Global Financial Crisis (Was: Subprime Meltdown)

[ewmayer]

Originally Posted by jasonp

So has Soros, probably.

You flatter me excessively, sir. :)

Actually I heard rumors to the effect that GS shorted the *Indian* Sensex - probably just in time to make a couple billion on the huge selloff at beginning of this week, and reinvest the proceeds in safer havens or beaten-down issues. The rest of us mere mortals can only stand back and admire the true wizards at work, and perhaps emulate a small fraction of their success. Main thing is to choose one's guiding "wizard" with care - look at all the people who follow that clueless stock-pumping moron Jim Cramer on CNBC - his picks bring to mind that Seinfeld episode where feckless George briefly turns his life around by "doing the opposite" of what his instincts tell him to do. Cramer says "Buy Apple at $200"? Sell! Sell! Sell! [Or if you're a real sophisto, short AAPL.]

Edit; Ha, apparently my "do the opposite" comment about Cramer is literally true:

* In February 2007, Henry Blodget -- himself indicted for civil securities fraud in 2002 and banned for life from the securities industry -- criticized Cramer for overstating his abilities as a market forecaster, noting that in 2006 Cramer's suggested portfolio lost money "despite nearly every major equity market on earth being up between about 15 percent and 30 percent."[24]

* In March 2007, a review by CXO Advisory showed that Cramer's stock picks have done worse than the market averages.[25]

* In March 2007, Joseph Parnes, a noted short seller featured in Barron's, refuted positions by Cramer on CNBC, and has shown to his audience in his publication, Shortex, that using positions contrary to Cramer's recommendations is actually more advantageous.

And speaking of other "do the opposite" picks, how 'bout those bond-ratings agencies?

[Humor] Moody's Places Itself on Negative Watch

Washington - Moody’s the ratings agency, has placed itself on negative watch, citing its horrendous track record at rating just about everything except t-bills.

“We suck. We couldn’t spot an investment-grade bond in a box of Confederacy Debentures or Continental Bank CD’s,” said one source at the agency.

[/Humor]


p.s.: Let's Check Cramer's now-infamous "Four-Horsemen-plus-one-rotten-Apple" picks to see how they've done in the short time since his pumping of them, shall we?

First Solar: Opened 10 Dec 2007 @237.31, Closed yesterday @171.46, down 27.8%

CME Group: Opened 10 Dec 2007 @705.50, Closed yesterday @635.14, down 10.0%

Intuitive Surgical: Opened 10 Dec 2007 @358.29, Closed yesterday @270.00, down 24.6%

Mastercard: Opened 10 Dec 2007 @211.00, Closed yesterday @191.78, down 9.1%

Apple: Opened 10 Dec 2007 @193.59, Closed yesterday @135.60, down 30.0%

If you had bought equal amounts of each of these at the opening price on last Dec 10th, you would now be down 20.3%, not factoring in transaction fees.

Compare that aggregate performance of the major U.S. Stock Indices in the same time frame:

DJIA: Opened 10 Dec 2007 @13,623.55 Closed yesterday @12378.61, down 9.1%

NASDAQ: Opened 10 Dec 2007 @2,710.73 Closed yesterday @2360.92, down 12.9%

S&P500: Opened 10 Dec 2007 @1,505.11 Closed yesterday @1352.07, down 10.2%.

Thus, Cramer-the-stock-picking-guru once again manages to "beat the markets" by having his picks drop nearly twice as much. Like I said, "do the opposite".

[ewmayer]

60 Minutes Legitimizes "Walking Away" From Underwater Mortgage

Steve Kroft: "It sounds complicated but it's really very simple. Banks lent hundreds of billions of dollars to homebuyers that can't pay them back. Wall Street took the risky debt, dressed it up as fancy securities and sold them round the world as safe investments. If it sounds a little bit like a shell game or a ponzi scheme, in some ways it was".

...

"Matt and Stephanie Valdez say they knew exactly what they were doing when they bought this small two bedroom house for $355,000."

....They cannot refinance because the value of the house fell below the existing mortgage. They say they can afford the higher payments but see no point in making them.

Matt: The value of the house keeps going down and the payments keep going up. Where's the logic in that?

Stephanie: Why make a $3200 a month payment on a 1200 square foot home? It makes no sense.

Steve Kroft: But that's what you agreed to do when you bought the house.

Stephanie: Fine if the value was going up. The value is going down.

Steve Kroft: You are saying essentially you are going to stop making payments.

Stephanie: The only advice we've gotten so far is to walk away.

This trend is apparently already widespread - especially in the most-inflated markets - and growing. In other housing news: 2007 New home sales: Biggest drop ever


Moving abroad: the "decoupling" myth takes another hit:

Financial Crisis Poised To Hit Europe: Links to a Reuters article about the coming massive job losses in London's financial sector, and the news of major European Hedge Funds freezing their plummeting assets to try to stave off a "run on the bank":

I see European hedge funds have learned nothing from their US counterparts at Bear Stearns. Halting redemptions is a very poor decision. All it does is create a pent up demand for more investors to leave as net asset values sink.

And we at last have a plausible profit motive for the SocGen [alleged] rogue trader: Eurex ‘raised alarm’ over SocGen trades

Jean-Claude Marin, of the Paris public prosecutor’s office, also said that Mr Kerviel was making non-authorised trades as early as 2005. In addition to interest from Eurex, Mr Kerviel’s actions had been the subject of internal investigations in his department, but each time he was allowed to continue in his job because he had produced fictional contracts showing counter-parties that appeared to hedge his position.

Investigators in addition revealed that Mr Kerviel had made €55m ($81m) in profit on positions he had fully closed by the end of 2007, and was hoping for a €300,000 bonus this year on the basis of these trades.

So of SocGen had actually bothered to VERIFY just one of the claimed counterparties in these mutliple 'worrisome' trades, they wouldn't be in such deep sh*t now. A simple phone call or two is all that would have been needed ... you'd think with the kind of money at stake, that wouldn't have been too burdensome. But I forgot ... in the end, it was other people's money.

But that was the bank's side of things - in fairness, let's listen to the other side, by way of Mr. Kerviel's lawyers: SocGen Accused of Raising 'Smokescreen' to Hide Own Losses

Mr Kerviel was charged by French police on Monday with attempted fraud. But earlier his lawyers insisted that Mr Kerviel “did not commit any dishonest act, nor embezzle a single cent, and he in no way benefited from the bank’s funds”.

Elisabeth Meyer and Christian Charrière-Bournazel told Agence France Presse that SocGen wanted to “raise a smokescreen that would distract the public’s attention from far more substantial losses that it had made in recent months, notably in the unbelievable subprime affair”.

They also said that the timing of the bank’s decision to close positions relating to Mr Kerviel’s trading and the manner it executed these trades “itself provoked the losses of €4.5bn”. The lawyers also claimed that Mr Kerviel’s trading was in profit to the tune of €1.5bn ($2.2bn, £1.1bn) at December 31.

Derivatives boom raises risk of bankruptcy

A study by academics Henry Hu and Bernard Black concludes that, thanks to explosive growth in credit derivatives, debt-holders such as banks and hedge funds have often more to gain if companies fail than if they survive. The study suggests this development could endanger the stability of the financial system.

The findings highlight a crucial problem in corporate restructuring when more and more companies are facing financial difficulties as a result of the credit crunch and US economic slowdown. According to the research and industry practitioners, creditors have a strong interest in voting against a restructuring plan if they have bought credit or loan default swaps, which trigger payments when a company fails

Which brings me to:

Phrases To Watch out for in 2008:

"Monoline Insurer"

"Credit Default Swap"

"Counterparty Failure"

[ewmayer]

Bloomberg.com: Fed May Cut Rate Below Inflation, Risking New Asset Bubble

So-called negative real interest rates represent an emergency strategy by Chairman Ben S. Bernanke and are fraught with risks. The central bank would be skewing incentives toward spending, away from saving, typically leading to asset booms and busts that have to be dealt with later.

Umm ... at the risk of appearing to question the divine wisdom of the Masters of the Finanial Universe: isn't this exactly the kind of thing that got us into the current mess to begin with? Oh, yes, I see it is:

The last time the Fed pushed real rates so low was in 2005, in the middle of the three-year housing bubble, when consumers took on $2.9 trillion in new home-loan debt, the biggest increase of any three-year period on record.

Home ownership in record plunge: Fourth quarter saw biggest one-year drop in since tracking began in 1965 - as mortgage problems and rising foreclosures take their toll.

NYTimes: Inquiry Raises New Questions on French Bank: Jérôme Kerviel told prosecutors that his fictitious trading started a year earlier than Société Générale has said.


Chief of Countrywide Will Forgo $37.5 Million: Angelo Mozilo, under fire over the size of his potential payout from the sale of Countrywide, said he is forfeiting severance pay, fees and perks he was scheduled to receive upon his retirement.

Mozilo, however, will still retain retirement benefits and deferred compensation that he has already earned, Countrywide said in a statement being released Monday.

...

Mozilo had been in line to receive a package, including his retirement pay and stock holdings, of nearly $66 million, according to estimates by The Hay Group, a compensation consulting company. Other estimates have suggested Mozilo's payout could exceed $110 million.

Under his employment agreement, Mozilo was entitled to a severance cash payment equal to three times his annual salary of $1.9 million, and three times his incentive cash bonus for the year preceding a change in the company's ownership or the average of two years' bonuses.

The size of his bonus depends on how well the company performs. His 2007 employment agreement sets a target of $4 million for his annual incentive compensation bonus and a cap of $10 million.

Now, he'll leave with a pension plan and supplemental executive retirement plan that totaled $23.8 million as of December 2006, according to the most recent proxy statement the company filed with the Securities and Exchange Commission.

Poor guy - wonder if that'll be enough to make the payments on his Caymans mansion once the adjustable-rate mortgage resets from the teaser rates to the full rate? I think the government should consider setting aside a chunk of its pork-barrel bailout, erm, I mean "economic stimulus plan", to help poor Mr. M out in his retirement.

*** - And by way of followup to the discussion about George Soros, interesting article about the kinds of arcane strategies the real wheelers and dealers use to try to profit from falling markets:

Tiger's Julian Robertson roars again: Eight years after he shut down his famed Tiger fund, the veteran 'retired' manager is racking up the biggest wins of his life. Fortune gets an exclusive peek at the Wall Street legend's portfolio.

Appropriately enough, the biggest bet that Robertson has in his own portfolio at the moment came, he says, from a former Tiger who he had given some ideas on subprime shorts. Robertson has shared the strategy with the seed funds and some of them have followed him into it - with great success so far. Here's the idea: In the fall, Robertson invested in a derivative called a "curve steepener" that allows him to be long the price of two-year Treasury and short the price of the ten-year Treasury - betting that the difference, or curve, in the yield between the two will increase.

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.

So far in 2008, the difference in the between the two bonds has already increased from 97 to 138 basis points. "I've made a big bet on it," he says. "I really think I'm going to make 20 or 30 times on my money." Considering the momentum he has, it wouldn't be a surprise.

[ewmayer]

Economy much weaker than expected: Raises fears of stagflation
That's what flooding the market with newly printed dollars, a.k.a. "Ponzi currency units" [PCUs] will do. But - "Expected" by whom, exactly? Let`s see ... housing market in freefall, real wages stagnant for over a decade, number of 2-earner couples [whose increase since the 60s help disguise the wage stagnation] has peaked, financial sector imploding from its own excesses of the past decade, waves of mass layoffs underway which even the USGov`s fake jobs numbers can`t completely hide ... I`m willing to bet that if the GDP numbers weren`t similarly fudged using lunatic bull-market extrapolations, real GDP growth for the last half of 2007 would come out negative.

Wall Street Examiner: More "Decoupling" Debunking: Following on yesterday’s post on the test of the decoupling theory comes news that major production cutbacks are underway in Japan. I believe the same should be happening in China.

Refinancings fuel mortgage application surge: Mortgage Bankers Association says the volume of applications filed last week rose 7.5%.

Countrywide reveals that a whopping 1/3 of its subprime loans are delinquent: Conventional-loan DQs also spike; CFC stock up over 5% on the news.

NEW YORK (Fortune) -- Countrywide on Tuesday reported a loss of $422 million in the fourth quarter and revealed that an astounding one-third of its investment portfolio`s sub-prime mortgage loans are delinquent.

The loss threw cold water on Countrywide chief operating officer Steve Sambol`s confident assurances to investors in October that, "We view the third quarter of 2007 as an earnings trough, and anticipate that the company will be profitable in the fourth quarter and in 2008." Seen in this light, Countrywide`s fourth-quarter quarter loss, compared to a $621 million profit a year ago, is what the numerous class action attorneys circling Countrywide (CFC, Fortune 500) will surely call "an unfavorable fact." Countywide finished 2007 with a loss of $704 million.

The numbers didn`t appear to faze Bank of America CEO Ken Lewis`s determination to acquire Countrywide, however. In a conference Tuesday, Bloomberg quoted him as telling investors. "Everything is a `go` to complete this transaction." Just over two weeks ago, BoA (BAC, Fortune 500) agreed to buy Calabasas, Calif.-based Countrywide in a $4 billion deal. If and when the deal goes through, the combined company will control just over 25 percent of the U.S. real estate loan origination market.

Math question: What is 25% of a vanishingly small number?

And the "Blinkered PermaBullish Moron of the Week" award goes to this blogger: various idiocies, non sequiturs and logical fallacies underlined:

For 25 years, China has been exporting dis-inflation in manufactured goods to the rest of the world. A slowdown in this exporting occurred last year because China temporarily ran out of energy. China could not continue to find more goods to make when it did not have enough energy to employ the hundreds of millions of people lined up to take the next products forward.

This is no longer the case. China is averaging adding a new power plant every fourth day! The environmentalist can whine all they want about how much more coal is being burned, but the result in the near term is that more and more goods can be made in China where the labor costs are low. As an aside, I would remind the environmentalist of two things, 1) Kuznets Curve is at work here and the environment will ultimately improve as a result of bringing China into the developed world 2) Cleaner alternatives would be used for power if the environmentalist were not standing in the way

...

The anti bubble is a good thing. The anti bubble means that interest rates are very low, which means that the discounting of income streams yields soaring asset prices. The price of homes soared like never before from 2002 to 2005. Since that time, the prices have fallen back a tiny little bit relative to the prior climb. With interest rates back down, the tiny decline is over. Home prices and other asset prices are ripe for another big run.

[ewmayer]

Fed Cuts Interest Rates by Further 1/2 Point: Resulting Market Rally Lasts nearly 5 minutes!!! Then Fizzles.

S&P Mulls $500B in Mortgage Downgrades: Downgrade would threaten a broad swath of the world's finance industry, ranging from Wall Street's trading desks to regional banks to local credit unions.
Now that the horses have all left the barn, the ratings agencies finally get around to doing their job...

Bloomberg.com: Subprime Lenders Get Big Accounting Break at SEC: Just when it seemed as if the mortgage mess had hit a new low, now comes this: The Securities and Exchange Commission's staff has granted the subprime-lending industry a huge exemption from the normal rules for off-balance- sheet accounting.
In other words, the creative financing that got us into this huge mess is going to get papered over even more via creative accounting. That will only prolong the bleeding, and [by further decreasing transparency and thus magnifying uncertainty] may very well make the inevitable shakeout even worse.

[ewmayer]

Job Shock: U.S. Lost 17,000 Jobs in January: But December number revised up
Quite possibly the phoniest, most easily manipulable statistic out there - which begs the question, "why even bother posting a link?" I honestly don't know.


HELOCs: The Last Line of Credit for Big-Spending Americans: Now quickly drying up, too...note these are credit lines reserved for *prime* borrowers:

Chase Home Lending, a unit of banking giant JPMorgan Chase & Co., one of the country’s largest home equity lenders, is imposing new guidelines next week that will further restrict who can get a new credit line, the company said. Through this week, Chase customers in California can tap as much as 90% of the equity in their homes. Starting Monday, however, that limit goes down to 85% in most of the state. In six counties, including three in Southern California — Los Angeles, Orange and Imperial — Chase won’t let homeowners borrow more than 70% of the value of their homes. The bank wouldn’t say how the six counties were chosen. In Florida and Nevada, Chase’s loan limits are going down Monday to 70% and 65%, respectively.

Countrywide [Financial] set aside $924 million for credit losses during the fourth quarter, compared with reserves of $73 million during the final quarter in 2006. The mortgage lender also recorded an impairment charge of $831 million during the quarter tied to securities backed by prime home equity lines of credit typically reserved for borrowers with excellent credit histories.

Hidden Swap Fees by JPMorgan, Morgan Stanley Hit School Boards

David DiCarlo, an Erie-based JPMorgan Chase banker, told Barker and the [Erie City, PA] school board on Sept. 4, 2003, that all they had to do was sign papers he said would benefit them if interest rates increased in the future, and the bank would give the district $750,000, a transcript of the board meeting shows.

``You have severe building needs; you have serious academic needs,'' Barker, 58, says. ``It's very hard to ignore the fact that the bank says it will give you cash.'' So Barker and the board members agreed to the deal.

What New York-based JPMorgan Chase didn't tell them, the transcript shows, was that the bank would get more in fees than the school district would get in cash: $1 million. The complex deal, which placed taxpayer money at risk, was linked to four variables involving interest rates. Three years later, as interest rate benchmarks went the wrong way for the school district, the Erie board paid $2.9 million to JPMorgan to get out of the deal, which officials now say they didn't understand.

``That was like a sucker punch,'' Barker says. ``It's not about the district and the superintendent. It's about resources being sucked out of the classroom. If it's happening here, it's happening in other places.''

$12 Billion in Deals

It is. During the past four years in Pennsylvania alone, banks have pitched at least 500 deals totaling $12 billion like the one JPMorgan Chase sold to Erie, according to records on file with the state Department of Community and Economic Development. Most of the transactions -- which occurred outside the state's largest cities of Philadelphia and Pittsburgh -- have been made without public bidding, which means that banks and advisers privately arranged the deals with small school districts, the records show.

[ewmayer]

First off, what better way to start our week blogging in this thread than with the latest lies from ex-Fed-Chairman Alan Greenspan?

Greenspan Denies Pushing Risky Mortgages

Now that we've dispensed with the apéritif, on to today's main course:

Excellent article from the New Yorker on the self-induced-speculative boom-and-bust-cycle economic hypothesis of maverick economist Hyman Minsky. Interesting that some of the key (de)regulatory decisions which enabled the current bubble of speculative real estate excess occurred in the Clinton administration - of course that was very nearly coincident with the start of Greenspan's tenure at the Federal Reserve. [Though note that Reagan nominated AG to take over from Paul Volcker, in the last year of RR's presidency].

I've excerpted and highlighted some of the major points - but it's extremely worth one's while to read the whole thing.

Do We Have a Minsky Moment?

Minsky, who died in 1996, at the age of seventy-seven, earned a Ph.D. from Harvard and taught at Brown, Berkeley, and Washington University. He didn’t have anything against financial institutions—for many years, he served as a director of the Mark Twain Bank, in St. Louis—but he knew more about how they worked than most deskbound economists. There are basically five stages in Minsky’s model of the credit cycle: displacement, boom, euphoria, profit taking, and panic. A displacement occurs when investors get excited about something—an invention, such as the Internet, or a war, or an abrupt change of economic policy. The current cycle began in 2003, with the Fed chief Alan Greenspan’s decision to reduce short-term interest rates to one per cent, and an unexpected influx of foreign money, particularly Chinese money, into U.S. Treasury bonds. With the cost of borrowing—mortgage rates, in particular—at historic lows, a speculative real-estate boom quickly developed that was much bigger, in terms of over-all valuation, than the previous bubble in technology stocks.

As a boom leads to euphoria, Minsky said, banks and other commercial lenders extend credit to ever more dubious borrowers, often creating new financial instruments to do the job. During the nineteen-eighties, junk bonds played that role. More recently, it was the securitization of mortgages, which enabled banks to provide home loans without worrying if they would ever be repaid. (Investors who bought the newfangled securities would be left to deal with any defaults.) Then, at the top of the market (in this case, mid-2006), some smart traders start to cash in their profits.

...

If anybody is at fault it is Greenspan, who kept interest rates too low for too long and ignored warnings, some from his own colleagues, about what was happening in the mortgage market. But he wasn’t the only one. Between 2003 and 2007, most Americans didn’t want to hear about the downside of funds that invest in mortgage-backed securities, or of mortgages that allow lenders to make monthly payments so low that their loan balances sometimes increase. They were busy wondering how much their neighbors had made selling their apartment, scouting real-estate Web sites and going to open houses, and calling up Washington Mutual or Countrywide to see if they could get another home-equity loan. That’s the nature of speculative manias: eventually, they draw in almost all of us.

You might think that the best solution is to prevent manias from developing at all, but that requires vigilance. Since the nineteen-eighties, Congress and the executive branch have been conspiring to weaken federal supervision of Wall Street. Perhaps the most fateful step came when, during the Clinton Administration, Greenspan and Robert Rubin, then the Treasury Secretary, championed the abolition of the Glass-Steagall Act of 1933, which was meant to prevent a recurrence of the rampant speculation that preceded the Depression.

At this point the famous Santayana quote about not remembering one's past seems apt.

[ewmayer]

Latest "paid liar from the Greenspan School" sighting: Citi's Robert Rubin: What meltdown?

Uh, the meltdown going on all around you, Bob? Let's see what the economy-at-large thinks of Mr. Rubin's Ruby-colored outlook:

Stock Selloff in Face of Recession Fears: Report Shows U.S. Service sector activity plummeting

The ISM services index, a survey of services sector executives, showed business activity falling in January for the first time in five years. The report was released nearly an hour ahead of schedule, unnerving investors at the start of trade. The report countered last week's reading on the manufacturing sector, which showed expansion. (Full Story).

"This is the most unequivocal sign we've had that the economy is weakening," said Stephen Stanley, chief economist at RBS Greenwich Capital. "We've had data pointing in that direction, but they've been all over the map and it always seemed like there was a silver lining in the weak reports."

"There is nothing in this report that was redeeming," he added. "Its simply terrible."

Update on the issue of rising home equity loan defaults: Home equity loan defaults soar

Last week, buried deep in the ugly details of Countrywide Financial Corp.'s (CFC, Fortune 500) earnings release, was the news that its $32.4 billion portfolio of prime HELOCs - home equity lines of credit - had begun to rapidly deteriorate. The reeling Calabasas, Ca.-lender was forced to take a $704 million charge related to homeowners' inability to pay back equity they extracted from their homes.

The structure of these loans appears to spell trouble for Countrywide and other home lenders with big home equity loan books. According to an overlooked Moody's Investors Services note that came out last Wednesday, once a certain threshold of losses is achieved in a home equity loan securitization pool, the bond holder is paid off ahead of the lender.

What's worse is that it's difficult to see how large a lender's exposure is to home equity loans. Known as rapid amortization, this risk is treated as a contingent liability for Countrywide and other home equity loan lenders and is carried off balance sheet, until deterioration occurs and the lender goes on the hook for the loans. Countrywide is the nation's biggest home equity lender, with around 9% of the market.

In the short-term, this is just another blow for a investors in the financial sector. Longer-term however, it looks like a lot of ready cash is getting taken away from homeowners, at least in California. Coupled with rising unemployment, this could pose a major headache for already strapped homeowners.

...

The Calculated Risk blog, which specializes in real estate and mortgage finance issues, has estimated that mortgage equity withdrawals for the fourth quarter totaled $145 billion. If tightening lending standards are put rapidly into place for home equity loans, it is not inconceivable that $50 billion or more of spending power is instantly removed from the economy.

In other words, at least one-third of the recently passed $150 billion stimulus package is already canceled out.

And speaking of the top econo-blogs, which appear increasingly to be the best place to go for sane economic readings sans Wall Street and USGov spin, here's a fine piece [largely based on a recent Business Week article] in the Common Sense Forecaster blog, which includes a telling (non)-quote by House-Price guru Robert Shiller:
Home Prices May Drop Another 25%

Shocking though it might seem, a decline of 25% from here would merely reverse the market's spectacular appreciation during the boom. It would put the national price level right back on its long-term growth trend line, a surprisingly modest 0.4% a year after inflation. There's a recent model for this kind of return to normalcy after the bursting of a financial bubble. The stock market decline that began in 2000 erased most of the gains of the boom of the second half of the 1990s, leaving investors with ordinary-sized returns.

...

One look at the long-term home price chart [here] tells you all you need to know: Starting in 2000, prices crossed above their trend line and just kept going up. The spike had never happened in modern U.S. history, according to data dating back to 1890 that Shiller painstakingly compiled for the second edition of his book Irrational Exuberance in 2005. Back then he predicted a sharp drop in house prices. Now he says lawyers won't let him publicly forecast home prices because he's involved in preparing the market-sensitive Standard & Poor's/Case-Shiller home price indexes. All he'll say is: "This is a historic turning point."

Note also how much the inflation-adjusted trend line in the Case-Shiller index appears to be skewed by the recent run-up - without the unprecedented price inflation during the Greenspan housing bubble, it would be more-or-less completely flat.

An interesting note about the fictional statistics continually being cranked out by the US Bureau of Labor Statistics: BLS Censors Birth/Death Employment Disclaimer

And lastly, the kind of truth-is-stranger-than-fiction news which could only come from the Bizarro Universe of the credit card lenders: Citigroup: Prudent customers risk losing credit cards

[ewmayer]

Moron-of-the-Week - I realize Wednesday is a trifle early, plenty of time for stcok pumpers and Administration officials to make morons of themselves still - award goes the writer of this Fortune.com article and the various entities quoted therein. Egad, how wrong-headed can an article be - let me attempt to count at least the most-egregious ways

...the predictions of a deep downturn are highly exaggerated, in part because Washington is rushing to revive the flagging economy.

...With more borrowed money [a.k.a Ponzi currency units, formerly known as "dollars"] and not nearly enough of them to make a dent in the big picture. Another wave of loan-portfolio writedowns by the major banks - which is virtually certain - wipes out the equivalent of that entire $150B stimulus package. Homeowners who bought into the housing market around its most-inflated peak of the past 2-3 years are hemorrhaging phony equity - which they alas borrowed real money against and used to buy real gas-guzzling SUVs and real made-in-china junk - at a rate that dwarfs any stimulus Washingt6on will be able to provide.

GDP increased 0.6% in the fourth quarter (on first estimate), after a powerful 4.9% surge in the third quarter - so no contraction yet.

...At least if you believe those made-up-fantasy numbers.

Exports are booming, growing at an annual rate of 13%, thanks to the weak dollar.

Not now that the major European and Asian economies have also started to tank, they're not.

The employment picture is surprisingly resilient. Jobless claims, a reliable harbinger of recession, have averaged about 325,000 for the past four weeks, far below the danger point.

Uh, those are strictly first-time jobless claims, a notoriously unreliable and easily manipulable number. Also, this upbeat [alleged] statistic doesn't jibe at all with the service-sector implosion numbers reported yesterday, so either someone is fiddling with the numbers or simply looking at the wrong numbers.

"We haven't seen the 25% increase in jobless claims we had before the last two recessions," says Michael Darda, chief economist with MKM Partners, an equity trading and research firm. "We're not getting a recession signal."

Like the saying goes, "Past performance is no indicator of future results." The current economic crisis is not at all like the last several - you have to go all the way back to 1929 for a better parallel, and at least back in '29 Americans-as-a-country still had savings to fall back on, and those were not in the form of artificially blown-up housing values-on-paper.

But any slump is likely to be short and mild, mainly because Washington is on the case. Since mid-September, Federal Reserve chairman Ben Bernanke has reduced the target for the Fed funds rate by 2.25 percentage points, with the biggest move, a sudden 75-basis-point cut, coming on Jan. 22. On Jan. 30, the Fed cut another half-point, bringing the target to 3%. It usually takes six to nine months for a Fed rate cut to bolster consumer and business spending.

Again, the theme of the Almighty-Fed-riding-to-the-rescue ... note that it usually takes Wall Street a lot shorter time than 6-9 months to vote confidence or no-confidence w.r.to Fed rate cuts, and in both of the above much-ballyhooed instances, the ensuing confidence vote essentially amounted a resounding "so what - fundamentals are still rotten." This writer, like so many other permabullish [or perhaps "permabullshit"] pundits, simply doesn`t get it: A decade or more of living way, way beyond their means, and encouraged to do so by insanely irresponsible Fed artificially-low-interest-rate money policy, has left Americans tapped out. The whole gigantic Ponzi scheme - like all Ponzi schemes - worked only as long as everyone believed that housing prices would continue to rise at double-digit annual percentage rates in perpetuity. This led to a huge upsurge in consumer spending, essentially based on using one`s price-inflated home as a gigantic ATM. I'll ask it again, of any of these head-up-their-ass pundits: How much of the so-called "economic growth" of the past decade was a direct or indirect result of Americans not actually producing anything of intrinsic value, but rather selling each other houses at ever-more-ridiculous prices? Anyone who doesn't ask themselves that question, or who asks and comes up with an answer less than "a frighteningly high fraction" is living in a fantasy world.

By midyear the flood of liquidity will be channeled into new loans for companies and consumers. A resurgence in easy credit - stoking the appetite for everything from big-screen TVs to capital equipment - will be practically irresistible.

So the cure for what ails us ... is even more of what ails us? What follows is a bunch of financial advice on how to [allegedly] profit from the current economic "not-in-crisis": let's see ... ah yes, beaten-down bank stocks very attractive, especially since we've no clue how much other worthless paper they're still sitting on ... ooh, beaten-down homebuilder stocks, yes, very nice, get 'em now, before they go bankrupt ... and of course let's not forget to pooh-pooh one of the very few investments that has actually risen in value in the past 3-6 months:

Beware of bonds

The problem with most bonds is that they're not paying enough to compensate investors for today's inflation, let alone the surging prices that haunt our future. Right now ten-year Treasuries are yielding just 3.6%, because in these rocky times, many investors are willing to sacrifice returns for short-term safety. As Wharton economist Jeremy Siegel puts it, "There is no value for investors in most bonds."

Uh, that assumes you're investing in bonds by buying new ones, hot off the government Ponzi currency press. On the other hand, the typical long-term treasury bond *fund* - like this one here or here - is up roughly 10% since the start of the year, and in many cases up ~20% since the stock market peak of last summer. And of course even a zero rate of return is still far better than any of the major stock indices since the start of the year, and will likely remain so at least though the end of the year. Like I said, morons, all.

Reporter associates Katie Benner and Eugenia Levenson contributed to this article.

I really, really hope that "Reporter associate" is a polite euphemism for "cub reporter, fresh out of college" - because in any other instance, the above article is not only shockingly naïve, but downright irresponsible.

[ewmayer]

Update on my commentary above - Aaron Krowne of the hf-implode.com blog writes:

Great commentary

My only quibble: he's right about bonds being a crappy long-term investment, but he doesn't seem to notice how incredibly bearish the flight into Treasuries is. We've never seen such a failure of the Fed to keep the financial system calm and orderly in the modern era. This is so embarassing that virtually no one in the mainstream is talking about it: the Fed has actually been *tight* relative to the market itself, where outright panic rules.

Bond funds are strong purely because of the Fed following the market downward with interest rates. However, when this goes as far as it can, and inflation takes over, the fortunes of bond funds will reverse.

If people want a safe haven, I suggest gold instead.

Note that with gold, the main decision is whether to own the physical metal or to invest in it more-liquidly via one of the various exchange-traded funds, e.g. this ETF here. If you really believe the sky is falling or simply don't like paying the typically-0.5% storage fee charged by a typical ETF, you'll want the real stuff, but of course that means you'll need to arrange secure storage yourself, and have to arrange to sell the stuff yourself if and when you want to move back into stocks or other kinds of investments.

I dislike bullion because of the terribly adverse environmental impacts of gold mining. One way of owning physical gold [or silver] but avoiding that problem would be to invest in certified historic gold coinage - that is, in metal which was mined long ago. Getting the professionally graded and plastic-slabbed coins serves the dual purpose of protecting the coins from wear and damage, and making them easier to buy and sell at a fair price.

[ewmayer]

Stimulus plan hits a Republican wall in the Senate: The proposed economic stimulus package, with an additional $44 billion in payouts, falls short in the Senate.

WASHINGTON (AP) -- The fate of $600-$1,200 rebate checks for more than 100 million Americans is in limbo after Senate Democrats failed Wednesday to add $44 billion in help for the elderly, disabled veterans, the unemployed and big business to the House-passed economic aid package.

Whodathunkit - *Republican* lawmakers opposing any measure that includes welfare-for-big-business? Apparently there was too much Democrat-pushed pork in the bill even for the iron-stomached Republicans ... or more likely, simply the wrong kind of pork. But enough politics, let's have some fun with a little "quiz about this story", the kind you might give to a classroom full of 3rd-graders:

Which of these does not belong with the others?

A. The Elderly
B. Disabled Veterans
C. The Unemployed
D. Big Business
E. All of the Above
F. None of the Above
G. E and F, but not (A & B) | (C ^ !E)
H. What is "Orthogonal Complement of the Nullspace", Alex?


Wal-Mart's distress signal: The world's largest retailer leads a parade of sales misses in January, indicating trouble in the U.S. economy.
A.k.a., "China Inc. misses sales targets!"

Home prices set to slide in '08: National Association of Realtors pulls back on outlook and forecasts second consecutive annual decline in prices and sales

The Realtors, in its monthly economic and sales outlook, is forecasting a 1.2% drop in prices of existing homes sold this year.

Only a month ago, the association was forecasting that prices would be flat in 2008 and that the home market would rebound in the last half of the year.

What? The NAR having to revise earlier forecasts downward? That's rather unheard-of for this most bearish, grimly-realistic bunch of merchant trade associations. I am shocked, just shocked. Next thing they'll be telling us that sales are down at Wal-Mart, too ... oh, wait...


Charge: Freddie and Fannie taking on too much debt: The housing slump has compelled the two entities to buy up mortgages on the secondary market that banks are backing away from.
In other words, all signals "Go" for the largest taxpayer bailout in U.S. history...as the following op-ed describes in more detail.


"It's like some sort of upside-down communism where the poor pay the rich welfare" -- Scathing SF Chronicle Op-Ed piece about the higher-mortageg-loan-limit component of the Economic Stimulus plan:

Stimulus Plan a Scam to Benefit the Rich: Higher loan limits will lead to Fannie Mae, Freddie Mac bailout

Sean Olender
Sunday, February 3, 2008

Congress is about to sell us the biggest fraud in American history.

It's been highly touted as an economic stimulus bill that will help millions of Americans - and has the backing of both President Bush and House Speaker Nancy Pelosi. In the coming year, individuals would receive rebates of up to $600 and families up to $1,200. There are other goodies, too, including tax write-offs for small businesses and an expansion of the child tax credit.

But, as the old adage goes, nothing comes for free. As part of the bill, Congress is set to rush through an increase in the mortgage loan limits for Fannie Mae and Freddie Mac (and Federal Housing Administration insurance, too) - from $417,000 to $729,750 - the first step toward a massive financial disaster in which taxpayers will end up paying through the nose.

Here's how we got to this point. Domestic and international investors hold hundreds of billions of dollars in bad debt, because U.S. investment houses sold them junk securities based on often fraudulent mortgages. Many of these mortgages were sold to unqualified buyers under terms that made widespread foreclosures a certainty once the housing market began to fall.

Investment banks and bond rating agencies sat down and tried to figure out how to describe Americans with insufficient incomes and little for a down payment as great credit risks on loans too big for their incomes. The new rules focused on credit scores, because it was a good excuse to avoid looking at income and down payment, factors that would have restricted this moneymaking fiasco.

Now, thanks to Congress, junk bond investors will be able to pawn off their bad debt to Fannie and Freddie, instead of suing the big investment houses for ripping them off. This shift will certainly doom Fannie Mae and Freddie Mac, so don't be surprised if we, the taxpayers, have to bail out poor Fannie and Freddie - to the tune of more than $1 trillion.[More]

I would add that "reverse welfare" - e.g. by way of tax cuts that benefit the wealthy most - has in fact been the norm under the current administration.