One of the problems with out of control government spending is the way it affects the behavior of government itself. Like any other junkie, the government convinces itself it needs "just one more" fix and will do anything to get it. Again like a junkie, the government will prostitute itself and steal from friends and family to keep the drug supply coming.
We see a glaring example of the later when governments simply grab private property in order to pay off their own debts. We have already seen the precedent for pensions being seized by government. Just last week in Hungary the government grabbed $14 billion in private assets. Over the weekend, the Irish government decided to take 15 billion Euros from the future pensions of its citizens to give to the banks. Now France is taking 36 billion Euros from the pension fund to keep its bloated and unsustainable welfare state afloat for just a little while longer.
People need to understand that the United States is not immune to the same financial pressures that caused Hungary, Ireland and France to take these desperate measures. If you are counting on a future pension from the state, you might wish to start making alternate plans. In most states, there is effectively zero chance that you will get everything promised - the state government pension funds are already over $1 trillion in the hole. The gap will only grow as additional obligations are incurred but little new money is available to meet them from the state budget side. It would be completely unsurprising if the more desperate and foolish states attempted to raid these pension funds to "invest" in more unemployment payouts or other attempts to fund general budget spending.
Of course we won't have that problem with Social Security since it is funded entirely by current taxes. Since no such pension fund exists, we don't have to worry about the government grabbing it. Of course that raises the question of which assets the will try to take since the same financial imperatives and the same junkie behavior are at work in Washington as in Budapest, Dublin and Paris. That said, we need to be vigilant for any sign that similar asset seizures are imminent here in the United States since the precedent has already been set. We have been warned by events across the pond.
Showing posts with label debt. Show all posts
Showing posts with label debt. Show all posts
Monday, 29 November 2010
Monday, 7 June 2010
THe Keynesian Comeuppance
During the current economic crisis, most of the major countries have tried to spend their way out - either with government programs funded with new debt or by forcing debt directly into the private economy through guarantees, regulations and action by quasi-government bodies. We discussed the implications for China in Command and Control and for the US in The Federal Funhouse. These initiatives were based on Keynesian economic theory - that government should make up for any shortfall in private demand by spending (likely
incurring deficits) sufficient to stabilize aggregate demand.
This is a temporary band aid at best and the governments and central banks were hoping to buy time and convince everyone that things were OK so they should go out and spend. This was doomed to fail as prior private demand was based on nearly universal lending at suicidal risk levels. One of the key objectives of Financial Jenga was to document the extent of the madness in credit. Enough people have seen through the wishful thinking so that there will be greater caution on the part of both borrowers and lenders for the foreseeable future.
The massive deficits that various governments have run can only be sustained as long as there are lenders out there willing to finance them. Several bond auctions have failed or nearly failed in the last several weeks. Now we see the appetite for debt drying up and some key nations beginning to talk about austerity. A good example is this statement from the G-20 Meeting Communique:
Bux Populi
Austerity is the new watchword and it is showing up first in places where governments either have their backs to the wall or are less under the influence of the banks. Yet even here in the US, where we have the best government the bankers' money can buy, things are starting to change. Actual voters concerned about the rapidly growing deficit seem to be a stumbling block to Congressional spending with less than 6 months until the elections. Web-based My Way News reports:
The difficulty financing our debt led the Obama Administration to float several proposals for major tax increases in an effort to convince bond buyers that there would be enough tax revenue to support the debt. This included a VAT. Notice how little we have heard about that and other taxes since the Euro crisis made the dollar and Treasuries the only game in town. Even so, the easy period of debt finance is coming to an end - even for the US government. Washington had best not expect to fund large deficits easily into the indefinite future.
A lot of bankers have to be asking themselves a question. If governments are cutting back, who is going to bail me out?
incurring deficits) sufficient to stabilize aggregate demand.
This is a temporary band aid at best and the governments and central banks were hoping to buy time and convince everyone that things were OK so they should go out and spend. This was doomed to fail as prior private demand was based on nearly universal lending at suicidal risk levels. One of the key objectives of Financial Jenga was to document the extent of the madness in credit. Enough people have seen through the wishful thinking so that there will be greater caution on the part of both borrowers and lenders for the foreseeable future.
The massive deficits that various governments have run can only be sustained as long as there are lenders out there willing to finance them. Several bond auctions have failed or nearly failed in the last several weeks. Now we see the appetite for debt drying up and some key nations beginning to talk about austerity. A good example is this statement from the G-20 Meeting Communique:
The recent events highlight the importance of sustainable public finances and the need for our countries to put in place credible, growth-friendly measures, to deliver fiscal sustainability, differentiated for and tailored to national circumstances... We welcome the recent announcements by some countries to reduce their deficits in 2010 and strengthen their fiscal frameworks and institutions.Clearly, the finance ministers are signaling a new mood of fiscal responsibility here - in sharp contrast to the "stimulus" measures that have previously reigned. This change in emphasis is further reinforced by the recent statements from two key European governments. From the UK we have (Prime Minister) "Cameron warns of painful cuts to tackle debt" as a headline. In Germany, Chancellor Merkel is cutting the budget by nearly $100 billion according to Bloomberg. This is not only a sharp contrast with the Keynesian program here in the US, it is a direct slap in the face of Tim Geithner at Treasury and the entire Obama Administration:
German Chancellor Angela Merkel’s Cabinet approved levies on banks, air travel and nuclear-power plants as part of what she called an “unprecedented” round of budget cuts, rejecting U.S. calls to spur growth.
Bux Populi
Austerity is the new watchword and it is showing up first in places where governments either have their backs to the wall or are less under the influence of the banks. Yet even here in the US, where we have the best government the bankers' money can buy, things are starting to change. Actual voters concerned about the rapidly growing deficit seem to be a stumbling block to Congressional spending with less than 6 months until the elections. Web-based My Way News reports:
Obama's proposed $250 bonus payment to Social Security recipients was killed by the Senate. Also gone is an $80 billion-plus Senate plan that promised money to build roads and schools, help local governments keep teachers on the payroll and stimulate hiring in the home improvement industry with rebates for homeowners who make energy-saving investments.The Federal Government has been able to finance large deficits so far. Partially this results from capital flight as Europe's problems become more apparent. Part of the equation is an increased preference for Treasury bonds over stocks and lower-grade private bonds. Finally, there is the large-scale purchases of MBS by the Fed, which has indirectly funded Treasury auctions by putting more money into the hands of bond buyers and Primary Dealers. Despite a very favorable environment for Treasury bond demand, huge issuance pushed yields upward until the recent resurgence of Europe's problems.
Just last month, deficit concerns killed $24 billion in fiscal relief to prevent state workers from being furloughed. It was a measure that earlier had won initial votes in both the House and Senate.
The battle over extending jobless benefits for up to 99 weeks for the long-term unemployed typifies how the Democrats' jobs agenda has foundered. What originally was a $200 billion measure combining the jobless benefits with renewing popular business and family tax breaks was cut to $115 billion by House leaders after moderate Democrats who are particularly vulnerable in November refused to support it.
The difficulty financing our debt led the Obama Administration to float several proposals for major tax increases in an effort to convince bond buyers that there would be enough tax revenue to support the debt. This included a VAT. Notice how little we have heard about that and other taxes since the Euro crisis made the dollar and Treasuries the only game in town. Even so, the easy period of debt finance is coming to an end - even for the US government. Washington had best not expect to fund large deficits easily into the indefinite future.
A lot of bankers have to be asking themselves a question. If governments are cutting back, who is going to bail me out?
Sunday, 7 February 2010
The Non-Comparison
It seems quite popular in these days of crisis for certain commentators to compare struggling individual states within the USA to the troubled Eurozone PIIGS (Portugal, Ireland, Italy, Greece and Spain). ECB President and Apologist in Chief for the Euro Jean-Claude Trichet (and boy isn't that a bunch of Capitalized Words strung together) is a prime example. A couple of weeks ago in a speech about the Greek Financial Crisis his remarks were summarized by Business Week:
For perspective, let's start with raw numbers. The debt of the Greek government hit 300 billion Euros two months ago making headlines around the financial world. At current exchange rates, this is over $400 billion and is surely higher today. The total general fund debt of California is LESS THAN $85 billion as of January 1, 2010. So in absolute terms, the Greek Problem is nearly FIVE TIMES LARGER than California's. In terms proportional to the size of the respective economies, the disparity becomes even more striking.
Implications of Federalism
With a little thought, the reason for this disparity should be obvious. California's state government brings in tax revenue of just under 5.0% of GSP and plans to spend 5.5% of GSP in the FY 2010 budget. Greece taxed 32.2% of GDP and spent 43.0% of GDP in 2009 as estimated by the CIA World Factbook. The state government of California is not the top-level sovereign even within its own borders. Federal taxation and spending within California far exceeds the comparable activities driven by Sacramento. In terms of government impact on the economy, the key is at the Federal level, not the state. So in addition to California's government problems being a much smaller deal overall, the consequences of failure would also be less for the population than would be the case in Greece. We can safely conclude that Trichet's statement, while true at first blush was highly misleading in its implications. There is simply no comparison between the gravity of the current crisis in Greece and the looming one in California.
Having dealt with that nonsense, let's talk about the rest of the PIIGS. These are all similar, top-level sovereign situations. It would appear that Portual is next, with Spain not far behind from the trading activity in CDS and the rising risk premiums being demanded. Italy is not nearly as badly off and it may be unfair to lump them in with the rest of this group; the market appears to be taking note of that as well. And then, there is Ireland.
Celtic Hedge Fund
Ireland is in for a tough time. Their total external debt was 1,637 billion Euros (roughly $2.23 trillion) as of September 30, 2009 with an economy of $177 billion per the CIA. Irish banks alone account for 41% of the debt. Another way to express this is that their banks owe foreigners over 500% of the nation's annual GDP. Many financial institutions are counted in the "Other" category which is nearly as large in terms of foreign obligations. The largest components would be insurance companies and pension funds. In all, Ireland's financial sector probably owes nearly 1,000% of GDP to overseas entities. This is a time bomb comparable in design to Iceland but with many times the explosive power. This is another nation being run like a hedge fund but Ireland currently owes more than 30x as much as Iceland going into their meltdown.
None of this is to suggest that the US doesn't have truly huge problems. But let's not be distracted by specious comparisons involving the states. In the US, the fate of sovereign credit will be determined almost entirely by the actions of the Federal government and the market's reaction to them. In the Eurozone, that same process will be resolved in the national capitals and possibly also in Berlin. Barring a decision by Germany to bail out other members, individual European nations can and will choose austerity or default themselves.
A number of news outlets and blogger have echoed these sentiments so it behooves us to examine the validity of the comparison. On the pure surface level, Trichet is correct: California had a GSP of $1,850 billion in 2008, whereas Greece's GDP was less than one fifth as large at $343 billion. So we can conclude that he in not lying outright but what of the implied statement that California's financial problems are more important to the US than Greece's are to the Eurozone and EU? For this analysis we will leave aside the issue of the rest of the PIIGS.He [Trichet] also played down the importance of Greece's economy on the euro region, which he said represents less than 3 percent of the bloc's GDP, especially when compared with the size of a U.S. state such as California.
For perspective, let's start with raw numbers. The debt of the Greek government hit 300 billion Euros two months ago making headlines around the financial world. At current exchange rates, this is over $400 billion and is surely higher today. The total general fund debt of California is LESS THAN $85 billion as of January 1, 2010. So in absolute terms, the Greek Problem is nearly FIVE TIMES LARGER than California's. In terms proportional to the size of the respective economies, the disparity becomes even more striking.
Implications of Federalism
With a little thought, the reason for this disparity should be obvious. California's state government brings in tax revenue of just under 5.0% of GSP and plans to spend 5.5% of GSP in the FY 2010 budget. Greece taxed 32.2% of GDP and spent 43.0% of GDP in 2009 as estimated by the CIA World Factbook. The state government of California is not the top-level sovereign even within its own borders. Federal taxation and spending within California far exceeds the comparable activities driven by Sacramento. In terms of government impact on the economy, the key is at the Federal level, not the state. So in addition to California's government problems being a much smaller deal overall, the consequences of failure would also be less for the population than would be the case in Greece. We can safely conclude that Trichet's statement, while true at first blush was highly misleading in its implications. There is simply no comparison between the gravity of the current crisis in Greece and the looming one in California.
Having dealt with that nonsense, let's talk about the rest of the PIIGS. These are all similar, top-level sovereign situations. It would appear that Portual is next, with Spain not far behind from the trading activity in CDS and the rising risk premiums being demanded. Italy is not nearly as badly off and it may be unfair to lump them in with the rest of this group; the market appears to be taking note of that as well. And then, there is Ireland.
Celtic Hedge Fund
Ireland is in for a tough time. Their total external debt was 1,637 billion Euros (roughly $2.23 trillion) as of September 30, 2009 with an economy of $177 billion per the CIA. Irish banks alone account for 41% of the debt. Another way to express this is that their banks owe foreigners over 500% of the nation's annual GDP. Many financial institutions are counted in the "Other" category which is nearly as large in terms of foreign obligations. The largest components would be insurance companies and pension funds. In all, Ireland's financial sector probably owes nearly 1,000% of GDP to overseas entities. This is a time bomb comparable in design to Iceland but with many times the explosive power. This is another nation being run like a hedge fund but Ireland currently owes more than 30x as much as Iceland going into their meltdown.
None of this is to suggest that the US doesn't have truly huge problems. But let's not be distracted by specious comparisons involving the states. In the US, the fate of sovereign credit will be determined almost entirely by the actions of the Federal government and the market's reaction to them. In the Eurozone, that same process will be resolved in the national capitals and possibly also in Berlin. Barring a decision by Germany to bail out other members, individual European nations can and will choose austerity or default themselves.
Saturday, 1 August 2009
The Federal Funhouse
Washington DC has now become the linchpin of lies regarding the US economy. When one looks at the numbers, it is easy to see why this must be so. The Federal budget deficit is now running at somewhere between 14% and 15% of GDP. Because the administration has postponed the budget update past the mandatory deadline, we do not have any official figures so we must estimate based on other data but Americans should be quite used to that by now.
The latest Monthly Treasury Statement through June 30 gives us a lot of very useful data. Tax receipts are falling rapidly; for the fiscal year to date, taxes are down from $1,934 billion to $1,589 billion - a drop of 17.8%. The trend has been for the monthly numbers to get worse as the FY has gone on but if that applies to the full year then revenues will be $2,073 billion. The current budget estimate is just under $4,000 billion but will likely be higher as unemployment and related expense rise with a tanking economy. This leaves the US government with a $2 trillion deficit in a $14 trillion economy. In other words deficit spending is on pace to equal 14.3% of the economy.
Looked at another way, approximately one-seventh of the economy should not exist, currently exists only due to Washington spending money it doesn't have and will cease to exist as soon as that spending stops. The spending can continue only so long as creditors are foolish enough to supply more capital for the Federal government to destroy. Once the funhouse mirror of massive deficit spending is removed, we will likely see at least a 10% further decline in the economy within 6 months - taking huge chunks of other nations' economies with it.
Wall Street Wacko
We have also now seen the "confidence" return to Wall Street. What this really means it that speculators have put aside their fully justified fears and returned to blind, stupid buying. The "reasoning" behind this is that they managed to rob the taxpayers to cover their last set of enormous losses so their is no longer any such thing as risk. Heads they win, tails the taxpayer loses. As we have pointed out before, the Fed has aligned themselves with the speculators and is feeding such delusions. But these folks obviously haven't been paying any attention to the political climate at all. Congressmen that voted to bail out Wall Street at our expense are facing hostile crowds in their home districts. Many of them are now cancelling public appearances. Politicians now fear for their safety as their victims are beginning to realize what has happened. Even if the bond market allows this foolishness to continue, there is unlikely to be any support for another bailout when the next bubble bursts - which is likely to be either commercial real estate or commodities (again).
The latest Monthly Treasury Statement through June 30 gives us a lot of very useful data. Tax receipts are falling rapidly; for the fiscal year to date, taxes are down from $1,934 billion to $1,589 billion - a drop of 17.8%. The trend has been for the monthly numbers to get worse as the FY has gone on but if that applies to the full year then revenues will be $2,073 billion. The current budget estimate is just under $4,000 billion but will likely be higher as unemployment and related expense rise with a tanking economy. This leaves the US government with a $2 trillion deficit in a $14 trillion economy. In other words deficit spending is on pace to equal 14.3% of the economy.
Looked at another way, approximately one-seventh of the economy should not exist, currently exists only due to Washington spending money it doesn't have and will cease to exist as soon as that spending stops. The spending can continue only so long as creditors are foolish enough to supply more capital for the Federal government to destroy. Once the funhouse mirror of massive deficit spending is removed, we will likely see at least a 10% further decline in the economy within 6 months - taking huge chunks of other nations' economies with it.
Wall Street Wacko
We have also now seen the "confidence" return to Wall Street. What this really means it that speculators have put aside their fully justified fears and returned to blind, stupid buying. The "reasoning" behind this is that they managed to rob the taxpayers to cover their last set of enormous losses so their is no longer any such thing as risk. Heads they win, tails the taxpayer loses. As we have pointed out before, the Fed has aligned themselves with the speculators and is feeding such delusions. But these folks obviously haven't been paying any attention to the political climate at all. Congressmen that voted to bail out Wall Street at our expense are facing hostile crowds in their home districts. Many of them are now cancelling public appearances. Politicians now fear for their safety as their victims are beginning to realize what has happened. Even if the bond market allows this foolishness to continue, there is unlikely to be any support for another bailout when the next bubble bursts - which is likely to be either commercial real estate or commodities (again).
Thursday, 16 July 2009
The Price of Ponzi
Faking Bank
First let's be clear that prices for the majority of asset classes around the world are unsustainably high. This is an obvious corollary to the very inflated state of the global financial system and economy due to the excessive leverage that we have commented upon many times. It bears repeating that central banks (CBs) have little actual power, they merely serve as rallying points and fetish-totems for optimistic, true-believing speculators. The evidence is quite clear that CBs often fail to accomplish their goals, in recent cases despite extraordinary actions to "inspire confidence" - i.e. reignite speculation.
If the CBs were as powerful as most think, they could not possibly fail to accomplish their goals. Like voodoo, it is the BELIEF of the victim that causes the damage - a negative application of the well-documented placebo effect. While they have succeeded in restarting speculation to some extent in equities and commodities, they have utterly failed to do so in most of the securitization and especially the re-securitization markets. Other than the Fed itself, there is very little demand for MBS and ABS. CDOs have fallen flat on their face and can't get up. The investment bankers' efforts to re-securitize garbage and get it rated as AAA again have largely met with derision. Assets in the real economy are seeing no increase in demand at all to this point. Housing, commercial RE, private businesses, capital equipment and others are all in the doldrums with hardly any positives even in the second derivative.
Flee(t)ing Confidence
Take note of which asset classes are seeing speculation and which are not. It is only those that can be sold instantly with a mouse click that are getting any action - equities and commodities which trade as futures on an exchange. The exceptions are revealing. Iron ore, which requires long-term contracts instead of futures isn't going up and in fact is going down, with users essentially buying at spot by refusing to commit to L-T deals. Assets that are theoretically liquid but actually trade by appointment only are seeing little help. This would include the aforementioned MBS and ABS. Those that require a real commitment and have payback periods measured in years continue to crater. Basically, the only confidence at this time is the confidence of the daytrader.
Yet we now see speculation among economists that there could be a return to growth in the next four quarters and actually, it's hard to disagree that such a thing is technically possible. The key here is the massive amount of deficit spending by governments around the world. Official US Treasury estimates place the FY 2009 deficit at $1.8 trillion but $2 trillion is more likely. The DEFICIT will likely represent 14% of GDP this year. China is in a similar situation, with a "stimulus" package of nearly $600 billion in a $4.4 trillion dollar economy - which works out to just under 14% of GDP. Hmm, that number sounds familiar.
Large segments of both economies are ponzi schemes, though China's most vulnerable sectors are both larger and more leveraged relatively speaking. In the US, the most affected sector is finance; in China, construction and fixed investment. Consider for a moment that both governments are spending enormous sums of money they don't have - effectively borrowing it from the future to spend now. Once again hoping to ignite a chain reaction of speculation and a new bubble.
We actually expect a slight positive print in US GDP in early 2010, with a larger collapse to follow as soon as the government can no longer borrow cheaply. This is the inevitable result of spending twice your income (tax revenue) just to keep the current illusion alive. When the bond market cuts off this foolishness, the portion of the economy that is unsustainable without a bubble dies and all of the capital spent to keep it alive dies with it - a complete waste. Instead of a mere depression, we have a depression compounded with the destruction of capital that should have been preserved to start rebuilding afterwards.
Pricing Ponzi
If you think about it, both the US and China are expending one-seventh of their respective GDPs to support a lie. Another way to think of it is the rate of return the market (in the form of speculators) demands to continue to invest in the ponzi schemes. In effect, the government's best guess at the required RoR is 14%. Antal Fekete has written about the falling marginal productivity of debt. In other words, the debt-based ponzi scheme is becoming less and less effective. As a result the sponsor of the scheme (governments) are having to increase the amount pumped into the bubble to keep the speculators in and prevent a UNIVERSAL recognition of the failure that has already occurred. This is typical of late-stage ponzi schemes where a critical mass of investors become suspicious and demand their money. The sponsor has to come up with it somewhere and in this case they can conveniently pledge their citizens' future income (taxes) as collateral for more loans.
It is impossible to calculate the precise cost but we can look at deficit and "stimulus" spending as a good first approximation of the price to keep the ponzi scheme rolling. If 14% of GDP can be spent and not even produce a single quarter of positive numbers then the decay is even larger and more advanced than we have previously postulated. As an example, the latest Personal Income Report from the BEA showed the scale of government attempts to manipulate the economy. Wages dropped sharply but personal income rose 1.4%. The money quotes:
Once the long-end of the Treasury yield curve resumes its upward march, the financing will get more difficult. If short-term money ever becomes expensive for the US government then the deception is over. But for right now we may get further upticks in optimism as long as the government can continue to create doubt and obscure the real state of the economy. In the near term, it's all in the hands of the speculators and their mood swings and isn't that a sad commentary on the state of the world.
First let's be clear that prices for the majority of asset classes around the world are unsustainably high. This is an obvious corollary to the very inflated state of the global financial system and economy due to the excessive leverage that we have commented upon many times. It bears repeating that central banks (CBs) have little actual power, they merely serve as rallying points and fetish-totems for optimistic, true-believing speculators. The evidence is quite clear that CBs often fail to accomplish their goals, in recent cases despite extraordinary actions to "inspire confidence" - i.e. reignite speculation.
If the CBs were as powerful as most think, they could not possibly fail to accomplish their goals. Like voodoo, it is the BELIEF of the victim that causes the damage - a negative application of the well-documented placebo effect. While they have succeeded in restarting speculation to some extent in equities and commodities, they have utterly failed to do so in most of the securitization and especially the re-securitization markets. Other than the Fed itself, there is very little demand for MBS and ABS. CDOs have fallen flat on their face and can't get up. The investment bankers' efforts to re-securitize garbage and get it rated as AAA again have largely met with derision. Assets in the real economy are seeing no increase in demand at all to this point. Housing, commercial RE, private businesses, capital equipment and others are all in the doldrums with hardly any positives even in the second derivative.
Flee(t)ing Confidence
Take note of which asset classes are seeing speculation and which are not. It is only those that can be sold instantly with a mouse click that are getting any action - equities and commodities which trade as futures on an exchange. The exceptions are revealing. Iron ore, which requires long-term contracts instead of futures isn't going up and in fact is going down, with users essentially buying at spot by refusing to commit to L-T deals. Assets that are theoretically liquid but actually trade by appointment only are seeing little help. This would include the aforementioned MBS and ABS. Those that require a real commitment and have payback periods measured in years continue to crater. Basically, the only confidence at this time is the confidence of the daytrader.
Yet we now see speculation among economists that there could be a return to growth in the next four quarters and actually, it's hard to disagree that such a thing is technically possible. The key here is the massive amount of deficit spending by governments around the world. Official US Treasury estimates place the FY 2009 deficit at $1.8 trillion but $2 trillion is more likely. The DEFICIT will likely represent 14% of GDP this year. China is in a similar situation, with a "stimulus" package of nearly $600 billion in a $4.4 trillion dollar economy - which works out to just under 14% of GDP. Hmm, that number sounds familiar.
Large segments of both economies are ponzi schemes, though China's most vulnerable sectors are both larger and more leveraged relatively speaking. In the US, the most affected sector is finance; in China, construction and fixed investment. Consider for a moment that both governments are spending enormous sums of money they don't have - effectively borrowing it from the future to spend now. Once again hoping to ignite a chain reaction of speculation and a new bubble.
We actually expect a slight positive print in US GDP in early 2010, with a larger collapse to follow as soon as the government can no longer borrow cheaply. This is the inevitable result of spending twice your income (tax revenue) just to keep the current illusion alive. When the bond market cuts off this foolishness, the portion of the economy that is unsustainable without a bubble dies and all of the capital spent to keep it alive dies with it - a complete waste. Instead of a mere depression, we have a depression compounded with the destruction of capital that should have been preserved to start rebuilding afterwards.
Pricing Ponzi
If you think about it, both the US and China are expending one-seventh of their respective GDPs to support a lie. Another way to think of it is the rate of return the market (in the form of speculators) demands to continue to invest in the ponzi schemes. In effect, the government's best guess at the required RoR is 14%. Antal Fekete has written about the falling marginal productivity of debt. In other words, the debt-based ponzi scheme is becoming less and less effective. As a result the sponsor of the scheme (governments) are having to increase the amount pumped into the bubble to keep the speculators in and prevent a UNIVERSAL recognition of the failure that has already occurred. This is typical of late-stage ponzi schemes where a critical mass of investors become suspicious and demand their money. The sponsor has to come up with it somewhere and in this case they can conveniently pledge their citizens' future income (taxes) as collateral for more loans.
It is impossible to calculate the precise cost but we can look at deficit and "stimulus" spending as a good first approximation of the price to keep the ponzi scheme rolling. If 14% of GDP can be spent and not even produce a single quarter of positive numbers then the decay is even larger and more advanced than we have previously postulated. As an example, the latest Personal Income Report from the BEA showed the scale of government attempts to manipulate the economy. Wages dropped sharply but personal income rose 1.4%. The money quotes:
Private wage and salary disbursements decreased $12.4 billion in May, compared with a decrease of $0.7 billion in April.
Personal current transfer receipts increased $162.6 billion in May, compared with an increase of $59.1 billion in April. The American Recovery and Reinvestment Act of 2009 provides for one-time payments of $250 to eligible individuals receiving social security, supplemental security income, veterans benefits, and railroad retirement benefits. These benefits boosted the level of personal current transfer receipts by $157.6 billions at an annual rate in May.
Once the long-end of the Treasury yield curve resumes its upward march, the financing will get more difficult. If short-term money ever becomes expensive for the US government then the deception is over. But for right now we may get further upticks in optimism as long as the government can continue to create doubt and obscure the real state of the economy. In the near term, it's all in the hands of the speculators and their mood swings and isn't that a sad commentary on the state of the world.
Tuesday, 3 February 2009
Smaller Piece of a Smaller Pie
We would just like to summarize the macro picture of the era we are leaving in order to understand the era we are entering. We have been blogging about the credit dangers on Financial Jenga since 2007 and warning about them even longer than that. The global scope of the financial crisis should surprise no one. Didn't we hear all about "globalization" for many years during the synchronized boom? That level of integration virtually guaranteed that any bust would be synchronized as well.
Nearly all other economic ills stem from the mainspring of a deformed and distorted credit system. For many years now, the foundation of the entire world economic system has been the willingness of the average American to spend their entire income - and more besides. This blog described the magnitude of that "more" in its very first entry. That foundation is collapsing and the global system is flying apart as American households suddenly realize that they are in a hole and stop digging. Savings rates have rebounded from negative territory almost back to 3% per the Bureau of Economic Analysis. The fact that Americans are saving again is viewed as a disaster by the Keynesian orthodoxy, which seems oblivious to the need for savings as a source of capital. They are going to have an absolute coronary when US savings rates begin to approach the historical norm of 10% +/- 2%.
The renewed interest in savings certainly will impose short-term pain on a distorted economy based on excessive consumption. The foundation of the economy will have to shift to something more balanced. The simultaneous and related desire to reduce debt is going to accelerate the shift. The pie of funds available to spend is shrinking as income falls in real terms and willingness to take on debt disappears. In addition, the slice of the pie going to consumption is shrinking (it couldn't exactly grow much beyond 100%) as a tiny piece is actually being allocated to savings again. Activities dependent on profligate spending are suffering badly. It was this insight that led us to forecast the consumer spending collapse and the subsequent implosion of the export-dependent economies.
As the cure of a mountain of debt, our government now proposes to borrow in OUR name thus fitting our children and grandchildren for the chains of debt slavery. We must exert ourselves to stop the madness. Though it is financial rather than political, this quote from George Orwell's 1984 seem utterly apt. As Inner Party member O'Brien explains to the protagonist:
Nearly all other economic ills stem from the mainspring of a deformed and distorted credit system. For many years now, the foundation of the entire world economic system has been the willingness of the average American to spend their entire income - and more besides. This blog described the magnitude of that "more" in its very first entry. That foundation is collapsing and the global system is flying apart as American households suddenly realize that they are in a hole and stop digging. Savings rates have rebounded from negative territory almost back to 3% per the Bureau of Economic Analysis. The fact that Americans are saving again is viewed as a disaster by the Keynesian orthodoxy, which seems oblivious to the need for savings as a source of capital. They are going to have an absolute coronary when US savings rates begin to approach the historical norm of 10% +/- 2%.
The renewed interest in savings certainly will impose short-term pain on a distorted economy based on excessive consumption. The foundation of the economy will have to shift to something more balanced. The simultaneous and related desire to reduce debt is going to accelerate the shift. The pie of funds available to spend is shrinking as income falls in real terms and willingness to take on debt disappears. In addition, the slice of the pie going to consumption is shrinking (it couldn't exactly grow much beyond 100%) as a tiny piece is actually being allocated to savings again. Activities dependent on profligate spending are suffering badly. It was this insight that led us to forecast the consumer spending collapse and the subsequent implosion of the export-dependent economies.
As the cure of a mountain of debt, our government now proposes to borrow in OUR name thus fitting our children and grandchildren for the chains of debt slavery. We must exert ourselves to stop the madness. Though it is financial rather than political, this quote from George Orwell's 1984 seem utterly apt. As Inner Party member O'Brien explains to the protagonist:
If you want a vision of the future, Winston, imagine a boot stamping on a human face forever.
Sunday, 2 November 2008
Submerging Market Update
note: This post was begun some time ago and the date-time stamp reflects the initial draft. The bulk of the data has been added since then.
China: The Collapse Begins
Chinese exports are collapsing and industrial activity with it. Recent reports suggest that they are experiencing mass factory shutdowns with owners and manager absconding. According to the BBC, migrant workers from rural areas are returning to their homes in the countryside en masse. Those watching the media would think that an shocking collapse came out of nowhere in the last few weeks. Readers of Financial Jenga have known that this was not just possible but virtually inevitable for many months.
China could spend some of their dollars but they need to keep at least $1 trillion so the Yuan doesn't completely crash and burn. The interesting problem is the currency mismatch and "sterilization" issues. China's money supply growth is going to fall quickly as there will be fewer incoming dollars against which to issue new Yuan. Yes they will also be exporting fewer dollars to pay for raw materials but that doesn't matter to the unemployed citizens.
The mismatch issue is more critical. Everybody likes to talk about China's currency reserves. The problem is they've already been used up. Yes, they still have the dollars at the central bank but they've already issued Yuan against them as part of their "sterilization" operations. I.e. they cannot use the reserves to "stimulate" the domestic economy. They can SPEND them abroad, which will enable China to consume but will add production elsewhere, doing nothing for the production side of the Chinese economy. The mismatch problem is that they need more Yuan but what they have are Dollars. Much of the existing base of Yuan supply only exists because of the Dollar reserves. If they spend down the reserves, they either have to reduce their domestic money supply or simply print more money to make up the difference.
People like to point to China's dollar reserves but they've already had as much stimulative impact on China's economy as they ever will. Note that the Yuan is NOT a convertible currency. There is no large pool of Yuan outside of China that could be exchanged for dollars and spent in the domestic economy. Nor can they be lent out with the understanding that the loan be spent on Chinese goods (vendor financing). They have already done that indirectly by purchasing Treasury and Agency debt. Those looking for such an impact don't understand the structure of China's financial system.
Latin Cognates
Despite a vicious snapback, the trend is quite clearly down. Likely driven in part by the Fed's dollar swaps, these markets found support last week but it looks like a dead cat bounce. During that week a rally in their sovereign bonds of 200 basis points +/- 10 bp, left Mexico and Brazil debt trading 8.55% and 7.58% respectively. What this tell us is that the threat of immediate default has been averted by Fed imprudence but no one is willing to lend at anything less than a huge multiple of the 100 bp spreads we saw only a year and a half ago.
Latin economies are heavily dependent on natural resource extration. Thus they have had and continue to have a symbiotic relationship with the resource-eating black hole known as China. With consumption slowing worldwide and the initial feedback effects on the exporting countries, we are starting to see resource demand falling but the excess capacity created is collapsing commodity prices. The storm of demand destruction is roaring up the supply chain and spawning tornados that tear through individual sectors. The latest example comes from Brazil, where giant mining conglomerate Vale do Rio Doce is desperately cutting spending. The big news is the cancellation of 12 giant ore carriers - which would have been built in new Chinese shipyards. At the same time, they are cutting ore production as demand falls.
An intersting question is how much demand for their own ore Vale just destroyed by cancelling the ship order. This is a vicious circle as the feedback loop in the symbiotic relationship turns negative. Rising expectations and optimism feed off themselves - until they don't anymore. Then ugliness always ensues. In this case the fall will be long and ugly - like that of Icarus, who flew too close to the sun. We have dubbed it the Universal Debt bubble as virtually every country and every industry was caught up in it. Countries like Brazil and China were some of the biggest beneficiaries of the UDB, yet those who advocated the Decoupling Theory essentially argued that the biggest beneficiaries of a trend would be hurt little if at all when it ended. The silliness of THAT position is now manifest for all to see.
Containment Breach
We've heard many times how the crisis would be "contained" to a specific industry or geographic region. The authorities making these countless claims were either lying, incompetent or both. We see now that it is and was global and across the board - thus UDB is very accurate. While we expect exporters and raw materials producers to suffer worse than most, the damage goes on elsewhere. German factory orders fell 8%. US durable goods spending fell 14.1% in the 3Q GDP report. Japanese auto sales have hit levels not seen since the 1970s, while US sales are Back to the Future of the 1980s. This is global and ugly friends. Please protect yourselves.
China: The Collapse Begins
Chinese exports are collapsing and industrial activity with it. Recent reports suggest that they are experiencing mass factory shutdowns with owners and manager absconding. According to the BBC, migrant workers from rural areas are returning to their homes in the countryside en masse. Those watching the media would think that an shocking collapse came out of nowhere in the last few weeks. Readers of Financial Jenga have known that this was not just possible but virtually inevitable for many months.
China could spend some of their dollars but they need to keep at least $1 trillion so the Yuan doesn't completely crash and burn. The interesting problem is the currency mismatch and "sterilization" issues. China's money supply growth is going to fall quickly as there will be fewer incoming dollars against which to issue new Yuan. Yes they will also be exporting fewer dollars to pay for raw materials but that doesn't matter to the unemployed citizens.
The mismatch issue is more critical. Everybody likes to talk about China's currency reserves. The problem is they've already been used up. Yes, they still have the dollars at the central bank but they've already issued Yuan against them as part of their "sterilization" operations. I.e. they cannot use the reserves to "stimulate" the domestic economy. They can SPEND them abroad, which will enable China to consume but will add production elsewhere, doing nothing for the production side of the Chinese economy. The mismatch problem is that they need more Yuan but what they have are Dollars. Much of the existing base of Yuan supply only exists because of the Dollar reserves. If they spend down the reserves, they either have to reduce their domestic money supply or simply print more money to make up the difference.
People like to point to China's dollar reserves but they've already had as much stimulative impact on China's economy as they ever will. Note that the Yuan is NOT a convertible currency. There is no large pool of Yuan outside of China that could be exchanged for dollars and spent in the domestic economy. Nor can they be lent out with the understanding that the loan be spent on Chinese goods (vendor financing). They have already done that indirectly by purchasing Treasury and Agency debt. Those looking for such an impact don't understand the structure of China's financial system.
Latin Cognates
Despite a vicious snapback, the trend is quite clearly down. Likely driven in part by the Fed's dollar swaps, these markets found support last week but it looks like a dead cat bounce. During that week a rally in their sovereign bonds of 200 basis points +/- 10 bp, left Mexico and Brazil debt trading 8.55% and 7.58% respectively. What this tell us is that the threat of immediate default has been averted by Fed imprudence but no one is willing to lend at anything less than a huge multiple of the 100 bp spreads we saw only a year and a half ago.
Latin economies are heavily dependent on natural resource extration. Thus they have had and continue to have a symbiotic relationship with the resource-eating black hole known as China. With consumption slowing worldwide and the initial feedback effects on the exporting countries, we are starting to see resource demand falling but the excess capacity created is collapsing commodity prices. The storm of demand destruction is roaring up the supply chain and spawning tornados that tear through individual sectors. The latest example comes from Brazil, where giant mining conglomerate Vale do Rio Doce is desperately cutting spending. The big news is the cancellation of 12 giant ore carriers - which would have been built in new Chinese shipyards. At the same time, they are cutting ore production as demand falls.
An intersting question is how much demand for their own ore Vale just destroyed by cancelling the ship order. This is a vicious circle as the feedback loop in the symbiotic relationship turns negative. Rising expectations and optimism feed off themselves - until they don't anymore. Then ugliness always ensues. In this case the fall will be long and ugly - like that of Icarus, who flew too close to the sun. We have dubbed it the Universal Debt bubble as virtually every country and every industry was caught up in it. Countries like Brazil and China were some of the biggest beneficiaries of the UDB, yet those who advocated the Decoupling Theory essentially argued that the biggest beneficiaries of a trend would be hurt little if at all when it ended. The silliness of THAT position is now manifest for all to see.
Containment Breach
We've heard many times how the crisis would be "contained" to a specific industry or geographic region. The authorities making these countless claims were either lying, incompetent or both. We see now that it is and was global and across the board - thus UDB is very accurate. While we expect exporters and raw materials producers to suffer worse than most, the damage goes on elsewhere. German factory orders fell 8%. US durable goods spending fell 14.1% in the 3Q GDP report. Japanese auto sales have hit levels not seen since the 1970s, while US sales are Back to the Future of the 1980s. This is global and ugly friends. Please protect yourselves.
Monday, 29 September 2008
The Limits of Optimism
The absurd actions of our financial authorities continue to impress with the sheer hubris and vast scale of their proposals - with today's bailout attempt being the latest and greatest of many attempts. Some of the government's contortions would be impressive even for Cirque du Soleil were they not such a blatant effort to distort the market. Our nation and the world at large seem to be living out the economic equivalent of a Kafka novel today. Yet even here we see the boundaries of government interference and the limits of (unjustified) optimism. As advocates of the free market and rule of law, we have been constantly appalled. A nominally Republican administration continually interferes with market forces and changes investment rules in the middle of the game. How did we come to such a sad pass?
Like many children, yours truly had a favorite word for much of his childhood - "Why?" Eventually, I stopped bothering Mother but never stopped asking the question. It is particularly pertinent now. How did we put ourselves in a position where using tax money to subsidize Wall Street's losses could even be considered? Well, the stock market is now considered key to the retirement of many Americans.
Why?
Er, most Americans now have a substantial part of their pension or 401(k) invested in stocks.
Why?
Well, the higher average rate of return on stocks allows us to say that retirement is fully funded with less up-front investment. This is especially important for corporate and government pension plans. For individuals it allows hope of the big score and a cushy retirement.
Did the pension managers decide that was a good idea, themselves?
Umm, not really. Remember, stocks are not bought - they are sold. Some smart salesmen on Wall Street started to push this in the late 1980s, just as the last people who lived through the Great Depression were retiring.
But what about the higher risk?
The salesmen could point to the superior long-term returns from equity, while glossing over the risk and the folks who remembered the risk in very visceral ways were gone. Even so, many pension managers objected but were overruled by their bosses who wanted to lay out less money for pensions so they could spend it elsewhere (government) or report higher earnings (corporate).
What about 401(k) plans?
The long bull market convinced many individuals that there was little risk in stocks. They certainly had produced high returns. Many people hitched their wagon the Wall Street.
Perpetual Motion Machine
With so much money from average Americans pouring in, stocks could hardly do anything else but rise. Eventually it became a self-fulfilling prophecy as money chased performance, while pushing the price up in turn. That reached its peak with the Tech Bubble, when completely worthless companies were valued in the billions. When that broke down, the Fed stepped in and created a new bubble - actually several bubbles, led by housing. The same self-reinforcing dynamic - as old as markets themselves played out again.
With so much money from the masses committed to the stock and housing markets, there is considerable support for ANY measure to bail out these markets and prop up asset prices. This is the end result of individuals and pension funds refusing to settle for the smaller but steady gains from lower-risk investments. Keep in mind that not long ago, most pension and endowment type funds invested almost exclusively in bonds. For the economic importance of this, let's examine the characteristics of each class of capital:
- Senior Debt (bonds or bank loans):
first in line for assets and cash
must be paid or the creditor can liquidate the borrower
reliant on total company cash reserves
- Junior Debt:
next in line but otherwise similar to Senior Debt
- Preferred Stock:
3rd in line for assets and cash
dividend can be suspended as stockholders CANNOT force liquidation
reliant on company cash flow
- Common Stock:
last in line for assets and cash
dividend has the least protection of any security
reliant on company profits
potential for speculative gains
Slouching towards Insolvency
Over time, asset allocations at all levels have become riskier, including pension funds. From an economic standpoint, investment results became more reliant on marginal financial activities. For example, bonds are tied to current and future corporate cash (reserves + cash flow), which tends to have a linear relationship with revenue. Preferred is reliant largely on cash flow. Common is tied to marginal profit and even to the growth rate of profit - the second and third derivatives of revenue. Investment results went from relying on the soundness of the companies, to their profitability and then to the growth rate of that profitability. Under these circumstances, it is no surprise that the emphasis shifted away from ensuring that companies remained sound and certain to survive and towards showing growth or even accelerating growth (a fourth derivative!) at almost any price.
The eventual price was to lever up companies far beyond what was prudent in the quest for "growth." It didn't matter if the growth was real or not, it just had to look real for the shareholders. Companies undermined their own capital base with stock buybacks that juiced EPS growth while consuming cash flow and in some cases requiring additional indebtedness. We pointed to this problem nearly a year ago in Tactical Nukes. The paradoxical result was a slew of companies that were "growing" rapidly but could not survive a downturn. By placing so much reliance on marginal outcomes, the system became easy to game as small movements in revenue could drive huge changes in "growth" rates. Eventually, growth became THE foundation of many investment strategies, making those folks dependent on them willing to support increasing distortions of free markets for financial gain.
Those distortions have been a large part of the discussion here at Financial Jenga since the very beginning. The collapse of the illusion of growth and the economic distortions that supported it have revealed the true state of the underlying economy for all to see and it's not a pretty sight. Such are the ironic outcomes of the Universal Debt Bubble.
Like many children, yours truly had a favorite word for much of his childhood - "Why?" Eventually, I stopped bothering Mother but never stopped asking the question. It is particularly pertinent now. How did we put ourselves in a position where using tax money to subsidize Wall Street's losses could even be considered? Well, the stock market is now considered key to the retirement of many Americans.
Why?
Er, most Americans now have a substantial part of their pension or 401(k) invested in stocks.
Why?
Well, the higher average rate of return on stocks allows us to say that retirement is fully funded with less up-front investment. This is especially important for corporate and government pension plans. For individuals it allows hope of the big score and a cushy retirement.
Did the pension managers decide that was a good idea, themselves?
Umm, not really. Remember, stocks are not bought - they are sold. Some smart salesmen on Wall Street started to push this in the late 1980s, just as the last people who lived through the Great Depression were retiring.
But what about the higher risk?
The salesmen could point to the superior long-term returns from equity, while glossing over the risk and the folks who remembered the risk in very visceral ways were gone. Even so, many pension managers objected but were overruled by their bosses who wanted to lay out less money for pensions so they could spend it elsewhere (government) or report higher earnings (corporate).
What about 401(k) plans?
The long bull market convinced many individuals that there was little risk in stocks. They certainly had produced high returns. Many people hitched their wagon the Wall Street.
Perpetual Motion Machine
With so much money from average Americans pouring in, stocks could hardly do anything else but rise. Eventually it became a self-fulfilling prophecy as money chased performance, while pushing the price up in turn. That reached its peak with the Tech Bubble, when completely worthless companies were valued in the billions. When that broke down, the Fed stepped in and created a new bubble - actually several bubbles, led by housing. The same self-reinforcing dynamic - as old as markets themselves played out again.
With so much money from the masses committed to the stock and housing markets, there is considerable support for ANY measure to bail out these markets and prop up asset prices. This is the end result of individuals and pension funds refusing to settle for the smaller but steady gains from lower-risk investments. Keep in mind that not long ago, most pension and endowment type funds invested almost exclusively in bonds. For the economic importance of this, let's examine the characteristics of each class of capital:
- Senior Debt (bonds or bank loans):
first in line for assets and cash
must be paid or the creditor can liquidate the borrower
reliant on total company cash reserves
- Junior Debt:
next in line but otherwise similar to Senior Debt
- Preferred Stock:
3rd in line for assets and cash
dividend can be suspended as stockholders CANNOT force liquidation
reliant on company cash flow
- Common Stock:
last in line for assets and cash
dividend has the least protection of any security
reliant on company profits
potential for speculative gains
Slouching towards Insolvency
Over time, asset allocations at all levels have become riskier, including pension funds. From an economic standpoint, investment results became more reliant on marginal financial activities. For example, bonds are tied to current and future corporate cash (reserves + cash flow), which tends to have a linear relationship with revenue. Preferred is reliant largely on cash flow. Common is tied to marginal profit and even to the growth rate of profit - the second and third derivatives of revenue. Investment results went from relying on the soundness of the companies, to their profitability and then to the growth rate of that profitability. Under these circumstances, it is no surprise that the emphasis shifted away from ensuring that companies remained sound and certain to survive and towards showing growth or even accelerating growth (a fourth derivative!) at almost any price.
The eventual price was to lever up companies far beyond what was prudent in the quest for "growth." It didn't matter if the growth was real or not, it just had to look real for the shareholders. Companies undermined their own capital base with stock buybacks that juiced EPS growth while consuming cash flow and in some cases requiring additional indebtedness. We pointed to this problem nearly a year ago in Tactical Nukes. The paradoxical result was a slew of companies that were "growing" rapidly but could not survive a downturn. By placing so much reliance on marginal outcomes, the system became easy to game as small movements in revenue could drive huge changes in "growth" rates. Eventually, growth became THE foundation of many investment strategies, making those folks dependent on them willing to support increasing distortions of free markets for financial gain.
Those distortions have been a large part of the discussion here at Financial Jenga since the very beginning. The collapse of the illusion of growth and the economic distortions that supported it have revealed the true state of the underlying economy for all to see and it's not a pretty sight. Such are the ironic outcomes of the Universal Debt Bubble.
Friday, 19 September 2008
Frederick the Great vs. Hank Paulson
This is total panic time. They're now firing off everything that they have after the first several attempts at an options expiration week stick save failed badly. Basically, the Treasury is guaranteeing virtually everything now with backstops for money market mutual funds and a new super SIV for bad assets. But as Fredrick the Great said: "He who defends everything, defends nothing!" This was a simple acknowledgement of military reality - concentrate on protecting the most important assets. Spreading yourself too thin invites defeat in detail and the destruction of your forces. Then the enemy can loot at leisure.
The government seemingly doesn't understand this but they will. There simply isn't the money to do everything and in their arrogance the Fed and Treasury have over-reached badly. By trying to save all of the bankrupt financial companies, they are weakening the defenses of the strategic key - Treasury debt. The bond market is already demanding 50 basis points more in interest than just days ago. Another way to look at it is that 10-year government bonds have lost 3.5% of their value in that time. The Treasury is the logistics depot from which the army defending every other target is being supplied. If it falls, the war is over and our enemies win.
One shot wonder, long-term consequences
The SEC, erstwhile market watchdog is barking up the wrong tree again. They sat on their hands and did nothing while the disaster built all around them and now they are attacking the group pointing out the problem, not the ones who caused it. In banning short-selling, they also increase the probability that there will be no bounce when the next decline occurs since short-covering is the one thing that has kept our stock market from collapsing like much of the rest of the world's.
The fact that they feel the need to use this one-time guaranteed short-squeeze now ought to tell you everything you need to know when the cost is so high for so little gain in terms of time. This tells me that election politics are paramount here since there is at least a chance (maybe 50/50) to delay the crash by 6 weeks. There is little prospect that we make it 6 months. With so little difference, I'd prefer it occur before the election to guarantee an Obama presidency. Whichever party holds power over the next 4 years will be discredited for a generation (after Hoover and GD 1.0, the Republicans were unable to build sustainable majorities for two generations). Though I'm disgusted with both political parties, there is at least some chance that the Republicans will return to their Reaganite roots after a time in the wilderness. I have no hope at all where the Democrats are concerned. The fundamentals are positively horrific and much depends on sustaining the illusion of control. Short-sellers overwhelmingly profit from disparities between perception and reality - as such, they are always among the first to point out that the emperor has no clothes. Given the stakes, anyone who sees through the deception must be punished and silenced.
There isn't even enough tax money to cover the normal operations of our bloated government, much less this madness. But the bond market was willing to make up the difference as long as there was a high probability of repayment. But the checks that Paulson is writing with his mouth right now are guaranteed to bounce and some bond buyers are noticing. From a low beneath 3.30% this week, the yield on the 10-year Treasury bond has skyrocketed by 50 basis points. The fact that the bailout silliness has more than doubled that deficit doesn't help at all. Like any fool who continues to spend far beyond his means, the creditors will charge us more and more to borrow until insolvency.
The only solution is immediate cuts in government spending and the repudiation of all the backstops that have been proposed. Getting within shouting distance of a balanced budget is the only thing that can prevent an imminent spike in Treasury rates. The entire game depends on the willingness of foreign savers to fund the now gaping chasm of the Federal Deficit. If they balk, the whole structure is endangered. By taking on the toxic waste of the financial industry, all the US government has done is place itself at risk in the inevitable implosion. This is too large for any government or even all of them together to solve. Remember how Congress sent the GSEs out to save a drowning housing market and the "lifeguards" not only failed the rescue but also got pulled to the bottom right along with everybody else? That is precisely what is going to happen to the US government if they don't extricate themselves now. A blowout in borrowing costs was a precursor to the demise of Fannie and Freddie; we appear to be seeing a super slow-mo, reverse-angle replay with the Treasury right now.
One reason the US survived GD 1.0 without the political damage in the rest of the world (think Hitler, generals in Japan, Peron and petty dictators from Pilsudski to Metaxas) was the fact that the our government's finances never reached a state of existential crisis. The deficit (what there was of it) and government bonds were always sure to be paid back. That assurance is not present today and the government's actions are making ultimate repayment ever less likely. The Argentine example is particularly poignant. In the early 20th century, that country had a higher per capita income than the USA. After decades of socialist and corporatist policies under the Perons, they became the ongoing basket case and borderline Third World country they are today.
I hate to paraphrase anything from the Star Wars series but it is too apropos: This is how freedom dies - to thunderous applause.
The government seemingly doesn't understand this but they will. There simply isn't the money to do everything and in their arrogance the Fed and Treasury have over-reached badly. By trying to save all of the bankrupt financial companies, they are weakening the defenses of the strategic key - Treasury debt. The bond market is already demanding 50 basis points more in interest than just days ago. Another way to look at it is that 10-year government bonds have lost 3.5% of their value in that time. The Treasury is the logistics depot from which the army defending every other target is being supplied. If it falls, the war is over and our enemies win.
One shot wonder, long-term consequences
The SEC, erstwhile market watchdog is barking up the wrong tree again. They sat on their hands and did nothing while the disaster built all around them and now they are attacking the group pointing out the problem, not the ones who caused it. In banning short-selling, they also increase the probability that there will be no bounce when the next decline occurs since short-covering is the one thing that has kept our stock market from collapsing like much of the rest of the world's.
The fact that they feel the need to use this one-time guaranteed short-squeeze now ought to tell you everything you need to know when the cost is so high for so little gain in terms of time. This tells me that election politics are paramount here since there is at least a chance (maybe 50/50) to delay the crash by 6 weeks. There is little prospect that we make it 6 months. With so little difference, I'd prefer it occur before the election to guarantee an Obama presidency. Whichever party holds power over the next 4 years will be discredited for a generation (after Hoover and GD 1.0, the Republicans were unable to build sustainable majorities for two generations). Though I'm disgusted with both political parties, there is at least some chance that the Republicans will return to their Reaganite roots after a time in the wilderness. I have no hope at all where the Democrats are concerned. The fundamentals are positively horrific and much depends on sustaining the illusion of control. Short-sellers overwhelmingly profit from disparities between perception and reality - as such, they are always among the first to point out that the emperor has no clothes. Given the stakes, anyone who sees through the deception must be punished and silenced.
There isn't even enough tax money to cover the normal operations of our bloated government, much less this madness. But the bond market was willing to make up the difference as long as there was a high probability of repayment. But the checks that Paulson is writing with his mouth right now are guaranteed to bounce and some bond buyers are noticing. From a low beneath 3.30% this week, the yield on the 10-year Treasury bond has skyrocketed by 50 basis points. The fact that the bailout silliness has more than doubled that deficit doesn't help at all. Like any fool who continues to spend far beyond his means, the creditors will charge us more and more to borrow until insolvency.
The only solution is immediate cuts in government spending and the repudiation of all the backstops that have been proposed. Getting within shouting distance of a balanced budget is the only thing that can prevent an imminent spike in Treasury rates. The entire game depends on the willingness of foreign savers to fund the now gaping chasm of the Federal Deficit. If they balk, the whole structure is endangered. By taking on the toxic waste of the financial industry, all the US government has done is place itself at risk in the inevitable implosion. This is too large for any government or even all of them together to solve. Remember how Congress sent the GSEs out to save a drowning housing market and the "lifeguards" not only failed the rescue but also got pulled to the bottom right along with everybody else? That is precisely what is going to happen to the US government if they don't extricate themselves now. A blowout in borrowing costs was a precursor to the demise of Fannie and Freddie; we appear to be seeing a super slow-mo, reverse-angle replay with the Treasury right now.
One reason the US survived GD 1.0 without the political damage in the rest of the world (think Hitler, generals in Japan, Peron and petty dictators from Pilsudski to Metaxas) was the fact that the our government's finances never reached a state of existential crisis. The deficit (what there was of it) and government bonds were always sure to be paid back. That assurance is not present today and the government's actions are making ultimate repayment ever less likely. The Argentine example is particularly poignant. In the early 20th century, that country had a higher per capita income than the USA. After decades of socialist and corporatist policies under the Perons, they became the ongoing basket case and borderline Third World country they are today.
I hate to paraphrase anything from the Star Wars series but it is too apropos: This is how freedom dies - to thunderous applause.
Wednesday, 26 December 2007
Consumer Co-dependency
It appears that the abused average American has finally had enough. Target reported that Christmas sales were very weak and lowered their revenue growth numbers for December quite a bit. Add in the margin pressure from discounting and earnings in that sector should be a mess. The problems seem to be widespread and for once, stocks actually seem to be reacting to obvious fundamental problems. This should really be no surprise at all but sadly, equities have ignored fundamentals for so long that it's a shock when reality intrudes on the feeding frenzy.
Here at Financial Jenga, we've been documenting the many pressures facing consumers for some time now. Housing and mortgage debt were covered in Where to Start? We wrote about the deteriorating employment situation and failure of government statistics to reflect it in Behind the Numbers. The collapse of personal savings and explosion of total household debt was the theme of First Principles. Why is anyone surprised that a consumer sector with no savings, huge debts and fewer jobs would decide that reducing spending the the right course? "When you're in a hole, quit digging" is just common sense.
Of course, common sense has been in short supply for years. Americans have been able to get away with all sorts of foolishness and the banks and other lenders have been their enablers. It is simply human nature to slip into wishful thinking that there really IS a free lunch out there somewhere. Mark Twain once described a banker as "a fellow who lends you his umbrella when the sun is shining and wants it back the minute it begins to rain." Former uber-banker and CEO of Citigroup, Chuck Prince pretty much confirmed Twain's characterization back in July when he said:
Apparently, Chuck has stopped dancing and wants his umbrella back - except that he's no longer CEO. The reason he's not CEO now is because he waited too long to grab the umbrella and it looks as if he was right that "things will be complicated."
Banks are always willing to lend when they think there's little risk. That doesn't mean they are right in their risk assessment. Consumers have proven willing to borrow as long as they think they can make the payments. They are often overconfident on that front. The confidence of both is being pressured by the weak job market. Banker's willingness to lend is also falling with the value of the loan collateral - especially housing. Consumer confidence faces additional challenges due to higher food and energy prices. They were both wrong to be confident because they confused cyclical and secular economic forces. They also failed to recognize that their own behavior was the cause of the spike in asset prices. They borrowed and lent money used to buy the assets and prices quite naturally rose. Then they all congratulated each other on how smart they all were to "get in on a rising market." Now the prices are falling and the debt will still be the same size.
Consumers have a co-dependent relationship with their bankers - who have enabled destructive behavior for years. It appears that both sides are ready to walk away now that the relationship serves the needs of neither side.
Here at Financial Jenga, we've been documenting the many pressures facing consumers for some time now. Housing and mortgage debt were covered in Where to Start? We wrote about the deteriorating employment situation and failure of government statistics to reflect it in Behind the Numbers. The collapse of personal savings and explosion of total household debt was the theme of First Principles. Why is anyone surprised that a consumer sector with no savings, huge debts and fewer jobs would decide that reducing spending the the right course? "When you're in a hole, quit digging" is just common sense.
Of course, common sense has been in short supply for years. Americans have been able to get away with all sorts of foolishness and the banks and other lenders have been their enablers. It is simply human nature to slip into wishful thinking that there really IS a free lunch out there somewhere. Mark Twain once described a banker as "a fellow who lends you his umbrella when the sun is shining and wants it back the minute it begins to rain." Former uber-banker and CEO of Citigroup, Chuck Prince pretty much confirmed Twain's characterization back in July when he said:
When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.
Apparently, Chuck has stopped dancing and wants his umbrella back - except that he's no longer CEO. The reason he's not CEO now is because he waited too long to grab the umbrella and it looks as if he was right that "things will be complicated."
Banks are always willing to lend when they think there's little risk. That doesn't mean they are right in their risk assessment. Consumers have proven willing to borrow as long as they think they can make the payments. They are often overconfident on that front. The confidence of both is being pressured by the weak job market. Banker's willingness to lend is also falling with the value of the loan collateral - especially housing. Consumer confidence faces additional challenges due to higher food and energy prices. They were both wrong to be confident because they confused cyclical and secular economic forces. They also failed to recognize that their own behavior was the cause of the spike in asset prices. They borrowed and lent money used to buy the assets and prices quite naturally rose. Then they all congratulated each other on how smart they all were to "get in on a rising market." Now the prices are falling and the debt will still be the same size.
Consumers have a co-dependent relationship with their bankers - who have enabled destructive behavior for years. It appears that both sides are ready to walk away now that the relationship serves the needs of neither side.
Thursday, 22 November 2007
Tactical Nukes
The fundamental case for a bull market died a long time ago and has not terribly sound in a long, given the combination of high valuations, slowing growth and a significant portion of earnings that were an outright illusion. Strategically speaking, the last time the bull case made any sense was in early 2006. That has not prevented tactical factors from pushing an overvalued market still higher in the interim. The primary tactical focus has been "liquidity" which readers of this blog will recognize as simply a synonym for growing debt.
The UDB threw off a tremendous amount of this "liquidity" as debt expanded rapidly. The serial collapse of mortgage finance, CDOs, MBS, asset-backed CP and other debt markets has reversed the flow as outstanding debt/credit shrinks. But how is this affecting stocks, you might ask? Well, there is the obvious collapse of profits in the building and financial sector as well as similar impending action in the consumer sector. But these are indirect effects and failed to knock down the indexes for long until recently.
There is now a much more direct impact on supply and demand for stocks and the financial pressures are affecting both sides of the equation. On the supply side, many distressed financial firms will be forced to issue new equity to bolster their crumbling capital base. Two major sources of "greater fool" demand for stocks have essentially disappeared - leveraged buyouts and corporate buybacks financed with debt. Lenders are no longer willing to finance such foolishness now that it has been exposed as such. The WSJ has this to say:
Big Buybacks Begin to Haunt Firms
"Liquidity" has been removed. LBOs of any real size are dead. Instead of buying back shares to reduce the supply, corporations are starting to issue more stock and increase supply just as demand is falling. It looks to me as if the even the tactical bull case has been nuked at this point. The strategic case is long-dead. What is the reason to still own stocks today?
The UDB threw off a tremendous amount of this "liquidity" as debt expanded rapidly. The serial collapse of mortgage finance, CDOs, MBS, asset-backed CP and other debt markets has reversed the flow as outstanding debt/credit shrinks. But how is this affecting stocks, you might ask? Well, there is the obvious collapse of profits in the building and financial sector as well as similar impending action in the consumer sector. But these are indirect effects and failed to knock down the indexes for long until recently.
There is now a much more direct impact on supply and demand for stocks and the financial pressures are affecting both sides of the equation. On the supply side, many distressed financial firms will be forced to issue new equity to bolster their crumbling capital base. Two major sources of "greater fool" demand for stocks have essentially disappeared - leveraged buyouts and corporate buybacks financed with debt. Lenders are no longer willing to finance such foolishness now that it has been exposed as such. The WSJ has this to say:
Driven by billions of dollars in share buybacks, record-setting buyouts and a wave of mergers, the amount of stock in the market shrank by hundreds of billions of dollars in the past four years.
With the supply of stock down and demand strong, the market rallied. Now, as the economy slows and credit markets buckle, high-profile companies are cutting back on buybacks, and some wish they held on to the cash they gave back to shareholders.
The reversal of the trend exposes a flaw in the buyback strategy -- many companies bought high and are selling low.
Big Buybacks Begin to Haunt Firms
"Liquidity" has been removed. LBOs of any real size are dead. Instead of buying back shares to reduce the supply, corporations are starting to issue more stock and increase supply just as demand is falling. It looks to me as if the even the tactical bull case has been nuked at this point. The strategic case is long-dead. What is the reason to still own stocks today?
Saturday, 11 August 2007
Humpty Dumpty Repair
It appears that the CBs have managed to stave of an immediate disaster in the financial markets - at least for the moment. Yet any hope of a material turnaround in market conditions seems distant indeed. The entire system was built on an ever-rising tide of debt and confidence. Debt served to expand the money supply and confidence ensured that the larger pool of money would move through the economy at accelerating velocity.
Now, fears of default have undermined the willingness to lend and borrow - undermining the psychological conditions necessary to sustain debt growth. At the same time, confidence has been crushed, slowing the headlong rush of money around the globe. The sale of CDOs has fallen dramatically - 35% from June to July. These instruments epitomize both trends; they serve to direct capital into new debt deals quickly while simultaneously taking out loans themselves to leverage the profits from those deals.
Confidence has not merely broken, it is shattered. The Fed and other CBs can do nothing to restore this confidence but that hasn't kept them from trying to put Humpty Dumpty back together again. The massive and fully justified loss of confidence has nothing to do with the Fed; it is in the credibility of Wall Street, housing collateral, ratings agencies, credit derivatives and complex financial structures generally. During the boom, the opaque, complex vehicles didn't matter as everything was going up. As things got shaky, the lack of transparency served as a smokescreen to hide the losses and keep the public in the dark.
As the scale of the problem has come to light, trust and confidence in everyone involved has tanked as it should. They have sustained or abetted a fraud against investors and should not be trusted. Given the reluctance to lend, it's clear that many financial institutions don't trust each other. The Fed can flood the markets with credit to temporarily stabilize the system but they can't undo the series of frauds and resulting rational distrust that has spread through the financial world like a virus.
The alphabet soup of complex and opaque credit derivatives helped to hide the damage for a long time. They continue to mask the full extent of the losses and the identity of the losers. But belated recognition by investors has changed the default setting. Previously, they assumed everything was fine unless specific problems were identified. Now, the problems are known if not truly understood, so the assumption is that risk portfolios are in trouble unless proven otherwise. The lack of transparency that was previously helpful is now a gigantic ball and chain.
It can't be undone now. It will take months to find who is holding all of the toxic waste and how much they are holding. Until then, all financial institutions are guilty until proven innocent. Lending will continue to be frozen by the high risk of losses. Humpty Dumpty can't be repaired even by "all the king's horses and all the king's men."
Now, fears of default have undermined the willingness to lend and borrow - undermining the psychological conditions necessary to sustain debt growth. At the same time, confidence has been crushed, slowing the headlong rush of money around the globe. The sale of CDOs has fallen dramatically - 35% from June to July. These instruments epitomize both trends; they serve to direct capital into new debt deals quickly while simultaneously taking out loans themselves to leverage the profits from those deals.
Confidence has not merely broken, it is shattered. The Fed and other CBs can do nothing to restore this confidence but that hasn't kept them from trying to put Humpty Dumpty back together again. The massive and fully justified loss of confidence has nothing to do with the Fed; it is in the credibility of Wall Street, housing collateral, ratings agencies, credit derivatives and complex financial structures generally. During the boom, the opaque, complex vehicles didn't matter as everything was going up. As things got shaky, the lack of transparency served as a smokescreen to hide the losses and keep the public in the dark.
As the scale of the problem has come to light, trust and confidence in everyone involved has tanked as it should. They have sustained or abetted a fraud against investors and should not be trusted. Given the reluctance to lend, it's clear that many financial institutions don't trust each other. The Fed can flood the markets with credit to temporarily stabilize the system but they can't undo the series of frauds and resulting rational distrust that has spread through the financial world like a virus.
The alphabet soup of complex and opaque credit derivatives helped to hide the damage for a long time. They continue to mask the full extent of the losses and the identity of the losers. But belated recognition by investors has changed the default setting. Previously, they assumed everything was fine unless specific problems were identified. Now, the problems are known if not truly understood, so the assumption is that risk portfolios are in trouble unless proven otherwise. The lack of transparency that was previously helpful is now a gigantic ball and chain.
It can't be undone now. It will take months to find who is holding all of the toxic waste and how much they are holding. Until then, all financial institutions are guilty until proven innocent. Lending will continue to be frozen by the high risk of losses. Humpty Dumpty can't be repaired even by "all the king's horses and all the king's men."
Saturday, 4 August 2007
Leverage and Its Uses
During the Universal Debt Bubble (UDB), corporations borrowed a lot of money, so where did it go? Quite a bit of it went into buying other companies as worldwide buyouts reached a record $4.06 trillion in 2006, with about 40% of that in the USA. That was well above the previous record $3.3 trillion in 2000. The difference was that the M&A boom in 2000 was done largely with stock; this one is funded with debt. When things went bad in 2000, the equity didn't have to be paid back, but the debt from the current frenzy will.
While a lot of money went to buy other companies' stock, another big chunk funded companies who bought back their own stock. Naturally, all of this debt-funded stock buying has served to prop up equity prices. Many shareholders came to believe that they were in a no-lose position because of continuous demand from buybacks. And if anything went wrong, someone else would swoop in and buy the whole company as part of the M&A wave. That sort of overconfidence is usually a setup for a big fall - which looks to be starting now.
Until very recently, we were on pace for takeovers to be even higher in 2007 than last year. Then someone apparently had a blow to the head that restored rational thought processes. The interest payments on many of these deals could barely be supported in the current good times. What might happen in bad times is something I don't like to think about. Apparently, many market participants agreed and collectively decided not to think about it - until forced to as buyout deals started to go sour. There are apparently some $300 billion worth of deals that still need funding and can't get it.
-----
"Investment banks including JPMorgan Chase & Co. and Citigroup Inc. have promised to sell about $300 billion in bonds and loans to fund takeovers of companies including TXU Corp. and First Data Corp. Investors have balked at buying much of the debt offered so far"
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aK_K.Nq65USQ
The banks have stuck their necks way out there and are not anxious to increase their exposure further. In fact, they are trying hard to get out of the deals they've already committed to doing. There will be little M&A activity for the foreseeable future. To a significant extent, company stock buybacks are also dependent on debt. The clearest case of this was Expedia, which was forced to cancel 80% of its buyback when their borrowing fell through.
http://www.reuters.com/article/marketsNews/idUKN2333911620070723?rpc=44
While a lot of money went to buy other companies' stock, another big chunk funded companies who bought back their own stock. Naturally, all of this debt-funded stock buying has served to prop up equity prices. Many shareholders came to believe that they were in a no-lose position because of continuous demand from buybacks. And if anything went wrong, someone else would swoop in and buy the whole company as part of the M&A wave. That sort of overconfidence is usually a setup for a big fall - which looks to be starting now.
Until very recently, we were on pace for takeovers to be even higher in 2007 than last year. Then someone apparently had a blow to the head that restored rational thought processes. The interest payments on many of these deals could barely be supported in the current good times. What might happen in bad times is something I don't like to think about. Apparently, many market participants agreed and collectively decided not to think about it - until forced to as buyout deals started to go sour. There are apparently some $300 billion worth of deals that still need funding and can't get it.
-----
"Investment banks including JPMorgan Chase & Co. and Citigroup Inc. have promised to sell about $300 billion in bonds and loans to fund takeovers of companies including TXU Corp. and First Data Corp. Investors have balked at buying much of the debt offered so far"
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aK_K.Nq65USQ
The banks have stuck their necks way out there and are not anxious to increase their exposure further. In fact, they are trying hard to get out of the deals they've already committed to doing. There will be little M&A activity for the foreseeable future. To a significant extent, company stock buybacks are also dependent on debt. The clearest case of this was Expedia, which was forced to cancel 80% of its buyback when their borrowing fell through.
http://www.reuters.com/article/marketsNews/idUKN2333911620070723?rpc=44
With the takeover wave in full retreat and much of the fuel for stock buybacks being choked off, the two key pillars supporting the stock market are looking very shaky. For now, that should be more than sufficient the keep stocks weak.
Once we go out a few months, the far larger fundamental problems will start to become apparent. First, is the large number of companies that should already be bankrupt but have been kept on life support by cheap debt.
-----
"The persistently large volume of 'CCC - C' rated bonds in combination with a historically low default rate suggests that liquidity more than fundamentals kept defaults in check."
"'CCC - C' issuers are generally only able to service their significant debt burdens by tapping external funding and have no cushion to sustain them if business or borrowing conditions soften. "
Well, borrowing conditions have already softened and these companies can no longer borrow more money to pay off the interest like they've been doing. In addition, we have just over 2 months until the reports for the 3rd quarter start to come in. That will be when many financial firms are going be forced to report just how much the end of the UDB has cost them. It could get ugly, but that's another topic.
Where to Start?
This is such an enormous subject, it's difficult to know where to begin. I'm going to start with the prevalence and destructiveness of excessive debt. The best illustration of that so far is in the housing market. The symptoms there are more obvious and advanced than elsewhere. So let's go to the stats.
According to the Federal Reserve mortgage lending grew from $153.8 bil in 1995 to $1,051.8 bil in 2005 - a mere 584% in 10 years.
http://www.federalreserve.gov/releases/z1/current/z1r-2.pdf
The results were amazingly predictable: housing prices rising rapidly, with a speculative frenzy at the end. It's axiomatic that bubbles can only last as long as there is more money coming in. I'll freely admit that I expected a top in housing in 2004 as the pool of qualified buyers was drained. The lenders fooled us by making further loans to unqualified buyers to keep things going for another 15-18 months. In the end, this has only made things worse naturally.
We are at the front end of the suffering now. It was easy to see it coming when new houses were adding 2% or more to the existing supply for years and the population was growing at half that rate or less. The Census Bureau confirms that the number of empty houses has never been higher. Until 1999, homeowner vacancy rates were almost never above 1.7%. That number has been 2.5% or higher for 4 straight quarters now - suggesting over 1 million empty and unneeded houses.
http://www.census.gov/hhes/www/housing/hvs/historic/histtab2.html
The consequences are popping up in the form of falling home sales and prices, rising delinquencies and foreclosures, with collapsing lenders following quickly behind them. For detailed coverage and discussion of all these trends, check http://thehousingbubbleblog.com/
Unfortunately, the madness of the lenders was not confined to housing - far from it. There was similar Crazy Eddie lending in commercial real estate, corporate lending, foreign government bonds and the various forms of consumer credit. I'll examine each of these separately but the bottom line is that these practices have erected a house of (credit) cards that now threatens to collapse - taking much that I hold dear with it.
According to the Federal Reserve mortgage lending grew from $153.8 bil in 1995 to $1,051.8 bil in 2005 - a mere 584% in 10 years.
http://www.federalreserve.gov/releases/z1/current/z1r-2.pdf
The results were amazingly predictable: housing prices rising rapidly, with a speculative frenzy at the end. It's axiomatic that bubbles can only last as long as there is more money coming in. I'll freely admit that I expected a top in housing in 2004 as the pool of qualified buyers was drained. The lenders fooled us by making further loans to unqualified buyers to keep things going for another 15-18 months. In the end, this has only made things worse naturally.
We are at the front end of the suffering now. It was easy to see it coming when new houses were adding 2% or more to the existing supply for years and the population was growing at half that rate or less. The Census Bureau confirms that the number of empty houses has never been higher. Until 1999, homeowner vacancy rates were almost never above 1.7%. That number has been 2.5% or higher for 4 straight quarters now - suggesting over 1 million empty and unneeded houses.
http://www.census.gov/hhes/www/housing/hvs/historic/histtab2.html
The consequences are popping up in the form of falling home sales and prices, rising delinquencies and foreclosures, with collapsing lenders following quickly behind them. For detailed coverage and discussion of all these trends, check http://thehousingbubbleblog.com/
Unfortunately, the madness of the lenders was not confined to housing - far from it. There was similar Crazy Eddie lending in commercial real estate, corporate lending, foreign government bonds and the various forms of consumer credit. I'll examine each of these separately but the bottom line is that these practices have erected a house of (credit) cards that now threatens to collapse - taking much that I hold dear with it.
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