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Yes, Peter, correlating correlations are part of the problem.
Doug Noland essentially describes the basis for a coming
MCHVIE which will be likely driven by a derivative meltdown,
soooo a Mass-Correlation Hyper-Volatility Illiquidity Event,
or MCHVIE, may be coming to your neighborhood soon.
We’ve shown that correlations are not well understood
by derivative developers with a correlation puzzle that
makes this point clear. It is available upon request.
Asset class correlations are themselves correlated with
whole system volatility and when they all spike together,
it’s a selling panic MCHVIE.
Very rare, but very devastating. More later.
January 18, 2008
by Doug Noland
The financial crisis took another giant leap this week. Credit insurer ("financial
guarantor") Ambac lost its AAA rating (from Fitch), in what will mark the onset of a
devastating run of downgrades for the likes of Ambac, MBIA and the entire industry. The
"monoline" insurance business, as we've known it, is done and the value of the
insurance they're written is evaporating by the day. The market is now desperate to
determine which financial institutions (and there are many) have purchased large
amounts of (now suspect) insurance for hedging purposes, as well as other financial
companies that have in one way or the other participated in the Credit "reinsurance"
Virtually all the major financial players are embroiled in this Systemic Credit Fiasco.
Importantly, the mind-blowing demise of the "financial guarantors" is fomenting a crisis
of confidence in Credit insurance in all its various forms (certainly including the Credit
default swap (CDS) and MBS guarantee markets). I'm assuming that our policymakers
will attempt to throw together some type of industry recapitalization strategy, although
the complexity of the issue leaves one perplexed as to how any bailout plan would be
structured. I suspect that our federal government will eventually be forced to enter the
"financial guarantee" business, at least to the point of assuming the obligations of
municipal bond (from the "monolines") and mortgage-backed securities (from the GSEs)
The Credit system is today an incredible mess. Literally Trillions of securities, previously
valued in the marketplace based upon confidence in the underlying financial guarantees,
are now suspect. This has severely impacted marketplace liquidity. And perhaps tens of
Trillions of Credit and other derivative contracts are now subject to very serious
counterparty issues. Many players throughout the Credit market are now severely
impaired and have lost the capacity to hedge against/mitigate further losses.
To be sure, Discontinuous and Illiquid Markets have Wreaked Bloody Havoc on
"dynamic" trading strategies used commonly to hedge various risks. I don't believe it is
hyperbole to suggest that "dynamic hedging" (in particular shorting Credit instruments
to provide the necessary cashflows to pay on Credit derivative contracts written) became
the critical linchpin of contemporary Wall Street risk intermediation. Yet today the
models behind so many strategies that have come to permeate "contemporary finance"
have completely broken down; the strategies of thousands of financial institutions - big
and small - have turned infeasible.
From a macro perspective, Wall Street Risk Intermediation has essentially crashed and
the "risk markets" essentially "seized up." Almost across the board, the major risk
operators are moving aggressively to rein in risk-taking. The leveraged speculating
community is in turmoil. The "quants" are in a quandary. Basically, the entire market
today desires, at least to some extent, to reduce/mitigate/transfer Credit and market
risk. Inevitably, however, when "the market" is keen to hedge there'll be no one with
the necessary wherewithal to take the other side of The Trade. I have so many fears I
don't even know where to begin, although I will say that I am less than comfortable
these days discussing individual companies. Tonight the (brief) analysis will be in
There are scores of financial players - from small hedge funds to the major "money
center banks" - with complex books of derivative trades that now have a very serious
problem. These "hedged books" contain various supposedly offsetting risk exposures
that, in there entirety, were to (through financial "alchemy") have created a reasonable
and manageable portfolio risk profile. But the breakdown in Wall Street finance has
transformed these too often highly leveraged "books" into essentially unmanageable
"toxic waste" and financial landmines.
First, correlations between various instruments have broken down [We’ve demonstrated
that correlations are not well understood by their developers with a correlation puzzle
that makes this point clear. It is available upon request] (i.e. junk bond spreads widen
while "dollar swap spreads" narrow). Second, the liquidity profile (hence pricing) of
various sectors has diverged radically (i.e. agency MBS vs. "private-label" MBS/ABS).
Third, with the breakdown in Wall Street's "private-label" MBS market and the collapse
in confidence in the "monoline" Credit insurers, liquidity has all but evaporated
throughout huge cross-sections of the debt securities and related derivatives markets.
This dynamic is fomenting dangerous counter-party risks and uncertainties. The capacity
of a rapidly rising number of market participants to fulfill their obligations in various
types of derivative and "insurance" contracts is in question.
Imagine you have a "hedged book" of securities and derivative - for example a portfolio
of CDOs hedged with Credit Default Swaps (CDS) from one of the "monoline financial
guarantors." Today, the value of your CDO portfolio is declining while the "value" of your
offsetting CDS hedge is impaired by the increasing likelihood of a default by the
"monoline" (who provided the CDO default "insurance"). The reality is that the hedged
position has broken down and risk now rises by the day. And, unfortunately, your
options are decidedly limited - there is little if any liquidity to sell the underlying CDO.
One could go into the market and attempt to buy additional protection, although in
many cases the cost would be prohibitive. Besides, there's today little assurance that
counter-party risks wouldn't emerge in the second hedge as well.
The Wall Street firms and many of the more sophisticated hedge funds run very complex
"books" of securities and derivatives. The dilemma they face today is commensurate
with the complexity of their strategies. Recent developments - in particular heightened
marketplace illiquidity, rising probabilities of "monoline" defaults, dislocation in the CDS
markets, and a breakdown in typical correlations between instruments/sectors/markets -
makes the job of effectively comprehending, quantifying, analyzing and managing risk
impossible. Do the managers, then, attempt the highly problematic task of recalibrating
hedges based on current conditions (i.e. spiking hedging costs, likely counterparty
defaults, and recent market correlations) and risk compounding the problem if market
conditions begin to normalize? Is it feasible for these players to recalibrate hedges,
knowing full well that our well-intentioned policymakers are destined to intervene
clumsily in the marketplace?
It is difficult for me to see how the leveraged speculating community is not in serious
jeopardy. It became all too commonplace to leverage illiquid (and difficult to price)
securities, while even the previously liquid markets today barely trade. Few speculative
Bubbles in history were as vulnerable to a "run." None were remotely as gigantic or
global in scope. This "community" creates (systemic) worry because of the vulnerability
of losses and resulting redemptions creating panic dynamics. Today, market illiquidity
increases the likelihood that many funds will be forced to halt redemptions. This dynamic
has commenced and it holds the potential to batter industry trust and confidence.
The leveraged speculators create various systemic risks. Their desire to hedge risk
exposures - as well as seek speculative profits - during market turbulence has certainly
exacerbated the Credit Crisis. During the cycle's upside, their desire to leverage
securities greatly amplified the liquidity bull run. Today, their selling/deleveraging/
hedging foments liquidity crisis and panic. Importantly, the speculators are today keen
to short stocks, sell futures, and purchase equity put options. The "hedge funds" have,
after all, sold themselves as capable of minting money in any kind of market
environment. All the same, a major systemic dilemma is unfolding.
Leveraged speculator dynamics in concert with a Bursting Credit Bubble now places
enormous stains on the stock market. Not only have faltering Credit Availability and
Credit Marketplace Liquidity dramatically diminished the prospects for companies,
industries and the general economy. Limited liquidity in the Credit market has also
created a backdrop where those seeking to hedge (or profit from) heightened systemic
risks have few places to go for relatively liquid trading outside selling stocks and equity
index products. And sinking stock prices further aggravates the unfolding Corporate
Credit Crisis, fostering only greater systemic stress and only greater selling pressure.
"Contemporary finance" is being exposed as a daisy-chain of interrelated risks and
The Credit Bubble Bulletin
Wow... For the week, the Dow dropped 4.0% (down 8.8% y-t-d) and the S&P500 5.4%
(down 9.8%). The Transports dipped 0.2% (down 8.6%), and Morgan Stanley Cyclicals
dropped 3.9% (down 12.3%). The Utilities were smacked for 7.5% (down 5.9%), and the
Morgan Stanley Consumer index fell 4.6% (down 7.7%). The small cap Russell 2000 was
clipped for 4.5% (down 12.1%), and the S&P400 Mid-Caps sank 5.0% (down 11.9%). The
NASDAQ100 declined 3.6% (down 11.6%), and the Morgan Stanley High Tech index lost
2.1% (down 12.1%). The Semiconductors rallied 1.3% (down 12.2%). The Street.com
Internet Index fell 2.9% (down 11.5%), and the NASDAQ Telecommunications index
dropped 4.7% (down 12.8%). The Biotechs declined 2.6% (unchanged). The Broker/Dealers
sank 7.1% (down 14.2%) and the Banks 7.7% (down 12.4%). Although Bullion was down
only $10.50 to $885, the HUI Gold index was hammered for 8.1% (up 6.7%)
Another week of trading, a further melt-up in Treasuries... Three-month Treasury bill rates
sank 25.5 bps the past week to 2.845%. Two-year government yields fell 21 bps to
2.345%. Five-year T-Note yields fell 20 bps to 2.84%, and ten-year yields fell 15.5 bps to
3.63%. Long-bond yields were 9 bps lower to 4.28%. The 2yr/10yr spread ended the week
at 128 bps. The implied yield on 3-month December '08 Eurodollars sank 24 bps to 2.66%.
Benchmark Fannie MBS yields fell 10 bps to 5.06%, this week under-performing Treasuries.
The spread on Fannie's 5% 2017 note was one wider at 50 bps and Freddie's 5% 2017 note
little changed at 50 bps. The 10-year dollar swap spread increased 1.8 to 62. Most
corporate bond spreads were wider, with the spread on an index of junk bonds ending the
week 16 bps wider.
Investment grade issuance included Target $4.0bn, Cargilll $1.25bn, National Rural Utility
Coop $700 million, Southern California Edison $600 million, State Street $500 million, ITC
Holdings $385 million, John Deere $350 million, ITC Midwest $175 million, and Textron
Junk issuance included Atlas Energy $250 million and Theravance $150 million.
Convertible issuers included Pioneer Natural Resources $440 million,
Foreign dollar debt issuance included Oester Kontronbk $2.0bn.
German 10-year bund yields dropped 10 bps this week to 3.97%, while the DAX equities
index sank 5.2% (down 9.3% y-t-d). Japanese "JGB" yields declined 2bps to 1.39%. The
Nikkei 225 fell 3.7% (down 9.5% y-t-d). Emerging equities markets took it on the chin and
debt markets were mixed-to-lower. Brazil's benchmark dollar bond yields jumped 10 bps to
5.69%. Brazil's Bovespa equities index sank 7.2% (down 10% y-t-d). The Mexican Bolsa fell
7.0% (down 9.6% y-t-d). Mexico's 10-year $ yields dropped 10 bps to 5.11%. Russia's RTS
index was hammered for 6.7% (down 5.7% y-t-d). India's Sensex equities index sank 8.7%
(down 6.3% y-t-d). China's Shanghai Exchange sank 5.5%, reducing y-t-d performance to a
loss of 1.5% (up 88% y-o-y).
Freddie Mac posted 30-year fixed mortgage rates dropped 18 bps this week to 5.69% (down
54bps y-o-y). Fifteen-year fixed rates sank 22 bps to 5.21% (down 77 bps y-o-y), with a
two-week decline of 47 bps. One-year adjustable rates fell 11 bps to 5.26% (down 25 bps
Bank Credit jumped $24.8bn during the most recent data week (1/9) to a record $9.304 TN
(4-wk gain of $140bn). Bank Credit posted a 25-week surge of $660bn (15.9% annualized)
and a 52-week rise of $1.005 TN, or 12.1%. For the week, Securities Credit dipped $1.7bn.
Loans & Leases surged $26.5bn to a record $6.831 TN (25-wk gain of $507bn). C&I loans
declined $2.2bn, with one-year growth of 21.4%. Real Estate loans gained $9.4bn (up 7.7%
y-o-y). Consumer loans rose $6.6bn. Securities loans gained $11.1bn, and Other loans
added $1.7bn. On the liability side, (previous M3) Large Time Deposits increased $2.9bn.
M2 (narrow) "money" supply slipped $5.9bn to $7.456 TN (week of 1/7). Narrow "money"
expanded $399bn y-o-y, or 5.6%. For the week, both Currency and Demand & Checkable
Deposits were little changed. Savings Deposits fell $10.1bn, while Small Denominated
Deposits added $1.4bn. Retail Money Fund assets increased $2.9bn.
Total Money Market Fund assets (from Invest. Co Inst) surged $23.8bn last week (2-wk
gain $75.8bn) to a record $3.189 TN. Money Fund assets have posted a 25-week rise of
$605bn (49% annualized) and a one-year increase of $810bn (34.1%).
Total Commercial Paper rose $35.5bn to $1.849 TN. CP has declined $375bn over the past
23 weeks. Asset-backed CP jumped $26.4bn (23-wk drop of $390bn) last week to $805bn.
Over the past year, total CP has contracted $147bn, or 7.4%, with ABCP down $265bn
Fed Foreign Holdings of Treasury, Agency Debt last week (ended 1/14) jumped $14.4bn to
a record $2.072 TN. "Custody holdings" were up $299bn year-over-year (16.9%). Federal
Reserve Credit declined $1.7bn last week to $867.5bn. Fed Credit expanded $21.5bn y-o-y
International reserve assets (excluding gold) - as accumulated by Bloomberg's Alex Tanzi -
were up $1.334 TN y-o-y, or 27.1%, to a record $6.270 TN.
Global Credit Market Dislocation Watch:
January 17 - Bloomberg (Emma Moody): "MBIA Inc.'s AAA insurance rating may be cut by
Moody's... Moody's also said it may cut the Aa2 rating of surplus notes sold by MBIA last
week. The ratings review reflects potential losses from subprime mortgage securities
including collateralized debt obligations, Moody's said..."
January 16 - Financial Times (Ben White and Justin Baer): "Citigroup's announcement
yesterday that it lost nearly $10bn in the fourth quarter and would write down $18.1bn on
subprime mortgage-related losses was not cheering to investors. Nor was the bank's
decision to slash its dividend by 40% and raise $14.5bn in fresh capital...But these things at
least did not come as much of a surprise... What came as more of a shock, and left analysts
scurrying to reassess Citi's earnings power in the future, was the jump in credit costs to
$5.4bn, which included a charge of $3.31bn to increase US consumer loan-loss reserves, up
from a net release of $127m a year ago. The increase reflects rising delinquencies on first
and second mortgages, unsecured personal loans, credit cards and auto loans. And the
increase in reserves indicates Citi believes the health of the consumer is likely to get
significantly worse before it gets better as the US heads into a downturn."
January 16 - Bloomberg (Shannon D. Harrington): "The worst may still be ahead for the
world's biggest financial companies, trading in credit-default swaps shows. Prices for
contracts tied to the bonds of MBIA Inc., Bear Stearns Cos. and Washington Mutual Inc.,
which protect lenders and creditors against the possibility that debt payments won't be
made, are higher for one year than for five, according to data compiled by Bloomberg.
Longer-term protection is usually more expensive because the risk of nonpayment is
greater... Lenders hold more than $200 billion of bonds and loans used to finance leveraged
buyouts that they can't sell and are falling in value, based on data compiled by JPMorgan
Chase & Co."
January 17 - Financial Times (Ben White): "Citigroup and Merrill Lynch turned to foreign
investors for an unprecedented bail-out yesterday, saying they will raise a total of $21.1bn
in fresh capital - mainly from outside the US - to shore up balance sheets devastated by the
subprime mortgage crisis. Citigroup also unnerved investors by warning of losses to come
from consumer loans as it revealed a 40% dividend cut, a $9.83bn fourth-quarter loss,
$18bn in subprime-related credit writedowns and remaining exposure of $37bn to subprime
mortgages. 'No one can say this whole thing is over.' Gary Crittenden, Citi chief financial
officer, said... 'These are not optimistic assumptions. But there are always circumstances
under which things could get worse.' Citigroup is raising $14.5bn and Merrill $6.6bn, largely
from private investors and governments in the Middle East and Asia, representing the
biggest-ever single transfer of capital to American banks from abroad. It could raise
pressure from US politicians concerned about foreign influence on the banking system. 'Not
since before World War I have companies gone looking for foreign capital as much as they
are now,' said Charles Geisst, a Wall Street historian. 'It poses a number of significant
January 16 - Bloomberg (John Glover): "Bondholders in structured investment vehicles,
caught in the collapse of the subprime mortgage market, have seen the value of their
investments fall by almost 50%, according to Moody's... The net asset value of SIVs, funds
that use commercial paper and medium-term notes to buy higher-yielding debt, fell to 53%
at the end of last year from 100% in July... Investors who own the funds' lowest-ranking
bonds, called capital notes, would lose an average 47% should the SIVs be forced to
January 17 - Dow Jones (Anusha Shrivastava): "Growing worries about the health of the
commercial mortgage bond market gripped investors Thursday, sending a derivative index
based on those bonds into a tailspin. The triple-B minus slice of the Markit CMBX 4 series,
which is based largely on deals from early 2007 through the summer of last year, widened
by 175 bps..."
January 17 - Financial Times (David Oakley): "Bank and corporate bond issuance has
recorded the worst start to a year since 1997 as growing fears of a US recession and
concerns over company results weigh on the market. Fundraising in the debt capital
markets stands at $152bn this year, down 35% compared with the same period last year,
according to Dealogic... This marks the slowest start to a year since $77.9bn was raised in
the first two weeks of 1997."
January 15 - Bloomberg (Mark Deen and Kitty Donaldson): "The U.K. Treasury said it may
nationalize Northern Rock Plc in order to recover more than 25 billion pounds ($49 billion) in
loans it made to the bank and to protect depositors. 'Conditions are difficult,' Chancellor of
the Exchequer Alistair Darling said... 'I would like to find a private sector solution, but all
options, including nationalization, have to be considered.'"
January 15 - Bloomberg (Laura Cochrane): "Centro Properties Group, the Australian owner
of 700 U.S. shopping malls, said Chief Executive Officer Andrew Scott resigned and asked
lenders to extend a Feb. 15 deadline to refinance A$3.9 billion ($3.5 billion) of debt...
Centro fell 30% to a record in Sydney trading, valuing the company at A$502 million."
January 16 - Bloomberg (Patricia Kuo): "The risk of Asian banks defaulting on their debt
rose to a record... Contracts on Kookmin Bank, South Korea's largest by market value,
jumped 10 bps to 140 bps... Credit-default swaps on ICICI Bank Ltd., India's biggest,
moved out 20 bps to 330 bps, according to Barclays."
January 17 - Financial Times (Peter Garnham): "The current turmoil in financial markets has
revealed the extent to which the low-yielding yen has funded soaring global asset prices in
recent years. Last year, the yen tumbled to multi-year lows against a raft of currencies as
carry trade investors sold the currency to finance the purchase of riskier, higher yielding
assets elsewhere. But now, as asset prices falter, the yen is threatening to climb sharply...
The Japanese currency has soared in recent days as fears of US recession have prompted a
fresh exodus from carry trades. Yesterday it surged to a 2½-year high..."
January 15 - Financial Times (Gillian Tett): "The US looks poised to lose its mantle as the
world's dominant financial market because of a rapid rise in the depth and maturity of
markets in Europe, a study suggests. The change may have occurred already, not least
because US markets are beset by credit woes, according to research by McKinsey Global
Institute... 'We think the differential growth rates are so significant that it is quite likely
Europe has overtaken the US," said Diana Farrell, author of the report. 'They are now neck
and neck, which means exchange rates are very important. It is a real change.'"
The dollar index rallied 0.5% this week to 76.50. For the week on the upside, the Japanese
yen increased 1.4%, the Mexican peso 0.1%, and the Taiwanese dollar 0.1%. On the
downside, the South African rand declined 4.7%, the Norwegian krone 3.9%, the New
Zealand dollar 3.8%, the Brazilian real 3.2%, the Swedish krona 2.2%, the Australian dollar
2.1%, the Danish Krone 1.8%, and the Euro 1.7%.
For the week, Gold declined 1.2% to $885 and Silver 0.5% to $16.28. March Copper fell
2.1%. February Crude slipped $2.13 to $90.56. February Gasoline declined 0.7%, and
January Natural Gas dropped 3.5%. March Wheat bucked the selling, gaining 5.9%. The
CRB index fell 1.2%, reducing 2008 gains to 0.7%. The Goldman Sachs Commodities Index
(GSCI) dropped 1.4%, with a y-t-d decline of 2.1% (52-week gain 48.3%).
January 16 - The Wall Street Journal (Andrew Batson): "China's government moved to exert
further control over increases in some food prices, signaling a heightened political concern
over the high inflation that is threatening to erode the meager incomes of the nation's rural
majority. Under temporary measures announced yesterday, large producers of some food
products -- including dairy, pork, mutton and eggs -- must now seek government approval
before increasing prices. Wholesalers and retailers of those food products don't have to seek
permission for raising prices, but most notify the government when the gains cross certain
January 16 - Bloomberg (Li Yanping and Nipa Piboontanasawat): "China ordered banks to
set aside larger reserves and imposed price curbs on grain, meat and eggs to try to prevent
inflation at an 11-year high from triggering civil unrest. Lenders must park 15% of deposits
with the central bank from Jan. 25, the People's Bank of China said... up from 14.5%. The
ratio is the highest in at least 20 years. 'Significant price increases of some key commodities
over the past few months have affected people's lives, especially low-income households,'
the National Development and Reform Commission said... Inflation helped trigger the
Tiananmen Square protests and crackdown of 1989 and stampedes for discounted food
have injured and killed Chinese citizens over the past year."
January 15 - Bloomberg (Michele Batchelor): "China, the world's biggest user and producer
of coal, increased purchases of the fuel from overseas by 34% last year as its economy
January 15 - Bloomberg (Wang Ying and Ying Lou): "China has shut down more than 6% of
the power generating capacity in its southern provinces because of a coal shortage, with the
region bracing for the worst electricity shortage in at least five years... 'The problem is
serious,' Xiao Peng, vice president of China Southern Power Grid Co., said. 'We have sent an
urgent request to the central government to address the issue,' he said... China burns coal
to generate about 78% of its electricity."
January 16 - China Knowledge: "Due to the upcoming Chinese New Year...China's major
liquor producers have started increasing their liquor and spirits prices in succession... In
response to the rising market demand, Kweichow Moutai, China's leading spirit company,
announced last Friday that it would increase the spirits prices by 20% on average, which
would be the company's second time to raise the producer prices since last March."
January 16 - Financial Times (Lindsay Whipp): "Japanese producer prices jumped at their
fastest pace in a year in December mainly because of higher oil and food costs, a burden
companies may have to force their customers to bear to protect profits. Consumers are
already paying higher oil and food costs even though most are not receiving higher wages,
leaving them less to spend on items other than daily necessities such as petrol and noodles.
Wednesday's 2.6% increase in producer prices will only add to the burden. Oil and coal
costs surged 24.4%..."
Asian Bubble Watch:
January 17 - Financial Times (John Aglionby): "Indonesia was yesterday forced to take
emergency action to calm street protests over record soyabean prices. The record prices
were triggered by US farmers opting to grow corn to supply the biofuel industry over
soyabeans. Rising Chinese demand for soyabeans and bad harvests in Argentina and Brazil
have also contributed to the jump, which saw Indonesia suffer the biggest food-related
protests since last year's Mexican tortilla crisis. Susilo Bambang Yudhoyono, Indonesian
president, was forced yesterday to announce measures to boost local soyabean supply. The
move came a day after 10,000 people took to the streets in Jakarta to complain about the
rising cost of one of the country's staple foods."
Unbalanced Global Economy Watch:
January 16 - Bloomberg (Alan Purkiss): "European economies may suffer from 'stagflation'
this year, with growth slowing even as inflation quickens, the Wall Street Journal reported.
European Central Bank staff projections indicate that inflation in countries that have
adopted the euro wll be about 2.5%, compared with the bank's 2% target..."
January 16 - Bloomberg (Gabi Thesing and Chris Malpass): "German inflation accelerated
last year to the fastest pace since records began in 1996... Consumer prices rose 2.3% in
January 15 - Bloomberg (Gabi Thesing): "Investor confidence in Germany fell to the lowest
in 15 years on concern that a U.S. recession will deepen the slowdown in Europe's largest
January 15 - Bloomberg (Balazs Penz): "Hungarian inflation accelerated in December as oil
prices advanced, making it more difficult for the central bank to reduce the European
Union's second-highest benchmark interest rate. The inflation rate climbed for a third month
January 16 - Bloomberg (Tracy Withers): "New Zealand's inflation rate accelerated in the
fourth quarter... Consumer prices rose 1.2% from the third quarter... From a year earlier,
prices rose 3.2%."
January 17 - Associated Press (Riaz Khan and Ashraf Khan): "When the delivery truck finally
arrives, laborer Sher Nawaz joins about 400 Pakistanis scrambling to buy a sack of wheat
flour. He returns empty-handed. 'We were told there was a bumper crop of wheat this
season, but look at us,' says Nawaz, 45, his voice trembling with anger. He waited three
hours in a crowd of bearded men wrapped in woolen shawls and burqa-clad women at a
Peshawar bazaar, only to have the state-subsidized flour run out before he and 100 others
got any... While terror attacks have left hundreds dead, it's flour shortages and rising food
prices that will be the most pressing issues in elections next month in this poor nation of
160 million people. Food prices jumped by about 14% in 2007, on top of double-digit
increases for the two previous years. Now Pakistanis wait in long lines at state-subsidized
stores to buy flour for the flat bread usually eaten with every meal."
Central Banker Watch:
January 15 - Dow Jones (Alan Purkiss): "The controversy over the Federal Reserve's
handling of the U.S. economic downturn has heated up, with former Chairman Paul Volcker
now on record saying the central bank has lost its grip. 'Too many bubbles have been going
on for too long,' Volcker said in an interview with Roger Lowenstein to be published in this
Sunday's New York Times magazine. 'The Fed is not really in control of the situation.'"
January 15 - Fortune (Colin Barr): "Alan Greenspan keeps on cashing in. The former Fed
chief is joining hedge fund Paulson & Co. as an adviser. The move, which comes on the
same day that Merrill Lynch and Citi raise some $21 billion in new capital to offset losses
tied to the collapse of the housing bubble, puts Greenspan on the advisory board of the firm
that has been among the biggest winners in betting against subprime mortgage-related
securities. Greenspan, who has also been busy promoting his book, already advises bond
shop Pimco and Germany's Deutsche Bank, The Wall Street Journal points out."
Bursting Bubble Economy Watch:
January 16 - Financial Times (Krishna Guha and Daniel Pimlott): "The underlying rate of
inflation remained uncomfortably high in December... highlighting the risk the Federal
Reserve is taking as it turns its focus to fighting recession risk... the whole year data
showed that overall consumer price inflation was 4.1% at an annual rate in 2007, the
highest since 1990."
January 17 - Financial Times (Krishna Guha and Matthew Garrahan): "California and Florida,
two of the most important states in the US, are either in recession or on the brink of it,
many economists now believe. The two states together account for nearly two-fifths of US
gross domestic product. California alone would rank among the world's top 10 economies,
while Florida would rank in the top 20. State-level data is patchy, but it suggests economic
activity is probably contracting in Florida and may be declining in California as well...
California and Florida, along with Nevada and Arizona, represent a new group of housing
boom-turned-bust states that could experience regional recession... Sales of existing homes
fell 36% in California and 30% in Florida in the year to November 2007, while median sale
prices fell 12% in California and 10% in Florida. Both states have large inventories of unsold
homes. California's high-cost property is particularly vulnerable to the continued dysfunction
in the jumbo, or large-denomination, mortgage market. Labour market data show that job
creation stalled in both states from August onwards."
January 16 - Financial Times (Krishna Guha and Daniel Pimlott): "The underlying rate of
inflation remained uncomfortably high in December... highlighting the risk the Federal
Reserve is taking as it turns its focus to fighting recession risk...the whole year data showed
that overall consumer price inflation was 4.1% at an annual rate in 2007, the highest since
1990. The higher-than-expected rise in core inflation will trouble the Fed, and raises fears of
stagflation, as slowing growth in the US economy is complemented by higher rates of
January 16 - Bloomberg (Tony C. Dreibus): "Food prices rose 4.9% in the U.S. last year, the
most since 1990, as energy costs surged and the production of crops, livestock and dairy
products failed to keep pace with increased global demand. The pace of price gains more
than doubled from 2.1% in 2006... Food sold in grocery stores rose 5.6%, including a
13.4% jump in dairy products, the department said."
January 17 - Financial Times (Justin Baer): "Mounting fuel costs could wipe out the US
airlines industry's profits this year, forcing consolidation in the sector as carriers seek to cut
costs, according to Doug Parker, the chief executive of US Airways. 'Speaking for US
Airways, fuel prices are going to be $800m or so higher than what they were in 2007,' Mr
Parker told the Financial Times. 'Everyone has that same equation. What we're spending on
oil this year, if all else stays equal, is more than enough to push them from a profit to a
pretty big loss.'"
Latin America Watch:
January 15 - Dow Jones (Alan Purkiss): "Panama's consumer prices rose 6.4% in 2007 - its
fastest pace since 1980 - led by transportation and food and beverage costs, the Statistics
and Census office said..."
MBS/ABS/CDO/CP/Money Funds and Derivatives Watch:
January 17 - Bloomberg (Jody Shenn): "Moody's...last year downgraded $76 billion of
collateralized debt obligations made from securities backed by assets such as U.S. subprime
mortgages, and entered this year with $185 billion of deals under review."
Mortgage Finance Bust Watch:
January 17 - Bloomberg (Sharon L. Lynch and Bob Ivry): "Home appraiser Julian 'Tony'
Perez conjured $7.5 million out of thin air in the first six months of 2001 by overvaluing 33
condominiums in the Atlanta area. Perez valued eight unfinished properties at the Deere
Lofts development on April 2. Some were missing ceilings, cabinets or sinks. Each had been
bought the previous week for $90,000 to $167,000. Perez said they were worth $177,000 to
$330,000, according to the U.S. Attorney's Office in Atlanta. 'These are the worst condos
ever,' Perez said last January during testimony at the federal trial in Atlanta of developer
Phillip Hill, who used the appraisals to resell the properties. 'Those values are super over-
inflated, probably double what the amount of that property is probably worth.' Perez and
appraisers like him helped exaggerate U.S. mortgage values by as much as 10%, or $135
billion, in 2006, according to Susan Wachter, a real estate professor at the University of
Pennsylvania's Wharton School..."
January 17 - Bloomberg (Yalman Onaran): "Lehman Brothers...the largest U.S. underwriter
of mortgage-backed bonds, will eliminate 1,300 jobs in the firm's fourth round of cuts
resulting from the collapse of the subprime market. Aurora Loan Services LLC, the Lehman
unit that makes loans to customers with higher credit ratings than subprime borrowers, will
also shut three offices in California, Florida and New Jersey..."
Real Estate Bubbles Watch:
January 17 - Financial Times (Daniel Pimlott): "New residential building in the US last year
suffered its biggest drop in nearly three decades... Housing starts for 2007 fell by more than
25% to 1,376,100 homes. The largest previous drop was recorded in 1980, as the US
entered a deep recession. Builders broke ground on fewer new homes in December, leaving
the annual rate of construction at 1,006,000 - its lowest level since 1991, and down 14%
from November and 38% from the same month a year earlier."
January 16 - Bloomberg (Sharon L. Lynch): "Long Island and Queens home sales dropped
25% in the fourth quarter and the inventory of properties surged as the housing decline hit
residential areas east of Manhattan, Miller Samuel Real Estate Appraisers said... The median
price declined 3.2% to $425,000... A total of 38,769 homes were on the market, 41% more
than a year ago. The survey excludes the Hamptons. 'We're seeing real price erosion across
every major market,' on Long Island, said Jonathan Miller, director of research for Radar
Logic Inc...'Their behavior over the last couple of years has been the opposite of the city.'"
January 15 - The Wall Street Journal (Conor Dougherty): "Slower growth in tax revenues,
the result of a weakening economy, are prompting governors from New Jersey to California
to consider an array of belt-tightening measures to balance their budgets for this year and
next. Facing a severe revenue shortfall, Kentucky Gov. Steve Beshear has asked most state
agencies to trim their spending by 3% in the current fiscal year, which ends June 30. New
Jersey Gov. Jon Corzine has proposed raising tolls and freezing spending to reduce his
state's debt. And California Gov. Arnold Schwarzenegger, in a bid to avert a deficit in the
coming fiscal year, has proposed closing state parks, eliminating dental care for the poor
and cutting $4 billion from the state education budget. 'There are going to be very difficult -
- but very necessary -- reductions to close the spending gap," says H.D. Palmer, a deputy
budget director for California. 'By definition, closing a $14.5 billion budget gap is difficult.'"
January 15 - Reuters (Jim Christie): "Home sales in Southern California sank to their lowest
in nearly two decades in December as buyers were sidelined or dropped out of the market
because they could not obtain mortgages... A total of 13,240 new and resale houses and
condominiums were sold in Southern California last month... 45.3% from a year earlier,
according to DataQuick... 'Last month's sales were by far the lowest for any December in
DataQuick's statistics, which go back to 1988...' 'The sales count was 23.5% below the
previous December low of 17,272 in 1990...' The median price paid for a home in the region
last month was $425,000, its lowest level in nearly three years and down 2.4% from
November and 13.3% from a year earlier. Prices have fallen 15.8% from the peak during
the spring and summer. Jumbo mortgages were used to finance about 22% of home sales
in Southern California last month, down from nearly 40% before the credit crunch began in
August, DataQuick said."
January 14 - Bloomberg (Michael B. Marois): "California, the biggest U.S. seller of municipal
bonds, may have the credit ratings on $49 billion of its debt lowered by Fitch Ratings as a
slowing economy leaves the state with a $14 billion budget shortfall. Fitch...placed $43
billion of general obligation bonds and $5.9 billion of other debt paid for with state
appropriations under review for a possible downgrade..."
January 17 - Dow Jones: "Hedge-fund assets increased by 30%, or $462bn, in 2007 to
$1.997 trillion, Hennessee Group reports. The industry saw net inflows of $278bn, with the
remaining $184B coming from performance gains. The net inflows represented a record, the
firm says... Total assets for arbitrage and event-driven funds rose 35%, and 26% for
long/short equity funds."
January 17 - Bloomberg (Jenny Strasburg and Caroline Salas): "The main hedge fund of
Sailfish Capital Partners LLC, run by former SAC Capital Advisors LLC bond trader Mark
Fishman, has lost about half its assets since July because of soured investments and clients
pulling money, according to two investors. Sailfish's Multi-Strat Fixed Income fund, which
had $1.9 billion in July, fell 13.5% last year on credit bets..."
January 17 - Dow Jones (Margot Patrick): "A $1 billion credit hedge fund run by London-
based Elgin Capital LLP has barred investors from redeeming their capital, highlighting how
some of the industry's most experienced traders are feeling the pain of declines in
leveraged-loan and high-yield bond markets."
Crude Liquidity Watch:
January 16 - Financial Times (Simeon Kerr): "The net foreign assets of Gulf Arab states are
set to rise to more than $2,000bn by the end of this year on rocketing oil prices, according
to new research. The Institute of International Finance said the region's public and private
overseas wealth stood at $1,800bn at the end of 2007. 'High oil prices are enabling the GCC
[Gulf Co-operation Council] governments to place a growing volume of resources into
reserve and wealth management funds, which will play increased roles in international
financial markets,' said Charles Dallara, managing director of the IIF... Sustained high oil
prices will generate more capital spending and foreign investment as the GCC's combined
current account surplus should exceed $250bn in 2008, up from $215bn in 2007."
January 16 - Bloomberg (Matthew Brown): "Saudi Arabian inflation accelerated to a record
6.5% in December, increasing pressure on the largest Arab economy to revalue its
currency... Gulf states, including Saudi Arabia and the United Arab Emirates, are under
pressure to revalue their currencies against the falling dollar to arrest rising inflation, which
has accelerated to records in all six Gulf Arab states in the last 12 months."
January 15 - Financial Times (Simeon Kerr and Roula Khalaf): "The central bank governor of
the United Arab Emirates...called on the government to develop a comprehensive plan to
tackle rampant inflation after ruling out de-pegging from the weak US dollar or revaluing
the dirham. In an interview with the Financial Times, Sultan bin Nasser al-Suwaidi said
rising rents were the main factor behind soaring inflation in the booming oil-driven
January 16 - Bloomberg (Matthew Brown): "Oman inflation accelerated to a record 7.6% in
November as the cost of rents and food increased, the Ministry of Economy said. The cost of
food increased 12.6%, while rents jumped 11%..."
From: Behavioral-Finance@yahoogroups.com [mailto:Behavioral-
Finance@yahoogroups.com] On Behalf Of pgreenfinch
Sent: Monday, January 21, 2008 6:51 AM
Subject: [Behavioral-Finance] Economics: money, spending, trust:
Those three things are not always correlated,
either positively or negatively.
More money is not always more spending.
More money might even be less trust.
Seems we are in a period to test correlations ;-)