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.
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:
-
The debt bubble is much bigger than what we've
seen so far of the problems in the subprime mortgage market.
-
The possibility that the Federal Reserve will cut interest rates in 2007
will put a temporary floor under the debt markets.
A significant and lasting deflation of this debt bubble is unlikely
until events demonstrate that the Fed won't cut rates. Hopes
of a rate cut are likely to persist through 2007.
-
The bursting of the debt bubble depends on the
timing of the next economic downturn. The longer we have to wait for that
downturn, the more violent the bursting will be.
At this
moment, however, it doesn't look like we'll
see that economic downturn in 2007.
-
The widespread knowledge that we're at a dangerous turn in the credit cycle
on the part of investors who feel trapped into participating in the debt
markets anyway will produce episodes like the Feb. 27 sell-off with distressing
regularity.
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...
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.
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.
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.
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.
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.
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:
-
What if the U.S. soft patch isn't all that soft after all?
-
What if a supposedly robust world turns out to be more dependent
on American than it is willing to admit? The overseas view is that America
is fine--that there's no need to sweat the current downshift.
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 ...
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.
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.”
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.
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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