Global Financial Crisis (Was: Subprime Meltdown)

[cheesehead]

Originally Posted by garo

Your "Their/Our" statements do not make clear whether you meant them as a statement of fact or of complaint. I suspect the former.

Yes, the former.

[cheesehead]

Originally Posted by ewmayer

I fail to see what Chinese pre-olympic oil purchasing patterns have to do with seasonal-demand adjustments by the Bureau of Lies and Statistics.

Have you read "Fact Sheet on Seasonal Adjustment in the CPI" at http://www.bls.gov/cpi/cpisaqanda.htm ?

Originally Posted by Fact Sheet on Seasonal Adjustment in the CPI

The technique of intervention analysis also is used in the seasonal adjustment of consumer price indexes to provide more accurate CPI data. This process offsets the effects that extreme price volatility would otherwise have on the estimates of seasonally adjusted data.

Intervention analysis is the prior adjustment of an index series before the calculation of the seasonal factors. Prior adjustment may be called for if a "ramp" occurs. (A "ramp" occurs where a good or service undergoes a unique, large, and rapid change in price level.) An example would be a large decrease in the price of gasoline due to the breakdown of an oil cartel. Removal of the ramp gives a clearer seasonal pattern and lessens the irregular component. When a ramp exists, intervention analysis helps to calculate more accurate seasonal adjustment data.

Originally Posted by ewmayer

By definition, the increased oil buying by the Chinese is *not* a seasonal phenomenon.

Correct. It's a ramp, and needs to have its influence counteracted by intervention analysis.

The whole point of seasonal-demand adjustments is to remove known year-to-year supply and demand variations from the price signal in order to better discern price variations due to other factors, i.e. to better be able to discern the "signals" of interest from the known harmonics.

... and without undue influence from known ramps.

studying historical global temperature trends to see if there's an anthropogenic-warming signal, the first thing I do is to remove the known harmonics such as seasonal swings and e.g. sunspot-cycle-related 11-year swings. If there's a noncyclical event such as a volcanic eruption in Indonesia [ = Chinese oil buying spree prior to the Beijing Olympics], that's a nonseasonal signal.

... i.e., a ramp ... and its effect also needs to be removed in order to more clearly discern the long-term trend.

My analysis suggests to me that on top of these "usual suspects" in the downward fudging of CPI numbers,

but until you perform interventional analysis to sift out the effects of known non-fudge one-off events, you won't have the fairest basis for comparison.

[ewmayer]

Point taken about the "one time event"-based adjustment - OTOH, what's happened over the past five *years* to oil prices is apparently getting treated as a "one time ramp event", because they've consistently been understating the associated CPI increases.

Also note the care paid to "one time events" in the CPI fudge factoring, but the complete stripping out of "volatile" food and energy prices from the CPI, even when there is a steady multiyear rise, rather than volatility. Let's begin with the standard dictionary definition of volatile: (2a) in the foregoing link is the one we want: "Tending to vary often or widely, as in price: the ups and downs of volatile stocks."

A steady multiyear rise is exactly what ii is - it is *not* volatility. The fact that they govt simply defines such phenomena away in its calculation of "core CPI" shows that the books are cooked to begin with. People are having to pay those ever-increasing food and energy prices from their "core" household budgets - try telling them not to worry, "it's not a core price phenomenon, simply volatility."


Speaking of pinched American überconsumers - The quote by the S&P chief economist at the end of this recent Chicago Tribune article is rather interesting:

Chicago Tribune: Amid economic downturn, consumers clear the clutter: Emptying closets for cash, but is it a trend that'll last?

...retailers and economists are starting to wonder if this current downturn is bringing about a longer-lasting shift in the consumer mindset.

The "American mania" to shop has led to the doubling of consumption of goods in the U.S. between the 1950s and the 1990s, the UCLA report said. Consumer spending hit a record high in 2007 at 71.6 percent of the gross domestic product, up from 60.8 percent in 1952. At the same time, Americans in total saved about 8 percent of their income in the 1950s and save nothing today.

It's a trend that Standard & Poor's Chief Economist David Wyss doubts will reverse any time soon as the craving for new things seems to be ingrained in the American psyche.

"I have full faith in Americans' ability to continue to live beyond their means," Wyss said.

[R.D. Silverman]

Originally Posted by ewmayer

The "American mania" to shop has led to the doubling of consumption of goods in the U.S. between the 1950s and the 1990s, the UCLA report said.

This is meaningless by itself.

We must also ask: how much has the population increased over the same
time period? IIRC U.S. population in the 50's was 'only' about 150M.
Now it is about 300M. So a doubling of consumption does not represent
an increase in spending habits...........



==================

Editor's note: Bob, I cleaned up the quote syntax above, which somehow went awry in your posting (you used a \quote instead of /quote in your closing quote box). Also, if I read the UCLA study correctly, the "doubling" refers to per capita consumption - one would indeed be surprised to see such sloppiness in a peer-reviewed scientific study, but the problem here was not with the published study itself, but rather with the n00z-blurb summaries thereof.

[R.D. Silverman]

Originally Posted by R.D. Silverman

This is meaningless by itself.

We must also ask: how much has the population increased over the same
time period? IIRC U.S. population in the 50's was 'only' about 150M.
Now it is about 300M. So a doubling of consumption does not represent
an increase in spending habits...........



==================

Editor's note: Bob, I cleaned up the quote syntax above, which somehow went awry in your posting (you used a \quote instead of /quote in your closing quote box). Also, if I read the UCLA study correctly, the "doubling" refers to per capita consumption - one would indeed be surprised to see such sloppiness in a peer-reviewed scientific study, but the problem here was not with the published study itself, but rather with the n00z-blurb summaries thereof.

Is that per-capita consumption in real (adjusted for inflation) dollars?

[ewmayer]

Originally Posted by R.D. Silverman

Is that per-capita consumption in real (adjusted for inflation) dollars?

Yes. How much convincing do you need that Americans' consumption has shot through the [already very high] proverbial roof in the past 50 years? Just look around you - McMansions sprouting up like weeds during the housing bubble, the garages of those so stuffed with foreign-made stuff-we-can't-even-fit-in-the-house-anymore that the poor long-suffering matched set of SUVs has to sleep outside in the driveway. In fact, I'm reasonably certain that by some objective non-currency-dependent measure such as "gross weight of stuff", U.S. consumption has risen by far more than 2x in the past 50 years - offshoring so much production-of-stuff to countries with cheap labor and lax environmental laws has made most of that "stuff" relatively less expensive than it was 50 years ago. In other words, even the 2x figure cited in the research likely understates the overall material accumulation by quite a bit.

Viewing things more anecdotally - When I was growing up, your typical teenager from a middle-class family had a nice bike, a decent set of clothes and toys, some basic sports equipment and maybe a hi-fi set. Now [judging by my niece and nephew's stash-o-loot] they have a garage full of toys [the nephew has not one one but 3 bikes - a 10-speed, a mountain bike and a BMX - to say nothing of the multiple skateboards and snowboards], multitudes of expensive X-games-style gear [while the baseball mitt likely gathers dust], multiple closets full of clothes, a stereo, an iPod, a computer, a Wii console [and/ort Xbox, and/or PS3, plus the attendant multitude of violent video games], a color TV, a cell phone with a hundred-dollar monthly calling plan... you get the picture. It's just completely nuts. I stopped even trying to buy stuff off the aforementioned kids' Christmas wish lists, because it was just a litany of multi-hundred-dollar items [I think the $3000 Fender electric guitar the nephew asked for last year may have been the last straw] and had degenerated into a giant who-can-buy-the-spoiled-brats-more-stuff competition amongst the relatives. Don't get me worng, I dearly love the niece and nephew, but the sheer level of materialism among them and their peers is just staggering.

On to today's news...

Mortgage crisis seeps to prime loans: About 2.3% of prime loans were 60 days' past due in February, the highest level in at least a decade, according to data from FirstAmerican CoreLogic LoanPerformance. That's up from 1.4% a year ago.


US Commercial property price fall most since 2000 -Moody's

NEW YORK, May 19 (Reuters) - Retail properties are leading a drop in U.S. commercial real estate prices, which in March posted their steepest one-month decline since at least 2000, Moody's Investors Service said on Monday.

Slowing U.S. economic growth and the ailing housing market have begun to take their toll on retailers.

Moody's said prices of retail properties have dropped 5.7 percent from their peak in 2007, compared with declines of 3.4 percent for apartment buildings and 2.3 percent for industrial real estate, respectively. Office property prices are down 2 percent from their peak, according to quarterly data.

On a monthly basis, commercial property prices fell 2.3 percent in March, the most since Moody's began collecting the data in 2000. Values were 2.6 percent below their October 2007 level, but still up 0.9 percent from a year ago, Moody's said.

The sneaky issue about CRE [to which the mainstream media have paid little attention so far] is that a huge number of regional banks have large exposure to it, as described in this recent Wall Street Examiner article:

Over a third of the nation’s community banks have commercial real estate concentrations exceeding 300 percent of their capital

Citigroup-Albertis wins right to lease Pennsylvania Turnpike: A group led by Citigroup and Spanish toll road operator Abertis Infraestructuras SA won the right Monday to lease the Pennsylvania Turnpike, with a bid of about $12.8 billion.

Gov. Ed Rendell has been advocating leasing the turnpike as a means of funding mass transit and much-needed bridge and road repairs in the state.

Rendell has touted the lease as an alternative to Act 44, legislation he signed 10 months ago that includes converting Interstate 80 into a toll road. The federal government has not approved the introduction of that toll, which has garnered strong opposition.

The lease would run for 75 years, and the $12.8 billion bid is for the life of the agreement.

"Seems like a slam dunk," Rendell said of the lease agreement.

...with "who gets slammed, and who gets dunked" yet to be worked out, of course. Gosh, I wonder if Citi will manage to find some sneaky "it's not a toll" way of squeezing money out of I-80 motorists? [Note that I-80 is in fact a toll road from where it enters Ohio westward to Chicago, so the mere idea of PA making its portion of it a toll road is not shocking on its face.] The state is basically trading 75 years of turnpike revenue for a short-term shot of fiscal crystal meth which allows them to avoid making the brutally hard financial choices that years of reckless spending have left them in. But enough about California, getting back to the subject of Pennsylvania ... ;) My prediction: the new turnpike owners, erm, leaseholders, will waste little time before the hike gas and food prices at rest stops and cut back on turnpike maintenance, thus fattening their bottom line significantly. Pennsylvania lawmakers will rail against this in public, but in private say to themselves, "Gee - why didn't we think of that?"

Expect many more such creative-financing proposals from increasingly cash-strapped states in the coming months and years. All in order to avoid that unspeakably heinous option known as "cutting expenditures."

Next, we turn to the retail front:

Target's profits decline 8%

The detailed numbers here are quite interesting:

The company said profit margins declined slightly from last year because sales grew faster in low-margin categories, which generally includes food and essentials like paper towels.

Sales at established stores fell 0.7%. Retail profits not counting interest and taxes fell 2% to $959 million.

In its credit card operation, Target said it earned $199 million before interest and taxes, down almost 10% from a year ago.

Net credit card write-offs increased to an annualized rate of 7.6%, versus 6% a year ago. It wrote off $161 million in bad debts, up almost 62% from a year ago.

If even the discount retailers like Target are now seeing a significant drop in consumer spending [especially on discretionary items] and rapidly spiking credit-card defaults, the omens are dire indeed. Another example of a major consumer buying pullback in discretionary items is described here:

U.S. cell phone sales plummet in 2008:

The economy's in such a sorry state that people are postponing or foregoing altogether the purchase of a new cellular telephone, according to research from the market analysts at The NPD Group. The grim research says that domestic cell phone sales declined a whopping 22 percent in the first quarter vs. Q1 of 2007, a monumental decline.

On a rare [allegedly] bright note for the housing sector, "if it you price it reasonably, they will come":

So. California home sales jump 22% from March

Bargain hunters snap up 15,615 properties - foreclosure sales and big discounts included - in an area hard hit by housing slump.

SAN DIEGO (AP) -- Home sales surged 22% in April in Southern California as bargain-hunters bought lower-end homes in areas hardest hit by foreclosures, a research firm said Monday.

Sales of new and resale homes and condos reached 15,615 in April, up from 12,808 in March and the highest monthly total since August, according to DataQuick Information Systems.

The monthly increase of 22% in the six-county region is well above the average gain of only 1.2% from March to April since DataQuick began keeping statistics in 1988.

Homes under $500,000 accounted for two-thirds of the monthly gain, DataQuick said. Riverside County, which the firm calls the "epicenter" of foreclosures and price declines in Southern California, posted the region's only annual sales increase, its first in two years.

"Quite a few more buyers stepped off the sidelines last month to snap up homes at substantial discounts relative to the market's short-lived peak," said DataQuick President Marshall Prentice.

Foreclosures drew buyers, according to DataQuick. Nearly 38% of homes resold in April were in foreclosure at some point during the previous 12 months, compared to 36% in March and only 5% in April 2007. In Riverside County, foreclosures accounted for 53% of resale homes sold.

April's median home price in Southern California was $385,000, down 24% from $505,000 in April 2007.

Despite the sales surge since March, April sales were down 19% from 19,269 in the same period last year, marking the weakest April tally since 1995, DataQuick said.

"We continue to look for evidence of a sales bounce in the mid-priced and higher-end markets along the coast," Prentice said.

[ewmayer]

We always knew Moody's ratings in the past few years have been unadulterated horsesh*it, but this just takes the proverbial cake:

Computer bug bites Moody’s

Moody’s (MCO) is in hot water once again. The Financial Times reported Tuesday that the agency mistakenly assigned a triple-A rating to billions of dollars in complex debt, due to a bug in its computer models. When Moody’s discovered the error, the FT reports, the agency changed its rating methodology, allowing the debt to retain its coveted top rating until a downgrade earlier this year. Moody’s said such a change would be “inconsistent with Moody’s analytical standards and company policies” and added it is reviewing the matter.

The errors in Moody’s ratings of constant proportion debt obligations, or CPDOs, are only the latest problem to surface at the rating agency. Connecticut’s attorney general said earlier this month he was looking into apparent conflicts of interest in Moody’s rating of a newly formed municipal bond insurance company, Berkshire Hathaway Assurance, which is run by a big Moody’s shareholder, Warren Buffett’s Berkshire Hathaway (BRKA). And of course Moody’s and rival S&P are widely seen as having played a leading role in the inflation of the housing bubble, through their willingness to put triple-A ratings on debt backed by risky subprime loans. Moody’s shares have had a nice bounce off March’s panic lows, but the good will was gone Wednesday, as the stock plunged 13%.

Now that Moody's shares have gotten hammered, S&P will likely announce something along the lines of "we are reviewing the possibility of a downgrade of Moody's to 'underperform.' That is, as soon as we fix our own ratings model software, which we recently discovered to have been hacked by a disgruntled ex-contractor, as a result of which it has been assigning the opposite ratings it should have been. So all those subprime and Alt-A mortgage-backed securities we rated AAA should have been BBB-. Whoopsie! Sorry about that folks!"

As far as details of the software "glitch" which triggered the raft of bogus ratings at Moody's, I'm afraid it's really all very technical, but one analyst put it nicely in terms of more-easily-understandable pseudocode, thusly:

If bond_issue = "paying customer", then bond_rating = "AAA"

The more serious implication is that a whole bunch of bond ratings may need to be downgraded, which will also negatively impact bank earnings. Poor banks - it's getting harder all the time to procure fictitious earnings. Luckily there's still the huge "level-3 asset" scam to be played, otherwise the banks would have to report their real financial status, which for many of them, is "insolvent" - that would mean less free government good-paper-for-bad, which would risk turning a papered-over insolvency into a real one.


Bill Gross: Greenspan Helped Pimco Make Billions

May 21 (Bloomberg) -- Alan Greenspan, the former Federal Reserve chairman, has helped Pacific Investment Management Co. make ``billions of dollars'' in his role as a consultant, said Bill Gross, the bond manager's co-chief investment officer.

During a 30-minute discussion on banks several months before the global credit crisis, Greenspan's ``brilliance in terms of forecasting the potential for exactly what happened was a big money saver for us,'' Gross, who runs the world's largest bond fund, said yesterday at a conference organized by the Asia Society in Los Angeles. ``He's made and saved billions of dollars for Pimco already.''

Billions? That's nothing ... he made and lost trillions for the U.S. economy. Only problem being the sign of the eventual "net trillions", which is looking to be a "-".


JP Morgan cutting 55% of Bear staff: Bank CEO says it would retain just under half of the employees from its acquisition of Bear Stearns; the deal could add $1B to 2009 earnings.

NEW YORK (AP) -- JPMorgan Chase & Co.'s chief executive confirmed Tuesday that the bank will be cutting more than half of the employees at Bear Stearns Cos., the struggling investment bank that JPMorgan agreed to buy in March.

At JPMorgan's annual shareholder meeting, CEO James Dimon said in his opening remarks, "We're retaining 45% of the Bear Stearns staff."

Most of those job offers have already been made. Last week, Dimon said at a conference that it had offered jobs to 6,000 of the 14,000 Bear Stearns workers, and found positions outside the company for another 1,500.

"Positions outside the company" - what is that, one wonders? If you make me pack my personal things in a copy-paper box and show me the door, does that constitute a "position outside the company?" Nice wording by the JPM CEO, though: "We're not 'firing 55% of the poor acquisition-victimized Bear losers - we're 'retaining 45% of the valuable human capital that is the wonderful Bear staff'." Just like one doesn't say, "nearly 10% of U.S. mortgages are behind on their payments or in default"; rather, we say that "over 90% of U.S. mortgages are current." Anyway, not to worry, the crafty statisticians at the BLS will surely find some way to seasonally-adjust the lost jobs away - "presumption of imminent re-employment in the fast food sector", or some such thing.


And finally, the winner of the "Dumb financial news headline of the week" award:

How to make money from $4 gas

Um ... by selling it? [Is this a trick question?]

[R.D. Silverman]

Originally Posted by ewmayer

As far as details of the software "glitch" which triggered the raft of bogus ratings at Moody's, I'm afraid it's really all very technical, but one analyst put it nicely in terms of more-easily-understandable pseudocode, thusly:

If bond_issue = "paying customer", then bond_rating = "AAA"

Yep!

"Positions outside the company" - what is that, one wonders? If you make me pack my personal things in a copy-paper box and show me the door, does that constitute a "position outside the company?" Nice wording by the JPM CEO, though: "We're not 'firing 55% of the poor acquisition-victimized Bear losers - we're 'retaining 45% of the valuable human capital that is the wonderful Bear staff'

We can be sure that the ones who get fired are not the decision makers
who were responsible for the mess in the first place. They will get to
keep their cushy jobs, no matter how badly they do it.

The ones laid off will be middle level staff and analysts.

[cheesehead]

Earlier, I pointed out that:

Originally Posted by cheesehead

a look overseas shows that China has started stocking-up on oil in preparation for the Beijing Olympics (so they won't have to worry about a crisis in oil on top of Olympic-time anything else). China is adding to its oil reserves in a big way

Note that such stocking-up will presumably end at Olympics time (8/8/2008), if not sooner. Therefore, I offer this prediction, which I've not yet seen anyone else mention:

Oil prices will drop back to lower levels starting about August 8, 2008 (or sooner if China ends its stocking-up sooner or oil traders start anticipating that event).

You read it here first, folks.

(Disclosure: My publicly-posted predictions in the past have had a lousy record -- almost all, other than a few in areas about which I had genuine expert knowledge, have failed.)

Advice by other analysts to buy oil stocks, based on presumption of continuation of current price trends in oil, may be hazardous to the financial health of those who follow that advice unless such investors remain poised to jump out (or go short!) as soon as there is a slackening of Chinese demand.

Conversely, such oil price slackening will be good news for many other stock categories, so I expect a general market jump in August (which is also consistent with the rules-of-thumb about summer rallies and election years). But then watch out for treacherous October unless you're going in for the long run.

[KriZp]

Originally Posted by cheesehead

Oil prices will drop back to lower levels starting about August 8, 2008 (or sooner if China ends its stocking-up sooner or oil traders start anticipating that event).

Normally the oil price is at it's highest level of the year in the 4th quarter because of the buildup of heating fuel ahead of the northern hemisphere winter, so if it eases in august there won't be all that long untill it is likely to start rising again. Since global oil production has been more or less flat the last couple of years, and economic growth has continued, It seems reasonable that the price will need to keep going up untill either production starts increasing, or a global or at least US economic recession reduces demand.

BTW, I haven't seen any actual numbers on this oft mentioned chinese stockpiling, so it's hard to know if it's a reasonable cause for parts of the recent surge in oil prices.

[xilman]

Originally Posted by KriZp

Since global oil production has been more or less flat the last couple of years, and economic growth has continued, It seems reasonable that the price will need to keep going up untill either production starts increasing, or a global or at least US economic recession reduces demand.

In that case, why has the price of candle-wax not gone through the roof?

The world has a much higher population these days than 50 years ago, economic activity (total and per capita) is much higher than it used to be, the global rise in living standards has brought a much greater demand for domestic lighting and candle-wax production has certainly not increased in proportion.

Even so, candle-wax is much the same price in inflation-weighted terms as it was 50 years ago.


Paul