Lala Land

Yves at Naked Capitalism has a nice discussion on how financial institutions are moving another $610 billion of assets into the make-believe land of Level 3. That is where bad assets go when you send them to their room. Technically, it is suppose to be for assets the institutions cannot price using market price or pricing on comparable assets. Thus, they are allowed to price them using "unobservable" inputs. You know, the invisible kind from lala land. Yves does a good job of pointing out the games these institutions are probably playing, so I will not repeat that here.

Rather, let me focus your attention on another aspect of it that perhaps the financial institutions themselves are not considering; when you are playing games with your books and you know it and everyone else knows it, you are only adding to the sense of mistrust that is freezing the credit markets. "Credit" after all is derived from the Latin word for trust. No trust, no credit. Moreover, you are just kicking the can down the road. Eventually those bad assets will blow up and you will have to deal with that impact on your balance sheet. Putting them in Level 3 simply allows you to delay the day of reckoning. Why not go ahead and face the music now when everyone is already expecting your results to suck wind. The sooner we get this behind us the better.

Of course, that's easy for me to say.

http://www.nakedcapitalism.com/2008/12/quelle-surprise-banks-increase-mark-to.html

In the interest of full disclosure, my daughter calls her grandmother Lala. If you knew her grandmother, you would understand.

Making Some Progress

The attached Marketwatch piece has plenty of bad news for the third quarter, including a slight downward adjustment to the household net worth in the U.S. of $2.81 trillion. I hate it when that happens. Nonetheless, I am looking for silver linings here and the article has one. Despite the massive drop in net worth, Americans were able to reduce household debt for the first time ever recorded. Now I know this is more due to there being no new credit available than to us all voluntarily deciding to live within our means, but progress is progress even if it is forced upon us. As painful as this will be to the retail sector, we need to cut our debt, which means cutting consumption. We certainly are not going to be doing it by increasing our wages.

Obviously the government wants us to go out and spend and make everything look good. Retail sales will look good, store owners will look good and China factories will thank us, but nobody benefits in the long run by us living beyond our means. It is a new world coming, so get used to it. It would not be so painful had we let it happen sooner.

http://www.marketwatch.com/news/story/US-households-pay-down-debts/story.aspx?guid=%7B823A97D3%2DECA6%2D4887%2DA70B%2D9425366E7473%7D

573,000

That's the number of weekly unemployment insurance claims being reported by the DOL. This number is continuing to rise and sadly will undoubtedly do so for some time to come. As I have noted before, high unemployment typically tends to hang around quite a while (months or even years) after a recession has ended, and this one has not ended, so this will be the situation for a long time to come.

http://www.marketwatch.com/news/story/US-households-pay-down-debts/story.aspx?guid=%7B823A97D3%2DECA6%2D4887%2DA70B%2D9425366E7473%7D

You Knew It Would Not Last

One of the few things easing the pain lately has been low prices at the pumps. Gas is the cheapest it has been in years and OPEC doesn't like it one bit. Low demand at low price does not make a happy Middle East - or Russia or Venezuela. So it is not surprising that OPEC is expected to agree to a production cut at its December 17th meeting. That expectation is already driving the price of crude north again. Today nearly up to $49 a barrel, which is a week-to-date climb of 16%. Don't expect it to stop there. I suspect OPEC would like to see it at least in the $75-80 per barrel range. Of course they agree to cuts and then some of them cheat, but there will still be some reduction in output. The question then becomes whether other oil producing countries try to fill the production void. Perhaps, but for now don't expect the price at the pump to continue in the same direction it has for the past few months. Time to fill up the tank.