Chris White

China's Inflation Hits American Price Tags

And the 'toxic' financial products the US has sold them? Inflationary or not? What do you think? If inflationary for China, how about for the US too? If not, why the discussion about moving away from the dollar? Oh, and what about the dollar? how would you feel about one of your major assets losing more than 40% in the last few years? That might be inflationary too, wouldn't you think?

There might be others who think there in the same position as China, mightn't there?

Probably be a good thing to look at both sides of the story, or maybe just more than one side. There might be some benefit from that, wouldn't you agree?

Who Is Jerome Kerviel?

How on earth can anyone in their right mind tell the difference between what this one guy was doing from what everyone else who does the same thing every day in this 600 trillion dollar whatever it is does?

Putting a face on the functionary who was playing with 70 billion whatever kind of concretises stuff. But, please, who is going to compare his 'losses' with the 'write downs' at Citi Merrill and who knows where else? What's a write down if not a leveraged bet gone bad?

LIBOR: What's the Big Deal?

I can understand LIBOR and inter bank lending. It was also one of the rates used to calculate those "flow of funds" mortgages which could adjust every month, provide flexible payments and amortize negatively. How does LIBOR function with respect to money markets (currencies) and the other commodities which are traded in London? How do those London markets relate to NY and Chicago?

Or, what might be the relation between the custom built derivatives and the futures, options and indices for currencies, bonds mortgages and commodities which are/were traded in various places?

How do the hedges between these different "sides" of the derivative world work? How do they impact the asset/liability structures of the financial system.

May the LIBOR matter not indicate, perhaps, some major dislocation developing in the interstices between these different markets, tradeable instruments, and the world of hedged on and off balance sheet liabilities?

Housing is No Different in Portland and Seattle

On the moth ball strategy. You'd have to know the details to be definitive. The main one is when they bought the land and at how much per acre. What if they bought 10 years ago? Then the cost of building the houses. They order materials in bulk, for parts of a project, not per unit, so total costs are divided by total acres/units. Labor costs, probably migrant, so on the low end of the scale. Finishing houses is a way of protecting the investment in the land, and other sunk costs. A house without a roof or windows, with holes through the walls for utilities and stuff doesn't weather too well, and is quickly worth a lot less then when it was abandoned. If they've paid local government for water and sewer hook-ups at what they thought was a favorable price, why not use the hook-ups instead of running the risk of losing them?

So their position vis-a-vis the current pricing curve may not be anything like what you'd think at first sight. And their behavior may give some clue about the relative weights of their sunk costs and expected loss in pricing 'power.'

Big Ben Panics and Gold Responds

Drilling down through the derivatives, structured products, cdo's and whatever each is hedged against or swapped for down at the bottom of the heap will be found someone who took out a mortgage to buy a house. The security for his mortgage is the house. As they used to say "if you pay you stay, if you don't you won't".

Suppose, pre-Greenspan's interest rate reductions, the 'house' would have sold for around 250K. There will be an 80% first and some mix of down payment and second for the balance. After the rate decreases and the mania the price may have gone north of $700k. The owner has no equity in the property. His income is the same as the guy who bought it at 250K.

The housing market turned in the summer of 2005. By last summer it was clear that sales had collapsed nationally. By this summer as inventories move beyond 11 months worth of sales at current levels we now know we're in a buyer's strike. Buyer's are waiting for the excesses to be wrung out of the system.

That may get resolved by what might come next in housing when the "sellers' panic"."Let's do what we have to do to sell, never mind holding on for price."

Already the equity in the $750k house should have been marked down. When the sellers' panic begins the mark downs will head back to where these houses were priced before Greenspan started his thing.

With the buyer's strike and houses not selling it is not possible to know what the mortgages at the bottom of the heap are worth because there is no value for the asset securing the mortgage. They aren't worth anything because no one wants to be holding the asset when prices collapse. Anyone lending today is not only going to need a really qualified buyer, with real income and documentation to back it up, they will also want to build in protections against the sellers' panic which will set prices much, much lower.

This problem cannot be dealt with in the credit markets either by interest rate reductions or repos and fractional lending. That will produce digital Weimar inflation even while the properties securing the asset class and everything leveraged against it continues at zero. That's when the Fed goes into the business of property management and becomes the country's landlord. Somehow that doesn't seem like anymore of a solution than having the banks take over the properties.

Last time anything like this happened they had to wait for the 'holiday' that cleaned out the financial part of the mess, which included converting what they then called "balloon" notes into 30-yr self-amortizing paper. This gave banks an income stream and kept people in their properties. Nowadays you'd have to forget about all the fancy structured stuff, and just replace the computers its all on with new ones with clean hard drives. But people get attached to all the bits and bites they say are making money for their employers.

Market Sinkhole Alert: Look Out Below

Money is coming in from the Fed. They announce they are doing it. The banks involved can multiply the amount the Fed puts in by whatever reserve ratio they're using, and buy stocks. It is two week money. Isn't that why the Fed is providing the money? Or do they have some other reason do you think?

Of course banks leveraged up the hedge funds by lending to them. Some think banks could be holding say $6.4 trillion worth of hedge fund debt. That's like between 30 and 40 per cent of the capitalization of the stock market. Could be a motive for them to own some stocks for a while too.

The amounts in Europe are much bigger but the effect depends on the reserve ratios used.

We're lucky to have computers. With hundreds of billions being pumped into banks by central banks we probably no longer have enough wheel barrows to move all the money around. Good job inflation is still under control.

Market Sinkhole Alert: Look Out Below

I agree with your view of the sink-hole. I think you are right to point out that officials are acting as if they are unaware.

The actions taken by the ECB today, and their stated intent, imply an awareness of a "problem" which might assume that the something which is amiss is as many orders of magnitude more serious than thought here as the difference between the funds provided by the ECB and the Fed through their market operations.

The orthodoxy is tht derivatives spread risk and permit hedging etc. The evaporation of the asset class on which the risk spreading is based, and I don't mean the mortgages but the indeterminate pricing of housing and the lack of certainty in the repayment income streams reverses the risk profile which has been securitized sold around the world and provided the basis for trades against commodities, interest rates and currencies.

It will be extremely interesting I guess to watch the discussions between major oil and gas producers and the large scale consumers of their product. At what point do "market mechanisms" which are part of the compromised derivative structure, get replaced by long term state to state deals, as people realize that while dollars are easily come by there's no longer much that can be done with them?