Wednesday, February 13, 2008

Suspended Animation

Markets seem to be in suspended animation mode, zipping and getting zapped by a variety of relevant and irrelevant newsbits, rumors and wishful expectations. The latest were Mr. Buffet's offer to assume the monolines' municipal bond insurance books and the agreement between a group of banks to freeze home-owner foreclosure actions for 30 days.

They are both "no-brainers"..

Of course, Mr. Buffet wants the muni insurance business! It's the profitable cream which, if removed from the monolines' books, will leave them with the rapidly souring structured finance insurance business, hastening their demise. The sly old gentleman does not expect the ailing insurance companies to accept voluntarily; he's just placing a marker on the table, for the event that monolines go under and their municipal business has to be transferred to other insurers - for example, his own recently formed credit insurance company.

In the meantime, credit risk for corporate bonds keeps going up and up, even for investment grade names.
CDX Investment Grade Index (Chart: Markit)

As for the 30-day "freeze" plan, it's a delaying tactic in anticipation of further deep Fed interest rate cuts, which could ease some of the pain in the upcoming wave of adjustable rate mortgage resets. The initiative's name is straight out of Depression Era programs: "Hope Now". Now, it looks to me, Hope is the only thing being offered to the desperate investors who see the value of their "creature feature" securities plunge deeper and deeper into the toxic waste dump, from which they initially arose...and Hope dies last.

So far, attention has been focused almost exclusively on banks' holdings and their write-offs, amounting to some $130 billion. But this is a small part of the problem; after all, banks acted as intermediaries, packagers who funnelled the merchandise to the ultimate buyers: pension, mutual, hedge and private equity funds, plus SIVs and corporations who parked their cash there. In other words, the banks' holdings were the leftovers and the rotting main course is still to be accounted for. Only a few foul whiffs have escaped so far, as a small number of non-financial corporations took charges against fourth quarter 2007 earnings to write down losses in their holdings.

There is more to come. According to SIFMA, a total of $1.5 trillion in CDOs alone were issued globally during 2004-07.


  1. After that farce in January, I guess the Fed feels it cannot further strain its credibility via another unscheduled ('emergency') rate cut, so ridiculous measures -- like this freeze on foreclosures and the Buffett news -- serve, or are used, to prop up the equity markets until the next Fed meeting. It is hard to understand how anyone -- e.g. "investors" -- could take what we heard yesterday seriously enough to buy on the news; but this is the spin you hear.

  2. Americans were very loud and righteous in their advice to Japan over 10 years ago, and telling that any delaying would just make things worse on the long run. It would appear that advice is so much easier to give than take. We are still in the first inning, this will go on for a long time!

  3. How long before municipalities and state pension funds realize that they have a grave revenue shortfall on their hands?

    How long before they have to inform their employees (and the taxpayers) that their retirement fund is almost worthless?

  4. I'm amazed at how many analysts I consider pretty savvy - Calculated Risk, John Hussman, Eric Janszen, John Mauldin, Martin Hutchinson - are in the shallow recession or stagflation camp. All of these guys saw the credit crunch and market correction coming yet now seem to think the consequences will be muted. One trait they share in common - resource depletion is either not on their radar or not taken as a serious threat. Meanwhile on Bubble Television this morning (aka CNBC) was a gushing piece on the explosive growth in private jet sales. Apparently a Marquis Jet card has become the latest must-have status symbol for Wall Street's million-dollar-bonus babies.

  5. Yes I agree that America is acting just like Japan and probably will for the next 10 to 20 years, at least we have a pretty good idea of what to expect.

  6. fat_tail_rider,

    I am wondering exactly same thing,
    I am curious what is the opinion of our dear host on this matter?

  7. About resource depletion:

    THE subject. In resources I also include habitable environment, which is 100% related to other resources such as oil, coal,etc. whose use and depletion proportionately degrades the environment. As I have said b4, The Era of Permagrowth is over.

    It's time to scale down to sustainability, and do so quickly, because I have a growing suspicion that the Earth's natural ability to "buffer" human over-activity is running out.

    Remember your chemistry? Buffered solutions? Look them up...


  8. maybe even super-saturated solution, where one little input will begin a self-perpetuating cascade.

    Jason B

  9. fat_tail_rider,

    What the analysts you named really have in common is - without Wall Street as it's currently configured their "meal ticket" is worthless.

  10. H. Buffers!! Now this is not a topic for the Great Unwashed! Good analogy though.

    I saw this on Market-ticker.denninger;

    "... the Fed has been aggressively draining the SOMA account, with the pace of that drainage stepping up precipitously since December."

    Is this significant at this time?

    Brian P

  11. Hellasious:
    RE: Resource depletion

    In the mid '70s Princeton physicist Dr. Gerard O'Neill along with colleague Freeman Dyson proposed the building of new habitat in the form of space colonies fabricated from lunar material or asteroids.

    The economic justification included construction of orbiting solar power stations which were envisioned to beam electrical power to the surface via microvave transmission. Engineering studies were performed by Peter Glasser at the Arthur Little Corporation and featured in Aviation Week & Space Technology Magazine.

    The idea briefly so captured the imagination that it was featured in the American Bicentennial edition of the National Geographiic Magazine in an article written by Isaac Asimov. I believe it was the return of cheap oil that dried up the enthusiasm.

    Search "Gerard O'Neill", "Space Colonies" and "The High Frontier".

    The human race survives only if it expands into space and creation of new habitat is the first step. Now may be the time to revive the idea.

  12. Going against nature is part of nature too.

    Love and Rockets

    Jason B

  13. Re: Space colonies-
    Sign me up. I assume only vegetarians need apply?

    Re: Suspended animation-
    Freezing foreclosures and propping up the insurers all to hold off the fire sale of homes which would allow the assets to be revalued (which will be the wake up call you referred to, Okielawyer). If banks weren't also covering up true delinquency rates, it seems a virtual model could be created tracking delinquencies to probable foreclosures to probable sales price to effect on market value by ZIP code back to MBS value..bah too complicated. Suppose I'll just have to wait patiently instead of trying to figure out the ending.

  14. "Markets seem to be in suspended animation mode, zipping and getting zapped by a variety of relevant and irrelevant newsbits, rumors and wishful expectations. The latest were Mr. Buffet's offer to assume the monolines' municipal bond insurance books"

    Warren Buffet, an ambulance driver who arrives at the scene of an accident only to take away the healthy people....

  15. Love to see a post on where you think the dollar is heading. Personally I think bond yields are on their way to zero.

  16. dink:

    RE Vegans only ?

    Not so sure about that.

    O'Neill envisioned huge structures, over a mile across with artificial gravity, lakes, streams, farms, clean manufacturing etc. A self contained ecosystem along the lines of the "Biosphere" experiment in Arizona.

  17. For those that advocate a mass exodus to space...I'd surely love to go, but the price is high. It costs (roughly) $5000 per pound of payload. If you weigh about 170 lbs, that's almost a million bucks to get you into space, never mind all the rest of the gear you'd need in order to survive there, e.g. a "house", a "farm" and some "factories" and also some "materials".

    It's going to be a while, I think, before the human race inhabits space.

    Meantime, have you given any thought to how many people you might convince to .. ahem.. refrain from breeding, if you had $1MM to spend?

    Speaking of suspended animation, the political process sleepwalks forward...but Wait! Obama has announced that he understands that people want specifics from him, not just hope (although that's a good start). He's mentioned that Economic Plans are forthcoming.

    Anyone care to take a fling at what his "Plan" is going to be?

  18. Sue,

    As the Credit crunch advances, money will just not be there anymore. Two years t-bill close to zero, yes, but the longer maturities straight up! Steepener is the long term bet to make.

  19. America acting like Japan? If I take the meaning of the word "acting" literally, not a chance, anonymous san. We are an unruly bunch here in the U.S. and there will be civil unrest like they never saw in Japan where everyone behaves.

  20. It is technologically possible to build any number of systems that will give us cheap access to space. I've been working on this since 1979.
    You think you've got pricing problems for housing now...