The Inflation Tsunami

It's in America's best interests for the dollar to depreciate. It will stimulate trade and demand for American goods. Don't be surprised if in a year or two the dollar to euro conversion rate is 2:1.

Credit Crisis: Episode II: The Empire Strikes

The $700 billion bailout sets the stage for the third episode, Revenge of the Market Makers.
Actually, episode I should have been called A Phantom Menace? Followed by Attack of the Fed, Revenge, and the rest fits as by that time we won't be in the same Universe anymore anyway:
Episode IV - A New Hope
Episode V - The Empire Strikes Back
Episode VI - Return of the Jedi

Credit Crisis: Episode I: No Hope

I created a Star Wars crawl on the credit crisis, with the text from this AP story. I think Lucas could do wonders with a movie...

Update: The site was closed due to a Lucasfilm C&A. It was fun while it lasted. Maybe some day Mr. Lucas will charge us only $.99 to make our own. [7/11/08]

Update: The AP story is now gone. I found it, or what I think is the story on http://floridaloanspecialist.wordpress.com (searched for home foreclosures June 5, 2008 associated press on Google). [9/24/08]

WASHINGTON (AP) – June 5, 2008 – Home foreclosures and late payments set records over the first three months of the year and are expected to keep rising, stark signs of the housing crisis’ mounting damage to homeowners and the economy.
The latest snapshot of the mortgage market showed that the proportion of mortgages that fell into foreclosure soared to 0.99 percent in the January-through-March period. That surpassed the previous high of 0.83 percent over the last three months in 2007.
The report by the Mortgage Bankers Association also found that more homeowners slipped behind on their monthly payments.
The delinquency rate jumped to 6.35 percent in the first quarter, compared with 5.82 percent for the three months earlier. Payments are considered delinquent if they are 30 or more days past due.
Both the rate of new foreclosures and late payments were the highest on record going back to 1979.
Jay Brinkmann, the association’s vice president of research and economics, told The Associated Press that the slump in house prices was the biggest factor for rising foreclosures and late payments.
With prices expected to keep dropping, foreclosures and late payments “are going to continue to go up” in the months ahead, he said.
Homeowners with tarnished credit who have subprime adjustable-rate loans took the hardest hits. Foreclosures and late payments for these borrowers also swelled to all-time highs in the first quarter.
The percentage of subprime adjustable-rate mortgages that started the foreclosure process climbed to 6.35 percent. The rate was 5.29 percent in fourth quarter, the previous high.
Late payments rose to 22.07 percent from 20.02 percent, the previous high.
The association’s survey covers just over 45 million home loans.
More problems also cropped up with loans to more creditworthy borrowers.
The percentage of such loans falling into foreclosure was 0.54 percent, compared with 0.41 percent at the end of last year. Late payment rose to 3.71 percent, compared with 3.24 percent.
The numbers were higher for prime borrowers with adjustable rate mortgages. The proportion of those loans falling into foreclosures jumped to 1.55 percent from 1.06 percent. The delinquency rate rose to 6.78 percent, compared with 5.51 percent.
“The number one problem is the drop in home prices,” Brinkmann said. Declining prices, especially in newer built areas, “are hurting people’s ability to recover when they run into trouble – a divorce or loss of job,” he said. “In other days, you could sell the home. But because home prices have fallen so much, in many of those cases, the homes are going into foreclosure.”
California, Florida, Nevada and Arizona accounted for 89 percent of the total increase in new home foreclosures, he said. Those are places where prices have fallen sharply and there was a lot of home building, creating too much supply, Brinkmann said.
The housing crisis is at the center of the country’s economic troubles.
After a five-year boom, the market fell into a deep slump two years ago. That dragged down sales, and prices with it. As the value of homes plummeted, many newer homeowners found themselves owing more on their mortgages than their homes were worth.
Homeowners with adjustable-rate mortgages were clobbered when their initially low rates reset to much higher ones. That made it difficult, if not impossible, to keep up with monthly mortgage payments.
As foreclosures and late payments climbed, financial companies took multibillion losses when their investments in mortgage-backed securities soured. A credit crisis erupted and spread, crimping other types of financing. The fallout plunged Wall Street in turmoil, disrupting the normal functioning of markets.
All those troubles have pushed the economy to the brink of a recession, if the country isn’t already in one. Consumers and business have tightened their spending. Employers have cut more than a quarter-million jobs in the first four months of this year.
To bolster the economy, the Federal Reserve made aggressive interest rate cuts. That has helped homeowners facing rate resets on their adjustable-rate mortgages. But with inflation on the rise, Fed Chairman Ben Bernanke this week sent his strongest signal yet that the central bank’s rate-cutting campaign that started in September is coming to an end.
The Bush administration has taken steps to help distressed homeowners. It has urged lenders to freeze rates for some homeowners and encouraged lenders to rework mortgage terms so troubled borrowers can stay in their homes.
Congress is considering giving government-backed mortgages to thousands of strapped borrowers. The White House has expressed some concerns.
Source: ap.org

Oil

Oh yeah, and oil would be up to $135 a barrel, which a year from now, will seem pretty cheap, when we're paying $6 a gallon at the pump, and there are riots in the streets that Homeland Security is suppressing. Maybe the conspiracy theorists aren't so crazy after all.

Update: At close to $150 a barrel, $135 sounds cheap! [7/11/08]

The Economy: One Year Later

If I told you last year that housing would drop, major lenders like Accredited Home Lenders and New Century Financial would be gone, Countrywide would be absorbed into Bank of America, Bear Stearns would be bought at fire sale prices by JPMorgan, investment brokers and banks would write down record losses, the Fed would cut a combined total of 3.25%, finance the Bear Stearns take over, and virtually photocopy money for banks, would you have believed me?

Poole retires, Bullard on board

St. Louis Fed Names Bullard to Succeed Retiring Poole (Update2)

Bullard's published research indicates that he, like Poole and Fed Chairman Ben S. Bernanke, espouses a numeric inflation goal. A research paper that Bullard co-wrote last year said that ``independent central banks will set low positive inflation targets in economies that possess highly developed financial markets.''

In a research paper titled ``A Model of Near-Rational Exuberance,'' written in March 2007, and revised in January, Bullard and his co-authors said that too much reliance by economists and central bankers on their own judgment has drawbacks.

Drawbacks, yes-- namely, they can't stop relying on their own judgment. If they did, the Fed wouldn't have bowed to market pressures and lowered rates, setting the stage for the impending CPI bubble and the hyperinflation that will follow.

Where Is the Next Bubble?

The next bubble: Priming the markets for tomorrow's big crash

Trimming the Investment Firms

Last week, the Times had a great article explaining the credit mess to the layperson:
Can’t Grasp Credit Crisis? Join the Club

Today it came out with another good article:
What Created This Monster?

I thought a hedge fund would collapse-- I didn't know an investment firm would.

I disagree with the first article that the crisis has been going on for 7 months (which would mean it started in September)-- I think it started in August with the first big dip in the market.

More news that the crisis is spreading into other areas of credit:
CIT Taps Credit Lines and Talks of Asset Sales

Time to short Visa?
Visa Has a $45 Billion Debut on Wall St.

The trend for IPOs these days is to start them off big, then bleed them [investors] dry:
The Blackstone Group

(Which I always confuse with Blackrock, Inc, which is on the good side of this equation.)

Reminds me of the end of the tech boom.

Finbar Taggit

Yahoo Finance Tech Ticker had a video on Finbar Taggit, a hedge fund blogger that anonymously corrects incorrect stories in the press about hedge funds. See the video above, or the link for the story.

Some buzzwords:

• Rebates
• Performance fee
• Large ticket
• Lock ups
• Side letters
• Side pockets
• Seed capital-- $40MM used to be enough for investors from Goldman Sachs and Morgan Stanley, but now they want to see at least $100MM in your startup fund before recommending you. The average investor won't invest in a hedge fund unless it has at least $125MM in it. As he says, the days of starting a hedge fund with just a laptop are over.
• Risk/Reward criteria
• Market neutral

He says that contrary to popular belief, the credit crunch that started in August of last year was not due to hedge funds, but caught most of them in the muck with the rest of us. Now hedge funds are not finding many investors due to the "safety issue" of cautious investors, scared of the markets.

August may be a good model for January [Update 2]

I thought about posting this yesterday. Jeremy Siegel's Yahoo Finance column, "Why Bernanke's Critics Have it All Wrong," posted August 29, 2007, lays out the financial meltdown that started in August. Then, Bernanke surprised the market with a 50 bps federal funds rate cut.

No one likes to call a bottom for fear of being wrong, but the .75% rate cut just announced by the Fed may be enough to float the markets up for another 6 months. I like what Boris Boehm of Germany's Nordinvest said, as quoted in the Times, "There’s an old saying in the market that banks lead us into recession and banks lead us out."

Love 'em when they're up, love 'em when they're down

Citigroup lost $9.83 billion in the fourth quarter.

Merrill lost $9.8 billion in the fourth quarter.

No wait, make that $16 billion.

Yet Merrill paid $15.9 billion in compensation and benefits to 64,200 employees.

Seems like they should have nixed the bonuses and they would have come out even. Glad I'm not a stockholder. Looks like the only industry not accountable to stockholders are the brokerage firms.

And here it is: Goldman, like cream, rises to the top

Goldman Sachs Rakes in Profit in Credit Crisis
While other firms tumble and fall, Goldman rises with profits from their hedges against toxic mortgage backed securities.

Meanwhile,

Fed fund futures show traders see a 90 percent chance the central bank will reduce its target a quarter-percentage point to 4.25 percent at its Dec. 11 meeting, 67 percent odds of another 25-basis-point cut in January, and a 43 percent likelihood the rate falls to 3.75 percent in March. Policy makers already lowered the target from 5.25 percent in August.

So, unless Bernanke feels like bucking the trend, expect to see further rate cuts, no matter what the other Fed governors say.

Simple, but not easy

A billionaires' guide to investing.

Hedge funds normally charge fees of 1.5 to 2 per cent of the asset value plus 20 per cent of the return. Their own fees make it hard for them to deliver the goods.

Mr Oldfield quotes the decline of the first hedge fund, A. W. Jones. In December 1968 it had $200 million under management: in September, 1970, that had fallen to $31 million. Later George Soros was to rebuild the reputation of hedge funds but there remain questions about whether they can find the exceptional talent they need and whether clients will pay their fees.

Don't believe the hype

OPEC Interested in Non-Dollar Currency
Do you believe the behind the scenes leaked news that OPEC members want to support the dollar, or the posturing by Iran's Ahmadinejad and Venezuela's Chavez, who have blatant political motives for creating a new world standard for pricing oil? I'll go with door number 1. Nevertheless, oil will price over $100 this week.

[Added 11/19/2007] Note that this was only the third time that a full OPEC meeting has occurred with all members and states since the committee was formed in 1960. What does that say?

Saudis don't want the US dollar to collapse

Saudi Arabia Won't Include U.S. Dollar in OPEC Talks
Good thing it was accidentally broadcast to journalists.

86% chance fed will cut rates in Dec: take the pain now or later?

Fed's Kroszner Says `Rough Patch' Won't Warrant Cuts
This is exactly what I was expecting in September, but instead of holding steady, the Fed cut rates by 50 bps. So now they are saying they want the economy to weather the rough waters of the coming months, and probably all of 2008. The 5-headed monster Fed is testing the waters by letting the Fed governors speak freely. First Poole says that only a calamity would force a change in Fed policy, then the 50 bps cut, then Miskin's the man to watch as his guidance has more closely followed what the Fed did, now Kroszner pops his head above water.

First the recession is imminent. Then there's a 30% chance. Now no one is sure.
One thing may be sure: earnings next year doesn't look too good. However, I'm investing in ROW stocks. That's stocks that sell to the Rest Of the World more than the US.

Hedge fund collapse? Why not banks and brokerages instead? Why not cities and towns?

Florida Holds $2.2 Billion of Debt Cut to Junk Status
This article goes over the how mortgage-backed securities are threatening some cities and towns that invested in them. But buried at the end is a little history on the collapse of banks and brokerages. Not exactly the hedge funds I was looking for, but tragic enough:

Potential losses by states are part of the subprime meltdown that shook up Merrill Lynch & Co., the world's biggest brokerage, in October. The firm reported a $2.24 billion third- quarter loss and an $8.4 billion write-down, leading to the firing of CEO Stan O'Neal.

Executives Step Down

The next week, subprime losses reported by Citigroup Inc., which at the time was the largest U.S. bank by market value, led to the departure of CEO Charles Prince.

In June, two bear Stearns Cos. hedge funds holding subprime debt reported losses of $1.5 billion. Bear Stearns fired Warren Spector, the firm's co-president for fixed income and asset management and the bank's stock lost 30 percent of its value in the following two months.

Bernanke: Fed will respond "as needed"

Bloomberg report.

Fed speaks II

Lacker says the mortgage crisis isn't over yet. I say just wait until next year's rate cuts. Dissention in the ranks by non-voting members. If it gets much worse you may see more regulation in the mortgage market.
Warsh is waiting for more information.
Poole says we may need more cuts, which worries me, because he was against this before the first one.
Instead of Greenspan, now we have a five-headed monster to deal with when attempting to decode future moves.

Miskin Speaks; Fed outook is as volatile as the markets

Miskin spoke to the House Small Business Committee. Bloomberg report. Reuters. Looks like he's taking back what he said about taking back the Halloween rate cut. "Wait and see" seems to be the tone of this cautious Fed. Later today we'll hear from Warsh, Lockhart, and Poole, then Bernanke tomorrow.

98% bet that Fed will lower fed funds rate 25bps tomorrow

Quotes From Fed Officials on Economy

Hopefully they will surprise again with a 50 bps cut. The bursting of the housing and credit bubbles, compounded with China's "irrational exuberance," according to Greenspan, will hopefully inspire the Fed to be more aggressive, but the comments above suggest otherwise. If there is no cut, the market will fall. The 25 bps cut is already priced in. People may take profits if this happens. If it's a 50 bps cut, the market will rally.