Vikram Saxena

Great Depression Not Imminent, But Inevitable

The author's basic premise is that the lack of insurance providers will significantly limit business as usual in the more riskier markets/projects where CDS were needed to hedge risk. To me this is another way of saying that investors will be a lot more prudent in their investments and do their own due diligence instead of just buying CDS to hedge a part of the risk.

What would really help is an estimate of the size of CDS secured projects with relations to the total number of projects. Is that size significant enough to cause a depression?

Ten Bear Market Phases, Current Edition

Mish:

I find your analysis interesting, since it often highlights the negatives which are often ignored. But the spin you put on the numbers is nothing but scare mongering, bordering on the line of unethical conduct.

A few months earlier, you had a blog post about AAA rated bonds having large defaults and suggested that it was a Titanic about to sink. What you failed to mention was that the market was already treating those bonds as junk they were already trading at anything between 20-50c/dollar. For people who trade them their AAA rating was meaningless.

The current post has a link which claims:
". Of the $6.84 Trillion in bank deposits, the total cash on hand at banks is a mere $273.7 Billion. Where is the rest of the loot? The answer is in off balance sheet SIVs, imploding commercial real estate deals, Alt-A liar loans, Fannie Mae and Freddie Mac bonds, toggle bonds where debt is amazingly paid back with more debt, and all sorts of other silly (and arguably fraudulent) financial wizardry schemes that have bank and brokerage firms leveraged at 30-1 or more. Those loans cannot be paid back."

Your inference is that all the loans made out by banks are bad loans and the financial system is on the verge of collapse. This is nothing but scare-mongering.


A vast majority (at least 90%) of Americans pay their mortgage on time. Commercial real estate, in spite of the prognostics of doom, is holding up reasonably well. Further real-estate, even a depressed market has an intrinsic value: the replacement value. People will continue to need homes and the collateral in place is not worthless. Even in the places hit with the biggest defaults, the liquidation value of homes is rarely if ever below 50% of the high water mark; more often than not homes sell at 60-80% of the high water mark. And not all the defaulting homes have zero equity; nor were all bought at the peak of the market. And by the way, the best run bank will go insolvent, if there is a run on the bank and everyone withdraws their deposits.

REBEL: I disagree with you on government intervention.The banking system can tolerate large losses as long as their magnitude is known; what it can tolerate is uncertainty about losses which leads to irrational and illiquid markets. We need a RTC redux to buy and hold properties at their liquidation values and then sell them once the market recovers (inflation will help that happen sooner than you think). It is easy to talk about tax-payer money being misused but if you consider all the ways our politicians spend our taxes, a housing bailout is going to be universally useful in propping up the US economy and our financial system. The cost of inaction when measured across all metrics (fear/uncertainty crippling lending, weaker dollar, higher commodity prices and inflation, falling paper asset pricing, lower economic growth and higher unemployment) is going to be a lot more than what backstop which the Federal government puts to put a floor on the housing mess. Remember unlike much of other government spending, the government is getting real assets with real utility out of this spending, and helping almost everyone in the US.

Economic Slowdown: Employment Holding Up Well

fxtrader:

Your posts focus on my interpretation of the job numbers and completely ignore the thesis behind the arguments.

Having worked in 'real' companies before coming to Wall Street, I saw with my own eyes how companies became leaner and more effecient. I also noticed that unlike the past where it was easy to shed excess, there is not much excess left. The unemployment rates for college grads is close to an all time low. That is why I am not at all surprised that job losses in this cycle are not as severe as before.

I also gave specific arguments about why the financial services number is better than what many expected (repo/refi in the mortgage market).

I had gone through the BLS report specifically focussing on the construction and financial sector. Both of them show big year to year losses; construction even shows a month-to-month loss on a seasonally adjusted basis.

All the doom/gloom headlines condemn the birth-death (of companies) model; however they too are shallow in their interpretation. The same bearish pundits did not mind when the same model contributed to a big loss in January.

If you take a dispassionate look at the birth-death model, you will see some correlation with reality.

-The fourth quarter of last year was the time when the economy really hit the brakes and consumer spending plumetted. So it is not surprising that a lot of businesses did not survive the weak Christmas season and shut down (death of businesses).

-Right now, the economic trends (ISM indices) are reversing their downward trend and after accounting for seasonal factors, it is likely that the new business formation is increasing. This is being reflected in the birth aspect of the birth-death model.

April Jobs - Another Report from Bizarro World

You article makes a lot of accusations and casts aspersions but with very little supporting evidence. The report clearly shows a big loss in construction jobs on an year to year basis. It also shows a drop in construction jobs on a month to month (March to April, 2008) basis on a seasonally adjusted basis; the absolute number is higher since the construction season is starting in the snow-belt.

Economic Slowdown: Employment Holding Up Well

fxtrader07:

The anger in post seems to suggest that you are short the dollar and are a bit unhappy about the last week. If you had read through my post, you would have noticed the link to the BLS report which has all the details. My article is not based on a cheat sheet someone sent to your trade desk.

-As I have noted, the report still indicates a 90K drop in financial services on an year to year basis, but a recent uptick. I strongly believe that the uptick is coming from the retail mortgage industry which has been decimated and is ready for a big refinance wave.

- Similarly page 20 of the report says that the construction industry lost 61K jobs between March and April on a seasonally adjusted basis. It did gain jobs on a non-seasonally adjusted basis which is due to the end of winter when construction activity resumes in the snow-bound areas of the US. There are about 200K more unemployed workers in the construction industry right now compared to an year ago. There is nothing which suggests manipulation; all data points to a industry in deep recession.

-The birth-death model takes into account new business formation and the death of old businesses and the time-lag between their formation/death and collection between the employment generated ( www.bls.gov/web/cesbd.... ). The same model contributed to a loss of 378,000 jobs in January 2008 which contributed to the bear-case. You want the cake and eat it too?

Was That a Short-Covering Rally?

Clearly, short covering is always a factor in Bear Market rallys. What is interesting is that this was a bimodal move. There was short covering AND there was genuine buying as the hump on the right side of the chart indicates.

There is no doubt that the game has changed. The Fed and Treasury are now swinging. That provides a short term floor.

5 Reasons the Fed's Credit Bailout Will Likely Disappoint

Matt:

Have you looked at where the ABX AAA indices are trading? The market is already pricing the risk; AAA bonds dont trade with a 50 handle. And with Mark to Market rules the banks have to take the write-downs as they occur.
www.markit.com/informa...
Index Series Version Coupon RED ID Price High Low

ABX-HE-AAA 06-1 6 1 18 0A08AHAA1 86.19 100.38 84.17
ABX-HE-AAA 06-2 6 2 11 0A08AHAB8 70.06 100.12 66.1
ABX-HE-AAA 07-1 7 1 9 0A08AHAC6 55.94 100.09 53.46
ABX-HE-AAA 07-2 7 2 76 0A08AHAD4 52.92 99.33 52.47

www.markit.com/informa...
The TABX index tracking the BBB sub-prime mezannine debt converted into CDOs is treating them as pretty much worthless even the 40-100 tranche.


Another thing to keep in mind: The salvage value for loans on homes in foreclosure varies between 50-80% of the home's market value depending on the size of the loan and the market condition. Assuming an average recovery of 66%, the number of loans defaulting has to be 3 times the credit support before the bond take real losses. And not all these loans were no-down payment loans; in many cases they homeowners had some kind of equity in the deal (downpayment).

Homes have a tangible value and use; in nominal dollar terms there are unlikely to fall significantly below the replacement costs. Of course their real values has collapsed with the collapse of the USD.

Rate Cuts and Inflation: Linkage Overblown?

That should read:
However just because commodity prices translate to inflation to a lower degree does not mean that they are *NOT* the prime cause of inflation right now.

Rate Cuts and Inflation: Linkage Overblown?

robbyt:

There is nothing contradictory about what I have written.

In emerging markets the cost of the raw material is a major component of the production cost since labor is cheap and marketing is a much smaller component. In the US, it is the cost of labor and marketing which dominates the cost of raw materials when you consider the cost structure.

To get a perspective, the price of most commodities has gone up multiple times but inflation in the US still in the low single digits. That highlights the impact which commodity price increase has in the US; visible but not in the same order of magnitude.

However just because commodity prices translate to inflation to a lower degree does not mean that they are the prime cause of inflation right now. And higher Fed Funds Rate will not have any direct impact on the price of commodities (except for their effect on the exchange rate).

Rate Cuts and Inflation: Linkage Overblown?

SIMPLE d:

It is again a US centric view. What we got to realize that the US and US consumption is no longer the prime driver when it comes to the demand for commodities. That is a fundamental shift from the past.

It is easy to blame excess money supply for inflation. However, in the US economic structure most of the costs are in distribution and marketing; not in production. The raw material cost is a very small percentage (except for energy which is a tax across all elements).

I agree that the US Dollar is a major factor. However, there are other factors in play apart from interest rates when it comes to the dollar. Look at the interest rates in the Greenspan and the value of the dollar to get an alternative perspective.

Rate Cuts and Inflation: Linkage Overblown?

robbyt:

The issue is not whether inflation is good or bad. There is no doubt about that.

The issue of debate is the degree of control which the Fed has in reducing inflation in the current environment. Since the inflation is not being driven by US consumption, the senstivity of inflation to the Fed funds rate is much lower than it used to be in the Volcker era.

On the other hand, what is quite certain is that lower rates will provide support to the US economy. Once the credit markets and the housing markets stabilize, the Fed can attack inflation at will.

Even in Volcker's time, what got us out of the inflationary spiral was increasing effeciency and greater energy supply. His rate increases helped limit US growth till the energy demand/supply situation became balanced again. However right now, any rate increases in the US will not significantly affect the demand in the emerging economies. They might strengthen the dollar but there are many other factors at play when it comes to the dollar. Remember that the Fed Funds Rate were much lower and the Dollar much higher in the Greenspan era.

Rate Cuts and Inflation: Linkage Overblown?

nitroae23:

A lot of people in the West confuse the correlation between the markets and the economies of the developing economies. The markets, especially the equity markets, will continue to be strongly correlated. However, the underlying economies are not.

Growth in China and India is not only been driven by the West but also their internal growth. These economies were long shackled by artificial constraints, which are gradually withering away and they are going to play catch-up with the rest of the world.

To learn more, watch the interview on CNBC with Mohammed El-Erian (PIMCO/Harvard) one of the most respected investors on Wall Street. El-Erian understand emerging markets better than most.

www.cnbc.com/id/158402...#

Around 4:00 Minutes is where the discussion about emerging markets start.

Rate Cuts and Inflation: Linkage Overblown?

nitroae23:

We live in a different world than which Volcker lived in. The USA no longer is the largest driver of raw-material consumption that it was two decades ago. The growth in demand is coming from countries whose economies can grow significantly organically, with out much help from growth in the developed world.

Increasing interest rates in the USA will not have a significant effect on the consumption of raw-materials in the emerging markets. Hence interest rates are not the right tool when it comes to commodity driven inflation in the USA.

Incidentally, what fixed the energy driven inflation during Volcker's time was the increasing energy effeciency and greater oil supply coming on line. We need to focus our interest on that; not on the false hope that decreasing growth in the West will sufficiently decrease demand in the emerging markets.

en.wikipedia.org/wiki/...