then sell low put The Shiller put The Mozillo put The I hate Libor put The I am joining the Peace Corps put The I joined the army left for Iraq put The don’t twist my ARM put …
@Mark(the original? one) Julian Robertson From Wikipedia, the free encyclopedia Julian H Robertson Jr (1932- ) was born in Salisbury, North Carolina in the United States. Robertson founded the investment firm Tiger Management Corp. He is credited with turning $8 million in start-up capital in 1980 into over $22 billion in the late 1990s, though that was followed by a fast downward spiral that ended with the funds’ closing in 2000. http://en.wikipedia.org/wiki/Julian_Robertson
the Roubinis told you so put…
Written by London Banker on 2008-02-14 14:47:24 An ounce of prevention is worth a pound of cure. Benny should cut rates before the long weekend:-) At this point, all Goldilocks have left to support the market is lower rates: 200 bpts to 1%!
Some data points on Julian Robertson who is making the dire predictions referenced above from a current Fortune article. - Julian Robertson, the former master of the hedge-fund universe, turned in a 77 percent return on multi-billion subprime bets, using a portfolio comprised entirely of his own money. Not bad for a 75-year-old “retiree.” - The investment reflects a negative outlook on the prospects for the U.S. economy that has been building in Robertson for years. He believes that the Federal Reserve will continue to flood the economy with money, weakening the currency and ultimately causing the Japanese and Chinese central banks to stop purchasing Treasuries, which will drive the price of 10-year bonds down. It’s a macroeconomic hedging strategy that has already paid off handsomely. It interests me that he refers to the Bush-Cheney “regime” and warns about the concentration of wealth with stealth accretion of unconstitutional dictatorial powers. Sounds a lot like me!
Economic index hits fresh 5 year low! http://www.bullandbearwise.com/IndexHistoryChart.asp
Written by Mark on 2008-02-14 15:09:15 Thanks for the link. Robertson is a smart man and I doubt he has gone insane (I just read a 2007 interview he gave for Katherine Burton’s Hedge Hunters and he seemed very sharp). IMO, his view is extremist but plausible. He is definitely headed in the right direction. Hope he is wrong on the extreme inflation call but so far the steps we are taking move us into that direction.
The well contained put The level 3 asset put The Ch-Enron put The GAP! (the Great American Put) The double down put The “how much money can you afford to put in a bag, light on fire, and throw it out of a moving vehicle” put Is there any way to hold David Lareah accountable for his part in the whole thing??? His cheerleading and Spin doctoring where at the heart of the entire housing boom. He was the gas company, and the fire starter of the crisis. …but has somehow walked away from his public life as spokesman for the NAR unscathed. When we were house hunting, brokers directly quoted him on why houses were “worth” what people were asking. He justified it all! From the appraisers, to the sellers, to the lenders. How about renaming the whole thing(greenspan/bernake/?): The David Lareah Put! @ LB, conceptually, it’s a great move (for TPTB)… but I don’t see the cash to make the move. (I’m waiting to hear back on net Subs/Redm in the MF world) Tomorrow is the 15th and a Friday. (the 2 most common pay days!) …so the 401k world will have a nice infusion. To be honest, my gut’s telling me there’s going to be a pump. …but my gut’s also telling me to run and hide. Maybe I just need to go to the bathroom? What’s had me interested is the disconnect in the DOW/Tech/Broad S&P markets And likewise the disconnect in the 3 different Time zone markets. Trends that are usually more consistent have started straying more. (IMO) For example, Wall St may have actively sold Asian knowing the good news would rally. Then sold here to take profits domestically. Likewise, the exact opposite makes sense too. Buy and ride the asian assets up, and sell US to cover the earlier purchases. Either way, those are 2 opposite approaches that both can prove profitable depending on the “Timing” of the next move. This disconnect has answers. I’m trying to see the angles. …but I need more info. Rich H
I posit that the people walking away from their houses (not homes) is a positive indication that the people en masse are getting smarter to the vagaries of the elite and the tricks of the banking / financial industries trade. From Banks – in such times people can expect them to ‘grab’ ‘other peoples’ money and fall back on protracted legal battles that can take decades to solve, where in the meantime, the ‘other people’ suffer, starve and die while the banks live comfortably. Such is the way of Bank and their ilk and this in history is well witnessed. Peter’s Principle dictates that the incompetent always a priori get further promoted to points of great responsibility and ultimate incompetence and here are the clues as to what is happening now. Responsibility is not something that the elite take seriously except in its avoidance. History; its in our history! George, Hank and poor, poor Ben have no idea – being thoroughly incompetent in the prevail at hand and therefore shall seek consensual needs and preferences as their solution that shall be dispersed in full secrecy – such is the way of the ruling elite where after all, the public purse is at their want and call. Even the Swiss want (and shall get) the American public purse! Bottom line: the people (some) are wising up and will not let themselves be exposed and constrained to the criminal behaviors of the incompetent leadership. A “home” is where a family grows and loves and lives. A “house” is a box with walls and a roof. If the grassroots people are getting smarter as I suggest here, then this economic collapse will be all worthwhile and I judge this matter as totally and affirmatively positive indeed. PeterJB
Please note that the Robertson interview was on the Ron Insana show on May 24, 2004 which makes his predictions even more amazing! http://www.movermike.com/posts/1118125009.shtml
Sleepless in … It seems like every day I open Bloomberg, read, and my jaw just drops open, aghast at the latest financial news. Every day, almost without exception. I cannot sleep, night after night, full of a mixture of dread and anticipation, wondering if tomorrow will be D-day. Can any of you?
@Mark(the original? one) The doomsday/conspiracy ideas in the Julian Robertson article are a joke. The author took some liberties with his original comments from other interviews. That said, its interesting to contemplate…
@ Rich H As for the cash for the move, $30 billion from Monday’s TAF auction will have been settled on the lucky (secret) winners today. Just like the Thursday before MLK weekend . . . And don’t forget, that the point of the global sell off is to repatriate the cash to ramp the US market. Since the start of 2008, the US is down 6 percent and global is down 12 percent.
I think that Julian Robertson is past his sell-by date.
@Gloomy ”Every day, almost without exception. I cannot sleep, night after night, full of a mixture of dread and anticipation, wondering if tomorrow will be D-day. Can any of you?” For me it’s as if there’s no room for long term planning, starting of a project, even guidance to my children unless this whole mess will be dealt with. Maybe it’s a bit like war. You know where it started, but not where it ends…
@Lili You asked days ago about historical bond default rates. Don’t know whether you got an answer, but I ran into this today: http://pages.stern.nyu.edu/~ealtman/2006%20InvestPerf.pdf Might be useful.
“Sleepless in ..” @Gloomy, you can not be serious ? IF you are and I have absolutely not one solitary interest in this recommendation other than passing on info which was useful for me – How to Stop Worrying and Start Living Carnegie – just common sense Basically, two tidbits: assess the situation on paper worst case and best case. Reality often falls in the middle somewhere. Make a plan to deal with the problem as best you can. Another excerpt from the book. Two men were in prison: one man looked out his window and saw the mud on the ground the other looked out his window and saw the stars. other than this, exercise, eat well, TRY not to obsess with this crap(nearly impossible for me to do by the way at times), practice faith, laugh, listen to music and have fun this too shall pass where fear ends faith begins chart technically speaking, tonight i am going to party like it is August 26, 1998 IMHO (with some extremely hard to hold onto presently long protection in case i am wrong and we rally…)
Written by tutterfrut on 2008-02-14 15:22:04 the Roubinis told you so put… => The Roubini put Written by Rich H on 2008-02-14 15:48:59 The David Lareah Put! => The Lereah put The Joe6pack put The I Wanna be Free put The wolf blew my house put The banker’s nightmare put The “what housing bubble?” put The music stopped; I need a chair not a house put The Greater Fool put The Greater House put Housing is old-fashioned, I am going into commodities put …
better start looking up what “hot stains” are: In the U.S. you are sending about one-third of your water out of watersheds — it is not sustainable. http://www.alternet.org/water/76819/
Mr. Roubini or anyone with knowledge, What effect will the bond market turmoil effect closed end funds like CSQ, BLW, ETG, etc. Could the entire fund(s) default besides lose value? Would really appreciate response. Thanks
@JMa ”Two men were in prison: one man looked out his window and saw the mud on the ground the other looked out his window and saw the stars.” How did it end? ”…laugh, listen to music and have fun…” Just bought a 36 year old Yamaha wing piano for my wife from a hotel. When she plays, the world can fall apart and would not even notice.
collect all the guns in amercia for cash! it seems to be getting ugly out there. http://www.cnn.com/2008/US/02/14/university.shooting/index.html
Gloomy: “I cannot sleep, night after night, full of a mixture of dread and anticipation, wondering if tomorrow will be D-day. Can any of you?” I felt like that in August and in September. Then apparently I got used to it. Everything is so slow and unreal. Prof. Krugman must feel something similar: ”A self-reinforcing cycle of anxiety Things are proceeding more slowly that I sort-of-but-didn’t-really predicted. But current events — in which every week or two some important market you never heard of seems to collapse — bear at least a family resemblance to the scenario I laid out a year ago.” http://krugman.blogs.nytimes.com/2008/02/14/a-self-reinforcing-cycle-of-anxiety/ Then again, thanks to this blog, I positioned to absorb a medium size shock in the life of my family: a little stock of basic goods (canned food, baby diapers, etc), some cash and PM in a supposedly secure place and a bike. Thanks to this blog and to other resources on the internet we’ve been ahead of this crisis since July. We all have seen each and every blow coming. So I have a reasonable hope, that if things gets really out of hands I’ll panic before the average Joe and, if need be, I’ll be the first in the queue at the bank-run party, and the one who clears the shelfs at the local food shop.
Written by Alessandro on 2008-02-14 16:58:09 Thanks for the Krugman link. The comments are pretty good. He is getting better; I may add his blog to my daily reading….
Written by Sanford on 2008-02-14 16:42:26 Fixed income/convertible closed end funds are probably selling at significant discounts to book value (assuming book value has any meaning these days). I don’t follow any but they are probably the subject of a fair number of subscription letters that try telling you that making money investing is easy. They sound as a tempting/unique opportunity for the little guy to buy debt at huge discounts. But, IMO, this would take a HUGE amount of homework. Note that I am debating the long side of the argument. The short side is even riskier…
@tutterfrut how did it end ? the point is not the ending, but perpective on the situation – how do you view the current situation any situation for that matter good can be found in any situation for example, if people in the US end up living with 3 families under one roof, either be grateful for the roof over all of your heads or instead complain and worry about the fact you are all stuck together or be grateful for whatever food is on the plate as the plate could literally be empty. likewise, you can look at and wish you had the steak, but if instead you CHOOSE to be grateful for the rice and beans things are better – you can alter your own reality There was a powerful part of the story of Pope John Paul II where the Nazis occupied Poland he was seeing people killed and beaten everyday while he worked every day like a slave. He was losing his mind and consulted one of his colleagues who reminded him of all of the things they can do to you there is one thing they can never control which is your mind and the way you think and view your reality. I imagine McCain may have a few thoughts on this as an ex-POW… off to boxing class…
Hey! Why should I live in a smaller house so Mr. Henry Paulson can live in a bigger house? Why should I bail HIM out? And I WON’T live with my mother-in-law. Where’s Big Manny when I NEED him? And it’s Valentine’s Day, too!!!!! I’m VERY upset. Miss Kitty Montana
It just gets curiouser and curiouser. Dr. Roubini and others have opined that downgrading the monolines would have a serious detrimental effect on the credit markets that could possibly be the catalyst for a systemic financial meltdown. Yet, this week the monolines have rejected Buffett’s offer, and stated, just today, that they do not need nor want a bailout. At the same time, Spitzer and Dinallo are saying it may be necessary to force the companies to split their business and cut dividends. In addition, Ben spoke today of stronger growth in the second half; Jim Cramer says the government needs to do a Chrysler style bailout out and buy distressed (paper) assets; and Ron Insana said today on CNBC that the situation is so serious that the Fed will need to implement a Japan style zero interest rate policy! I am beginning to feel like I am on jury duty again! One witness testifies it is black, and another testifies that it is definitely white! IMO, the situation now has the feeling of something that is spinning out of control, and the probability of an equities market crash, as Prof Roubini mentioned last week, is increasing.
Thanks for sharing your thoughts. I will attempt to keep the chin up!
…even as the dominos keep falling. GMAC May Face `Substantial Difficulty,’ Cerberus Says (Update1) By Jason Kelly and Katherine Burton Feb. 14 (Bloomberg) — GMAC LLC, the auto and mortgage lender controlled by Cerberus Capital Management LP, may run into “substantial difficulty” if credit markets don’t improve, said Stephen Feinberg, founder of the private-equity firm. “We have detailed contingency plans in a continuing worsening environment,” Feinberg wrote in a Jan. 22 letter to investors, a copy of which was obtained by Bloomberg News. “However, if the credit markets continue to decline and we find ourselves in a prolonged environment of capital market shutdown, GMAC could run into substantial difficulty.”
Felt sorry for the young Bozo who attempted to go head-to-head with Nouriel…yikes! Bull market baby has no clue, none. If you look closely, you’ll see Kudlow’s Goldilocks hands moving the puppets mouth behind the scenes in a feeble attempt to sound credible! Too funny.
Not just the little guy walks away… http://www.ft.com/cms/s/0/5becb572-db30-11dc-9fdd-0000779fd2ac.html Banks advised to walk away from big deals By Henny Sender in New York Published: February 14 2008 22:03 | Last updated: February 14 2008 22:03 Leading banks are being advised that it would be cheaper to walk away from big buy-out deals than incur further losses on their funding commitments, increasing the chances that more high-profile private equity transactions will collapse. This advice from lawyers contrasts with the conventional wisdom that banks would risk serious damage to their reputations if they were to drop out of deals. … “It is the tipping point argument,” said a senior partner at one of the biggest private equity firms, who asked not to be named. “The banks have so many issues with their balance sheets that they are considering a new policy.” However, such a radical shift could have a dramatic impact on the markets. The presence of private-equity buyers is one factor that has helped boost stock prices. “If you want to come up with news that could make the Dow drop another 500 or 1,000 points, this would be it,” says one lawyer specialising in private equity issues for a major New York law firm. “But desperate times call for desperate measures.” …
@Octavio ”We’re all subprime now” by Tanta of CalculatedRisk The name is definitely the “subprime put”, they took the lead, everybody else is just playing catch up.
@LB Thanks for your insightful response. The point I was trying to make about Mr. King was that he has been “in charge” of monetary policy for some time. Loose MP and too low interest rates were behind the inflationary push in house prices. I think that poor bank supervison is of secondary concern. I do agree that this should revert to the BoE’s domain.
@Mark (the original one) REading the first few lines of that Baker web page, I thought I’d been put back two years in a time machine. That stuff would have been current about that time.
@Gloomy :) I say this in jest. Don’t pay your Hydro bill and they’ll cut off your electricity. That way, you won’t be able to fire up Bloomberg each day and torment yourself. Take care!
@ London Banker I’d be interested to know whether you [Rich H] think TPTB are playing the same game they did last month… The fly in your ointment is that there can be no bailout of the monolines. Bailing them out requires capital. I would be real sure that has already been explored. Govt. going to step in? That would be the end of credibility for MSM, Kudlow, Cramer, BB, HP, PPT, Spitzer, Dinallo, TPTB… I don’t think so. There must be enormous pressure from the munis (politicians) to keep that business viable. In any case, somebody obviously has a gun to the head of the ratings agencies or those insurers would have been downgraded long ago. Hear the professor: “any company that can’t operate without AAA…” The best idea so far involves splitting off the muni business. But then the monlines — __– (can you visualize this as I draw my finger across my throat?). Insurance is not banking. Insurance writes puts. Banks know puts too. They would have to write the rest down. Probably to 0. So, I imagine the bankers aren’t enthusiastic about it. I don’t know how this will shakeout but it doesn’t fit the shakedown scenario. Too many VIP’s have too much on the line and it’s too likely they would be shaken down with it. I expect it to be hushed-up. Be thinking Japan, 1990. Liquidity crisis. Ratings agencies overruled. Banks operate as insolvents. Shhhh…. Another question: liquidity crisis, FED pushing on string, when do other CB’s quit buying? Too big to fail? Shhhh…. - jd -
Thanks to all for the thoughtful/ insightful analyses. One thought having to do with the Fed check some of us will be receiving:1) help pay down debt 2)if you are lucky enough to be able to handle it, buy gold coins with it thereby sidestepping the greedy clutches of WS. Just a thought.
Not to be gloomy…but here are today’s headlines on the Daily Digest of business news (C2) of the San Francisco Chronicle: Southern California home sales nose-dived in January Consumer fraud complaints rise 20% Morgan Stanley plans to cut 1,000 jobs Sears headquarters to trim 20 jobs Tribune Co. to ax hundreds of jobs Hewlett-Packhard reaches settlement Bond insurer sells shares to save rating Thomas Weisel posts $11.2 million loss That’s it.
Enough of the snivelling and whining about Wall Street. For those of you who are its critics, if you were sharp enough you’d be there feeding at the trough. Alas….
You can keep Bernanke and Paulson. I’d rather have the unvarnished truth and a clear sighted central banker at the helm in these times. Written by London Banker on 2008-02-14 12:33:12 Are you sure? In this country we’re not used to hearing the unvarnished truth. See what happened to the markets today just because Bernanke came close to telling the truth? –iww
Well, now. There is a solution to bankers that ought to have been taken ages ago . . . burn them. Burn their banks, houses, yachts, property. No harm to them, just destroy their property as they have done to us. It’d be a lesson long remembered. PS: I had the same ideas as Robertson back on 2001. I was wrong and Robertson is wrong. At least we have the ability to avoid such a thing, if not the wisdom. Be of good cheer, for we all die anyway.
I can never get the video links that NR provides to work for me; a commercial and nothing else! Anyway, here’s a link to the latest one (“debate” with Kudlow) that actually works (for me, on my Mac). http://www.paperdinero.com/BNN.aspx?id=505 –iww
Written by Alessandro on 2008-02-14 18:01:17 I like subprime put but don’t understand your note about CR. Do you have a link? I have been aware about the subprime problem at least since 2004. Are you saying they are the first ones who wrote about it?
Written by Gloomy on 2008-02-14 17:39:35 You never know how risky leverage is until things get rough. When management is forced to make things like this public, it is usually to late. My bet: they will go under.
Three weeks later but no recovery expected soon, IMO… AN ECONOMIC HEART ATTACK BROUGHT ON BY SUGAR AND FAT by Richard Benson, http://www.sfgroup.org 22 January 2008 The other day I was frankly stunned to see President Bush in a panic. He was flanked by the Secretary of the Treasury and the head of the Federal Reserve as they rolled our sick economy onto a gurney to the OR. Congress witnessed this as defibrillator paddles were thrust into the country’s open chest and screams of “clear” were heard as far as Washington, as a jolt of $150 billion dollars in tax cuts was administered. It’s a rare sight, indeed, to see not only the President of the United States but the Secretary of the Treasury, Chairman of the Fed, and both parties in Congress, in panic mode pushing for greatly increased government spending. Obviously, government does not see itself as the problem! Financial markets around the globe sensed the panic and responded dramatically, creating volatile and sinking markets overnight. Our economy’s heart attack sent the financial markets swooning and even with the infusion of cash mentioned above, flu-like symptoms still exist. But what can one expect given the economy’s diet over the last five years which consisted of mainlining “easy money” sugar, and the consumption of mountains of fat (in the form of trillions of dollars of new consumer and corporate borrowing). This risky diet has finally taken its toll on the economy’s waistline. Today, in a surprise move, the Fed swiftly responded as attending physicians, led by the Paulson and Bernanke, imposed an interest rate cut of 3/4 percent. This move was intended to offset a potentially huge sell-off in the stock market, but it indicates the Fed will continue to feast on sugar, and the government will continue to offer a high-fat diet to the feeding-frenzy American consumer in the form of lower interest rates and easy money. Forget about savers; they’re not only forgotten but mugged in broad daylight by the Fed and US Treasury as interest rates drop well below the rate of inflation, and the rate of inflation is forced up. Inflation is raging now and even with hedonic adjustments and chain weighting tricks, the CPI is up 4.1 percent year-over-year. (Without the tricks used to distort the CPI down, the actual inflation rate is probably more like 6 percent). The American worker is also on life support because the cost of food and fuel is eating them alive and stagnant wages aren’t helping to pay the bills, now that home equity extraction is no longer an option. So where do we go from here? Today’s prescribed cure (more like a band aid solution over a sword wound) will fuel even fatter federal deficits funded by new money printed up by the Federal Reserve. So the prognosis for the economy may not be death by heart attack, but it will remain in intensive care or in a comma for years. The citizens of our great country experienced an intense sugar rush over the last decade as their waistlines expanded and they ran up very fat personal deficits amounting to over $14 trillion dollars. (It is estimated that $500 billion dollars of that easy money created debt could be in default very soon). Too much sugar, too much fat, a collapsing dollar, and higher inflation can cause an economic heart attack. It happened this week, and you should watch for it to happen again and again.
WHat is this a joke? I guess you really have to be good to make it in a serious business with such a name. Or on the contrary, it may be advantageous as it all seems to be a big joke. Smoked but didn’t inhale; I didn’t use steroids/HGH etc. but my wife did; subprime is contained; slow growth but no recession, etc. http://www.bloomberg.com/apps/news?pid=20601103&sid=alAnXyRmpHHY&refer=news … No Bailout Needed MBIA Chief Financial Officer Charles Chaplin dismissed suggestions that the industry needs a rescue or stronger federal oversight, according to his prepared remarks. “A bailout of highly credit-worthy companies who, at most, are at risk of losing the very highest ratings available, is misplaced,” Chaplin said. MBIA has raised $2.6 billion through investors and an additional $500 million in capital has been generated as existing policies have run off and through gains in the investment portfolio, Chaplin said in an interview ahead of his scheduled testimony before the hearing. “That gives us a cushion of more than a $1 billion to each of the rating agency’s stated requirements,” Chaplin said. “No reasonable person would say MBIA won’t be able to pay claims.” Chaplin and Ambac Chief Executive Officer Michael Callen are trying to fend off critics who say the companies may be headed for bankruptcy. One of the most vocal skeptics, hedge fund manager William Ackman, will also deliver remarks today….
Monolines given five days to find funds By Aline Van Duyn in Washington and Michael Mackenzie in New York Published: February 14 2008 14:54 | Last updated: February 15 2008 00:46 Eliot Spitzer, New York governor, gave bond insurers three to five business days to find fresh capital, or face a potential break-up by state regulators who want to safeguard the municipal bond markets. Mr Spitzer’s warning came shortly before Moody’s Investors Service highlighted concerns about the bond insurers by withdrawing its triple-A credit rating for privately held Financial Guaranty Insurance Company However, the sting of Moody’s downgrade was mitigated by its more positive comments about MBIA and Ambac, the two largest bond insurers, which helped send their shares up 8.4 per cent and 12.4 per cent, respectively, in New York trading. If the bond insurers lose their triple-A credit rating, the bonds and other instruments they insure also would be downgraded. This could trigger more writedowns for banks and other investors that hold such investments and a sharp rise in borrowing costs for local government entities that issue insured bonds. Mr Spitzer told the House financial services sub-committee on capital markets in Washington that he believed the crisis involving the credit insurers needed to be resolved in three to five business days. “We will be forced to act sooner rather than later,” Mr Spitzer said. He said New York regulators were considering a division of the bond insurers into a “good bank, bad bank” structure. Under such proposals, the insurers’ municipal bond businesses would be separated from their riskier activities, such as guaranteeing complex structured securities. Mr Spitzer did not say what specific steps could be taken by insurance regulators, who operate at the state rather than federal level. But the state regulators have powers to protect policyholders, as well as banks. The tough tone was echoed by Eric Dinallo, New York’s insurance superintendent, who was appointed by Mr Spitzer and who has been pushing for bond insurers and the banks most exposed to them to discuss new sources of capital. He said his first priority would be to protect the municipal bondholders and issuers. Mr Dinallo said the regulator would allow bond insurers to split into two companies. Warren Buffett, the billionaire investor, has already offered to take over the municipal portfolios of Ambac, MBIA and FGIC. One has already rejected the offer. Mr Dinallo said other investors were also interested. “If we do not take effective action, this could be a financial tsunami that causes substantial damage throughout our economy.” Mr Dinallo said he was considering rewriting the rules for bond insurance to prevent companies taking inappropriate risks. A break-up of the bond insurer model holds grave implications for financial institutions that face writedowns on insurance and derivatives contracts entered into with bond insurers. http://www.ft.com/cms/s/0/3b313712-db09-11dc-9fdd-0000779fd2ac.html I don’t think breaking them up is going to be so easy. The holders of non-municipal insurance will scream like crazy. Unless, of course, the taxpayer foots the bill…
Unfortunately, Dr Roubini’s blog has become a haven for some of the internet’s conspiracy/perma-nut population. This is the type who believes the Fed has some secret agenda and that Bush knew all about the 9/11 planes… But let’s go back to one of Dr. Roubini’s most cherished belief’s-the “Coupled/De-Coupled/Re-Coupled debate. Dr. Roubini believes strongly in “Re-Coupling”, but the reality is that no one knows the answer to this and if you look at some of the evidence, there are a number of economy’s that are indeed “De-Coupled”. Does it look like any type of recession is occurring in Dubai right now? Is China “Re-coupled” if the IMF are saying they will grow 10% this year?
The Kiss Me in the Dark, Baby, put.
Unfortunately, Dr Roubini’s blog has become a haven for some of the internet’s conspiracy/perma-nut population. This is the type who believes the Fed has some secret agenda and that Bush knew all about the 9/11 planes… But let’s go back to one of Dr. Roubini’s most cherished belief’s-the “Coupled/De-Coupled/Re-Coupled debate. Dr. Roubini believes strongly in “Re-Coupling”, but the reality is that no one knows the answer to this and if you look at some of the evidence, there are a number of economy’s that are indeed “De-Coupled”. Does it look like any type of recession is occurring in Dubai right now? Is China “Re-coupled” if the IMF are saying they will grow 10% this year? Written by NewstraderFX on 2008-02-14 21:56:45 I agree with the part about becoming “a haven for some of the internet’s conspiracy/perma-nut population”. However, NR’s predictions of re-coupling, or the absence of decoupling, may yet to be proven correct. The effects of the recession are slowly being felt across the Pacific (and the Atlantic). China will not stop growing, but that 10% growth prediction may turn out to be too optimistic if we do enter a deep recession here. Dubai comment of course is irrelevant. –iww
Have you noticed, usually when the rains come, the clouds that bring it block out the sun?
Unfortunately, Dr Roubini’s blog has become a haven for some of the internet’s conspiracy/perma-nut population. This is the type who believes the Fed has some secret agenda and that Bush knew all about the 9/11 planes… Ah, but if you take peoples sight away – it’s easy to read too much into what you hear. Criticize those who remove people’s sight, rather than those who listen intently.
Sorry that first paragraph should have had quotes around it or a reference, it’s not mine.
QUOTE You can keep Bernanke and Paulson. I’d rather have the unvarnished truth and a clear sighted central banker at the helm in these times. Written by London Banker on 2008-02-14 12:33:12 UNQUOTE Hear, hear. It takes courage for a people to face the tough facts when there is a looming crisis. The quicker we recognize the crisis and work together to solve it the better. Unfortunately, the equity markets will very soon discover what a “financial tsunami” is. (Aside: It’s okay for anyone disagree with me – please do buy more stocks now as they are REALLY UNDERVALUED…. I mean borrow money from your credit cards at 15% so you can invest in the stock market. When the stock market comes back in a year, it’s going to go UP UP UP 100%. So you’d still be okay paying only 15% interest. No, really. TRUST ME!) I am waiting, waiting , waiting…. (Disclosure: it does not take a genius to figure out that I am short…. Actually, short might really be an understatement. How about very, very short, as in super midget sized. But hopefully, it just pops out BIG when the time comes right. Badda-badda-bing….) Mirth off…. Seriously, if anyone is still long NOW and reading this blog, you may not wish to consider not speculate on the long side until “it” is over…. Going into cash might be one of the best invetsment ideas for 2008.” Let me quote a very interesting statement from Martyin Feldstein who was interviewed by Foreign Policy magazine. He is the Chief of the NBER which decides when recessions occur in the US. He was already warning Bernake at Jackson Hole Wyoming, last year for him to cut rates immediately. The link: http://www.foreignpolicy.com/story/cms.php?story_id=4143 Seven Questions: Martin Feldstein on the “R” Word Posted January 2008 Is the global economy headed for a rough patch? With the world’s stock markets in turmoil, FP spoke with distinguished Harvard economist Martin Feldstein on what a U.S. recession would mean for America and the world. MARTIN OESER/AFP/Getty Images Ground control to Major Tom: Is it time to strap our helmets on and prepare for a hard landing? FOREIGN POLICY: Everyone is anxiously discussing the possibility that the U.S. economy is in a recession or that it will be soon. You wrote in December that the probability of a recession in 2008 has now reached 50 percent. Where do you stand now? Martin Feldstein: Well, I think it’s higher. The negative evidence continues to accumulate, so I think there’s a greater than 50 percent chance that we are in recession now. It is not a sure thing, and it depends on what happens in both monetary and fiscal policy, but at this point there’s unfortunately a better than even chance that we will see the economy contract. —–Content excised—– LOOK AT THE MONEY QUOTE BELOW: FP: I think it’s fair to say that most Americans would be worse off as a result of a U.S. economic slowdown. But who would you say are the likely winners from a U.S. recession? MF: (Laughs.) That’s a tricky question. Likely winners from a U.S. recession … um … (pause). There are not many winners in a situation where income is falling and sales are falling and profits are falling and so on. So, the winners, if there are winners, are going to be financial investors who have seen this recession coming and who have in effect bet financially on an economic downturn—***they’ve sold stock short.**** Martin Feldstein is professor of economics at Harvard University and president and CEO of the National Bureau of Economic Research. He was chairman of the Council of Economic Advisers under U.S. President Ronald Reagan. _________________________________________________ Imagine here is the TOP person who is the final arbiter for marking recessions in the US (who actually is following EVERYTHING closely), in mirth, saying that those who might win in this environment are short-sellers. Hhhmmm. Revealing, isn’t it? Might you think that he is also making a few bucks being long inverse ETFs too? If you disagree with me, please go long in this market now. BIG BIG BIG LONG….
I heard from credible sources that one of the big 5 brokerages had massive lay offs this week ? 20+ veterens in technology being thrown out ? Did any one hear any such news ? Guys, anyone who can confirm this news ?
Spitzer is being very brave. Rescuing the munis by separating them from the derivatives parts of the monolines will cause the derivatives parts to sink, but they would have sunk anyway. That charge goes against the banks. As I said Spitzer’s got guts. Food may not continue to inflate. Our local Whole Foods is having always something on sale now. They used to have sales only once in a while. If food demand weakens (it is somewhat elastic) won’t prices stabilize or drop a bit? Here’s the gameplan I would follow to bail things out. As Roubini says we’re in a solvency crisis as well as a liquidity crisis. The solvency problem is largely denominated in USD. The total amount of insolvency is probably too much for the government to buy out. So follow the two step program: 1. The Fed inflates like crazy to reduce the real value of that insolvency. 2. Then the government steps in and buys out the critical insolvencies or those that affect your friends, once they were knocked down to size by the inflation in step 1. Both steps can actually proceed simultaneously as long as the government trusts that the Fed will continue to inflate. So the government can take on apparently unmanageable debts (even more unmanageable than those they have now!), on the expectation that much of the debt will be inflated away. Since that’s what I would do in their shoes, that’s what I will expect them to do.
Yes I believe Morgan Stanley fired 1000 people this week. They also fired 1000 about 2 weeks ago; they are not the same thousand. How did you hear that technology guys got cut? I would not be surprised if so; they won’t likely focus on new initiatives and infrastructure right now.
Testimony on monoline bond insurance by Patrick M. Parkinson, Deputy Director, Division of Research and Statistics Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, Committee on Financial Services, U.S. House of Representatives February 14, 2008 Well worth reading.
NINJA Put? I have been doing some calculations based on Hellasious’ post over at Sudden Debt. His premise is that banks will again require a 20% down payment, and underwriting standards will be strict. It would take a family of median income 10 years to save the downpayment. Factor in stagnant wages, foreclosure sales and motivated sellers, and home proces could fall 50% over the next 10 years. Will someone please tell me I’m wrong?
Octavio Richetta: “I like subprime put but don’t understand your note about CR. Do you have a link? I have been aware about the subprime problem at least since 2004. Are you saying they are the first ones who wrote about it?” ”We’re all subprime now” is a refrain used on CR since the, now distant, times when “the problem was well contained to subprime mortgages”. If the problem is well contained to subprimes and the contagion is spreading day after day, it must be that the whole financial system is ‘subprime’. http://www.google.com/search?hl=en&q=we%27re+all+sub-prime+now+site%3Acalculatedrisk.blogspot.com subprime: a borrower with higher risk characteristics as inferred by his credit history Just drop the ‘credit history’ part and you describe the best part of the world financial system. We’re all subprime now.
Credit crisis is viral and spreading fast http://globaleconomicanalysis.blogspot.com/2008/02/credit-crisis-is-viral-and-spreading.html This is getting beyond rational. What next?????
@Octavio Thanks for your thoughts regarding bank failures. Regarding monolines, don’t forget AMBAC is incorporated in Wisconsin. Spitzer has no authority there. http://www.nakedcapitalism.com/2008/02/dinallo-considers-breaking-up-bond.html
@gloomy But the attorney general of Wisconsin does.
Say goodbye to the America we dearly loved. It is slowly falling apart. I just hope we dont have riots in the streets. You may think I am crazy, but strange things happen when people have no homes, no income and no dignity. Read the Great Reckoning by Lord Wees Mog and Dale Anderson. It spells it out in great detail. Wait till the social welfare programs get cut. That will be the tipping point.
Oops… Two Citigroup funds have troubles: report Fri Feb 15, 2008 7:51am EST NEW YORK (Reuters) – Citigroup Inc (C.N: Quote, Profile, Research) has barred investors in one of its hedge funds from withdrawing their money, and a new leveraged fund lost 52 percent in its first three months, the Wall Street Journal reported on Friday. The largest U.S. bank suspended redemptions in CSO Partners, a fund specializing in corporate debt, after investors tried to pull more than 30 percent of its roughly $500 million of assets, the newspaper said. Citigroup injected $100 million to stabilize the fund, which lost 10.9 percent last year, the newspaper said. http://www.reuters.com/article/ousiv/idUSN1554158820080215
what does this headline tell you? Hormel fiscal 1st-quarter profit rises 17 percent helped by sales of Spam, refrigerated meats. People are resorting to eating that mystery meat spam instead of the real thing.. No recession?
NY Times February 13, 2008 Totally Spent By ROBERT B. REICH Berkeley, Calif. WE’RE sliding into recession, or worse, and Washington is turning to the normal remedies for economic downturns. But the normal remedies are not likely to work this time, because this isn’t a normal downturn. The problem lies deeper. It is the culmination of three decades during which American consumers have spent beyond their means. That era is now coming to an end. Consumers have run out of ways to keep the spending binge going. The only lasting remedy, other than for Americans to accept a lower standard of living and for businesses to adjust to a smaller economy, is to give middle- and lower-income Americans more buying power — and not just temporarily. Much of the current debate is irrelevant. Even with more tax breaks for business like accelerated depreciation, companies won’t invest in more factories or equipment when demand is dropping for products and services across the board, as it is now. And temporary fixes like a stimulus package that would give households a one-time cash infusion won’t get consumers back to the malls, because consumers know the assistance is temporary. The problems most consumers face are permanent, so they are likely to pocket the extra money instead of spending it.
More Bad News New York Fed Manufacturing Index Dropped to -11.7 in February http://www.bloomberg.com/apps/news?pid=20601087&sid=auPW3EeNFkQ0&refer=home
LOLOLOLOL!!!! S&P just updated earnings estimates for 2008 and they were RAISED!!!! Now the street is looking for 18.27% profit growth YOY!! They must have a new brand of cool-aid they’re sippin! Even with that, fair value today for the S&P on those estimates stands at 1332. FYI, my model for 2008 earnings calls for 11% profit growth using December data and that translates to a fair value of 1219…0 growth puts fair value at 992, buckle up folks, buckle up…
Hi Prof, just a feedback… u really need to slam their so called arguments for no recession and the bias in their data… Guys, here is a pretty interesting article abt the minsky credit bubble… http://www.mises.org/story/2787 ”While most mainstream economists are of the view that economic busts are the outcome of various external shocks to the economy, Minsky held that, even in the absence of such shocks, the capitalistic economy has an inherent tendency to develop instability, which culminates in severe economic crises. The key mechanism that pushes the economy towards a crisis is the accumulation of debt… According to Minsky, the financial structure of a capitalist economy becomes more and more fragile during the period of prosperity. In short, the longer the prosperity, the more fragile the system becomes. Minsky argued, - In particular, over a protracted period of good times, capitalist economies tend to move from a financial structure dominated by hedge finance units to a structure in which there is large weight to units engaged in speculative and Ponzi finance. This framework of thinking comprises the essence of what Minsky dubbed the “Financial Instability Hypothesis” (FIH). Another aspect of the FIH is that, during good times, banks and other intermediaries strive to innovate with regard to the assets they acquire and the liabilities they market. This means that, during good times, financial intermediaries (Minsky labeled them as “merchants of debts”) try to lure investors to buy the debt by means of sophisticated innovations. The chase for making more profits causes players in financial markets to place their money in various investments that have very little substance — such as subprime-mortgage-backed securities. What makes these investments attractive is sophisticated packaging and the relatively high rate of return… Contrary to Minsky, our analysis shows that it is the existence of the central bank that makes modern capitalism unstable. It is this factor alone that is responsible for the current financial instability…” mrskeptical
Written by Jason B on 2008-02-15 05:27:30 Written by Alessandro on 2008-02-15 05:39:28 I like NINJA put, (A NINJA mortgage search gives RGE link on top:http://www.rgemonitor.com/blog/roubini/183467) However, subprime put is a lot more generic. Subprime originated all this and I agree “it is all subprime now”. So for example, 1. Subprime put can also be applied to private equity firms walking out on deals: Cerberus walking out of the union rentals deal: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=an15nuhm7JxA United Rentals In November, Cerberus backed out of a $4 billion agreement to buy United Rentals Inc., the U.S.’s largest construction- equipment rental company, because deteriorating credit markets would make it hard for United Rentals to borrow money after the acquisition was completed. “Walking away from the transaction was very difficult for us because we knew we would get criticized and there would be significant reputational fallout,” Feinberg wrote in the letter. “Nevertheless, our responsibility and obligation are to our investors, and we will always protect you, even if we have to take a lot of grief in the process.” Feinberg stressed that Cerberus spreads its funds, including the current Series Four, across a number of investments. “If any one, two or even three deals fail, however, our people will feel awful and will find it unacceptable, but it will not hurt the funds terribly,” he wrote. “Because Series Four is very diversified, its overall success does not depend on the future of GMAC, Chrysler or any other single investment.” 2. Banks walking out on auction-rate securities: http://www.bloomberg.com/apps/news?pid=20601103&sid=abzW0RRyRgas&refer=news Muni Regulators Seek Disclosure on Auction-Rate Bonds (Update2) By Michael Quint Feb. 15 (Bloomberg) — U.S. banks and securities firms may be forced to disclose more information on bidding for auction- rate bonds after dealers stopped buying the securities, triggering more than $20 billion of failures this week that squeezed local governments nationwide. http://www.bloomberg.com/apps/news?pid=20601015&sid=auqJw0BJbTAY&refer=munibonds Merrill Reduces Support for Auction-Rate Securities, People Say By William Selway Feb. 14 (Bloomberg) — Merrill Lynch & Co., the largest U.S. brokerage, is reducing purchases of auction-rate securities that don’t attract enough bids from investors, according to people with direct knowledge of the matter. Merrill, the seventh-largest underwriter of the debt, sent a memo to its brokers yesterday explaining the decision, according to a copy obtained from a broker who declined to be identified because the memo wasn’t publicly disclosed. Rates on the bonds are set through periodic auctions run by dealers including Merrill, who in the past stepped in routinely with their own bids when demand faltered. … 3. Hedge funds stopping redemptions: February 15, 2008 Citigroup suspends hedge fund redepmtions http://www.bankingtimes.co.uk/15022008-citigroup-suspends-hedge-fund-redepmtions/ Yes, it is all a HUGE subprime put. Alessandro wins! Professor, you da boss! Please feel free to pick up on “The Subprime Put”
I was wondering; if the government decides to socialise the losses ie tax payers footing the bill for corp america’s greed and subprimeness, just so as to avoid a depression; isnt this for the greater good becoz a depression is avoided? wonder what the long-term effects to the country if this avenue were to be pursued.. views anyone? mrskeptical
“The Subprime Put” The subprime put provides a lot of versatility: All can use it, at any time, for any reason, at any place in the world! IMO, the subprime put is WAY STRONGER than the Grenspan put or the BArnanke put. The Subprime Put is the game’s quintessential trump card!
The subprime put: little guys walk away, banks walk away, private equity firms walk away, hedge funds walk away, bond insurance companies walk away, towns walk away, cities walk away, the FED walks away, the treasury secretary walks away…
Bond Insurer FGIC Plans to Split Into Two Companies http://www.cnbc.com/id/23182192
@Gloomy. The rally is done. Look for more downside.
Octavio: “The subprime put: little guys walk away, banks walk away, private equity firms walk away, hedge funds walk away, bond insurance companies walk away, towns walk away, cities walk away, the FED walks away, the treasury secretary walks away…” You got it in full! The subprime put: if you can’t pay, you walk away.
For those that don’t believe or see the link between baseball and the “elite”, and the co=rruption that exists… Please read: http://www.bloomberg.com/apps/news?pid=20601079&sid=aHDEBxWHPTEc&refer=home The owners of these teams are the elite! They are the secret society. Their players are like the stock brokers! Rich H
I believe subprime put value, the difference between mortgage and house value, will be regarded by tax authorities as income. So there is a hurdle to walk away – pay extra taxes on the “gain”.
@FGuest Apparently this has been removed with legislation backad by the NAR (??). See: http://globaleconomicanalysis.blogspot.com/2008/02/debt-trap-mass-exodus.html http://globaleconomicanalysis.blogspot.com/2007/10/mortgage-forgiveness-act-seen-and.html
@Alessandro, Thanks for the link! I always wondered about how reasonable such tax code was. Blessing in disguise, though, if a well-intentioned government smooths the way to massive walk aways. Is there a tax walk away put in operation too? With all the walk away puts, who ends up paying the bill: current and future taxpayers, they’re stuck writing all these puts (including some shareholders)
ECRI index growth rate plunges again to -9.1!! They say construction and finance industries are in a recession but other economic sectors have YET to confirm an overall recession. Also, consumer confidence (U of MI) plunges to 69.6 from 78.4! The Dow should close down 385 points today…
Mr Skeptical: If a Depression is avoided by socializing the losses in this crisis, it will be miraculous. Just because businesses won’t take the hit does not mean the hit won’t hurt someone. Taxpayers would be better off with fewer lenders than with additional trillions of debt to burden generations not yet dreamed of…. We have plenty to pay for already in the US, starting with the costs of this stupid “War on Terrorism” bullshit that Bush & Co. sold to us. We have 78 million boomers to take care of soon with limited funds, we have a decaying infrastructure to rebuild and a healthcare system on the brink of disaster due to the capitalized nature of health insurance and for profit medicine. You know, as a side note, in a meeting yesterday with the administration of my hospital, I was reminded that our patients are to be reffered to as “clients” (when they were patients, we were providers, now I feel like a waiter in my own hospital!). But, I digress. The reality is that we have enough debt to pay off without adding more on top. In my view, anything other than letting the insolvent lenders go down makes the Depression longer and more debilitating than letting a recession be deep and prolonged with businesses closing, but the rest changing their ways.
@ London Banker I apologize for having had it all wrong. The monolines are going to be split up. That is to say that TPTB lead by Spitzer & Dinallo will re-write their business plans so that their constituents (munis) are protected leaving the other tranches in that insurance pool to drown. The mistake that I had made was to think that shakedowns would be limited to the shadow financial system. These ostensibly regulated bodies (regulated by Spitzer & Dinallo) are going to the gallows too. And nobody is going to say anything about Spitzer & Dinallo being responsible themselves. Shhhh. - jd -
Another big hedge fund operator, Eddie Lampert, has lost his touch. http://jtaplin.wordpress.com/2008/02/15/smart-player-gone-cold/
Stocks going green! What a joke.
Feb. 15 (Bloomberg) — FGIC Corp., the bond insurer stripped of its Aaa guaranty rating by Moody’s Investors Service, asked to be split in two to protect the municipal bonds it covers, according to the New York Insurance Department. FGIC applied for a new license so it can separate its municipal insurance unit from its guarantees on subprime- mortgages, David Neustadt, a department spokesman, said in a telephone interview. http://www.bloomberg.com/apps/news?pid=20601087&sid=adNUc78zSsfo&refer=home My guess: they see trouble coming, try to turn the clock back and send the losses back to where they came from: irresponsible lenders. Keeping themselves in business, of course. Bankers are going to have bad dreams tonight, I guess. What will be the effects on further developments in the financial crisis?
Stocks rallied on the industrial production numbers. They are no where near recessionary levels. It appears as though ECRI may be on to somthing here, even though financials are in big trouble as well as construction, the rest of the economy is performing relatively well.
FGIC split PS: Another walk away? Financial high tech? PMLY? Profits mine, losses yours?
Best Buy missing and lowering earnings estimates for all of 2008 is a pretty good economic tell. It is just a matter of months IMHO before the jobs, retail sales and production numbers fall in line and tank…
Re the FGIC proposed split of businesses. If I were one of the toxic waste issuers that went to the FGIC and paid them a fee to insure my junk, part of the decision to use that company was because of its financial strength. Neither I nor my buyers are going to be happy that any financial strength they FGIC has being removed to support their initial business. I see holders of the junk secuities going straight to the courts to get injunctions to prevent FGIC’s, and others, plans.
equity indices still indicate 100% denial…. When the fall comes it is going to be hard….
Split the Insurers? You Can’t Do That. State insurance commissioners lack authority to favor one class of claimants over another to the degree of setting up a “good bank/bad bank” remedy, where municipalities get preferential treatment over other potential claimants. The regulators allowed the nonstandard business to be written for years, with no objection. The insureds that would be forced into the “bad bank” would likely not have agreed to the contract had they known that the claims-paying ability of the guarantor would be impaired. There is nothing in contract law that should favor municipalities over other claimants. Now, if they want to modify the law prospectively, that’s another thing. Create a separate class of muni insurers, distinct from financial guarantors that can guarantee anything for a fee. Different reserving and capital rules for each class. Now this doesn’t mean that New York won’t try to split the guarantors in two; I think they will lose on Ambac because it is Wisconsin-domiciled. With MBIA, they will lose after a longer fight, because they don’t have the authority to affect the creditworthiness of contracts retroactively.
Another save on the Dow at 12,300…
CCIE-It is gonna happen, they will split and keep the good paper in one company and file bankruptcy on the company with the bad paper. This is all about survival now and to hell with the law- Bush and the reulatory agencies have already shown us their color on the law for the last 7 years.
FUNNIEST SUBPRIME CARTOON — MASTERPIECE! This is posted from Bigpicture. I am sure it will be marked as the masterpiece cartoon representing subprime debacle. http://docs.google.com/TeamPresent?docid=ddp4zq7n_0cdjsr4fn&skipauth=true
CCIE They could use water boarding for those who disagree. No, seriously, I don’t know anymore what to believe from the financial players, public or private.
@FGuest ‘I believe subprime put value, the difference between mortgage and house value, will be regarded by tax authorities as income. So there is a hurdle to walk away – pay extra taxes on the “gain”.’ Honey, you got it. You know your government!
Octavio Richetta wrote on 2008-02-15 10:36:46 “equity indices still indicate 100% denial…. When the fall comes it is going to be hard….” I am torn about this. I agree that fundamentally things are so bad that a sharp break in the market is possible at any time. But on the other hand, the sentiment indicators are very bearish. Money has poured into short EFTs, and too many people are expecting a decline. So I am wondering if everybody who wanted to sell has already sold, and even if the market does fall sharply, the short covering will push it back up very quickly. Therefore, instead of a hard fall, perhaps it will be a very slow grind down – a volatile trading range with a downward bias. The whole economic slowdown has progressed VERY slowly, IMO. (I expected recession to arrive last Summer!) So I guess it should be no surprise that the stock market is taking a long time to fully recognize the problems and reprice to reflect lower earnings in ’08 and probably ’09.
@KJF I’ve been concerned about those “bounce” issues you cite and had felt that the S&P could get back to the 1400-1410 level before it ran out of steam. But it REALLY feels like it’s run out of steam already. Thinking back to my days as a pro trader, the times I’d get myself in trouble would be when I was trying to play the corrections. The eye would be taken off the big picture and boom, the major trend (in the current case, down) would reassert itself and I’d be caught offside. Bottom line is that you’ve got to be positioned in line with the fundamentals. The technicals help with the timing of transactions.
Due to budgetary constraints, the Economic Indicators service (http://www.economicindicators.gov) will be discontinued effective March 1, 2008. http://www.economicindicators.gov/ Transparency? That’s for the little countries. We think obfuscation works better.
Posted By NewstraderFX By TERENCE POON WSJ February 15, 2008 7:33 a.m. BEIJING — An acceleration of China’s export growth in January will likely bolster the case for Beijing to continue its tight monetary policy. Economists said the trade data and rebounding money-supply growth in January will encourage China’s government to continue trying to curb inflation and economic overheating, instead of easing policy to cushion the nation from the impact of a slowing U.S. economy. China’s exports in January grew 26.7% from a year earlier, higher than December’s 21.7% rise and the average forecast for an 18.5% gain in a poll of eight economists by Dow Jones Newswires, data issued Friday by the General Administration of Customs showed. The pickup confounds expectations that export growth would slow as global demand for China-made goods weakened and snow storms battered many parts of China last month, shutting down factories and roads. Still, the January numbers typically are an imperfect barometer because of seasonal distortions caused by China’s Lunar New Year holiday. maybe, maybe not but i can tell what I do as a consumer: I needed a new pair of those magnifying eyeglasses. I was in my local drugstore chain and they had the glasses there-for $15. Being that we are going into an economic slowdown, what I did was to go to my local Chinese .99 cent store and bought 2 pairs (one for the bedroom and one for the living room). Total cost? $2 plus sales tax. So you see, in times of economic stress I am looking more then ever for as many bargains as I can get so I’m buying MORE at the Chinese store, not less. I also bought 4 AA batteries (.25 each), 5 washcloths/dishtowels ($2.50), can opener ($1), some knock-off dish soap ($1)… Where is China going with their $1 Trillion + current account? They’ll put their people to work on infra structure projects and create a consumer demand base and if they are smart, they are going to buy as many deflated assets as they can.
Giraf wrote on 2008-02-15 11:42:24 “Thinking back to my days as a pro trader, the times I’d get myself in trouble would be when I was trying to play the corrections. The eye would be taken off the big picture and boom, the major trend (in the current case, down) would reassert itself and I’d be caught offside. Bottom line is that you’ve got to be positioned in line with the fundamentals. The technicals help with the timing of transactions.” Thanks for your comments. I am positioned (short) in line with the fundamentals, and I have been paying more attention to the technicals recently after being too slow to recognize the big rallies in the past six months. But it still worries me because I do not recall a bear market that was so well advertised and well “attended” by what appears to be a great many retail shorts. Shorting the market has never seemed so popular. Can we all be right and still make money?
Posted by NewstraderFX Call me crazy, call me nuts or call me Kudlow it really doesn’t bother me-somehow I have to believe deep down inside that a work-out is going to be found and that the housing crisis will not devolve into a full blown economic meltdown. It’s time to stop all the crying and MAN UP HERE. We need a big play now so just like Eli in the Superbowl, shake off those would-be sackers and get that pass completed! It’s 1st and 80 yards to go with 2.30 left in the game. How bad do you want it?
welcome to leadville! socializing losses DENVER, Colorado (AP) — More than 1 billion gallons of contaminated water — enough to fill 1,500 Olympic-sized swimming pools — is trapped in a tunnel in the mountains above the historic town of Leadville and threatening to blow. toxic financials ,toxic water who is left remaining – the janitors? The problem (profit) makers leave the socializers to “contain” the uncontained. rinse lather repeat?
Radian Group Inc. said Friday that it lost $618 million, or $7.74/share, during the fourth quarter as paid claims mounted, and the mortgage insurer set more aside to cover future expected losses. The quarterly loss compares to $158.3 million in earnings one year earlier. The quarterly loss outstripped analysts’ estimates, with Reuters reporting that median analyst expectations were for a loss of $2.53 per share. “We have come through a difficult year and the environment continues to be very challenging,” said S.A. Ibrahim, Radian CEO. “These challenges will remain with us for the near-term and may intensify, so we are looking at various scenarios and responses.” He did not elaborate on what responses were under consideration. Driving the loss was a huge jump in the company’s provision for losses, which amounted to a $687.8 million charge for the quarter compared to just $84.3 million in the year-ago period. Radian ended the year with $1.3 billion in mortgage insurance loss reserves, it said. Increased claims and rising loss severity led to $410 million in mortgage-insurance incurred losses, Radian said, while it also absored a $298 million write-down in the value of derivatives it held (including CDOs). Other losses included a $50 million pre-tax charge associated with a write-off of the company’s investment into C-BASS. Default activity continued rising, as well. Total defaults reached 6.8 percent of the primary insurance portfolio at the end of the fourth quarter, compared to 5.43 percent at the end of 2006. But the jump in deliquencies was most noticable among the company’s insured Alt-A loans, with defaults at a reported 9.74 percent during Q4, versus 5.9 percent one year earlier. 32 percent of new insurance underwritten in the fourth quarter represented loans with an LTV above 95 percent; that was up from 24 percent in the fourth quarter of 2006. Higher LTV loans have been singled out by other insurers as more likely to default and result in paid claims; mortgage insurer the PMI Group, Inc. said earlier this week that it would no longer write insurance for loans above 97 percent LTV.
Posted by NewstraderFX I am here to tell any homeowner with negative equity: DON’T BE A FOOL AND SELL YOUR HOUSE IF YOU DON’T HAVE TO!! There are plans to help you and more are coming. Do what Hank Paulson has suggested. Contact your lender now and get a solution worked out. These lenders do not want to foreclose-it helps no one. Unless you absolutely cannot make your payments, don’t make the worst BUY HIGH/SELL LOW TRADE that you will EVER MAKE IN YOUR LIFETIME. I promise you that at some point, housing will bottom and prices will start to go up again. You’ll rue the day you sold if you do it now. Make saving your home your number one priority.
VIX is actually DOWN today even though stocks are down.
hmmmm, look at that, 12,300 reclaimed once again. Seems like a pretty important level to hold today….
NewstraderFX wrote on 2008-02-15 12:07:50 “Call me crazy, call me nuts or call me Kudlow it really doesn’t bother me-somehow I have to believe deep down inside that a work-out is going to be found and that the housing crisis will not devolve into a full blown economic meltdown. It’s time to stop all the crying and MAN UP HERE. We need a big play now so just like Eli in the Superbowl, shake off those would-be sackers and get that pass completed! It’s 1st and 80 yards to go with 2.30 left in the game. How bad do you want it?” If saving the economy from the twin debacles of the housing and credit market crises was as easy as throwing a completed hail Mary pass, then coach Ben would have already called that play and quarterback Hank would have already thrown it… repeatedly, if necessary, to get the completion (they are not limited to just 4 downs). IMO, control of the economy (as with most things in life) is an illusion. We may or may not have a financial meltdown and severe recession, but our ability to control it is very limited at this point. Consider this; it seems now that the financial fate of the country, and perhaps the entire world, is in the hands of Elliott Spitzer and Eric Dinallo! Don’t you find that more than a little scary? It’s like the 1962 Cuban missile crisis: Will President Kennedy make the right decision? All we can do now is hold our breath and wait for the result. But even if they make the “right” decision about the monolines, there are many other problems now for which no cure is apparent.
@ mrskeptical “I was wondering; if the government decides to socialise the losses ie tax payers footing the bill for corp america’s greed and subprimeness, just so as to avoid a depression; isnt this for the greater good becoz a depression is avoided? .. views anyone?” The question reminds me of the old Lifeboat Quiz. Time after time, the central banking cartel forces you to make an immoral choice. It’s always a tough choice: I know you don’t want to reward the guys who caused the problems but if you don’t we’re all going down. It’s like the old Lifeboat Quiz. modified. Lifeboat Quiz: A central banker is in a lifeboat with several people. The boat is overloaded and will capsize soon killing everyone aboard unless you lighten the load. The banker has grievously injured several of the people aboard but argues that they are now sick and need to be thrown overboard for the greater good. Could you throw these people overboard – the savers, commuters, working class, pensioners, jobless — knowing that it could possibly save everyone else and knowing that those people would know what you were doing while you were doing it?
“VIX is actually DOWN today even though stocks are down.” keep in mind they have to take 3 days out of option prices for the holiday next week… the VIX is still hanging around right on the trend line here… it is hard to keep my long deltas here, if nothing else day trading Ben and Hank have kept shorts like myself honest to a degree… i work in an office where every single person has absolutely no freaking clue what is happening out there. i really appreciate this space for that reason and am grateful for the 2 other people who i know who understand. other than that, most do not want to hear, understand or believe it is sort of like living in the twilight zone – the zombies walk around like they have each and every day knowing not what is really going on. i mean a municipal bond offering could not get done until 20% was paid ! is that fact alone not a case for the whole society approaching a point where things grind to a halt ? how can people not get it ?
NewstraderFX: “I promise you that at some point, housing will bottom and prices will start to go up again. You’ll rue the day you sold if you do it now. Make saving your home your number one priority.” I can promise you as well that at some point, housing will bottom and prices will start to go up again. The problem is that: Housing Bottom Nowhere in Sight by Mish http://globaleconomicanalysis.blogspot.com/2008/02/housing-bottom-nowhere-in-sight.html Upside-down homeowners have very difficult choices to make and there are a lot a variables, but sure enough “holding tight” is not the best choice for all.
Re: FUNNIEST SUBPRIME CARTOON — MASTERPIECE! All the best cartoons about this shitstorm are by Kahunabear at stockmania.com.
memory jogger from the day we nearly crashed a few weeks back, the Fed surprise cut and the market still remained down 500 points in the DOW and lingered for a while correct ? it even was near those lows the following day. as all know, we had the scheduled 50 bps cut the following week. perhaps that is what saved that day during these most recent day trading days at the Fed ? point to ponder is this, does the next “surprise” rate cut actually get SOLD immediately ? if so, shall day trading Ben and Hank come out shooting from the hips with back to back cuts ? only 300 bps to go …
George Soros called this craziness in 2006… UNCANNY http://video.google.com/videoplay?docid=4346254971075937343&total=42&start=0&num=10&so=0&type=search&plindex=8
@Octavio LOL! Tanta must have read our ‘subprime put’ posts: ”This was a pretty amazing article in the Financial Times: Homeowners are being advised that it would be cheaper to walk away from big mortgages than incur further losses on their household budgets, increasing the chances that more high-end real estate transactions will collapse. … Wow, that’s pretty brazen. Of course it is. I made it up. This is what the FT actually says: Leading banks are being advised that it would be cheaper to walk away from big buy-out deals than incur further losses on their funding commitments, increasing the chances that more high-profile private equity transactions will collapse.“ http://calculatedrisk.blogspot.com/2008/02/sauce-for-goose.html
JMa wrote on 2008-02-15 13:03:52 “i mean a municipal bond offering could not get done until 20% was paid ! is that fact alone not a case for the whole society approaching a point where things grind to a halt ? how can people not get it ?” I found that muni news shocking too. It seemed like a very serious symptom of a very sick credit market to me, something like a child with a fever spiking to 105 degrees! We’ve got to do something or the child will die or at least have brain damage! But Hank explained it away; he seemed to be saying it was a technical anomaly that would be corrected by a refinancing that would result in a more normal market interest rate. I certainly hope he is right. I cannot imagine what would happen to this country if municipalities could not borrow money, or couldn’t do so at reasonable rates! And it doesn’t look like things have improved in that market yet. UPDATE 1-Failures of bond auctions soar to 87 pct Fri Feb 15, 2008 10:41am EST excerpt NEW YORK, Feb 15 (Reuters) – Eighty-seven percent of auction-rate security auctions failed on Thursday as liquidity continued to deteriorate in this $330 billion market, Bank of America said in a report late on Thursday. The percentage of failures has skyrocketed from just 2 percent on Feb. 7 and only 6 percent on Monday, Bank of America said. ”This latest episode in the credit crunch reflects liquidity risk rather than credit risk, as unlike last summer, the underlying credits affected remain generally stable,” the report said. There were more than 200 auctions of municipal auction-rate securities this week, according a portfolio manager familiar with the market. The auction rate security failures illustrate the constrained conditions of financial institutions’ balance sheets, Bank of America said. … http://www.reuters.com/article/bondsNews/idUSN1556324220080215
LOLOL. Another save at 12,300! WWell, we are in teh withching hour now so this should be interesting with both option expirations and the bond market closed.
Written by KJ Foehr on 2008-02-15 11:20:27 Agree! slow grind WW is quite plausible and if that is what happens the correction will slip by Benny’s put work. Written by Giraf on 2008-02-15 11:42:24 Thinking back to my days as a pro trader, the times I’d get myself in trouble would be when I was trying to play the corrections. The eye would be taken off the big picture and boom, the major trend (in the current case, down) would reassert itself and I’d be caught offside. Bottom line is that you’ve got to be positioned in line with the fundamentals. The technicals help with the timing of transactions. Excellent point. The few times I have tried this it has backfired.
Hello all, JMa and others located in the NY metro area… How about a night out? at 5:15pm tonight, I’m hitting: The House of Brews @ 302 W 51st St just off 8th ave. (behind blockbuster) (212) 541-7080 RGE staffers??? just hop on the hop on the uptown C or E @ Spring street and take it to 50th. let’s get some great minds together! Rich H
S&P GREEN!!! The joke continues!!!
that would be absolutely brilliant Rich H… ! unfortunately, I was in NYC a while back and now reside in Chicago. darn it
Me too Rich-I am in MN.
Here are the top five news stories on Bloomberg right now. – U.S. Consumer Confidence Falls to 16-Year Low; Manufacturing Fails to Rise – FGIC Wants to Be Split Up to Salvage Municipal Bond Business, Dinallo Says – U.S. Stocks Drop on Consumer-Sentiment Data, Concern Bank Losses to Widen – Banks Are at Risk of Another $203 Billion in Writedowns, UBS Analyst Says – Muni Regulators Seek More Disclosure in Auction Market Beset by Failures Sounds bad doesn’t it? No, bad is not strong enough, it sounds horrible, like the economy is falling apart! Yet the S&P500 closes up 1 point on the day. What to blame for this illogical performance? a. PPT b. soft-headed fund managers c. clueless retail investors d. options expiration e. too much bearishness / oversold f. all of the above g. none of the above. Who knows??? And I am sick and tired of trying to figure it out. Enjoy your long weekend…
@KJ Foehr: h.news doesn’t exist until the TV tells you. Written news seldom moves markets. The Medium is the Message. TV will elaborate the news and Monday the World Markets will pay. Tuesday some televised pseudo-solution will save our S&P prior to market opening.
Written by KJ Foehr on 2008-02-15 15:18:54 You are wondering why the market is hanging in there. Here is your answer: This article is a good reflection of the consensus view. Goldilocks latest repositioning: soft first half of 2008 turning around in the second half as the rate cuts which have a 6 mo. lag and the rebates kick in. Consumers will be buying wide screen TVs again in no time (I am no kidding they say that. Shawn Tully is Fortune’s editor at large) http://money.cnn.com/2008/02/05/news/economy/recession_invest.fortune/index.htm?postversion=2008020603
stocktiming Marty Chenard pointed out the 30 year treasury yield’s breaking an important trend line to the upside. Even if Fed Funds go down to zero as the day trading Fed fights reality, argues with gravity, ignores natural law, etc. can the long end rise at the same time significantly ? In other words, will the home price depreciation start to coincide with the increase in mortgage rates as banks say we need higher rates on all new mortgages period ?
@KJ Mr. Market resides in the orchard and lives from the fruit of the trees. The irrigation water (credit) has dried up and the trees (banks) have begun to die. The fruit on the branches fall off and begin to rot. It’s pretty bad to eat rotten fruit. Mr. Market tells himself, “Maybe the caretaker, Mr. Bernanke, has gotten the irrigation working again.” Unfortunately, Mr. Market is blind. Only when dead trees begin to fall and hit Mr. Market will he realize the orchard is dead. He then will panic knowing long and painful starvation awaits.
Octavio Richetta wrote on 2008-02-15 16:13:02 “You are wondering why the market is hanging in there. Here is your answer: This article is a good reflection of the consensus view. Goldilocks latest repositioning: soft first half of 2008 turning around in the second half as the rate cuts which have a 6 mo. lag and the rebates kick in. Consumers will be buying wide screen TVs again in no time (I am no kidding they say that. Shawn Tully is Fortune’s editor at large) http://money.cnn.com/2008/02/05/news/economy/recession_invest.fortune/index.htm?postversion=2008020603” Thanks for your post. So people sincerely believe we are going to get through the bursting of the biggest housing bubble and the biggest credit bubble in our history with a bear market lasting only 113 days (from Oct 9 to Jan 22) and a decline in the S&P500 of only 18.6%? That is amazing to me, but I can see how some people might draw that conclusion if they compare our situation to the 1990 bear market. But I see the current situation as more comparable to the bear market in 1974 that lasted 630 days and declined 48%, and/or the 1929 bear market that last 714 days and declined 89%. Those who think the worst is over are entitled to their opinion. I guess that is what makes horse races and stock markets – if we all held the same opinion then we couldn’t even make a market! But I will continue to hold my positions, and may the best economic forecasters win! GLTA
Business, Obama-Style http://www.businessweek.com/magazine/content/08_08/b4072034342177.htm?chan=magazine+channel_news I was pleasantly surprised by this article! Seems to me Obama is a much better choice than either Clinton or McCain. Smart, well-balanced guy.
How sad, here we go begging again… for some of those dollars we blew through the tailpipes of our cars, and sent to China to buy lead painted toys and poison dog food, and other junk. NY Regulator To Talk To Sov Wealth Funds, Buffett On FGIC -FT excerpt The New York insurance regulator will soon hold talks with sovereign wealth funds, Warren Buffett and other investors in an effort to stabilize credit ratings on $220 billion of municipal bonds guaranteed by Financial Guaranty Insurance Company, the Financial Times reported on its Web site Friday. FGIC, which lost its triple-A credit rating this week, has asked the New York insurance regulator to allow it to split its municipal bond business from its riskier activities, which involve guaranteeing more complex structured securities, some backed by payments from subprime mortgages, FT stated. By separating the “good book” of municipal guarantees from the “bad book” of guarantees on structured debt, regulators are hoping to stem a municipal bond crisis that is pushing up funding costs for municipal borrowers across the U.S, according to the report. … February 15, 2008 18:01 ET Wow, I thought Dinallo already had a plan! Now it looks like they are just getting started with this – it could take weeks yet to put something together!
@KJF Hey KJF, are you a fellow Canadian? In one of your recent posts about Coach Ben and QB Hal, you mentioned 4 downs! We only have 4 downs in the Great White North.
@KJF and JMa, Slow down on the Auction Reset stuff. I just got my hands on a GS piece. Most of the resets have reasonable limits to the upside yield, usually penal to the existing holders of said securities. The Port Authority of NY obviously didn’t have competant help when they did their deal and the upside fix was 20%. From what I’ve been able to glean, this “product” is primarily a retail investor vehicle. There was a piece in today’s WSJ that hedge funds (a.k.a. sharks, vultures, etc.) were becoming interested in ARS because of the usurious rates that have become available. Bottom line is that retail investors, and the majority of ill informed (lazy???) institutional investors have run for the hills because of credit concerns. IMHO, these markets will settle down as opportunist buyers overwhelm foolsish sellers.
From my previous post, those “foolsish sellers” have, like me, had a little too much red wine.
Posted by NewstraderFX ”Consider this; it seems now that the financial fate of the country, and perhaps the entire world, is in the hands of Elliott Spitzer and Eric Dinallo! Don’t you find that more than a little scary? It’s like the 1962 Cuban missile crisis: Will President Kennedy make the right decision? All we can do now is hold our breath and wait for the result. But even if they make the “right” decision about the monolines, there are many other problems now for which no cure is apparent.” Written by KJ Foehr on 2008-02-15 12:51:03 This is exactly what I’m talking about. Does everyone see the fear, here? We have get over that and get on with the job. That’s why what I’m saying is to not make irrational, fear driven economic decisions like selling or walking away from your home. I’m telling you-take advantage of what’s being offered by banks and government agencies, pay your mortgage and invite some friends and family over for a nice Sunday dinner. Stop thinking about Muni bond auctions and all the other nonsense that you have no ability to do anything about anyway. The onlt thing you can do anything about is your home and your family. Take care of that and you’ll be fine.
Prof. Roubini-Both you and Kudlow seem to rule out the Stagflation possibility. Here is why I think you are wrong http://jtaplin.wordpress.com/2008/02/17/creative-destruction-economic-policy/
up goes the price of oil http://www.cnn.com/2008/US/02/18/refinery.blast/index.html?eref=rss_topstories