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Financial Skeptic Bulletin, March 2007

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Economists forecast 'not because they know, but because they are asked'

John Kenneth Galbraith

 

[Mar 26, 2006] Credit cards addicts will be milked by banks along with subprime owners

If you look at the rates that credit card offers provide you will definitely noticed that zero percent deals are gone and minimum rate for balance transfers is probably 5% for one year. With 7% for those who have significant balances. That means that those people who get used to cheap credit cards credit will now be mercilessly milked.  It's not clear what percentage of consumers have large balances but still this might affect both consumer sentiments and consumer spending.

[Mar 23, 2007] Why the debt bubble hasn't burst -- yet By Jim Jubak

 It doesn't look like we'll see that economic downturn in 200, does it ?

You and your retirement

So what does all this mean to you and me and our attempts to solve our own individual retirement funding problems?

Four things:

[Mar 23, 2007] Freddie Reports Fourth Quarter Loss of $480 Million (Update4) By James Tyson

Those games with derivatives looks more and more like a new Las Vegas. Half billion dollar loss...

March 23 (Bloomberg) -- Freddie Mac, the second-largest US mortgage finance company, had a $480 million net loss in the fourth quarter as fees from providing guarantees for bonds fell and it lost money on derivatives...

[Mar 23, 2007] The Standard - China's Business Newspaper

We all know that maestro Greenspan was the co-author/facilitator of two major bubbles... The Conference Board said Thursday its composite index of leading indicators, which is meant to foreshadow changes in the economy three to six months in advance, slipped 0.5 percent to 137.3 in February after a revised 0.3 percent decline in January. The drop in February was the steepest since February 2006. The index tracks 10 economic indicators.

The US Federal Reserve failed to act on early signs of trouble in the riskier subprime mortgage market that has put 2.2 million borrowers at risk of losing their homes, Senate Banking Committee chairman Christopher Dodd said.

The Fed shrugged off growth in fraudulent lending from 2003, and in 2004 encouraged the spread of adjustable rate and other "alternative mortgages," Dodd said in Washington Thursday. Those actions set the conditions for a "perfect storm" that is sweeping over millions of US homeowners, Dodd said.

Financial regulators "were spectators for far too long," Dodd told regulators gathered to testify before his committee in Washington.

Between 2004 and 2006 Americans borrowed US$2.9 trillion (HK$22.6 trillion) in new home loans.

The Office of the Comptroller of the Currency, regulator of the biggest American banks, said "abusive" lending and fraud helped fuel a surge in subprime lending.

Emory Rushton, the agency's senior deputy comptroller, told the panel: "It is clear that some subprime lenders have engaged in abusive practices and we share the committee's strong concerns about them. We are now confronting adverse conditions in the subprime mortgage market, including disturbing but not unpredictable increases in the rates of mortgage delinquencies and foreclosures."

... ... ...

While worries over mortgages linger The Conference Board said Thursday its composite index of leading indicators, which is meant to foreshadow changes in the economy three to six months in advance, slipped 0.5 percent to 137.3 in February after a revised 0.3 percent decline in January. The drop in February was the steepest since February 2006. The index tracks 10 economic indicators.

[Mar 11, 2007] Business Pushes Back Against Regulation Financial News - Yahoo! Finance

The price of SOX is the loss of competitive edge. This is a huge price...  In a very interesting way Greenspan undermined the competitiveness of financial sector, despite being a lobbyist for its interests.

Bloomberg and Sen. Charles Schumer, D-N.Y., released a report in January saying that the burden of tough regulation is contributing to New York City's loss of its competitive edge in the financial services industry to cities like London and Hong Kong. Unless remedies are made, they warned, New York's -- and thereby America's -- leadership in global finance will be eroded, reducing jobs and chilling the U.S. economy.

[Mar 11, 2007] China to create firm to invest its $1 trillion in reserves By Joe McDonald

They do not want passively watch the depreciation of the dollar and 401K investors should either...

(ASSOCIATED PRESS) China will soon create one of the world’s largest investment funds, with ramifications for global stock, bond and commodities markets and for how the U.S. finances its trade deficits.

[Mar 11, 2007] Econbrowser Financial crises

401K "all stock" investors without international diversification might have a nice haircut before the year end... Weakening dollar ties Fed hands and their ability to move aggressively on this front is potentially limited by the need to avoid a precipitous collapse in the value of the dollar.

So does this have anything to do with current concerns about subprime mortgages and interlayered hedge fund risk? I would take away two points from this discussion. First, insofar as we are talking about solvency problems, there is little the Fed is able to do to prevent those-- some subprime mortgages are going to default, and that's that. However, the Fed can and will prevent these from cascading into broader liquidity problems, by which I mean insolvencies created solely because of forced liquidation or unavailability of short-term credit. Even so, the Fed's capacity to move aggressively on this front is potentially limited by the need to avoid a precipitous collapse in the value of the dollar.

Whether the outcome would look more like the U.S. in 2001 or Korea in 1997 remains to be seen.

[Mar 11, 2007] Another study confirms contrarian view of bull market

401K investors should follow, should not they?
MarketWatch

... the top long-term performers appear to have begun an orderly process of taking some money off the table.

[Mar 11, 2007] Global Investor Stephen Roach Newsweek - Find Articles

Are 401K investors prepared for the slump ?

December, 2006 (Newsweek)  

The world is unprepared for a slump made in America. That's the distinct impression I gather from six weeks of globe-hopping that took me to Japan, South Africa, the Middle East, Singapore, Hong Kong, China and Australia. Most I met believe that the world has now "decoupled" from the United States--with increasingly robust economies from Asia to Europe fully capable of standing on their own in the event of an American soft patch.

Two key questions come to mind:

There is deep trust in the line of analysis favored by Fed chairman Ben Bernanke--that any slowing is nothing more than a housing-related ...

[Mar 10, 2007]  Online Asian news and current affairs - Hobson's choice By Chan Akya

If you believe the author of this paper, Dow might not be over 10K at the end of the year.  But are his arguments convincing ? Not exactly. China needs to subsides the USA  as it cannot sell what it is producing anybody else.

March 10, 2007 (Asia Times)

It is a good old rule of banking that when you borrow $1 million from the bank and cannot repay, you are in trouble, but if you borrow $100 million from the bank and cannot repay, the bank is in trouble. In the above scenario, linkages through the global financial system mean that Asian banks and investors were holding a substantial portion of risk linked with the poor borrowers in the US. These are the same people whose inability to repay prompted the bankruptcy of some specialist firms that lend money to poor Americans, in turn touching off the crisis described above for global equity markets.

My point in repeating the story is to highlight the fact that the other shoe has not dropped yet - ie, Asian lenders who suffered losses from buying these securities are unlikely to purchase other US obligations until a clearer picture of the economy emerges. This translates to a withdrawal of liquidity from US financial markets, adversely affecting the prospects for the rest of the year. Americans, who are used to consuming more than they produce, will have to reverse course. The result will be akin to a fat person going on a bread-and-water diet for six months: painful, but necessary.

The likely pain of the adjustment for Americans will depend much on how quickly the rest of the world goes into recession with the US. It is important to note that any "lag" will only make the US recession more painful for Americans.

[Mar 10, 2007] Crisis Looms in Market for Mortgages - New York Times

Looks like analysts are under attack again. That's a bearish sign is not it ? :-)

On March 1, a Wall Street analyst at Bear Stearns wrote an upbeat report on a company that specializes in making mortgages to cash-poor homebuyers. The company,

The analyst’s untimely call, coupled with a failure among other Wall Street institutions to identify problems in the home mortgage market, isn’t the only familiar ring to investors who watched the technology stock bubble burst precisely seven years ago.

Now, as then, Wall Street firms and entrepreneurs made fortunes issuing questionable securities, in this case pools of home loans taken out by risky borrowers. Now, as then, bullish stock and credit analysts for some of those same Wall Street firms, which profited in the underwriting and rating of those investments, lulled investors with upbeat pronouncements even as loan defaults ballooned. Now, as then, regulators stood by as the mania churned, fed by lax standards and anything-goes lending.

Investment manias are nothing new, of course. But the demise of this one has been broadly viewed as troubling, as it involves the nation’s $6.5 trillion mortgage securities market, which is larger even than the United States treasury market.

... ... ...

“There are delayed triggers in many of these investment vehicles and that is delaying the recognition of losses,” Charles Peabody, founder of Portales Partners, an independent research boutique in New York, said. “I do think the unwind is just starting. The moment of truth is not yet here.”

... ... ...

A paper published last month by Mr. Rosner and Joseph R. Mason, an associate professor of finance at Drexel University’s LeBow College of Business, assessed the potential problems associated with disruptions in the mortgage securities market. They wrote: “Decreased funding for residential mortgage-backed securities could set off a downward spiral in credit availability that can deprive individuals of home ownership and substantially hurt the U.S. economy.”

[Mar 10, 2007] Morgan Stanley - Global Strategy Bulletin

Is the USA a new Switzerland ? JP Morgan, Citigroup, AIG, and Bank of America now earn about as much as the bottom 250 companies in the S&P 500 combined.

... ... ...

Morgan Stanley - Global Economic Forum

Corporate America seems increasingly unwilling to boost capital spending, despite moderately positive fundamentals.  For example, after rising at a 7% rate in the three years ending in the first quarter of 2006, real equipment and software spending slowed to a 1.2% annualized crawl in the last three quarters of that year.  Spending on commercial structures fared much better, with a three-year growth rate of 11.9% and a booming 19.2% annual rate over the past three quarters.  But overall, the capital spending expansion has largely been missing in action — and, as our macro team’s global capex rant suggested last month, not just in the US but globally (see “The Global Capex Debate,” Global Economic Forum, February 16, 2007).

... ... ...

Back home, however, recent indicators of investment spending look downright dire.  For example, overall capital spending contracted last quarter for the first time in nearly four years, and bookings for capital goods excluding defence and aircraft declined at a 13.6% annual rate in the three months ended in January.  Will capital spending decelerate along with the economy?  Or worse, will CFOs starve their companies of needed growth by succumbing to capital anorexia?

... ... ...

There’s no mistaking the message in recent data: Near-term risks are tilted to the downside, potentially conveying a renewed sense of overall economic fragility that could, in turn, trigger additional caution, creating a downward spiral.  In addition, financial conditions could tighten if lenders and investors, anxious about recent market volatility, further tighten lending standards.  In contrast, the message in our analytics is that sooner or later corporate capital spending will reaccelerate.

[Mar 2, 2007] Independent Online Edition Business Comment

The construction sector already being in recession.

No doubt he had meant his latest utterance - that a recession in the US this year was a possibility, though not a probability - as a clarification of the earlier one. It didn't work out that way, with world markets suffering another serious wobble. Yet it is all a bit odd really. Mr Greenspan is only making a statement of the bleedin' obvious in talking about the possibility of recession.

The longer an expansion continues, the greater the chances of it coming to an imminent end. Higher interest rates have already caused a pronounced slowdown in the US housing market, and there was renewed evidence yesterday of the construction sector already being in recession. Yet construction is not the whole economy, and most of the other data emerging from the US yesterday was still positive. The balance of probability, as Mr Greenspan would no doubt concede, is still very much that the Fed has indeed engineered the hoped-for soft landing.



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