Archive for the ‘Economics’ Category

Is a low housing start number in this housing market is a bad thing?

Thursday, April 16th, 2009

We’re looking for “green shoots” in areas that got us into trouble in the first place – excessive consumption, mis-allocated capital, and a trading mentality. We’re celebrating firms like Goldman and JP Morgan because they made good trading gains while credit to the real economy continues to be cut.

If you believe like the Administration and Wall Street that we’ve got a “confidence” problem, then growing housing starts indicates improvement. If you that we have a structural problem with the economy, then a drop in building over-supplied assets is actually good news.

Lower housing prices can be a good thing because it means that workers can prosper at lower compensation levels, which means that we can start regaining cost advantages relative to our trading partners and taking back industry lost as well as creating new industry. All it would take would be to let the zombies on Wall Street go under.

Why we can not allow AIG to fail

Sunday, March 8th, 2009

Many Americans are tired of giving money to AIG. It does not seem to be making things better. However, if the government were to allow AIG to collapse, the rest of the economy would go with it.

AIG is a different kind of animal when compared to the Bear Sterns and Lehman Brothers. Those companies were allowed to collapse because they were more or less self contained. As an insurer, AIG has its hands in way too many cookie jars. Many large and somewhat stable companies have assets that are backed by AIG, if you remove AIG from the equation, these stable companies are now are a huge risk to default themselves. There credit ratings will suffer and you would see another Bear and Lehman like spiral.

The government will keep pumping in capital until the nasty spiderweb that AIG has created can be untangled and bankruptcy can occur gracefully. Until then, get used to the abyss of soul sucking sorrow that is AIG.

It seems that AIG has been a major underwriter of Mortgage Insurance. Of course, in keeping with the times, they were fraudulent about the underwriting of these policys.

AIG categorized its instruments as Credit Swap Defaults, rather than the Mortage Insurance that it really was, because they did not have the liquid assets to qualify these instruments as Insurance.

Say bye to AIG and there would be a domino effect throughout the international banking industry, as many institutions far and wide hold what they think, and are counting on as positive assets, would be in fact worthless.

Here’s the problem: if you insure against loss in a case where a catastrophe can hit almost all your insurance customers are once, you’re screwed.

Was AIG dumb? Yes. Did they understand the risks they were taking? No.

But now look at who bought the insurance. Banks that were trying to hedge their exposures. Did they understand the counterparty risk they were taking by using AIG? No… but AIG was rated AAA so they thought there was no risk.

How much money has the Government handed over to AIG? And how many installments have already been made? I lost count, but one cannot help but notice this repetitive propping up of AIG at any cost. I think I understand why.

Expect the recession to get much worse

Saturday, February 28th, 2009

Check out the unsold inventory numbers – Reductions in demand were so steep in December that producers were not able to stop in time. That Inventory will be standing there for quite some time, When the quarter gets re stated in 180 days (like they always do) the decline will have been sharper.

Better (as in more current) indicators of actual economic activity would be found looking at Commercial Rail traffic trends or miles driven. Total traffic is down over 16% y-o-y. That suggests that second quarter GDP will be much worse than 4Q08.

The impact of global declines has not yet fully hit our economy. Only one of several reasons why the “this is good, we will now rebound faster” idea is not sound this time around. Many were surprised when at the end of last year, economic data was not as bad as they projected. Part of the reasons was that the excess inventory problem had not fully hit the market. Expect it to hit soon, and hit hard.

It’s a pretty vicious spiral. Consumers don’t buy goods from stores. Stores have inventory sitting on shelves and warehouses, so they don’t buy from manufacturers. Manufacturers don’t get the capital to produce goods (since no one is purchasing). To make end meets, they lay off workers. These workers (consumers) are unable to purchase goods from stores. Hence the spiral.

Add another dimension – the warehouse concept for retail is built on turns per square foot. If people aren’t buying, each marginal purchase picks up cost per square foot. Lower margins can only last for awhile, especially when leverage has been used to fund the stores. Then, take it a step further in regards to the cost function of the supply chains that are no longer at optimal levels. When you have a system that depends on stability, there is no way to forecast the impact of our present instability.

Sophisticated and large supply chains are narrowly optimized (ODE/PDE) and all the hubs, spokes, trucks, rail cars, depots, warehouses and racks and the people within are built to a forecast demand point which squeezews all excess out of the system within a narrow range of the demand forecast….but change the demand forecast downward in a somewhat significant way and the fixed and semi fixed costs escalate all out of proportion to straight line revenue declines.

1.5% interest rate on mortgages?

Tuesday, December 9th, 2008

What do you think of this idea to give every American a 1.5% mortgage. It would kill banks that are already hurting but would it help the economy overall?

One look at the current subprime meltdown

Friday, November 21st, 2008

This article is worth reading, all 9 pages of it. Wait until you get to page 7…

Reasons the economy is not real close to recovery

Thursday, October 9th, 2008

1) We are only now begining to witness the unemployment numbers catch up to the financial crisis. This months 6% was vastly understated, and reflects among other things people giving up on searching. Those numbers will spike dramaitically over the next 2-3 quarters. In other words, people have just started losing their jobs. That will also lead to declining wages, so less people working and those working earning less.

2) Most of the adjustable rates taken out at the peak have yet to reset, meaning we will soon be inundated with tons of the types of adjustments that have already crashed the financial markets to date.

3) Many millions of people, even were they willing, are no longer capable of receiving financing. Those days of easy credit are gone, and lending standards have and will continue to tighten drastically. Meaning les competition for homes, already flooded with unpurchased homes, unbought new construction, and foreclosures.

Speculators influencing oil prices more than some thought

Monday, August 25th, 2008

Yes, a speculator can obviously lose money but in a bull market the only sure loser is the end purchaser of the commodity. For this reason, regulators want to make sure that private parties and the speculation isn’t screwing the regular people too much.

This article shows how they failed. It seems Vitol had as much as 11% of oil contracts regulated by the New York Mercantile Exchange.

Naturally it’s becoming a political issue: “It is now evident that speculators in the energy futures markets play a much larger role than previously thought, and it is now even harder to accept the agency’s laughable assertion that excessive speculation has not contributed to rising energy prices,” said Rep. John D. Dingell (D-Mich.). He added that it was “difficult to comprehend how the CFTC would allow a trader” to acquire such a large oil inventory “and not scrutinize this
position any sooner.”

Regulators getting fooled in the oil market

Friday, August 22nd, 2008

Yes, a speculator can obviously lose money but in a bull market the only sure loser is the end purchaser of the commodity. For this reason, regulators want to make sure that private parties and the speculation isn’t screwing the regular people too much.

This article shows how they failed. It seems Vitol had as much as 11% of oil contracts regulated by the New York Mercantile Exchange.

Naturally it’s becoming a political issue: “It is now evident that speculators in the energy futures markets play a much larger role than previously thought, and it is now even harder to accept the agency’s laughable assertion that excessive speculation has not contributed to rising energy prices,” said Rep. John D. Dingell (D-Mich.). He added that it was “difficult to comprehend how the CFTC would allow a trader” to acquire such a large oil inventory “and not scrutinize this position any sooner.”

Explaining long term interest rate increases

Wednesday, June 18th, 2008

Question: Why the uptick in interest rates. I would think with the Fed rate as low as it is, that 30 Year fixed rates would be around 4-4.5%. I see this morning it is around 6.3%.

Answer 1: Short-term interest rates, such as the Fed Funds rate, are rates charged for loans of a year or two or less. Home mortgages, on the other hand, are typically 15-30 year loans, although on average they are paid or refinanced in 8-10 years.

Over the course of ten years the cumulative impact of inflation will be much greater than it will be over just one year. Think about it: if you as a lender are receiving a fixed payment of say $500/month, how much less will that $500 buy you ten years from now than it will today?

You, I and the markets are seeing evidence of increasing inflation every day. It was reported by the government today that wholesale costs for producers and manufacturers increased over 7% over the prior twelve months. That’s signficant.

So when inflation is rising, longer term interest rates rise in tandem to compensate lenders for the risk that inflation will make the future payments they receive worth less.
Several things are going on.

Answer 2: First, mortgages are priced off of the 10-year Treasury, which is yielding 4.25%, while short-term rates are set in comparison with Fed Funds, which is 2.00%.

Second, 10-year Treasury yields have moved up as investors became more worried about inflation, and stopped expecting the Fed to keep lowering short-term rates. The 10-year Treasury yield bottomed out at around 3.30% in March, so it is up nearly 100 basis points.

Third, banks aren’t all that willing to lend, as they work on fixing their balance sheets. Meanwhile, investors in agency debt and mortgage-backed securities, which help set the interest rate on conforming loans, are requiring more of a risk premium over Treasury yields than they did before the credit “bubble” started to collapse last year.

Finally, while the slope of the Treasury curve has flattened recently, it is still a lot steeper than it was last year in the midst of the credit bubble. In other words, investors are demanding a lot higher yield on long-term debt relative to short-term debt than they did a year ago.

Bankrupt retailers indicate trouble for US economy

Saturday, May 3rd, 2008

Interesting NY Times article here about the retailers going out of business or closing stores to stay in business.

Figures released on Monday showed that spending on food and gasoline is crowding out other purchases, leaving people with less to spend on furniture, clothing and electronics. Consequently, chains specializing in those goods are proving vulnerable.

In short, consumers are still spending money – however we spend so much on gas and food that we don’t have much left over for the local shopping mall.