In-Laws Day Three

Surviving fairly well. Only a few minor meltdowns so far, and none of them by me. It is early yet, so we shall see how the week moves along.

Bail-out Smail-Out

Apparently the Bush (temporary) loan/bailout of the U.S. auto manufacturers is not making the rating agencies all warm and fuzzy. GM and Ford both got downgrades today, from S&P and Moody's, respectively. They are both several grades below investment grade so in some respects it is relative. Either way, neither is about to attract anyone's money until folks have faith that they will survive. Until then, Uncle Sam continues to be the lender of only resort (other than Canada, which gave their Canadian subs a few billion). Not big news, but the fact that this follows the supposed bailout is telling on whether this is a turning point.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aeb9Jow5oXNY&refer=home

Stocks Down

Again, hardly a surprise. Not a particularly big drop. I mention it because I expect to see more of the same over the next two to three months. First, as we approach year end, you will have mutual funds and others realigning their portfolios and dropping some duds so that they do not have to report them in their year end books. Second, I believe there will be more hedge fund quarterly redemptions, which will create more pressure in January and beyond as they have 90 days to pay up, typically. Third, the fourth quarter and year end results will be horrendous, so this will put pressure on the markets throughout February and March. Just my take. Let's revisit in three months to see if I guessed right. And by the way, that is all it is - a guess.


http://www.bloomberg.com/apps/news?pid=20601087&sid=aEcUjf7SQK60&refer=home

Back to "Normal"

I have spoken here often about how the economy is not about to return to where it was in 2007 any time soon, nor should it, as we were at artificially inflated - or you might say abnormal - levels of credit, debt, consumption and everything else that builds a bubble. These were all things that in time simply revert to mean. The problem is in defining mean. Mean has been in a process of distortion for years, well over a decade, and mean itself may need to revert to mean. So what is normal? I suspect over the next 2-5 years we will all find out.

Here in a piece by Cassandra, she talks about what is normal and how recent past has distorted expectations in this regard. It is a common theme here. We are going to have a new world after this recession. Then again, you may view it as a very old world, depending on your perspective. Either way, we have all been spoiled and now they are taking the punch bowl away. Get used to it.

It will be boring or even down right depressing for a while living this way. Then again, all this fiscal stimulus could succeed in building yet another bubble to help us escape the current mess, which should truly make the next bubble prick most spectacular! Only time will tell. I just hope to have my retirement under my mattress before the next one pops, if that is what happens. The alternative I fear is a long recession followed by a slow and unexciting recovery. Not rosy either way.

http://nihoncassandra.blogspot.com/2008/12/if-you-cant-tell-who-sucker-is.html

Wage Deflation

It is what it is and it is happening left and right. Those that still have jobs are seeing wage deflation. This does not always need to take the form of smaller per hour wages. It more often takes the form of shortened work weeks, unpaid vacations, lessened benefits, brief shut downs and the like. Wage deflation is not terribly upsetting when there is commensurate price deflation to match it, but that is hard to expect across the board. Sure, we are seeing gas down, for now, and retail sales are providing bargains, as are lower housing prices, but certain things are not going down. Food prices and fixed rate mortgages for two. By fixed rate mortgages, I do not mean new mortgages, which are going down. Rather, I am talking about the millions of people like me who have them already. If you have one and your pay goes down, the bank still wants the same monthly payment. And other prices will either hold steady or increase in price in due order. This too will cause this recession to drag on.

http://www.nakedcapitalism.com/2008/12/wage-deflation-underway.html

Gettin' Down With The OTS

Quiz question, when is supervision not supervision? Answer, when it is supervision in name only, which has been the case with the Office of Thrift Supervision for quite some time. They were seen as the more "flexible" regulator, so banks preferred them. It is hard to say any regulator was exactly breathing down the necks of those they regulated this past decade, so when banks seek yet an even more flexible regulator that means something is afoot that really needs regulating. Looks like the OTS needed supervision itself. It is now accused of letting those it supervised commit fraud through backdating. In "normal" times I would be shocked. Hopefully some day stuff like this will shock everyone again.

http://www.calculatedriskblog.com/2008/12/ots-official-accused-of-backdating.html


Credit Watch

Calculated Risk does a nice daily take on a variety of credit indicators. Right now it is quite a mixed bag. The one that optimistically has my attention at the moment is the three month LIBOR, which is down significantly off its peak. Still a bit high, but down nicely. Between that and three month treasuries at 0%, you will have many adjustable rate mortgages that could reset lower over the next 12-18 months. Not all of them mind you. Some homeowners, for example, have option ARMs that allowed them to pick among payment options. They could have picked an interest only option such that they have paid no principal for a few years and now must amortize it all over shorter period. There were even even loans that allowed you to pay even less and increase the principal. So while the low rates are promising and they might help us reach a bottom sooner, they will be little help the most foolish of the fools, who will likely still see increased payments..

Even those who are helped by lower payments are well advised to find refinancing and lock in a fixed rate if the can. If the flooding of the economy with fiscal stimulus does have the desired effect over the short or medium term and that results in inflation, do not expect these rates to stay low forever. Over the short term deflation may drive them even lower (below 0%, however, is going to be tough), but eventually (like yesterday) you will wish you had locked in a rate sooner.

http://www.calculatedriskblog.com/2008/12/credit-crisis-indicators_22.html

Wait, look, it seems people are already looking to lock in those new lower rates and refinance. Refinancing applications are up sharply. Now all these applicants have to do is pray their homes appraise above water, their credit is not too low and their employer does not confess to the bank how shaky their job situation truly is at this point in time. Maybe, just maybe, some of these refinancings will be approved and housing starts to reach a bottom. The problem for me if I am a lender, I know fiscal stimulus can, and eventually probably will, lead to vicious inflation, so how many really low rate loans am I looking to lock in and who am I interested in lending to? The answers - not many and only to those with the best credit, i.e. those that probably really do not need to refinance. Those on the edge needing to refinance before their rate resets may not get what they are looking for. If they do, I will be pleasantly surprised.

http://www.minyanville.com/articles/bac-Fed-Federal-Reserve-tbt/index/a/20419

Disclosures: None