Time to reLAX

As luck would (not) have it I have 7 hours to waste in LAX airport before boarding my redeye home to the Northeast. I do have a broadband connection, so life could be worse. Some time to catch up on some reading - and writing.

Wish I had said That!

Obama apparently gave a speech where he noted the U.S. debt loads are "unsustainable." Now there is a concept! He notes we cannot just keep borrowing from China. Yet another Earth shattering concept. Indeed, there are some indications the Chinese feel the same way. I like Obama and I am glad to hear that he gets it, at least in part. I just wish he would put our money where his mouth is and stop squandering it on the financial institutions that caused this mess. I admit that stabilizing credit is important to the economy, but I disagree with how it is being done. And at the moment I believe it is more important to focus on building new sustainable businesses, be it in alternative energy, infrastructure rebuilding or other areas where our country can productively spend the dollars. The government can lend directly to the businesses needing money and bypass the banks that caused the problem or at least focus on banks that operated properly and fund their lending. With Obama admitting our dollars to spend on this recovery are not unlimited, I hope he gains a better focus soon.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aJsSb4qtILhg&refer=home

Double Take

Here is a nice piece, a guest post at Naked Capitalism, on how Geithner claims to get it but then again is doing exactly what he says in part caused this problem in the first place. Low rates caused people and organizations to chase market gains through other riskier investments than some of the conservative fixed income assets of the past, like Treasuries. This led to more risk and a bubble. Guess what, rates are now lower than the time frame Geithner seeks to partially blame for our mess. We would be into building a much faster bubble already if investors did not have a healthy dose of fear (and large losses) keeping them in Treasuries or on the sidelines. All we can do is hope fear does keep us from making some repeated dumb mistakes.

http://www.nakedcapitalism.com/2009/05/guest-post-geither-admits-easy-money.html

And for those conspiracy theorists in the group, here is a rather fun cloak and dagger piece about the Bilderberg Group. I would tell you more, but then you would have to be taken care of, if you know what I mean.

http://pensionpulse.blogspot.com/2009/05/will-bilderberg-sink-global-economy.html

We did it to ourselves - to a certain extent.

It is fun to blame the banks, the mortgage brokers, the derivatives market, the credit agencies and the like for all our problems. It is not as much fun to blame ourselves. I (and my wife) are as guilty as the next couple. We like to buy the nice TV, the good vacations, the nice car and so forth and so on. Years ago in the late 90s we put close to $100,000 on credit cards to refurbish an old house we had bought. We thought we could get a loan to do that but we thought wrong, so we borrowed on credit cards. That led to some very touchy times for us and I vowed never again. We were able to sell that house in 2002 for a nice six figure gain, even after paying off credit cards, after just four years, so we escaped that problematic situation. Nonetheless, had housing taken a dive then like it has now I believe we may have walked away.

Now I am not the most sophisticated person on financial matters but I like to think I am smarter than the average Joe, so if I can get in over my head that easy, it is easy to understand how others can. Indeed, in times of easy credit and mortgage brokers throwing money at you, it is easy to get drunk on the power of what credit can buy you. Nonetheless, at the end of the day it is - in most instances - us listening to that little devil on the one shoulder talking us into the good times. We are from a rather decadent couple of decades. Now we must return to the frugality of our parents or grandparents. That is a good thing.

Here is a nice piece from the NY Times on how someone who definitely knows better - a writer on matters economic - allowed himself to get caught up in the luster of what debt could bring him. You can guess the end result:

http://www.nytimes.com/2009/05/17/magazine/17foreclosure-t.html

Bucket Shops

Here is a nice piece from Calculated Risk on an interview of Charlie Munger, Vice Chairman of Berkshire Hathaway. It starts with a good discussion of accounting issues but then goes into a discussion of how the CDS market resembles the Bucket Shops of the somewhat distant past. So what is a bucket shop?

In the early 1900s, there were off-exchange shops that allowed people to bet on the direction of securities they did not even own. Their bets were literally placed into buckets. This in part led to a serious credit freeze and bank panic in 1907. (There are obviously some steps I am skipping here but trust me, it led to problems). In response, various laws were enacted to prevent bucket shops.

By some standards, credit default swaps arguably violated these laws. Oh what to do, what to do? What we do is we enact a new law that makes it clear that CDSs are legal. It was called the Commodity Futures Modernization Act of 2000 and it was passed in the waning days of the Clinton Administration. Basically, CDSs bought to protect actual positions were not a concern (though these might qualify as insurance and should be regulated as such). The concern was for those CDS positions insuring against at default where the holder of the CDS had no risk tied to that default. These potentially might violate bucket shop laws. So we "modernize" these antiquated laws to allow it.

Perhaps before we repeal old laws we should study why they existed in the first place. Then again, I am foolishly thinking politicians have good sound logic to their decision making, as opposed to political considerations. Either way, we have ourselves to blame for this.

http://www.calculatedriskblog.com/2009/05/interview-with-charlie-munger.html

http://www.kioli.org/cafe/LocalFiction/1011/

Only the Shadow Knows!

Of course I am talking about shadow inventory - that group of homes sitting on the sidelines that would be put on the market but for the current conditions. Some of that may sit with banks, some with builders, but a lot is with homeoners looking to sell for whatever reason. Here Calculated Risk notes there is usually about a 6% homeowner turnover each year, i.e. 6% of existing homeowners put their house on the market. Now, in addition to all the existing inventory - around 1o months worth I believe - the number of homeowners "somewhat likely" to "very likely" to put their homes on the market if housing prices improve is roughly 31%. In normal times, that would be six years worth of turn over. In other words, if you expect inventories to go down and prices to start improving a lot, time to rethink.

http://www.calculatedriskblog.com/2009/05/zillow-high-percentage-of-homeowners.html

Especially with unemployment numbers continuing to shoot through the roof.

http://www.calculatedriskblog.com/2009/05/unemployment-claims-continued-claims.html

Did S&P Say That?

The S&P- you know the rating agency that gave AAA to anything that moved - is now saying the banks need more capital than the government is saying and the banking crisis may go on another three or four years. Now some have said the ratings agencies have gone too far the other way due to criticism of their earlier lax ways, but we will see.

http://www.reuters.com/article/newsOne/idUSTRE54C6XL20090513

I agree that the stress tests were a joke for the most part. Others agree. This especially seems to be the case for Citigroup. They seemed to have done extremely well. By some accounts they should have required $63 billion more in capital, not $5.5 billion, and that appears to be based even on the government bogus stress test parameters. Me thinks me smells something.

http://www.time.com/time/business/article/0,8599,1898049,00.html

Time for some inflexion?

There has been some talk lately of inflexion, a term not all people understand. It reflects basically that the speed of decline has slowed. Decline continues but not at the torrid pace it was at. This has to come at some point. Housing prices will not go to zero, unemployment will not go to 100% and the stock market will not lose all value. Eventually each of these will eventually slow in terms of rate of decline. That is basically the point of inflexion.

For those who model, it is an important point. It adds a measure of realiability to their models. In normal times, I believe such models would have a bit more legitimacy. Right now, there is too much prospect for government stimulus to build a false recovery - or at least a false inflexion - so I am not betting on it. We will see.

http://brontecapital.blogspot.com/2009/05/when-stockmarket-does-analysis.html

Disclosures: None.