Friday, March 30, 2007

One Simple Question

Markets go up and down. The Fed hems and haws and million-dollar economists tear its statements apart to see if a comma was moved one word over. The BLS, Census, Commerce, U. of Michigan, etc. etc. etc. all issue data and reports which are slashed, underlined and marginalized until grosses of Mont Blanc pens run out of ink.

Then, after all is said and done, all of the analysts appear on TV, Internet or newspapers saying exactly the same things as before: the data, whatever it is, does not change their prior expectations and beliefs one iota. Highly scientific, eh?

My experience has taught me that 80% of all you need to know about the economy is contained within the answer to a simple question, such answer being immediately and correctly available to all reasonably informed persons. You need not travel to Delphi to offer bags of gold to Apollo's priests; in any case, Pythia was one sharp lady who just uttered things like "Haagrfstry Allastyrbg Junoklser" and let the priests "translate" according to the weight of the gold offered and the current geopolitical conditions. You know.... just like Alan Greenspan.

Here is the question:

Is it getting easier or harder to borrow money?

As anyone who has seen "Cabaret" knows, Money Makes The World Go Round. This being so, it is perfectly clear why it would also affect such comparatively trivial things like mortgages, corporate loans, stocks, commodity prices, et cetera.

Now, I must freely admit that in recent years it has gotten somewhat harder to obtain the answer. It used to be that almost all you had to do is follow the real Fed Funds rate, but no longer. As even Alan "The Oracle" himself freely admitted, there are now "conundrums" to be dealt with. To wit, how come longer rates remained stubbornly low and credit flooded everywhere even after a dozen and a half Fed rate hikes?

Ha! you may cry...: "I have been reading a certain blog and I know my credit alphabet soup: CDOs, CDSs, ABX, CMBX...I realize that banks no longer lend but simply pool, securitize and sell loans to speculators, thus are not constrained by liquidity regulator valves like reserve requirements and Fed rates."

Not only that, but you found out that, for an additional risk, borrowers could completely snub the mighty dollar and import ultra cheap loans from Japan and Switzerland in yen or francs - the finance equivalent of buying cheap-o Chinese sneakers from MartMart.

"Financial innovation" and "globalization" are now just as important as the Fed - probably even more so. Darn, can't just figure out liquidity conditions while sipping your morning java, flipping to the business section and looking at Fed funds rates.

But it doesn't take much more effort... one glance at the Foreign Exchange section will reveal the USD/JPY and USD/SFR rates. As for derivatives, you will need to go to the Internet or the WSJ and peruse the movement of credit spreads for a few indexes like ABX, CDX and iTraxx.

That's not such a chore, if we are to ascertain that the world keeps going round or if we are in for a re-release of "The Day The World Stood Still".


  1. Hellasious,

    Interesting WSJ article about San Diego pension fund suing Amaranth for being misled re: potential risk exposure. It seems that whether it is the housing bubble or hedge fund blowups, San Diego is right on the bleeding edge of the debt crisis.

    Of course, I'm sure the fact that the San Diego pension fund is already dreadfully underfunded had nothing to with the "prudent" decision to use pension monies to speculate on natural gas futures.

    If I were a prospective pensioner I would be screaming up and down asking what my retirement money is doing in leveraged commodity plays. I am already doing that myself with my no money down ARM.

  2. Hedge funds' capital under management have grown to approx. $2 trillion, as of 12/06. Quite a lot of that money comes from pension funds trying to make as much money as possible to cover holes in their funding. More potential return = higher assumed risk, no two ways about it.

    For anyone plunking down money to a hedge fund and saying they were misled about risk is nonsense.

    And since you brought up pension funds: there is a huge storm brewing out there with billions in "structured finance" bonds sold to dozens of pension funds, in the US and Europe. Lots of them are already 15-25% under water.

  3. The party is well and truly over where the multi-faceted money spigot is concerned, and kudos to you for doing such a wonderful job outlining our crazed credit creating landscape. Despite the happy talk that emanates from the street, The sub-prime catastophe is just the first event in in a whole slew of hideous financial "accidents" to come. I put accidents in quotes since high wire (financial) acts of the sort you have chronicled, rarely, if ever, end well after repeated forays across the canyon. See Ludwig Von Mises on "The crack up boom."

    Our latest asset bubble collapse, unlike the one's before it, is going to be too much to overcome this time around, because, well, real estate ain't tech stocks. But, interestingly, to me at least, the secular bear that begain in '00 and ended in late '02, early '03, you know the one that took 50% off the S&P500, has not, after four years in bull mode, been surpassed in real terms. And now we are at the very early states of the next and likely most savage leg down in shares, though the woes of real estate will likely be grabbing the headlines more often than during our incipient death spiral.