Brent Nyitray
Fairlington Blade
Let the mutherfuker burn!
jnc4p
Kevin S. Willis
Michigoose
lmsinca
markinaustin
Arcanaut
novahockey
quarterback
ScottC
yellojktVital Statistics:
| Last | Change | Percent | |
| S&P Futures | 1265.7 | 8.2 | 0.65% |
| Eurostoxx Index | 2335.1 | 59.160 | 2.60% |
| Oil (WTI) | 96.16 | 0.640 | 0.67% |
| US Dollar Index (DXY) | 76.846 | -0.133 | -0.17% |
| 10 Year Govt Bond Yield | 2.04% | 0.01% |
Today is a “risk on” day, as Euro markets rally on Vodafone’s positive earnings announcement and Germany’s unexpected increase in exports. Later today, Italian lawmakers will vote on Prime Minister Silvio Berlusconi’s budget. EURIBOR / OIS (a measure of stress in the banking system) is declining again after spiking last week, but is still elevated.
There is an interesting article in this morning’s WSJ discussing the decline in Chinese real estate prices. Prices fell .23% MOM (about 23 basis points) in October after falling .03% (or about 3 basis points) in September. The Chinese authorities have been trying to cool the real estate market for two years, and it appears that they are finally getting some traction. Of course, letting the air slowly out of a financial bubble has proven to be a nearly impossible task. The article discusses how the financing of projects has dried up, which presages a hard landing about 110% of the time.
“Real-estate developers are having greater problems finding financing to complete projects or start new ones. Trust-investment vehicles—a key part of China’s shadow lending system—have become a major source of funding for developers, after bank lending all but dried up this year.”
This sounds a lot like the US in July, 2007. That was when the credit markets started seizing up. Of course the financial press referred to it as a “buyer’s strike” – meaning a temporary phenomenon. Main Street and Washington didn’t even notice there was a problem until Fall of 2008. My point is that these things have long lead times, and this time next year, the Chinese economic implosion may dominate the headlines.
In the “bursting Asian bubbles” category, a couple of Japanese blue chips have been getting roughed up lately. Olympus Optical (the maker of cameras and diagnostic equipment) was limit down last night as news of accounting issues dating back to the 1990s come out. Olympus hid losses from securities in the mid 90s, by holding them off balance sheet. They then tried to use inflated M&A acquisition costs to launder these losses. The problem came to light when Olympus tried write off a 27% M&A fee for the Gyrus acquisition. Nomura (Olympus’s banker) was also in the doghouse and hit a 37 year low.
Part of the reason why the Japanese implosion was such a slow-motion event stems from this. Because of the Japanese keiretsu system, most Japanese companies had holdings in other companies, typically suppliers, customers, etc. These holdings dated back to the WWII era. Japanese accounting has these investments carried at cost, not market, which means that companies always had a “slush fund” they could draw upon to manage earnings. If earnings are going to be in the red, sell a part of your equity holdings and buy it back at market. The gains on that sale (the difference between the stock price today and the cost basis, which for all intents and purposes was close to zero) drop to the bottom line. Presto! Profitability. This allowed the Japanese corporate sector to avoid facing reality for a decade. As a matter of fact, the Ministry of Finance used to conduct “price keeping operations” where they would instruct the banks to support the equity markets. The Japanese believed equity prices and real estate prices were too important to be determined by a mere market.
Unfortunately the Obama administration believes house prices to be too important to be determined by a mere market and is focusing on trying to support house prices at an unsustainable level. And that remains an anvil on the economy.
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All Things in Moderation 
Over at PL, there was recently a lot of gnashing of teeth over what to do about the continuing decline in US home values. Most of the discussion revolved around reducing defaults on underwater mortgages, which isn't the same thing.I sense what happens in the Eurozone may ripple significantly into China's export business. If China gets hit with a decline in exports and a real estate crash simultaneously, as my now-adult niece said as a toddler, "that not good, Mommy."FYI, the Cain campaign may have violated campaign and tax laws. http://www.jsonline.com/watchdog/noquarter/state-firms-cash-to-herman-cain-may-breach-federal-campaign-tax-laws-132898423.htmlAn internal investigation is underway.
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Just stopped by Plumline. A potentially good discussion on unions drowned by how evil Wal-Mart is. Ethan says banning smoking will reduce healthcare costs, even though there is no evidence of this that I know of (non-smokers still get old, get sick, and consume tons of healthcare). I'm tempted to jump in, but yet I know it will lead nowhere. And who is a bigger fool, the fool or the fool who wastes time debating the fool? You let them decline. It's sad, but everybody came to this party and got drunk–the government, the banks, the homebuilders, the home-flippers, the home buyers. Now we all just have to make it through this punishing hangover like the men and women we are, and move forward, once we've finally hit bottom.
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I refuse to debate Liam or Ethan. Actually they remind me somewhat of the campus marxist that i used to hang around with at the People's Republic of Madison WI back in the day. (He was the lead singer in my band)Fun fact: he is now the chief market strategist for a big money manager (is on CNBC all the time) and is quite conservative.
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OT: Obama as Hoover.Hoover was the last incumbent to lose a presidential election without being challenged in the primary, a 3rd party, or declining to run (or failing to receive the nomination of his party, something that can no longer happen). Hoover was broadly seen, however, as being materially responsible (though he wasn't, really) for much of the '29 crash and subsequent economic downturn. He was also seen as doing nothing, and said things that I fundamentally agree with, but would have understood that you should not say as president: "Nobody is starving in America. Hobos are eating better than ever!" He also lacked a credible opposition on whom to blame the foundering economy, or did not try. As such, I don't get the impression there was a broad sense that the Democrats were holding things up, or were partly or mostly to blame for the economy of 1932. Obama has that. I don't get a sense of how FDR was perceived early on in 1931, but I imagine he was perceived more favorably than any of the current Republican crop is (even, in many cases, by other Republicans).
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Re: my "let them decline" statement was in reply to MsJS. Occurred to me on re-reading I didn't include what I was replying to, and it really didn't make sense:Over at PL, there was recently a lot of gnashing of teeth over what to do about the continuing decline in US home values.You let them decline. It's sad, but everybody came to this party and got drunk–the government, the banks, the homebuilders, the home-flippers, the home buyers. Now we all just have to make it through this punishing hangover like the men and women we are, and move forward, once we've finally hit bottom….There we go, that's more like it.
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It's not that Hoover did nothing, he didn't do enough. A charge which will be validly laid at the feet of this administration eventually.
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I second KW's "do nothing" policy re: housing, with the caveat of that "nothing" should also be extended to promoting home ownership in the first place.
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I accept 'do nothing' about home prices if that does NOT extend to job creation. The problem isn't housing prices alone, it's the poor ratio of housing prices to income.The irrational exuberance of the housing boom was the decoupling of housing costs & income.
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All of this discussion presupposes the government CAN do anything about prices. I don't think they can. Prices are going to go where they are going to go. The government's policies will simply amount to pulling off the band-aid slowly. Better just to rip it off and move on. The economy will recover that much faster.
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The proposals being bandied about these days have more to do with keeping homeowners with underwater mortgages from defaulting than slowing or reversing the decline in home prices. I'm usually for some sort of government intervention to soften the blow/reduce suffering, but I have yet to hear about a proposal that (a) has limited impact; (b) comes with risks I don't like; (c) is workable on a large scale.
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Also, any attempts to have principal reduction on conforming mortgages will mean that Fannie and Fred will need more money from the government. They are probably carrying these mortgages on their balance sheet at par. That is a dicey problem for the administration. If it appears they are using taxpayer money (which they are) to pay for principal writedowns, that isn't going to go over well.
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Brent, Fannie and Freddie have said if they're forced to write down principal, they will raise the cost of borrowing to partially make up for it. Another dicey problem for the administration.The idea that Fan/Fred can get away with carrying the mortgages on their balance sheets at par is like saying the Emperor has a closet full of new clothes.
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well, i think any reduction plan will only apply to performing loans which will definitely be carried at par.
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well, the day they reduce principals is the day i stop writing my mortgage check.
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