recession graduate

Case-Shiller: Home Prices Continue to Rise

there is a lot of noise in the housing data and it will be a long time before there is any broad fundamental improvement- there is a severe supply overhang in the context of what is likely to be a secular shift in demand.

I summarize this argument here:

2and20vision.wordpress...

Fed Minutes: Appease the Chinese

china's monetary policy is a simple reality of its economic position- it may not be convenient for the global system but it certainly makes sense given the incentives they face. the us dollar's movement is similarly explicable. I touch on both issues on my blog:

2and20vision.wordpress.../

On Paul Krugman's Deficit Rationalization

the US will not be able to fund its deficit without facing higher rates. I outline this argument in detail on my blog:

2and20vision.wordpress.../

Why You Can't Short This Market: The Expectation Ratio

equities are more often than not just a child of credit and with the doveish fed I wouldn't expect things to derail in the near future. I discuss my thoughts on the long risk/short dollar rally on my blog.. some of you might have interest.

2and20vision.wordpress.../

The U.S. Budget Challenge in International Context

Japan is the real story when it comes to funding the US deficit- they are rapidly approaching insolvency prompting the question of who will take their place as a buyer of US debt, and whether the US will be able to fund its enormous obligations at low nominal yields.

I dive into this a bit further on my blog.. You can find the post at 2and20vision.wordpress.../

The Next Major Crisis Brewing

I'm short long dated treasuries in the expectation that higher rates will have to come one way or another- the yields on 20 and 30 year paper barely eclipse even TTM CPI inflation (during what was probably a deflationary period of deleveraging).

The Fed is in a tough spot and will have limited policy flexibility moving forward. Withdrawing credit from the system will be extremely difficult in the best of circumstances and the prevailing conditions will likely force them to keep rates lower for longer, which could be trouble if their massive stimulatory efforts are even modestly successful. Another minor asset or credit bubble isn't unfathomable given the shaky fundamental picture and the massive federal injection of liquidity, and it seems given the current rhetoric that the fed will be more active in managing emerging asset/credit bubbles. The Eurodollar future curve has flattened lately, interestingly.

In the context of this, external forces could further constrict the Fed's policy options. The bearish dollar view is essentially a bet on the inability of the current administration to successfully back itself out of the massive fiscal hole it has dug itself in and the real catalyst would be on the demand side. While the Chinese dumping their treasuries or ceasing to buy is extraordinarily unlikely, even a marginal slowing of Asian treasury buying would prove extremely troublesome. The above data could suggest we've already reached that stage. Wholesale dumping would push rates into the 19-20% range, so it wouldn't take much adjustment to cause some serious dislocations.

Most sovereign investors no longer need the dollar to park their reserves especially as many are wiped out or blew their loads on stimulus. I think even a modest recovery could drive global inflation high enough to cause problems- with rates the way they are currently, it wouldn't take much of a pick up inflation to make treasuries even less attractive and the Fed would suddenly find themselves in an arguably worse position than they were a year ago.

I'm of the opinion that enough forces are coming together to make a convincing argument for an inflection point coming sooner rather than later. I've been looking for a good spot to put this short on and I think the time is at hand.

Need More Bullishness for a Correction

yeah, i'm with you on this one, as is the research. check out solt and statman (1988, journal of portfolio mgmt) and clarke and statman (1998, financial analysts journal). basic take-away is that its a meaningless indicator that talking heads and investors use to reinforce their existing conceptions.


On Sep 13 10:43 AM David Van Knapp wrote:

> I don't put much stock in bullish/bearish sentiment indicators and
> their supposed contrarian-indicator qualities, because I have not
> seen a controlled, long-term study that supports that hypothesis.
> If anone knows of one, please point me to it.
>
> However: It makes sense that if, as is often said, a bear market
> bottom cannot happen until there is "capitulation" as shown by the
> last bull throwing in the towel and selling out, then it stands to
> reason that a bull market top won't happen until there is capitulation
> by the bears. I suppose that would be demonstrated by their not only
> unwinding their short positios, but by their actually grittting their
> teeth and buying stocks.

Fannie and Freddie Are Surviving, But Barely

On Sep 11 08:20 AM blondino wrote:

> The GSE’s are responsible??? WTF??? Unreglated market and irresponsible
> loan-takers are responsible. And noe taxpayers pay the bill.

the government played a significant role in expanding credit. they took it upon themselves to vastly increase american home ownership and lowered credit standards to meet politically motivated targets, forcing private sector lenders to further misprice risk to stay competitive. the mortgage interest subsidy played a role at the margin. also, i don't think there's even a need to mention the decade or so of a stimulative fed funds rate.

politically motivated lending always ends in disaster. government meddling in capital markets (the greenspan fed) has been a disaster and no one seems to have learned their lesson.

The Coming Consequences of Banking Fraud

while the enormous conspiracy theories suggested by your article are a bit tin-hat, i would agree that there are likely some pretty serious troubles under the surface in the banking sector, although the extent will only be visible after the fact.

those familiar with the government's handling of the s&l crisis will recognize the danger of many of the policies adopted thus far. providing cheap money and an explicit guarantee to lenders that are insolvent or approaching insolvency creates some seriously skewed incentives. thrifts in this position chose to bet the farm on commercial real estate loans, hy debt from lbo's, and engage in other wholly inappropriate transactions while using their legislative muscle to get the FHLBB to relax reporting requirements. those unable to continue were merged into other banks to avoid bankruptcy.

all of these policies greatly magnified costs and delayed ultimate resolution by years (some would suggest up to 60% of the final fiscal cost, although estimates are understandably difficult)- the problem was visible in 1982, wasnt taken seriously until 84-86, and wasn't fully wrapped up until 92-93. sound vaguely familiar to anyone?

our government is extremely poorly set up to accommodate systemic banking episodes- there is no monitoring capability, no explicit responsibility, and no guidelines for a major credit event and the result is that policy gets tossed around between various agencies seeking to avoid responsibility and shift the costs on to others. the structure of the resolution trust corporation is a good example of the bureaucratic monstrosities such an institutional structure creates.

i sold all my banks in early august after giving some thought to how little transparency is available into balance sheet quality and to the past failures of government resolution of failed banks. this is a much bigger problem that the s&l crisis, the 87 crash, or the tech bubble, and i think people tend to lose sight of that.

i don't think that elaborate conspiracy theories are justifiable or even necessary to explain the rally- everyone in markets has learned to buy the dips in the past couple decades and has no memory for serious extended economic drawdowns. its not surprising they're failing to comprehend the scale of the shift occuring, and politicians with a tie to status quo policy will always tell the citizenry everything is just fine, no matter how dire the reality.

EWO: Take Advantage of Targeted Investment in Austria

can you provide any color on the state of erste bank's loan portfolio?

their tier 1 capital seems a bit thin given their exposures, i'd be interested to know what kind of a dislocation would be necessary to cause a big shake out.

What the IEA Doesn't Want You to Know About Peak Oil

people have voiced concerns that we'll run out of oil since it was first profitably extracted from the penn-ohio fields in the 19th century.

chronic underinvestment in the 90's during a period of brutal price pressure preceded a brief spike before global economic collapse, during which the costs of bringing new capacity online reached record highs. everything from renting drilling rigs to finding man power became extremely costly, resulting in a continuing underinvestment. its worth nothing that petroleum engineers are the only recent college grads that can still count on a nice six figure pay package straight out. this is more of a global supply/demand imbalance than a signal of impending doom, and one that will be necessary to spur any serious investment in alternatives.

never underestimate the power of exponential technological change and innovation- there is a lot that can be done to moderate marginal consumption, and secularly high oil prices will force alternatives, particularly in emerging markets. cheap and easy oil is gone for the time being, but as alternatives become more practical and crude rallies the transition will happen faster than many expect, and i would expect new capacity combined with sharply reduced marginal consumption going forward to rapidly change oil's future. it may drive the global economy today, but those with a sense of history would be wise to take a little bit more macro-view.

malthusian doom-mongers have been wrong time and time again- this is the same sort of tripe that would have you believe that we are all going to starve in the late 70's. you seem like you should still be at school with your head down a toilet rather than speculating on our future energy-induced global collapse.

Four Reasons We're Headed Even Higher

as a sidenote, thanks for posting this, it makes me feel better about all the puts im sitting on

Four Reasons We're Headed Even Higher

comps have already been driving some of the bull market particularly with housing data- its all been 'less bad' and the low base values have flattered the marginal improvements we've seen.

additionally, you're still making the dangerous assumption that the future will resemble the recent past, which seems difficult to justify.
you can't just take a look back at the chart and draw a line between two points and extrapolate without making some consideration of the critical distinctions between the two periods. this market is already trading at 17X trailing earnings, and a lot of companies had decent goes of it in 2008, which should make this back of the envelope number something of a warning sign.

the credit-fueled growth of late will not be revisited anytime soon, especially during a period where bank failures continue to climb, mortgage defaults aren't looking any better, and consumer access to credit remains restrained. almost all of the previous drivers of explosive growth are absent and unlikely to return anytime soon

unemployment will likely reach a secularly high new level in the 6-8% range, growth will likely only in the 2-3% range rather than 4-5%, and its difficult to state the importance of a benign interest rate cycle over the past 25 years. interest rate cycles move at a glacial pace and i think its very likely that we'll see much higher rates moving forward than investors became accustomed to during the mid-late 80's, 90's, and early 00's. multiple compression seems like an almost certainty moving forward, particular as emerging markets continue their shift towards domestic organic growth.

the contributions to GDP made by the financial sector (look at its contribution to corporate profits since 1980) and construction were enormous and you're fooling yourself if you think we can shake that off overnight. bank credit growth is still moving at a snail's pace, not to mention credit card lending and mortgage finance (wait until the effects of treasury purchases subside- if you need a mortgage, apply now)

also, on (3), fannie and freddie are essentially insolvent and sitting on huge piles of toxic assets and will likely need further capital infusions. the combined value of all of those stakes is infintesimal compared to the ruinous entitlements the government faces moving forward, not to mention any added expenditures from a healthcare or energy reform. even if AIG, FNM, FRE, GM, et. al. enjoy run ups of historical proportions and the government can exit at a profit in an orderly fashion (quite the assumption) it wouldnt come remotely close to funding social security and medicare down the line. you're looking for the evidence you want to hear and ignoring the glaring realities of the situation.

Fannie Mae's Results: Dismal

yes, because short term trading results imply causality

great call ace

What Investors and Traders Should Do Right Now

the valuations and earnings of '08 are unlikely to be revisited anytime soon for a number of reasons.

super-charged leverage, historically low interest rates, and seemingly unlimited risk appetite amidst an environment of 4-5% gdp growth and 5% unemployment. if you think this is what the american economy is going to look like moving forward, ill definitely take the other side of that bet.