BrentB

Global Markets in Review: Reversal in Financial Markets

Well written, comprehensive article. Thanks.

Short ETFs are up 10% over the last 2 weeks, but still a buy. It is no time to sit with cash on the sidelines.

Proposal for Fed to Become the Next AIG

In the chart, column 11 is the sum of 12, 13, and 14. It shows the total (column 11) as actually lower on 09/03 than in 08/12, although it shows no breakout numbers in columns 12, 13, 14.

Is this just a flop in thei rdata collection? Does the table make sense?

What Strong Homes Sales Numbers Mean

Bush had his Merlin's and Obama has another set - some small overlap.

It is not clear that the US and the world are well served by Merlins.

These people are looking for magic to solve problems rather than changing the system that is producing faulty outcomes.

When faced with the problem of funding a war and unable to raise taxes, the Bush Merlin's stimulated the economy into a massive housing/finance bubble.

When faced with a problem of rebuilding a shattered system, the Obama Merlin's again resorted to hocus pocus tricks to simulate recovery without pain. Yes. lots of people have been lost their jobs or been foreclosed or both, but the real pain is not there for most people.

Until everyone has to share the pain of solving this problem, people will not admit there is a problem. People will not start going back and looking at the cause of the problem and decide it is high time to bring a little justice to the perps.

The fact that there is no movement to find and sanction the people who broke the economy is bizarre. It is like a family in which a member maxed all the credit cards buying drugs and no one will admit there is a problem. If no one admits there is a problem, if we try a number of head fakes to pretend we are not bankrupt, perhaps no one, even ourselves, will notice.

We are about 3 head fakes from a massive head butt.

'Clunkers' Needs More Cash

The whole idea is so flawed economically I am surprised so many people think it is a success.

Who takes advantage of the program? Which 250,000 people bought new cars and pocketed the cash?

It was the 250,000 people who were most likely to buy a car anyway. They got the car they were going to buy and they got the cash.

What happens now? Those 250,000 who would have bought cars anyway over the next year now have a new car. They won't be buying another. So, sales are lower by 250,000 from what they would have been with no plan over the next year.

Net after a year - tax payers out a billion, auto industry nets out at 0, 250,000 got a deal on a car.

It was a dumb program. Extending it makes it even dumber.

These are supposed to be the smart guys. The previous bunch was dumb - no question. These guys may well be smarter, but they are still too dumb to run a country.

U.S. Government Bonds: Sounds Like a Ponzi Scheme to Me

The calculation in the article appears to be based on the real value of the bond at the end of 30 years, ignoring the interest payments along the way.

It also assumes the next 30 years will have inflation about the same as the last 30. The last 30 years had most of the inflation in the first few years, and very high inflation at that. This tips the analysis alot.

Are we about to repeat the last 30 years? Will most of the inflation occur in the next few years? Will it be as bad as the early 80s?

A difficult question. Few were predicting a US$ meltdown in 1979, when the US was nearing the top of its economic power. US$ meltdown is now the null hypothesis.

While I am not sure about forecasting the next 30 years based on the last 30 years, I would not buy any 30 year bond US$ right now - at anything under 15%. And even then I would think long and hard.

Reining in Oil Speculators

People here seem to think that the new restrictions will affect their ability to buy and sell various speculative instruments. It is not the few tens of thousands that people, working on their own and making independent investment decisions. No need to touch those because they cannot make markets.

The restrictions are going to prevent the really big guys from gaming the system. Right now the big guys take billions off the top, leaving crumbs for independent investors. They own the system and the politicians. Independent investors and the consuming public, which needs the commodities these people manipulate, are getting the short end.

Of course, the new regulations will stop only the worst manipulation. There will still be a few billions skimmed. Should still be a good bonus year at GS and a good year for political contributions.

What Were Subprime Loans Modeled On?

The argument is that the CRA model led to changes in behaviour that eventually led to the subprime fiasco. For this to be true, you have to identify the groups who chose to adopt the CRA model as appropriate to them. The options include: lenders, borrowers, politicians.

Lets look first at borrowers. We know that total mortgages ballooned from $7 trillion to $14 trillion during the Bush II years, while home ownership as a percentage went from 66 to 70 percent. Lets assume all of the 4% new home owners were CRA. CRA borrowers bought below average value homes. So, 4% of homes at below average price accounts for at most 4% of mortgages.

We know that most of the CRA loans are ok. So, CRA homes are not the problem. The only option then is that people who ALREADY owned homes increased their mortgages. The argument that they did this because CRA mortgages existed would then go as follows. Mr Average Home Owner who decides to remortgage his home to buy a new BMW does it because ACORN is helping poor people in Detroit or Chicago. Nah! The guy just wanted the car and his banker was OK with that. CRA did not change the buying habits of most non-CRA home owners.

So, what about the bankers. Did they look around and say: we have these poor folks being encouraged to buy homes and helped along a bit. Why, I think that I should encourage people who already have homes to remortgage and buy a new car or take a vacation in Vegas. Nah! The banker makes money by lending money. The banker makes more money by lending more money. The people at Washington Mutual who made all these bad loans were not told about CRA loans. They were told to move the product to middle income people who wanted to buy bling.

So, what about the politicians? Do you think Phil Gramm justified his law by saying that middle america needed a level playing field with the poor folks? Nah! This item on the UBS web site explains Phil's motivations pretty well: "Senator Phil Gramm to join UBS Warburg".

For the growth in mortgage debt to be attributed to existence of the CRA concept, you have to require irrational behaviour by all the people who actually grew the mortgage debt.

That is not how it happened. What did happen was Middle America was conned by mortgage lenders. And the con continues with many of the people responding to this article. They still don't admit that it was middle class acquisativeness, facilitated by politicians like Gramm and lobbied for by bankers and non-bank lenders (primarily the latter) that led to this collapse.

Blaming it on a few poor folks, whose total mortgages may amount to 2 or 3 percent of total mortgage debt is a denial of the facts. People who still believe this need a twelve step program of some sort.

If you take John Carney's argument and work through how people must have responded for the argument to work, you find the argument makes no sense at all. It only works for people who don't think it through. Sounds like a lot of people who are underwater on their mortgages today.

ECRI: Economic Growth in Positive Territory

First, all prediction assumes the future is like the past. Right now, the present is not much like the past (different economic drivers seem to be dominant). Can their model be as accurate now as it has been in the past.

Too bad Seeking Alpha - which seems to be bear territory these days - has not been around for long enough to use posting here as input to an economic model. Right now sentiment here certainly points down. If ECRI is right, Seeking Alpha sentiment is negatively correlated with the market!

As you say, there is a lot of bad news out there and many readers of Seeking Alpha may be focusing on that news and ignoring the positive indicators.

However, the ECLI report does contain a lot of bad news that they seem to be ignoring - the February low in their indicator. If this is a 6 month indicator should we expect a market/economy low in August? That would be followed by improvements indicated by the more recent up trend in their indicator.

How do they explain the shape of the curve and the shape of the recovery? Do we have one bear market to work through before the next long term bull?

Thanks Steve for reporting an important source of overall market trend information. I think I will still short the broad market today, but perhaps not as aggressively.

Why I'm Keeping an Eye on Corporate Defaults

The numbers on increased debt are way low - they might be just the increase in credit card debt. The total of all residential mortgages in the US went from about $7 trillion in 2000 to over $14 trillion in 2008 - wikipedia. All that money bought bigscreen TVs and iPhones. Essentials, I know, but the money is gone and the houses have lost 30% of their value.

The consumers won't be back big time for many years. Only the banks that can fiddle their debt portfolios will be making any money, assuming something prevents foreclosures from snowballing.

Credit Cards: The Interplay Between Innovation and Regulation

Credit card rewards represent a classic case of tragedy of the commons. When you get 1% back, knowing that the money is coming from the merchant and is being paid by all consumers, you take is anyway. Who cares if all consumers are screwed by these rewards through higher transaction fees and hence higher costs as long as I get my reward.

Well, it turns out the credit card companies are making a sucker of you. Sure you get 1% back, but they charge the merchant more than 1%. New super reward cards pay even more to the credit card companies. Since these new cards will quickly collect users who ignore the common good, they will become the norm. Soon we will be faced with a reward feedback loop.

Merchants, faced with these costs, have to raise prices again.

This is an example where the actions of a card holder, actions motivated by greed, cost people who don't even use credit cards. This makes no sense.

When individuals have to be protected from the actions of others it is time for government to step in.

Government must limit transaction costs to actual costs - around .3% at the very most. Goodbye reward cards. Goodbye air miles cards. Hello return to common sense.

ECRI: Canadian Inflation Gauge Sets a New Low

Has the ECRI done anything to modifty the factors it uses to predict future inflation in light of the changes to the financial factors present in the economy over the last year?

Specfically, does it take into account the massive stimulus and the bailout money flooding into the economy? Interventions in the past would not have been even remotely as important as the interventions in the last year. An economic model could even have ingored interventions similar to the quantitative easing we have seen in the last year. There really were none.

In so many ways the US is at the limits of its ability to act. Interest rates cannot go lower. QE cannot continue. All the stimulus factors seem to be exhausted. Can any model predict the future from here based only on the past?

What if commodity prices decouple from the US economy? What happens to the US economy if rest of the world demand pushes up commodity prices (and hence finished product prices) even as the US economy falters. Inflation in a faltering economy could really drive the economy down.

Wondering if any models work well from here.

Maybe It Is Different This Time

Interesting and thanks for the data. It would help to understand how an increase in 10 year rate affects the market if we also knew the rate at the start of each increase. Right now we are getting a rate bump, but the rate at the start was so low we still have 10 year rates that are quite low. Perhaps some employment numbers at the times as well - what other problems are the rates causing.

In short, a single number may not define the economy and its near future.

Will New Credit Card Regulation Lengthen the Recession?

These changes are fiddling on the edges - not getting at the real problem with credit cards. And the growing problem - from the point of view of merchants. Banks keep on introducing new cars with even more premiums on the cars - some as much as 5% cash back. Air miles, cash back - consumers think this is all free. Well, the merchant is jacking up his prices for all consumer to pay the credit card fees for these premium cards. A few get some money back, the bank gets even more - the average person pays. Some areas - Australia for example - have capped the merchant fees at 0.3%. Goodbye all those premium cards. Hello lower prices for everyone. Time for all countries to get with it and limit the banks' take on all purchases.

Dean Baker Largely on the Mark - Crisis Was Predictable

To be more precise, it was an $8T mortgage bubble - between 2000 and 2008 the value of all mortgages went from under $7T to over $14T.

The percentage of people owning their own homes rose about 5% in that time.

Even if all those new homeowners had totally bogus loans it could not have caused the bubble. The bubble was caused by average folks using their homes to finance consumption.

You cannot blame someone else, some shoddy lender, some ethnic borrower who lied about her means. It was the average joe the plumber. Accept responsibility America.

It is time for America to accept that Pogo was right: We have seen the enemy and it is us.

Understanding that the responsibility is national - almost every homeowner is involved - is important for investors.

The solution will not involve a lot of pain for a few bad apple borrowers. The solution will involve some pain for almost every single homeowner for a very long time.

What parts of the economy grow under these conditions? That is where you invest.

Where is that again?

San Francisco Fed Concerned About Consumer Deleveraging

The San Fran Fed report missed a few charts - that would have helped a lot.

First, the misconception that it was NINJA mortgages - mortgages to unqualified borrowers - that was at the heart of this crisis. Absolute nonsense. It was not ACORN. It was not marginal borrowers. The doubling of mortgage debt between 2000 and 2008 - from about $T7 to $T14 - was accomplished while the increase in home ownership increased only 5%. Those 5% did not add $7 trillion in mortgage debt.

This move to less consumption is not the result of people deciding to save a little more in these parolous times. It is people deciding to pay the mortgage rather than buy more nikes. It is people unable to refinance their homes who decide not to trade in the Buick after 2 years. This is not a virtuous decision, this is stark necessity. When faced with a choice between a new SUV and living on the street, the SUV will just have to wait. (Are you sure, I really wanted a new SUV? Yep, it will have to wait until our home is worth more than the mortgage once again.)

If the ATM on the side of the American house if shut for the next 10 years, how does that change your economic forecast? How does that affect your investment decisions?

Forget all the charts in the SF Fed article. They are all looking back and assuming the future is more of the same. That was then, this is now.